Premium Brands Holdings Corp (PRBZF) CEO George Paleologou on Q1 2019 Results - Earnings Call Transcript

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About: Premium Brands Holdings Corporation (PRBZF)
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Earning Call Audio

Premium Brands Holdings Corporation (OTC:PRBZF) Q1 2019 Earnings Conference Call May 13, 2019 1:30 PM ET

Company Participants

George Paleologou - President and CEO

William Kalutycz - CFO

Conference Call Participants

George Doumet - Scotiabank

Derek Lessard - TD Securities

Sabahat Khan - RBC Capital Markets

David Newman - Desjardins

Stephen MacLeod - BMO Capital Markets

John Zamparo - CIBC

Dimitry Khmelnitsky - Veritas

Robert Gibson - PI Financial

Stephen McLeod - BMO Capital Markets

Operator

Good afternoon. My name is Denise, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Premium Brands Holdings Corporation First Quarter 2019 Earnings Conference Call. Our speakers on the call today will be George Paleologou, CEO and President of Premium Brands; and Will Kalutycz, CFO of Premium Brands. All lines have been placed on mute to prevent background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you.

I'd now like to turn the call over to George Paleologou. You may begin your conference.

George Paleologou

Thanks Denise and good morning, everyone. I would like to welcome you to our 2019 first quarter conference call. Our first quarter results once again show the progress we're making in becoming North America's leading specialty foods company. We standalone as a food company that continues to execute a values based strategy that is based on the long-term.

Our unique strategy of partnering with talented and successful entrepreneurs in the specialty food industry and helping them to grow their businesses both through organic initiatives and acquisitions is the core to our success. For more information on this strategy and our long-term plans, please see my 2018 letter to shareholders titled The Long Game, which can be found on our website at www.premiumbrandsgroup.com.

I will now be turning the presentation over to our CFO, Will Kalutycz for an overview of financial results for the quarter after which I will make a few brief comments. This will then be followed by the Q&A segment of the presentation. Will?

William Kalutycz

Thanks, George and good morning, everyone. Before discussing our results for the quarter, I would like to caution you that to the extent we make forward-looking statements during our presentation, our forecast and assumptions are subject to change and actual results may vary. Please see our 2018 MD&A, which is filed on the SEDAR’s website, www.sedar.com, for details on some of the factors that could cause our actual results to differ from our current expectations.

Turning to our results, I would like to start out by highlighting that our first quarter is generally our weakest of the year due to the seasonality of many of our businesses, and that the seasonality was further exaggerated by some of the acquisitions we made last year.

Our revenue for the quarter grew by $191.7 million, or 32.8%, to a record $776.6 million. Acquisitions accounted for $181.3 million of the increase, organic volume growth for $11 million and currency translation for $9.6 million. These increases were offset by $1.3 million in selling price deflation, and the impact of a late Easter holiday, which was estimated to be approximately $8.9 million.

After normalizing for the late Easter holiday, our organic volume growth rate for the quarter was approximately 2%. This was driven by solid momentum in a variety of protein related categories including Meat Snack, Deli Meats and cooked protein, as well as by our new food service initiative in the Greater Toronto Area. These factors were partially offset by two challenges.

The most significant of these was a decrease in our wholesale business, with retailers in Eastern Canada, resulting from a variety of transitory factors, including the timing of product promotions, and a particularly harsh winter in Quebec. The other challenge was continued lower consumer food service spending in Western Canada, particularly in the white-table-cloth segment of the market.

Overall, however, our growth for the quarter was in line with our expectations, particularly given that this is for seasonal reasons, our weakest quarter of the year.

Normalizing for the impact of the new IFRS 16 accounting standard, our adjusted EBITDA for the quarter increased by $8.9 million, or 20.6% to $52 million. This was driven mainly by acquisitions, efficiency improvements at a number of our production facilities and organic sales growth. Commodity costs on an overall basis were relatively neutral, with wage and freight inflation having a negative impact of approximately $2.3 million.

Our recently acquired Ready Seafood business also continued to be impacted by China's tariffs on U.S. lobster products. However, looking forward we expect this issue to largely be resolved by several initiatives launched by Ready towards the end of the quarter.

During the quarter, we incurred $1.9 million in startup and restructuring costs, which primarily related to two projects, the construction of a state-of-the-art 105,000 square foot distribution facility in Greater Toronto Area and the construction of a new 22,000 square foot culinary plant in Surrey BC. Both of these facilities commenced operations near the end of 2018.

Our adjusted earnings per share for the quarter decreased by $0.12 per share or was $0.52 per share. Due to highly seasonal nature of many of the acquisitions acquired late in 2018, and to the adoption of the new IFRS 16 accounting standard.

Looking forward, we're seeing solid momentum building across all of our platforms. However, due to significant uncertainties associated with an outbreak of African Swine Fever in China, and the possible repercussions of this on global protein prices we've expanded our adjusted EBITDA range to $300 million to $340 million from the previous guns range of $320 million to $340 million. We are maintaining our 2019 revenue guidance range of $3.66 billion to $3.72 billion.

In terms of our financial position, we continue to maintain a solid balance sheet and very strong liquidity. Our senior debt to adjusted EBITDA ratio was 2.7 to 1 at the end of the quarter, which was in the middle of our long-term targeted range at 2.52 to 2 3 to 1. While our total debt to adjusted EBITDA was 3.9 to 1, which was below our long term targeted range of 4 to 1 to 4.5 to 1. Furthermore, we had almost $164 million on utilized credit capacity at the end of the quarter.

Turning to our investment activities, during the quarter, we made two business investments totaling $47.2 million, consisting of $21.4 million in cash and $25.8 million in contingent consideration. And we spent $8.1 million on project capital expenditures.

During the quarter, we declared a dividend of $17.7 million, or $52.5 per share, which on an annualized basis works out to $2.10 per share. Our free cash flow for the trailing 12 four quarters was a record $167.8 million as compared to dividends of $65.7 million, resulting in a payout ratio of 39.1%.

I will now turn the presentation back to George.

George Paleologou

Thanks, Will. Back in 2001, when we launched Premium Brands, we believed strongly that consumers would eventually shun sugar based highly processed foods in favor of high quality protein products made with clean ingredients by companies demonstrating good social values. Our growth since then into one of Canada's largest and most successful value added protein companies is a testament to our vision and resolve to continue to upgrade the food eating experience through regionally focused brands and platforms.

This focus has propelled us to leading market positions in a number of high growth categories including fully cooked protein and skewers, meat snacks, sandwiches, protein distribution, seafood, and cured meats. The companies that joined us over the past year are all making great progress in leveraging our ecosystem to take their businesses to the next level. We're especially pleased with progress that the Oberto is making in the U.S. by using the expertise and resources of our best-in-class meat snack and deli platforms in Canada to launch new and innovative products in that market.

The opportunities we're seeing in the U.S. are even bigger than we originally anticipated. And correspondingly we're working hard to add capacity to sustain and support this growth. Many of our plants are looking at expanding their operations, as we work towards our objective of doubling the size of the company over the next five years.

Furthermore, since launching our PB Ecosystem project in Q4 2018, we have already had a number of significant successes, and expect this initiative to accelerate our innovation pipeline and market channel development plans. The recent launch of our Italian meats offering in the U.S. is a great example of several of our companies working together to bring about innovation to generate new growth opportunities.

We’re following the ASF crisis in China closely as we try to understand its potential impact on our business. We are however, diversified across many proteins and for this, as well as other reasons are confident that we will manage through this crisis better than others. Also, I should mention that not all possible scenarios are negative for us, and that there are many factors that could largely mitigate many of the projections around global pork shortages. These include global demand destruction resulting from higher pork prices, the substitution effect to other proteins, the timing of containment of the disease, or an escalation in trade tensions between North America and China.

Looking forward, we're very excited about how we're positioned as we continue to innovate and drive growth at a unique time of disruption and opportunity in the food space. As to acquisitions, we continue to be viewed as the acquirer of choice by many of the owners of specialty food companies. And I am pleased to report at we're still enjoying an especially robust pipeline of acquisition opportunities, and fully expect to add to our portfolio of specialty food companies in the very near future.

I will now turn the presentation over to Dennis for the Q&A part of the presentation, Dennis?

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from George Doumet with Scotiabank. Your line is open.

George Doumet

Good morning, guys.

William Kalutycz

Good morning, George.

George Doumet

The reduced guidance for year almost $10 million at the midpoint, should we assume most of that -- most of the impact being in Q2 and to a smaller degree in Q3? And by when you guys expect to have fully past through the prices?

William Kalutycz

Well, it's a -- we've made some approximate estimates based on like you say mainly Q2, George. The key is going to be how long it continues for and what happens. Like George says said there is so much uncertainty around this issue. So it’s sort of a one-time impact, we see it steady off and yes, it will be solely a Q2 impact if it falls off it could be a neutral Q2 and if prices continue throughout the year increasing it will go beyond Q2. Again, it sort of goes to the uncertainty of the whole situation.

George Doumet

Okay. And on that note maybe what was the rationale for maintaining the higher end of the EBITDA guidance? And I am just wondering is there a buffering that guidance may be a general guidance may built in for a rise in beef and poultry prices over the next three quarters?

William Kalutycz

There is a chance towards, George, ASF does come to anything in which case Q1 was on plan. A lot of our sales initiatives are gaining the momentum we expected. They’re on plan. So there's still that potentiality if things don't go bad on the commodity side of things that there's a lot of upside potential in the numbers still.

George Doumet

Okay. Maybe shifting gears to the food distribution business, the margins were down quite a bit year-over-year and I am just wondering how much of that was ready sea foods and much of it was maybe other categories like, I guess, operating leverage impact and others?

William Kalutycz

Sorry, can you say that again George?

George Doumet

Yes, the food distribution business, I’m just wondering the margins were down year-over-year, so I’m just wondering the bucket I know ready seafood isn’t there, but you can just kind of...

William Kalutycz

The new GTA facility contributed a bit to that, but it’s primarily ready seafood. And ready Obertos, Concord, TMF these businesses all acquisitions of 2018 have a tremendous amount of seasonality in their business. And so you had ready impacting PFD on that basis and then you also further compounded that with the lobster issue that the tariffs issue with China. So some of those issues we should see reverse themselves in Q2. As I mentioned ready now got in place number of initiatives that will largely mitigate the tariff issues, so that should be behind us. And then also the natural seasonality will kick in Q2 with the positive results then.

George Doumet

Okay, thanks for that Will. And maybe just one last one, maybe for George and your 2019 Letter to Shareholders you discussed removing guidance. So I’m just wondering is that something we can possibly expect this year at all?

George Paleologou

Again George I didn’t discuss removing guidance, I basically discussed the pros and cons of guidance. So there is no plan to remove guidance under any circumstances. But I was just basically talking about some of the pros and cons of trying to run a business for the long-term and obviously having to respond to quarterly guidance.

George Doumet

Okay, thanks for the clarification. Those are my questions.

George Paleologou

Thanks, George.

Operator

Your next question comes from Derek Lessard with TD Securities. Your line is now open.

Derek Lessard

Good afternoon, everyone. I wanted to drill down a little bit further on the hamburger business in Belmont, you did call out the plant protein based burgers as one area of strength. Just wondering what your strategy is in this area and some advantages over some of other players we’ve heard about recently?

George Paleologou

Yes, it’s a very good question, Derek, as you probably know we're probably Canada's larger broker company, we’re a very, very significant player in Canada and in North America as well. We -- over the past two or three years, we’ve launched a brand called Pure, which is actually doing well in the marketplace. You could find it at the retailer near you. These are very, very clean ingredient type of burger products.

We’ve followed the plant protein space for long time now for about 10 years now because this category has been around in Europe for about 10 years and we appreciate that there is growing demand for these types of products. And our burger platform has leveraged this knowhow and its manufacturing facilities to develop some very, very good products in this segment.

We do significant business in this segment and we’ve spent considerable amount of time in learning about it in and in trying to come up with the right products with the right ingredients that meet our brand vision and brand specification. So we're excited by it there's some growth to it.

I should also say that plant protein is a sub-segment of the protein space. The protein space is very trendy these days, for the comments I made earlier. Consumers are shunning refined sugar, there's way too much sugar in our diet in North America people know that. And they're looking to find protein solutions for their snacks and for their dietary decisions.

So again, protein is really on trend. Plant protein is a sub-segment of protein that's growing. But I should also say that as Will mentioned earlier seafood is growing as well. Organic, is growing very quickly as well. Meat snacks are growing; I don't want you to assume that this is the only part of a protein space that is growing.

Derek Lessard

Okay, thanks for the color on that. And maybe just changing gears here on acquisitions, I'm just curious to get your inside as to why, again, you mentioned this in the MD&A, but why you're seeing increased interest from larger competitors to join you guys? And maybe if you can just talk about which platforms you are seeing the most interest from?

George Paleologou

Yes, again, they're a good question in the sense that we are seeing more transactions and bigger transactions because we're a much more significant company in the U.S. we have four very, very good platforms in the U.S. today, with excellent management teams. We're gaining a lot of traction in terms of listings and innovation. And just the fact that the size of the companies in the U.S. are bigger by virtue of the fact that it's 10 times bigger than Canada in terms of population. So it's a natural consequence of the traction we're getting in the U.S. market.

Derek Lessard

Okay. I’ll requeue. Thanks, guys.

George Paleologou

Thank you.

Operator

Your next question comes from Sabahat Khan with RBC Capital Markets. Your line is open.

Sabahat Khan

Thanks. Just one on the ASF issue, can you maybe walk us through some of your bigger business lines and how quickly you can pass through pricing on each of them? I'm thinking sort of the food distribution businesses such as seafood versus sandwiches, and maybe compared to your products that are sold into the retail channel, just any directional commentary there?

George Paleologou

Yes. In general terms, two-thirds of our business would be distribution in sandwiches. And those businesses have cost plus business model. So generally speaking, they pass on price increases on a very dynamic basis. So that leaves the other third. That's -- our protein businesses are in there, our meat snack business are in there and obviously the Deli and fully cooked protein.

It is about 10%, 11% of our sales pork today. Many years ago, it was probably closer to 50%. So it's come down a lot. As Will mentioned earlier, the -- there is some uncertainty there as to the extent of the issue in China. The story is changed a few times out of China, they're going to be pork deficient. For the remainder of this year, we don't know how much. They will reach out to procure pork all over the world, they have to a large extent already. But again, we don't know the extent of the problem in China at this point.

In overall terms, we think that we are looking at a relatively inflationary environment for all proteins. Because of the substitution effect, we think if pork prices double, for example, and not as many consumers are going to consume as much pork and consumers will switch to other proteins like chicken, for example. So there is some uncertainty there as to what behavior will be.

But, as I mentioned earlier for us, we've already passed, cost increases through on 30-day notice basis. And it's really the only part of our business that we have to give notices and our notices usually are 30 to 90 days. In this particular case though we're going for 30 days.

Sabahat Khan

Okay. And then just one on the outlook for the rest of the year, As you look towards seasonality of your sales, is there a ramp up we should expect in some of the programs for the rest of the year in some of the meat snacks and the sandwiches program that you talked in the past? Or should we expect sort of a full quarter of contribution from your newer programs starting in Q2?

William Kalutycz

Yes, definitely a ramp up there. A lot of the initiatives particularly in the sandwich group are kicking in sort of mid to late second quarter. So the way we look at the balance of the year is Q2 is ramp up, all of initiatives are pretty well in full gear up for Q3. And then you should see in Q4 a little less seasonality in our business, because some of the newer initiatives are less seasonal particularly again in the sandwich group. But that's the way we're looking at the balance of the year.

Sabahat Khan

Okay. And then just last one for me, I guess, as these programs ramp up, how should we think about margins? I guess, these programs aren't necessarily tied to I guess new facilities coming on, but rather you're servicing them out of existing facilities. So is there some sort of a margin ramp up there as well?

William Kalutycz

Exactly, yes. That is a big factor contributing to what we see as the expansion of our margins over the course of this year is the higher contribution margin on incremental sales.

Sabahat Khan

Okay. And then one more if I can squeeze it in. On the food distribution side, you talked a little bit about the seafood side. I guess, what are you seeing on the Western Canada weakness. Does that look to be moderating at all or do you expect to be a headwind for the rest of the year?

William Kalutycz

We are cautiously optimistic that it's going to be better in the second half of the year. We think Q2 will continue to be a bit of a headwind. But oil prices seem to have stabilized general sentiment seems to stabilize a little bit. So yes cautiously optimistic on the second half of the year.

George Paleologou

Especially with Alberta, I think we're seeing a little bit more excitement out of the Alberta market, which has been slow in the last couple of years.

Sabahat Khan

Thank you.

Operator

Your next question comes from the David Newman with Desjardins. Your line is open.

David Newman

Good morning, gentlemen.

George Paleologou

Hey, David.

David Newman

As we look into your outlook for the entire year on organic volume growth, I think you previously flagged for around 10% in specialty food and food service distribution being around 8% to 9% if I'm correct. So you held your revenue guidance intact, but I’d assume that within that that there would be price increases embedded going back of the African Swine Fever. So I'm just kind of getting sense of what you think the volume outlook might look like for the remainder of the year, for the full year?

William Kalutycz

So our guidance is the range and those rates you quoted are in that range. So the way we looked at any inflation coming through from African Swine Fever is, yes, it will probably push us to the top of our range given sort of an average level of assumptions. So we didn't feel we needed to increase the range because of that. But you're absolutely right that would be factor that would push us towards the higher end of that range.

David Newman

Okay. And you've nailed down $100 million captured out of the $135 million in months [ph] and each you may have Wal-Mart in as well, starting June 1. So if you kind of look out beyond that there was another $100 million that you're kind of looking at with 711 crew start and those sort of guys in seafood channel. And you did note in your press release that there is new listings, any color you guys can share?

William Kalutycz

Well again, David, I can't tell you how excited we are with all the new listings that we've got, and in executing those liftings. As I mentioned in my prepared comments, Obertos has made incredible strides in terms of their renovation pipelines. They're having almost 100% success in presenting new items to their customers and getting listings for those customers . And I just can’t tell you how excited we are to be working with them in terms of growing their platform and their business in the U.S. market.

Another area is our fully cooked kebabs, skewers and other proteins, we got a lot of new listings in that particular area in the U.S., you just have to remember that the size of the market in the U.S. is 10 to 11 times bigger than Canada. So a lot of times with us, our innovation gets us the listing, but we have to figure out the capacity and the way we can execute it. So, lots of very, very exciting initiatives with a lot of well-known customers, some of them of which you've mentioned in your question, and we're just exciting to be executing them.

David Newman

Okay. So just connecting the dots and back to the organic growth question then, I would assume then if you nail down some of these other ones the 135 that kind of gets you to the 10% organic growth on volume in specialty foods.

William Kalutycz

Absolutely yes, David.

David Newman

Okay. And just a couple quick ones, the weather certainly in second quarter here has been pretty sloppy. I'm not sure what it’s like in the West Coast, but it's pretty horrible in Toronto we've had a terrible spring. Does that weigh in to your second quarter as well, being a sloppy spring here in terms of weather, flooding, et cetera.

William Kalutycz

It's a little early to tell at this point, David, the real barbecue season, the real outdoor season doesn't really kick into high gear until May. So, we're a weak into it now. If it continued throughout the month, then it may start to become a factor, but I wouldn't say it is one today.

George Paleologou

The other point, David is that, again, you've commented about weather in Central Canada, our businesses now are truly North American. So you have to look at weather patterns across North America, West Coast had a great spring so far, and the South and the Northeast to the U.S. not bad. So you just have to look at the entire weather patterns in North America, not just one part of it.

David Newman

Yes, know for sure. And then just last one for me and just Will, I know we talked about this in the past that your working capital is been creeping up. And you mentioned there's some initiatives that you have underway just other than obviously the puts and takes of these programs kicking in, which is already evidenced, but there is programs kicking in because the working capital is building on inventory. But is there other things that you're focused on inventory in terms of managing it?

William Kalutycz

Yes, so I can't emphasize a big part of that inventory bump is our businesses planning for this summer, it’s a lot more advanced building of inventory. There's a little bit of building of inventories as well associated with the global protein situation. But yes, we feel there's -- it can always be managed better. And one of the things we are implementing now we are directly tying our senior executives compensation to specific metrics around working capital. And so we're trying to bring more focus to it as well to make sure that it is at an ideal level. But certainly a large part of that increase this quarter is planning for the summer.

George Paleologou

Again, David it’s planning for the summer, as Will mentioned, but there's also a little bit of planning for a worst case scenario under the ASF situation as well. That's very significant.

David Newman

Make sense. Thanks, guys.

George Paleologou

Thanks, David.

Operator

Your next question comes from Stephen MacLeod with BMO Capital Markets. Your line is open.

Stephen MacLeod

Thank you. Good afternoon, guys.

George Paleologou

Hey, Stephen.

Stephen MacLeod

I just wanted to follow up a little bit on the price increases that you put through, you said you put through I guess a 30 day price increase request or demand, not sure how to phrase it. But can you talk a little bit about what you're seeing or what you're hearing? I know, it's still early days, but what you're hearing in terms of the willingness to accept the price increases. I mean, if you put them forward, do your customers have to take them?

George Paleologou

Well, again, Stephen, what's happening with ASF is not new, it's not unique to us, of course, and the retailers are already seeing increased input costs in terms of some of the fresh pork cuts that they sell, right. So it's not a surprise to them in terms of what's going on in the marketplace. So again, our business model is one that's always been dynamic when it comes to pricing. We are having very good communications with our customers. Obviously, if the situation improves, we’ll pass on decreases as well, but we have a very unique situation here.

They know about it, and in some cases some customers basically even notified us and said you know what are you going to do in this situation. So again there is nothing new here in terms of -- this is not new or unique to Premium Brands.

Stephen MacLeod

Okay, yes that makes sense. And then just in terms of the of the guidance, I know you already referred to it in response to previous question, but what kind of levied of the low end of guidance give you in terms of the ASF is a long drawn out pronounced issue.

William Kalutycz

So our estimates at this point, Steve, are based on kind of what we've seen so far in the markets and our regional extrapolation of that. So if things get really crazy then we're going to have to go back and re-examine the numbers. But it sort of based on what happened to-date, and the best outlooks says to what's going to be happening go forward.

George Paleologou

I think Steven there is probably 10 assumptions or many, many assumptions in how we estimate the impact of this crisis, right. So it's not one assumption, it’s not two, it’s many. But what we've done is we've gone back and looked at what's happened historically in similar situations because our industry has had similar situations in the past. So that's what we're basing our projections at this time.

Stephen MacLeod

Right, okay that makes sense. And then, I just want to clarify you mentioned that pork was 11% of sales, just so I understand is that a percentage -- your pork cost are 11% of your sales.

William Kalutycz

That’s cost divided by the sales.

Stephen MacLeod

Okay that's helpful. And then just finally, Will, you mentioned some of the initiatives that Ready has put place in the market to offset some of the challenges you’ve seen in the lobster market. Can you just elaborate a little bit on what those are?

William Kalutycz

Yes, I can't there's sort of a proprietary nature to them, but essentially a big part of it is opening new markets and getting product into new markets. But, yes, it's not something we want to share.

George Paleologou

They have also invested in a Canadian operation as well, Stephen.

Stephen MacLeod

Right, okay. Okay, yes that’s great, thank you.

Operator

Your next question comes from John Zamparo with CIBC. Your line is now open.

John Zamparo

Thanks. Good morning, guys.

George Paleologou

Good morning, John.

John Zamparo

Just a couple housekeeping questions to start, is it fair to assume the -- I think with the $8.3 million impact from IFRS 16 can we assume that is likely going forward for quarter.

William Kalutycz

Yes, it's -- on an annual it’s about $31 million, John.

John Zamparo

Okay. Thanks great, thanks. And then, I just want to confirm the previous EBITDA guidance of $320 million to $340 million that did not include the IFRS benefit and then the current EBITDA guidance does include IFRS 16, is that right?

William Kalutycz

No, no it’s all pre-IFRS 16.

John Zamparo

Okay, that’s good. Thank you. And then as a follow-up to the last question, within the EBITDA guide you mentioned there is a lot of assumptions at it relates to ASF and granted there's so much uncertainty here, but what's the embedded net impact of ASF in your current guidance?

William Kalutycz

We haven't disclosed that, John, it's just one of -- it's a range of factors in difference scenarios and that’s what’s brought us to that range. So we don't have one specific number.

John Zamparo

Okay, understood. Sticking with ASF, on the pricing side, can you comment on the magnitude of the dollar increase you’re going to get on pricing versus cost, is it an attempt that a pure pass-through or do you try to get some margin expansion through these price increases?

George Paleologou

Just a pure pass through, John.

John Zamparo

Okay. And then just one more ASF one I promise, you call out the impact of a few items. I'm trying to get a sense of, I guess, part of the fear on ASF is that it passes through to other proteins. So, have you seen so far any cost inflation on your other main proteins, in particular beef and seafood?

George Paleologou

Beef in general terms has been a little bit inflationary, but nothing material. I wouldn't say the other proteins have been impacted at this point although there is a lot of talk out there that if they will be impacted depending on the size of the problem in China, of course, right. So there's a lot of speculation right now.

And I want to emphasize that a lot of it is speculation, there is a lot of miss information and disinformation about this subject out there, and I think that people forget that as prices for pork let's say go up in China, there's a substitution effect there. There's a lot of demand destruction there and people go to chicken and other proteins, right. So there is a lot of linear type of estimates out there and -- so we're being cautious.

John Zamparo

Okay, understood. And then last one for me towards the end of last year and I suppose mid last year you called out impact of U.S. labor rates and to a lesser extent freight just trying to get a sense of how you expect these costs to progress throughout the year?

William Kalutycz

So far as I mentioned in the comments, freight and labor was about a $2.3 million, $2.4 million impact on the quarter. That was in line with our budget, our expectations and that's sort of the rate we expect going throughout the year.

George Paleologou

And, again, since we've ramped up our Phoenix plant, our Phoenix sandwich plant, we are, as Will mentioned in his prepared remarks, we're getting better efficiencies, out of that facility and in general out of our entire sandwich platform. So we are getting some good traction in capturing some efficiencies.

John Zamparo

Okay, great. That's all for me. Thank you very much.

George Paleologou

Thank you.

Operator

Your next question comes from Rob Welk [ph] with TD. Your line is open.

Unidentified Analyst

Good morning, George and Will.

George Paleologou

Hey Rob, how are you?

Unidentified Analyst

The question about labor with the U.S. unemployment rate at 3.6%, how do you see that impacting the business over the next year or so? Do you have a big challenge there, as with hiring people?

George Paleologou

Yes. Well, like, again, Rob, it's a good question. This has been the case obviously for us for about a year now. A lot of our U.S. operations have had challenges with respect to accessing labor. But as I've mentioned in the earlier question, we have made some great progress with respect to efficiency and automation and coming up with programs to be able to hire people and to hold people.

But the other side of the equation is actually a positive for us, because we have Canadian based operations, our Canadian based operations are not having as many challenges access and labor. So we're getting a lot of opportunities right now to bid and win business that in the U.S. that are made manufactured in Canada. So there is a silver lining there as well for us.

Unidentified Analyst

Okay. And what do you see as the biggest challenge for the company over the next year that is within your control?

George Paleologou

Well, again, I -- we're very, very excited with everything that's going on in the company, Rob. I'd say, we need to manage ASF as best we can. And, as we've mentioned on the call, there is a lot of uncertainty to it. We feel that we need to manage it better than everybody else. It's an industry problem, it's not a PB problem, but we need to come up with the right strategies and the right scenarios to manage it better than everybody else.

Unidentified Analyst

Okay, thanks.

George Paleologou

Thanks, Rob.

Operator

Your next question comes from Dimitry Khmelnitsky from Veritas. Your line is open.

Dimitry Khmelnitsky

Thank you. Thanks very much for taking my question. What portion of the $11 million in Specialty Foods organic growth this quarter came up from the new initiatives?

William Kalutycz

It's a mixed Dimitry, I don't have the specific blend. Off the top of my head I would probably guess 50% sort of range, but the reality is a lot of the new initiatives are seasonal products and aren’t kicking in until Q2.

George Paleologou

But in…

William Kalutycz

It wasn't a big driver in the quarter.

George Paleologou

In general terms, Dimitry, the star of the show for us was meat snacks and deli, getting a lot of traction in meat snacks and deli in the U.S. market.

Dimitry Khmelnitsky

I see. And just to confirm I understood it’s right from the prior call at this stage for 2019 out of the new initiatives that should contribute $135 million on an annualized basis, you expect in 2019 they will contribute somewhere around, I guess, $90 million to $100 million this year in terms of incremental growth.

William Kalutycz

That's correct, Dimitry.

Dimitry Khmelnitsky

I see. And the last question is, you haven't highlighted sandwiches in specialty foods organic growth during the quarter. And so does that suggest that that sandwich business delivered less than 3% organic growth in the segment during Q1?

William Kalutycz

Yes, no it was a situation where there were just less LTOs, so wasn't a big driver of our growth in the quarter. Because LTOs can be a very kind of choppy element in that segment of our business. And sorry, by LTOs I mean limited time offers by key customers.

Dimitry Khmelnitsky

Okay, thank you very much. Go ahead. Sorry.

George Paleologou

Yes, a lot of the growth in that category is determined by the limited time offerings of end of promotions of the customer base Dimitry, right? So there weren't very many, again, those are usually dependent on weather patterns and other factors. And there weren't that many in the quarter.

Dimitry Khmelnitsky

So were sandwiches substantially less them than the headline organic growth and 3% organic growth for that segment during the quarter.

William Kalutycz

It was relatively flat, Dimitry, once you normalize for some of the LTOs.

Dimitry Khmelnitsky

Okay, thank you very much.

George Paleologou

Okay.

Operator

Your next question comes from Bob Gibson with PI Financial. Your line is open.

Robert Gibson

Will, so let me just get this clear, the guidance you're giving is pre-IFRS 16?

William Kalutycz

Correct. Yes, everything is -- yes. So the numbers we gave last year are completely comparable to the numbers we just gave.

Robert Gibson

So are you going to give us post IFRS 16 guidance numbers.

William Kalutycz

Yes, roughly $31 million is the annual impact of IFRS on our EBITDA.

Robert Gibson

Okay, great. And looking below the EBITDA number, the impact of IFRS is it pretty much smooth or is there anything else I should look at?

William Kalutycz

No, it's -- you can isolate the specific line items in the statement below. But overall for the quarter, it was about up almost a $0.04 negative impact on our EPS net. So the positive EBITDA offset by the increased accretion and amortization was a negative.

Robert Gibson

Okay, great. Thank you.

William Kalutycz

Okay.

Operator

Your next question comes from Derek Lessard with TD Securities. Your line is open.

Derek Lessard

Thanks, guys. I just want to follow up on a previous question. I mean, you talked about capacity being the biggest hurdle to growth. Maybe if you could just talk about some of the initiatives you got going on there.

George Paleologou

Well, again, Derek, I would say just about every facility we have in the system is undergoing some sort of expansion right now. We're working really hard to find and grow capacity in the system. We have a number of plants that have expansions that are just about completed.

Again, these are not major projects in general, but their capacity expansion initiatives are two cook skewer plants have just -- they've both finished capacity expansions. We have three seafood plants that are either just completing major expansions as well including a new facility by Ready Foods to value add lobster.

Our deli meat snack plant in Western Canada are all undergoing capacity expansions. And, also, a lot of the non-sandwich plants in the U.S. are going expansions -- are going through expansions as well. So there's a lot going on in with respect to increasing capacity in the system. As I mentioned earlier, that's part of our plan to double the size of the company over the next five years.

Derek Lessard

Okay. And maybe just a follow-up on that, the CapEx is running at roughly $60 million annually is this still a reasonable assumption for the year?

William Kalutycz

Yes, so a lot of what George talked about are smaller projects, but there are some larger projects in there, Derek that are in the planning stages that we have not sort of finalized and therefore are not included in our guidance yet. But at this point what's in our MD&A is what's approved and we're proceeding with. And -- but I would give you a heads up that there could be some bigger projects coming down the pipeline, subject to going through our approval processes.

Derek Lessard

Okay, thanks for that.

William Kalutycz

Thanks, Derek.

Operator

Your next question comes from Stephen McLeod with BMO Capital Markets. Your line is open.

Stephen McLeod

Thank you. I just had one quick follow-up question. Are you able to quantify what your sales are for plant based proteins?

George Paleologou

I don't think we've disclosed that numbers, Stephen. It's in the single digit millions of dollars.

Stephen McLeod

Okay.

George Paleologou

And, most importantly, we've got a lot of initiatives coming to market shortly, a lot of launchings coming to market shortly. So a lot of noise in this category and we are getting lots of inquiries about it. And as I said, we do have production capacity and expertise in the segment.

Stephen McLeod

So you specifically have plant based protein launches coming to market?

George Paleologou

Absolutely, absolutely, we have plant based protein burgers on the market as we speak. We've had them for quite a while now. Some under our brand, some under private label, and we have more coming to market.

Stephen McLeod

Right. Okay, that's great. Thank you.

George Paleologou

Thank you.

Operator

[Operator instructions] Your next question comes from David Newman with Desjardins. Your line is open.

David Newman

Hi, guys. Just a couple of quick follow-up here you called out on SG&A, obviously, you had increased discretionary promo spending and whatnot ahead of the launches. So if you look at SG&A just more holistically on 30,000 foot level, do you think this is going to level off at some point? Is this going to be the new level, but you're going to get better absorption on it and how are you thinking about the SG&A?

William Kalutycz

Yes, that's a fair comment, David. The problem with the first quarter it being so slow, it doesn't take a lot of extra costs in that line to really throw the margins out. So that's one of the factors you've got going against us. So there was some increased discretionary spending in the quarter, but it wasn't huge.

David Newman

Okay.

William Kalutycz

It was just sort of laying the platform for some of the new products. And like I say, the impact of that because of the lower sales dollars was more meaningful on a percentage basis.

David Newman

Got it. And then just on the sandwich expansion down in Phoenix, I noticed it was in the filings it was says Q1 2020 now and I think was previously Q3 2019. So anything going on there in terms of the rollout of those lines?

William Kalutycz

Yes, we ran into some issues with a supplier and the specifications around the product. And in these automated lines, it's incredibly important to have a consistent components going into them. So we had to work our way through that we've worked through it now, it's all settled. But now we've got had to get back in the queue with the supplier. So it's just a question of the supplier gone on to other projects. Now we're working with them, we're back in the queue. And so that should be a hard date now.

David Newman

And can you leverage those learnings in terms of automation into your other plants? I mean, you must have learned quite a bit through this whole process, I would imagine.

William Kalutycz

Well, it's kind of -- automation is an interesting one. This is a sandwich automation project. So it's quite unique to sandwiches, but where we are getting a lot -- so there's not a lot of leverage going from that into, say our protein businesses. But within our protein businesses, we're seeing some tremendous gains by leveraging some of our recent acquisitions and in particular a small company we bought up in Northern BC called Country Prime Meats and their use of robotics and automation. So we are leveraging a lot of lessons they've learned and bringing that to our other protein plants.

David Newman

Okay, very good. Thanks, guys.

Operator

There are no further questions queue up at this time. I will turn the call back over to George Paleologou.

George Paleologou

Thank you, Denise. And I'd like to thank everybody for attending today. Thank you so much.

Operator

This concludes today's conference call. You may now disconnect.