Lassonde Industries Inc.

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Lassonde Industries 2024 First 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 0. Before turning to management's prerecorded remarks, 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, May 10th, 2024. I would now like to turn the call over to Vince Timpano, President and Chief Operating Officer. Please go ahead.

Good morning, ladies and gentlemen. I am here with Eric Gemm, Chief Financial Officer of Lassonde Industries. Thank you for joining us for this discussion of the financial and operating results for our first quarter, ended March 30th, 2024. Our press release reporting these results was published yesterday after markets closed. It can be found on our website at lassonde.com, along with our MD&A and financial statements. These documents are 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. Lausanne sustained its sales and profit growth momentum in the first quarter. Sales increased 4.1%, mainly reflecting pricing adjustments in Canada and the consolidation of Diamond Estate sales. This solid execution combined with efficient cost management and a more favorable sales mix led to a 32% improvement in operating profit. As anticipated, our volume was down slightly compared to the same period a year ago, with the decline essentially occurring in the Canadian market. Now let's turn to slide five for a review of our divisions. In the US, we are happy with the progress after the first quarter. Our US divisions are performing according to our plan, both financially and from an execution roadmap perspective. And we are confident that this trend will continue throughout the year. Of note, we recorded a slightly higher sales volume this quarter, up about 3% compared to the same period last year. This favorable variation came from both sides of our US business. For the branded operations, volume momentum was driven by key growth areas such as in the single serve format. Meanwhile, for private label volume, quarter one represents a complete lap of our portfolio simplification process and the start of our rebuild phase. When we look at our operations, we are realizing improvements from where we were at the same period last year on many fronts, starting with our leadership and our people. Having the right talent in the right seat enabled us to re-examine how we operate. From our processes to our system, many modifications were made, including the deployment of our TMS and the demand planning system during 2023. Also, learning from the challenges experienced with our supply chain, more specifically around the reliability of our co-packers, we are investing in our own capability. Starting in January, we started to insource the production of a significant volume of aseptic juice boxes, reducing the dependency on an important external supplier, while at the same time improving our profitability. All these efforts, some of which are still ongoing, are yielding the intended benefits so far, including improving our operating efficiency, reducing our operating cost structure, and increasing our manufacturing capacity. These elements are essential to build back our U.S. volume, and we are now at a point where we can comfortably integrate new volume. On the demand side, we are also progressing well with our various initiatives to secure this new volume. As we said in the past, it's a lengthy process that requires some patience. It requires the right balance between getting the volume to absorb our fixed cost, but at the same time, not securing volume at any condition. we remain confident that the incremental volume will begin to materialize in the second half of the year. In fact, we have good visibility to that effect with confirmation of new business and production already planned for later in this quarter. More importantly, this volume should generate better margins as it will leverage our improved cost structure and further absorb fixed costs. Looking at our North Carolina single serve expansion project on slide six, we are moving closer to the start of production expected in the third quarter. Following a ramp-up phase in the second half of this year, full production is expected to begin in early 2025. As witnessed by our sales mix this quarter, single serve formats continue to show strength, and this new line will play a pivotal role in providing further growth opportunities in new markets, across both our branded and private label businesses. Leveraging the success of Project Eagle and reflecting on the future of our U.S. business, we are in the process of evaluating various investment scenarios to ensure the competitiveness of our manufacturing network. In addition to improving efficiency, our scenarios also consider the possibility of adding capacity and new capabilities to meet market opportunities over the longer term. the outcome could lead to an additional important CapEx program. Turning to our Canadian activities on slide seven, our focus was on executing certain pricing adjustments to reflect higher input cost as our Canadian business has a higher exposure to orange juice and concentrate. As always, we considered potential changes in consumer behavior in a context of ongoing inflation to find the sweet spot. between growth and margin expansion. Although these pricing adjustments were accompanied by volume erosion that affected the entire category, the net effect for Lausanne was an increase in sales as the volume decline for our branded business was somewhat offset by increased private label volume. During the first quarter, the market rate of decline did not worsen, and we continue to see a slight shift in consumer preferences in favor of private label products. we will continue to closely monitor the market evolution. During the quarter, we further progressed on achieving the key objectives of our Canadian beverage division to fortify its industry leadership. In regard to channel expansion, I am pleased to report volume growth in our food service business. As for productivity improvements, we are currently in the process of implementing the TMS in our Canadian beverage business. With respect to innovation, certain new products will hit the market by the end of the second quarter, mainly under the Pruite and Del Monte brands. These products have been crafted with the goal of appealing to consumers' taste and market trends while reducing our commodity exposure. Finally, on slide eight, our specialty food division had a solid quarter. We had good success in leveraging our Canton brand, well-recognized in Quebec by extending its reach into the premium glass jar soup category. We also made further inroads to optimize productivity and efficiency by implementing the TMS at our specialty food division during the quarter. We remain confident about the specialty food business, and this division represents an important platform in building a growth-oriented portfolio. I now turn the call over to Eric for a review of our results. Eric.

Thank you, Vince. Good morning, everyone. Before I begin, Please note that most amounts have been rounded to ease the presentation. Also note that I will refer to non-IFRS measures or ratios in my remarks, mostly to ease the comparability between periods. Reconciliation to IFRS measures are provided in the appendix to our presentation. Let's move on to slide nine. First quarter sales amounted to $570 million they were up 4.1% from last year. If we exclude an $8 million contribution from Diamond and a slight unfavorable foreign exchange impact, sales increased by 2.8%. This increase mainly reflects selling price adjustments in Canada, which were partially offset by a lower volume of sales also in Canada. Moving on to slide 10. Cost of sales increased by 2.3%, resulting from higher costs of certain input, mainly orange juice and orange juice concentrates, and the consolidation of diamonds cost of sales. These were offset by the impact of lower sales volume and improved operating efficiency. As a result, gross profit reached $150 million, representing a gross margin of 26.2%. up from $137 million a year ago, or a 25% margin for that quarter. Excluding the contribution from Diamond, gross profit rose 7.2%. SG&A expenses were $115 million. Excluding $4 million in expenses from the consolidation of Diamond's SG&A, the SG&A increased by 0.5%. resulting from increases in certain administrative expenses and warehousing expenses, a portion of which is in support of our North Carolina construction project. These increases were partly upset by lower performance-related compensation expenses and lower transportation expenses. Excluding items that impact comparability, adjusted EBITDA increased 22% to $52 million. or 9.2% of sales. This marked an improvement from the 7.9% EBITDA margin generated last year. Adjusted profit attributable to the corporation shareholder came in at $25 million, or $3.68 per share, compared to $17 million, or $2.48 per share, last year. Turning over to our balance sheet on slide 11. Days of operating working capital increased slightly in the first quarter, reaching 48 days, up four days compared to the previous quarter, but down significantly from 57 days a year ago. The sequential variation reflects higher DIO, the yellow bar, due to higher raw material inventory, mainly resulting from the advanced purchase of apple and apple concentrate to temporarily secure supply. This decision also had the counter effect of increasing DPO, the gray bar. Our objective remains for days of operating working cattle to settle within our pre-COVID range by the end of 2024. However, this target does not reflect consideration of punctual events, such as when we are required to secure price and or availability of certain commodities, as we just did in this first quarter. Turning to cash flow on slide 12. Operating activities generated $11 million this quarter compared to $5 million used last year. The improvement reflects mainly better profitability and lower working capital requirements compared to the same quarter last year. Capital expenditures amounted to $26 million in this first quarter. It's twice the amount we've invested during the same quarter last year. Looking ahead at 2024, we continue to expect CapEx to reach up to 5% of sales. Now on slide 13, our net debt increased by $27 million versus year end, reaching $218 million at the end of March. You can see on the left side of this slide the key components of such variation. Despite the increase during the quarter, the current net debt level compares very favorably versus the $268 million level a year ago. Our net debt-to-adjustability ratio stood at 1 to 1 at the end of the first quarter of 2024, slightly up versus the end of the previous quarter, but down significantly from 1.7 to 1 a year ago. Finally, the Board of Directors declared a quarterly dividend of $1 per share payable on June 14th to shareholder of records on May 22nd. I turn the call back to Vince for the outlook.

Vince? Thank you, Eric. Let's turn to slide 14. As we look ahead to the balance of 2024, our priorities remain. Building back U.S. volume, fortifying our leadership position in Canada through product innovation and service excellence, channel expansion, brand marketing, and through further productivity improvements, and pursuing the assessment of options to grow our specialty food offering to capitalize on solid market demand. We are pleased with our first quarter performance, and we intend to maintain our focus on execution to meet our objectives of sales growth, improved profitability, and long-term value creation. Pricing adjustments were successfully executed in quarter one to reflect higher input costs mainly for orange juice and concentrate, and it remains an area of focus that's closely monitored. Having said this, we will keep driving our innovation efforts to offer consumers valuable alternatives that are well aligned with their needs, while reducing our commodity exposure. At the same time, we will pursue efficiency gains and cost reduction initiatives to enhance profit growth. Moving to slide 15. Given our first quarter results and market dynamics, We continue to expect 2024 sales growth rate to be in the mid-single-digit range, excluding foreign exchange impacts. This growth rate will be primarily driven by the run rate of selling pricing adjustments and expected year-over-year volume growth in the second half. This back half improvement should result from the combination of expectations about the gradual pace of U.S. demand buildback, additional volumes available following the commissioning of the single-serve line in North Carolina, and demand normalization. In closing, 2024 is off to a good start, and our momentum supports our positive outlook for the rest of the year. Executing our strategy remains our focus area as we set sights on achieving our long-term growth objectives and on creating lasting value for our shareholders. This concludes our prepared remarks, and we are now pleased to answer your questions.

We will now begin the question and answer session. To join the question queue, you may press star, then 1 on your telephone keypad. You will hear a tone acknowledging your request. If you're using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star, then 2. We will pause for a moment as callers join the queue. The first question is from Luke Hannon from Canaccord Genuity. Please go ahead.

Thanks. Good morning, everyone. Before we get into the performance during the quarter, I wanted to ask about the investment scenarios within U.S. beverage, and more specifically, how far along are you in that process in evaluating those scenarios? Is this more about fortifying your positioning there and keeping that lowest cost to serve? Is it more about expanding the capabilities that you're able to offer to customers, just more broadly how you're thinking about those investment scenarios?

So Luke, it's Vince. I'll answer that. So let me first start with a refresh on Project Eagle. So Project Eagle to us was very focused on addressing some of the constraints that we started to see in around the 2020, 2021 timeframe. And so the real focus for us at that time was to ensure that we were improving you know, our operational capacity, that we were lowering our cost structure, that we looked at the simplification process as a means to do that, that we improved our labor pool in improving our vacancy rates, and then obviously we moved forward to look at things like North Carolina expansion that allowed us to move into single serve. As we take a look at the next generation of ensuring that we've got a competitive network for the future, That's really what we're focused on now. We're still in the assessment phase, but to your point in terms of what do we see it serving, it's a little bit of all of the above in that what we're trying to do is ensure that we've got capacity that we think is appropriately built for the long term, that we've got the capabilities that allow us to support new innovation and growth in adjacent categories, But as well, we've got an eye to ensuring that we automate to ensure to find ways to bring down our costs. So it really is about cost, capabilities, and capacity with an eye to the long term.

Okay, got it. Thank you. And there was commentary in the outlook as well that these scenarios are being examined in parallel with specialty foods and either investing more in organic growth or M&A there. So I guess my question is, is it possible to be able to do both, invest a little bit more in the U.S., this next phase of Project Eagle, and also support more growth in specialty foods? And more specifically on that, is it still fair to say that then, you know, as we get into 2025 and beyond, that 5% of sales is a reasonable level of capex to support both of those objectives?

So, Luke, it's Eric. First, we do have the balance sheet to support both initiatives. And in terms of CAPEX, so we are very mindful when we give our guidance in terms of what we call maintenance CAPEX or basic CAPEX between two and three. And then if and when we determine that there's CAPEX In addition to that baseline capex, we will give you enough information so you can model not only the cash outflow associated with that capex or that investment, but also you can reflect in your model the expected P&L and cash flow implications going forward. So at the moment, I would still advise that you keep the 2% to 3% guidance in the longer term. Follow the guidance for this year. and stay tuned for more information in terms of where else we're gonna go and how we're gonna use our very strong balance sheet to help us support the growth.

Okay, understood. Last question and I'll pass the line here. Eric, you did mention that DIOs ticked up slightly, and that was a strategic move in order to get the apple juice and apple juice concentrate. Maybe two parts to that. What was the rationale for that? I'm assuming it was maybe visibility into further price increases. And then if we think about DIOs specific to apple juice and related concentrates, has that improved thus far into Q2?

So, yeah, so it was a strategic move twofold. One is fresh apple. We have a bit more fresh apple in our mix, but also we, as Vince mentioned, right through innovation, we're trying to find a way to balance the cost and implication of orange juice in our portfolio. So Apple is another good 100% juice filler that we can use in some of our blend. So we wanted to make sure that we have enough of this commodity of this product to help us support the innovation platform. So that was point number one. Now, in terms of visibility, At the moment, our internal visibility takes us back to normal level of DIO by the end of the second quarter.

Okay, great.

Thank you. Thank you, Rick.

The next question is from Frederic Tremblay from Desjardins. Please go ahead.

Thanks. Good morning. I was wondering if you could maybe start by discussing the the consumption trends that you're seeing between, you know, private label and national brands, any sort of recent developments there in terms of the consumer demand in those two categories? And I guess related to that as well, can you speak to the flexibility of your manufacturing platform in terms of, you know, there's a shift in demand in one category to the other. I know you're Your North Carolina line sort of addresses that, but I guess with the legacy assets, how you think about flexibility to move from private label to national brand as needed?

So, let me tackle that in a sense. Let me talk first about what we're seeing in the category. First of all, we're continuing to see in Canada category declines in the 6% to 7% range. What we are seeing, however, is that category consumption is not worsening. And when I look at that, I look at it from a quarter over quarter over quarter basis. And so what we're seeing is some more resilience in the category. So that's point number one. When you talk about trends, it's more of what I've shared in the past. What we continue to see is a shift to value. And you see that shift to value both across channel and product and by brand versus private label type. So channel, obviously a shift discount. We continue to see that when you talk to look at when you take a look at products, obviously consumers trying to seek out more value oriented products for which we believe are well positioned to support. And you are seeing a continued shift to private label. So in a world of category consumption that is down, even though dollars are up, the winner in the mix right now in Canada is private label. So I think that's the Canadian perspective. When you look at the U.S., a little more resilience in the category as well as down about 3%. What I would see is you see some recent shift to private label, but you continue to see a more balanced outlook between brand and private label. But like Canada, you are seeing a continued shift from a channel perspective into value. And you asked the question about flexibility, and I know I've talked about this in the past, but recall that our network is built to support a portfolio that is very diversified. And that's across juices and drinks. It's across brand versus private label. And it's across various package formats. You know, refrigerated, shelf-stable, multi-serve, single-service, septic, juice box. So it's built for flexibility. And when you consider sort of the brand private label reality for us, recall that we do business with virtually every customer across North America and specifically in Canada. So again, the network is built for flexibility. Obviously, we continue to take a look at new ways to ensure that we're flexible and address the demands for the future. But I wouldn't describe it at all as a constraint today.

Very helpful. Maybe last question for me. At the investor in September, you mentioned that the internal production volume at the US private label operations were down nearly 20% between 2018 and 2022 because of operational complexity and other factors. I'm just wondering if you can provide an update on where you stand on that now and if you have any sort of visibility on when you may have recouped this 20% gap?

So what I can tell you is in terms of the activities that we put in place for Project Eagle in the US, we talked about improving our conversion costs. We talked about improving our capacity. Obviously, job number one for us was to simplify the portfolio such that we could actually reduce changeover and downtime. What you are seeing, and I'll give you just an example, in New Jersey, our case per hour, our output is up 15%. For the same facility, when you take a look at conversion costs, our conversion costs are down 13%. And so we believe our efforts, both in terms of investing in equipment to improve efficiency and capacity, and also to improve conversion costs are starting to be realized. And what we're also seeing through that process is we're securing volume at a better margin. So when I look at it operationally, there's two things that I would say is we're never really done, but in as far as Project EGLE, from an operational perspective, equipment is being deployed, labor has been stabilized, capacity has been addressed, and that's where we now turn our attention to building back volume.

And Vince, right, just to, when we met at the investor day, we were at the tail end of a situation where our demand was superior to what we were able to build. And since then, we've crossed that line. So now our ability to manufacture is in excess of the current demand. And that's why this build back plan is so crucial. and we're making good stride with that regard.

Good cover. Thanks very much.

Thank you, Anthony.

As a reminder, if you have a question, please press star, then 1. The next question is from Gabriel Chu from National Bank. Please go ahead.

Hi, it's Gabriel on for Vishal. Thanks for taking our questions. It's a great color so far. I just wanted to clarify, given all the comments you had talked about, it seems to suggest that the improvement in gross margin, that seems sustainable. Could you confirm that? And perhaps I'll give a little bit more color on even margins in the U.S. and Canada. Would it be fair to say that it's improved in the U.S. and Canada's compressed slightly overall?

So, Gabrielle, first on gross margin. Gross margin expansion, yes, we're at 25 same quarter last year, 26.2. Reflects both reality, remember the theme of 2022 and early 2023 was rapid expansion of cost and us trying to catch up with price adjustment. And Q1 last year was still the same theme and mainly in Canada. So now we are more at the right place in terms of having the price reflect the other costs. So at the 26.2 that we realize, it translates this versus last year. Now also the 26.2 translate some operational efficiencies that we start to realize across our North American network. Can we expand from there? The answer is yes. Am I got a guide on this? No. But as you hear us say, now that our U.S. manufacturing network is able to take on more volume, you have to remember that volume is key for us to absorb fixed costs. So as we are able to generate more volume, sell more volume out of the U.S., we should see some good improvement on absorption and, therefore, all things being equal and improvement from a margin perspective. Now, when it gets to profitability by region, we don't disclose that. What we can say, however, and what we've said is the US at the moment delivers to our expectation after the first quarter. And when we stretch our neck a little bit and think about the full year, they are still aligned with our expectations. And as you may recall, we've said that the U.S. will be improving years over years. And Canadian business continues to do very well.

Okay, got it. And then maybe turning towards the balance sheet, I understand that you have a variety of strategic actions that you're contemplating at the moment. But at what point do you view the balance sheet to be overcapitalized? And how are you thinking about that?

So the balance sheet, part of our capital structure strategy, we said that at 325, 350 of leverage, we would be probably at the highest point that we are comfortable with. So we still have a lot of room to deploy capital, if that's your question. And our intention is to use that balance sheet to invest in growth platform for the business.

Okay. Okay. And in terms of growth, Rushman, we understand you're looking at a second juice box line there. That's going to be conditioned in the back half. I'm just wondering in terms of the timeline. September. September. September. And then for the timeline startup costs, should we think about that? It's going to be similar to what happened in January as well, the timeline and the cost involved.

The cost will be minimal because it's technology that we are familiar with. So it was quite transparent in January when we deployed. the first line, so I don't expect that we'll see an impact, a material impact to the point that it will be noticeable outside of our walls with the launch of this line in September.

Okay. Got it. I think I'll pass the line then. Thank you very much, Gabriel.

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 for joining us this morning. We invite you to attend our virtual annual meeting of shareholders to be held next Friday, May 17th at 2 p.m. The webcast link is available in our management proxy circular on CDAR+. We also look forward to speaking with you again at our next quarterly call. Have a great day.

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