Lassonde Industries Inc. (LASA) Earnings Call Transcript

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Lassonde Industries 2026 Third Quarter Earnings Conference Call. The corporation's press release reporting its financial results was published yesterday after market close. 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, November 6, 2026. I will now turn the call 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 third quarter ended September 26, 2026. Please turn to Slide 4. Lassonde delivered another quarter of gross profit and EPS growth despite a challenging operating environment. Externally, macroeconomic uncertainty continues to weigh on consumer sentiment, placing pressure on volumes across several segments of the agri-food sector, while inflationary pressures also impacted freight costs. Internally, temporary production issues in our U.S. beverage network constrained our ability to meet certain growth opportunities and to a lesser extent, increased conversion costs. Despite these headwinds, the strength of our brands, continued disciplined revenue management and the agility of our network enabled us to consolidate our position in key categories. Now let's turn to Slide 5 for a closer look at our operations, beginning with beverage activities. In our U.S. beverage business, commercial gains offset category softness, but supply constraints driven by internal operational issues led to a volume decline. Disciplined pricing and promotions enabled us to remain competitive while delivering value amid evolving consumer purchasing behaviors. In private label, our performance was in line with the category, while brands outperformed, driven by distribution gains for Apple and Eve as it continued expanding with national retailers in the U.S. Midwest and West. The brand also gained incremental distribution in certain channels, driven by innovation and reduced sugar juice box formats. Regarding the production issues noted earlier, certain mechanical problems on our North Carolina single-serve line resulted in a production shutdown of approximately 20 days, while managing end-of-life assets at our existing New Jersey facility caused temporary disruptions and suboptimal production levels. We quickly mitigated these disruptions by shifting production to other facilities, including to Canada. While these measures increased conversion and transportation costs, they also limited our ability to pursue certain growth opportunities, particularly in single-serve formats that continue to outperform the category. As for our new facility in New Jersey, we remain on track to begin the gradual transfer of production activities and the initial test runs near the end of the fourth quarter with the transition continuing through most of 2027. Turning to Slide 6 for our Canadian beverage activities. This quarter, we sustained our market leadership despite category volume declines, underscoring the strength of our Canadian beverage portfolio. We also maintained disciplined pricing and promotional practices that preserved our competitiveness while adapting to shifts in consumer behavior. Our national brands were up against a strong prior year comparison, but Oasis delivered further volume and market share gains in the chilled category, while shelf-stable volumes were affected by changes in retailers' promotional strategies. Meanwhile, private label volumes remained soft, primarily reflecting changes in a major customer's go-to-market strategy as well as our planned portfolio optimization actions, including the discontinuation of selected product lines. Moving on to Food service on Slide 7. North America volume growth remained constrained as macroeconomic pressures continue to weigh on away-from-home dining. Nevertheless, our overall volumes remained relatively steady with new concentrate business from national accounts offsetting broader market softness. As for bag-in-a-box, we continued ramping up volumes with a prominent Canadian-based QSR chain, meeting or exceeding expectations, and we are now introducing innovations to support seasonal menu items. We also launched a new offering with the U.S. provider of automated beverage dispensing solutions using our aseptic packaging platform. Reflecting our growth presence in food service, I'm proud to share that we received 2 important industry honors. First, we were named one of Sysco Canada's top 10 suppliers out of more than 1,500, and we were the only beverage supplier recognized. Second, Gordon Food Service recognized us through its 2026 VIP Awards, which honor key partners across North America. These awards reflect our ability to meet the high standards of an industry, where consistency, dependable service and responsiveness to customer needs are essential. Now let's turn to Specialty Food on Slide 8. North American industry volumes remain soft across most of our product categories. At the same time, consumer demand became increasingly polarized with some consumers trading up as an alternative to dining out and others prioritizing more affordable, value-oriented options. That said, our core premium and super premium pasta sauce subcategories continue to outperform the market with third-party brands delivering volume growth in both the U.S. and Canada, supported by earlier distribution gains. As for our brands, G. Hughes' non-barbecue better-for-you specialty sauces performed very well, delivering double-digit sales growth, driven by a new brand campaign and innovation in Asian-inspired sauces, while facing greater competitive pressure in the U.S. barbecue sauce category. In Canada, G. Hughes delivered strong performance as we continue to expand the brand's reach. It is now available at 10 of Canada's leading food retailers and building G. Hughes into a leading North America better-for-you brand remains a priority. I now turn the call over to Francis for a review of quarter 3 results. Francis?

Thank you, Vince. Good morning, everyone. Let's turn to Slide 9. Third quarter sales totaled $713 million versus $724 million last year. Excluding a favorable foreign exchange effect, sales decreased by 2.3%. The reduction reflects the impact of the change in promotional strategies of certain retailers, the discontinuation of low-margin or non-strategic product lines at our Canadian beverage business, suboptimal production level at our New Jersey and North Carolina plants and general category trends. On the other hand, we benefited from a more favorable sales mix. Please move to Slide 10. Gross profit amounted to $206 million, up from $198 million a year ago. Excluding a favorable foreign exchange impact, it rose $5.4 million or 3%, reflecting a decrease in orange and apple commodity costs and a positive shift in the sales mix. These factors were partly offset by higher conversion costs mainly due to the temporary equipment issues mentioned earlier, higher PET resin costs and lower sales volumes. SG&A expense were $149 million, up $9 million versus last year, mainly due to higher transportation costs to deliver products to clients and an increase in selling, marketing and certain administrative expenses. Excluding items impacting comparability, adjusted EBITDA was $84 million or 11.7% of sales versus $86 million or 11.9% of sales last year. Turning to Slide 11 for profit. Excluding items impacting comparability, adjusted profit attributable to the corporation shareholders totaled $41 million or $5.94 per share, up 2% from $40 million or $5.84 last year. Let's turn to working capital on Slide 12. At the end of Q3, the days of operating working capital ratio stood at 50 days versus 46 days 3 months earlier. While the ratio remained within our normal seasonal range, the sequential variation reflects lower days of payable outstanding. Please note that we also expect year-end working capital to remain within historical range. Now on to Slide 13 for cash flows. Operating activities generated $63 million in Q3 2026 compared to $118 million last year. The variation comes from working capital requirements of $1.4 million this year as opposed to $51 million release last year. CapEx totaled $55 million in the quarter, and they are still projected to reach up 7% of sales in 2026, including approximately USD 87 million for the New Jersey project. Looking ahead to 2027, residual investment to complete the New Jersey facility should result in CapEx being above historical range, but below 2026 as a percentage of sales. Turning to our financial position on Slide 14. Lassonde's net debt was $456 million at the end of the third quarter, relatively stable from $451 million 3 months earlier as operating cash flow generation was offset by CapEx and dividends. As a result, the net debt to adjusted EBITDA ratio was 1.25:1 at the end of the quarter compared to 1.22:1 3 months earlier. All things being equal, we expect the leverage ratio to remain well below our internal maximum threshold of 3.25:1. As for our share repurchase program, since reinstating our normal course issuer bid in August, we have repurchased more than 68,000 shares to date for a total consideration of $15.8 million. As a reminder, the program allows us to repurchase up to 200,000 shares over a 12-month period. Before turning the call back to Vince, with less than 2 months remaining in fiscal 2026, we will provide an outlook extending into early 2027. Please turn to Slide 15. In the coming months, we expect consumer demand and volumes to remain under pressure as affordability concerns continue to influence purchasing behaviors. As a result, we reiterate our view that fiscal 2026 sales will be slightly below last year's level, excluding the impact of foreign exchange. In addition, in relation with the asset impairment announced in the previous quarter, 2027 sales will reflect contractual changes with one important specialty food customer. We've already secured approximately 70% replacement volume for 2027 and remain in active discussion for the balance. However, uncertainty remains about our ability to replace that volume at historical business terms. On the cost side, higher crude oil prices are expected to continue putting pressure on transportation and PET resin costs. Partially offsetting these pressures, we continue to expect the benefit from favorable commodity costs. Moving to Slide 16. Conversion costs in our U.S. beverage network will also remain higher for the balance of 2026 and early '27 for 2 main reasons. First, managing end-of-life production asset at our existing facility in New Jersey may result in suboptimal production levels. Temporary disruption, similar to those experienced in Q3 may occur until the transfer of the new facility is complete. Please note that as we begin transferring production later in the fourth quarter, we expect to incur usual start-up costs. We intend to classify these items impacting comparability between periods and exclude them from adjusted EBITDA and adjusted EPS. Second, although the situation in North Carolina is improving, we continue to prudently operate a single-serve line at a reduced run rate. We have temporarily shifted some production to other facilities until we reach a normal cadence, but these mitigation measures are also resulting in higher freight costs. That concludes my section. I turn the call back to Vince for the conclusion. Vince?

Thank you, Francis. Please turn to Slide 17. Our performance to date in 2026 demonstrates the resilience of our business and the effectiveness of the actions we have taken to deliver sustainable profitability. While external pressures from a challenging macroeconomic and geopolitical environment may affect consumer spending, input costs and supply dynamics, our focus remains clear: leverage the strength, depth and breadth of our portfolio and execute on the levers within our control, including optimizing our commodity exposure through product innovation, maintaining price discipline and implementing targeted cost initiatives to protect margins. Turning to Slide 18 for our priorities. Our immediate focus is on executing a successful production transfer in New Jersey. We are very excited with the upcoming start of this facility that represents an important milestone in strengthening our manufacturing footprint and enhancing our competitive position in the U.S. market. The other priority for our U.S. beverage business is to restore normal operations in North Carolina to capture growth opportunities in single-serve formats. As for our Canadian beverage business, our priority remains fortifying our leadership by stepping up our innovation agenda to stimulate growth in emerging beverage segments and strengthening execution across our core channels through disciplined revenue management and sustained investments in our brands. In Food service, we will build on our recent gains to drive further volume growth with broadline distributors and national accounts. Finally, in Specialty Food, we are focused on refining the positioning of our branded products and strengthening our position by further diversifying our customer base and product portfolio by backfilling available capacity following changes with one important customer. Notably, the majority of the replacement volume secured to date comes from new third-party relationships. In closing, on Slide 19, while we continue to navigate near-term challenges, Lassonde remains a strong organization built around passionate and innovative people. Supported by ongoing investments in our network, a diversified portfolio of leading brands, deep customer relationships and disciplined execution, we are well positioned to capture medium and long-term opportunities to drive sustainable growth in the North America food and beverage market. This concludes our prepared remarks. We are now pleased to answer your questions.

[Operator Instructions] Your first question comes from Ahmed Abdullah with National Bank of Canada.

Just touching on the plant disruption costs. Is it possible to quantify the 3Q EBITDA impact from the North Carolina and New Jersey disruptions there? And how much of that should kind of linger into the fourth quarter?

So we don't -- hi, Ahmed. So we don't disclose that. However, I would lead you to our comments on what happened in the quarter. Conversion costs and freight have been the 2 main components and look at our margin impact there. And you could -- like you could assume that, that had a significant impact in the quarter. And is that going to continue in Q4? As we alluded in our outlook section, there's a risk there, and that's why we've put it there specifically as we're working on solving the issue, we're still at the suboptimal production right now.

Okay. That's fair. So on the Specialty Food replacement economics that you touched on, so with approximately 70% of the volume secured, how much of the associated earnings contribution have you replaced? And can you kind of give us a bit more color as to the remaining risk that spills into the 2027 profitability?

Yes. So on that front, what -- in the last quarter, we said it was going to start having impact Q3, Q4 this year, which we started to see. So that's number one. We're doing a good job on the top line side as like in the last few months, replacing 70%, as you said. The thing that we've put in our comments there, there is risk in terms of replacing at similar business terms, the volume. So that's something right now that we see having an impact in Q4 and early 2027, as we said in our outlook section.

Okay. And just finally, just touching on private label demand. The weakness that we saw, can you perhaps give us a bit more color between what drove that? Is it the deliberate portfolio exits, customers changes or the demand? And which components do you expect to kind of improve as the operations normalize?

Yes. So Ahmed, it's Vince. The situation on private label is fairly similar, whether you look at Canada or the United States. The first thing is clearly it's being impacted by the same category headwinds that the total category is being -- is experiencing. When you look at the Canadian business, volumes are down about negative 5% on a total basis in the U.S., about negative 3%. So category volume performance remains stubborn in this inflationary environment. The other thing that's happening, though, is shifts in retailer strategies. And I'll give you 2 perspectives on this. More broadly speaking, what you're seeing, in particular, in Canada is a shift from promo Hi-Lo to EDLP. And so that's having some impact on performance, in particular, when you face that off against brands looking at promotions as a means to deal with the issue of affordability. So those are the things that I would say in Canada. From a U.S. perspective, the additional thing that I would add to it is you're seeing consumers be much more selective in channels in which they participate. And when you take a look at the makeup of the business and the importance of grocery, you are starting to see shifts away from the grocery channel into discount for sure. But in the U.S., you're looking at mass and club, which are more on the winning side as part of this. I would say that's how I would describe it in terms of what you're seeing. The persistence to which that's going to continue, there's a question on just how persistent the category declines are going to be. But what I would assume is that some of the issues that we're seeing this year from a volume perspective tied to these retailer strategies, we should be able to cycle those when you come into 2027, looking over 2026.

And if I may add, in terms of your second question in terms of what we're planning to improve, I think you saw in the quarter, the sales mix having a positive impact. And we've started in the last few months and last few years like to work on our portfolio and innovation to be able to better meet like customer demand and the change in customer habits. So that's something we are doing and that shows positive results. And as we said in our results in this quarter, that had a significant impact. On top of that, I would say, like in terms of distribution, our away-from-home segment is something that we're working on. And in terms of positioning ourselves also in like outside like traditional retailers is also something we're working on to offset this trend in the market right now.

Your next question comes from Marty Landry with Stifel.

I was wondering if you could expand a little bit as to what has happened in North Carolina. I think you said that like a 20-day downtime, which is pretty important. Is that the new line that was just established last year?

Martin, it's Vince. Yes, it is. And so it was down for about 20 days. What I can say to you, though, is that it's an equipment challenge that we've been dealing with. We see it as temporary. We're seeing improvements, but we're trying to be very prudent in the planning. We've got redundancy in our network that we're continuing to leverage to make sure that we can still satisfy demand of our existing customer base. The real challenge for us is to what extent does it sort of dampen our ability to pursue growth. But I think what's important here is we see it as temporary. We're seeing improvements in that at this stage. As Francis said, the challenge as well for us is this notion of it comes at a cost, whether you're dealing with freight from other markets into the U.S. marketplace when it's coming out of Canada and overhead absorption challenges in North Carolina at the same time. But it's an equipment challenge.

And I would add also, Vince, it comes at a cost of not being able to capture some growth opportunities. So while we have -- like we're very resilient and are able to like offload to other plants, it affects our ability to plan in advance. So that's also affected the results of the quarter.

Yes. Okay. It would have been great to have a little bit of an idea of the magnitude of all this on revenues and earnings. But if it's something you don't want to share, that's fine. And so just to be clear, so I understand that the New Jersey facility will be suboptimal heading into '27. Is the North Carolina situation, will that be resolved by year-end?

Yes.

Okay. Vince, you gave some interesting numbers. So industry volumes down 5% in Canada, down 3% in the U.S. Can you contrast that with your volumes? Just to understand if -- I mean, it sounds like you have been gaining share. So I'd just like to have a little bit more color on that?

So if you take a look at the U.S. market, I'll start there. We are gaining share on the branded side. We've had real success with the Apple and the Eve brand, in particular, with the reduced sugar format. And so really pleased with what we're seeing on that front. I already shared with you sort of perspectives from a private label of view. When you take a look at Canada volumes, it's the same message that I delivered prior, which is category headwinds. There is an impact that we -- that I noted in my script in terms of a retailer strategy that is having an impact on performance. A real shift away from frequency of promotion as well as depth of promotion that we would have benefited from. And that's one of the things that the Canadian business is dealing with. And as I mentioned earlier, call it a reset, that reset is nearly complete, and we'll be able to cycle that when we look into 2027. We are pleased with some of the performance that we are seeing in Canada, though as well. When you take a look at our share performance, solid performance in chilled in particular, over the last 4 weeks, really solid improvements that we're seeing in there. And obviously, the team has been very, very focused on leveraging mix because of a really diversified portfolio to try to address some of these category headwinds. But primarily speaking, I would draw it back to some of the things that we're seeing on the promotional front.

Okay. So just to summarize, there's a lot in there, just to summarize, like are you gaining share in Canada? Because you do say that you're gaining share for Oasis and chilled category, but like are you gaining share in -- for Oasis overall? Or are you losing?

What I would say to you, when you take a look at the total business, I would say, first of all, over the past short while, you would have seen a decline in share. But when you take a look at our share performance relative to 2024, it's above 2024 levels. And so you're clearly seeing some adjustments from that 2024 period because we had some onetime benefits in 2025. So overall, I'm pleased with the performance of the business. And again, when I talk at the last 4 weeks, we're also seeing some improvements in our share position.