Premium Brands : 2022 CEO Message to Shareholders — The Next Five Years — Accelerating Growth

Letter To Shareholders

The Next Five Years - Accelerating Growth

2022 Lookback

In last year's letter I described 2021 as one of the most challenging operating environments in my 35 years in the food industry. Then came 2022. Not only did the many challenges of 2021 carry over to 2022, but they were further exacerbated by new geopolitical events such as Russia's invasion of Ukraine that led to further supply chain and commodity market disruptions. This was then followed by some of the most aggressive rate hikes by central banks in recent history as the hoped-for transitory nature of inflation quickly disappeared and inflation rates hit 30+ year highs. The combination of these factors resulted in the cost of some of our product ingredients increasing by over 300%. Despite the many unique and unusual challenges of 2022, we were, however, able to again generate record financial results while continuing to build the foundations for further success in the future.

The following shows some of the key metrics we use to assess the performance of our business.

A tough year but with a silver lining

Organic volume growth rate (OVGR)

2022 was the first time in 19 years that we did not meet or exceed our long-term targeted OVGR range of 4% to 6%. A key reason for this was the extreme cost inflation we experienced over the course of the year. You may think this relates to demand destruction caused by higher selling prices, but apart from a few exceptions it wasn't. Rather, the primary impact of inflation on our sales was the result of disciplined margin management by our businesses. In short what happened was as follows. As the cost of inputs used by our businesses increased sharply, they were obligated to provide as much as three months' notice to their retail customers before moving prices up as needed - a relatively standard practice in the retail industry. Our businesses reacted to this notice period by pulling back on product promotion to protect their margins and avoid utilizing their production assets for low margin or unprofitable sales. Hence, less growth but the preservation of their cash flows and production assets. The good news is that with the cost of many of the key inputs used by our businesses stabilizing, and even decreasing in some cases, their product contribution margins have returned to targeted levels and they are once again actively featuring and promoting their products.

Another key factor impacting our OVGR in 2022 was that the chaotic environment of 2022 was not conducive to launching new and innovative products as many retailers and foodservice operators were instead focused on managing the lingering impacts of the pandemic. Leveraging product innovation to find white space opportunities is a major growth driver for our businesses and has played a key role in our past success. Correspondingly, when many of our customers backed away from in-person innovation sessions we temporarily lost this growth driver. Here too there is good news. Throughout the pandemic our businesses continued to invest in their innovation pipelines and the capacity needed to support their new product initiatives. This is now starting to pay off as things return to normal and our customers look to us to bring them the next generation of new and innovative food products that will capture the attention of consumers.

Adjusted EBITDA

Our adjusted EBITDA margin for 2022 was impacted by rapid and extreme cost inflation combined with the selling price notice periods I discussed above (the estimated impact of the selling price notice periods on our 2022 adjusted EBITDA was approximately $42 million), but the key factor that prevented us from achieving our 10% target was the almost $2 billion in investments (acquisitions and project capital expenditures) we have made over the last five years to support our long-term growth objectives. These have resulted in higher operating costs and temporarily lower margins while we grow into these investments. With the chaos of the last few years slipping into the rear-view mirror and the momentum of our organic growth initiatives, we are very well positioned to achieve our 10% target within the next couple of years.

RONA

Our RONA for 2022 is below our long-term target of 15% due primarily to two factors. The first is the nature of our investments. From a financial metrics perspective, all our capital allocation decisions are based on generating a minimum expected internal rate of return of 15% after tax and unlevered, generally using a ten-year financial model. The annual return on an investment is, however, more often lower in the initial years then, as we leverage capacity and generate revenue synergies, increases substantially over time. Correspondingly it is normal for the RONA on our investments to initially be below our 15% target then over time well exceed it. This maturity process normally takes two to four years, which brings me to the second major factor impacting our current RONA, namely the chaos of the last three years that has resulted in the timeline for many of our recent investments being pushed out. Our long-term outlook for these investments, however, has only gotten more bullish as we see the momentum being generated in the current, much more stable and predictable economic environment.

This cycle of low initial returns followed by longer term superior returns is embedded in the history of Premium Brands. While our annual RONA over the last 19 years has periodically been below our 15% target, generally due to heavy investment cycles, we have generated for our long-term shareholders a 19.5-year compounded annual return through dividends and capital appreciation of approximately 20%. In reading Warren Buffett's recent letter to Berkshire shareholders, I was inspired by how closely our story resembles two of the more successful investments he highlights, namely Coca Cola and American Express. Mr. Buffett outlines that by owning these two companies over a long period (18 years and 17 years, respectively) Berkshire is now generating average dividend yields on its original investments of approximately 54% and 23%, respectively, while earning compounded annual returns on the original investments of approximately 18% through capital appreciation. In our case, a shareholder who has held our shares for 19.5 years is now generating a dividend yield of approximately 36% and will have earned a compounded annual return on their original investment of almost 14% through capital appreciation.

Both Mr. Buffett's examples and Premium Brands illustrate the importance and potential of focusing on the long-term prospects of a company and not getting caught up in the short-term gyrations that seem to be increasingly driving investors' behavior in the capital markets. I cannot stress enough how engrained into our culture is a focus on long-term strategic thinking and creating long-term sustainable value for our shareholders. We do not take short cuts, which sometimes means having to endure short-term pain to achieve long-term gains.

Organic Growth

Organic growth of our high margin specialty food businesses has been and will continue to be a key driver for creating long-term sustainable shareholder value, and while there are many things going on in the world that can cause me to lose sleep, our long-term organic growth prospects is not one of them. This is for three simple reasons.

First, is our passionate focus on identifying, and investing in long-term sustainable trends. We spend a significant amount of time and resources on identifying these trends and they are fundamental to the criteria we use in assessing the acquisition of a new business or an investment in additional production capacity. This strategy not only ensures we are positioned in higher growth segments of the food industry, but also enables us to avoid fads and wasting capital on "flavor-of-the-day" product categories often highly publicized in mainstream media.

The key long-term trends, which we call the mega trends, currently guiding our decision making include:

• Growing demand for higher quality foods made with simpler, more wholesome ingredients and/or with differentiated attributes such as antibiotic free, no added hormones or use of organic ingredients;
• Increased reliance on healthier and less processed convenience-oriented foods both for on-the-go snacking as well as easy meal preparation, both at home and in foodservice;
• Healthier eating, including reduced sugar consumption and an increased emphasis on animal protein and seafood. Furthermore, purchasing animal protein that is produced using farming practices that promote regenerative agriculture and soil biodiversity, and seafood that is harvested using sustainable practices;
• Increased snacking in between and in place of meals;
• Increased interest in understanding the provenance of individual food products; and
• Increased social awareness of issues such as reconciliation with Indigenous Peoples, sustainability, and ethical supply chain practices.

Our focus on these mega trends is how we avoided getting pulled into the relentlessly promoted plant protein-based meats category. When these products were at the peak of their hype, we had many investors challenging us for not investing in them, especially as many well-known food companies placed large bets in this category. It was, however, clear to us that these products did not fit with many of our identified mega trends, and correspondingly it was an easy decision not to invest. The passage of time continues to validate our decision.

Second, is our core strategy of a decentralized structure that empowers our incredibly talented and passionate entrepreneurial teams to drive growth within their businesses. This allows them to rapidly identify and react to new growth opportunities in the marketplace, and when combined with the resources available to them as part of a much larger entity, including capital, uniquely positions them to gain the first mover advantage in the specialty food space.

Third, which stems from the passionately entrepreneurial cultures of our businesses, is how product innovation is built into the DNA of our businesses. As I discussed earlier, our growth has been hampered in recent years as the impacts of the pandemic resulted in our retail and foodservice customers not prioritizing new product innovation. With things getting back to normal, our customers are more than ever looking to bring new and exciting products to market. Correspondingly, our businesses' product innovation pipelines are incredibly robust and we are batting close to a thousand in the new format innovation sessions we have been having with existing and potential customers in Canada, the U.S. and even internationally.

Five-Year Plan

For the third time in a row, we exceeded our five-year plan revenue target a year or more ahead of schedule. In 2018 we set the objective of achieving $6 billion in sales by 2023 while our 2022 sales came in at just over $6 billion. In 2018 we also set for the first time an adjusted EBITDA target, which was $600 million. While we did not achieve this target ahead of schedule due to the factors I discussed earlier, we are confident we will achieve it on plan in 2023 based on our current trajectory. It is hard to believe that a little over 19 years ago we were a small western Canada focused company with sales of $182 million and adjusted EBITDA of $14 million. I clearly remember back to 2010 when for the first time we publicly announced our five-year plan, which was targeting $1 billion in sales by 2015, and thinking what an amazing accomplishment that would be. I did not quite appreciate then how unique our business model was and, as we replicated the success we had in western Canada to the rest of Canada, our sales quickly grew to over $3 billion by 2018.

Until 2017 we were largely focused on Canada but that changed dramatically in late 2017 and into 2018 with our investments in Raybern's, Buddy's Kitchen, Oberto's, Shaw Bakers and Ready Seafood, all amazing U.S. based companies with passionate and talented management teams and, most importantly, cultures that fit with ours. These transactions not only gave us platforms in several high growth product categories in the U.S. but also greatly increased the general awareness of our unique business model by U.S. based food industry entrepreneurs. Correspondingly, it did not take long to go from $3 billion in sales to $6 billion and for our acquisition pipeline to expand exponentially.

Our U.S. based platforms have delivered exceptional growth since 2017 despite lacking the capacity to pursue larger sales initiatives with customers that have national footprints - the percentage of our Specialty Foods segment's sales from U.S. based businesses has grown from less than 44% in 2017 to well over 50% today, while the segment's annual sales have grown over this same period from $1.3 billion to more than $3.7 billion. This leads me to our most recent five- year plan, which we announced in March, to achieve $10 billion in sales and $1 billion in adjusted EBITDA by 2027. The unique part of this plan is that we have the clearest path yet to how we are going to achieve these objectives as our targeted organic growth initiatives, largely driven by production capacity investments being made by our U.S. based platforms, are projected to get us to annual sales of $9.5 billion over this period, meaning that only $500 million in sales from acquisitions are needed to achieve our target. Historically, assumed acquisitions played a much larger role in how we expected to achieve our five-year targets. Our reduced reliance on acquisitions to achieve our goals is not, however, due to a change in our acquisitions strategy, but rather our current five-year plan is just very conservative.

My final comment on our five-year plan relates to our $1 billion adjusted EBITDA target, which equates to a 10% margin. I just want to highlight that we were even more conservative in setting this objective on the basis of positioning ourselves to exceed it at least a year early, even if 2026 sees challenges similar to those we experienced in 2022.

Issuer Bid

In 2022, we repurchased 167,086 of our common shares at an average price of $81.68 per share. While the purchase price was far below what we view as the intrinsic value of our shares, it was with mixed feelings that we limited our buying. On one hand, we viewed this investment as highly accretive with very low risk to our shareholders, however our exuberance had to be tempered as we wanted to ensure we had the liquidity and balance sheet needed to support the growth objectives of our many wonderful businesses. We did, however, as part of balancing these two competing concerns, temporarily increase our return expectations on new capital allocations to our businesses to above the 15% IRR threshold I discussed earlier.

We fully appreciate the scarcity of capital and the trust we have been given in managing it for our shareholders. Correspondingly, we hold ourselves and our partner entrepreneurs to the highest standards of stewardship in preserving and investing the capital entrusted to us.

Environmental, Social and Governance (ESG)

We will be issuing our fourth annual ESG report later this year which will again provide a comprehensive update on our progress on the various ESG objectives we have set for our company. In advance of the report, I want to touch on a few of the key topics that are currently top-of-mind for us.

Diversity, Equity and Inclusion (DEI) Initiatives

I am especially encouraged by the progress we have made over the last year in promoting the principles of DEI across our company. Having recently helped to set up two PB committees in this area, The Women of PB and PB DEI committees, for both of which I am the corporate sponsor, I am seeing firsthand the solid progress being made by our businesses. Other DEI related initiatives recently implemented across all our businesses include ongoing web-based unconscious bias training and new procedures to improve the transparency of our hiring practices. Developing DEI across our company makes us stronger and more resilient and correspondingly this is an area of our business we will continue to prioritize.

Environmental and Sustainability Initiatives

We also made solid progress towards our environmental and sustainability objectives through targeted reductions in the waste and carbon emissions generated by our businesses and our continued support of regenerative farming practices both locally and globally. We are avid students of the interconnection between the health of our planet and the health of people and are pleased to see the progress being made in understanding the science behind this interconnectivity. This includes the connection between people's health, maintaining a healthy microbiome, regenerative agricultural practices, promoting soil biodiversity and generally reducing the use of chemicals and toxins in the food supply chain.

We are firm believers that our practical, continuous improvement driven approach to sustainability and the environment will reward our long-term shareholders with financial success while helping to improve the health of people and our planet.