Lassonde Industries Inc.

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to LaSonde Industries 2022 fourth quarter and year-end earnings conference call. At this time, all participants are in listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at the time for you to queue up for questions. If anyone has any difficulties hearing the conference, please press star followed by zero for the operator assistance at any time. Before turning the meeting over to management, please be advised that this conference call will contain statements that are forward-looking and subject to a number of risks and uncertainties that could cause actual results to differ materially from those anticipated. I would like to remind everyone that this conference call is being recorded on Friday, March 31, 2023. I will now turn the conference over to Vince Timpano, President and Chief Operating Officer. Please go ahead.

Good afternoon, ladies and gentlemen. I am here with Eric Jem, Chief Financial Officer of Lausanne Industries. Thank you for joining us for this discussion of the financial and operating results for our fourth quarter and fiscal year ended December 31st, 2022. Our press release reporting these results was published earlier today. It can also be found on our website along with our MD&A and financial statements. These documents will be available on CDAR as well. We also posted a presentation supporting this conference call on our website. Let me remind you that all figures expressed on today's call are in Canadian dollars, unless otherwise stated. Now let's turn to slide four. Despite a challenging year impacting our financials, Lausanne nonetheless achieved important progress on many fronts in 2022. Annual sales exceeded the $2 billion mark for the first time ever, showing our ability to adjust selling prices in response to rising costs, albeit with a normal lag in the midst of macro, economic, and industry-wide challenges. Eric will provide additional details on our performance in a few minutes. But first, let me discuss our market dynamics. The entire Lausanne team worked hard and with discipline to strengthen our position in the North America food and beverage sector. While we focused on all parts of our business, particular emphasis was put on improving our U.S. operations through Project Eagle, which I'll provide an update on shortly. At the beginning of 2022, we shared our multi-year strategy aimed at accelerating revenue growth, improving overall profitability, and driving long-term value by focusing on three key pillars listed on slide five. Those are to build a growth-oriented portfolio, drive sustainable performance, and improve our capacity to act. Moving to slide six, let me mention certain key initiatives put forward to achieve these goals. To build a growth-oriented portfolio, we invested in a project to optimize the current capacity of our specialty food division and to explore new capacity and capabilities for its expansion. Although we have not discussed this division much in the past, it is performing well and it represents an important growth platform for us in the future. We will continue to explore promising opportunities in this market over the coming months. Driving sustainable performance is closely related to operational excellence. In this regard, we are increasing investments in our manufacturing network with productivity and growth initiatives, including a new single serve line in the United States and higher speed juice box lines in Canada. We are also implementing new processes and systems. Improving these essential elements will optimize resource utilization while also delivering on our ESG commitments. Finally, We also began implementing a new operating model that enhances our capacity to act as an organization. In addition to fortifying our capabilities with new equipment and new tools and technologies, we have established three new centers of excellence with a focus on innovation, manufacturing, and supply chain. This has resulted in strengthening our leadership and will enable us to capture long-term synergy, accelerate our innovation agenda, and leveraged best practices across our entire North America network. As a result, Lassonde reported incremental operating expenses associated with this strategic plan of $2.8 million and $11 million, respectively, in the fourth quarter and fiscal year. Turning to slide seven to focus on Project Eagle, which is the essential component of our strategy aimed at revitalizing our U.S. operations. After completing the diagnostic phase earlier in 2022, we have been taking important steps to simplify our product portfolio. In doing so, we have and will continue to reduce skew complexity by harmonizing package formats, consolidating formulas, and rationalizing low margin products. These initiatives will allow us on to reduce execution complexity. which would significantly limit downtime related to production changeovers and ultimately increase throughput. In addition, we continue to invest in our plans to optimize productivity. A minute ago, I mentioned a single-serve line, which will be commissioned in North Carolina, and we are also installing a new filler in New Jersey. While we anticipate some short-term disruptions associated with these upgrades, We firmly believe they will be largely outweighed by mid to long term benefits. More importantly, we believe the initiatives deployed under Project EGLE will over time benefit the entire organization. As an example, new transportation management and demand planning systems are initially deployed at our US operation. But the rollout is also planned throughout our North American network commencing in 2024. Overall, We are pleased with the progress that we achieved on the operational improvement initiatives, and we look forward to leveraging these benefits in the future. With that, I turn the call over to Eric for a review of our quarter four results.

Thank you, Vince. Good afternoon, everyone. Let me begin on slide eight with our fourth quarter top line review. Sales reached $556 million, up 14%, from $487 million last year. Excluding a favorable foreign exchange impact, sales increased by 9.5%, mostly due to selling price increases in both the US and Canada. By brand type and net of foreign exchange, private label sales increased 11.1%, while national brand sales increased by 7.3%. Overall, Sales contracted slightly as the impact from the U.S. production disruptions and supply chain related issues was partially upset by increased volume in Canada. Conversely, we benefited from a favorable effect from shifts in sales mix, primarily for private label products in the U.S., demonstrating early benefits from the portfolio transformation resulting from Project Eagle. On slide nine, gross profit amounted to $124 million. or 22.2% of sales, down from $134 million, or 27.5 million of sales a year ago. Net of the foreign exchange impact, gross profit was down $16 million due to higher input costs, mainly apple and orange concentrates and PET resin. An increase in our conversion costs and a $3.7 million loss in profitability from the cranberry sauce line interruption in our New Jersey plant. During the quarter, we also incurred incremental expenses of $2.8 million directly related to our strategic transformation. Excluding these expenses and the profit loss due to the production interruption, both of which impact comparability between periods, adjusted EBITDA totaled $38 million compared to $46 million last year. Adjusted profits attributable to corporation shareholders came at $14 million or $2.09 per share compared to $22 million or $3.22 per share last year. Briefly looking at annual results on slide 10, sales exceeded the $2 billion mark for the first time ever, reaching $2.2 billion versus $1.9 billion last year. Excluding foreign exchange variation, sales growth was 11.3%, essentially driven by selling price adjustment and a more favorable sales mix, mainly from our US private label division. Gross profit total $523 million or 24.3% of sales versus $522 million or 27.6% of sales last year. Excluding items impacting comparability, adjusted EBITDA stood at $157 million in 2022 versus $180 million last year. Adjusted profit attributable to corporation shareholder totals $64 million or $9.37 per share compared to $80 million or $11.48 per share last year. On slide 11, we highlight the days operating working capital ratio, which represents the amount of sales tied up as operating working capital. As you see, the number of days represented by the blue line move up for most of 2021 and 2022, peaking in the third quarter of 2022 because of higher inventory. However, with the cash flow from operating activity generated in the fourth quarter, the ratio improved at year end. Our objective is to progressively converge towards historical levels over the course of 2023 by reducing our DIO and by closing the gap between DIO and DPO. Turning to cash flow on slide 12. Cash flow from operating activities total $52 million in the fourth quarter of 2022 versus $19 million last year. The year-over-year variation is mainly attributable to positive changes in non-cash working capital requirements, mainly cash generated by a higher level of accounts payable and accrued liabilities. For the year, cash flow from operating activities amounted to $24 million, compared to $94 million a year ago. The decrease mainly reflects negative working capital requirements, mostly related to increased inventory, and the decreased operating results. Slide 13 shows capital expenditure of $48 million for 2022, a figure below our target set at the beginning of the year. As a disbursement on certain projects, including those related to multi-year strategy, were deferred. For 2023, we expect CapEx to reach up to 4.5% of sales as we deploy further funds in support of this strategy. At the end of 2022, we had over $23 million committed for 2023 CapEx and an additional $4 million already earmarked for 2024. As of 2025, we expect to spend between 2% and 3% of sales on CapEx, including maintenance and growth investments. Looking at our financial position on slide 14, net debt amounted to $247 million as of December 31, 2022, compared to $175 million at the end of 2021. Excluding the foreign exchange impact, the year-over-year increase reached approximately $61 million, reflecting a draw on our Canadian revolving credit facility to finance higher inventory and a draw on our US revolving credit facility to repay pay term loan. With a higher debt and lower profitability, our net debt to adjusted EBITDA ratio stood at 1.57 to one at the end of 2022, compared to slightly below 1 to 1 a year earlier, still well within our objective of maintaining the ratio below 3.25 to 1. This should provide us with sufficient flexibility to finance our capital expenditures and profitable expansion opportunities that may arise. I turn the call back to Vince for the outlook.

Vince? Thank you, Eric. Looking ahead to 2023, Our priority is to continue executing our multi-year strategy to accelerate revenue growth, improve overall profitability, and to drive long-term value for our shareholders. We will closely monitor the macroeconomic environment and its impact on the financial health of consumers, inflationary cost environment, and any effect it may have on the supply chain. We have proven our ability to efficiently manage cost inflation and we will remain disciplined in that regard. With pricing action taken on both branded and private label products, we have recovered some of the cost increases incurred in 2022. Given a normal lag between actual cost inflation and contractual adjustments, full effects of such pricing action will be only captured in early 2023. If inflation persists, we intend to implement further pricing actions. We are keeping a close eye on PET resin, transportation, and concentrate cost, for which we included price graphs in appendix for your reference. For instance, the price of orange concentrate has been at an elevated level for about six months, reaching new peaks earlier this year. Driven by these pricing actions and assuming stable exchange rates, we expect our 2023 sales growth rate to be in the mid to high single digit range. Additionally, as our production capacity and improvements in service materialize, our teams are focused on recapturing volume lost throughout 2022. As for our multi-year strategy, we will continue the revitalization of our U.S. operations and the upgrade of IT infrastructure throughout 2023. This includes pursuing the implementation of new processes and systems. In doing so, we are confident to significantly improve customer service and reduce costs. These initiatives, in support of our strategic transformation, are expected to result in additional expenses of approximately $10 million in 2023. In closing, I sincerely thank all Lassonde employees for their dedication and hard work. We are building this organization for the long term, and we are confident that tangible results from our efforts to enhance operational excellence will gradually become apparent in 2023 and 2024, establishing a clear path towards sustainable growth. This concludes our prepared remarks. We will now be pleased to answer any questions.

Thank you, ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star followed by the one on your touchtone phone. You will hear a three-tone prompt acknowledging your request and your questions will be pulled in the order they are received. Should you wish to decline from the polling process, please press star followed by the two. If you are using a speakerphone, please lift your handset before pressing any keys. One moment, please, for your first question. Your first question comes from Frédéric Tremblay from Desjardins. Please go ahead.

Merci. Good afternoon. Good afternoon. So, first, I'd like to get your thoughts on the demand outlook for juices. It seems like market demand slowed in Q4 of 2022. So, I was wondering if you could share maybe your expectations for market demand for the year, the upcoming year, considering that, you know, additional price increases could be implemented. And maybe as a follow-up to that, it's a good comment on the tools that Lassonde has to maybe stimulate demand. I'm thinking maybe new products or promotions or things like that.

Thanks. So, Frederick, it's Vince. It's a difficult question to answer because it depends on the further inflation that may occur in the balance of the year, you know. Obviously, when we took a look at, you know, providing you an outlook at, you know, mid to high single-digit range, we assumed a certain category assumption. You're correct in terms of taking a look. As we noted in our MD&A, we're seeing softness from a category perspective, somewhere between 1% and 4% between Canada and the U.S. through the fourth quarter last year. If you look into sort of the last 12 weeks, you do see continuing softness of around 4% to 6%. So it's an area that we continue to focus on. What I would say is on the basis of what we're seeing in the category, that's what gives us our view in terms of our outlook in terms of mid to high single digit growth. Again, I simply want to qualify what we're watching very closely is further inflation. You know, I shared with you the notion of orange juice pricing that we continue to experience, you know, escalated levels. We have pass-through pricing, but to the extent that more inflation occurs, we're going to have to take a look at further pricing, which may have a compounding effect on the category. We're simply not there yet. We're comfortable with the pricing actions that we've taken and the rollover effect that we believe that they will have in 2023. Okay.

Yeah, thanks. That's helpful. And then maybe sticking with the pricing aspect, you know, assuming that, you know, you're previously announced price increases do get implemented in early 2023, and it's something like they have. Would you say you have caught up now with inflation challenges? Like all else equal, are you, let's say, neutral between pricing and inflation at this point?

Yeah, like when I take a look at, you know, the front half of 2023, our view is on the pricing we took on 2022, there was a lag effect, plus additional pricing that were taken more recently. that should take effect in quarter one, quarter two, that has a catch-up effect. That will have a catch-up effect. Again, the question is to the extent that we see continued inflation in the market. One of the things that we noticed, of course, in 2022 was not just the fact that there was inflation, but it was rapid. And I think the thing that we're going to have to continue to watch is the normal lag effect associated with rapid inflation, because clearly there is a lag effect. And you see that in our performance. And I also want to come back to the question that you had asked before in terms of innovation and what will you do to stimulate demand. Of course, we will take a look at all of the levers at our disposal, including marketing investment, to ensure that we're stimulating demand. One of the great things about our business, Frederick, is the fact that we're so diversified. When I take a look at our portfolio between brand and private label, It allows us to capture the shifting trends that consumers are going through. So it allows us to play on both sides of that. And when you take a look at the diversification of our products across not just beverages but food, just as an example, and when you take a look at just the variety of channels that we do business in across value-based channels, across traditional grocery, mass, and clubs, it allows us to make sure that we're staying on track with the trends that we're seeing with consumers.

Okay, great. You did allude to, you know, the specialty foods business earlier on the call. I wanted maybe to get a bit more details on that. That's not an area that you talk about often. So maybe just to start, maybe give us a bit of background on sort of their – recent performance, but maybe more importantly, what's sort of the possibilities that you're seeing to drive, you know, further profitable growth in that part of your business?

So look, it's not a part of our business that we break out and disclose. So I'm mindful of that, Frederick. What I will say to you is that Eric and I are working through the plan, not only of our AGM, but an investor day presentation, which will give you more exposure to each of our divisions, including our specialty food business. You know, in the meantime, what I can say is it's an attractive business. It's an important part of our business. I see continued growth potential within that business. And part of that is through enhancing our penetration in the U.S. marketplace. It doesn't mean it's only in the U.S., but that's what gives me confidence in addition to what we see in Canada and that we can grow that business off our core capabilities. But more to follow, Frederick, in the months to come, because we do want to talk with you more about that and our other businesses.

Okay. And maybe one last question for me. You've laid out the plans for CapEx. Maybe wanted to get your thoughts on other areas of capital allocation, maybe share buybacks and potential acquisitions. Any thoughts on on those potential uses of capital.

Thank you, Frederic. So from a share buyback perspective, as you may have noticed, we had a share buyback program that ran into December last year. We bought more than 100,000 shares for $14 million. At the end of this program, we reflected on our 2023 cash flow management. and between requirement to have the right working capital level, and also support a business with a CapEx program that is a bit elevated versus prior years, we've decided to pause on this normal courses for a bit. So share buyback. And that's how we would like to use our capital is to make sure that we have the funds to grow through CapEx. And also as we are moving into next phase of our strategic plan, which is growing in some area, we want to make sure that we still keep some dry powder here to do so.

Okay, great. Thanks for taking that question. Thank you.

Your next question comes from Martin Landry with Stifel. Please go ahead.

Hi. Good afternoon, Vince and Eric.

Good morning, Martin. Good afternoon.

My first question is on your outlook. You're calling for sales to increase mid to high single digits year over year, and you do mention that this is mainly driven by price increases, but I was wondering what kind of volume growth is embedded in that sales outlook?

So we have not broken down externally the price and the volume effect. However, for the volume effect, if you look at 2022, for instance, and I'm going to save you to look at the NDNA, what you'll realize is the market went down about 5% in the U.S., 3% in Canada, but Lausanne still held up very well with that. And when you look at the past Lausanne, always was good in being slightly better than the market. So now, when we look at this category, and Vince commented on that in the future, the volume in the future, so we expect to be, again, playing a solid role, a solid, sorry, let me go back, to keep trying to beat what the market is doing. in the sense, so being better than what the category is doing, like we've done in the past.

Hey, Martin, the only other thing that I want to mention to you is, you know, I've talked about the exercise we've gone through to simplify our operations in the U.S., and part of what we're trying to do is manage back from a volume perspective. We took out SKUs. We simplified our product base. We simplified our package base. We're actually harmonizing our formulas. And frankly, through the difficulties that we had in 2022 in terms of manufacturing and service challenges, you know, that had also an eroding effect on our volume in 2022. So clearly, we are in a volume build back mode. The question in terms of just what is the specific volume price relationship, I don't want to get into the specifics on that. But clearly, we take a look at the role that volume plays. And we're dealing with a baseline in 2022, in particular in the U.S., that we believe that we can build off of. But it's going to take time because I want to make sure that we're managing the business with discipline and continuing to make sure that we're producing products that we can do at a margin.

Okay, that's fair. And that's a good segue into my next question, actually, on your portfolio simplification. You know, is there any, like, we love numbers, right? So is there any ways you can tell us what kind of percentage of SKUs that you think you may rationalize and Also, you know, what impact it could have on your gross profit margin, all else equal?

So what I would say, Martin, is when we take a look at the products that we've rationalized and the SKU-based impact, you know, you should think of low to mid double-digit percentages. So 10% to 15% is what we'd be taking a look at. And certainly those were the things that we deployed in 2022 that we'll start to see an effect in terms of our ability to enhance capacity in 2023. Now, clearly, you know, within that and a little bit potentially in addition to that, we also had difficulties because we couldn't service certain customers last year as well. So you saw some rationalization within that. But if I had to give you a ballpark range, I would say in the 10% to 15% range is what you focus on.

In terms of percentage of SKUs that you're reducing, right?

Yeah. Yeah. And so what I would say in terms of just what it's done, and we've talked publicly about this as well, you know, one is we just run a more simplified operation. Two, that simplification enhances our ability to deliver growth at a margin that is attractive. But, you know, the other thing that it's done is opened up capacity. So we've identified with these activities that we've undertaken that that just by an example that we have opened up another 2,500 hours of line time off our existing lines just by that exercise. So it's not just going to have an effect in terms of just the volume and margin, but also in terms of the throughput because our plants can run more efficiently.

Okay. Okay, that's helpful. Maybe just switching on your inputs. You have an interesting slide on the orange juice concentrate, and you do say that it's reached a peak in February, which is a bit surprising because transportation costs and inflation is abating a little bit. So I was wondering, what explains this increase in orange juice concentrate? Has there been other external factors specific to the industry that could explain that increase? sudden rise in February of the commodity?

So, and I'm not the, this is Eric, I'm not the procurement specialist in the organization, but for sure when we looked at this, there's an availability component of orange in the market that has an impact, and there's also some speculation because of that. So, That's what we see in the market at the moment. There's not a lot of liquidity and there's not a lot of volume available. So we watch that very closely. But it's a bit strange, not strange, but when you look at this, it's a bit surprising even for us who's in that commodity, big time to see the elevated level and those spike that we've observed recently.

Mm-hmm. And then maybe last question. I'm going to give it a try and feel free if you're not comfortable to answer that question. But you do talk a lot about Project Eagle. It's a cornerstone of your improvement and profitability. So I was wondering, again, if you can quantify the impact of Project Eagle on – on the potential cost savings that you could realize with Project Eagle. And then what kind of timing are we talking about? Is this a five-year plan? Is this a three-year plan? Just a little bit of a refresher would be super helpful.

Well, let me start on this one. So from a timing perspective, we've set a few place. And I think during Vince also remarks, we started this project in 2022. We are seeing already some element of Project Eagle yielding benefits. However, through some of the issues that we've experienced in the back end of 2022, they're not clear. But Vince shared earlier, line time, that we are getting back. I shared in my remark that mixed private label in the US is improving. These are some of the benefits that we are seeing now coming out of Eagle. Now there's longer lead elements that are deployed in 2023, including capital, including change in methods, including the transformation of the portfolio. So we hope that 2023 will see more and more. And I think the ultimate year where we should hopefully see the benefit of EGLE, including the transformation of our U.S. operation is by 2023 when we finally get this single serve line in our North Carolina facility deployed, I think this is probably where we should aim in terms of getting the real benefit, the full benefit of EGLE, right?

So, Martin, I'm going to go back to your first point in terms of your like numbers, and I know we've had this conversation before, but we're not going to share those numbers that you're looking for at this stage. What I would say to you, though, is in terms of a timeline, You know, I think the investments that we're going to make now will have continued carryover positive effects far into the future. But in terms of a turnaround transformation five years, that's long. And so my view is that, as Eric said, you will see gradual improvements in 2023. You'll see more in 2024. If I were to put a timeline on it, I'd certainly see it within three years. So that two- to three-year range. Part of it is because the decisions that we're making, and frankly, we made last year to deploy capital, actually take time. And we won't get the effects of those until they're up and running into mid 2024. Let me give you an example. We're deploying a lot of capital in North Carolina. It's one of our largest investments we've made outside of an acquisition. That's not a productivity drive. That's not a maintenance. That's about growth. So that is a new capability that we have in U.S. that we're going to leverage our expertise in Canada that allows us to capture growth opportunities in the single serve market. So you won't see the benefits of that through, you know, into 2024 and into 2025 based on when we get the line up and running. Having said that, we've also made investments from a productivity perspective in putting high-speed juice box lines in Canada. where you're going to start to see more, not only growth, but the potential to bring down costs as a result of the efficiency gains we get from those lines. So there's a series of investments that obviously we're making, but they do have a lag effect because you've got to consider when you can get them in the ground, up and running, and then deployed again. But just to come back to sort of how long, you know, for me, take a look at the two- to three-year timeline here. and assume that you'll see gradual improvement starting this year. I hope that was helpful, Mark.

Yes, it has been. Thank you very much for doing this, and thank you for doing the earnings call. Well, thank you, Mark, then.

There are no further questions at this time. Please proceed.

So without any other questions, I want to thank everybody for joining us this afternoon. We look forward to speaking with you again at our next quarterly call in May. All the best.

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.