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

I second the motion.

You have heard the motion, and I would ask that anyone who has not previously voted their shares in this regard, please do so now. The results of this vote will be announced later in the meeting once all the votes have been tabulated. The next item of business is approval of the advisory resolution respecting the corporation's approach to executive compensation. As outlined on Pages 7 and 8 of the corporation's information circular, the Board, through the Compensation and Human Resources Committee, is responsible for formulating and monitoring the effectiveness of the corporation's executive compensation program. The Board believes that the corporation's shareholders should have an opportunity to express their opinion on the corporation's executive compensation program by voting for or against the resolution set out on Page 7 of the information circular. As this is an advisory vote, the results of this vote will not be binding upon the Board. However, the Board and the Compensation and Human Resources Committee will consider the outcome of the vote as part of their ongoing review of the corporation's executive compensation program. In order to meet the requirements of the Canada Business Corporations Act, this resolution must be passed by a majority of votes cast by the shareholders of the corporation. As you have all had a chance to review the resolution prior to the meeting, I would request a motion dispensing with the formal reading of the resolution.

I move that formal reading of the resolution approving the corporation's approach to executive compensation, found on Page 7 of the corporation's information circular, be dispensed with.

I second the motion.

Are there any objections to this motion? As there are no objections to the motion, I declare the motion carried. I would ask that anyone who has not previously voted their shares regarding this resolution, please do so. The results of this vote will be announced later in the meeting once all of the votes have been tabulated. I would now advise that we are closing the polls. It is now 1:41 p.m. Pacific Time. I will close the polls in respect to all resolutions in 30 seconds to allow all online votes to catch up. [Voting]

The polls are now closed. While the ballots are being tallied, we will receive a brief update on the corporation's operations from George Paleologou, our President and Chief Executive Officer; and Will Kalutycz, our Chief Financial Officer.

Thank you, Bruce, and welcome, everyone, to our 2024 AGM. Our CFO, Will Kalutycz, and I are going to take you through a formal presentation followed by Q&A. We're now on Slide 2 and 3, our standard disclaimers as usual. We're now on Slide 4. Our sales for fiscal '23 came in at a record $6.3 billion, up from $6 billion in '22 and $200 million in 2004. We started in 2004 with 8 operations located mainly in Western Canada. We have now expanded across Canada and the U.S. with 116 operations overall. Over the years, we have grown the business by staying true to our core values and principles and managing for the long term. Our free cash flow per share came in at $5.70 per share for the year. During 2023, we made great progress towards our 5-year targets of $10 billion in sales and $1 billion in EBITDA by the end of 2027. We remain very confident that we will exceed these targets. As we've grown our free cash flow, we have shared some of the growth by returning close to $1 billion of capital back to our shareholders as dividends. We're now on Slide 5. We're steadfast in executing our vision, no matter the many challenges that come our way. We invest entrepreneurial food companies run by great people that are making delicious, nutrient-rich products, with a passion for their communities and what is best for our planet. All of our capital allocation decisions are driven by this simple vision. We are now on Slide 6. We delivered nearly 18.2% compounded annual return to our long-term shareholders since 2004 through growing dividends per share and capital appreciation. We're disappointed that our stock price is trading below its intrinsic value at the moment, but we're confident that the market will eventually correct itself as it always does. We're now on Slide 7 and 8. We understand capital and we take our responsibility as stewards of capital very seriously. We invest our capital in targeted segments of the food industry, and we aspire to bring transformational change to the businesses we invest in and their industries. We partner with talented people, and we support them over the long term. We're very passionate about innovation in new products and in adopting new technologies as we continue to build deep moats around our portfolio of trade Specialty Food businesses. We're now on Slide 9. Our fourth comprehensive ESG report is due to come out later this year. We're making good progress here and we're on track to achieve all of our sustainability and DI objectives. We're proud to be producing authentic food that is healthy, nutrient dense and minimally processed. We believe that our passion for regenerative agriculture and the sustainable stewardship of our fisheries combined with our stated objective to help reduce food waste will improve both the environment and human health while helping to reduce food insecurity. We're now on Slide 10. This slide provides you with a list of the many resources and attributes available to partners that joined the PB ecosystem. PB is not a roll-up, an integrator or a consolidate. We're passionate about investing in the right megatrends by partnering with successful food entrepreneurs that share our values and our vision for the future. We're now on Slide 11 to 13. The next 3 slides show you how diverse we are in terms of the channels we sell through, the geographies we sell to by channel and by product and species. This diversity enables us to better manage the many risks we face in our business, including customer and channel-specific risks as well as commodity and geopolitical risks. We're now on Slide 14. Our global supply chain is shown here on Slide 15. Our supply chain teams travel the world in looking for partners that share our values, and these relationships are leveraged for the benefit of the entire PB ecosystem. We're now on page -- on Slide 15. The map shows the location of our various operations in North America. Our U.S. sales and footprint continue to grow and is now about 60% of our Specialty Foods sales. We're now on Slides 16 and 17. We continue to remain active in acquisitions. Our acquisition pipeline remains full, and we expect to complete several transactions during 2024. Given the tighter credit environment and higher interest rates, we remain as disciplined as ever on due diligence, overall risk mitigation and of course, valuation. We're now on Slide 18. This slide shows you the size of each one of our platforms. 4 of our 6 platforms are now at or exceed $1 billion of sales, while we expect Bakery & Culinary to grow substantially over the next few years. Now, we will now play 2 videos that demonstrate our commitment to operational excellence by building and operating state-of-the-art facilities, leveraging leading technologies combined with old world artisanship. The first video shows you our recently commissioned laminated bakery in San Leandro, California, followed by video of our new artisan bread and bun line at the Stuyver's Bakery in Langley, BC. [Presentation]

Thank you. I will now pass it back to Will for the financial part of the presentation. Will?

Thanks, George. There were 3 major themes that challenged our financial performance in 2023. The first was the transitioning from COVID-related challenges, including supply chain disruptions, extreme inflation and labor shortages. The major impacts of this challenge were earlier in the year and by the end of the year, had largely dissipated. The next theme that was -- the next theme was that of positioning our company for future growth. Over the last 3 years, we have made significant investments in production capacity to support our growth initiatives, most of which are in the U.S. These investments have resulted in additional interest, depreciation and lease costs in the interim period prior to us being able to generate earnings from this new capacity. The third theme impacting our 2023 performance, which occurred mainly in the latter half of the year, was a weakening Canadian consumer. The good news is that despite these challenges, we were still able to generate record sales and adjusted EBITDA for 2023. Turning to Slide 22. Our sales for 2023 were a record $6.26 billion, which was an increase of $231.2 million or 3.8% as compared to 2022. There were 4 key drivers of our growth. The first was organic volume growth in our Specialty Foods segment of $167.7 million, representing an organic volume growth rate of 4.4%. This was within our long-term targeted range of 4% to 6% despite some of the headwinds I mentioned earlier. The favorable translation of our U.S. dollar denominated sales contributed $87.2 million to our growth. Acquisitions, mainly relating to transactions completed partway through 2022, accounted for $50.8 million of the increase, with the final factor being selling price inflation of $48.5 million. Offsetting these drivers were 2 significant challenges. The first was an extra week of operations in 2022, which accounted for about $82 million of sales growth. Normalizing for this factor, our year-over-year growth in 2023 is 5.3% versus the 3.8% I mentioned earlier. The second challenge for the year was a sales contraction in our Premium Food Distribution group. This was the result of 2 transitory factors. The first was lobster supply challenges resulting from 4 weather conditions that impacted both the Maine and Nova Scotia fisheries towards the end of 2023. The underlying biomass for both these fisheries does remain, however, very healthy. The second transitory factor was the weakening consumer I mentioned earlier, which resulted in consumers trading down to discount banners where we are underrepresented. Looking forward, our guidance for 2024 are sales of $6.65 billion to $6.85 billion. The chart here shows the midpoint of that range of $6.75 billion, which represents an organic volume growth rate expectation of 7.3%, which is well above our long-term targeted average or range of 4% to 6%. Turning to Slide 23. Our EBITDA for 2023 was $559.1 million, an increase of $54.9 million or 10.9%. This was driven by our sales growth, improved pricing as we catch up with the record cost inflation from the last 2 years and plant efficiencies of almost $7 million. These factors are partially offset by the continued investment in plant and SG&A infrastructure we are putting in place to support our current growth plans. Wage inflation was also a bit of a headwind. Our EBITDA margin for the year was 8.9%, an increase of 50 basis points from 2022, all driven by our Specialty Foods segment, whose margins increased by 130 basis points to 9.8% in 2023. This is still well below our 14% target for the group, but we are very confident in achieving this as we start leveraging the recent investments we have made in capacity to support our U.S. growth initiatives. Looking forward, our guidance for 2024 is adjusted EBITDA of $630 million to $650 million. The graph here shows the midpoint of that of $640 million. Using the midpoint of our sales, that represents an EBITDA margin of 9.5%, which will be a 60 basis increase from 2023 and will put us within 50 basis points of our midterm target EBITDA margin of 10%. Turning to Slide 24. Our earnings for the year were $179.1 million or $4.03 per share. Both our earnings and earnings per share were down relative to 2022, despite the increase in our adjusted EBITDA due to 2 factors. The first is the recent investments we have made in additional capacity that I discussed earlier, which will support our future value creation. These had a negative impact of our earnings of approximately $35 million or $0.79 per share. The other factor was a higher interest rate environment, which impacted our earnings by approximately $33 million or $0.74 per share. Turning to Slide 25. In 2023, we invested almost $400 million in capital expenditures. This was a record for us with the previous record set in 2022 at $228 million, again, as we invest in additional capacity. Our 2023 capital expenditures consisted of $289.2 million on major project capital initiatives. And we define major project capital initiatives as capital investments that on an unlevered after-tax basis generate an internal rate of return of 15% or greater. Primarily all of these expenditures in 2023 were to build capacity, as I mentioned earlier, to support our U.S. growth initiatives, mainly in protein, sandwiches and artisan baked goods. We spent an additional $64.5 million on smaller project CapEx. We generally spend about $10 million to $15 million per quarter on these, and they're mostly for plant efficiency initiatives and automation, but also for smaller capacity expansion projects. The final portion of our capital expenditures was $46 million on maintenance capital expenditures. These are essentially any expenditures that don't meet our 15% hurdle rate. And like I say, it was $46 million for the year. Looking forward, based on our approved project CapEx pipeline, we expect to spend an additional $366 million on these initiatives over the following 7 quarters. We do, however, expect to partially offset a significant portion of these expenditures through the sale and leaseback of real estate associated with some of the projects. Turning to Slide 26. This slide shows 3 of the key metrics we use to assess our debt levels. Our senior debt-to-EBITDA ratio, our total debt-to-EBITDA ratio, the difference between those 2 being our convertible debentures, are included in the total debt-to-EBITDA ratio, and our unused credit capacity. You can see we ended the year with very solid liquidity, having $734 million of unused credit facilities. In terms of the ratios, both of them were above our long-term targets, but well within our comfort zone. The higher ratios are due to the major capital expenditures we've been making in recent years. As we look forward, we expect both these ratios to be within our targeted ranges by the end of 2024 as we leverage the investments for our sales growth and complete the planned sale and leasebacks. Turning to Slide 26. Our free cash flow for the year was $253 million. This was a decrease of $32.8 million while our free cash flow per share was $4.03, a decrease of $0.71 per share as compared to 2022. Both metrics were down due to the same factors that impacted our earnings and earnings per share, namely recent investments in production capacity and the higher interest rate environment. Our payout ratio for 2023 was 54.3%. This was only slightly higher than our long-term targeted range of 50%. And this was despite the challenges I mentioned earlier. In 2023, we paid out dividends of $3.08 per share, which totaled $137.5 million of payments to our shareholders. Looking forward, for 2024, we increased our dividend by 10.4% to $3.40 per share. This is our 12th consecutive annual increase in our dividend and our tenth consecutive increase of 10% or greater. Turning to Slide 28. This shows a history of our 5-year plans. We've now completed 3 of our 5-year plans. The first 2 plans, we met our sales targets 1 year in advance. For our most recent ending plan, we also met our sales target 1 year in advance, it was for 2023. We hit our sales target of $6 billion in 2022. We, however, did miss our EBITDA margin in -- our EBITDA target of $600 million coming in at the $559 million I mentioned earlier. Looking forward, we've set new targets. As George mentioned earlier, our 2027 targets, 5-year targets are $10 billion in sales and $1 billion in adjusted EBITDA. We believe these targets to be conservative based firstly, most of our projected growth is expected to come from organic initiatives versus in prior plans where acquisitions were core to being able to achieve our targets. And secondly, the conservative assumptions used for our adjusted EBITDA target which were set based on missing our previous target. We have been very conservative and set a target we are highly confident in achieving as we go forward. That concludes management's presentation. I will now pass the call back to Doug Goss.

Well, thanks, George and Will. My name is Doug Goss. I'm Secretary for this meeting. And I'm going to give you some voting results. I'm pleased to advise that the shareholders have voted by a margin of at least 99.45% depicts the number of directors elected at no more than 9. The shareholders have voted by 99.72% margin of a leaseback to approve PricewaterhouseCoopers as our auditors for the ensuing year at remuneration to be fixed by the Board of Directors. I'm also pleased to advise that each of our director nominees has been elected by a margin of at least 94.56% and accordingly, effective on completion of the Annual Meeting, each will hold office until the next Annual Meeting of shareholders or until their successor is duly elected or appointed, unless their office is earlier vacated in accordance with the Articles of Incorporation unless they become disqualified. Accordingly, I'd like to congratulate Sean Cheah; Johnny Ciampi; Tom Dea; Dr. Marie Delorme; Bruce Hodge; Kathleen Keller-Hobson; Hugh McKinnon; George Paleologou; and Mary Wagner on their reappointments to the corporation's Board of Directors. I'm especially pleased to advise that the shareholders have approved the corporation's approach to executive compensation by a margin of at least 98.8%, which meets the majority standard required for the passage of this resolution. Accordingly, I declare this resolution to be carried and I will attach a copy of this resolution to the minutes of the meeting as Appendix 3. I'd also like to advise that that a full and complete report of voting results with respect to this meeting will be prepared and filed on SEDAR+ later this afternoon.

Thanks, Doug. I would ask the secretary of this meeting to attach the direction of votes received by the proxy from TSX Trust Company to the minutes of this meeting as Appendix 4. If there's no further business to be brought before the meeting, I would ask a motion to terminate the meeting.

I move that the meeting terminate.

I second the motion.

Are there any objections? As there are no objections, I declare the motion carried. I declare the meeting terminated. Thank you all for participating in the meeting today.