Lassonde Industries Inc.

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Lausanne Industries 2023 Third Quarter Earnings Conference Call. At this time, all participants are in listen-only mode. Following the presentation, we will conduct a question and answer session, open to research analysts only. To join the question queue, you may press star, then 1 on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star, then zero. 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 today, Friday, November 10, 2023. I would now like to turn the call over to Vince Tempano, President and Chief Operating Officer. Please go ahead.

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 third quarter ended September 30th, 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 Plus 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. LaSonde achieved another quarter of solid year-over-year profitability improvement, driven by strong execution against our strategic priorities. Sales increased 4.9%, mainly reflecting pricing adjustments taken in 2022 and earlier in 2023, both in Canada and in the U.S. These pricing actions, along with improved mixed in the U.S., have more than offset volume reduction attributable to the simplification of our U.S. portfolio and to softer consumer demand. In this regard, according to industry data, sales volume measured on a trailing 13-week basis in the U.S. and Canadian fruit juice and drink markets decreased at a rate above the mid-single-digit range during the third quarter of 2023 compared to the same period last year. This rate is slightly higher in this quarter compared to the mid-single-digit rate observed in the first half of the year. Once again, all divisions delivered higher gross profit than in the same period last year. This reflects market share growth in our Canadian beverage division and improvements in our U.S. operations. Now, turning to slide five. Over the past few months, we have worked on all streams of our U.S. turnaround plan. We optimized our portfolio through product rationalization, PAC harmonization, and formula consolidation. We made important investments in our New Jersey facility. We stabilized our labor pool, and we deployed new decision-making tools and technology. On the latter, we finalized the implementation of an integrated supply and demand planning system during the third quarter. This new tool will improve forecast accuracy, drive more efficient inventory management and production scheduling. As a result, this will be a key contributor in continuing to improve plant efficiency, customer fill rates, while at the same time optimizing our inventory levels. Moving to slide six, our turnaround plan is resulting in efficiency improvements, ultimately leading to increased production capacity. As we are restoring capacity, We are also turning our attention to building back demand. Higher demand volume, in addition to bringing higher variable contributions, will drive better cost absorption and together result in further improvement in profitability. Lower freight costs also drove profitability improvement this quarter. We benefited from favorable market conditions with a decrease in fuel surcharges and base transportation rates. and generated savings through the investments we've made in our transportation management system. Now turning to slide seven, we remain on schedule to commission our newest septic single serve line in North Carolina in the summer of 2024. Following a ramp up phase, we expect full production to begin in early 2025. With a total investment estimated at US $53 million, this new line will considerably strengthen our core capabilities and provide additional capacity for both our branded and private label activities while enabling us to expand general presence. Meanwhile, in Rougemont, we will commission two aseptic high-speed juice box lines in 2024. Early in the new year, a first line will enable us to bring back in-house volume currently cold packed in support of our U.S. business and provide flexibility for growth opportunities. In the second half, A second line will allow us to progressively decommission older and smaller lines that have been in service for over 40 years. Now, before turning the call over to Eric, let me briefly discuss key takeaways from our first Investor Day held on September 19th on slide 8. The event allowed Lausanne to expose the depth and quality of its leadership team, which is a key driving force in executing our strategic plans. To base this strategy on tangible goals, we also shared objectives to achieve an annual sales run rate of $3 billion by the end of 2026, while sustaining our efforts to improve profit margins. These objectives will be achieved by a combination of organic and investment-driven growth. Organic growth mainly consists in leveraging existing assets by further increasing and optimizing their utilization. It also incorporates business mix improvements favoring higher margin products with attractive growth profiles. Investment-driven growth regroups all initiatives aimed at widening our physical footprint, either by building or expanding existing facilities, or making strategic investments which may include acquisitions. Let me now turn it over to Eric for a review of our quarter three results. Eric.

Thank you, Vince. Good afternoon, everyone. Before starting, please note that most amounts have been rounded to ease the presentation. Also note that I refer to non-IFRS measure or ratio in my remarks, mostly to ease comparability between periods. Reconciliation are provided in the appendix to our presentation. Let me begin on slide 9, with our sales, which total $583 million, up 4.9% from $556 million last year. Excluding a favorable foreign exchange impact, sales increased 3.4%, essentially due to selling price adjustments coming mainly from Canada, but also from the US. This was partially offset by a volume decline, essentially reflecting lower market demand. Moving on to slide 10, gross profits reached $146 million, representing 25.1% of sales, up significantly from $125 million last year, or 22.5% of sales. Net offering exchange variation, gross profit rose $24 million, reflecting higher sales and a decrease of 1.2% in the cost of sales both expressed in constant currency. The higher gross profit is mainly attributable to the run rate effect of previously deployed price adjustments. SG&A expenses were $111 million, up from $106 million last year. The increase reflects higher performance-related compensation expenses this year compared to last, higher administrative expenses and unfavorable ethics impact of $1.2 million. These factors were partially offset by lower transportation costs, which, in addition to the benefits from the new process and system in the U.S., also reflect a decrease in base rate and fuel surcharges as well as a lower sales volume. Excluding all items that impact comparability, adjusted EBITDA increased 36% to $53 million or 9.1% of sales from 39 million or 7% of sales last year. Adjusted profit attributable to the corporation shareholder came in at $25 million or $3.67 per share compared to 17 million or $2.54 per share last year. Turning over to our balance sheet on slide 11, I am pleased to report further improvement in our operating working capital. You can see on the graph that between the second and the third quarter of 2023, days of operating working capital, the blue line, decreased from 46 to 42. This improvement results from an important reduction in days of inventory outstanding, the yellow bar, which is now getting back to historical range. Regarding inventory, the improvement represented a cash inflow in excess of $58 million in the per quarter loan. We adapted our inventory management strategy to reflect for many of our inputs abating supply chain issues. Our objective remains to conclude 2023 with days of operating working capital near the IRN of its pre-COVID range and to settle within that range in 2024. However, we may continue to use our balance sheet to secure price and or availability of certain commodities. Turning to cash flow on slide 12. Cash related to operating activities generated $76 million this quarter, compared to using 1 million in the same period last year. The significant improvement reflects better profitability, a $24 million cash generation from working capital this year, as opposed to 34 million requirement last year. Capital expenditure for PP&E and intangible assets amounted to $22 million, in the third quarter of 2023, compared to 10 million last year. After nine months, CapEx reached $63 million, and we expect to conclude the year with CapEx representing approximately 4.5% of sales, essentially to support our growth strategy. Slide 13 shows that improved profitability and a working capital release led to further debt reduction. as we concluded the third quarter with net debt of $188 million, down from $228 million three months ago, and $247 million at the beginning of this year. Giving higher profitability and lower debt, our net debt to adjusted to bid-day ratio improved significantly, reaching 0.98 to 1 at the end of the third quarter, versus 1.28 to 1 three months ago, and 1.57 to 1 at the beginning of the year. Briefly, slide 14 shows our nine-month performance. Sales reached $1.7 billion in 2023, up 7.2% over last year. Excluding foreign exchange variation, the increase was 4.5%. Adjusted EBITDA amounted to $155 million, up 30% from $119 million last year. Finally, adjusted profit attributable to shareholders was $68 million or $10.03 a share, up from $50 million or $7.27 a share a year ago. I turn the call back to Vince for the outlook. Vince.

Thank you, Eric. Let's turn to slide 15. Looking ahead to the final quarter of 2023, we will remain focused on executing our strategy. As I mentioned earlier, market conditions have softened and we now expect to conclude 2023 with a sales growth rate in the mid single digit range, excluding foreign exchange impact. This growth rate is primarily driven by price increases and includes further pricing action that we are taking in the fourth quarter to reflect higher costs of orange. Although most input costs have stabilized, orange concentrate remains the exception. having reached another all-time high at the end of October. It's a situation that we continue to monitor very closely. Beyond cost increases, availability constraints are also anticipated as a result of low worldwide inventory levels in a context of sustained global demand. The first lever to mitigate impact of cost increases on our business is further pricing, including through mechanisms in our customer agreements. However, price increases are always taken with a careful eye on potential changes in consumer habits and demand elasticity. And this situation is no exception. We will continue to strike the right balance between meeting consumer demand and protecting our margins. Our portfolio diversification through branded and private label offerings and presence in multiple categories will also play a role in mitigating the potential impact. To conclude on this topic, now on slide 17, the situation with Orange reinforces the importance of even further portfolio diversification. This will be possible through innovation, including on product formulation, formats and packaging, and new product development. Now let's turn to slide 18 for our key priorities moving forward. In the U.S., the focus will be on building back demand, leveraging the improvements we are making in the operations, and restoring relationships affected by earlier disruptions. In Canada, we will continue to protect our core business, reinforce innovation to further diversify our portfolio, expand our presence in the food service channel, and increase productivity in all areas of the business. Finally, we will continue to evaluate various scenarios to grow our specialty food business beyond its existing assets. In closing, We are pleased with the results from this quarter and remain focused on our identified priorities that we believe will result in strong performance for 2023 and position us to deliver sustainable performance for the long term. This concludes our prepared remarks. We will now be pleased to answer your questions.

Thank you. We will now begin the question and answer session. To join the question queue, you may press star, then one on your telephone keypad. You will hear a tone acknowledging your request. If you are using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star, then two. We will pause for a moment as callers join the queue. Our first question comes from Vishal Sridhar of National Bank Financial. Please go ahead.

Hi, thanks for taking my questions. Just wondering on the commodity price increases that you're seeing particularly on orange juice cost trade and the elasticity of your business and your ability to take price and not impact volume when you're in fact trying to grow volume at the same time. Maybe you can talk us through those dynamics and help us understand how you're looking at 2024 at this point.

Yeah, so Vishal and Vince, I appreciate the question. I'm not going to get into the specifics of elasticity, but it's obviously something that we take a look at. The reality is, though, is the cost environment that we're experiencing will have an impact on price. And the cost environment that we're looking at is higher than historical norms that we've seen. And so I suspect elasticity will be tested, you know, when we take a look at it. So the pricing will move up. We suspect, obviously, demand will move down. But as I said in my script, for us there's a few things that we need to do. First, we need to capture pricing to offset the cost increase. Obviously, we're mindful of the impact that it's going to have on the volume, and we'll continue to monitor that. But in addition, I think you would have heard me talk to this at Investor Day. One of the competitive advantages that I believe LaSonde has is its diversification. both in brand and private label, and then also in products outside of orange that are impacted. So obviously we're going to do what we can to scale up our businesses outside of orange. We'll continue to look at new innovation that we'll bring to the market to offset any anticipated volume decline within orange juice. And also within orange, we've got formula modifications that we'll take a look at. We've got breakfast blend as a scenario option that we have that is 100% orange juice but has other 100% juice properties in it that comes at a lower cost and satisfies consumers' needs for a breakfast item. So all up, you take a look at pricing, diversification, and innovation, and taking advantage of the portfolio diversification that we have. All up, that's how we'll continue to look at managing the inflationary environment on orange juice.

Okay. Thank you for that. You know, it was a small item in the quarter, but just thinking about as you are launching new facilities and new products, there was an impact related to a cranberry sauce line. Wondering what that issue was and if it's been rectified and how you think about implementing the new capacity initiatives and if you deem those to be operational risks, how should investors think about that?

So, Vishal, this is Eric. The cranberry sauce line issue was last year. We had an unfortunate event happening in our third quarter. So the reference that you see in the MDNA is to cycle this impact in the third quarter, and you'll see, again, a continuing impact in the fourth quarter being cycled through. So that unfortunate event is now from a production perspective. We are back producing cranberry sauce since January this year. And the cranberry sauce season is in the full swing at the moment.

Okay, thank you for that. And as we look towards 2024, obviously, you know, the big improvements made so far this year are related to pricing. But we're going to anniversary those. I understand new pricing is coming up. But what should we think of the major drivers of performance as you try to achieve your historical levels of profitability? how should we prioritize them in our head?

So for me, Vishal, it's Vince. I mean, clearly, and we shared this with you as well at Investor Day, the focus for us in the U.S. is to build back volume. So when we take a look at the volume declines that we're seeing year over year in the U.S., recall that we made significant rationalization decisions that we're now cycling versus prior years. And so our focus now is to build back volumes. I'm really quite pleased with the progress that we've made in terms of improving the operational capabilities and capacity of our plants in the U.S. And so they're demonstrating efficiency improvements. They're demonstrating improvements in capacity. And clearly for us over time, what we now need to do is build back volume in the U.S. I would say that's a number one priority for us, in particular when you take a look at the U.S. market. In Canada, it's a little bit of what we just talked about, just sort of getting back to orange juice, understanding that it's an important part of our business within Canada, and we will have to make sure that we recover those cost increases through pricing and then work at ensuring that we're innovating and we're scaling up our non-orange juice businesses in a way that allows us to still capture volumes. But the folks in Canada were largely centered around addressing the orange tree situation.

And for clarification, Vishal, and those of you on the line, so oranges is also a commodity that we handled in the U.S., but in far less extent than we have in Canada. Right.

Okay. Thank you very much.

Once again, if you have a question, please press star, then 1. Our next question comes from Frederick Tremblay of Desjardins. Please go ahead.

Thank you. Good afternoon. Just starting with the U.S., as we try to assess the sequential progress of your U.S. plans, can you discuss maybe trends in volumes produced and volumes shipped sequentially compared to Q2 in the U.S.? ?

So from a volume perspective, sequential in the U.S., we are just hold on a second, slightly ahead of last year and also on a sequential basis. Sorry, I mean on a sequential basis. So volume is slightly up on the sequential. But at the moment, as Vince said, and you've heard us many times, including the investor day, it's about building back demand. So we have capacity to produce much more than what we currently sell.

And Frederick, just so I'm clear on your question, were you looking at the financial performance Q3 versus Q2?

Yeah, I was just looking at Q2 versus Q2 in terms of just seeing if there was a stabilization or maybe slight increase in volumes produced and sold from the U.S.

So when I look at the variance analysis, there's a slight favorable volume observed in the US. From ability to produce, continue to make progress. In fact, in the second quarter, the third quarter, we had to stop some of our line for major CAPEX deployment that contribute to, again, part of our EGLE project. So there was a bit of lack of overhead absorption because of this. So from a production perspective, a bit less than in the previous quarter. Yeah, but we're progressing well with our U.S. revitalization plan. And then while we're on this, of course, from a timing perspective, we took benefit of some of the shutdown and the third quarter to spend on maintenance. And so the spend profile on our fixed costs in the U.S. was a bit higher in the third quarter than what it was in the previous two quarters.

Okay, that's helpful. And then maybe switching to building back the volume in the U.S., given that it's a significant focus for you guys, can you maybe expand a little bit on ways to do that? I mean, the strategies that you have, whether it's with existing customers, new customers, is there some pricing considerations into gaining back the volume, like any details you could share on that?

I mean, Frederick, it's a great question, but it's a difficult one to answer, obviously, because it's competitively sensitive in as far as the things that we need to do. What I can tell you, though, is it's not that we're trying to secure new customers. We've got pre-existing relationships where decisions were made to rationalize both on a customer basis and on a product basis. And so it's now working with those customers in particular on a private label basis as they work through their contract and contract renewals that we re-engage with them through that process to win back some of those private label contracts. And so now it's important that we demonstrate to them that we've got the capacity as an organization to be able to fulfill the demand that they require. And that had been a core issue for us in the past. And I think we can demonstrate that to our customers quite effectively now. But obviously, that all takes time, you know, as we look to build that. The second thing that I would say, Frederick, is we've also got a branded business that we don't spend a lot of time talking about. That's different from a growth strategy perspective. A couple of things. When you take a look at the performance of the branded business, it too suffered like private label as a result of rationalization decisions. It was mostly impacted as a result of supply constraints. So we had difficulty accessing canned supply, paper supply, and it forced us to exit a key channel like school, parts of a school channel that was an important part of the branded business in the U.S. When you exclude that in the U.S., our branded business is actually growing share. And so we're going to continue to build our branded business in the U.S., while we do what we're going to do from a build back perspective on the private label business. And as you know, we've got a capability in Canada, both in brand and private label, and we do as well in the U.S. And so we're going to continue to focus on growing that, including through things like innovation.

Great. Thanks for taking the questions.

Okay. This concludes the question and answer session. I would like to turn the conference back over to Vince Timpano for any closing remarks.

Thank you, Operator, and thank you for joining us all this afternoon. We look forward to speaking with you again at our year-end call in March. Have a great weekend.

This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.