Premium Brands Holdings Corporation (PBH), a leading food manufacturing and distribution company, reported its fourth-quarter earnings with mixed results. The company saw a slight decrease in revenue compared to the previous year, but after adjusting for an extra week in 2022, sales actually increased marginally.
Despite challenges in the Canadian market, the U.S. initiatives in the Specialty Food Group delivered strong organic volume growth. The company remains optimistic about its long-term strategies and expects U.S. organic growth to accelerate. Premium Brands also reaffirmed its commitment to achieving its five-year plan of reaching $10 billion in sales and $1 billion of EBITDA by 2027.
Key Takeaways
- Q4 revenue at $1.55 billion, down $80.1 million year-over-year, but up $1.4 million after normalization.
- U.S. Specialty Food Group outperformed with 9.3% organic volume growth.
- Long-term five-year plan on track, aiming for $10 billion in sales and $1 billion EBITDA by 2027.
- Adjusted EBITDA guidance for 2024 set between $630 million and $650 million.
- Quarterly dividend for 2024 projected to increase by 10.4%.
- Capital expenditures of $131.6 million for the quarter; future investment of $380.7 million planned.
- Largest Italian charcuterie player in Canada and significant growth in the U.S. market.
- Commitment to not increase leverage through acquisitions; focus on creative structures.
- Optimistic about the Clearwater business and expecting improvements in 2024.
Company Outlook
- Premium Brands expects U.S. organic growth to continue accelerating.
- The company is on track with its five-year plan, with several capital projects nearing completion to support U.S. sales growth.
- Anticipates a 14.5% increase in adjusted EBITDA for 2024.
- The sales outlook for 2024 includes an organic growth rate between 6% and 9%.
Bearish Highlights
- Canadian businesses underperformed due to a challenging macroeconomic environment.
- Earnings for the quarter decreased by $15.0 million, mainly due to increased costs and higher income taxes.
- A large U.S. QSR customer is no longer displaying the company's products, impacting sales for four quarters.
Bullish Highlights
- Record top-line growth and adjusted EBITDA for the 20th consecutive year.
- Significant growth in the U.S. market, including a new $100 million customer.
- Clearwater business expected to improve cash flow and performance in 2024.
Misses
- The company experienced a slowdown in sales in the Canadian market in December.
- Active opportunities for acquisitions have declined, though the company remains confident in its pipeline.
Q&A Highlights
- The company expects to add $4-5 million to free cash flow per share, assuming strong year growth.
- Margins between the U.S. and Canadian markets are similar, with benefits when the Canadian dollar is weaker.
- The lobster biomass is healthy, and the company is working on reducing inventories by $50 million.
Premium Brands Holdings Corporation continues to focus on its growth initiatives and capital projects to bolster its presence in the U.S. market. With an optimistic outlook for its Specialty Foods segment and strategic acquisitions, the company aims to maintain its trajectory towards its five-year plan objectives. Despite some setbacks, including the underperformance of the Canadian market and the temporary hit to sales from a U.S. QSR customer, Premium Brands is determined to optimize its capacity and expand its margins to support future growth.
Full transcript - None (PRBZF) Q4 2023:
George Paleologou: Welcome, everyone, to our 2023 Fourth Quarter Conference Call. With me here today is our CFO, Will Kalutycz. Our presentation today will follow the deck that was posted on our website this morning. You can also access it by clicking on the link of our press release issued this morning. We're now on Slide 4, which outlines certain key highlights for the quarter and the year. Fourth quarter revenue came in at $1.55 billion, representing an $80.1 million decrease for the quarter. Normalizing for the extra week in 2022, sales for the fourth quarter were up $1.4 million. In general terms, our Canadian businesses underperformed during the quarter due to a difficult macroeconomic environment in Canada as consumers traded down to lower cost meals or shopped at discount banners, where we're under indexed. Our Specialty Food Group's U.S. focused initiatives outperformed during the quarter, delivering 9.3% organic volume growth, driven by sandwich, protein and specialty-baked goods, while our overall organic volume growth in Canada was a negative 4.3%. Despite the consumer demand headwinds in the Canadian market, which should not come as a surprise to anyone, given Canada's weak economic growth numbers and the challenging macroeconomic backdrop, we are very confident that we remain on track and that our progress in the U.S. validates our long-term capital allocation strategies of focusing on this important market. For the quarter, our U.S. growth initiatives generated $581 million in sales, while for the year, they generated $2.3 billion in sales and annual growth rate of 10.1%. We expect our U.S. organic growth to accelerate over the next few quarters as new capacity ramps up. 2023 was our 20th consecutive year of delivering record top-line growth and adjusted EBITDA. This is despite the many challenges that we faced along the way. Over the past 20 years, we have evolved from a small regional company based in Western Canada into a diversified food platform, with 115 facilities located across Canada, the U.S. and Europe. Our growth and our diversification, combined with our entrepreneurial culture and great people, helped us to navigate the unique challenges we faced over the past 20 years, including the pandemic, hyperinflation and COVID-related supply chain disruptions and tight labor markets, and is currently helping us to manage the challenging macroeconomic environment in Canada. Overall, we remain on plan to achieve or exceed our five-year plan of $10 billion in sales and $1 billion of EBITDA by the end of 2027, and we have never been more excited and optimistic about our future. We are now on Slides 5 to 7. We are pleased to report that several capital projects are at or very near completion, as you can see on these slides. This new state-of-the-art capacity is mainly focused on supporting our various sales growth initiatives in the U.S. We are now on Slide 8. I have included here some pictures of products launched recently by Concord Meats. Concord, which is based in Ontario, joined the PB ecosystem in 2018 and has more than doubled its sales over the past five years. Concord is expertly run by the talented entrepreneurs that founded it and has incredible runway for further growth in both Canada and especially the U.S. Over the past five years, their sales in the U.S. have grown from $7.8 million in 2018 to $115 million. Many of the Concord products launched into the U.S. market in recent years have trajectories to become $100 million SKUs assuming capacity availability. We are now on Slide 9. As you can see, our acquisition pipeline remains very full, and we expect to complete many more transactions in the months and years to come. You will see that the active and advanced files add up to almost $0.5 billion in sales. I will now pass the presentation to our CFO, Will Kalutycz, who will update you on our financial results for the quarter. Will?
William Kalutycz: 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 13 and 52 weeks ended December 30, 2023, as well as other information on our website for a broader description of the risk factors that could affect our performance. Turning to Slide 11. As George mentioned earlier, after adjusting for an extra week of sales in the fourth quarter of 2022, our sales increased slightly by $1.4 million. The components making up this increase were organic volume growth in our Specialty Foods segment of $26.6 million, selling price inflation of $5.2 million, a favorable translation of our U.S.-based businesses sales of $2.9 million due to a weaker Canadian dollar and business acquisitions, which contributed $1.5 million in incremental sales. These factors were partially offset by a $34.8 million sales contraction in our Premium Food Distribution segment. The organic volume growth in our Specialty Foods segment was driven entirely by its U.S. market focused initiatives. Turning to Slide 12. As George mentioned earlier, you can see that these generated organic volume growth of $53.4 million, representing a growth rate of 9.3%. Our Protein Group generated volume growth of 9.8%, while our Sandwich Group generated 7.9% and our Bakery Group 27.6%. Furthermore, if you adjust for the impacts of delays in new capacity coming online in our Protein Group and a temporarily lower growth rate in our Sandwich Group due to a major customer implementing a new product display strategy to reduce food waste. The fourth quarter adjusted organic volume growth rate for our U.S. market focused growth initiatives is 12.5%. On Slide 13, we show our organic volume growth rate for the last 20 quarters. For the quarter, we had a small contraction with our Specialty Foods generating organic volume growth of 2.6% and our Premium Foods distribution experiencing volume contraction of 5.9%. As I mentioned earlier, Specialty Foods growth was driven by its U.S. focused growth initiatives. These were partially offset by the impacts of a challenging consumer environment in Canada, as outlined by George earlier. Premium Food Distribution's sales contraction was primarily the result of two factors. The most significant of these was the challenging consumer environment in Canada that impacted sales of premium beef and seafood products. The other was continuing lobster supply challenges, resulting from the poor Maine fishery last quarter, followed by a poor South Nova Scotia fishery this quarter. Looking forward, we view all the challenges experienced in the quarter as temporary. In the case of the Canadian consumer environment, we expect the situation to improve as inflation and interest rates normalize over the course of 2024. And in the case of lobster supply availability, the poor fisheries were due solely to unusually poor weather that prevented vessels from harvesting. The underlying lobster biomasses remain very healthy. On Slide 13, we show our organic volume growth rate for the last 20 quarters. For the quarter, we had a small contraction with our Specialty Foods generating organic volume growth of 2.6% and Premium Food Distribution experiencing a volume contraction of 5.9%. As I mentioned earlier, Specialty Food growth was driven by its U.S. focused growth initiatives. This was partially offset by the impacts of a challenging consumer environment in Canada, as outlined earlier by George. Premium Food Distribution sales contraction was primarily the result of two factors. The most significant of these was the challenging consumer environment in Canada that impacted sales of premium beef and seafood products. The other was continuing lobster supply shortages resulting from the poor Maine fishery last quarter, followed by a poor South Nova Scotia fishery this quarter. Looking forward, we view all the challenges experienced in the quarter as temporary. In the case of the Canadian consumer environment, we expect the situation to improve as inflation and interest rates normalize over the course of 2024. And in the case of lobster supply availability, the poor fisheries were due solely to unusually poor weather that prevented vessels from harvesting. The underlying lobster biomasses remained very healthy. Turning to Slide 14, our sales for the year came in at a record $6.26 billion, up 5.3% once normalizing for the extra week in 2022 and well ahead of the five-year to of $6 billion we set back in 2018. You can see from the chart that over the last 13 years, we have grown our sales at a compounded annual growth rate of over 20%. With the release of our fourth quarter results, we provided a sales guidance range for 2024 of $6.65 billion to $6.85 billion. This slide shows the midpoint of this guidance of $6.75 billion. I should note that this guidance does not include any of the potential acquisitions George mentioned earlier. Turning to Slide 15. Our adjusted EBITDA for the quarter was $137.2 million, representing an increase of $0.8 million as compared to the fourth quarter of 2022 or $3.2 million after adjusting for the extra week in 2022. Our EBITDA was positively impacted by improved plant efficiencies, reduced bonus accruals and the recovery of our margins as selling price increases continue to catch-up with cost inflation. These factors were partially offset by higher plant overheads relating mainly to investments being made in increased capacity. Slide 16 shows our adjusted EBITDA margin for the last 20 quarters. For the fourth quarter, which normally has lower-than-average margins due to seasonality related factors, we have reached a recent history fourth quarter record of 8.8%, driven by the continued recovery in Specialty Foods’ margins, which improved by 100 basis points in the quarter. This was partially offset by a 90 basis point contraction in Premium Food Distributions margins, largely due to the contraction in its sales. Turning to Slide 17. Our adjusted EBITDA for the year came in at a record $559.1 million, up 10.8% or 11.4% after normalizing for the extra week in 2022. This is a bit below the five-year target of $600 million we set back in 2018, largely due to the inflationary and other carry-forward challenges associated with the global pandemic. You can see from the chart that over the last 13 years, we have also grown our adjusted EBITDA at a compound annual growth rate of over 20%. For 2024, we have provided an adjusted EBITDA guidance range of $630 million to $650 million, with the slide showing the midpoint of $640 million and an expected adjusted EBITDA margin of 9.5%. Based on this midpoint, we are projecting our adjusted EBITDA for 2024 to increase by $80.9 million or 14.5% as compared to 2023, driven largely by expected sales growth in our Specialty Foods segment, which is product contributions from 20% up to as high as 45% on certain highly differentiated products. Turning to Slide 18. Our earnings for the quarter were $37.9 million, representing a decrease of $15.0 million from 2022. The main reasons for the decrease were increased interest, depreciation and amortization associated with recent investments made to drive both the current as well as future quarter sales growth and higher income taxes resulting from a variety factors, including the timing of certain tax adjustments. Our adjusted earnings were also impacted by higher interest rates, albeit this impact at $6.2 million was much smaller than in previous quarters. Turning to Slide 19. For the quarter, we had $131.6 million in capital expenditures, consisting of $120 million in project CapEx and $11.6 million in maintenance CapEx. For the year, we invested $353.7 million in project CapEx, $335.5 million or 95% of which related to supporting the growth of our high margin specialty food businesses. Looking forward, based on our approved capital project pipeline, we expect to invest another $380.7 million or $125.7 million after planned sale and leasebacks on project CapEx over the next six to seven quarters. I should note that we expect to generate an unlevered after tax return of 15% or greater on all of these projects. Slide 20 shows some of the key metrics we use to assess our financial position. Our debt leverage levels remain stable as compared to the previous quarter, with our senior debt-to-EBITDA ratio holding at 3.1:1 and our total debt-to-EBITDA ratio, which includes our subordinate debentures holding at 4.1:1. In terms of liquidity, we finished the quarter in a strong position with $734 million in unused credit capacity. The next and final slide shows a variety of our free cash flow and dividend metrics over the last 18 years. For 2023, our free cash flow per share decreased to $5.70 per share from $6.41 per share in 2022, due solely to higher interest costs. Excluding the impact of these, our free cash flow per share increased by almost 7%. Looking forward, we are increasing our quarterly dividend for 2024 by 10.4% or $0.85 per share. This will be our tenth consecutive year of increasing our dividend rate by 10% or more. That concludes our formal presentation. Please join us on our Q&A conference call later today at 10:30 am Vancouver time or 1:30 pm Toronto time. Thank you.
Operator: Good morning, ladies and gentlemen, and welcome to the Premium Brands Holdings Corporation Fourth Quarter 2023 Earnings Conference Call Question-and-Answer session. At this time, all lines are in a listen-only mode. [Operator Instructions] This call is being recorded on Friday, March 15, 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.
George Paleologou: Thanks. Welcome everyone to our 2023 fourth quarter conference call. With me here today is our CFO, Will Kalutycz. Our presentation today will follow the deck that was posted on our website this morning. You can also access it by clicking on the link off our press release issued this morning. We're now on slide. [Technical Difficulty]
Operator: Ladies and gentlemen we'll now begin the question-and-answer session. [Operator Instructions] Your first question is from Martin Landry from Stifel.
Martin Landry: My first question, I would like to go back on the performance in Q4 in Canada. Trying to understand the decline in sales. Is it all related to the consumer spending weakness or did you also lose some listings or clients during the quarter?
George Paleologou: First of all, I'd like to apologize for the technical difficulties this morning. Again, Martin, nothing unusual with regards to the business, the listings or customers. A lot of segments we're in are highly competitive. I think overall, we are focusing all of our companies and our partners to basically expand their margins in general. I think that in the past, as we've acquired companies or brought companies into the PB ecosystem, we generally encourage them to disinvest from low margin business and to pursue high margin business. I mean, that happens all the time. But I would say that by and large, the majority of the myths was due to lower sales, not because we lost listings, but because the consumer spending environment was exceedingly weak, particularly in December.
Martin Landry: And then just trying to understand what assumptions you've used for ‘24, because you do talk in your opening remarks about the potential for an improvement in consumer spending in Canada in 2024. So what have you used in your guidance? What kind of assumptions have you used in your guidance in terms of improvement in consumer spending?
William Kalutycz: So for the first half of the year, Martin, we've assumed continued weakness in the Canadian market, particularly in what the impacts in the premium food distribution group. We've also assumed some continuing weakness in Q1 and a bit Q2 in the specialty foods businesses in Canada with the idea being that, like George says, when we looked at the consumer behavior, it was reasonably solid going into December, and then it was a real hit in December and we seemed to have seen things stabilized in January, February, although still a little weaker. So, we have factored in some continued weakness, but see that sort of improving in the second quarter and then assuming we start seeing some interest rate decreases, inflation certainly seems to be coming down, seeing a much more improved consumer environment in Canada in the back half of the year. Now, in terms of the -- you saw in our presentation, the future big growth driver in our company are the investments we've been making in the US. And so we see that as a steady ramp up throughout the year. So you saw the strong performance in Q4, that should continue in Q1 and continue to ramp up through the course of the year as new programs are enrolled.
George Paleologou: The other comment that I would make, Martin, is that assuming that the weakness persists in Canada, then we have other strategies that we can pursue in terms of redirecting capacity, let's say in Canada to the U.S. market. As Will said, we got caught a little bit by surprise in terms of what happened in December. But again, if we determine that, this is going to persist long-term, there is ways for us to ensure that we continue to grow by dedicating capacity to the U.S. market.
William Kalutycz: Just to be clear, Martin, like George said, that's definitely part of the thinking, but that is not what's reflected in our numbers. To the extent that we do see weakness, we are able to expand in the U.S., focus more capacity in the U.S., that's more upside than what's in the current modeling.
Martin Landry: Okay. Will, is it fair to say that it's not going to be a straight cadence of increase for this year. It's going to be maybe a little bit more back-end loaded in terms of EBITDA growth?
William Kalutycz: Yes. Our expectation is you're going to see year-over-year solid increases throughout the year, but the extent of those increases will, they'll be much smaller in Q1, much better in Q2 and then continue to accelerate into Q3 and Q4.
Operator: Your next question is from Derek Lessard from TD Cowen.
Derek Lessard: I thought that you gave great color and transparency. I think it was the first time you did it and you split out the U.S. and Canada. I was wondering if that's something that we can continue to expect going forward?
William Kalutycz: Yes, it will be. With all our new capacity now starting coming online, Derek, it's going to be a big part of a story and absolutely we'll be tracking it just like you saw in the Q4.
Derek Lessard: Okay. Super helpful. Like I said, great transparency there and good to hear. You mentioned that, some products launched into the U.S. market in recent year have trajectories to become $100 million SKUs, assuming capacity availability. Can you just maybe highlight some of those SKUs and the opportunities that you're seeing?
George Paleologou: Yes. I think that, if you look at the slides on Page 11, I think, of the deck, for example, the chicken bites there that you see in those yogurt-like containers have been...
William Kalutycz: Slide 8.
George Paleologou: Sorry, Slide 8, have been extremely successful in the U.S. We've been out selling our capacity and we continue to add more lines. We are launching a similar product as we speak. It's a grass-fed beef bite in the same type of container. And I can tell you that, everybody we presented to wants it. It's just a matter of us figuring capacity again. We are making some moves to create capacity for that product in the U.S. Right now, the product is made in Canada. Again, at this point, we see unlimited growth in regards to the demand we're seeing in those items. Those are some of the most successful launches of any product in the U.S. market. Similarly, we’re getting good traction with our raw skewers. There's some pictures in the deck, again on Page 8 of the deck. We have gained a lot of distribution in raw skewers in the U.S. We are by far the biggest player in raw skewers in the U.S. We have gotten a lot of distribution in the last couple of years. And as we've added capacity, we're gaining more distribution. If I apply the same math to possible demand in the U.S. with what we do in Canada with those products, then you easily get to $100 million in sales and maybe a lot more. And then also some of the Italian SKUs that you see again in that picture. If we had capacity today with regards to producing more, it would be fully utilized. We are working of course in adding capacity in Italy to support the growth of our U.S. charcuterie business. Over the last five years, we've become by far the largest Italian charcuterie player in Canada. And we've had amazing growth in the U.S. market. So those are three items that can easily get to being a $100 million SKUs. And I haven't even touched on, you know, a lot of the sandwich initiatives of course, that we've launched over the last few years. I mentioned, during the last call that we've done business with a large QSR, a new customer in the U.S. where we launched two SKUs within last year. And, you know, we did close to $100 million of business with them, and now we're talking to them about adding more SKUs to the menu, et cetera, et cetera. So we have a lot of very exciting initiatives in the U.S. in areas of the business where, you know, we're very efficient, we have great capacity, great innovation, and, you know, that's driving part of the growth you're seeing in the U.S. market.
Derek Lessard: Super helpful, George, and thanks for that. And I guess maybe my final follow-up to that is and you mentioned a little bit in terms of capacity, so could you maybe talk about sort of the timing of that capacity coming on stream this year?
George Paleologou: Yeah. So I have to go by platform, Derek. With regards to specialty bakery, we've commissioned a brand new facility in San Leandro in October of this year. So that capacity is coming on stream and we're getting very good traction there. We're at the point right now, you know, a few months after commissioning that plan where we're actually looking at finding more capacity to support the growth, which is a good problem to have. With regards to cooked protein, we've added capacity in two of our cooked protein plants in the U.S. We're looking at acquiring a cooked protein facility. Again, as the schedule says, we have an LOI with regards to another facility. And then we've added a number of cooked protein lines in some of our plants in Canada. And then with regards to sandwiches, we commissioned a brand new facility in Edmonton, and then we've added capacity in Ohio. There's a picture of the Cleveland, Tennessee plant in the deck. So you could see it's about half complete. It's going to be our best and largest facility when completed. And then finally, in protein and meat snacks, we've commissioned a brand new facility at Hamplers in Washington state, which is now operational and is being ramped up. So a lot of capacity expansions in the network.
Derek Lessard: Okay. Thanks for that. Sounds good, and good luck guys.
William Kalutycz: Thanks, Derek.
Operator: Thank you. Your next question is from George Doumet from Scotiabank.
George Doumet: Hey. Hi. Good morning, guys. Maybe a quick one for Will. At the midpoint of the guidance, it looks like we're looking for 60 basis points of EBITDA margin expansion. Is that just mix from the higher margin products coming online? Is there any commodity relief baked into that? Maybe if you could just kind of help us unpack that, please.
William Kalutycz: Yeah, no, the two drivers, George, are a little bit of mix in terms of our specialty foods businesses are driving our growth and they’re higher margin businesses, but then also just the contribution margin story, the sales leveraging story in our specialty foods businesses with all that capacity. Because when you go through the different drivers, so if you start with bakery and if you look on the slide, you saw the tremendous growth in percentage terms there. Those products can have contribution margins of 40% to 45%, so incredibly accretive to margins. Our sandwich group, another big driver, the new products coming online are generating a 25% plus contribution margin, and then in our protein group, they're about 30% plus. So, again, that's the big driver. In terms of commodities and what we've assumed in our ‘24 outlook, we've assumed overall basket to be relatively stable. You've got some things like beef where we are expecting some inflation, maybe a little bit on chicken, pork relatively stable and a few other things, a little deflationary or flat sort of non-protein related items. So, a stable commodity assumption is what's built into the outlook.
George Doumet: And are you baking any promo, Will, any higher level of promo perhaps for Canada in that?
William Kalutycz: Yes. No, there is. We are looking at a variety of strategies in terms of dealing with the consumer environment. We're just sort of tiptoeing into the promo category to address that. But we're only doing it in categories where there was a tremendous amount of inflation in the underlying commodity and that inflation is coming off. And so we have a lot of room margin wise to do promotion. Our cooked chicken products are a great example. And so instead of dropping list prices, we're doing a little more promotion.
George Paleologou: But at the same, George, we've delivered a pretty good quarter with regards to margin EBITDA margin expansion. It's kind of unusual to do that when you have issues with your core market, right? So because we're very focused on margin expansion in general. For us, it's really about optimizing the mix with regards to our capacity. So, again, in our business, you can generate lots of sales if you drop prices. Our focus is really what market do we go after where we can optimize margins in general. So, let's say, we weigh the benefits of doing a promotion in Canada with do we dedicate the capacity to U.S. or the overseas markets, right? That's something we do normally, but again, if this situation in Canada persists for whatever reason, then we have other options in order to maintain our margins.
George Doumet: And Will, your longer term guidance, I think calls for around 10% organic top-line growth per annum. If we look to just 2024, specifically, is there a quarter where you think you can maybe hit that run rate or maybe go slightly above it?
William Kalutycz: Certainly in terms of our specialty foods business, George, Q2, we may hit it. And certainly by Q3, we expect to be in the double digit ranges.
George Doumet: And just one last one for me. George, you said something really interesting earlier on about a redirecting capacity into the U.S. Can you maybe talk a little bit about what products, what facilities will allow us to do that?
George Paleologou: For example, George, if you drive across the border into Washington State today, you will see a lot more premium brands product on the shelves. So a lot of our companies in Canada have been working on developing the U.S market. It makes a lot of sense for them to do that. They leverage the we -- Canadian dollar, they're more competitive with regards to doing business there. So in general terms, the companies in our portfolio that are well developed in the U.S., like a Concord Meats for example, had pretty good quarters. The companies that haven't done that suffered, right, because of the consumer spending environment in Canada. The bottom line is that we have tremendous sales and distribution infrastructure in the U.S. and a lot of our companies are already doing business in the U.S. They have customers in the U.S. A lot of times they get requests for more products, but they just don't have the capacity. So if let's say that we find the market challenging in Canada, then we’ll make decisions around disinvesting from the Canadian market and getting in capacity to the U.S. market. It is not as if we're not doing business in the U.S. now from Canada. We do a lot of business from Canada into the U.S.
Operator: Your next question is from Vishal Shreedhar from National Bank. Please ask your question.
Vishal Shreedhar: Hi, thanks for taking my question. Will, just wondering how you feel about the balance sheet, where you are versus where you thought you'd be and how you feel about your inventory levels and the reduction inventory that you anticipated earlier on in the year?
William Kalutycz: Yes. We had expected to make a little bit more progress on the balance sheet in Q4. As you see, it's relatively stable from Q3. But given some of the consumer challenges in Canada and the impact on sales and EBITDA because of that. But going forward, we expect it to be stable and steadily coming down. We are coming to the near the end of our capital program in terms of our existing projects, that with the growth in our free cash, sorry, excuse me, that with the growth in our free cash flow and EBITDA should just naturally deleverage the balance sheet in the coming quarters.
Vishal Shreedhar: Okay. And given the consumer hesitancy and the uncertainty overhanging, has there been thought to looking at the target financial metrics for balance sheet and reducing those, I know Premium Brands operates differently, but perhaps more in line with other staples companies.
William Kalutycz: Really the only difference in our balance sheet from the more conservative food companies is really the difference between our total and our senior debt EBITDA ratio. Like a 3:1 senior debt TB ratio is very, very reasonable and maybe even a little bit conservative in the food industry, given the stability of our cash flows. The only difference is the total debt, which is driven by convertible debentures. We've talked about this in the past how for us that's really an equity strategy and over time we expect to, at least the majority of those converts that are outstanding convert them to equity and that's what gives us that a little extra comfort on that extra churn over that. The convert market was a unique opportunity in Canada, given interest rate and where they gone and there is a little question mark on how that market is going to evolve. As our converts fall off the table and we replace that with other financing alternatives such as maybe a bond issuance or something like that. Yes, you'll naturally see our leverage ratios over the longer-term go towards that 3:1 or 2.5:3 total debt-to-EBITDA ratio.
Vishal Shreedhar: Okay. And that brings me along to the acquisition questions. How should we think about that unfolding? Is it more, I know you gave a slide with indicated sales numbers, but that could evolve through the year. Is that more tuck-in smaller type deals that we should contemplate?
William Kalutycz: As George mentioned in the prepared remarks, we've got some great opportunities out there. Some of them are relatively significant. The reality is, we are committed to not further increasing our leverage as a result of an acquisition. We'll use more creative structures. To the extent we issue shares to the founder as part of the transaction, what we do in our valuation models is we value those shares at their intrinsic value, not their market value to ensure we are not diluting our shareholders or creating false returns in our model expectations. We have got levers like contingent consideration and some other levers to make sure that when we're doing any acquisitions, it's not going to be a negative impact on our ratios.
Vishal Shreedhar: Okay. Getting back to the Canadian situation and I understand that the opportunity to longer-term possibly repurpose some capacity, but notwithstanding this switch to discount, there is some commentary out there that it could be more enduring. And if so, is there opportunity or is there wherewithal to alter products or have some product innovation to address more fulsomely this discount segment?
George Paleologou: Yes, Vishal, again, for us, we're indifferent as to where our capacity goes, right? Our name is Premium Brands. We produce premium products and we sell them to consumers that are willing to pay a little more for quality, right? That, you know, that's our ethos, right? And that will always be the case. Now, we are partnering with retailers today and we're making, I would say, premium private label products for them, to the extent that they want to offer that to their customers. We're in a lot of discussions today about leveraging our capacity to produce a premium private label for different retailers in Canada and the U.S. So if it's a premium private label product, absolutely. But, you know, you're not going to see us cheapen our products or change our formulations to enter the low end of the market. That's simply not what we do, right. We cater to a certain consumer in Canada and the U.S. that is willing to pay premium for clean, high quality products, and that will always be the case.
Vishal Shreedhar: Thank you for the color.
William Kalutycz: Thanks, Vishal.
Operator: Thank you. Your next question is from Kyle McPhee from Cormark Securities. Please ask your question.
Kyle McPhee: Hi, everyone. First one on CapEx. In your prepared remarks, you mentioned gross project CapEx of $380 million over the next six to seven quarters, or net 126 after expected sale leasebacks. Can you detail the timing of those sale leasebacks? Like, will we see the growth CapEx numbers flow through your cashflow statement in 2024 and the sale leasebacks come at a later date, maybe out in ‘25? Any color on that would be helpful.
William Kalutycz: Yeah. In terms of the sale lease back, it's really going to depend on how the industrial leasing market develops, Kyle. It's really sort of been like we've got a couple of items right now that we're ready to roll into our REIT, but we're just waiting for that industrial lease rate market to normalize so that we can determine a fair rate for moving it into the REIT. So it's really going to be a timing of what happens in the interest rate market. You know, I suspect we should see a transaction by, you know, early in the second quarter and maybe another one or two in, in the back half of the year.
Kyle McPhee: Got it. Okay. So it sounds like most of that would come in 2024?
William Kalutycz: Oh, yes, yes, absolutely.
Kyle McPhee: Okay. And then on project CapEx for the total five year plan, a bunch of its already sunk now and you've given specific guidance for the next six to seven quarters, but is that total five year plan project CapEx still about $800 million? Or has that plan changed?
William Kalutycz: Yeah, that hasn't changed, that's still ballpark number.
Kyle McPhee: Okay. And that was the net of sale lease back, just to confirm?
William Kalutycz: Actually that number, that was a gross number actually, Kyle. I might have to go back and double check that, but off the top of my head, I believe that was a gross number.
Kyle McPhee: Got it. Okay. Okay, that's it on CapEx. On EBITDA margin. You already, to George's question, you already talked about some of the moving parts feeding the expected EBITDA margin percentage gains in 2024. Can you just address one other moving part? I don't, I'm not sure if it's meaningful or not, but has anything changed with the margin levels you generate with large contracted clients and, you know, the cost plus side of your business?
William Kalutycz: Absolutely not. You know, our cost plus side of our business in our specialty foods group is as solid as it ever been. And, you know, we continue to develop new programs with those customers. And generally on the new programs, we're getting slightly better contribution margins.
Kyle McPhee: Got it. Okay. Thanks for confirming that. Then on Clearwater, I'm looking at the Clearwater performance you disclosed and the earnings drag flowing through your financials that's linked to Clearwater. Should we expect any major changes in 2024 and beyond for your share of their losses flowing through your statements? Like are there any major changes with the Clearwater business plan coming to improve that drag?
William Kalutycz: Yeah, there's lots going on in our Clearwater business. Lots of exciting things. Not much we can talk about at this point, Kyle, but, yeah, we're very optimistic on how things are developing in the Clearwater business. They are, you know, one of their biggest headwinds right now is sort of the, what's happening in the Canadian consumer environment is really outside of the U.S. a global story, and they are a global business. So that is impacting them. But lots of interesting stuff happening on the value add and some other strategic product initiatives they're working on. So yes, no, we're optimistic that it will be a much better year for Clearwater in 2024.
George Paleologou: But also, Kyle, it's been a really tough year for the Seafood industry in general for the reasons that Will talked about. And I think on a relative basis, Clearwater has performed well on a relative basis. Yes, their numbers are down, but there's a lot of companies in the Seafood space in North America and around the world and Will and I were just at the Boston Seafood Show that has not done well this past year for many, many reasons. Some of them relating to the consumer environment globally, but also some of them relating to the fact that a lot of the companies that are competing in the fisheries that Russia is involved are really upside down now from a global demand and pricing environment. So again, it's been -- it was a rough year. Clearwater did well relative on a related basis and lots of exciting initiatives in that business to take it to the next level.
Kyle McPhee: Okay. Appreciate all that color. I'm going to squeeze in one more quick one that, Will, that plant restructuring and start-up cost line item, the one-time cost bucket, it's been pretty big the last couple of years. What should we expect in 2024?
William Kalutycz: Yes. Q4 was the peak quarter. And you should see that drop off pretty dramatically by -- in over the next couple of quarters and be very small by the Q3, Q4 next year. As these new capacities come online, we work through the start-up issues and back half of the year, they're contributing meaningfully to our EBITDA.
Operator: Your next question is from John Zamparo from CIBC.
John Zamparo: I wanted to start on the sales outlook, and it looks like it's an organic guide between 6% and 9% for '24. I suspect the answer is yes here, but are we right to think that the Specialty Foods would be on the higher end or maybe even above that and PFD on the lower end or below that range for the year?
William Kalutycz: Absolutely. As I mentioned earlier, Specialty Foods by the second quarter, we expect to be in the double digits growth. And we are projecting continued challenges in the Premium Foods Distribution group around lobsters, the lobster industry and the consumer impact has been much more dramatic on them than on our Specialty Foods business. So we're expecting that to take a little bit longer to turn around, particularly, that element of the trade down to discount banners. Our Specialty Foods businesses can pivot easily and sort of work on products and listings and initiatives to get into those discount banners, which historically they've been under-indexed in. But in our Premium Beef and Seafood programs through the Premium Food Distribution group, it's a little tougher because it's a different consumer generally from that discount banner consumer.
John Zamparo: Okay. Got it. One follow-up on the PFD then. The challenges you've seen in the lobster business, does that continue for another couple of quarters until you get another opportunity for a harvesting season in Q3? Like is that going to happen, I suppose, irrespective of whatever consumers are doing in terms of their purchasing behavior?
William Kalutycz: Yes. No, it's certainly going to continue into Q1 because there is no major fishery to address the supply issues. And then as spring hits and the vessels are out more regularly. Assuming normal weather, then you should see that being addressed in Q2, Q3, but we've taken a relatively conservative outlook on that.
John Zamparo: Okay. Okay. The '24 EBITDA outlook, when you think about the role that plant openings play in that. Are there one or two plants that are required to be opened in '24 that you need to get to the EBITDA level you're guiding to?
William Kalutycz: Yes. So in terms of the plans George went through earlier, the real key ones have been the Hempler's facility, which is now up and running, the San Leandro USDA baked facility, which is now up and running. And then our Cooked facilities, our cooked protein initiatives with our Kings Command and Made Right businesses, which they're just in the process. So they're in the next critical step. And then finally, in the midyear, we're looking for the Columbus capacity to come on stream. So those are the real core ones that are baked into our 2024 outlook.
John Zamparo: Okay. That's helpful. And then one last one. Last quarter, we talked about a couple of potentially material drivers for sales growth. One was a $100 million opportunity in Asia. The other was one that George, you mentioned earlier with your relatively new QSR customer. Are either of those expected to be meaningful contributors to '24? Or are those longer-term goals?
George Paleologou: Yes, definitely, both channels are expected to perform better than what we had anticipated during the last quarterly call. So we've made good traction in both channels. We're getting more and more listings in Asia, for example, and more listings with this particular customer. So we're on target.
Operator: Your next question is from Chris Li from Desjardins.
Christopher Li: Sorry, I think you've already mentioned this maybe in the beginning. I'm just wondering, with Q1 now pretty much in the books I was wondering if you can provide a bit more color in terms of how the quarter is playing out? Is it fair to assume a lot of the same trends that we saw in Q4 sort of continuing on into Q1?
William Kalutycz: Well, that's a very difficult question at this point, Chris, just because the seasonality of our businesses, Q1 -- or sorry, the first two periods, which we’re through now in the quarter are much less significant than the last period where we start to gain some of the momentum going into the spring and the more seasonally strong periods. But looking at the first two periods of the quarter, they're tracking plan. So we feel really good about that. But it's the third period that is the critical one that will set the tone for the quarter. And it's sort of -- it's very similar to the fourth quarter where the fourth quarter is also a seasonally slow quarter, particularly in October, November. And then December, there is a nice push of business associated with the holiday season. So it similarly, it's that last period of the quarter that really sets the tone for the quarter.
Christopher Li: I see. Okay. That's helpful. And I just want to confirm, you said earlier that you expect double-digit organic volume growth in Specialty Foods by Q2, you're referring specifically in the U.S. Is that right?
William Kalutycz: No. No for the group overall.
Christopher Li: For the group overall...
William Kalutycz: And just to clarify that, Chris, with the U.S. being -- Well, you saw in Q4, effectively, you took out some unusual factors in the numbers, and it was well into the double digits already. And we expect that to accelerate 2024. Canada, it will not be double digits, obviously, they're going to be at the lower end of our growth expectations, but the blend will be double digit.
George Paleologou: And that been the case for a while, Chris. Our U.S. business have been -- our U.S. business in our Specialty Foods segment have been the driver of our growth in the last few years. That's how we went from very little sales to $2.5 billion, right? So and again, with a lot of the capacity expansions we've done, we expect that the growth to accelerate, right? But we're very mature in terms of our business in Canada. But we're early stage in regards to the U.S. market. There's lots of runway for us to grow in the U.S.
Christopher Li: And just to confirm, from where you sit today, you do have good visibility of achieving that double-digit growth in Q2?
William Kalutycz: Absolutely, Chris.
Christopher Li: Okay. That's helpful. And then sorry, I’m kind of newbie to the name still, but I'm just also be surprised by the diversions in the consumer between Canada and the U.S. in terms of the impact that it had on your performance, especially for this quarter. Is that also partly a function of the differences in terms of the customer channel and that you serve and the product mix that also resulted in that stark difference between Canada and the U.S.?
George Paleologou: No. Again, Chris, we've been doing business in the U.S. for a long time, particularly in the West Coast of the U.S. And I would say, historically, the consumer behavior is very similar. But in December, we saw a disconnect. And in other words, the U.S. market seems to be strong. U.S. consumer was out there spending and the Canadian consumer was holding back. And we think it's because maybe in the U.S., they have a 30-year mortgage rates, so the higher rates just don't impact them as much as in Canada. Anyway, I don't know all the reasons, but certainly, the Canadian consumer is trying to save money when they go grocery shopping, and we're not seeing that in the U.S. And I've been in this business for 35 years, and this is the first time I've seen this.
Christopher Li: Okay. That's helpful. I just had maybe two more questions. Just in the U.S., again, the temporary sales challenges with your large QS customer in the U.S. Can you just remind us again what's happening there? And do you expect that those challenges to persist in the first half?
William Kalutycz: Yes. So it's a really interesting story, Chris. It's a major customer. They traditionally displayed our product in their stores for consumers. And at the end of the day, the products that got displayed got thrown out. So it was waste for our customer, but those are sales for us. And as part of the food waste program, part of the way their business is developing, they're no longer displaying those products. And so that's sort of a one-time hit for us for four quarters. That started in the second quarter. So you're going to see that continuing in the first and second quarters of 2024. But then after that is gone. It's a really isolated specific situation.
George Paleologou: And it was the right thing to do for them. It made a lot of sense. There's a pure saving to them in terms of what they did, and now they've got pictures of the product as opposed to displaying them, right? And it will impact 12 months' worth of sales for us, but then we basically lap it.
William Kalutycz: But the program itself continues to grow at solid organic growth rates and continues to be incredibly successful.
Christopher Li: That's great. That's very helpful. And my last question, just maybe on Specialty Foods on the gross margin. In the quarter, it did increase, but the pace of increase has low compared to recent quarters. I'm just wondering, is it just the slowdown is because you're moderating some of the raw material costs and that kind of run its cost? Or is it less volume in leverage? Or what should have drove that slowdown in gross margin?
William Kalutycz: It's solely due to the contraction of the Canadian sales, Chris, and it’s when a contribution margin and plant overhead coverage. And then, then added to that is there is a little bit of additional plant overhead in the new plants we've been bringing online. So that's also a temporary headwind.
George Paleologou: But again, the fourth quarter generally is a slower quarter, right, Chris. So there's sort of the leverage -- the plant leverage aspect to that.
Operator: Your next question is from Stephen MacLeod from BMO Capital Markets.
Stephen MacLeod: I just wanted to follow-up on a couple of things. Just with respect to kind of the three factors that were weighing on the Specialty Foods U.S. organic volume growth, you just addressed the Sandwiches in the last question. Just wondering if you can talk a little bit about sort of where you're sitting now with respect to, I guess, the capacity delays as well as the product launches that have been pushed into Q1. Do you still have visibility on both of those things kind of coming to fruition as expected?
William Kalutycz: Yes. In terms of the product launches, absolutely, that was a very easy one from a visibility perspective. In terms of the plants coming online, the pace like -- the key ones in the quarter that impacted Q4, the delays were in the Hempler's facility, which is now up and running. There's still some yield and efficiency issues. But in terms of throughput, they're starting to hit their numbers. So we're fine there relative to our plan. And then the Kings Command Cooked Protein capacity expansion and another one that we expected to come online in Q4 is now just ramping up, and it's in line with our expectations for the quarter at this point.
Stephen MacLeod: Okay. That's great. Thanks, Will. Just looking at just a slight nuance for the presentation. On the acquisitions chart, I noticed that the active opportunities sort of dropped quite a bit quarter-over-quarter. And I'm just wondering what you would attribute that to? Is that just the timing of how these things evolve? Or is there something else that was happening?
George Paleologou: Yes. We've always said, Stephen, what's relevant is the three columns on the left of the page. A lot of times, this is a small industry, some of the bigger stuff, if we put into the active file, people may guess who they are. So we're just trying to be transparent without violating any confidentiality agreement.
William Kalutycz: A transaction can go from the early stage to the advanced stage incredibly quickly.
Stephen MacLeod: Okay. That makes sense. And then just on the Canadian business, you guys kind of addressed it by noting that December have slowed down materially. But just as you think about that trade down on a full quarter basis, was it worse in Q4 than it was in Q3?
William Kalutycz: Absolutely. Like I say, October -- sorry, October and November, we're really -- we saw maybe flatter sales. It was really December that surprised us.
Stephen MacLeod: Yes. Okay. Okay. Great. And then my last one is just a modeling question. Corporate costs kind of trending in that looks like $30 million a year range, maybe high 20s. Is that a good number to use going forward?
William Kalutycz: Yes. So our corporate costs for 2023 were lower than normal. Again, our bonus programs are -- and it was primarily related to bonus accruals. Our programs are based on the growth in our free cash flow per share on a fully diluted basis. And unfortunately, we did not hit those targets this year. So there was a significant reduction in the bonus for the year. So if you were looking at 2023 as your guide, you probably want to add about $4 million or $5 million to that, assuming a really solid year growth in our free cash flow per share.
Operator: Your next question is from Saba Khan from RBC Capital Markets.
Saba Khan: So there's been a bit of discussion just about kind of the sales potentially and taking advantage of the opportunity in the U.S. I guess as you think about the two markets overall, how would you describe, I guess, margin differential? I think George noted, you're not that different. You're not picking out what the market you're selling in, but are we assuming it's similar margins? Is U.S. better or worse? How should we think about that?
George Paleologou: I would say, overall, similar, Saba. I'd say, similar. Certainly, our strategies are similar in terms of the way we position the product and the way we sell the product. Sometimes, if the Canadian dollar is weaker, we benefit a little more because to the extent that we make the product in Canada and sell it into the U.S. But overall, I'd say similar.
Saba Khan: Okay. Great. And then just on the Clearwater, I think you noted that you expect some level of improvement there into next year. Just I guess, does that give you some confidence even with some of the softness there recently and their ability continue to make cash payments, I guess, for the interest portion and the management fee portion in line with kind of in the past?
William Kalutycz: Yes. We are expecting an improvement in the amount of cash flow we get relative on our accrued interest that so far as well as existing our future interest.
Operator: Your next question is from Derek Lessard from TD Cowen.
Derek Lessard: I just have a few follow-ups for me. I wanted to hit on in the press release, you talked about the underlying lobster biomass being healthy. But if you kind of read some of the news coming out of the U.S., it sort of flies in the face of that comment. I was just wondering if you can maybe help square away the healthiness of that? I think the U.S. legislation is supposed to increase catch sizes in 2025.
William Kalutycz: Yes. So I'm not sure where that information is coming from, Derek. We're incredibly involved in terms of managing the asset in the main fishery. We've got one of the leading experts in our Ready Seafood business -- and all our indications are -- is the biomass is incredibly healthy. It's gone a little deeper because the waters have gotten a little warmer, and that's kind of what's somewhat related to that weather issue because -- now the vessels have to go out a little further, so they need a little bit better weather to do that. But in terms of the biomass itself, all our indications are it's very healthy.
George Paleologou: And this is scientific, right? This is based on the constant monitoring of the biomass in both Canada and the U.S.
Derek Lessard: Okay. I just wanted to clarify that, and that's fair. And just maybe housekeeping on working cap. Last quarter, you did mention you're hoping maybe reduce inventories by another $50 million. Are you still expecting a further reduction in inventories? And overall, I guess, how should we think about working capital in '24?
William Kalutycz: Yes. In terms of inventories, we made a little bit of progress in the quarter. Like it gets a little tricky in terms of moving from quarter to quarter because now we go into seasonality factors. So there's a natural increase in our inventory. So we tend to understand where our inventories are on a year-over-year basis, you kind of have to look at the days in inventory on a year-over-year basis. But if we look at the fourth quarter, we still feel we were about four days of inventory heavy -- four days of purchases and inventory heavy in the quarter. So that would be about $50 million plus of inventory, we still have some work to get done. And there was some factors driving that. There were some opportunistic buys in the business. And there was, I mentioned earlier, the delays in some of sales initiatives, which meant the inventory sat in our warehouse instead of gotten shipped. So is that kind of -- some of that stuff that contributed to that $50 million, but there is still some work to be done. And hopefully, that just naturally we see that over the next quarter as we go into the busy season now, and there's a natural inventory build, and that build will need to be less than it has been in the past.
Operator: Thank you. There are no further questions at this time. I will now turn the call back to George for the closing remarks.
George Paleologou: Yes, I'd like to thank everybody for attending today. Again, sorry about the technical difficulties early on. Back to you, Jenny.
Operator: Thank you. Ladies and gentlemen, that concludes our conference call for today. Thank you all for joining. You may all disconnect.
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