Premium Brands Holdings Corporation (PBH) Earnings Call Transcript

Good morning and afternoon, ladies and gentlemen, and welcome to the Premium Brands Holdings Corporation Second Quarter 2025 Earnings Conference Call Question-and-answer Session. [Operator Instructions] Also note that this call is being recorded on Wednesday, August 6, 2025. Our speakers will be George Paleologou, CEO and President of Premium Brands; and Will Kalutycz, CFO of Premium Brands. And I would like to turn the conference over to George Paleologou. Please go ahead, sir.

Thank you, Sylvie. Good morning, and welcome, everyone, to our 2025 second quarter conference call. With me here today is our CFO, Will Kalutycz. Hopefully, you've had a chance to listen to our prerecorded call posted on our website this morning. We will now take your questions. Sylvie?

[Operator Instructions] And your first question will be from Derek Lessard at TD Cowen.

Congrats on a great quarter.

Good morning, Derek.

Thanks, Derek.

I guess my first question is, how should we be thinking about the cadence over your next 2 quarters, I guess, just in terms of your revenue and EBITDA guide, is it -- do you think it's an equal split? Or does the momentum build and Q4 should be a stronger quarter?

Yes. It does build, but there's an offsetting cycle with cyclicality. So it should be pretty -- our expectation is pretty consistent over the next 2 quarters, maybe a little bit stronger in Q4 because of the momentum.

Okay. And maybe just -- I was wondering if you guys could maybe just update us on the timing of some of the new contracts or launches that are coming through on that U.S. sales pipeline, I guess, other than meat. What are the bigger programs that are coming through?

Yes, Derek, our business development pipeline is full. It's very robust. We've onboarded and launched a number of new programs in the first 2 quarters of the year, which has obviously driven our organic growth. We are in the process of ramping up a number of brand-new facilities. Obviously, we want to execute well. We want to execute the launches well. It's not an issue for us in terms of business opportunities. It's an issue of obviously making sure that the plants are running well. And again, as I mentioned earlier, a lot of the launches are going to be large and very lumpy. We don't have the best visibility today in terms of the exact timing, but I can tell you that we're very excited at the pipeline, the business development pipeline.

Okay. And maybe one final one for me before I requeue. Just maybe talk about the decision for you guys to introduce ROIC and make it part of the compensation program. And is there a time frame for you guys getting to that 15% target?

Yes. So we've been using the concept of RONA, which is a pretax calculation, and that dates back to when we were an income trust. And we probably should have made the change sooner, but we've moved to RONA our ROIC to better reflect our after-tax status. It ties closely with our internal metric or target of a 15% unlevered after-tax IRR for all capital allocation decisions. And in terms of meeting that target, it's going to take a couple of years, but '28, '29 is when we expect to be at or exceeding that 15%.

Next question will be from Martin Landry at Stifel.

I would like to follow up on Derek's question to just to get a bit of more visibility and color on your adjusted EBITDA guidance of $680 million to $700 million for the full year. It does imply a very strong back half. it looks like by my calculation, your EBITDA will need to increase by at least 18% to meet the low end of your guidance. So can you talk a little bit about some of the drivers of EBITDA growth for the back half that we can expect and that could give us a bit more visibility as to how you're going to achieve that pretty strong pace of growth?

Yes. It's really growth, Martin. And particularly, Q3, we expect to see some continued growth with the initiatives being launched. They are over the course of Q3 and the largest single launch in our -- our pipeline, which will actually be one of our largest launch -- new product launches in our history is in now early September. So it is sort of loaded to the back half of the quarter. But that's really going to drive a much stronger year-over-year Q4 because Q4 has historically been one of, if not our weakest quarters for seasonality reasons. But a lot of these launches, a lot of this growth is in the U.S. market. It's less seasonal business. And really, that's going to be the biggest year-over-year factor driving that growth into our targeted EBITDA range.

The other part, Martin, that you need to remember is that even though we've reported in line EBITDA for the quarter, we absorbed about $15 million to $20 million in margin contraction because of hyperinflation in chicken and beef. Plus there were some tariffs there as well, not that material, but there were some tariffs as well. So that shows you that the earning capacity of the company on a normalized basis is much higher than what we've reported, right? So you have to account for that in terms of any projections you make.

Okay. So understood. So maybe just to follow up on that last point on your price increases that you've put in place to absorb commodity increases. Are you -- is Q3 also impacted a little bit by that? Or were you able to mitigate fully the commodity cost increases in Q3?

We are -- we put through price increases, but our expectations of our margins normalizing to where they should be over the long term, Martin, is a combination of those price increases, and we do see easing of certain commodities, particularly chicken. So -- and then the third factor is we do expect to see some efficiency gains, which has been consistently part of our EBITDA growth over the last couple of years. But it's sort of a combination of those factors that get our margins back to that normalized number.

Having said that, Martin, there's a lot of moving parts now given the tariff noise in the U.S., not necessarily with Canada, but with obviously trade with Brazil and Australia and New Zealand and Europe and others, right? So again, you have to incorporate some element of risk there as well.

Okay. And then just lastly, George, you talked about in the previous question -- in the previous -- with the question with Derek that some of the launches would be large and lumpy. Are you referring to launches of products this year or this was more a 2026 comment?

No, no. This year, of course, and next year as well. But I was talking generally about the business development pipeline over the next couple of years.

Next question will be from Stephen MacLeod at BMO Capital Markets.

Just wanted to follow up on a couple of things. Just with respect to just the Q3 commentary, I just want to make sure I fully understand the commodity impact. It sounds like you do expect to see margins normalizing, but would you expect to see gross margins in the Specialty Foods business actually improving year-over-year in Q3? Or are you still under pressure just a little bit because of the time it takes to make -- to pass through those price increases?

Yes. Steve, I don't know off the top of my head, the actual percentage margin Q3 over Q3 projected versus next year. But the reality is we do expect to see improvement from Q2.

Okay. No, that's helpful. Okay. Great. Maybe just thinking about the sales capacity that you have. You've talked about the $1.7 billion for -- with the new capacity you have in place. Can you talk a little bit about whether you've previously talked about like $700 million being highly likely for 2025. Can you just let us know if that's still the case? And then how much do you think you've realized by the end of Q2 of that full capacity amount?

As much as we continue to recognize amounts from that pipeline and off the top of my head, I think of that original pipeline, we talked about $1.2 billion. I think it's about $200 million of that has been realized. The reality is the pipeline hasn't changed. As we realize new things, a few projects have dropped off, new projects have come on. We look at our pipeline and today, it's still around that $1.2 billion. In terms of where it falls in terms of likely, highly likely and the quarters, that's always moving around, Steve, as you've seen, this launch I mentioned earlier coming up in September, there's always little delays. There's always things that happen. Originally, it was beginning of August. We had a piece of equipment that was delayed. It's tough to put it that refined of a bucket. But the key note is the pipeline continues to be very strong and lots of exciting stuff going on.

And a lot of that, Stephen, is driven by the 3 megatrends that I mentioned in my prepared remarks, which have driven the growth of Premium Brands since inception and are still driving the growth of Premium Brands, subject obviously to capacity, which we're bringing on stream as we speak with the capital investment that we've made over the last 2 or 3 years, right? We are invested in the right products, in the right plants, obviously catering to the channels that are recognizing that these megatrends [indiscernible] and are investing in them.

Right. Okay. That's helpful. Just to clarify on the sales capacity, I thought in the prepared remarks, you talked about $1.7 billion. But Will, you just said $1.2 billion. So I'm just wondering, is there a difference between those 2 numbers that I'm not aware of?

No, no. The $1.2 billion is the -- those are actual initiatives, Steve, that target initiatives, X product with Y customer. The $1.7 billion is something we'll grow into over the next year or two and as we develop other new opportunities.

That's the available total capacity.

Okay. Okay. That's great. And then maybe just finally, just on the investment income representing the Clearwater investment. It's been a bit higher, sort of the last 2 quarters have been higher than what we saw through the quarters in fiscal 2024. And I'm just curious, is that kind of a new run rate? Or is there anything else that's happening with that line item to cause it to move higher?

If you saw the equity earnings number, Clearwater has been -- had a very tough first half of the year. Now the positive that we are expecting a much better half -- second half of the year for Clearwater. But as a result of that, we've been accruing our interest and the interest compounds. So that's been a driver. And then as we talked about last quarter, we did have to advance them $40 million at the beginning of the year to help with their liquidity as they put a new financing structure in place. And so the combination of that has led to that growth in the interest rate. Lots of good things happening in the business, though, Steve. They're very close to closing on a new financing, which will greatly address their liquidity needs through this sort of tough part of the cycle. As I mentioned, the core business itself is starting to show solid improvement for a much better back half. And strategically, there's a lot of good things happening that we'll probably talk about next quarter.

Next question will be from Ty Collin at CIBC World Markets.

So maybe my first one, just to follow up on a previous point. You mentioned that you're expecting one of your biggest programs or contracts of all time to turn on. I think you said around September and that the EBITDA guide is kind of levered to that. I'm just wondering what your level of visibility is on that timing specifically and whether there's any risk that, that gets pushed further into Q3 or into Q4.

Again, the business will be executed by a brand-new facility, Ty, which we're currently ramping up. And we feel comfortable at this point that we'll be able to execute it. If we don't execute it in terms of a big bang type of opportunity, we will basically gradually launch it and ramp up the capacity. But we're hoping that we'll ramp it up all at once, but plan B is to basically launch it gradually.

Okay. Got it. And then I'm wondering if you could kind of provide your updated thoughts on whether there are any parts of your business that you'd consider noncore and might look at divesting at the right price. There's obviously been some consolidation going on in the food distribution space down south. And I'm curious if that's kind of jump-started any conversations around premium brands recently.

Yes. I think, as Will said in his prepared remarks, Ty, we're always looking for ways to improve our liquidity, unlock value, obviously, pay down debt. We're committed to getting back to 3:1 debt to EBITDA. Obviously, growing the EBITDA will be one where you're getting there as well. So all I could say is that we're looking at a number of value unlocking transactions that we will able to use to bring down the debt as we promised we would.

Next question will be from Luke Hannan of Canaccord Genuity.

I wanted to ask about CapEx. I know it's consistent with what you said in the past, CapEx -- project CapEx gradually has been coming down. I think you mentioned $108 million is what you expect over the course of the next 4 quarters. I'm curious so if we look beyond that, let's just say, 2 or 3 years out, should we expecting either on an absolute dollars or a CapEx intensity basis, should we expect relative consistency over the next few years? Or what can you share on that front?

Yes. So we look at CapEx in 3 buckets. Our maintenance CapEx, which tends to be fairly steady, around $60 million to $65 million a year. And then we -- there's generally across our plant network, smaller CapEx projects, adding a line, adding some automation, things like that. And that's generally about $60 million to $65 million a year as well. So that's kind of our baseline CapEx. And then we have these other larger projects that tend to accelerate or increase our organic volume growth rate. And that's what that $108 million we referred to in the presentation, we're left to spend on those major projects. And so your question is really, are there going to be future major projects. In terms of hitting our target of $10 billion in sales by 2027, and the organic growth number in that is about $9.2 billion to $9.4 billion of sales and then a little bit of acquisitions to get us to the $10 billion. We'll have completed the CapEx cycle of the major projects to get there. Now I can't say there won't be more projects because it will depend on the growth profiles of our business. If they exceed the expectations of their growth profile, they run out of capacity, well, then it will be a very positive story, but we will then be needing to invest more money in their businesses. But based on today and hitting our 5-year targets for 2027, we are essentially at the end of that CapEx cycle.

Okay. I appreciate it. And then on that $9.2 billion to $9.4 billion, if there's a scenario that presents itself where there happens to be more attractive acquisition opportunities out there where perhaps maybe you'd be comfortable giving up some organic growth to go after and chase those acquisitions. Is that a plausible scenario? I guess the question is, are you comfortable potentially acquiring more than what it is that's -- what's being implied.

Absolutely. And just to correct you on something, we wouldn't give up the organic growth, right? Those are niches in place. Our businesses are executing on them. We put what we feel is a very conservative acquisitions number into our 5-year plan. The reality is we expect to exceed that. And so the answer is absolutely yes. If opportunities arise, -- and in George's prepared remarks, our pipeline right now is incredibly robust. There's lots of increasing or interesting transactions we're looking at. And I think we increased our active pipeline to, I think it's about $2 billion in sales opportunities today. So yes, there's significant opportunities there. Now the one thing I will caveat that will is with is we are committed to maintaining or getting to within our midterm leverage targets, the 2.5 to 3:1 senior debt to EBITDA and the 3.5:1 -- sorry, 4.5:1 total debt to EBITDA. So we're not going to do anything that prevents us from getting within those targets. And I should say and make this very clear is our long-term target is to get our total debt-to-EBITDA ratio down to 3 or less. So those are -- whatever we do, we're working within those trajectories as well.

Yes. Just to talk about history a little bit, Luke, as we've started in Canada many years ago and started to do good things in the food space, many, many food entrepreneurs came to us to join us. And of course, we grew organically by acquisition in Canada. The same thing is happening in the U.S. We're doing a lot of amazing things in the U.S. market. We're launching some of the best-selling products in that market in different channels, and we're well known. We're getting to be well known these days. And because of that, we are having a lot of discussions with many, many food entrepreneurs that would like to join Premium Brands, right? So yes, absolutely, Will is right. We will be doing a lot of acquisitions in the U.S. in the future as we grow our different platforms.

That's great. Last one here, and then I'll pass the line. Just on the Cleveland, Tennessee sandwich facility, roughly speaking, I mean, are the sales that are expected to come out of Phase 1 and potentially future phases? Is that concentrated to any one customer? Or is that relatively well diversified amongst your existing or potentially new customers?

Well diversified, Luke. Again, we have a robust pipeline of large opportunities. And again, we're very, very certain, I would say that we will fill that capacity sooner than what we even budgeted ourselves.

And that's for future phases as well?

Absolutely.

Next question will be from John Zamparo at Scotiabank.

I wanted to ask about the $1.7 billion in capacity, just to follow up on that. Is the right way to think about that, that's the capacity you have in place for facilities today? Or does that include the remaining $108 million in remaining project CapEx over the next 12 months?

Yes. No, let me clarify a couple of things there, John. So the $1.7 billion is, yes, after we complete that $100 million of projects. And in particular, the big project in there is a consolidation of our Concords businesses, plants in the Greater Toronto area. That's about $100 million of sales capacity. So that's the $1.7 billion. But I want to be clear, that $1.7 billion is just the incremental capacity from the new projects. So there's still other capacities in the system. Not every plant was running at full capacity before we started on this CapEx plan. So there is some slack in the system in addition to that as well as I mentioned on an earlier question, the 3 buckets of CapEx. Well, that small project CapEx budget, a bucket of about $60 million to $65 million a year, that also provides us with an additional growth capacity. So it's not limited to the $1.7 billion. There are other elements to it.

Okay. That's good color. The margins on incremental volumes on your organic volume growth this quarter, are those still hitting the, call it, the high 20s percent rate? Is it fair to say this quarter you saw that or above that level?

Yes. Yes. In fact, if you look at our U.S. initiatives, it's much better because -- we've talked about this in the past. Our sandwich group has -- of the 3 big growth platforms in the U.S. Our sandwich group has the lowest contribution margins there, sort of that 20% to 25% range. Our sandwich are 25%, 30%, even over 30% contribution margins depending on the product mix. And then our bakery is 40% plus. So absolutely relative to 20%, 25%, we're far exceeding that.