Premium Brands Holdings Corporation Announces Fourth Quarter 2014 Results and Increase in Dividend

VANCOUVER, BC--(Marketwired - March 12, 2015) - Premium Brands Holdings Corporation (TSX: PBH), a leading producer, marketer and distributor of branded specialty food products, announced today its results for the fourth quarter of 2014.

HIGHLIGHTS FOR THE QUARTER

• Revenue for the quarter increased by 16.0% to a record $322.1 million as compared to $277.7 million for the fourth quarter of 2013. For the year, revenue increased by $168.9 million or 15.7% to 1.24 billion.

• Record fourth quarter adjusted EBITDA of $19.2 million despite $1.3 million in unusual asset write-downs. Adjusted EBITDA for the fourth quarter of 2013 was $15.4 million. For the year, adjusted EBITDA increased by $6.4 million or 9.1% to $76.1 million.

• Adjusted earnings for the quarter of $4.5 million or $0.20 per share as compared to $2.8 million or $0.13 per share for the fourth quarter of 2013. For the year, adjusted earnings were $20.2 million or $0.92 per share as compared to $20.1 million or $0.95 per share for 2013.

• Fourth quarter declared dividend of $0.3125 per share. Declared dividends for the year totaled $1.25 per share.

• Rolling four quarters free cash flow of $57.4 million resulting in a dividend to free cash flow ratio of 48.4%.

• Completed the acquisition of Ocean Miracle Seafood for $3.4 million plus contingent consideration of up to $3.0 million. Ocean Miracle Seafood is a distributor of live, fresh and frozen seafood to restaurants and specialty retailers in the Greater Toronto Area.

The Company also announced that it will be increasing its quarterly dividend by 10.4% to $0.345 per share ($1.38 per share annually) from $0.3125 per share ($1.25 per share annually). The increase will commence for the dividend period ended March 31, 2015 with the first dividend under the new rate being payable on April 15, 2015. Unless indicated otherwise in writing at or before the time the dividend is paid, each dividend paid by the Company in 2015 or a subsequent year is an eligible dividend for the purposes of the Enhanced Dividend Tax Credit System.

SUMMARY FINANCIAL INFORMATION

"During 2014 we continued to make solid progress towards our goal of becoming one of North America's leading specialty foods companies," said Mr. George Paleologou, Present and CEO. "In fact, our sales growth for the year of $168.9 million exceeded what our total specialty food sales were when we began implementing our current business strategies in 2001," added Mr. Paleologou.

"2014 was, however, a very challenging year with the cost of many of the raw materials used in our operations reaching record highs. And while we are pleased with our overall results, we see our fourth quarter performance, with sales and adjusted EBITDA increases of 16.0% and 24.7%, respectively, as more indicative of our future potential. Our results are now starting to reflect the benefits associated with a number of significant investments we have made in recent years in both our existing businesses and in acquiring new specialty food businesses.

"In terms of the ramp up of our new 180,000 square foot sandwich facility in Columbus, OH, we have made significant progress over the last month and are pleased to report that we now expect this project to start being accretive to our earnings in the second quarter of 2015.

"Looking forward, we are very excited about what lies ahead for 2015. Our recent investments in plant capacity and efficiency improvements combined with raw material costs returning to normal levels will help to expand our margins and drive our continued sales growth. Furthermore, we are pursuing a number of exciting acquisition opportunities and I am very confident that we will be adding to our portfolio of great specialty food businesses in the near future.

"Consistent with our outlook for 2015 and our objective of maintaining a payout ratio of approximately 50%, we are pleased to be announcing a 10.4% increase in our quarterly dividend to $0.345 per share per quarter or $1.38 per share per year," said 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, Direct Plus, 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.

www.premiumbrandsholdings.com

RESULTS OF OPERATIONS

Revenue

Retail's revenue for the fourth quarter of 2014 as compared to the fourth quarter of 2013 increased by $28.1 million or 16.0% primarily due to organic growth across a range of products and customers. 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 and expansion into new markets in the U.S. northeast.

Retail's revenue for 2014 increased by $116.5 million or 17.5% as compared to 2013 primarily due to: (i) net organic growth of $100.5 million, representing an average growth rate of 15.1%; and (ii) the acquisition of Freybe Gourmet Foods at the end of the first quarter of 2013 which accounted for $16.0 million of the increase.

Retail's organic growth rate for 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 raw materials (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 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 for 2015 to continue to remain at above its targeted range 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 fourth quarter of 2014 as compared to the fourth quarter of 2013 increased by $16.3 million or 16.0% primarily due to: (i) organic growth of $8.0 million, representing an average growth rate of 8.5%; (ii) the acquisitions of Reddi Foods and Ocean Miracle which accounted for $4.9 million of the increase; and (iii) increased sales in its Worldsource food brokerage business of $3.4 million resulting from improved trading opportunities and average higher selling prices for beef and pork products.

Foodservice's revenue for 2014 increased by $52.4 million or 12.9% as compared to 2013 primarily due to: (i) organic growth of $36.8 million, representing an average growth rate of 9.8%; (ii) the acquisitions of Reddi Foods and Ocean Miracle which accounted for $8.5 million of the increase; and (iii) increased sales in its Worldsource food brokerage business of $7.0 million resulting from improved trading opportunities and average higher selling prices for beef and pork products.

Foodservice's organic growth rate for 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 raw materials (see Gross Profit) and (ii) increased wild sockeye salmon sales in the third quarter due to a very strong fishery on the west coast of B.C. These increases were partially offset by: (i) temporary supply chain disruptions for certain seafood products in the fourth quarter of 2014; and (ii) 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 2014 was slightly below 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 for 2015 to be at the bottom end of its targeted range of 6% to 8% based on: (i) a much weaker west coast sockeye salmon fishery as compared to 2014; and (ii) slower growth from its traditional restaurant customers due to a variety of factors including an expected slowdown in Alberta's economy resulting from lower oil prices, and a negative impact on consumer demand resulting from continued record high beef prices.

Gross Profit

Retail's gross profit as a percentage of its revenue (gross margin) for the fourth quarter of 2014 as compared to the fourth quarter of 2013 increased primarily due to: (i) selling price increases implemented by its protein focused businesses over the last several quarters (see Revenue) in order to address a record run up in raw material beef and pork costs that began in the fourth quarter of 2013; and (ii) some softening in raw material pork costs during the quarter. These positive factors were partially offset by: (i) temporarily lower operating efficiencies in Retail's sandwich operations while a new 180,000 square foot sandwich production facility is brought into production (see Plant Start-up and Restructuring Costs -- Sandwich Capacity Project); and (ii) 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.

Retail's gross margin for 2014 as compared to 2013 decreased primarily due to; (i) significant increases in the cost of a variety of raw materials, with the most significant being for beef and pork products which, for certain items, were 40% to 50% higher as compared to 2013; (ii) the sales mix changes that impacted the fourth quarter as discussed above; and (iii) the temporarily lower operating efficiencies in Retail's sandwich operations as discussed above.

Foodservice's gross margin for the fourth quarter of 2014 as compared to the fourth quarter of 2013 decreased primarily due to continued record high raw material beef costs. Foodservice has been able to recover most of these cost increases through higher selling prices, however, due to the extent of the increases it has not been able to achieve its historic gross margin levels. Looking forward (see Forward Looking Statements), Foodservice expects its gross margin to improve over the course of 2015 due to a combination of continued selling price increases and an easing off of raw material beef costs in the latter part of 2015. 

Foodservice's gross margin in the fourth quarter was also impacted by a $0.9 million write down of tuna inventory due to an unexpectedly strong tuna fishery in 2014 that resulted in lower selling prices for tuna purchased in 2013.

Foodservice's gross margin for 2014 as compared to 2013 decreased due to record increases in the cost of a variety of raw materials including beef, and the $0.9 million tuna inventory write down, as discussed above.

Selling, General and Administrative Expenses (SG&A)

Retail's SG&A for the fourth quarter of 2014 as compared to the fourth quarter of 2013 increased by $1.2 million due to incremental costs associated with Retail's organic sales growth (see Revenue) including higher variable selling costs, such as freight, and additional sales and administration infrastructure. These increases were partially offset by reduced costs resulting from the sale of a portion of Retail's direct-to-store delivery network (see Plant Start-up and Restructuring Costs -- NDSD Reconfiguration Project).

Retail's SG&A for 2014 as compared to 2013 increased by $4.0 million primarily due to: (i) additional SG&A resulting from the acquisition of Freybe Gourmet Foods at the end of the first quarter of 2013; and (ii) incremental costs associated with Retail's organic sales growth as discussed above. These increases were partially offset by: (i) a temporary reduction in discretionary marketing and advertising programs in the second and third quarters of 2014 as part of a strategy to partially mitigate the impact of record high raw material costs (see Gross Profit); and (ii) the rationalization and subsequent sale of a portion of Retail's direct-to-store delivery network channel as discussed above.

Retail's SG&A as a percentage of its revenue for 2014 as compared to 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 fourth quarter of 2014 as compared to the fourth quarter of 2013 increased by $1.3 million primarily due to: (i) incremental costs associated with Foodservice's organic sales growth (see Revenue) including higher variable selling costs and additional sales and administration infrastructure; and (ii) an unusual bad debt expense of $0.4 million resulting from a major restaurant chain customer permanently shutting down its operations.

Foodservice's SG&A as a percentage of its revenue for 2014 as compared to 2013 decreased mainly due to the fixed nature of certain costs relative to the growth in its revenue (see Revenue).

Adjusted EBITDA

The Company's adjusted EBITDA for the fourth quarter of 2014 as compared to the fourth quarter of 2013 increased by $3.9 million or 25.1% to $19.2 million primarily due to:

• Growth in the Company's sales (see Revenue);

• Improved operating efficiencies resulting from the reconfiguration of the Company's deli meats production capacity (see Plant Start-up and Restructuring Charges -- Deli Capacity Project);

• Improved gross margins resulting from higher selling prices and decreases in certain raw material costs (see Gross Profit); and

• The rationalization and subsequent sale of the Company's direct-to-store delivery network for the convenience store channel (see Plant Start-up and Restructuring Charges -- NDSD Reconfiguration Project).

These increases were partially offset by:

• Temporarily lower operating efficiencies in the Company's sandwich operations while a new 180,000 square foot sandwich production facility is brought into production (see Plant Start-up and Restructuring Costs -- Sandwich Capacity Project); and

• $1.3 million in unusual costs incurred by the Company's foodservice operation consisting of a $0.9 million write down of tuna inventory (see Gross Profit) and a $0.4 million bad debt write-off (see Selling, General and Administrative Expenses).

The Company's adjusted EBITDA for 2014 as compared to 2013 increased by $6.4 million or 9.1% to $76.1 million primarily due to the factors that favourably impacted the fourth quarter. These were partially offset by: (i) the factors that unfavourably impacted the fourth quarter; and (ii) below normal margins on most protein products for the first three quarters of 2014 due to record high raw material costs (see Gross Profit). The impact of this factor was much more severe in the first half of 2014 due to: (i) most of the raw material cost increases occurred during this period; and (ii) delays associated with increasing selling prices, such as customer notice periods, which resulted in most selling price increases taking effect in the latter part of the year.

Looking forward (see Forward Looking Statements), the Company expects its adjusted EBITDA to continue to show substantial improvement in 2015 based on:

• Gross margins in the Company's deli and premium processed meats operations returning to normal levels;

• A steady improvement in the profitability of the Company's sandwich operations driven by: (i) improved operating efficiencies at its new production facility as start-up related issues are resolved and its workforce becomes more experienced; and (ii) sales growth which will help to offset the incremental overhead associated with its new production facility and the sales and administration infrastructure that was put into place in 2014 to support the sandwich operation's long-term growth objectives;

• Strong growth from the Company's businesses that have completed significant capital projects over the last three years including: its bakery operations, which completed a new state-of-the-art artisan bakery in 2012; its seafood operations, which built a new seafood processing facility in 2013; and its premium processed meats operations, which expanded its Ferndale, WA facility in 2013;

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

• The integration of the Ocean Miracle business acquisition;

• Continued improvement in the Company's foodservice operation's gross margins (see Gross Profit);

• The turnaround of the Company's protein snack foods business with the completion of its NDSD Reconfiguration Project (see Plant Start-up and Restructuring Costs -- NDSD Reconfiguration Project); and

• Continued general organic growth.

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.

Sandwich Capacity Project

This project 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. Once complete, it will provide the Company with much needed incremental sandwich production capacity and will result in improved efficiencies at its other U.S. sandwich plant in Reno, NV.

The first phase of the project was completed in the third quarter of 2014 with the startup of the new Columbus plant in August. The second and final phase of the project consists of: (i) getting the Columbus plant operating at normal efficiency levels (see Adjusted EBITDA); and (ii) reallocation of production between the Columbus and Reno plants to maximize various operational efficiencies. The second phase of the project was originally projected to be completed by the end of 2014, however, due to unexpectedly high sales volumes in the fourth quarter of 2014 and in early 2015 certain aspects of the project had to be delayed. In response, the Company has brought in additional resources and now expects (see Forward Looking Statements) this phase of the project to be completed in the second quarter of 2015.

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 delivery business for the convenience store channel. 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 this 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, NDSD's Quebec operations were sold to a well-established regional distributor as part of a strategy to: (i) form strategic alliances with strong regional distributors (Strategic Distributors) for the direct-to-store delivery of the Company's products to the convenience store channel; and (ii) shutdown and/or sell NDSD's direct-to-store delivery operations to the Strategic Distributors. In the fourth quarter of 2014 the Company continued to execute this strategy with the sale/exit of NDSD's operations in Alberta, Saskatchewan and Manitoba. Correspondingly, the Company has entered into strategic alliances with strong regional distributors in each of these markets.

As a result of the sale of NDSD's operations the Company recorded a loss of $0.7 million in the fourth quarter of 2014.

Looking forward (see Forward Looking Statements), the Company expects to sell the small remaining portion of NDSD's operations, consisting of several routes in the Vancouver region, in the first half of 2015.

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.

Other Income

Other income for 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 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.

Interest and other financing costs

The Company's interest and other financing costs for the fourth quarter of 2014 as compared to the fourth quarter of 2013 and for 2014 as compared to 2013 increased by $0.2 million and $2.1 million, respectively, primarily due to an increase in the Company's funded debt resulting from the Company's project capital expenditure initiatives and business acquisitions.

FREE CASH FLOW

ADJUSTED EARNINGS PER SHARE

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 March 11, 2015, 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) changes in the cost of raw materials used in the production of the Company's products; (ii) seasonal and/or weather related fluctuations in the Company's sales; (iii) changes in consumer discretionary spending resulting from changes in economic conditions and/or general consumer confidence levels; (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 initiatives; (xi) execution risk associated with the Company's business restructuring initiatives; (xii) risks associated with the Company's business acquisition strategies; (xiii) changes in the value of the Canadian dollar relative to the U.S. dollar; and (xiv) new government regulations affecting the Company's business and operations; (xv) the Company's ability to raise the capital needed to fund its various growth initiatives; (xvi) labour related issues including potential labour disputes with employees represented by labour unions and labour shortages; (xvii) the loss of and/or the inability to attract key personnel; (xviii) fluctuations in interest rates charged on the Company's variable rate debt obligations which have not been hedged with interest rate swaps; (xix) a major disruption, failure, or breach of the Company's information technology systems; (xx) credit risk associated with the Company's major customers; (xxi) plant shutdowns, periods of reduced production, or unexpected interruptions in production capabilities as a result of equipment failures; (xxii) risks related to the health status of livestock which impact both the supply of raw materials to the Company's production facilities as well as consumer confidence in the Company's products; (xxiii) risks associated with international events that affect the price of food commodities or the free flow of food products between countries; and (xxiv) changes in environmental, health and safety regulations under which the Company operates. Details on these risk factors as well as other factors can be found in the Company's 2014 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 March 11, 2015 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.