Lassonde Industries Inc.

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to Lassonde Industries' 2023 First Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for questions. If anyone has any difficulties hearing the conference, please press star followed by zero for 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, May 12, 2023. I will now turn the conference over to Vince Timpano, President and Chief Operating Officer. Please go ahead, sir.

Good afternoon, ladies and gentlemen. I am here with Eric Jem, Chief Financial Officer of LaSonde Industries. Thank you for joining us for this discussion of the financial and operating results for our first quarter ended April 1st, 2023. 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 and less otherwise stated. Now let's turn to slide four. Our results show that Lausanne made good progress against its priorities in the first quarter, and we enjoyed solid performance across each of our divisions. Sales increased by 7.5%, reflecting pricing adjustments and the favorable evolution of our U.S. private label portfolio since last year. These actions and efficiency gains led to noticeable improvements in both operating and net earnings. Eric will provide additional details on our financial performance in a few minutes, but first let me focus on a few key elements. Except for the orange concentrate situation, we are noticing some stabilization in the inflation trend on most input costs. Next, our efforts to adjust pricing are yielding benefits, and we are now closing the gap between cost increases and related price increases. And, as mentioned on the previous conference call, we remain laser-focused on executing our multi-year strategy and, more importantly, our plans to revitalize our U.S. operations. Today, I am pleased to report tangible benefits on several fronts which had a measurable effect on our first quarter results. First, recall that we are in the process of simplifying our product portfolio by reducing SKUs sold in the U.S. market by approximately 10% to 15%. In doing so, our goal is to reduce execution complexity by harmonizing packaging formats, consolidating formulas, and eliminating low margin products. While this portfolio rationalization was a factor, partially explaining the quarter one volume decline, the outcome of these measures are many. First, our offering better reflects what we can more efficiently produce as evidenced by an improved mix of private label products this past quarter versus last year. Second, It reduces downtime and costly changeovers, which ultimately improves throughput. And thirdly, we opened up line hour availability from which we could deliver growth at a better margin. Another positive effect is directly related to the implementation of a new transportation management system in the U.S., which we'll refer to as TMS. It provides us with better tools to identify the most optimal routes and carriers for both inbound and outbound freight. We are also seeing benefits from a review of our processes and other supporting tools surrounding logistics management. Overall, we are witnessing improved efficiency in our New Jersey plant and across most of our operations. However, from a US supply chain perspective, there are still a few minor disruptive elements. More specifically, the availability of aseptic production capacity from our co-packers and of aluminum can from our suppliers affected output and sales volume in the quarter. These issues are slowly fading away, which should allow us to regain some of the lost volume and manage our inventory more efficiently in the coming quarters. With that, I turn the call over to Eric for a review of our quarter one results.

Thank you, Vince. Good afternoon, everyone. Let me begin on slide seven with our first quarter top line review. Before starting, please note that most amounts have been rounded to ease the presentation. Sales reached $547 million, up 7.5% from $509 million last year. Excluding a favorable foreign exchange impact, sales increased by 3.7%, mostly due to selling price adjustments and to more favorable sales mixed in our U.S. private label portfolios. Conversely, we experienced a volume decline, mainly in the US, but as Vince mentioned, a good portion of this reduction relates to the streamlining of our product portfolio and to supply chain shortages. Now on slide eight. Cost of sale rose approximately 10% from last year. Excluding foreign exchange variation, the year-over-year increase was 5.4%, mainly reflecting higher input costs, especially apple and orange concentrates, and increase in our conversion costs. As a result, gross profit amounted to $137 million or 25% of sales versus $136 million or 26.6% of sales a year ago. Net of the foreign exchange impact, gross profit decreased by $1.4 million. SG&A expenses were $110 million down from 113 million last year. The reduction reflects lower transportation costs, which, in addition to benefits from the new TMS, is also attributable to the decrease in base rates and fuel surcharges. It was partially upset by higher selling, marketing and administrative expenses, as well as unfavorable FX impact of almost $3 million. Excluding all items that impact comparability, Adjusted EBITDA improved to $43 million, up from $40 million last year. Profit attributable to corporation shareholders came in at $17 million, or $2.51 a share, compared to $15 million, or $2.14 a share last year. On an adjusted basis, Q1 EPS stood at $2.48 versus $2.37 a year ago. Turning over to slide nine, and looking at our balance sheet, we are still not pleased with our working capital situation. The graph in front of you is key and regularly reviewed by management to help us track and manage the evolution of the main working capital components over the years. You will note that this chart not only includes the common working capital indicators, such as day sales outstanding, day inventory outstanding, day payable outstanding, but also reflects an integrated measure labeled number of days invested in the working capital, represented by the blue line. This measure, as the name indicates, represents the number of days of sales tied up as operating working capital. What's evident from that graph is that our inventory holding, the yellow bar, is currently elevated compared to its historical level. This reflects, in part, the impact of our strategy to secure inventory in response to the supply chain challenges. the related implication of the service level to our customers, but also reflects some timing issues between the manufacturing and the shipping of finished goods inventory. We should also note that at the same time, our day's paywall standing, the gray bar, were at the lower end of its historical range when looking at this metric in relation to the inventory it should mostly finance. The combined effect of those two elements resulted in an overall increase of approximately 10 days of sales invested in the working capital over the course of the last 12 months. We expect to progressively reduce inventory levels over the next few quarters. As a result, the day-operating working capital should land near the higher end of its historical range by the end of 2023 and should settle within this range in 2024. On slide 10, we see that our investment net level remains solid with long-term debt including its long current portion of $268 million at the end of the quarter, compared to $249 million at the end of 2022. The increase reflects draws on our revolving credit facility, mostly to finance working capital. Given the higher debt, our net debt to adjusted EBITDA ratio rose slightly to 1.67 to 1 at the end of the first quarter, still well within our objective of maintaining the ratio below 3.25 to 1. Turning to cash flow on slide 11. Cash flow used by operating activities were $5 million compared to 21 million last year. The improvement reflects a better profitability, lower working capital requirement this year versus last, and lower income taxes paid. Finally, capital expenditure for PP&E and intangible assets, mainly IT system, amounted to $13 million compared to 9 million last year. As a reminder, we estimate CapEx to reach up to 4.5% of sales in 2023 to support our multi-year strategy. I now turn the call back to Vince for the outlook. Vince.

Thank you, Eric. Let's move on to slide 12. Looking ahead to the rest of 2023, our priorities are to drive continued improvement in our financial and operating performance for the balance of fiscal 2023 and to focus on executing our multi-year strategy to accelerate revenue growth, improve overall profitability, and drive long-term value for shareholders. We are pleased with the progress achieved in the first quarter, but much remains to be done. We will pursue the implementation of cloud-based systems, and we will also intend to look very closely at the potential benefits of upgrading our UF CRP system. In quarter one, we have taken additional pricing action on branded and private label products to accelerate the recovery of cost increases. In regards to input costs, we are seeing some stabilization with the exception of orange concentrate, which reached another historical peak in April. Considering a normal time lag, we expect the run rate of these pricing actions to gradually benefit the balance of the year, and we intend to implement further actions should inflation persist. We will, however, remain vigilant in monitoring the evolution of consumer habits and demand elasticity in a context of price increases. Given current market conditions and excluding foreign exchange impacts, we continue to expect our 2023 sales growth rate to be in the mid to high single digit range, primarily driven by price increases. In closing, We are confident that our efforts to enhance operational excellence will gradually deliver more tangible results throughout 2023 that will be sustained in 2024 and beyond. This concludes our prepared remarks. We will now be pleased to answer any questions you may have.

Thank you, sir. Ladies and gentlemen, if you would like to ask a question, please press star followed by one on your touchtone phone. You will then hear a three-tone prompt acknowledging your request. And if you would like to withdraw from the question queue, please press star followed by two. And if you're using a speakerphone, we do ask that you please lift the handset before pressing any keys. Please go ahead and press star one now if you have any questions. And your first question will be from Frédéric Tremblay at Desjardins. Please go ahead.

Merci. Good afternoon. Good afternoon, Frédéric. My first question is on the price increases and their potential effect. With price increases becoming effective in 2023, can you maybe share your thoughts on the elasticity of demand? I guess going forward, how you think about balancing the benefits of higher pricing with the potential impact on operating leverage of maybe adding lower unit demand across your manufacturing platforms?

I mean, I think it's a good question, Frederick. When you think about pricing, I mean, it's not just pricing that took effect in 2023. We took pricing in 2022 as well. And so when you take a look at its impact and elasticities, and in particular, when you look at category performance, I think I shared with you last quarter that the market was down about 5% approximately. I would say it was pretty consistent in what you saw in Canada and the U.S. When we take a look at quarter one, I would say that it's very similar. As we've noted in the MD&A, the volume is down about 5% to 6%, so you haven't seen any appreciable change year over year in that regard. When we take a look at pricing, all I can say is clearly we take a look at multiple factors, including its impact on the category and its impact on the consumer. We try to take a very balanced perspective. When we take a look at the price-volume relationship, obviously we're trying to do a few things. We're trying to ensure that we maintain our profitability to the extent possible. We're taking a look at making sure that we protect our share. We're strategically important. And we're always mindful in terms of what the capacity is of the consumer to withstand pricing. So we're very sensitive to that. The other thing that I was going to say to you, Frederick, and I think you understand this as well, is that LaSonde has a very diverse portfolio. It's well represented across both brands and private label. It's well represented across various channels. And it has got a wide range of products. And what it allows us to do is not necessarily be solely dependent on pricing, although pricing is an important factor, but obviously we take a look at where and when we need to pivot in terms of merchandising, promotion, focus on a channel basis to ensure that we're following the consumer as well. So there's a lot that goes into sort of the consideration, but I hope that helps you understand it a little bit more.

Yeah, that's a great overview. Thanks for that. Maybe switching topics here, just on the competitive environment, do you have any comments on what you're seeing from certain competitors? Are you seeing new players come in, or are existing players making some moves in terms of pricing or capacity? Just any general thoughts on the competitive environment right now.

It's a... Not necessarily. I mean, the competition really hasn't changed. Clearly, they're dealing with a lot of the same pressures that we are. And I think in terms of what I see in terms of our performance in the market, I think we're effectively competing with them.

Okay, perfect. And lastly, for me, on your capital allocation priorities, if we exclude CapEx related to your strategic plan, Do you have a view on allocating capital to acquisitions or share buyback at this point?

So, as we discussed last quarter, Fed Eric, I'll remind us that we had a program share buyback last year that we have not continued this year because we want to reserve our capital, our dry fodder to allow us to deploy our strategy. which include, of course, some organic capex, which should be pretty much financed with current cash flow generated by operation, but also to allow ourselves to get into bigger type of investment, which might be acquisitions, yes. So that's why we'd rather reserve our cash for those real opportunity versus a share buyback.

Perfect. Thanks for taking the questions and congrats on the progress in the quarter.

Thanks, Frederic. Merci, Valérie.

Next question will be for Martin Landry at Stifel GMP. Please go ahead.

Hi, good afternoon, everyone. My first question is on the rise in the cost of orange concentrate. It's been very impressive. But we're not seeing a major impact on your gross profit. Your gross profit was down, but nowhere near the same extent as the rise in your input costs. Like, is there a lag between what we're seeing on your chart and then what appears in your financials? Like, could we see more pressure in the coming quarters? Just a bit of clarity on that would be great.

It's Eric. I'll take the first part, and then Vince will complete. So, of course, when you look at the price from an orange concentrate, yes, the spot price is very high. However, as an organization, we buy. We have buying strategy. We have hedging strategy. And also, we manage the portfolio. And as Vince mentioned in his remark, right, our price adjustments mechanism are starting to be deployed and deployed. help us close the gap on this. And, again, oranges is one component of all of our product offerings. So it's not as if we're all dependent on oranges.

I don't think there's a lot more for me to add to that, Eric. I mean, when you consider it, it is something that we take a close look at, and you talk about it includes in terms of our purchasing strategies, in terms of what it is that we do to better protect ourselves from ongoing inflation in the market. And then obviously what we take a look at is pricing to reflect the cost inputs that we're seeing on orange concentrate. Clearly it's something that we're paying very, very, very close attention to, but right now, and as far as how it is that we're managing it, we're quite comfortable with it.

Okay. And maybe to follow up on that last discussion, Does your pricing, because I would think that from what it looks like, the fluctuation in input costs, it's elevated right now, but at some point I would expect it returns back to historical levels. Are your price increases reflecting the full swing in input costs right now, or you're not passing on all of it to your clients?

So there's a couple of things that you said in there, Martin, and I want to make sure that I get the question correctly. You talked about pricing returning back to normal. I mean, in our MD&A, what we said is we're seeing a stabilization in inflation. So we're not necessarily seeing yet, you know, a pullback in terms of declines on prices. So I think that is an important, that's an important consideration for you. Now, just remind me of your second part of your question, Martin.

Well, I mean, I'm just trying to figure out a little bit what are the levers you have in terms of setting that increase in input costs. Are you fully passing on those increase in input costs? Are you keeping some of that? Are you reducing promotional activity? Because I would expect that when you put on a price increase, it's got some some permanent effect, and you don't change prices on a weekly basis. So just trying to understand a little bit how that dynamic works.

So let me just first answer the question in terms of the levers at our disposal. Like a lot of businesses, we've got pricing, promotion, mix, cost management levers, all sort of at our disposal to manage inflation. And so I talked a little bit about, look, if we feel like the smart thing to do is to hold pricing but manage our mix such that it's actually, you know, there's a shift in terms of our focus on value orientation, then I think we're well protected from that standpoint. On your question in terms of coverage, I would say that we're well covered in terms of pricing versus the input costs that we've received to date.

Yeah, with the stabilization, as we said in our MD&A, with the stabilization of most of our input, except for FCOJ, our ranges, it allows us finally to catch up and close that gap from a pricing to cost increase timing.

Yes. Okay. And then maybe last question. Are you seeing trade downs in customer, in shopper's patterns? And are you seeing a benefit to that with your private label brands?

Yes. So, What you're seeing is a couple of things that I've reinforced this a couple of times. The diversification of our portfolio between brand and private label, and then also the mix that we have from a channel representation perspective. If I just focus on brand versus private label, yeah, we benefit from that. I mean, we've got strong brand proposition, but we've got a healthy private label portfolio. And what you do see is the private label portfolio, from a category perspective, is performing stronger than brands. So as consumers start to shift as a result of, the realities of the market environment were well sort of hedged in being able to follow that.

And, Matthew, just to clarify, because I'm sure you or other will read our material in more detail, I'll draw your attention to the table on page 11 where it analyzes our sales. And you would look at this and you'll see a volume impact for brand and private label. Just remind whoever looks at this that the a private label decrease is not only a factor of demand or some explanation around what triggered that. So you can have a view on how brand and private label are performing in current environment.

Okay, perfect. Thank you.

Thank you. And at this time, I would like to turn the call over back to Mr. Tempano. Please go ahead.

So thank you for joining us this afternoon. We invite you to attend our virtual annual meeting of shareholders to be held next Friday, May 19th at 2 p.m. The webcast link is available in our management proxy circular on CDAR, and we look forward to speaking with you again at our next quarterly call in August. Thanks for your engagement. Have a great weekend. Thank you. Bye-bye.

Thank you. Ladies and gentlemen, this does indeed conclude the conference call for today. Once again, thank you for attending. And at this time we do ask that you please disconnect your lines.