Q3 2021 Premium Brands Holdings Corp Earnings Call
Okay.
Good day and thank you for standing by welcome to the premium brands Holdings Corporation third quarter 2021 earnings conference call. At this time, all participants are in a listen only mode.
After the speaker's presentation, there will be a question and answer session.
Ask a question during the session you will need to press star one on your telephone. Please be advised that today's conference is being recorded if you require any further assistance. Please press star zero.
Our speakers will be Georgetown, Oh logo C O N president of premium brands and will political <unk> CFO of premium brands I would now like to hand, the conference over to your speaker today, George Paleo logo. Please go ahead.
Thank you Mr. <unk> welcome everyone to our 2021 third.
Third quarter conference call with me today, I have our CFO will converge.
Our presentation today, we will follow the deck that was posted on our website. This morning.
We are now on slide five which outlines Jordan key highlights for the quarter.
Despite the various well documented challenges facing the manufacturing sector and the overall economy, we reported excellent results for the quarter and year to date.
Our CFO will <unk> will provide you with more color on our results later on in the presentation.
Commodity cost inflation and supply chain issues and labor shortages continue to challenge our various platforms almost D. R.
Our strong results for the quarter demonstrate the balanced and resilience of our unique business model and its ability to continue to deliver above average and consistent returns to our shareholders. Despite the headwinds.
Foodservice demand return during the quarter, while our seafood group delivered record results. In addition, our meat snacks charcuterie cooked protein and sandwich platform continued to perform well.
Clearwater seafood once again had an excellent quarter and results are running well ahead of plan here.
<unk> results are benefiting from robust demand and strong pricing for its product combined with proactive and disciplined cost management. We remain very encouraged with what we see in terms of seafood related consumer trends and we're very well positioned to capitalize on these trends in both retail and foodservice in.
North America and globally.
Our original investment thesis that seafood is at the intersection of several powerful consumer trends like health and wellness convenience and the aging demographics is beginning to translate into excellent financial performance for our seafood platform.
We're pleased to announce the closing of two strategic acquisitions. After the end of the third quarter make right, which is located in Pennsylvania U S. Complements our cook meat platform very well wild Westmoreland further strengthens our value added lobster business both companies have been highly.
And are run by very talented into printers, when we welcome as partners.
We're now on slide six to nine.
I have included here some pictures of new products recently launched by the PB ecosystem.
I'm sure you'll agree with me that the products looks amazing and demonstrate their passion for innovation and for reinventing and disrupting the traditional food chain with best in class clean wholesome and great tasting products.
We're now on slide 10.
As you can see our acquisition pipeline remains very full and we expect to complete many more transactions in the months and years to come you will notice that the active and advanced files had up to one 4 billion in sales I will now pass the presentation to our CFO will <unk>.
We will update you on our financial results for the quarter well. Thanks, George before I begin I would like to remind you that some of the statements made on today's call may constitute forward looking information and our future results may differ materially from what we discuss please refer to our MD&A for fiscal 2020 and.
For the third quarter of 2021 as well as other information on our website for a broader description of the risk factors that could affect our performance.
Okay now turning to the quarter I'm on slide 12 talking about our sales sales for the quarter were 134 1 billion up $240 million from 2020, representing a 22% increase.
The major drivers of that was by far the largest was selling price inflation roughly a $126 million in the quarter. This is very broad based across all of our businesses and pretty well across all of our product categories.
Acquisitions contributed about $96 million tour growth.
Organic volume growth contributed $51 1 million.
And that came from our specialty within our specialty foods segment from sandwiches meat snacks, charcuterie and cooked protein products and within our premium food distribution segment from the retail expansion initiatives.
Covid related factors had a relatively neutral impact on our quarter as we saw a tremendous comeback in our foodservice sales roughly roughly $26 $4 million of growth in the quarter.
And that was by however that was mainly offset are primarily offset by a recovery of a return to normal demand levels in the retail channel, which resulted in a decline of about $25 8 million, giving the overall impact relatively.
Neutral impact and I'll discuss about that more in a later slide.
Our sales were also negatively impacted by the stronger Canadian dollar, which resulted in a lower translated value for our U S based businesses.
Looking at the Covid related impact on our quarter, we estimate that to be about $33 million continuing impact.
And I'll talk a bit more about that in a later slide normalizing for that our sales for the quarter or 1.3 dollars $75 billion.
Turning to slide 13 talking about our organic growth rates for the quarter.
Overall growth rate for the quarter was four 6% or four 7%, which is down from where we've been trending the last number of quarters and that was primarily due to a number of what we consider transitory factors within our specialty foods group, we had some capacity related issues in the meat snack and kebab.
Categories. This resulted in about $21 million of short shipments our specialty food business is also particularly our branded businesses did a lot less featuring during the quarter. Its part of the normal sales cycle. However, they hold back as a result of both.
Margin pressures from a commodity price inflation, we were seeing out there and as they put through price increases there's delays in that in one way. They manage those delays is through less featuring and then also with labor and supply chain challenges.
Packing the ability to grow as well in the short term.
One of our Premier food distribution group, we saw some transitory impacts with less live lobster, featuring as a result of record high lobster prices and I'll show you that in a bit on another slide as well as longer term, we see a key growth driver in our premium food distribution group being the food.
Service channel and while we saw a tremendous recovery in that channel from the co batch COVID-19 related impacts last year, it's still in recovery mode.
So if we look at the two segments and sort of analyze their organic growth a little bit.
I want to show, how there's a lot of tremendous activity a lot of growth going on there there and sort of trying to filter out some of these transitory impacts. So if we look at specialty food groups, there organic growth rate volume growth rate for the quarter was five 5%, we normalized for Covid related factors name.
Lee the recovery or the reversal of the retail demand bump we saw in 2020, there normalized rate for that is about 7% and then if we normalize for the shorts meat snack and cut.
Bob shorts, they're close to a 10% growth rate for the quarter, which is getting closer to our medium term expectations of the growth in that category and that's before considering the featuring impacts and the supply chain impacts.
In terms of our premium food distribution group, it's organic volume growth for the quarter was three 2% once we normalize for the foodservice recovery there.
Their sales are relatively flat, 0.3% organic growth rate, but then when we take into account the impacts of the reduced live lobster, featuring again, a transitory impact and reduced exports due to some supply chain challenges in Asia their growth rate is about six 2%. So.
Again approaching our longer term expectations with that group, particularly given that we're not seeing the organic growth yet coming from foodservice.
Turning to the next slide it shows.
Some of our most of our major growth initiatives across our six platforms the ones highlighted in yellow or the ones contributing to the quarter and the unrelated ones are ones that are in the works and are expected to be major drivers of organic growth in the future. So lots of good stuff.
Come.
Turning to slide 15.
This is a summary of our major capacity expansion initiatives across the six platforms the ones with no highlighting our completed and those are contributing to our current organic growth the ones highlighted our once in the works that will address some of the capacity issues, we're having today.
And you can see particularly in our protein group, we've got three major initiatives underway all focused on the meat snack category, which we've been seeing tremendous growth as we rollout our U S based strategies and then in our Sandwich group, we've got three major projects as well as that that group continues to generate.
High double digit.
Organic volume growth.
Yeah.
Turning to slide 16, and just talking a bit about the impact of Covid related factors on Q3.
Starting with the premium food distribution group you can see we saw a good recovery in foodservice sales roughly $21 million of recovery from the 2020 impacts and then that was partially offset by the reversal of that unusual demand. We saw in the retail channel in 2020, so overall a favorable impact.
About $11 million from the premium food distribution group.
In our specialty food.
Group, we saw some foodservice recovery positive impact, but that was by far offset by the reversal in the retail demand impact, giving them an overall negative impact of just a little under $11 million. Once you net the two segments you can see overall COVID-19 related factors.
A neutral factor on the quarter.
Overall organic volume growth.
Turning to the next slide talks a little bit about the continuing impact of Covid on our business in the quarter.
Looking at premium food distribution group you can see most of the continuing impact is on their cruise line business we.
We saw very little recovery is that in the third quarter, we do expect to start seeing that ramp up in Q4 and then.
Even quicker in Q1 next year.
And then also a little bit of continuing foodservice impact mainly related to hotels in advance and the fact that Q3 was sort of a ramp up quarter for foodservice. So overall, the continuing impact in the third quarter on premium food distribution roughly $12 million.
Looking at the specialty Foods group.
You can see airlines, we saw some recovery of airline business in the quarter, but it's still relatively small we expect to see that improving in Q4 and again Q1 next year. So a continuing impact in Q3 of about $7 million and then continuing foodservice impacts.
Relating mainly to hotels and institutions and then the ramp up factor in Q3 you.
You can see on the retail side, we pretty well reverse the full extent of what we estimated the unusual COVID-19 demand bump to be in 2020, so going forward that should no longer be a factor and then we had some new impacts in the quarter roughly $8 million relating to supply.
Chain challenges.
Mainly some procurement issues on some very high valued pork items and then some plant shutdown issues in our Burger Division.
So we do expect all of that to reverse in 2022. So the overall impact on specialty foods about $26 million and then the combined impact on the two segments roughly $33 million in the quarter.
Turning to slide 18, and looking ahead, a little bit the Green line represents our weekly sales volumes or sales for 2021, the Blue line for 2020. The gold line for 2019, you can see post the third quarter, we continued to generate very strong sales momentum.
Driven by organic growth COVID-19 recovery as well as inflation.
Turning to slide 19, looking at our EBITDA for the quarter was $122 $6 million representing.
Representing an increase of $29 1 million or 31% from 2020.
Looking at the major drivers clearly selling price inflation acquisitions organic growth for the big three drivers following them. We did see some reversal of COVID-19 related costs from 2020, mainly planted inefficiencies and staff. Thank you bonuses paid out last year.
That were incurred this year.
We also saw a reduction in our marketing and promotion costs kind of it ties back to my comment earlier on our branded business is doing less featuring as a strategy to manage their margins as well.
Deal with some labor growth issues.
We continue to see production efficiency improvements and in our specialty Foods group there was some reduced incentive based compensation accruals.
Offsetting these positive factors were incredible commodity cost inflation, we saw it across all of our commodity inputs.
As well as just general costs that pretty well offset our selling price increases for the quarter. Our businesses are continuing to put through more selling price increases post the quarter as well as in the quarter that $120 million selling prices. We saw was was transitioning of initiatives. So it wasn't the <unk>.
Full impacted the current price increases put through so.
While commodity costs continue to rise we are addressing it with selling price increases.
Wage inflation was another significant factor in the quarter plant overhead increases some of that due to our higher volumes, but also we did have to take much more significant inventory positions just to manage our way through the supply chain disruptions we're seeing.
And that created a lot of additional costs, particularly in outside storage. Then we also saw some freight inflation and the impact of the stronger Canadian dollar on the translation of our Canadian or sorry, our U S based businesses.
Our EBITDA margin for the quarter was nine 1%.
A nice improvement from 2020, which was eight 5%.
Still below expectations because of the commodity price inflation, primarily.
And also the impacts of the continuing impacts of Covid. If we look at the impact of Covid on the quarter, we estimate that to be about $7 6 million.
Primarily all of that related to the sales impact I talked about earlier normalizing for that our EBITDA margin for the quarter is about nine 5%.
Turning to slide 20, the next four slides 20 to 24, all indicate our show you the trends in some of the key commodity inputs used by our businesses and all four slides you'll see the story is very similar its one of increasing demand with the reopening of our.
Economies, particularly North America and Asian economies.
And then offsetting are creating tightness in the market is supply challenges relating to labor relating to supply chain disruptions. So we kind of have a worst case scenario of increasing demand.
Sluggish supply growth and as a result, the tremendous inflation, we've been seeing so and all of these slides you'll see the commodities are at record highs. This one shows a basket of pork based products that we purchase our business as purchases you can see all at record highs if.
If you flip to the next slide for beef again, all at record highs I know their stories in our company of some of our businesses and certain beef products because of such high increases in these costs of these products have had to put through price increases as high as 24% on certain beef entre products.
Next slide shows you lobsters again record highs and then finally, the last slide Atlantic and Chilean salmon both at record highs.
Turning to slide 24, and our adjusted earnings for the quarter, which were $57 $8 million, an increase of $15 8 million or 37, 6% from 2020.
The key driver of that was our EBITDA growth and then that was offset by a little bit of increases in our depreciation. This is as a result of acquisitions and recent capital projects and also some additional interest expense due to higher debt balances, partially offset by favorable market conditions and better <unk>.
Spreads on our senior debt.
Then also increased income taxes, offset our EBITDA growth.
Looking at the impact of Covid, taking the impact on our EBITDA of $7 6 million, which after taxes of about five seven.
Our normalized for coal that earnings would be about $63 $5 million or $1 46 per share.
Yes.
Turning to slide 25, and the results of our recent investment Clearwater seafood.
Very good quarter as George mentioned earlier their sales increased by $24 7 million or.
$24 7 million from 2020 to $158 4 million. This was driven by primarily the reopening of the economies in North America, and Asia, which provided a tremendous amount of price inflation, which which benefits clearwater and their seafood.
<unk> as well as some volume increases and then offsetting that was the stronger Canadian dollar and the translation of the U S are there exports with a large portion of which our U S and Europe euros.
And then some lower crab sales.
Relative to some procurement issues and the timing of landings.
Clearwater EBITDA for the quarter was $40 1 million, a $14 7 million or 58% increase from 2020.
This was driven by the strong pricing environment.
Based on the nature of Clearwater business, whereby as harvester of many other species there costs are relatively fixed so they benefited immensely from the inflation, we've seen across all proteins, including seafood.
Then also organic growth was a positive contributor some operational efficiencies partially due to better catches this way this year as well as the reversal of some pandemic related inefficiencies last year.
And finally, some positive FX hedging gains and then these were offset partially by the reversal of some governments.
Subsidies last year as well as increased incentive accruals.
Turning to slide 26, and talking a little bit about our five year outlook.
We set back in 2018 objectives to have $6 billion in sales and $600 million in EBITDA by 2023 walking through where we are in terms of our sales target you can see our sales for the trailing 12 months at the end of Q3 were $4 642 billion.
If we normalize for the trailing 12 months impact of the pandemic or Covid related factors, that's about $170 million of $79 million and then we annualized for acquisitions completed partway through 2020 or in 2021, that's an impact of about 423 million.
Giving us a current run rate of 524 4 billion.
And then if we look ahead to 2022 2023 make a very conservative growth assumption of nominal growth of 6%. The reality is we've been growing at a volume growth of.
Roughly eight 5% over the last two years or over 10% nominal terms. So again, a very conservative assumption that would give us about $648 million of growth, leaving us with only the need to complete about $170 million in acquisitions to achieve our <unk>.
6 billion target and as George mentioned, we have well over one 4 billion in acquisitions in the pipeline is active or advance and even just in the advanced.
Acquisition pool, which are transactions, where we have a signed LOI.
That's about $116 million in sales so correspondingly, we're very bullish on exceeding our 2023 sales target and.
And.
Next I'll turnover to EBITDA, which is on slide 27.
Again going through a similar calculation the trailing 12 months is $405 million of EBITDA.
Normalizing for Covid related sales impacts that's the $33 8 million impact on EBITDA, and then annualized nation of the acquisitions and our Clearwater investment income brings us to a run rate EBITDA of about 100 504 million, which represents a <unk>.
Nine 6% EBITDA margin.
And then we add in EBITDA related to the growth assumption, we made on the earlier side using a very conservative contribution margin of 20% that's about $130 million and then a conservative estimate of the EBITDA from our acquisition assumption that would take us to about $642.
$43 million in EBITDA, So again, well ahead of our target both in terms of dollars and percentages.
Turning over to slide 28, and capital allocation during the quarter, we allocated $34 $2 million in capital to acquisitions and capital projects.
And by capital projects were defining those as generating a return of at least 15% or greater on an after tax unlevered basis.
Really the capital project expenditures were across a variety of projects, while the most significant investment in the quarter was in our <unk> acquisition.
For the year, we've invested roughly $582 million in acquisitions in project capital expenditures.
And the total capital allocated with those initiatives are about $803 million, leaving about $180 million still to spend on those initiatives.
Looking forward subsidy could subsequent to the quarter, we as George mentioned, we completed the Westmoreland and made right acquisitions, which is about another $200 million of capital allocation and again just to reemphasize all of these investments our expectations are.
Minimum 15% internal rate of return after tax Unlevered.
Turning to slide 29, looking at our balance sheet. It continues to be very strong.
Our senior debt and total debt ratios were stable from Q2, our total debt.
To EBITDA ratio staying at three four to one and our senior debt to EBITDA ratio staying at two one to one.
Our overall credit capacity still remains strong at $426 million down slightly from $50 million last quarter as we've invested in the.
The projects I mentioned on the previous page as well as we made significant investments in working capital this past quarter driven in large part by inventory and the issues I talked about in terms of securing more inventory to protect against supply chain disruptions as well as <unk>.
Some inflation hedging.
Subsequent to the quarter, we renewed renegotiated our senior revolving credit facility, we increased the facility by U S $250 million, bringing the total to roughly a $1 5 billion dollar facility.
And we extended the term maturity date of the facility to November 26, 2026, Aida. Another five years and then finally, we added some ESG linked targets sustainability linked targets to the facility mainly tied to our greenhouse gas emissions.
Food safety targets and our employee diversity targets.
Turning to slide 30, the final slide in the deck, our free cash flow.
Free cash flow for the quarter was 245 points on a trailing 12 month basis was $245 6 million.
Ending of $56 $8 million or 30% increase from 2020.
Our free cash flow per share was a record $5 80 per share as George mentioned earlier, representing a 93 per share or 19% increase from 2020.
Our payout ratio for the quarter was 44, 1% or if you normalized for a four year full year at our current dividend policy rate and shares outstanding It's 45, 1%.
That concludes the formal presentation for the quarter I will now turn it back to Mr. <unk> for the questions section.
At this time, if you would like to ask a question press star one on your telephone keypad again that is star and the number one. The first question comes from the line of George Thomas.
Yes, hi, thanks for taking my question.
You guys called out higher input costs that exceeded the selling price of increases in the foreigners.
Timing, so can you maybe quantify that or give us some sense of magnitude.
Just trying to get a sense of what normalized margins are once prices constant gone through inflation.
Yes, so George again.
A challenging question in a sense that we're really not through what's been going on with commodities and so in the short term.
We're seeing some moderate moderation in commodity costs in certain categories, which is a positive but still there is a lot of uncertainties. There how the supply chain is going to pick up what's going to happen with consumer demand. So in the short term, it's challenging to answer your questions in the longer term.
We're all of our businesses and their pricing strategies are focused on.
On an EBITDA perspective that sort of 13% plus average in our specialty food group.
Roughly 7% average in our premium food distribution group.
Those are the targets in sight and those have not changed.
Sure.
Okay.
George last quarter, you mentioned that we lost about 25% to $50 million in potential revenues owning to labor constraints.
Would you estimate that number to be bigger or smaller or the same this quarter.
No I'd say, it's about the same at Georgia similar issues fade second into third quarter. We're very similar in terms of the challenges and the disruptions that we faced nothing much has changed so about the same.
Okay, and one last one if I may there was some talk.
Last quarter's call about.
Adding extra sandwich capacity can you maybe give us a little bit of an update there.
Should we think about investment.
Maybe substantially higher than the <unk>.
Unlevered after tax IRR of 50%, but you typically get from other capex projects.
Yes, So we announced two projects with the press release, we announced a.
A second facility in Columbus, 144000 square foot to support our continued sort of artists in premium sandwich initiatives across North America.
And then we also and that was about a U S $25 $26 million investment and then we also announced a new plant for to support a Canadian initiatives.
Based in <unk>, both replaces an older facility is as well provides additional capacity and thats about $17 million investment. So we will post those will be well suited to continue to drive some some solid growth over the next couple of years in terms of <unk> you are absolutely right George those would be.
<unk>.
Particularly the U S investment, we expect to be higher than 15% minimum.
I'd, just like to add to that.
George.
In general terms, the labor shortages or the labor.
<unk> that we're having.
We are also driving a lot of the demand.
For our products because a lot of our customers a lot of our <unk> our customers in particular.
Trying to solve some of their labor ratios by.
Coming to us so again.
Demand is there and even accelerating given some of the labor shortages that youre hearing out there.
In all parts of the economy.
Alright, guys. Thanks for answers and good luck.
Thanks George.
Your next question comes from the line of Martin Landry.
Okay.
Hi, good morning.
Good morning Martin.
There is.
Selling price increases contributed meaningful.
Part to your revenue you mentioned $120 million during the quarter you were talking about putting further price increases.
I'm just trying to understand.
If you see these price increases as temporary or permanent.
Under a scenario, where we would see inflationary pressures abate next year could we see you decrease your selling prices.
I think in general terms.
<unk>.
In the past.
<unk>.
We've raised prices of course to reflect.
Commodity type of inflation.
At times as commodity prices come down then we will lower prices as well now in terms of your inflation question of course right now we're facing other type of inflation, including labor cost inflation.
Yes.
Some of that inflation will I think it's permanent and some of it is more temporary.
So so.
Again, we're monitoring it.
We're managing it.
<unk>.
As will said earlier I think that there will be some commodity inflation.
Which normally we will pass on to our customers.
Sort of maintain our margins.
System levels and Martin.
It's interesting.
Number of our especially our branded protein businesses some of the more differentiated products. These do set new consumer price points. So there is some permanent.
Recapture of that margin, but what businesses will often do is they will use that additional margin to drive additional featuring and so similar to how featuring was a negative impact on this quarter because of managing their margins in the future it could be an acceleration of their organic.
<unk> growth as they they use that additional margin to generate new demand.
Okay.
Okay. That's helpful.
And just wanted to.
Maybe you have a little bit more color on your on your recent acquisitions.
With more land seems to be the largest when you've done this year aside from Clearwater.
Can you give a little bit of color.
Attracted you to that business.
The kind of historical growth rates.
Generated potential for cross selling synergies and anything like that would be helpful.
Yes, I'll start Martin bye thank that.
Westmoreland is doing very very well managed company built by.
Very successful entrepreneur they are a big player in lobster meat.
This is an area that we spend a lot of capital and a lot of effort with our.
Our investment in.
In ready seafood.
We believe that lobster meat is a growing protein with respect to demand we want to make it easier for consumers to consume lobster.
Consumers don't want to buy the <unk>.
The tails.
Have to fight too.
Split it up in Cook it.
<unk> is that we want to make it easier to for consumers both in terms of.
At home consumption as well as <unk>.
In restaurants and.
Again, Westmoreland is leading player in North America in this area, so and natural fit for us.
Did you have that kind of offering before in terms of the upstream.
Yes, when we when we invested in ready seafood, we built the facility that.
That basically separated.
The meat from the lobster and.
And I'd say, it's a major category for us that we've done well there ready seafood has done very well building. This category. There is some pictures of some some of the products in Australia.
Products that we serve.
And then in the deck.
Again, Westmoreland as a major player in that segment.
Okay.
It's a very exciting category Martin.
Ready seafood made the investment in the cycle facility as George mentioned.
The IRR or we've seen in that facility. It was all based on growth and it's just been fabulous and and through Covid, there's been a real sort of.
Realization of the product by the consumer both in retail and by foodservice customers across the U S. So we're seeing tremendous growth opportunities in Westmoreland.
Part of the ready food group's strategy to be able to benefit from that growth.
Perfect. Thank you.
Thank you Martin.
The line of Derrick with Dart.
Yes, good afternoon, gentlemen, and congratulations on another good quarter.
Just talking continuing along the lines on the <unk>.
The acquisition, but I was just curious on the split between the $200 million that you paid between the two companies and it may be.
On the what.
What the revenue contribution we should expect from both.
Yes, so so.
Vendors are very sensitive about individual prices. So we don't talk about individual prices.
Derik, but in terms of sales ready is about.
Made right is about $80 million U S in sale or roughly $80 million U S. <unk> sales and Westmoreland is about $140 million in sales I believe.
We've disclosed in the MD&A, so you'll have a chance to get the specific numbers there.
And the valuations.
If you wanted to sort of make some estimates made rights margin profile is very reflective of our specialty food group, while not Westmoreland margin profile is very reflective of our our premium food distribution group.
Okay. That's helpful. Thanks.
Like how should we look at the the timing of the.
The unrecovered Colgate or supply impacts over 2022.
Yes, so in terms of the third quarter I would suspect the impact we talked about the third quarter to $33 million.
All of that should be gone by the third quarter of 2022, assuming things continue to normalized rates. So airlines cruise lines, we expect that to normalize over the coming two quarters.
Foodservice Similarly.
Certainly by late next year that should be fully normalized in terms of maybe events in some of those sort of final straggly components, but yeah.
Certainly by Q3 next year, we would expect that all to be gone.
Okay, and maybe just one last one for me is just remind us where you are in terms of.
The increased automation in the sandwich plants, and maybe just talk about.
The decision behind building.
Another sandwich facility and why in Ohio.
One in Ohio.
Yes for us that Derek as we said earlier.
We're seeing a lot of demand from various channels with regards to our products.
The decision around the hires that we already have a facility there any management infrastructure. There. So look at it as more of a satellite plant rather than in new plant right.
Is 144000 square feet of new capacity and we already have an established management infrastructure. There. So that was the logic behind Ohio.
And in.
In terms of the automation initiatives again.
It's well known that.
Labor is challenging what we bring to the table for our customers is the fact that we're able to scale and automate so lot of automation initiatives not just in our sandwich.
Also throughout the company as we speak.
Alright, Thanks, George Thanks will.
Thanks Derek.
Your next question comes from the line of Stephen Macleod.
Thank you good afternoon guys.
Hey, Steve.
Okay.
Couple of a couple of follow up questions just very quickly.
In terms of Westmoreland.
You noted that the margin profile is sort of reflective of the PFD group with that business and premium food distribution does that is that the way to think about it.
Correct, yes, it will form part of our seafood group and premium food distribution and consist of the distribution and seafood groups.
Right, Okay, great. Thank you.
And then I just wanted to follow up.
Some really good slides about the major growth initiatives slides 14, and then the Capex expansion projects on slide 15, I mean, it's a bit of a big question, but is there any way to quantify kind of what the revenue contribution could be from these from these growth initiatives and capex expansion projects.
As we think about.
Beyond 2023 are these are the kinds of things that drive growth beyond that 2023 target.
Yes no.
Again in that 2023 target I set that nominal growth of 6%, yes. The.
These are far and these are drivers far in excess of that.
The way, we look at growth Steve is.
<unk> to 6% volume growth is just sort of a no brainer.
It's there are market is growing at faster than that and Thats easy to achieve and then as we invest in these capacity initiatives. These new initiatives. Those are the factors that are going to get us to that low or high single digits low double digit growth rates and that's exactly what these factors are.
If you look at what we've done historically, Steve is we're kind of shy in terms of investing until we prove that demand and once we prove the demand we're not afraid to invest as we've done in the Sandwich Group for example, right. So yes absolutely.
And we will probably be coming out with our next five year plan.
Sometime in 'twenty, two and all of the sales projections will be adjusted in accordance to the capital where we are spending in these areas.
Right Okay, yes.
Helpful.
And then maybe just one more question more of a more of a near term question just thinking about the commodity inflation.
Labor inflation and supply chain issues understanding obviously that these are manageable.
Over time, but when you think about Q4, I mean is it safe to assume that.
These factors will still be a headwind the price that you put through maybe may or may not be enough to offset some of those headwinds I'm just thinking more near term versus longer term.
Yes in the near term.
I would say as will said earlier it just depends on what happens to commodities commodity inflation is a big part of the overall inflation.
We are seeing so.
We've seen a little bit of.
You know of a downturn in terms of commodities. Most recently from the record levels. So I guess, we'll see.
The rest of it.
Yes, there is some inflation in other areas of the business.
It's pretty well manageable.
But Steve I would add and you saw this trend in the third quarter.
Our premium food distribution group exceeded our expectations for the quarter, while our specialty food group was below expectations and really was one story of the reopening going better than than we had planned and commodity prices taking off a lot stronger than we'd expected.
And those trends will continue likely into the fourth quarter.
In fact that the commodities hopefully will be much lesser on the specialty foods segment as some other price increases take effect and like George says that we.
We are starting to see some modest moderation in commodity prices, but in general terms those those trends will likely continue.
And that was the reason we moved our guidance for the year from being a percentage to our range, we're still very confident of being within our our EBITDA range, but likely will be below that 9% target because of those factors.
Okay, Okay that makes sense okay.
Well, that's great color. Thanks, Thanks, so much guys.
Okay Steve.
Your next question is from the line of David Neumann.
Hi, good morning, guys.
Hey, Dave Adam, resulting in a chaotic environment.
Obviously here.
So as you push through price increases are you seeing anything at all in the way of any demand destruction mid growing concerns about inflation a stagflation.
Our personal savings so strong that people are still spending and I know you guys are really nicely balanced that you had the food at home and away from home. It does give you a bit of a balance there and you can capture people's eating our consumption pattern somewhere so maybe just some thoughts on what youre seeing in the channels as far as the inflationary.
<unk>.
Yes, so David.
We're certainly concerned about that.
We're not seeing.
Okay.
Good again, I guess I guess again people have pretty thick pocket books right now courtesy of the government against the spending.
Our restaurants, as well and the supply chain.
Pat.
David do that.
One of the things you have to remember is that we generally sell premium products.
So that means that the consumers are buying a product tends to buy them for reasons other than price.
Key differentiating 0.2 premium rents.
No absolutely and on the supply chain George.
The challenge that you guys are facing we're kind of moving into the peak season.
Obviously lobster exports in the early part of the new year are you seeing any signs that some of these supply chain challenges are abating to any degree.
Not really David I wouldn't say that in general terms for us it just means longer lead times and more stockpiling any weaknesses.
To adjust the way, we do business basically right we're managing.
But.
Generally again, we've adjusted.
Okay, and you guys. Obviously, the Clearwater results have been have been exceptionally strong.
And I think there was some concern out there that you might not depending on what their results were in the first year I know youre not actually collecting till the second year, but it does looking increasingly confident that you might be able to.
Received your payment in the second year is that how youre looking at it.
Yeah, Hey, David can you do us a favor can you mute your phone. After you asked the question because we're getting a really bad echo from your phone Oh, Okay, sorry about that.
Great. Thanks, David David.
Sorry, I guess it wasn't your phone we're still getting tackle.
In terms of Clearwater, Yes, no status quo, David you're absolutely right. They are tracking well ahead of them in and we would expect to see that that interest payments start sooner, but the reality is there's also all sorts of other exciting opportunities, we're looking at with them and so it's.
I can't commit to any one specific direction at this point point got it and last one from me more of a housekeeping issue, but if I look at your growth Capex for next year, obviously, you've expanded your lines et cetera in part because of the acquisitions Youre doing but also because youre investing in your plants does a growth cap.
It looks like to me if I have I tally everything up it looks like it could be about $180 million next year my off the mark there.
Yes that sounds about right David I'd have to go back to the math work.
Yes.
Hi, all.
All of the projects that we're looking at or that had been approved or in our MD&A. So and the way. We generally look at it is maintenance capex is roughly $30 million to $40 million a year general Capex is roughly 30% to $40 million per year, and then you have all the special projects, which as you know.
They are all disclosed in our MD&A.
Excellent thanks, gentlemen.
Thanks, Jamie.
Your next question is from the line of Jonathan apparel.
Thanks, Good morning, guys.
Hey, John.
I'll start with a quick housekeeping question you gave some some really compelling growth numbers, specifically for seafood and distribution in the quarter, but I'm wondering if you can quantify those even approximately versus 2019, rather than 2020, just trying to get a sense of how those are doing versus pre COVID-19.
Oh, yes, and John Thats exactly what our Covid normalization calculation was when we went through the gross slides. So we looked at when you.
Take out strip out inflation, the volume growth in the premium food group was.
<unk>, 3% and then you strip the strip out the Covid impact and it was roughly flat with 2019 and our premium food group. The specialty food group you do that same calculation and it was up roughly up 7% in volume terms from 2019.
Okay understood.
I know it's.
It's beating a dead horse, but the supply chain and particularly the labor constraints I know no. One has got a crystal ball on that but we just like to get your sense of how long you expect this to last.
And are there any regional differences youre seeing that are worth calling out.
Yes, John I would say, we're feeling more confident in terms of Canada, I think Canada is looking at.
We will open the doors of immigration into the wider I believe this coming year or so.
We're feeling more optimistic about the situation resolving itself.
Sooner in Canada U S. We don't know we hope that this will be the case in the U S. As well I mean, we have to remember that.
Majority of our industry in particular relies on immigrants for labor. So so again.
Feeling a little more positive about.
The U S. The Canadian situation improving.
At this point.
Okay understood and then sticking with that are the labor shortages within your operations do you find those are solvable by wage increases or are there other components like immigration or otherwise that you might need to fill that that labor gap.
I would say John that we're using.
<unk> tool available to us too.
To resolve these issues.
<unk> of course is wages.
But again.
As I mentioned earlier automation is a big focus as well.
Effectively trying to reduce our dependency on label with regards to all of our operations right. So there's a lot of initiatives going on to deal with the situation.
Okay got it and then last one for me.
Wanted to ask about the 2023 EBITDA margin goal.
Super Helpful analysis that you provided on a bottom up basis, but if I think about this from top down youre expecting it to be sub 9% margin. This year, which would mean you would need at least 50 basis points of expansion in each of the next two years.
It has historically been a business that's grown sales at around the same rate as EBITDA. So.
Maybe just elaborate on what gives you confidence in the environment of food cost inflation in labor cost inflation that you can get that type of margin expansion on either on the existing business or on your acquired businesses.
Yes in terms of.
The compression we're seeing in our margins today in our minds is completely transitory, we fully expect to recover whether it's through selling price increases or a normalization of commodity prices too.
To recover that and get back to what is really the key driver of our margin expansion, which is sales leveraging.
So.
And on that point, if you just normalized for the Covid sales impact and annualize Asian of our acquisitions were at a 969596 EBITDA margin.
So it's not that far to go and with with some normalization of commodities, which is obviously not built into that bridge we gave.
That's we're very bullish on it being able to achieve that 10% plus EBITDA margin.
Okay. That's helpful. Thank you I'll pass it on.
Thanks, Sean.
Your next question is from the line of Labatt Con.
Okay, great. Thanks, very much just along the similar lines I think there was some commentary earlier around the <unk>.
Our target being around 15% for projects.
Looking at the ROIC here over the last few years, it seems to be sort of in that high single digit range kind of maybe 10% this year.
Maybe the acquisitions that are kind of keeping you from having sort of a 15% ROIC or how do you think about.
On that return metric sort of over the long run or is there a target for that.
Yes no.
It's very straightforward.
It's both acquisitions and capital projects because the reality is in these projects. They are generally 10 year plus models and quite often in the early years. They are putting pressure on our return on investment and then as as we start realizing acquisition synergies we start realize.
On capacity investments that ultimately was what is what generates those returns and that takes time to appreciate so we made some significant investments over the last three years that have pushed down our rona, but two.
<unk> 2000, 22021 should have been kind of a pivot year and certainly when we run our modeling and we do our normalization for the impact of the pandemic you do see the returns starting to turn back up but ultimately, yes, we're very confident that over time that.
Youre going to see as these investments play out and we've got a history of that we went earlier in our history. We went through a similar it wasn't near to the degree because we were a much smaller company, but we went through a similar investment cycle, where it pushed down our Rona and then as we started realizing the returns on those investments.
<unk> and <unk>.
We've been very fairly stable on new investments for a period, you saw our rona spiked to well over 17%.
Okay. So is the idea I guess here that after.
The investment period, and maybe the next few years or I'm just thinking in terms of timeline is there a plan to sort of be around the 15% IRR that you could probably get otherwise.
When the investment period stops.
Yes, no again, yes, it's kind of a bit of the both the realities.
It should be in the relatively near future in terms of the commodity and the COVID-19 transitory impacts going away.
And this stuff rolling out but.
If everything else stayed the same then yes, it would be relatively short term. The only unknown is future investment right. So we are continuing to invest in new new sandwich facilities meat snack facilities.
Our acquisition strategy is as George showed is we've got a tremendous pipeline. So it is a little bit challenging but.
The exciting part is the growth and we see.
Our process is we do do with every significant investment that we make we do look backs and the reality is our legacy investments are all exceeding targets and we see that unfortunately.
It's a little more challenging for you, but the reality is it is working it's just it's being camouflaged filed a new investment.
And that is not going to stop and fortunately or unfortunately.
Okay that makes sense and then just kind of following up on the margin discussion earlier and obviously the last couple of years last year and a half has been impacted by Covid and if we look at the specialty foods segment here I guess, what do you see as sort of the medium term potential here I think your margins. This year, obviously, along along the lines of your guidance, but can we get north of that 10%.
Over the next couple of years and is that going to be a change in mix or just.
Operating leverages as we were talking about earlier.
Yes.
Absolutely as I mentioned earlier sort of 13% plus is our target for our specialty foods group.
So and but a lot of that is sales deleveraging and then just the normalization of the commodity markets.
Okay, great. Thanks very much.
No problem no question.
From the line of Kyle Mcphee.
Hi, guys. Just a quick question on the linking of your cost of debt.
Capital to your ESG performance and it's an interesting concept you've moved forward with tier and probably something that will be increasingly topical musical beitzel can you quickly provide maybe a bit more cover color is this something youre lender brought to you or did you promote proposal to your lender.
Meaningfully curious your performance on your ultimate cost of debt capital.
Yeah. So this is something we brought to our lender we've been following the market we've been very active.
Improving our reporting around ESG principles of ESG as a core to our business since the beginning.
And it just made sense given what we're seeing in the market that we reflect that that focus in our credit facility. At this point, it's not a huge factor, it's a plus or minus five basis points factor tied to the three metrics I mentioned earlier, but it's a step in the right direction and.
It's a signal of how important we view these principles and our continuing investment in them.
Got it well hats off to you for them. Thanks, guys.
Thanks Scott.
You have a follow up question from the line of Derik I'll start.
Yes.
Two more for me and then housekeeping I was wondering if you will if you have an idea of what the.
Yes.
Pro forma leverage impacting the.
The latest two acquisitions would be.
You know.
I should know that off the top of my head, Derek but I don't but it.
<unk>.
It really doesn't have a material impact on our overall financial position and covenants. There is some but we will certainly still be below our targeted range.
Right Okay.
And a follow up on the Capex do you have a quick and dirty number that youre looking for for 2022.
Total capex.
Again, we.
We talk about maintenance capex sort of that $35 million on average $30 million to $40 million a year in maintenance capex.
30% to $40 million on general Capex across all of our different businesses smaller projects and then just all the items, we disclose in the MD&A as sort of above that that those two categories.
Okay. So all of the all of what you've disclosed.
In the MD&A.
822 Capex.
Yes, some of it goes into 2023.
But the majority of it is in 2022.
Okay fair enough thanks, guys.
There are no further questions at this time I will now turn the call back over to the presenters for closing remarks.
Now I'd like to thank everybody for attending today. Thank you very much.
Back to you Mr.
This concludes today's conference call you may now disconnect.
Okay.
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