Good day, ladies and gentlemen. Welcome to the Premium Brands Holdings Corporation third quarter 2019 earnings conference call. As a reminder, this conference is being recorded. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question and answer session. At that time, participants are asked to press star one to register for a question. For assistance during the call, please press star zero on your touch-tone phone. It is now my pleasure to introduce your host, George Paleologou. Please go ahead.
Thanks, Corey, and good morning, everyone. I would like to welcome you to our 2019 third quarter conference call. I would also like to recognize the significance of this day and thank all the brave men and women who have fought for our country and to whom we owe our rights and freedoms. On an overall basis, I'm pleased with the progress we made in the execution of our many growth initiatives during the past quarter, and in particular with the success we're seeing in the U.S. across our seafood, sandwich, and protein platforms. Unfortunately, factors outside of our control, namely issues resulting from the severe outbreak of ASF in Asia, and in particular China, combined with global trade disputes, have temporarily distorted the economics of some of our legacy businesses.
It is now projected that the ASF outbreak in China will result in the loss of 50% to 55% of their hog production, creating an unprecedented supply-demand imbalance in global protein markets. To put the size of this issue in perspective, China produces almost half of the world's pork supply, which means that over one-quarter of the global supply of pork has been temporarily taken off the market. This is truly a first-time event in modern history. I will be expanding on this issue as well as on some of our successes later, but before I do, I will be turning the presentation over to our CFO, Will Kalutycz, for an overview of our financial results for the quarter. Will?
Thanks, George. Good morning, everyone. Before discussing our results for the quarter, I would like to caution you that to the extent we make forward-looking statements during our presentation, our forecasts and assumptions are subject to change and actual results may vary. Please see our 2018 MD&A, which is filed on the SEDAR website, www.sedar.com, for details on some of the factors that could cause our actual results to differ from our current expectations. Turning to our results. Our revenue for the quarter grew by CAD 132.8 million, or 15.9%, to a record CAD 968.3 million. Acquisitions accounted for CAD 69.1 million of the increase, organic volume growth for CAD 51.7 million, net selling price inflation for CAD 6.5 million, and currency translation for CAD 5.5 million. Our organic volume growth rate, which excludes the impact of selling price and exchange-related inflation, was 6.2% for the quarter, or on a nominal dollar basis, 7.6%.
Our strong growth was driven by a broad range of initiatives, with most of our success being in the seafood, sandwich, meat snack, and charcuterie product categories. This was partially offset by three top-line challenges. These consisted of, One, tough year-over-year comparatives for our Quebec-based distribution operation due to an unusually large amount of feature activity by a particular retailer in 2018. Two, lower than normal promotional activity for certain pork-based products as a result of cost and supply uncertainties associated with the outbreak of African swine fever in China. Three, continued weakness in the Western Canadian full-service food service market. While our growth for the quarter exceeded our long-term targeted range of 4%-6%, it was below our expectations, mainly due to slower than planned ramp-up in a variety of new meat snack and sandwich product launches and the ASF-related challenge mentioned earlier.
Our adjusted EBITDA for the quarter increased by CAD 12.8 million or 18% to CAD 84.1 million. This was driven primarily by our sales growth, adoption of the IFRS 16 accounting standard, and efficiency improvements in a number of our production facilities. These positive drivers were partially offset by four main factors, namely, one, additional costs associated with investments we are making in infrastructure to support our current and future growth, including additional overhead associated with our new GTA facility, expanded Montreal operation, and new lobster procurement initiatives. Two, a run-up in the cost of mainland lobsters due to unexpectedly low landings, which resulted in lower than normal margins on fixed-price lobster promotions with several major U.S. retail chains. Three, labor cost inflation, particularly in our U.S.-based businesses where the labor market is extremely tight.
Four, additional outside storage costs, mainly associated with long inventory positions being taken to hedge against rising global pork and beef commodity costs and to prepare for new product launches. The impact of pork and beef commodity cost inflation had a negative impact on our margin percentage for the quarter, but on a dollar basis was relatively neutral due to price increases implemented earlier in the quarter or in the previous quarter offsetting cost inflation. While our adjusted EBITDA set a new third quarter record, it was below our expectations due to the lobster margin and sales challenges I mentioned earlier and also because the margin improvement we had expected to result from recent selling price increases put through by many of our protein businesses to address ASF-related cost challenges did not happen.
This is because of further commodity cost inflation and, in particular, significant increases in the cost of specialized raw materials sourced from Europe, which in turn was the result of a major increase in Europe's pork exports to China. Looking forward, we are reducing our sales and adjusted EBITDA guidance for 2019 based primarily on four considerations. Namely, the greater than expected challenges that occurred in the third quarter, the continuation of some of these challenges into the fourth quarter, and in particular, those associated with the outbreak of ASF in China, the Canadian dollar being stronger in the back half of 2019 than we had previously forecasted, and delays in the closing of several planned business acquisitions. Note that this last factor impacted only the top end of our guidance.
These factors are expected to be partially offset by the recent completion of two acquisitions, namely Viandex and Maine Coast, albeit the impact of these is mitigated by the seasonality of their businesses. While we are expecting to complete additional acquisitions in the fourth quarter of 2019, these have not been factored into our revised guidance. Our adjusted EPS for the quarter decreased by CAD 0.15 per share to CAD 0.88 per share, primarily due to three causes, namely, one, the dilutive effects of our recent private placement, as a significant portion of the new capital raise is yet to be invested. Two, the adoption of the IFRS 16 accounting standard, which represented approximately one-third of the decrease in our EPS. Three, the ASF challenges I outlined earlier. In terms of our financial position, we continue to maintain a very conservative balance sheet and strong liquidity.
Our senior debt to adjusted EBITDA ratio was 2.0 to one, which was well below our long-term target range of 2.5 to one to 3.0 to one, while our total debt to adjusted EBITDA was 3.3 to one, which was also below our long-term targeted range of 4.0 to one to 4.5 to one. In terms of liquidity, we had CAD 409 million of unutilized credit capacity at the end of the quarter. During the quarter, we invested CAD 68.7 million in businesses and growth-related capital projects. These consisted of CAD 49.6 million for the investments in Viandex and North Delta Seafood, and CAD 19.1 million for project capital expenditures. Turning to dividends, during the quarter, we declared a dividend of CAD 19.6 million, or CAD 0.525 per share, which, on an annualized basis, works out to CAD 2.10 per share.
Our free cash flow for the trailing four quarters was a record CAD 174.7 million, as compared to dividends of CAD 73.1 million, resulting in a payout ratio of 41.8%. I will now turn the presentation back to George.
Thanks, Will. While ASF and global trade disputes are presenting us with certain short-term challenges, we feel very good about our third quarter and year-to-date performance and the progress we're making towards becoming North America's leading specialty food company. We're particularly pleased with the headway being made by our seafood, sandwich, and protein platforms in the U.S. Our third quarter growth in this market of almost 50% underscores the merits of our long-term strategies and gives us the conviction that we will exceed our plan of achieving sales of CAD 6 billion and an EBITDA margin of 10% by 2023. At a time when most large food companies are struggling just to maintain their sales, we're hitting singles and doubles on a regular basis, driven by our passion for producing authentic, great-tasting and great quality products.
Our U.S. protein platform's meat snack initiatives are generating great momentum in all retail channels, including club, grocery, and convenience store. This is most evident in the C-store channel, where we can now claim the title to having the fastest-growing meat snack brand in the U.S., driven by new product launches and excellent commercial execution. During the quarter, our U.S. seafood platform commissioned a new 40,000-square-foot lobster processing plant in Saco, Maine. The ramp-up of this facility is going very well, and we're now, without a doubt, the best-positioned company in the U.S. to capitalize on the growing demand by both retail and food service customers for new and innovative value-added lobster products. It is early days, but the response so far from our customers to the new and innovative product solutions we're bringing to them has been excellent, and sales traction is accelerating much faster than planned.
Our U.S. sandwich platform, which is our most developed initiative in the U.S., had another solid quarter generating double-digit organic growth, driven in part by their new sales initiatives in the club, retail, and C-store channels, and by their focus on the assembly of charcuterie platters and trays. While sandwiches continue to be their focus, the success they're having in leveraging their assembly abilities to expand into the charcuterie and tray pack product categories has quickly filled their capacity in this fast-growing segment of the market. Correspondingly, they're in the process of planning an expansion of their capacity as they establish themselves as the best-in-class manufacturer in this category. Partially offsetting the success we're seeing in so many areas of our business are the challenges caused by ASF-related issues and global trade disputes, which are resulting in unprecedented volatility in both domestic and international global protein markets.
There have been some recent positive developments, with China lifting its ban on Canadian pork and beef and reducing some of its tariffs on meat imports from the U.S. While these developments don't resolve the immediate supply-demand imbalances, they will help global protein markets to return to some normalcy and predictability. As a final word on this situation, I would like to reemphasize the transitory nature of these challenges and that our long-term perspective has not changed. We continue to manage our business and growth prudently and deliberately, focusing on innovation, operational excellence, and diversification, all the while keeping our eye on the long game. Turning to our acquisitions, I'm very pleased to welcome the Viandex, Maine Coast Shellfish, and North Delta Seafood teams to Premium Brands.
Viandex is a leading distributor of proteins in Quebec City and will expand the capabilities of our Quebec-based C&C platform. Maine Coast Shellfish is a leading distributor of locally harvested seafood in the U.S. Northeast and will provide downstream distribution capabilities to Ready Seafood as they ramp up production at their Saco facility. North Delta Seafood is a leading processor and distributor of a wide variety of wild Pacific cod seafood and will further enhance and diversify our sourcing capabilities for these highly sought-after products. North Delta will also expand our seafood platform's access to key markets in Asia and more specifically, China. We're very happy to welcome these three very talented management teams to the PB family.
In closing, I would like to once again state that we remain on track to deliver another year of record top and bottom line growth, despite some of the unprecedented headwinds currently facing us. 2019 will be the 16th year in a row that we deliver record year-over-year results while continuing to grow and diversify our revenue and cash flow streams. In terms of our acquisitions activity, I'm pleased to report that we continue to enjoy an especially robust pipeline of opportunities, some of which are sizable, and fully expect to add to our portfolio of great specialty food companies in the relatively near future. I will now turn the presentation over to Corey for the Q&A part of our presentation. Corey?
Thank you. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. Again, please press star 1 to ask a question. We'll pause momentarily to allow everyone an opportunity to signal for questions. We will take our first question from George Doumet with Scotiabank.
Yeah, hi, NS. Thanks for taking my questions.
Hey, George.
Will, I think you guys called out about CAD 6 million of the impact for ASF on EBITDA last quarter. Would you have that number handy for this quarter? Do you guys have any approximation maybe for the sales startup challenges that were also happened in the quarter as well?
It's actually very similar quarter-over-quarter, George. It's close to the CAD 6 million. It's just a little under CAD 6 million. Again, a similar sort of mix between commodity and sales impact. In terms of the ramp of the sales impact, it was a much smaller impact on our EBITDA, probably less than CAD 2 million. Sort of in that ballpark, just because of generally promo costs associated with those new ramp-ups. Finally, and the one I want to make clear, because maybe it's a little more difficult to explain in the written MD&A, is the challenge in our Ready Seafood business with the Maine lobster situation. For the last little while, we've been talking about how there's been a glut of lobsters in the U.S., and that's been impacting Ready's margins.
This quarter, actually, a lot of the initiatives they put in place to address that have sort of kicked in, and that's been addressed. We had sort of a reverse situation happen then in that the lobster landings in Maine this year were way below expectations, which actually resulted in a ramp-up of lobster prices in the U.S. Ready got caught because they had a bunch of fixed promotions, which are negotiated well in advance of the season with some major U.S. retailers. That was another CAD couple million of hit to our EBITDA.
Yeah, thanks for the call.
Those would be sort of the three major factors in the normalization of our earnings.
Great. Thanks for that. I think, George, in your prepared remarks, you had mentioned progress in the sandwich platform in general. We seem to be doing quite a bit of stuff on the capacity side. I'm just wondering, is it possibly in the cards to maybe add another sandwich plant over the next 12 months? Is it going to be just mainly reconfiguration of our existing ones?
No, we will not be adding another plant, George. Again, we made two acquisitions, Buddy's and Raybern's. Both acquisitions came with a lot of capacity, a lot of unutilized capacity. Plus, we built Phoenix as well. Again, we have plenty of production space. As I mentioned in my prepared remarks, we're getting very good traction in sandwiches in all channels. We're growing very nicely in all channels, but also the charcuterie tray business is growing faster than sandwiches right now. We filled our capacity, which we have at Reno and Columbus, and now we're looking to expand that capacity within the plant network that we already have.
Okay. That's helpful.
Just a follow-up on that, George, is we will be investing in more lines in the existing facilities. There will be some CapEx that support our sandwich growth, but nothing on the scale of a new facility.
Okay. Maybe just the last one, maybe more of a general question for you guys. I know you guys pride yourselves on being entrepreneurial and kind of decentralized model. Can you hold on to and maybe keep that culture, but also work out a plan to, I guess, reduce your footprint in the manufacturing and distribution capacity, maybe to ultimately improve margins? Is that something you guys would consider?
Again, George, we're not a consolidator. We don't make decisions that are driven by costs. We make decisions driven by value. Being entrepreneurial is part of our strength, is part of our point of difference. At times, we can sit back and say, "Yes, we can save some costs here by rationalizing and consolidating." Some large companies have done it in the past, not with good results. Part of selling premium artisan type of products means that we have to maintain our entrepreneurial nature. Yes, there is some cost associated with that, there's also opportunities to charge more for selling these type of products. I think the value equation outweighs the cost savings equation.
Okay. Thanks for the answers.
Thanks, George.
Thank you. Our next question comes from Derek Lessard with TD Securities.
Yeah. Good afternoon, everybody. George, you talked about double-digit growth in sandwiches and charcuterie trays even faster. You're strong in seafood, and you got momentum in C-Stores. Just wondering how that only translated into 6% organic growth and how does that tie into the slower ramp-up in new products that you guys talked about?
Yeah. Derek, the big factor there is the challenges around a lot of the processing meats, the pork-based products and ASF's impact on them. That was sort of a negative on our growth profile, while sandwiches was the big positive. You had categories that did well, but overall, the other categories weighing them down in the protein group.
Yeah. Derek, I think, just based on Will's prepared remarks earlier, it's not a surprise to anyone for us to say that we weren't focusing our promotions with respect to pork-related type of products. In Canada in particular, and to some extent in the U.S., we have some exposure to pork, and because of the uncertainty of the input costs and the prices, et cetera, we just didn't focus very much on promoting those type of products or those type of launches. Having said that, we are focusing more on seafood, chicken-based, fully cooked protein, and of course, sandwiches and charcuterie trays. We're focusing more on products that are not impacted by ASF, for obvious reasons.
Excuse me, so the slower ramp was because of the focus on everything but pork.
Exactly. We're trying to run the business prudently, and I think that middle of the year, everybody was saying ASF was going to be a 20% impact in terms of China's production, and it's gotten worse and worse. It's now up to 50% to 55%. As I said in my prepared remarks, we did have the ban on Canadian pork, which meant that Chinese sourced a lot of pork from Europe. Prices skyrocketed in Europe, impacting all of our partners and our suppliers there. Again, for obvious reasons, we focused on promoting other products other than those that are pork-based. We felt that it was the right thing to do and the prudent thing to do, and happy to say that we had a lot of traction, a lot of success with respect to all those non-pork related products.
Again, it's good to be diversified in this type of situation.
Okay. Thanks for the color, Derek. I guess maybe a follow-up to that is, how much of the business is tied to European specialty meat? I'm just trying to get a sense of your sensitivity to European prices.
Derek, we procure about CAD 60 million a year of product from Europe, and roughly 40% of that's deli, 40% of that's charcuterie, and 20% is rib products. They're all very specialized products. As a result, we can't easily shift procurement to another market. That's kind of why we're tied in with what's happening with Europe.
Just want to mention, Derek, that the disconnect between Europe and North America was strictly the result of the ban that China imposed on mainly Canadian pork. Obviously, there were some trade issues with the U.S. pork as well. With respect to the Canadian situation, that's gone away, right? The market opened up again last week. We expect the disconnect between European pork and North American pork to go away or diminish. It was a short-term issue. It was really a distortion of the economics that we're used to. We're faced with situations we have to raise prices in our domestic market because we import product from Europe. At the same time, the domestic situation is relatively benign, we don't have a lot of pricing ability in those situations. Of course, we don't want to lose market share.
It was kind of a very unusual event, but again, with Canada opening up now, we expect that discrepancy to go away.
Okay. One final one for me, it's just on turning to your cash flow statement. Will, the working capital was a big source of funds this quarter. Just wondering if you can tell us what the driver of that was there anything one-off in terms of business operations?
Yeah, no, it was just timing. If you recall in Q2, we had a very big negative in our cash flow statement on the working capital line. It was just the timing of items.
Okay. Thank you.
Thank you. Our next question comes from David Newman with Desjardins.
Good morning, gentlemen.
Hey, David.
Hey, David.
Just quickly on, just to kind of put a final nail in the coffin on this ASF situation. EU prices are high and North American prices are flat to rolling over, but Canada is opening up. If you get the situation where you see some normalization around the world, I guess you're in a pretty decent position that you can raise prices again if the prices in North America rise or costs rise in North America?
Definitely, David. That we've always done that. Again, the issue was the large disconnect between North American prices and European prices, right? That did not give us the ability to raise prices because, again, the competitive prices in North America were benign or flat. With Canada opening up again, now you'll have sort of more normal global supply and demand conditions, which we've operated for a long time, and obviously we understand, and again, we feel comfortable that in this situation we will be able to raise prices if we have to.
What do you think the typical-- I know what your pricing lag is, but how long do you think this could linger as an issue? Obviously, you got election next year in the U.S. Obviously, you want to get this solved, but how long do you think this might linger into 2020?
Again, as I said in my prepared remarks, there appears to be some sanity coming back into the global trade situation. The fact is that China has a massive protein deficit, given ASF. It has a massive pork deficit as well. They will need to import pork from Canada and the U.S. I believe that's why they opened up these markets more recently. Again, we think it's probably a 2019 issue, and we're already seeing that. We're already seeing openness and more liberalization of trade and trade coming back to normal. In the last six months, I would say we had nothing. Nothing was normal. It was very unusual.
No, for sure. Then if you look at your programs in terms of your current programs that you've won and some of the ones that you guys are still looking at, you had some delays, I guess, on launching some of your current programs, which I think if I recall, was like CAD 100 million of CAD 135 million or CAD 135 million in total with the CAD 35 cascading into 2020. Maybe just some thoughts on the delays. I think it's basically your Walmart Breakfast Sandwich Program. How's that going?
As our organic growth overall, David, and also our numbers show, we're getting really good traction in terms of our product launches into the U.S. As I mentioned, our meat snack platform is doing extremely well, growing very quickly. We now own the number one growth brand in Festo in the U.S., getting really good traction in club and grocery as well. We talked about our sandwich initiatives and our charcuterie initiatives, where we're getting incredible traction, particularly in the U.S. market. We're getting really, really good traction in terms of what we're trying to do and the way we're executing in the U.S. We generally follow the markets. We try to make prudent and astute decisions as to what we promote and what we don't promote.
We even had to make some changes in our strategies given the recent 25% tariffs on some European pork products being imported in the U.S. Some products are included in getting the tariff, some are not. We're always trying to adjust and reposition ourselves and what we focus on to make sure, obviously, we manage our business as prudently as we can. Overall, we're very pleased with the growth that we're seeing and the opportunities we're seeing. There's no question about that.
Are you still seeing some big C-stores as potentially part of the mix, or is it still more of the small chains, or what is kind of the constitution of the mix of business that you guys are currently bidding on?
Again, David, I welcome you to take a trip into the U.S. and check out both some of the large C-store chains and some of the smaller chains. We're getting very good traction in both sandwiches and meat snacks. Again, not an issue there, and that's driving a lot of our growth.
Okay, guys. Hopefully, this thing gets sorted out real soon in 2020. There until it would be a much better year when compared to this kind of debacle that we face this year. We'll talk soon.
Thank you, David.
Thank you. Our next question comes from John Zamparo with CIBC.
Hey, thanks. Good afternoon. First question is more of a follow-up on what was asked earlier, so apologies if I missed it. I just want to better understand the ASF impact. The press release noted the ASF did impact margins, but also said the impact from commodity costs was largely offset by price increases. Just help me understand what exactly was the impact from ASF, and I think you'd split it earlier. Assuming it was mostly on new product sales, I'm assuming that's referring to the new contract wins in C-store and club channels. Can you remind us of the CAD 130 or so million of that, how does it split between those two channels?
Yeah. In terms of the margins versus dollars impact, so it's a nominal versus percentage concept, John. We were able to cover the actual cost increases off on an overall basis, but we didn't make the margin. Effectively, our margins were gone down while the net dollars change stayed flat. Does that make sense?
Yep, understood.
Yeah. Okay. Sorry, what was the second part on the sales?
You said that you're going to have to finesse some new sales initiatives and that ASF impacted some of the new product launches that you'd targeted. Assuming this is referring to the CAD 130 or so million of new contract wins, can you remind me the split of that CAD 130 between sandwich and meat snacks?
Yeah. The split was roughly 45% sandwiches, 55% protein, which included meat snacks, charcuterie, and some of our cooked protein plans. All of those initiatives that were outlined in that CAD 130 million are progressing and progressing well. Like George talked about, some of the meat snack and charcuterie items, we have taken a less aggressive approach in terms of our featuring and promo based on what's been happening in Europe. Those are ramping up slower than the original expectation. They're still progressing.
Got you. Okay. That's helpful. Thanks. I want to ask about labor cost inflation. It impacted especially food's gross margin in the quarter. It seemed this had been maybe an issue in the rearview mirror, but it sounds like it is still something you're dealing with. Can you talk about how this is impacting the business and are there incremental steps you can take to address this? I believe you had already tackled some last year.
Yeah. John, that was a year-over-year impact. That wasn't a surprise from a looking forward perspective. We had built that into our expectations. It's just purely that is the year-over-year impact of primarily labor inflation.
Okay, thanks.
That number was not a surprise to us.
Also, again, we're in a unique position to leverage our Canadian production to service the U.S. market. In fact, this past quarter, we had record production out of Canada shipped to the U.S. We have an advantage over labor in this situation. It's one of our competitive advantages, I think, in terms of our projects and growth initiatives in the U.S.
Okay, understood. Maybe moving to the lobster market. That had a significant impact on margins, and I know you're excited about the future of this business and that you're building it for the long term. Is there anything you can do to execute to reduce the impact on results over the next few quarters?
There's two stories, right, in the lobster impact on the quarter. One was the one I mentioned earlier on the question from George Doumet in terms of the impact on some fixed price contracts with retail. That was an actual negative hit to us. In terms of the other impact, one of the exciting things happening within our Ready Seafood business is they are using the disruption in the market to implement a whole number of new procurement initiatives, and those are going very well. What they're doing is they're setting up the supply for their new Saco facility and some of their other growth initiatives. In that industry, procurement is critical. It's a scarce resource, and your first step in any growth strategy has to be to procure the product. They've gone out, procured it.
In the interim, while they're now developing their Saco facility and other growth initiatives, they're effectively selling that supply at a nominal margin. It's not a negative. It's just, again, it's impacting the percentage on margins. Now as they execute on their growth strategy, they will expand their margin. They'll pick up that additional margin.
Our overall strategy is usual, again, in lobster, as it is in pork and beef and chicken, is really to move more towards value-added and branded. That's why we're so excited with the completion of Saco and the commission of that facility.
Right. Do you have a timeline in mind for when that business would be selling at sustainable margins or the margins you like? Is it closer to a year, or is this kind of a three to five-year project?
No, it's sort of a one-plus type project, one-plus years project. We're pretty excited about the opportunities and how quickly we expect them to ramp up.
Okay, understood. If I could just sneak in one more. More broadly, I'm just trying to get a sense into visibility into your portfolio companies. The Q2 call reaffirmed guidance, the quarter didn't come in where you'd like. Is it that operations turned really sharply in the last six to seven weeks of the quarter, or is it that you have limited visibility into some of the businesses? If it's the latter, are there levers you can pull to try to increase visibility?
I think the major issue for us, it's really ASF. I don't know if you follow ASF and some of the reports that are coming out of both China is that we've modeled about 20% loss of pork production in China, and it's coming out at 50%-55%, which is really disrupting the international pork markets to a much larger extent than what we modeled. This has not happened before. We didn't model the disconnect between the European markets and the North American markets. We've never had this type of a disconnect before. Generally, ASF is the big issue for us, but as I've mentioned earlier, we're adjusting our strategies, our launches, our innovation, et cetera, to make sure that we minimize the impact. At the same time, we're obviously managing the business for the long term.
The situation in terms of ASF in China has been the real issue for us.
The European disconnect results.
The consequent disconnect, yeah.
Right. Okay. That's helpful. Thank you very much.
Thank you.
Thank you. Our next question comes from Fahad Khan with RBC Capital Markets.
Thanks, and good afternoon. Just wanting to understand the logistics of, I guess, how some of these promotions go into the market. I think you had similar commentary at Q2 that because of some of these commodity concerns, you may have pulled back on promotions or didn't execute them. I guess, can you just walk us through maybe the logistics of that? Is it as you see the commodity price rising up or you realize cost is high, are you just pulling back on those promotions? Is the margin not right for you or the customer? I'm just trying to understand how that's working on the ground level.
Well, typically, a certain retailer will have six promotions, let's say, in a given year, and we bid on those promotions. When it comes to pork type of products, we have not been very aggressive at all this year in both the second and the third quarter because of the uncertainty of pork pricing in particular, given the uncertainty around ASF. Again, somebody else may have gotten that business. They're welcome to get the business at a loss. That's fine. They can do that. We have not been aggressive at all with respect to any product which involved pork. We've been aggressive on promotions with regards to other proteins.
Generally speaking and historically, pork is a big part of our business, but we have not been aggressive at all in terms of these type of promotions on a retail by retail basis in Canada and the U.S.
Similarly with launch of the charcuterie programs in the U.S., again, just because of the margin profile being challenged, the team doesn't want to go out there with premium pricing to start off with. They've just done a soft launch, and it is proceeding on a much more sort of conservative basis.
Okay. Go ahead.
Yeah, go ahead. Just in general terms, I would say that every company in North America today that value adds pork is probably very cautious with regards to promotions. This ASF is impacting everybody, so it shouldn't surprise anyone that companies are not promoting aggressively with respect to pork.
Okay. Just to follow up on that, I guess, what kind of visibility are you seeing to commodity prices around the costs for the next few quarters? Do you have some of the pricing locked in for late this year, early next year, both from a North American and European sourcing point of view?
We're comfortable with respect to supply. Again, prices fluctuate. Pricing has been volatile with respect to pork in particular. We're modeling it to be quite inflationary for 2020, and again, our companies are planning accordingly. As I mentioned earlier, we're generally happy with the fact that China has opened up to North America for pork in particular. We think what we're looking for is for the markets to return to normal global supply and demand conditions. That's what has been missing in the last six months.
Okay, great. I guess just on the M&A front, it looks like kind of between last quarter and this quarter, you've indicated that some of the acquisitions might have been a little bit delayed, I guess. Is it acquisitions you just didn't feel were the right fit? Is it pricing? I guess, maybe what are some of the causes of some of these acquisitions maybe not getting done around time, and how do you see the sort of pipeline for transactions over the next while?
Well, we have probably the most robust pipeline we've had in our history. Our M&A group here has been extremely busy over the last little while. It shouldn't surprise anybody that we're not aggressively trying to close acquisitions right now that involve pork-related companies. We're concerned with respect to anything that involves pork. Having said that, all of our platforms right now have major acquisitions in the works. A lot of times, the timing stretches by a few months. A lot of the timing is driven by the other side. Again, we're very confident with our pipeline and our ability to close many more acquisitions over the next few months.
Okay, great. Just on the capacity side, I guess in terms of adding the lines that you're talking about in the sandwich plants, is it primarily in the new Phoenix facility? Because I understand, I think you moved away some production from some of the other plants to Phoenix. I guess, how should we think about how ramped up that Phoenix plant is right now, and how much room is there to add lines in some of the other plants?
Yeah. Phoenix is running extremely well. We're very pleased with how well it's been running in the last year or so. Phoenix is mainly focusing on sandwiches, and as we've taken some sandwich type of production out of Reno and Columbus and moved them into Phoenix, that gave us space to convert to charcuterie. We do charcuterie in Reno and Columbus, and we're looking, as Will said, to add more lines to this very fast-growing category.
We have a lot of space in one of our Lakeville facilities, which we acquired as part of the Buddy's transaction. Ultimately, depending on how rapidly we see growth coming, that gives us a lot of flexibility in adding lines as well.
Very good. That's helpful. Thank you.
Thank you. Our next question comes from Stephen MacLeod with BMO Capital Markets.
Thank you. Good afternoon, guys.
Thanks, Stephen.
Hey, Stephen.
Hi. I just wanted to circle back around on the sales delays. I know the question's been asked a couple different ways, I just wanted to try to figure out kind of, you were saying previously that CAD 100 million of those CAD 135 million of new product introductions would flow through in the back half of the year. Can you talk about how much you still expect to come through in the back half of the year, and how much sort of gets bumped into early 2020?
We haven't isolated that 130 specifically, Stephen, but it is factored into our projections for the year. In general terms though, I would say that our run rate of that 130 for 2019 was about CAD 90 million. We had expected CAD 40 million of that run rate to happen in 2020. I guess probably about 10-15 in that's maybe been pushed out.
All pork-related.
Yeah. These are certainly not lost, just delayed.
No, absolutely not.
In fact, in terms of the pipeline, we haven't updated or we don't sort of continually update that CAD 130 million number. The reality is, based on further contracts that have been won, the run rate of that number into 2020 is much larger today than the CAD 130.
Oh, I see. Okay. Would it be safe to assume that the incremental dollars above and beyond that CAD 130 would be in those categories, sandwiches, charcuterie, meat snacks?
Yeah.
Cooked protein. Don't forget cooked protein. That's a high growth category for us.
Right. Okay. That's great. I know visibility right now is quite low, just given where all the moving parts that obviously impacted the quarter, I just wanted to get your sense as to what is your visibility as you roll into 2020, whether it's the top-line. I guess, top-line gross margin would be the two biggest variables. I'm just curious, how do you think about those numbers and what kind of confidence you have in where you could potentially end up as you roll into 2020? Understanding it's a ways away and there are some factors, I just wanted to get a sense of what visibility might look like.
Again, Stephen, I think you know that over the years we've diversified quite a bit away from pork. When we first launched Premium Brands, I think pork was probably 50% of our inputs. Today, it's a much lesser number. I would say that we have very good visibility with respect to the rest of the platform as it relates to other proteins, of course. Chicken, beef, seafood, these are massive parts of our business. Again, there is some uncertainty with respect to the pork situation. The situation in Canada far exceeded anyone's expectations with respect to how bad ASF would get. We're a little bit cautious with respect to pork, of course. Having said that, as I mentioned earlier, all we want is we want normal global supply and demand conditions to be in place. We're seeing evidence of that, which makes us very happy.
We did not have normal supply and demand conditions with regards to pork over the last six months. We like the fact that Canada now has been opened up in regards to exports to China. We like the fact that there appears to be, again, more liberalized trade between U.S. and China with regards to protein, and that will make the markets get back to normal. The pork situation is what causes us a little bit of concern, but we're seeing evidence that the markets are going the right way.
Okay. That's helpful. Just finally, on the lobster situation, with respect to the pricing, when do you see that issue sort of resolving itself in terms of the pricing with respect to the fixed price contracts?
That was completely a one-off situation this past summer, Steve.
Okay. That's great. That's it for me. Thank you.
Thank you. Thanks, Steve.
Thank you. Our next question comes from Dimitry Khmelnitsky with Veritas.
Hi, thanks for taking my question. How much revenue did you generate from the new product initiatives year to date?
Well, that was the majority of that growth in our organic specialty foods, 6.2% would have come from the new initiatives. Like I say, in fact, when you look at the new initiatives, it's larger than that because you saw flattened or in some cases, a little bit of contraction in some of the other pork categories with what's happening around the featuring issues.
I see. Okay. How much revenue was lost in relation to your original guidance due to the ASF?
It's probably in the CAD 5 million-CAD 10 million range.
For the quarter
For the quarter. Yeah, it was about CAD 5 million in the second quarter and sort of CAD 5-CAD 10 depending on how we look at our promo activity in the U.S. with some of the new programs.
I see. Okay. Broadly, what kind of multiples did you pay for 2009 acquisitions?
We never talk multiples, but in terms of the two recent acquisitions, they're roughly 5% of EBITDA businesses at this point before synergies.
Sorry, but then again-
If you do the math around the sales and the margins, you can sort of extrapolate some estimates around EBITDA. Again, we always talk about in our minds, and the way we look at these things are through an IRR model or 15% IRR concept.
Right. In terms of revenue, is it around one times revenue? I am just trying to figure out the impact of the 2019 acquisitions on revenue.
I don't have that metric, Dimitry. Again, we look at it from IRR perspective, not a multiple of revenue.
Okay.
I'd have to go back and run those numbers.
Yeah. There was also a put option exercised in the quarter for CAD 17 million. Just wonder which business does that relate to?
No, this past quarter, there was no put options exercised.
On the cash flow statement.
Are you looking on the year to date? Last quarter, we bought out the minority shareholders in our Templars business in the U.S. We moved them up to the Premium Brands level.
That was in second quarter, not in the third.
For 13 weeks that ended September 28, 2019, investment gain and advances to associates, net of distribution, it's CAD 16.3 million.
Oh, okay. Yeah. That's our investment in North Delta Seafood, Dimitry. Because that was a 50% interest, so it's being accounted for as an equity investment.
I see. Okay. Excellent. Well, okay, thank you very much.
Okay, Dimitry. Thank you.
Thank you. Our next question comes from Rob Wells with TD Wealth.
Good morning, George and Will.
Good morning.
Hey, Rob.
First thing, thank you for your efforts in building and growing the company. Look forward to better longer-term returns, and thanks for your work to date. Two questions. The first one is, back in November last year, you announced the normal course issuer bid. How much of that planned share buyback did you complete prior to the private placement in May this year?
We actually didn't. We put in place the buyback program, Rob, way back in last year when there was a significant amount of weakness in our share price. We were down in sort of CAD low 60s. We put it in place because of, in our opinion, the silly valuation of the company. By the time we got the program in place, because there's various regulatory steps we had to go through, by that time, the share price had normalized, and as a result, we never ended up using it.
Okay. Thank you. The second question-
The good news in that, though. Sorry, Rob.
No, go ahead.
We did have the reason it normalized is we had some good long-term shareholders who stepped into the stock and took advantage of the weakness.
Are you saying it's outside of the private placement?
Yeah, outside of the private placement.
Okay. Thanks. George, in August, on the call, you mentioned the possibility of a European acquisition, and I can't recall if it was either year-end or within a six-month period. Can you share any updates on that potential purchase?
Yeah. Again, we're in a number of discussions with companies in North America and Europe. We fully expect to probably close a transaction involving one or two European companies in 2020.
Okay. Thanks very much.
Thank you, Rob.
Thank you. Our final question comes from Derek Lessard with TD Securities.
Just a few follow-ups from me, gentlemen. I was just wondering if you're modeling any pressure in any other commodity markets like beef.
We always model inflation or deflation, of course, given the volatility in the markets. Generally, we're modeling inflation with respect to beef in particular. Again, there is a protein shortage in the world today based on what's happening in China with respect to ASF. Very often, there's a substitution effect when a certain market is short of a protein. Generally, we're modeling inflation. We've done that in the past. What we won't model is obviously the type of trade issues and aberrations in global supply and demand that we saw in the last six months. We're comfortable with inflation or deflation. A lot of our pricing tends to be cost-plus. Again, and we're very comfortable with regards to passing on pricing increases to our customers under normal conditions. Inflation is not an issue for us.
It's just that we had this unusual situation with respect to the disconnect of European and Canadian prices.
Yeah. Okay. Thanks for that, George. I was wondering, you guys talked about taking advantage of a lobster disruption. Can you remind me again what that disruption is?
Well, it was the China tariff issue, where China placed a 25% tariff on U.S. lobsters.
Oh.
As a result, a number of suppliers, a number of players had really based their business plans on China. That created a tremendous amount of disruption in the local market.
Okay. One final one for me, again, it's on M&A, but the ones that you guys completed this quarter. I'm just wondering how we should be modeling? I think there was some disclosure on sales for one of them, but maybe total sales and sort of the margin expectations.
Yeah. There will be more coming, we expect, this quarter, Derek. In terms of the ones we completed, the Viandex and Maine Coast, you're looking at about CAD 120 million sales range with a roughly 5% EBITDA margin.
5%, you said?
Yeah.
Okay.
They're both distribution businesses.
Okay.
That's before any synergies. That's their historic levels.
Right. Thank you.
Thank you. This concludes today's question and answer session. I would now like to turn the call over to today's speakers for closing remarks.
Yes, I'd like to thank everybody for attending today. Thank you so much. Bye-bye.
Thank you, ladies and gentlemen. This concludes today's teleconference. You may now disconnect.