PREMIUM BRANDS HOLDINGS CORPORATION

Management's Discussion and Analysis

For the 13 Weeks Ended April 1, 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 May 12, 2023. It should be read in conjunction with the Company's unaudited interim condensed consolidated financial statements for the period ended April 1, 2023, and its fiscal 2022 audited consolidated financial statements and the notes thereto, both of 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.sedar.com.

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.

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

%

13 weeks

%

ended

(1)

ended

(1)

Apr 1,

Mar 26,

2023

2022

Revenue by segment:

Specialty Foods

948.8

66.3%

801.8

64.1%

Premium Food Distribution

481.7

33.7%

449.4

35.9%

Consolidated

1,430.5

100.0%

1,251.2

100.0%

  1. Expressed as a percentage of consolidated revenue.

Specialty Foods' (SF) revenue for the quarter increased by $147.0 million or 18.3% primarily due to: (i) selling price inflation of $51.5 million; (ii) business acquisitions, which accounted for $32.4 million of SF's growth; (iii) a $33.7 million increase in the translated value of sales generated by SF's U.S. based businesses due to a weaker Canadian dollar - approximately 57% of SF's revenue for the quarter was generated by these businesses; and (iv) organic volume growth of $29.4 million representing an organic volume growth rate (OVGR) of 3.7%.

SF's OVGR, which was driven primarily by its artisan sandwich, cooked protein and specialty baked goods initiatives, was slightly below its long-term targeted range of 4% to 6% primarily due to: (i) the first quarter generally being its slowest as a result of seasonal factors (see Summary of Quarterly Results); (ii) lower sales of branded protein products in the retail channel as consumer spending on out- of-home dining normalized to pre-pandemic levels; and (iii) a shortage of turkey raw materials caused by industry wide supply challenges.

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Premium Food Distribution's (PFD) revenue for the quarter increased by $32.3 million or 7.2% due to:

  1. organic volume growth of $37.4 million representing an OVGR of 8.3%; and (ii) a $3.8 million increase in the translated value of sales generated by PFD's U.S. based businesses due to a weaker Canadian dollar. These factors were partially offset by selling price deflation of $8.9 million, which related primarily to lower lobster market prices.

PFD's OVGR of 8.3%, which was above its long-term targeted range of 4% to 6%, was driven primarily by the continued post pandemic recovery in sales to foodservice and cruise line customers as consumer spending in these channels normalized to pre-pandemic levels.

Gross Profit

(in millions of dollars except percentages)

13 weeks

%

13 weeks

%

ended

(1)

ended

(1)

Apr 1,

Mar 26,

2023

2022

Gross profit by segment:

Specialty Foods

199.3

21.0%

165.7

20.7%

Premium Food Distribution

70.5

14.6%

61.1

13.6%

Consolidated

269.8

18.9%

226.8

18.1%

  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) steady progress in normalizing its margins as its selling price increases catch up to the impacts of cost inflation across a broad range of inputs including raw materials, labor and freight; and (ii) production efficiencies resulting from investments in automation, continuous improvement projects and a more stable labor market. These factors were partially offset by: (i) investment in additional plant infrastructure to support SF's growth objectives going into the busier second and third quarters; (ii) higher outside storage costs resulting from increased inventory levels (see Liquidity and Capital Resources - Net Working Capital Requirements); and (iii) recently acquired businesses that are undergoing significant restructurings and in the interim are generating lower margins relative to SF's average margin.

PFD's gross margin for the quarter increased by 100 basis points primarily due to: (i) sales leveraging associated with its organic growth; (ii) the moderation of certain raw material costs; and (iii) the reclass of certain warehouse rental incomes.

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Selling, General and Administrative Expenses (SG&A)

(in millions of dollars except percentages)

13 weeks

%

13 weeks

%

ended

(1)

ended

(1)

Apr 1,

Mar 26,

2023

2022

SG&A by segment:

Specialty Foods

117.8

12.4%

97.5

12.2%

Premium Food Distribution

48.1

10.0%

42.4

9.4%

Corporate

8.3

5.9

Consolidated

174.2

12.2%

145.8

11.7%

  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 increased by 20 basis points primarily due to: (i) wage and freight cost inflation; (ii) increased promotional activities; and (iii) higher incentive- based compensation accruals. These factors were partially offset by sales leveraging associated with SF's organic sales growth.

PFD's SG&A ratio for the quarter increased by 60 basis points primarily due to wage, freight, and general cost inflation, partially offset by sales leveraging associated with PFD's organic sales growth.

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).

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

(in millions of dollars)

13 weeks

13 weeks

ended

ended

Apr 1,

Mar 26,

2023

2022

Earnings before income taxes

8.5

30.9

Plant start-up and restructuring costs (1)

5.8

3.5

Depreciation of capital assets (2)

22.2

17.5

Amortization of intangible assets (2)

4.0

7.5

Amortization of right of use assets (2)

14.8

10.8

Accretion of lease obligations (3)

6.6

5.3

Interest and other financing costs (3)

33.4

11.4

Acquisition transaction costs (1)

1.0

1.2

Change in value of puttable interest in subsidiaries (4)

1.6

-

Accretion of provisions (3)

0.5

2.8

Equity loss in investments in associates (5)

12.3

4.9

Adjusted EBITDA

110.7

95.8

  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

%

13 weeks

%

ended

(1)

ended

(1)

Apr 1,

Mar 26,

2023

2022

Adjusted EBITDA by segment:

Specialty Foods

81.5

8.6%

68.2

8.5%

Premium Food Distribution

22.4

4.7%

18.7

4.2%

Corporate

(8.3)

(5.9)

Interest Income from Investments

15.1

14.8

Consolidated

110.7

7.7%

95.8

7.7%

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

The Company's adjusted EBITDA and adjusted EBITDA margin for the quarter of $110.7 million and 7.7%, respectively, were both in line with its expectations.

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Premium Brands Holdings Corporation published this content on 15 May 2023 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 15 May 2023 11:44:07 UTC.