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

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Lassonde Industries 2026 Second Quarter Earnings Conference Call. The corporation's press release reporting its financial results was published yesterday after market closed. It can be found on its website at lassonde.com, along with the MD&A and financial statements. These documents are available on SEDAR+ as well. A presentation supporting this conference call was also posted on the website. [Operator Instructions] Before turning to management's prerecorded remarks, please be advised that this conference call will contain statements that are forward-looking within the meaning of Canadian securities laws. Forward-looking information is based on management's current expectations and assumptions and is subject to risks and uncertainties that could cause actual results to differ materially from those anticipated. For a discussion of key assumptions and risk factors, please refer to the forward-looking statements section of the MD&A. Also note that all figures expressed on today's call are in Canadian dollars unless otherwise stated, and that most amounts have been rounded to ease the presentation. This call will also include certain non-IFRS financial measures and ratios that are not standardized under IFRS and may not be comparable to similar measures used by other issuers. Reconciliations to the most directly comparable IFRS measures and related definitions are provided in the appendix to the presentation and in the corporation's MD&A. This conference call is being recorded on Friday, August 7, 2026. I will now turn the conference over to Vince Timpano, Chief Executive Officer.

Good morning, ladies and gentlemen. I'm here with Francis Trudeau, our Chief Financial Officer. We appreciate your time today as we review our results for the second quarter ended June 27, 2026. Please turn to Slide 4. Lassonde delivered strong gross profit growth of 16% in the second quarter, driven by effective revenue management, improved product mix, moderating input costs and solid execution of our business strategy. Despite pressure on industry volumes as macroeconomic uncertainty affected consumer demand and despite cycling a strong prior year comparison, our diversified portfolio performed well, underscoring its strength and resilience. Now let's turn to Slide 5 for a closer look at our operations, beginning with beverage activities. In the U.S., we delivered a solid performance, growing volumes and gaining share despite category volume declines across measured channels. Despite continued softness in private label market demand, our business outperformed the category as we began regaining some of the distribution that had been temporarily affected by earlier supply constraints. We also maintained a disciplined approach to revenue management, carefully balancing input cost-related pricing actions with targeted promotional activity, while remaining mindful of consumer price elasticity. You may recall that in early 2025, our volume Build Back Plan delivered meaningful gains with new and existing customers. I'm pleased to report that we have since expanded volumes with several of these customers while maintaining our contractual commitments with most others. Meanwhile, our U.S. branded business had a solid quarter, driven by distribution gains for Apple & Eve with national retailers in the U.S. Midwest and West. Leveraging Apple & Eve's strong reputation, we are methodically expanding the brand's reach across the United States in single-serve and juice box formats, supported by targeted investments in these platforms at our North Carolina facility. These efforts are driving market share gains across both package formats, reinforcing Apple & Eve's strong momentum and growth potential, while aligning with consumer trends favoring convenient on-the-go options. As for our new facility in New Jersey, the pace of construction continues to progress on schedule with equipment installation now underway. We remain on track to gradually begin transferring existing production activities from the current facility by late 2026 and complete this phase in the first half of 2027. Turning to Slide 6 for Canadian beverage activities. Despite cycling an exceptionally strong prior year period that benefited from Buy Canadian sentiment and despite mid-single-digit category volume declines, we maintained our category leadership, once again underscoring the strength of our Canadian beverage portfolio. Our national brands continue to outpace the category, driven by solid gains in shelf-stable products and sustained momentum in single-serve formats, while chilled performance was affected by a strong prior year comparison. Meanwhile, private label volumes were softer, primarily reflecting changes in a major customer's go-to-market strategy as well as our targeted portfolio optimization actions, including the discontinuation of selected product lines. Against this backdrop and as with U.S. activities, we remain focused on ensuring discipline in managing revenues through price and promotion practices that preserve market competitiveness while remaining responsive to shifts in consumer behavior. Finally, innovation remains an important lever for improving our product mix in both established and emerging beverage segments. New formulations across our Del Monte and Oasis Health Break portfolios, along with new single-serve formats designed to meet consumer needs throughout the day, are improving our product mix, expanding our presence in attractive growth segments, reducing commodity exposure and enhancing profitability. Moving on to Food Service on Slide 7. While North American volume growth remained constrained by macroeconomic conditions affecting consumers' away-from-home dining habits, we continue to build meaningful traction with broadline distributors in the United States, primarily by expanding private label beverage offerings in different pack formats. During the quarter, we began supplying tailored beverages to a prominent Canadian-based QSR chain using our bag-in-a-box aseptic packaging platform. Initial results have exceeded early expectations, and we expect volumes to continue ramping up in the second half of the year. At the same time, we remain actively engaged in negotiations and competitive bidding processes with national and regional partners across North America, and we expect to acquire several additional customers, albeit smaller in scale, over the balance of the year. Now let's turn to Specialty Food on Slide 8. While industry volumes were softer across most of our key product categories with modest increases in select areas, both our Canadian and U.S. operations delivered solid gains, led primarily by our core premium and super premium pasta sauce category. In the U.S., Summer Garden increased volumes for third-party pasta sauce brands, further demonstrating its execution capabilities, while in the barbecue sauce category, G. Hughes maintained its position as the #1 better-for-you brand. During the quarter, we completed the G. Hughes brand refresh internally and transitioned all packaging at the manufacturing level. While some legacy packaging remains on shelf as inventory moves through the retail network, we expect the refreshed positioning to increasingly support brand momentum in the second half of the year. You may recall that on our previous call, we announced distribution gains for G. Hughes with a mass merchant in Canada. I am pleased to report that this agreement has since been expanded and that we have also secured distribution with a national food retailer, an important step that further broadens the brand's reach and supports our growth ambitions in Canada. Finally, our Canadian operations delivered a solid performance, growing third-party brand volume, mainly through distribution gains for pasta sauces, and to a lesser extent, share gains in the ready-to-serve soup category. I now turn the call over to Francis for a review of Q2 results. Francis?

Thank you, Vince. Good morning, everyone. Let's turn to Slide 9. Second quarter sales totaled $738 million versus $742 million last year. Excluding an unfavorable foreign exchange effect, sales decreased by 0.5%. This variation reflects lower sales volume, primarily within private label categories in Canada. The decrease also results from intentional portfolio management decisions, including the discontinuation of lower margin or nonstrategic product lines within our Canadian Beverage business unit. These decisions accounted for approximately $8 million in sales during the quarter. Recall that last year's second quarter was exceptionally strong due to substantial volume growth from the Buy Canadian sentiment and to a lesser extent, the U.S. Build Back Plan. On the other hand, we benefited from higher U.S. private label sales volume, the favorable impact of overall selling price adjustments in the U.S. and from a more favorable mix of private label sales in Canada. Moving to Slide 10. Gross profit amounted to $228 million, up from $196 million a year ago. Excluding a favorable foreign exchange impact, it rose $29 million or 15%. This increase is coming from a decrease in the cost of orange concentrates, the favorable impact of selling price adjustments and a positive shift in the sales mix. These factors were partly offset by lower sales volume and higher PET resin cost. SG&A expense were $157 million, up from $141 million last year due to higher transportation costs to deliver products to clients resulting from recent fuel surcharges, higher performance-related compensation expense and an increase in certain administrative expenses. During the quarter, we recorded $30 million in impairment charges, including $27 million related to a customer relationship intangible asset in our U.S. specialty food operations. This charge follows contractual changes in one customer that will result in lower production volume and associated profits. Importantly, the impairment is specific to a customer relationship and does not reflect any deterioration in the goodwill associated with our U.S. specialty food operations. Vince will provide additional color on the backfill plan in the outlook section later. Excluding these charges and other items that impact comparability, please note that adjusted EBITDA increased 19% to $101 million or 13.7% of sales from $84 million or 11.4% of sales last year. Turning to Slide 11 for profits. Profit attributable to corporation shareholders was $27 million or $3.95 per share compared to $34 million or $5.03 per share last year. Excluding items impacting comparability, adjusted profit attributable to the corporation shareholders reached $51 million or $7.45 per share, up 36% from last year. Let's turn to working capital on Slide 12. At the end of Q2, the days of operating working capital ratio stood at 46 days versus 51 days 3 months earlier. The sequential improvement was driven primarily by higher DPOs and, to a lesser extent, lower DIOs, while the ratio remained within our normal seasonal range. For the remaining part of 2026, we continue to expect working capital to remain within its historical range. Now on to Slide 13 for cash flows. Operating activity generated $78 million in Q2 2026 as opposed to requiring $3 million last year. The improvement is mainly coming from a lower working capital requirement this year compared to last. CapEx totaled $38 million in Q2 2026. As a reminder, CapEx are projected to reach up to 7% of sales in fiscal 2026, including approximately USD 96 million for the New Jersey project. Turning to our financial position on Slide 14. Lassonde's net debt was $451 million at the end of the second quarter, down from $474 million 3 months earlier. This improvement was driven by solid operating cash flow generation, partly offset by CapEx. During the quarter, we allocated a portion of our cash flow to debt repayment, reducing borrowings by $32 million. As a result, the net debt to adjusted EBITDA ratio was 1.22:1 at the end of the quarter, down from 1.35:1, 3 months earlier. All things being equal, we expect the leverage ratio to remain well below our internal maximum threshold of 3.25:1. Finally, on Slide 15, we have announced our intent to launch a normal course issuer bid to purchase for cancellation up to 200,000 common shares, representing approximately 6.5% of issued and outstanding Class A subordinate voting shares over a 12-month period. The launch of the normal course issuer bid is subject to TSX approval. I now turn the call back to Vince for the outlook. Vince?

Thank you, Francis. Please turn to Slide 16. Looking ahead, we will remain focused on executing our strategy by strengthening the competitive position of our brands, accelerating our innovation agenda and ensuring the readiness of our New Jersey facility. At the same time, we recognize that the macroeconomic and geopolitical environment remains challenging with potential implications for consumer spending, input costs and supply dynamics. In this context, we will continue to leverage the strength, depth and breadth of our portfolio, while pursuing a balanced contribution from revenue management initiatives and volume growth. Given the current operating environment and excluding the impact of foreign exchange and any major external disruptions, we now expect 2026 sales to be slightly below last year's level. That said, we will continue to prioritize profitable sales over volume growth for its own sake, consistent with the disciplined approach reflected on our performance so far this year. Moving to Slide 17 for our strategic priorities by division. In U.S. Beverage, our focus will be on leveraging our investments in single-serve and juice box capacity to support continued growth in attractive formats, maintaining disciplined revenue management while remaining responsive to evolving consumer behaviors and price sensitivity and completing our new facility in New Jersey, which will enhance operational efficiency and support our long-term U.S. growth platform. As for our Canadian beverage business, our priority remains fortifying our leadership through advancing innovation-led growth initiatives, maintaining disciplined revenue management, including targeted promotional spending while continuing to invest in our brands, and strengthening execution across our core channels. In Food Service, our North American team will continue to pursue growth opportunities in this attractive market. Building on the early success of our first major bag-in-a-box customer, we are encouraged by the momentum we are seeing. Finally, in Specialty Food, we are focused on optimizing the integration of our North American network, refining the positioning of our branded products and backfilling available capacity following contractual changes with one customer. On the backfill, through multiyear agreements, we have already secured replacement volume representing more than 50% of the expected 2027 shortfall, with advanced negotiations underway for an additional 25%. This progress underscores our strong reputation in the marketplace and creates a meaningful opportunity to strengthen Specialty Food's position by further diversifying its customer base and product portfolio in line with our long-term objectives. Overall, our disciplined execution gives us confidence that we can successfully manage this transition and use it as a catalyst to build a stronger, more diversified specialty food platform. Turning to Slide 18 for an overview of certain cost components. Based on currently observed spot prices, we expect orange concentrate costs and to a lesser extent, apple concentrate costs to be lower than last year. At the same time, the situation in the Middle East is adding inflationary pressure to transportation costs as the broader logistics chain adjusts to higher operating costs and evolving market conditions, and to PET resin costs. While geopolitical developments and tariffs are beyond our control, we are focused on the levers we can manage, including reducing our commodity exposure through product mix optimization and innovation, maintaining pricing discipline and executing targeted cost initiatives to protect margins. As for tariffs, our network flexibility helps mitigate the impact by allowing us to optimize production and distribution flows as conditions change. However, we will continue to reassess and adapt our sourcing strategies as tariff rates on globally sourced inputs used in U.S.-based production evolve. In closing, on Slide 19, we remain well positioned to navigate near-term challenges while continuing to advance our long-term strategy. The NCIB reflects our confidence in Lassonde's long-term prospects and our belief that the shares are currently undervalued. With our strong balance sheet and disciplined approach to capital allocation, we view share repurchases as a compelling investment in the business and an effective way to create value for our shareholders. With a diversified portfolio of leading brands, deep customer relationships built in part on our proven ability to help them grow and strengthen their own brands and disciplined execution by our dedicated teams, we will continue investing in the capabilities that will drive sustainable and profitable growth in the North American food and beverage market. This concludes our prepared remarks. We are now pleased to answer your questions.[Operator Instructions] We have our first question from Martin Landry with Stifel.

Congrats on your results. My first question focuses on your gross margin. It expanded by 440 bps, a huge expansion on a year-over-year basis. I was wondering if you could provide us with a bridge and quantify the main buckets that explain this strong expansion.

Yes, sure. So yes, so the main story of the quarter is commodity costs. So I would say the significant part of the increase is related to commodities. So that would be the largest component. The second component would be price. However, what we see on price that is less of an impact versus the previous quarters, where price year-over-year was driving a significant part of the margin improvement. That's been less of a story, but still a positive story in terms of margin. And the third one is really mix and what we're doing in terms of the mix with our innovation and working with the clients on better mix, that would be the third main component. So that would be the 3 main components. I would say the bridge from a division standpoint, Martin, everyone contributed to the positive impact of year-over-year -- quarter-over-quarter.

Okay. That's helpful. And maybe continuing on the commodity costs. Looking at the price of orange juice concentrate, it continued to decline this year. I was wondering what is the proportion of your needs that are hedged for '26? And to what extent can you benefit from this continued decline?

We take, I would say, aggressive position on hedging, considering what we've seen in the last few months. I don't have the percentage of hedging in front of me, Martin, but we're well protected right now. I would say most of our hedging positions are ending towards the end of this year.

Okay. Okay. Because I think the broader question is -- sorry, I'm all on gross margin today, but it is one of those days. The broader question is, at gross margin level, is it sustainable? Or you feel like there are other pressures that may bring it down sequentially in Q3 and Q4? Just trying to assess a little bit what is the level of sustainability of that gross margin?

Yes, that's obviously a great question. I just want to -- before I answer your question, to basically reiterate our position on margins. We always focus on profit dollars and not profit margin. So that has been our approach in the last few years, and that's what we're going to prioritize. This being said, you see our margins, and they are probably on the high side versus what we've shown in the last few quarters and last few years. So we're happy with this. We still see improvements in our network, pockets of improvement in terms of cost. And frankly, some of that has been reflected in the current margins. However, as we've disclosed a bit everywhere, it's a very volatile environment right now. We see a lot of pressure right now on freight, transportation, and there's the input cost also a situation that we're following carefully. So in terms of sustainability, we don't know. We'll work to keep it for sure, but that's something right now that is very, very volatile. So difficult for me to answer that one.

Martin, I'll just add in terms of the volatility that we continue to see on items outside of orange concentrate, just as an example. We talk about transportation costs, there's fuel component that's tied to that. But in addition, when you consider the Middle East and the impact on fuel and the fact that we buy plastic, PET resin is also impacted. So that's sort of the counterbalancing as far as concentrate in orange, which is a portion of our commodities offset by some of the volatility that we continue to see and feel pressure again. So we started really feeling quarter 2 towards the tail end.

We have our next question from Ahmed Abdullah with National Bank of Canada.

I'll follow a little bit differently from Martin's line of questioning, but still on the profit. So you've moved your outlook a little bit to slightly below 2025. But your first half profitability from a dollar growth perspective looks like you're up 16% in the first half on adjusted EBITDA versus last year. Do you see that top line eroding all that first half growth? And for the full year, you would see your adjusted EBITDA down based on the top line pressure or is there buckets of savings that you think would help manage that growth in the back half of the year?

Yes, that's a tough one, Ahmed, because as I said, we're on the low side on commodity, and the pressure we're facing on external environment is difficult to quantify right now. There's also elements like negotiation of USMCA that in the next 2 weeks, we'll follow carefully. Right now, we're still protected. So for me to answer about what's going to be the impact of the lower sales in the guidance versus historically is very difficult right now.

Excluding tariffs, I mean, that's the caveat.

Excluding tariff. That's very difficult to answer. I think we're -- again, we're -- when you compare ourselves versus market, I think we're happy with the margin level. However, as I said, we're on the good side on commodity. And what the impact is going to have, should there be some changes on the margin in the later half of the year, is difficult to quantify right now.

Okay. That's fair. And then just switching on to the charge related to the customer relationship. Can you perhaps give us a bit more color around the revenue EBITDA contribution that came with that? And what caused that kind of contractual change? Is this a trend in the market that's happening? Or should we expect this to reoccur at some point with other U.S. Specialty Food customers?

It's definitely not a trend in the market, and it does not affect anything in terms of our positivity versus that segment of the market and the food category. Basically, what happened is when we acquired this Summer Garden, we had a significant concentration with one client. And basically, we knew that this agreement would be, at one point, rediscussed, and we were kind of exclusivity position. And what happened is some additional capacity was added in the market. And basically, the client decided to diversify their risk while continuing our relationship with us. So we signed a 3-year agreement with that customer. So we still are having a discussion with them. However, the volume has decreased in a significant portion, and that materially affected the amount of -- that we had in our books, and we had to record an impairment. But nothing in terms of, like, not -- we're doing business with the client, nothing in terms of our level of optimism in that category. And as Vince mentioned, it's also going to provide us an opportunity to diversify and already 50% of the volume has been backfilled. We're working on the rest and the impact will come in the future quarter, and we're working on this right now. And I think the teams are doing a good job, but we see that also as being stronger by being more diversified.

Okay. And just one last follow-up for me. The backfill volumes that you've secured, are these margins expected to be -- how do they compare with the lost customer business that you lost there?

We're not talking margins by client, Ahmed. We're backfilling the volumes. And over the next -- it's going to depend on all kinds of situation in terms of productivity and mix and type of business we're going to backfill, but we're not providing details on that.

We have our next question from Luke Hannan with Canaccord Genuity.