May 10, 2024
Operator
Good morning, ladies and gentlemen. Thank you for standing by.
Welcome to the Lassonde Industries 2024 First Quarter Earnings Conference Call. [Operator Instructions] 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 10, 2024. I would now like to turn the call over to Vince Timpano, President and Chief Operating Officer.
Please go ahead.
Vincent Timpano
Good morning, ladies and gentlemen. I'm 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 first quarter ended March 30, 2024. Our press release reporting these results was published yesterday after markets close.
It can be found on our website at lassonde.com, along with our MD&A and financial statements. These documents are 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. Lassonde 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 Estates 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 5 for a review of our divisions.
First, in the U.S., we are happy with the progress after the first quarter. Our U.S.
divisions are performing according to our plan, both financially and from an execution road map 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 U.S.
business. For the branded operations, volume momentum is driven by key growth areas such as in the single-serve format.
Meanwhile, for private label volume, quarter 1 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 in-source 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 6, 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. Now turning to our Canadian activities on Slide 7.
Our focus was on executing certain pricing adjustments to reflect higher input costs 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 from Lassonde 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 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 and 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 Fruité 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 8, 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?
Eric Gemme
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 9.
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 some 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 cost of certain input mainly orange juice and orange juice concentrates and the consolidation of Diamond's 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 offset 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 4 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 adjusted 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 $260 million level a year ago. Our net debt to adjusted EBITDA ratio stood at 1:1 at the end of the first quarter 2024, slightly up versus the end of the previous quarter but down significantly from 1.7:1 a year ago.
Finally, the Board of Directors declared a quarterly dividend of $1 per share payable on June 14 to shareholders of record on May 22. I'll turn the call back to Vince for the outlook.
Vince?
Vincent Timpano
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, improve profitability and long-term value creation. Pricing adjustments were successfully executed in quarter 1 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 build back, 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.
Operator
[Operator Instructions] The first question is from Luke Hannan from Canaccord Genuity.
Luke Hannan
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 and 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.
Vincent Timpano
So Luke, it's Vince. I'll answer that.
So let me first start with the refresh on Project Eagle. So Project Eagle to us, we're very focused on addressing some of the constraints that we started to see in around the 2020, 2021 time frame.
And so the real focus for us at that time was to ensure that we were improving 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 at 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. But 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.
Luke Hannan
Okay. Got it.
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 as we get into 2025 and beyond that 5% of sales is a reasonable level of CapEx to support both of those objectives.
Eric Gemme
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 2% and 3% [ph]. 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 going to go and how we're going to use our very strong balance sheet to help support the growth.
Luke Hannan
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 apple juice and apple juice concentrate.
Maybe two parts to that, why -- what was the rationale for that? I'm assuming it was maybe visibility into further price increases.
And then if we think about DIO specific to apple juice and related concentrates, does that improve thus far into Q2?
Eric Gemme
So yes, 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 blends. 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.
Operator
The next question is from Frederic Tremblay from Desjardins.
Frederic Tremblay
I was wondering if you could maybe start by discussing the consumption trends that you're seeing between private label and national brands. Any sort of recent developments there in terms of the consumer demand in those 2 categories?
And I guess related to that as well, can you speak to the flexibility of your manufacturing platform in terms of there's a shift in demand in one category to the other. I know 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 brands as needed?
Vincent Timpano
So let me tackle that. It's Vince.
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 to discount. We continue to see that.
When you talk about -- when you take a look at products, obviously, consumers trying to seek out more value-oriented products for which we believe we're 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 the 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, refrigerated shelf stable, multiserve, single-service aseptic 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.
Frederic Tremblay
That's very helpful. Maybe last question for me.
At the Investor Day in September, you mentioned that Lassonde's internal production volume at the U.S. private label operations were down nearly 20% between 2018 and 2022 because of operational complexity and other factors.
Just wondering if you can provide an update on sort of where you stand on that now? And if you have any sort of visibility on when you may have recouped this 20% gap?
Eric Gemme
So what I can tell you is in terms of the activities that we put in place for Project Eagle in the U.S., right, we talked about improving our conversion cost. 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 cost, 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 Eagle, from an operational perspective, equipment is being deployed, labor has been stabilized, capacity has been addressed and that's why we now turn our attention to building back volume.
Vincent Timpano
And that's 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 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 on that.
Operator
[Operator Instructions] The next question is from Gabriel Chiu from National Bank.
Gabriel Chiu
It's Gabriel on for Vishal. So, great color so far.
I just wanted to clarify, given all the comments you had talked about, this seems to suggest that the improvement in gross margin, that seems sustainable. Could you confirm that?
And perhaps can you give a little bit more color on EBITDA margins in the U.S. and in Canada, would it be fair to say that it has improved in the U.S.
and we can let compress slightly overall?
Vincent Timpano
So Gabriel, First, on gross margin. Gross margin expansion, yes, we're at 25% 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 adjustments. 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 order cost. So at the 26.2% that we realized, it translates this versus last year.
Now also the 26.2% translate some operational efficiencies that we start to realize in -- across our North American network. Can we expand from there?
The answer is yes. Am I going to 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, 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 U.S. 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 year-over-year. And Canadian business continued to do very well.
Gabriel Chiu
Okay. Got it.
And then maybe turning towards the balance sheet. I understand that you have already 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?
Eric Gemme
So the balance sheet part of our capital structure strategy, we said that at 3.25x, 3.50x [ph] 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 it's your question.
And our intention is to use that balance sheet to invest in growth platform for the business.
Gabriel Chiu
Okay. And in terms of growth, we understand there's a -- you're looking at a second juice box line there.
That's going to be commissioned in the back half. I'm just wondering in terms of the timeline.
Eric Gemme
September.
Gabriel Chiu
September. And then for the timeline start-up 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?
Eric Gemme
The cost, they 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.
Operator
This concludes the question-and-answer session. I would like to turn the conference back over to Vince Timpano for any closing remarks.
Vincent Timpano
So thank you for joining us this morning. We invite you to attend our virtual Annual Meeting of Shareholders to be held next Friday, May 17 at 2:00 p.m.
The webcast link is available on our management proxy circular and SEDAR+. We also look forward to speaking with you again at our next quarterly call.
Have a great day.
Operator
This concludes today's conference call. You may disconnect your lines.
Thank you for participating and have a pleasant day.