Premium Brands Holdings Corporation Announces First Quarter 2014 Results

VANCOUVER, BRITISH COLUMBIA--(Marketwired - May 8, 2014) - Premium Brands Holdings Corporation (TSX:PBH), a leading producer, marketer and distributor of branded specialty food products, announced today its results for the first quarter of 2014.

HIGHLIGHTS

• Revenue for the quarter increased by 16.4% to $266.9 million as compared to $229.2 million for the first quarter of 2013. 

• Adjusted EBITDA for the quarter increased to $15.9 million as compared to $12.8 million in the first quarter of 2013. Excluding a $4.7 million gain resulting from a sale and leaseback transaction and approximately $3.7 million in lost margin due to an extremely unusual and rapid rise in the cost of certain input commodity proteins, the Company's adjusted EBITDA for the quarter was $14.9 million.

• Earnings for the quarter of $1.9 million or $0.09 per share as compared to $1.2 million or $0.06 per share for the first quarter of 2013.

• The Company declared a quarterly dividend of $0.3125 per share.

• Rolling four quarters free cash flow of $46.9 million resulting in a dividend to free cash flow ratio of 58.0%.

• Completion of the sale and leaseback of the Company's distribution facility in Surrey, BC resulting in net proceeds of $10.2 million.

• Subsequent to the quarter the Company purchased certain assets, including inventory, production equipment, and customer lists, from the Calgary, AB based foodservice distributor Reddi Food Group Inc. for $1.7 million. 

SUMMARY FINANCIAL INFORMATION

(In thousands of dollars except per share amounts and ratios)	13 Weeks Ended			13 Weeks Ended
	Mar 29, 2014			Mar 30, 2013
Revenue	266,875			229,181
Adjusted EBITDA	15,919			12,758
Earnings	1,862			1,166
EPS	0.09			0.06
	Rolling Four Quarters Ended
	Mar 29, 2014			Dec 28, 2013
Free cash flow	46,900			49,247
Declared dividends	27,214			26,498
Declared dividend per share	1.2500			1.2315
Payout ratio	58.0	%		53.8	%

"While we continue to make solid progress in growing the potential of our company, the past quarter presented us with some significant short term challenges. Hyper-inflation among a variety of input commodity proteins resulted in our deli and premium processed meats businesses experiencing cost increases of over 70% on some raw materials. Similarly, our foodservice business experienced cost increases of over 40% on certain raw materials," said Mr. George Paleologou, President and CEO. 

"We are, however, pleased with how our affected businesses have been able to manage their way through these challenging times, the worst of which are now behind us. Furthermore, we are also pleased with how our overall business model, with its focus on entrepreneurial values and diversification, has enabled us to withstand one of the most extreme run ups in beef and pork prices in recent history.

"Looking forward, we expect to emerge from this difficult environment stronger and even better positioned as we take advantage of opportunities that might not have presented themselves under normal operating conditions. A good example of this is our acquisition subsequent to the quarter of the business of Reddi Food Group Inc., a long-time competitor to our Centennial Foodservice business. 

"In addition, we are continuing to pursue a number of other exciting acquisition opportunities that will further accelerate growth in our sales and earnings," added Mr. Paleologou.

About Premium Brands

Premium Brands owns a broad range of leading specialty food manufacturing and differentiated food distribution businesses with operations in British Columbia, Alberta, Saskatchewan, Manitoba, Ontario, Quebec, Nevada, Ohio and Washington State. The Company services a diverse base of customers located across North America and its family of brands and businesses include Grimm's, Harvest, McSweeney's, Bread Garden Go, Hygaard, Hempler's, Quality Fast Foods, Gloria's Best of Fresh, Direct Plus, National Direct-to-Store Distribution (NDSD), Harlan Fairbanks, Creekside Bakehouse, Stuyver's Bakestudio, Centennial Foodservice, B&C Food Distributors, Shahir, Wescadia, Duso's, Maximum Seafood, SK Food Group, OvenPride, Hub City Fisheries, Audrey's, Deli Chef, Piller's and Freybe.

RESULTS OF OPERATIONS

Revenue

(in thousands of dollars except percentages)
		13 weeks		%		13 weeks	%
		ended				ended
		Mar 29,				Mar 30,
		2014				2013
Revenue by segment:
	Retail	172,205		64.5	%	138,323	60.4	%
	Foodservice	94,670		35.5	%	90,858	39.6	%
	Consolidated	266,875		100.0	%	229,181	100.0	%

Retail's revenue for the first quarter of 2014 as compared to the first quarter of 2013 increased by $33.9 million or 24.5% due to: (i) the acquisition of Freybe Gourmet Foods Ltd. at the end of the first quarter of 2013 which accounted for $16.0 million of the increase; and (ii) organic growth of $17.9 million, representing an average growth rate of 12.9%. 

Retail's organic growth rate for the quarter was well above the Company's long-term targeted range of 6% to 8% primarily due to: (i) an increase in the translated value of Retail's U.S. based businesses' sales resulting from a decline in the value of the Canadian dollar; and (ii) selling price increases that were implemented by several of Retail's businesses in response to a record rise in the cost of a variety of input commodity proteins (see Gross Profit). Excluding these factors, Retail's organic growth for the quarter was within its long-term targeted range of 6% to 8%.

Looking forward (see Forward Looking Statements), the Company is expecting Retail's organic growth to continue exceeding its long-term targeted range for the next several quarters based on (i) the factors outlined above; and (ii) the expected completion of several production capacity expansion projects.

Foodservice's revenue for the first quarter of 2014 as compared to the first quarter of 2013 increased by $3.8 million or 4.2% primarily due to selling price increases that were implemented by several of its businesses in response to a record rise in the cost of a variety of input commodity proteins (see Gross Profit). These increases were partially offset by: (i) a decrease in Foodservice's Worldsource food brokerage business' sales due mainly to a labour dispute at a major seaport in Vancouver, BC which prevented it from shipping and receiving certain products; and (ii) a small decrease in sales to hotels and restaurants that was the result of: (a) extremely poor weather conditions across the Prairies and Ontario for much of the quarter; and (b) a later than normal Easter holiday.

Looking forward, the Company is expecting Foodservice's organic growth to return to its long-term targeted range of 6% to 8% in the second quarter of 2014 based on: (i) a return to more normal weather conditions; (ii) selling price increases associated with the record rise in input commodity proteins; and (iii) resolution of the Vancouver seaport labour dispute at the end of the first quarter.

Gross Profit

(in thousands of dollars except percentages)
		13 weeks		%		13 weeks	%
		ended				ended
		Mar 29,				Mar 30,
		2014				2013
Gross profit by segment:
	Retail	31,228		18.1	%	27,982	20.2	%
	Foodservice	16,300		17.2	%	16,557	18.2	%
	Consolidated	47,528		17.8	%	44,539	19.4	%

Retail's gross profit as a percentage of its revenue (gross margin) for the first quarter of 2014 as compared to the first quarter of 2013 decreased primarily due to an extremely rapid rise in the cost of a variety of input commodity proteins during the quarter. These increases, which exceeded 75% for some commodities, temporarily impacted the margins of Retail's deli and premium processed meat businesses. Excluding the impact of this issue, which is estimated at approximately $2.8 million, Retail's gross margin for the quarter was 19.8%. This is down slightly from 20.2% for the first quarter of 2013 due to a number of causes including sales mix changes and the restructuring of Retail's NDSD business (see Selling, General and Administrative Expenses and Restructuring Costs).

The rapid rise in the cost of certain input commodity proteins, namely beef and pork, during the quarter was the result of several factors. In the case of beef, one of the major causes dates back to a record drought in the U.S. Midwest in 2012 which resulted in feed shortages that made raising cattle in certain areas uneconomical for much of 2012. In turn, this has translated to the lowest U.S. cattle herd in over 60 years and, correspondingly, a shortage of beef. In the case of pork, some of the major factors were: (i) the North American outbreak of Porcine Epidemic Diarrhea (PED) Virus in 2013 which has resulted in a decline in the number of hogs coming to market in 2014; and (ii) increased North American exports to Asia.

Looking forward (see Forward Looking Statements), the Company expects Retail's margins to improve during the second quarter based on: (i) selling price increases that have been implemented and are effective in the latter part of April and early May; and (ii) stabilization of commodity inputs costs, which is a trend that started in mid-April. Longer term the Company anticipates that beef and pork prices will return to more normal levels as: (i) higher commodity prices and current favourable feed prices result in the expansion of livestock herds; and (ii) North American hog herds develop a natural immunity to PED.

Foodservice's gross margin for the first quarter of 2014 as compared to the first quarter of 2013 decreased primarily due to the extremely rapid rise in the cost of a variety of input commodity proteins as discussed above. Increases in the cost of certain beef commodities, in particular, significantly impacted Foodservice's gross margin with the cost of some items rising by as much as 46%. Excluding the impact of this issue, which is estimated at approximately $0.9 million, Foodservice's gross margin for the quarter was consistent with its gross margin for the first quarter of 2013 at 18.2%.

Looking forward (see Forward Looking Statements), the Company expects Foodservice's margins to improve during the second quarter based on: (i) selling price increases that were implemented part way through the first quarter; and (ii) the stabilization of commodity inputs costs, as discussed above.

Selling, General and Administrative Expenses (SG&A)

(in thousands of dollars except percentages)
		13 weeks	%		13 weeks	%
		ended			ended
		Mar 29,			Mar 30,
		2014			2013
SG&A by segment:
	Retail	21,872	12.7	%	18,154	13.1	%
	Foodservice	12,766	13.5	%	12,061	13.3	%
	Corporate	1,674			1,566
	Consolidated	36,312	13.6	%	31,781	13.9	%

Retail's SG&A for the first quarter of 2014 as compared to the first quarter of 2013 increased due to: (i) additional SG&A associated with the acquisition of Freybe Gourmet Foods Ltd. at the end of the first quarter of 2013; and (ii) increased selling and marketing costs associated with Retail's organic sales growth (see Revenue). These decreases were partially offset by a decrease in Retail's NDSD business' SG&A as a result of the rationalization of its distribution network (see Restructuring Costs). 

Retail's SG&A as a percentage of its revenue decreased to 12.7% from 13.1% in the first quarter of 2014 mainly due to the fixed nature of certain costs relative to the growth in Retail's revenue (see Revenue).

Foodservice's SG&A, as well as its SG&A as a percentage of its revenue, for the first quarter of 2014 as compared to the first quarter of 2013 increased primarily due to increased costs associated with the development of additional sales and administrative infrastructure needed to support a variety of growth initiatives.

Other Income

Other income for the first quarter of 2014 consists of a $4.7 million gain resulting from the sale and leaseback of a distribution centre in Surrey, BC.

Adjusted EBITDA

(in thousands of dollars except percentages)
		13 weeks		%		13 weeks		%
		ended				ended
		Mar 29,				Mar 30,
		2014				2013
Adjusted EBITDA by segment:
	Retail	14,059		8.2	%	9,828		7.1	%
	Foodservice	3,534		3.7	%	4,496		4.9	%
	Corporate	(1,674	)			(1,566	)
	Consolidated	15,919		6.0	%	12,758		5.6	%

The Company's adjusted EBITDA for the first quarter of 2014 as compared to the first quarter of 2013 increased by $3.2 million or 24.8% to $15.9 million primarily due to: (i) a $4.7 million gain resulting from the sale and leaseback of a distribution centre in Surrey, BC (see Other Income); and (ii) the Company's sales growth (see Revenue). These increases were partially offset by a decrease of approximately $3.7 million in the Company's gross profit that was the result of an extremely rapid rise in the cost of a variety of input commodity proteins (see Gross Profit). 

Looking forward (see Forward Looking Statements) the Company expects its adjusted EBITDA for 2014 as compared to 2013 to improve significantly based on:

• Implementation of selling price increases designed to address the first quarter gross margin issues that resulted from the rapid rise in the costs of certain input commodity proteins (see Gross Profit);

• Stabilization of commodity protein markets, which is a trend that started in mid-April (see Gross Profit);

• Improved performance by its Freybe Gourmet Foods business as the major initiatives associated with the restructuring of its Langley production facility near completion (see Restructuring Costs); and

• Steady growth in a number of the Company's businesses that is expected to result from capital projects completed in 2012, 2013 and 2014. These include Stuyver's new artisan bakery, Deli Chef's new sandwich plant, Centennial Foodservice's new seafood processing facility and SK Food Group's new sandwich plant.

Interest and other financing costs

The Company's interest and other financing costs for the first quarter of 2014 as compared to the first quarter of 2013 increased by $0.8 million despite a decrease in the Company's funded debt primarily due to $57.9 million of funded debt associated with the acquisition of Freybe Gourmet Foods Ltd. (see Revenue) being incurred at the end of the first quarter of 2013.

Restructuring Costs

Restructuring costs consist of costs associated with the significant restructuring of one or more of the Company's businesses. During the first quarter of 2014, the Company incurred $3.4 million in restructuring costs consisting of:

• $2.0 million for the reconfiguration of the Company's deli meats production capacity including a major realignment and expansion of the capacity of Freybe Gourmet Foods' plant in Langley, BC. This project, which commenced in mid-2013 and is scheduled to be completed early in the second quarter of 2014, will provide the Company's deli meats businesses with much needed incremental production capacity prior to their busy summer season. An additional $1.2 million in restructuring costs are budgeted (see Forward Looking Statements) for this project.

• $0.9 million for the reconfiguration of the Company's sandwich production capacity including the construction of a new 180,000 square foot production facility in Columbus, OH. This project, which commenced in the fourth quarter of 2013 and is scheduled to be completed early in the third quarter of 2014, will provide the Company's sandwich businesses with much needed incremental production capacity as well as improved efficiencies at its existing plants. An additional $1.8 million in restructuring costs are budgeted (see Forward Looking Statements) for this project.

• $0.5 million in costs relating to the restructuring and rationalization of NDSD, the Company's direct-to-store distribution business for the convenience store industry, in order to address changes occurring in this industry. The major elements of this initiative were completed in 2013 with the costs in 2014 consisting mainly of employee severance payments and the write-down of inventory made obsolescent by the restructuring. An additional $0.6 million in restructuring costs are budgeted (see Forward Looking Statements) for this project. 

FREE CASH FLOW

(in thousands of dollars)	52 weeks ended Dec 28, 2013		13 weeks ended Mar 30, 2013		13 weeks ended Mar 29, 2014		Rolling Four Quarters
Cash flow from operating activities	15,156		(5,193	)	10,271		30,620
Changes in non-cash working capital	22,663		12,443		(7,199	)	3,021
Sale of redundant property	2,413		-		-		2,413
Acquisition transaction costs	560		33		-		527
Restructuring costs	12,749		1,297		3,365		14,817
Capital maintenance expenditures	(4,294	)	(935	)	(1,139	)	(4,498	)
Free cash flow	49,247		7,645		5,298		46,900

FORWARD LOOKING STATEMENTS

This discussion and analysis contains forward looking statements with respect to the Company, including its business operations, strategy and financial performance and condition. These statements generally can be identified by the use of forward looking words such as "may", "could", "should", "would", "will", "expect", "intend", "plan", "estimate", "project", "anticipate", "believe" or "continue", or the negative thereof or similar variations.

Although management believes that the expectations reflected in such forward looking statements are reasonable and represent the Company's internal expectations and belief as of May 7, 2014, such statements involve unknown risks and uncertainties beyond the Company's control which may cause its actual performance and results in future periods to differ materially from any estimates or projections of future performance or results expressed or implied by such forward looking statements.

Factors that could cause actual results to differ materially from the Company's expectations include, among other things: (i) seasonal and/or weather related fluctuations in the Company's sales; (ii) changes in consumer discretionary spending resulting from changes in economic conditions and/or general consumer confidence levels; (iii) changes in the cost of raw materials used in the production of the Company's products; (iv) changes in the cost of products sourced from third party manufacturers and sold through the Company's proprietary distribution networks; (v) risks associated with the Company's conversion from a publicly traded income trust to a publicly traded corporation, including related changes in Canada's income tax laws; (vi) changes in the Company's relationships with its larger customers; (vii) potential liabilities and expenses resulting from defects in the Company's products; (viii) changes in consumer food product preferences; (ix) competition from other food manufacturers and distributors; (x) execution risk associated with the Company's growth and business restructuring initiatives; (xi) risks associated with the Company's business acquisition strategies; (xii) changes in the value of the Canadian dollar relative to the U.S. dollar; and (xiii) new government regulations affecting the Company's business and operations. Details on these risk factors as well as other factors can be found in the Company's 2013 MD&A, which is filed electronically through SEDAR and is available online at www.sedar.com.

Unless otherwise indicated, the forward looking information in this document is made as of May 7, 2014 and, except as required by applicable law, will not be publicly updated or revised. This cautionary statement expressly qualifies the forward looking information in this document.

Premium Brands Holdings Corporation

Consolidated Balance Sheets

(Unaudited and in thousands of dollars)

		March 29,  2014		December 28, 2013		March 30, 2013
Current assets:
	Cash and cash equivalents	4,376		1,437		3,806
	Accounts receivable	81,278		92,880		83,208
	Inventories	116,349		108,729		99,403
	Prepaid expenses	7,040		7,746		8,227
	Other assets	457		358		293
		209,500		211,150		194,937
Capital assets		182,446		177,275		203,799
Intangible assets		74,327		75,099		78,012
Goodwill		169,349		168,925		167,725
Investment in associate		9,787		7,949		4,199
Deferred income taxes		27,416		26,697		26,196
Other assets		3,183		3,222		4,743
		676,008		670,317		679,611
Current liabilities:
	Cheques outstanding	3,816		5,689		1,775
	Bank indebtedness	19,520		29,466		18,786
	Dividend payable	6,912		6,863		6,196
	Accounts payable and accrued liabilities	95,864		94,288		84,098
	Current portion of long-term debt	129,178		113,222		24,541
	Current portion of provisions	2,161		2,219		3,595
		257,451		251,747		138,991
Long-term debt		11,369		11,938		181,588
Convertible unsecured subordinated debentures		175,528		177,057		133,630
Puttable interest in subsidiaries		14,635		14,498		15,736
Deferred revenue		3,518		1,103		1,492
Provisions		3,922		3,820		4,468
Pension obligation		683		653		1,905
		467,106		460,816		477,810
Equity attributable to shareholders:
	Accumulated earnings	163,454		161,560		149,112
	Accumulated dividends declared	(188,288	)	(181,376	)	(161,074	)
	Deficit	(24,834	)	(19,816	)	(11,962	)
	Share capital	224,230		221,994		209,546
	Equity component of convertible debentures	1,744		1,744		1,754
	Reserves	7,144		4,929		1,544
	Non-controlling interest	618		650		919
		208,902		209,501		201,801
		676,008		670,317		679,611

Premium Brands Holdings Corporation

Consolidated Statements of Operations

(Unaudited and in thousands of dollars except per share amounts)

		13 weeks ended  March 29, 2014		13 weeks ended  March 30, 2013
Revenue		266,875		229,181
Cost of goods sold		219,347		184,642
Gross profit before depreciation and amortization		47,528		44,539
Selling, general and administrative expenses before depreciation and amortization		36,312		31,781
Other income		(4,703	)	-
		15,919		12,758
Depreciation of capital assets		4,579		3,943
Amortization of intangible assets		1,117		1,088
Amortization of other assets		1		1
Interest and other financing costs		4,976		4,165
Amortization of financing costs		73		74
Acquisition transaction costs		-		33
Change in value of puttable interest in subsidiaries		216		200
Accretion of provisions		102		3
Unrealized gain on foreign currency contracts		(100	)	(100	)
Unrealized loss on interest rate swap contracts		-		100
Restructuring costs		3,365		1,297
Equity loss in associates		22		182
Earnings before income taxes		1,568		1,772
Provision for income taxes
	Current	401		358
	Deferred	(695	)	248
		(294	)	606
Earnings		1,862		1,166
Earnings (loss) for the period attributable to:
	Shareholders	1,894		1,196
	Non-controlling interest	(32	)	(30	)
		1,862		1,166
Earnings per share
	Basic and diluted	0.09		0.06
Weighted average shares outstanding (in 000's)
	Basic	21,930		20,966
	Diluted	22,043		21,060

Premium Brands Holdings Corporation

Consolidated Statements of Cash Flows

(Unaudited and in thousands of dollars)

			13 weeks ended  March 29, 2014		13 weeks ended  March 30, 2013
Cash flows from operating activities:
	Earnings		1,862		1,166
	Items not involving cash:
		Depreciation of capital assets	4,579		3,943
		Amortization of intangible and other assets	1,118		1,089
		Amortization of financing costs	73		74
		Change in value of puttable interest in subsidiaries	216		200
		Gain on sales of capital assets	(4,702	)	(3	)
		Accrued interest income	(6	)	(6	)
		Net unrealized gain on foreign currency and interest rate swap contracts	(100	)	-
		Equity loss in associates	22		182
		Deferred revenue	(124	)	(127	)
		Accretion of convertible debentures, long-term debt, and provisions	829		654
		Change in value of cash conversion option liability	-		(170	)
		Deferred income taxes	(695	)	248
			3,072		7,250
	Change in non-cash working capital		7,199		(12,443	)
			10,271		(5,193	)
Cash flows from financing activities:
	Long-term debt - net		15,074		46,991
	Bank indebtedness and cheques outstanding		(11,819	)	22,405
	Dividends paid to shareholders		(6,863	)	(6,188	)
	Purchase of 7.00% Debentures under normal course issuer bid		-		(178	)
	Other		-		(38	)
			(3,608	)	62,992
Cash flows from investing activities:
	Capital asset additions		(12,038	)	(3,081	)
	Business acquisitions		-		(54,347	)
	Payments to shareholders of non-wholly owned subsidiaries		(123	)	(114	)
	Payment of provisions		(58	)	(253	)
	Collection of share purchase loans and notes receivable		62		18
	Investment in associate		(1,860	)	-
	Net proceeds from sale and leaseback of asset		10,200		-
	Net proceeds from sales of assets		28		3
			(3,789	)	(57,774	)
Increase in cash and cash equivalents			2,874		25
Effects of exchange on cash and cash equivalents			65		23
Cash and cash equivalents - beginning of period			1,437		3,758
Cash and cash equivalents - end of period			4,376		3,806