Premium Brands Income Fund
TSX : PBI.UN

Premium Brands Income Fund

March 22, 2007 09:00 ET

Premium Brands Income Fund Announces Record 2006 Sales and Earnings

VANCOUVER, BRITISH COLUMBIA--(CCNMatthews - March 22, 2007) - Premium Brands Income Fund (TSX:PBI.UN), a leading producer, marketer and distributor of specialty branded consumer food products, announced today its results for 2006 and the fourth quarter of 2006.

HIGHLIGHTS

- The Fund ended 2006 with record sales from continuing operations of $216.5 million as compared to $206.6 million in 2005 despite exiting approximately $16.8 million in lower margin mainstream processed meats business. EBITDA for the year increased by 16.9% to a record $22.7 million as compared to $19.4 million in 2005 while the Fund's EBITDA margin rose to 10.5% exceeding for the first time, on an annual basis, the 10% target set in 2001.

- For the fourth quarter, unusually severe winter conditions across western Canada combined with the Fund's exit from $5.3 million in lower margin mainstream processed meats business resulted in sales of $53.0 million versus $55.6 million in 2005 and EBITDA of $4.8 million as compared to $5.0 million in 2005. Despite the poor weather conditions, EBITDA for the quarter was still the Fund's second best fourth quarter on record.

- The Fund posted record earnings from continuing operations for 2006 of $14.2 million or $0.91 per unit versus $5.8 million or $0.47 per unit in 2005. For the fourth quarter, the Fund's earnings from continuing operations were $2.8 million or $0.16 per unit versus $2.3 million or $0.17 per unit in 2005.

- Distributable cash for 2006 was $18.7 million while declared cash distributions to the Fund's unitholders totaled $18.4 million resulting in a payout ratio of 98%. The Fund's payout ratio was temporarily high due to the proceeds from an October 2006 public offering being mostly un-deployed at the end of 2006. The Fund expects to use these funds for accretive acquisitions and capital projects in 2007.

- During the fourth quarter, the Fund completed a treasury offering of 2,444,280 units at $11.60 per unit resulting in net proceeds of $26.6 million after deducting underwriters' fees and expenses of the offering. The funds from the offering were initially used to reduce the amount outstanding on the Fund's credit facilities and will ultimately be used for acquisitions and capital projects.

- Also during the fourth quarter of 2006 the Fund completed the acquisition of Creekside Custom Foods for $4.0 million in cash. Creekside is a leading manufacturer and distributor of a variety of fresh "grab-and-go" food items in southern B.C. and owns the Bread Garden brand name.

- The Fund provided financial performance guidance for 2007 including projected organic sales growth of 7% to 8%, EBITDA of $25 million to $26 million and capital maintenance expenditures of $2.0 to 2.5 million.

FOURTH QUARTER RESULTS

Sales from continuing operations for the quarter were $53.0 million as compared to $55.6 million in the fourth quarter of 2005. The decrease was due to a $5.3 million decrease in sales of mainstream processed meat products resulting from the Fund's decision to exit certain lower margin product categories. This decrease was partially offset by $2.2 million in incremental sales from acquisitions and a $0.5 million or 1.0% increase in sales of the Fund's core specialty food products. The small increase in the Fund's core specialty food products sales, relative to its annual growth rate for 2006 of 7.4%, was primarily due to unusually severe winter weather conditions across a large portion of western Canada that resulted in missed deliveries and reduced consumer activity at the store level. To a lesser extent, the Fund's specialty food sales on a comparative basis were also impacted by the fourth quarter of 2006 having only a 13 week accounting period versus a 14 week accounting period in the fourth quarter of 2005.

"Despite the severe weather conditions, our EBITDA for the quarter still represented our second best fourth quarter on record," said Mr. George Paleologou. "The occurrence of these types of weather anomalies is inevitable and in no way impacts our momentum and long term performance," added Mr. Paleologou, President.

As a percentage of sales, gross profit from continuing operations for the quarter improved to 31.7% from 30.0% in the fourth quarter of 2005 due primarily to a favourable sales mix shift resulting from the Fund's exit from certain lower margin mainstream processed meats business; and production efficiencies associated with increased sales of internally manufactured specialty food products.

As a percentage of sales, selling, general and administrative expenses for the quarter increased to 22.6% from 21.0% in the fourth quarter of 2005 due primarily to a shift in the Fund's sales mix to higher margin products that have higher selling costs associated with them; increased commission and bonus costs associated with the Fund's increased sales and profitability in 2006; and, to a lesser extent, higher fuel and freight costs.

For the fourth quarter of 2006 there was no loss or gain from discontinued operations as the Fund's last discontinued operation was shut down in the third quarter of 2006. In the fourth quarter of 2005 discontinued operations incurred a loss of $8.1 million, the majority of which related to a $7.7 million writedown of the discontinued operations' assets to net realizable value and the accrual of certain exit costs.

Overall the Fund generated net earnings of $2.8 million or $0.16 per unit for the fourth quarter of 2006 versus a loss of $5.8 million or $0.47 per unit in the fourth quarter of 2005.

2006 RESULTS

Sales from continuing operations for 2006 were up $9.9 million or 4.8% to $216.5 million as compared to $206.6 million in 2005. The increase was due to a combination of a $14.1 million or 7.4% rise in sales of the Fund's core specialty food products; and acquisitions, which accounted for $12.6 million of the increase. These increases were partially offset by a $16.8 million decrease in sales of mainstream processed meats due to the Fund's decision to exit certain lower margin product categories.

The Fund's earnings from continuing operations before trust conversion costs, taxes and non-controlling interest increased by 32.9% to $14.4 million in 2006 from $10.9 million in 2005.

The 7.4% increase in sales of the Fund's core specialty food products and the strong improvement in its earnings from continuing operations was driven by the continued successful implementation of its two core strategies:

- The development of branded specialty food businesses that have a leading position in a niche market segment.

- The diversification of the Fund's customer base through the development of unique distribution and wholesale networks that service a large variety of end users including niche retailers, convenience stores, delicatessens, restaurant chains, concession stands and small grocery chains. These networks provide the Fund's specialty food operations with proprietary access to a large and diversified customer base.

"Our solid financial performance in 2006 has come at a time when most food companies' financial performance is being impacted by a variety of issues including customer concentration, pressure from larger retailers to produce lower margin private label products and rising commodity and labour costs. This is not to say that these issues do not impact us, however, our unique business model enables us to better manage their impact and in turn, generate superior financial performance," said Mr. Fred Knoedler, CEO.

Discontinued operations, which were shut down in the third quarter of 2006, incurred a loss in 2006 of $1.4 million as compared to a loss of $9.5 million in 2005. Excluding asset writedowns, exit cost accruals and income tax recoveries, the discontinued operations' loss for 2005 would have been $2.0 million.

Overall for 2006 the Fund generated net earnings of $12.8 million or $0.83 per unit versus a loss of $3.7 million or $0.29 per unit in 2005.

DISTRIBUTABLE CASH

The Fund's distributable cash for 2006 was $18.7 million as compared to declared cash distributions of $18.4 million resulting in a payout ratio of 98.3%. This is below the 100% payout ratio that was initially set when the Fund was created in July 2005 but above the Fund's current long term targeted payout ratio of 85% to 90%, which was set to prevent short term shocks to its business from impacting its cash distributions.

The high payout ratio in 2006 was due in part to the issuance of 2,444,280 new units in October 2006 at $11.60 per unit. The Fund intends to use the capital raised from this issuance for acquisitions and project capital expenditures, which are expected to increase its distributable cash and therefore reduce its payout ratio, however, in the interim the increased number of units outstanding results in a high payout ratio. Excluding the impact of the new units issued, and normalizing for the additional interest expense that would have been incurred had the new units not been issued, the Fund's payout ratio would have been approximately 95.9%.

2007 GUIDANCE

For 2007 the Fund expects continued growth of its core specialty food sales at an organic rate of 7% to 8% based on three key growth initiatives: the development of new specialty food products, the introduction of new products sourced from other suppliers into the Fund's distribution networks and geographical expansion into the U.S. Pacific Northwest and central Canada. In addition, the Fund intends to continue to pursue its successful acquisition strategy, which focuses on small to medium sized businesses that complement its existing manufacturing and/or distribution business, or expand its distribution capabilities.

"Given our commitment to preserve our core cash flows and achieve a payout ratio of between 85% and 90%, we are focusing on lower risk growth initiatives and therefore have set a relatively conservative organic growth target range of 7% to 8%," said Mr. Paleologou.

The Fund's projected EBITDA range for 2007 is $25 million to $26 million with a projected EBITDA margin of approximately 11%; its expected maintenance capital expenditures for 2007 are between $2.0 million and $2.5 million; and its estimated collection on notes receivable is approximately $0.5 million.

Based on giving priority to maintaining and growing cash distributions to its unitholders, the Fund has set relatively conservative targets for both its payout and debt leverage ratios. The Fund has a long-term targeted payout ratio of 85% to 90% which it expects to achieve within the next twelve to eighteen months. In terms of debt leverage, the Fund's long-term target is a net funded debt to EBITDA ratio of 1.5:1, which is well above its 0.7:1 ratio at December 31, 2006 hence giving significant capacity to finance acquisitions and project capital expenditures with debt.

"Our low financial leverage is due in part to an issuance of 2,444,280 units at $11.60 per unit on October 10, 2006. We had raised these funds in anticipation of completing several acquisitions in late 2006 or early 2007. However, with the Minister of Finance's October 31, 2006 announcement on proposed changes to how publicly traded trusts are taxed, we subsequently delayed, where possible, acquisitions that were in our pipeline until we had a better understanding of how these changes would impact us. Now that things are settling down and there is some clarity on the effects of the proposed tax changes, we have resumed work on these potential transactions and, assuming things go well, hope to successfully complete them in the near future," said Mr. Knoedler.

SUPPLEMENTAL DISCLOSURE

EBITDA and distributable cash are not terms defined under GAAP. As a result, these terms as defined by the Fund may not be comparable to similarly titled measures presented by other publicly traded entities, nor should they be construed as alternatives to other earnings measures determined in accordance with GAAP.

The Fund believes that EBITDA is a useful indicator of the amount of cash generated by the Fund's operating businesses prior to financing and income tax related costs. The following table provides a reconciliation of EBITDA to net earnings from continuing operations:



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(in thousands of dollars) 13 weeks 14 weeks Year Year
ended ended ended ended
Dec 31, Dec 31, Dec 31, Dec 31,
2006 2005 2006 2005
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Earnings from continuing
operations before non-
controlling interest 2,818 2,277 14,446 5,881
Depreciation of capital
assets (1) 1,501 1,402 5,559 5,268
Interest and other
financing costs (2) 372 440 2,185 2,567
Amortization of intangible
and other assets (1) 151 128 503 707
Trust conversion costs (2) - 705 - 3,043
Income tax provision
(recovery) (2) (31) 52 (11) 1,935
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EBITDA 4,811 5,004 22,682 19,401
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(1) Amount added back as this is a non-cash expense for the period.
(2) Amount added back as this is a financing or tax related charge.


The Fund believes that distributable cash is a useful indicator of the amount of cash available for distribution to its unitholders from a specific operating period. The following table provides a reconciliation of distributable cash to cash flows from continuing operations:



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(in thousands of dollars) 75 weeks
from date
of the
income
trust
13 weeks 14 weeks Year conver-
ended ended ended sion to
Dec 31, Dec 31, Dec 31, Dec 31,
2006 2005 2006 2006
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Cash flows from
continuing operations 3,091 3,243 19,481 26,100
Change in non-cash
working capital (2) 1,362 565 1,010 (382)
Trust conversion costs (3) - 705 - 3,043
Payments received on
notes receivable (4) 69 60 432 544
Maintenance capital
expenditures (5) (386) (296) (1,887) (2,300)
Non-controlling interest (6) (61) - (253) (253)
Principal debt repayments (7) (28) (27) (112) (154)
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Distributable cash 4,047 4,250 18,671 26,598
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(1) Due to the income trust conversion occurring in July 2005, no
comparative for the year ended December 31, 2005 has been presented.
(2) Cash used for increases in the Fund's working capital is funded through
draws on its operating lines of credit while cash resulting from
decreases in its working capital is used to pay down its operating
lines of credit.
(3) Trust conversion costs were financed from the proceeds of a public
offering that was done at the time of the income trust conversion.
(4) Amount represents principal payments received on notes receivable.
(5) Amount represents the portion of the Fund's capital expenditures that
are funded from cash generated by its operations.
(6) Amount represents the portion of the Fund's cash flows that is
attributable to non-controlling interests.
(7) Amount represents the portion of the Fund's payments on long-term debt
that is funded from cash generated by its operations.


FORWARD-LOOKING STATEMENTS

This discussion and analysis includes forward-looking statements with respect to the Fund, including its business operations strategy and financial performance and condition. These statements generally can be identified by the use of forward-looking words such as "may", "could", "should", "would", "will", "expect", "intend", "plan", "estimate", "project", "anticipate", "believe" or "continue", or the negative thereof or similar variations. Although management believes that the expectations reflected in such forward-looking statements are reasonable and represent the Fund's internal expectations and belief at this time, such statements involve unknown risks and uncertainties which may cause the Fund's actual performance and results in future periods to differ materially from any estimates or projections of future performance or results expressed or implied by such forward-looking statements. Important factors that could cause actual results to differ materially from the Fund's expectations include, among other things: (i) seasonal and/or weather related fluctuations in the Fund's sales; (ii) changes in the cost of raw materials used in the production of the Fund's products; (iii) changes in consumer preferences for food products; (iv) competition from other food manufacturers and distributors; and (v) new government regulations affecting the Fund's business and operations.

The Fund disclaims any intention or obligations to revise forward-looking statements whether as a result of new information, future developments, or otherwise.

Premium Brands owns a broad range of leading branded specialty food businesses with manufacturing and distribution facilities located in British Columbia, Alberta, Saskatchewan, Manitoba and Washington. In addition, the Fund owns proprietary food distribution and wholesale networks through which it sells both its own products and those of third parties to approximately 20,000 customers. The Fund's family of brands includes Grimm's, Harvest, McSweeney's, Bread Garden, Hygaard, Hempler's, Quality Fresh Foods, Gloria's Fresh and Harlan's.



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Premium Brands Income Fund

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CONSOLIDATED BALANCE SHEET
(Unaudited and in thousands)

-------------------------------------------------------------------
Dec 31, Dec 31,
2006 2005
-------------------------------------------------------------------

Current assets:
Cash and cash equivalents $ 1,940 $ 455
Accounts receivable 18,054 16,894
Current portion of other assets 766 1,501
Inventories 21,424 17,568
Prepaid expenses 1,334 1,419
Future income taxes 304 304
Current assets of discontinued operations 61 907
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43,883 39,048

Future income taxes 524 524
Capital assets 53,119 44,821
Goodwill 65,040 61,330
Intangible assets 7,116 5,345
Other assets 4,527 3,083
Non-current assets of discontinued operations 200 1,532
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$ 174,409 $ 155,683
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Current liabilities:
Cheques outstanding $ 756 $ 1,501
Bank indebtedness 5,424 -
Distributions payable 1,710 1,470
Accounts payable and accrued liabilities 19,056 16,840
Current portion of long-term debt 179 112
Current liabilities of discontinued operations 415 1,604
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27,540 21,527

Long-term debt 11,880 22,296
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39,420 43,823

Non-controlling interest 2,373 -

Unitholders' equity:
Unitholders' capital 154,382 127,810
Accumulated earnings (deficit) 7,058 (5,778)
Accumulated distributions declared (25,945) (7,588)
Cumulative translation adjustment (2,879) (2,584)
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132,616 111,860
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$ 174,409 $ 155,683
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Premium Brands Income Fund

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CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited and in thousands except per unit amounts)

--------------------------------------------------------------------------
13 weeks 14 weeks Year Year
ended ended ended ended
Dec 31, Dec 31, Dec 31, Dec 31,
2006 2005 2006 2005
--------------------------------------------------------------------------

Revenue $ 53,037 $ 55,584 $ 216,465 $ 206,649
--------------------------------------------------------------------------

Gross profit 16,821 16,692 71,479 60,408
Selling, general and
administrative expenses 12,010 11,688 48,797 41,007
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4,811 5,004 22,682 19,401
Depreciation of
capital assets 1,501 1,402 5,559 5,268
Interest and other
financing costs 372 440 2,185 2,567
Amortization of intangible
and other assets 151 128 503 707
Trust conversion costs - 705 - 3,043
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2,787 2,329 14,435 7,816
Income tax provision
(recovery) (31) 52 (11) 1,935
--------------------------------------------------------------------------

Earnings from continuing
operations before non-
controlling interest 2,818 2,277 14,446 5,881
Non-controlling interest -
net of income taxes 61 - 253 86
Loss from discontinued
operations - net of
income taxes - 8,103 1,357 9,500
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Net earnings (loss) $ 2,757 $ (5,826) $ 12,836 $ (3,705)
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Earnings per unit from
continuing operations
after non-controlling
interest:
Basic and diluted $ 0.16 $ 0.17 $ 0.91 $ 0.47

Loss per unit from
discontinued operations:
Basic and diluted $ 0.00 $ (0.64) $ (0.09) $ (0.76)

Earnings (loss) per unit
Basic and diluted $ 0.16 $ (0.44) $ 0.83 $ (0.29)

Weighted average units
outstanding 17,148 13,355 15,537 12,637


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Premium Brands Income Fund

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CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited and in thousands)

--------------------------------------------------------------------------
13 weeks 14 weeks Year Year
ended ended ended ended
Dec 31, Dec 31, Dec 31, Dec 31,
2006 2005 2006 2005
--------------------------------------------------------------------------
Cash flows from
operating activities:
Earnings from continuing
operations before non-
controlling interest $ 2,818 $ 2,277 $ 14,446 $ 5,881
Items not involving cash:
Depreciation of
capital assets 1,501 1,402 5,559 5,268
Amortization of intangible
and other assets 151 128 503 707
Write down of deferred
financing fees - - - 839
Stock-based compensation - - - 15
(Gain) loss on
sale of assets (17) 1 (17) 11
Future income taxes - - - 1,801
-------------------------------------------------------------------------
4,453 3,808 20,491 14,522
Change in continuing
non-cash items (1,362) (565) (1,010) (785)
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Cash flow from continuing
operations 3,091 3,243 19,481 13,737
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Discontinued operations (229) (717) (368) (1,124)
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2,862 2,526 19,113 12,613
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Cash flows from financing
activities:
Long-term debt - net (17,734) (27) (10,985) (12,447)
Bank indebtedness and
cheques outstanding 356 20 4,659 (7,286)
Issuance of units - net
of issuance costs 26,572 - 26,572 31,109
Distributions paid
to unitholders (4,889) (4,412) (18,117) (6,118)
Other (31) - (245) (545)
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4,274 (4,419) 1,884 4,713
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Cash flows from investing
activities:
Net change in notes
receivable (31) 62 1,051 2,840
Net proceeds from
sales of assets 12 16 30 37
Capital asset additions (794) (603) (11,697) (3,958)
Business acquisitions (4,085) (1,076) (7,127) (15,500)
Purchase of units for unit
purchase loan plan (1,500) - (1,500) -
Other (239) (313) (269) (414)
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(6,637) (1,914) (19,512) (16,995)
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Change in cash and
cash equivalents 499 (3,807) 1,485 331
Cash and cash equivalents -
beginning of period 1,441 4,262 455 124
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Cash and cash equivalents -
end of period 1,940 455 $ 1,940 $ 455
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Contact Information

  • Premium Brands Income Fund
    George Paleologou
    President
    (604) 656-3100
    or
    Premium Brands Income Fund
    Will Kalutycz
    CFO
    (604) 656-3100