PREMIUM BRANDS HOLDINGS CORPORATION

Management's Discussion and Analysis

For the 13 and 52 Weeks Ended December 30, 2023

The following Management's Discussion and Analysis (MD&A) is a review of the financial performance and position of Premium Brands Holdings Corporation (the Company or Premium Brands) and is current to March 14, 2024. It should be read in conjunction with the Company's fiscal 2023 audited consolidated financial statements and the notes thereto, which are prepared in accordance with International Financial Reporting Standards (IFRS). These documents, as well as additional information on the Company, are filed electronically through the System for Electronic Document Analysis and Retrieval (SEDAR+) and are available online at www.sedarplus.ca.

All amounts are expressed in Canadian dollars except as noted otherwise.

BUSINESS OVERVIEW

Premium Brands is an investment platform focused on acquiring and building food businesses in partnership with talented entrepreneurial management teams. Its current holdings consist primarily of:

Specialty food businesses. The Company considers the key characteristic of a specialty food business to be that a consumer's and/or customer's decision to purchase its products is based primarily on factors other than price, such as quality, convenience, health and/or lifestyle. As a result, specialty food businesses generally earn higher and more consistent selling margins relative to food companies that focus on less differentiated products. Furthermore, due to a variety of consumer trends impacting the food industry, these businesses tend to generate higher sales growth rates as compared to large national and international food companies.

Differentiated food distribution and wholesale businesses ("premium food distribution businesses"). The Company considers the key characteristic of a premium food distribution business to be that it offers its customers specialized and/or unique products and services in addition to logistical solutions. This enables it to generate higher and more consistent selling margins relative to the large national and international food distributors that are primarily focused on logistics.

The Company's premium food distribution businesses also enable it to generate and sustain additional margin by using these businesses to provide its specialty food businesses with proprietary access to a broad and diversified customer base that includes regional and specialty grocery retailers, restaurants, hotels and institutions.

SELECT ANNUAL INFORMATION

The following is a summary of select annual consolidated financial information. Adjusted EBITDA, free cash flow per share, net senior debt and RONA are non-GAAP measures, and all other amounts are derived from the Company's audited consolidated financial statements for each of the three most recently completed financial years prepared in accordance with IFRS.

The calculation of RONA is shown below. See Results of Operations for the calculation of adjusted

EBITDA.

(in millions of dollars except per share amounts)

52 weeks

53 weeks

52 weeks

ended

ended

ended

Dec 30, 2023

Dec 31, 2022

Dec 25, 2021

Revenue

6,261.0

6,029.8

4,931.7

Adjusted EBITDA (1)

559.1

504.2

430.7

Earnings

94.2

160.1

132.7

Basic earnings per share

2.12

3.59

3.05

Diluted earnings per share

2.11

3.57

3.04

Total assets

5,158.1

5,078.6

4,408.9

Net senior debt (2)

1,504.8

1,458.3

1,102.6

Long-term financial liabilities (3)

1,996.9

1,906.5

1,409.6

RONA (4)

10.7%

10.3%

10.6%

Dividends declared per share

3.08

2.80

2.54

Free cash flow per share (5) (6)

5.70

6.41

6.05

  1. Adjusted EBITDA is not defined under IFRS. See Results of Operations - Adjusted EBITDA for the description and calculation of Adjusted
    EBITDA.
  2. Net senior debt is not defined under IFRS. Net senior debt excludes cash and includes the current and long-term portion of long-term debt, bank indebtedness and outstanding cheques.
  3. Excludes deferred financing costs and includes the current and long-term portions of long-term debt, pension obligations and convertible unsecured subordinated debentures.
  4. RONA is not defined under IFRS. See Business Overview - RONA for the description and calculation of RONA.
  5. Free cash flow is not defined under IFRS. See Liquidity and Capital Resources - Dividends - Free Cash Flow for the description and calculation of free cash flow.
  6. Free cash flow per share is calculated as free cash flow divided by the weighted average shares outstanding for the applicable period.

2

Revenue and Earnings

The Company has grown its revenue and adjusted EBITDA for each of the last three years through a combination of business acquisitions and organic growth initiatives. Its earnings and earnings per share have been more volatile due to a variety of factors including: (i) higher debt levels associated with work- in-progress project capital expenditures (see Liquidity and Capital Resources - Capital Expenditures) in 2023 and to a lesser extent 2022; (ii) significant increases in interest rates in 2023; (iii) rising plant start-up and restructuring costs from 2021 to 2023 as the Company ramps up an increasing number of major capacity expansion and production automation projects; (iv) a $30.0 million gain in 2021 resulting from the revaluation of the conversion options attached to its outstanding convertible debentures; and

(v) a $19.8 million fair value gain on investments in associates in 2022.

Total Assets

The increases in the Company's total assets over the last two years were primarily due to investments in business acquisitions, project capital expenditures and working capital assets, primarily all of which were based on: (i) pursuing growth opportunities; and (ii) in the case of working capital, holding larger inventory positions to mitigate the Company's exposure to COVID-19 pandemic related supply chain disruptions and severe cost inflation.

Net Senior Debt and Long-term Financial Liabilities

The Company's net senior debt and long-term financial liabilities can fluctuate significantly based on where it is in its financing cycle. The Company uses its excess credit capacity (see Liquidity and Capital Resources - Debt Financing Activities) to fund business acquisitions, project capital expenditures and general corporate purposes, all of which generally result in increases in its net senior debt and long- term financial liabilities. The Company then uses its excess free cash flow as well as accesses the public capital markets at opportunistic times or when additional funding is needed for larger transactions to reduce its long-term financial liabilities and correspondingly replenish its credit capacity. Furthermore, a key component of the Company's equity financing strategy is the issuance of convertible debentures, which are initially classified as a long-term financial liability but are generally expected to be converted into shares (see Forward Looking Statements).

3

RONA

Return on adjusted net assets (RONA) is not defined under IFRS and, as a result, may not be comparable to similarly titled measures presented by other publicly traded entities, nor should it be construed as an alternative to other earnings measures determined in accordance with IFRS.

The Company believes RONA is a useful indicator of the performance of its operations relative to the assets employed.

The following table provides the calculation of RONA for each of the last three fiscal years:

(in millions of dollars)

52 weeks

53 weeks

52 weeks

ended

ended

ended

Dec 30, 2023

Dec 31, 2022

Dec 25, 2021

Return:

Adjusted EBITDA (1)

559.1

504.2

430.7

Impact of the adoption of IFRS-16 on Adjusted EBITDA

(74.0)

(64.2)

(50.4)

Maintenance capital expenditures (2)

(46.0)

(43.2)

(29.3)

439.1

396.8

351.0

Average adjusted net assets (3):

Opening net assets

4,081.1

3,497.4

2,844.2

Closing net assets excluding net assets of businesses

acquired during the year

4,113.0

3,806.7

2,735.0

Average net assets (4)

4,097.1

3,652.1

2,789.6

Weighted net assets of businesses acquired during the year (5)

1.2

200.7

534.4

4,098.3

3,852.8

3,324.0

RONA (6)

10.7%

10.3%

10.6%

  1. Adjusted EBITDA is not defined under IFRS. See Results of Operations - Adjusted EBITDA for the description and calculation of Adjusted
    EBITDA.
  2. See Liquidity and Capital Resources - Capital Expenditures.
  3. Net assets are calculated as total assets less right-of-use assets, deferred income tax assets, accounts payable and accrued liabilities.
  4. Calculated as the sum of the opening net assets and the closing net assets (excluding net assets of businesses acquired during the year) divided by two.
  5. Based on weighting the net assets of businesses acquired during the current fiscal year by a factor based on the number of days in the fiscal year that the Company owned the applicable business in relation to the total number of days in the fiscal year.
  6. Calculated as return divided by average adjusted net assets.

The Company's RONA for each of the last three years has been below its long-term target of 15% primarily due to: (i) business acquisitions and major capital project investments that are in the early stages of development and correspondingly are not yet generating the returns expected over the long term - the Company's investment horizons are generally ten years or longer; and (ii) in 2021, COVID- 19 pandemic related factors, including significant labor and supply chain disruptions, impacting the Company's adjusted EBITDA.

4

FOURTH QUARTER OPERATING RESULTS

The Company's operating results for the fourth quarters of 2023 and 2022 and for the fiscal years of

2023 and 2022 were as follows:

(in millions of dollars)

13 weeks

14 weeks

52 weeks

53 weeks

ended

ended

ended

ended

Dec 30,

Dec 31,

Dec 30,

Dec 31,

2023

2022

2023

2022

Revenue

1,554.7

1,634.8

6,261.0

6,029.8

Gross profit before depreciation, amortization and plant start-

up and restructuring costs

295.2

306.0

1,208.4

1,103.7

Interest income from investment in associates

15.3

16.5

60.9

61.8

Selling, general and administrative expenses

173.3

186.1

710.2

661.3

Operating profit before depreciation, amortization and plant

start-up and restructuring costs

137.2

136.4

559.1

504.2

Plant start-up and restructuring costs

17.3

13.2

45.3

27.2

119.9

123.2

513.8

477.0

Depreciation of capital assets

23.5

22.0

86.5

79.5

Amortization of intangible assets

2.8

5.8

13.3

28.8

Amortization of right of use assets

15.2

18.4

60.2

52.0

Accretion of lease obligations

6.7

8.2

26.4

24.5

Interest and other financing costs

40.4

31.7

150.9

81.4

Acquisition transaction costs

1.1

1.2

4.4

6.2

Change in value of puttable interest in subsidiaries

1.0

5.5

10.2

5.5

Accretion of provisions

0.3

0.5

2.2

6.8

Remeasurement of provisions

-

(21.8)

-

(21.8)

Equity loss in investment in associates

3.5

1.5

22.5

15.8

Change in value of investments in associates

2.5

16.0

2.5

16.0

Fair value gains on investments in associates

-

(0.1)

-

(19.9)

Other

1.5

0.7

1.5

0.7

Earnings before income taxes

21.4

33.6

133.2

201.5

Income tax provision - current

4.0

(1.7)

43.1

36.4

Income tax provision - deferred

2.4

4.4

(4.1)

5.0

Income tax provision

6.4

2.7

39.0

41.4

Earnings

15.0

30.9

94.2

160.1

5

RESULTS OF OPERATIONS

The Company reports on two reportable segments, Specialty Foods and Premium Food Distribution, as well as non-segmented investment income and corporate costs (Corporate). The Specialty Foods segment consists of the Company's specialty food manufacturing businesses while the Premium Food Distribution segment consists of the Company's differentiated distribution and wholesale businesses as well as certain seafood processing businesses. Investment income includes interest and management fees generated from the Company's businesses that are accounted for using the equity method.

As part of a realignment of certain businesses and management responsibilities, starting in fiscal 2023 the Company reclassified a business from the Premium Food Distribution segment to the Specialty Foods segment. All comparative information has been retrospectively restated.

Revenue

(in millions of dollars except percentages)

13 weeks

%

14 weeks

%

52 weeks

%

53 weeks

%

ended

(1)

ended

(1)

ended

(1)

ended

(1)

Dec 30,

Dec 31,

Dec 30,

Dec 31,

2023

2022

2023

2022

Revenue by segment:

Specialty Foods

1,005.2

64.7%

1,040.9

63.7%

4,097.0

65.4%

3,801.1

63.0%

Premium Food Distribution

549.5

35.3%

593.9

36.3%

2,164.0

34.6%

2,228.7

37.0%

Consolidated

1,554.7

100.0%

1,634.8

100.0%

6,261.0

100.0%

6,029.8

100.0%

  1. Expressed as a percentage of consolidated revenue.

Specialty Foods' (SF) revenue for the quarter decreased by $35.7 million or 3.4% primarily due to: (i) an extra week of operations in the fourth quarter of 2022 resulting from the Company's 2022 fiscal year having 53 weeks versus 52 weeks in fiscal 2023 - this accounted for $50.0 million of the decrease; and

  1. selling price deflation of $14.4 million relating primarily to products containing chicken and/or eggs. These factors were partially offset by: (i) organic volume growth of $26.6 million representing an organic volume growth rate (OVGR) of 2.6%; and (ii) a $2.1 million increase in the translated value of sales generated by SF's U.S. based businesses due to a weaker Canadian dollar.

SF's OVGR was driven by its core U.S. sales growth initiatives in sandwiches, protein and baked goods, which generated an OVGR of 9.3% and total sales of $580.9 million for the quarter. This performance was despite: (i) experiencing temporarily lower sandwich sales growth while a customer implements a new merchandising strategy - normalizing for this factor the OVGR for SF's core U.S. sales growth initiatives is 11.4%; (ii) delays in new capacity coming online to support these sales initiatives; and (iii) approximately $8.1 million of new product launch sales planned for the quarter being delayed to the first quarter of 2024.

The solid growth generated by SF's core U.S. sales initiatives was partially offset by: (i) lower premium protein product sales in Canada caused largely by a challenging consumer environment; and (ii) reduced beef jerky product sales due to a combination of factors including consumer price sensitivity and high selling prices resulting from high beef commodity input costs. SF expects (see Forward Looking Statements) these challenges to be transitory and in the meantime is implementing a variety of strategies to counter them including targeted promotion, product development, and developing new markets.

SF's revenue for 2023 increased by $295.9 million or 7.8% primarily due to: (i) organic volume growth of $167.7 million representing an OVGR of 4.4%; (ii) selling price inflation of $52.5 million; (iii) a $76.4 million increase in the translated value of sales generated by SF's U.S. based businesses due to a weaker Canadian dollar; and (iv) business acquisitions, which accounted for $49.3 million of SF's growth. These factors were partially offset by the extra week of operations in the fourth quarter of 2022.

6

Premium Food Distribution's (PFD) revenue for the quarter decreased by $44.4 million or 7.5% due to:

  1. a sales volume contraction of $34.8 million; and (ii) the extra week of operations in the fourth quarter of 2022 which accounted for $31.5 million of the decrease. These factors were partially offset by: (i) selling price inflation of $19.6 million relating primarily to lobster-based products; (ii) business acquisitions, which generated $1.5 million in growth; and (iii) a $0.8 million increase in the translated value of sales generated by PFD's U.S. based businesses due to a weaker Canadian dollar.

The contraction in PFD's sales volume was primarily due to: (i) lobster supply shortages caused mainly by a decline in the Maine lobster catch of approximately 20% in the previous quarter and a poor southwest Nova Scotia fishery in the current quarter. The decreases in both fisheries, which were the result of unusually cold waters and poor weather that prevented vessels from harvesting, are expected (see Forward Looking Statements) to be transitory; and (ii) lower Canadian premium beef and seafood sales caused mainly by a challenging consumer environment, which is also expected (see Forward Looking Statements) to be transitory.

PFD's revenue for 2023 decreased by $64.7 million or 2.9% primarily due to: (i) a sales volume contraction of $41.5 million; (ii) the extra week of operations in the fourth quarter of 2022; and (iii) selling price deflation of $4.0 million. These factors were partially offset by: (i) a $10.8 million increase in the translated value of sales generated by PFD's U.S. based businesses due to a weaker Canadian dollar; and (ii) business acquisitions, which generated $1.5 million in growth.

Gross Profit

(in millions of dollars except percentages)

13 weeks

%

14 weeks

%

52 weeks

%

53 weeks

%

ended

(1)

ended

(1)

ended

(1)

ended

(1)

Dec 30,

Dec 31,

Dec 30,

Dec 31,

2023

2022

2023

2022

Gross profit by segment:

Specialty Foods

210.5

20.9%

214.1

20.6%

882.0

21.5%

773.2

20.3%

Premium Food Distribution

84.7

15.4%

91.9

15.5%

326.4

15.1%

330.5

14.8%

Consolidated

295.2

19.0%

306.0

18.7%

1,208.4

19.3%

1,103.7

18.3%

  1. Expressed as a percentage of the corresponding segment's revenue.

SF's gross profit as a percentage of its revenue (gross margin) for the quarter increased by 30 basis points primarily due to: (i) the moderation of certain raw material input costs; (ii) production efficiency improvements resulting from investments in automation, continuous improvement projects and a more stable labor market; and (iii) the extra week of operations in 2022 having, for seasonal reasons, relatively low sales and therefore lower margins after accounting for production overheads. These factors were partially offset by: (i) wage inflation; and (ii) investments in additional plant infrastructure to support future growth.

SF's gross margin for 2023 increased by 120 basis points primarily due to the factors impacting the fourth quarter of 2023.

PFD's gross margin for the quarter decreased by 10 basis points primarily due to: (i) the reclass of warehouse rental income in the fourth quarter of 2022, which included a retroactive component; and (ii) increased plant overhead driven primarily by inflationary cost increases. These factors were partially offset by: (i) higher margins on lobster-based products resulting from a stronger pricing environment; (ii) the extra week of operations in 2022 having, for seasonal reasons, relatively low sales and therefore lower margins after accounting for production and warehousing overheads; and (iii) production efficiency improvements.

7

PFD's gross margin for 2023 increased by 30 basis points primarily due to: (i) higher margins on lobster- based products combined with the moderation of certain raw material costs earlier in the year; and (ii) improved production efficiencies; partially offset by an increase in production overhead.

Selling, General and Administrative Expenses (SG&A)

(in millions of dollars except percentages)

13 weeks

%

14 weeks

%

52 weeks

%

53 weeks

%

ended

(1)

ended

(1)

ended

(1)

ended

(1)

Dec 30,

Dec 31,

Dec 30,

Dec 31,

2023

2022

2023

2022

SG&A by segment:

Specialty Foods

118.0

11.7%

128.5

12.3%

482.5

11.8%

450.3

11.8%

Premium Food Distribution

51.4

9.4%

50.1

8.4%

199.3

9.2%

185.9

8.3%

Corporate

3.9

7.5

28.4

25.1

Consolidated

173.3

11.1%

186.1

11.4%

710.2

11.3%

661.3

11.0%

  1. Expressed as a percentage of the corresponding segment's revenue.

SF's SG&A as a percentage of sales (SG&A ratio) for the quarter decreased by 60 basis points primarily due to: (i) lower incentive-based compensation accruals; and (ii) sales leveraging benefits associated with its organic growth.

SF's SG&A ratio for 2023 was relatively stable as the sales leveraging benefits associated with its organic growth were largely offset by: (i) higher promotion costs relating to a variety of new sales initiatives; and (ii) wage inflation and general cost inflation.

PFD's SG&A ratio for the quarter and for 2023 increased by 100 basis points and 90 basis points, respectively primarily due to: (i) the impact of lower sales relative to a relatively fixed cost base; and (ii) wage and general cost inflation.

Adjusted EBITDA

Adjusted EBITDA is not defined under IFRS and, as a result, may not be comparable to similarly titled measures presented by other publicly traded entities, nor should it be construed as an alternative to other earnings measures determined in accordance with IFRS.

The Company believes that adjusted EBITDA is a useful indicator of the amount of normalized income generated by operating businesses controlled by the Company before taking into account its financing strategies, consumption of capital and intangible assets, taxable position and the ownership structure of non-wholly owned businesses. This measure is widely used by investors in the valuation and comparison of companies. In addition, it is used in the calculation of certain financial debt covenants associated with the Company's senior credit facilities (see Liquidity and Capital Resources - Debt Financing Activities).

8

The following table provides a reconciliation of adjusted EBITDA to earnings before income taxes:

(in millions of dollars)

13 weeks

14 weeks

52 weeks

53 weeks

ended

ended

ended

ended

Dec 30,

Dec 31,

Dec 30,

Dec 31,

2023

2022

2023

2022

Earnings before income taxes

21.4

33.6

133.2

201.5

Plant start-up and restructuring costs (1)

17.3

13.2

45.3

27.2

Depreciation of capital assets (2)

23.5

22.0

86.5

79.5

Amortization of intangible assets (2)

2.8

5.8

13.3

28.8

Amortization of right of use assets (2)

15.2

18.4

60.2

52.0

Accretion of lease obligations (3)

6.7

8.2

26.4

24.5

Interest and other financing costs (3)

40.4

31.7

150.9

81.4

Acquisition transaction costs (1)

1.1

1.2

4.4

6.2

Change in value of puttable interest in subsidiaries (4)

1.0

5.5

10.2

5.5

Accretion of provisions (3)

0.3

0.5

2.2

6.8

Remeasurement of provisions (4)

-

(21.8)

-

(21.8)

Equity loss in investments in associates (5)

3.5

1.5

22.5

15.8

Change in value of investments in associates (5)

2.5

16.0

2.5

16.0

Fair value gains on investments in associates (5)

-

(0.1)

-

(19.9)

Other (1)

1.5

0.7

1.5

0.7

Adjusted EBITDA

137.2

136.4

559.1

504.2

  1. Amount is not part of the Company's normal operating costs and/or gains.
  2. Amount relates to the consumption of the Company's capital assets, intangible assets or other assets.
  3. Amount relates to the Company's financing strategies.
  4. Amount relates to the valuation of provisions or minority shareholders' interest in certain subsidiaries of the Company.
  5. Amount relates to businesses that the Company does not consolidate as it does not own a controlling interest.

(in millions of dollars except percentages)

13 weeks

%

14 weeks

%

52 weeks

%

53 weeks

%

ended

(1)

ended

(1)

ended

(1)

ended

(1)

Dec 30,

Dec 31,

Dec 30,

Dec 31,

2023

2022

2023

2022

Adjusted EBITDA by segment:

Specialty Foods

92.5

9.2%

85.6

8.2%

399.5

9.8%

322.9

8.5%

Premium Food Distribution

33.3

6.1%

41.8

7.0%

127.1

5.9%

144.6

6.5%

Corporate

(3.9)

(7.5)

(28.4)

(25.1)

Interest Income from Investments

15.3

16.5

60.9

61.8

Consolidated

137.2

8.8%

136.4

8.3%

559.1

8.9%

504.2

8.4%

  1. Expressed as a percentage of the corresponding segment's revenue.

9

Revenue and Adjusted EBITDA Outlook

See Forward Looking Statements for a discussion of the risks and assumptions associated with forward looking statements.

2024 Outlook

(in millions of dollars)

Bottom of Range

Top of Range

Revenue guidance range

6,650

6,850

Adjusted EBITDA guidance range

630

650

For 2024, the Company expects its sales to be between $6.65 billion and $6.85 billion and its adjusted EBITDA to be between $630 million and $650 million. These estimates are based on a range of assumptions (see Forward Looking Statements) including: (i) reasonably stable economic environments in Canada and the U.S. with inflation and interest rates moderating over the course of the year; (ii) stable raw material costs; and (iii) a stable Canadian dollar relative to the U.S. dollar.

The Company's sales and adjusted EBITDA outlooks for 2024 do not incorporate any provisions for potential future acquisitions, however, it remains active on this front and expects (see Forward Looking Statements) to complete several transactions during the year.

5 Year Plan

(in millions of dollars)

5-Year Target

(2027)

Revenue

10,000

Adjusted EBITDA

1,000

The Company remains on track (see Forward Looking Statements) to meet or exceed the five-year targets it set at the beginning of 2023.

Plant Start-up and Restructuring Costs

Plant start-up and restructuring costs consist of expenses associated with: (i) the start-up of new production capacity; (ii) the reconfiguration of existing capacity to gain efficiencies and/or additional capacity; and/or (iii) the restructuring of a business to improve its profitability. The Company expects (see Forward Looking Statements) these investments to result in improvements in its future earnings and cash flows.

During 2023, the Company incurred $45.3 million in plant start-up and restructuring costs relating primarily to the following projects, all of which are expected to expand its capacity and/or generate improved operating efficiencies (see Forward Looking Statements):

  • Reconfiguration and 8,000 square foot expansion of its cooked protein facility in Versailles, Ohio
  • Reconfiguration of its cooked protein facility in Scranton, Pennsylvania, including the addition of another cooked products production line
  • Construction of a new 91,000 square foot artisan bakery in San Francisco, California
  • Reconfiguration of its meat snack facility in Kent, Washington
  • 107,000 square foot expansion and reconfiguration of its meat snack and processed meats facility in Ferndale, Washington

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Premium Brands Holdings Corporation published this content on 15 March 2024 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 15 March 2024 11:07:46 UTC.