Good morning, ladies and gentlemen, and welcome to the Premium Brands Holdings Corporation Q1 2024 earnings conference call question and answer session. At this time, all lines are in a listen-only mode. If at any time during this call you require immediate assistance, please press star zero for the operator. 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 Q1 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? Thank you. Ladies and gentlemen, we will now begin the question and answer session. If you have a question, please press the star followed by the one on your touch-tone phone. You will hear a prompt that your hand has been raised. Questions will be taken in the order received. Should you wish to cancel your request, please press the star followed by the two. If you are using a speakerphone, please lift the handset before pressing any keys. Once again, that is star one should you wish to ask a question. Your first question is from Martin Landry from Stifel. Please ask your question. Hi. Good morning, guys. Hey, Martin. Morning, Martin. Congrats on your results. They're above our expectations. I'd like to try to understand a little bit where we go from here. Obviously, you are expecting a better growth to accelerate on a year-over-year basis for the remainder of the year. I'd like to understand if you could list maybe three 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 weak 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'd be helpful. Well, again, Martin, we're very pleased to, of course, show progress in the Q1. As we've said in our prepared remarks and in the press release, over the last two or three 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 great innovation in our pipeline, and we're very busy presenting solutions to customers, to retail and food service customers that are trying to deal with inflation. 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. I think we're in pretty good shape for the remainder of the year. That's not to say that there are no risks 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. I think that the wisdom of our business model continues to prove itself. Yeah. 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. Sorry, 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. Yeah. The only other comment. Yeah. Sorry, Martin. Go ahead. Go ahead. 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 US, 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. Great. That's it for me. Best of luck. Thanks, Martin. Thank you, Martin. Thank you. Your next question is from George Doumet from Scotiabank. Please ask your question. Yeah. Hi. 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? Was the quarter performance different? Anything you want to maybe call out there? It was pretty quick improvement there. Yeah. Again, as we've said in regards to the Q4 call, George, the slowdown in December surprised us, surprised many of our businesses. I think in general terms, recognizing this slowdown, a lot of our businesses did a lot of promotions and also pivoted some of their capacity to the US. But so between the two, we've sort of reacted to what happened in December. Can you give some examples of some of the pivoted capacity? Sorry, George. 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. Okay. Understood. Thanks. 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 Q1 versus a contraction last quarter in Specialty Foods. Premium Foods Distribution, it's a little more subtle understanding. There, we continue to struggle with consumers trading down to discount banners, or 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. Gotcha. And I guess when you guys said 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 Canada delivers flat to positive organic growth this year, do you think that could be a source of upside to your guidance? Yeah. The current state of the market is kind of unfolding as we expect it. Again, we didn't expect that large contraction in Q4 to be sustainable or to be sustained. And so it's really playing out how we expect it. And then again, from last quarter, what we talked about was sort of stable for the first half of the year, maybe a slight contraction on the Premium Foods Distribution side of thing, and then improvement showing in the back half of the year as we start lapping some 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 a 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 double-digit growth in organic at SF and assuming stable commodity markets? Yeah. We're cautiously optimistic we should hit that number in 2025. Okay. As an annual number? As an annual number, yes. Gotcha. All right. Appreciate it. Thanks for your comments. Thanks, George. Thank you. Your next question is from Derek Lessard from TD Cowen. Please ask your question. Yeah. Good afternoon. I echo the congratulations on the quarter. Curious if you've seen any sort of 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. 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. 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 Q3 of last year. Okay. Perfect. 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 and 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 few years, we will be doing a lot more business in C-store and in QSR in the U.S. Okay. Maybe one last one for me before I queue it. 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? Yeah. So our leverage was a little higher than we expected at the end of the quarter, primarily due to inventory-related issues. We did have a significant, most of it was planned, the increase in our inventory seasonality. And we have 3 major new product launches coming on stream in the Q2. 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 lease-back transactions that we've been discussing. Those could happen in the third or the Q4, 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. Okay. That's helpful. Thanks, Will. Yep. Nope. Thank you, Derek. Thank you. Your next question is from Stephen MacLeod from BMO Capital Markets. Please ask your question. Thank you. Good afternoon, guys. Morning. Morning. Good morning for you. Good morning. Just a couple of questions. 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 kind of three major product launches coming on stream in Q2. So just curious if you can give a little bit of color around those if you're able to. Yeah. 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 three major launches, there's one in retail actually, sorry, two in retail, one in the sandwich group, one in the protein group. They're with a major national customer, North American customer. So we're excited about those. Sorry, one is in protein group. One 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. Thank you. And then just thinking about the margins through the balance of the year, I mean, relative to our estimates, kind of gross margin was better than expected, but SG&A was a little bit higher. So is that kind of 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 seasonal quarter, 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, the increase or the improvement year-over-year in our EBITDA margin. Okay. Okay. Great. I guess that's also coming back to the strong contribution margins of those new products coming online. Sorry. Repeat that again, Steve? I was just saying that that also points to the strong contribution margins of those new products as they come into the market. Exactly. Exactly. We've talked about that in the past. Our sandwich, protein, and bakery goods have contributions anywhere from 25%-45%. Yeah. Okay. Okay. That's great. And then just one final one for me. Corporate costs, we're just running a touch higher in Q1, and I'm just curious what you expect for that for the full year of 2024. Yeah. Q1 should be a fairly good example of the run rate for the year. Most of that was variable compensation-related. And again, assuming we hit our yes, last year was a tough year, and correspondingly, our bonus accruals were much reduced. And this year, we're much more optimistic, and you're seeing that reflected in the accruals. Yep. Okay. That's great. Thanks, Will. Thanks, George. Appreciate it. Thanks, Stephen. Thanks, Stephen. Thank you. Your next question is from Vishal Shreedhar from National Bank Financial. Please ask your question. Hi. Thanks for taking my questions. Hey, Vishal. Good afternoon. Just on the selling price deflation in Specialty Foods, it happened this quarter, it happened last quarter, and you gave us some explanation for that. In the past, PBH talked about the ability for Specialty Foods to hold pricing following periods of heightened inflation. I was just wondering if you could reflect on that comment and put it in context of the deflation that we're seeing right now and put that in perspective of how we should think about it going forward. Yeah. The vast majority of that deflation, Vishal, related to our sandwich business and a cost-plus contract. So again, we don't take any margin risk there because, again, it's cost-plus. But correspondingly, as raw material prices increase and decrease, we pass those on to our customer, whether they're savings or cost increases. This is not new. That's always been the case with regards to that business. Ex that business, did that phenomenon about holding the price increases hold? Yeah. Absolutely. The only exceptions to that, and we've talked about this with Vishal, is one, George mentioned earlier, we're doing a lot more promotion. And so we reflect that promotion cost to the extent it's an off-invoice price given to our customers, deflation. So there was a little bit of that in there. And then also, the one area we have given a bit pricing back to our customers is in poultry. A year ago, poultry prices were at absolute record highs, and they've come down significantly. And we talked a bit about this last year. We did see a little bit of demand destruction. And so we have been passing on some of those savings to our customer to get those volumes back, and we're seeing that success of that strategy. Okay. Changing topics here, there is a seemingly increasing weakness in the QSR channel. You referenced it somewhat with that comment on inventories, and some QSRs have reported weaker than expected results, in some cases meaningfully so. Wondering, as you reflect on that, is that in consideration with your guidance? And considering that, does that still feel comfortable for you as you look to expand? Yeah. Again, Vishal, I think that's actually a positive for Premium Brands because I think a lot of the QSR are talking about the menu inflation challenges and the fact that they're looking to innovate by introducing products into the market that are lower priced. So we're in a very good position to give them innovative solutions that address the menu inflation issue. So one of the reasons why we're so busy today making all kinds of presentations to many, many QSRs, particularly in the U.S., is because of that. And Vishal, what George is saying is definitely the case over sort of the mid to long term in the course of the year. We did internally pull back our expectations because of some weakness with one specific customer, but we're still well within our guidance range for the year. Okay. Thank you for that. And if lobster recovers, as PBH anticipates, how quickly should the PFD segment return to growth? Is it reasonable to expect growth in Q2, or is it more Q3 or Q4? Yeah. Our expectation is Q2 is hopefully, again, sort of similar to this quarter or sorry, better than this quarter, should hopefully be flat year-over-year in organic volume growth rate terms. And then as the lobster continues to help and we see some stability in the Canadian consumer in our beef and seafood programs, we should see a return to growth in Q3, Q4. That's our general expectation. I see. And you talked about it a bit last quarter, but the sale and lease-back, there was some expectation that you could get some of that early Q2. I think you referenced Q3, Q4. Wondering if you can give us some thoughts on the magnitude and the associated rent expense and how we should think about modeling that. Yeah. We're looking at several transactions. Nothing will happen in the Q2. We are pushing for one transaction in the Q3 and possibly a second one in the Q4. Again, we talked in the past, they're probably around CAD 250 million-CAD 300 million in total real estate value. In terms of lease impacts, I can't comment at all on that at this point. Thank you. Thanks, Vishal. Thank you. Your next question is from John Zamparo from CIBC. Please ask your question. Thanks. Good morning, George and Will. Hey, John. A couple of follow-ups and then to a broader question. I wanted to come back to the commodities environment. I appreciate the comments on poultry. I wonder what you're seeing in your other major commodities. Where are you seeing inflation versus deflation, and where have you hedged your positions? Well, sort of probably the most critical commodities to our business today are pork and poultry just because beef is largely used in our Premium Foods Distribution group, which is a much more dynamic pricing model. And so in terms of our most concern around inflation, it would be the beef category. But again, we have dynamic pricing there and the least amount of exposure to sort of short-term fluctuations or increases in that commodity. So if we look at the Specialty Foods segment, pork, in general terms, we expect relatively stable environment. Production is slightly up in the U.S. Globally, production is better. Feed prices are coming down. So we're expecting relatively stable prices there. Chicken is a little bit more uncertain. We do expect there's been a bit of spike most recently in chicken poultry prices in the U.S. It has stabilized. There is some expectations of maybe a bit of softening towards the end of the year. So again, overall, we're expecting a relatively stable environment. But again, John, I'll always go back to our pricing power. Over 2022, 2023, and we put through over CAD 750 million of price increases, and most of that was in our Specialty Foods group. They have tremendous ability to pricing, and really, it's one of managing the short-term pricing delays as we give our customers notice. But again, in general terms, we're expecting commodities for our Specialty Foods group to be relatively stable for the year. Okay. Thanks for that. A quick one on the quick service business and your customers in that space. Whether sandwich or not, are those contracts typically structured as cost-plus, and is there potential for volatility from some of those in the coming quarters beyond what you'd announced in Q1? They're generally cost-plus, not always, but generally cost-plus. That's the way I would describe them. They're partnerships. There's a lot of transparency with the customer. And again, we're very happy to have them cost-plus. Right. Okay. Understood. And then I wanted to get to capacity. And I wonder if we take the scenario of let's fast forward to, say, the end of 2025 when all your primary project capex is complete. I wonder if you can try to quantify what percent of your capacity would be spoken for once those facilities are open within your three key U.S. core sales growth initiatives. Yeah. So by the end, when we finish the Tennessee facility, at that point, we should have about CAD 8 billion-CAD 8.5 billion of capacity in place. Again, there's some other projects coming along over the next couple of years that'll take us to that CAD 9.5 billion target we've talked about in our five-year plan. In terms of 2025, though, John, we haven't given any guidance on that year at this point in terms of sales. That comment, John, assumes no acquisitions of more capacity in the meantime. Okay. Just so I make sure I understand that, the Tennessee facility, that's the current phase that you're referring to because I think the final phase isn't set for 2028 or 2029. Yeah. The final phase isn't even in our current five-year business plan in terms of the sales coming from that. Right. Okay. And then just one last one, coming back to the earlier question on EBITDA margin commentary that you're cautiously optimistic you can get to the 10% next year. That was previously expected in 2027. I wonder, what was the biggest driver of change? I mean, everything's kind of moving in the right direction in terms of commodities environment, your gross margins, growth from your core drivers, but that is a meaningful change to potentially hit that target two years early. I wonder, what was the biggest driver that you saw that made you think that that's achievable next year? Really, it's quite a simple answer, John, is we set a very conservative target when we set our five-year plan because our last five-year plan, we exceeded our sales one year early, which we have done in the previous two five-year plans, but we didn't hit our EBITDA target. And we just want to make sure we set a plan, set an expectation that the risk of not achieving it was incredibly low. So we've been conservative in that five-year plan, and the planning has worked out, and the execution is going well. And as a result, we expect to exceed that. Okay. That's helpful. I'll pass it on. Thank you. Thanks, John. Thanks, John. Thank you. Your next question is from Derek Lessard from TD Cowen. Please ask your question. Yeah. Just a few follow-ups for me. You noted that you expect, let's call it, another CAD 300 million in project capex over the next six quarters. Just based on, I guess, your current timeline, are you able to give us sort of a rough timing of that spend? Or do you expect it to be more front-end or back-end loaded? Yeah. So if everything goes according to plan in that timing of the expenditures, it's roughly CAD 200 million this year, CAD 100 million next year in the first two quarters of next year. But again, generally, we find that that's just the timing our businesses have given us. We generally find it takes a little longer. So I suspect it's probably closer to 60% this year, 40% next year percentage-wise. But right now, today, like I say, if everything goes according to plan, it's about two-thirds this year, one-third next year. Okay. That's helpful, Will. One last one for me on M&A. It looks like you have another or you have one deal on the protein side moving to the advanced stage. Just maybe add some color to the M&A pipeline? It's basically much, much needed capacity based in the U.S. to service the U.S. market in areas where we're very under capacity. So it's a capacity solution for us. Okay. Thanks, George. Thanks, everybody. Thanks, Derek. Thank you. There are no further questions. Oh, sorry. We have another one from George Doumet from Scotiabank. Please ask your question. Yeah. Thanks for sticking me in here. Can we talk a little bit about seafood? So maybe just Clearwater, the outlook for the rest of the year. And I did notice an M&A target in seafood. So can you maybe talk a little bit about what's on the wish list for M&A there? Thanks. In terms of Clearwater, they're looking at several transactions at this point, George, but there's nothing imminent. Again, we've talked in the past. The core strategy for them is to continue to value-add the wonderful species they harvest. That plan is proceeding, and a core part of that plan is through acquiring certain customers. At this point, there's nothing specific to comment on. I should also say, George, that we're also working on a number of projects to improve the capital efficiency of that business. Hopefully, we'll be able to talk about those in the next few quarters. Okay. Great. Thanks again, guys. Thanks, George. Thank you. There are no further questions at this time. I will now hand the call back to George for the closing remarks. Yeah. Just like to thank everybody for attending today. Thanks a lot. Back to you, David. Thank you. Thank you. Thank you. Ladies and gentlemen, the conference has now ended. Thank you all for joining. You may all disconnect.