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

Good morning, ladies and gentlemen, and welcome to the Premium Brands Holdings Corporation First Quarter 2024 Earnings Conference Call Question-and-Answer Session. [Operator Instructions] This call is being recorded on Monday, May 13, 2024. Our speakers today are George Paleologou, CEO and President of Premium Brands; and Will Kalutycz, CFO of Premium Brands. I would now like to turn the conference over to George. Please go ahead.

Good morning and welcome everyone to our 2024 first quarter conference call. With me here today is our CFO, Will Kalutycz. Hopefully, you've had a chance to listen to the prerecorded call posted on our website this morning. We will now move to the Q&A portion of the call. Jenny?

[Operator Instructions] Your first question is from Martin Landry from Stifel.

Congrats on your results. They're above our expectations. And I'd like to try to understand a little bit where we go from here. Obviously, you are all, you are expecting EBITDA growth to accelerate on a year-over-year basis for the remainder of the year. So, I'd like to understand if you could list maybe 3 factors that you're watching that could prevent you from reaching your guidance this year. Is it delay in new capacity coming online? Is it the weakened consumer demand? Is it labor? If you could tell us a little bit how you look at your risks for the remainder of the year, it would be helpful.

Well, again, Martin, we are very pleased to, of course, show progress in the first quarter. As we've said in our prepared remarks and in the press release, over the last 2 or 3 years, we've invested a lot of capital in building capacity, focused mainly on the U.S. market, and it's great that we're showing progress, of course, in terms of the U.S. market. In terms of your comments in regards to the remainder of the year or the quarters ahead, of course, we're always dealing with risks, and we're managing risks. It's part of our business. But overall, we're very pleased with where we're at today. For the first time in a long time, we have very food-safe, efficient capacity. We have [Technical Difficulty] great innovation in our pipeline, and we're very busy presenting solutions to customers, to retail, and foodservice customers that are trying to deal with inflation. So, we're in a very good position. We're very pleased with what we see. We're happy to be bringing very efficient capacity on stream, and I think we're in pretty good shape for the remainder of the year. That's not to say that there's no risk in our business, but again, I think, over the last 20 years, we've shown that the business model is very conducive to managing risks. We don't manage quarter by quarter. We manage for the long term. And I think that the wisdom of our business model continues to prove itself.

Yes. And, Martin, I would just add from a capacity perspective, all of the facilities that we need to execute on our 2024 growth strategy, all those capacities are now in place. So, that should not be an issue. And really, it's just, like George says, executing at this point.

Okay. Maybe just to follow up on the capacity. Is it fair to say that there's limited to no delays versus your original budget at the beginning of the year in terms of time to come online?

Sorry, can you say that again, Martin? That wasn't clear. I didn't understand your question.

I'm just trying to understand if there's delay in your capacity coming online versus your original plan when you set up your budget.

No, that was my point earlier. All the capacity we need now to execute on our 2024 business plan is in place today.

Yes, the only other comment -- yes, sorry, Martin. Go ahead.

So no delays in your capacity coming online versus your original budget?

No. Not on the capacity front, Martin. The only other comment I have is that in the U.S. in particular, we're generally dealing with larger customers. I think that the onboarding of new customers sometimes takes longer than what we may have anticipated. There's big chunks of business there, but the process of onboarding may be lumpy at times. So, again, we're not in control of the exact timing, but we are very, very optimistic in terms of what we have in the pipeline and what we see.

Your next question is from George Doumet from Scotiabank.

Congrats on a good quarter, George and Will. I just want to understand a little bit what happened in Canada. There was a pretty material improvement quarter-over-quarter. Was it a stronger exit in March? Just was the intra-quarter performance different? Anything you want to maybe call out there? It's pretty quick improvement there.

Yes. Again, as we've said in regards to the fourth quarter call, George, the slowdown in December surprised us, surprised many of our businesses. I think, in general terms, recognizing the slowdown, a lot of our businesses did a lot of promotions, and also pivoted some of their capacity to the U.S. So, between the 2, we've reacted to what happened in December.

Can you give some examples of some of the pivoted capacity? Sorry, to interrupt. Maybe just follow up on that point.

Well, again, our bakery business, for example, has secured a lot of business in the U.S. more recently. And again, it's a good example of pivoting capacity instead of facing issues in the domestic market.

And George, just a little more color there. What George talked about is certainly Specialty Foods, and it was nice to see. I think we called it out that we actually saw growth in our Canadian business in the first quarter versus a contraction last quarter in Specialty Foods. Premium Food Distribution, it's a little more subtle understanding there. We continue to struggle with consumers trading down to discount banners where we just don't sell our premium beef and seafood programs. But we were helped this quarter by a really strong Atlantic salmon fishery that positioned them well to do a lot of featuring with retailers. So, that helped offset some of that weakness. But that's something we don't expect to continue into Q2.

And I guess when you guys set the guidance, it seemed that the Canadian business was under a little bit of pressure. All things equal, it seems like it's a little bit better. So, if we continue to deliver flat-to-positive organic growth this year, do you think that could be a source of upside to your guidance?

The current state of the market is unfolding as we expected. Again, we didn't expect that large contraction in Q4 to be sustained. And so, it's really playing out how we expected. And then again, from last quarter, what we talked about was stable for the first half of the year, maybe a slight contraction on the Premium Foods Distribution side of things, and then improvement showing in the back half of the year as we start lapping of those more challenging numbers. And hopefully, we start seeing some relief on interest rates and the consumer being able to spend a little bit more on their food bill.

Okay. And my last one, in your prepared remarks, you mentioned the midterm EBITDA target of 10%. Do you think that level is attainable in the second year for the entirety of the business, assuming we can do a double-digit growth in organic [ LSF ] and assuming stable commodity markets?

Yes, we're cautiously optimistic we should hit that number in 2025.

Okay. As an annual number?

As an annual number, yes.

Your next question is from Derek Lessard from TD Cowen.

And I echo the congratulations on the quarter. Curious if you've seen any cracks in the U.S. consumer.

I think that it depends on the channel, Derek. As I said in my prepared remarks, there's evidence that menu inflation in both Canada and to a lesser extent in the U.S. is an issue. And consumers obviously have to buy food. Consumers love to eat food outside of the home. But there's no question that menu inflation is a big issue for a lot of the operators. This bodes really well for us in the sense that we're able to give them solutions to that issue. It's part of the reason why we're very optimistic about where we're at, given that for the first time in a long time we have capacity to sell. But yes, in certain channels, absolutely, there is some evidence of slowing demand in the U.S. as well.

Okay. And maybe just switching gears to the sandwich business in particular. When should we expect you guys to start lapping the impact from the new product display strategy from your large client?

One more quarter, Derek. That started in the third quarter of last year.

And I think you guys, a few quarters ago, also highlighted some real nice progress with sandwiches in particular going into the club channel. Just wondering if you can maybe update us on the progress there on any incremental or new potential customers.

All I could say, Derek, is that there's a lot of activity going on. As I mentioned earlier, every major C-store operator, every major QSR in the U.S. today is looking for innovation and solutions with regards to their menu inflation issues, a lot of it caused by the increased cost of labor. So, we're able to offer them solutions with regards to innovation and cost savings as well. So, every channel, I think that over the next few quarters and a few years, we will be doing a lot more business in C-store and in QSR in the U.S.

Okay. And maybe one last one for me before I requeue, and I know you must be thinking one thing at a time, but how do you feel about where your leverage stands and maybe expectations for the remainder of the year?

Yes. So, our leverage was a little higher than we expected in the quarter, at the end of the quarter, primarily due to inventory-related issues. Most of it was planned, the increase in our inventory, seasonality, and we have 3 major new product launches coming onstream in the second quarter. But there was an unplanned component in terms of, we had a major customer who saw some soft sales towards the end of the quarter, and that ended up in a bit of a ramp up of our inventories. And also, then we had some timing issues around with some containers coming from offshore, but those should normalize over the course of the year. Our outlook for the balance sheet hasn't changed. We still expect to be within our long-term guidance ranges by the end of the year, but in the short term, there will be a bit of noise. It will be subject to the timing of the sale and leaseback transactions that we've been discussing. Those could happen in the third or the fourth quarter, and they'll certainly have a material impact on our balance sheet. But overall, you shouldn't see anything -- it should be stable to coming down over the course of the year.

Your next question is from Stephen MacLeod from BMO Capital Market.

Just a couple of questions. You mentioned -- I just wanted to dig in a little bit on some of the product launches. Just wondering if you can give some examples of things that hit the market in Q1. And then, Will, you just alluded to 3 major product launches coming onstream in Q2. So, just curious if you can give a little bit of color around those if you're able to.

Yes. So, there was no new launches in Q1. There was the continuation of launches we did in 2023 and continue to see the benefit because we're not lapping them yet. In terms of going forward, the 3 major launches: there's one in retail -- actually, sorry, 2 in retail, 1 in the sandwich group, 1 in the protein. They're with a major national customer, North American customer. So, we're excited about those. Sorry, 1 is in protein, 1 is in sandwiches. And then we also have another product launch coming with a major QSR chain in the U.S. So, all exciting opportunities, and again, mainly U.S. driven and will help to continue to drive that growth we're seeing from our U.S. sales initiatives, and largely the result of these capacity expansions we've been investing in over the last couple of years.

Okay, that's great color. And then just thinking about the margins through the balance of the year relative to our estimates, gross margin was better than expected, but SG&A was a little bit higher. So, is that how you expect things to unfold through the balance of the year?

I think you'll see less impact from the SG&A factor just because Q1 is a more slower quarter, and so SG&A can have a higher impact as a percentage. So it should have less. And then as the year unfolds, and we see that sales leveraging from our growth, you should see some improvement in the gross margin. So, it really should be gross margin driven increase or the improvement year-over-year in our EBITDA margin.

And I guess that's also coming back to the strong contribution margins of those new products coming online.

Sorry, repeat that again, Steve.