Good day, and thank you for standing by, and welcome to the Premium Brands Holdings Corporation first quarter 2022 earnings conference call. Our speakers for today will be George Paleologou, CEO and President of Premium Brands, and Will Kalutycz, CFO of Premium Brands. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to the speaker today, George Paleologou. Please go ahead.
Thank you, Faith, and welcome everyone to our first quarter conference call. With me here is our CFO, Will Kalutycz. Our presentation today will follow the deck that was just posted on our website this morning. You can also access yesterday's AGM presentation on our website at your convenience. Some nice pictures and videos there to enjoy. We are now on slide four, which outlines certain key highlights for the quarter. Despite the various headwinds facing our industry, including acute inflation, we're pleased to report yet another quarter of record results. Sales of sandwiches and meat snacks remained strong during the quarter, while supply chain disruptions and reduced promotional activity negatively impacted our overall volumes for the quarter. Our CFO, Will Kalutycz, will give you more color on our first quarter later in the presentation.
Our strong results despite the headwinds are a testament to the resilience and diversification of our unique business model. It is also a testament to our great people who are working relentlessly and diligently as we navigate through these volatile and unusual times. Inflation is, of course, the issue of the day. During the first quarter, we executed CAD 122.6 million worth of price increases, with more pricing to be taken during the second quarter. The first quarter was quite noisy and begun with unprecedented disruptions to our operations due to very high absenteeism caused by the Omicron variant. Fortunately, Omicron subsided quickly around the end of January, and our operations went back to normal for the remainder of the quarter. While overall demand was strong during the quarter, supply chain disruptions impacted our ability to pursue certain sales opportunities.
On a positive note, we were very pleased to see food service demand return as COVID-related restrictions eased. We're also pleased to report that during the quarter, demand from channels that were previously hit hard by COVID, like airlines and cruise lines, begun to come back. Demand from these channels is now beginning to accelerate. We're now on slides five to 10. Over the past couple of years, we have invested a lot of capital on expanding capacities and on process improvement opportunities with excellent results. We believe that these investments greatly enhance our overall earnings and cash flow potential, and we're certain that this will be demonstrated in our financial results as things begin to normalize. We're now on slide 11.
As you can see here, our acquisition pipeline remains very robust, and we expect to complete many more transactions in the months and in years to come. I will now pass the presentation to our CFO, Will Kalutycz, who will update you on our financial results for the quarter. I should also mention that Clearwater Seafoods delivered strong results for the quarter, driven by economic reopenings and the return of food service around the world, combined with excellent operational and commercial execution. Clearwater's access to sustainable, wild, top-quality seafood resources is unmatched, while demand for its products continues to be very strong. We remain very encouraged with what we see in terms of seafood-related consumer trends, and we're very well positioned to capitalize on these trends in both retail and food service in North America and globally. I will now pass it to Will.
Thanks, George, and welcome everyone. I'm now on slide 13, our quarterly sales performance. For the quarter, we generated sales of CAD 1.251 billion. That was an increase of CAD 241.4 million or 23.9% as compared to 2021. There were three key drivers of our growth. Selling price inflation, as George mentioned earlier, of CAD 122.6 million. Acquisitions contributed CAD 93.1 million, and organic volume growth, CAD 27.5 million. Turning to slide 14 and looking at our growth rate for the quarter, our organic volume growth rate, it came in at 2.7%, which was well below our potential. There were six main factors contributing to this, four of them temporary, two of them structural.
The temporary factors were reduced featuring of our branded products in the retail channel to mitigate the impact of cost inflation while price increases are being implemented. The second was supply chain and labor-related disruptions resulting in lost sales of approximately CAD 28.8 million. Most of this was labor related, and as George mentioned, a lot of that occurred at the beginning of the quarter with the outbreak of Omicron, the Omicron variant, and incredible absenteeism in a number of plants. The third factor was sales mix changes with lower average selling prices for certain new listings offsetting volume growth. The final factor was a later Easter. On the structural side, there were two key factors that impacted our growth rate for the quarter.
One was the evolution of our processed lobster strategy, which resulted in additional inventory being put away for the busy spring and summer seasons and less retrading of lobsters. The second factor was seasonality, with the first quarter being our slowest, naturally our growth rate tends to be lower in the first quarter. If you normalize for two of the more quantifiable factors, mainly the supply chain challenges and the sales mix challenges and a third factor, Easter, then our normalized growth rate for the quarter would have been about 6.5%, which would be above our long-term targeted range of 4%-6%, but still below our potential, largely due to seasonal factors as well as the featuring factor I mentioned earlier.
The next slide 15, shows the major growth drivers across all of our platforms. The ones highlighted in yellow were the ones mainly contributing to the quarter's growth. As George mentioned earlier, sandwich and snack were big drivers, as well as some of our initiatives in the food service channel. The remaining items listed on this slide are future growth drivers that are well underway and should contribute to our growth in 2022. Turning to the next slide 16, we are maintaining our sales guidance for 2022 of CAD 5.6 billion-CAD 5.85 billion. The midpoint of that is CAD 5.725 billion.
Assuming we achieve that will represent growth of CAD 773 million over 2021 and a growth rate of about 16%, which is below our 11-year CAGR of about 22.4%, but does not reflect any acquisitions that have not yet been announced. Turning to the next slide 17, our weekly sales trend. You can see we started the second quarter of 2022 with strong sales momentum, the gold line representing 2022, the green line 2021. Like I say, good momentum going into the second quarter. Slide 18. For the quarter we generated EBITDA at CAD 95.8 million. This is a CAD 13.3 million or 16.1% increase over 2021.
There are three key positive drivers of that: selling price inflation, acquisitions, and organic sales growth. Three smaller drivers, namely incentive-based compensation accruals being lower, investment income from a full quarter of Clearwater Seafoods, the acquisition there, and production efficiency improvements. Offsetting that were several negative factors, by far the most significant of which was cost inflation, primarily with direct materials, wages and freight inflation totaled about CAD 124.5 million in the quarter. Smaller factors included overhead, mainly associated with the growth and building infrastructure for the future, additional outside storage costs, mainly associated with hedging strategies we're using right now to address and mitigate the impacts of inflation and supply chain disruptions. Finally, some additional SG&A infrastructure.
Turning to slide 19, looking at our EBITDA margin for the quarter, we came in at 7.7%. This was roughly 230 basis points off our annual target of 10%. There were five factors contributing to the difference, four temporary and one structural. The four temporary factors were, first off, the most significant one, being delayed selling price increases due to retail notice periods. This was about a CAD 16.2 million impact if you reflect the price increases put through partly through the quarter. The second was lost contribution margin from supply chain and labor disruptions. The third, certain product categories, and this relates mainly to our Premium Food Distribution businesses, were being temporarily managed to maintain margin dollars versus margin percentages in order to assist customers with dealing with extreme cost inflation.
Finally, cost-plus contracts, again, mainly in our Premium Food Distribution group. The structural issue was the seasonality of the first quarter. It is our slowest quarter of the year and generally is a lower growth quarter. If you normalize for the delayed selling price increases and the supply chain disruptions, our normalized EBITDA margin would have been 9.2%, which is within normal expectations, given the seasonal consideration, relative to our 10% target. The next five slides show general market pricing trends for the major commodities used by our businesses. You will see that all of them illustrate a very inflationary environment with seasonal record high prices for most or all of the quarter.
This first slide 20, which is for our basket of pork-based commodities purchased mainly by businesses in our protein group, is the least dramatic of them, with seasonal record high prices for most of the quarter, but not absolute record highs. The next slide is for a basket of these beef-based commodities purchased mainly by our businesses in the protein group and distribution group. It shows record seasonal highs, but at least a somewhat stable market, which is a positive for us, as volatility is generally the biggest challenge to managing our margins in the short term. The next slide is a basket of chicken-based products purchased mainly by businesses in our protein group. As the chart clearly shows, chicken cost inflation for the quarter was at extreme levels, with most items reaching seasonal and absolute record highs.
We will be discussing the impact of chicken as well as turkey commodity costs in our business, later in the presentation. The next slide is for a basket of lobster products sold by businesses in our seafood group, and again shows record high seasonal prices and close to record high absolute prices. The final slide is for a basket of salmon products purchased by businesses, in our seafood and distribution groups, and similar to the previous slides, show record high seasonal and absolute prices. Turning to the next slide 25, this is an analysis of the impact of chicken and turkey commodity cost inflation on our first quarter results. As I mentioned earlier, these commodities are purchased primarily by our businesses in our protein group, and with the recent success of our co-protein initiatives are becoming a meaningful input for the group.
The pictures at the bottom of the slide illustrate some of the group's products that use these commodity inputs. The table on this slide bridges our sales and gross margins from Q1 2021- Q1 2022. You can see in Q1 2021, we had sales of approximately CAD 80.6 million, with a gross margin of 28.6%. Over the course of the year, we put through CAD 17.3 million in price increases that impacted the quarter. Despite these price increases, we continued to see volume increases of about CAD 4.3 million. During the quarter, we saw commodity cost inflation of CAD 21 million. The net result was, at the end of the first quarter, we had sales of CAD 102.2 million, but our margins had fallen to 19.5%.
The decline in our margins, you can see as a result of the commodity and cost inputs relate mainly to the delays in pricing that result from retailers requiring 60- to 90-day notice periods. Again, using the price increases that were put through during the quarter but didn't have a full quarter's impact, normalizing for a full quarter's impact, that would have been about another CAD 9.2 million of margin and selling price increase, and that would have brought our margins more in line with the historic level, roughly at 26.1%. The next slide shows a case history on a specific chicken-based SKU, a very successful SKU. You can see in 2021, looking at the table on the left, it had sales of roughly CAD 58 million. During 2021, we put through almost 24% price increases.
To show the inelasticity of the product, you can see we still had volume growth of 8% despite those price increases. The table on the right just shows you how extreme the situation has gotten. Subsequent to 2021, we put through three additional price increases, such that over the past year, the total price increases are almost 76% for this product, and the product continues to move well. Turning to slide 27, we are also maintaining our EBITDA guidance for 2022, a range of CAD 510 million-CAD 530 million.
The chart shows a midpoint of CAD 520 million, which if we achieve that, will be an increase of CAD 89.3 million from 2021 or roughly 20.7%, which is in line with our 11-year CAGR of about 22%. This does not show or reflect any potential acquisitions for the balance of 2022. Turning to slide 28 and our adjusted earnings performance. Adjusted earnings for the quarter were CAD 39.4 million. That was an increase of CAD 8.1 million or 25.9% as compared to 2021. Our EPS for the quarter was CAD 0.88 per share. This is an increase of CAD 0.16 per share or 22.2%.
Looking at our slide 29 and our five-year targets, we continue to remain very bullish on achieving the target. You know, using the midpoint of our 2022 guidance. Adding some very moderate growth for 2023, you can see we easily exceed our CAD 6 billion target. Turning to the next slide in our EBITDA margin, our EBITDA target for 2023. You can see again, with our midpoint of our guidance and the moderate growth and a conservative contribution margin on that growth, we will exceed both our EBITDA profit target or absolute number target and our 10% EBITDA margin target. Turning to our balance sheet on slide 31, we continue to maintain a solid balance sheet and good liquidity.
Our key ratios continue to be in the targeted zone, and our available credit capacity at the end of the quarter was CAD 305 million. Turning to slide 32. Our free cash flow for the trailing 12 months increased to CAD 269.8 million. That was a modest increase of CAD 6.5 million or 2.5%. Again, it reflects only one quarter, and a slow quarter at that, of change from our 2021 number. On a free cash flow per share, we grew that to CAD 6.16 per share, up from CAD 6.05 per share. Our payout ratio came in at a very conservative 42.7% on a trailing 12 months basis.
Subsequent to the quarter, we declared a dividend for quarter two of CAD 0.70 per share. Turning to capital allocation. Total project CapEx for the quarter was CAD 33.8 million. Again, we define project CapEx as projects that are generally expected to earn an internal rate of return of 15% or greater after tax, unlevered, normally using a 10+ year business model. You can see we have 13 major projects underway, with four of those becoming complete and online in 2022, so there will be some contribution in 2022. Most of these projects will be major drivers of our growth in 2023 and forward. In terms of acquisitions, we completed four acquisitions in the quarter, with a total capital allocation of CAD 41.6 million.
Again, all of our acquisitions, there's generally expectation of a 15% internal rate of return. As George mentioned earlier, we continue to have a very full pipeline of opportunities we are exploring. With that, I will turn the presentation back over to the commentator.
Back to you, Faith.
Thank you, presenters. As a reminder, to ask a question, you will need to press star one on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Your first question comes from the line of Martin Landry. Your line is open.
Good morning George and Will?
Hi, Martin.
Hey, Martin.
You know, you seem to be doing a really good job dealing with several challenges. You know, I'm wondering, you know, if we look at what you're facing, you're facing inflation, you're facing uncertain consumer sentiment, you're facing supply chain challenges, you're facing labor shortages. You know, which one of those are you the most concerned with? Which one of those impacts your business in the biggest way?
Well, I think, Martin, as you know, we faced a number of challenges over the last two years, particularly with the onset of COVID, right? You know, a lot of labor shortages, in particular. You know, I think we've done a pretty good job managing through a lot of these headwinds, and we continue to do a good job. The issue of the day, as I said earlier, is inflation. Again, as Will explained, you know, we demonstrated our ability to pass on pricing. You know, the big question mark for us is, you know, at what point are consumers going to push back, right?
Because there's a price point that we might get to, but it is that very price point that will force commodities to go back down. You know, again, for us, it's important to stay proactive and, you know, we run our business in a dynamic way, particularly with regards to pricing. Again, we'll see what happens with inflation. You know, you know, the other side of the coin is that, you know, these tough conditions may be difficult for Premium Brands, but they're more difficult for other companies as well. In an environment where, you know, consumer demand for food is relatively stable, that provides us with more opportunities, right?
You know, there's the pluses and the minuses because it's a challenging environment. We're very confident that you know, we're well positioned. We've invested a lot of capital in automation and robotics. I showed a video of our Generation 3 line, which we installed at our Phoenix plant recently. We've made a number of investments in our business to deal with some of these issues. Anyway, I think overall, we're very well positioned for, well, when things normalize. You know, the unfortunate part is that you know, some of these investments and effort and capital that we've spent hasn't really shown on our results as of yet because of some of the headwinds that you mentioned. But eventually will.
Anyway, hopefully I answered your question.
Yep. It's yeah, super helpful. Good color. Maybe my other question would be on capacity utilization. I'm wondering if you can give us a bit of a view of what was your capacity utilization during the quarter? Are you still capacity constrained? Are you still selling everything you produce?
Absolutely. Again, as Will mentioned, you know, our business is quite seasonal. The first quarter, in general, and the fourth quarter, you know, capacity utilization is relatively low. As I mentioned in my prepared remarks, you know, January was particularly tough. You know, if you're not running plants at or near full capacity, you know, your margins suffer immensely, you know, because your costs get out of line and your productivity gets out of line. Generally speaking, you know, we're looking forward to the second and the third quarters where we've added more capacity now. You know, we've invested in automation and efficiency and we're well positioned for the rest of the year.
Okay. That's it for me. Congrats on your results.
Thank you, Martin.
Thanks, Martin.
Your next question comes from the line of George Doumet. Your line is open.
Yeah. Hi, guys. I wanted to just talk to you a little bit on the prepared remarks. Will, you alluded to temporarily providing a cushion to customers. I think that showed up in the PFD margin. Can you talk a little bit about what that entails a little bit, and is that something that we'll probably see more of across other commodities?
Hey, hey, George, you cut out there at the beginning of your question. Can you just repeat the start of it?
Sure. Sure. I think in the PFD we had some margin pressure relating to temporarily providing cushion to customers. I was wondering if you can maybe provide a little bit more color if that's gonna be spread to other areas of the business or other commodities, other segments.
Yeah. No. That's pretty unique to the Premium Food Distribution group. We don't expect that to go into the specialty foods group. You know, it's. You know, the Premium Food Distribution group, you know, a big part of their business is cost plus. So you've got that element and then this environment with the extreme, you know, a lot of the restaurants, those types of customers, they need time to adjust. They're working with, they're maintaining gross profit dollars. Ultimately we do expect that normalize, whether it's just through stability or ultimately through deflation. You know, it is a transitory impact.
Okay. And it looks like your 2022 guidance is predicated on some mild deflation in certain commodities, like, I guess in the latter half. Like, I guess there's some expectation out there that raw material prices are probably gonna remain elevated for longer, well into even next year. Can you talk a little bit about maybe if that pressure continues, what that could mean for, I guess, for our margin guidance for the year? Any color there?
Yeah. No. You know, the reality is what's most important to us, George, is stability, right? You know, what causes us the most grief is these extreme, especially when you have all the baskets moving up at once, you know, it's that pricing delay impact on our specialty foods segment. So as long as we get stability, that's the most important assumption in our guidance. Then, you know, if there's some inflationary impact, you know, that puts us towards the top end of our guidance kind of thing. So we're you know, based on the current outlook and how we're seeing the commodities and the general expectations of the market, we're pretty comfortable with our guidance.
I think, George, the example that Will gave you in the deck with regards to poultry is a very good gauge to use. I mean, we've seen unprecedented inflation with regards to our commodity pricing as you know, and we keep pushing prices up. We're expecting volumes to go down, but they haven't as of yet, and we'll see what happens. That's a very good example really of our ability to manage inflation in this type of environment.
Okay. Just one last one, maybe a housekeeping question for Will. You guys put out a maintenance CapEx number for this year, but not a growth. Can you assume like around CAD 150-CAD 170? First question. Second question is, I know it's early days, but would you expect that number to be directionally higher, lower or flat next year?
Yeah. It's, you know, your number's not far off for the year. Again, all the projects that are in the pipeline are in our MD&A. This quarter we did announce three new projects, two of them fairly material. You know, don't expect any other major things impacting this year. There may be some other new projects that may be coming online towards the end of the year. Not a bad number for this year. In terms of 2023, it's really playing out the projects that are currently in the pipeline.
Okay. Thanks, guys.
Thank you, George.
Thanks, George.
Your next question comes from the line of John Zamparo. Your line is open.
Thanks. Good morning, guys.
Good morning, John.
I wanted to follow up on the inflation dynamic. You mentioned there's a point at which consumers push back on the inflation might subside at that point because of lower demand. Assuming we do eventually get there, though, is there potential for inflation to remain high because of growth going on supply side rather than people being able to demand? I'd like to get your thoughts there.
I think it depends on the commodity, John. I think as you probably know, poultry supplies are quite tight, and we do have an avian flu situation now in North America. I think that there's 37 million birds I think were euthanized with regards to that, you know, the avian flu already. I think we probably have about a month to go with regards to that. I don't think poultry is going to subside. Really, I think you have to go back to Will's comment and, you know, for us, you know, we've gone through high pricing in the past, particularly with pork.
It's the volatility that we're concerned about. If prices go up and they remain high, you know, we'll do fine. We'll maintain our margins. We'll move prices up. Our products generally are branded and consumers don't buy. You know, they buy them for their other attributes. I think you're seeing that. You've seen that in Will's slides with the poultry example.
Okay, thanks. In the press release, you called out global supply chains and access to different services for manufacturing and distribution as one of the conditions of the guidance. Can you add some color here? It didn't sound like I was referring to food, but I'd like to better understand that component of the guide.
It's just a general risk, John. I don't know if you recall, in Q4, one of the major impacts on our sales was, you know, a couple of critical lines were shut down because we couldn't source parts for those lines. Literally for three or four weeks they were not running. You know, it's that kind of stuff. Now, things have gotten much better. You know, a little bit of that carried over into Q1. But by the end of the Q1, those issues seem to be easing up. Again, we'll see how things unfold globally, but it seems that, you know, at least for goods, things are improving. Anyway, it's more just highlighted as a general risk factor.
Okay, understood. One more on inflation and the guide and then one housekeeping question. Assuming your price increases are a one-to-one offset on the cost inflation, then I would assume you're in double-digit territory on inflation like most are in the industry. Can you quantify even approximately what it is you're expecting for through the back half of the year?
Yeah. We don't provide that information, John.
Okay, fair enough. Last one for me. Can you remind us approximately how much access to liquidity does Clearwater have?
We don't disclose that. Their balance sheet is very solid and they're well ahead of our expectations we built into their original model, just given the solid performance of their business.
Okay, that's all for me. Thank you very much.
Thank you, John.
Your next question comes from the line of Stephen MacLeod. Your line is open.
Thank you. Good afternoon, guys, or I guess good morning for you.
Hey, Steve.
I just had a couple of questions. I wanted to start with just some of the headwinds that you've seen in the quarter. I know lots of moving parts, but just wondering if some of the volume headwinds that you've cited have abated, so things like the retail featuring and some of the mix changes, you know, the ones you cited as temporary, just wondering how those are trending as you get to Q2.
Yeah. The big, you know, they're kind of segment specific. The big impact on specialty foods was by far the issue with featuring. That's one, Steve, is we, you know, we got to catch our price increases up, and once they've caught up, then they'll start resuming their normal featuring activities. You know, that should be something we see transitioning over the course of Q2, given our outlook around commodities and our pricing structures in place. It will be a bit of a story for Q2 and hopefully not much of anything in Q3. In terms of the sales mix, that's actually featuring related as well, and that's more a Premium Food Distribution group story. The Premium Food Distribution group has.
They're constantly looking for new procurement opportunities, new solutions they can provide customers, and they've made some really great gains on products they've been sourcing out of Mexico and some other markets. It's created some great sales momentum. The reality is those prices for those products are lower-dollar items. What's happened is the volume they've seen grow there, which we expect to be sustainable, that volume growth has been hidden because of the incredibly high prices for premium protein and premium seafood products. Their traditional retail customers aren't featuring their products, and that's a big part of their sales, helping their customers with those features. That's a different featuring concept from specialty foods where it's our decision. This is the retailers not featuring it.
You know, we fully expect that business to come back, but it's probably not going to come back until you see some easing of those premium proteins and seafood product pricings. You know, and the reality is though that we are showing good volume growth that's just getting hit or hidden by that noise of the sales mix.
Right. Okay. That's great. Thanks, Will. With respect to the gross margin outlook, do you still expect margins to kind of get into that 10% range in the back half of the year? I think that was what you were looking at as of last quarter.
Now, you mean EBITDA margins, right?
Yes, sorry. Yeah, that's right. I meant EBITDA margin. Yeah, that's right.
Yeah. 10%. Yeah. No. Certainly, by Q3 we're expecting that. You know, the reality is our normal cycle or what we've built in to hit that 10% annual target is, you know, better than 10% margins in Q2 and Q3, and then again, Q1 and Q4 being shoulder seasons, lower margins with the average coming in at 10%. Q2 is still going to have some normalization from pricing delays as some of those deals still catch up. By Q3, you should see that solid excess of 10% margin.
Great. Okay. Then maybe just one more, if I could. I know it's a trickier one. I think I know the answer, but I just wanted to ask. Like, as you exited Q1, do you feel like you were sort of fully caught up on inflation with price, and then you have to put through more price in Q2? Or is it just so dynamic that you feel like you're still sort of catching up?
Materially, yes, Stephen, materially. There's still some pricing we need to take, particularly with poultry. Poultry continues to go up in certain situations. But you know, mostly, yes, we've pretty well caught up.
Well, the nice thing too, Steve, is, you know, one of the biggest challenge for us is we've quite often had these incredible inflationary cycles within a specific commodity. You know, in 2019, you had pork with ASF, and we've had drought issues impact beef. The unique thing over this last year, two years has been everything going up, and now it's moving away. You know, we're getting, as you saw from the charts, we're starting to get stability in a number of items and it makes it a little more manageable, like George says, when it's only one commodity spiking.
Right. Okay. Well, great, guys. Thank you so much.
Thank you, Stephen.
Thanks, Steve.
Your next question comes from the line of Vishal Shreedhar. Your line is open.
Hi. Thanks for taking my question, and thanks for that commentary on the impact of the inflation on your various metrics. That was very helpful. I noticed in the language in the 2022 outlook, it's changed slightly from what you presented in Q4. I mean, the baseline commentary regarding reaffirming guidance is the same, but risks have changed a little bit. So wondering if there's any, if your views and feelings on how the risks have evolved from Q4 to Q1, have those changed as you reprioritize them?
Again, I think it is more reflective of what's going on today, Vishal. You know, but you know, overall, if you rank them, again, you know, still inflation and supply disruption. You know, I don't think the rankings changed at all, and we've just refined some of the language.
Okay.
I wouldn't say they've changed, Vishal. Like, you know, they're the same issues and risks.
Okay. PBH, you know, through the last few years, like many companies have faced, you know, many challenges. The company has, as you noted off the top, executed through them, currently and in the past as well. Given the challenges that we're in and given how you're seeing PBH is reacting, is that causing you to reflect on any of the elements of the strategy and how you might orient yourself in the future with acquisitions or CapEx investments? Obviously, the key tenets of PBH are still in place, but in terms of the geographies, market segments, has anything like that been fine-tuned as a result of this experience?
You know, again, Vishal, we've been doing this for, you know, 22 years now, with from the time we launched Premium Brands. As you said, we've been through a lot of challenges and headwinds, and particularly with mad cow disease in the early 2000s and, you know, followed by the economic collapse of 2007, 2008. We've been through a lot and, you know, I would say that, you know, we never change our strategy. You know, we think that consumers looking for better quality food is a mega trend. Consumers looking for more convenient, better for you food is a mega trend. You know, again, we never deviate from our vision. We take a very long-term view to the food business.
We don't manage quarter by quarter. By and large, it's, you know, we've delivered, you know, over 20% compounded return to our shareholders, over the last 20 years. Again, you know, we manage the challenges. Yes, they do impact our quarterly numbers once in a while, but the strategy has not changed. We're not deviating from it. I think that our success kind of gives us more conviction even to continue it and sometimes to accelerate it, you know, because a lot of times you find the best opportunities during these tough times.
Just moving on to your thoughts on the consumer. Last quarter, management indicated that the demand outlook was very robust. Wondering what you're seeing with your various segments and your diversified base of business. What are your thoughts on a potential slowdown of the consumer? We're seeing some broader peers mention that they're seeing some of that. Are you seeing differences between Canada and the U.S.?
As I mentioned earlier, Vishal, you know, the mega trends that we've talked about are universal. You know, they're not unique to Canada or the U.S. We think they're universal and you know, I think Canada and the U.S. are very well positioned to feed the world in terms of growing demand for proteins in particular and good quality food in general. So again, you know, we're in a good place. We're in a good situation. You know, as we've seen during this pandemic, the trends don't change. Sometimes the channels change.
That's why we've invested a lot of time and effort in having a multi-channel approach to our business. You know, we wanna be able to offer consumers food in every venue that they decide to consume food, whether it's at home or in a hockey arena or on an airline or on a cruise line, right? You know, that's again part of our strategy overall to make sure that we're able to cater to demand where that demand happens to occur.
Okay. Are you able to, through your various businesses, gather insights on the consumer's ability to accommodate this inflation, currently right now? Are you seeing anything that's leading you to think one way or the other? Off the top, George, you mentioned that as one of the risks.
Well, as I said earlier, Vishal, I think that there's an element, and we've seen that in the past. For example, like, you know, if we go back 10 years ago, you know, belly prices, which is what you use to make bacon, as you know, skyrocketed. Well, you know, when you've got very high bacon prices, a lot of the QSR stop featuring their bacon burger products, right? As soon as that happens, you know, demand of course for bellies goes down and then the price of bellies comes back down, you know? We expect that to happen. You know, as you probably know, a lot of restaurant chains launched chicken breast type of sandwiches in the last couple of years.
You know, there will be a point in our view that the pricing will become too high and the margins for the QSR chains will be too low and they will move to another protein and they'll feature other products. At that point, we think that you know, prices for boneless skinless chicken breast will come down from its record high. Anyway, you have all these dynamics in our industry all the time. You know, the supply and demand does matter, and the behavior of certain channels with regards to a commodity does matter.
Thank you for the color.
Your next question comes from the line of Sabahat Khan. Your line is open.
Thanks so much. I guess starting with sort of the balance sheet and the M&A strategy. How are you thinking about continuing where leverage is at, I think sort of high end of the three to four range? How are you thinking about financing, the size of transactions? You know, what's kind of the difference? Does that lead you to maybe focus on more smaller tuck-ins? Just wanted to get perspective on that at this point, you know, where the leverage is at.
Yeah. We do expect, Sabahat, you know, status quo anyways for the balance sheet to, you know, significantly improve over the course of the year with, you know, you probably noted one of the issues or one of the big elements on our balance sheet is our inventory. We have significant inventory positions going into Q2, Q3 that we built up for this number of businesses have built up for the busy summer and spring seasons.
That's naturally going to unwind. That combined with the natural growth we're expecting in our EBITDA will, you know, bring both the ratios down as well as help with our capacity. You know, in terms of future acquisitions and opportunities there, like George mentioned, lots of stuff in the pipeline and, you know, all we really can say is we're, you know, committed to maintaining a solid balance sheet, and, you know, any capital allocation decision will be done within that context.
Okay. I think you partly answered my other question. Just, I guess, so the expectation for, I guess, working capital, obviously driven by inflation and inventory build up, how should we think about the working capital for the year relative to sort of the 2021 spend on working capital?
Yeah, certainly, you know, looking at the two big assets, receivables and inventory, you know, outside of receivables, you know, receivables we expect to, you know, be in line with historic turnover ratios. In terms of inventory, they're way above historic turnover ratios, and we do expect that to come down over the course of the year. However, you know, a big part of that being, as I mentioned earlier, the unwinding of inventories built up for the busy spring and summer seasons. You know, but there's also additional sort of built up inventories in response to managing our way through inflation and these supply chain disruption issues. As the world normalizes, those will naturally unwind too, but really that's gonna be driven by how quickly the world returns to a normal environment.
you know, if that happens sooner, then you could very well see, you know, our inventory turns coming back down to historic levels by the end of the year.
Okay. Thanks for that color. Then if you look at the sort of build up you provided for 2023 on slide 29 and 30, particularly on slide 30 around the EBITDA, I'm just trying to understand this 25% of sales, organic contribution to EBITDA to sort of get to that 10% range. Is it just, I guess, the growth that you're expecting is gonna be in super high categories? I just wanna understand how you're building up to that 88% there.
Well, the real, you know, if you look at our contribution margin, our growth in Q1, again, a slow quarter, it was roughly 30%. It is a mix issue. The contribution margins in our specialty foods segment, because of the manufacturing overheads and, you know, the depreciation and those things associated with producing this product, the cash flow from a sale, the contribution margin from a sale is quite high, because they have to cover all those fixed costs. Once those costs are covered, incremental sales are incredibly accretive. That's what you're seeing in the contribution margins of specialty foods, which tend to be, you know, 25%-35% and sometimes more depending on the business and the product.
You know, but then we have to blend that with our Premium Food Distribution group, which tends to be more distributive in nature. As a result, the contribution margins are closer to their gross profit margins, and so they tend to be in that sort of 15% range. That 25% is kind of a blend between not aggressive contribution margins in specialty foods, but average contribution margins and the contribution margins in our Premium Food Distribution group. It's kind of a midpoint at those.
Okay. This is, I guess, why we're thinking about this sort of like incremental margin sort of assuming SG&A stays flat.
Well, not only SG&A, but plant overhead and depreciation, right? Like, because, you know, when we sell a product, it's covering the cost of all those fixed item, you know, fixed cost items. You know, when you have a manufacturing operation, that contribution margin tends to be quite significant because there's a lot of fixed costs that product has to cover. Once you cover those fixed costs, those incremental sales are incredibly accretive.
Which is why your margins are much higher in the second and the third quarter.
Sabahat, that is a big factor of how we saw ourselves getting from, you know, that 8% historic level to 10% EBITDA margins. It's through that contribution margin growth. The fact is we have seen that over the last couple of years as we've grown the business. The problem is all of this noise from COVID and the supply chain disruptions and the inflation has masked that. That's why we spend a lot of time on these normalizations showing, "Hey, look, if you take out this noise and there's some really good trends here, there's some really good stuff happening," and a lot of that is driven by this contribution margin concept.
Okay. Just one last question from me. I guess, you know, there's been a lot of discussion around inflation and pricing, and I appreciate the example on poultry you provided on slide 25. I guess, you know, when looking over here, it looks like as pricing comes in, the gross margin is a little bit below historical. Is there a point this year where you think, you know, based on your outlook on where the commodity prices are, the pricing you've taken and plan to take, like, is this sort of a catch-up quarter where it's sort of 100% of the inflation is offset? Or is it sort of, well, before we even get there, you in your forward purchasing are seeing commodity prices come back down anyway.
I wanna get an understanding of when we're sort of caught up on that or what is sort of the assumption that you're sort of building off of at this point?
We're getting to that point, as I mentioned earlier. You have to remember that like in the first quarter, you know, January for us was a mess, right? The impact on our margins was not just inflation. Inflation was a factor of course, as we mentioned. We've moved prices up, but not entirely, you know. They didn't take effect. Some pricing didn't take effect until the second quarter, right? You know, January was a mess because, you know, we had extremely high absenteeism, you know, with our plants, right? If our plants can't produce, then whatever we produce is very expensive. You know, our fixed costs have to be spread over much fewer products, right? You know, you have to sort of separate the different issues in terms of what's impacting our overall margins, right?
It wasn't just inflation in the first quarter, right? January was pretty rough.
Thanks very much for all the color.
Thanks, Sabahat.
Thank you.
The next question comes from the line of Derek Lessard. Your line is open.
Yeah. Good morning, gentlemen. Just one question from me. Most of my questions have been asked. Just curious, and I know that you guys buy good businesses. I was just wondering if there's been any impact on potential M&A valuations, you know, given the difficult macro environment and if there's been more opportunities come across your desks.
Yeah. What I would say, Derek, is that, and as Will mentioned earlier, you know, our acquisition pipeline has never been more robust. A couple of things happened during the last couple of years. A lot of you know, successful entrepreneurs, food entrepreneurs are really, really tired. You know, they're very fatigued. They've been through a really rough time. They face just about every issue possible. You know, it's one thing when you're part of the ecosystem and you have, you know, a lot of, you know, a lot of partners to help you out and to work with you.
We're having a lot of these type of entrepreneurs approach us directly and they tell us, "Listen, I still wanna do this, and I still love the business, but I don't wanna do it alone anymore because it's been very stressful." Anyways, we're seeing a lot of opportunities because of that. Secondly, you know, I would say that you know, for a while there was a lot of capital chasing food deals, particularly from private equity. We're not seeing that as much at this point. You know, it's a good environment for us to continue to make acquisitions that kinda complement our different platforms.
Very helpful, George. Thanks, and have a good week.
Thanks.
Thanks, Derek.
There are no questions over the phone. I would now like to turn the call over to Mr. Paleologou.
Yeah. Thank you, Faith, and thank you for attending everybody. Bye-bye.
This ends today's conference call. Thank you for participating. You may now disconnect.