Q3 2022 Premium Brands Holdings Corp Earnings Call
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Good afternoon, ladies and gentlemen, and welcome to the premium brands Holdings Corporation third quarter 2022 earnings Conference call. At this time all lines are in a listen only mode. Following the presentation, we will conduct a question and answer session.
And you can kind of call you need assistance. Please press star zero for the operator. This call is being recorded on Thursday November 3rd 2022.
Our speakers will be charged pallial logo, CEO and president of premium brands and world color. That's C. F. O F. P premium packs I would now like to turn the conference over to Josh probably Hello caller. Please go ahead. Thank you Joanna.
Welcome everyone to our 2022.
Third quarter conference call with me today is our CFO will college.
Patients today, we'll follow the deck that was posted on our website. This morning.
We're now on slide four which outlines several key highlights for this quarter.
Very pleased to report very good results for the quarter and year to date in an environment, where the challenges of inflation and supply chain issues and labor shortages have been moderate.
This was very evident in our monthly sequential results with September coming in well ahead of schedule.
Our CFO Hello, <expletive> will provide you with some color on our results later on in the presentation.
Normality for premium brands and its ecosystem.
Great Food company means a return to the relentless pursuit of product and process innovation.
Capacity expansion to satisfy increasing demand.
And of course strategic and opportunistic acquisitions that complement our portfolio.
All businesses.
You want a seafood.
Very good quarter and continues to perform well ahead of planned pricing for most of this thesis continues to be very strong with the exception of snow crab pricing of which she rates maturity earlier in the year due to certain imbalances in supply and demand.
Haier water chose to hold onto Snowcap inventory instead of selling it at a loss and this action appears to have been a split decision as snow crab prices are recovering.
Despite the challenging margin finished snow pack business and substantially higher fuel cost Clearwater disciplined cost management and very good commercial execution helped to deliver solid results.
We did not complete any acquisitions during the quarter prioritizing capital allocation like capacity expansion and process automation initiatives instead.
We'll also be acting on our N. CIB this quarter as we were not able to activated during the second quarter due to our trading related blackout rules.
Overall, we're very pleased with our results as we continue on our path back to her mouth.
We're very well positioned to accelerate their growth so amazing product innovation capacity expansions and process automation and optimization initiatives combined with exceptional operational and commercial execution.
We remain very confident that our decentralized entrepreneurial business model combined with our great people and culture will continue to distinguish us from the rest.
We are now on slide five.
We have recently posted our 2022 ESG progress report on our website.
Making great progress in elastic subsea ESG and look forward to achieving all of our ESG goals as outlined in the report.
We are now on slide six to 13.
I mean, so the PFM fixtures of new innovative products manufactured and sold by the artisan bakery cooked protein shake coronary ordinary snacks word in Spanish groups.
Demand for these type of products remains very strong and we're pleased to have recently had opportunities to introduce some innovation to new and existing customers in person.
And that some of the products you see here when he has actually become multimillion dollar skus in both retail and foodservice.
In regards to slide 14 in your deck I'm very happy to report the Clearwater seafood is working closely with our various distribution groups like Centennial foodservice in Western Canada to bring new seafood based solutions to new markets.
It also prioritizing value added seafood is a key area of focus.
Reviewing both organic and acquisition opportunities in this segment the.
We're confident the Clearwater is well on its way to becoming a best in class vertically integrated seafood company on a global scale.
We're now on slide.
12.
Yes.
Slide 16, as you can see our acquisition pipeline remains robust and we expect to countries many more strategic opportunistic and transformation of transactions in the months and years to come.
I will now pass the presentation to our CFO , who.
We will update you on our financial results for the fourth well, Thanks, George and welcome everyone.
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 back.
<unk> that could affect our performance.
Turning to slide 17.
Our sales for the quarter were one $6 billion to $4 billion up $285 million or 23% from 2021.
The major drivers of our growth for acquisitions, which accounted for $153 million of our growth shell.
Selling price increases, which were $90 million organic volume growth of $39 million.
And the translation of our U S businesses into Canadian dollars.
Contributed $18 million due to a weaker Canadian dollar.
These factors were partially offset by an accrual for a claim made by a customer for products sold in the second quarter of this year that did not meet the customers specifications total amount of the claim is approximately $18 $5 million.
Our organic volume or sorry, our organic growth for the quarter was roughly 10% just below 10%.
And well above our 6% to 8% nominal growth objective.
Turning to slide 18.
Our organic volume growth rate for the quarter was two 9%.
This was below our 4% to 6% long term target.
Primarily for seven temporary fact caused by several temporary factors. The first and most significant was lower retail channel sales, resulting from consumer spending shifting to foodservice and less featuring activity in general.
The cancellation of the new Sandwich program.
Of which related to the claim I mentioned earlier also was a major headwind to our growth in the quarter.
Continued development of our lobster strategies, which resulted in.
A building of inventory for that will drive future sales.
It impacted our sales in the quarter, because we had less trading of live lobsters.
Turkey supply issues also impacted our sales as we saw significant shortages of raw materials in Canada and.
Incredibly high prices in the U S.
A three week shutdown of a very successful cooked protein program in the U S. Also impacted our our sales due to production issues on a new line.
And the final factor impacting our sales growth was a little bit of demand destruction, primarily in the C store channel relating to our meat snack initiatives.
Turning to slide 19.
This outlines all of the major growth initiatives across our different platforms. The once we've highlighted in yellow, we're the ones that contribute to our growth in the second or the third quarter.
Turning to slide 20.
The gold line represents our weak our sales by week in 2022 relative to the Blue line, which were our sales by week for 2021, you can see going into the fourth quarter. We continued to show good solid momentum in our sales growth.
And it's interesting the impacts of inflation have been slowing we peaked in the second quarter of this year, where our selling price inflation was about $134 million in the quarter.
<unk> fell to about $90 million as I mentioned earlier in this quarter and we expect that will come down more in the fourth quarter saw our growth being more driven by volume versus price growth.
Turning to slide 21.
Our EBITDA for the quarter was $141 $2 million, which was a record level. This was up $18 $6 million or 15% for 2021.
The major positive drivers were selling price inflation as I mentioned earlier of $90 million acquisitions.
Organic sales growth.
Lower incentive based compensation accruals.
True plant efficiencies.
And the weaker Canadian dollar relative to the U S. Dollar contributed about $800000 of the increase in our EBITDA.
Offsetting these factors were several challenges the most significant of which was cost inflation across our raw materials wages and freight this totaled about $78 million for the quarter.
Interesting if you look at the difference between our selling price inflation and our cost inflation in those three categories for the third quarter that was a positive margin expansion of about $12 million that compares to about $3 $5 million in the second quarter and a contraction of two mills.
In the first quarter, so, we're making excellent progress in getting our our pricing and our margins back to the levels they need to be.
Also impacting the positive factors was some increased over head in our plants mainly associated with it.
Increased infrastructure to support both our current and future growth.
Outside cold storage costs associated with our inventory positions, which we'll talk to you on a later slide.
Also there was some increased promotional activities in our our specialty food businesses, which was great to see us as their pricing returns to normal levels, we will see that pick that that spending up and that should drive our organic growth volume growth rates higher in coming quarters, and then finally, we invested a little bit extra.
In SG&A.
Infrastructure in order to support the continued growth of our company.
Our EBITDA margin for the quarter was eight 7%. This was up 40 basis points decrease from 2021.
And I'll talk about this decrease on the next slide so turning to slide 22.
Our targeted EBITDA margin is 10%.
For the third quarter, we would normally have expected it to be above the 10% because of seasonal factors as I mentioned earlier, we came in at eight 7%, which was 130 basis points off our target.
The variance was due to primarily seven temporary factors one was underutilized capacity, particularly in our specialty foods segment, which generates much higher margins and the growth in that segment is will be a key driver of the growth in our EBITDA margin over time.
Next was freight and freight cost inflation.
Higher outside storage costs as I mentioned earlier.
There's also a continuing impact of the delay in getting our pricing through.
And especially in our specialty foods segment. It takes anywhere from 60 days 90 days to get our price increases.
Take effect from when we put them through with the major retailers. So that delay in the quarter was about $4 $6 million of an impact on our EBITDA and then finally recent acquisitions are of King's Command Golden Valley, and Beech Grove had a fairly significant impact on our margins because all of.
These acquisitions are bolt on turnaround acquisitions by our various businesses and they are in the very early days of their business plan and as a result, they are weighing on our EBITDA margins.
Also contributing to our EBITDA margins, mainly in our premium food distribution group and much less impact on the overall margins was a certain amount of strategy focused on the continued.
Pricing based on recovering gross profit dollars versus gross margin levels because of the increase credibly high price points are a lot of products and then also the impact of cost plus contracts I should mentioned that if you normalize for the second through fifth or a second third fourth and fifth factors I mentioned.
Earlier, namely freight cost inflation outside storage cost increases retailer selling price delays and acquisitions. Those four factors alone would normalize our gross from our EBITDA margin to above 10%.
Turning to slide 23.
This slide shows a chart that tracks a basket of commodity raw pork raw materials used mainly by our specialty foods segment, you can see the Green line represents 2021, the Red line 2022 overall pricing on a year over year basis was relatively stable.
But still at record highs.
Turning to slide 24.
This slide shows a chart that tracks a basket of commodity beef raw materials used primarily in our premium food distribution group.
The trends in the commodities are not as reflective of the impact on our EBITDA margin is the.
The impacts of pork on our specialty foods segment, mainly because of the dynamic pricing models and this this segment.
But you can see overall beef was slightly deflationary in the quarter, but continued to be at record high levels.
Our near record high levels.
Turning to slide 25.
This shows a chart that tracks a basket of commodity chicken raw materials used mainly by our specialty foods segment.
This was a incredibly deflationary commodity you can see coming down from all time record highs in the second quarter down to close to 2021 levels are actually by the end of the quarter below 2021 levels, but still again on a historic basis very high levels.
This deflation did help our specialty foods segment margins help counter some of the headwinds I mentioned earlier, but the impact was limited beef because of inventory positions going into the quarter as well as just the normal time it takes to process the product and sell it.
Turning to slide 26.
This slide shows a chart of lobster input prices and relates primarily to our premium food distribution group.
Our lobster prices tend to be also fairly dynamic in their pricing or our businesses with their lobster products. However, we move more and more into process lobsters, it's becoming a little more stickier than the pricing around this product. There's a lot of that product is going into the retail channel as a result of it.
That stickiness you can see the significant deflation from the second quarter going into third quarter shown in the Red line and so this really did help the margins of our premium food distribution group in the quarter.
And my last commodity slide on Slide 27 shows a chart of salmon input prices and again this relates primarily to our premium food distribution group can see on a year over year basis relatively stable pricing and continue to be at very high levels.
Turning to slide 28.
Our earnings for the quarter was $61 $3 million.
This was an increase of $3 $5 million of roughly 6% from 2021.
The increase was driven by our EBITDA growth as well as a small decrease in our income tax expense and these factors were partially offset by increased amortization and depreciation mainly relating to acquisitions.
And increased interest costs overall, our interest costs were up $10 $9 million.
The majority of the increase related to our higher debt balances, which has been driven by the capital investments we've been making in recent times as well as some of the acquisitions recent acquisitions. So we've yet to leverage the full benefit of those investments yet.
It accounted for about seven $4 million of the increase.
FX translation was roughly half a million dollars and the balance related to rate increases and that was about $3 million.
Turning to slide 29.
And our five year targets, which focus on 2023 for sales.
Slide the starting point, we did in this analysis was the midpoint of our 2022 guidance, which is from $5 75 billion to $6 billion for our sales for 2022.
We expect to be at the top end of that guidance. So we're starting at a relatively conservative point.
If you adjust that then for the impact of delayed pricing over the course of the year, which was about $33 5 million for the first three quarters of the year.
And in some nominal organic growth at a rate of 6%, which we feel very confident based on our historic performance and you can see our pro forma 2023 sales would be roughly $6 3 billion well ahead of our 6 billion dollar five year target.
Turning to slide 30, our five year 2023, adjusted EBITDA targets again going through a similar calculation. We started at the low point of our 2022 guidance range of 510 to 530 million. This is what we're currently guiding to.
Adjusted that for the record it rec toe retroactive impact of delayed pricing increases and that gave us a normalized adjusted EBITDA of $543 million or an EBITDA margin of approximately nine 2%.
Added to that the contribution margin associated with the 6% nominal growth and that gives us a pro forma 2023, adjusted EBITDA of $614 million again ahead of our target of $600 million for 2023.
Yeah.
Turning to slide 31.
Our inventory levels continued to be at record highs they've been driven by hedging trucks surface hedging strategies by our different businesses in this incredibly inflation.
Aerie environment as well as some hedging against supply chain disruptions. So our inventory at the end of the quarter was 821 million. This was down from the second quarter of $836 million, which was about a $15 million increase.
The actual progress made by our legacy business was about $24 million increase sorry decrease in their inventories for the second quarter and then that was offset by the impacts of FX translation because of the weaker Canadian dollar and acquisitions.
If you look forward to the end of 2022 were projecting inventory of roughly $718 million.
That's in line or a bit favorable relative to our plan that we presented in Q2. So we are still very focused on bringing down our inventories and expect to make a lot of progress in the fourth quarter if.
If we do achieve our 718 million that'll bring our days cost of sales and inventory down to 53 to 54 days, which is still above our targeted level of about 49 days, but certainly good progress from from where we are today.
Okay.
Turning to slide 32.
We continue to main very continue to maintain very strong liquidity, our unused credit facilities at the end of the quarter were $455 million, giving us great flexibility on on on four are executing of our various growth labs.
Our senior and total debt to EBITDA ratios. However continued to stay at the elevated levels from Q2 our.
Our total debt to EBITDA ratio was four five to one which was a bit ahead of our long term target range of three and a half to four to one and our total debt to EBITDA ratio for the core at the end of the quarter was $3 three to one again, a little ahead of our long term targeted range of two and a half to three to one.
We actually did make some solid progress on bringing down our our ratio over the quarter. These ratios over the quarter. However, you could turn to slide 33.
The the impact of this progress was offset by kind of an anomaly in the translation of our U S currency balances. What this chart shows is the gold line on the left was the ended the second quarter.
And then we're showing the Blue line is our exchange rates and the gold line on the right is at the end of the third quarter. So you can see for most of the quarter. The exchange ratio was within a fairly reasonable band and then at the end of the quarter. It spiked dramatically. So what this did was we translate.
Our EBITDA at a average rate that was much lower than the rate at the end of the quarter. So when we translated our U S debt balances.
The net effect of these two factors was our our covenant ratios got impacted negatively if you normalize for this effect our debt to EBITDA ratio would've been three points of the euro to one senior debt to EBITDA ratio so back within our targeted range. So we look forward for the.
We ended the year, we do expect to be within our targeted range by the end of the year.
Turning to slide 34, and our free cash flow.
For the quarter was $286 million, an increase or sorry, a free cash flow for the trailing 12 months was $286 million. This was a $22 6 million dollar increase or eight 6% from 2021.
Our free cash flow per share for the trailing 12 months ending the third quarter was $6 45.
This is an increase of 40 <unk> per share or six 6%.
Our payout ratio for the trailing 12 months was 42, 8%.
And subsequent to the quarter, we declared a dividend for the fourth quarter of <unk> 77, or <unk> 70 per share or $2 87 per share on an annualized basis.
Turning to slide 35.
Okay.
This slide outlines our project capital expenditures, we differentiate project capital expenditures for maintenance capital expenditures.
By the fact that these are all projects that are expected to generate a 15% internal rate of return after tax unlevered.
Maintenance capital expenditures are those that don't meet that test. So during the quarter, we spent $44 $1 million on project capital expenditures and year to date in 2022. We spent a 125 billion you can see from the chart virtually all of these are relating to capacity expansion.
Across our many platform forms so lots of growth offered a head opportunities ahead, and we continue to invest significantly in the future.
That ends the financial presentation, and with that I will turn the call back over to Joanna Joanna.
Thank you ladies and gentlemen, we will now begin the question and answer session should you have a question. Please press star followed by one on your Touchtone phone.
Well here with Tom Johanna.
If you are using a speaker phone please lift the handset before pressing any keith.
Our next question comes from Derek Lessard TD Securities. Please go ahead.
Yes, good afternoon gentlemen.
Just looks like you guys did hit.
Hey, guys.
It looks like you did have some operating snags in the quarter.
Installation of the new launched products from Turkey shortage in production shutdown.
Maybe just could you maybe add some color to those and maybe some of the mitigation efforts you took and whether those issues are now behind you.
Yeah, Hi, Derek.
Yeah, again, I think that that as will mentioned.
And as I said in my prepared remarks.
You know the last two and a half years for the last 30 months have been very disruptive.
I think that there.
There were a lot of supply chain issues a lot of.
Not just logistically, but a lot of suppliers are having labor shortages et cetera are there or not.
Able to execute at the level of that.
Need to.
And I.
I think that the cancellation of the launch was.
As a result of that basically the third party supplier did not deliver.
Raw material that was based on the spec that they had agreed to so it was unfortunate for us of course it meant that there was a huge opportunity cost there right. We do have a lot of demand for assembly services because of the labor shortage issues in <unk> as we've talked about before.
But we do have to keep capacity for.
Our large customers of course, and so it's a huge opportunity cost there for us because effectively that capacity remained unutilized and not as as you'd like this plan.
I think with with.
Turkey that you mentioned in particular.
Sort of a different type of situation. The avian flu has impacted the Turkey industry in North America are worse, and then you know in India in the chicken segment that resulted in in shortage in raw material I think that one will will pass as well what was the other one that Derek.
Yeah. So derik on me just in terms of the ongoing issues.
Like George says the Turkey is really the only one that's ongoing.
The impact of the claim that's been fully accrued we are working with the customer hopefully for the relaunch of that program and 2023, and we're excited about that opportunity. So that'll be a big driver next year and then the other production issue relating to the cooked protein that was a three week issue.
Very specific window, it's been fully addressed in that that program is backend and going incredibly successful over the last couple of years said, Derek we've invested a lot of effort and capital into new lines and new processes.
Again, you expect to have some startup issues with some of these lines again.
It's back operating today and actually the lines doing extremely well.
Yes, Thanks, Brian .
Derek a little bit more color on George's point on the <unk>.
The sandwich issue in there.
You might've noticed our restructuring costs were a little higher this quarter than in previous quarters.
That's because we started up several new production lines in anticipating.
Some significant volume increases and and again, so we've got a lot of capacity sitting there ready to go in and it's going to take a little time to grow into that capacity.
Okay makes sense you also.
Pointed out probably for the second time for some some demand destruction in certain categories meat snack kings of Hep C store just wondering.
How material is that and have you seen it.
Are you seeing it spread to other categories as you know the fed or bank of Canada haven't started tightening or tightening the purse strings.
Yes.
Demand destruction was risk there was a little bit of it in the chicken category.
Which would have been the only thing outside of the C store each snack category and that was as you saw in that chart earlier when chicken prices were just absolutely absolutely a record highs. They are coming off or are you know our business is starting to feature it yet again, so that that was really kind of a temporary anomaly.
And we're very comfortable that youre not going to see that in part that that demand destruction has been addressed in terms of the C store channel yes.
That channel has been hit hard.
And particularly the consumer that picks up the meat snack products.
So the year over year impacted that.
<unk> was not that significant it was a little bit of an impact it was more a growth headwind because we really see long term great growth opportunities in that channel is.
This is quite typical derrick to what happens in our in our business with.
The run up in certain.
Input commodities.
<unk> mentioned the case of course.
Pork bellies when they.
Ultimately.
The price of Bacon to foodservice and retail it goes up and demand goes down.
The underlying commodity comes off as well and it is pretty well what happened with with beef jerky.
The underlying commodity got way too high in.
Retail pricing.
Was very high as well and that impacts of course demand and that's how it great.
So that's really what's happening.
With beef, Turkey in particular in the C store channel.
Youre not seeing it you're not seeing it.
Going to the category so far.
No actually quite the opposite that Derek.
Hi.
We're actually seeing deflation is.
As will explained earlier with a lot of the underlying commodities, we think that inflation has peaked in.
And so in some cases, even after the end of the quarter commodities are coming Austin.
Freight rates are coming off and container rates are coming to us and I think we've seen the peak of inflation.
We actually expect demand to go up for a lot of these products as the pricing comes down.
Okay. Thanks for the color I'll re queue.
Thank you Derek Thanks sure.
Thank you next question comes from George to Me at Scotia Bank. Please go ahead.
Yes, hi.
There was a significant increase in the margin.
Guys.
The significant increase in the margins.
<unk> I think you called out lobster.
And the shift to value add can you maybe talked about and just trying to get a sustainability I'm just kind of get a sense of the sustainability of those margins I guess over the medium to longer term.
Yeah, so so longer term.
Longer term, we do expect to have PFD margins expanding of it if they were accelerated a bit in the quarter because like you saw that big drop in lobster prices did create.
Some expanded margins.
Longer term, we do see PFD is sort of a seven 5% to 8% EBITDA margin business. So they were roughly in that range or a little bit above it because at the lobster benefits.
Okay, that's helpful and by my math here.
You hit the lower end of this year's guidance, we would need to see a similar margin profile in Q4.
In Q2, and Q, sorry, Q3, Q4 is seasonally a weaker quarter. So maybe you can just help me understand kind of the building blocks to the guidance for the year.
Yeah, again, I think it'll be a similar story there.
<unk> continued to be some some pressure on the sales side and retail at the beginning of the quarter that that's going to hit the margins because of that sales mix issue I talked about earlier.
But overall, we are expecting to hit the bottom end of that range.
I think that the.
Dynamics there George.
We're playing out today is as I mentioned earlier deflation right right. So you have a lot of underlying commodities that shut out.
We adjusted pricing and now they are coming off that pricing doesn't come off as quickly and effectively margins contracted on the way up and expand with the underlying commodities go down so that should help the quarter end.
As I mentioned before I think that is a lot of pent up demand for large gatherings downtowns or back.
Downtown crowds or back office scribes or back end.
We expect a.
Quite a strong.
End of the year December in particular, but again, George with the with that side of the equation. That's PFD right, which are PFD margins are below sort of our average our specialty foods is above our average rate. So again that goes to that sales mix issue.
Okay. Thanks for that George just one last one if I may.
I'm just wondering how you prioritize the NCI versus M&A kind of given where the stock is and given where the balance sheet is.
Yeah again.
As I mentioned in the prepared remarks, we will be acting on the CIB in the fourth quarter. Unfortunately, we missed the window in terms of our blackout within the third quarter.
We are.
Obviously always look at.
The allocation of capital and where we get the highest returns and we find the value of our shares today very compelling for our long term shareholders. So so.
We will certainly be buyers in the fourth quarter.
Alright, thanks, guys.
Thanks, George Thanks sure.
Thank you next question comes from Martin Landry at Stifel. GMP. Please go ahead.
Hi, good morning, guys.
Hey, Mike Hey, Martin.
My first question is on your M&A pipeline.
Looking at the the slide that you put on a regular basis it looks like there was less.
How many files active currently and I was wondering if you can discuss a little bit that dynamic.
Yes, there are many many active file Sam Martin.
Our premium brands I can tell you that our M&A team is extremely busy.
As I mentioned again in my prepared remarks, we're not prioritizing acquisitions at the moment, we're focusing internally things are getting back to normal, we're adding capacity or investing in process automation to deal with some of the ongoing labor issues, particularly in the U S.
We have a lot of companies that would like to be acquired or partnered with premium brands.
The M&A environment is very benign right now I would say it is not a lot of buyers out there there's not a lot of sort of transactions taking place out there. So we don't feel that any pressure to do anything we're moving some possible deals into the new year and anyway, we will be very busy over the knee.
Next 12 months with M&A not just immediately as we speak right now.
Okay, and just to be clear why is it that youre not prioritizing acquisitions right now.
Well again, I think that what we saw earlier in the year, we saw a lot of transactions were.
The expectations of value was relatively high end.
In inflationary.
Disruptive environment, and we didn't feel the need to act.
Those are good deals as we we think that timing is favors us at this time and it's <unk>.
Expectations for value a moderate then we will be more active.
Okay.
Okay and the other question you you've been talking a little bit about deflation.
You know being in a deflationary environment with your commodity costs I was wondering and you touched a little bit you, you're saying, there's usually a lag when prices go up and there's a lag when prices go down.
Hugh you lagging.
Some of the pass through so but I was wondering when do you think or at what point are you going to start thinking about maybe reducing some of your selling prices to reflect lower commodity costs.
Yeah, So so Martin.
Over the last couple of years, we've as you know we've got a lot of questions around inflation and how are we going to manage this high food inflation that we've seen in the last couple of years and I have to say that in my 35 years into business I've never seen so much inflation in the last couple of years, and we don't really get too excited about that.
Because we have demonstrated in the past that we can pass on pricing again, we're not trading and commodities with trading and differentiate it.
Our products are.
Generally branded products unique products.
And again once again as will mentioned earlier, we've demonstrated our ability to pass on pricing.
Having said that.
You know, we make it back as the underlying commodities begin to to.
To come down and Indiana will end up with our normal margins, we do pass on the pricing of course.
But we want to make back what we gave underway that sort of thing and that's generally what happens that Martin.
Okay. Okay. So so no expectations of price declines in the near term.
Well I think what youll see in the near term Martin is a lot more featuring by our businesses.
So so to the extent that they are passing on some of that price benefit.
The offsetting gain from that will be higher organic volume growth, so better margin from a contribution margin perspective.
Which drives our plant efficiencies.
Drives R R.
Optimization of our operations optimization of our labor et cetera, right. So those are our.
A positive in terms of the bottom line for us.
Hum.
Okay perfect. Thank you.
Thanks, Mike.
Yeah.
Thank you next question comes from Stephen Macleod BMO capital markets. Please go ahead.
Good afternoon. Thank you good afternoon, Steve.
Yes.
It sounds like based on your commentary I think what you had in the press release as well it sounds like your momentum sort of accelerated through the quarter and I'm, just curious and even into Q4 I think is what you said so I'm. Just curious if you were to think about the top line and maybe the organic volume growth rate into into Q4 do you expect it to.
Accelerate sequentially from Q3.
We do expect to see some improvement Steve but it is much it is seasonally a slower quarter.
So.
What would happen in the third quarter was.
A lot of that strength in retail around.
Sort of outdoor activities Barbecueing all of those things that drive our protein business and the seasonality of it.
We didn't see them in in the early parts of the quarter.
And because people work at home they were all going out dining out traveling just post pandemic sort of.
That that that that demand of getting out of the home. So so we did see that significant a shift and improvement over the course of the quarter.
But again that that dynamic isn't going to play out as much in the fourth quarter, just because it's different seasonal factors.
Oh, Okay I see that's.
That's helpful.
And then maybe just turning to the to the gross margin I know you just I know you talked a little bit about about the mix, but just with.
Some of the slides that you showed on on on.
On commodity prices it looks like they've come off but they are still historically high so do you expect that.
That should be reflected in gross margin improvements as you as you roll into Q4, and then and then into next year as well.
Yes. So you know again looking at the two different segments right. Steve. So if you look at the specialty foods segment. The two key commodities, we talked about pork and chicken.
We're expecting to be relatively stable so.
That probably no wins there.
Chicken yeah.
We do expect to see good margins in there as we get back to normal levels.
With our pricing and <unk>.
Hopefully with some feature and we get some really good solid growth out of that but chicken is a much smaller component of our overall basket right. So, although it's helping to offset some of those retail mix change.
<unk> its not as dramatic of an impact on our business. So so hence why we're being a little conservative around our expectations of EBITDA for the fourth quarter.
Right Okay.
You're more confident in the PFD margins sort of based on yeah, sorry, so going going over to PFS.
The you know the commodity is there the red lobster salmon and beef.
Again.
We do expect to see some some continued deflation in beef.
<unk> stable.
And lobster, possibly inflationary. So you know relatively overall you know a stable situation, although again, the dynamic pricing model of our premium food distribution businesses.
Tends to make inflationary or deflationary cycles less of kind of.
An issue than it is in our specialty foods segment.
When youre focusing.
On the commodity pricing of course or the pricing of the underlying commodities we use.
Which is what will explain again don't forget that in the last couple of years, we've had tremendous issues with labor shortages, which impacts.
The efficiencies and the productivity and the optimization of output out of our facilities, which seems to be abating now is labor, particularly in Canada.
Seems to be plentiful not so much in the U S.
But we're making progress there as well and that should help the overall margins.
Okay as we go forward.
Really helpful. Thank you.
And then maybe just my last one.
On Slide 21, you had this you showed the selling price inflation outpacing.
Raw material and wage and freight inflation. So that was a net positive impact to EBITDA, but then you cited it as a margin headwind on the next slide and I'm just curious if you can explain.
That that difference.
Sorry.
I don't quite understand your question, Steve will you.
We're saying on slide 21, you showed a selling price and selling prices outpacing raw material inflation.
So off so a net positive EBITDA impact.
But then you cited it as a.
As a.
The delay in putting through price as a margin headwind on.
On slide 22, so I'm just curious how that dynamic Oh, yes. So on slide 22, what we're talking about is that $4 6 million I mentioned earlier. So in Q3, we were still at the beginning of the quarter, we were still waiting for some price increases to take take effect.
And that's at $4 6 million dollar impact on the quarter now for Q4, we're not expecting that to be a factor all the pricings in commodities are stable from just a pure selling price relative to raw material commodity prices, we should be back at normal margins for the quarter.
Because of that.
Subject to some of these other factors like are outlined on slide 22, such as the freight situation, which does seem to be stabilizing.
And the.
The impact of the acquisitions and outside storage costs.
Okay. That's great. Thanks, guys appreciate it.
Thank you.
Okay.
Thank you next question comes from Johnson <unk> at CIBC. Please go ahead.
Thanks, Good morning, guys.
Hey, John .
Okay.
Wanted to start with.
$19 million order that you ended up refunding and two parts to this first did did quality control issues on that order.
Has that impacted the relationships at all with that customer have you seen any change in volumes your orders with that customer and then second.
It's finding other suppliers present any challenges in Q4, so far.
The relationship with that customer John has never been better.
And.
Again, we will continue to grow with that customer.
Supply like this is an issue John that is black and white in the suppliers is our eyes and the customer's eyes.
We were the assembler and there is absolutely no doubt what what part of the process was broken and it wasn't one of our processes.
And effectively the product was delivered out of spec and again it was very clear.
The suppliers not denying it so again, it's not if there was a lot of.
<unk> cost to us, but but.
You know what.
It was clearly not at PB issue.
Okay. That's helpful. Thanks.
I wanted to ask about inventory and one of the reasons inventories so elevated strategic choice to mitigate cost inflation I wondering if you could just take a shot at quantifying the impact of that or even just broadly describing how material a benefit that has been to you.
Yeah. So so you know it's really it's the strategic element from what I mentioned earlier relating to supply chain challenges and inflation and then there's also the element of the shift in retail in the quarter. So there's some inventory built up from that so.
It's a combination of those three factors if you go to that slide on the inventory.
With slide.
<unk>.
Uh huh.
Sorry, John you missed that slide 31.
We kind of isolate a little bit so $37 million was specific plans to build inventory for the fourth quarter by different businesses.
And then you know that other number the $59 million that was kind of a combination of you know.
The safety stock related to the inflation and the supply chain challenges issues.
Okay.
Okay.
I wanted to clarify on SG&A, you press released and I think the prepared remarks referenced.
Promotional and variable selling costs associated with driving organic volume growth I'm. Just wondering if you can elaborate on what those were.
Well, it's a whole range of things John nothing nothing individually significant so it's purchased participating in ad campaigns.
In store demos it's.
Uh huh.
Working for different coupon programs, it's a whole range of different initiatives across our many businesses.
Okay is it just that those were you're always doing those but they were incrementally higher this quarter.
Well no because a lot of that stuff we had cut.
Cut back significantly over the last six quarters, because the businesses pricing wasn't where it needed to be they didn't have the margin they.
They were struggling to get back to their normal margins and one way we're addressing that was cutting back on promotions last thing. They want to do is promoting our product at nominal margins why bother doing that.
So there was a so it's really a step back to getting to normal levels of activity. There is still not there yet there is still there is still below sort of historic levels for promotion just because like I say Q3 was still a transitory.
Quarter, and getting margins back and the fact is a lot of these programs you need to work with the retailer three to six months out to put in place that program. So this would have been stuff that you'd have to start planning in the middle of all of that inflation.
But like I say the upside it's good money spent we love it when we can promote product because it always drives organic volume growth. We're just very responsible we are only going to do it when there is a decent margin to still be made.
Got it okay. That's good color and then my last one is on capital allocation and specifically the dividend.
And you have a track record here, 10% annual increases, but I wonder with leverage where it is currently is higher than you'd like your investments in working capital elevated most of your debt is variable is the reason to think you put more priority on deleveraging.
As I mentioned in CIB.
Rather than seeing a similar increase in the dividend next year.
Well for starters, we expect our balance sheet to Delever pretty quickly in 2023, John with the growth the expected growth in our EBITDA.
Again, you look at our EBITDA for this year and just the pricing delays alone was $34 million impact on EBITDA.
So so.
We're very bullish on our EBITDA for next year.
That is going to have a dramatic impact on leverage levels. We then generate a lot of free cash flow that will continue to go towards <unk>.
Some of it invested internally some of it to pay down debt and then finally the inventory issue again, we expect to see a fairly significant amount of cash come out of our inventory when you put that altogether, we've got very good flexibility on the balance sheet.
We have no plans John to change our dividend policy or strategy.
In terms of sharing our growth with our shareholders.
Okay. That's very helpful. That's all from me. Thank you.
Yeah. Thanks, John .
Thank you next question comes from the South stream that that National Bank. Please go ahead.
Hi, Thanks for taking my questions.
Hey, Vishal.
Hi.
With the.
Management indicated right off the top on the strong acquisition backdrop, including potential transports transformative acquisitions understand nothing.
Currently in the pipeline or at least that's what I understood in terms of the immediacy, but just on the transformational deal does that suggest that management would consider issuing equity.
Around current levels.
Case.
Okay.
We have no plans to issue equity at current levels Vishal.
We're always in discussions with.
Possible.
Partners for four strategic.
Opportunistic and transformation of acquisitions the timing of.
These deals tends to be driven by the seller. Many many times by Redwood, we're conveying effectively that we have a few transformational ones in the pipeline that meet our criteria. We don't know when they will happen, possibly in 'twenty three 'twenty four but but we're always working on transformation of the use in <unk>.
The relationships to be able to.
Ultimately do them and execute them and make sure that there.
The accrued benefits to our shareholders.
Okay, and just changing topic here a lot of volatility on that including the.
Net interest rate impacts on free cash flow translation impact on the debt ratio I'm wondering if this.
Backdrop has caused management to reflect on some of its debt policies and do things a little bit differently and if so if that's the case just wondering what management would be thinking about.
Yeah again, we're very comfortable with our current policy you know the IRR to ratios for our total debt to EBITDA ratio in the senior debt to EBITDA ratio.
I again.
A lot of stuff going on as noise. The shell in terms of the impacts of FX.
It's just it's just kind of math in the quarter.
And the reality is as we weave.
We've invested a lot in capacity and growth and we're just in the early days of that and as that unfolds in 2023.
That that is going to address a lot of the issues youre talking to.
Okay and in terms of the variable versus fixed on rates is that something that is it more of a transitory impact as well.
Or is that something that management is going to look at in the future.
I I again as you saw in the quarter the impact of the higher interest rates on our interest expense is only $3 million.
And the reality is we've always been of the philosophy that.
Long term variable rates are more beneficial than fixed rates and and yes, if you're tying things perfectly that it can be vice versa, but you have to time things perfectly and no one ever gets outright or rarely gets that rate without just being lucky.
I again, where we see rates going to and we see our historic rates of interest we've paid.
There is certainly within the band of normality and it's really the absolutely incredibly low rates. We've just come off of that that was the abnormal environment.
And again Vishal.
Sometimes we have to look at things in terms of materiality.
We we put through in excess of $600 million in price increases this past year or six quarters.
Last six quarters.
Yeah.
Again, our business has grown and continues to grow we're still getting organic growth.
In the most difficult operating environment, we've seen in probably our career. So 3 million increased interest cost is not material to us.
I appreciate that color. Thank you.
Yeah.
Thank you next question comes from Kyle Mcphee Cormack Securities. Please go ahead.
Yes.
Hi, guys just a question on your growth Capex projects.
I noticed that a big sandwich production facility investment disclosed in your list of projects last quarter.
It disappeared from the list of projects this quarter, referring to a to a new sandwich production.
Duction facility that was being built in hillard, Ohio.
It looks like now replaces a smaller investment Columbus, So am I interpreting this right now and why.
Might you be scaling back the sandwich platform growth spend.
Yes no.
Sure you are definitely interpreting right. This was a unique opportunity John .
We had been going down the path of building. This this satellite facility to our Columbus facility to kind of bridge our capacity tour for the next evolution in our sandwich platform.
And before starting on that that satellite plan, an opportunity presented itself with this brand new storage facility that came on the market are right by our Columbus plant. So so that's allowing US now to instead of building a another satellite production facility.
Moving the distribution.
Element of our Columbus facility to this new facility Thats right by it.
Which will provide us with much needed distribution capacity and then keeping all of the production and the production growth in the Columbus facility. So it's a great solution and it gets us the bridge that the Hilli project would have gotten us and it's $40 million U S cheaper.
Effectively half the costs, so we couldnt.
After that.
Okay. So I saw that it was half the cost, but it sounds like youre not it doesn't result in less production square footage.
Well it is slightly smaller but the key is it's the bridge we need to as we elevate the next evolution of our sandwich platform because when we look out at our growth opportunities in that platform.
We need more capacity there to meet our next three to five year plan. So we're starting to look at a new major facility down the road a couple of years from now.
Somewhere on the east coast of the U S.
South East southeast of the U S.
And.
And this is the capacity that bridges that need which was the strategy of the original Hillary Hilliard project.
Understood. Okay. Thanks for the color that's it for me.
Thanks, John .
Our <unk>.
Thank you. Our next question is from Douglas start at TD Securities. Please go ahead.
And just a few follow ups for me.
Maybe a housekeeping question Willie I think you alluded to it on depreciation it up it's up about 4 million Bucks a quarter over quarter Curie.
Curious how much of that is.
<unk> versus <unk>.
M&A or acquisitions and capital projects.
Yeah, it's almost all acquisitions theres some FX in there and if you go into our M&A it'll breakout our N DNA it will break out the FX impact Derek I don't know it off the top of my head but.
From the actual growth in Capex. It is almost all acquisitions related.
Okay, and just one final one on the sandwich business just to be clear you guys are the assemblers, but the the suppliers are chosen by your customers.
They are chosen in collaboration with the customer right. So so basically by both.
Okay.
Yeah. So so we have to make sure that the customer the supplier fits in with our production.
Standards, and all that sort of thing versus the customer make sure that that's the product they want for their end.
Component or their end product.
Okay. So I guess I guess my question is is that at the end of the day.
When when something does go wrong with the supplier.
How we blame I guess shared.
Well again as George mentioned earlier, the supplier has taken full responsibility for the issue, but just because of the contractual structure. The customer it makes a claim against US and then we make a claim against the supplier.
Okay understood. Thank you.
Thank you there are no further questions I will now turn the call back over to George <unk> logo for closing comments.
I'd like to thank everybody for attending today. Thank you very much bye bye.
Ladies and gentlemen, this concludes the conference call for today, we thank you for participating and we ask that you. Please disconnect your lines.