Good afternoon, ladies and gentlemen, and welcome to the Premium Brands Holdings Corporation 1st quarter 2026 earnings conference call. Our speakers today will be George Paleologou, CEO and President of Premium Brands, and Will Kalutycz, CFO of Premium Brands. I will now turn the call over to George Paleologou. Please go ahead.
Thank you, Joanna. Good morning and welcome everyone to our 2026 first quarter conference call. With me here today is our CFO, Will Kalutycz. Hopefully, you've had a chance to listen to our pre-recorded remarks posted on our website this morning. We will now take your questions. Joanna?
Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. Should you have a question, please press the star followed by the 1 on your touchtone phone. You will hear a prompt that your hand has been raised. If you wish to decline from the polling process, please press star followed by the 2. If you are using a speakerphone, please lift the handset before pressing any keys. The first question comes from Kyle McPhee from ATB Cormark. Please go ahead.
Hi, everyone. Great update and nice to see all the moving pieces increasingly coming together here to push your earnings up. I want to dig in on some of the moving pieces that will allow us to better understand your free cash flow profile in the coming quarters and into next year. I have some CapEx budget questions. You've already given the larger project CapEx budget for the next four quarters, CAD 55 million. What will that larger project bucket look like beyond that? Is it essentially going to zero given the larger projects are done? For the smaller projects, how should we think about that? You didn't give a budget for it.
Will it stay around CAD 70 million a year, in line with prior comments, or will that also tail off for a period of time?
In terms of the major projects, you know, the current, as we talked about in the presentation, we've got about CAD 55 million left to spend on that, and then we're through all the things that have been proved that are in the pipeline. Our intent is that in the future, any projects we manage will be in that bucket of other, you know, which right now we refer to the smaller bucket. You're right, that's CAD 70 million. What will happen over time, maybe that bucket will creep up a little bit, CAD 70 million-CAD 80 million as we have to add capacity here and there. You're not going to see a repeat of what we've been through in the last 4 years. We just don't see anything like that in the next couple of years.
We're exiting 2025 with about close to CAD one and a half billion of sales capacity once the GTA project is online. We're well-positioned for the next couple of years.
Okay, and just to confirm, while you're sinking the remaining large project budget, do you also expect to still be sinking the CAD 70 million-ish per year this year for the smaller stuff?
Oh, yeah. Yeah. Absolutely. You know, we've got over 110 plants in the system, and, you know, they're always adding a line or doing a improvement to a line to increase efficiency. Those types of projects are constantly ongoing. We're always looking to improve the plants, refine capacity, and that's just part of that. We do consider it project CapEx 'cause all of these smaller projects, they are smaller projects, do generate returns. They're not like maintenance CapEx, where you're really just replacing an old machine with a new machine and you're no better off. These smaller projects are incremental cash flow to the company in the future.
Got it. Okay. Okay, and beyond everything we've just talked about, the only other bucket is maintenance CapEx, CAD 70 million-CAD 75 million a year.
Yeah.
You know, maybe just confirm there's nothing else, but maybe a capital release from one last sale leaseback this year. Is that right?
Yeah. Yeah. We do expect to complete the GTA facility sale and leaseback in the fourth quarter of this year. That'll be our expectations are CAD 60 million-CAD 65 million in proceeds from that.
Got it. Okay. Last thing impacting free cash flow conversion, the plant startup and restructuring costs. Nice to see it was down a lot in Q1. Will it stay down in Q2 and beyond to very thin numbers, or will it spike back up with some of the big product launches you have planned?
Yeah. Absolutely. We expect it to continue to trend down from the Q1 level. You know, if you took Q1 and annualized that 4 times, we'll be well below that for 2026.
Got it. Okay. Thank you. I'll pass along.
Thanks, Kyle.
Thank you. The next question comes from Martin Landry from Stifel. Please go ahead.
Hi, good morning, George and Will.
Hey, Martin.
I wanna just dig a little bit into some of the call-outs you've made in your press release. You're calling out delays in timing of promotional events and also of new product launches. Just wondering if you could give us a bit more color on that and if it's possible to quantify the impacts.
The biggest item, Martin, is, you know, we did have a very successful promotion through the course of 2025 with a customer in the QSR channel, that came to an end in 2025. We had expected new programs to replace it coming in towards the end of Q1, Q2. Those have now been pushed out to Q3, Q4. We did see that impact of that falling off, and we still You know, we're not gonna see the impact of the benefit to Q3 to Q4 this year. It was really the one big program that was the challenge. You know, the other factor is, and this is in our sandwich group or what we call now our Custom Culinary Solutions group.
The other factor was, you know, another major QSR customer, just the timing of shipments to them. You know, we'd had a significant increase in sales to them in the fourth quarter of last year. We thought most of that was related to just inventory builds, but it turns out some of it was the timing of sales. That's been pushed. You know, that impacted Q1, but that should largely go away in Q2.
The bottom line, Martin, is that we have a very robust pipeline of LTOs in the U.S. with retail and food service customers, right? This is an environment where customers in food service and retail are looking for LTOs to drive traffic to their locations. You know, we have capacity now. Again, we build inventory for these LTOs. Ultimately, we don't control the exact timing of these LTOs, right? To the extent that they happen, then, you know, it gets kind of lumpy for that particular period, right? If it's delayed, again, we see the impact of that, right? We are in a lot of LTO type of activities in our platform.
Understood. Okay. Just, if you can share any color on Q2 so far? You know, some grocers are talking about Canadians trading down, discount banners doing better than traditional banners. Just trying to see if you're seeing anything impacting your sales?
We would generally agree with those comments, Martin. You know, again, this is not new to Canada. You know, I would say that our mix with regards to both retail and food service is changing a little bit for the reasons that you mentioned. No, you know, no issues there.
Okay. Are you still under indexed with discount banners or is your distribution in discount banners in Canada, more or less the same as traditional banners?
I would say that we're not as under indexed as before. We've picked up a lot of business. As you saw, our business in Canada has grown in the quarter. Our organic growth was a little bit above what we expected. That's because we're picking up business in the discount channel.
Okay, super. Thank you, and best of luck.
Thank you, Martin.
Thanks, Martin.
Thank you. Next question comes from Chris Li with Desjardins. Please go ahead.
Hi, good morning, George and Will. Hope you guys are doing well.
Hey, Chris.
Hey, Chris.
My first question is, I was wondering on the cost side in terms of obviously fuel, freight, packaging, and et cetera. I was wondering if you can share with us, like, how are you guys managing those cost pressure, and then what's the potential impact on the business for this year?
You know, again, Chris , I think we've talked about it in the past. You know, we obviously try to as much as possible provide dynamic pricing to our customers. It's not that we're not familiar with inflation. You know, with regards to some of our core commodities like beef, for example, and with chicken last year, you know, we saw tremendous inflation. Ultimately, you know, we take actions with regards to pricing and obviously restore our margins through pricing.
Okay. That's very helpful. My follow-up question is, just in terms of the non-core investment, in the press release, you mentioned that's still ongoing. I was curious, I think you did disclose a number, CAD 1 billion in net proceeds over the longer term. I was wondering if you can elaborate on the timing on that and the reason for putting a number in the press release.
Yeah, we're in a number of discussions, Chris. We've got a pretty good idea as to where we'll end up. It'll probably take a couple of years. Again, we're in a number of monetization type of discussions. In some cases, we're taking on partners in some of our platforms. You know, we felt very comfortable with that number, so we wanted to convey that to the market.
Okay. That's helpful. I'll get back into the queue and all the best.
Thanks, Chris.
Thank you.
Thank you. Next question comes from George Doumet with Ventum. Please go ahead.
Yeah, hi, guys. Wanted to talk a little bit about the specialty food margins. A really strong performance there. I just wanted to know, are we caught up on beef? Can you quantify the increase, from the plant overhead costs and the higher storage costs? Maybe, Will, when do you expect those to go away?
In, in terms of the higher costs, George Paleologou, they're not going to go away. The storage costs, which was the smaller component of it, Will Kalutycz, as we work through the inventories we built in Q1 through the course of the year, but the plant overhead is associated with the additional capacity coming on. Really now the key is to leverage that overhead, right? Those plant expenses will continue to grow, but at a lesser rate relative to the growth we're expecting in our contribution margin is from sales growth. It's really leveraging that capacity that expands now to grow our EBITDA. In terms of the overall margins in specialty foods, they were generally in line with our expectations.
We've been catching up, as we've talked over the last 2 quarters with beef pricing. You know, a lot of that is in effect, came into effect by the during the first quarter. You know, we have a little bit more still to work on going forward, but really, it's been just a catch-up play on beef pricing.
The other comment I have, George, in regards to margins, again, as you know, we've built a lot of new capacity, invested in many new lines to support our growth. With regards to, you know, the ramp-up of plants, you know, we're starting to basically see the light at the end of the tunnel with regards to running the plants at scale, which obviously helps. Then, you know, we're in the process now of driving what we call internally operational excellence, right? Which are, you know, basically, get the metrics right, get the productivity right, the yield right, the quality right, and all of those things. Those should drive margin expansion in the future.
Okay. That's helpful. George, in your prepared remarks, you mentioned the cattle business. I think the sales are running north of CAD 100 million. There's a plan for that platform to become the next billion-dollar platform. I'd love to hear your thoughts on that. Like, how do we get there? Where can we see M&A to support that growth? You know, you just want to pay attention, you guys have done that in the past, and you've seen a lot of growth in other platforms. I just want to, I'd love to unpack that a little bit if you can.
The run rate of that business today is in excess of CAD 100 million, George. We love that business. It exports globally, it exports to Asia. We lack capacity. You know, when we invested in our supply chain with the acquisition of our 50% ownership of Clearwater Seafoods and also our then 50% ownership of North Delta Seafoods, I think we told the market that we were looking to basically guarantee our access to best-in-class supplies. You know, we're, you know, probably the only company in this space that has guaranteed access to exceptional raw material, mainly coming from the seafood side of our business.
We've leveraged that to grow substantially. We have a lot of demand for our soups, sauces, and dips in the U.S. Unfortunately, we don't have a lot of capacity. We're in the latter stages of completing our expansion in Auburn, Maine, of the plant there. We put together a great management team and, you know, we have, as we speak, we probably have a CAD 100 million pipeline of opportunities that we're looking at. Again, the plant will be ready in the fall and, you know, we're looking forward to executing that capacity.
What should we think about the margin profile of those products, George? Superior to kind of a specialty foods in line or any thoughts there?
Yeah, yeah. They're about average, George. You know, their contributions margins are in the 25% range. You know, some of the more unique specialty products get as high as 30%. You know, that, you know, we view that business long term, consistent with our other legacy, specialty food businesses. Should be averaging EBITDA of, you know, 13%-14%.
One quick one, if I may, just to follow up to Kyle's question earlier. On working capital, can you maybe help us? It does fluctuate. It's been a drag the last couple of years, but can you maybe help us, well, just frame that line item, I guess, for the year?
Yeah. Well, it's interesting, George. You know, we used in working capital in the quarter, I think it was about CAD 113 million. Of that, our Stampede business, our recent acquisition was CAD 96 million of it. Stampede's business is, you know, they have a large component of it that is fixed pricing for their customers on an annual basis. A core part of their strategy for hedging the margins on that business is they do take these large inventory positions at the beginning of the year and then use that inventory over the course of the year to service their customers. It's a bit different than most of our other businesses and hence the, you know, the big impact on Q1.
The interesting thing, I think this is a real indication for how you're going to see our free cash flow in 2026, because as 2026 unfolds, you know, that working capital is gonna be converted to cash by the end of the year, and year-over-year, you're not going to see that impact by the end of Q4. If you look at Q1 and you strip out the impact of Stampede, we actually, you know, we actually showed what we call our net free cash flow, positive net free cash flow. It's been a while since we've had that. You know, we always talk about what we've defined in the presentation as our steady state free cash flow, where we exclude our investment in the future.
We exclude project CapEx, restructuring, and net working capital usages. Even once you subtract those, to come up with what we call net free cash flow, in Q1 it was actually a positive number taking out the Stampede effect. Like I say, it is a unique situation to their business. We feel looking forward to 2026, it is going to be the first time in 5 years that we generate substantial net free cash flow.
That's really helpful. Thank you.
Okay, George.
Thank you. The next question comes from Ty Collin with CIBC. Please go ahead.
Hey, good morning, George and Will. Thanks for taking my questions.
Hey, Ty.
Hey, Ty.
Hey, hey. Just to start off, lobster margins were a pretty material drag within distribution this quarter again. I think previously you talked about working through some higher cost inventories in Q1. Just looking for an update on how far through that process you are and what sort of improvement you're expecting in Q2 and throughout the rest of the year.
Yeah. It really, Ty, it's going to depend on how the fisheries go. You know, year over year, their margins were relative. You know, they were down slightly, you know, they're relatively stable. You had some pluses and minuses on mix versus catch rates. Really it's going to be catch rates that drive it because, you know, it's a situation where when you have poor catches, it drives up the shore price, and that creates margin challenges for the group. The positive is, you know, you know, we're in the you know, some fisheries now, the Canadian fisheries, and they seem to be going well, that's setting the stage for better margins for lobster. Yeah, it's really going to be a function of the fisheries.
Also, Ty, I just wanna remind everybody that there are still tariffs to China as well, which appear to be coming off at some point. Those should help as well.
Okay, great. That's helpful. You know, I think last quarter, you guys were kinda indicating your expectation that specialty foods or organic volume growth would land around 10% for the full year. I'm just curious, whether that view has changed at all given some of the dynamics discussed on the call today around promo timing and whatnot.
Yeah. Two comments there, Ty, is we do as, you know, due to the LTO discussion we had earlier, we do expect to push some growth that we were expecting in Q2 into Q3, Q4. That will take a little bit of growth out of our specialty foods for the year, but we're still expecting high single digits for the specialty foods group. It has come off a little bit because of the timing of those LTOs, but it's still gonna have strong growth for the year.
Okay, thanks. All the best.
Thanks, Ty.
Thank you. Next question comes from Luke Hannan with Canaccord Genuity. Please go ahead.
Hey, thanks. Good morning, guys.
Hey, Luke.
Hey, Luke.
Hey. I just wanted to follow up on the, on the promos or the LTOs. What was this driven by, I guess? It was just a change in scheduling on behalf of the food service customer. Is that in response to what's going on with consumer, or is there something else at play there?
There is always different dynamics, Luke, depending on the customer and the channel. You know, I would say from my perspective, given the war, you know, which appears to be over, hopefully it's over, and also the high gas prices, probably they, some of the customers decided to delay. You know, there's always different reasons depending on the customer and the channel.
Yeah. The big one that impacted Q1, Ty, the business itself had some internal issues, nothing to do with the program, that they were just working through. You know, they're largely through them now that that's stabilized, that's what gives us confidence that they will happen in the back half of the year. Yeah, like George says, there's a whole number of factors that are driven by the customer that goes into that timing.
Our view, Luke, and my sort of advice is that you know, what's important is really the LTO pipeline, and there's not much we can do ultimately about the timing of the launch. I mean, the launch of our biggest launch in our history was delayed, you know, a couple of quarters. Ultimately, it took place, we've executed it, and it's done extremely well. Right? We're not in control of the timing. We're not gonna pretend that we are. Our pipeline of LTOs is very healthy.
Got it. Thanks for that. I did wanna follow up also, George, I think you had mentioned the organic volume growth rate that you saw in specialty foods in the Canadian business was above your expectations. That was in part because of the exposure that you guys have to discount as well. Also, how much of that growth can be explained by the new meat stick program that you guys launched late last year and the rollout amongst the Canadian store base there?
It's a small component, Luke, because the launch was towards the end of the year. Actually, no.
It was in January, yeah.
I'm sorry. Sorry. It was towards the end of January.
Yeah. Yeah.
That was a component, but a small component of it. You know, the biggest component, if you wanted to call out one single factor, was actually our kettle business. It Like George says, we're doing really well in that channel, and particularly with some of the large club chains and, yeah, so that was probably the biggest single growth driver in the quarter.
Okay, thanks.
Sorry, just to clarify, Luke, in Canada.
Yep, got it. Thanks. I did wanna dig in a little bit deeper there as well. Just on the meat stick program, you guys have been very happy with it. I think your customers have been very happy with it. Is it too early to now be thinking about potential expansion there, I guess, just as far as maybe different flavors or other SKUs that can be added there?
Yeah. We've actually we've recently did some taste tests on some new innovation that we wanna bring to market. Again, some very, very exciting products. I think it's well established now that we have great knowledge and expertise in this area. This stick has done extremely well. It is best in class. You know, we're challenged a little bit by capacity. Again, we have capacity left in the system, some of these launches are very large as we found out. Yeah, there's a lot going on. We're excited to say that there is more coming, more flavors, more species.
We're actually launching an amazing bison stick in the U.S. under the Roam Free brand, which we think will do really, really well. Yeah, we love the stick category. You know, we produce the best quality consistently in North America in our view. Yeah, we're seeing lots of opportunities there.
That's great. Last one. Then I'll pass the line. Just on Stampede, if I remember correctly, it's CAD 8 million synergies that you guys were targeting for this year. Just curious if you can share anything on that front.
Yeah. We're well on our way to hitting that target for the year, Luke.
That's great. Thank you very much.
Thank you, Luke.
Thanks.
Thank you. The next question comes from Stephen MacLeod with BMO Capital Markets. Please go ahead.
Thank you. Good afternoon, guys. Good morning.
Hey, Steve.
Hey, Stephen.
Hey, Will. Hi, George. I just wanted to follow up quickly on the specialty foods outlook for 2026 on the top line. Understanding around the promotional shift into Q3 and Q4. You know, on top of the kind of high single-digit volume growth that you're talking about for 2026, do you also still have price to pass through or is most of that price now passed through, you know, through the end of Q1?
Yeah. just to be clear, that high single digits is volume growth, right, Stephen?
Dollar.
Not dollar growth.
Yes.
Yeah. Absolutely. As I mentioned on the beef side, we're we've caught up a lot as you saw us, and that drove some of our specialty foods margin expansion year-over-year in the quarter. There's still some work to do there. You will still see some price gains. I don't suspect it's going to be as large as it was in Q1, there still will be continued gains. As George talked earlier, you know, we are sort of we are working through potential pricing around other inflationary factors like fuel.
Right. Okay. That's helpful. Thanks, Will. Then just to kinda high level or taking a step back, just thinking around, you know, the commentary around, you know, you're through your CapEx cycle, executing on the capacity initiatives you have in place. You know, is it, is it, is it now reasonable to think that that 13% to 14% specialty foods margin, you know, may come into view sometime over the next, I don't, you know, 12, 18, 24 months, something like that?
Well, absolutely on the back end of your estimated range. It's really now, you know, leveraging that remaining, you know, 1.4, 1.5 billion of capacity that we've built. That's what's going to, you know, margin up the business. That'll unfold over 2026, 2027. I would suspect by the end of 2027, we're at run rates like that.
Yeah.
Stephen, from my perspective, as I said earlier, as I look at our portfolio today, our products and our margins, and operations, I would say that operational excellence will get us there.
Right. Okay. That's helpful. Maybe just a clarifying point just on the one and a half billion dollars of sales capacity. Is that currently reflecting capacity that is currently not filled at all, or is there a portion of it that is sort of being ramped up?
No, that's what was available at the start of 2026, including the capacity of our new GTA facility, which won't come online till the end of the year. You know, I'm looking at that total CapEx spend of about CAD 1.1 billion, and that's created about CAD 2 billion of sales capacity. Between 2024 and 2025, we've used about roughly a half a billion CAD of that sales capacity.
Okay. That's helpful clarity. Thanks, Will. Great. Thanks, guys. Appreciate it.
Thank you, Steve.
Thank you, Steve.
Thank you. Next question comes from John Zamparo with Scotiabank. Please go ahead.
Thank you. Good morning, George and Will.
Hey.
Hey, John.
I wanted to return to your production footprint. I appreciate the details so far. I wonder if you could give us an idea approximately. Let's fast-forward maybe 1 or 2 quarters or maybe even to year-end, but I wonder what capacity utilization you're at on some of your key categories like meat sticks and sandwiches, and bakery and charcuterie.
Yeah. Again, it depends on many factors, John. I would say, we have a lot of capacity left in our sandwich platform with the build-out of the Cleveland, Tennessee plant and the addition of lines there, and some reconfigurations of the other plants. We have quite a bit of capacity left in our stick business, but we believe that we will fill it relatively quickly given the innovation pipeline we have in place. We will probably be tapped out by the end of the year with regards to stick capacity. We're actually, you know, looking at maybe some opportunities to purchase more capacity or add more capacity. Again, haven't made any decisions yet, but we're looking at that.
You know, the rest is, basically, you know, covers different areas like, obviously our, our kettle business and, our bakery business and, our processed meats business. In general terms, as Will said, at the beginning of the year, we had CAD 1.5 billion of capacity left and, you know, I've commented on some of the high growth areas.
Okay. Thank you for that. I wanna follow up on the OVGR question, and I wonder, should we interpret your answer as the likeliest outcome is Q4 is probably going to be the highest result for OVGR this year, followed by Q3, followed by Q2? Is that comment you made earlier, was that relevant to specialty or U.S. specialty?
Yeah. They'll be close, but yeah, probably Q4 will be weighted larger. You know, Q3 is a better seasonal quarter. You've got that tailwind. You know, Q4, we would expect to be on a percentage year-over-year basis higher than Q3.
Okay. That's U.S. or consolidated within?
That's specialty foods consolidated. U.S. is the big driver.
Got it. Okay. Lastly, I wonder if you could say for this quarter where incremental margins landed relative to your typical range on incremental sales. I think it's 25%-40% is typically the range where that landed in Q1.
Yeah. It was, it was roughly in line. It was a little bit low. I think, you know, I think it worked out for the specialty foods group around 22%-23%, which, you know, we would have expected sort of 25%-30% range. The factor being sales mix. You know, the jerky category, which we've been talking about, was down quite a bit in the quarter. It just more and more customers are shifting shelf space to sticks on top of the high beef prices, consumer sensitivity challenges. You know, that was a fairly big number in the quarter, and that's a very high margin product. That's what brought the overall contribution margin down, maybe a little bit lower than what you would expect.
Okay, that's helpful. I'll leave it there. Thank you very much.
Okay. Thanks, John.
Thanks, John.
Thank you. The next question comes from Vishal Shreedhar from National Bank. Please go ahead.
Hi. Thanks for taking my questions.
Hey, Vishal.
On Dusoe, Good afternoon. Is that about CAD 100 million in terms of the value anticipated, that I'm getting from the balance sheet? What is the magnitude of Dusoe on the P&L?
You know Sorry. All the value in that you're extrapolating, Vishal, is in Shop Acres. Dusoe's is a very small business. It's really, I hate to say this, but it's almost a rounding error.
Less than one-tenth of that, Vishal.
Okay. Of the divestitures plan that greater than CAD 1 billion, do you anticipate a large portion of that more to come in 2026 or is that How should we think about it over the years to come?
Yeah, again, we need to be careful, Vishal, because we didn't use the words dispositions or sales. We use the word monetizations, right? We expect to have complete the process, as I mentioned earlier, over the next 2 years. Not sure as to timing, but I, you know, we are in a lot of robust discussions with regards to taking on partners in some of our platforms.
Okay. George, off the top, you suggested that you are seeing, and I think you pointed more so to Canada, some trade down behavior on behalf of consumers within your segments. Are you noticing in the, in the markets when you're looking for acquisitions, softer valuations, for potential files and/or, some hesitation on behalf of those partners or those potential buyers for those assets?
Yeah. Again, Vishal, we wanna be careful with regards to trade down. Trade down by channel, right? We're seeing trade down by channel.
Customer.
Right? By customer and channel, right? Not trade down in terms of, you know. Generally, people don't change their eating choices in a recession, right? They just buy elsewhere where they can get it cheaper, right? That's what we see. It's really important to convey that and for you guys to understand that, right? We're seeing some changes in, you know, in terms of where the consumer shops. They're still buying the same items they were buying before.
Vishal, our margins in those different channels are very similar. We're relatively agnostic on where we sell that product.
With regards to the M&A environment, I would say that the, you know, there's a lot of assets for sale. Some of them are owned by PE, some of them are you know, are being sold by large CPG as they try to sharpen their portfolios. So there's a lot of assets for sale. You know, we're looking at two or three opportunities every week. So I would say that leads to a general softening of valuations. Not much, but some softening. There's a lot of assets for sale.
Okay. With respect to your monetization indications, are you seeing a similar softening on your side or not really?
What we've said before, Vishal, is that as you saw with the sale of Shaw Bakers, right? You know, we're comfortable with our balance sheet. We don't feel the need to discount anything to sell it, right? You know, our assets are in good shape. They're doing well. They're growing. They're leading the industry in many areas, including innovation and growth. Again, we expect to be able to get fair prices for them, right? We're not gonna discount them to move them, right? That is not going to happen.
Got it. Okay. Lastly, the nudging up of 2027 expectations, is that on the basis of the expectation of more acquisitions to come, or is that just on an organic basis of the business currently today?
It's so, you know, when we last talked about 2027, we talked about meeting or exceeding our targets. You know, before Stampede, to hit our sales target, not necessarily EBITDA target, we needed to complete an acquisition. With Stampede now completed, from here to the end of 2027, we'll hit our targets just organically. We don't need to complete any more acquisitions. That's really the key message we're trying to say.
Thank you. The next question comes from Michael Glen with Raymond James. Please go ahead.
Oh, hey. Good afternoon. Will, can you just characterize.
Hey, Michael.
The organic volume growth in Q2? Should we expect a similar level? I know you gave the back half a year color, but on Q2 itself, should we expect a similar level to Q1 given what you're seeing?
Like, Q1 is generally a slower quarter for seasonal purposes, and it is just tougher to grow in for that same purpose. We do expect to see some pickup in Q2. It will be a bit stronger, but it's not going to be as strong as we originally expected because of the LTO issue that we've been talking about, but it will be stronger than Q1.
Okay. Just carrying that over to margins. We should expect that margins and specialty follow a similar cadence to how we model the organic volume growth through the year?
Correct. Absolutely. You know, the biggest You know, now that most of our pricing is where it needs to be, like I said, a little bit more work to do in Q2, but most of it's where it needs to be, assuming there's no crazy inflation in Q2. You know, we sort of continue. You know, beef, we do expect to be inflation, but mildly. Under those assumptions, the biggest driver is gonna be contribution margin growth, i.e. sales growth. You know, we've talked about it. You know, our contribution margins in the specialty foods group are anywhere from, you know, some, you know, a low on some of our co-pack business of 20% up to as high as 40% in certain categories. That is the big driver of the expansion in our margin.
Okay. Just coming back to some of the items discussed in the release itself in terms of the asset sales or the partnerships, the M&A and then the leverage targets themselves. How do we think about all of these items in conjunction with one another? Because you're talking about hitting leverage of 3 times in by mid-2027, but at the same time, you're referencing the M&A environment and the asset monetization process. Like, I'm just trying to think for myself how this all comes together.
Yeah. No, no. Fair, fair question, Michael. Let's be clear. We expect to hit our 3 to 1 or better total debt to EBITDA ratio target by early to mid 2027. The only asset dispositions built into that is the sale of leaseback I talked about earlier. Outside of that, it's only through growing our free cash flow and paying down our debt and growing our EBITDA, which favorably hits the ratio, obviously. There's no business dispositions built into that target. Anything we do on that side will only accelerate it, how quickly we achieve it.
Okay. Is that a firm target to hit before you look at M&A or an M&A opportunity could come in before that?
No, no. We'll continue to manage M&A as we've been doing for the last year and a half. That is any transaction we do will be structured that it either doesn't hinder or helps us achieve that target. You know, we've been doing our transactions with some contingent consideration, maybe issuing some shares to the ownership group, and using other mechanisms to make sure that any acquisitions we do do not put us behind schedule in achieving that target.
Okay. Thank you.
Okay. Thanks, Michael.
Thank you. The next question comes from Derek Lessard from TD Cowen. Please go ahead.
Yeah, good morning, George and Will. Good, good quarter.
Hey, Derek.
Hey, Derek. Thanks.
Good. I just want to follow up on your last comment. I do think it's the first time, though, that you have given a timeline on getting below that 3 times leverage. I was just curious on how much visibility you have on that timeline.
Yeah. We've had that objective for a while now. You know, we wanted to see a few of these pieces fall in place, like the recovery for the beef inflation, just the cadence of the growth in our various initiatives, U.S. initiatives in particular, the stability of the Canadian market. You know, we have more confidence now, and that's why we started communicating it as a specific target.
Okay, that's fair. Maybe just to follow up on George's working capital question way back. The CAD 96 million increase in inventories due to Stampede, like, do you expect that to start reversing in Q2?
Well, I want to be clear on that 96, just in case somebody starts crunching the math. It's CAD 56 million in actual inventory increases, the balance is prepaid inventory for international shipments. It's all inventory, but it's not necessarily in an inventory bucket. Just to make sure anyone sort of checking all the details, they're trying to figure it out. The net impact is the CAD 96 million. In terms of how that unwinds, yeah, it should start unwinding in Q2 and Q3, you know, accelerating on Q4, you know, by that point, I would expect they're through most of it, and they're actually starting to buy to support the sales programs at that part.
You know, the strategy is always, you know, the beef market peaks in Q2, Q3, the summer months, grilling, all that stuff. You know, if you look any charts of the key beef cuts they use, you'll see, you know, that sort of goes up and, you know, it has a traditional seasonal cycle of increasing in Q2, Q3, and then coming off in Q4. That is what the buying is meant to do. Q2, Q3 is when it'll all be used up, or the primary, most of it used up.
Okay, that's helpful. Just one last one for me. You know, again, strong, I think, considering that you are lapping a tough comp or a promo comp last year in the U.S. at 10% organic volume growth. Just do you have a sense of what it would've been excluding that promo?
Yeah. Yeah, I do. I, I think, it turns out, you know, our Custom Culinary Solutions growth would've been pretty close to 6% versus a 1% contraction. Overall, I think that put us at about 12% for the entire U.S. initiative group. You know, relative to last, again, this is really important to understand when you're looking at this metric, is you have to look at it on a year-over-year basis, not a quarter-over-quarter basis, just because of the seasonality of the business. You know, on a quarter-over-quarter business, you're looking at, you know, 9.7% last year, 9.9% this year, including the impact of that customer initiative. You know, normalizing for that, you're probably at that 12%-13%.
You know, showing good momentum year-over-year in that growth rate.
Yeah. Okay, that's what I was getting at. Thanks, Will.
Thanks, Derek.
Thank you. The next question is a follow-up from Kyle McPhee from ATB Cormark. Please go ahead.
Hello again. Are you able to give us some color on Stampede's EBITDA margin in Q1 just to get a feel for how quickly their margins are normalizing higher? Kinda allow us to feel out the specialty food margin with and without that mix impact. I assume they're taking price to offset deflation like you are, any color appreciated.
Yeah, yeah. They're around the 9%, a little over 9%, Kyle, they are, you know, below the average of and we knew that, right? That was one of the reasons why our 10% EBITDA target is a little bit behind schedule. It's just the mix with Stampede coming into that mix. Yeah. Around 9%, a little over 9%.
Got it. Okay, thank you. That's it.
Thanks, Kyle.
Ladies and gentlemen, as a reminder, if you have any questions, please press star one. Next question comes from Ryland Conrad with RBC Capital Markets. Please go ahead.
Hey, good morning, guys.
Good morning.
Just to start off, I know last quarter you acknowledged that beef pricing was set a bit below the absolute peak. I guess heading into the grilling season, can you just give us a sense of how much of that buffer remains in your current pricing versus your beef input costs?
You should be Like, the seasonality is built into the pricing structures, right? We don't look as that seasonality as inflationary. It's really the year-over-year comparison on a quarterly, you know, year-over-year basis that's the important number. We do expect that to continue to be inflationary. You know, our expectation is mild inflation, we'll see with all the chaos in the world, who knows what's gonna happen.
It's not one commodity, right? It's many commodities. Again, you have the processing cuts and the retail cuts, of course, and then you've got domestic and international and there's different pricing, right, for different commodities. A lot of the press that you see is based on domestic pricing, which is very different than imports.
Okay. Got it. Appreciate the color there. It would just be great to get an update on Stampede and the cross-selling opportunities there and the extent to which we might see any of that kinda flow through later this year or into next year.
We couldn't be happier with Stampede. It's a great business, great management team. We've had a number of conferences to introduce the Stampede management team to the Premium Brands ecosystem. We had a leadership conference. We had a procurement conference. We're having an operations conference in about 10 days time. There has been all kinds of conversations around introducing them to our product lines and vice versa. They've introduced our companies to some of their customers and again, vice versa. Lots of positive movement there over the last 3 months. You know, again, we're very pleased with how things are going. Obviously, they're focused on managing their business overall.
You know, we couldn't be more excited about Stampede and having the management team join Premium Brands.
Okay, great. Just last for me, you know, in your slide deck, the acquisition pipeline appears to still be relatively thin versus last year. With your ongoing focus on delevering, can you just share your latest thoughts on M&A in this macro environment? Maybe taking that a step further, you know, if you are still active, should we expect any near-term acquisitions to maybe be smaller tuck-ins rather than, let's say, another Stampede-sized transaction?
Yeah. We will always do tuck-ins and smaller acquisitions. We try to support our different platforms with their different initiatives in terms of access to capacity or a product line that they wanna sell or they wanna get into and those type of things. We will always be in discussions with regards to the smaller type of acquisitions. As Will said, we're gonna be disciplined. It to the extent that we do any, they will not stretch the balance sheet in any way or weaken the balance sheet in any way. We will do lots of those, and we have a lot of those in the pipeline. Again, we're in a lot of discussions.
With regards to anything larger, you know, a lot of stars need to line up for us to do a larger acquisition. Are we in discussions with regards to larger acquisitions? Of course, we are. We're always in those type of discussions. Again, we don't see anything imminent. As I said earlier, a lot of stars need to line up for us to do that.
Okay. Thanks very much.
Thank you.
Thanks, Ryland.
Thank you. We have no further questions. I will turn the call back over to George Paleologou for closing comments.
Yeah. Thank you, Joanna. I just wanna say that we have never been more excited about our future, and we look forward to reporting to you on our progress in the quarters to come. As I keep mentioning in my CEO letters, my CEO letter for this year should be coming out in the next couple of weeks. In my prepared remarks, the food industry is at an inflection point, and consumers are moving away from ultra-processed foods to foods that contribute to their well-being. Over the past couple of years, we completely transformed our business model, adding substantial capacity to our plant network in the U.S., as you know.
Although we have grown a lot in this market over the past 5 years, we still believe that we're that our business there is still at its early innings, and we have incredible growth runways ahead of us. Thank you for attending today. Back to you, Joanna.
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating, and we ask that you please disconnect your line.