Earnings Call: Q4 2018

Mar 14, 2019

Earnings release

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 Corp. Fourth Quarter twenty eighteen Earnings Conference Call. Our speakers will be George Paliologou, 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. You. Mr. George Paliologou, you may begin your conference. Thank you, Cheryl, and good morning, everyone. I would like to welcome you to our twenty eighteen fourth quarter conference call. I will be turning the presentation over to our CFO, Will Kalutych, 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 and A segment of the presentation. Bill? 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 and A, which is filed on the SEDAR website, www.sedar.com, for details of 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 $258,500,000 or 44.2% to a record $843,900,000 Acquisitions accounted for $231,500,000 of the increase, organic volume growth for 18,900,000 and currency translation for $8,500,000 These increases were offset slightly by $400,000 in selling price deflation. Our organic volume growth rate for the quarter was 3.3%. 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 $15,400,000 or 32.6% to $62,700,000 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 and 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 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 and 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 foodservice sales in Western Canada with lower margin wholesale businesses. During the quarter, we incurred $2,700,000 in start up and restructuring costs, which primarily related to two projects, the construction of a state of the art 105,000 square foot 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 square foot culinary plant in Surrey, DC that will be capable of producing a wide variety of fresh salads, soups and sauces for retail and foodservice customers across Western Canada. Both of these facilities commenced operations at the November. Our adjusted earnings per share for the quarter increased by $08 per share or 10.8% to $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 $3,700,000,000 and EBITDA of between $320,000,000 and $340,000,000 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% to 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 to one at the end of the quarter, which was at the bottom end of our long term targeted range of 2.5 to one to three point zero to one, while our total debt to adjusted EBITDA ratio was 3.8 to one, which was below our long term targeted range of four:one to 4.5:one. Furthermore, we had almost $220,000,000 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 $1,100,000 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 $753,000,000 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 $19,500,000 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 Poutine 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 $16,000,000 or 47 and a half cents per share, which on an annualized basis works out to $1.90 per share. Our free cash flow for 2018 increased by 25.4% to a record 164,600,000.0 as compared to a 131,300,000.0 in 02/2017, 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 52.5¢ per share per quarter or $2.1 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 spring boarding 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 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 $400,000,000 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 $753,000,000 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 thirty 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 $135,000,000 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 $6,000,000,000 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 were 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 and A part of our presentation. Cheryl? Thank you. And our first question comes from George Doumet, Scotiabank. Just wondering how much of the $40,000,000 in delayed sales that you guys called out last quarter as part of this $135,000,000 of confirmed new product listings. Yes. Most of it is in there, George. So most of the initiatives we talked about last quarter, both the sandwich and meat snacks that had been delayed, have now been secured. Okay. That's helpful. So if you add that $135,000,000 of confirmed sales to the announced acquisition that you guys announced for this year, that would be about another $135,000,000 or so to get to the midpoint of your 'nineteen 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. But some of the bigger drivers that aren't specifically in that $1.35 would be the cheap new GTA facility in in Toronto. Some of the organic initiatives we're working on in the charcuterie segment and and in our seafood group, some other new initiatives leveraging the Ready Seafood acquisitions. I think the 135,000,000 number, George, was in reference to my comment on the conference call during the last quarter where we said we're working on about $100,000,000 worth of opportunities. So effectively, we wanted to convey that we've secured in excess of that. Okay. That's helpful. And George, in your MD and A, you guys talk about cautious approach for pursuing new growth opportunities. Can you maybe give a little color on that? Yes. 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 food protein space in The U. S. Is getting great traction. We secured a record amount of listings driven by the innovative products that we've shown customers. In many, many situations, we're looking at opportunities where we get regional listings with the customer asking for a more widespread launch. So 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. So that was the reference to that point. Thanks for that, George. And one last one, I may. Your five year plan calls for a doubling revenues, but only a 1% expansion in EBITDA margins from the, 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 the assumption of labor issues persisting? Anything you can talk to there. I think there's an assumption there, George, obviously, that the way we're going to get to $6,000,000,000 is it would include acquisitions as well. And 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, 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, and 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. So there is obviously that type of an assumption into that figure. That's helpful. Thank you. Thank you. Our next question comes from Derek Lessard, TD Securities. I just wanted to maybe ask if you could talk about what happened on, I guess, the margincost side from the time you guys gave your guidance in Q3 back in November and the end of the quarter. Ultimately, it felt like you fell a little short on the EBITDA side. And 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 to 9.2 guidance range you gave? Yes. So 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 that had a particularly hard hit impact in December. And then 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 the impact of the Chinese tariffs on our lobster business. We had expected that to happen earlier in the quarter. It's just it's been a much more difficult process to get the initiative in place. It isn't done now. We've we've actually, the first shipment goes out this week under that initiative. But as a result, Ready Food Ready Seafood got hit both by directly on the tariff tariff, as well as by its its North American sales as as a result of product that was stuck in North America. Okay. Are you able to talk about a little bit about the initiative that 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 wanna add, Derek, in regards to the quarter, the there was a definite slowdown in the western based food service business in December, which Will mentioned in his in his in his in his definitive slowdown in the in the Western economy, particularly in Alberta, a little bit in the Lower Mainland in D. C. So December was a little softer in our Foodservice 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 ERP and how you view that as a tool going forward. Yes. The ERP project for us is a long term project as we bring different businesses on to the central platform. It is it there certainly is a factor of it helping with efficiencies as, you know, through better plant particularly better data capture in the plants. And so that's a factor. But the bigger factor driving the improvement in our margins over time is the investments in automation and the 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. So as we ramp that facility up, that's certainly gonna be a big driver of the improvement in our specialty food segments margins. Okay. So the the automation is is is installed currently? Well, the on the automation side, I I I'm talking much more broad than just the sandwich. You know, we've got all sorts of initiatives across the different businesses adding automation and 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 is not expected to be completed until the second quarter of this year. The other comment I have, Eric, 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. So 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. And maybe just one last one for me. And again, it's on the ERP. It seems like you're spending about $3,000,000 a year, so it's sort of like an annual spend. Can you explain why you guys do that and you just didn't set one big onetime kind of target that you're going spend? And why I guess, I'm just trying to understand what you spend on an annual basis on the ERP and, you know, how you you and how, I guess, the your decentralized structure and how you get all the information from from from your reporting units. Yeah. The ERP project isn't a single project know, in a massive basis. It's rather we have a a suite of software solutions that we offer up to our different businesses. And so different businesses are at different cycles in their lives, and whether they want to, you know, adopt it now or a year or two. You know, 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 time lines. Now, it just so happens that it's been relatively consistent, the expenditures over the last two years, but, you know, that could easily increase significantly if, you know, a number of businesses were now ready to move forward. Okay. Thank you. Thank you. Our next question comes from Sabahat Khan, RBC Markets. Just on the five year plan, I I know you gave only one year forward guidance, but are you able to talk about the overall cadence of the top line and the EBITDA margin? Are you expecting it to be steady? Or do you think it will be chunky based on acquisitions? It's going to be a combination, Saba. The you know, that that $6,000,000,000 target incorporates probably about 30 to 40% of the growth coming from acquisitions, and those those can be very choppy. And then the balance is organic with it actually being stronger upfront in our our internal assumptions. Okay. And then, there's a commentary around short shipments and some of the backlog occurring in 2019. I guess, was these were, I guess, was it onetime issues? Is it changing the way your customers are buying? And how do you expect that to play out over the course of '19 if we're trying to think about cadence? Yeah. No. It it was the vast majority of that $8,000,000 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. So that has been largely resolved now. It's taken some time. You know, there was a combination of both just the ability to produce the product and the quality of the product. And a little bit of that still spilled over into q one. That's incorporated into our thinking, but it's largely resolved now. I would say that that that was probably a result of which we're seeing in various parts of the food space. So 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. And then, just one on the 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 uptick it maybe at q one? Yeah. That that's correct, Seth. Okay. And then, just one more. I guess, on the, I guess, your balance sheet and acquisition commentary, you know, I guess, are you still kinda comfortable with that four times on the high end? Or, you know, I guess, if you're thinking about taking into account a larger acquisition this year, you know, what kind of leverage should we think about through the course of 2019? Yeah. Again, we're we're certainly very comfortable with that four to four and a half months total because, again, the only difference between our senior and total debt to EBITDA ratios are the convertible debentures, which, you know, we talk quite often about is really for us an equity strategy. Ultimately, we're looking to have those instruments converted to shares. So the way we've traditionally raised equity. In terms of acquisitions and larger acquisitions, generally shares are a component of any acquisition. So 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 on maybe 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 we're still not fully built out on our Phoenix facility. It it you know, right now, we're running eight lines, and we're not even, you know, running them at capacity. And we're in the process of stalling lines nine and ten, which are the automated lines, and then we still have room for two additional lines. So so we have quite a bit of capacity. In percentage terms, it's tough to estimate because with our buddies and Rayburn acquisitions, we also gained capacity there. So I would say overall through the network, we're probably in the, you know, before adding additional lines, probably in the 60 to 70% range and then even lower with those additional lines when they come online. Yeah. That's that's a very good number, Saba, by by Will. I would say the limiting factor there is tightness of labor. That's more of a challenge for us than we have plenty of capacity and advantages for our growth. Our next question comes from Alex Diacon from Canaccord Genuity. So just a quick question on the five year plan. I was just kind of wondering how this splits out maybe by platform or how it's communicated by platform? And then what incentives, I guess, are in place to, I guess, incentivize these business owners within the system? Just any more guidance you could provide on that would be helpful. Yes, Alex. I think in broad terms, 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. So most of the growth with respect to acquisitions and organic growth to get us to the $6,000,000 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, and we just got to figure out capacity and, in some cases, labor. Okay. Thank you. And and sorry. Go ahead. The only thing I'd 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. It's our seafood group. We we do expect to see a lot of growth across North America in our seafood group. Ready seafood, our our our platform in The US, an incredibly talented management team. They've already done a couple of little tuck in acquisitions, and we expect them to be very active, both organically and through acquisition. Okay. That's helpful. I think one more for me. I just noticed flipping through the MTA that there were a couple of acquisitions done subsequent to the quarter. I was just wondering if you could maybe talk about how that fits into the overall strategy there. Yes. They were relatively minor acquisitions. The the the the bigger one was it was business we effectively already had. We've been in the sense that we were co packing it for a customer who then was selling it to the end retailer, and and, essentially, we've taken that business in house. And a lot of consideration in these transactions is contingent consideration because it's based on certain new initiatives taking hold. So, overall, we've been fairly conservative in our guidance and not reflecting that in the guidance because of that contingent element. Thank you. Our next question comes from Frank Fang, Desjardins Capital. This is Frank filling in for David Newman. Thanks for taking my questions. So the GTA facility is launched. Maybe an update on the traction to date in terms of utilization, cross selling proteins to seafood customers and vice versa? Yes. Again, we launched around the November. I just wanna remind everybody that the main purpose of that expansion was to give us more capacity to grow our seafood businesses in in Ontario. We have a very large seafood platform in in Ontario, and we were out of capacity. So so that's that's that's gone well. We have a business called Ocean Miracle that services restaurants, etcetera, mainly in the ethnic sector, and and I think that's gone quite well. We've recently launched a meat platform as well as part of this warehouse. It's it's early days. We're out there selling program of servicing customers with both seafood and meat, and we're getting some traction. So we're hoping to supplement that growth with a few acquisitions here and there. And and we're in a lot of discussions with in in that regard. You know, we have plenty of capacity there to to grow. It's a nice facility, and, you know, we're really excited by 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 Foods for Hambler and also Espresco in Montreal for the chicken skewers. How is that faring? And also, mentioned importing from The EU. Has that begun as well? Yes. Yes. Thank you for that question, Frank. Absolutely. Part of Project PV ecosystem is basically to expand the capacity of some of our Canadian plants to service The U. S. Obviously, the Harvest Meat Plant is one plant that we're expanding. We're expanding its meat snack capacity to service the The US market by having them work with with our Bordeaux business. We currently import substantial product from Europe for the Canadian market, and we're starting to 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 from Europe for for for our Canadian markets and to free up capacity in Canada to service The US market. So that's part of our PB ecosystem initiative to to optimize capacity year round. Okay. That 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 30,000,000 to $35,000,000 range positive impact. Our next question comes from John Zambaro from CIBC. Just wanted to follow-up on the 135,000,000 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 that compare to say the past two or three years? Yeah. Again, Derek, we we got a little more refined than we would in the past just given what the issues we faced in q three q three with the sales LAs. This is certainly starting the year off the strongest we ever have. You know, dollars 135,000,000 in 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 to The U. S. Over the last couple of years. And obviously, as part of our projections, as part of our budgets, we projected growth in The U. S. Market. And the majority of these are showing that we are being successful in in getting opportunities to grow in in in The US market. So most of these are basically new opportunities in in The US marketplace. Okay. That's helpful. 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 referred to 2019 as being a busy year for acquisition. So 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 with this. 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 But we're also actively looking for more capacity in The US market. We feel very comfortable that we have the business and we have the demand. So so it does fit in the sense of the the acquisition story. Okay. Great. And maybe we can move to the ecosystem. Appreciate the the color here. Is there anything else you can provide on on what initiatives you might implement at each of these portfolio companies? Because you you typically say you don't wanna integrate these businesses. Is is part of the ecosystem, kind of the sense that some functions can be integrated? I don't believe that the ecosystem, project, John, is 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. So I think that an 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. So it's really an attempt to coordinate activities in terms of capacity optimization and capacity expansion in order to meet the growth targets of the company. Okay. Great. And last one for 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. But all we ever talk about is what is actually approved. And what's approved is what's reflected in our projections. So to the extent that we have bigger projects, then they'll have to be reflected in revised guidance. And everything that's approved is outlined in our MD and A. Our next question comes from Steven McCloud from Capital Markets. I just wanted to sort of drill down on something specific, just on the specifically Specialty Foods SG and A. That sort of consistently ticked higher through the year in terms of G and A deleverage. And I'm just wondering how you expect that to evolve as you head into 2019? And is it a function of just SG and A from acquisitions being structurally higher? Or do you think there's an opportunity to actually begin to lever that incremental SG and A? There is well, there's two factors there, Steve. One is there absolutely is some ability to lever. The last part of 2017 and most of 2018, we invested a lot in additional SG and A infrastructure that's really set us for the growth we're expecting in 2019. So you should see some leveraging there. And then 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, you know, if if we weren't going out and and developing all this new business, you wouldn't see repeated. So there were a lot of things like product listing fees. We some of the businesses had brought on additional broker networks where they had upfront fees for. So 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've built in The U. S. Have made substantial investment in SG and 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. So there's substantial ability to lever that in the future. The s g and a that we have in The US today can support a much larger business. So you you know, 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 and A. Mhmm. So is it safe to say that just to paraphrase, like, lot of that upfront investment has already been done? Absolutely. Absolutely. Okay. Okay. That's helpful. And then just turning to the top line. I mean, I know you made some comments around sort of the organic outlook around the TV ecosystem. Do you continue to expect for 2019 sort of that rate you those growth rates you highlighted at the last quarter, so Specialty Foods organic growth of close to 10% and high single digit in the premium food distribution business? Yeah. I'll I'll I'll we're as bullish as ever on the specialty food, but, you know, it's it's built into our guidance in our guidance range. But we have pulled back a little bit on the p 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. Mhmm. So, know, it's it's still probably around that eight eight to 9% range, though, given the initiatives on the seafood side of things. That's for premium food distribution? Yeah. And then still close to 10% for specialty food. Oh, yeah. Yeah. Like I said, we're as bullish as ever, if not even more bullish these days on on specialty food segment. Yeah. Okay. And do you sort of expect that to ramp as you move through the year? Absolutely. You know, absolutely. That that 135,000,000 just to be that we announced with our our quarterly results of new sales, just to be clear, that that's an annualized number. Yeah. And a number of those initiatives don't start hitting until the second quarter. They're seasonal products. They're sort of more summer summer type, you know, meat snacks, things like that. And so, absolutely, you'll see it ramping in q two and then a full benefit in q three. Mhmm. Okay. And then I just wanted to clarify just on the 135,000,000 just so I just understand it correctly. So it sounds like that $1.35 is includes most of the 40,000,000 of lost sales that you highlighted in the last quarter, but also shows that you've achieved and exceeded the $100,000,000 that you would have expected to get as you rolled into 2019? Yes, absolutely, Stephen. But also it also reflects the fact that the s g and a associated with that was effectively absorbed in in '18. Okay. Because there was tremendous investment in innovation, in listings, in in, as Will said, in in in setting up the the selling and marketing infrastructure, etcetera, etcetera. Right? That that's a front loaded investment. So that's what we were trying to convey. We've absorbed those costs in '18, but the benefit of that will come in '19. I see. Okay. And when would those listings have been secured? Would it have been in calendar twenty nineteen, or would it been late calendar twenty eighteen? Some of them would have been in late 'eighteen and some of them early 'nineteen, depending on the customer cycle. And then maybe just finally, just on the just a modeling question, a couple of modeling questions. Can you just talk a little bit about how you expect D and 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? Yes. In terms of the tax rate, yeah, you know, I would suspect and and it's it's so tricky because it's such a blend of different rates and and all the crazy stuff you get into with the IT nowadays. But 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 US, which is now a a lower tax rate region, should drive that number down a bit. In terms of what was the first part of your question, Steve? Just D and A given the capital investments you made. D A. Depreciation and amortization. Yes. I think Q4 is a good signal of the impact of all the acquisitions. All that stuff's pretty flat line. 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. So on an annualized basis, it won't have that much of an impact. Okay. And then, sir, just to clarify on the tax rate, it looks like you came in this year at 16.6%. Although, I guess, normalized you're saying normalized would be less than the 25.2% that you have. Yeah. Yeah. Yeah. That that you you have to look at the and I think we we talked about some of the normalization factors in the MD and A. Yeah. Okay. That's that's that's it for me. Thank you. Thank you. You. Our next question comes from Bob Keesen, Five Financial. Gentlemen, 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. So as I mentioned in my prepared comments, we did see overall between freight and labor probably about $2,000,000 to $2,500,000 of cost inflation. In The U. S, that number on the freight side seems to be normalizing a little bit. And 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 is what which was one of the drivers in The US. But so, anyways, you're continue to see us talking about that as we go forward. I I you know, we talk about this all the time about you know, we have all sorts of costs that are going up and down, commodities, labor, freight. Ultimately, you know, one of the things we look for and an important characteristic in all the pieces that 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. So, generally, those impacts are just going to be temporary or transitory when you do see them. Okay. And the rest of my questions have been answered. Thank you. Thank you. Our next question comes from Neil Lindsdell, Industrial Alliance. Yeah. Hi, guys. Again, a lot of the questions have been already asked, but just to follow-up on a couple of 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 a road map for new systems that are gonna be rolled out over the next six months, twelve months, twenty four months? It's definitely new, Neil, in the sense that we're very much a North American company today than than than ever before in our history. As I said earlier, half of all the sales of our specialty food division are now in The US, and they're growing faster than in Canada. Obviously, we've talked about some of the labor tightness in The US market and some of the capacity challenges. So this is really an initiative that's driven by our optimism on the opportunities that we see in The US market. We believe that there's substantial opportunities to go in that market. And what we're trying to do is leverage our Canadian capacity and our partner's capacity, not just our own, but our partner's capacity in North America and in Europe to basically service that market. So it's a completely different approach. To give you another example, our Canadian plants the Canadian market is very much a seasonal market. So our Canadian plants are very busy in the second and the third quarter. They are 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 Copac, have Copac or partners in Europe make product for us for the Canadian market so we can free up capacity to service The U. S. Market. So 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. So 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. So how much so are these initiatives to help dealing with the suppliers' problems as well? And and how much of the labor issue rests with premium brands versus suppliers? How much do you have control over? Yeah. Well, I I I can I think the the the the tight labor markets, Neil, are as you know and as we've we've said, are are mainly in The US? Right? Right? That's 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. So so it's really trying to reinvent our supply chain in some cases by leveraging capacity that is not based in The US. Right? So that that addresses the the supply chain discussion as well. Okay. And just if I may, one last thing on the on the labor. You mentioned employee enhancement initiatives. Is this you're you're changing the offering or the things that you're offering to entice employees to come work for you? Well, in in many cases, we're offering retention bonuses. You know, people stay for a year. They get a a bonus at the end of the year. In some cases, we're offering referral fees to to people to bring their friends in or relatives. I mean, we we choose just about every 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 thirty years in the business. All right. Appreciate it. Thanks. Our next question comes from Dmitry Kamalitsky from Veritas. So can you please tell us what portion of the $135,000,000 in your sales initiatives that 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, the 100,000,000 Again, it's going to be on the specific timing of when everything is launched. I see. And can you give roughly an indication what part of that relates to meat sticks or meat snacks and what part goes to sandwiches? The majority of it, Dmitry, is cooked protein and meat snacks and then a lesser portion of that is sent. And is there any progress with Cusaro seven 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. And you're saying you've been out of this new initiative, the $135,000,000 most of it will be cooked protein and meat snacks opposed That to is correct. I see. Okay. And can you talk a little bit about the SG and A in terms of revenue in 2019? Where do you see that? In terms of? SG and A, your total SG and A as a percentage of total revenue. Yes. We talked about that a little bit earlier, right? You should see us leveraging it a bit in 2019. We invested a infrastructure throughout the year and later and towards the end of 2017. And then we did have some upfront costs towards the end of the year. So you should see that number come down as a percent of sales in 2019. But do you expect it to come down significantly compared to where it was in Q4 as well as where it was in 2018 overall? No. That's all reflected in our guidance on the EBITDA side, 'twenty three. Okay. And just to touch on the Phoenix facility, on the Phoenix plant. The incremental lines that you plan to install in 2019, so Line nine and ten, do you intend to use are those intended to provide incremental sales to your biggest customers, 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 M3. Got you. Okay. Sorry. And the last question, if I may sneak it. So in terms of the acquisitions that were made in 2018, are you now expecting a larger contribution from the annualization of loan acquisition compared to what was expected in 2018? Again, Dimitri, 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 and A activity in all of them in terms of adding to their platforms. And again, busy, a lot of discussions, lot of opportunities. We're really excited by what we see with our platforms in The U. S. Market. Your Your next next question comes from the line of Derek Lessard from TD Securities. Yes, 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 your question, Derek. Can you maybe explain it? Yes. Well, you said that you were like you're cautiously you're cautious on growth. And George, in your opening comments, you said that you 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 more of a I guess, a more national rollout. But you also said, that you had roughly 60% to 70% capacity and even lower when you start adding in the additional lines that you could put in. Yeah. So you just to be clear, Derek, that 60 to 70 is on the sandwich side. Okay. And 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 was was talking about sandwiches at that time. Right? Right? I yeah. I just wanted to I just wanted to to tune it up. There are no further questions at this time. I'll 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.