Premium Brands Holdings Corporation Q1 2023 Earnings Call
and will Kalutich CFO . At this time, all lines are in a lesson only mode. Following the presentation, we'll 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 on Monday, May 15th, 2023.
is our CFO Will Kalutich.
Our presentation will follow the deck that was posted on our website this morning.
We are now on slide 4.
which outlines certain key highlights for the quarter.
Results for the quarter were unplanned as industry headwinds subsided. Our overall volume growth for the quarter was within our targeted range of 4 to 6%. However, the majority of the growth came from the foodservice channel as out-of-home dining returned and food traffic in retail slowed down somewhat.
Consumers have resumed their regular activities. They're spending more time at the office downtown. They're traveling more for business and pleasure. And they're consuming more food at QSR and the white tablecloth dining establishments.
This of course means that they're eating and entertaining a little less at home.
Return to normality for us means that once again, we're able to present our products and process innovations to new and existing customers and we're pleased to report that responses have been excellent. Innovation is back in vogue and the premium brands ecosystem remains prolific in this area.
Both of reporting platforms performed well during the quarter and are very well positioned to gain traction going forward. Demand for a cooked protein, artisan sandwich and specialty bakery products was very strong while our center of the plate best in class protein offerings continued to drive the growth of our food service business.
We're pleased to report that our new sandwich facility in Edmonton, Alberta is now ramping up and will be fully operational by the end of this month. The facility features automated state-of-the-art sandwich assembly lines as well as industry-leading charcuterie tray assembly capabilities. We continue to gain momentum in growing our US businesses.
opportunities. We have visibility to this number growing substantially in the future.
We're now on slide 5.
You can see that our acquisition pipeline remains very full. Although we did not close any acquisitions during the quarter, we're pleased to report the completion or near completion of several capital projects that will solve a number of capacity challenges facing our various businesses while improving efficiencies and enhancing productivity.
Hopefully, you had a chance to watch the three videos we showed at our AGM on Friday. All three videos demonstrate the degree of automation and robotics we have been investing in over the past three years.
Before I pass it to Will, I would like to reiterate that, as promised, we're emerging from the past three chaotic years bigger, stronger and even more diversified.
Our decentralized, entrepreneurial-focused business model combined with our great people and culture continues to differentiate us and we look forward to translating these competitive advantages.
into sustainable top and bottom line growth and above average long term returns for shareholders.
As you can see on slides 6 to 12, our prolific product innovation continues to disrupt and reinvent the various categories we compete in.
Look for some of these products at a store near you. We're especially pleased to be bringing Premium Center Cut Super Lean Best in Class Bacon to Central and Eastern Canada under the Ledbetter's brand. It won't be the cheapest bacon you ever bought, but it will be the best you've ever had. I will now pass it on to Will. Will?
Thanks George. Before I begin, I would like to remind you that some of the statements made on today's call may constitute forward-looking information and our future results may differ materially from what we discuss. Please refer to our MD&A for the 14 and 52 weeks ended December 31, 2022.
as well as other information on our website for a broader description of the risk factors that could affect our performance.
as other information on our website for a broader description of the risk factors that could affect our performance. We are now on slide 14.
Our sales for the quarter were $1.43 billion. This was an increase from 2022 of $179.3 million or roughly 14.3%.
There were four major drivers of our growth. First and the largest was our organic volume growth which was up $66.8 million.
This was driven by the recovery in our food service and to a lesser-sent Cruise Line Bidsip sales to those channels as George mentioned earlier. Our artisan frozen sandwich programs.
our cooked protein initiatives which mainly are in the US and our artisan baked goods initiatives which are both in Canada and the US.
Our organic growth rate for the quarter was 11.7%, which is well above our long-term target of 6-8%.
Turning to slide 15.
You can see on this slide from the chart which shows our organic volume growth rate by quarter, the steady progress we've made over the last four quarters from a trough of 1.3% in the second quarter of last year which was greatly impacted by the pandemic and inflation related factors.
steady improvement over the four quarters at reaching 5.3% for this quarter, which is in fact the highest first quarter growth rate in our five year history other than the first quarter of 2020, which was heavily impacted by a pandemic related demand search.
Compared to our expectations for the year, the first quarter's growth rate of 5.3% is low, primarily due to Q1 being a seasonally slow quarter, as well as ongoing supply challenges with our turkey.
which is good news there that we have seen some openings and some normalization in the commodities market which is allowing us to re-enter that category this year. So we're excited about that.
Turning to slide 16.
We reaffirmed our sales guidance for 2023 of $6.4 billion to $6.6 billion.
Using the midpoint of this guidance of $6.5 billion, that would represent growth from 2022 of roughly $470 million or 8%.
Turning to slide 17.
This slide shows our weekly sales.
And the black line is for 2023 relative to the gold line which is 2022. You can see we continue to generate solid momentum. The good news is FX, translation and...
And selling price increase impacts are lesser of a fact and as we go forward organic volume growth will be more of a factor.
Turning to slide 18, our EBDOT for the quarter was $110.7 million. This is an increase of $14.9 million or 15.6% from 2022.
There were three positive drivers and four major negative drivers of our results for the quarter. On the positive side, we continue to make great progress in recovery, in margin recovery, with our selling price increases outstripping our raw material, freight and wage cost inflation by about $18 million in the quarter.
We'll talk a bit more about that on the next slide. And then organic volume growth was the next biggest driver. And finally plant efficiencies driven by recent investments we've made in automation and new technology.
On the negative side, our plant overheads were much higher year over year. This was driven primarily by the ramp up in capacity that we've been investing in, which will drive our growth in the second and third quarters of this year.
Incentive-based compensation was also up due in part to our higher expected earnings for the year and free cash flow.
Discretionary promotion was up, mainly due to the normalization of this expanse post-pandemic. And finally, outside storage costs continued to increase year over year due to our inventory levels, which I will be talking to in a later slide.
Turning to slide 19, it just gives you some progress we have made over the last five quarters on recovering our margins from the impacts of cost inflation. You can see the first row shows our selling price inflation by quarter.
And the third row, the net margin impact of our selling price increases after wage for raw materials and freight inflation. You can see from Q1 last year of a negative impact of $1.9 million, we made steady progress to roughly an $18 million positive impact in the first quarter.
Turning to slide 20.
Our EBDOT margin for the quarter was 7.7% which was flat year over year.
Q1 is generally a lower margin quarter due to the seasonality of our business.
And then other factors impacting our margin for the corridor was the significant unutilized capacity we built up to support our growth in the second and third quarters. As I mentioned, that relates directly to the increase in the plant overheads.
Then also our bolt-on acquisitions that we completed in 2022 which are making great progress but still have much lower margins than their projected margins. That resulted in about a 30 basis point dilutive effect on our EBITDA margin. And finally the notice of period associated with price increases we're putting through.
If you've noticed on the previous slide, it was about $1.7 million in the quarter, much less significant from prior quarters as our pricing is catching up, but that was about 10 basis points of dilution in our EBDOT margin. So on a normalized basis, our EBDOT for the margin for the quarter was about 8.1%. Turning to slide 21.
We also reaffirmed our guidance for adjusted EBDOT for the year of $590 million to $610 million.
Using the midpoint of that guidance of $600 million dollars, that would be an increase of roughly $96 million dollars or 19% for 2022. We also are projecting a nice increase in our EBDOT margin for the year. Again, using the midpoint, that would be about 80 basis points over 2020-22.
point of that guidance of $600 million dollars. That would be an increase of roughly $96 million dollars or 19% for 2022. We also are projecting a nice increase in our EBDOT margin for the year. Again, using the midpoint that would be about 80 basis points over 2020-22. For more information, visit EBDOT.gov.
Our earnings for the quarter were down $10.8 million to $28.6 million and our adjusted EPS was down $0.24 to $0.64 per share.
There are four main drivers of the impact on our earnings. On the positive side was the growth in our EBITDA, which was about $14.9 million, and lower income taxes, which is about $6.3 million.
The major negative impact on our earnings and earnings per share came from the investments we've been making in growth. We estimate that impact from investing in capacity which will set us up again for growth in the second and third quarter was about $19.6 million before tax or roughly $14.5 million after tax and that consisted of $20 million after tax.
interest on the capital we've invested and then additional lease and depreciation costs associated with those investments. Then the fourth factor impacting our earnings and earnings per share for the quarter was higher interest rates, which was at impact of about $12.3 million before tax or about $9.1 million after tax.
Normalizing for the growth investments you can see our earnings and adjusted earnings per share would both have been at record levels for the quarter.
Slide 23, we finish this quarter with strong liquidity with $475 million of unused credit capacity.
Our debt ratios did however remain relatively flat from Q4 at 4.3 to 1 for our total debt TB-DAH ratio and 3.2 to 1 for our senior debt TB-DAH ratio.
Both these ratios are high due to our high inventory levels, which I will be talking to on a later slide, as well as our strong capital plan for 2023. We do expect solid improvement in these covenants in the back half of the year as we grow our UBDA and our inventory levels normalize.
Turning to slide 24, our days cost of sales and inventory at the end of the quarter were 65 days, which was a slight improvement for the first quarter of last year, which was 65.8 days.
However, we still have lots of work to be done as we're still about 8 to 9 days over our historic levels.
Our higher inventory levels for the first quarter are driven by three key factors.
One was, and you can see it from the chart below, Q1 is just a normally strong inventory bill period. You can see each of the last five years Q1 has been sort of the peak point in our inventory cycle on a day's cost of sales basis.
And with all of the sales initiatives we're preparing for in Q2 and Q3, you know, that was elevated in Q1 this year. Then we also had new sales initiative builds. We've got some very exciting sales initiatives launching in the second quarter.
which we had built about $35 million of inventory for, which was an unusually high level. And then we had an unusual level, high level of what we call opportunistic purchases where we were able to go into the market and buy raw materials at favorable prices. And that was about $27 million of additional inventory.
which should contribute to better margins in the second quarter.
Turning to slide 25, for the quarter we spent $62.1 million on project capital expenditures. These are expenditures that are expected to return or generate an internal rate of return of 15% or greater. 43.3 million of those expenditures were on 11 major projects.
seven of those are
either complete or nearing completion, with two more scheduled for early next year into 2023 andume STORYummy too between 2025 and 2023
Overall, the total expected investment for our projects underway is about $642 million.
of which we spent about $180 million leaving $463 million spent over the next couple of years.
That concludes the financial presentation. With that, I'll hand it back to the moderator.
Thank you. Ladies and gentlemen, should you have a question, please press the star followed by the one on your touch tone phone. If you'd like to withdraw your question, please press the star followed by the two. If you're using a speakerphone, please leave the handset before pressing any keys. One moment please.
Your first question comes from Martin Laundrie from Stiefel GMP. Please go ahead.
Hi, good morning George and Will. Hey Martin. Good morning.
My first question, in your opening remarks you're talking about unused capacity utilization as having a bit of an impact on your margins.
I was wondering if you can put a number to that. What was your capacity utilization during the quarter? And then you're talking about...
expecting it to improve in Q2 and Q3. So I was wondering, what was your utilization this quarter? And where do you see it going in Q2 and Q3?
Yeah, we don't have a utilization number, Martin, just because we're a portfolio of businesses and they're all at different levels.
So it's really hard to come up with one percentage that summarizes everything. But you know they range from some of our sandwich facilities or you know sort of the 70%, 70 to 75% range, some of our meat snack facilities, 60%. We've got lots of capacity.
particularly with what's coming on stream now and in, sorry, that came on stream at the end of the first quarter and is coming on stream in the second quarter to certainly exceed our sales expectations for this year.
Yeah, so Martin, we have 115 facilities across the network, and so there's quite a range of capacity utilization.
As Will said in general terms, the second and the third quarter are by far the busiest.
for many reasons having to do with the weather in particular, people eating outdoors, barbecuing, all of those things. And when you run a plant at 60 percent capacity, you're still running it with the same type of overhead, right? So as you ramp up to 100 percent, that improves your water quality where you set up your controls, throughout your larval system. You know, you can't use these sensors at your home. So no Yeah. It takes a year, and also, the trees in it.
efficiencies and your productivity immensely. Right? So generally the first quarter is impacted, the margins are impacted because of the low utilization of the facilities.
And just to give you a sense of the impact on the Quarter-Martin, our EBDOT, the impact on the EBDOT plant overhead increase was close to $6 million.
There's a little bit of cost inflation of that, but a lot of that is just building that infrastructure now to support our sales for the balance of the year.
That's helpful. It's a good segue into my next question. In your opening remarks, you've talked about an inventory built up.
I think you mentioned $35 million that was related to new sales initiatives. So, could you share some of those new sales initiatives that you have lined up that are going to unveil in the next quarter?
Yes, so just to correct the comment, Martin, Will was referring to one specific sales initiative you know with the expected sales being in that range. There's of course many sales initiatives in the pipeline of premium brands going to the second quarter.
Right? And as we've talked before, and as you know, we don't talk.
specifically about customers, but with increased capacities in the areas of sandwiches in particular, meat snacks, there's a lot going on with regards to opening new channels and...
and finding new markets for a price.
Yeah, but to George's point, Martin, it is primarily driven by a number of sandwich initiatives that are new and we don't include in that factor the normal sort of seasonal buildup for ongoing sales initiatives.
just to George's point, Martin, it is primarily driven by a number of sandwich initiatives that are new and we don't include in that factor the normal sort of seasonal build-up for ongoing sales initiatives. Okay, I see.
And then last question for me.
With regards to the overall environment and the customer confidence, being a bit shaky right now, are you seeing your private label products or your growth in private label sales?
being faster than your growth in branded products and could that have a bit of an impact on your on your margins or not at all?
I wouldn't say that's an issue for us, Martin. As we've mentioned in the prepared comments, what's happening right now is that we're basically back to normal and, you know, I think consumers, as you know, are out and about and traveling and...
getting on airplanes and I think you're seeing that in all the data that's coming out. So there is less entertaining and eating at home. Obviously that translates into reduced traffic through certain channels. We've always emphasized the importance of...
selling food diversified channels as a business overall. And we're really happy with our diversification. And again, as you've seen during the quarter, we picked up sales in the food service channel and maybe lost a little bit of traction.
in the retail channel as consumers are eating out more frequently.
Okay, that's helpful. Thank you.
That's helpful. Thank you. Thank you, Norton. Thanks, Mark.
Your next question comes from Steven McLeod from BMO Capital Markets. Please go ahead.
Thank you, good morning guys, good afternoon for us, good morning for you.
Hi Steve. Hi. I just wanted to circle around on the margin. You gave some good examples or some of the reasons why margins came in a little bit below expectations in Q1. Some of the headwinds that you're seeing. As you work towards that full year margin in the 9% plus range.
which will be leveraging the capacity. Most of the capacity we've invested in over the last year is in our specialty food segment.
and it's a much higher margin business, much higher contribution margin. So that certainly is the biggest driver. And then the investments we've made in plant efficiencies, in the quarter our plant efficiencies number was up about $5 million.
through primarily automation and other kind of investments in new technology. So those are going to be the two big drivers. And so as you fold that out over the quarter, the automation is something that's going to be sort of equal in Q2 to Q3. But in terms of the sales...
the ramp-up is certainly we're going to see some benefits in Q2, but Q3 will be the full quarter of those benefits. So that we're expecting that certainly to be our burger for Q1 and Q3 again
Okay, that's helpful. And then just along those lines, you talked about capacity challenges. Is that all sort of wrapped in together with what you expect to see in Q2 and Q3 as some of these investments come on or you know?
reap the benefits from these investments and is that where you expect to see the capacity solutions coming kicking in?
from these investments and is that where you expect to see the capacity solutions coming kicking in? Yeah, absolutely.
We've talked in the past about particularly around sandwiches and some of our protein categories, cooked protein in particular, and even artisan bakery goods being real bottlenecks and those are the bottlenecks we're addressing.
out. Great, okay thanks guys, appreciate it. Thanks Steve. Thank you Steve. Your next question comes from John Zamparo
Thanks, good morning George and Will. Hey John . I wanted to get back to capacity and particularly within the Sandwich platform. We spoke last quarter about how you weren't able to service all the Sandwich customers you wanted to because of a combination of lack of capacity and just how fast your largest customer was growing.
So I think you've said in the previous question, or one of the previous questions, you're now at 70 to 75% capacity in Sandwich. So I wonder how quickly can you fill this capacity? Is there kind of a waiting list of customers that you could quickly onboard? And I think the next expansion within Sandwich is Columbus.
group throughout the next two years. And that's why we've already started on the Tennessee plant which is scheduled to come online Q1 2025. Based on the outlooks and the discussions we've had with the customers and potential customers we're going to be pushing that capacity pretty quickly.
and scrambling right through until 2025. But that's a good problem to have, John , and again, as Will, just to answer your earlier question, you know, we're not just onboarding one or two customers, we're onboarding a lot of customers.
what we have, what we offer to the industry is in very high demand. We're really happy to be commissioning the Edmonton facility. We've had lots of innovation sessions and lots of visitors with regards to customers wanting that capacity.
So there's a lot going on in that platform. In addition to that, because we have such a lead in that area, we seem to be taking market share as well. This is something that we've never done because this has really been white space for us, but...
but we're even seeing opportunities to take market share as well. So there's lots going on in that pipeline, a lot of exciting growth initiatives in that platform.
Okay, understood. And sticking with some of your different projects, you have multiple large ones underway and I wonder if we're trying to figure out what's going to have the greatest impact on EBITDA. Is it as simple as looking at what you're spending on these or are there one or two projects that are...
I'm going to over contribute when it comes to EBITDA improvements among your project ethics.
There's one outlier that our San Leandro Bakery initiative, John , these products are absolutely amazing. They are, to George's point, white space products that are just, we can't keep up with the demand of our customers that are wanting us to take them into new markets.
the project is a good indication of the impact on our margin.
And, you know, the biggest impact, again, John , overall on our margins is going to be getting back to normal, right? You have to understand that in the last three years we had amazing challenges accessing labor, supply chain issues, and of course inflation. So
you know, you have to look at our margins today in that context. If you assume normalization, which we're seeing, that will have a big impact in terms of our margins.
Understood. Okay. Question on Clearwater. And the loss this quarter was larger than what we typically see. You listed some of the reasons in the press release and I know Q1 seasonally the softest quarter in that business. But can you elaborate on how Clearwater is performing and can you give any color on their access to liquidity to pay your expected interest and fees?
Yeah, so there's no doubt there was sort of a variety of challenges in the quarter for Clearwater. Most of them just that, just sort of temporary challenges, some weather related issues, just the timing of some inventory sales. Some of that, they are a good portion of that Clearwater is expecting to make up in the back half of the year.
Q1 is exactly that. But for the year, we're still very positive on the year for the business and expect a decent cash flow coming in to pay what essentially is the stripping, the free cash flow of the business by our interest payment.
And I would just add that we worked with Clearwater's management team for the last couple of years to measure how many
reconfigure the business plan, the overall long-term business plan towards more value added in branded products and we're making very good progress in regards to that. There's a few downstream type of acquisitions in the pipeline. So again, the plan is on track and on plan. Thank you very much, everyone.
Okay, that's helpful. And then just one more on margins, then I'll pass it on. The elevated inventory levels that you've held so far and understood why you make them, there's opportunistic raw materials prices you're getting, but can you say to what extent, if any, this has benefited margins to this point, or is that a future margin benefit?
It's largely a futures margin. To the extent, we made some opportunistic buys in the last quarter or Q4 that we did carry into Q1 and used in Q1, but the reality is that was part of that margin normalization. It's captured in that $18 million margin normalization.
So there is a little bit of that, but in terms of the $27 million of unusual buys, that is all for Q2, Q3 this year.
Got it. Okay. I'll pass it on. Thank you very much. Thanks, John . Your next question comes from Derek Lassard from CD Cohen. Please go ahead.
Yeah, good afternoon gentlemen. I appreciate the update. Hey Darren. I just wanted to maybe, I had one just maybe give us an update on sort of your seafood initiatives and in the broader sense and when you expect to really start seeing the benefits of those investments.
Well, there's a lot going on in seafood, Derek, and I did speak to it a little bit.
Well, there's a lot going on in seafood, Derek, and I did speak to it a little bit at the en-
at our AGM on Friday, we are quite advanced in announcing a Clearwater West type of transaction.
involving certain Indigenous First Nations, Coastal First Nations in BC. We've made a number of investments in value added, both in our soup business. We've launched a number of...
shower type of soups in Canada and the US and we are launching more. We're also launching them with customers in Asia as well. And then with one of our companies.
Here, we've launched a number of value-added seafood and branded initiatives into retail mainly. As I mentioned earlier, with Clearwater, we're working on a number of acquisitions that will move them into the value-added space. So there's a lot going on. There's some pictures in the...
in the deck that show you some of the seafood products we're launching or we've launched, including a wonderful lobster, macaroni and cheese product. Anyway, there's a lot going on in the pipeline with regards to value-added seafood initiatives.
Car aside and take questions,
colors
Your next question comes from Chrisley
Hi, Joachim. Well, nice to talk to you. Hi, Chris. Hi, Chris. Maybe I'll start with a specific question just on the specialty foods organic volume growth in a quarter. Was the year-old comparison particularly a bit more challenging because there were five or six weeks of Omicron shut down, where everyone was eating at home and therefore you benefited from the excess demand?
in the retail channel from a year ago? Yeah, a little bit, although that was more of an issue in 2020, Chris. By 2021, 2022, it sort of had steadied and again, this year it was a bit of a headwind, but there were different headwinds, Q2 last year.
Yeah, well it's early Chris and things are just ramping up now. The May long weekend is kind of the big starting point for specialty foods with the turn in the weather. So, but you know so far it's on plan. It's looking good and you know as we showed in that weekly sales chart we continue to generate high tuks.
good year-over-year weekly sales growth. And I should comment too that Q1 is likely the last quarter that you see that big growth coming from food service.
whereas you know by Q2 last year you're already seeing that normalization. So the growth being driven now is in the specialty food segment.
Yeah, and I'd like to add, Chris, that...
Some of the products that we are featuring in the deck, you know, they've been recently launched into the national channels in the US and in Canada as well, right? So there's a lot of positives. You know, again, we've got national listings and...
These are multi-million dollar opportunities. Okay, great. And I guess my last question is, to the extent that you are increasing the featuring rebates for your retail customers, are you seeing a corresponding pick up in volume or is there a bit of a lag? And maybe secondly, is there a lack of a
how important is more volume from more featuring a key part of your capacity utilization in the back half of the year? Thank you. Yes, so Chris, the general answer to that is absolutely. As you know, some input costs were very high in the last year or so and to the extent that the underlying commodities come off, we passed on some of the
savings to customers through different programs and to the extent that they pass that on to the consumers, the volume generally picks up. And again, this is a big part of why we're feeling pretty good about the next couple of quarters. There's a lot going on. The prices seem to be...
deflationary in certain areas and we expect that to be passed on to the consumer and for volume to be to pick up because of that.
Okay great, thanks and all the best.
Great, thanks and all the best. Thank you, Chris. Thanks, Chris.
Your next question comes from Vishal Sridhar from National Bank. Please go ahead. Hi, thanks for taking my question. Just wondering how we should think about balance sheet improvement. I'm wondering if we should see that manifest in a
You had a decent EVA growth, but the offsets relates to cap-acts and inventory and interest seem to be also constraining some of that improvement that would have been otherwise expected.
Yeah, Chris, or sorry, Vichael, we might see a little improvement in Q2, but I think it's more back half of the year story. You know, the two major drivers are going to be, of an improvement are going to be the growth in our EBITDA. So, you know, that will accelerate from Q2 through Q3. So, you know, that's going to be a big factor. And then the normalization of our inventories, which we expect some progress in Q2, but...
Okay, and related to the inventory, like how much, you know, looking kind of from two years ago it's
On a year-over-year basis, it's not quite double, but it's getting there. So, how much cash can we unlock from normalizing inventory? Just to broaden our model and know what it varies by quarter. A conservative estimate, as we've talked in previous courses, just the two factors that we pointed out the opportunistic...
Is that kind of number that you had in Q1 a good run rate? And should I think of that over the that kind of number for the next several years, given all the opportunities that you see?
I think, yeah, it's probably not a bad run rate for 2022, or sorry, 2023. But, you know, we do expect it to drop off a bit in 2024. But, you know, it can be quite a choppy number just on the timing of things, right?
run rate for 2022, or sorry 2023, but you know we do expect it to drop off a bit in 2024. But you know it can be quite a choppy number just on on the timing of it.
And with respect to the optimism that you have for Q2 in particular, and I guess this question was alluded at...
by another but the drivers that you see currently in place, like you're seeing your initiatives pan out as anticipated quarter to date. I know it's early, but you know what kind of what gives you confidence that the organic growth will pick up as you anticipate through the quarter?
Well, a lot of these initiatives, particularly the ones where we've been building inventory, they're done, they're baked in, they're good to go. And just again, going back to, I think was Chris' comment, a lot of the retail featuring and those sort of programs, those have all been set now. To find out more, visit www.fsteady
So, you know, there's good visibility on what the drivers are going to be. Now there's ultimately always the risk of what the consumer reaction is going to be, but at this point we feel very bullish on that. And sorry, George, just before, and just to be clear, so in terms of how we see these wrapping up, you know, Q2 is a transition quarter, right, Michelle? You know, Q3 is when everything's running at full speed. So that's where most of our optimism is.
But if you assume normality, we have excellent visibility going forward because we're very close to our customers. We understand the demand patterns for our products.
Okay, thank you for your comments. Thank you, Michel. Ladies and gentlemen, as a reminder, should you have a question, please press the star followed by the one. Your next question comes from Sabahat Khan from RBC Capital Markets. Please go ahead. Great, thanks very much. Just, I guess, on the lobster business, there's some headlines. There's some headlines.
So cyber has, you know, Canada ships a lot of live lobster to China and other markets around the world. The global highly sought after commodity as you know, China is a big market for live lobster. Our strategy overall as a business is always...
to move the commodity to value added. You know, we've built a lot of capacity to produce and sell lobster meat. It constitutes the majority of our initiatives. You know, we're trying to democratize lobster. We've created new customers in cruise lines and...
food service and restaurants, etc. And that's our major, major focus, right? Now, with regards to trade disputes, we can impact those, but again, our focus is really to continue to move the business towards more value added and more branded, and we've had a lot of success doing that.
Chris, I'd just add that typical to premium brands in our diversification, the reality is premium brands proper, the big driver of our lobster business is Ready Seafood which is actually a US company. So to the extent there is a dispute in Canada and it impacts.
Clearwater will probably benefit from that and ready in our US business. Okay, great. And then I guess you talked a little bit about your kind of Clearwater investment earlier. And I remember when the acquisition was undertaken, there was a bit of a pause in the actual kind of cash flow payments on this kind of $15 million a quarter that you recognize. I guess if they do run into a bit of a tougher time, can they pause on those cash payments again?
going to happen, they have that ability to weather and then when they have the upturns and they generate excess cash flows, they'll pay a higher amount. But yeah, it definitely will fluctuate with the performance of their business. Okay, great. And then this last one, I guess, on the margin side here, you talked about being a bit more of a ramp in age two.
Is that more, you know, you cried a bit earlier, but is that a bit more of a specialty foods ramp with some of these initiatives ramping up, or are you expecting a significant improvement across both businesses, I guess, given, you know, Q1, it's going to, I guess, going to be a bit more of a meaningful ramp, but is it way toward one segment more than the other based on your current outlook? Yeah, absolutely. It's heavily weighted to specialty foods.
Again, the big driver of our margin growth overall for premium brands over the next couple of years will be our specialty food segment. There's still some opportunity for improvement in the premium food distribution group, but it is much smaller than specialty foods.
And again, it's not that big of a reach if you look at the challenges we faced in the last two to three years, right? We faced a lot of challenges.
again with regards to labor and supply chain and inflation etc. So if you assume normality, it's not that much of a reach. Again, we've invested a lot of capital in automation and robotics.
showing some videos that demonstrate the extent to which we've automated a lot of our businesses. And again, if you assume normality, we will expand margins for sure.
videos that demonstrate the extent to which we've automated a lot of our businesses. And again, if you assume normality, we will expand margins for sure. Great. Thanks very much.
Thanks, Emma. Your next question comes from Chris Lee from Desjardins. Please go ahead. Oh, thank you. Just maybe a few quick ones for me. In the specialty food business, I noticed you didn't call out specifically price inflation as having an impact on certain product categories as you did in previous quarters. I'm just wondering, was that an issue during the quarter or is that largely because of the
behind me now? Yeah, so Chris, it's largely behind us now. The big factors or the big categories that were impacted were some of our cooked protein products in the chicken category, which if you look at any chart of chicken breast prices in 2022, they're just absolutely off the roof.
They have come down significantly now and pricing is where it needs to be and we're seeing really good volume pick up as George mentioned when the customer passes that on, we see almost an instant response in the volumes. The other category was jerky which isn't a big category for us but the prices on the specific cuts used for that product have come off so we are seeing a...
at least a stabilization in volumes. The only area we're seeing a little bit of challenge right now is in our premium bacon products and that's just because we use very high-end raw materials that come from Europe and there's a bit of a disconnect between Europe and North America right now that's causing us.
our products to sell at an incredible premium over the mainstream products. But even that, it was only a small amount, not even enough to sort of mention in terms of our mDNA. The only thing I would add, Chris, is that in the case of turkey meat, turkey prices, chicken bare shout outs.
were very, very high and we actually walked away from some listings because of that. Thankfully, Turkey pricing has corrected and now we're reentering categories and basically reclaiming our listings and again that's a...
positive going forward.
Great, my next question was on the Turkey side. I think you mentioned last quarter that was maybe a drag around 60 basis point in Q4. I was wondering what was the drag in Q1?
Well, it's an interesting question, Chris. In terms of just year over year, I think it's a really interesting question.
there was about a 30 basis point impact in terms of lost sales because of, like George says, listings we walked away from that we didn't have this quarter. But the reality is that a big part of our turkey business that we walked away from, we're already laughing. So there's categories that we're not in that we weren't in in the first quarter of last year.
of last year. So those now are coming back as well. So the impact, if you normalize for the lost growth opportunities, much greater than the 30 basis points, but that is what it was sort of on just a year over year impact on sales.
Okay, that's helpful. And then maybe another one, just I wanted to ask you, you know, you take a step back and you know where you're sitting today. Can you give us a sense of what you're seeing in some of the key commodities, the outlook for the rest of the year in beef, chicken, you know, chicken.
pork etc. Do you foresee any sort of major headwinds or is it like what George alluded to, you know, a sense of normality that should come back for the rest of the year? Just any comments on what you see on the commodity side will be helpful.
Again, Chris, we follow commodities. The commodities that you've mentioned are global commodities, as you know. We follow them.
very, very closely. And, you know, again, I go back to my comment around normality. And in the last three years, we did not have any semblance of normality whatsoever with regards to any of our inputs, right? So basically, if we assume normality, then...
In general terms, as Will mentioned earlier, poultry, turkey is coming down to normal from extraordinarily high levels. Pork probably flat to down in general for the remainder of the year. There seems to be plenty of pork around.
China produces a lot of pork now. They've basically repopulated their industry and invested in massive hog production. They're not as significant an importer as they used to be from the global market.
And then, you know, in general terms probably flat to up.
mainly because the herd has contracted a little bit, particularly in the U.S., although Australia and New Zealand have rebuilt their herds and they're kind of on the up cycle. So those would be our general.
observations with regards to each one of the commodities. But the key here is really to assume normal supply chains, normal demand through the different channels, etc.
Yeah, and Chris, the good news in terms, as George says, probably the most in terms of the specialty food segment in the premium food, beef being the most sort of inflationary element.
commodity we're looking at. The good news is that's primarily in our premium food distribution group and it's primarily priced on a very dynamic basis. So it's probably our least exposure in terms of the impact on our profitability.
And to add to the comment, Chris, again in general is that again in the last three years we've had circumstances where we didn't even know whether we could access the protein, right? Those are circumstances that we had to deal with. We were willing to buy it. We had to mango too so we were def dehydrated immediately.
business for it, but we weren't able to access it. That just gives you an impression of what we've managed through in the last three years.
Very helpful. My last housekeeping question, maybe this one is for Will, I apologize if you mentioned this already, but there was a rise in corporate costs. Can you just talk about what drove it and is the Q1 a good run rate to model for the rest of the year? Thank you. Yeah, the biggest factor in there, Chris, was incentive and crules.
So, but you know, it's probably not an unreasonable number as a run rate.
Thanks again. Presenters, there are no further questions at this time. Please proceed with your closing remarks. I would like to thank everybody for attending today. Thank you. Ladies and gentlemen, this concludes your conference call for today. We thank you for joining and you may now disconnect your lines.
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