Premium Brands Holdings Corp T.PBH.DB.G

RBC 2

[retiredcf]

Their upside scenario target is $152.00. GLTA

May 6, 2022

Premium Brands Holdings Corp. Q1 results largely in line with forecasts

Our view: Premium Brands Holdings Corporation (“Premium Brands”) reported Q1 results that were largely 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. Revising our price target -$1 to $125; reiterate Sector Perform rating.

Key points:

Q1 results in line with forecasts; full year guidance reiterated – Premium Brands reported consolidated sales of $1,251.2MM (+23.9% YoY) vs. RBC/consensus forecast of $1,206.9MM/$1,232.6MM. Adjusted EBITDA of $95.8MM (+16.1% YoY) was in line with RBC forecast of $97.3MM and consensus at $94.6MM. The company also reiterated full year sales guidance of $5.60B-$5.85B and Adjusted EBITDA guidance of $510MM- $530MM. Looking ahead, additional pricing and/or lower commodity prices will be required for the company to deliver Adjusted EBITDA margin in line with the guidance range, in our view. Management commentary on the call indicated that the company has taken significant pricing to-date; however, the company has yet to benefit from the full run-rate benefit of these prices increases. The continued volatility in commodity prices is also contributing to this "mismatch."

Q1 FCF negative due to continued inventory investments – 2021 represented a year of meaningful investments in inventory for Premium Brands (we note 2021 FCF was meaningfully impacted by a $254MM Working Capital outflow). This reflected higher input costs and management likely building inventory positions ahead of further price increases. With this context, Q1 FCF of -$94.3MM continued this trend (inventories up $95.3MM QoQ to $740.5MM); however, we believe FCF should improve through the rest of the year as W/C investments normalize (on the call, management noted that the elevated inventory position should "unwind" after the busy spring/summer period and as the operating environment somewhat normalizes).

Specialty Foods ("SF"): Adjusted EBITDA below expectations – In the SF segment, modestly higher-than-expected sales were more than offset by lower-than-expected gross margin %, driving Adjusted EBITDA of $66.6MM (below RBC forecast of $70.1MM). The Q1 gross margin was -89 bps YoY and reflected input cost and wage inflation, and higher outside storage costs. Looking ahead, we expect continued pricing actions and higher margins on incremental organic sales (e.g., meat snacks) to drive improved segment margins through 2022.

Premium Food Distribution ("PFD"): Adjusted EBITDA in line with expectations – Modestly higher-than-expected PFD sales were offset by lower-than-expected GM %, driving Adjusted EBITDA of $20.3MM, in line with RBC forecast of $20.7MM. Looking ahead, we expect improved trends in the restaurant space to drive stronger demand over the coming quarters.