Premium Brands Holdings Corp.
Keeping an eye on margin progression and FCF through 2022
Our view: Premium Brands Holdings Corporation (“Premium Brands”) reported Q4 Adjusted EBITDA in line with RBC and consensus expectations. Looking ahead, we are maintaining a cautious view given the potential for rising commodity prices to impact margins over the next year. Reiterating our $126 price target and Sector Perform rating.
Key points:
Q4 results in line with forecasts; 2022 guidance in line to modestly ahead – Premium Brands reported consolidated sales of $1,345MM (+27.4% YoY) vs. RBC forecast of $1,221MM and consensus of $1,254MM. Q4 Adjusted EBITDA of $113.4MM was +29.3% YoY, largely in line with RBC forecast of $116.9MM and consensus at $112.4MM. The company also provided 2022 sales guidance of $5.60B to $5.85B, which was ahead of RBC and consensus estimates coming into the quarter of $5.38B and $5.48B, respectively. Consensus 2022 Adjusted EBITDA entering the quarter of $513.6MM was near the low-end of the guidance range of $510MM to $530MM. While the Q4 results were better than some may have anticipated given the volatile backdrop, there is likely to be a ramp-up in margins through the year as Q1 and potentially Q2 are likely to be impacted by inflationary headwinds (likely to show up in margins). Management noted on the call that margins should improve through the year. In our view, sufficient pricing and/or lower commodity prices will be required for the company to deliver Adjusted EBITDA in line with the guidance range.
Looking for Free Cash Flow to improve in 2022 (from a negative FCF in 2021) – 2021 FCF was meaningfully impacted by a $254MM Working Capital outflow, which led to negative FCF for the year. We estimate 2021 FCF of -$127MM (CFO incl. W/C - capex - lease payments). Management noted that they had invested in inventories in 2021, so we will be looking for FCF to improve YoY, driven in part by the non-recurrence of this significant W/C investment.
Specialty Foods ("SF"): Adjusted EBITDA below expectations – In the SF segment, higher-than-expected sales were more than offset by lower-than- expected gross margin %, driving Adjusted EBITDA of $63.2MM (below RBC forecast of $78.5MM). The Q4 gross margin was -200 bps YoY and reflected input cost and wage inflation, and higher outside storage costs. Looking ahead, we expect continued pricing actions (resulting in $307MM in increased consolidated sales in 2021, of which $103MM was from SF) and higher margins on incremental organic sales (e.g., meat snacks) to improve segment margins in 2022.
Premium Food Distribution ("PFD"): Adjusted EBITDA above expectations – Higher-than-expected PFD sales and lower-than-expected SG&A %, partially offset by lower-than-expected GM %, drove Adjusted EBITDA of $40.5MM (RBC forecast: $33.9MM). Looking ahead, we expect improved trends in the restaurant space to drive stronger near-term demand