Premium Brands Income Fund
TSX : PBI.UN

Premium Brands Income Fund

March 27, 2009 06:00 ET

Premium Brands Income Fund Announces Record Fourth Quarter and 2008 Revenue and EBITDA

VANCOUVER, BRITISH COLUMBIA--(Marketwire - March 27, 2009) - Premium Brands Income Fund (TSX:PBI.UN), a leading producer, marketer and distributor of branded specialty food products, announced today its results for the fourth quarter of 2008 and the year ended December 31, 2008.

HIGHLIGHTS

- The Fund's revenue for the quarter increased by $15.0 million or 14.7% to a record $116.7 million as compared to the fourth quarter of 2007. For the year the Fund's revenue increased by 37.7% to a record $449.4 million as compared to $326.4 million in 2007.

- EBITDA increased to a fourth quarter record of $9.6 million as compared to $8.9 million in the fourth quarter of 2007. For the year the Fund generated record EBITDA of $40.6 million as compared to $33.4 million in 2007. Excluding the impact of one-time plant start up costs the Fund's 2008 EBITDA was $41.2 million.

- The Fund's distributable cash for 2008 increased to $29.6 million or $1.692 per unit as compared to $26.6 million or $1.522 per unit for 2007 and $18.8 million or $1.209 per unit in 2006.

- In the fourth quarter of 2008, the Fund expensed a $1.0 million insurance claim receivable that was the result of a product recall by one of its pre-packaged sandwich operations. The Fund wrote off this receivable due to its insurance provider attempting to deny coverage on the basis that none of the recalled products were found to be contaminated. The Fund has been advised by legal counsel that the insurance provider's position is most likely not defensible in court and intends to pursue legal action. The amount of any insurance recovery will be recognized when determinable.

- Earnings for the quarter after the write-off of the $1.0 million product recall insurance claim were $3.0 million or $0.17 per unit as compared to $3.2 million or $0.18 per unit for the fourth quarter of 2007.

- The Fund made $20.6 million in distributions to its unitholders in 2008 resulting in a payout ratio of 69.5%. Since converting to a trust in July 2005 the Fund has distributed over $70.0 million to its unitholders.

- Subsequent to the quarter the Fund completed the acquisition of an interest in S.J. Irvine Fine Foods Ltd. for $2.5 million consisting of $1.26 million for a 25% equity interest and $1.24 million for a shareholder loan. Irvine, which started operations in January 2008, manufactures high quality processed meats for the foodservice and retail industries out of a modern 40,000 square foot facility located in Saskatoon, SK.

- Also subsequent to the quarter the Fund acquired the business and working capital assets of Multi-National Foods for approximately $1.6 million. MNF is a food brokerage business with sales of approximately $9 million and is based in Calgary, AB. MNF will be combined with the Fund's commodity trading division.

"Our results for this past year are a good example of how our unique business strategies have enabled Premium Brands to continue to perform well even in difficult times. 2008 brought with it numerous external challenges including record energy prices, rapid cost increases for a broad range of food commodities, an unprecedented product recall by one of Canada's largest food companies and difficult weather conditions throughout the year. Despite these challenges Premium Brands continued to prosper," said Mr. George Paleologou, President and CEO.



SUMMARY

(In thousands of dollars except per unit Quarter ended Year ended
amounts) Dec 31, Dec 31, Dec 31, Dec 31,
2008 2007 2008 2007

Revenue 116,735 101,765 449,363 326,441
EBITDA 9,603 8,900 40,626 33,351
Earnings before income taxes 3,443 3,574 21,958 19,217
Earnings per unit before income taxes 0.20 0.20 1.25 1.10
Earnings 2,963 3,172 20,973 25,488
Earnings per unit 0.17 0.18 1.20 1.46

Distributable cash 29,622 26,557
Distributable cash per unit 1.692 1.522
Declared cash distributions 20,593 20,514
Declared cash distributions per unit 1.176 1.176
Payout ratio 69.5% 77.2%


"This is the fifteenth of the last sixteen quarters in which we have achieved record year over year sales and EBITDA with the one quarter exception being the fourth quarter of 2006 when there were unusually difficult weather conditions across all of western Canada.

"As we look to the future and what lies ahead for the Canadian economy, we are confident that the business strategies that have lead to our success over the last four years will enable us to continue to generate industry leading results despite the volatility and uncertainty associated with today's economic environment," said Mr. Paleologou.

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 State. 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 25,000 customers. The Fund's family of brands include Grimm's, Harvest, McSweeney's, Bread Garden, Hygaard, Hempler's, Quality Fast Foods, Gloria's Fresh, Harlan's, Centennial Foodservice and B&C Foods.



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CONSOLIDATED BALANCE SHEETS
(Unaudited and in thousands)

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Dec 31, Dec 31,
2008 2007
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Current assets:
Cash and cash equivalents $ 1,679 $ 1,116
Accounts receivable 35,020 30,870
Current portion of other assets 247 897
Inventories 44,088 39,533
Prepaid expenses 2,240 1,855
Future income taxes 85 70
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83,359 74,341

Capital assets 69,833 59,931
Intangible assets 41,063 41,384
Goodwill 110,769 107,716
Other assets 2,485 2,282
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$ 307,509 $ 285,654
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Current liabilities:
Cheques outstanding $ 1,354 $ 695
Bank indebtedness 9,676 9,703
Distributions payable 1,725 1,710
Accounts payable and accrued liabilities 42,472 35,914
Current portion of long-term debt 386 148
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55,613 48,170

Puttable interest in subsidiaries 4,224 3,575
Future income taxes 1,532 423
Long-term debt 107,067 96,914
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168,436 149,082

Non-controlling interest 1,155 1,158

Unitholders' equity:
Unitholders' capital 156,238 154,382
Accumulated earnings 53,078 32,647
Accumulated distributions declared (67,052) (46,459)
Accumulated other comprehensive loss (4,346) (5,156)
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137,918 135,414
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$ 307,509 $ 285,654
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CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited and in thousands except per unit amounts)

13 weeks 13 weeks 52 weeks 52 weeks
ended ended ended ended
Dec 31, Dec 31, Dec 31, Dec 31,
2008 2007 2008 2007

Revenue $116,735 $101,765 $449,363 $326,441
Cost of goods sold 86,244 74,325 329,053 230,251
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Gross profit 30,491 27,440 120,310 96,190
Selling, general and administrative
expenses 20,888 18,540 79,684 62,839
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9,603 8,900 40,626 33,351
Depreciation of capital assets 2,375 1,623 7,927 6,164
Interest and other financing costs 1,652 1,792 7,293 4,932
Amortization of intangible and other
assets 937 1,200 2,701 2,030
Amortization of financing costs 54 97 199 97
Accretion of puttable interest in
subsidiaries 250 43 650 43
Unrealized (gain) loss on foreign
currency contracts (51) 461 (1,186) 461
Product recall insurance claim 987 - 987 -
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Earnings before income taxes and
non-controlling interest 3,399 3,684 22,055 19,624

Provision for (recovery of) income taxes
Current - 2 5 104
Future 480 400 980 (6,375)
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480 402 985 (6,271)
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Earnings before non-controlling interest 2,919 3,282 21,070 25,895
Non-controlling interest - net of income
taxes (44) 110 97 407
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Earnings for the period $ 2,963 $ 3,172 $ 20,973 $ 25,488
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Earnings per unit:
Basic and diluted $ 0.17 $ 0.18 $ 1.20 $ 1.46

Weighted average units outstanding 17,526 17,444 17,505 17,444


RESULTS OF OPERATIONS

Revenue

The Fund's revenue for 2008 increased by 37.7% or $123.0 million to $449.4 million as compared to $326.4 million in 2007. Acquisitions made part way through 2007 and in 2008 accounted for $110.0 million of the increase and organic growth at a rate of 4.0% for the balance.

The Fund's organic growth was driven by a combination of product selling price increases (estimated to be on average in the 2% to 3% range) and a variety of new product, distribution and geographical expansion sales initiatives. Offsetting these factors was approximately $1.6 million in lost pre-packaged sandwich sales due to a product recall by one of the Fund's plants in the third quarter of 2008 (see Product Recall Insurance Claim).

Gross Profit

The Fund's gross profit as a percentage of revenue ("gross margin") for 2008 decreased to 26.8% from 29.5% in 2007 due primarily to the acquisitions of Centennial in mid-2007 and B&C Food Distributors ("B&C") in 2008. These transactions resulted in a higher portion of the Fund's sales being generated from the lower margin foodservice channel, i.e. 51.0% of total sales in 2008 as compared to 37.4% of total sales in 2007.

Excluding the impact of the Centennial and B&C acquisitions, the Fund's adjusted gross margin for 2008 of 32.9% was relatively consistent with the comparable 2007 gross margin of 33.3% with the decrease being due primarily to:

i. $0.6 million one-time costs associated with the start up of a new 34,000 square foot meat snack facility in Langley, B.C., and the consolidation of the Fund's B.C. based fresh sandwich and pastry operations into a new 27,000 square foot facility. Both of these projects are now complete and, in addition to providing much needed incremental capacity, are expected to generate operating efficiencies through improved production line designs.

ii. Unusually rapid increases in the cost of a variety of commodity protein inputs part way through the third quarter of 2008 that could not be immediately passed on through increased selling prices (mainly due to customer required minimum notice periods) and therefore resulted in lower than average gross margins for part of the third and fourth quarters.

Selling, General and Administrative Expenses

Selling, general and administrative expenses ("SG&A") for 2008 increased by $16.9 million to $79.7 million from $62.8 million in 2007 mainly due to acquisitions which accounted for approximately $14.7 million of the increase. The remainder of the increase was primarily due to higher variable selling costs, such as sales commissions and freight expense, associated with Fund's organic sales growth and approximately $1.4 million in increased freight and fuel costs associated with a run up in energy based commodities in 2008.

SG&A as a percentage of revenue for 2008 decreased to 17.7% from 19.2% in 2007 due mainly to a higher portion of its sales being generated from the foodservice channel, which historically has lower selling costs, as a percentage of revenue, as compared to those in the Fund's retail distribution channels.

EBITDA

The Fund's EBITDA for 2008 increased to $40.6 million from $33.4 million in 2007. Excluding one-time costs of $0.6 million associated with the start up of a new 34,000 square foot meat snack facility in Langley, B.C. and the consolidation of the Fund's B.C. based fresh sandwich and pastry operations into a new 27,000 square foot facility, its EBITDA for 2008 was $41.2 million.

Product Recall Insurance Claim

During the third quarter of 2008 one of the Fund's plants issued a recall for pre-packaged sandwiches that had potentially been contaminated with Listeria monocytogenes. The recall was completed in an orderly manner with minimal customer complaints and no known instances of consumer illness associated with the consumption of these products.

As a result of the recall, the Fund destroyed approximately $0.4 million in products, incurred $0.4 million in disposal costs and lost approximately $0.3 million in product contribution margin due to lost revenue. The Fund expects to recover these costs (see Forward Looking Statements), less $0.1 million for its deductible, under its product recall insurance policy. It has, however, expensed its insurance claim receivable due to its insurance provider attempting to deny coverage on the basis that none of the recalled products tested positive for Listeria monocytogenes. The Fund has been advised by legal counsel that the insurance provider's position is most likely not defensible in court and intends to pursue legal action. The amount of any insurance recovery will be recognized when determinable.

Other Items

Depreciation for 2008 increased to $7.9 million from $6.2 million in 2007 primarily due to acquisitions.

Interest and other financing costs for 2008 increased to $7.3 million from $4.9 million in 2007 due to additional debt associated with acquisitions made in 2008 and part way through 2007 partially offset by average lower interest rates on the Fund's floating debt.

Amortization of intangible and other assets increased from $2.0 million in 2007 to $2.7 million in 2008 due to the amortization of intangible assets associated with businesses acquired in mid-2007 and 2008 partially offset by a $0.4 million charge in 2007 resulting from the write off of a note receivable from Tapp Technologies Inc. ("Tapp"). The note receivable from Tapp resulted from the sale of a non-core label printing business to Tapp in 2003.

The Fund's accretion of puttable interest in subsidiaries increased by $0.6 million to $0.7 million. This expense represents the value accrued in the applicable period on options that entitle third parties to require the Fund to purchase their respective interest in non-wholly owned subsidiaries of the Fund.

In 2008 the Fund recognized an unrealized gain on foreign currency contracts of $1.2 million as a result of changes in the fair market valuation of its U.S. dollar forward purchase contracts. The Fund does not intend to liquidate these contracts, but rather uses them to stabilize the cost of its U.S. dollar denominated purchases and, in turn, its selling margins. In 2007 the change in the fair market value of the Fund's foreign currency contracts resulted in an unrealized loss of $0.5 million.

The Fund recorded a future income taxes recovery in 2007 of $6.4 million due to the recognition of $6.8 million in future income tax assets resulting from changes in the manner in which publicly traded trusts such as the Fund will be treated for tax purposes starting on or before January 1, 2011, partially offset by a $0.4 million provision relating to other changes in the Fund's future income tax accounts in 2007. The Fund's 2008 future income taxes expense of $1.0 million relates primarily to changes in assumptions relating to the expected timing of the reversal of temporary differences between the value of its net assets for tax purposes and their value for accounting purposes.

Fourth Quarter

Revenue for the fourth quarter of 2008 was up $15.0 million or 14.7% to $116.7 million as compared to the fourth quarter of 2007. $11.0 million of the increase was due to business acquisitions with the balance coming from organic growth across a range of products at an average rate of 3.9%.

Gross profit margin decreased to 26.1% from 27.0% in the fourth quarter of 2007 due mainly to unusually rapid increases in the cost of a variety of commodity protein inputs part way through the third quarter of 2008 that could not be immediately passed on through increased selling prices (mainly due to customer required minimum notice periods) and therefore resulted in lower than average gross margins for part of the third and fourth quarters. A shift in the Fund's percentage of sales coming from foodservice customers, which was primarily due to the acquisition of B&C Food Distributors, to 51.9% in the fourth quarter of 2008 from 48.7% in the fourth quarter of 2007 also impacted the Fund's gross profit margin.

SG&A expenses for 2008 increased by $2.4 million to $20.9 million from $18.5 million in 2007 primarily due to acquisitions which accounted for approximately $1.5 million of the increase, and higher variable selling costs, such as sales commissions and freight expense, associated with the Fund's organic sales growth. SG&A as a percentage of revenue decreased to 17.9% for the quarter as compared to 18.2% in the fourth quarter of 2007.

Depreciation of capital assets for the fourth quarter of 2008 increased by $0.8 million as compared to the fourth quarter of 2007 primarily due to $0.3 million in final depreciation charges relating to the shut down of a meat snack production facility that was replaced by a new 34,000 square foot facility located in Langley, BC and acquisitions, which accounted for $0.2 million of the increase.

During the fourth quarter of 2008 the Fund recorded a charge of $1.0 million relating to its product recall insurance claim (see Product Recall Insurance Claim).

FORWARD LOOKING STATEMENTS

This document 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 as of March 26, 2009, such statements involve unknown risks and uncertainties beyond the Fund's control 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 consumer discretionary spending resulting from changes in economic conditions and/or general consumer confidence levels; (iii) changes in the cost of raw materials used for the Fund's products; (iv) changes in the cost of products sourced from third party manufacturers and sold through the Fund's proprietary distribution networks; (v) changes in Canadian income tax laws; (vi) changes in consumer preferences for food products; (vii) competition from other food manufacturers and distributors; (viii) new government regulations affecting the Fund's business and operations; and (ix) other factors as discussed in the Fund's Annual Information Form, which is filed electronically through SEDAR and is available online at www.sedar.com. It should be noted that this list of important factors affecting forward looking information may not be exhaustive.

Unless otherwise indicated, the forward looking information in this document is made as of March 26, 2009 and, except as required by applicable law, will not be publicly updated or revised. This cautionary statement expressly qualifies the forward looking information in this document.

SUPPLEMENTAL DISCLOSURE

EBITDA, distributable cash and net funded debt 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 following table shows the calculation of each of these items starting from a GAAP defined term.



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13 weeks 13 weeks Year Year
ended ended ended ended
Dec 31, Dec 31, Dec 31, Dec 31,
(in thousands of dollars) 2008 2007 2008 2007
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EBITDA:
Earnings before non-controlling interest 2,919 3,282 21,070 25,895
Depreciation of capital assets 2,375 1,623 7,927 6,164
Interest and other financing costs 1,652 1,792 7,293 4,932
Amortization of intangible and other
assets 937 1,200 2,701 2,030
Amortization of financing costs 54 97 199 97
Accretion of puttable interest in
subsidiaries 250 43 650 43
Unrealized (gain) loss on foreign
currency contracts (51) 461 (1,186) 461
Product recall insurance claim 987 - 987 -
Income tax provision (recovery) 480 402 985 (6,271)
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9,603 8,900 40,626 33,351
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Distributable cash:
Cash flows from operating activities 5,156 12,005 34,220 31,853
Change in non-cash working capital 1,927 (4,825) (1,765) (3,551)
Restricted Trust Unit Plan expense
accrual (142) (82) (225) (82)
Payments received on notes receivable 28 132 739 463
Maintenance capital expenditures (617) (417) (2,600) (1,780)
Accretion of puttable interest
In subsidiaries (250) (43) (650) (43)
Non-controlling interest 44 (110) (97) (407)
Unusual cash income taxes - - - 104
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6,146 6,660 29,622 26,557
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Net funded debt:
Cheques outstanding 1,354 695
Bank indebtedness 9,676 9,703
Current portion of long-term debt 386 148
Deferred financing costs 534 641
Long-term debt 107,067 96,914
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119,017 108,101
Less cash and cash equivalents 1,679 1,116
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Net funded debt 117,338 106,985
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Contact Information

  • Premium Brands Income Fund
    George Paleologou
    President and CEO
    (604) 656-3100
    or
    Premium Brands Income Fund
    Will Kalutycz
    CFO
    (604) 656-3100
    Website: www.premiumbrandsincomefund.com