Premium Brands Holdings Corporation (PBH) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen, and welcome to the Premium Brands Holdings Corporation Fourth Quarter 2022 Earnings Conference Call. [Operator Instructions] This call is being recorded on Thursday, March 16, 2023. I would now like to turn the conference over to George Paleologou, CEO and President of Premium Brands. Please go ahead.

Thank you, Ina. Welcome, everyone to our 2022 fiscal year and fourth quarter conference call. With me here today is our CFO, Will Kalutycz. Our presentation will follow the deck that was posted on our website this morning. Will is going to help us unpack the numbers for the fourth quarter and the year shortly, followed by a more in-depth discussion of our new 5-year plan. We're now on Slide 4, which outlines certain key highlights for the quarter and the year. Some of the headlines of the quarter are as follows: Results for the quarter were on plan despite the various well-publicized headwinds, including inflation, supply chain disruptions and labor shortages. On a more positive note, we continue to see evidence that, life in the world are normalizing after 3 years of unusual volatility and economic and industry dislocations. We're delighted to share our new 5-year plan and related targets, which called for us to reach $10 billion in sales and $1 billion of EBITDA by the end of 2027. We will have more discussion on this later on in the presentation. Clearwater had an excellent quarter and delivered record EBITDA for the year of about $130 million on sales of approximately $600 million. Both our platforms did well during the quarter, benefiting from improving business conditions, including better labor availability and easing supply chain issues. Our charcuterie cooked protein, artisan sandwich and specialty bakery businesses performed very well, while our center of the plate best-in-class protein offerings continue to drive the growth of our foodservice businesses. Of particular note this quarter is that 55% of our Specialty Foods platform sales were generated by our U.S. based businesses. 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 businesses. We're pleased to have purchased approximately 167,000 shares for cancellation or NCIB at very compelling prices, thus benefiting all shareholders. For the ninth year in a row, we announced yet another double-digit increase in our quarterly and annual dividend. At PB, we'll have to share our growth and our value creation with our long-term shareholders through dividend increases as a way of cushioning the blow of unprecedented market and stock price volatility. We remain very confident that our decentralized entrepreneurial business model combined with our great people and culture will continue to drive above average returns for our long-term shareholders through increasing dividends and capital appreciation for many more years to come. Now we're on Slide 5. As you can see on Slide 5, we remain an acquisitor of choice, and our pipeline continues to be very robust with many exciting small and larger projects and opportunities. Acquisitions remain a key part of our growth strategy over the next few years, and we expect to complete many more transactions in the future. 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. We are now on Slide 7. Our sales for the quarter were $1.6 billion, that was an increase of roughly $289 million or 21.5% from 2021. There were 5 key drivers of our growth. First was, there was an extra week in the quarter due to our year-end falling on December 31st, which resulted in 14 weeks versus the normal 13. This accounted for about $80 million of our growth. Selling price inflation was another $61.9 million of our growth. Organic volume was $60.8 million of our growth. And that was driven, as George mentioned earlier, by our sandwich initiatives, cooked protein, artisan baked goods, value-added processed lobster products and reclassing of certain warehousing rental income. Acquisitions accounted for $43.8 million of our growth and a weaker Canadian dollar relative to the U.S. dollar, $42.9 million. Turning over to Slide 3 -- sorry 8, our organic volume growth for the quarter was 4.5%. You can see from the chart over the last 3 quarters, we've improved our growth rates consecutively nicely rising from 1.3% back in Q2, up to 4.5%. So, we are now in our long-term targeted range of 4% to 6%, but there is still 4 main factors holding us back from reaching our potential of exceeding our long-term target. First was Q4 is generally a lower growth quarter just for seasonal factors. Next was our protein branded businesses were impacted particularly by a shift in spending by consumers from retail to foodservice. We continue to experience Turkey supply challenges both in Canada and the U.S. This knocked about 60 basis points off of our organic volume growth rate. And finally, we have seen slower growth or a relatively flat sales in certain categories mainly beef jerky and certain cooked protein categories, which is a positive from previous quarters where we actually -- we're seeing some demand destruction that is now leveled and year-over-year, roughly flat. And as we see some stability in commodities, we expect to see growth resume there in 2023. Turning to Slide 9, for the year, our sales were $6,029.8 million, that was an increase from 2021 of $1.1 billion or 22.3%. For 2023, we've issued new guidance or our guidance of sales of $6.4 billion to $6.6 billion, using the midpoint of that at $6.5 billion. That would represent an increase from 2022 of $470 million or roughly 8%. And I should note that does not include any potential new acquisitions, that's entirely based on the businesses that exists today. Turning to Slide 10, this slide just shows our sales by week. The black line on the far left is the start of 2023, the gold line was 2022 and the blue line 2021. You can see we started that we continue to show great growth across our platforms. And more importantly, as we've seen -- you'll see on a later slide, inflation is pulling back, pricing is stabilizing. So more and more of that growth should be organic volume versus price inflation. Turning to Slide 11, our adjusted EBITDA for the quarter was $136.4 million that was an increase of $22.9 million or 20.2% from 2021. There were 5 key positive drivers. First was selling price increases, net of certain cost inflation and we're going to talk a bit more on that on the next slide. Organic sales growth was a major driver of the increase in our EBITDA. Plant efficiencies, as George mentioned, we're seeing much better labor conditions, supply chains normalizing and that's translating to much improved operations. The 53rd week, extra week did contribute a bit to our EBITDA, it was only about $2 million on $80 million of sales, as I mentioned earlier. So it was dilutive to our margins, but it was a small contributor to our EBITDA and then finally, the weaker Canadian dollar relative to the U.S. dollar. On the negative side, we continue to experience higher outside storage costs due to our inventory positions, which we will be talking about in a later slide. Discretionary promotion was up, which is a great sign. We are definitely seeing more, normalcy in the market. Retailers opened to new products, new product listings and correspondingly our business are getting much more active on promotion and advertising, which is setting the stage for 2023. Continued investment in our SG&A infrastructure, a good portion of that was actually invested in salespeople as our businesses are ramping up for 2023 and then finally, some additional incentive-based compensation. Turning to Slide 12, as I mentioned, inflation was a positive impact on our EBITDA for the quarter. This slide shows by quarter for 2022. Our selling price increases. And then the cost inflation of our raw materials wages and freight costs, which are the 3 components we do isolate. And you can see Q1, this 2022, it was a negative $1.9 million as we started catching up on our pricing, you saw improvement in Q2 to $3.5 million, Q3 to $12 million and Q4 to $16 million. So a very positive trend and made so even more because Q4 is a seasonally slow quarter. So adjusting for that trend would have been even stronger. From a margin impact, for the first 2 quarters of the year, you can see inflation was definitely eroding our overall margins. Q3 was probably slightly positive because again this is before general cost inflation. So once you take into account that is probably slightly positive. And by Q4, we're making great progress in margin recovery, which sets the stage for a very positive 2023. Below that, we've isolated what we call the impact of retailer selling price increase notice periods, which generally run 60 to 90 days. You can see they were steadily decreasing through the year as we were catching up on our pricing in those notice periods met. There was a bump in Q4 as a number of our businesses started putting through price increases for just general cost inflation. We are seeing some stability on the commodities and labor fronts and a little bit of deflation and freight. So again supporting -- setting us up well for 2023. Turning to Slide 13, our EBITDA margin for the quarter was 8.3%, relatively flat compared to Q4 last year at 8.4%. Our target is 10% and there were 5 key factors that resulted in that variance from our target for the quarter. One of the key ones is just been unutilized production capacity. Due to some of the challenges George mentioned earlier in 2022, inflation in the back half of the year and particularly, which resulted in a lot less featuring by retailers or us featuring with retailers. And then in the first part, a little bit in the second part of the year supply chain, labor challenges and little interest by retailers and listing new products. All of that led to significant unutilized capacity in our network, which I'll talk about on the next slide. Another big factor in the quarter was just Q4 is a seasonally slow quarter, usually our margins for the quarter above 40 to 60 basis points below the annual average margins. So that was certainly a contributor. The retailer selling price increases, I mentioned earlier, the $8.6 million that was about 60 basis points impact on the quarter, the extra week again, the $2 million in contribution based on $80 million in sales that eroded about 30 basis points in our margin. And then finally, bolt-on acquisition turnaround acquisitions that we made in 2022 that impacted our overall margins by about 10 basis points, which was a very positive message because back in Q3, which is again a seasonally much stronger quarter, those same acquisitions had a negative impact, up about 25 basis points. So we're making great progress on those initiatives and are very excited to see how they are coming along. Slide 14, this just gives you a bit of a sense of where the unused capacity is in -- across our network relating to some of our more recent projects. There's also general capacity throughout the system as well. You can see from the slide, roughly $320 million of unutilized capacity in 2022. And at the start of the year, our expectation was a good portion of that was going to be put to work. But for the challenges of 2022, it wasn't. Again, going into 2023 everything is lined up well and we're excited that that capacity will be used. Slide 15, for 2022 annual, our EBITDA was $504.2 million. That was an increase of $73.5 million or 17.1% from 2021. We also issued our guidance for 2023 with our quarter 4 results, and that is for a range of $590 million to $610 million in adjusted EBITDA, using the midpoint of that, $600 million, which would represent an increase from 2022 of $95.8 million or roughly 19%. Slide 16. Our adjusted earnings for the quarter were $52.9 million, that was up about $700,000 or 1.3% from 2021. Major drivers were EBITDA growth and lower income taxes. And then that was offset by increased amortization of a right of use assets and appreciation of our lease obligations as well as some additional depreciation. And then the biggest factor was additional interest expense both through a combination of higher market rates and our larger debt balances. Our EPS for the quarter, adjusted EPS was $1.19, and that was roughly in line with 2021. Slide 17, just talking a little bit about our inventory, which we've talked in previous quarters has been a bit of a challenge coming through the supply disruption issues over the last couple of years. We made some progress from Q3. Our inventory was down about $35 million from Q3. However, it was about $68 million short of the target we set last quarter. The good news is $50 million of that variance is for very positive reasons, it's new initiatives that occurred in the back half of the quarter and should create value in 2023. First off, we invested about $26 million in opportunistic inventory buys just great opportunities for margin expansion in 2023 largely for products where the price is locked in. And so by doing these buys, we've locked in the margin. And then also about $24 million for new sales initiatives, inventory builds and some of that is actually sales that were expected in 2022. But we're -- just due to timing difference of occurred in 2023 so very positive factors driving most of that variance from our target. Slide 18, we continue to remain very strong liquidity. Our unused credit facilities totaled about $514 million at the end of the quarter, that was up from $455 million last quarter. We showed some improvement in our senior debt and total debt to EBITDA ratios. Our total debt to EBITDA ratio fell from 4.5 last quarter to 4.3 this quarter. And our senior debt to EBITDA ratio fell from 3.3 last quarter to 3.2:1 this quarter. We had expected a bit more of an improvement in the ratios this quarter. However, the inventory buys that I mentioned in the last slide, as well as the 53rd week did impact our ratios and the impact of the 53rd week was on our accounts payable. We saw a dramatic decrease in our days purchases and payables, just because of that extra week and the timing of invoices. And if you normalize for the additional inventory buy the roughly $50 million and the AP, we would have been at a ratio of roughly 2.9:1 for our senior debt to EBITDA ratio, still within our targeted range. Turning to Slide 19. Our free cash flow for the quarter -- sorry, for 2022 was $286 million. That was an increase of $22.6 million or 8.6% from 2021. Our free cash flow per share was $6.41, an increase of roughly $0.36 from 2021 or 6%. Our payout ratio for the year came in at 43.8%. And as George mentioned earlier with our fourth quarter results, we announced a 10% increase in our dividend rate to $0.77 a quarter or $3.08 per annum. And you can see from the slide that this will be the ninth year in a row where our dividend increase has been double-digits. Slide 20. During the fourth quarter, we spent roughly $60 million on project CapEx. You can see $44 million of that was spent on 16 major projects, all primarily capacity related. We have since completed 5 of those projects and the remaining ones are proceeding well within plan. For the year, we spent $185 million on capital project CapEx with $141.2 million of that being on the major projects. Slide 21, our 5-year plan. We're pleasant, as George mentioned earlier, to report that we did exceed our 5-year target that we set in 2018, 1 year early with our sales coming in at $6,030 million versus the $6 billion target. And you can see from the slide, this is the third year in a row that we have exceeded our 5-year targets earlier than planned. And with our -- in 2018, we also set an EBITDA target of $600 million. And while we won't achieve, we did not achieve that a year early. We are certainly well on track to achieve it on plan in 2023. Correspondingly, we've set new targets, as George mentioned, of $10 billion in sales and $1 billion in adjusted EBITDA by 2027. These new targets we set are a little bit unique because generally in the past, our targets have included a fairly significant acquisition's component to the expected growth. And as George mentioned earlier, we do expect acquisitions to be -- continue to be a major growth driver. However, because of there being so many organic initiatives going on across our company and a fair amount of investment associated with those, we isolate most of the growth to organic volume or organic growth. So you can see roughly $9.5 billion of our targeted $10 billion relates to -- will be driven by organic growth initiatives. Corresponding with that, we've given some guidance around our capital spend over the next 5 years, which we expect to be about $800 million to support growing to that target. Again, we fully expect these to be easily achievable targets based on the fact that very little acquisitions are included in them. The next slide gives you a sense of the -- or a summary of the major projects included in our 5-year plan. There's 18 projects listed here. 11 of them are in progress as we -- you would have seen on the earlier slide, and 7 are in assessment or in early planning stages. With that, I'll turn the presentation back over to George.

Yes, thank you, Will. We're now on Slide 23. Again, we'll go through some of our new capacity additions and build. We're excited, as Will said, to bring more automated efficient capacity online. This is a picture of our Stuyver facility in Langley BC, where we've just installed a state-of-the-art fully automated artisan bakery line featuring robotics, automation and fully continuous lines in terms of ovens and packaging as well. We're now on Slide 24. We just completed a 55,000-square-foot addition to our Premier mean facility. And just outside of Montreal, the plant will now feature both cooked and the value added fresh lines as well, mainly for the -- for healthcare, food service and specialty retail. We're excited to bring the largest state-of-the-art sandwich assembly charcuterie assembly facility to fruition in Edmonton, Alberta. This plant will be fully operational in May of this year very excited to have more sandwich assembly charcuterie assembly capacity on board. This is a picture of a brand new build, next adjacent to an existing campus facility in Ferndale, Washington. We're bringing on board about 100,000 square feet of production space. Hempler's is well known for best-in-class bacon. So we're adding bacon capacity to that facility, but also steak capacity to support the growth of our steak business in the U.S. market. And finally, and as we've talked earlier, we're pleased to announce the construction of 525,000 square foot plant complex actually in Cleveland, Tennessee, to service the U.S. Southeast market. This plant will be very, automated food-safe state-of-the-art. And actually, we talked about adding some vertical integration to that facility as well. So some of the products that we're getting good traction in -- in both Canada and the U.S., I think, as you probably know, we are a large player in dry cured meats in Canada and in the U.S. and a lot of these products now can be found in both Canada and the U.S. and we're just getting started in the U.S. market. As Will said, cooked protein on Slide 29 is a major focus for us. We're the leader in skewers cooked and raw skewers in North America. A lot of these products can be found again all across North America. Same with on Page 30 as well, some other cooked protein products that we recently launched into the market. Fresh skewers, a major focus for us, again, we've been a significant player in Canada in that market, but now you can find a lot of these products in retail and food service in North America. We are looking forward in a laminated bakery facility, a brand new built in San Leandro, California should be completed mid-2023, getting a lot of traction with a lot of these amazing authentic products. I spoke earlier about the added steak capacity at Hempler's in Ferndale, that plant will make a lot of these products. A lot of these products are getting good traction, particularly in the U.S. market and we're happy to bring on extra steak capacity. And finally, again, we bring labor-saving and labor-solving solutions to QSR and in other channels. We're seeing a great traction in this platform, it's growing a lot for us and we're really happy to have a complex now that will take care of our needs, probably for the next 5 years. I will now turn it back to Ina for questions. Ina?

[Operator Instructions] Your first question comes from the line of Derek Lessard from TD Securities.

My first question is, I just wanted to maybe just touch on your featuring and promo activity in the quarter or maybe into Q1. So what does it look like and how has that translated into volume growth if any and your expectation for margins for the rest of the year?

Q1 will probably -- is again a seasonally slow quarter, Derek. So the key message is, things are setting up for the busy quarters Q2, Q3. Featuring should be back to historic levels. So we expect that to be a story you're not going to hear anymore. But it's not a big story in Q1 generally, because of it being a seasonally slow quarter.

Yes. And Derek, I think that goes well with my comments and Will's comments around normalizing business conditions for a few years. We couldn't present products, our innovation to customers. Now, they're all open for business. I think in many, many ways with food service reopening. Retail again is starting to look at exciting innovation to drive traffic anyway. So these conditions generally bode well for featuring and promotions, which is something that wasn't done for a couple of years.

Okay and maybe just switching gears. And for the new 5-year guidance, you guys have clearly shown an ability to hit these longer ranges. It's aggressive on the top-line for sure. But it looks like you're being a little conservative on the margin side next year, you're guiding to at the midpoint of your guidance range to about 9.2% but only 10% 5 years after that. Just maybe help me square that away?

Yes. It's pretty simple answer, Derek, you're absolutely right. We have been conservative there. Our internal expectations are actually quite a bit higher, but we just wanted to make sure we made it put a commitment out there. We were absolutely certain we going to meet.

You have to understand that -- Derek, that we've been shell shocked obviously with black swan events. The last 3 years, all happened in at once. So we're tending to be a little bit conservative with some of our assumptions.

And your next question comes from the line of George Doumet from Scotiabank.

I just want to talk a little bit about the use sandwich facility. Can you maybe title a little bit about the capacity of that facility and when it's ramped up and we also have 210 million of extra capacity sort of feel that you guys see a pretty big runway for sandwich growth over the next little bit. You talked a little bit about where that's coming from 1 end markets, et cetera?

Yes, it's the same old story, George. We continue to run, we've got all these fantastic initiatives on opportunities that we've identified in the sandwich category. But we have a key customer that keeps growing like crazy and that's just how we keep losing that capacity to that customer and not being able to pursue these other growth initiatives. So, we fully see kind of the current network being filled up in 2023, early 2024, including the recent Columbus initiative that we're working on. And so, this is going to provide us that capacity we need to both support that customer as well as pursue these other growth initiatives.

Yes. And I think to add to that, George, is that you have to look at the 2 mega trends that got us here in the first place and obviously drove the growth of this division. One of course is the fact that a lot of QSRs today are having labor challenges, right? So what we do is we provide a labor saving solution for the QSRs. We don't see the situation improving because of that we getting over the years, we've gotten a lot of inquiries for QSR unfortunately we just haven't had the luxury of extra capacity. We prioritized our existing customers. So, we feel very comfortable that the labor saving food safe great quality sandwich solutions that we bring to QSR customers in particular will bode well in terms of filling that capacity. Secondly, we're starting to see tremendous traction in club as well. I think you can see a lot of our SKUs appearing now in club stores. We feel that we're just scratching the surface of that channel. There is simply more opportunity for us to grow in club in particular, consumers are busy, they're looking for convenient, good quality snacking solutions and breakfast solutions and this category fits really well with those trends. And with those 2 drive -- those 2 trends are driving a lot of the demand that we see going forward.

That's really helpful. And I saw a reclassification of warehouse rental income in PFD revenues. Will, can you talk a little bit about that and give us some color what that is?

Yes, it's a core part of our Confab businesses. They lease parts of their warehousing space. So in the past, they have -- we were netting that with the least lease structure. So that was netted into the use of assets account, and that's been reclassified now is where it should be as revenue. So that's about $1.5 million a quarter.

Got you. And just 1 last 1 from me, the guidance assumes stable commodity prices. In the event that perhaps we see deflation accelerating towards the second half of the year. Can you perhaps talk a little bit about the potential for upside to margins and how that should flow through the P&L from a timing standpoint?

Yes. So in our guidance, we are -- our assumption is relatively stable commodity markets in our 2023 guidance. If we see a deflationary environment, particularly in pork, which is a key rock material for our protein businesses that generally is a margin expansion opportunity. The fact is and you see it on 2 ways. 1 is prices tend to be sticky on the way down for most products. So you have some temporary expansion. But then also there are certain categories where, when we go through these inflationary times they set new consumer price points and those price points don't change. And so you have sort of a permanent value capture there. But you will see as we generally will use that margin to drive some more featuring, but now we're featuring at historic margin. So it's -- again it's a value opportunity and value capture opportunity. But like I say, going back to our outlook for 2023 in that range of $590 million to $610 million in adjusted EBITDA, that's based on a relatively moderate stable commodities environment.

Just a comment, George -- and sorry, George, just on your last question, in terms of the sales around this new sandwich facility in the U.S. So that facility, once it's fully built out, we'll support about $650 million to $660 million in sales.

Okay.

And we built in 3 stages all the way to 2029, I believe.

Yes, exactly. Yes again, Will's comments are very relevant, George, in regards to commodities. I just want to remind everybody that we are not over-developed in 1 commodity. The comment relates to a basket of many commodities that we use, including seafood and lobster and beef and pork and chicken, et cetera, et cetera. We're well-balanced in terms of commodities. Sometimes a certain commodity takes off or drops, but overall the basket of commodities remains constant because another commodity has gone the other way. So just wanted to remind you that.

And your next question comes from the line of Martin Landry from Stifel GMP.

My first question is on your 5-year guidance. You're calling for $1 billion in EBITDA. And I was wondering if you anticipate to be able to fund that with internally generated cash flows or you think you're going to need to maybe issue equity. Just trying to get a sense of what your $1 billion EBITDA could look like or could translate into an EPS metric?

Well, that's the exciting part of this plan, Martin is. We can achieve this plan entirely organically without any including the small amount acquisitions built roughly $0.5 billion or $500 million in acquisition sales revenue built into the expectations internally. No equity would require. Equity would become more of a requirement, if there was a larger acquisition opportunity on the horizon.

Okay. That's helpful. And then, I mean you touched a little bit on it, George, in the answers to the previous questions. But when I look at your organic growth rate again for your 5-year plan, I think, well you're calling for a growth rate organically of 9.6% annually. That's higher than your 6% to 8% of your historical guidance. So it's obviously a big number. And it sounds like you have a lot of inbounds from your clients, it sounds like you still have a lot of untapped proportionate of these, but it's certainly much faster than industry growth rates. So just wanted to see how much visibility do you have in that growth rate right now?

Yes. So that's -- just to give you some context for that 6% to 8% organic volume growth rate that is based on kind of just normal trends like looking at our existing products, product mix, and what we expect it to grow just on its own organically. And then as we make these investments in these new initiatives, these new capacities, we always expect that to accelerate the growth rate to well above that 6% to 8% range. And again, so what you're seeing is we're investing in these higher growth categories. The reality is where we're investing, they're not stable category that these are fast growing opportunities. Cooked protein is a great example. It's growing at well over low double-digit rates. So we're investing in those high growth categories and without capacity coming along. That's what's making us bullish on those overall growth numbers.

The other comment I have, Martin, is that, if we make the same assumptions around the growth over a lot of these exciting categories that Will mentioned in the U.S. similar to the way they grow in Canada for us, then we're just scratching the surface in the U.S. We're just getting started in the U.S. market. So -- and we are getting a lot of traction in the U.S. as we speak. You'll be surprised how many of our products you'll see on shelves in the U.S. And the nature of the U.S. market is that when we see opportunities, they are not small opportunities, they're larger opportunities. And that's the discussion around capacity -- right capacity. A lot of times, we'll sit down with the customer we'll do an innovation session with them. And they'll say, okay. We want to roll it out across our 10,000 stores. Well, we don't have the capacity for that. So for us, automated modern capacity is a key variable that as you can see with our discussion earlier, we're solving that issue. And we're really excited with our ability to now cater to the demand that we see.

And your next question comes from the line of Stephen MacLeod from BMO.

Just wanted to follow up on a couple of lines of questioning. Just in terms of the long-term growth targets through 2027, given a lot of good color around the top line and EBITDA margin potential. Just curious if you can give a bit -- maybe a bit more of a granular breakdown between how you think about gross margin and SG&A leverage over that time period? And then maybe more specifically or more near-term SG&A did seem to take a little bit higher in Q4? And just curious if that's just related to that seasonality of the period?

Yes, I'll start with the last part of your question, Steve. In terms of Q4, definitely there is a seasonality element, right, because of the slower sales relative to SG&A being relatively fixed. But going forward, your -- 1 of your first questions, absolutely, there's investment being made there for future growth. Our SG&A, I think was up over the quarter. Our SG&A infrastructure, i.e. they're spending in our core people. It was up around $3 million. And almost half of that, was additional salespeople across the network. So that's all sort of to support that growth in 2023 going forward. So it is investing in the future.

Okay, that's great. And then would you expect any major material changes to your gross margin profile over that time period?

Yes. So -- and this kind of goes to Derek's comment a bit. We talk a lot about our contribution margins, particularly in our Specialty Foods businesses. And I should note Steve that, when we look at our growth outlook over the next 5 years, it is much more weighted to the Specialty Foods side of our business then to the Premium Food Distribution. And the contribution margins in those businesses, i.e., the dollars that flow to the bottom line with an incremental sale, they're on average 25% plus with, in our bakery goods. They can be over 40% on certain items so very, very accretive to our overall margin. And so yes, you're going to see gross margin improvement as we leverage those capacities vice versa that's 1 of the reasons why our margins have not improved over 2022, because we invested in that capacity, invested in that overhead, and we have -- we didn't see the leveraging happening. So as we see that leveraging, you'll see our gross margin and obviously EBITDA margins improving.

Okay, that's helpful. And then I just wanted to go back because I think you gave a little bit of color around the new sandwich facility. I believe you said it can support north of $600 million in sales, and it's being built in stages. But I was just wondering if you'd just give that color again, I missed it?

Yes, no, no, you're right. That's around $650 million plus U.S. in sales. That's U.S. dollars.

Okay, okay. And over what time period? Did I hear that it will be done in stages through 2009, is that right?

Yes, yes, it'll be in stages. Now the big part of the growth is in from '20. The first phase is completed at the end of '24, early '25. So you'll see that growth kicking in at '25, '26, '27 being the big years and then support some more towards the latter part with the final addition coming on stream in 2029. So that $655 million U.S. in sales that will support us beyond our 5-year business plan based on how things are looking today.

Okay, okay, great and then maybe just along those lines -- along the sandwich -- new sandwich facility. You talked about it being very automated leveraging technology. And I know you have some of that technology in your Phoenix plant. But just curious if you can give a little bit of incremental color around like what that does for you in terms of throughput and profitability at the plant level?

Yes, well, absolutely. The advantage of the automation is really cost efficiency. And so, we've got to 2 gen 3 lines, George now in Phoenix and 1 in Reno. And certainly with the Columbus expansion that we're undergoing, there'll be a gen 3 line put in there which is the fully automated line and more plan for the Tennessee plant. Again, there are tremendous efficiency gains. I can't remember off the top of my head the savings. But you have instead of, by order of magnitude, 50 people on the line, doing very manual repetitive work, now you have 15 to 20 doing much more sophisticated work. So not only is it incredibly efficient, but it does make for a much better work environment.

[Operator Instructions] And your next question comes from the line of John Zamparo from CIBC.

I also wanted to start on the 2027 targets. And I appreciate all the color on that so far, a couple of quick questions. The long-term guide on organic growth, can you share your assumptions on pricing or volumes within that number?

Yes. So in terms of -- the only year where there is significant pricing assumptions is in 2023. And in fact, we are projecting overall to be slightly deflationary. So our guidance -- our sales guidance for 2023, you'll notice that the growth rate is a little bit lower than you might have expected. That is because we're in a bit of deflation. Going out to '24 and beyond, John, we generally -- 1% to 2% inflation is built into the numbers.

Okay, that's helpful. And then secondly, can you say what a reasonable split would be between specialty and distribution? Specialty typically outperformed, of course. But I wonder, are these going to be somewhat in line or do you think specialty is above that 9% to 10% number?

You're talking growth rates, John?

Yes, yes. Still within the growth rates?

Yes, yes, no, no, specialty is by far the big growth driver. It's going to be above that. And premium foods distribution group, it will be sort of in our targeted range that 4% to 6% range. You'll notice from the capital investment, the vast majority of it is in our protein sandwich and bakery groups, i.e., all Specialty Foods groups companies.

Okay, that's very helpful. And I think that may answer this next 1, and it's a follow-up on Martin's question. Just the level of organic growth is a meaningful step up versus the past. And I'm wondering when you think about the $1 billion in EBITDA versus $0.5 billion now, what the biggest drivers are going to be in EBITDA dollars if you could rank them between sandwich and seafood and protein?

I think, John, it's a -- as Will said, it's driven by a mix issue, a change in the mix. There's no question that we're seeing some and taking advantage of some mega trends that we are well positioned in. For example, the growth in charcuterie demand across North America, the growth in cooked protein. We talked about skewers as well, dry cured which were 1 of the leaders in dry cured in North America, dry cured meats including Italian in German. The premiumization trend in terms of meat snacks and the artisan bakery goods that we've talked about earlier, all of these products tend to be the ones that are going to drive our growth based on availability of capacity and they're generally higher margin than. That's what we've done historically with the entire basket. So, those will drive the growth in our margins.

Yes, George is right. Its contribution margin higher contribution margins on those Specialty Foods groups it's a big driver, but you should also know John that the $500 million we did this year is a depressed number like inflation, had a major impact on us. Just the price delays, i.e., not taking into account the impact of inflation before we put the pricing in and just the price delays from retailers that, alone was $46 million impact on us this year, i.e., if the price, increase that just gone through. When we first -- sat down with the retailer and negotiated that would have right there have been $46 million to our bottom line. So it's definitely a depressed number we're starting from.

Right, that's great color. And just a couple of housekeeping matters the re-measurement of provisions in Q4 is that from lower expectations of contributions from recent deals or is there an accounting element of that, it will be discount rate or the multiple you're paying, but just what [indiscernible] out there?

That relates to a seafood business on the West Coast that we have an equity interest in and we just for conservative purposes, because the West Coast fisheries are struggling. I don't know how much you hear about it in Ontario. But there are serious concerns around the salmon fishery and some of the other fisheries and just for conservative purposes, we wrote down the investment on that basis. The business itself is doing okay and certainly oh, I'm sorry John, I was referring to the equity adjustment we made. In terms of the provisions yes, actually, that was a very simple 1. The re-measurement of provisions related to the contingent consideration on an acquisition and the contingent consideration was set at incredibly high rates high levels. So that if they were hit it made our IRR work, the fact they're not going to hit those levels, we've done re-measurement based on that. But overall, the business is still in sort of plan relative to our base IRR. It's just not we're not going to see the upside that would have driven the contingent consideration.

All right. That's helpful. And then last 1 from me, George, you referenced vertical or potentially looking at vertical integration, I think that was on your Ferndale plant. Can you elaborate a bit there?

No, actually John, that was referring to the facility in Cleveland, Tennessee. We have secured about 65 acres. We've talked about the assembly plant that -- and the assembly capacity. But again it's not in the plan yet, but we have talked about adding a bakery there. Possibly that will save our customers a lot of freight, because a lot of the baked goods that we use come from all over the place. Saves the planet as well and there's many, many reasons to do more things there. That's why I called it a complex. So again, it's not in the 5-year plan, but we've certainly talked about the possibility of adding vertical integration to that facility both in baked goods as well as in some of the other proteins that we use.

Mr. Paleologou, there are no further question at this time, please continue.

I'd like to thank everybody for attending today. Thank you.

Thanks, everyone.

Thank you. This does conclude the conference for today. Thank you all for participating. You may now disconnect.