CA - Premium Brands Holdings Corporation (PRBZF) Q2 2023 Earnings Call Transcript
2023-08-14 16:51:06 ET
Premium Brands Holdings Corporation (PRBZF)
Q2 2023 Results Conference Call
August 14, 2023 01:30 PM ET
Company Participants
George Paleologou - President & Chief Executive Officer
Will Kalutycz - Chief Financial Officer
Conference Call Participants
Martin Landry - Stifel
Derek Cassard - TD Cohen
George Doumet - Scotiabank
Stephen MacLeod - BMO Capital Markets
Vishal Shreedhar - National Bank
Chris Li - Desjardins
John Zamparo - CIBC
Sabahat Khan - RBC Capital Markets
Jon Evans - IntraFish
Presentation
Operator
Good morning, ladies and gentlemen, and welcome to the Premium Brands Holdings Corporation Second Quarter 2023 Earnings Conference Call. The speaker will be George Paleologou, CEO and President of Premium Brands; and Will Kalutycz, CFO of Premium Brands.
I would now like to turn the call over to Will. Please go ahead.
Will Kalutycz
Thank you, Julie, and good morning, everyone. I'm here with George Paleologou, our President and CEO. We hope that everyone is having a great summer. Before we begin, I would like to remind you that some of the statements made on today's call may constitute forward-looking information, and our future results may differ materially from what we discuss.
Please refer to our MD&A for the 14 and 52 weeks ended December 31, 2022, as well as other information on our website for a broader description of the risk factors that could affect our performance.
In case you missed it, we have prerecorded our investor presentation, and it was made available on our website this morning. Hopefully, you had a chance to listen to it. In addition, I would like to bring to your attention that George's annual letter to shareholders has now been posted on our website.
I will now turn it back to Julie for the Q&A part of the presentation.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] Your first question comes from Martin Landry from Stifel. Please go ahead.
Martin Landry
My first question is on your distribution business. Your volumes were down a little bit this quarter. And you mentioned that some of the pressures are transitionary. I'd like to get a bit of color on the outlook for the remainder of the year for that segment, especially in terms of volumes, that would be helpful.
Will Kalutycz
Sure. Yes. So it was sort of a mix of -- for the immediate quarter, second quarter, Martin, it was a mix of things that were very short term and a few things that will continue for a few quarters. For instance, the biggest impact on the quarter was the reduced featuring of premium beef and seafood products. Some of that was timing. So we do expect to see some future -- some featuring in the third quarter and hopefully back to a bit more normal in the fourth quarter.
But we do expect there's still to be a reduced level year-over-year. And then similarly, we are seeing some demand pressure on premium seafood. And what's happening there is, as consumers shift their buying patterns from the regular banners to more discount-oriented grocery banners. Those grocery -- the discount grocery banners generally don't have the premium fresh seafood programs that we provide.
So, we're sort of an indirect casualty of that shift. So we do expect that to continue for the next couple of quarters. So having said all that, looking at Premium foods distribution and our growth expectations for Q3, Q4, we expect it to be fairly stable in Q3 on a relative year-over-year basis. So, not like this quarter where it was down a bit. So it should stabilize in Q3, and we should see a little bit of growth happening in Q4.
George Paleologou
The other part, Martin, to a lesser extent is that, in general terms, a normal environment brings less trading opportunities for us. So again, that's impacting our results somewhat and may impact them in the future.
Martin Landry
That's helpful. And I want to switch gears and talk a bit about the commodity prices. Do you include slides on the evolution of commodity prices such as pork, beef and chicken? I was wondering if you could give us some color as to how these commodities have fluctuated recently? And then what kind of impact it could have on your margins in the back half?
George Paleologou
Again, Martin, it's tough to predict the direction of commodity prices. My general comment is that a lot of people are looking for solutions, looking at what's happening locally. And really to gauge the direction of commodity prices, you have to look at the global dynamics between supply and demand. And many, many factors go into these dynamics, including, of course, economic activity in different parts of the world.
So our view is that commodities will generally be stable I know that that's a general statement because in our world, we don't deal with commodities in general, we deal with specific cuts. And for example, in the case of bellies, belly prices have gone up a lot, but that doesn't necessarily mean that other costs of port have gone up as well.
So very, very sort of general question. I gave you a general answer. But again, from our perspective, commodities to a large extent, have been returning back to normal five-year averages. And the dynamics of commodities by their very nature are not driven by local supply and demand dynamics, but global supply demand dynamics.
Martin Landry
Is there any risk that you may have to give back some price increases that you've put in recently given that some of the commodities have chicken has gone down?
George Paleologou
Yes. A company like ours, Martin, we tend to move prices up and down accordingly. It's not really about raising prices or lowering prices is about maintaining a reasonable margin based on what we do and the differentiated products we sell. A lot of times, if there is more margin into a product, we're more likely to promote it or feature it or do whatever we need to do to move more volume. That's really what we do.
Again, I know there was now in the past as prices were going up immensely whether we could move prices up, we did. Thankfully, volumes weren't impacted that much. And similarly, as prices go down, we do -- would do give some pricing sometimes in the form of lower prices, sometimes in the form of more featuring and more promotions.
Will Kalutycz
And Martin, when you look at the second quarter, in our Specialty Foods group, the commodities were relatively stable on a year-over-year basis with the exception of chicken. Chicken was down dramatically. And to the extent it was down to what George talked about, most of that featuring some price decreases, all of that stuff kind of happened in the second quarter with that commodity. And as we go forward, we expect chicken to be relatively stable. So our margins in that category for the balance of the year, assuming that stability should be similar to the second quarter.
Operator
Your next question comes from Derek Cassard from TD Cowen. Please go ahead.
Derek Lessard
Feels like you're starting to get the momentum back in specialty foods. Could you just maybe add some context around some of the categories where you feel you're getting the greatest momentum in just after reading your beta letter to shareholders, maybe can you just share what we should expect from your innovation pipeline now that you can promote a feature in the coming quarters and years?
George Paleologou
Yes. Just again, Derek, let me start by saying that I know that a lot of people look at what's going on in the world at large and looking for the different trends and -- and you have to understand that at premium brands, we don't compete in categories. We create categories. So as an innovator, disruptor company, we go out there when we create -- we find the white space and we create the demand for it.
And looking at our sandwich business or our charcuterie business, our skewer business, those are good examples of what's going on. And those categories are growing substantially because demand is growing substantially. But ultimately, because we're creating the category, we usually lack capacity right? So the challenge for us is to continue to create the capacity to keep up with demand, right?
And again, a lot of these categories that I mentioned, have grown a lot. We've been an innovator to these categories. We have been for many years, and we continue to invest in their capacity. And as those capacities come on stream, then we're able to grow the business, as we've shown in this quarter. In this quarter, these categories that I mentioned have grown substantially because we've added capacity.
Derek Lessard
And maybe that's a good segue to a follow-up question to that. Can you maybe just talk about the strength and momentum in the Marcangelo brand? I mean it hasn't been something you've called out historically, but clearly, it's prompted a new facility in brand and the consolidation through others.
George Paleologou
Yes. I think when you talk about the Marcangelo brand, again, of course, we're talking about the growth in Italian needs. Again, we are doing extremely well in Canada, growing substantially in the U.S. I would say that the Marcangelo brand is one of the fastest-growing brands in Italian meats in North America and intake in general to make a trend in our view. They've grown a lot in sausage and in races as well.
I was traveling in the Midwest of the U.S. recently. And -- you go through a lot of major banners in the Midwest and you see a lot of Marcangelo sausages and charcuterie and they keep gaining distribution in the U.S. in those categories. So, it's been -- again, it's run by amazing partners. They've done an amazing job of building that business and some challenges around growth in terms of capacity. But as we keep adding capacity, obviously, the growth is showing up in our numbers.
Derek Lessard
And maybe one just final one before every Q, I think it's the first time that you guys have provided a target margin for Specialty Foods. And I think investors will appreciate the actual disclosure there. But -- do you have a time line of when you reasonably expect to get there? And lastly, I guess if I use that target in kind of seven to eight for food distribution, you can argue for consolidated margin in excess of 10%. So just maybe help us square away the 10%, five-year guidance with that.
Will Kalutycz
Yes. So, the Specialty Foods margins getting into that 12% to 13% range, we should see that next year in our busier quarters are getting close to that range anyways. For an annual -- and that's what's going to drive us getting to that 10% target, hopefully, next year or early 2024, '25.
In terms of exceeding the 10%, it's certainly on the radar. It's certainly within our expectations, but we've set our goal right now just to get our consolidated margin up to that 10% hopefully, we exceed that well ahead of plan in terms of our five-year plan as a percentage. And then from there, we grow 11%, 12% range longer term.
Operator
Your next question comes from George Doumet from Scotiabank. Please go ahead.
George Doumet
Just a follow-up on the consolidation. I understand the top line benefits, but are there other financial benefits there, maybe perhaps margins? And I guess more importantly, are there other opportunities in the network for us to do, I guess, this consolidation as well?
Will Kalutycz
Well, George, this was a unique -- no, this was relatively unique in that Concord has grown at such a fast rate and they were scrambling for capacity, and they're sort of piecemealing it together. And A big part of the IRR can be justified just on the cost savings of taking these three sort of good, but not as sufficient as they can be plants.
And the fact that you've got a lot of product moving between these three facilities, moving all into one consolidated facility, so there's a business case just around the efficiencies. And then like George says, there's going to be capacity coming out of that project as well. But it is a bit of unusual situation.
George Doumet
Got you. And on Slide 13 of your deck, there's a pretty notable deceleration in the top line kind of Q3 to date. And I appreciate your comments on your prepared remarks in there. But I'm just wondering, I guess, first off, are you seeing a slowdown at all in specialty channel? And number two, as a clarification around featuring, is that more about intra-quarter timing featuring or is that something that could maybe be pushed to Q4?
Will Kalutycz
Yes. No, you can't read too much into that chart, George. There's a variety of factors and definitely featuring and timing is a big one. That's why you saw that sort of spike down in that one quarter. But a couple of factors to consider in it is we are seeing quite a bit of deflation on the premium foods distribution side.
In the second quarter, lobster deflation was $20 million alone in that group lobster price deflation. So you've got that hitting it, the timing. And then as we talked about earlier, the PFD challenges continuing into the second quarter. But we do expect that to kind of continue to improve as the quarter unfolds.
George Doumet
Okay. And specialty is running in line with expectations for Q3....
Will Kalutycz
Well, absolutely. Yes.
George Doumet
And just a quick follow-up, maybe on the topic of the pork value prices. I know there are -- I know part is an important commodity for the specialty channel. Just wondering to what extent that can maybe, if at all, get into the way of the margin recovery there in the second half?
Will Kalutycz
Well, it's kind of an interesting situation because if you look at a basket of port commodities in North America right now, and you look at the beginning of the second quarter, and you'll see it's on average down from last year. And then by the end of the quarter into the third quarter, it's above last year or in line with last year and the big fluctuation there is bellies which we don't buy a lot in North American bellies.
Most of our pork inputs are trim and lake. Most of our bellies come from Europe. So -- and Europe has been at a premium throughout the quarter. And so that trend you're seeing in North America actually works for us -- is in our favor because it's taking the differential between North American bacon prices -- deli based bacon prices, which it's a far less lesser quality products, our European bellies, a very specialized, very high quality. It's taking that away. So it's actually working in our favor right now, the acceleration of belly prices in North America.
George Paleologou
The only other thing I would add, George, is that the belly market in North America, in particular, is a bit of a mess right now because of Proposition 12 in California, whereby they won't allow the sale of bacon from hog operations that do not have open pens for sows. So, it's creating a dual market for bellies. And again, it's a bit of a mess right now. So anyway, but as Will said, we bring most of our bellies from Europe. So we're not impacted as much.
Operator
Your next question comes from Stephen MacLeod from BMO Capital Markets. Please go ahead.
Stephen MacLeod
And thanks for this new format, I think it's great. Just wanted to follow up. Just my first question is just specific to something, Will, that you said. Did I understand correctly that you said that margins in the PFD segment in the back half should be stable to where they were in Q2. Did I understand that correctly?
Will Kalutycz
Well, actually, I was talking about sales growth. In terms of sales growth, it should stabilize versus we saw contraction in the second quarter. In terms of margins, the PFD tends to be relatively stable in margins. And based on our outlook right now for commodities over the next quarter or two, you should see a slight hopefully, appreciation in their margins going forward, but certainly, stable to positive is our outlook for PFD's margins.
Stephen MacLeod
That's helpful. And then just as I think about the pricing environment, I know you benefited this quarter from raw material and other cost deflation, and you had that chart that shows the margin dollar contribution. Is it fair to assume that like you're going to see a similar dynamic in Q3 and Q4, like you're not putting through a lot more price at this point. Is that correct?
Will Kalutycz
Yes. Well, it's an interesting chart because it's quite a different story, Steve, between the premium foods distribution group and the Specialty Foods like overall, it was relatively stable. Our pricing, right? It was $3.9 million in price inflation for the quarter. But if you tear that apart, it was about $15 million of inflation in the Premium Foods Group -- or sorry, the Specialty Foods Group as sort of the annualization of our price increases we've been putting through over the last few quarters continued through.
And the deflation that we're seeing in chicken -- or sorry, in lobster in the premium foods distribution is offsetting that. So going forward, I think you're going to continue to see that trend of deflation in premium foods distribution but the price inflation in Specialty Foods continue to come down. It's been notching down steadily as we catch up on our pricing. So yes, it will probably be a negative number in Q3, I suspect.
Stephen MacLeod
That's great. And then maybe just finally, we talked a little bit about sort of the margin profile for PFD. Just wondering if you can comment a little bit about Specialty Foods and sort of what you're seeing. Obviously, it sounds like the top line is holding in nicely. Do you expect that kind of volume growth? And then just wondering if you can give a color on how that might slow down to the margins.
Will Kalutycz
Yes. I think you're going to continue to see -- for Specialty Foods Group, it's kind of going to be more of the same from Q2 to Q3. Unfortunately, a lot of our new capacity that's really going to accelerate the group's growth, particularly our cook capacity with Kings Command, our new facility with Hempler's for meat snacks and premium bacon, and our Shaw laminated dough facility in San Francisco those are going to be real significant drivers. But they're not kicking until Q4. So Q2 from a growth is going to be similar. And then similarly, on the margins, it's going to be a similar story as Q3 as well -- sorry, it's Q2.
Operator
Your next question comes from Vishal Shreedhar from National Bank. Please go ahead.
Vishal Shreedhar
With respect to acquisitions, management indicated that in the prepared commentary that acquisitions, the teams were starting to look at it again. You can correct me if I've got that wrong. But can you just talk about what the appetite is for acquisitions perhaps want to materialize in this fiscal year? And how management thinks about equity for an acquisition.
George Paleologou
Yes, Vishal, again, we've gone through a very difficult period over the last three years, as you know. And in that type of environment, we generally focused on our business on making sure that we managed a lot of black swan events like extreme inflation and supply chain issues and labor shortages. And the message there for us is that we're starting to feel more comfortable with regards to these issues moderating or even going away.
And because of who we are, we always have a lot of acquisitions in the pipeline. We're in a lot of discussions with very good businesses. We chose to basically slow down the M&A activity. But the message we're giving now is that we're starting to feel more comfortable about the future. And obviously, these issues that I mentioned going away. So it's a lot more likely now that we will advance our discussions and we're kind of giving a signal that our M&A team is working really hard on advancing these discussions to the next stage.
And anyway, so we feel very good about the pipeline. There's a lot of good companies that we're in discussions with. Some of them are fairly large. And typically for us, in the right type of environment with the right acquisition that provides us with the right IRR and meets our different hurdles. We're willing to issue equity to the buyer sometimes or to use our credit lines, right? So that's what we've done in the past, and you're likely to see us do that in the future.
Vishal Shreedhar
And with respect to the upcoming converts, what strike is it under that you can convert? And what is your expectation on how that will go? Do you expect to convert? Or do you expect to just pay that out?
Will Kalutycz
On our converts, our strategy is always to force conversion because I think we've talked about this in the past is in equity. The next convert comes due 2025. It's got a pretty high strike price, $172. We issued those sort of at the peak of our equity value. Hopefully, we grow into that over the next two years. And if not, it's a relatively small amount. It's only $172 million, I believe, is the balance outstanding on the converts. So, we've got lots of flexibility and time to deal with that. But like I say, our hope, our expectation is to force conversion.
Vishal Shreedhar
And just changing topics here on the premium seafood and the consumers moving to discount, which is a trend we've been seeing over the last several quarters at least. Is there opportunity to move some of those products, perhaps via different packaging or a different type of product towards discount as the discount -- the movement of customers towards lower-priced grocers, it doesn't seem to be a big thing for the moment?
George Paleologou
I think, again, for us -- and again, I just want to mention that the seafood space is very global, right, in nature. Most of the products we harvest in general through our investment in Clearwater is sold globally, right? So the seafood market is very global. There's always demand for seafood around the world. The world demand for seafood is more than the wash-ability to supply. So there's always markets for the product. It's just a question of maximizing prices and margins.
Vishal Shreedhar
Okay. I appreciate that color. And with respect to last quarter, I think, in this quarter as well, there was a little bit of an issue on margin and excess capacity. And I understand it's difficult to assess because by business by business what the true unutilized capacity is. But wondering if that's trend improved quarter-over-quarter and you're seeing less of that pressure? And how should we expect that to evolve through the year?
Will Kalutycz
Yes. So it's really a few areas right now where there's good leverage still to be had in our sandwich group, we have some nice capacity to use there. As well still in our bakery group a little bit on the dry cured side, some expansion we did in Ontario. So there is some sales leveraging benefits still to be gained there. in terms of quantifying it, it's sort of built into our margin expectations that I talked about earlier and how we're going to get there. It's certainly a we generate organic growth. It's becoming lesser a part of the future growth margin story, but it definitely is still part of that story.
George Paleologou
The only thing I would add to that, Vishal, is that optimizing the mix is important to our capacity utilization. And as things normalize, we're able to optimize the mix, which helps the margins as well.
Operator
The next question comes from Chris Li from Desjardins. Please go ahead.
Chris Li
Maybe I'll start with a question on the Specialty Foods. I wanted to check if I interpreted your comments correctly. Are you seeing you do believe the 8% of the high single-digit organic volume growth that you achieved in Q2? Do you believe that is sustainable in Q3 or into Q4?
Will Kalutycz
Yes. So that's exactly it, Chris. We expect it to be relatively consistent with Q2 into Q3 and then actually accelerating Q4 as our new capacity comes online, as I mentioned earlier.
George Paleologou
Yes, Chris, again, to add to Will's comment, and again, just given my comment earlier is that we have pretty good visibility in terms of demand, right? In this quarter, if we had more capacity in certain categories, we would have done better than the right? And that's kind of something to remember. As Will said earlier, we have capacity coming on stream in the third and fourth quarter, predominantly in the fourth quarter.
But the demand for us has been proven. We're getting lots of distribution gains with a lot of our key products, and we will continue to gain distribution subject to capacity, right? So it's capacity that's driving the organic growth more than anything, right, because we're in new categories where we have to keep creating capacity.
Chris Li
No, that makes a lot of sense. And then is it fair to say on the specialty food side. So some of the pressure that you're seeing on the distribution side -- they're not being manifested in specialty food side in that. So from a demand perspective, that's why you're seeing still good visibility in terms of growth.
Will Kalutycz
Yes. And they're just such business -- different businesses, right, Chris. Specialty Foods, it's generally retail and QSR focus and a lot of it is in the U.S. I can't stress enough how important the U.S. market has been to the group and how successful they are down there. And as George talked about, a lot of the growth is taking these regional success stories we've had and working with our customers to take a national.
So to do that, you need significant capacity in place, and that's what we're doing right now. Premium foods distribution is primarily a Canadian story. And like I say, if there's some unique dynamics around the premium seafood category that we're working our way through to how to deal with this issue with the consumer shifting banners.
Chris Li
And maybe just another question on Specialty Foods, I think Will you mentioned earlier that you expect a similar story for EBITDA margin in Q3, similar to the store in Q2. Did you mean in terms of like margin percentage similar Q3 versus Q2? Do you mean like the margin growth, the year-over-year growth that you achieved in Q2 will continue.
Will Kalutycz
The absolute margin percentage.
Chris Li
Okay. Actually much ... It's really.
Will Kalutycz
We can't -- sorry, Chris, we can't stress it now how wonderful it is to be in a somewhat normal operating environment again. And that's what you're seeing in the specialty foods. You're seeing stability. So with that stability, you're seeing nice margins and margin expansions as they leverage capacity as they generate plant efficiencies plant efficiencies was a nice contributor to our margin profile this quarter. Specialty Foods, it was almost $10 million of efficiencies in that group. So lots of progress being there. So it's just it's stability and continuing on into the next quarter on quarter with that stability.
Chris Li
And then maybe another topic that I wanted to quickly cover your balance sheet. And Bill, I think in your prepared remarks, you reiterated that you do expect your leverage to return to kind of or the target range by the end of the year. So I just wanted to maybe get a bit more precise from you. Do you mean do you expect leverage to be back to around 4x by the end of this year? Is that still the target you're aiming at?
Will Kalutycz
Yes, absolutely. No -- our -- we look more at the senior debt to EBITDA ratio is the critical one we track or focus on. And we were at 3.3% for the quarter. We expect to be in our 2.5 to 3 zone by year-end. And really, there's two factors there, Chris, One is just the natural growth in our EBITDA that we're expecting over the next two quarters. And the second is our working capital. We made significant progress making -- bringing our inventories down this quarter. You didn't see that in our working capital because Q2 is a very intensive working capital quarter.
But as we go down to the next two quarters, winding down our working capital is a natural process. So you will see some cash come in from that. And then we also have some more work to do on our inventory. Our days purchases and inventory is still higher than we like. So we feel there's still some opportunity to bring our inventories down.
Chris Li
And the last question, maybe really also the balance sheet I'm just wondering, are there any levers you can -- other levers you can pull to improve your leverage and thinking in particular any noncore assets you can sell or any changes in the Clearwater capital structure that could happen that will help you debt your leverage as well or reduce your leverage.
Will Kalutycz
Yes. We're working on a number of initiatives at this, Chris, at this point, Chris, but they're all speculative at this point.
Operator
Your next question comes from John Zamparo from CIBC. Please go ahead.
John Zamparo
I wanted to start on lobster. It seems like this is a really peculiar part of your business at the moment, you'd said, I think it was $20 million in price deflation, but there was also a comment in press release about a run-up in prices from speculative buying. And I was hoping you could add some more color to what you're seeing in your lobster business.
Will Kalutycz
Yes. It's a very strange situation you hit it on the head of the nail, John. So what is happening is a lot of prices in the retail side of things, the selling of it are definitely down. If you look at any chart there, they're back to five-year average levels from record highs in the last year. And so you've seen that price deflation on the selling side year-over-year. But now what's happening is there was a Canadian fishery. And a number of players went into that fishery and started speculating on there being some price inflation in lobsters, which were not big fans of.
But -- so they started buying up the price to purchase the lobsters to inventory it, to put it away for future sales. We're well positioned on inventory. So that's not part of our strategy. If we were -- went into that market was purely to service opportunities in the current market. So we just couldn't justify that speculative price relative to the current selling prices. And so we just decided to not participate in that market. It's a real anomaly. We've never seen anything like this before.
John Zamparo
That's interesting. That's good color. And I want to go back to the topic of grocery and the shift to discount from conventional. And I wonder if you can say anything to quantify or to frame your overall exposure within your grocery customers. How much of your sales would go through conventional versus discount, whether it's in seafood or more broadly? Any more color there would be helpful.
Will Kalutycz
Yes. So starting on the specialty foods side, it's -- our Specialty Foods businesses, they cater to all the banners. So it's really whether we sell it in X or Y it doesn't matter. And the margins on our products are very similar. So it's not much of a story in our specialty food side. And in fact, I think we've talked about this in the past, we find recessionary downturns to be beneficial to our Specialty Foods Group as consumers stop eating out as much or spending money on large ticket items. They'll spend a little bit more on their grocery bill, treat themselves to some more premium products.
And we, in the past, have tended to benefit from that. In the premium foods distribution group, again, premium seafood is what they do, and that's really been focused on the mainstream or premium banners. So in terms of exposures, I think you've seen the extent of it in our Q2 numbers. It's certainly not going to get any worse. But we don't specifically track or quantify the difference in banners in that group.
George Paleologou
The other thing I would add, John, is that as we always talk about, we don't really focus on the banner, we focus on the consumer, right? So the question is, where does the consumer who is willing to pay more for quality shop at, right? So again, that consumer doesn't tend to downscale their purchasing in a recession, for example, so again, as Will said, we're very diversified in terms of the channels we sell to. And we cater to a consumer who has that when they go to the store, they don't buy the cheapest they buy a product because they like it because of its attributes. And generally, they're willing to pay a little premium for it, right? That's our consumer.
John Zamparo
That's helpful. I want to move to the inventory levels. And I think last quarter, the target was $100 million this year in inventory reduction. And I wonder, is it fair to say that that's also the expected cash flow benefit from working capital as a whole? Or do you look at that as offsetting other factors and working capital is a fairly neutral item to your cash flow this year?
Will Kalutycz
Yes. So our inventory goal over the year was $100 million to $150 million. We did $30 million improvement in Q2. So, we still think there's probably $70 million plus of opportunity there of improvement. That's cash coming in.
Now in Q2, you saw a tremendous run-up in our receivables. A chunk of that was just because of general growth, but a chunk of that was just a timing of sales being weighted more towards the end of the quarter relative to the earlier in the quarter, which just naturally drives up the working capital cycle.
So, that's cyclical, that's seasonal that unwind. So as we go down through the course of the year, you should see AR becoming neutral to a cash positive and then that inventory being pure cash flow.
John Zamparo
That's useful. And then lastly, on Clearwater. I know there is a significant amount of seasonality in this business and earnings are not cash flow, but Clearwater has had a year-to-date loss of around $35 million. So run rate loss is $70 million. Clearwater still have reasonable access to capital in order to keep paying the distribution to PDH?
Will Kalutycz
Yes. Again, this is volatility we expected in their business. We set up the structure to account for that. So the short answer is yes. Now in terms of the next quarter or two, again, as they work through some of the issues they've been facing, particularly they work through the snow crowd, the lays and one of their ships has really hurt their cash flows.
So, we're going to have to be a little more patient on our expectations around interest received from them while they work through those issues. But those are short-term issues that don't impact our long-term outlook of the cash flows on Clearwater.
Operator
Your next question comes from Sabahat Khan from RBC Capital Markets. Please go ahead.
Sabahat Khan
Great. You provided a lot of color on the margin outlook for the rest of this year. So, if I just understand correctly, I guess the working assumption is that the margin for Q3 and Q4 will be kind of at or above Q2 levels for you to hit your full year guidance. Is that kind of your working assumption at this point on the guidance?
Will Kalutycz
So in terms of Specialty Foods, they should be relatively consistent as the year plays out. And like I said, in premium food distribution, we expect maybe a little bit of a benefit there.
Sabahat Khan
I guess because this quarter, I think the mix of premium food distribution just in terms of sales was down quite a bit year-over-year, so that might have helped the margin. I guess as that comes back up, I'm just wondering if there's a bit of a dilutive effect on the margin from the mix in terms of getting to that kind of low 9% EBITDA margin for the full year.
Will Kalutycz
Yes, there -- that's the thing with premium food distribution, which is very dissimilar to Specialty Foods in that, contribution margins are close to their gross margins. So you don't see that variability in their margin as much with variability in their sales. The EBITDA margin tends to be relatively stable.
Sabahat Khan
And then just one -- I guess, one just on the overall demand environment and the consumer. I guess, does your outlook for the sales for the back half of the year that includes any sort of promotional activity that you might have to put in place to respond to the consumer environment? Or is that some -- or is there a certain amount of that that you decide in quarter based on how things are going? Just trying to understand what portion of your planned promotional activities preset versus things you may do in the quarter?
George Paleologou
Yes. As Will said, Sabahat, we're back to normal activities, right? So that includes promotions and featuring, et cetera. But again, I just want to comment. And in my prepared remarks, I talked a little bit about some of the inroads we're making in selling soups, for example, to Asia, and we're getting lots of new listings there. The only reason we're getting traction there is because now we have capacity to service that market.
And we have a lot more demand for other products other than soup in Asia, in places like Japan and South Korea and China, which now we're pursuing because in certain areas of our business, we have capacity now. So again, as I mentioned earlier, we've proven demand in a lot of the areas of the value-added food space. And as capacity comes on stream, then we're able realize the growth, right? That's generally what we see. And the market seems to have a tough time understanding that. But if you look at our growth over the last 20 years, it's very consistent as capacity comes on stream, we grow the business.
Sabahat Khan
And then just one last one, maybe a bit of a broader question. It sounds like you're looking into a new sandwich facility. Can you maybe talk about channels and the type of customers that you still see a runway with as you try to grow that business. Just trying to understand where the opportunity stands. Now they were sort of a year or two past pandemic in the type of customers that are showing interest in your offering?
George Paleologou
Yes. So, I think in general terms, we've been a disruptor and an innovator in the QSR channel, in Canada and in the U.S. Because of the growth we've had from certain parts of the QSR channel, we historically haven't had the capacity to grow in the C-store channel. So, I would say we're going to see more growth in C-store and in club as well. We do some business in club. They're not national business because we haven't had the capacity to the national business. But as capacity come on stream, we're going to grow in club and faster, I would say. And there's still some growth in QSR as well.
Operator
[Operator Instructions] Your next question comes from Derek Lessard from TD Colin. Your line is open.
Derek Lessard
Just a few follow-ups for me. You did not -- or you did note in the MD&A about a $2 million inventory write-off due to the bankruptcy of a customer. Just curious, if you're seeing any material change in sort of the credit risk of your client base?
Will Kalutycz
No. If you look at our receivables, Derek, there is fantastic shaping. Our days sales and receivables at about 34%. That's down from 37 days last year overall receivables very good. This was a sort of a -- not a mainstream client a little bit sort of off the mainstream. And it happened earlier in the quarter. So sales are pretty well reflected on a run rate basis in the quarter. But yes, no, no, is the ultimate answer.
Operator
Your next question comes from Jon Evans from IntraFish. Please go ahead.
Jon Evans
I missed a little bit of the call at the start on the bright side. Maybe I could just recap one or two things. But just -- on your net losses, $12.3 million and $12.8 million, is any of that linked to the actual acquisition of Clearwater in terms of you paying it off? Or is that the issues that you mentioned a little bit earlier.
Will Kalutycz
Sorry, John, when you say net losses, you're talking about -- we just need to look premium brands overall.
Jon Evans
Sorry, on Clearwater.
Will Kalutycz
Yes. So Clearwater's core operations continue to be profitable. The big hit that they're taking is when we structured the transaction, all of the equity component went in as a subordinate debt structure, paying 10% interest and it's that interest component that is creating their losses. So that's all coming to us.
And that's where we talk about we know there's going to be variability in their business. We'll just defer the interest until they work through their issues and then when they catch back up, they'll have excess cash flow to catch back up on their payments. So, we expect this up and down kind of nature within Clearwater's business and the cash flows we receive from it.
George Paleologou
The reason we structured the deal like this, John, was to basically accommodate the volatility in their numbers due to the seasonal nature of the business, right? So, that's basically what you're seeing there in terms of the reported numbers.
Operator
And there are no further questions at this time. George, please proceed with your closing remarks.
George Paleologou
I would like to thank everybody for attending today. Enjoy the rest of your summer.
Will Kalutycz
Thanks, everyone.
Operator
Ladies and gentlemen, this concludes your conference call for today. We thank you for joining, and you may now disconnect your lines. Thank you.
For further details see:
Premium Brands Holdings Corporation (PRBZF) Q2 2023 Earnings Call Transcript