Premium Brands Holdings Corporation Announces Third Quarter 2014 Results

VANCOUVER, BC--(Marketwired - November 06, 2014) - Premium Brands Holdings Corporation (TSX: PBH), a leading producer, marketer and distributor of branded specialty food products, announced today its results for the third quarter of 2014.

HIGHLIGHTS

• Revenue for the quarter increased by 15.2% to $330.4 million as compared to $287.0 million for the third quarter of 2013. 

• Adjusted EBITDA for the quarter increased to $24.0 million as compared to $21.8 million in the third quarter of 2013 despite continued record high input commodity protein costs. 

• Earnings for the quarter of $4.7 million or $0.21 per share as compared to $5.2 million or $0.25 per share for the third quarter of 2013. Excluding plant start-up and restructuring costs associated with the Company's new 180,000 square foot sandwich production facility in Columbus, Ohio, its earnings for the quarter were $8.4 million or $0.38 per share.

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

• Rolling four quarters free cash flow of $53.2 million resulting in a dividend to free cash flow ratio of 52.0%.

• During the quarter the Company started production at its new 180,000 square foot sandwich production facility in Columbus, Ohio.

"We are very pleased to report another quarter of strong growth in both our sales and adjusted EBITDA," said Mr. George Paleologou, President and CEO. "In particular, we are pleased that the strategies we have been implementing over the last several months to deal with the rapid run-up in our input commodity protein costs are starting to be reflected in our adjusted EBITDA. This once again demonstrates the resilience of our company and the ability of our business model to deal with any headwinds and challenges that come our way.

"Our adjusted EBITDA is also starting to reflect some of the potential we expect to realize from the significant investments we have made over the last two years in major business restructuring initiatives and capital projects. These include the integration of our Freybe and Piller's acquisitions with our deli group of businesses, the rationalization of our NDSD business' distribution network and the construction of incremental production capacity for several of our businesses. With many of these projects now complete they are starting to make a significant contribution to our earnings and, over the next several years, will be key drivers of sustainable growth in our top and bottom lines. 

"We are also pleased to report that our North American Sandwich Group's new 180,000 square foot production facility in Columbus, Ohio is now fully operational and in the ramp-up stage of its business plan. This new state-of-the-art facility not only provides us with much needed production capacity to service our existing customers, but also ideally positions us to aggressively grow our sandwich business in the eastern U.S. and eastern Canada. In the short term we are, however, experiencing the start-up costs typical of a project of this nature.

"On the acquisition front we remain very active. We have a number of promising opportunities that we are looking at and expect to expand our portfolio of great specialty food businesses in the near future," 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

Retail's revenue for the third quarter of 2014 as compared to the third quarter of 2013 increased by $25.3 million or 14.2% primarily due to organic growth across a range of products and customers partially offset by a $2.5 million decrease in sales resulting from the sale of a portion of Retail's NDSD business (see Plant Start-up and Restructuring Costs). Retail's sandwich business, in particular, generated significant growth in both Canada and the U.S. primarily due to the introduction of a variety of new products by one of its major customers.

Retail's revenue for the first three quarters of 2014 increased by $88.4 million or 18.0% as compared to the first three quarters of 2013 primarily due to: (i) net organic growth of $72.4 million, representing an average growth rate of 14.7%; and (ii) 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.

Retail's organic growth rate for the first three quarters of 2014 was well above the Company's targeted range of 6% to 8% primarily due to: (i) 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); and (ii) 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. Excluding these factors, Retail's organic growth for the first three quarters of 2014 was slightly above the Company's net of inflation targeted range of 4% to 6%.

Looking forward (see Forward Looking Statements), the Company is expecting Retail's organic growth to continue exceeding its targeted range for the remainder of 2014 based on (i) the factors outlined above; and (ii) continued implementation of a variety of growth initiatives including several production capacity expansion projects.

Foodservice's revenue for the third quarter of 2014 as compared to the third quarter of 2013 increased by $18.2 million or 16.8% primarily due to: (i) organic growth of $13.9 million, representing an average growth rate of 13.8%; (ii) the acquisition of Reddi Foods which accounted for $1.8 million of the increase; and (iii) increased sales in its Worldsource food brokerage business of $2.5 million resulting from improved trading opportunities and average higher selling prices for beef and pork products.

Foodservice's revenue for the first three quarters of 2014 increased by $36.1 million or 11.9% as compared to the first three quarters of 2013 primarily due to: (i) organic growth of $28.7 million, representing an average growth rate of 10.0%; (ii) the acquisition of Reddi Foods which accounted for $3.6 million of the increase; and (iii) increased sales in its Worldsource food brokerage business of $3.8 million resulting from improved trading opportunities and average higher selling prices for beef and pork products.

Foodservice's organic growth rate for the first three quarters of 2014 was above the Company's targeted range of 6% to 8% mainly due to: (i) 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) and (ii) increased salmon sales in the third quarter due to a strong west coast salmon fishery. These increases were partially offset by lower than expected growth in Foodservice's sales volume during the first half of 2014 due mainly to poor weather conditions across much of the Prairies and Ontario. Excluding the impact of selling price increases, Foodservice's organic growth for the first three quarters of 2014 was within the Company's net of inflation targeted range of 4% to 6%.

Looking forward (see Forward Looking Statements), the Company is expecting Foodservice's organic growth to exceed or be at the high end of its targeted range of 6% to 8% for the remainder of 2014 based on: (i) selling price increases associated with the record rise in the cost of input commodity proteins; and (ii) continued execution of a variety of growth initiatives.

Retail's gross profit as a percentage of its revenue (gross margin) for the third quarter of 2014 as compared to the third quarter of 2013 decreased primarily due to: (i) a significant portion of its volume sales growth coming from products that are sold on a cost plus basis. These products generally have lower than average gross margins since the customer assumes the risk associated with changes in raw material costs; (ii) significant increases in the cost of a variety of raw materials that resulted in lower gross margins on products sold on a cost plus basis; and (iii) extremely high costs for a variety of input commodity proteins, which in many cases were 40% to 50% higher than their respective costs in the third quarter of 2013. Most of the impact of this last factor was, however, offset by higher selling prices (see Revenue).

Retail's gross margin for the first three quarters of 2014 as compared to the first three quarters of 2013 decreased primarily due to: (i) an extremely rapid rise in the cost of a variety of input commodity proteins during the first half of 2014; (ii) increased sales of lower gross margin products sold on a cost plus basis as discussed above; and (iii) the impact of higher raw material costs on the gross margins of products sold on a cost plus basis.

Looking forward (see Forward Looking Statements), the Company expects Retail's margins to increase over the next several quarters based on: (i) improved capacity utilization in several of its recently completed production facilities as some of its newer sales growth initiatives begin to generate results; (ii) continued improvement in deli meat product margins as Retail further adjusts its selling prices to account for historically high input commodity protein costs; (iii) plant efficiency benefits associated with the Company's various restructuring projects (see Plant Start-up and Restructuring Costs) and (iv) in the longer term, a return to normal levels in the cost of input commodity proteins that are currently at historically high levels. These positive factors will, however, be partially offset by the impact of continued strong growth in Retail's sales of products sold on a cost plus basis, which typically have lower gross margins.

Foodservice's gross margin for the third quarter of 2014 as compared to the third quarter of 2013 and for the first three quarters of 2014 as compared to the first three quarters of 2013 decreased primarily due to increases in the cost of a variety of input commodity proteins, in general, and certain premium beef commodities, in particular. During the third quarter, Foodservice was able to almost fully recover increases in its input commodity protein costs; however, due to the extent of the increases, it was unable to immediately raise its selling prices sufficiently to return to its historic gross margin levels.

Looking forward (see Forward Looking Statements), although the Company expects Foodservice's margins to improve over the next several quarters, they will likely remain below normal levels until mid-2015 due to expected continued volatility and supply issues for premium beef products.

Retail's SG&A for the third quarter of 2014 as compared to the third quarter of 2013 decreased by $0.7 million due to: (i) a temporary reduction in discretionary marketing and advertising programs as part of a strategy to partially mitigate the impact on its gross margin of record high input commodity protein costs (see Gross Profit); and (ii) the sale of NDSD's Quebec operations (see Plant Start-up and Restructuring Costs). These decreases were partially offset by increased variable selling costs, including freight, associated with Retail's organic sales growth (see Revenue). 

Retail's SG&A for the first three quarters of 2014 as compared to the first three quarters of 2013 increased by $2.7 million primarily 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 variable selling costs associated with Retail's organic sales growth. These increases were partially offset by the factors that resulted in a decrease in SG&A in the third quarter as discussed above.

Retail's SG&A as a percentage of its revenue for the first three quarters of 2014 as compared to the first three quarters of 2013 decreased mainly due to: (i) the fixed nature of certain costs relative to the growth in its revenue (see Revenue); and (ii) decreased discretionary marketing and advertising spending as discussed above.

Foodservice's SG&A for the third quarter of 2014 as compared to the third quarter of 2013 and for the first three quarters of 2014 as compared to the first three quarters of 2013 increased primarily due to: (i) increased variable selling costs, including freight, associated with its organic sales growth (see Revenue); and (ii) additional sales and administrative infrastructure needed to support a variety of growth initiatives.

Other Income

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

Other income for the first three quarters of 2013 consists of a $1.2 million gain resulting from the Retail segment's sale of vacant land in Edmonton, AB in the third quarter.

The Company's adjusted EBITDA before other income for the third quarter of 2014 as compared to the third quarter of 2013 increased by $3.4 million or 16.5% to $24.0 million primarily due to: (i) the Company's sales growth (see Revenue); (ii) improved operating efficiencies associated with the reconfiguration of the Company's deli meats production capacity (see Plant Start-up and Restructuring Charges); and (iii) the turnaround of NDSD's business (see Plant Start-up and Restructuring Charges). These increases were partially offset by lower than normal margins on certain products resulting from record high input commodity protein costs (see Gross Profit). 

The Company's adjusted EBITDA before other income for the first three quarters of 2014 as compared to the first three quarters of 2013 increased by $2.4 million or 4.6% to $56.9 million primarily due to the factors impacting the third quarter as discussed above. Similarly, these factors were partially offset by lower than normal margins on certain products resulting from record high input commodity protein costs. The impact of the record high input commodity protein costs was, however, much more severe in the first half of 2014 as compared to the third quarter of 2014 due to: (i) most of the increases in the related commodities occurred in the first half of 2014; and (ii) the delays associated with increasing selling prices, such as customer notice periods, occurred mainly in the first half of 2014.

Looking forward (see Forward Looking Statements), the Company expects its adjusted EBITDA for the last quarter of 2014 as compared to the last quarter of 2013 to show continued improvement based on:

• Additional selling price increases being implemented in the fourth quarter of 2014 (see Gross Profit);

• Stabilization of commodity pork markets;

• Continued improvement in the performance of its deli meat businesses with the completion of the Deli Capacity Project (see Plant Start-up and Restructuring Costs);

• 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; and

• Continued improvement in the performance of NDSD with the completion of the NDSD Reconfiguration Project (see Plant Start-up and Restructuring Costs).

Interest and other financing costs

The Company's interest and other financing costs for the third quarter of 2014 as compared to the third quarter of 2013 and for the first three quarters of 2014 as compared to the first three quarters of 2014 increased by $0.7 million and $1.9 million, respectively, primarily due to an increase in the Company's funded debt resulting from the Company's project capital expenditure initiatives.

Plant Start-up and Restructuring Costs

Plant start-up and restructuring costs consist of costs associated with the start-up of new production capacity and/or the significant restructuring of one or more of the Company's businesses. The Company expects these projects to result in significant improvements in its future earnings and cash flows.

U.S. Sandwich Capacity Project

This project, which involves the reconfiguration of the Company's U.S. based sandwich production capacity including the construction of a new 180,000 square foot production facility in Columbus, OH, will provide much needed incremental sandwich production capacity as well as improved efficiencies at the Company's other U.S. sandwich plant in Reno, NV.

The first phase of the project was completed in the third quarter with the new Columbus plant commencing production in August. The second and final phase of the project, consisting of reconfiguring production between the Columbus and Reno plants to maximize efficiencies, is expected to be completed in the fourth quarter of 2014.

Deli Capacity Project

This project involved the reconfiguration of the Company's deli meats production capacity in western Canada including: (i) the shutdown of an older facility in Richmond, BC; (ii) a major realignment of a new facility in Langley, BC acquired in 2013 as part of the acquisition of Freybe Gourmet Foods; (iii) the transfer of the Langley plant's distribution to the Company's distribution centre in Surrey, BC; and (iv) the start-up of a new distribution operation in Calgary, AB.

This project, which increased the Company's deli meats production capacity and significantly improved its operating efficiencies, was completed in the second quarter of 2014.

NDSD Reconfiguration Project

This project involved the restructuring and rationalization of NDSD, the Company's direct-to-store distribution (DSD) business for the convenience store industry. The project was initiated to address the impact that a variety of factors, including the proliferation of quick serve restaurants, was having on consumer demand for food products sold through the convenience store channel.

The major elements of the initiative, which consisted mainly of streamlining NDSD's distribution infrastructure so that it could be profitable on a lower sales volume, were completed in 2013. The restructuring costs incurred in 2014 consist mainly of final employee severance payments and the write-down of inventory made obsolete by the reconfiguration. 

In the third quarter of 2014, the Company sold its NDSD business' Quebec operations to a well-established Quebec based distributor (Martel) as part of a new strategic alliance. Under this alliance:

• Martel will combine some of its existing operations with NDSD's Quebec operations to create a stronger and more efficient direct-to-store distribution network for the Quebec convenience store market;

• Martel will be the exclusive distributor of the Company's sandwiches and meat snacks to direct-to-store distribution customers in Quebec; and

• Martel will source primarily all of its sandwiches and meats snacks sold to the convenience store industry from the Company.

New Seafood Facility Start-up Project

This project, which consisted of the start-up of a new seafood processing facility in Richmond, BC and the subsequent integration of a business acquired from Harbour Marine in 2013, was completed in the first quarter of 2013.

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 November 5, 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; (xiv) the Company's ability to raise the capital needed to fund its various growth initiatives; and (xv) labour related issues including potential labour disputes with employees represented by labour unions and labour shortages. 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 November 5, 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.