Mr. George Paleologou reports

PREMIUM BRANDS HOLDINGS CORPORATION REPORTS RECORD SECOND QUARTER SALES AND ADJUSTED EBITDA AND DECLARES THIRD QUARTER DIVIDEND

Premium Brands Holdings Corp. has released its results for the second quarter of 2023.

Second quarter highlights:

• Record second quarter revenue of $1.63-billion representing a 7.3-per-cent, or $111-million, increase as compared with the second quarter of 2022;
• Record second quarter revenue for the company's specialty foods segment which generated organic volume growth of 8.1 per cent and total growth of 14.2 per cent;
• Record second quarter adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) of $152.4-million representing a 16.5-per-cent, or $21.6-million, increase as compared with the second quarter of 2022;
• A 9.3-per-cent adjusted EBITDA margin, up from 8.6 per cent in the second quarter of 2022;
• Second quarter adjusted EPS (earnings per share) of $1.27 per share representing an 8-per-cent, or 11-cent-per-share, decrease as compared with the second quarter of 2022;
• Declared a dividend of 77 cents per common share for the third quarter of 2023;
• Sales and adjusted EBITDA guidance for 2023 reaffirmed;
• Announced plans to consolidate three Ontario specialty foods production facilities totalling 65,000 square feet into a new 109,000-square-foot facility in Brampton, Ont.

Question-and-answer session

The company will hold a Q&A session on its second quarter 2023 results today at 10:30 a.m. Vancouver time (1:30 p.m. Toronto time). Management's prerecorded remarks and an investor presentation that will be referenced on the conference call are available by navigating through the company's website.

Access to the Q&A session may be obtained by calling the operator at 416-764-8646 or 888-396-8049 (conference ID: 57795699) up to 10 minutes prior to the scheduled start time. For those who are unable to participate, a recording of the conference call will be available through to 11:59 p.m. Toronto time on Sept. 14, 2023, at 877-674-7070 (passcode: 795699 followed by the pound key). Alternatively, a recording of the conference call will be available at the company's website.

"We are pleased to report another quarter of record sales and adjusted EBITDA as we continue to execute our various growth strategies," said George Paleologou, president and chief executive officer. "The key driver of our performance was our specialty foods group of companies, which generated organic volume growth of over 8 per cent, despite a difficult year-over-year comparison, while increasing its adjusted EBITDA margin by 80 basis points to 10.1 per cent," said Mr. Paleologou. "With the chaos of the pandemic quickly fading, we are starting to show the value creation potential of this group, in which we have invested over $1.5-billion in the last five years. Looking forward, we expect the group's performance to continue to improve, and even accelerate in the latter part of the year as several major capacity expansions come on stream.

"A particular area of success for our specialty foods group of businesses, which produces a variety of premium products in high-growth categories such as premium sandwiches, charcuterie, artisan baked goods, cooked protein and meat snacks, has been its U.S.-based strategies, which drove approximately two-thirds of its organic volume growth in the quarter," added Mr. Paleologou.

"Our overall results for the quarter were, however, tempered by several challenges faced by our premium food distribution group of businesses," said Mr. Paleologou. "While some of these challenges will continue into the back half of the year, they are all transitory in nature and we remain confident in the long-term potential of this group.

"Our acquisitions pipeline remains full, and we are close to moving several early-stage conversations involving larger businesses into active and advanced-stage discussions. Correspondingly we expect to complete several transactions in the coming quarters," added Mr. Paleologou.

"I am also pleased to report the publishing of this year's CEO letter to shareholders in which I provide an update on our strategic plans, including a discussion of our recently announced new five-year plan. You can find it on our website," said Mr. Paleologou.

Third quarter 2023 dividend

The company also announced that its board of directors approved a cash dividend of 77 cents per share for the third quarter of 2023, which will be payable on Oct. 13, 2023, to shareholders of record at the close of business on Sept. 29, 2023.

Unless indicated otherwise in writing at or before the time the dividend is paid, each dividend paid by the company in 2023 or a subsequent year is an eligible dividend for the purposes of the enhanced dividend tax credit system.

Results of operations

The company reports on two reportable segments, specialty foods and premium food distribution, as well as non-segmented investment income and corporate costs (corporate). The specialty foods segment consists of the company's specialty food manufacturing businesses while the premium food distribution segment consists of the company's differentiated distribution and wholesale businesses as well as certain seafood processing businesses. Investment income includes interest and management fees generated from the company's businesses that are accounted for using the equity method.

As part of a realignment of certain businesses and management responsibilities, starting in fiscal 2023 the company reclassified a business from the premium food distribution segment to the specialty foods segment. All comparative information has been retrospectively restated.

Revenue

Specialty foods' (SF) revenue for the quarter increased by $135.2-million or 14.2 per cent primarily due to: (i) organic volume growth of $77.2-million representing an organic volume growth rate (OVGR) of 8.1 per cent; (ii) a $26-million increase in the translated value of sales generated by SF's United States-based businesses due to a weaker Canadian dollar -- approximately 53 per cent of SF's revenue for the quarter was generated by these businesses; (iii) business acquisitions, which accounted for $16.9-million of SF's growth; and (iv) selling price inflation of $15.1-million.

SF's OVGR was driven primarily by its cooked protein, fresh skewers, artisan sandwiches, meat snack and charcuterie initiatives in the U.S. Normalizing for a new sandwich that was launched in the second quarter of 2022 then recalled and cancelled in the third quarter of 2022 due to third party supplier quality issues, SF's OVGR is 10.2 per cent.

SF's revenue for the first two quarters of 2023 increased by $282.1-million or 16.1 per cent primarily due to: (i) organic volume growth of $106.6-million representing an OVGR of 6.1 per cent; (ii) selling price inflation of $66.6-million; (iii) a $59.6-million increase in the translated value of sales generated by SF's U.S.-based businesses due to a weaker Canadian dollar -- approximately 55 per cent of SF's revenue for the first two quarters of 2023 was generated by these businesses; and (iv) business acquisitions, which accounted for $49.3-million of SF's growth.

Premium food distribution's (PFD) revenue for the quarter decreased by $24.2-million or 4.2 per cent due to: (i) a sales volume contraction of $16-million; and (ii) selling price deflation of $11.2-million, which related primarily to lower lobster market prices. These factors were partially offset by a $3-million increase in the translated value of sales generated by PFD's U.S.-based businesses due to a weaker Canadian dollar.

The contraction in PFD's sales volume was primarily due to: (i) less featuring of premium beef and seafood products by major retail customers as a result of several factors, including general timing of promotions and historically high beef prices; (ii) PFD's lobster business choosing to temporarily reduce its participation in a seasonal Canadian fishery due to a run-up in purchase prices caused by unusual speculative buying; and (iii) lower sales of fresh premium seafood as consumers increasingly shifted to shopping at discount grocery banners. These factors were partially offset by the continued postpandemic recovery in sales to food service customers, albeit at a slower pace than in prior quarters.

PFD's revenue for the first two quarters of 2023 increased by $8.2-million or 0.8 per cent primarily due to: (i) organic volume growth of $21.3-million representing an OVGR of 2.1 per cent; and (ii) a $7-million increase in the translated value of sales generated by PFD's U.S.-based businesses due to a weaker Canadian dollar. These factors were partially offset by selling price deflation of $20.1-million.

Gross profit

SF's gross profit as a percentage of its revenue (gross margin) for the quarter increased by 110 basis points primarily due to: (i) the moderation of certain input costs, including some raw materials and freight; and (ii) production efficiencies resulting from investments in automation, continuous improvement projects and a more stable labour market. These factors were partially offset by: (i) wage inflation; (ii) investments in additional plant infrastructure to support SF's current and future growth objectives; (iii) reduced overhead absorption as a result of lower production levels associated with SF's inventory reduction initiatives; and (iv) the write-off of $2-million of inventory produced for a customer that filed for bankruptcy. Normalizing for the reduced overhead absorption and inventory write-off factors, SF's gross margin is 22.3 per cent.

SF's gross margin for the first two quarters of 2023 increased by 70 basis points primarily due to the factors impacting the second quarter of 2023, partially offset by higher outside storage costs in the first quarter of 2023 that were the result of increased inventory levels.

PFD's gross margin for the quarter and for first two quarters of 2023 increased by 190 basis points and 140 basis points, respectively, primarily due to: (i) the moderation of certain raw material costs; (ii) sales mix changes, including the impact of reduced lower-margin feature product sales; (iii) the reclassification of certain warehouse rental incomes; and (iv) improved operating efficiencies.

Selling, general and administrative expenses (SG&A)

SF's SG&A as a percentage of sales (SG&A ratio) for the quarter and for the first two quarters of 2023 increased by 30 basis points primarily due to: (i) increased promotional activities; and (ii) higher incentive-based compensation accruals. These factors were partially offset by sales leveraging associated with SF's organic sales growth.

PFD's SG&A ratio for the quarter increased by 120 basis points primarily due to: (i) wage, freight and general cost inflation; and (ii) the impact of lower sales relative to a relatively fixed cost base.

PFD's SG&A ratio for the first two quarters of 2023 increased by 90 basis points primarily due to wage, freight and general cost inflation.

Plant start-up and restructuring costs

Plant start-up and restructuring costs consist of expenses associated with: (i) the start-up of new production capacity; (ii) the reconfiguration of existing capacity to gain efficiencies and/or additional capacity; and/or (iii) the restructuring of a business to improve its profitability. The company expects these investments to result in improvements in its future earnings and cash flows.

During the first two quarters of 2023, the company incurred $15.6-million in plant start-up and restructuring costs relating primarily to the following projects, all of which are expected to expand its capacity and/or generate improved operating efficiencies:

• Reconfiguration and 8,000-square-foot expansion of its cooked protein facility in Versailles, Ohio;
• Reconfiguration of its cooked protein facility in Scranton, Pa., including the addition of another cooked products production line;
• 107,000-square-foot expansion and reconfiguration of its meat snack and processed meats facility in Ferndale, Wash.;
• Reconfiguration of its meat snack facility in Kent, Wash.;
• Construction of a new 165,000-square-foot distribution centre and the related reconfiguration of its sandwich production facility in Columbus, Ohio;
• Construction of a new 91,000-square-foot artisan bakery in San Francisco, Calif.;
• Reconfiguration of its kettle cooking facility in Richmond, B.C.;
• Construction of a new 67,000-square-foot sandwich production facility in Edmonton, Alta.

Equity earnings (loss) in investment in associates

Equity earnings (loss) in investment in associates includes the company's proportionate share of the earnings and losses of its investments in associates.

Clearwater Seafoods Inc.

Clearwater's sales for the quarter increased by $4.6-million primarily due to: (i) selling price inflation, mainly driven by a weaker Canadian dollar; (ii) the sale of its remaining excess snow crab inventory carried over from 2022; and (iii) continued strong global demand for its Canadian self-harvested sea scallops and clams. These factors were partially offset by: (i) further delays in the delivery of a replacement Canadian shrimp/turbot harvesting vessel, which is now expected to arrive toward the end of the third quarter of 2023 -- a legacy vessel was sold early in the first quarter of 2023; and (ii) lower European sales of premium Argentine scallops due to consumers focusing more on managing their grocery spend.

Clearwater's earnings before payments to shareholders for the quarter increased by $900,000 primarily due to: (i) the adoption of hedge accounting which resulted in unrealized foreign exchange losses being recorded in other comprehensive income rather than earnings; (ii) a higher tax recovery; and (iii) a $2.3-million gain on the translation of U.S. dollars to Argentine pesos resulting from an Argentine government export grant program. These factors were partially offset by: (i) higher realized losses on foreign exchange contracts; (ii) sales mix changes with unprofitable snow crab sales replacing higher-margin shrimp and premium Argentine scallop sales; (iii) higher senior debt interest expense resulting from general market rate increases; (iv) lower Canadian self-harvested clam margins due to natural size and grade variability; and (v) general cost inflation.

Revenue and adjusted EBITDA outlook

The company is maintaining its 2023 guidance for sales of between $6.4-billion and $6.6-billion and adjusted EBITDA of between $590-million and $610-million. These estimates are based on a range of assumptions including: (i) reasonably stable economic environments in Canada and the U.S. with inflation rates in both countries continuing to moderate; (ii) stable raw material costs; and (iii) modest appreciation in the Canadian dollar relative to the U.S. dollar.

About Premium Brands Holdings Corp.

Premium Brands owns a broad range of leading specialty food manufacturing and differentiated food distribution businesses with operations across Canada and the United States.

We seek Safe Harbor.