Earnings Call: Q1 2018

May 15, 2018

Earnings release

Good afternoon, my name is Denise, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Premium Brands Holdings Corporation first quarter 2018 earnings conference call. On today's call, you'll be hearing from George Paleologou, CEO, and Will Kalutycz, CFO. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you'd like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you'd like to withdraw your question, press the pound key. Thank you. George Paleologou, CEO, you may begin your conference. Thanks, Denise, and good morning, everyone. I would like to welcome you to our 2018 first quarter conference call. I will be turning the presentation over to our CFO, Will Kalutycz, for an overview of 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 2017 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. I would like to start out by highlighting that our first quarter is generally our weakest of the year due to the seasonality of many of our businesses. As a result, minor factors can sometimes have an exaggerated impact on the results. Our revenue for the quarter grew by CAD 106.7 million, or 22.3% to CAD 584.9 million. Acquisitions accounted for CAD 62.7 million of the increase, organic volume growth for CAD 44.9 million, and price inflation for CAD 6.5 million. These factors were partially offset by the impact of a stronger average Canadian dollar, which resulted in the lower translation of our U.S.-based businesses revenue. Our organic volume growth for the quarter was 9.4%, which was well above our long-term targeted range of 4%-6%, primarily due to strong growth in our sandwich and meat snack businesses and a variety of successful initiatives in our distribution businesses. An early Easter relative to last year also had a modest sales benefit in the quarter. Our adjusted EBITDA for the quarter increased by CAD 4.7 million or 12.2% to CAD 43.1 million. This improvement was largely driven by our sales growth as our margins were impacted by several factors, including overhead associated with our sandwich platform's new Phoenix plant, which was commissioned in the middle of last year, a variety of transitory challenges that impacted several of our protein businesses, which included increases in the cost of certain specialized commodities imported from Europe, the seasonality of recent acquisitions, in particular, Skilcor, Leadbetter, and Raybern's, and finally, higher freight costs, which had a modest impact across a range of our businesses. Our year-over-year comparative EBITDA was also impacted by the stronger Canadian dollar, which resulted in the lower translated value of our U.S.-based businesses. In terms of the issue of labor scarcity, which had a major impact on our previous quarter's results, the initiatives implemented by our various businesses over the course of that quarter and this current quarter has significantly mitigated this issue, albeit it is one that we continue to manage very closely. During the quarter, we incurred CAD 600,000 in start-up costs for two projects. The construction of a state-of-the-art 105,000 sq ft distribution and custom cutting facility in the Greater Toronto Area, and the reconfiguration of production among our three artisan bakeries in the Vancouver Lower Mainland. Both of these projects will drive future growth in earnings and cash flows and are expected to be completed over the next two quarters. Our adjusted earnings for the quarter were CAD 15.4 million or CAD 0.50 per share, which was down slightly from CAD 15.7 million or CAD 0.53 per share in the first quarter of 2017, largely due to the margin issues discussed previously, including the seasonality of recent acquisitions as well as the impact of the stronger Canadian dollar. Looking forward, for fiscal 2018, we have increased our revenue and EBITDA guidance. We are now projecting revenues of between CAD 2.95 billion and CAD 3.06 billion and adjusted EBITDA of CAD 274 million-CAD 286 million. The revised guidance is based on adjusting for recent acquisitions and maintaining our guidance for our legacy businesses, whose first quarter results were in line with our expectations, albeit at the bottom end of the targeted range. I should note that our revised guidance includes the expected 2018 results of our recently announced Oberto and Concord acquisitions, both of which are expected to close at the end of this month. In terms of our financial position, we have also been very busy. Subsequent to the quarter, we raised CAD 345 million in new capital through the issuance of CAD 172.5 million of convertible debentures and CAD 172.7 million of subscription receipts. The convertible debentures, which have a coupon of 4.65% and mature in 2022, will be partially used to fund the Concord acquisition. The subscription receipts, which were issued at a price of CAD 117.35 per sub receipt and entitle holders to receive upon the closing of the Oberto transaction one common share per sub receipt, will be used to partially fund the Oberto purchase. We also recently issued a notice of intention to redeem for our 5% convertible debentures, CAD 22.7 million of which were outstanding at the end of the quarter. Given that the conversion price associated with these debentures is CAD 44.65, we expect them all to be converted to common shares. After adjusting for our recent financings, the acquisitions of Oberto and Concord, and the expected conversion of the 5% debentures, our pro forma first quarter total debt to adjusted EBITDA and our senior debt to adjusted EBITDA ratios are 2.1 to 1 and 3.4 to 1 respectively. These are both below our long-term targeted ranges for these ratios of 4.0 to 1 to 4.5 to 1 for our total debt EBITDA ratio and 2.5 to 1 to 3.0 to 1 for our senior debt to adjusted EBITDA ratio. Looking forward, we intend to use a portion of our excess capacity, debt capacity to fund a variety of growth initiatives, including capital projects and business acquisitions. Turning to our investment activity. Since the beginning of 2018 and including the Oberto and Concord acquisitions, we have deployed over CAD 470 million in capital, consisting approximately CAD 8 million for various project capital expenditures and over CAD 462 million for acquisitions and business investments. We are very excited about what this means for the future of our company as the minimum expected long-term return on these investments is 15% or higher. Turning to dividends. During the quarter, we declared a dividend of CAD 14.7 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 the trailing four quarters was CAD 129 million as compared to dividends of CAD 52.8 million, resulting in a payout ratio of 40.9%. I will now turn the presentation back over to George. Thanks, Will. Our first quarter results continue to demonstrate the strength and resilience of our unique business model and the progress we're making in becoming North America's leading specialty foods platform. Since we founded Premium Brands back in 2001, we have consistently executed on our core strategy of investing in local food companies with iconic brands and great legacies and partnering with their founders to provide them with the resources they need to grow their businesses, both through organic initiatives and acquisitions. For more information on our unique strategy and future plans, please refer to my letter to shareholders, which was just posted on our website at www.premiumbrandsholdings.com, titled A Bright Future by Learning From Our Past. Overall, we're on track to deliver another record year of top and bottom-line growth and to meet our goal of delivering steady and consistent returns and dividend growth for our shareholders. I can't emphasize strongly enough that one of the key reasons for our success and what makes us different from many other public food companies is that we take a very long-term view to our business. Back in 2001, when we launched Premium Brands, we believed that the future belonged to strong and authentic local brands, and that consumers were losing trust in the national and multinational brands for many reasons that are now well known. We also believe that artisan products produced locally using only fresh, clean ingredients and traditional old world methods would win the hearts of consumers and gain shelf space and market share. With nearly 50 plants across North America, all operating as valued and engaged corporate citizens in their respective communities, we're uniquely positioned to meet consumers' demand for local and authentic products produced in a sustainable manner. Consumers know that local generally means fresher, better tasting, healthier and more sustainable. While they're highly doubtful and question the efforts of the large industrial food complex to rebrand itself as local and craft. The execution of this simple but unique strategy is what has propelled us into leading market positions in a number of rapidly growing product categories including meat snacks, sandwiches, fully cooked proteins and skewers, seafood and artisan deli meats and breads. We're continuing to add to our portfolio of great food companies and so far this year have completed or are close to completing the acquisitions of Alberto's, Concord Meats, The Meat Factory, Penguin Meats, Country Prime Meats and Frandon Seafood. All of these companies have passionate, best-in-class management teams who share our values and vision for the future. Furthermore, we expect Alberto's and Concord Meats in particular will be especially transformational to our meat snack, Italian meats and fresh and cooked skewer initiatives. Looking forward, despite our level of activity over the last couple of quarters, I'm also pleased to report that we continue to enjoy an especially robust pipeline of opportunities and fully expect to add to our portfolio of specialty food companies in the near future. I will now turn the presentation over to Denise for the Q&A part of the presentation. Denise? Ladies and gentlemen, to ask a question, please press star then 1 on your telephone keypad. To withdraw your question, press the pound key. Your first question comes from George Doumet with Scotiabank. Your line is open. Yeah, hi guys, and thanks for taking my questions. Hey, George. Hey, George. At the midpoint of guidance, looks like we're about 60 basis points year-over-year improvements in the margins. Can you let us know how you expect the cadence of improvements to go throughout the year, and maybe talk a little bit about some of the transitory issues that we're tackling? Sure. You know, the improvement on margins should follow the seasonality of our business. You know, we're expecting a lot of that benefit to come in the second and third quarters. In terms of the transitory issues in the first quarter, you know, there's most of it related to some commodities we import from Europe, mainly bellies for our bacon business. Then there were a variety of smaller issues, a little bit of direct labor related inefficiencies and some regulatory changes that's causing us to have to make some adjustments in some businesses. Overall, the impact of those were probably at close to about CAD 1.6 million, just to give you some sense of the scale. Okay, that's helpful. Can you also please give us maybe share your outlook, your 2018 outlook for some of the larger input commodities that we play in? Yeah. Overall, George, we believe that the commodity environment will be relatively benign. We've budgeted a flat commodity environment. Most projections are showing that it'll be flat to down at this point, and we have no reason to change that at this point. Okay, that's helpful. Just one last one, if I may. Just kinda switching over to the sandwich business. I think we had some increased overhead costs at Phoenix. Just maybe call them out, and do we expect those to recur into Q2? Well, it's just a new plant, right? It's not an increase sort of a year-to-year on a similar plant. It's a new plant. There's a lot of overhead associated with the plant. Given the growth profile of the company, you would have expected to see more margin expansion, but that was offset by the incremental overhead of the Phoenix facility. As that business continues to grow and leverage that additional capacity, you'll start seeing some margin expansion coming from it. Understood. All right. Thanks. Your next question comes from Derek Lessard with TD Securities. Your line is open. Yeah, thanks, and good afternoon, everybody. I think last quarter you talked about the Phoenix plant and how you were finalizing installation of line 7 and 8. I assume those are done and related to the snack trays. Is that right? The snack trays, the snack tray initiatives, is driven out of Reno and the Columbus plants. Okay. Those initiatives are going extremely well. Over the last few months, we've made tremendous progress at Phoenix as well, as Will mentioned, including ramping up the revenues quite substantially, which you've seen obviously in our quarterly numbers. Yeah. Hey, Derek. Okay. Line 7 and 8, those are for our sandwich production. Okay. Those are just coming on stream. The fresh pack room, which if you go to the MD&A, we've got a little write-up on it. The fresh pack room was what's driving that business, the tray business. Okay. Thanks for the clarification. I guess lines 9 and 10 had to do with automation. I think there were some difficulties maybe getting some equipment there, just again, tied to the tightness in the labor market. Wondering if you can give us an update there. Yeah. Yeah, we're very excited about the automation project. That's, you know, it's been a challenging process just dealing with the complexity of the line and getting the automation in place. The plant crew have now worked out all the bugs. The equipment has been ordered, and we're now proceeding with that project, which will be implemented later this year. Okay, thanks. Maybe one final one for me before we queue. With the CAD 2.1 million reclassification, your total freight costs in the quarter, and maybe if you can just add some color in terms of what you're seeing on the freight side, you know, what businesses it does typically affect and your ability to pass it on. Yeah. Just for clarity, the reclass is just that, right? It's just some of our businesses were including extra freight out expense in the cost of sales. We've moved that down to SG&A, which is where it should be. In terms of the overall impact, there was a little bit of impact of higher freight prices on the quarter. It was no single business that it was a huge issue. It was just kind of a little bit of increases across all the businesses. On a combined basis, it was probably CAD 400,000-CAD 500,000 impact. Not a huge impact, but it is definitely something we're seeing as a common theme in our businesses, rising freight costs, particularly in the U.S. with some of the regulatory changes down there combined with the labor shortages. It's an issue we're watching and definitely managing. Okay. Sorry, just on the what regulatory changes? Well, the trucks are all now monitored, and as a result, there's a very strict enforcement of the rules around how long a driver can be behind the wheel. Okay. You know, in the past there was probably a little bit of cheating going on, and now that's gone. You've got, you know. It's requiring more drivers in our already tight labor markets, which is just sort of compounding the problem. Yeah. Some of the drivers have to double up in order to meet their delivery headlines. There's no question that there's a shortage of drivers in North America. It's an especially challenging situation for a lot of our supply chain partners in the U.S. especially. Well, I mean, I did see that you did pass on some pricing. Have you had any pushback on that front? No, I think the general environment with respect to passing on costs on freight is inflationary. I think a lot of companies are talking about that. As Will said, we're monitoring the situation. In the U.S. especially, a lot of our business is FOB our plants, so we're not responsible for the majority of the freight, which obviously works out. Again, it's a situation we're monitoring and it's impacting the entire industry. Thank you. Your next question comes from Leon Aghazarian with National Bank Financial. Your line is open. Hi. Good afternoon, guys. Hey, Leon. Hi. You mentioned there was an unfavorable product mix shift in specialty food, and that was driven by lower margin products. Could you talk about that a little bit? I mean, 'cause your organic growth in the quarter seemed to be very high. You mentioned maybe a bit on the sandwich packaging side. Just kinda wanna get a bit more color as to what lower margin products we're referring to. Yeah, I wouldn't say it was a gross profit issue, right? In terms of the EBITDA, it's a lesser issue 'cause there's a lot less SG&A associated with the product, and it's largely our sandwich. A lot of our sandwich business is focused on the QSR industry. In that industry, you don't have any of the selling and marketing costs. In fact, in a lot of the business, it's FOB the plant, you don't even have freight costs. As a result, you have lower gross margins, but lower SG&A and still a you know a solid EBITDA margin on the product. Okay. Cause the way I'm looking at it is if you compare, for example, to last year's specialty food, taking into account the seasonality, obviously Q1 versus Q1, you were down quite a bit. I guess kind of back to George's earlier question is how should we see the ramp up in specialty food in order to achieve your guidance that way? Well, I think again, the Q2 and Q3 are going to be the big quarters. It's a seasonal factor, right? You have to remember, Leon, that the first quarter in general is quite slow across the network, right? So we have a number of plants that are not running anywhere near optimum capacity, so that impacts our margins. that seasonality, Leon, was sort of amplified with some of our recent acquisitions, right? Especially Skilcor and Leadbetter, which are particularly seasonal businesses. Okay. No, that's fair. Just as it relates to the Concord and the Oberto acquisitions, you did mention that they were going to close at the end of this month. Can you tell us from your guidance that you're providing the additional revenue and EBITDA, how much those two acquisitions would contribute within that guidance, within that increase, I would say? Yeah. We don't break out the individual companies, but they're certainly a significant majority of that revenue growth. Okay. Last question from me would be, you mentioned what would be the CapEx for this year? I mean, I thought you mentioned again that there would be some additional projects that you've been looking at. Was there anything new that you wanted, you know, to share, or is it the same CapEx that you mentioned prior? Yeah. Yeah. No. You know, from our MD&A, there's not much update. You know, next quarter you'll see the, as I mentioned earlier, the automated lines, we'll start investing in those. So we'll provide some guidance around that. Other projects at this point are going through the approval process and we don't announce them until they're formally approved. We are looking at a number of capacity expansion initiatives, Leon, overall. Again, it's a good problem to have. In many areas of the food space, we're short of capacity and we're looking at some expansion initiatives. Okay, thanks. I'll get back in queue. Your next question comes from Derek Dley with Canaccord Genuity. Your line is open. Yeah. Hi, guys. Good afternoon. Hey, Derek. Derek. Just following up on that, your comment there just on capacity expansion. I think one area where you do have a little bit of excess capacity just as it ramps is within the sandwich business. What are you guys operating at, in terms of capacity utilization in Phoenix currently? Well, Phoenix is at, like we say, you know, it's gonna ultimately go to 12 lines, possibly more if we've got to flex portion of the plant. We're just installing line 7 and 8 at this point. There's a lot of capacity there still. There's also, well, you know, part of this project, the Phoenix project, was a rationalization or a reconfiguration of production among the three major sandwich plants in the U.S. We now have some capacity available in both our Columbus and Reno plants, which, you know, previously they were operating at capacity and some of the production's been moved to Phoenix. I'd like to add as well, Derek, that again, we've had a lot of capacity challenges over the years with our sandwich platform, given the growth. Having said that, when we purchased Raybern's and Buddy's, we've got three facilities. Three facilities came with those acquisitions, and all of them came with some extra capacity as well. So again, it's a high growth segment for us, but we do have plenty of capacity available to continue to grow. Yeah, that's great. In terms of the plants that you acquired through those acquisitions, is there potential to, you know, further optimize the efficiency of those plants, or are they pretty solid as is? No, these are solid plants, solid facilities. We have no intention of rationalizing anything by any means. We feel that we need the capacity to accommodate the growth we see. They're quite efficient. In the case of one of the plants in the Minneapolis area where we're looking at some efficiency investments, but that's for new business, not legacy businesses. Yeah. The opportunity there, Derek, is particularly with one of the Buddy's facilities. It's very underutilized now, and we have some interesting sales initiatives coming down the pipeline. There'll definitely be a margin pickup opportunity from a flow-through or a contribution margin concept. Okay. That's helpful. Just one last one, more of a minor question, but just on working capital in the quarter, you know, I noticed it was, you know, quite a bit bigger of a drawdown than what we've seen in, you know, your last two Q1s. Was there anything abnormal that happened this quarter on the working cap side, and should we expect that to be recouped over the balance of the year? You're absolutely right. It was a bit of an anomaly. You know, probably a good two-thirds of that's just timing and, you know, it ebbs and flows. The working capital, like you say, will sort of normalize itself over the course of the year. You know, about a third of it is our seafood business has been growing tremendously. One of the competitive advantages that they've been developing is, as their volumes are getting bigger, they're buying more and more product in container loads. That's creating a larger inventory buffer, particularly 'cause a lot of seafood products you pay prepaid while they're on the water. That's been a factor, and that's probably a bit of a permanent increase in our working capital. Like I say, most of the increase is just the natural ebb and flow of working capital. Got it. That's very helpful. Thank you very much. Your next question comes from Stephen MacLeod with BMO Capital Markets. Your line is open. Thank you. Good afternoon. Hey, Stephen. Hey, Stephen. I just wanted to circle back around on some of the gross margin impacts on the quarter. I guess specifically, can you just talk a little bit about, are you able to quantify what the seasonal impact was from recent acquisitions? And then secondly, the transitory issues that you cited and touched on earlier in the call, can you just talk a little bit about, your confidence in the confidence that, you know, these are issues that won't, you know, may not revert or may not reappear in Q2? Yeah. In terms of quantifying the seasonality, yeah, we don't break that out specifically, Stephen. Yeah. In terms of the transitory impact, you know, the biggest factor was the cost of bellies coming over from Europe. We use them in our specialty bacon products, both Hempler's and Harvest. That's likely to stay relatively high. Part of that is just the strength in the euro as well relative to the U.S. dollar. You know, where the upside is, as George mentioned earlier, it's not built into our expectations, but we are thinking that there is gonna be a deflationary element in the pork market. Based on that, you know, Harvest and Hempler's have been conservative in their price increases that they put through 'cause they see possible wins on the other sides or in other parts of their business. Oh, I see. if that doesn't flow through, then what you'll see is pricing put through and ultimately that margin regained. Oh, okay. What's the typical lag between pricing coming through and that offsetting commodity cost inflation? You know, different customers have different notice periods, but also it's a judgment call by our business, each individual business as to, you know, is this a long-term trend? Is it a short-term issue? Are there other offsetting issues? It's a complex question as to when they actually put through a pricing increase. But when they do, it's anywhere from 30-90 days. Oh, okay. Okay, that's very helpful. Thanks, Will. Just secondly, on the top line, so you know, obviously didn't change anything with regard to the base business for your outlook for 2018. Can you just talk a little bit about what kind of visibility you have into, you know, volume growth in the specialty foods and PFD business through the balance of the year? Yeah. We feel very good on the guidance. A lot of the initiatives that are built into it, you know, have been implemented or are in progress. You know, a lot of the work's already been done. Probably the biggest risk or the biggest unknown is the weather. As you remember from last year, you know, a lot of our businesses got impacted by the very poor seasonal weather and wet on the eastern side of Canada and the U.S. You know, we're counting on a normal summer. Again, Stephen, I think in general terms, the U.S. economy is very robust. We're seeing great demand for our products. A lot of our companies are making very good inroads in that market. You have to remember that a lot of the American-based manufacturing plants are having all kinds of labor issues. Some of them are even turning down business because of that. We're getting a lot of opportunities to sell into the U.S. market. There are many examples where we're getting listings with customers. Again, we're very optimistic about you know the sales growth in our company. Yeah. Okay. You still think that volume growth is in that roughly 13% range, which you cited at Q4? Yeah, yeah. It's in low single or low double digits, definitely. Right. I can't remember exactly what the percentage was. Okay. That's great. Just finally, you know, the interest expense looked to tick a bit higher in Q1. Was there something unusual in that period, or is that, you know, a rate you would expect to see going forward? Yeah, no. There was nothing unusual. That's just a function of, you know, our level of activity on the acquisition side. You know, most of it's been financed through debt. Right. Okay. In terms of the actual percentage rate? Percentage rate? No. It's normal. It was maybe a little bit higher because we normally mitigate some of our interest costs through Banker's Acceptance, but just because of how fast everything was moving, we just borrowed on a prime basis. There's a little bit of that impact that should normalize going forward. Outside of that, no, nothing else unusual. Okay. That's great. Thanks, guys. Your next question comes from John Zamparo with CIBC. Your line is open. Hey, thanks. Good afternoon, guys. Hey, John. I wanted to touch on the annual letter to shareholders. You mentioned the term global strategies and looking beyond North America. Granted you don't wanna over promote this statement, but can you elaborate a bit on what this might entail and when we might see that strategy played out? Well, I think that, as you know, John, we're very proud of our business model. We believe our business model is very much part of the reason why we've had some success. We are always in discussions with our global supply chain partners, always in discussions with companies in Europe, South America, Australia, with respect to what's going on in their markets. We feel that our business model is applicable to solving some of their issues. Some of the issues that they're facing are similar to some of the issues that some of our partners faced before they joined Premium Brands. Again, I just mentioned in the letter that you know it is possible that at some point we may look at creating a platform in other parts of the world other than North America. Okay, great. Maybe I could follow up on your other question about pricing. You achieved a price increase in both divisions this quarter, but can you talk a bit about pricing dynamics by distribution channel? Do you find it's easier to get price increases in, you know, grocery or QSR or C stores? I think in general terms, John, you know, the part of our business that caters to QSR and food service in general have trained their customers to be cost-plus. A lot of that business is done on a cost-plus basis. Let's say the cost goes up, they generally put price increases through on a very dynamic type of basis. If prices go down, then they reduce prices. That's a very dynamic type of pricing business model. With retail, it's a little bit different. Usually, we have to give you know up to 90 days notice you know to get increases, and in some with some retail customers less. It's less dynamic, I would say. That's the difference between the two. Okay. That's helpful. Thanks. Lastly, just housekeeping. The guidance that you've given for revenue and EBITDA, I just wanted to verify. That excludes Oberto, and is there anything else excluded from that number? Oh, no, no. Hey, John Zamparo, that includes Oberto. Includes it. Okay. Partial year for Oberto. Assuming that Oberto and Concord, the two larger acquisitions, will be closed at the end of May. Okay, understood. That's it for me. Thanks very much. Okay. Thanks, John. Your next question comes from Sabahat Khan from RBC Capital Markets. Your line is open. Thanks, good afternoon. Just in terms of how we should think about the ramp-up of the sandwich facility in Phoenix, do you expect to be at full kinda in terms of total number of lines at that plant by the end of this year, or is that something we should expect in 2019? I would say probably by mid-2019, only because we still have some work to do in terms of designing the fully automated two lines. All right, thanks. Then just on the plant that you guys are putting up in Toronto, you know, you said you expect it to be completed by Q3. Is some contribution from that reflected in your guidance, I guess, in terms of Q4? Just in terms of the ramp up or build up of that plant, seems like it's been a little bit delayed. Is that something related to construction or anything else that you wanna call in? No, there definitely have been delays with that project. Initially, it was just the City of Richmond or Richmond Hill, I think, sorry. The building permit process was extremely painful to go through. We did finally get the building permit at the beginning of this year, and then the harsh winter hit, so that kind of put us back another month or two. Everything's going full-blown now. All the trades are lined up, so we're pretty confident in that Q3 startup. In terms of impact, while we expect the facility to have a pretty quick, definitely a positive impact on the top line, it will sort of similar to the Phoenix facility from last year. It'll actually be a slight negative impact on the EBITDA initially. Okay, thanks. Then, just going back to the sandwiches business. You called out that there was some margin impact from adding more sandwiches. Is that just because this was a seasonally light sandwiches quarter, or is the new sandwiches business that you added just going to be at a lower margin than your previous kind of sandwiches business? No, no. It's not the margin relative to other sandwiches. It's just the sandwich business relative to the specialty foods group in general. It wasn't a mix within the actual group. Okay ... the sandwich group. It was the sandwich group relative to the total group. The sandwich group was such a significant portion of the growth of the total group. Okay, great. Thanks. I guess just lastly, just to go back to kind of the seasonality discussion, just at a high level, you know, taking into account the acquisitions that are about to close and the ones that have closed, would you be able to provide an approximate kind of sales percentage for the Q2 and Q3 versus Q1 and Q4 just to guide us? Just kind of your pro forma business. I don't. Sorry, Sava, I don't have that in front of me right now. You know, in general terms, I would say Q3 tends to be a little heavier than Q2. You know, the problem is ultimately it's where you get the best weather. You know, really is a big factor on sales. Very good. Thank you. Your next question comes from Bob Gibson with PI Financial. Your line is open. Thanks for taking my call. I just have a three-parter on foreign exchange, if I could. I might have missed it, but what exchange rate are you using for your forecast? We haven't actually disclosed that. In general, we're using roughly a 79-cent dollar. Okay, cool. Once the two acquisitions close, any idea of the revenue split, Canada, U.S.? Yeah. You know, this year will be a little bit distorted because of partial years, but going forward, it's probably gonna get close to, you know, 35%-40% U.S. for 2019. Perfect. Because of that increase on the U.S. side, have you given any thought to changing your currency hedging situation or anything in that respect? Well, see, the big issue this quarter wasn't something you can really hedge about. It was really just a translation. You know, our U.S. business is producing in the U.S. and selling in the U.S. There's nothing really to hedge from a currency perspective until there's a cash flow across to us. At this point, it's just the translation of their operations. We do an extensive amount of hedging around the buying and selling of products that, you know, are sold from one country to the other to protect margins. We you know, longer term, ultimately, the best way to hedge against translation is the financing structure. Okay, there's not a lot of cross-border product movement? Like George mentioned earlier, it's growing, and we do hedging around that. Most of this translation or virtually all of it related to or a significant component of it related to just the translation of U.S. operations. The majority of our U.S. business, Bob, is manufactured in the U.S. and sold in the U.S. Perfect. Thanks so much. Again, to ask a question, please press star one on your telephone keypad. Your next question comes from Derek Lessard with TD Securities. Your line is open. PFD had a very strong organic growth this quarter, particularly versus Q4. Just wondering what some of the drivers were there. On the gross margin side, you talked about a new line of premium beef products in Quebec. Maybe if you could just talk about that as well. A big part of the growth was, you know, there are a couple of factors in there. One was just the momentum in Western Canada of our seafood initiatives. That continues to be a big driver out here. In Quebec, you know, there was a bit of a timing, a feature element to it, but also, just, you know, the team with C&C and the acquisition and Premier have just been making great progress in that market. Part of that has been this new. They've never had a premium beef program to offer their customers in Quebec, and they just launched that this year. It's called 1855. It's a sort of top-grade beef program. That also has been a nice success. I think also and we've talked about this in the past is that traditionally our distribution business was focused more on food service, and more recently we've been leveraging the infrastructure we have to deliver to specialty retail. The specialty retail segment has been doing extremely well. Awesome. Thanks for that. Maybe one last one, if you can talk about the Oberto acquisition. In your prepared remarks, you talked about it being transformational. Just wondering what opportunities do you guys see in this space? Yeah. We're very excited to partner with Oberto. Oberto is just a great company with a great management team. We've known Oberto for a long time. They're based in Seattle, as you probably know. It has national distribution across the U.S., and the second most recognizable brand in meat snacks in the U.S. I think it's well known that, you know, we're a major player in meat snacks in Canada. I think we're by far the largest player in meat snacks in Canada. This is a segment that we know well. We've been investing in it for the last 20 years, recognizing that consumers will eventually move from sugar snacks to protein. Protein is in. We have deep knowledge in meat snacks, especially in the area of sticks. Traditionally, Oberto's has been a beef jerky brand, and we look forward to sharing some of our innovation pipeline with respect to sticks. We think that leveraging the brand and some of our expertise in sticks and launching products into the U.S. market will be very exciting. Having said that, Oberto's does come with some available capacity as well, especially in the area of sticks. Again, we're getting some extra capacity which we need in this segment of the market. They've done a very good job developing a trail mix line of products. These are basically trail mixes that include dried meats as well. We believe that they're one of the leaders in that segment, and we think that there is tremendous runway with respect to that particular type of product both in the U.S. and in Canada and maybe internationally. Another thing that's done that we're very excited about is that they've brought the production of the trail mixes in-house. They used to have a co-pack for them, and they've recently commissioned a plant in Seattle to make their own mixes. Again, there's a lot of good things going on with this company and we believe that it will be a great fit both from the point of view of culture as well as opportunities in the meat snack segment. Yeah. Sorry, George, is that a new plant they commissioned or is it part of a, I guess, an expansion of their existing facility? No, they commissioned a new plant for trail mix to do trail mixes. Okay, thank you. Your next question comes from Dimitry Khmelnitsky with Veritas. Your line is open. Hi, and thanks for taking my question. Could you please elaborate a little more on the seasonality of recently acquired sandwiches business, the ones which you bought at the end of 2017? If you could also provide more details on increased overhead costs at the Phoenix plant, what drove those and were they offset by increased sales? Thank you. Sure. In terms of the seasonality of the sandwich business, it's really one of, in the Raybern's business, they get various listings within some of the major retailers in the U.S. that are seasonally driven so that the retailer will put out more shelf space, more product for their SKUs depending on the season. You know, that's a key driver of their volumes. In terms of the Phoenix facility and the overhead, again, it's not an increase in the Phoenix facility's overhead because the Phoenix facility didn't exist in the first quarter last year. It's purely one of, it's a new facility. As a result, the sandwich business had a lot of incremental overhead associated with the new facility. It came on stream in the middle of last year. You know, there is some benefit offsetting that from the sense that that facility has allowed for the growth and driven the growth, but it's still significantly underutilized relative to its capacity. As a result, even though there is contribution margin coming from the plant, its overall gross margins wavered, impacted it, the overall division negatively. Ultimately what will happen is that plant grows its volumes and its contribution margin contributes more to the overall margin of the business. You're gonna see a steady improvement in gross margins coming out of our sandwich business. That is supposed to happen later this year? Yeah. It'll happen through the course of the year. Certainly by the, you know, Q3 we'll have year-over-year comparatives that should be quite favorable because at that point we had that overhead associated with the Phoenix facility. Right. very little revenue. Yeah. I see. In terms of Raybern's, the listings from major retailers, do you have a sense whether there's gonna be a incremental or increased listings in the future quarters? Oh, yeah. No, the business is on track. It's again, it's one of seasonality, right? All that stuff's happening. Right. It's just a seasonal process. I see. Okay, thank you. Okay. There are no further questions here at this time. I turn the call back over to presenters for closing remarks. Yeah. Thank you, Denise, and I'd like to thank everybody for attending today. We are very excited about the rest of the year and the years to come. We believe that we're gonna have a very exciting year, and we look forward to reporting further on our progress. Thank you very much. This concludes today's conference call. You may now disconnect.