Ticker Prior Close Market Cap Enterprise Value Dividend Yield EPS EBITDA P/E EV/EBITDA Next Earnings Release March 28, 2014 (Estimate) Q1 Q2 Q3 Q4 TOTAL EPS Consensus Asante 0.83 1.69 1.75 2.45 6.72 EBITDA (in millions) Consensus Asante 20.5 25.5 28.5 33 107.5 2013 2014 2015 EPS Consensus Asante - 6.72 7.05 Special Developments Actual 6.43 EBITDA (in millions) Consensus Asante - 108 122 Actual 116 N/A N/A N/A N/A E q u i t y
R e s e a r c h
_ _ _ KIMS Capital Markets Key Statistics Analyst Estimates 116 M 1040 M 763 M $109.25 8.91 16.70 LAS.A BUY $6.70 ~1.5% Initiating Coverage March 27, 2014 Lassonde Industries CPG: Food and Beverage All figures calculated using TTM New Distribution Deal with Reed's Inc. - Reed's is a manufacturer of naturally brewed soft drinks that operates predominantly in the United States until recently. It sells its drinks mainly in mainstream American retailers such as Kroger and Costco as well as specialty food stores like Whole Foods. Within Canada, Reed's products can only be found in niche stores but the firm has just agreed to a distribution deal with Lassonde. The deal gives LAS the rights to use Reed's family of brands throughout Canada and given LAS' extensive relationship with retailers it should provide an avenue of growth for Reed's products. This opportunity will give Lassonde an avenue to expand into soft drink manufacturing and perhaps provide experience it can use to develop its own brands in the future. Share Buyback: In January LAS announced its intention to initiate a share repurchase program starting with ten percent of the public float from now until January 2015. Not only does this intention signal management's confidence in the company, but the dramatic compression of the float will help stimulate demand for the company's shares as supply lowers. This, coupled with dividend increases will help stretch share price returns. rajank@mcmaster.ca $130 Founded in Rougemont, Quebec during 1918, Lassonde Industries (LAS.A) is a firm with rich history that manufactures and bottles of a broad array of wines and fruit and vegetable beverages under popular brand names such as Oasis, Del Monte and Fruit. Its two business segments are Retail and Food Service. Since acquiring Clement Pappas in 2011, the firm has expanded its beverage portfolio and ventured into producing food products such soups, broths and sauces. The acquisition has helped reignite growth for the Canadian firm which has a very bright outlook. Hello, today we are initiating coverage for LAS with a BUY recommendation citing improved brand equity, shelf space and sales promotions which should do well to help the sell-through as much as the sell-in of LAS' products. LAS has seen its products receive much better shelf spacing at retailers such as Shoppers Drug Mart and Wal- Mart which carry a limited array of soft drink products outside of those from the Americans: Pepsico, Coca-Cola, Dr. Pepper Snapple and Monster. These retailers have often used sales promotions to promote the adoption of LAS' products, particularly in the refrigerated section of their stores. With respect to the non-perishable products such as Rougemont and Fruit, sales promotions coupled with improved shelf spacing has and should continue to ignite growth for LAS going forward ss it looks to enter the US/Global markets. An underlying positive outlook for the TSX Composite Index should help compound returns as well for 2014. Squeezing returns out of Lassonde fusiarode@mcmaster.ca Suliat Ifeyemi Fusigboye - 1055470 Martin Asante - 0954403 asantem@mcmaster.ca Salvatore Chiarelli - 0945277 chiaresd@mcmaster.ca Khalil Rajan - 0861017 Page 1 Lassonde Industries CPG: Food and Beverage Lassonde's Current Strategy
LAS' strategy consists of a trifecta; to innovate, consolidate, and focus on providing healthy products. This excites us because it shows just how dedicated management is to growth. Its largest competitors all benefit from economies of scale which allow them to offer retailers better pricing arrangements and sell at higher volumes. Nonetheless, LAS has great footing with respect to retail sales rounding out the top 3 which consists of Pepsico (Tropicana) and Coca-Cola (Minute Maid). These three beverage producers account for 49% of the juice market. KIMS Capital Markets March 27, 2014 If you look below you will notice that in 2011 there was a considerable increase in sales as well as Earnings Before Interest, Tax and Depreciation. This is mainly attributed to the acquisition of Clement Pappas which allowed the company to improve its margins and ignite sales growth. Recently the company has increased is stake from 71 to 84% citing ideal integration between the two business. This bodes well for those looking for insight on how much the acquisition is helping LAS. Also, the interest expense of term loans used to finance the acquisition have been relaxed as LAS incrementally pays down its debt. In the third quarter of 2013 for instance, finance expenses increased by about 15% to $5.7 Million. This decrease represents about 10% of the net income for the latest quarter. Paying down debt remains a priority for the company so this should improve profit margins accordingly going forward. Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3-Est Q4-Est 133,014 146,870 210,822 269,552 233,406 256,403 255,080 277,320 240,578 258,550 257,569 289,500 93,011 104,920 155,006 195,939 175,552 187,490 184,628 195,717 178,347 185,474 186,188 196,860 29,413 30,885 42,058 48,679 44,679 49,727 47,870 51,030 48,401 53,581 49,190 56,500 10,590 11,065 13,758 24,934 13,175 19,186 22,582 30,573 13,830 19,495 22,191 36,140 28.30% 4.04% 0.60% 41.54% 24.41% 73.39% 64.14% 22.62% 4.97% 1.61% -1.73% 18.21% Cost of Goods Sold 2011 2012 2013 Sales Depreciation & Amortization 23,072 31,622 34,784 Selling and Admin Expenses QUARTERLY OPERATING PROFIT YOY EBITDA GROWTH ANNUAL EBITDA 83,419 117,138 126,440 YOY EBITDA GROWTH 40.42% 7.94% Taxes 17,139 23,004 24,655 EBIAT 43,208 62,512 67,001 Page 2 Lassonde Industries CPG: Food and Beverage Historical Annual Performance Future Considerations Current Challenges Getting the best out of its acquisition, using CPC to expand its USA footprint and improve economies of scale Continued diversification away from soft drinks and into food products As stated earlier, the main challenge that LAS and other small sized competitors such as National Beverage Corporation (NASDAQ: FIZZ) and Cott Corporation (TSX: BCB) face is with respect to small margins and poor economies of scale. Larger firms such as Coca Cola and Pepsico have the benefit of extremely high brand equity and demand. As a result, they produce a much greater volume of products and get the most of their fixed assets. Furthermore, the high demand gives the larger companies more leverage when negotiating terms with retail outlets. Lassonde also engages in private-label manfuacturing. This is an industry with very low margins because it involves retailers who provide low cost alternatives to brand names and rely on the supplier for even lower prices. A prime example of this is Cott Corporation who relies on Wal-Mart for a substantial part of its business. Its profit margin ranges from 1 to 2% while the companies such as Coca Cola and Pepsi enjoy profit margins of 15-20%. More details regarding this and other challenges facing LAS are below: Volatile raw material / commodity prices Lassonde is employing an "if it isn't broken, don't fix it" approach as it continues its strategy to seek means of expanding its product offerring and exploring international opportunities. This strategy is comprised ofusing innovation, licensing agreements and consolidations to increase sales as well as the bottom line as economies of scale improve. This bodes very well given the current outlook for the industry. There has been a large shift towards healthier niche products which if marketed well can provide much greater returns when compared to the unhealthy counterparts. Introducing brands such as Flavur and locking agreements with firms such as Reed's will help LAS venture into these markets. The expectation is that Lassonde will use such agreements to develop a competency in producing and marketing carbondated soft drinks before engaging in producing products that yield a greater demand. Furthermore, as it uses consolidations to expand and improve economies-of-scale it should be able to expand internationally and compete with some of the American competitors such as Pepsico (Tropicana) and Coca-Cola (Minute Maid). Below is a summary of opportunities given LAS' current strategy. Pressure from the larger american companies who have better brand equity and greater EOS Using licensing/mergers to venture into carbonated soft drinks. A suitable acquisition would be of Canada Dry Motts. Exchange rate fluctuations, CAD has declined about 11% since 2013 compared to the USD KIMS Capital Markets March 27, 2014 Page 3 Lassonde Industries CPG: Food and Beverage Cost of Goods Sold as a % of Revenue- Industry Figures As you will see, the larger American companies are benefiting from much lower COGS. Gross profit is thus higher. Volume on purchases of raw materials (fruits / concetrated juice) allows for better hedging and pricing terms Private label manufacturing (Cott / Lassonde) hinders margins as low cost retailers rely on producer for cheap supply Increased volume also allows for better usage of fixed overhead, labor and direct labor costs Valuation Methodology I: Comparable Company Analysis Enterprise Value Projection (Values in Millions) FY2014 FY2015 8.9 8.2 135 148 1201.5 1213.6 20 32 -275 -257 -21 -24 925.50 964.60 6.988 6.988 Target Price $132 $138 a share Key Assumptions Another dividend increase Continued lowering of debt and increased cash flow Sales growth through distribution agreements / consolidations Non Controlling Interest Equity Value Shares Outstanding EBITDA EV Cash Estimate Debt Multiple March 27, 2014 KIMS Capital Markets TTM 2014E 2015E Ent. Value TTM Forward TTM 2014E 2015E Mkt. Cap TTM Forward Coca Cola KO 13100 M 186930 M 14.26 1.94 2.20 2.33 171040 M 20.43 16.60 Pepsico PEP 12340 M 145410 M 11.78 4.37 4.75 5.07 125600 M 19.20 16.30 Lassonde LAS 116 M 1040 M 8.91 6.70 6.60 6.90 763 M 16.70 16.60 National Bev. FIZZ 77 M 976 M 12.58 1.01 1.36 1.17 898 M 19.11 16.60 Cott COT 194 M 1170 M 6.01 0.18 0.41 0.56 771 M 45.20 14.30 SunOpta STKL 59 M 893 M 14.92 -0.13 0.47 0.61 776 M n/a 17.90 EPS P/E Ticker Corporation EBITDA EV/EBITDA Valuation Notes:
* Lassonde undervalued relative to competitors
Reasons:
* Lassonde offers a lower dividend yield to shareholders...lowest amongst comparables
* Lassonde has strong intangibles, but paie in comparison to the first tier manufacturers (KO, PEP)
Page 4 Lassonde Industries CPG: Food and Beverage Valuation Methodology II: Discounted Cash Flow DCF's Proposed Market Cap: $842,183,406 Shares outstanding: 6.988 Million DCF's Proposed Price: $122 March 27, 2014 Using a equal weighting between the two valuation techniques brings us to a valuation of $130. Please be aware that the WACC was also calculated using debt information from the 2nd quarter of 2013 however. KIMS Capital Markets Sales Cost of Goods Sold Selling and Admin Expenses QUARTERLY OPERATING PROFIT YOY EBITDA GROWTH ANNUAL EBITDA YOY EBITDA GROWTH Depreciation & Amortization Taxes EBIAT 15.03% 11.22% 6.77% 9.77% -15.63% 14.04% 89,913 82,961 73,027 60,509 50,556 231,250 183,750 46,250 36,988 100,513 156,780 43,290 30,529 1,200,000 849,000 228,000 167,400 44,400 33,087 212,800 107,464 38,304 18,604 212,850 122,550 39,775 22,266 216,450 140,970 41,070 26,873 225,810 2014 2015 2016 2017 2018 TERMINAL 1,064,000 782,040 1,075,000 779,375 1,110,000 793,650 1,170,000 830,700 1,250,000 881,250 PROJECTIONS OPERATING SCENARIO: BASE COGS/SALES SGA/SALES D&A/SALES EBITDA MARGIN 14.70% 3.70% 73.50% 10.10% 11.40% 12.70% 13.40% 13.95% 70.50% 18.50% 3.70% 70.75% 19.00% 3.70% 71.50% 19.50% 3.70% 71.00% 19.30% FUTURE ASSUMPTIONS 2014 2015 2016 2017 2018 TERMINAL 20.00% 3.60% 72.50% 19.80% 3.70%
EBIAT DEPRECIATION & AMORTIZATION (+) WORKING CAPITAL CHANGES _____Accounts Receivable (-) Inventory _____Accounts Payable/Accrued Liabilities (+) _____Other Non-Cash Items CAPEX (PP&E PURCHASES) UFCF 50,556 60,509 73,027 82,961 89,913 76,869 78,671 (30,000.00) (32,000.00) (35,000.00) (40,000.00) (42,500.00) (45,000.00) 19,565 57,654 64,699 67,406 -10,800 -11,250 -9,675 -9,990 -10,530 (13,626) 599 (3,207) (8,324) (4,111) (7,245) -9,576 (6,082) (3,041) (5,068) (13,648) (1,115) (3,548) 38,304 39,775 41,070 43,290 44,400 46,250 100,513 2014 2015 2016 2017 2018 TERMINAL FREE CASH FLOW PROJECTIONS (438) (2,445) 2,347 6,090 3,008 473 YEAR UFCF WACC GROWTH PV PROPOSED ENT. VALUE $1,122,646,406 52,327 76,869 6.53% 56,013 78,671 6.53% 0.50% 891,636 18,365 57,654 6.53% 50,798 64,699 6.53% 53,508 2014 2015 2016 2017 2018 TERMINAL 19,565 6.53% 67,406 6.53% DISCOUNTED CASH FLOWS PREMIUM 10.38% NET CASH $12,028,000 MINORITY INTEREST $18,562,000 DEBT PROPOSED MKT CAP $273,929,000 $842,183,406 Page 5 Lassonde Industries CPG: Food and Beverage Additional Qualitative and Technical Factors Risk Factors Competitive Forces: Coincidentally, two of Lassondes main competitors, PepsiCo Beverages and Coca-Cola compete rigorously in these sectors. They also maintain strong market share in the juice sector with PepsiCo Beverages owning Tropicana and Gatorade, and Coca-Cola owning Minute Maid. As a result of the decline in sales in both the soft drink and bottled water industries, these large competitors may look to further penetration of the fruit juice industry to offset this trend. This will result in increased competitiveness in the juice industry, thereby further driving down profit margins for Lassonde. Consumer Trends: Lassondes main source of revenue comes from its fruit juice business segments. Many of its products are high in glucose-fructose and recently, consumer trends/preferences have resulted in declining sales in the soft drink industry (due to health concerns). The bottled water industry has also taken a hit (due to environmental concerns). This has led to ongoing discussions of an additional tax being tacked on soft drink sales. Such social and political factors could really adversely affect Lassonde. Inclimate Weather: This year, North America experienced a cruel winter that is likely to hinder sales a tad bit. If you view Lassonde's earnings figures, you will notice that its least amount of sales occurs in Q1. This is due to weather factors. With Lassonde offering a great deal of chilled beverages, cold weather has the ability to adversely affect sales. However, on the flip side cold weather coupled with sickness has the ability to heighten the sales of products that cater to the immune system. Increased Investment Activities: Lassonde has recently continued to improve its Property, Plant and Equipment even during times of slowed growth. This shows that depsite the current dormancy in demand, the company is still anticipating growth opportunities that will require robust capital assets. Besides capital assets, the company has also increased its investment in subsidiaries, namely Clement Pappas. In January Lassonde announced an increase of its stake in the firm. This will lead to higher consolidated profits. PEAD History: The past earnings release was accompanied by no change in the company's share price. This is mainly due to the firm's low trading volume. History suggests that the market takes time to adjust to new information fully and this is especially the case with narrowly traded securities. Last quarter when Lassonde released there was also a minimal reaction to the earnings results. However, without any further press releases the company's share price managed to increase from $97.03 to a 52 week high of $118.40 within the ensuing 70 days. The low trading volume makes it difficult to assess shareholder reactions to earnings releases. Furthermore, the intimacy of the shareholders provides a good floor / support for the share price. Earnings Quality and Persistance: Over the past 9 years, Lassonde has seen continuously growing Net Income figures. From 2005 to now, there has been nearly 270% Net Income growth. As discussed earlier, this increase in earnings over the years can be attributed to many factors involving supermarkets such as increased shelf space, sales promotions, and better brand equity. Despite this continued growth, the most recent figures released for Q4 of 2013 indicated that there has been a decline of 5.9% in Net Income from Q4 of 2012. This is not an area of concern because we suffered an unnaturally long and cold winter in 2013/2014. As such, Lassondes products typically dont sell well during the colder seasons. Furthermore, there was an increase in selling and administrative expenses attributible to operational adjustments related to the Clement Pappas and Company, Inc. integration process. This has naturally led to higher advertising expenses as well. Lassonde should be expected to at least rebound from this minor drop, if not see a significant increase in Net Income related to Lassonde's increased exposure to the US market. In conclusion, Lassonde has seen healthy growth in earnings and should be expected to continue to see significant growth looking to the future. KIMS Capital Markets March 27, 2014 10 20 30 40 50 2005 2006 2007 2008 2009 2010 2011 2012 2013 Net Income Between 2005-2013 ($ Millions) Net Income ($Mn) Page 6
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