Premium Brands Holdings Corporation

Thank you, Misty. Welcome everyone to our 2021 third quarter conference call.

With me today, I have our CFO, Will Kalutycz. Our presentation today will follow the deck that was posted on our website this morning.

We're now in Slide 5, which outlines certain key high for the quarter. Despite the various well-documented challenges facing the manufacturing sector and the overall economy, we reported excellent results for the quarter and year-to-date.

Our CFO, Will Kalutycz will provide you with more color on our results later on in the presentation. Commodity cost inflation, supply chain issues and labor shortages continue to challenge our various platforms almost daily.

Our strong results for the quarter demonstrate the balance and resilience of our unique business model and its ability to continue to deliver above average and consistent returns to our shareholders despite headwinds. Food service demand returned during the quarter while our seafood group delivered record results.

In addition, our meat snacks charcuterie, food protein and sandwich platforms continue to perform well. Clearwater seafood once again had an excellent quarter and results are running well ahead of plan.

Clearwater's results are benefiting from robust demand and strong pricing for its products, combined with proactive and disciplined cost management. We remain very encouraged with what we see in terms of seafood related consumer trends and we're very well positioned to capitalize on these trends in both retail and food service in North America and globally.

Our original investment thesis that seafood is at the intersection of several powerful consumer trends like health and wellness, convenience and aging demographics is beginning to translate into excellent financial performance for a seafood platform. We're pleased to announce the closing of two strategic acquisitions after the end of the third quarter.

Maid-Rite which is located in Pennsylvania, U.S. compliments our cooked meat platform very well, while Westmorland further strengthens our value added lobster business.

Both companies have been highly successful and are run by very talented entrepreneurs whom we welcome as partners. We're now on Slide 6 to 9; I have included here some pictures of new products recently launched by the PPE ecosystem.

I'm sure you'll agree with me that the products look amazing and demonstrate our passion for innovation and for reinventing and disrupting the traditional food chain with best in class, clean, wholesome and great tasting products. We're now on Slide 10, as you can see, our acquisition pipeline remains very full and we expect to complete many more transactions in the months and years to come.

You will notice that the active and advanced files add up to $1.4 billion in sales. I will now pass the presentation to our CFO, Will Kalutycz who will update you on our financial results for the quarter.

Will?

Thanks George. Before I begin I would like to remind you that some of the statements made on today's call may constitute forward looking information and our future results may differ material from what we discuss.

Please refer to our MD&A for fiscal 2020 and for the third quarter of 2021, as well as other information on our website for a broader description of the risk factors that could affect our performance. Okay.

Now turning to the quarter, I'm on Slide 12, talking about our sales. Sales for the quarter were $1.341 billion, up $240 million from 2020 representing a 22% increase.

The major drivers of that was by far the largest was selling price inflation, roughly $120.6 million in the quarter. This is very broad based across all of our business and pretty well across all of our product categories.

Acquisitions contributed about $96 million to our growth. Organic volume growth contributed $51.1 million, and that came from our specialty food – within our specialty food segment from sandwiches, meat snacks, charcuterie and cooked protein products., and within our premium food distribution segment from the retail expansion initiatives.

COVID related factors had a relatively neutral impact on our quarter. As we saw a tremendous comeback in our food service sales rough, roughly $26.4 million of growth in the quarter.

And that was – but however that was mainly offset or primarily offset by a recovery or return to normal demand levels in the retail channel, which resulted in a decline of about $25.8 million giving the overall impact relative new – a neutral impact. And I'll discuss about that more in a later slide.

Our sales were also negatively infected by the stronger Canadian dollar, which resulted in a lower translated value for our U.S. based businesses.

Looking at the COVID related impact on our quarter; we estimate that to be about $33 million continuing impact, and I'll talk a bit more about that in a later slide. Normalizing for that our sales for the quarter are $1.375 billion.

Turning to Slide 13, talking about our organic growth rates for the quarter; overall growth rate for the quarter was 4.6% or 4.7%, which is down from where we've been trending the last number of quarters. And that was primarily due to a number of what we consider transitory factors.

Within our specialty foods group we had some capacity related issues in the meat snack and kabob categories, this resulted in about $21 million of short shipments. Our specialty food businesses also particularly our branded businesses did a lot less featuring during the quarter it's part of the normal sales cycle.

However, they pulled back as a result of both margin pressures from the commodity price inflation we were seeing out there and as they put through price increases there's delays in that, and one way they manage those delays is through less featuring, and then also with labor and supply chain challenges impacting the ability to grow as well in the short term. On our premium food distribution group we saw some transitory impacts with less live lobster featuring as a result of record high lobster prices.

And I'll show you that in a bit on another slide, as well as longer term we see a key growth driver and our premium food distribution group being the food service channel and while we saw tremendous recovery in that channel from the COVID related impacts last year, it's still in recovery mode. So if we look at the two segments and sort of analyze their organic growth list little bit, I want to show how there's a lot of tremendous activity, a lot of growth going on under there and sort of try and filter out some of these transitory impacts.

So if we look at specialty food groups, their organic growth rate volume growth rate for the quarter was 5.5%. We normalize for COVID factors, namely the recovery or the reversal of the retail demand bump we saw in 2020, their normalized rate for that is about 7%.

And then if we normalize for the shorts meat snack and kabob shorts, they're close to a 10% growth rate for the quarter, which is getting closer to our medium term expectations of the growth in that category. And that's before considering the featuring impacts and the supply chain impacts.

In terms of our premium food distribution group, its organic volume growth for the quarter was 3.2%. Once we normalize for the food service recovery their sales are relatively flat 0.3% at organic growth rate.

But then when we take into account the impacts of the reduced live lobster featuring again, a transitory impact and reduced exports due to supply chain challenges in Asia, their growth rate is about 6.2%. So again, approaching our longer term expectations with that group particularly given that we're not seeing the organic growth yet coming from food service.

Turning to the next Slide, it shows some of our – most of our major growth initiatives across our six platforms. The ones highlighted in yellow are the ones contributing to the quarter, and the un-highlighted ones are ones that are in the works and are expected to be major drivers of organic growth in the future.

So lots of good stuff to come. Turning a Slide 15; this is a summary of our major capacity expansion initiatives across the six platforms.

The ones with no highlighting are completed, and those are contributing to our current organic growth. The ones highlighted are ones in the works that we’ll address some of the capacity issues we're having today.

And you can see particularly in our protein group, we've got three major initiatives underway, all focused on the meat snack category, which we've been seeing tremendous growth as we roll out our U.S. based strategies.

And then in our sandwich group, we've got three major projects as well as that that group continues to generate high double digit organic volume growth. Turning to Slide 16, and just talking a bit about the impact of COVID related factors on Q3.

Starting the Premium Food Distribution group you can see, we saw a good recovery in food service sales, roughly $21 million of recovery from the 2020 impacts and then that was partially offset by the reversal of that unusual demand we saw in the retail channel in 2020; so overall a favorable impact of about $11 million in the Premium Food Distribution group. In our Specialty Food group we saw some food service recovery, positive impact, but that was by far offset by the reversal in the retail demand impact, giving them an overall sort of negative impact of just a little under $11 million.

Once you net the two segments you can see overall COVID related factors was a neutral factor on the quarter, overall organic volume growth. Turning to the next Slide, talks a little bit about the continuing impact of COVID on our business in the quarter.

Looking at Premium Food Distribution group, you can see most of the continuing impact is on their cruise line business. We saw very little recovery in that in the third quarter.

We do expect to start seeing that ramp up in Q4 and then and even quicker in Q1 next year. And then also a little bit of continuing food service impact, mainly related to hotels and events, and the fact that Q3 was sort of a ramp up quarter for food service.

So overall the continuing impact in the third quarter on premium food distribution roughly $12 million. Looking at the Specialty Foods group you can see airlines, we saw some recovery of airline business in the quarter, but it's still relatively small.

We expect to see that improving in Q4 and again Q1 next year. So continuing impact in Q3 of about $7 million and then continuing food service impacts relating mainly to hotels and institutions and then the ramp up factor in Q3.

You can see on the retail side, we've pretty well reversed the full extent of what we estimated the unusual COVID demand bump to be in 2020. So going forward that should no longer be a factor.

And then we had some new impacts in the quarter, roughly $8 million relating to supply chain challenges, mainly some procurement issues on some very high valued pork items, and then some plant shutdown issues in our burger division. So we do expect all of that to reverse in 2022.

So the overall impact on specialty foods about $20.6 million and then the combined impact on the two segments roughly $33 million in the quarter. Turning the Slide 18, and looking ahead a little bit, the green line represents our weekly sales volumes or sales for 2021, the blue line for 2020, the gold line for 2019.

You can see post the third quarter we continue to generate very strong sales momentum driven by organic growth, COVID recovery, as well as inflation. Turning the Slide 19, looking at our EBITDA for the quarter, it was $122.6 million representing an increase of $29.1 million or 31% from 2020.

Looking at the major drivers, clearly selling price inflation, acquisitions, organic growth for the big three drivers. Following them we did see some reversal of COVID related costs from 2020, mainly plaintiff inefficiencies and staff thank you bonuses paid out last year, that weren't incurred this year.

We also saw a reduction in our marketing and promotion cost, kind of it ties back to my comment earlier on our branded businesses doing less featuring as a strategy to manage their margins as well as deal with some labor growth issues. We continued to see production efficiency improvements and in our Specialty Food group there was some reduced incentive based compensation accruals.

Offsetting these positive factors were incredible commodity cost inflation we saw it across all of our commodity inputs as well as just general costs. That pretty well offset our selling price increases for the quarter.

Our businesses are continuing to put through more selling price increases post the quarter, as well as in the quarter that 120 million selling prices we saw was a transitioning of initiatives so it wasn't the full impact that the current price increases put through. So while commodity costs continue to rise, we are addressing it with selling price increases.

Wage inflation was another significant factor in the quarter. Plant overhead increases some of that due to our higher volumes, but also we did have to take much more significant inventory positions just to manage our way through the supply chain disruptions we're seeing and that created a lot of additional costs particularly in outside storage.

Then we also saw some freight inflation and the impact of the stronger Canadian dollar on the translation of our Canadian or sorry, our U.S. based businesses.

Our EBITDA margin for the quarter was 9.1%, a nice improvement from 2020, which was 8.5%. Still below expectations because of the commodity price inflation primarily and also the impacts of – the continuing impacts of COVID.

If we look at the impact of COVID on the quarter, we estimate that to be about $7.6 million, primarily all of that related to the sales impact I talked about earlier. Normalizing for that our EBITDA margin for the quarter is about 9.5%.

Turning to Slide 20, the next four Slides 20 to 24 all indicate or show you the trends in some of the key commodity inputs used by our businesses. In all four slides, you'll see this story is very similar.

It's one of increasing demand with the reopening of economies, particularly North America and Asian economies, and then offsetting or creating tight in the market is supply challenges relating to labor, relating to supply chain disruption. So we kind of have a worst case scenario of increasing demand and sluggish supply growth, and as a result the tremendous inflation we've been seeing.

So in all these slides, you'll see the commodities are at record highs. This one shows a basket of pork based products that we purchase, our businesses purchases.

You can see all at record highs. If you flip to the next slide for beef, again all at record highs.

I know there's stories in our company of some of our businesses on certain beef products because of such high increases in these costs of these products have had to put through price increases as high as 24% on certain beef entree products. Next slide shows you lobsters, again record highs, and then finally the last slide Atlantic and Chilean salmon, both at record highs.

Turning to Slide 24 and our adjusted earnings for the quarter which were $57.8 million, an increase of 15.8 million or 37.6% from 2020. The key driver of that was our EBITDA growth and then that was offset by a little bit of increases in our depreciation as a result of acquisitions and recent capital projects and also some additional interest expanse due to higher debt balances, partially offset by favorable market conditions and better credit spreads on our senior debt.

Then also increased income taxes offset our EBITDA growth. Looking at the impact of COVID, taking the impact on our EBITDA of $7.6 million, which after taxes about $5.7 million, are normalized for COVID earnings would be about $63.5 million or $1.46 per share.

Turning to Slide 25 and the results of our recent investment Clearwater Seafood, a very good quarter as George mentioned earlier. Their sales increased by $24.7 million or – $24.7 million from 2020 to $158.4 million.

This was driven by primarily the reopening of the economies in North America and Asia, which provided a tremendous amount of price inflation, which benefits Clearwater in their seafood commodities, as well as some volume increases and then offsetting that with a stronger Canadian dollar and the translation of their U.S. are their exports with a large portion of which are U.S.

and euros, and then some lower crab sales resulted some procurement issues and the timing of landings. Clearwater's EBITDA for the quarter was $40.1 million, a $14.7 million or 58% increase from 2020.

This was driven by the strong pricing environment based on the nature of Clearwater's business, whereby as a harvester of many of their species, their costs are relatively fixed. So they benefited immensely from the inflation we've seen across all proteins including seafood.

Then also organic growth was a positive contributor, some operational efficiency partially due to better catches this year as well as the reversal of some pandemic related inefficiencies last year. And finally some positive FX hedging gains and then these were offset partially by the reversal of governed subsidies last year, as well as increased incentive accruals.

Turning to Slide 26 and talking a little bit about our five-year outlook. We set back in 2018 and objectives to have $6 billion in sales and $600 million in EBITDA by 2023, walking through where we are in terms of our sales target.

You can see our sales for the trailing 12 months at the end of Q3 we're $4.642 billion. If we normalize for the trailing $12 months impact of the pandemic or COVID related factors that's about $179 million.

And then we annualize for acquisitions completed part through 2020 or in 2021. That's an impact of about $423 million giving us a current run rate of $5.244 billion.

And then if we look ahead to 2022, 2023 make a very conservative growth assumption of nominal growth of 6%, the reality is we've been growing at a volume growth of roughly 8.5% over the last two years or over 10% nominal terms. So again a very conservative assumption that would give us about $648 million of growth leaving us with only the need to complete about $170 million in acquisitions to achieve our $6 billion target.

And as George mentioned, we have well over $1.4 billion in acquisitions in the pipeline is active or advanced, and even just in the advanced acquisition pool, which are transactions where we have assigned that's about $116 million in sales. So correspondingly we're very bullish on exceeding our 2023 sales target.

And next I'll turn over to EBITDA which is on Slide 27. Again going through a similar calculation, the trailing 12 months is $405 million of EBITDA normalizing for COVID related sales impacts, that's the $33.8 million impact on EBITDA and then annual of acquisitions and our Clearwater investment income brings us to a run rate EBITDA of about $504 million, which represents a 9.6% EBITDA margin.

And then we add in EBITDA related to the growth assumption we made on the earlier side using a conservative contribution margin of 20%. That's about $130 million, and then a conservative estimate of the EBITDA from our acquisition assumption that would take us to about $642 million, $643 million in EBITDA.

So again well ahead of our target, both in terms of dollars and percentages. Turning over to Slide 28 on capital allocation; during the quarter we allocated $34.2 million in capital to acquisitions and capital projects.

And by capital projects, we're defining those as generating return of at least 15% or greater on an after tax unlevered basis. Really the capital project expenditures were across a variety of projects while the most significant investment in the quarter was in our Mermax acquisition.

For the year we've invested roughly $582 million in acquisitions in project capital expenditures and the total capital allocated with those initiatives are about $803 million leaving about $180 million still to spend on those initiatives. Looking forward subsequent to the quarter, we as George mentioned we completed the Westmorland and Maid-Rite acquisitions, which is about another $200 million of capital allocation.

And again just to reemphasize all of these investments, our expectations are a minimum 15% internal rate of return after tax unlevered. Turning to Slide 29, looking at our balance sheet, it continues to be very strong.

Our senior debt and total debt ratios were stable from Q2, our total debt-to-EBITDA ratio staying at 3.4 to 1 and our senior debt-to-EBITDA ratio staying at 2.1 to 1. Our overall credit capacity still remains strong at $426 million, down slightly from $50 million last quarter, as we've invested in the projects I mentioned on the previous page, as well as we made significant investments in working capital this past quarter driven in large part by inventory and the issues I talked about in terms of securing more inventory to protect against supply chain disruptions, as well as some inflation hedging.

Subsequent to the quarter, we renegotiated our senior revolving credit facility. We increased the facility by US$250 million, bringing the total to roughly a $1.5 billion facility.

And we extended the term maturity term date of facility to November 2026 i.e., another five years. And then finally we added some ESG linked targets, sustainability linked targets to the facility, mainly tied to our greenhouse gas emissions, food safety targets, and our employee diversity targets.

Turning to Slide 30, the final slide in the deck are free cash flow. Free cash flow for the quarter was $245 points – sorry on a trailing 12-month basis was $245.6 million representing a $56.8 million or 30% increase from 2020.

Our free cash flow per share was a record $5.80 per share as George mentioned earlier, representing $0.93 per share, or 19% increase from 2020. Our payout ratio for the quarter was 44.1%.

Or if you normalize for a full year at our current dividend policy rate and shares outstanding, it's 45.1%. That concludes the formal presentation for the quarter.

I will now turn it back to Misty for the questions section.

Yes. Hi, thanks for taking my questions.

In the SF you guys called out higher input costs that exceeded selling price increases in the quarter due to timing. So can you maybe quantify that, give us a sense of magnitude.

Just trying to get a sense of what I guess normalized margins are once price catches on to inflation?

Yes. So George, again, it, it's a, a challenging question in a sense that we're really not through what's been going on with commodities.

And so in the short-term, we're seeing some moderation in commodity costs in certain categories which is a positive, but still there's a lot of uncertainties there, how the supply chain is going to pick up what's going to happen with human demand. So in a short-term it challenging to answer your questions.

In the longer term we're of our businesses and their pricing strategies are focused on an EBITDA perspective that sort of 13% plus average in our Specialty Food group and it's roughly 7% average in our premium distribution group. You know, those are the targets in site and those have not changed.

Okay. George last quarter you mentioned that we lost about $25 million to $50 million in potential revenues owning to labor constraints.

Would you estimate that number to be bigger or smaller or the, this quarter?

No, I'd say it's about the same George, similar ratios. I'd say the second and the third quarter were very similar in terms of the challenges and the disruptions that we faced, nothing much has changed, so about the same.

Okay. I'm one last one if I made it was, it was some talk, last quarter was call about adding extra sandwich capacity.

Can you maybe give us a little bit of an update there and should we think of that investment as being maybe substantially higher than the unlevered kind of after tax IRR of 50% that you typically get from other capital projects?

Yes. So we announced two projects with the press release.

We announced a second facility in Columbus, 144,000 square foot to support our continued sort of artisan premium sandwich initiatives across North America, and then we also – and that was about US$25 million, US$26 million investment. And then we also announced a new plant for, to support a Canadian initiative based in Edmonton.

It both replaces an older facilities as well provides additional capacity and that's about a $17 million investment. So post those will be well suited to continue to drive some solid growth over the next couple of years.

In terms of IRRs you're absolutely right, George, those would be particularly the U.S. investment we expect to be higher than 15% minimum.

And I'll just like to add to that George that, that in general terms, the labor show shortages or the labor challenges that we're having are also driving a lot of the demand for our products, because a lot of our customers, a lot of our QSR customers in particular are trying to solve some of their labor issues by coming to us. So again the demand is there and it's even accelerating given some of the labor shortages that you're hearing out there in all parts of the economy.

Okay. Thanks for the answers.

Good luck.

Thanks, George.

Hi, good morning.

Good morning, Martin.

Good morning, Martin.

There's a selling price increases contributed a meaningful part to your revenue; you just mentioned $120 million during the quarter. You're talking about putting further price increases.

Just trying to understand, if you see these price increases as temporary or permanent under a scenario where we would see inflationary pressures abate next year. Could we see you decrease your selling prices?

I think in general terms Martin in the past we've raised prices of course to reflect commodity type of inflation and at times as commodity prices come down, then we will lower prices as well. Now, in terms of your inflation question, of course, right now we're facing other type of inflation including labor cost inflation.

Yes, so some of that inflation will – I think is permanent and some of it is more temporary. So again, we're monitoring it.

We're managing it, and as, Will, said earlier, I think that there some commodity inflation which normally will pass on to our customers and sort of maintain our margins at consistent levels.

Yes. And Martin it's interesting in a number of our, especially our branded protein businesses, some of the more differentiated products, these do set new consumer price points.

So there is some permanent recapture of that margin, but what businesses will often do is they'll use that additional margin to drive additional featuring. And so similar to how featuring was a negative impact on this quarter because of managing their margins, in the future it could be an acceleration of their organic volume growth as they use that additional margin to generate new demand.

Okay. Okay.

That's helpful. And just wanted maybe have a little bit more color on your recent acquisitions.

Westmorland seems to be the largest one you've done this year, aside from Clearwater. Can you give a little bit of color at what attracted you to that business?

The kind of historical growth rates, they've generated potential for cross selling synergies, anything like that would be helpful?

Yes. I'll start Martin by saying that Westmorland is a very, very well managed company built by a very successful entrepreneur.

They're a big player in lobster meat. This is an area that we've spent a lot of capital and a lot of effort with our investment in Ready Seafood.

We believe that lobster meat is a growing protein with respect to demand. We want to make it easier for consumers to consume lobster.

A lot of consumers don't want to buy the tails and have to fight to split it up and cook it. Our view is that we want to make it easier to for consumers and both in terms of at home consumption, as well as in restaurants and again Westmorland is a leading player in North America in this area.

So an actual fit for us.

Did you have that kind of offering before in terms of lobster meat?

Yes. When we invested in Ready Seafood, we built a facility that that basically separated the meat from the lobster and yes, it's a major category for us.

It's that we've done well there, Ready Seafood is done very well building category. There's some pictures of some of the products that offer meat products that we sell in the deck, and again Westmorland is a major player in that segment.

Perfect.

And it truly, it's a very exciting category, Martin. Ready Seafood made the investment in the Saco facility, as George mentioned, and the IRR we've seen in that facility it was all based on growth and it's just been fabulous.

And through COVID there's been a real sort of realization of the product by the consumer, both in retail and by food service customers across the U.S. So we're seeing tremendous growth opportunities and Westmorland is part of the Ready Food Group strategy to be able to benefit from that growth.

Perfect. Thank you.

Thank you, Martin.

Yes. Good afternoon, gentlemen and congratulations on another good quarter.

Maybe just talking continuing along the lines on the acquisitions, I was just curious on the split between the $20 million that you paid between the two companies and it may be on the – what the revenue contribute we should expect from both?

Yes. So vendors are very sensitive about individual prices.

So we don't talk about individual prices Derek, but in terms of sales Ready is about, Maid-Rite is about US$80 million in sale, or roughly yes US$80 million in sales and Westmorland about $140 million in sales, I believe. We've disclosed it in the MD&A so you'll have a chance to get the specific big numbers there.

And the valuations, if you wanted to sort of make some estimates, Maid-Rite's margin profile is very reflective of our Specialty Food group, while Westmorland's margin profile is very, very reflective of our Premium Food Distribution group.

Okay. That's helpful.

Thanks Will, and let me – like, how should we look at the timing of the unrecovered COVID or supply impacts over 2022?

Yes. So in terms of the third quarter, I would suspect – the impact we talked about the third quarter is $33 million, all of that should be gone by the third quarter of 2022, assuming things continue to normalize, right?

So airlines, cruise lines we expect that to normalize over the coming two quarters, the food service similarly, certainly by late next year that should be fully normalized in terms of maybe events and some of those sort of final components. But yes, certainly by Q3 next year we would expect that all to be gone.

Okay. And maybe just one last one for me is, and just remind us where you are in terms of the increased automation in the sandwich plants.

And maybe just talk about the decision behind building the – another sandwich facility in Wayne in Ohio, a second one in Ohio?

Yes. For us there as we said earlier we're seeing a lot of demand from various channels with regards to our products.

The decision around Ohio is that we already have a facility there in a management infrastructure there. So look at it as more of a satellite plant rather than a new plant, right.

It gives us 144,000 square foot of new capacity, and we already have an established management infrastructure there. So that was the logic behind Ohio.

And in terms of the automation initiatives again it's well known that labor is challenging. What we bring to the table for our customers is, is the fact that we are able to scale and automates.

So lot of automation initiatives, not just in our Sandwich group, but also throughout the company as we speak.

All right. Thanks, George.

Thanks Will.

Thanks, Derek.

Thanks, Derek.

Thank you. Good afternoon, guys.

Hey, Steve.

Hey, Steve.

A couple of follow-up questions just very quickly. In terms of Westmorland you cited – you noted that the margin profile is sort of reflective of the PFD Group.

Would that business sit in premium food distribution? Is that the way to think about it?

Correct. Yes.

It'll form part of our Seafood Group and Premium Food Distribution consists of the distribution in Seafood Groups.

Right. Okay, great.

Thank you. And then I just wanted to follow-up, you had some – you have some really good slides about the major growth initiative Slides 14 and then the CapEx expansion projects in on Slide 15.

I mean, it's a bit of a big question, but is there any way to quantify kind of what the revenue contribution could be from these growth initiatives in CapEx expansion projects? I mean, I guess as we think about beyond 2023, are these the kinds of things that, that drive growth beyond that 2023 target?

Yes. No.

Again in that 2023 target, I said that nominal growth of 6%. Yes, the reality, these are far in excess – these are drivers far in excess of that.

The way we look at growth, Steve is 4% to 6% volume growth is just sort of a no brainer. It's there, our market's growing faster than that, and that's easy to achieve.

And then as we invest in these capacity initiatives, these new initiatives those are the factors that are going to get us to that low or high-single-digits, low-double-digit growth rates. And that's exactly what these factors are.

Yes. If you look at what we've done historically Steve is, we're kind of shy in terms of investing until we prove the demand.

And once we prove the demand, we're not afraid to invest as we've done in the Sandwich Group for example, right. So yes, absolutely these – and we'll probably be coming out with our next five-year plan sometime in 2022 and all the sales projections will be adjusted in accordance to the capital we're spending in these areas.

Right. Okay.

Yes, that's helpful. And then maybe just one more question, more of a near-term question just thinking about the commodity inflation, labor inflation, supply chain issues understanding obviously that these are manageable over time, but when you think about Q4, I mean, is it safe to assume that these factors will still be a headwind, the price that you put through won't maybe may not be enough to offset some of those headwinds.

I'm just thinking more near-term versus longer term?

Yes. Near term Steve, I would say, as Will said earlier, it just depends on what happens to commodities.

Commodity inflation is a big part of the overall inflation. We're seeing so – we've seen a little bit of a downturn in terms of commodities more recently from the record level.

So I guess we'll see the rest – the rest, yes, there is some inflation in other areas of the business. It's pretty well manageable.

But Steve, I would add, and you saw this trend in the third quarter. Our premium food distribution group exceeded our expectations for the quarter, while especially food group was below expectations.

And really was one, a story of the reopening going better than we had planned and commodity prices taking off a lot stronger than we would have expected. And those trends will continue likely into the fourth quarter.

The effect of the commodities hopefully will be much lesser on the specialty food segment, as some other price increases take effect and like George said that we are starting to see some moderation in commodity prices, but in general terms those trends will likely continue. And now is the reason we moved our guidance for the year from being 1% to a range.

We're still very confident of being within our EBITDA range, but likely we'll be below that 9% target because of those factors.

Okay. Okay.

That's – that makes sense. Okay.

Well that's a great color. Thanks.

Thanks so much guys.

Okay, Steve.

Good morning guys.

Hey David.

Hey David.

Great results in a chaotic environment obviously here. So as you push through price increases, are you seeing anything at all in the way of any demand destruction, mid-growing concerns about inflation or stag inflation or are personal savings so strong that people are still spending.

And I know you guys are really nicely balanced that you have the food at home and away from home it does give you a bit of a balance there and you can capture people's eating or consumption patterns somewhere. So maybe just some thoughts on what you're seeing in the channels as far as the inflationary environment?

Yes. So David, we're certainly concerned about that.

We're not seeing.

Okay. Well, that's good again.

And I guess – I guess again, people have pretty thick pocket books right now, courtesy of the government I guess is spending at restaurant as well. And the supply chain...

David, can I just add – can I add David to that, that one of the things you have to remember is that we generally sell premium products, right? So that means that the consumers that buy our product tends to buy them for reasons other than price, that's a key differentiating point to premium brands.

No, absolutely. And on the supply chain, George and the challenges you guys are facing, we're kind of moving into the peak season, obviously lobster exports in the early part of the New Year.

Are you seeing any signs that some of these supply chain challenges are evading it to any degree?

Not really, David. I wouldn't say that.

In general terms for us, it just means longer lead times and more stockpiling and we've to adjust the way we do business basically, right, right. We're managing, it's different, but that generally again, we've adjusted it.

Okay. And you guys, obviously the Clearwater results have been – have been exceptionally strong.

And I think there was some concern out there that you might not depend on what the results were in the first year. I know you're not actually collecting till the second year, but does look increasingly confident that you might be able to receive your payment in the second year.

Is that how you're looking at it?

Yes. Hey David, can you do us a favor?

Can you mute your phone after you ask the question because we're getting a really bad echo from your phone?

Okay. Sorry about that.

Great. Thanks David.

David. Sorry, I guess it wasn't your phone.

We're still getting the echo. In terms of Clearwater, yes, no, status quo, David, you're absolutely right.

They're tracking well ahead of plan. And we would expect to see that interest payments start sooner.

But the reality is there's also to other exciting opportunities we're looking at with them. And so it – I can't commit to any one specific direction at this point.

Got it. And last one for me, more of a housekeeping issue, but by looking at your growth CapEx for next year, obviously you've expanded your lines et cetera, in part, because of the acquisitions you're doing, but also because you're investing in your plants.

Does the growth CapEx, looks like to me if I tell you everything up looks like it could be about $180 million next year. Am I off the mark there?

Yes, that sounds about right, David. I'd have to go back to the map and we're pretty upfront.

All of the projects that we're looking at are, that have been approved are in our MD&A. So – and the way we generally look at it is maintenance CapEx is roughly $30 million to $40 million a year.

General CapEx is roughly $30 million to $40 million per year, and then you have all the special projects, which as, you know, they're all disclosed in our MD&A.

Excellent. Thanks, gentlemen.

Thank you, David.

Thank you, David.

Thanks. Good morning guys.

Hey John.

We'll start with a quick housekeeping question. You gave some really compelling growth numbers for Seafood and Distribution in the quarter, but I'm wondering if you can quantify those even approximately versus 2019, rather than 2020, just trying to get a sense of how those are doing versus pre-COVID?

Yes. And John that's exactly what our COVID normalization calculation was when we went through the growth slides.

So we looked at when you – you take out, strip out inflation, the volume growth in the premium food group was 3%. And then you strip out the COVID impact and it was roughly flat with 2019.

In a premium food group, the specialty food group, you do that same calculation and it was roughly up 7% in volume terms from 2019.

Okay, understood. I know it's beating a dead horse, but the supply chain in particularly the labor constraints, I know no one's got a crystal ball on this, but we'd just like to get your sense of how long you expect this to last.

And are there any regional differences you're seeing that are worth calling up?

Yes. John, I would say we're feeling more confident in terms of Canada.

I think Canada is looking at opening the doors of immigration, a little wider I believe this coming year. So we're feeling more optimistic about this situation resolving itself sooner in Canada, U.S.

we don't know. We hope that this will be the case in the U.S.

as well. I mean, we have to remember that the majority of our industry in particular relies on the immigrants for labor.

So again feeling a little more positive about the U.S., the Canadian situation improving at this point.

Okay. Understood.

And then sticking with that, are the labor shortages within your operations? Do you find those are solvable by wage increases or are there other components like immigration or otherwise that you might need to fill that labor gap?

I would say John that we're using every tool of available to us to resolve these issues. Part of it, of course is wages, but again as I mentioned earlier automation is a big focus as well, effectively trying to reduce our, our dependency on, on label with regards to all of our operations, right.

So there's a lot of initiatives going on to deal with the situation.

Okay, got it. And then last one from me.

I wanted to ask about the 2023 EBITDA margin goal. It's a super helpful analysis you provided on a bottom up basis.

But if I think about this from top down, you're expecting to be sub 9% margin this year, which would mean you'd need at least 50 basis points of expansion each of the next two years. This is historically been a business that's grown sales at around the same rate as EBITDA.

So maybe just elaborate on what gives you confidence in the environment of food cost inflation and labor cost inflation that you can get that type of margin expansion on either on the existing business or on your required businesses.

Yes. In terms, again the compression we're seeing in our margins today in our minds is comp transitory.

We fully expect to recover whether it's through selling price increases or a normalization of commodity prices to recover that and get back to what is really the key driver of our margin expansion, which is sales leveraging. So, if you – and on that point, if you just normalize for the COVID sales impact and the animalization of our acquisitions, we're at a 9.6 – 9.5, 9.6 EBITDA margin.

So it's not that far to go and with some normalization of commodities, which it is obviously not built into that bridge we gave, we're very bullish on it being able to achieve that 10% plus EBITDA margin.

Okay. That's helpful.

Thank you. I'll pass it on.

Thanks, John.

Great. Thanks very much.

Just I guess along those similar lines, I think there's some commentary earlier around, the IR targets being around 15% for projects. Just looking at the ROIC over the last few years, it seems to be sort of in that high-single-data range, kind of maybe 10% this year.

Is it maybe the acquisition that are kind of keeping you from having sort of 15% ROIC or how do you think about the – that return metric sort of over the long run or is there a target for that?

Yes. No, it's very straightforward.

It's both acquisitions and capital projects, because the reality is in these projects, they're generally 10-year plus models. And quite often in the early years they're putting pressure on our return on investment.

And then as we start realizing on acquisition synergies we start realizing on capacity investments that ultimately was what is what generates those returns and that takes time to appreciate. So we may made some significant investments over the last three years that have pushed down , but 2020, 2021 should have been kind of a pivot year.

And certainly when we run our modeling and we do our normalizations for the impact of the pandemic, you do see the returns starting to turn back up, but ultimately yes. No, we're very confident that over time that you're going to see as these investments play out and we've got a history of that.

We went in earlier in our history, we went through a similar – it wasn't near to the degree because we were a much smaller company, but we went through a similar investment cycle where it pushed down and then as we started realizing the returns on those investments and we'd been very fairly stable on new investments for a period, you saw spike to what all over 17%.

Okay. So is the idea I guess here that after, so is the investment period maybe next few years or I'm just thinking in terms of timeline, is there a plan to sort of be around the 15% IR that you target otherwise?

Or is that sort of just, when the investment period stops?

Yes. No.

Again, yes, it's kind of a bit of the reality is, it should be in the relatively near future in terms of the commodity and the COVID transitory impacts going away and this stuff rolling out. But if everything else stayed the same, then yes, it would be a relatively short-term.

The only unknown is future investment, right? So we are continuing to invest in new sandwich facilities, meat snack facilities.

Our acquisition strategy is as George showed is we've got a tremendous pipeline. So it is a little bit challenging, but the exciting part is the growth.

And we see, part of our process Saba is we do with every significant investment we make. We do look back and the reality is our legacy investments are all exceeding targets.

And we see that unfortunately it's a little more challenging for you, but the reality is it is working. It's just it's being camouflaged by all the new investment and that is not going to stop fortunately or unfortunately.

Okay. That makes sense.

And then just kind of following up on the margin discussion earlier, and obviously the last couple of years or last year-and-a-half has been impacted by COVID and if we look at the, the specialty food segment here, I guess, what do you see as sort of the medium term potential here? I think, margins this year are obviously along the lines of your guidance, but, could we get north of that 10% over the next couple of years?

And is that going to be a change in mix or just operating leverage as you were talking about earlier?

Yes. No, absolutely, as I mentioned earlier sort of 13% plus our target for a Specialty Foods group.

So, and, but a lot of that is sales de-leveraging and then just the normalization of the commodity markets.

Okay, great. Thanks very much.

No problem.

Hi guys, just a quick question on the linking of your cost of debt capital to your ESG performance. It's an interesting concept that you've moved forward with here and probably something that'll be increasingly topical as the years go by.

So can you quickly provide maybe a bit more color? Is this something your lender brought to you or did you propose this to your lender and how meaningful is your issue performance on your ultimate cost of debt capital?

Yes. So this is something we brought to our lender.

We've been following the market. We've been very active in improving our reporting around ESG.

The principles of ESG have big core to our business since the beginning. And it just made sense given what we were seeing in the market that we reflect that, that focus in our credit facility.

At this point, it's not a huge factor. It's a plus or minus 5 basis points factor tied to the three metrics I mentioned earlier, but it's a step in the right direction.

And it's a signal of how important we view these principles and our continuing investment in them.

Got it. Well hats off to you Mr.

Paleologou.

Thanks Kyle.

Thanks Kyle.

Yes, guys. Just two more for me and its housekeeping.

I was wondering if you – well, if you have an idea of what the, I guess the pro forma leverage impacting the latest two acquisitions would be?

I should know that off the top of my head Derek, but I don't, but it really doesn't have a material impact on our overall financial position and covenants. There is some, but we'll certainly still be below our targeted range.

Right. Okay.

And a follow up on the CapEx; do you have a quick and dirty number that you're looking for 2022?

Total CapEx?

Again, yes. We talk about maintenance CapEx, sort of that $35 million on average, $30 million to $40 million a year in maintenance CapEx, you know, $30 million to $40 million on general CapEx across all of our different businesses, smaller projects.

And then just all the items we disclose in our MD&A as sort of above that – those two categories.

Okay. So all of the – all of what you've disclosed in the MD&A is 2022 CapEx?

Yes. Some of it goes into 2023, but the majority of it is in 2022.

Okay. Fair enough.

Thanks guys.

I'd like to thank everybody for attending today. Thank you very much.

Back to you Misty.