Lassonde Industries Inc. (LASA) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Lassonde Industries 2023 Second Quarter Earnings Conference Call. [Operator Instructions] 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, Thursday, August 10, 2023. I would now like to turn the call over to Vince Timpano, President and Chief Operating Officer. Please go ahead.

Good afternoon, ladies and gentlemen. I am here with Eric Gemme, Chief Financial Officer of Lassonde Industries. Thank you for joining us for this discussion of the financial and operating results for our second quarter ended July 1, 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 SEDAR 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 4. I am pleased to report that Lassonde achieved another quarter of improved performance driven by further progress in the execution of our 2023 priorities and our multiyear strategy, resulting in sales growth and profit gains across each of our divisions for the second quarter. Sales increased 9.4%, essentially reflecting pricing adjustments in response to cost inflation, improved private label product mix in the U.S., along with solid volume in Canada, resulting in market share growth. Meanwhile, in the U.S., benefits from our portfolio optimization plan resulted in improved operating efficiency, while lower logistics costs also contributed to margin and profit growth. Notably, we experienced less disruptions in our U.S. supply chain. With fill rates converging towards historical levels, we can safely say the situation is almost back to normal. Eric will provide additional details on our financial performance in a few minutes. But first, let me focus on certain key elements of our 3-pillar strategy. In regards to our first pillar, build a growth-oriented portfolio. Our share gains in Canada speak highly about the strength of our brands, the diversification of our portfolio, our customer relationships and last but not least, the strength of our team. While category volume was down approximately 5%, our greater volume, excluding pricing effect, yielded a $6.8 million sales increase and overall market share growth. In the U.S., the optimization of our product portfolio has reduced execution complexity. Low-margin products have been discontinued, and we are forging ahead with harmonizing packaging formats and consolidating formulas. By reducing the number of SKUs sold in the U.S., we have reduced downtime and costly changeovers, which ultimately will improve throughput and we opened up line hour availability and are seeing improvements in productivity through increased cases per hour produced in New Jersey. Our specialty food division had another solid quarter supported by growing demand, and we continue to assess opportunities to further expand our reach to build on solid momentum in its market niches and leverage its unique capabilities. As for our second pillar, drive sustainable performance, we continue to make productivity and efficiency gains by using better decision-making tools and making investments in new equipment. Our new transportation management system, which we'll refer to as TMS, introduced several months ago, further reduced our costs and improved the management of our logistics. We are very pleased with the benefits we are seeing from this important investment. During the second quarter, we also began implementing our demand planning system in the U.S. This system should assist in further reducing downtime by improving scheduling and in optimizing customer service through higher fill rates. In regards to equipment, the new filler in New Jersey was installed in July and is up and running. It will further contribute to lowering our costs through improved line speed, while waste reduction from lost juice will also improve our environmental footprint. Finally, we have set summer 2024 as the start date for our new single-serve line to be commissioned in North Carolina. This very exciting project constitutes the largest investment ever by Lassonde outside of an acquisition, and we are looking forward to sharing more on this key project in the near future. Moving on to our third pillar, improve our capacity to act. Recall that just over a year ago, as part of our new operating model, we created 3 new centers of excellence in innovation, manufacturing and supply chain. Let me call out innovation, which has always been a core value of Lassonde. Our innovation center provides important input to our divisions by identifying market trends and needs so we can focus on building a long-term pipeline of product and packaging innovation to extend our reach into new segments or new capabilities. With ongoing focus, we will be in a position to speed up time to market and capture emerging trends more rapidly. Innovation remains a key priority for us as we look to further strengthen our portfolio, and ensure we are tapping into critical consumer trends. Ladies and gentlemen, Eric will now review our quarter 2 results.

Thank you, Vince. Good afternoon, everyone. Before starting, please note that most amounts have been rounded to ease the presentation. Also note that although I refer to non-IFRS measures or ratios in my remarks, mostly [ do ease ] comparability between periods, reconciliations are provided in the appendix through our presentation. Let me begin on Slide 9 with our top line review. Sales totaled $579 million, up 9.4% from $530 million last year. Excluding a favorable foreign exchange impact, sales increased 6.6%, mostly due to selling price adjustments, a better private label sales mix and a volume increase in Canada. Conversely, we experienced a volume decline in the U.S. but a meaningful portion of this reduction relates to our portfolio optimization process. Moving on to Slide 10. Cost of sales rose 9.3% from last year. Excluding foreign exchange variations, the year-over-year increase was 5.3%, mainly reflecting higher input costs, especially apple and orange concentrates and an increase in our conversion costs, mainly due to inflation factors and higher maintenance costs. The net results of these increases in sales and in cost of sales is a gross profit of $152 million or 26.3% of sales, up from $139 million a year ago and flat as a percentage of sales. Net of the foreign exchange impact, gross profit increased by nearly $14 million. SG&A expenses were $111 million, down from $116 million last year. The reduction reflects lower transportation costs, which in addition to benefits from the new TMS and improved logistic execution is also attributable to decreases in base rates in fuel surcharges as well as lower U.S. sales volume. This factor was partially offset by higher performance-related compensation expenses, warehousing cost and administrative expenses as well as an unfavorable FX impact of $2.2 million. Excluding all items that impact comparability, adjusted EBITDA increased 46% to $59 million or 10.1% of sales from $40 million or 7.6% of sales last year. Adjusted profit attributable to corporation shareholders came in at $26.5 million or $3.89 per share compared to $16.3 million or $2.36 per share last year. Turning to cash flow on Slide 11. Cash flows related to operating activities generated $76 million this quarter compared to using $6.5 million in the same period last year. The substantial improvement reflects a better profitability and a cash generation from working capital this year as opposed to a requirement last year. Finally, capital expenditures for PP&E and intangible assets amounted to $28.7 million in the second quarter of 2023 compared to $9 million last year. At the halfway mark of the year, CapEx stood at $41.6 million. As a reminder, we estimate CapEx to reach up to 4.5% of sales in 2023 to support our multiyear strategy. Turning over to Slide 12 to look at our balance sheet. I am pleased to report some improvement in our working capital situation. This graph that we present each quarter shows the evolution of the main working capital components over time. Between the first and second quarters of 2023, the days of operating working capital, the blue line, has been reduced from 52 to 46. This improvement stems from a reduction in days of sales outstanding, the red bar, days of inventory outstanding, the yellow bar, as well as by an increase in days of payable outstanding, the gray bar. In regard to inventory, while satisfied with last quarter directional movement, it still remained elevated compared to its historical level. With abating supply chain challenges and improvement in customer service and operational efficiency, we expect to progressively reduce inventory levels over the next few quarters. As a result, we remain confident to see days of operating working capital land near the higher end of the pre-COVID range by the end of 2023 and to settle within that range in 2024. On Slide 13, we see that our debt level has declined substantially this quarter with long-term debt, including its current portion of $228 million at the end of the second quarter, down from $268 million 3 months ago and $247 million at the beginning of the year. The decrease reflects a reimbursement of our revolving credit facilities mostly stemming from working capital release. Given the improvement in profitability, the lower debt, our net debt to adjusted EBITDA ratio decreased significantly in the last 3 months, reaching 1.28x as at the end of the second quarter versus 1.67x at the end of the first quarter. Briefly, Slide 14 shows our first half financial performance. Sales reached $1.1 billion in 2023, up 8.5% over last year. Excluding foreign exchange variations, the increase was 5.2%. Adjusted EBITDA amounted to $102 million, up more than 27% from $80 million last year. Finally, profit attributable to shareholders was $42 million, up from $29 million. On an adjusted basis, it was $43 million or $6.37 per share, up from $33 million or $4.73 a share. I turn the call back to Vince for the outlook. Vince?

Thank you, Eric. Let's move on to Slide 15. Looking ahead to the rest of 2023, our priorities are unchanged, and we will remain focused on driving continued improvement in our financial and operating performance and executing our multiyear strategy to accelerate revenue growth, improve overall profitability and drive long-term value for shareholders. We are pleased with our first half results. This said, there is still a lot of work to be done. But seeing such tangible progress reinforces that we are on the right path and provides additional motivation for our teams. Our pricing actions taken in 2022 and in the first quarter of 2023, continue to accelerate the recovery of cost increases, and we expect the run rate of these pricing actions to further benefit the balance of the year. In regards to input costs, we have seen some stabilization for most items with the exception of orange concentrate, which reached another historical peak in July. It's a situation that we are closely monitoring. As mentioned before, should inflation persist, we intend to implement further pricing action. We will, however, carefully analyze changes in consumer habits and demand elasticity in a context of price increases. Given our first half performance and current market conditions, we continue to expect our 2023 sales growth rate, excluding foreign exchange impacts, to be in the mid- to high single-digit range, primarily driven by price increases. In closing, our results so far this year help reinforce that we are on the right path. More importantly, we are confident that our efforts to enhance operational excellence will continue to deliver more tangible benefits in the months to follow. While there remains lots to do, we are optimistic that as we continue to fortify our operations, build back volume and remain focused on executing our 3-pillar strategy that Lassonde is poised to deliver growth at improved margins in 2024 and beyond. This concludes our prepared remarks. We will now be pleased to answer any questions you may have.

[Operator Instructions] The first question comes from Vishal Shreedhar with National Bank.

With respect to the balance sheet, as your EBITDA improves and working cap improves and -- what level of levers would management feel comfortable in perhaps returning capital to shareholders once again, or considering that?

Vishal, thank you for your question. This is Eric. So at the moment, as you know, we are in a situation where we are deploying significant capital to support our strategy. And we have opportunities as well to evaluate for use of that capital. But of course, in a world where returns are good, capital -- working capital is normalizing, we will be mindful of the right balance of use of capital and return to shareholders. But at the moment, I'm not ready to comment further on that until a few more quarters down and see where things evolve on investment side, performance side and the working capital side.

Okay. And with respect to quarter-over-quarter gross margin improvements, can you help me understand specifically what drove the sequential change in trend? Was it mainly the pricing actions? Was it the order fill rate? Is there some key factors you could point to?

So quarter-over-quarter, so there's a noticeable improvement, margin was 25% last quarter, now it's 26.3%. It's really the run rate effect of price increase that generated the bulk of the improvement, but also despite lower volume -- no, no, in fact, volume is slightly up. So also a bit of absorption and better execution from a plant perspective, operating in the U.S. So a combination of those 2 factors explain the improvement quarter-over-quarter.

Okay. And the order fill rates, you said, are now back to -- almost back to historical levels, is that a factor as well?

I think we're happy with fill right now going back to pretty much where they were pre -- I don't want to say pre-COVID but pre-supply chain crisis.

Okay. And with respect to the improvements in loss in volume in Canada quarter-over-quarter, was that mainly due to the gains that you saw in the Canadian business? And if so, can you expand upon what those gains were?

So on this one, let me -- first, can you repeat the question, so we're sure that we understand it, and I'll let Vince -- I'm not sure I really understood the meaning of your question.

Yes. So sorry. I mean if I may have stated it wrong. Within the national brands, the volume deterioration in Q2 was about $5 million versus in Q1 about $20 million of volume deterioration. And I was just wondering what caused that sequential change?

So what you would see is largely in the U.S. is where we saw the volume decline. When you take a look at it Vishal from a category perspective, the category was down about 5%, and that was pretty comparable Canada versus U.S. on a tonnage basis. We actually grew volume in Canada, and we actually grew market share because we outpaced the category. The declines that we saw were largely driven by the U.S., and I would say there were 2 factors. Recall that we made the decision to rationalize the portfolio. And when you take a look at the rationalization decisions that we've taken, I would say it would have contributed to around 60% of the decline. The balance would be contributed to market-driven activities. And so just recall, with that contraction in terms of volume within the U.S. that we experienced, it was also intentional. So we understood that we would say that we would see some contraction in volume. But it was coming at a higher margin. So what we wanted to do is allow the U.S. manufacturing facilities to reset, build back capacity, add a better cost structure. And now we're in a position where we feel like we can build back volume. The other thing that I would say is that when you take a look at the U.S. business, we have a private label business and a branded business, and we did see declines also in our branded business that were large in keeping with the declines that we saw in the category.

[Operator Instructions] The next question comes from Frederic Tremblay with Desjardins.

Just following up on the U.S. volume dynamics there. So I understand the impact of the SKU rationalization there. Can you tell us maybe where you're at with that? Are you essentially done with the SKU changes that you wanted to implement? And then I guess as a follow-up to that, do you have any visibility on when U.S. volumes might start to move into positive territory?

So I'll answer the first, not the second, and -- but I'll talk a little bit about it. In terms of the first, I would say, yes, in terms of the biggest changes that we made, we are through those changes in terms of the SKU rationalization. But I want to reinforce, Frederic, that the discipline that we're putting in place [ as an ] organization is to consistently take a look at our SKUs and making sure that we don't slowly build back the complexity with low margin. And so there's a process that we have placed to make sure that we continue to weed out those type of products, but the big bulk of it we took care of. We are now in a build back mode. Now the difference between the brand business versus the private label business, the brand business is largely things that we can do to drive performance from a promotional perspective, the marketing investment perspective. On private label, it's actually building back with customers in new contracts. And so we're actively in conversations with the U.S. Clearly, we have a pipeline that we're trying to build back against. But those conversations take time. And so I don't want to provide any type of timeline as far as when, but you should start to see some steady improvements over the course of next, I'll call it, 12 to 18 months. But clearly, we're going to try to exceed that, but those will take time. But we're in the process now of focusing on building back because while we have more work to do in our facilities, I'm growing confidence in terms of the operational foundation that we have, improving the cost structure, and it allows us to move back to building back volume the right way with the right margins and the right profile.

Okay. That's very helpful. And are there any learnings from that process in the U.S. that are applicable to Canada? Or are you comfortable with where your SKUs are in the Canadian market?

So I would say, in many respects, the U.S. borrowed from some of the disciplines that had been applied in the past in Canada. So Canada has continuously had a process where they took a look at SKUs and products. And I don't have the numbers on hand, Frederic, but had done quite a bit of work over the course of the last couple of years that really helped the portfolio. And they've got a pretty disciplined process as well just to make sure that they're not adding any more complexity to it.

And of course, we've learned from the U.S. and now reinforce our process and our execution across the board.

Yes. Look, let me add one more thing, Frederic, which goes beyond the point that you're making on portfolio. I talk a lot about the operating model that we put in place, which is actually the 3 centers of excellence. We've got manufacturing and supply chain. But what we're trying to do as an organization is to operate as close to the market as we possibly can. But there's a lot more knowledge sharing that we're applying across the market. And frankly, we're leveraging best-in-class practices across the market. It's like what we're doing with transportation management system, which we deployed in the U.S. That will find its way into Canada. The same will be applied in terms of demand and production planning. So what you should assume, Frederic, is that we already do a fair bit of knowledge sharing, but we will continue to apply these practices across the border, either way to make sure that we're leveraging best-in-class thinking.

Great. And last question for me with the internal improvements that we're seeing as well as the balance sheet and the leverage coming down. Can you maybe comment on your views on potential external growth opportunities, acquisitions, whether you're looking, if you're interested and if there's any specific areas that you're looking at specifically?

Yes. Look Frederic, that's a harder one for me to talk to, obviously. But what I would say is what we've said publicly is we will look at acquisitions as a means to stimulate growth. What's going to be pretty critical for us is that we're thoughtful about doing it in areas that we think have long-term growth because they're on trend. You've heard me talk about the focus on our specialty foods business and the role that it plays. And that's for us to be taking a look at whether it's an organic growth opportunity or an acquisition opportunity for us to significantly bolster our business. But we're going to go at a pace that makes sense. I mean it's got to be the right opportunity for us. It's got to fit our strategy at the right price, but that's why we talk about it.

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

Thank you, operator. Before concluding, please note that we're going to be holding our first Investor Day on Tuesday, September 19, at our head office in Rougemont. The event open to institutional shareholders and analysts only, will feature presentations by senior management and division leaders as well as plant -- as well as a planned tour. We're looking forward to this unique event that will allow us to showcase the extent of our wide North America network, the diversity of our product portfolio and the strength of our team, and we hope to see you there. Thank you for joining us this afternoon. We also look forward to speaking with you again at our next quarterly call in November. Have a great day.

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