PREMIUM BRANDS HOLDINGS CORPORATION

Management's Discussion and Analysis

For the 13 and 39 Weeks Ended September 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 November 13, 2023. It should be read in conjunction with the Company's unaudited interim condensed consolidated financial statements for the period ended September 30, 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.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.

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

%

39 weeks

%

39 weeks

%

ended

(1)

ended

(1)

ended

(1)

ended

(1)

Sep 30,

Sep 24,

Sep 30,

Sep 24,

2023

2022

2023

2022

Revenue by segment:

Specialty Foods

1,058.0

64.3%

1,008.6

62.1%

3,091.8

65.7%

2,760.2

62.8%

Premium Food Distribution

586.9

35.7%

615.3

37.9%

1,614.5

34.3%

1,634.8

37.2%

Consolidated

1,644.9

100.0%

1,623.9

100.0%

4,706.3

100.0%

4,395.0

100.0%

  1. Expressed as a percentage of consolidated revenue.

Specialty Foods' (SF) revenue for the quarter increased by $49.4 million or 4.9% primarily due to: (i) organic volume growth of $34.5 million representing an organic volume growth rate (OVGR) of 3.4%;

  1. a $14.5 million increase in the translated value of sales generated by SF's U.S. based businesses due to a weaker Canadian dollar - approximately 54% of SF's revenue for the quarter was generated by these businesses; and (iii) selling price inflation of $0.4 million.

SF's OVGR, which was driven primarily by its cooked protein, artisan sandwich, fresh skewer, meat snack and Italian charcuterie initiatives in the U.S., was below recent trends primarily due to: (i) temporarily lower sandwich sales growth while a major customer implements a variety of initiatives to optimize freight costs, reduce food waste and lower internal inventory levels; and (ii) delays in the startup of new cooked protein capacity at SF's King's Command facility in Ohio. Normalizing for these factors, SF's OVGR for the quarter is approximately 7.6%.

The impact on SF's OVGR of $18.5 million in prior period sandwich sales reversed in the third quarter of 2022, due to third party supplier quality issues, was offset by $19.0 million in one-time sales (consisting mainly of the liquidation of discontinued inventory) in the same quarter associated with the acquisition of King's Command.

2

SF's revenue for the first three quarters of 2023 increased by $331.6 million or 12.0% primarily due to:

  1. organic volume growth of $141.1 million representing an OVGR of 5.1%; (ii) selling price inflation of $67.0 million; (iii) a $74.2 million increase in the translated value of sales generated by SF's U.S. based businesses due to a weaker Canadian dollar - approximately 55% of SF's revenue for the first three quarters of 2023 was generated by these businesses; and (iv) business acquisitions, which accounted for $49.3 million of SF's growth.

Premium Food Distribution's (PFD) revenue for the quarter decreased by $28.4 million or 4.6% due to:

  1. a sales volume contraction of $28.0 million; and (ii) selling price deflation of $3.5 million, which related primarily to lower lobster product prices partially offset by higher beef product prices. These factors were partially offset by a $3.1 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) a very challenging lobster market caused by several factors including a decline in the Maine lobster catch of approximately 20%, which was the result of unusually poor weather that prevented vessels from harvesting; and (ii) softening consumer demand for premium beef and seafood as consumers increasingly look for lower cost meal alternatives and shift to shopping at discount grocery banners.

PFD's revenue for the first three quarters of 2023 decreased by $20.3 million or 1.2% primarily due to:

  1. a sales volume contraction of $6.7 million; and (ii) selling price deflation of $23.6 million. These factors were partially offset by a $10.0 million increase in the translated value of sales generated by
    PFD's U.S. based businesses due to a weaker Canadian dollar.

Gross Profit

(in millions of dollars except percentages)

13 weeks

%

13 weeks

%

39 weeks

%

39 weeks

%

ended

(1)

ended

(1)

ended

(1)

ended

(1)

Sep 30,

Sep 24,

Sep 30,

Sep 24,

2023

2022

2023

2022

Gross profit by segment:

Specialty Foods

235.9

22.3%

197.0

19.5%

671.5

21.7%

559.1

20.3%

Premium Food Distribution

84.1

14.3%

96.8

15.7%

241.7

15.0%

238.6

14.6%

Consolidated

320.0

19.5%

293.8

18.1%

913.2

19.4%

797.7

18.2%

  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 280 basis points primarily due to: (i) the moderation of certain input costs, including some raw materials 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 wage inflation.

SF's gross margin for the first three quarters of 2023 increased by 140 basis points primarily due to the factors impacting the third quarter of 2023, partially offset by investments in additional plant infrastructure made in the first two quarters of 2023 to support SF's growth objectives.

PFD's gross margin for the quarter decreased by 140 basis points primarily due to the 20% decline in the Maine lobster catch which resulted in increased shore prices during a time of softening consumer demand (see Results of Operations - Revenue).

PFD's gross margin for the first three quarters of 2023 increased by 40 basis points primarily due to the moderation of some raw material costs in the first two quarters of 2023; partially offset by the impact of the challenges faced by PFD's lobster focused businesses in the third quarter.

3

Selling, General and Administrative Expenses (SG&A)

(in millions of dollars except percentages)

13 weeks

%

13 weeks

%

39 weeks

%

39 weeks

%

ended

(1)

ended

(1)

ended

(1)

ended

(1)

Sep 30,

Sep 24,

Sep 30,

Sep 24,

2023

2022

2023

2022

SG&A by segment:

Specialty Foods

119.9

11.3%

116.0

11.5%

364.5

11.8%

321.8

11.7%

Premium Food Distribution

48.3

8.2%

46.4

7.5%

147.9

9.2%

135.8

8.3%

Corporate

8.4

5.5

24.5

17.6

Consolidated

176.6

10.7%

167.9

10.3%

536.9

11.4%

475.2

10.8%

  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 and the first three quarters of 2023 were relatively stable as the sales leveraging benefits associated with its organic growth were offset by higher promotion costs and incentive-based compensation accruals.

PFD's SG&A ratio for the quarter and for the first three quarters of 2023 increased by 70 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, freight, 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).

4

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

(in millions of dollars)

13 weeks

13 weeks

39 weeks

39 weeks

ended

ended

ended

ended

Sep 30,

Sep 24,

Sep 30,

Sep 24,

2023

2022

2023

2022

Earnings before income taxes

55.0

57.5

111.8

167.9

Plant start-up and restructuring costs (1)

12.4

8.7

28.0

14.0

Depreciation of capital assets (2)

21.7

21.8

63.0

57.5

Amortization of intangible assets (2)

2.5

7.8

10.5

23.0

Amortization of right of use assets (2)

15.3

11.6

45.0

33.6

Accretion of lease obligations (3)

6.5

5.5

19.7

16.3

Interest and other financing costs (3)

39.5

22.6

110.5

49.7

Acquisition transaction costs (1)

1.1

1.3

3.3

5.0

Change in value of puttable interest in subsidiaries (4)

3.0

-

9.2

-

Accretion of provisions (3)

1.0

1.8

1.9

6.3

Equity loss in investments in associates (5)

0.8

2.6

19.0

14.3

Fair value gains on investments in associates (5)

-

-

-

(19.8)

Adjusted EBITDA

158.8

141.2

421.9

367.8

  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

%

39 weeks

%

39 weeks

%

ended

(1)

ended

(1)

ended

(1)

ended

(1)

Sep 30,

Sep 24,

Sep 30,

Sep 24,

2023

2022

2023

2022

Adjusted EBITDA by segment:

Specialty Foods

116.0

11.0%

81.0

8.0%

307.0

9.9%

237.3

8.6%

Premium Food Distribution

35.8

6.1%

50.4

8.2%

93.8

5.8%

102.8

6.3%

Corporate

(8.4)

(5.5)

(24.5)

(17.6)

Interest income from investments

15.4

15.3

45.6

45.3

Consolidated

158.8

9.7%

141.2

8.7%

421.9

9.0%

367.8

8.4%

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

5

Revenue and Adjusted EBITDA Outlook

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

2023 Outlook

(in millions of dollars)

Bottom of Range

Top of Range

Revenue guidance range

6,300

6,400

Adjusted EBITDA guidance range

575

590

Revenue guidance range - previous

6,400

6,600

Adjusted EBITDA guidance range - previous

590

610

The Company is reducing its guidance range for 2023 based on the challenges faced by its lobster businesses in the third quarter, which are expected to continue into the fourth quarter, and the largely third quarter specific sales impacts experienced by its sandwich and cooked protein businesses (see Forward Looking Statements). The revised guidance ranges are based on a variety of assumptions (see Forward Looking Statements) including: (i) reasonably stable economic environments in Canada and the U.S. with inflation rates in both countries continuing to moderate; (ii) stable raw material costs; and (iii) modest appreciation in the Canadian dollar relative to the U.S. dollar. In addition, they do not incorporate any provisions for potential future acquisitions.

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 the first three quarters of 2023, the Company incurred $28.0 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
  • 107,000 square foot expansion and reconfiguration of its meat snack and processed meats facility in Ferndale, Washington
  • Reconfiguration of its meat snack facility in Kent, Washington
  • Construction of a new 165,000 square foot distribution center and the related reconfiguration of its sandwich production facility in Columbus, Ohio
  • Construction of a new 91,000 square foot artisan bakery in San Francisco, California
  • Reconfiguration of its kettle cooking facility in Richmond, British Columbia
  • Construction of a new 67,000 square foot sandwich production facility in Edmonton, Alberta in combination with the shutdown of a sandwich production facility in Laval, Quebec
  • Construction of a new 60,000 square foot value-added seafood processing facility in Auburn, Maine

6

Depreciation and Amortization (D&A)

(in millions of dollars)

13 weeks

13 weeks

39 weeks

39 weeks

ended

ended

ended

ended

Sep 30,

Sep 24,

Sep 30,

Sep 24,

2023

2022

2023

2022

Depreciation of capital assets and amortization of intangible assets (D&A) by segment:

Specialty Foods

19.8

22.9

60.2

60.9

Premium Food Distribution

4.1

6.3

12.4

18.4

Corporate

0.3

0.4

0.9

1.2

Consolidated

24.2

29.6

73.5

80.5

The Company's D&A expense for the third quarter of 2023 as compared to the third quarter of 2022 and for the first three quarters of 2023 as compared to the first three quarters of 2022 decreased by $5.4 million and $7.0 million, respectively, primarily due to the impact of increasing the estimated useful life of certain intangible assets from 15 years to 20 years. This was partially offset by: (i) the recent completion of several larger capital projects; and (ii) the impact of a weaker Canadian dollar on the translated value of the Company's U.S. based businesses' results.

Interest and Other Financing Costs

The Company's interest and other financing costs for the third quarter of 2023 as compared to the third quarter of 2022 and for the first three quarters of 2023 as compared to the first three quarters of 2022 increased by $16.9 million and $60.8 million, respectively, primarily due to: (i) increased average interest rates resulting from general market rate increases and higher cash flow ratio-based credit spreads on the Company's revolving senior credit facility; and (ii) higher levels of funded debt (see Liquidity and Capital Resources - Debt Financing Activities).

Change in Value of Puttable Interest in Subsidiaries

Change in value of puttable interest in subsidiaries (put expense) represents an estimate (see Forward Looking Statements) of the change in the value of options (the put options) held by non-controlling shareholders of certain subsidiaries of the Company that entitle such shareholders to require the Company to purchase their interest in the applicable subsidiary (see Liquidity and Capital Resources - Corporate Investments - Puttable Interest in Subsidiaries).

7

Equity Earnings (Loss) in Investment in Associates

Equity earnings (loss) in investment in associates includes the Company's proportionate share of the earnings and losses of its investments in associates (see Liquidity and Capital Resources - Corporate Investments - Investments in Associates).

(in millions of dollars)

13 weeks

13 weeks

39 weeks

39 weeks

ended

ended

ended

ended

Sep 30,

Sep 24,

Sep 30,

Sep 24,

2023

2022

2023

2022

Clearwater:

Revenue

149.6

157.7

412.0

412.0

Earnings before payments to shareholders

18.5

11.9

24.6

31.5

Net loss

(3.2)

(9.2)

(39.6)

(30.6)

The Company:

Equity loss in Clearwater

(1.6)

(4.6)

(19.8)

(15.3)

Other net equity gains (losses)

0.8

2.0

0.8

1.0

Equity loss in investment in associates

(0.8)

(2.6)

(19.0)

(14.3)

Clearwater Seafoods Incorporated (Clearwater)

Clearwater's sales for the quarter decreased by $8.1 million primarily due to: (i) the delayed delivery of a new Canadian shrimp and turbot vessel, which is expected to begin fishing in December (see Forward Looking Statements) - a legacy vessel was sold early in the first quarter of 2023; (ii) unfavorable mix changes in the natural size and grade of clams harvested; and (iii) increased consumer price sensitivity in Europe that is impacting sales of a variety of products, including Patagonian scallops from Argentina. These factors were partially offset by: (i) snow crab sales returning to pre-2023 levels with the normalization of the market after major supply / demand imbalances in 2023; and (ii) continued favorable conditions for Clearwater's Canadian sea scallops.

Clearwater's earnings before payments to shareholders for the quarter increased by $6.6 million primarily due to: (i) the adoption of hedge accounting which resulted in unrealized foreign exchange losses being recorded in other comprehensive income rather than earnings; (ii) lower non-controlling interest expense associated with its Argentinian operations; and (iii) reduced incentive-based compensation accruals. These factors were partially offset by: (i) lower margins on products sold in the European market; (ii) reduced sales volumes; (iii) higher income taxes due to tax jurisdiction mix changes; and (iv) higher senior debt interest expense resulting from general market rate increases.

Income Taxes

The Company's provision for income taxes as a percentage of earnings (tax rate) can be impacted by a variety of factors including: (i) changes in enacted tax laws, in general, and tax rates, in particular, in the tax jurisdictions in which the Company operates; (ii) the proportionate mix of the Company's taxable income by tax jurisdiction; (iii) differences in the treatment of certain income and expense items for income tax and accounting purposes; and (iv) the Company's equity loss or earnings in investments in associates not held in an income flow-through structure as this amount is excluded in the calculation of the Company's tax provision.

Based on current enacted tax rates in the tax jurisdictions the Company operates, the expected mix of its taxable income by tax jurisdiction (see Forward Looking Statements), the Company's general structuring of its tax affairs, there being no unusual revenue and/or expenses that are treated differently for income tax and accounting purposes, and excluding from the calculation equity earnings or loss in investments in associates relating to investments in associates not held in an income flow-through

8

structure, the expected range for the Company's tax rate in 2023 is approximately 23% to 26% (see Forward Looking Statements).

The Company's tax rate for the first three quarters of 2023 is 24.7% after adjusting its pre-tax earnings for $20.3 million in equity losses relating to investments in associates not held in an income flow-through structure.

SUMMARY OF QUARTERLY RESULTS

The following is a summary of selected quarterly consolidated financial information. All amounts, except adjusted EBITDA (see Results of Operations - Adjusted EBITDA), are derived from the Company's unaudited interim condensed consolidated financial statements for each of the eight most recently completed quarters.

(in millions of dollars except per share amounts)

Q4-21

Q1-22

Q2-22

Q3-22

Q4-22

Q1-23

Q2-23

Q3-23

Revenue

1,345.4

1,251.2

1,519.9

1,623.9

1,634.8

1,430.5

1,630.9

1,644.9

Adjusted EBITDA

113.4

95.8

130.8

141.2

136.4

110.7

152.4

158.8

Earnings

38.0

22.4

63.3

43.5

30.9

5.9

33.9

39.4

Earnings per share - basic

0.87

0.50

1.42

0.97

0.69

0.13

0.76

0.89

Earnings per share - diluted

0.87

0.50

1.41

0.97

0.69

0.13

0.76

0.88

The financial performance of many of the Company's businesses is subject to fluctuations associated with the impact on consumer demand from seasonal changes in weather. As a result, the Company's performance varies with the seasons (see Forward Looking Statements).

In general terms, its results are weakest in the first quarter of the year due to winter weather conditions which result in: (i) less consumer travelling and outdoor activities and, in turn, reduced consumer traffic through many of the Company's convenience oriented customers' stores such as restaurants, convenience stores, gas stations and concessionary venues; and (ii) reduced consumer demand for its outdoor oriented products such as barbeque and on-the-go convenience foods. The Company's results then generally peak in the spring and summer months due to favorable weather conditions and decline in the fourth quarter due to a return to poorer weather conditions (see Forward Looking Statements).

In addition to seasonal factors, over the last eight quarters, the trends in the Company's sales, adjusted EBITDA, earnings and earnings per share have been impacted by business acquisitions and a variety of organic growth initiatives that have generally resulted in year over year increases.

The trends in the Company's earnings and earnings per share were also impacted by: (i) a fair value gain on investments in associates in the second quarter of 2022; (ii) an increasing number of major capacity expansion and production automation projects coming online starting in the middle of 2022 and continuing through to the third quarter of 2023 resulting in rising plant start-up and restructuring costs;

  1. a gain on the remeasurement of provisions in the fourth quarter of 2022; and (iv) higher debt levels and rising interest rates over the course of 2022 and into 2023.

9

LIQUIDITY AND CAPITAL RESOURCES

Net Working Capital Requirements

Net Working Capital

Net working capital is not defined under IFRS, and as a result, may not be comparable to similarly titled measures presented by other publicly traded entities. The Company believes that net working capital is a useful indicator of the cash needed to fund the Company's working capital requirements.

The following table provides the calculation of net working capital:

(in millions of dollars)

As at

As at

Sep 30, 2023

Sep 24, 2022

Accounts receivable

545.5

632.6

Inventories

756.7

821.1

Prepaid expenses

25.3

33.7

Accounts payable and accrued liabilities

(480.1)

(435.1)

Net working capital

847.4

1,052.3

The Company's net working capital needs are seasonal in nature and generally peak (see Forward Looking Statements) in the spring and summer months and around festive holiday seasons (e.g. Easter, Thanksgiving and Christmas) as inventories are built up in anticipation of, and accounts receivable grow as a result of, increased consumer demand (see Summary of Quarterly Results). The cash requirements resulting from seasonal fluctuations in the Company's net working capital are managed primarily through draws and repayments on its revolving senior credit facility. The cash requirements for increases in the Company's net working capital resulting from its growth initiatives are, over the longer term, financed through the associated growth in the Company's free cash flow.

The following table shows certain non-GAAP ratios relating to the Company's accounts receivable and inventory balances:

(in days)

As at

As at

Sep 30, 2023

Sep 24, 2022

Days sales in accounts receivable (1)

30.2

35.4

Days cost of sales in inventory (2)

52.0

56.2

  1. Calculated as accounts receivable divided by sales for the applicable quarter multiplied by the number of days in the quarter.
  2. Calculated as inventory divided by cost of sales for the applicable quarter multiplied by the number of days in the quarter.

The Company's days sales in accounts receivable at the end of the third quarter of 2023 as compared to the end of the third quarter of 2022 decreased by 5.2 days primarily due to a new trade finance program; partially offset by general fluctuations in the timing of sales and accounts receivable collections.

The Company's days cost of sales in inventory at the end of the third quarter of 2023 as compared to the end of the third quarter of 2022 decreased by 4.2 days primarily due to the partial unwinding of conservative inventory positions taken by the Company's businesses in reaction to global supply chain, inflation and certain capacity challenges in the recent past; partially offset by general fluctuations in the timing of sales, production and purchasing of inventory.

10

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Premium Brands Holdings Corporation published this content on 14 November 2023 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 14 November 2023 15:07:35 UTC.