Good afternoon. My name is Cheryl, and I will be your conference operator today. At this time, I would like to welcome everyone to the Premium Brands Holdings Corporation Fourth Quarter 2018 Earnings Conference Call. Our speakers will be George Paleologou, CEO and President of Premium Brands, and Will Kalutycz, CFO of Premium Brands. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question at that time, simply press star then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. Mr. George Paleologou, you may begin your conference.
Thank you, Cheryl, and good morning, everyone. I would like to welcome you to our 2018 fourth quarter conference call. I will be turning the presentation over to our CFO, Will Kalutycz, for an overview of our financial results for the quarter, after which I will make a few brief comments. This will then be followed by the Q&A segment of the presentation. Will?
Thanks, George, and 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 258.5 million, or 44.2%, to a record CAD 843.9 million. Acquisitions accounted for CAD 231.5 million of the increase, organic volume growth for CAD 18.9 million, and currency translation for CAD 8.5 million. These increases were offset slightly by CAD 400,000 in selling price deflation. Our organic volume growth rate for the quarter was 3.3%. Normalizing for unusually high customer short shipments that were the result of supply chain disruptions, this rate was 4.6%. Our Specialty Foods Segment, with a normalized organic growth rate of 7.6%, was the major driver of our organic growth as our Premium Food Distribution Segment continued to be impacted by a soft economy in Western Canada. Our growth for the quarter was in line with our expectations, particularly given that this is, for seasonal reasons, traditionally one of our weakest quarters. Our adjusted EBITDA for the quarter increased by CAD 15.4 million, or 32.6%, to CAD 62.7 million. This was driven mainly by acquisitions and our organic sales growth. There was some benefit in the quarter from commodity cost deflation. This was largely offset by higher wage and freight costs.
However, normalizing for unusually high customer short shipments that were the result of supply chain disruptions, this rate was 4.6%. Our specialty foods segment, with a normalized organic growth rate of 7.6%, was the major driver of our organic growth as our premium food distribution segment continued to be impacted by a soft economy in Western Canada. Overall, our growth for the quarter was in line with our expectations, particularly given that this is, for seasonal reasons, traditionally one of our weakest quarters. Our adjusted EBITDA for the quarter increased by CAD 15.4 million, or 32.6%, to CAD 62.7 million. This was driven mainly by acquisitions and our organic sales growth. There was some benefit in the quarter from commodity cost deflation. However, this was largely offset by higher wage and freight costs.
From an expectations perspective, both our adjusted EBITDA and our adjusted EBITDA margin of 7.4% were below our projections from earlier in the year. This was due mainly to four factors, all of which we consider transitory. The first and most significant of these were delays in initiatives that our seafood group is putting in place to mitigate the impact of China's tariffs on its U.S. lobster business. These delays were recently resolved, and while there will be some continuing impact in the first quarter of 2019, it will be much less than what we saw in the fourth quarter.
The other factors impacting our adjusted EBITDA and adjusted EBITDA margin were lower margins on our Canadian seafood sales as a result of a weaker Canadian dollar, the timing of certain SG&A costs, including a variety of sales and marketing spends that will drive future sales growth, and sales mix changes as our premium food distribution segment offset the decrease in its food service sales in Western Canada with lower margin wholesale businesses.
During the quarter, we incurred CAD 2.7 million in startup and restructuring costs, which primarily related to two projects, the construction of a state-of-the-art 105,000 sq ft distribution center in the Greater Toronto Area that will support our seafood and food service initiatives in this market, and the construction of a new 22,000 sq ft culinary plant in Surrey, B.C., that will be capable of producing a wide variety of fresh salads, soups, and sauces for retail and food service customers across Western Canada. Both of these facilities commenced operations at the end of November. Our adjusted earnings per share for the quarter increased by CAD 0.08 per share, or 10.8%, to CAD 0.84 per share. This improved performance was driven by growth in our adjusted EBITDA, partially offset by higher interest costs associated with the significant amount of capital we invested in 2018 in business acquisitions and capital projects.
Looking forward, we are seeing solid momentum across our many businesses and correspondingly are maintaining our guidance for 2019, including sales of approximately CAD 3.7 billion and EBITDA of between CAD 320 million and CAD 340 million. The projected strong growth in both our sales and adjusted EBITDA is the result of a combination of the acquisitions we completed during 2018 Organic volume growth of about 9%-10% across our legacy businesses and a range of continuous improvement initiatives, including continued investment in automation. In terms of our financial position, we continue to maintain a strong and solid balance sheet and very strong liquidity. Our senior debt to adjusted EBITDA ratio was 2.6:1 at the end of the quarter, which was at the bottom end of our long-term targeted range of 2.5:1 to 3.0:1.
Our total debt to adjusted EBITDA ratio was 3.8 to 1, which was below our long-term targeted range of 4 to 1 to 4.5 to 1. Furthermore, we had almost CAD 220 million of unutilized capacity on our credit facilities at the end of the quarter. Turning to our investment activities, during the quarter, we made two small business investments totaling CAD 1.1 million. Our Ready Seafood business acquired a small lobster holding business in Nova Scotia, while our Hub City Fisheries business acquired a specialty smoked salmon processing business on Vancouver Island. In total, we invested CAD 753 million in business acquisitions in 2018, four of them being major platform transactions and the rest being bolt-on transactions.
During the quarter, we also invested CAD 19.5 million in project capital expenditures, with some of the more significant projects being the two facilities I mentioned earlier, as well as the expansion of one of our cooked protein plants in Montreal and the installation of new automated sandwich lines in our Phoenix facility. Turning to dividends, during the quarter, we declared a dividend of CAD 16 million or CAD 0.475 per share, which on an annualized basis works out to CAD 1.90 per share. Our free cash flow for 2018 increased by 25.4% to a record CAD 164.6 million as compared to CAD 131.3 million in 2017, and our payout ratio fell to a record annual low of 38.1%. Subsequent to the quarter, we announced a 10.5% increase in our dividend, raising it to CAD 0.525 per share per quarter or CAD 2.10 per share on an annual basis.
This increase was based on several factors, the most significant of which was the increase in our free cash flow. I will now turn the presentation back to George.
Thanks, Will. 2018 was a transformational year for Premium Brands as we made major progress in springboarding some of our key growth platforms into the U.S. marketplace. We're very confident that our unique business model, which has propelled us in a relatively short period of time to being the largest and most successful value-added protein company in Canada, will enable us to replicate this success in the U.S. The 10.5% dividend increase we announced today, which is our fifth consecutive annual double-digit dividend increase, is a reflection of this confidence. From when we first launched Premium Brands back in early 2000s, our cash flow per share has grown from zero to CAD 5.05 per share. Correspondingly, we have kept the promise we made back then to our shareholders to distribute a portion of the growth in our cash flow and have since declared over CAD 400 million in dividends.
At the same time, we have seen significant appreciation in our share price so that our shareholder who has been with us since 2004 will have earned a compounded annual return of over 22%. The reason for this past success and why we will continue to generate exceptional long-term returns to our shareholders is our core strategy of investing in talented entrepreneurs and management teams in the specialty food space and giving them access to resources that enable them to accelerate the growth of their businesses. As Will mentioned earlier, 2018 was our busiest year yet for acquisitions, with us completing 12 transactions and employing CAD 753 million of capital. While all of these transactions were expected to strengthen some of our businesses, many of them also position us to take advantage of the significant opportunities that exist in the U.S. marketplace.
Over my 30-year career in the food industry, I have never encountered more disruption and correspondingly more opportunity than I see today. Accelerating consumer demand for high-quality foods, product innovation, convenience, and product customization in a dynamic and ever-changing retail and food service environment is challenging the status quo and creating amazing opportunities for the entrepreneurial businesses that we invest in. While the timing of these opportunities can sometimes be difficult to predict, our recent announcement of securing over CAD 135 million in new product listings gives you some sense of the potential. We're also pleased to announce this quarter the launch of Project PB Ecosystem. As part of this initiative, we're working with our newer businesses to help them take full advantage of the resources available under the PB umbrella.
In addition, we have set a number of five-year targets, including achieving through a combination of organic growth, continuous efficiency improvements, and acquisitions, annual sales of CAD 6 billion and an EBITDA margin of 10%. Going forward, we will be providing regular updates on our progress towards meeting these targets. While there are many very exciting things happening within our company, we continue to be challenged by tight labor conditions that are impacting our operations as well as those of many of our suppliers. We're making good progress managing this while at the same time exercising judgment and prioritizing the opportunities that we pursue.
Overall, we're confident that our recent investments in new employee enhancement programs, the capacity of certain facilities, and in automation and robotics will help to alleviate this issue in due course. Turning to acquisitions, we expect 2019 to be another busy year, with there being the distinct possibility of us completing one and possibly more larger and more transformational transactions. As I mentioned earlier, the food universe is changing rapidly, and our investment strategy well positions us to continue to be an innovator and a disruptor. Our focus on partnering with passionate food entrepreneurs and talented management teams, respecting their cultures and ethos, supporting innovation and long-term decision-making, and investing in efficient state-of-the-art operations is very unique and sets us apart in the food space. I will now turn the presentation over to Cheryl for the Q&A part of our presentation. Cheryl?
Thank you. If you would like to ask a question at this time, please press star, then the number 1 on your telephone handset. Our first question comes from George Doumet, Scotiabank. Your line is open.
Hi, guys, thanks for taking my questions.
Hey, George.
I'm just wondering how much of the CAD 40 million in delayed sales that you guys called out last quarter as part of this CAD 135 million of confirmed new product listings.
Most of it is in there, George. Most of the initiatives we talked about last quarter, both the sandwich and meat snack that had been delayed, have now been secured.
That's helpful. If you add that CAD 135 million of confirmed sales to the announced acquisition that you guys announced for this year, that would leave another CAD 135 million or so to get to the midpoint of your 2019 guidance. I'm just wondering where those sales would come from.
It's across a range of initiatives we're working on in all of our businesses. Some of the bigger drivers that aren't specifically in that CAD 135 would be the new GTA facility in Toronto. Some of the organic initiatives we're working on in the charcuterie segment, and in our seafood group, some other new initiatives leveraging the Ready Seafood acquisition.
I think the CAD 135 million number, George, was in reference to my comment on the conference call during the last quarter where we said we're working on about CAD 100 million worth of opportunities. Effectively, we wanted to convey that we've secured in excess of that.
Okay. That's helpful. George, in your MD&A, you guys talk about a cautious approach for pursuing new growth opportunities. Can you maybe give people a color on that?
Yeah. Good question, George. There's no question that some of the innovation that we're bringing to the meat snack, deli, and sandwich space and protein space in the U.S. is getting great traction. We've secured a record amount of listings driven by the innovative products that we've shown our customers. In many situations, we're looking at opportunities where we get regional listings with a customer asking for a more widespread launch. We have to basically curb some of the launches given some of the issues we have around tightness of labor in particular and also capacity. That was the reference to that point.
Thanks for that, George. One last one, if I may. Your five-year plan calls for a doubling of revenues, but only a 1% expansion in EBITDA margins, I guess going from the midpoint of this year's guide. I'm just wondering why. Is it just lower margin acquisitions we're expecting to make? Is it just the assumption of labor issues persisting? Anything you can talk to that?
I think there's an assumption there, George, obviously, that the way we're going to get to CAD 6 billion, it would include acquisitions as well. I think if you looked at our numbers historically, the legacy businesses in the group tend to improve their margins substantially. Some of our highest growth and highest EBITDA margin businesses are our legacy businesses in the portfolio. Whenever we acquire, as we've acquired companies over the last couple of years, we've made a lot of acquisitions over the last couple of years, the overall average margins come down, as you've seen this past year. There is obviously that type of an assumption into that figure.
Okay. That's helpful. Thank you.
Thank you. Our next question comes from Derek Lessard, TD Securities. Your line is open.
Thanks. I hope you guys are doing well. I just wanted to maybe ask if you could talk about what happened on, I guess, the margin/cost side from the time you guys gave your guidance in Q3 back in November and the end of the quarter. It ultimately feels like you fell a little short on the EBITDA side. Maybe just a follow-up to that, just wondering what gives you the confidence to at least hit the bottom end of that 8.7%-9.2% guidance range you gave?
Probably the two most significant factors, Derek, on the margin side were the seafood margins as a result of the weakening of the U.S. dollar or the Canadian dollar, sorry, as the quarter unfolded. That had a particularly hard-hit impact in December. Also the free trade zone issue for us or the lobster issue for us. We've got an initiative in place with our Ready Seafood business whereby we're going to address the impact of the Chinese tariffs on our lobster business. We had expected that to happen earlier in the quarter. It's been a much more difficult process to get the initiative in place. It isn't done now. Actually, the first shipment goes out this week under that initiative.
As a result, Ready Seafood got hit both directly on the tariff as well as by its North American sales as a result of product that got stuck in North America.
Okay. Are you able to talk a little bit about the initiative that you've got going?
We'd rather not. It's something very proprietary and unique and very innovative for the industry and something we don't want to share at this time with the industry.
Okay.
I just want to add, Derek, in regards to the quarter, there was a definite slowdown in the Western-based food service business in December, which Will mentioned in his slow, definitive slowdown in the Western economy, particularly in Alberta and a little bit in the Lower Mainland in BC. December was a little softer in our food service business than what we expected.
Okay. That's some good color. Just wondering maybe if you could talk or what you think of your ability to control cost and maybe just update us on where you guys are with the ERP and how you view that as a tool going forward.
Yeah, the ERP project for us, it's a long-term project as we bring different businesses onto the central platform. There certainly is a factor of it helping with efficiencies through particularly better data capture in the plants. That's a factor, the bigger factor driving the improvement in our margins over time is the investments in automation and just the leveraging of our capacity. One of the factors on a year-over-year basis that negatively impacted our margins was the new Phoenix facility and the additional overhead associated with that. As we ramp that facility up, that's certainly going to be a big driver of the improvement in our specialty food segments margins.
Okay. The automation is installed currently?
Well, on the automation side, I'm talking much more broad than just the sandwich. We've got all sorts of initiatives across the different businesses, adding automation and various new processes in their facilities to improve efficiency and reduce labor, given the labor tightness out there. In terms of the sandwich line specifically, they're still being installed. That project's not expected to be completed until the second quarter of this year.
The other comment I have, Derek, with respect to the expansion of margins is the fact that, as you may have noticed, about 50% of our specialty food business now are in the U.S. The U.S. is a less seasonal market, mainly because of weather. Part of PB Ecosystem effectively incorporates us leveraging our Canadian-based capacity and part of the capacity of some of our European partners to basically service the less seasonal U.S. market, which should help us improve some of the margins in the slower quarters.
Okay, maybe just one last one from me, and again, it's probably for the ERP. Seems like you're spending about CAD 3 million a year, it's sort of like an annual spend. Can you explain why you guys do that and you didn't set a one big one-time kind of target that you're going to spend and why? I guess I'm just trying to understand why you spend on an annual basis on the ERP and how your decentralized structure and how you get all the information from your reporting units.
The ERP project isn't a single project that's out in a massive basis. It's rather we have a suite of software solutions that we offer up to our different businesses. Different businesses are at different cycles in their lives, and whether they want to adopt it now or a year or two, that's what's driving the process, Derek. It's not a Premium Brands corporate solution. It is a solution we provide to the businesses, and they adopt it on their timelines. It just so happens that it's been relatively consistent, the expenditures over the last two years, but that could easily increase significantly if a number of businesses were now ready to move forward.
Okay. Thank you.
Thank you. Our next question comes from Saba Hasan, RBC Capital Markets.
On the five-year plan, I know you gave only one year forward guidance, are you able to talk about just the overall cadence of the top line and the EBITDA margin? Are you expecting it to be steady or do you think it'll be chunky based on acquisitions?
It's going to be a combination of them, Saba. That CAD 6 billion target incorporates probably about 30%-40% of the growth coming from acquisitions, those can be very choppy. The balance is organic, with it actually being stronger up front in our internal assumptions.
Okay. There's a commentary around short shipments and some of the backlog clearing in 2019. These were, was it a one-time issue? Does it change the way your customers are buying? How do you expect that to play out over the course of 2019, if we're trying to think about cadence?
Yeah, no. The vast majority of that CAD 8 million was a very one-time type issue. It was a key customer of ours made some changes in their supply network, and the new suppliers couldn't meet our demands, and as a result, we ended up shorting our customer. That has been largely resolved now. It's taken some time. There was a combination of both just the ability to produce the product and the quality of the product. A little bit of that still spilled over into Q1 that's incorporated into our thinking, but it's largely resolved now.
I would say that was probably a result of, which we're seeing in various parts of the food space, for the fact that manufacturers are reluctant to invest in incremental capacity given some of the labor challenges. That's something we're seeing in the U.S. quite a bit these days.
Okay. Then just one on the guidance. I guess you mentioned that your results will start to be under IFRS 16. I'm assuming the guidance is still under the old standards and you'll update it maybe at Q1.
Yeah, that's correct, Saba.
Okay. Just one more, I guess, on the sort of balance sheet and acquisition commentary. Are you still kind of comfortable with that 4x on the high end? Or, I guess, if you're thinking about taking into account a larger acquisition this year, what kind of leverage should we think about through the course of 2019?
Yeah. We're certainly very comfortable with that 4x-4.5x total, because, again, the only difference between our senior and total debt PDL ratios are the convertible debentures, which we talk quite often about is really for us an equity strategy. Ultimately, we're looking to have those instruments converted to shares. It's the way we've traditionally raised equity. In terms of acquisitions and larger acquisitions, generally shares are a component of any acquisition. Through the additional EBITDA we pick up from the acquisition, some share component and our current liquidity, we've got a lot of flexibility there.
Okay. If I can just sneak in one more. Can you talk about maybe the capacity utilization at your sandwich facilities right now? I'm just trying to understand how much business can be added before you need to reinvest.
Well, we're still not fully built out on our Phoenix facility. Right now we're running eight lines and we're not even running them at capacity, and we're in the process of installing lines nine and 10, which are the automated lines, and then we still have room for two additional lines. We have quite a bit of capacity. In percentage terms, it's tough to estimate because with our Buddy's and Raybern's acquisitions, we also gained capacity there. I would say overall through the network, we're probably in the, before adding additional lines, probably in the 60%-70% range, and then even lower with those additional lines when they come online.
That's a very good number, Saba, by Will. I would say the limiting factor there is tightness of labor. That's more of a challenge for us. We have plenty of capacity and sandwiches for our growth.
Thank you.
Thank you. Our next question comes from Alex Diakun from Canaccord Genuity.
Thanks for taking my questions. A quick question on the five-year plan. I was wondering how this looks out maybe by platform or how it's communicated by platform, and then what incentives are in place to incentivize these business owners within the system? Any more guidance you could provide on that would be helpful.
Alex. I think in broad terms, our distribution business will remain in Canada. We have no plans to expand our distribution platform in the U.S. We are the only protein distributor today, coast to coast, from Victoria to the Maritimes. There's a few more opportunities to grow by acquisition in that space, but not a lot. There's a few in Ontario, there's a few in Quebec, but by and large, our distribution platform will grow, but not as much as the specialty division. In our specialty group, we have a number of initiatives around meat snacks, around cooked protein, around deli, and of course, sandwiches. Most of the growth with respect to acquisitions and organic growth to get us to the CAD 6 million will come from those segments. Most of it.
We see a lot of opportunity to leverage our platforms in the U.S. to grow quite substantially, organically and by acquisition. We have excellent products, excellent know-how, great management teams as partners. We just got to figure out capacity and in some cases, labor.
Okay. Thank you.
The only thing I add to that, Alex, is another growth. It falls in our distribution business, but it really is kind of a bit of a separate platform, is our seafood group. We do expect to see a lot of growth across North America in our seafood group. Ready Seafood, our platform in the U.S., an incredibly talented management team. They've already done a couple of little tuck-in acquisitions. We expect them to be very active, both organically and through acquisition.
Okay. Thank you. That's helpful. I think one more from me. I just noticed, flipping through the MD&A, that there were a couple acquisitions done subsequent to the quarter. I was just wondering if you could maybe talk a bit how that fits into the overall strategy there.
Yeah. They were relatively minor acquisitions. The bigger one was business we effectively already had, in the sense that we were co-packing it for a customer who then was selling it to the end retailer. Essentially, we've taken that business in-house. A lot of consideration in these transactions is contingent consideration because it's based on certain new initiatives taking hold. Overall, we've been fairly conservative in our guidance and not reflecting that in the guidance because of that contingent element.
Okay. Thank you.
Thank you. Our next question comes from Frank Meng, Desjardins Capital.
This is Frank Meng from Desjardins. Thanks for taking our questions. The GTA facility has launched. Maybe an update on the traction to date in terms of utilization, cross-selling proteins to seafood customers and vice versa.
Again, we launched around the end of November. I just want to remind everybody that the main purpose of that expansion was to give us more capacity to grow our seafood businesses in Ontario. We have a very large seafood platform in Ontario, and we were out of capacity. That's gone well. We have a business called Ocean Miracle that services restaurants, et cetera, mainly in the ethnic sector, and I think that's gone quite well. We've recently launched a meat platform as well as part of this warehouse. It's early days. We're out there selling a program of servicing customers with both seafood and meat, and we're getting some traction. We're hoping to supplement that growth with a few tuck-in acquisitions here and there. We're in a lot of discussions in that regard. We have plenty of capacity there to grow.
It's a nice facility and we're really excited by availing that business more capacity to grow.
Thank you. That's helpful. Can you talk a bit about the realignment of production into Canada at Harvest Meats for Hempler's, and also Expresco in Montreal for the chicken skewers? How is that faring? Also, you mentioned importing from the EU. Has that begun as well?
Thank you for that question, Frank. Absolutely. Part of Project PB Ecosystem is basically to expand the capacity of some of our Canadian plants to service the U.S. market. Obviously, the Harvest Meats plant is one plant that we're expanding. We're expanding its meat snack capacity to service the U.S. market by having them work with our Bordeaux business. We currently import substantial product from Europe for the Canadian market, and we're starting shortly to import product for the U.S. market as well. Having said that, part of our strategy as part of PB Ecosystem, in certain cases, is to import product from Europe for our Canadian markets and to free up capacity in Canada to service the U.S. market. That's part of our PB Ecosystem initiative to optimize capacity year round.
That's good color. Maybe some details on the transition to IFRS 16. What do you anticipate could be the EBITDA lift on the back of the IFRS 16 transition?
Well, we haven't provided any specific guidance at this time, but as a general indicator, it's likely going to be in the CAD 30 million-CAD 35 million range positive impact.
Got it. Thank you. Well, that's all for me. Thank you.
Okay.
Thank you. Our next question comes from John Zamparo from CIBC.
Good morning, guys. Just wanted to follow up on the CAD 135 million of new sales opportunities. I think this is a new form of disclosure, so I'm just trying to get a sense of scale. How might this compare to say, the past two to three years?
Yeah, again, Derek, we got a little more refined than we would in the past, just given what the issues we faced in Q3 with the sales delays. This is certainly starting the year off the strongest we ever have. CAD 135 million in new business secured is a record for us.
The other comment I have, John, is that this is in reference mostly to the acquisitions we've made in the U.S. over the last couple of years. Obviously, as part of our projections, as part of our budgets, we projected growth in the U.S. market. The majority of these is showing that we're being successful in getting opportunities to grow in the U.S. market. Most of these are basically new opportunities in the U.S. marketplace.
Okay. That's helpful. Thanks. I wanted to reconcile a couple of comments. You said in the press release that you're taking a somewhat cautious approach to pursuing new growth opportunities, presumably because of the U.S. labor market, but you also refer to 2019 as being a big year for acquisitions. Can you elaborate a bit on your views of each of these? They seem to be a bit divergent, but I'm possibly missing something.
Not really, John, in the sense that we are actively looking to purchase capacity. I mentioned earlier that most of our Canadian plants today are being expanded. We're implementing an aggressive capital expansion program to grow capacity to service the U.S. market and to take advantage of opportunities, but we're also actively looking for more capacity in the U.S. market. We feel very comfortable that we have the business, and we have the demand. It does fit in the sense of the acquisition story.
Okay, great. Maybe we can move to the PB Ecosystem. Appreciate the color here. Is there anything else you can provide on what initiatives you might implement at each of these portfolio companies? You did at least say you don't want to integrate these businesses, but is part of PB Ecosystem kind of a sense that some functions can be integrated?
I don't believe that the Project PB Ecosystem, John, is about integration. It's really about coordination and trying to effectively accelerate our growth or the growth of our businesses, given some of the challenges with labor and capacity. I think that a PB Ecosystem includes both plants that we own, of course, but also plants that we partnered with and partners that we have in Europe and in North America. It's really an attempt to coordinate our activities in terms of capacity optimization and capacity expansion in order to meet the growth targets of the company.
Okay, great. Last one from me on just a housekeeping matter. Can you share your expectations for CapEx in 2019?
Well, we've got a lot of projects on the go, John, all we ever talk about is what is actually approved, and what's approved is what's reflected in our projections. To the extent that we have bigger projects, they'll have to be reflected in revised guidance. Everything that's approved is outlined in our MD&A.
Okay. That's all for me. Thank you very much.
Thank you, John.
Thank you. Our next question comes from Stephen MacLeod, BMO Capital Markets.
Thank you. Good afternoon, guys.
Hey, Stephen.
I just wanted to sort of drill down on something specific, just on the specifically Specialty Foods SG&A. That sort of consistently ticked higher through the year in terms of G&A deleverage, and I'm just wondering how you expect that to evolve as you head into 2019. Is it a function of just SG&A from acquisitions being structurally higher, or do you think there's an opportunity to actually begin to lever that incremental SG&A?
There's two factors there, Stephen. One is there absolutely is some ability to lever. Last part of 2017 and most of 2018, we invested a lot in additional SG&A infrastructure that really set us for the growth we're expecting in 2019. You should see some leveraging there. Also with respect to the fourth quarter in particular, there were a lot of costs and marketing and selling costs in the quarter that were more future-oriented, that if we weren't going out and developing all this new business, you wouldn't see repeated. There were a lot of things like product listing fees. Some of the businesses had brought on additional broker networks where they had upfront fees for. There was sort of a lot of future-oriented costs in the quarter as well.
Again, I would echo that, Stephen. I would say that the four platforms that we built in the U.S. have made substantial investment in SG&A to accommodate the growth that will come organically and by acquisition. This is basically how we've built the business in the past in Canada. There's substantial ability to lever that in the future. The SG&A that we have in the U.S. today can support a much larger business. Again, a lot of those costs tend to be front-loaded, as we know, but we're managing the business for the long term, and we're making the right investment decisions with respect to SG&A.
Is it safe to say that, just to paraphrase, a lot of that upfront investment has already been done?
Absolutely.
That's helpful. Just turning to the top line, I know you made some comments around sort of the organic outlook around the PB Ecosystem. Do you continue to expect for 2019 sort of those growth rates you highlighted at the last quarter, so specialty food organic growth of close to 10% and high single digit in the premium food distribution business?
We're as bullish as ever on specialty food, it's built into our guidance and our guidance range, we have pulled back a little bit on the premium food distribution, just given some of the softness we've been seeing in Western Canada and the impact on our food service sales.
It's still probably around the 8%-9% range, though, given the initiatives on the seafood side of things.
That's for premium food distribution?
Yeah.
Still close to 10% for specialty food?
Oh, yeah. Like I said, we're as bullish as ever, if not even more bullish these days on the specialty food segment.
Yeah. Okay. Do you sort of expect that to ramp as you move through the year?
Absolutely. That CAD 135 million that we announced with our quarterly results of new sales, just to be clear, that's an annualized number.
Yeah.
A number of those initiatives don't start hitting until the second quarter. They're seasonal products. They're sort of more summer type, meat snacks, things like that. Absolutely, you'll see it ramping in Q2 and then a full benefit in Q3.
Mm-hmm. Okay. I just wanted to clarify just on the CAD 135 million, just so I understand it correctly. It sounds like that CAD 135 million includes most of the CAD 40 million of lost sales that you highlighted in the last quarter, but also shows that you've achieved and exceeded the CAD 100 million that you would've expected to get as you rolled into 2019.
Yes, absolutely, Stephen, it also reflects the fact that the SG&A associated with that was effectively absorbed in 2018.
Okay.
There was tremendous investment in innovation, in listings, as Will said, in setting up the selling and marketing infrastructure, et cetera. That's a front-loaded investment. That's what we were trying to convey. We've absorbed those costs in 2018, the benefit of that will come in 2019.
I see. Okay. When would those listings have been secured? Would it have been in calendar 2019, or would it have been late calendar 2018?
Some of them would have been in late 2018 and some of them early 2019, depending on the customer cycle.
Okay. That's helpful. Then maybe just finally, just a modeling question, couple modeling questions. Can you just talk a little bit about how you expect D&A to evolve through the year given the capital investments you've made, and then where you expect the tax rate to end up, because we did see a sort of a lower than expected tax rate in Q4?
In terms of the tax rate, I would suspect, it's so tricky because it's such a blend of different rates and all the crazy stuff you get into with CIT nowadays, I would expect our rates will be a bit lower next year. Part of the structuring of the transactions and the increasing portion of our taxable income coming out of the U.S., which is now a lower tax rate region, should drive that number down a bit. In terms of, what was the first part of your question, Stephen?
Just D&A, given the capital investments you made.
D&A. depreciation and amortization. Yeah, I think Q4 is a good signal of the impact of all the acquisitions. All that's just pretty flatlined. There'll be a little bit of growth next year from CapEx projects, but that'll be weighted far more towards the end of the year, on an annualized basis, it won't have that much of an impact.
Okay. sir, just to clarify on the tax rate, it looks like you came in this year at 16.6%.
Okay.
I guess you're saying normalized would be less than the 25.2% that you had.
Yeah. You have to look at the I think we talked about some of the normalization factors in the MD&A.
Yeah. Okay. That's it for me. Thank you.
Thanks, Steve.
Thank you. Our next question comes from Ross Gibson, Piper Jaffray.
Delman. I jumped on a little late. I don't know if you've addressed this, but could you talk about freight rates and where you're seeing that going forward?
Yeah. As I mentioned in my prepared comments, we did see, overall between freight and labor, probably about CAD 2 million-CAD 2.5 million of cost inflation. In the U.S., that number on the freight side seems to be normalizing a little bit. We're sort of expecting more freight inflation in Canada this year in 2019, given that there's some regulatory changes coming around electronic monitoring, which was one of the drivers in the U.S. You're going to continue to see us talking about that as we go forward. We talk about this all the time about, we have all sorts of costs that are going up and down. Commodities, labor, freight. Ultimately, one of the things we look for, and an important characteristic in all the businesses we invest in, is that they have some pricing power.
They have pricing power and the ability, if they need to, ultimately, to put through those price increases. Generally, those impacts are just going to be temporary and transitory when you do see them.
Okay. The rest of my questions have been answered. Thank you.
Thank you. Our next question comes from Neil Linsdell, Industrial Alliance.
Yeah. Hi guys. A lot of the questions have been already asked, just to follow up on a couple things. I'm making sure I understand the PB Ecosystem Initiative that you're talking about. Is this more of a philosophy where you're encapsulating a lot of the initiatives that you currently have, or is this something new and there's a roadmap for new systems that are going to be rolled out over the next 6 months, 12 months, 24 months?
It's definitely new, Neil, in the sense that we're very much a North American company today than ever before in our history. As I said earlier, half of the sales of our specialty food division are now in the U.S., and they're growing faster than in Canada. Obviously, we've talked about some of the labor tightness in the U.S. market, and some of the capacity challenges. This is really an initiative that's driven by our optimism on the opportunities that we see in the U.S. market. We believe that there's substantial opportunities to grow in that market. What we're trying to do is leverage our Canadian capacity and our partners' capacity, not just our own, but our partners' capacity in North America and in Europe to basically service that market. It's a completely different approach.
To give you another example, our Canadian plants, the Canadian market is very much a seasonal market. Our Canadian plants are very busy in the second and the third quarter. They're not that busy in the first quarter and the fourth quarter. Well, in some cases, we're looking to exit lower margin seasonal businesses and replace that with higher margin U.S. business that are year-round. In some cases, we're looking to co-pack, have co-packed with partners in Europe, make product for us for the Canadian market so we can free up capacity to service the U.S. market. It's a completely different approach given the fact that now we're really focusing on growth opportunities in the U.S. market because we're a big player in Canada.
We don't see as much growth in Canada as we did in the past because in the segments that we're in, we're by far the leader and there's not that much opportunity to grow anymore.
Okay. Fair enough. That leads into another question. When you talk about trying to deal with the labor shortages that you've talked about, it still seems to be a concern. You also mentioned it was between Premium Brands, but also your suppliers. Are these initiatives to help dealing with the suppliers' problems as well, and how much of the labor issue rests with Premium Brands versus suppliers? How much do you have control over?
Yeah. Well, again, I think the tight labor markets, Neil, are as you know and as we've said, are mainly in the U.S., right? That's why the narrative includes discussions around Canadian capacity where we don't have these type of labor issues and obviously our European partners as well. It's really trying to reinvent our supply chain in some cases by leveraging capacity that is not based in the U.S. Right? That addresses the supply chain discussion as well.
Okay. Just if I may, one last thing on the labor. You mentioned employee enhancement initiatives. Is this you're changing the offering or the things that you're offering to entice employees to come with you?
Well, in many cases, we're offering retention bonuses. People stay for a year, they get a bonus at the end of the year. In some cases, we're offering referral fees to people to bring their friends in or relatives. We've used just about every measure to try to access people, right? Because it's been a tight labor market in the U.S., more tight than we've ever seen in our 30 years in the business.
Mm-hmm. Okay. All right. Appreciate it. Thanks.
Thank you. Our next question comes from Dmitry Kaminskiy from Veritas.
Thanks for taking my question. Can you please tell us what portion of the CAD 135 million in your sales initiatives you talked about will be recognized in 2019?
At this point, Dmitry, we don't have a specific number, but certainly the vast majority of it. Probably close to that number George mentioned of CAD 100 million. Again, it's going to be on the specific timing of when everything is launched.
I see. Can you give roughly an indication what part of that relates to meat sticks and meat snacks, and what part relates to sandwiches?
The majority of it, Dmitry, is cooked protein and meat snacks, and then a lesser portion of that is sandwiches.
Is there any progress with Couche-Tard or 7-Eleven in terms of if you can provide any update on discussions or any type of agreement?
Well, Dmitry, I think you know we don't talk about individual customers on this call, but I will say that we're getting enormous traction in the C-store segment in the U.S. We've added about 12,000 customers to the network.
Mm-hmm. Are you saying out of this new initiative, the CAD 135 million, most of it will be protein and meat snacks as opposed to sandwiches?
That is correct.
I see. Okay. Can you talk a little bit about the SG&A in terms of revenue in 2019? Where do you see that?
In terms of?
SG&A or total SG&A as a % of total revenue.
Yeah. We talked about that a little bit earlier, right? You should see us leveraging it a bit in 2019. We invested a lot in infrastructure throughout the year and later towards the end of 2017. Then we did have some upfront costs towards the end of the year. You should see that number come down as a % of sales in 2019.
Do you expect it to come down significantly compared to where it was in Q4 as well as where it was in 2018 overall?
That's all reflected in our guidance on the EPS side, Dmitry.
Okay. Just to touch on the Phoenix facility, on the Phoenix plant, the incremental lines that you plan to install in 2019, so line 9 and 10, are those intended to provide incremental sales to your biggest customer in sandwiches or is it for new initiatives or other initiatives that are not related to the biggest customer?
The automated lines will absolutely provide additional capacity. In terms of the use of those lines, we're not giving any specific disclosure on that, Dmitry.
I see. Okay, sorry. The last question, if I may sneak it. In terms of the acquisitions that were made in 2018, are you now expecting a larger contribution from the annualization of the acquisitions compared to what was expected in 2018?
Again, Dmitry, I would say that all of them are on target to achieve their objectives for 2019 and beyond. They're great companies, great management teams. Lots of M&A activity in all of them in terms of adding to their platforms. Again, very busy. A lot of discussions, a lot of opportunities. We're really excited by what we see with our platforms in the U.S. market.
Yeah. Thank you very much.
Thank you.
If there are any additional questions at this time, please press star followed by number 1 on your telephone keypad. Your next question comes from the line of Derek Lessard from TD Securities. Please go ahead.
Yeah, guys, just one last follow-up for me. I was wondering if your comment regarding national growth from regional growth, or maybe just that you're holding back a little bit against How do you balance that against your comments that you actually do have the capacity to do that?
I don't understand the question, Derek. Can you maybe explain it?
Well, you said that you're cautious on growth. George, in your opening comments, you said that you've had a lot of success with, I guess, rolling out product or listings on a regional basis, and you have some clients who are now looking to roll that out on a bigger scale or I guess, a more national rollout. You also said that you had roughly 60%-70% capacity and even lower when you start adding in the additional lines that you could put in.
Just to be clear, Derek, that 60%-70% is on the sandwich side.
Okay.
A lot of the initiatives George is talking about is on the protein side.
Okay, got it. Thank you.
The entire discussion on capacity, Derek, was talking about sandwiches at that time, right?
Yeah. I just wanted to clear that up.
There are no further questions at this time. I turn the call back over to management for closing remarks.
I'd like to thank everybody for attending. Thank you very much.
This concludes today's conference call. You may now disconnect.