Yahoo Finance

Three of the Company's businesses that are in the midst of major transformations, and correspondingly are having a short term negative impact on the Company's earnings, are:

• Stuyver's, which recently invested $19.1 million in a new state-of-the-art artisan bakery;
  
  

• The Company's Deli Group, which wound down an older deli meat production facility and is transferring its production to its other deli meat plants including a state-of-the-art 118,000 square foot facility that was purchased as part of its acquisition of Freybe Gourmet Foods in the first quarter of 2013; and
  
  

• NDSD, which is undergoing a major restructuring in response to significant changes occurring in the convenience store industry.
  

"Our Bakery Group made significant strides during the quarter in improving its profitability both through continued improvement of production processes at its new plant and by realizing on several significant new sales opportunities," stated Mr. Paleologou.

"Similarly, our Deli Group made substantial progress with the orderly wind down of its older deli meat production facility in Richmond, BC. This initiative, which is scheduled to be completed by the end of the third quarter, is expected to result in significant operational synergies.

"On the sales and marketing side, our Deli Group further enhanced its product portfolio during the quarter with the purchase of a 25% interest, along with options to increase its ownership to 100%, in McLean Meats Inc. McLean's is a niche marketer and distributor of branded, high quality, preservative-free and organic processed meats to the foodservice and retail industries. The Deli Group intends to leverage this investment to accelerate its growth in these rapidly expanding food categories.

"In terms of NDSD, this business is being impacted by the continued contraction of food sales in the convenience store channel. We do, however, still see potential in this channel and as such have initiated a process to explore strategic alternatives for better servicing it. We expect this process to result in improvements in the efficiency and effectiveness of the distribution system used for our products in this channel and to allow us to maximize the value of NDSD.

"Our confidence in the progress we are making is reflected in our decision in the quarter to increase our dividend by 6.3% to $0.3125 per quarter. Our recent capital investments and operational initiatives, combined with the strengths and competitive advantages resulting from our solid foundation of diversified and entrepreneurial businesses, position us to continue generating significant shareholder value," added Mr. Paleologou.

About Premium Brands

Premium Brands owns a broad range of leading specialty food manufacturing and differentiated food distribution businesses with operations in British Columbia, Alberta, Saskatchewan, Manitoba, Ontario, Quebec, Nevada and Washington State. The Company services over 22,000 customers and its family of brands and businesses include Grimm's, Harvest, McSweeney's, Bread Garden Go, Hygaard, Hempler's, Quality Fast Foods, Gloria's Best of Fresh, Direct Plus, National Direct-to-Store Distribution (NDSD), Harlan Fairbanks, Creekside Bakehouse, Centennial Foodservice, B&C Food Distributors, Shahir, Wescadia, Duso's, Maximum Seafood, SK Food Group, OvenPride, Hub City Fisheries, Audrey's, Deli Chef, Piller's and Freybe.

RESULTS OF OPERATIONS

Retail's revenue for the second quarter of 2013 as compared to the second quarter of 2012 increased by $24.1 million or 16.1% due to: (i) the acquisition of Freybe which accounted for $20.1 million of the increase; and (ii) organic growth of $8.6 million, representing an average growth rate of 6.5%, from its legacy businesses after excluding NDSD.

These increases were partially offset by (i) a $2.7 million decrease in NDSD's sales resulting from the restructuring of its convenience store (C-store) distribution network (see Restructuring Costs) as well as continued contraction of food sales in the C-store channel; and (ii) the sale of Retail's fresh sandwich plant in Etobicoke, ON in the fourth quarter of 2012 which resulted in a $1.9 million decrease in fresh sandwich sales to the C-store channel.

Retail's revenue for the first two quarters of 2013 increased by $29.8 million or 10.5% as compared to the first two quarters of 2012 due to: (i) the acquisition of Freybe which accounted for $20.1 million of the increase; and (ii) organic growth of $18.4 million, representing an average growth rate of 7.4%, from its legacy businesses after excluding NDSD.

These increases were partially offset by: (i) a $5.3 million decrease in NDSD's sales resulting from the restructuring of its C-store distribution network as well as continued contraction of food sales in the C-store channel; and (ii) the sale of Retail's fresh sandwich plant in Etobicoke, ON in the fourth quarter of 2012 which resulted in a $3.4 million decrease in fresh sandwich sales to the C-store channel.

Looking forward (see Forward-Looking Statements), the Company is not providing growth guidance for the balance of 2013 for its Retail segment due to uncertainties associated with its Richmond plant transition initiative (see Restructuring Costs).

Foodservice's revenue for the second quarter of 2013 as compared to the second quarter of 2012 increased by $5.8 million or 5.9% due to: (i) general organic growth of $3.0 million representing an organic growth rate of 3.2%; (ii) the acquisition of certain businesses from Harbour Marine which accounted for $2.0 million of the increase; and (iii) increased sales in its Worldsource food brokerage business of $0.8 million resulting from improved trading opportunities.

Foodservice's revenue for the first two quarters of 2013 as compared to the first two quarters of 2012 increased by $12.9 million or 7.0% due to: (i) general organic growth of $7.4 million representing an organic growth rate of 4.2%; (ii) the acquisition of certain businesses from Harbour Marine which accounted for $3.8 million of the increase; and (iii) increased sales in its Worldsource food brokerage business of $1.7 million resulting from improved trading opportunities.

Foodservice's organic growth rate for both the quarter and the first two quarters of 2013 was below the Company's long-term target of 6% to 8% due to: (i) a supply shortage of wild and exotic seafood that impacted the sales of Maximum Seafood and Hub City Fisheries; and (ii) poorer than normal weather in western Canada which impacted Harlan Fairbanks and, to a lesser extent, Centennial Foodservice.

Looking forward (see Forward-Looking Statements), for the balance of 2013 the Company expects Foodservice's organic sales growth to continue to be below its long-term targeted range of 6% to 8% due to ongoing shortages of wild and exotic seafood.

Retail's gross profit as a percentage of its revenue (gross margin) for the second quarter of 2013 as compared to the second quarter of 2012 decreased due to the restructuring of NDSD's business (see Restructuring Costs). The restructuring resulted in the conversion of NDSD's customers in certain geographic regions from being serviced by NDSD's direct-to-store delivery trucks to being serviced by third party distributors and wholesale distributors. As a result, where this conversion has occurred the Company now sells its products at a discounted price to the new distributor who in turn sells and distributes the Company's products to C-store retailers. Corresponding with this change, and the lost margin associated with it, NDSD has been able to significantly reduce its SG&A (see Selling, General and Administrative Expenses).

Retail's gross margin for the first two quarters of 2013 as compared to the first two quarters of 2012 decreased due to: (i) the restructuring of NDSD's business as discussed above; (ii) temporary production inefficiencies at SK Food Group's Reno, NV plant in the first quarter of 2013 due to a combination of the launch of new sandwich wraps for two large international customers in the fourth quarter of 2012 and the installation of several new pieces of equipment during the first quarter of 2013; and (iii) increased plant overheads associated with Stuyver's new artisan bakery in Langley, BC, which was completed in the third quarter of 2012, and Deli Chef's new sandwich production facility in Laval, QC, which was completed in the second quarter of 2012.

Foodservice's gross margin for the second quarter of 2013 as compared to the second quarter of 2012 as well as for the first two quarters of 2013 as compared to the first two quarters of 2012 decreased due to: (i) poor production efficiencies at Hub City Fisheries resulting from record low salmon runs and a corresponding shortage of wild fish for processing; (ii) difficulties by Maximum Seafood in maintaining its selling margins due to a combination of global shortages in certain species of wild and exotic seafood combined with regional consumer price resistance; and (iii) a rapid rise in premium beef commodity prices.

Retail's SG&A for the second quarter of 2013 as compared to the second quarter of 2012 as well as for the first two quarters of 2013 as compared to the first two quarters of 2012 increased due to: (i) the acquisition of Freybe; and (ii) increased selling and marketing costs associated with Retail's organic sales growth (see Revenue). These increases were partially offset by a significant decrease in NDSD's SG&A as a result of its restructuring (see Gross Profit).

Foodservice's SG&A for the second quarter of 2013 as compared to the second quarter of 2012 as well as for the first two quarters of 2013 as compared to the first two quarters of 2012 increased due to: (i) higher variable selling costs associated with Foodservice's organic sales growth (see Revenue); and (ii) increased costs associated with the development of the infrastructure needed to accelerate the growth of its seafood based initiatives.

The Company's adjusted EBITDA for the second quarter of 2013 as compared to the second quarter of 2012 increased only slightly to $21.0 million from $20.7 million primarily due to solid organic growth across the majority of the Company's businesses being mostly offset by reduced earnings in NDSD, Maximum Seafood and Hub City Fisheries.

NDSD's reduced earnings were primarily due to the continued contraction of food sales in the C-store channel. This contraction is the result of a range of factors including competition from quick service restaurants, changing consumer eating habits, pay-at-the-pump legislation and high gas prices.

Maximum Seafood's and Hub City Fisheries' reduced earnings were due to temporary supply shortages of wild and exotic seafood.

The Company's most recently acquired business, Freybe, had a positive, albeit relatively small, impact on the Company's adjusted EBITDA for the quarter despite significant disruptions in Freybe's operations caused by the Richmond plant transition (see Restructuring Costs).

Looking forward (see Forward Looking Statements) the Company expects its adjusted EBITDA to be favourably impacted by the following:

1. a significant increase in the earnings of Freybe after the realignment of its Langley plant is complete (see Restructuring Costs). Currently the Company expects this process to be finished late in the third quarter of 2013, at which time Freybe is projected to be generating annualized adjusted EBITDA of approximately $6.3 million;
   
   

2. a steady improvement in Stuyver's and Deli Chef's margins as these businesses leverage the incremental capacity of new production facilities built in 2012 to generate new sales; and
   
   

3. improved earnings from Maximum Seafood and Hub City Fisheries once wild and exotic seafood supply conditions return to normal levels.
   

In terms of NDSD, the Company recognizes that as a result of the continued contraction of food sales in the C-store channel, further consolidation is needed of the distribution companies servicing this industry. Correspondingly, the Company has initiated a process to explore strategic alternatives for better servicing the convenience store channel with the goals of improving the efficiency and effectiveness of the distribution system used for our products in this channel and maximizing the value of its NDSD convenience store distribution business.

Due to uncertainties associated with the timing and impact of the items outlined above, the Company is not providing guidance on its projected adjusted EBITDA for 2013.

Interest

The Company's interest and other financing costs for the second quarter of 2013 as compared to the second quarter of 2012 and for the first two quarters of 2013 as compared to the first two quarters of 2012 rose primarily due to an increase in the Company's funded debt.

Restructuring Costs

Restructuring costs consist of costs associated with the significant restructuring of one or more of the Company's businesses. During the first two quarters of 2013 the Company incurred $4.5 million in restructuring costs consisting of:

• $2.5 million for the transitioning of production from the Company's Richmond, BC deli meat processing plant (the Richmond plant transition) to some of its other deli meat processing plants including Freybe's Langley, BC facility. This transition began in the first quarter of 2013 and the transfer of production was completed by the end of the second quarter.
  
  Looking forward (see Forward Looking Statements), the Company expects Freybe's Langley plant to continue to incur restructuring costs relating to this initiative due to: (i) setup problems associated with processing equipment transferred from the Richmond plant; (ii) employee training related issues; and (iii) production disruptions resulting from the refinement of production processes and the installation of new equipment designed to improve production flows and expand capacity. The Company anticipates that the transition will be substantially completed in the third quarter of 2013 and will result in approximately $2.5 million in additional restructuring costs in 2013.
  

• $1.6 million in costs relating to the restructuring and rationalization of NDSD's direct-to-store distribution network for the C-store channel (see Revenue). Looking forward (see Forward-Looking Statements), the Company expects this restructuring to be substantially completed in the third quarter of 2013 and will result in approximately $1.0 million in additional restructuring costs in 2013.
  
  

• $0.2 million in non-recurring costs relating to Centennial Foodservice's seafood initiatives, which include the startup of its new seafood processing facility in Richmond, BC and the integration of the businesses acquired from Harbour Marine. This initiative was completed in the first quarter of 2013.
  
  

• $0.2 million in restructuring costs associated with a variety of initiatives including moving the Company's head office to a new location in Richmond, BC.

FORWARD-LOOKING STATEMENTS

This discussion and analysis contains forward looking statements with respect to the Company, 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 Company's internal expectations and belief as of August 7, 2013, such statements involve unknown risks and uncertainties beyond the Company's control which may cause its 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.

Factors that could cause actual results to differ materially from the Company's expectations include, among other things: (i) seasonal and/or weather related fluctuations in the Company'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 in the production of the Company's products; (iv) changes in the cost of products sourced from third party manufacturers and sold through the Company's proprietary distribution networks; (v) risks associated with the Company's conversion from a publicly traded income trust to a publicly traded corporation, including related changes in Canada's income tax laws; (vi) changes in the Company's relationships with its larger customers; (vii) potential liabilities and expenses resulting from defects in the Company's products; (viii) changes in consumer food product preferences; (ix) competition from other food manufacturers and distributors; (x) execution risk associated with the Company's growth and business restructuring initiatives; (xi) risks associated with the Company's business acquisition strategies; (xii) changes in the value of the Canadian dollar relative to the U.S. dollar; and (xiii) new government regulations affecting the Company's business and operations. Details on these risk factors as well as other factors can be found in the Company's 2012 MD&A, which is filed electronically through SEDAR and is available online at www.sedar.com.

Unless otherwise indicated, the forward looking information in this document is made as of August 7, 2013 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.