Q1 2022 Premium Brands Holdings Corp Earnings Call
[music].
Okay.
Operator: Ladies and gentlemen, todays conference is scheduled to begin shortly. Please, continue to standby. Thank you for your patience. Again, ladies and gentlemen, todays conference is scheduled to begin shortly. Please, continue to standby. Thank you for your patience.
Operator: [music].
Operator: Good day, and thank you for standing by and welcome to the Premium Brands Holdings Corporation first quarter 2022 Earnings Conference Call. Our speakers for today will be George Paleologou, CEO and president of premium brands and William Dion Kalutycz, CFO Premium Brands.
Operator: At this time, all participants are in a listen only mode. After the speaker presentation, there will be a question and answer session. To ask a question during this session, you will need to press star one on your telephone. Please, be advised that today's conference is being recorded.
Operator: If you require any further assistance, please, press star zero. I would now like to hand the conference over to your speaker today, George Paleologou. Please, go ahead.
George Paleologou: Thank you, Fay, and welcome everyone to our first quarter conference call.
With me here is our CFO, William Dion Kalutycz.
Our presentation today will follow the deck that was just posted on our website this morning.
This morning.
You can also access yesterday's AGM presentation on our website at your convenience.
Some nice pictures and videos there to enjoy.
We are now on slide four which outlines certain key highlights for the quarter.
Despite the various headwinds facing our industry, including acute inflation, we're pleased to report yet another quarter of record results.
Sales of sandwiches and meat snacks remains strong during the quarter, while supply chain disruptions and reduced promotional activity negatively impacted our overall volumes for the quarter.
Our CFO, William Dion Kalutycz, will give you more color on our first quarter later in the presentation.
Our strong results. Despite the headwinds, are a testament to the resilience and diversification of our unique business model. It is also a testament to our great people, who are working relentlessly and diligently as we navigate through these volatile and unusual times.
Inflation is of course, the issue of the day, and during the first quarter, we executed $122.6 million worth of price increases with more pricing to be taken during the second quarter.
The first quarter was quite noisy and began with unprecedented disruptions to our operations, due to very high absenteeism caused by the Omicron variant. Fortunately, Omicron subsided quickly around the end of January, and our operations went back to normal for the remainder of the quarter.
While overall demand was strong during the quarter, supply chain disruptions impacted our ability to pursue certain sales opportunities.
On a positive note, we were very pleased to see foodservice demand return as COVID-related restrictions eased.
Also pleased to report that during the quarter demand from channels that were previously hit hard by Covid, like Airlines and cruise lines, began to come back.
Demand from these channels is now beginning to accelerate.
Okay.
We're now on slides 5 to 10. Over the past couple of years, we have invested a lot of capital on expanding capacities and on process improvement opportunities with excellent results. We believe that these investments greatly enhance our overall earnings and cash flow potential and we're certain that this will be demonstrated in our financial results as things begin to normalize.
We will be demonstrated in our financial results as things begin to normalize.
We're now on slide 11. As you can see here our acquisition pipeline remains very robust and we expect to complete many more transactions in the months and years to come. I will now pass the presentation to our CFO, William Dion Kalutycz, who will update you on our financial results for the quarter.
I should also mention that Clearwater seafood delivered strong results for the quarter.
Driven by economy`s reopening and the return of foodservice around the world, combined with excellent operational and commercial execution.
Clearwater`s access to sustainable wild, top quality seafood resources is unmatched, while demand for its products continues to be very strong. 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 in foodservice in North America, and globally. I will now pass it on to Will.
Tail in foodservice in North America, and globally I will now pass it to will.
William Dion Kalutycz: Thanks, George and welcome everyone.
I'm now on slide 13, our quarterly sales performance.
For the quarter, we generated sales of $1.251 billion that was an increase of $241.4 million or 23.9% as compared to 2021.
There were three key drivers of our growth, selling price inflation, as George mentioned earlier, of $122.6 million.
Acquisitions contributed $93.1 million, and organic volume growth of $27.5 million.
Turning to slide 14, and looking at our growth rate for the quarter, our organic volume growth rate came in at 2.7%, which was well below our potential. There were six main factors contributing to this, 4 of them temporary, 2 of them structural. The temporary factors were: reduced featuring of our branded products in the retail channel to mitigate the impact of cost inflation, while price increases are being implemented.
It came in at two 7%, which was well below our potential there were six main factors contributing to this for them temporary two of them structural the temporary factors were reduced featuring of our branded products in the retail channel to mitigate the impact of cost inflation while.
Price increases are being implemented.
The second was supply chain and labor related disruptions, resulting in lost sales of approximately $28.8 million.
Most of this was labor related and, as George mentioned, a lot of that occurred at the beginning of the quarter with the outbreak of the Omicron variant and incredible absenteeism in a number of plants.
The third factor was sales mix changes with lower average selling prices for certain new listings, offsetting volume growth.
And the final factor was a later Easter.
On the structural side there were two key factors that impacted our growth rate for the quarter. One was the evolution of our process lobster strategy, which resulted in additional inventory being put away for the busy spring and summer seasons and less like trading up lobsters.
Then the second factor was seasonality, with the first quarter being our slowest, naturally our growth rate tends to be lower in the first quarter.
If you normalize for two of the more quantifiable factors, namely the the supply chain challenges and the sales mix challenges.
Reduced.
Featuring a sorry, the supply chain challenges and the sales mix challenges.
And, I'm sorry, a third factor, Easter, then our normalized growth rate for the quarter would have been about 6.5%, which would be above our long term targeted range of 4 to 6, but still below our potential, largely due to seasonal factors, as well as the featuring factor I mentioned earlier.
The next slide, slide 15, shows the major growth drivers across all of our platforms.
The ones highlighted in yellow, where the ones mainly contributing to the quarter's growth.
And, as George mentioned earlier, sandwiches and meat snacks are big drivers, as well as some of our initiatives in the foodservice channel.
The remaining items listed on this slide are future growth drivers that all are well underway and should contribute to our growth in 2022.
Turning to the next slide, slide 16.
We are maintaining our sales guidance for 2022, a $5.6 billion to $5.85 billion.
The midpoint of that is $5.725 billion, assuming we achieve that, that will represent growth of $773 million over 2021, and a growth rate of about 16%, which is below our 11 year CAGR of about 22.4%.
But does not reflect any acquisitions that have not yet been announced.
Yeah.
Turning to the next slide, slide 17. Our weekly sales trend, you can see we started the second quarter of 2022 with a strong sales momentum, the gold line representing 2022, the green line 2021.
And like I said, good momentum going into the second quarter.
Yeah.
Slide 18.
For the quarter we generated EBITDA of $95.8 million. This is a $13.3 million or 16.1% increase over 2021.
There are three key positive drivers of that: selling price inflation, acquisitions, and organic sales growth. And three smaller drivers, namely incentive based compensation accruals being lower, investment income from a full quarter of Clearwater seafood, the acquisition there.
And production efficiency improvements.
Offsetting that were several negative factors, by far the most significant one of which was cost inflation, primarily with direct materials, wages and freight inflation that totalled about $124.5 million in the quarter, and smaller factors included plant overhead mainly associated with the growth in building infrastructure for the future, additional outside storage costs, mainly associated with hedging strategies we are using right now to address and mitigate the impacts of inflation and supply chain disruptions, and finally, some additional SG&A infrastructure.
infrastructure for the future, additional outside storage costs, mainly associated with hedging strategies we are using right now to address and mitigate the impacts of inflation and supply chain disruptions, and finally, some additional SG&A infrastructure.
Turning to slide 19.
Looking at our EBITDA margin for the quarter, we came in at 7.7%.
This was roughly 230 basis points off our annual target of 10%.
There are five factors contributing to the difference, 4 temporary and 1 structural.
The 4 temporary temporary factors were, first off and the most significant one, being delayed selling price increases due to retail notice periods. This was about a $16.2 million dollar impact if you pro-forma reflected price increases put through partway through the quarter.
The second was lost contribution margin from supply chain, the labor disruptions.
The third, certain product categories, and this relates mainly to our premium food distribution businesses, were being temporarily managed to maintain margin dollars versus margin percentages, in order to assist customers dealing with extreme cost inflation, and then finally, cost plus contracts. Again, mainly in our premium food distribution group.
Again, mainly in our premium food distribution group.
The structural issue was the seasonal [inaudible] in the first quarter. It is our slowest quarter of the year, and generally it`s a lower growth quarter. So, if you normalize for the delayed selling price increases in the supply chain disruptions, our normalized EBITDA margin would have been 9.2% which is within normal expectations, given the seasonal consideration, relative to our 10% target.
within normal expectations, given the seasonal consideration.
relative to our 10% target.
The next 5 slides show general market pricing trends for the major commodities used by our businesses. You will see that all of them illustrate a very inflationary environment, with seasonal record high prices for most or all of the quarter.
Sorry.
Next slide slide showed general market pricing trends for the major commodities used by our businesses.
You will see that all of them illustrate a very inflationary environment with seasonal record high prices for most or all of the quarter.
This first slide, slide 20, which is for our basket of pork-based commodities, purchased mainly by businesses in our protein group, is the least dramatic [inaudible], with CVT seasonal record high prices for most of the quarter, but not absolute record highs.
The next slide is for our basket of beef-based commodities, purchased mainly by our businesses in the protein and distribution group.
It shows record seasonal highs, but at least it's somewhat stable market, which is a positive for us, as volatility is generally the biggest challenge to managing our margins in the short term.
The next slide is a basket of chicken-based products, purchased mainly by businesses in our protein group.
As the chart clearly shows, chicken cost inflation for the quarter was at extreme levels with most items reaching seasonal and absolute record highs. We will be discussing the impact of chicken, as well as turkey commodity cost in our business later in the presentation.
Later in the presentation.
The next slide is for a basket of lobster products sold by businesses in our seafood group, and again shows record high seasonal prices and close to record high absolute prices.
The final slide is for a basket of salmon products, purchased by businesses in our seafood and distribution groups, as similar to the previous slides show record high seasonal and absolute prices.
Turning to the next slide, slide 25, this is an analysis of the impact of chicken and turkey commodity cost inflation on our first quarter results.
As I mentioned earlier, these commodity niece or purchased primarily by our businesses in our protein group, and with the recent success of our cooked protein initiatives have becoming a meaningful input for the group.
The pictures at the bottom of this slide illustrate some of the group's products that use these commodity inputs.
The table on this slide bridges our sales in gross margins from Q1 2021 to Q1 2022.
You can see in Q1, 2021, we had sales of approximately $80.6 million with a gross margin of 28.6%.
Over the course of the year, we put through $17.3 million in price increases that impacted the quarter.
Despite these price increases, we continue to see volume increases of about $4.3 million, but during the quarter, we saw commodity cost inflation of $21 million. So, the net result was at the end of the first quarter, we had sales of $102.2 million, but our margins had fallen to 19.5%.
And the decline in our margins you can see, as a result of the commodity cost inputs, relates mainly to the delays in pricing that, result from retailers requiring 60 to 90 day notice periods.
Using the price increases that were put through during the quarter, but didn't have a full quarter's impact normalizing for a full quarter's impact, that would have been about and not another $9.2 million of margin in selling price increase, and that would have brought our margins more in line with the historic level of roughly at 26.1%.
At 26, 1%.
The next slide shows a case history on a specific chicken based SKU.
Very successful SKU, you can see in 2021, looking at the table on the left, it had sales of roughly $58 million.
During 2021, we put through almost 24% price increases, and just to show the elasticity of the product, you can see we still had volume growth up 8%, despite those price increases.
The table on the right just shows you how extreme the situation has gotten, subsequent to 2021, we've put through three additional price increases, such that over the past year total price increases are almost 76% for this product, and the product continues to move well.
total price increases are almost 76% for this product, and the product continues to move well.
Turning to slide 27.
We are also maintaining our EBITDA guidance for 2022, a range of $510 million to $530 million.
The chart shows the midpoint of $520 million, which if we achieve that, will be an increase of $89.3 million from 2021, or roughly 20.7%, which is in line with our 11 year CAGR of about 22%, and again, this does not show or reflect any potential acquisitions for the balance of 2022.
potential acquisitions for the balance of 2022.
Turning to slide 28, at our adjusted earnings performance. Adjusted earnings for the quarter were $39.4 million, that was an increase of $8.1 million or 25.9% as compared to 2021.
Our EPS for the quarter was 88 cents per share. This is an increase of 16 cents per share, or 22.2%.
Looking at our slide 29, and our five year targets. We continue to remain very bullish on achieving the target, using the midpoint of our 2022 guidance, adding some very moderate growth for 2023, you can see we easily exceed our $6 billion target.
<unk> target.
Turning to the next slide and our EBITDA margin, our EBITDA target for 2023, you can see again, with our midpoint of our guidance, and the moderate growth in a conservative contribution margin on that growth, we will exceed both our EBITDA profit target or absolute number target, and our 10% EBITDA margin target.
With our midpoint of our guidance and the moderate growth in a conservative contribution margin on that growth, we will exceed both our EBITDA profit target or absolute number target and our 10% EBITDA margin target.
Okay.
Turning to our balance sheet, on slide 31, we continue to maintain a solid balance sheet and good liquidity, our key ratios continue to be in their targeted zone, and our available credit capacity at the end of the quarter was $305 million.
to be in their targeted zone, and our available credit capacity at the end of the quarter was $305 million.
Okay.
Turning to slide 32.
Our free cash flow for the trailing 12 months increased to $269.8 million.
That was a modest increase of $6.5 million or 2.5%, but again, it reflects only one quarter and a slow quarter of that, of change from our 2021 number.
Changed from our 2021 number.
On our free cash flow per share, we grew that to $6,16 per share up from $6,05 per share.
Our pay-out ratio came in at a very conservative 42.7% on a trailing 12 months basis.
Came in at a very conservative 42, 7% on a trailing 12 months basis.
And subsequent to the quarter, we declared dividend for Q2 of 70 cents per share.
<unk> dividend per quarter to <unk> 70 per share.
Turning to capital allocation.
Total project Capex for the quarter was $33.8 million, and again, we define project Capex as projects that are generally expected to earn an internal rate of return of 15% or greater, after tax, unlevered.
expected to earn an internal rate of return of 15% or greater, after tax, unlevered.
Normally using a 10 year plus business model.
You can see we have 13 major projects underway.
4 of those being coming complete on line in 2022, so there will be some contribution in 2022, but most of these projects will be major drivers of our growth in 2023 and forward.
online in 2022, so there will be some contribution in 2022, but most of these projects will be major drivers of our growth in 2023 and forward.
Yeah.
In terms of acquisitions, we completed four acquisitions in the quarter, with a total capital allocation of $41.6 million. Again, all of our acquisitions, there`s generally an expectation of a 15% internal rate of return.
And, as George mentioned earlier, we continue to have a very full pipeline of opportunities we are exploring. With that, I will turn the presentation back over to the commentator.
George Paleologou: Back to you, Fay.
Operator: Thank you, presenters. As a reminder, to ask a question, you will need to press star one on your telephone. To withdraw a question, please press the pound key. Please, stand by while we compile the Q&A roster.
Rusty pound key please standby, while we compile the Q&A roster.
Your first question comes from the line of Martin Landry. Your line is open.
Martin Landry: Good morning, George and Will.
Multiple speakers: [George Paleologou] Hi, Martin. [William Dion Kalutycz] Hey, Martin.
Martin Landry: You seem to be doing a really good job dealing with several challenges. But, I'm wondering, if we look at what you're facing, you`re facing inflation, you're facing uncertain consumer sentiment, you're facing supply chain challenges you`re facing labor shortages. Which one of those are you the most concerned with? Which one of those impacts your business in the biggest way?
I'm wondering if.
If we look at what you're facing are facing inflation you're facing.
And certain consumer sentiment, you're facing supply chain challenges your flight facing labor shortages.
Which one of those are you.
The most concerned with which one of those impacts.
Your your your business.
And the biggest way.
George Paleologou: Well, I think, Martin, as you know, we faced a number of challenges over the last 2 years, particularly with the onset of Covid, right?
We faced a number of challenges over the last.
particularly with the onset of Covid, right?
A lot of labour shortages, in particular.
In particular.
Yeah.
I think we've done a pretty good job managing through a lot of these headwinds and we continue to do a good job.
The issue of the day, as I said earlier, is inflation.
And again, as Will explained, we've demonstrated our ability to pass on pricing.
We've demonstrated our ability to pass on pricing.
The big question mark for us is, at what point our consumers want to push back, right? Because, there's a price point that we might get to, but it is that very price point that will force commodities to go back down.
At what point are.
Consumers want to push back right, because there's a price point that.
We might get to but it is that they're a price point that will force commodities to go back down so.
So, again, for us it's important to stay proactive, and we run our business in a dynamic way, particularly with regards to pricing.
Our proactive and.
We run our business in a dynamic way, particularly with regards to pricing.
And again, we'll see what happens with inflation. But, the other side of the coin is that these tough conditions may be difficult for premium brands, but they are more difficult for other companies, as well. In an environment where consumer demand for food is relatively stable, that provides us with more opportunities, right?
The other side of the coin is that.
These tough conditions.
It may be difficult for premium brands, but they are more difficult for other companies as well in an environment, where consumer demand for food is relatively stable that that provides us with more opportunities.
Right so.
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So, there`s pluses and minuses to this challenging environment. We're very confident that we're well positioned. We've invested a lot of capital in automation and robotics. I showed a video of our generation 3 line, which we installed at our Phoenix plant recently.
we're well positioned. We've invested a lot of capital in automation and robotics. I showed a video of our generation 3 line, which we installed at our Phoenix plant recently.
Which we installed at our Phoenix plant.
<unk>.
We've made a number of investments in our business to deal with some of these issues. Anyway. So, I think overall we're very well positioned for when things normalize. And, the unfortunate part is that some of these investments, and efforts, and capital that we`ve spent hasn`t really shown on our results as of yet, because of some of the headwinds that you've mentioned, but eventually it will. Hopefully I answered your question.
To deal with some of these issues and anyway. So I think overall we're viewing.
We are well positioned for well for when things normalize normalize and the unfortunate part is that you know.
Some of these investments and efforts and.
And capital that we spend has been.
As shown on our results as of yet because of some of the headwinds that you've mentioned, but eventually will.
Hopefully I answered your question.
Martin Landry: Yeah, it's super helpful color. And, maybe my other question would be on capacity utilization. I'm wondering if you can give us a bit of a view of what was your capacity utilization during the quarter? Are you still capacity-constrained? Are you still selling everything you produce?
What was your capacity utilization during the quarter are you are you still capacity constrained are you still selling everything you produce.
George Paleologou: Yeah, yeah, absolutely. Again, as Will mentioned.
Our business is quite seasonal, so the first quarter in general, and the fourth quarter capacity utilization is relatively low.
In general and the fourth quarter.
Capacity utilization is relatively low.
As I mentioned in my prepared remarks.
January was particularly tough. If you're not running plants at or near full capacity, your margins suffered immensely.
Last that at or near full capacity.
Your margins suffered immensely.
Because your costs get out of line and your productivity gets out of line. But, generally speaking, we`re looking forward to the second and the third quarters, we've added more capacity now, we've invested in automation and efficiencies, and we are well positioned for the rest of the year.
Get out of line and your productivity gets out of line, but generally speaking.
Going forward too.
The second and third quarters, where we've we've added more capacity now.
We've invested in automation and efficiencies and where we are well positioned for the rest of the year.
Martin Landry: Okay. That's it for me. Congrats on your results. Thank.
Multiple speakers: [William Dion Kalutyzc] Thank you, Martin. [George Paleologou] Thanks, Martin.
Operator: Your next question comes from the line of George Doumet. Your line is open.
George Doumet: Yeah. Hi, guys. I wanted to talk a little bit on your prepared remarks. You alluded to temporary providing a person per customer, I think that showed up in the PFD margins. Can you talk a little bit about what that is in sales a little bit? And, is that something that we'll probably see more of across other commodities?
Talk to a little bit in your prepared remarks, you alluded to temper.
Temporary providing a person to customers I think that showed up in the <unk>.
PFD margins can you talk a little bit about what that is.
Sales, a little bit and is that something that we'll probably see more of across other other commodities.
George Paleologou: Hey, George, you cut out there at the beginning of your question. Can you just repeat the start of it?
George Doumet: Sure sure.
I think in the T&C you had some margin pressure.
Are they leading to a temporary providing cushion for customers?
I was wondering if you can, maybe provide a little bit more color, if that's going to be spread to other areas of the business, to other commodities or segments?
William Dion Kalutycz: Yeah, no, that's pretty unique to the Premium Food Distribution group, we don't expect that to go into the Specialty Foods group.
You know, the Premium Food Distribution group, a big part of their business is cost plus.
A big part of their business is cost plus.
So, you've got that element, and then, this environment with the extreme, a lot of the restaurants, those types of customers, they need time to adjust, and so, they're maintaining the gross profit dollars. So, ultimately, we do expect that normalized, whether it's just through stability, or ultimately through deflation, but this is a transitory impact.
maintaining the gross profit dollars. So, ultimately, we do expect that normalized, whether it's just through stability, or ultimately through deflation, but this is a transitory impact.
George Doumet: Okay.
And it looks like your 2022 guidance is predicated on some mild deflation in certain commodities, I guess in latter half. I guess there`s some expectation out there that raw material prices are probably going to remain elevated for longer well into even next year. So, can you talk a little bit about maybe, if pressure continues, what it could mean for your margin guidance for the year? Any color there?
On commodities I guess.
Uh huh.
I guess there was some expectation out there that raw material prices are probably going to remain elevated.
Longer well into even next year. So can you talk a little bit about maybe pressure continues.
I mean for I guess for our margin guidance for the year.
Any color there.
William Dion Kalutycz: Yeah, no.
The reality is, what`s most important to us George, is stability, right?
What causes us the most grief is these extreme, especially when you have all the baskets moving up at once, is that pricing delay impact on our specialty foods segments. So, as long as we get stability, that's the most important assumption in our guidance.
is that pricing delay impact on our specialty foods segments. So, as long as we get stability, that's the most important assumption in our guidance.
Then, if there is some deflationary impact, that puts us towards the top end of our guidance, kind of thing. So, based on the current outlook and how we're seeing the commodities and the general expectations of the market, we're pretty comfortable with our guidance.
and the general expectations of the market, we're pretty comfortable with our guidance.
George Paleologou: I think, George, the examples that Will gave you in the deck with regards to poultry, is a very good gauge to use. I mean, we've seen unprecedented inflation, with regards to our commodity pricing, as you know, and we keep pushing prices up, we`re expecting volumes to go down, but they haven`t as of yet, we'll see what happens. But, that's a very good example really of our ability to manage inflation in this type of environment.
It is a very good gauge to use I mean, we've seen unprecedented.
Inflation with regards to our commodity pricing as you know and we can.
Keep pushing prices up.
<unk> volumes to coat talent, but to have anticipate then we'll see what happens, but that's a very good example, we view of our ability to <unk>.
Manage inflation.
In this type of environment.
George Doumet: Okay. Thanks. And just one last one, maybe as a housekeeping question for Will.
You guys put out a maintenance, I think you've put out a maintenance capex number for this year, but not on growth.
Can we assume like around the 150 to 170? That`s first question. And second question.
The first question and second question.
Would you expect, I know it's early days, but would you expect that number to be directionally higher, low or flat next year?
More of a flat next year.
William Dion Kalutycz: Yeah. Your numbers not far off for the year. Again, all the projects that are in the pipeline or in our MD&A, and this quarter we did announce three new projects, two of them fairly material. And I don't expect any other major things impacting this year. There may be some other new projects, but they'd be coming on line towards the end of the year. So not a bad number for this year.
Your numbers not far off for the year again, all the projects that are in the pipeline or in our MD&A and in this quarter. We did announce three new projects two of them fairly material.
And.
Don't expect any other.
Major things impacting this year there may be some other new projects, but they'd be coming on line towards the end of the year.
So not a bad number for this year.
And, in terms of 2023, it's really playing on the projects that are currently in the pipeline.
George Doumet: Okay. Thanks, guys.
Multiple speakers: [Will Dion Kalutycz] Thank you, George. [George Paleologou] Thanks, George.
John Zamparo: Your next question comes from the line of John Zamparo. Your line is open.
Your line is open.
John Zamparo: Thanks. Good morning, guys.
Multiple speakers: [William Dion Kalutycz & George Paleologou] Good morning, John .
John Zamparo: I wanted to follow up on the inflation dynamic, and you mentioned there was a point at which consumers pushback, and inflation might subside at that point because of lower demand.
I wanted to follow up on the inflation dynamic and you mentioned there was a point at which consumers pushback in the inflation might subside at that point because of lower demand.
Assuming we do eventually get there, is there potential for inflation to remain high because of what's going on in the supply side, rather than just looking at the name? I`d like to hear about that.
Okay.
George Paleologou: I think it depends on the on the commodity, John. I think, as you probably know, poultry suppliers are quite tight, and we do have the avian flu situation now in North America.
Poultry suppliers are quite tight and we do have. Avian flu. Situation now in North America.
Avian flu.
Situation now in North America.
So again, I think that is was, what? 37 million birds I think were euthanized with regards to the avian flu already. And, I think we probably have about a month to go with regards to that.
To that.
The avian flu already and I think we probably have about a month ago with regards to that.
So I don't think poultry is going to subside, but really, I think you have to go back to Will`s comments. And, for us, we've gone through high pricing in the past, particularly with pork, and it`s the volatility that we're concerned about. If prices go up and they remain high, we'll do fine. We'll maintain our margins, we`ll move prices up, our products generally are branded and consumers buy them for their other attributes, and I think you`re seeing that. You've seen that in Will`s slides with the poultry example.
We'll comment then.
And for Us.
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We've gone through higher pricing in the past, particularly with port.
And.
It's the volatility that that.
That we're concerned about if prices go up and they remain high.
We'll define we'll maintain our our margins will move prices up our products generally are branded and. Consumers don't buy them for four there are other attributes and I think youre seeing that. You've seen that in. Slides with the poultry example.
Consumers don't buy them for four there are other attributes and I think youre seeing that.
You've seen that in.
Slides with the poultry example.
John Zamparo: Okay. Thanks. And then, in the press release, you called out global supply chain and access to goods and services for manufacturing and distribution as one of the condition to the guidance. Can you add some color here? It doesn't sound like that's referring to food purchases. I'd just like to better understand that component of the guidance.
In the press release, you called them.
Our global supply chain and access to goods and services for manufacturing and distribution is one of the the condition to the guidance can you add some color here it doesn't sound like that's referring to food purchases I'd, just like to better understand that that component of the guidance.
William Dion Kalutycz: Yeah, It's just that it's a general risk, John, and, I don't know if you recall, in Q4 one of the major impacts on our sales was a couple of critical lines were shut down, because we couldn`t source parts for those lines, and so, literally, for three or four weeks they were not running.
a couple of critical lines were shut down, because we couldn`t source parts.
for those lines, and so, literally, for three or four weeks they were not running.
It's that kind of stuff. Now things have gotten much better.
A little bit of that carried over into Q1.
But, by the end of the Q1 those issues seem to be easing up.
And again, we will see how things unfold globally, but it seems that at least for goods things are improving. But anyway, it's more just highlighted as a general risk factor.
At least for goods goods. Things are improving but anyway, it's more just highlighted as a general risk factor.
Things are improving but anyway, it's more just highlighted as a general risk factor.
John Zamparo: Okay, understood. One more on inflation on the guide and then one housekeeping question.
Inflation in the guide and then one housekeeping question.
Assuming your price increases are one to one offset on the cost inflation, I would assume you're in double digit territory on inflation, like most are in this industry. Can you quantify, even approximately, what it is you're expecting through the back half of the year?
I would assume you're in double digit territory on an inflation like most are in this industry can you quantify even approximately what it is you're expecting for through the back half of the year.
George Paleologou: Yeah. We don't provide that information, John .
We don't provide that information John .
John Zamparo: Okay, fair enough. And then, last one for me. Can you remind us approximately how much access to liquidity does Clearwater have?
William Dion Kalutycz: We don't disclose that, but their bought balance sheet is very solid and they are well ahead of our expectations. We built into the original model, just given the solid performance of their business.
John Zamparo: Okay. That's all for me. Thank you very much.
William Dion Kalutycz: Thank you, John .
Operator: Your next question comes from the line of Stephen MacLeod. Your line is open.
Stephen MacLeod: Thank you. Good afternoon, guys or, I guess, good morning for you.
Sure.
I just had a couple of questions. I wanted to start with just some of the headwinds that you've seen in the quarter, and I know, lots of moving parts, but just wondering if some of the volume headwinds that you've cited have abated, so things like the retail featuring and some of the mix changes?
The ones you cited as temporary. Just wondering how those are trending as you get into Q2?
William Dion Kalutycz: Yes. They're kind of segment specific, so the big impact on Specialty foods was by far the issue with featuring, and that`s one, Steve.
The big they're kind of segment specific so the big impact on specialty foods was by far the the issue with featuring and Thats One Steve is.
We`ve got to catch our price increases up, and once they are caught up, then they'll start resuming their normal preaching activities.
So, that should be something we see transitioning over the course of Q2.
Given our outlook around commodities and our pricing structures in place. So it will be a bit of a story for Q2, and hopefully not much of anything in Q3.
In terms of the sales mix.
Actually, it's kind of featuring related as well, and that`s more premium food distribution group story.
The premium food distribution group, they`re constantly looking for new procurement opportunities, new solutions they can provide customers, and they've made some really great grounds on products they've been sourcing out of Mexico and some other markets, and it has created some great sales momentum. But, the reality is, the prices for those products are lower dollar items.
<unk> group is there.
We're constantly looking for new procurement opportunities new solutions, they can provide customers and they've made some really great grounds on products, they've been sourcing out of Mexico, and some other markets and it has created some great sales momentum, but the reality is those prices the prices for those products are low.
Sure dollar items.
And what's happened is, the volume they`ve seen grow there, which we expect to be sustainable, that volume growth has been hidden because of the incredibly high prices for premium protein and premium seafood products. Their traditional retail customers aren`t featuring their products and that's a big part of their sales.
Is helping their customers with those features.
That's a different featuring concept from specialty food towards our decision. This is the retailers not featuring it. So, we fully expect that business to come back, but it's probably not going to come back until you see some easing of those premium proteins and seafood product pricings.
And the reality is though, that we are showing good volume growth. It's just getting hit or hidden by that noise of the sales mix.
Stephen MacLeod: Right. Okay. Okay. That's great. Thanks will.
And then, with respect to the gross margin outlook.
Do you still expect margins to kind of get back to that, get into that 10% range in the back half of the year? I think that was what you were looking at as of last quarter.
William Dion Kalutycz: No, you mean EBITDA margins, right Steve?
Multiple speakers: [Stephen MacLeod] Yes, that's right, I mean, EBITDA margin, yeah, that's right. [William Dion Kalutycz] Yeah, and 10%. No, certainly, by Q3 we're expecting that. The reality is, our normal cycle or what we built in to hit that 10% annual target is better than 10% margins in Q2, and Q3.
Better than 10% margins in Q2, and Q3 and then I.
William Dion Kalutycz: And then, again, Q1, and Q4 being shoulder seasons, lower margins with the average coming in at 10.
So, Q2 is still going to have some normalization from featuring.
Sorry, from pricing delays, as some of those still catch up. But by Q3, you should see that solid excess of 10% margin.
Stephen MacLeod: Great. Okay, and then maybe just one more if I could. It`s a tricky one.
Okay, and then maybe just one more if I could.
I think I know the answer, but I just wanted to ask. As you exited Q1, do you feel like you were sort of fully caught up on inflation with price? And then you have to put through more price in Q2? Or is it just so dynamic that you feel like you`re still sort of catching up?
Do you feel like you were sort of fully caught up on inflation with price and then you have to put through more price in Q2 or is it just so dynamic that you feel like youre still sort of catching up.
George Paleologou: Materially, yes, Steven. Materially, there`s still some pricing we need to take, particularly with poultry. Poultry continues to go up in certain situations.
Situations by effect.
But mostly, yes, we've pretty well caught up.
William Dion Kalutycz: And the nice thing too, Steve, is: one of the biggest challenges for us is we've quite often had these incredible inflationary cycles within a specific commodity.
In 2019, you had pork with ASF, and we've had drought issues impact. But, the unique thing over this last year, two years has been everything going up and now it's moving away. We're getting, as you saw from the charts, we're starting to get stability in a number of items and it makes it a little more manageable, like George says, when it's only one commodity spiking.
Like George says when it's only one commodity spiking.
Stephen MacLeod: Right. Okay. Well, great, guys. Thank you so much.
Multiple speakers: [William Dion Kalutycz] Thank you, Steve. [George Paleologou] Thanks, Steve.
Operator: Your next question comes from the line of Vishal Shreedhar. Your line is open.
Vishal Shreedhar: Hi. Thanks for taking my question. And thanks for that commentary on the impact of inflation on your various metrics. That was very helpful.
I noticed in the language in the 2022 outlook, it's changed slightly from what you presented in Q4.
The baseline commentary regarding reaffirming guidance is the same, but the risks changed a little bit.
Reaffirmed guidance is the same but the risks.
Changed a little bit.
So I'm wondering if your views and feelings on how the risks have evolved from Q4 to Q1, have those changed how you prioritize them?
If you're if your views and feelings on how the risks have evolved from Q4 to Q1 and have those changed have you re prioritize them.
William Dion Kalutycz: Again, I think it is more reflective of what's going on today, Vishal.
But, overall, if you rank them, it`s still inflation and supply disruption, you know, I don't think the rankings changed at all, and we've just refined some of the language.
Vishal Shreedhar: Okay.
George Paleologou: I wouldn`t say they've changed, Vishal. Like, they're the same issues.
Congress Okay.
And.
Vishal Shreedhar: Okay. And, PBH, through the last few years like many companies, has faced many challenges, and the company, as you've noted off the top, has executed through them currently and in the past as well. But, given the challenges that we`re in, and given how you`re seeing PBH is reacting, is that causing you to reflect on any of the elements of the strategy, and how you might orient yourself into future with acquisitions or with Capex investments? Obviously, the key tenants of PBH are still in place, but I'm thinking about geographies, market segments. If anything [inaudible] that`s been fine tuned as a result of this experience.
PVH now through the last few years like like many companies in the space.
Many challenges in the company.
As you've noted off the top as it's executed through them currently and in the past as well, but given the challenges that were in and given how youre seeing PVH is reacting is that causing you too.
To reflect on any of the elements of the strategy and how you might orient yourself into future with acquisitions or what Capex investments. Obviously, the key tenants of PVH are still in place, but I'm thinking about geographies market segments.
If anything I would thats been fine tuned as a result of this experience.
George Paleologou: Again, Vishal, we've been doing this for 22 years now, from the time we launched Premium Brands, and as you said, we've been through a lot of challenges and headwinds, in particularly with Mad-cow disease in the early 2000s.
Followed by the economic collapse of 2007-2008.
We`ve been through a lot.
I would say that we never changed our strategy. We think that consumers looking for better quality food is a mega-trend, and consumers are looking for more convenient, better for you food is a mega trend.
We never change our strategy, we think that consumers looking for better quality food is a mega trend.
Consumers are looking for more convenience better for you food is a mega trend and.
And again, we never deviated from our vision, we take a very long-term view to the food business, we don't manage quarter by quarter, and by enlarge, as you know, we've delivered over 20% compounded return to our shareholders over the last 20 years. So again, we manage the challenges, yes, they do impact our quarterly numbers once in a while, but the strategy has not changed, we're not deviating from it.
Two the food business, we don't manage quarter by quarter and by and large as you know we've delivered.
Over 20% compounded return to our shareholders over the last 20 years. So again, we don't you know we manage the challenges yesterday duly impact.
Our quarterly numbers once in a while but the strategy has not changed we're not deviating from it.
And I think that our success, kind of gives us more conviction, even to continue it, and sometimes to accelerate it.
Because a lot of times you find the best opportunities during these tough times.
During these tough tough times.
Vishal Shreedhar: Okay, and just moving on to your thoughts on the consumer. Last quarter management indicated that the demand outlook was very robust.
And I`m wondering what you`re seeing with your various segments and your diversified base of business? What are your thoughts on the potential slowdown in the consumer we're seeing? Some broader peers mentioned that they are seeing some of that. Are you seeing a difference between Canada and the US?
On the potential slowdown in the consumer we're seeing some.
Broader peers mentioned that they are seeing some of that and.
Are you seeing a difference between Canada and the U S.
George Paleologou: Yes, as I mentioned earlier Vishal.
The mega trends that we've talked about are universal.
They are not unique to Canada or the U S. We think they are universal.
And I think, Canada and the US are very well positioned to feed the world in terms of growing demand for proteins, in particular, and good quality food, in general.
Proteins in particular and and.
Good quality food.
In general.
So again.
We're in a good place, we're in a good situation. And, as we've seen during the pandemic, the trends don't change. Sometimes the channels change. And that's why we've invested a lot of time and effort in having a multichannel approach to our business.
Thank you.
As we've seen during the pandemic.
The the trends don't change sometimes the channels change.
And that's why we've invested a lot of time and effort in and having a multichannel approach to tour business.
We want to be able to offer consumers our food in every venue that they decided to consume food, whether it's at home, or in the hockey arena, or on an airline, or on a cruise line, right?
Our food in every venue that they decided.
To consume food whether it's.
At home or.
Hockey arena or on an airline or on a cruise line right. So so.
So again, part of our strategy overall to make sure that we're able to cater to demand, where that demand happens to occur.
That we're able to cater to demand where that demand happens to occur.
Vishal Shreedhar: Okay. And, are you able to do your various businesses gather insights on the consumers ability to accommodate this inflation? Currently, right now, are you seeing anything that's leading you to pick one way or the other off the top? George, you mentioned that as one of the risks.
Are you able to do your various businesses gather insights on the consumers ability to accommodate this inflation.
Currently right now are you seeing anything that's leading you to think one way or the other off the top George you mentioned that as one of the grants.
George Paleologou: Well, as I said earlier, Vishal. I think that [inaudible] and we've seen that in the past.
For example, like, if we go back 10 years ago, belly prices, which is what you use to make bacon, as you know, skyrocketed.
Belly prices, which is what you used to make bacon as you know.
Skyrocketed.
When you've got very high bacon prices, a lot of the QSR stop featuring their bacon burger products, right? So, as soon as that happens, demand, of course, for belly goes down, and then the price of belly stands back down.
A lot of its USR stop featuring.
There are.
Bacon Burger.
Products right. So as soon as that happens demand of course for for balance goes down and then the price of valleys <unk> sat back down.
And we expect that to happen, you know ,as you probably know, a lot of restaurant chains launched chicken breast type of sandwiches in the last couple of years, and there will be a point, in our view, that the pricing will become too high and the margins for the QSR chains will be too low.
And they will move to another protein and to feature other products, and at that point, we think that prices for boneless, skinless chicken breast will come down from its record high. Anyway. So, you have all of these dynamics in our industry, all the time. The supply and demand does matter, and the behaviour of certain channels with regards to a commodity does matter.
Prices for boneless skinless chicken breast will come down from its record high anyway. So you have all of these dynamics.
Our industry, all the time that supply and demand does matter and the behavior of certain channels with regards to a commodity that's matter.
Vishal Shreedhar: Thank you for your color.
Operator: Your next question comes from the line of Sabahat Khan. Your line is open.
Sabahat Khan: Okay, great. Thanks very much.
I guess, starting with sort of the balance sheet and the M&A strategy. How you're thinking about, just given where leverage is at, I think closer to the high end of the three to four range.
How do you think about financing the size of transactions?
What's kind of a good? Does that lead you to maybe focus on more smaller tuck ins?
Just trying to get some perspective on that at this point.
Where the leverage is at.
William Dion Kalutycz: Yeah. We do expect, Saba, status quo anyways, for the balance sheet to significantly improve over the course of the year. One of the, you probably noted, one of the issues or one of the big elements on our balance sheet is our inventory, and we have significant inventory positions going into Q2, Q3, that we built up for the number of businesses, we built up for the busy summer and spring seasons.
We do expect Saba status quo any waste for the balance sheet too.
Significantly improve over the course of the year with one of the you probably noted one of the issues or one of the big.
Elements on our balance sheet as our inventory and we have significant inventory positions going into Q2 Q3 that we built up for the number of businesses are built up for the busy summer and spring seasons.
So that's naturally going to unwind. That, combined with the natural growth we're expecting in our EBITDA will bring the both the ratios down, as well as help with their capacity.
In terms of future acquisitions and opportunities there, like George mentioned, lots of stuff in the pipeline, and all we really can say is that we're committed to maintaining a solid balance sheet.
And any capital allocation decision will be done within that context.
Any capital allocation decision will be done within that context.
Sabahat Khan: Okay, and then I think you partly answered my other question. Just, I guess, so is the expectation for working capital, obviously, driven by inflation and inventory build-up. But how should we think about the working capital for the year relative to, sort of, the 2021 spend on working capital?
William Dion Kalutycz: Yes, certainly.
Looking at the two big assets, receivables and inventory.
Outside of receivables. You know, receivables, we expect to...
Should be in line with historic turnover ratios. In terms of inventory, they are way above historic term ratios and we do expect that to come down over the course of the year.
However, a big part of that being, as I mentioned earlier, the unwinding of inventory built up for the busy spring and summer seasons.
There is also additional sort of built up inventories in response to managing our way through inflation and these supply chain disruption issues. So, as the world normalizes, those will naturally unwind too, but really that's going to be driven by how quickly the world returns to a normal environment.
In response to managing our way through inflation and these supply chain disruption issues. So as the world normalizes those will naturally unwind two but really that's going to be driven by how quickly the world returns to a normal environment. So.
So, if that happened sooner, then you could very well see our inventory turns coming back down to historical levels by the end of the year.
Sabahat Khan: Okay. Thanks for that color. And then, if we look at the sort of the build up you've provided towards 2023 on slide 29, and 30, particularly on slide 30 around the EBITDA. Just trying to understand that 25% of sales organic contribution to EBITDA to sort of get to that 10% range.
organic contribution to EBITDA to sort of get to that 10% range.
Hum.
I guess the growth that you're expecting is going to be in the super high categories? I just want to understand how you're building up the 88 million.
The 88 million.
William Dion Kalutycz: It's a good question. Well, the route, if you looked at our contribution margin, our growth in Q1, again, a slow quarter, it was roughly 30%.
And it is a mix issue, the contribution margins, in our specialty foods segment, because of the over the manufacturing overhead.
And the depreciation and those things associated with producing this product, the cash flow from a sale, the contribution margin from a sale is quite high.
They have to cover all those fixed costs, but once those costs are covered, incremental sales are incredibly accretive.
And so that`s what you`re seeing on the contribution margins on specialty foods, which tend to be 25% to 35%, and sometimes more, depending on the business and the product.
Contribution margins, especially fluids, which tend to be.
25% to 35% and sometimes more depending on the business and the product.
But then we have to blend that with our premium food distribution group, which tends to be more distributive in nature, and as a result, the contribution margins are closer to their gross profit margins, and so they tend to be in that sort of 15% range, and so that 25% is kind of a blend between.
Not aggressive contribution margins in our specialty foods, but average contribution margins and the contribution margins in our premium food distribution groups. So it's kind of a midpoint at those.
Sabahat Khan: Okay. So, this is, I guess, the way I would think about it, as sort of incremental margin, sort of assuming SG&A stuff stays quiet?
William Dion Kalutycz: Well, not only SG&A, but plant overhead and depreciation, right?
Because, when we sell a product it's covering the cost of all those fixed cost items, and so, when you have a manufacturing operation, that contribution margin tends to be quite significant, because there's a lot of fixed costs that product has to cover, but once you cover those fixed costs, those incremental sales are incredibly accretive.
Accretive.
Multiple speakers: [George Paleologou] Which is why our margins are much higher in the second quarter. [William Dion Zalutycz] And, Saba, that is a big factor of how we saw ourselves getting from that 8% historic level to 10% EBITDA margins. It`s through that contribution margin growth. And the fact is, we have seen that over the last couple of years as we've grown the business. The problem is, all of this noise from Covid, and supply chain disruptions and the inflation has mass that. And that's why we spent a lot of time on these normalization, showing "hey, look, you take out this noise and there's some really good trends here, there's some really good stuff happening", and a lot of that is driven by this contribution margin concept.
At 8% historic level to 10% EBITDA margins is through that contribution margin growth and the fact is we have seen that over the last couple of years as we've grown the business. The problem is all of this noise from Covid and the supply chain disruptions and the inflation has mass.
That in and that's why we spent a lot of time on these normalization showing hey look you take out this noise and there's some really good trends here, there's some really good stuff happening and a lot of that is driven by this contribution margin concept.
Sabahat Khan: Okay. And then, just one last question for me. I guess, you know there's been a lot of discussion around inflation and pricing and I appreciate the example on poultry you provided on slide 25.
When we`re looking over here, it looks like if pricing comes in, the gross margins a little bit below historical, but are you, I guess, is there a point this year where you think, based on your outlook on where the commodity prices are, the pricing you`ve taken and plan to take. I guess it's sort of a catch up quarter, where it's sort of a 100% of the inflation is offset, or is it sort of "look, before we even get there" you and your forward purchasing or you`ve seen commodity prices come back down anyway? I just want to get understanding of whether we're sort of caught up, or what is sort of the assumption that you're sort of building off of at this point?
Based on your outlook on where the commodity prices are high.
I assume you've taken and plan to take because it's sort of a catch up quarter, where it's sort of a 100%.
Inflation is offset or is it sort of look before we even get there you and your forward purchasing or seen commodity prices come back down anyway, just want to get understanding of when we're sort of caught up on that and what is sort of the assumption that you're sort of building off of at this point.
George Paleologou: We're getting to that point, as I mentioned earlier, but you have to remember that like in the first quarter, January for us was was a mess, right? The impact on our margins was not just inflation. Inflation was a factor, and of course, as we mentioned, we move prices up, but not entirely.
January for US was was a mess right the impact on our margins was not just inflation in installation was a factor and of course as we mentioned, we move prices up but not entirely.
They didn't take effect, some pricing didn't take effect until the second quarter. But January was a mess, because we had extremely high absenteeism with our plants, right?
With our plants right.
If our plants can produce, then whatever we produce is very expensive.
Our fixed costs have to be spread over much fewer products, right? So you have to, sort of, separate the different issues, in terms of what's impacting our overall margins, right? It wasn't just inflation in the first quarter, January was pretty rough.
Much fewer products right. So you.
You have to sort of separate the different.
Issues in terms of what's impacting our overall margins right. It wasn't just inflation in the first quarter January was pretty rough.
Sabahat Khan: Great. Thanks very much for all the color.
Multiple speakers: [William Dion Kalutycz] Thanks, Sabahat. [George Paleologou] Thank you.
Operator: Your next question comes from the line of Derek J. Lessard. Your line is open.
Derek J. Lessard: Yes, good morning, gentlemen.
Just one question for me, most of my questions have been asked.
Just curious, and I know that you guys buy good businesses. But, I was just wondering if there`s been any impact on potential M&A evaluations, given the difficult macro environment. If there has been more opportunities coming across your desks?
You buy good businesses, but I was just wondering if theres been any impact on potential M&A valuations given the difficult macro environment. If there has been more opportunities come across.
Come across your desk.
George Paleologou: Yes, so, what I would say Eric, is that, and as Will mentioned earlier, our acquisition pipeline has never been more robust.
Our acquisition pipeline has never been more robust.
A couple of things happened during the last couple of years, a lot of successful entrepreneurs, food entrepreneurs are really, really tired.
Festival and took printers food into printers are really really tired.
They're very fatigue, they've been through a really rough time, they faced just about every issue possible. And it's one thing when you're part of the ecosystem, and you have a lot of partners to help you out, and to work with you. So, we're having a lot of these type of entrepreneurs approach us directly, and they tell us "listen, I still want to do this, and I still love the business, but I don't want to do it alone anymore, because it's been very stressful and anyway". So, we're seeing a lot of opportunities because of that.
And really rough time, they face just about every every issue possible and now it's one thing when you're part of the ecosystem and you have a.
A lot of.
A lot of partners to to help you out and to work with you. So we're having a lot of these type of and different approaches directly and they tell us listen I still want to do this and I still love the business, but I don't want to do it alone anymore, because it's been very stressful and anyway. So we're seeing a lot of opportunities because of that.
Secondly, I would say that, for a while, there was a lot of capital chasing food deals, particularly from private equity. We're not seeing that as much at this point.
For a while there there was a lot of capital.
<unk> food deals, particularly from private equity, we're not seeing that as much.
So, it's a good environment for us to continue to make acquisitions that, kind of, complement our different platforms.
Continue to make acquisitions that.
Kind of complement our different platforms.
Derek J. Lessard: Very helpful, George. Thanks, and have a good evening, guys.
William Dion Kalutycz: Thanks Derek.
Operator: There are no questions over the phone. I would now like to turn the call over to Mr. Paleologou.
George Paleologou: Yes. Thank you, Fay, and thank you for attending, everybody. All the best.
Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.
[music].
Okay.