Q2 2023 Premium Brands Holdings Corporation Earnings Call
Okay.
Yeah.
[music].
Good morning, ladies and gentlemen, and welcome to the premium brands Holdings Corporation second quarter 2023 earnings conference call.
This feature will be charged.
<unk> CEO and president of premium brands and will <unk> CFO .
Yeah.
I would now like to turn the call over to Bill. Please go ahead.
Thank you Julie and good morning, everyone I'm here with George Kelly logo, our president and CEO , We hope that everyone is having a great summer.
Before we 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 the 14 at 52 weeks ended December 31st 2022, as well as other.
The information on our website for a broader description of the risk factors that could affect our performance.
In case, you missed it we have prerecorded, our investor presentation and it was made available on our website. This morning, hopefully you had a chance to listen to it.
In addition, I would like to bring to your attention that Georges annual letter to shareholders has now been posted on our website.
I will now turn it back to Julian for the Q&A part of the presentation.
Thanks Julien.
Thank you ladies and gentlemen did you have a question. Please press the star followed by one on your Touchtone phone. If you would like to withdraw your question. Please press the star followed by the Q, if you're using a speaker phone. Please see the handset before pressing any keys one moment. Please for your first question.
Yes, and this question comes from Martin Landry from Stifel. Please go ahead.
Hi, good morning, guys.
Marty Martin and Martin.
My first question is on your distribution business.
Your your volumes were down a little bit.
And are you you mentioned that some of the pressures are a transition aerie.
I I'd like to get a bit of color on the outlook for the remainder of the year for that segment.
In terms of volumes that'd be that'd be helpful.
Sure. Yeah. So you know it was sort of a mix of you know for the immediate quarter second quarter Martin.
Mix of things that were very short term and a few things that will continue for a few quarters.
You know for instance that the biggest impact on the quarter was the reduced featuring premium beef and seafood products.
Some of that was timing so we do expect to see some future some featuring in the third quarter and hopefully back to a more normal in the fourth quarter, but we do expect there still to be at a reduced level year over year.
And then similarly, we are seeing some some demand pressure on premium seafood and what's happening there is as consumers shift their buying patterns from the regular banners to more discount oriented grocery banners those grocery that the discount grocery banners generally don't.
Have the premium fresh seafood programs that we provide so you know that it was sort of an indirect casual casualty of that's yeah. So so we do expect that to continue for the next couple of quarters. So having said all of that you know looking at premium food distribution our growth expectations for Q3 Q4, we we we.
Packed it to be fairly stable in Q3 or on a relative year over year basis.
No not not like this quarter, where it was down a bit so it should stabilize in Q3, and we should see a little bit of growth happening in Q4.
The other part.
Martin to a lesser extent is that in general terms and normal environment brings less trading opportunities for us. So so again, that's impacting our results somewhat in may impact them in the future.
Okay.
Okay. That's helpful.
And I wanted to switch gears and talking about the commodity prices. You are you using good slides on the evolution of commodity prices, such as pork beef and chicken.
I was wondering if you could give us some color as to.
How these commodities that fluctuated recently.
And and then what kind of impact it could have on your margins in the back half.
And again, Martin, it's tough to predict the direction of commodity prices.
My General comment is that you know a lot of people are looking for solutions.
Solutions looking at what's happening locally in and really to gauge the direction of commodity prices you have to look at the global dynamics between supply and demand and and many many factors go into these dynamics.
Including of course, our you know economic activity in different parts of the world. So you know our view is that you know commodities will generally be stable I know that that's a general statement because in our world, We don't deal with commodities and <unk>.
General with deal with deal with specific cuts.
And you know for example in the case of bellies belly prices have gone up a lot, but that doesn't necessarily mean that that the other.
Pork I have gone up as well so very very sort of general question. I gave you a general answer, but again from our perspective commodities to allergic.
To a large extent have been returning back to normal or a five year averages and you know the dynamics of commodities by their very nature are not driven by local suppliers.
Supply and demand dynamics, but global supply demand dynamics.
Okay is there any risk that you may have to give back some price increases that you've put in recently given that some of the commodities that chicken has gone down.
Yeah. It company like ours that Martin we tend to Hum.
You know moved prices up and down accordingly, it's not really about.
Raising prices or lowering prices is about maintaining a reasonable margin based on what we do and the differentiated products that that we sound like a lot of times. If there is more margin into a product we're more like more likely to promote it or a feature we adore do whatever we need.
Due to move more volume and that's really what we do I you know again I know there was doubt in the past as prices were going up.
Hum immensely there whether we could move prices up we did.
Thankfully volumes weren't worn impacted that much in and similarly as prices go down we do we do give some pricing sometimes in the form of lower prices, sometimes in the form of more featuring in more promotions.
And Martin when you look at the second quarter.
The in our specialty Foods group, you know that commodities were relatively stable on a year over year basis with the exception of chicken chicken was down dramatically and to the extent it was down.
To what George talked about most of that featuring.
Some price decreases all of that stuff kind of happened in the second quarter with that commodity and as we go forward, we expect chicken to be relatively stable. So our margins in that category for the balance of the year, assuming that stability should be similar to the second quarter.
Okay. That's helpful. Thank you guys.
Thank you Mark.
Thanks Mark.
Your next question comes from Derek Lessard from TD Cowen. Please go ahead.
Yeah. Good morning, guys I'm glad to hear you're both.
Hey, Jeremy.
Hey, well feels like Youre, starting to get them up at the back and specialty food.
Could you maybe add some context around some of the categories, where you feel you're getting the greatest momentum at the chip.
You know after reading your latest letter to shareholders and then can you just share what what we should expect from your innovation pipeline now that you can promote and feature in the coming quarters and years.
Yeah, just again, Derek let me, let me start by saying that.
I know that you know a lot of people look at what's going on in the world at large and in looking for the different trends in <unk>.
And you have to understand that that premium brands, we don't compete in categories, we create categories.
So I'd say its an innovator disruptor company would go out there when we create we find the white space and we create the demand for it and and AH you know looking at at our Sandwich business or our <unk> business. Our skewer business. Those are good examples of what is.
Going on in those categories are growing substantially.
Because demand is growing substantially but ultimately because we're creating the category. We usually lack capacity right. So the challenge for US is to continue to create the capacity to keep up with demand right and and you know again a lot of these categories that I.
Can have thrown a lot we've been an innovator to these categories. We have been for many years and we continue to invest in their capacity right right and as those capacities coming on stream then we're able to grow the business as we've shown in this quarter and this quarter. These categories that I mentioned have grown substantially.
Because we've added capacity.
And maybe that's a good segue to sort of a follow up question to that could you maybe just talk about the strength and momentum at the Moc Angelo Brad I mean, it hasnt been something you've you've called out historically, but clearly it's prompted you know on your facility and breadth in the consolidation of two others.
Yeah, you know I think when you talk about.
The Mark Angelo brand.
Again of course, we're talking about.
The growth in in Italian meats again, we've we're doing extremely well in.
In Canada.
Growing substantially in the U S. A I would say that the Mark Angela brand is one of the fastest growing brands in Italian meats and in North America, an inch or could it be in general too.
Two mega trends in our view.
They've grown their lobbying in in sausage.
And in raw skewed where says well I was traveling.
In the Midwest of the U S recently and are you know.
You go to a lot of major banners in the Midwest and you'll see a lot of Mark Angelo sausages, and fresh skewers, so and they keep gaining.
Distribution.
In the U S. In those categories. So it's been a again its run by our amazing partners they've done an amazing job of building that business.
And some.
Some challenges around growth in terms of capacity, but but as we keep adding capacity obviously the growth.
It's showing up in our in our numbers.
Thanks, George and maybe one just final one before I re queue I think it's the first time that you guys have provided a target.
Margin for specialty foods, and I think investors really appreciate the extra disclosure there but.
Do you have a timeline of when you reasonably expect to get there and lastly, I guess, if I use that target I'm kind of seven to eight core food distribution, but you can argue for consolidated margin in excess of 10%, but just maybe help us square away be up 10%.
Five year guidance with that.
Yeah, so the specialty foods margins getting into that 12%, 13% range. You know, we should see that next year in our busier quarters or getting close to that range anyways.
You know for four and annual and that's what's going to drive us getting to that 10% target hopefully next year or early 2020 for 20.
25.
In terms of exceeding the 10%, it's certainly on the radar its certainly within our expectations, but we've set our goal right now just to get our consolidated margin up to that 10%.
Hopefully we exceed that well ahead of plan in terms of our five year plan as a percentage and then from there. We grow you know 11, 12% range longer term.
Okay, that's fair okay.
Thanks, Thanks Derek.
Your next question comes from George <unk> from Scotiabank. Please go ahead.
Hey, guys. Thanks for taking my questions just a follow up on deconsolidation I understand the top line benefits, but I.
Are there other financial benefits there may be perhaps margins and I guess more importantly are there are other opportunities in the network for us to do I guess these consolidations as well.
Well George this was a unique off no. This was relatively unique in that.
Concord has grown at such a fast rate and you know they were scrambling for capacity in their you know their sort of piecemeal it together and.
And.
A big part of the IRR can be justified just on the cost savings of taking these three.
Good, but not as sufficient as they can be at plants and the fact that you've got a lot of product moving between these three facilities moving them all into one consolidated facility.
So there's a business case just around the efficiencies and then like George says he is gonna be capacity coming out of that project as well, but it is a bit of unusual situation.
Okay, Gotcha and on slide 13 of your deck.
Three notable deceleration in the top line kind of Q3 to date and I. Appreciate your comments on your prepared remarks in there, but I'm just wondering I guess first off are you seeing a slowdown at all in the specialty channel and number two as a clarification around featuring is that more about intra quarter timing featuring or is that something that could maybe be pushed out.
Q4.
Yeah, No you can't read too much into that chart George there, there's a variety of factors and definitely featuring and timing is a big one.
That's why you saw that sort of spike down in that one quarter, but you know a couple of factors to consider in it is.
We are seeing quite a bit of deflation on the premier foods distribution side in the second quarter lobster deflation was $20 million alone in that that that group a lobster price deflation. So so you've got that that hitting at the timing and then as we talked about.
Earlier, the PFT challenges continuing into the second quarter, but we do expect that that to kind of continue to improve as the quarter unfolds.
Okay and specialty is running in line with expectations for Q3, Oh, absolutely yeah, Okay, great and just a quick follow up maybe on the on the topic of the pork belly prices I know, they're unimportant important commodity for us.
With the channels just wondering to what extent I can maybe if at all the way up the margin recovery there in the second half.
Well, it's kind of a interesting situation because if you look at a basket of pork commodities in North America right now.
And you look at the beginning of the second quarter and you'll see it is on average down from last year and then <unk>.
By the end of the quarter into the third quarter. It's above last year are in line with last year and then the big fluctuation. There is belly set which we don't buy a lot of north American valleys, most of our pork inputs or trim and legs.
Most of our beer bellies come from Europe , So and Europe's been at a premium throughout the quarter and so that that trend youre seeing in North America actually works for US is in our favor because it's taking that differential between north American Bacon prices belly based bacon prices, which you know is it.
It's a far less.
Less or quality products, our European bellies are very specialized very high quality, it's taking that away. So it's actually working in our favor right now the acceleration of belly prices in North America.
The only other thing I would add George is that the.
Early market in North America in particular is a bit of a mess right now because of proposition 12 in California, whereby they wont allow the sale of Bacon from Hog operations that do not have open pants for four south so it's creating a dual market for Ford.
Lease and are again, it's a bit of a mess right now so anyway, but as will said, we bring most of our bellies from from Europe . So we're not impacted as much.
Great. That's very helpful. Thanks, guys.
Yeah.
No problem George.
Your next question comes from Stephen Macleod from BMO capital markets. Please go ahead.
Thank you good good morning, guys. Good afternoon.
And thankfully it's moot.
New format I think it's great.
Just wanted to follow up just just my first question is just specific to something you said did I understand correctly that you said that margins in the P. F. D segment in the back half should be stable to where they were in Q2 did I understand that correctly.
Well actually I was talking about sales growth in terms of sales growth. It should stabilize versus we saw contraction in the second quarter in terms of March right.
The PFD tends to be relatively stable and margins and based on our our outlook right now for commodities over the next quarter or two you should see.
A slight hopefully appreciation in their margins going forward.
But certainly stable to positive as our outlook for Pmt's margins.
Right Okay.
Okay. That's that's helpful.
And then just as I think about the pricing environment, you know I know you benefited this quarter from.
Raw material and other costs.
Cost deflation and you had that chart that shows the margin dollar contribution.
It is it is it fair to assume that.
Youre going to see a similar dynamic in Q3 and Q4 like you are not putting through a lot more price at this point is that correct.
Yeah, well, it's an interesting chart.
Because it's quite a different story, Steve between the premium food distribution group in the specialty foods like overall, it was relatively stable our pricing right and there was $3 $9 million of price inflation for the quarter, but if you tear that apart it was about $15 million of inflation and the premium foods grew our story.
The specialty foods group is sort of the annualized <unk> of our price increases we've been putting through over the last few quarters continued through and the deflation that we're seeing in in chicken or sorry in lobster in the premium food distribution offsetting that so going forward I think you kind of.
Continue to see that trend of deflation in premium foods distribution.
But the price inflation in specialty foods, continuing to come down it's been notching down steadily as we catch up on our pricing so it'll probably be a negative number in Q3 I suspect.
Okay. Okay, that's oh, that's great.
And then maybe just finally, we talked a little bit about sort of the margin profile for <unk>.
PFD just wondering if you can comment a little bit about specialty foods and sort of what you're seeing obviously it sounds like topline is holding in nicely do you expect that kind of volume growth and then just wondering if you can give any color on how that might flow down to the margins.
Yeah, I think youre going to continue to see.
For specialty Foods group, it's kind of going to be more of the same from Q2 to Q3.
Unfortunately, a lot of our new capacity, that's really going to accelerate the group's growth, particularly literally our cook capacity with King's command, our new facility with hemp layers for meat snacks and premium Bacon.
And our our Shaw laminated door facility in San Francisco, those are going to be real significant drivers, but theyre not kicking in until Q4. So Q2 from our growth is going to be a similar and then similarly on the margins, it's going to be a similar story as Q3 as well.
Our serious Q2.
Right. Okay, great. Thanks, guys appreciate it.
Okay. Thanks, Steve.
Your next question comes from Vishal <unk> from National Bank. Please go ahead.
Hi, Thanks for taking my questions habitual spec vision, Hi, Hi, good afternoon, I with respect to our acquisitions.
Management indicated that in the prepared commentary that acquisitions of teams we are starting to look at it again.
You can correct me if I've got if I've got that wrong, but can you just talk about what the appetite is for acquisitions, perhaps want to materialize in this.
At fiscal year end.
Management thinks about equity for an acquisition.
Yes vishal.
Again, we've gone through.
A very difficult period over the last three years as you know.
And.
And that type of environment, we generally focused on AR.
On our business on making sure that that we managed a lot of.
Black Swan events, like extreme inflation, and supplying it and supply chain issues and labor shortages.
And the message there for US is that we're starting to feel more comfortable with regards to these issues moderating our or even going away and.
Because of who we are we always have.
A lot of.
Acquisitions in the pipeline or in a lot of discussions with <unk>.
Very good businesses.
We chose to basically slow down the M&A activity, but the message. We're giving now is that we're starting to feel more comfortable about the future and obviously these issues that I mentioned.
Going away. So so it's a lot more likely now that we will advance our discussions.
No.
Kind of giving you a signal that our M&A team is working really hard on advancing these discussions to the next stage in.
Anyway, So we feel very good about the pipeline, there's a lot of good companies that we're in.
<unk> with some of them are fairly large and tip.
Typically for us in the right type of environment with the right acquisition that provides us with.
With.
To the right.
IRR and meets our different our hurdles.
We're willing to issue equity to the buyer, sometimes or two to.
To use our credit lines right. So that's what we've done in the past and you know youre likely to see us do that in the future.
Okay and.
With respect to the upcoming converts.
You know what strike is it under that you can convert and what is your expectation how that won't go do you expect to convert or do you expect to too.
To just pay that out.
Our our Rx on our converts our strategy is always to force conversion because I think we've talked about this in the past is in equity.
The next convert comes due in 2025, it's got a pretty high strike price of $172, we issued those sort of at the peak of our equity value.
Hopefully we grow into that over the next two years and if not you know it's a relatively small amount it's only 101.
172 million I believe is the balance outstanding on the converts so we've got lots of flexibility and time to deal with that but like I say are our hope or expectation is to force conversion.
Okay.
Just changing topics here on the premium seafood and.
The consumer is moving to discount.
Which is a trend we've been seeing over the last several quarters at least.
Is there opportunity to move some of those products, perhaps different packaging or a different type of product towards discount at the discount to the movement of customers towards south or price grocers it doesn't seem to be abating.
For the moment.
Hi.
<unk> for us.
And again I just wanted to mention that the seafood space is very global in.
In nature.
Most of the.
Products, we harvest in general through.
Our investment in Clearwater is sold globally right. So the seafood market is very global there's always demand for <unk>.
<unk> food around the world.
<unk>.
World.
Demand for seafood is more than the Willis ability to supply so theres always markets for the product. It's just a question of of maximizing prices and margins right right out of the shop.
Okay.
I appreciate that color.
And with respect to last quarter I think in this quarter as well there was a little bit of a issue on margin and and.
Excess capacity and I understand it's difficult to assess because of that.
By business with the two Unutilized capacity is but wondering if that trend improved quarter over quarter, and you're seeing less of that pressure and how should we expect that to evolve through the year.
Yeah. So it's really you know a few areas right now where there's there's good leverage still to be had or sandwich group. We have some nice capacity to use there as well still in our bakery group.
A little bit on the dry cured side. Some expansion we did in Ontario. So so there is some sales leveraging benefits still to be gained there.
In terms of quantifying it.
That's sort of built into our margin expectations I talked about earlier and how we're going to get there is it certainly as as we generate organic growth is becoming lesser are part of the future growth margin story, but it's definitely is still part of that story.
The only thing I would add to that Vishal is that.
Optimizing the mix is important too to our our capacity utilization and as things normalize we're able to optimize the mix, which helps the margins as well.
Okay. Thanks, very much for the color. Thank you.
Thanks Michelle.
Your next question comes from Chris Li from Deutsche Bank. Please go ahead.
Oh, Hi, George I'm, I hope, you're somewhere it's going well so far as well.
Maybe I'll start with the question on on the specialty foods.
I wanted to check if I interpreted your comments correctly.
Are you seeing you do believe the 8% of the high single digit organic volume growth that you achieved in Q2 do you believe that is sustainable in Q3 or into Q4.
Yes, so that's.
That's exactly it Chris we expect it to be relatively consistent with Q2 into Q3, and then actually accelerating Q4 as our new capacity comes online as I mentioned earlier.
Yeah, Chris again to add to Will's comment and again, just given my comments earlier is that.
We have pretty good.
Visibility in terms of demand right in this quarter, if we had more capacity in certain categories. We would have done better than the 8% right and that's kind of something to remember as will said earlier, we have capacity coming on stream in the third and fourth quarter.
Predominantly in the fourth quarter, but the demand for us has been proven.
We're getting lots of distribution gains with a lot of our key products and we will continue to gain distribution subject to capacity right. So it's capacity that's driving the organic growth more than anything right because we're in new categories, where we have to keep creating capacity.
No that makes a lot of things and then is it fair to say.
The specialty foods side, so some of that.
Pressure that youre seeing on the distribution side.
They're not being manifested in specialty fluids.
So from a demand perspective, that's why you're seeing still good visibility in terms of growth.
Yeah, and then they're just such business different businesses right, Chris Yes.
Specialty foods, it's reached generally retail and <unk> focus and a lot of it is in the U S. You know I can't stress enough how important the U S market has been to the group and how successful they are down there and as George talked about a lot of the growth is taking these regional success stories we've had.
And working with our customers to take them national So to do that you need significant pad capacity in place and that's what we're doing right now premium fluids distribution is primarily a Canadian story and like I say, it's if theres some unique dynamics around the premium seafood category that.
We're working our way through to how to.
Deal with this issue with the consumer shifting banners.
Perfect and maybe just another question on specialty foods.
I think you mentioned earlier that you expect a similar story for EBITDA margin.
In Q3 similar to the story in Q2 did you mean in terms of like margin percentage similar Q3 versus Q2 or do you mean like the margin growth with year over year that you achieved in Q2.
Yes.
The absolute margin percentage.
Okay. That's so much okay perfect.
It's been really shifting but we can't strict sorry, Chris we can now.
How wonderful it is to be in the normal somewhat normal market normal operating environment again, and Thats, what youre seeing in the specialty foods youre seeing stability, so with that stability, you're seeing nice margins and margin expansions as they leverage capacity as they generate plant efficiencies.
Plant efficiencies was a nice contributor to our margin profile this quarter, especially foods. It was almost $10 million of efficiencies in that group.
So lots of progress being there so its just its stability and continuing on into the next quarter over quarter with that stability.
Perfect and then maybe another topic that I wanted to quickly cupboards is your balance sheet and below I think in your prepared remarks, you reiterated that you do expect leverage to return to kind of the euro.
The targeted range by the end of the year. So I just wanted to maybe get a bit more precise from you do you mean do you expect leverage to be back to around four times by.
By the end of this year is that still the target you're aiming at.
Yeah, Yeah, no no yeah.
Yes, absolutely are we look more at the senior debt to EBITDA ratio is the critical one we track our focus on and we were at three three for the quarter, we expect to be in our two and a half to three zone by year end and really there's two factors there Chris one is just.
The natural growth in our EBITDA that we're expecting over the next two quarters and the second is our working capital we made significant progress, making bringing our inventories down this quarter you didn't see that in our working capital because Q2 is a very intensive working capital quarter, but as we go down to about the next two quarters.
Orders winding down our working capital as a natural process. So you will see some cash come in from that and then we also have some more work to do on our inventory our days purchases and inventory is still higher than we like so we feel there is still some opportunity to bring our inventories down.
Perfect and my last question, maybe relate also the balance sheet of them I'm. Just wondering are there any levers you can other levers you can pull to improve your leverage I'm thinking in particular any non core assets you can sell or any changes in the Clearwater capital structure.
What happened that will help you get to your leverage as.
Well reduce your leverage.
Yeah, we are.
Working on a number of initiatives at this Chris at this point, Chris, but Theyre all speculative at this point.
Okay, perfect. Thanks, guys and all the best.
Great. Thanks, Chris.
Your next question comes from John <unk> from CIBC. Please go ahead.
Hey, Thanks, Good morning, good morning, well good morning, John .
Hey, John Good morning.
I wanted to start on lobster. It seems like this is really peculiar part part of your business at the moment you had said I think it was $20 million in price.
But there was also a comment in the press.
A press release about a run up in prices from speculative buying and I was hoping you could add some more color to what youre seeing in your lobster business.
Yeah, Yeah, it's a very strange situation you you hit it on the head of the nail John So what is happening is a lobster prices.
In the retail side of things the selling of it are.
Definitely down if you look at any chart there theyre back to five year Hot last five year average levels from <unk>.
Our record highs in the last year, and so you've seen that price deflation on the selling side year over year, but now what's happening is there was a Canadian fishery.
And a number of players who went into that fishery and started speculating on there being some price inflation and lobster switch, we're not big fans of but.
So they started buying up the price to purchase the lobsters to inventory it to put it away for future sales.
We are well positioned on inventory. So that's not part of our strategy. If we went into that market was purely to service opportunities in the current market. So we just couldn't justify that speculative price relative to the current selling prices and so we just decided to not participate in that.
Market.
Is there really a nominally we've never seen anything like this before.
Okay. That's interesting that's good color. Thank you.
And I want to go back to the topic of <unk>.
Grocery and the shift to discount from conventional and I Wonder if you can say anything to quantify or to frame. Your overall exposure within your your grocery customers how much of your sales would go through conventional versus discount whether its in seafood or or more broadly any more color there would be helpful.
Yeah, so starting on the specialty foods side.
Our specialty foods businesses.
They cater to all of the banners. So it's really whether we sell it X or y.
It doesn't matter and the margins on our products are very similar so it's not much of a story in our specialty food side and in fact, I think we've talked about this in the past, we fine recessionary downturn to be beneficial to our specialty foods group as consumers stop eating out as much.
Sure spending money on large ticket items, they'll spend a little bit more on their grocery bill treat themselves to some more premium products and we in the past have tended to benefit from that.
And the premium food distribution group.
Again premium seafood is is what they do and that's really been focused on.
Mainstream or premium brand or so.
In terms of exposures I think you've seen the extent of it in our Q2 numbers its certainly not going to get any worse.
But we.
We don't.
Specifically track or quantify the difference in banners in that group.
The other thing I would add John is that.
As we always talk about we don't really focus on.
The banner, we focus on the consumer right. The question is where does the consumer who is willing to pay more for quality shop Act right. So so so again that consumer doesn't tend to downscale their purchasing in risk.
<unk> for example.
So so again as will said, we're very diversified in terms of the channels that we sell to.
And we cater to a consumer.
When they go to the store they don't buy the cheapest they buy a product because they like it because of its attributes and generally they are willing to pay a little premium for it right that's our consumer.
Right Okay.
That's helpful I wanted to move to the.
Inventory levels, and I think last quarter. The target was $100 million. This year in inventory reduction and I Wonder is it fair to say that that's also the expected cash flow benefit from working capital as a whole or do you look at that as offsetting other factors in working capital as a fairly neutral item to your cash flow this year.
Yeah. So so our inventory goal over the year was $100 million to $150 million, we did $30 million improvement in Q2. So we still think there is.
You know probably $70 million plus of opportunity there of improvement that's cash coming in now in Q2, you saw a tremendous run up in our receivables a chunk of that was just because of general growth, but a chunk of that was just a timing of sales being weighted more towards the end of the quarter relative to.
The earlier in the quarter, which is naturally drives up the working capital cycle. So that's like that's cyclical that seasonal that'll unwind. So as we go down through the course of the year, you should see <unk>, becoming neutral to a cash positive and then that inventory being pure cash flow.
Got it Okay. That's useful and then lastly on Clearwater.
I know there is there is a significant amount of seasonality in this business and earnings are not cash flow, but the Clearwater is at a year to date loss of around $35 million. So run rate loss of $70 million Clearwater still have reasonable access to capital in order to keep paying the distributions to PVH.
Yeah.
Again this is volatility we expected in their business.
We set up the structure to account for that so the short answer is yes.
Now in terms of the next quarter or two again as they work through some of the issues <unk> been facing particularly you know they worked through the snow crab that does it.
Delays in one of their ships has really hurt their cash flows. So we're going to have to be a little more patient honor expectations around interest received from them, while they worked through those issues.
Those are short term issues that don't impact our long term outlook of the cash flows in Clearwater.
Got it okay. That's helpful. I'll leave it there thank you very much.
Thanks, John .
Thanks, John .
Your next question comes from Scott.
Scott.
RBC capital markets. Please go ahead.
Great. Thanks, and good afternoon. So you provided a lot of color on the margin outlook for the rest of this year. So if I just to understand correctly I guess the working assumption is that the margin for Q3, and Q4 will be kind of at or above Q2 levels for you to hit your full year guidance is that kind of your working assumption at this point on the guidance.
Uh huh.
So in terms of specialty foods, they should be relatively consistent as the year plays out and like I say, a premium food distribution, we expect maybe a little bit of a benefit there.
Okay, and I guess, because this quarter I think.
Mix of premium food distribution just in terms of sales was down quite a bit year over year. So that might have helped the margin. I guess is that comes back up I'm. Just wondering if there is a bit of a dilutive effect on the margin from the mix in terms of getting to that kind of low 9% EBITDA margin for the full year.
Yeah, there that's the thing with premium food distribution, which is very dissimilar to specialty foods in that.
Contribution margins are close to their gross margins. So you don't see that variability in their margin as much with variability in their sales.
Our margin tends to be relatively stable.
Okay, Great and then just one I guess one is on the overall demand environment and the consumer.
Does your outlook for the sales for the back half of the year that includes any sort of promotional activity that you might have to put in place to respond to the consumer environment or is that something or is there a certain amount of value that you decide and quarter based on how things are going just trying to understand what portion of your planned promotional activities preset versus things you might do in quarter.
As will said Sarah.
Back to the normal activities right. So that includes promotions and featuring et cetera.
But again I just want to comment in my prepared remarks, I talked a little bit about some of the inroads, we're making and selling soups for example to Asia and we're getting lots of new listings there.
The.
Only reason we're getting.
Traction the areas because now we have capacity to service that market.
And we have a lot more demand for other products other than soup in Asia in places like Japan, and South Korea, and China, which now we're pursuing because in certain areas of our business we have capacity now.
Right right. So so again.
As I mentioned earlier.
We've proven demand in a lot of these.
Areas of the value added foods space and as capacity comes.
On stream, then we're able to.
Realize that growth right, that's generally what we see in.
The market seems to have it.
<unk> time understanding that but if you look at our growth over the last 20 years, it's very consistent as capacity come on stream, we grow the business.
Great and then just one last one maybe a bit of a broader question. It sounds like youre looking into a new sandwich facility can you maybe talk about <unk>.
Channels and the type of customers you still see runway with as you try to grow that business just trying to understand where that opportunity stands now there were sort of a year or two pass a pandemic and the type of customers that are showing interest in your offering.
Okay.
Yes, so I think in general terms.
<unk> been a disruptor and an innovator in the <unk>.
Channel in Canada and in the U S.
Because of the growth we've had from.
Certain parts of the <unk> channel, we historically haven't had the capacity to.
Grow in the C store channel. So so I would say, we're going to see more growth in C store and club as well, we do some business in cloud.
They're not national business, because we haven't had the capacity to do national business, but as capacity come on stream, we're going to grow in club.
And C store I would say and there is still some growth in <unk> as well.
Great. Thanks, very much for the color.
Yeah.
Thank you.
No.
Ladies and gentlemen, as a reminder, should you have a question. Please press the star followed by the one.
Your next question comes from Derek Lessard from TD Cowen. Please go ahead.
Hey, guys just a few follow ups for me you.
You did notice.
You did note in the MD&A about a $2 million inventory write off due to the bankruptcy of a customer.
Just curious if youre seeing any material change in sort of the credit risk of your client base.
No if you look at our receivables Derrick.
Fantastic shaping our days sales and receivables that are about 34, that's down from 37 days last year overall receivables very good that this was a a sort of.
And not a mainstream client a little bit sort of off the mainstream and it happened earlier in the quarter. So its sales are pretty well reflected on a run rate basis in the quarter.
But yes no.
No. It is the ultimate answer.
Your next question comes from Jon Evans from Jefferies. Please go ahead.
Good afternoon.
Missed a little bit of a cool stollmack, Mike maybe I could just do a recap.
Just.
On your lawsuit.
Two three.
And 12 points.
Right.
<unk> is any of that linked to the actual acquisition of Clearwater.
You're paying it all.
Now do we.
The issues that you mentioned a little bit earlier.
Sorry, John when you say net losses, you're talking about we just need a little premium brands overall.
Sorry on Clearwater.
Sorry.
Okay.
Yes.
Unclear water yes.
The.
Clearwater is core operations continued to be profitable.
The big hit that they're taking as when we structured the transaction all of the equity component went in as a subordinate debt structure paying 10% interest and it's that that interest component that is creating their losses. So that's all coming to us and that's where we talk about we know theres going to be.
<unk> ability and their business, we'll just defer the interest until they work through their issues and then when they catch back up they will have excess cash flow to catch back up on their payments. So we expect this up and down kind of nature within Clearwater <unk> business and the cash flows we receive from it.
Reason, we structured the deal like this John was to basically accommodate the.
<unk> in their numbers due to the seasonal nature of the business right. So.
That's basically what but what you're seeing there in terms of the reported numbers.
And there are no further questions at this time George Please proceed with your closing remarks.
I would like to thank everybody for attending today enjoy the rest of your summer. Thanks.
Thanks, everyone.
Ladies and gentlemen, this concludes your conference call for today, we thank you for joining and you may now disconnect your lines. Thank you.
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