Q2 2022 Premium Brands Holdings Corp Earnings Call
Good afternoon, ladies and gentlemen, and welcome to the premium brands Holdings Corporation second quarter 2020.
<unk> earnings Conference call.
At this time all participants are in a listen only mode.
Following the presentation, we will conduct a question and answer session.
If at any time during this call you require immediate assistance. Please press star zero for the operator.
This call is being recorded today Friday August two.
2022.
Our speakers today are George Pallial logo, CEO and president of premium brands.
And we'll.
Hello.
CFO of premium brands I would now like to turn the conference over to Mr. Pallial logo. Please go ahead Sir.
Thank you Michelle and welcome everyone to our 2022 second quarter Conference call.
With me today is our <unk>.
<unk> will coverage.
Presentation today, we'll follow the deck that was posted on our website. This morning.
Can also anticipate clicking on the link offs our earnings press release issued this morning.
We're now on slide five.
Which outlines certain key highlights for the quarter.
Right the various headwinds we reported very good results for the quarter and year to date.
Our CFO Bill alluded to we will provide you with more color on our results later on in the presentation.
Commodity cost inflation in a volatile and unpredictable environment continues to challenge our operations during the quarter.
Silver lining is that for the first time in over two years, we're beginning to gradually see normality back into the market and in consumer and customer behaviors.
Our labor challenges are abating supply chains are catching up and are becoming a little more reliable and inflation appears to be peaking.
Consumers are now, arguing about traveling and visiting friends attending large gatherings and consuming so we got outside of their homes.
Once again, we're pivoting and adjusting to this new drama, which by the way is beginning to look very much like the old pre pandemic normal.
Our solid results for the quarter. Despite the transitory headwinds once again demonstrates the balance and resilience of our unique business model and its ability to continue to deliver above average and consistently growing returns to our shareholders.
Foodservice demand came back strongly during the quarter as customers added seating capacity expanded menus in hours and hosted larger gatherings.
Our protein platform faced a perfect storm during the quarter and certain spring weather reduced featuring acute inflation, some price elasticity points and the reopening of foodservice, which reduced eating at home occasions.
Fight these challenges to macro trends, we have been investing in over the past few years remains on track and our check hutaree cooked protein and sandwich platform continues to do well.
Clearwater seafood had a record quarter and is performing ahead of plan year to date.
Clearwater its results are benefiting from robust demand and strong pricing for most of the species.
Despite weak margins seeing snow crab business and substantially higher fuel cost clear where species and sales channel diversification combined with proactive and disciplined cost management are helping to deliver excellent results.
We're pleased to announce the closing of two more strategic transactions during the second quarter <unk> demand is located in a high U S and that's capacity and market reach to a cookbook means platform, while the purchasing of the other 50% of course valley that we did not previously Jan will enable us to more soon.
Leslie expand our dry cooling capacity in the future.
We're well positioned to continue to profitably grow our various platforms and were pleased to see normality beginning to return in terms of consumer actions and buying behaviors.
Our foodservice airline on Coors light cruise line sales.
Are nearing pre pandemic levels, while our export business is gaining traction similar.
Similarly, the explosion in consumer discretionary spending, which clogged up supply chains around the world is slowing down.
It's more labor availability for the consumer Staples and service industries.
Overall, we're feeling very good about what lies ahead, assuming a continued return to normality we have come through some unusual volatile bought Italian unprecedented times and we have demonstrated our diversification.
Zillions and our ability to pivot quickly, we're confident that our decentralized entrepreneurial business model combined with our great people and culture will continue to propel us to new opportunities and new growth.
We're now on slide five to 11.
Having <unk> here some pictures of products manufactured and sold by <unk>.
Protein businesses demand for protein products continues to grow in both foodservice and retail and the recent acquisitions of Beech Grove May Dragon King's command provide us with more capacity and market reach in Canada, and the U S. Over the past five years, we have established ourselves as a leading provider.
Well cooked protein solutions to customers in Canada, and the U S cooked protein office retail and food service customized solutions to their labor shortage issues.
Providing consumers with convenient excellent quality food experiences.
We're now on slide 12, as you can see our acquisition pipeline remains 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 will college, who will update you on our financial results for the quarter as 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 discussed.
Please refer to our MD&A for fiscal 2021 as well as other information on our website for a broader description of the risk factors that could affect our performance.
Now turning to slide 14.
Our sales for the quarter were $1 519 billion, an increase of $285 million or 23% from 22021.
The key growth drivers of this increase were selling price inflation of $134 4 million.
I should note that over the last four quarters, we have put through price increases totaling roughly $490 million.
Acquisitions accounted for $114 $1 million of our growth.
A weaker Canadian dollar relative to the U S dollar, which resulted in the favorable translation of our U S operations contributed $21 million toward growth.
And organic volume growth contributed $16 $6 million.
Turning to slide 15.
Organic volume growth rate for the quarter was one 3%.
This was below our target and expectations for the quarter four five key reasons.
Two of those two key challenges in our specialty food groups included the sales challenge as George mentioned earlier in our protein group, namely poor weather across most of Canada less featuring by our business is the shift in sales from the retail segment to the foodservice segment and a small amount of demand.
Destruction as certain limited categories.
Our specialty foods sales were also impacted by issues in our sandwich groups Phoenix Sandwich plant that resulted from the transitioning of their production lines from Gen. One lines to their automated Gen three lines and corresponding with this transition resulted in some.
Higher than normal customer order short shipments.
Our premium food group, our premium food distribution groups organic volume growth rate was impacted also by three challenges first was our lobster strategy as our key lobster business has shifted David built inventory over the quarter for future sales initiatives.
They're processed operations, which resulted in less trading of live lobsters in the quarter.
Also our seafood group experienced less featuring up their premium seafood products by both retailers and foodservice is due to high record high price points and finally, our exports to China of live lobsters was down due to pandemic related issues within that.
Country as well as the lack of air transportation.
All five of these factors, we see as temporary and we are already seeing solid improvement in the third quarter, particularly on the weather front.
Turning to slide 16.
This slide outlines the major growth initiatives across our six platforms you can see it's a very diverse range of initiatives.
The ones highlighted in yellow contributed to our organic growth in the quarter in our seafood and distribution groups you can see a variety of initiatives, where we're generating good momentum in the quarter a lot of these driven by the recovery in the foodservice segment. Our Sandwich group also generated good solid growth in the quarter.
By their frozen artisan sandwich initiatives, which continue to gain momentum both in the <unk> and retail channels.
Our bakery group, while being a smaller platform had tremendous success in the U S. With the launch of a variety of new artisan bread products and finally, our culinary group the smallest of our platforms continue to see good progress in the retail channel with a number of new product solutions.
Turning to slide 17.
We increased our sales guidance for 2022 to $5 75 to 6 billion from a previous range of $5 6 billion to $5 eight 5 billion.
Using the midpoint of our current guidance, which is five 875 billion. This would represent an increase of $943 million from 2021, or roughly 19, 1%, which is in line with our 11 year sales CAGR of 22, 4%.
Turning to slide 18.
This slide shows our sales on a weekly basis. The gold line represents 22022, you can see going into the third quarter. We continued to show solid momentum in our sales and as some of the headwinds that we experienced in the second quarter subside, we expect that trend to.
Right.
Turning to slide 19.
Our EBITDA for the quarter was $138 million, that's an increase of $18 6 million or 16, 6% from 2021.
The key drivers of it we're selling price inflation of $134 4 million.
Acquisitions organic sales growth and reduced accruals as certain incentive based compensation.
These were offset by higher direct material wages and freight costs. This totaled about $131 million I should note that difference between our selling price inflation and our direct material wage and freight inflation was a positive $3 $5 million, which shows a.
A good trend relative to the first quarter when that same calculation was a negative $2 million again, showing the <unk> the impact of the price increases we've been putting through.
We did see also some increased plant head overhead as we invest in infrastructure for future growth.
Some increase out search outside storage costs relating to higher inventory levels, which we will discuss in a later slide and finally some is the continued investment in our SG&A infrastructure to support our growth.
Turning to slide 20.
Slide 20, our EBITDA margin adjusted EBITDA margin for the quarter was eight 6%.
This was 50 basis points off of our EBITDA margin for the second quarter of 2021, or 140 basis points off of our long term target of 10%.
The key factors impacting our EBITDA margin in the quarter were in our specialty food group.
Delays in retailer delays in our pricing increases, resulting from a retailer notice periods.
If you normalize for selling price increases implemented over the course of the quarter that were in reaction to commodity cost inflation in the first quarter.
Sumit those had taken place at the beginning of the quarter, our EBITDA margin would have been nine 4%.
Other factors impacting our sales, especially foods margins included the sales challenges I mentioned earlier in our protein and sandwich groups as well as the increase in our outside storage costs are.
Our premium food distribution groups gross EBITDA margins were challenged.
By two structural issues, namely pricing to gross to recover gross profit dollar maintain gross profit dollars and not gross profit margins. This was being done to help customers deal with extreme cost inflation and then the number of cost plus contracts within that group.
We also saw some lower margins in our lobster products as a result of extreme volatility in the pricing in that environment, and we will talk a bit more about that on a later slide.
Turning to slide 21, the next five slides outline some of the key commodities used by our different businesses.
First slide is our pork Index chart, which is highlight some of the key commodity these purchased by a protein group.
You'll note that the Red line, which represents the index for 2022 was relatively stable in the quarter.
And sort of goes to the point of our margin challenge in the protein group in the quarter was largely as a result of the delay in the retail pricing.
And I'm not not a commodity challenge.
The next slide 22.
Shows our beef Index chart. This relates primarily to our distribution group and again you can see that the commodity was relatively stable in the quarter.
Slide 23 is our Chicken Index chart. This was by far the most challenging.
Commodity for our business, it's primarily rates to our protein group can see significant cost inflation has continued from the first quarter through most of the second quarter. The good news is we have seen a break in this commodity and that breaks seems to be continuing and could be positive upside in our outlook.
For 2022, if that trend continues.
Turning to slide 24, and Lobsters Index chart, you can see the extreme decline in pricing partway through the quarter.
This was the result of a variety of demand factors, including less retail featuring and menu featuring by restaurants as a result of record high prices.
Also the lower China.
Exports to China, resulting from the shutdown of parts of that economy, and then also on the supply side. We saw some very strong landing. So all of that fed together to result in the price decline you see in the chart.
This pressured the margins within our lobster group as their procurement costs are delayed from when they actually make their sale of their process products.
The good news is this is stabilized and so we do expect to see a stabilization in the back half of the year of our margins in this category.
Turning to slide 25 lots to the commodities. This is our salmon Index chart relates all to our seafood group can you see a bit of a break there towards the end of the quarter, but continues at record high prices our pricing for these products tend to be very dynamic so margins tend to be.
Tivoli stable out of this product regardless of where the pricing is set.
Turning to slide 26.
We are maintaining our EBITDA guidance for 2022 of up $510 million to $530 million.
Using the midpoint of this guidance of $520 million that would represent growth from 2021 of $89 million or roughly 27%, which is in line with our 11 year EBITDA CAGR of 22%.
Turning to slide 27, our earnings for the quarter were $61 $5 million. This represents an increase of $8 million or 15% from 2021.
Our EPS for the quarter adjusted EPS was $101 38 per share representing an increase of <unk> 15 per share or 12, 2% from 2021.
The main drivers of our improved.
Improved earnings performance wear.
Our EBITDA growth and then this was offset by a little bit of additional depreciation and amortization amortization, mostly associated with acquisitions.
Increased interest mostly associated with our higher senior debt levels and some increased income taxes associated with our increased profitability.
Turning to slide 28.
Talking about our five year 2023 sales target on this slide what we've done we've used the midpoint of our prior 2022 guidance of $5 $8 $75 billion.
We've added some nominal growth for 2023 at a rate of 6%, which is far below what we've been running for the last couple of years.
And that gives us a pro forma number pro forma number six to $2 7 billion, which is well in excess of our $6 billion target. So we're very confident we will meet this target.
Turning to slide 28.
Looking at our five year 2023, EBITDA adjusted EBITDA target so similar to the previous slide we use the midpoint of our 2022 guidance $520 million. We adjusted this for the retroactive impact of delayed pricing increases from the first and second quarters.
Which total about $28 million, giving us a normalized EBITDA of about $548 million.
Adjusting for the organic growth at a conservative contribution margin of 20% that gives us a pro forma EBITDA of $619 million. So again in excess of our $600 million target and close to our 10% EBITDA margin target. So again we.
So very confident about meeting this target.
Turning to slide 30.
Our inventory at the end of the second quarter was much higher than normally expected at $836 million.
This was driven by four key factors all we see is temporary and we're at a good portion of them reversing over the next two quarters. The first and most significant was inventory built in the first half of the year that will drive sales in the second half of the year. So in our seafood group, we expect to see about 30.
Millions of dollars of inventory reversal, primarily related to our lobster strategy and the buildup of inventory to support sales.
And then in our protein group about a $29 million decrease.
Partly due to a normal seasonal buildup of inventory, but also due partly to the sales challenges from the second quarter.
The second major factor.
<unk> in the decrease in our inventory will be a reduction in our safety stocks.
Over the last two years, we have built up significant safety stocks to help deal with supply chain disruption issues as well as commodity inflation as.
As these markets normalize supply chain is normalizing commodity markets normalize we will be winding down those safety stocks and for the back half of the year, we're planning to wind down about $38 million.
The next factor is some very specific customer supply chain challenges that will normalize in the third quarter that will contribute about <unk> 8 million of the decrease and then the balance is just the normal seasonality of our business. So overall in the back half of the year, we expect to increase our inventory by at least $110 million, which will bring it.
Down to about $726 million that will be roughly 55 days cost of sales and inventory relative to our three year average of about 49 days at still high as we are still carrying safety stocks.
But as we see the continued normalization of supply chains in commodity markets that could come down faster in 2022 or <unk> sales come down in 2023.
Turning to slide 31.
We continue to continue to make very strong liquidity with $490 million on.
Use credit capacity.
Our total debt to EBITDA ratio on a senior debt to EBITDA ratio did at the end of the quarter exceed our long term targets. Our total debt to EBITDA ratio was four four to one versus our long term targeted range of three 5% to 1% to four points of <unk> to one <unk>.
Our senior debt to EBITDA ratio was three three to one relative to our long term targeted range of 2.5% to 1% to three points of <unk> to one.
Most of the debt that they they're higher ratios were driven almost entirely by our inventory positions and we do expect by year end to be back within our targeted range at both these ratios.
Turning to slide 32, and our free cash flow for the trailing 12 months at the end of the second quarter was $276 4 million. This represents an increase of $13 1 million or 5% from 2021.
Our free cash flow per share on a trailing 12 month basis was $6 27 per share an increase of 22 cents per share or three 6% from 2021.
Our payout ratio at the end of the trailing 12 months was 43%.
And at the end and we recently declared a third quarter dividend of <unk> 70 cents, a share or on an annualized basis $2 80 per share.
Turning to slide 33.
During the the.
First half of 2022, we spent $81 $3 million and project capital expenditures.
$60 3 million of these we're on 14 major active projects all of which are primarily growth related and spend five of our six platforms. So lots going on across the different platforms all oriented to future growth and then we spent about $21 million in a variety of smaller approach.
Rate cap capital expenditure projects many of these associated with efficiency products automation projects.
Turning to slide 34, as George mentioned, we completed two acquisitions in the quarter.
Increasing our interest to a 100% in Golden Valley farms from 50% and acquired Kings Command total invested in the quarter on these two transactions was $86 $5 million.
That Ah I should note also because of the nature of these.
These acquisitions, both of which were for capacity to support as George mentioned earlier are cooked protein and dry cured meats initiatives.
Neither of these are expected to contribute.
EBITDA in the second half of 2022, there really longer term capacity solutions.
That concludes the financial presentation, so with that I will now pass it back to Michelle for the Q&A segment of the call.
Michelle.
Thank you Sir.
Ladies and gentlemen, we will now begin the question and answer session.
I'd like to ask a question. Please press star followed by the number one on your telephone keypad.
I would like to withdraw your question. Please press star followed by the number of Q.
One moment, please while we compile.
The roster.
Your first question will come from Derek Lessard of TD Securities. Please go ahead.
Yes, good afternoon, guys and congrats on navigating a tough markets.
Thanks, Derek Thanks Derek.
It looks like.
One of the slides that you pointed to.
The sales trends are still doing are still pretty solid.
Just wondering how quickly.
Do you expect maybe the specialty foods organic volume growth to get back to your longer term historical target.
Yes, let me, let me start that dairy fact by saying I mean, I think we all did a great job explaining kind of what's been going on but again you have to sort of look at the.
What's.
It's happened from the point of view of the operational challenges that we were facing.
Our well documented everywhere right. So for example, we shorted a lot of.
Orders with regards to the sandwich platform, because a lot of the issues. So.
Again, we're confident that the demand in many ways. It is.
There.
Yeah, there was some offsetting factors of course, particularly with.
Some of the weather issues et cetera, which which address themselves in July as the weather got better. So it's not an issue of demand for us is just making sure that.
The stars align and some of the challenges again as we've talked about go away and they have been going away and we're really happy about that we're really pleased to see.
And return to normality in a lot of our plants that have been facing labor.
Outages are finding labor now and are getting populated again in terms of their shift et cetera, et cetera. So lots of positive trends as we go towards normality right. So so again no issue with regards to us feeling confident on the 4% to 6% organic growth I'll pass it to will if he's got anything.
Yeah, just to give you some specific numbers Derek.
For the first half of the year, the organic volume growth rate in our specialty foods segment was about 4% little over 4%, we do expect to finish the year close to the top of that our targeted range that 5% to 6% range. So like George says.
Q3, those issues did continue in but by the end of Q3, we saw some really good solid momentum and we're expecting that to continue through the street by the end of July we saw some good solid menus that momentum and do you expect that to continue through.
The year, Okay. Okay. That's super helpful. Thanks for that and I guess.
Maybe on the inflation side. It did look like it was starting to bite in some categories. I think you guys called out beef.
Beef jerky just wondering if there is other categories out there that might be showing some signs of demand destruction and if so how do you view pricing going forward.
Actually Derrick.
With the exception of <unk>.
Expensive impulse buy items, particularly through C store and that beef jerky for example, which.
We will specifically address.
And mentioned overall volumes are holding.
With regards to other channels.
<unk>.
We've tested a lot of very high price points.
Given the degree of the underlying inflation in volumes helped you never know how volumes are going to do.
Until.
The retail price goes to a certain level and and we're very pleased with the way the volumes have overall as you as you've seen you've seen from our numbers.
The good thing today is that as will mentioned most of the underlying commodities that we're using have crested and theyre going down and and again, so that will give us lots of ability to feature promote innovate et cetera, which is what we do very well. So so again lots.
The positives with regards to the trends there.
And Derrick so.
Just to make it really clear if you take out the little bit of demand destruction, we saw jerky and you normalize for that and the short order shipments in our sandwich group relating to the Phoenix facility.
Our specialty foods group would have had 2% to 3% organic growth in volume terms. So like like the categories are solid there were just some specific issues. There and then like George says the thing Thats going to drive our growth as we get some good weather, we get the featuring going again, we should then see some solid.
Organic volume coming back to the business.
To add to that Derek in the Sandwich group specifically.
Given some of the challenges.
Particularly with labor across the <unk>.
The system we have.
<unk> had lots of customers on allocation.
Quite a while right. So so again, they want more and we're going to get ourselves into a position to to service them better and to take orders from them. So theres lots of demand in our view its just a matter of addressing some of these other issues that we've been facing over the last.
A few quarters.
Thanks for that gentlemen, good luck.
Thank you Sir.
Your next question comes from Martin Landry of Stifel. GMP. Please go ahead.
Hi, good morning, Jordan.
Hey, Mark.
My first question is on the pricing delays on slide 20, you you highlighted that some of the delays and then implementing.
Prices at retailers had an impact of 80 bps on your EBITDA, it's a pretty material impact this quarter and I was wondering if you still expect under pricing delays in Q3, or if youre fully caught up.
From a timing standpoint.
Yes. So most of those these pricing increases were things that were actually implemented in the first quarter Martin and some of these retailers required 90 day notice periods. So they werent taking effect until mid meant this quarter late this quarter in some cases, if they have been put through at the beginning of the quarter. So in the <unk>.
<unk> part, they're mostly through now.
So that should not be a big factor in the third quarter and assuming commodity prices continue to stabilize our normalized.
Okay.
That's helpful and then just turning onto.
Your financial leverage you.
On Slide 31, you show that.
You were at the highest.
Level that you've been in a while probably the last five years.
And in a little bit above your comfort range you did talk about the fact that.
The inventory reduction is going to is going to help out and reduce a little bit more leverage.
Okay.
Nothing to worry wondering if if you're if you're if you are looking at other options to reduce your leverage and near term and an end.
Youre concerned by by your leverage ratios at this point.
No no we're very comfortable with the balance sheet Martin.
At this point, we're not exploring any specific options.
Again, theres going to be a range of factors that bring the margins back in line.
Reality is those target ranges, we set our long term targets.
The reality is our banking covenants are general risk profile, certainly adjust allow for much greater targets.
And so now we're very comfortable with the balance sheet very confident that the targets will be back in line by the end of the year, Yes, Martin if you again if you.
Sort of.
I accept the fact that we've been through some difficult times and you have to make all kinds of decisions to hold inventory to maintain service levels too.
<unk> four challenging supply chain and all of those things if you normalize our <unk>.
Inventory levels and our EBITDA level the numbers are very very.
In range Theyre not out of line.
So both our EBITDA has been impacted by the challenges and obviously, we're holding a lot more inventory at the end of the quarter than normal registry adjust for that if you normalize for that and the numbers are very reasonable.
And Martin we we.
Had expected to be at the top end of our range because we are in a an intangible intense investment period right now we've got some a number of as you saw in that one slide a number of capital projects underway.
Acquisitions, we made in the second quarter, both our sort of long term investments. So like George says this really is the inventory issue. That's that's caused most of the variance.
Okay and my last question is on is on your announcement last week.
Two weeks ago about putting in place and in CIB.
It's something pretty rare for you guys.
Especially given your growth through acquisition strategy and your leverage so I'm wondering if you can give us a bit of more color as to the reasons why you've established and in CIB.
And it seems to be your first since 2012.
It was really in response to at one point there the markets were becoming incredibly irrational incredibly volatile and it just gives us one more tool in the event that ways to create shareholder value if if the opportunities arise.
The reality is as things come normalize and things proceed in a normal manner.
Probably unlikely we'll end up using it it's really to give us the tool if some sort of dramatic event happens.
Okay. Thank you.
Thank you Martin.
Your next question comes from George <unk> of Scotiabank. Please go ahead.
Hey, guys. Thanks for taking my questions I, just wanted to dig a little bit I, just wanted to get a little bit deeper on.
The short shipments.
From the Phoenix plant.
I guess, how much of that is operational.
Versus just maybe general labor issues that are facing can you talk a little bit about maybe if you would expect to have.
Similar dynamics in other plants, maybe any color around kind of what's happening there. Please.
Yeah, really really George its a combination of factors.
One being obviously the shortage of labor issues, we've been we've been facing particularly in the U S, which by the way has gotten a lot better.
I mentioned in my prepared remarks.
The.
<unk> good.
Explosion in demand seems to be abating, and there seems to be a lot more people looking for work.
Again, we've had all kinds of labor shortage type of challenges in regards to.
Two Phoenix as we transitioned over to <unk>.
The automated lines, we had some startup issues normal startup issues and really lack of skilled labor, Florida, we've addressed it again.
Productivity numbers and our efficiency numbers are back up and again. It was it was something that was part of the startup of the new lines.
Yes.
Okay. Thanks for that and George in your letter to shareholders you mentioned.
North America is being underdeveloped in value added and premium seafood products.
It looks like there's a lot of potential targets in the pipeline.
In that area for your disclosure. So can you maybe talk a little bit about what areas. You feel you want to get bigger in in and ultimately I'm just wondering if margins in that area and maybe get above those premium brands.
Consolidated level, maybe down the road.
Yeah.
It's a couple of points there George one thing to that.
You know the.
Yes.
A number of companies that.
I'll have to say on these days in the value added seafood segment.
We're looking at a few of them and I just wanted to mentioned that Clearwater is looking at a few of them as well.
And the challenge for a lot of those companies has access to supply and and long term access to supply and thankfully with.
Our investment in Clearwater.
We were able to address that.
With regards to value added that again, we have a sort of a broad view of what value added means for.
For example, we.
Now the soup category.
Food soups are a big category for one of our divisions were selling those.
Not just in Canada, but also in Asia as well, we're launching a number of.
New products into the seafood space, leveraging our supply chain or access to supply our access to exceptional quality.
Raw materials and.
We think that that business will grow immensely over the next few years.
Again, there's all types of value added we can do we are looking at launching an amazing.
Lobster macaroni type of product in both Canada and the U S.
We are done a lot of the the RMB has done a lot of the development and and again, we think that.
We want to make it easier for consumers to two consumed seafood, we think thats an area, where we can upgrade the consumer experience again, leveraging our access to it.
Exceptional quality supply.
That's basically a summary of.
What we're working on lots of projects on the go lots of.
Development.
Lots of trials and we're really excited to be presenting.
Some new products in the near future to the market.
And I think George.
From a margin perspective portion of your question.
The beauty of these products is the margins are much more similar to those of our specialty foods segment right versus what you see in our premium food distribution. So youre talking 500, 600 basis points of improvement as you take those commodities and turn them into these wonderful branded value added products.
That's really helpful and last one for you George.
Just a quick clarification on the guidance the 510.
I guess the lower end.
I didn't anticipate kind of spot prices or does that anticipate maybe.
I guess after the charts, maybe a further kind of deflationary environment for most of our commodities.
Yeah, So our assumption in Q1, George when we maintained our guidance was we did expect some deflation in certain categories.
Particularly pork.
But there is some dynamics out there with what's happening in China, right now and stuff. So we've just taken a little more conservative approach in our outlook for commodities and sort of assumed a more stable environment versus maybe some deflation. So if we do see deflation then that that'll be upside in our numbers and.
We're starting to see deflation as we speak.
George.
Okay got it that's really helpful. Thank you.
Thank you George.
Your next question comes from Stephen Macleod of beef.
Capital markets. Please go ahead.
Thank you good afternoon guys.
Steve.
Just I just wanted to.
Follow up on a couple of things are great color. So far so thank you.
When you and the specialty fluids business you talked a lot about the protein headwinds that you saw.
Is there any way to quantify sort of what the what the what the magnitude of the volume headwind was due to volume growth from those challenges.
I had tough to do.
Steve The best I can do is when we ask derek's question earlier about you strip out those two basic factors.
And.
The challenges in the Phoenix plant and the <unk>.
I can't remember what the other one was but you strip them out and youre sort of in that 3% organic volume growth rate, we had expected to be in the high single digits in the quarter. So how much of that difference relates to how much of the factors is is it just too tough to determine.
The type of environment, we've been in Stephen for the last few quarters is one whereby.
It's been difficult to execute right given the challenges right. So so basically youre dealing with shortage of labor absent is high absenteeism.
Supply chains that are not functioning.
We're supposed to and.
Yes.
And then you also had a reopening of foodservice.
Well right. So if let's say, we assume that 50% of the food dollar is spent outside of the home then obviously there'll be some impact.
They are in terms of demand. So there's a number of factors impacting that number but as I said earlier in my remarks, I know that we've shown a lot of customers during the quarter or the last few quarters because of the the challenges.
With some of the inputs labor and.
And supply chain.
Okay.
That's helpful understandable.
When you look at the back half of the year I just wanted to sort of paraphrase make sure I'm understanding all the moving parts correctly it sounds like based on the chart.
So will you sort of caught up on price.
You were caught up on an inflation with price this quarter, but do you expect to put through more price into Q3 and Q4.
Well, you'll you'll have the continued year over year impact of the previous price increases right. So you're still going to see quite an inflationary factor. Although we are starting to lap. This quarter Q3, Q3 last year was when the significant price increases started but.
Outside of that.
Not a lot again on the assumption that we will see a normalization of commodities in the quarter, Steve I think the most likely scenario Stephen if this is as I said earlier will mentioned it as well as a lot of the commodities are coming off.
The most likely scenario is that.
And a lot of our input costs will go down.
And that we are our companies will do a lot more featuring.
To promote their products of course, and which should help volumes.
A lot of our companies are you talking about that given with.
What's happened with some of the underlying commodities more recently right so that that youre going to see a lot more featuring activity.
Kind of in that.
Okay, so considering or balancing out those two factors.
Do you expect sort of gross margins in the back half of the year.
John back to normalized levels or do you expect maybe a bit more pressure and then returning back to normalized levels in 2023.
Again, I think you've got our guidance, Steve So I don't think I want to get into the specifics of margins.
Margins outside of our guidance, but overall Steven were things if we assume.
<unk> normal.
Our normalizing and we will continue to normalize for the remainder of the year.
If you look at some of the investments we've made in key parts of our business, we're feeling really good about 'twenty three.
And again, we're just hoping that things will continue to normalize.
In terms of supply change in terms of the labor situation in terms of demand through foodservice and retail et cetera, et cetera lots of good things to look forward to.
Yes.
Okay. That's that's great really helpful. Thanks, guys appreciate it.
Thanks, Steve.
Your next question comes from John Zaro of CIBC. Please go ahead.
Thank you very much good morning, Georgia mill.
Yeah, Hey, John .
I wanted to hit on a couple of topics and a couple of questions within each.
On the pricing pass through or just want to fully understand where theyre also price increases taken in Q2 that we're going to see kind of mid to late Q3 or was the.
The Q1 pricing you're talking about the most recent round.
John there's a little bit of that but.
Most of it was stuff that was implemented either lost in Q1 or early in Q2. So we don't expect a lot of carryover into Q3 again on the assumption that we don't see further cost inflation.
Okay understood.
Can you quantify the Easter shift versus last year last year. It fell into Q2 this year versus Q1 last year on an organic volume.
Yeah again, there is so much noise around the numbers, John and with what happened with weather and and although the featuring it just.
The Easter is just such a small factor in that equation. So unfortunately not.
Think the bump in the first quarter of <unk> or sorry the.
<unk> in the first quarter of the year because of the later Easter was under.
Under $10 million. So it was a relatively small impact.
Okay understood and I wanted to better understand.
The dynamics within featuring and specifically the language in the press release for specialty Foods seems to suggest you are waiting for price increases kick in before you feature items, there which is understandable.
In premium food distribution. The comment was that there was less featuring because of record high prices.
Want to understand that the PFD comment better in particular, if those prices don't come down should we interpret that as you won't see featuring within that segment.
Yes, it's a good question John because they're really two different dynamics. So in the specialty foods segment featuring is something we drive our business is drive so they.
They will work with the retailer to go and say, Okay. We're prepared to give you. This pricing for this feature at this time and it's driven by the retail so that's the nature of featuring in the specialty fluids group.
We talked about featuring in the premium food distribution group Thats kind of we make a regular sales to the customer and then the customer decides to say, okay I'm going to put salmon on the menu as a special this week or I'm going to feature of this in the store. This week and we don't drive that we just provide them with the product.
At our normal margins and they make that decision to feature or not to feature.
So theres not a margin story and that for us it's purely a volume on the premium food distribution group side.
The customers John are very smart right if the.
<unk> is very expensive, they're not going to feature right.
It won't meet that price point that will move the most.
Most of my adult generally feature something now that.
Feature is more attractive to the consumer so that's.
That's part of what they do all the time.
And normally it's.
If it was just a single commodity that goes up and the premium seafood world.
Usually it's not an issue for us because they will feature something else, we sell them as a different alternative premium product, but the fact is just everything was at record high prices and so they started featuring.
Lesser sort of more commodity like products like salmon are.
A bit more simpler products and featuring those at lower price points versus the premium products because like I say.
Cost inflation price inflation was across that entire broad group.
Okay. That's very helpful. I appreciate the color on that.
Then I wanted to ask about leverage I know you've talked about it a little bit above where you'd like it you do have some pretty ambitious plans when it comes to growth Capex and given all of that I Wonder how you think about capital allocation for the next year or so and historically its been M&A first and foremost, but what are your thoughts on prioritizing deleveraging at this point.
Yeah again those targets. We said we always those are always part of our decision, making with any capital allocation decision certainly everything that's in the pipeline today.
It was built around those targets ultimately and we will continue to manage that way like I say, we are comfortable in the short term taking it over those targeted ranges because the reality is the relatively conservative our senior debt to EBITDA ratio for us our target range of two and a half to three.
To put it in context, our banking covenant is four times.
Yes.
We've got good flexibility there we're prepared in the short term as long as we see a clear sight to bringing it down to going over that target range, but ultimately we will always manage to that targeted range.
The other part John is that we have to remember that over the last couple of years. We've just about stress tested every aspect of our business. What happens is the whole channel shuts down the foodservice channel.
We manage through that.
Happens if labor goes away well, we managed through that what happens if you have the fastest inflationary times that we've never lived through well we've gone through that as well right. So we are as will said, we're feeling pretty good that things are normalizing if you normalize our balance sheet and our EBITDA, there's no issues there.
Okay fair enough one more clarification.
Do you have any interest rate swaps in place on your $1 $4 billion revolver or is that entirely variable.
Hi, it's entirely variable we had a swap in place that recently expired but.
Hey.
Most of our we do have a large component of fixed debt with our convertible debentures, but outside of that our senior facilities are pretty well all floating.
Okay understood. That's all for me. Thank you very much.
Hey, John Thanks.
Your next question comes from Vishal <unk> of National Bank. Please go ahead.
Hi, yes, thanks for taking my questions on the <unk>.
Okay.
Hi.
On the acquisition opportunity chart that you showed and and and and it's fluid from quarter to quarter I understand and I just wanted to make certain.
The advance in active stage files.
Sales members seem to be down quarter over quarter, just wondering if there's anything that you'd like to call out or point out for that or is that just regular course variability as it related to the way management's thinking about the opportunities or opportunities reducing as it relates to balance sheet I don't suspect. It is but I just wanted to get your point of view.
Shall I would say that the <unk>.
Left three columns are the most relevant.
These are.
Does that.
We're working on our group is working on steadily and a lot of times the timing is not really up to us.
It's up to the other side, but we have a lot of comp.
Conversations were working on a lot of transactions.
Again, a lot of times the larger transactions.
Our task to classify in the advanced stage because.
We're in a small universe and people kind of make assumptions as to who they are so so were kind of careful as to how we disclosed them, but I would say that our pipeline has never been more robust.
Yeah.
Okay.
I just wanted to change topics you on labor shortages.
Encouraging to hear that they are improving I'm wondering if in management's view do they think.
Yes.
Do you believe that the labor shortages experience are those transient issue or are those structural just given lower integration and if they are habit structural component to it.
Is there a way that management aims to address the address that I'm focusing more on the U S. Here is there a way that management teams to address it either focusing on states with more integration or things of that nature.
Yes, so vishal in terms of Canada, I would say through increased immigration I think that the situation is improving immensely.
Almost all of our businesses are.
I'm pretty good shape from that perspective.
You know a lot more applications.
A lot more people looking for work.
And.
In general in General terms, we are in good shape.
There is a positive to some of the challenges in the U S and that everybody is having these challenges and.
Our Canadian based plants are in very good position to continue to increase their business in the U S. So so anyway.
Kind of a positive there.
With regards to the U S.
There.
Things are improving as well.
Over the last couple of years as you know there has been an explosion in <unk>.
Demand for discretionary goods.
And there's a lot of retailers today that are announcing that they are long on inventory so with goods and.
And we know I don't want to mentioned particular states or towns back.
There has been layoffs in the manufacturers of <unk>.
Discretionary goods.
And we're getting more and more applications in which which is why we're feeling.
Banner about things I know the jobs report came out.
In the U S. Today.
Create a lot of jobs back.
But in terms of what we're seeing today.
We're getting a lot more applications in that we did over the last couple of years.
That's a positive.
And the other thing I'll mention is that as we've commented earlier.
We continue to make a lot of investments in in.
Automation.
And the robotics and those type of things and those will help as well.
Okay and just on another topic here I just wanted to get some clarification.
Willie in your prepared remarks, and in the east and the slide deck you showed.
Some indexes that particular commodities and in general they seem to be moderating and you mentioned that throughout this.
Panel discussion as well.
So just but in the past I understood that your major commodities, particularly in the specialty food group. They oftentimes deviated from those basic commodity due to higher labor requirements and other factors. So should we anticipate the commodity that you are using do they generally follow those trends or is there a lag of two to three quarters, how should we accommodate.
These.
Specific nature of the commodity cuts that you use.
Yeah. So so there is.
They generally do follow those trends.
But over the last couple of years, there's been some massive distortions again labor has been an issue because we tend to buy more value added than really based commodities and.
The trend in other processes.
Within the primary processing business and they were so short of labor there was massive shortage of those and as a result.
<unk>.
<unk> out of distortion wave distorted from what they would normally in the past as George has talked about is labor normalizes that issue was going away and they are going back to more sort of traditional trends are following the base commodities.
And then the second one has been.
The other market you have to sort of watch with us as we import a lot of product from Europe , just because it's a much higher quality leaner product and that market has its own unique dynamics. There are no sort of public indicators, we can follow for it.
But so.
That is something that unfortunately, I can't say, okay, it's going to stay stable or not because it does have a different sort of set of supply demand factors on a global basis from just what's happening in the North American market.
Okay. Thank you for that color.
Okay.
Your next question comes from.
Khan of RBC capital. Please go ahead.
Alright, great. Thanks, and good afternoon, just maybe starting with the housekeeping question.
More per well.
In the MD&A notes that the H, one organic growth rate for specialty foods is four 3%, but just looking at where Q1 came in and where Q2 came in I'm not sure. If that's if I'm.
At it wrong or if thats, the arithmetic should be a little bit lower than that thank.
Figure was four three in Q1, and I think flat to negative 5% in Q2, so concerned.
I'll turn it back to you all have to do I'll have to do that offline with you Sal because my my notes are showing four 3%.
Okay, no problem could take that offline and then maybe just I guess along the lines of the conversation on this call around commodity prices and margins I guess.
These headwinds have been around for a couple of years now I'm just wondering as we look forward to your 'twenty three targets and how confident are you enable to get kind of a 10% range I am just thinking some of these commodity and pricing dynamics there a bit more structural just given how long they've been in the market wanted to get some perspective on.
Just being able to get to that 10% range over call. It the next 12 months or even longer than that.
I guess the.
Big driver there is definitely some normalization in our margins right.
And if you go to that chart on a five year EBITDA margin target.
That's kind of that retroactive pricing impact those pricing increases are real that's been done.
But the big driver that gets us ultimately to our 10% target and beyond is sales growth is contribution margin right and particularly in our specialty foods segment. So as those sales come through that will just naturally drive up the margin.
Okay, and then I guess, maybe I'm getting a bit nitpicky, but as we think about maybe the deflation and at some point over the coming quarters would you have to give back some of that pricing potentially or do you find it tends to be stickier.
It tested it depends a lot on the product category.
As you move up the differentiation level and the product category. So when you go into products like some of our meat snacks in Chicago to re products, we tend to set new consumer price points. Those are held and what the business will do then is they will use that high price point to do a lot more featuring so you get the benefit.
<unk> volumes, so it's kind of a win win situation as you get less differentiated and the products, maybe some of our grilling products things like that.
What happens as the prices are sticky so as the commodity come down you do have some expanded margins, but they do over time sort of go back to normal levels.
But you sort of the traditional inventory cycle, our margin cycle for the industry or the less differentiated products as you lose some margin on the way up and then you gain it on the way down youre kind of neutral over the cycle, but again.
We monitor the velocities very carefully.
And we make decisions based on those velocities right. So again as will said if let's say the underlying commodity goes down then we tend to do a lot of them are featuring which moves volume which helps obviously.
The economics of the business right.
Generally what happens.
Okay. Thanks, and then just one last quick one theres been a lot of focus in on the call and just generally I think on your protein business on seafood.
If I go through the pandemic some of the sandwich businesses might've slowed down through the structural stuff, but are you still kind of pursuing some of those initiatives with new retailers new channels, obviously, there's capacity constraints given the environment right now but.
Does that become a bigger focus as we look out 123 years from here.
You cut out at the beginning can you repeat the first part of your question. Please.
Just asking about your sandwiches business before kind of pandemic took hold there is a lot of focus on pursuing new channels.
Obviously, the capacity constraints right now, but how do you look at that as we can.
Move to some sort of normalized manufacturing environment and you have capacity.
Yeah.
Yes, I mentioned before our sandwich business is in a situation where it provides labor saving solutions to customers retail foodservice and club.
If you make the assumption that labor is scarce and will remain scarce.
In terms of <unk> in terms of cloud in terms of retail then you can assume that our sandwich division is going to be very busy.
And this is what we're seeing.
We've made tremendous progress in terms of developing new channels I believe in the second quarter, we had record sales to the club channel.
And in a lot more demand from various customers.
Unless I read a statistic that the.
Rockford Sandwich category in retail in club is like up 20% year over year. This is an overall statistic right so that bodes well for us because we're a low cost producer.
We're very well positioned to benefit from that growth in.
In demand.
But our Sandwich group, we call it the Sandwich group.
Not just vantages, there basically one of the best Assemblers in North America.
Xerox recruiter business is doing extremely well taking advantage of course is the growth in <unk> demand. We are the assembler for most brands.
Out there.
And.
And we're doing extremely well there as well some of the challenges that we face there are not demand oriented they are labor.
Oriented and obviously as we solve those issues then.
The division will will deliver better growth and better numbers, but they've been growing quite substantially over the last even in the last couple of years.
Great. Thanks, very much for the color.
Yes. Thank you.
There are no more questions on the phone lines at this time I would like to turn the conference back to your hosts for closing remarks gentlemen.
I'd like to thank everybody for attending have a great rest of the summer. Thank you very much.
Ladies and gentlemen, this does conclude the conference call for this afternoon, we would like to thank you all for your participation and ask that you. Please disconnect your lines.
Okay.
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Okay.
Okay.