Interim Management s Discussion & Analysis Second quarter ended July 2, 2016

Transcription

1 Interim Management s Discussion & Analysis Second quarter ended July 2, 2016 The following Management s Discussion and Analysis ( MD&A ) presents the results, financial position and cash flows of Lassonde Industries Inc. and should be read in conjunction with its unaudited interim condensed consolidated financial statements ( interim consolidated financial statements ) and accompanying notes. In addition to containing an analysis of the second quarter ended July 2, 2016, this MD&A reports on items deemed significant that have taken place from July 2, 2016 up to and including August 12, 2016, which is the date on which this MD&A was approved by the Company s Board of Directors. The financial information in this MD&A has been prepared in accordance with International Financial Reporting Standards ( IFRS ). Additional information, including the Annual Information Form and certifications of filings for the second quarter of 2016, is available on the SEDAR website at Unless otherwise indicated, the reporting currency for figures in this document is the Canadian dollar. Forward-Looking Statements and Use of Estimates Any statement contained in this report that does not constitute a historical fact may be deemed a forward-looking statement. Verbs such as believe, expect, estimate and other similar expressions, in addition to the negative forms of these terms or any variations thereof, appearing in this report generally indicate forward-looking statements. These forward-looking statements do not provide guarantees as to the future performance of Lassonde Industries Inc. and are subject to risks, both known and unknown, as well as uncertainties that may cause the outlook, profitability and actual results of Lassonde Industries Inc. to differ significantly from the profitability or future results stated or implied by these statements. Detailed information on risks and uncertainties is provided in the Uncertainties and Principal Risk Factors section of the MD&A for the year ended December 31, In preparing interim consolidated financial statements in accordance with IFRS, management must exercise judgment when applying accounting policies and use assumptions and estimates that have an impact on the amounts of assets, liabilities, revenues and expenses reported and on the contingent liabilities and contingent assets information provided. The main assumptions and estimates used by management are as follows: Measurements of revenues from product sales; Measurements of the quarterly effective tax rate; Measurements of defined benefit assets and liabilities; Measurements of non-financial assets; Fair value measurements of financial instruments classified in Level 3; and Purchase price allocations of businesses acquired as part of business combinations. Because the use of assumptions and estimates is inherent to the financial reporting process, the actual results of items subject to assumptions and estimates may differ from these assumptions and estimates. Corporate Profile Lassonde Industries Inc. develops, manufactures and markets a wide range of ready-to-drink fruit and vegetable juices and drinks. The Company is the second largest producer of store brand shelf-stable fruit juices and drinks in the United States and a major producer of cranberry sauces. Furthermore, the Company develops, manufactures and markets specialty food products such as fondue broths and sauces, packaged corn-on-the-cob and pasta sauces. It also imports selected wines from several countries of origin for packaging and marketing purposes. It also produces apple cider and cider-based beverages. 1

2 The Company has five principal operating subsidiaries: A. Lassonde Inc.; Apple & Eve, LLC ( A&E ); Arista Wines Inc.; Lassonde Pappas and Company, Inc. ( LPC ) (formerly Clement Pappas and Company, Inc.); and Lassonde Specialties Inc. The Company produces superior quality products through the expertise of approximately 2,100 people working in 14 plants across Canada and the United States. The shares of Lassonde Industries Inc. are listed on the Toronto Stock Exchange. The Company is active in two market segments: the retail segment and the food service segment. Retail sales account for approximately 81% of total annualized sales and consist of sales to food retailers and wholesalers such as supermarket chains, independent grocers, superstores, warehouse clubs, major pharmacy chains and online sales. Food service sales account for approximately 19% of total annualized sales and consist of sales to restaurants, hotels, hospitals, schools and wholesalers serving these institutions. The Company s national brands are sold in various packages under several proprietary trademarks, including Antico, Apple & Eve, Arte Nova, Bombay, Canton, Double Vie, Dublin s Pub, Everfresh, Fairlee, Fruité, Grown Right, misangrina, Mont-Rouge, Northland, Oasis, Orange Maison, Pomme de Coeur, Rougemont, Ruby Kist, Sunlike, Tropical Grove as well as under trademarks for which the Company is a licensed user such as Allen s, Del Monte, Graves, Mitchell s, Nature s Best, and Tetley. On an annual basis, the Company s sales are geographically broken down as follows: approximately 58% of the Company s sales are made in the United States, 41% in Canada and less than 1% in other countries. In the normal course of operations, the Company is involved in apple and cranberry processing and packages corn-on-the-cob. These processing activities take place mainly from August to November. Processing the harvested crops generally increases inventory levels during the last quarter of the year. Overall Performance The Company s sales totalled $360.2 million in the second quarter of 2016, up $3.4 million from $356.8 million in sales in the same period of This increase was primarily driven by a favourable foreign exchange impact and an increase in sales of private label products, partly offset by a decrease in the sales volume of national brands. The Company s operating profit for the second quarter of 2016 totalled $30.3 million, up $1.0 million from operating profit of $29.3 million in the same quarter last year. This increase came mainly from improved profitability within the U.S. operations combined with a favourable impact of foreign exchange movements on the conversion into Canadian dollars of the financial results of these entities. In Canada, a favourable impact driven by improved profitability has been more than offset by an unfavourable impact of a low Canadian dollar on U.S.-dollar purchases. The Company s financial expenses went from $6.8 million in the second quarter of 2015 to $5.8 million this quarter. This $1.0 million decrease was mainly attributable to a lower interest expense resulting from a reduction in indebtedness and to a smaller change in the fair value of participating loans due, in part, to the full settlement of these loans in May Other (gains) losses went from a $0.7 million loss in the second quarter of 2015 to a $0.3 million loss in The 2015 second-quarter loss of $0.7 million was mainly due to $0.5 million in foreign exchange losses. The $0.3 million loss in the second quarter of 2016 was due to losses resulting from a change in the fair value of interest rate swaps related to LPC s term loan. Profit before income taxes totalled $24.3 million for the second quarter of 2016, up $2.5 million from $21.8 million in the same quarter of Income tax expense went from $6.8 million in the second quarter of 2015 to $7.6 million in the same quarter of At 31.3%, the 2016 second-quarter effective income tax rate was slightly higher than the 31.0% rate in the same quarter of The higher tax rate reflects an unfavourable change in the geographic mix of the Company s taxable income. The 2016 second-quarter profit was $16.7 million, up $1.6 million from $15.1 million in the second quarter of last year. Profit attributable to the Company s shareholders was $15.7 million, resulting in basic and diluted earnings per share of $2.24 for the second quarter of In the second quarter of 2015, profit attributable to the Company s shareholders had totalled $14.2 million, resulting in basic and diluted earnings per share of $2.03. Cash flows from operating activities generated $29.9 million in cash during the second quarter of 2016, while they had generated $43.3 million in cash during the same quarter last year. Financing activities used $12.3 million in the second quarter of 2016, while these activities had used $34.2 million in the same quarter of Investing activities used $4.7 million in the second quarter of 2016 compared to $5.2 million in the same quarter of At the end of the second quarter of 2016, the Company reported a cash and cash equivalents balance of $27.1 million and a bank overdraft of $4.3 million compared to a cash and cash equivalents balance of $0.5 million and a bank overdraft of $14.6 million at the end of the second quarter of

3 Quarterly Financial Information Consolidated Income Data Second quarters ended (in thousands of dollars, unless otherwise indicated) July 2, 2016 June 27, 2015 $ $ Sales 360, ,817 Cost of sales 253, ,491 Selling and administrative expenses 76,131 74,959 (Gains) losses on capital assets , ,514 Operating profit 30,326 29,303 Financial expenses 5,771 6,756 Other (gains) losses Profit before income taxes 24,277 21,832 Income tax expense 7,609 6,765 Profit 16,668 15,067 Attributable to: Company s shareholders 15,686 14,181 Non-controlling interest ,668 15,067 Basic and diluted earnings per share (in $) Weighted average number of shares outstanding (in thousands) 6,988 6,988 In the second quarter of 2016, sales totalled $360.2 million, up $3.4 million (0.9%) from sales of $356.8 million in the second quarter of This increase was mainly due to the combined impact of the following items: (i) a $10.5 million decrease in the sales volume of national brands; (ii) a $9.5 million favourable foreign exchange impact; (iii) a $5.8 million increase in sales of private label products; (iv) an unfavourable change in the sales mix of national brands that caused a $2.6 million decrease in sales; (v) sales price fluctuations that had a $0.6 million favourable impact on sales of national brands; and (vi) a favourable impact of a $0.6 million decrease in slotting fees. For the first six months of 2016, sales totalled $746.6 million, up 9.1% from $684.5 million in the first six months of Cost of sales went from $252.5 million in the second quarter of 2015 to $253.5 million in the same quarter of 2016, up $1.0 million or 0.4%. When compared to the 0.9% increase in sales, this increase in cost of sales essentially reflects the lower cost of certain raw materials mitigated by an unfavourable foreign exchange impact. For the first six months of 2016, cost of sales stood at $533.0 million, up 7.9% from $494.2 million in the first six months of Selling and administrative expenses went from $75.0 million in the second quarter of 2015 to $76.1 million in the second quarter of 2016, up $1.1 million. This increase was mainly due to the combined impact of the following items: (i) lower transportation costs due partly to lower fuel costs; (ii) an unfavourable foreign exchange impact resulting from the conversion of the selling and administrative expenses of the U.S. entities into Canadian dollars; (iii) higher salary expenses; and (iv) higher selling and marketing expenses. For the first six months of the year, selling and administrative expenses stood at $155.6 million, up 8.1% from $144.0 million in the first six months of The Company s operating profit for the second quarter of 2016 totalled $30.3 million, up $1.0 million from $29.3 million in the same quarter last year. Operating profit for the first six months of 2016 stood at $57.8 million, up $11.5 million from $46.3 million for the first six months of The Company s financial expenses went from $6.8 million in the second quarter of 2015 to $5.8 million this quarter. This $1.0 million decrease was mainly attributable to a lower interest expense resulting from a reduction in indebtedness and to a smaller change in the 3

4 fair value of participating loans due, in part, to the full settlement of these loans in May For the first six months, financial expenses went from $13.4 million in 2015 to $11.5 million this fiscal year. Other (gains) losses went from a $0.7 million loss in the second quarter of 2015 to a $0.3 million loss in The 2015 second-quarter loss of $0.7 million was mainly due to $0.5 million in foreign exchange losses. The $0.3 million loss in the second quarter of 2016 was due to losses resulting from a change in the fair value of interest rate swaps related to LPC s term loan. For the first six months, the Other (gains) losses item was a $1.1 million loss in 2016 compared to a $0.6 million gain in Profit before income taxes totalled $24.3 million for the second quarter of 2016, up $2.5 million from $21.8 million in the same quarter of For the first six months of 2016, profit before income taxes stood at $45.1 million, up $11.7 million from $33.4 million in the first six months of Income tax expense went from $6.8 million in the second quarter of 2015 to $7.6 million in the same quarter of At 31.3%, the 2016 second-quarter effective income tax rate was slightly higher than the 31.0% rate in the same quarter of The higher tax rate reflects an unfavourable change in the geographic mix of the Company s taxable income. Income tax expense for the first six months of 2016 stood at $14.6 million, up $4.4 million from $10.2 million in the first six months of Profit for the second quarter of 2016 was $16.7 million, up $1.6 million from $15.1 million in the second quarter of last year. For the first six months of 2016, profit totalled $30.6 million versus profit of $23.2 million in the first six months of Profit attributable to the Company s shareholders was $15.7 million, resulting in basic and diluted earnings per share of $2.24 for the second quarter of In the second quarter of 2015, profit attributable to the Company s shareholders had totalled $14.2 million, resulting in basic and diluted earnings per share of $2.03. For the first six months of 2016, profit attributable to the Company s shareholders totalled $28.6 million, resulting in basic and diluted earnings per share of $4.10 and, in the same six-month period of 2015, profit had totalled $21.9 million, resulting in basic and diluted earnings per share of $3.14. Interim Results (in thousands of dollars, unless otherwise indicated) Q Q Q Q Q Q Q Q $ $ $ $ $ $ $ $ Sales 360, , , , , , , ,978 Operating profit 30,326 27,430 36,182 28,806 29,303 16,961 32,221 19,980 Profit attributable to the Company s shareholders 15,686 12,955 20,197 14,837 14,181 7,764 16,307 10,615 Basic and diluted earnings per share (in $) Adjusted EBITDA i) 41,372 38,672 47,075 39,619 39,879 27,460 42,478 29,012 For the definition, see the Financial Measures Not in Accordance with IFRS section of this MD&A. Third Quarter of 2014 The Company s sales totalled $315.0 million in the third quarter of 2014, up $57.4 million (22.3%) from $257.6 million in sales in the third quarter of Sales from A&E added $38.8 million to the Company s third-quarter sales. Excluding A&E s sales, the Company s third-quarter sales increased $18.6 million (7.2%) year over year, mainly due to higher sales of private label products and to a favourable foreign exchange impact, partly offset by higher trade spending that had an unfavourable impact on sales of national brands. The Company s operating profit for the third quarter of 2014 totalled $20.0 million, down $2.1 million from operating profit of $22.1 million in the same quarter of Excluding the impact of the A&E acquisition, operating profit was up $2.0 million from the third quarter of This increase was mostly due to an improvement in the profitability of private label products in the United States partly offset by higher selling and administrative expenses. During the third quarter of 2014, the Company incurred $3.5 million in expenses related to the A&E acquisition. In addition, A&E posted a $0.6 million operating loss due, in part, to a $1.0 million increase in cost of sales attributable to an inventory step-up resulting from the acquisition. Profit attributable to the Company s shareholders was $10.6 million, resulting in basic and diluted earnings per share of $1.52 for the third quarter of In the third quarter of 2013, profit attributable to the Company s shareholders had totalled $11.2 million, resulting in basic and diluted earnings per share of $

5 Fourth Quarter of 2014 The 2014 fourth-quarter sales totalled $349.4 million, up $65.9 million (23.2%) from sales of $283.5 million in the fourth quarter of This sales growth came mainly from $59.3 million in sales from A&E. Excluding the impact of the A&E acquisition, the Company s sales were up $6.6 million (2.3%) compared to the same quarter of This sales growth came mainly from a higher volume of private label sales and from a favourable foreign exchange impact resulting from an increase in the conversion rate applied to the Company s U.S.-dollar-denominated sales. The positive impact of these factors was partly offset by lower sales volumes of the Company s national brands and by an unfavourable price impact on national brands sales that was largely due to higher trade spending. The Company s operating profit for the fourth quarter of 2014 totalled $32.2 million, up $4.5 million from $27.7 million in the same quarter of It should be noted that the quarter s operating profit included $2.8 million in operating profit from A&E. Excluding the impact of the A&E acquisition, operating profit was up $1.7 million from the fourth quarter of This increase was mainly due to an improvement in the profitability of U.S. operations partly offset by a deterioration in the profitability of Canadian operations explained in part by higher trade spending and an increase in certain product costs. Profit attributable to the Company s shareholders totalled $16.3 million, resulting in basic and diluted earnings per share of $2.33 in the fourth quarter of In the fourth quarter of 2013, profit attributable to the Company s shareholders had totalled $16.5 million, resulting in basic and diluted earnings per share of $2.37. First Quarter of 2015 The Company s sales totalled $327.7 million in the first quarter of 2015, up $83.5 million or 34.2% from $244.2 million in sales in the same period of Sales from A&E added $62.5 million to the Company s 2015 first-quarter sales. Excluding A&E s sales, the Company s 2015 first-quarter sales posted a year-over-year increase of $21.0 million (8.6%). This increase was primarily driven by a favourable foreign exchange impact and higher sales of private label products partly offset by lower sales volumes of the Company s national brands. The Company s operating profit for the first quarter of 2015 totalled $17.0 million, up $2.7 million from operating profit of $14.3 million in the same quarter of Excluding the $3.3 million operating profit from A&E, operating profit was down $0.6 million from the first quarter of This slight decline came mainly from reduced profitability within the Canadian operations given an unfavourable impact of a low Canadian dollar on the Company s raw material costs. Profit attributable to the Company s shareholders was $7.8 million, resulting in basic and diluted earnings per share of $1.11 for the first quarter of In the first quarter of 2014, profit attributable to the Company s shareholders had totalled $7.1 million, resulting in basic and diluted earnings per share of $1.01. Second Quarter of 2015 The Company s sales totalled $356.8 million in the second quarter of 2015, up $84.4 million or 31.0% from $272.4 million in sales in the same period of Sales from A&E added $59.7 million to the Company s second-quarter sales. Excluding A&E s sales, the Company s second-quarter sales posted a year-over-year increase of $24.7 million (9.1%). This increase was primarily driven by a favourable foreign exchange impact and higher sales of private label products. The Company s operating profit for the second quarter of 2015 totalled $29.3 million, up $7.4 million from operating profit of $21.9 million in the same quarter of Excluding the $3.1 million operating profit from A&E, operating profit was up $4.3 million from the second quarter of This increase came mainly from improved profitability within the Canadian operations owing to a stronger performance by specialty food products, partly offset by an unfavourable impact of a low Canadian dollar on U.S.-dollar purchases. Operating profit also benefited from the favourable impact of foreign exchange movements on the conversion of LPC s results into Canadian dollars. Profit attributable to the Company s shareholders was $14.2 million, resulting in basic and diluted earnings per share of $2.03 for the second quarter of In the second quarter of 2014, profit attributable to the Company s shareholders had totalled $11.2 million, resulting in basic and diluted earnings per share of $1.61. Third Quarter of 2015 The Company s sales totalled $363.3 million in the third quarter of 2015, up $48.3 million or 15.4% from $315.0 million in sales in the same period of Sales from A&E stood at $63.1 million in the third quarter of A&E s sales had reached $38.8 million for the period of July 26, 2014 to September 27, Excluding A&E s sales, the Company s third-quarter sales posted a year-over-year increase of $24.0 million (8.7%). This increase was primarily driven by a favourable foreign exchange impact. The Company s operating profit for the third quarter of 2015 totalled $28.8 million, up $8.8 million from operating profit of $20.0 million in the same quarter of A&E s operating profit was $2.9 million during the quarter ended September 26, For the period of July 26, 2014 to September 27, 2014, A&E had posted a $0.6 million operating loss due, in part, to a $1.0 million increase in cost of sales attributable to an inventory step-up resulting from the acquisition. Moreover, the Company incurred, during the third quarter of 5

6 2014, $3.5 million in expenses related to the A&E acquisition. Excluding the impact of the A&E acquisition, operating profit was up $1.8 million from the third quarter of This increase came mainly from improved profitability in Canadian operations partly offset by an unfavourable impact of a low Canadian dollar on U.S.-dollar purchases and by a charge related to customs duties claimed by the U.S. authorities for the years 2009 to Operating profit also benefited from a favourable impact of foreign exchange movements on the conversion of LPC s results into Canadian dollars. Profit attributable to the Company s shareholders was $14.8 million, resulting in basic and diluted earnings per share of $2.12 for the third quarter of In the third quarter of 2014, profit attributable to the Company s shareholders had totalled $10.6 million, resulting in basic and diluted earnings per share of $1.52. Fourth Quarter of 2015 The Company s sales totalled $401.5 million in the fourth quarter of 2015, up $52.1 million or 14.9% from $349.4 million in the same period of This increase was primarily driven by a favourable foreign exchange impact and higher sales of private label products. The Company s operating profit for the fourth quarter of 2015 totalled $36.2 million, up $4.0 million from $32.2 million in the same quarter of This increase came mainly from a favourable impact of foreign exchange movements on the conversion into Canadian dollars of the results of the U.S. entities and from improved profitability within the U.S. operations, partly offset by lower profitability in the Canadian operations caused by an unfavourable impact of a low Canadian dollar on U.S.-dollar purchases and by a charge related to customs duties claimed by the U.S. authorities. Profit attributable to the Company s shareholders totalled $20.2 million, resulting in basic and diluted earnings per share of $2.89 in the fourth quarter of In the fourth quarter of 2014, profit attributable to the Company s shareholders had totalled $16.3 million, resulting in basic and diluted earnings per share of $2.33. First Quarter of 2016 The Company s sales totalled $386.5 million in the first quarter of 2016, up $58.8 million from $327.7 million in the same quarter of Part of this increase stems from the fact that, in the first quarter of 2016, there were five more delivery days than in the first quarter of 2015, resulting in an estimated $27.0 million increase in sales. Excluding this circumstance, to obtain a comparable basis, the remaining increase in sales was mainly due to a favourable foreign exchange impact and an increase in sales of private label products, partly offset by a decrease in the sales volume of national brands. The Company s operating profit for the first quarter of 2016 totalled $27.4 million, up $10.4 million from operating profit of $17.0 million in the same quarter of This increase was mainly due to the favourable impact on profit of the marginal contribution from the Company s additional sales and to a favourable impact of foreign exchange movements on the conversion into Canadian dollars of the financial results of the U.S. entities. The improved profitability came essentially from the U.S. entities, as the favourable impact of additional sales was largely offset in Canada by the unfavourable impact of a low Canadian dollar on U.S.-dollar purchases. Profit attributable to the Company s shareholders was $13.0 million, resulting in basic and diluted earnings per share of $1.85 for the first quarter of In the first quarter of 2015, profit attributable to the Company s shareholders had totalled $7.8 million, resulting in basic and diluted earnings per share of $1.11. Cash and Financial Position Financial Position Data (in thousands of dollars, unless otherwise indicated) July 2, 2016 Dec. 31, 2015 $ $ Total assets 1,086,974 1,143,848 Shareholders equity 525, ,800 Shareholders equity / total assets (in %) Total debt i) 327, ,067 Including long-term debt and the current portion of long-term debt. Note that total debt excludes participating loans with a fair value of $nil as at July 2, 2016 ($14.3 million as at December 31, 2015). 6

7 When comparing condensed consolidated statement of financial position items, readers must consider the conversion rate applicable to closing balances denominated in U.S. dollars, which went from $ CAD per USD as at December 31, 2015 to $ CAD per USD as at July 2, The following table presents the Condensed Consolidated Statement of Financial Position items that are significantly affected by the movement in exchange rates. (in millions of dollars) Increase (decrease) Foreign Variance, excluding exchange foreign exchange July 2, 2016 Dec. 31, 2015 impact impact $ $ $ $ Accounts receivable (6.3) (14.2) Inventories (8.5) 10.3 Property, plant and equipment (7.6) (2.9) Other intangible assets (16.5) (9.0) Goodwill (14.2) - Accounts payable and accrued liabilities (7.8) 4.7 Long-term debt, including the current portion (16.1) 2.5 Deferred tax liabilities (1.1) (2.5) July 2, 2016, the Company had total assets of $1,087.0 million versus $1,143.8 million as at December 31, 2015, a 5.0% decrease that was largely due to a foreign exchange impact. At the end of the second quarter of 2016, the Company s working capital stood at $168.0 million for a ratio of 1.78:1 compared to $166.7 million and a ratio of 1.75:1 as at December 31, July 2, 2016, current assets totalled $384.8 million versus $389.8 million as at December 31, Cash and cash equivalents stood at $27.1 million as at July 2, 2016 compared to $0.5 million as at December 31, Accounts receivable totalled $121.4 million as at July 2, 2016 compared to $141.9 million as at December 31, Excluding the foreign exchange impact, accounts receivable decreased by $14.2 million explained mainly by (i) an $11.0 million decrease in trade accounts receivable resulting mainly from lower receivables related to a U.S. government agency, (ii) a $2.2 million decrease in discounts receivable from suppliers, and (iii) a $1.0 million decrease in other receivables. Inventories went from $222.1 million as at December 31, 2015 to $223.9 million as at July 2, Excluding the foreign exchange impact, inventories increased by $10.3 million. This increase came mainly from a $5.5 million increase in raw materials and supplies inventories, owing in part to the greater seasonal needs for certain raw materials, and from a $4.8 million increase in finished goods inventories in preparation for the autumn spike in cranberry sauce sales. Other current assets went from $12.2 million as at December 31, 2015 to $9.1 million as at July 2, This $3.1 million decrease was mainly due to a $1.9 million decrease in sales tax receivable and a $1.4 million reduction in prepaid expenses. July 2, 2016, the fair value of derivative instruments recorded as current assets was $1.2 million compared to $10.9 million as at December 31, This statement of financial position item reflects the favourable variances between the rates on the foreign exchange forward contracts held by the Company to cover its foreign currency requirements for the 12 months following its reporting dates and the exchange rates on those dates. Property, plant and equipment went from $271.3 million as at December 31, 2015 to $260.8 million as at July 2, Excluding the foreign exchange impact, property, plant and equipment decreased by $2.9 million as the Company posted a depreciation expense of $11.6 million while purchasing $9.1 million in property, plant and equipment. Other intangible assets went from $260.2 million as at December 31, 2015 to $234.7 million as at July 2, Excluding the foreign exchange impact, other intangible assets decreased by $9.0 million essentially because the Company posted an amortization expense of $10.5 million while purchasing $1.2 million in intangible assets. Current liabilities stood at $216.8 million as at July 2, 2016 compared to $223.0 million at the end of Bank overdraft stood at $4.3 million as at July 2, 2016 compared to $9.5 million as at December 31, Accounts payable and accrued liabilities went from $183.7 million as at December 31, 2015 to $180.6 million as at July 2, Excluding the foreign exchange impact, accounts payable and accrued liabilities increased by $4.7 million. This increase was mainly due to: (i) a $4.3 million increase in trade payables and accrued expenses due in part to improved management of supplier payment terms, (ii) a $3.6 million increase in trade marketing costs payable, and (iii) a $3.3 million decrease in the Salaries, deductions at source and accrued vacation payable item. 7

8 Other current liabilities went from $13.5 million as at December 31, 2015 to $2.4 million as at July 2, This $11.1 million decrease came essentially from a full settlement, in May 2016, of participating loans for which an amount of $9.2 million was reflected in other current liabilities as at December 31, 2015, and from a $2.1 million payment of a customs duties liability. Long-term debt, including the current portion, was $327.5 million as at July 2, 2016 compared to $341.1 million as at December 31, Excluding the foreign exchange impact, long-term debt increased by $2.5 million. This increase was mainly due to an amount of $9.2 million drawn on the Canadian revolving operating credit, whereas the Company repaid $2.7 million of the U.S. revolving operating credit. The Company also repaid $2.9 million on LPC s term loan and $2.9 million on other Canadian debts. On July 27, 2016, the Company exercised its right to make prepayments, without penalty, on LPC s term loan. This prepayment, in an amount of $27.0 million (US$20.7 million), will reduce the portion of the repayment that is tied to excess cash flows established at yearend. Deferred tax liabilities went from $43.0 million as at December 31, 2015 to $39.4 million as at July 2, Excluding the foreign exchange impact, deferred tax liabilities decreased by $2.5 million. This decrease stems mainly from the tax impact of recognizing, in comprehensive income, an actuarial loss and losses on financial instruments designated as cash flow hedges, partly offset by the tax amortization of goodwill. Other long-term liabilities went from $5.9 million as at December 31, 2015 to $0.6 million as at July 2, This $5.3 million decrease came essentially from the full settlement, in May 2016, of participating loans. Equity attributable to the Company s shareholders was $485.4 million as at July 2, 2016, down $15.6 million from $501.0 million as at December 31, The foreign currency translation reserve decreased by $25.6 million to total $66.7 million, and the hedging reserve decreased by $8.2 million. Retained earnings increased by $18.1 million to total $369.8 million at the end of the second quarter of This increase essentially reflects the $28.6 million in profit attributable to the Company s shareholders for the first six months of 2016 less $6.4 million in dividends paid and the recognition of a $4.1 million actuarial loss, net of tax, in comprehensive income. Non-controlling interest went from $41.8 million as at December 31, 2015 to $40.1 million as at July 2, The non-controlling interest represents a minority interest s share in the comprehensive income of the Company s U.S. entities. Analysis of the Consolidated Cash Flows Second quarters ended First six months ended (in thousands of dollars) July 2, 2016 June 27, 2015 July 2, 2016 June 27, 2015 $ $ $ $ Operating activities 29,885 43,300 67,142 58,748 Financing activities (12,269) (34,211) (21,284 ) (47,252 ) Investing activities (4,670) (5,184) (13,772 ) (8,116 ) Increase in cash and cash equivalents 12,946 3,905 32,086 3,380 Cash and cash equivalents at beginning 10,648 (18,406) (8,989) (17,088) Impact of exchange rate change on cash and cash equivalents (832) 437 (335) (356) Cash and cash equivalents at end 22,762 (14,064) 22,762 (14,064) Cash flows generated by operating activities in the second quarter of 2016 totalled $29.9 million compared to $43.3 million in the second quarter of This $13.4 million downward change was essentially due to a change in non-cash operating working capital items that used $3.9 million in cash in the second quarter of 2016 compared to $13.7 million in cash inflows in the same period last year, for an increase of $17.6 million in cash outflows. This increase in cash outflows from working capital was essentially due to the combined impact of the following items: (a) a change in accounts receivable that generated $6.9 million during the second quarter of 2016 compared to $18.4 million in cash generated in the second quarter of 2015; (b) a change in accounts payable and accrued liabilities that used $7.2 million during the second quarter of 2016 compared to $2.9 million used during the second quarter of 2015; (c) a change in inventories that used $5.2 million during the second quarter of 2016 compared to $1.9 million used in the second quarter of 2015; and (d) a change in other current assets and liabilities that generated $1.6 million during the second quarter of 2016 compared to $0.1 million generated in the second quarter of last year. A $0.4 million decrease in non-cash expenses recognized in profit or loss and related to changes in the fair value of financial instruments also contributed to the downward change in cash flows from operating activities. However, this $13.4 million downward change also reflects the favourable impact of the following items: (i) a $2.1 million increase in earnings before interest, taxes, depreciation and amortization; (ii) a $1.0 million decrease in interest paid; (iii) a $0.7 million upward change in Unrealized foreign exchange (gains) losses ; (iv) a $0.4 million decrease in settlements of derivative instruments; and (v) a $0.2 million upward change in (Gains) losses on capital assets. For the first six months of 2016, cash flows generated by operating activities totalled $67.1 million, up $8.4 million from the same period in This upward change was mainly due to an $11.8 million increase in earnings before interest, taxes, depreciation and 8

9 amortization and to a $1.5 million decrease in interest paid. Moreover, the change in non-cash operating working capital items generated $14.8 million in cash in the first six months of 2016 compared to $12.9 million in cash in the same period last year, for an increase of $1.9 million. This increase in cash inflows was essentially due to the combined impact of the following items: (a) a change in accounts receivable that generated $14.2 million during the first six months of 2016, whereas they had used $0.4 million in the same period last year; (b) a change in accounts payable and accrued liabilities that generated $9.9 million during the first six months of 2016 compared to $20.4 million generated during the first six months of 2015; (c) a change in other current assets and liabilities that generated $1.0 million during the first six months of 2016 compared to $2.7 million generated in the same period last year; and (d) a change in inventories that used $10.3 million during the first six months of 2016 compared to $9.8 million used in the first six months of However, this $8.4 million upward change in cash flows generated by operating activities was partly offset by (i) a $3.9 million downward change in the Cost of the defined benefit pension plans recognized in profit or loss, net of contributions, mainly attributable to a $4.1 million increase in the funding of the defined benefit pension plans in the first quarter of 2016, (ii) a $1.6 million increase in income tax paid and (iii) a $1.4 million decrease in non-cash expenses recognized in profit or loss and related to changes in the fair value of financial instruments. Financing activities used $12.3 million in the second quarter of 2016, whereas they had used $34.2 million during the same quarter last year. This $21.9 million downward change in cash outflows was mainly due to (i) a $9.7 million cash inflow from the revolving operating credit during the second quarter of 2016 compared to a $25.5 million repayment during the second quarter of 2015 and (ii) a $2.8 million decrease in long-term debt repayments. These items were partly offset by (i) the full settlement in May 2016 of participating loans for an amount of $14.6 million, (ii) the payment in May 2016 of $0.8 million in dividends to the non-controlling interest and (iii) a $0.7 million increase in dividends paid. For the first six months of 2016, financing activities used $21.3 million, whereas these activities had used $47.3 million in the first six months of This $26.0 million decrease in cash outflows was mainly due to (i) a $6.3 million cash inflow from the revolving operating credit in the first six months of 2016 compared to $32.6 million in repayments in the first six months of 2015 and (ii) a $3.1 million decrease in long-term debt repayments. These items were partly offset by (i) the full settlement in May 2016 of participating loans for an amount of $14.6 million, (ii) the payment in May 2016 of $0.8 million in dividends to the noncontrolling interest and (iii) a $0.8 million increase in dividends paid. Investing activities used $4.7 million in cash in the second quarter of 2016 and used $5.2 million in the same quarter of This $0.5 million downward change was essentially due to a $1.2 million decrease in cash outflows related to acquisitions of property, plant and equipment partly offset by a $0.5 million increase in cash outflows related to acquisitions of other intangible assets. For the first six months of 2016, investing activities used $13.8 million compared to $8.1 million for the same period of fiscal This upward change in cash outflows came mainly from a $3.9 million increase in acquisitions of property, plant and equipment, a $1.1 million increase in cash outflows related to acquisitions of other intangible assets and the receipt in the first quarter of 2015 of a $0.5 million consideration receivable as at December 31, 2014 related to the A&E acquisition. Financial Measures Not in Accordance with IFRS Non-IFRS financial measures have no standardized meaning prescribed under IFRS. They are therefore unlikely to be comparable with measures of the same type presented by other issuers. Working Capital and Working Capital Ratio The Company uses working capital as a financial measure to assess whether it has sufficient current assets to cover current liabilities. Working capital is equal to current assets minus current liabilities, whereas the working capital ratio is obtained by dividing current assets by current liabilities. (in thousands of dollars, except the working capital ratio) July 2, 2016 Dec. 31, 2015 $ $ Current assets 384, ,750 Current liabilities 216, ,003 Working capital 168, ,747 Working capital ratio 1.78:1 1.75:1 9

10 Shareholders Equity to Total Assets The Company uses the shareholders equity to total assets financial measure to determine the shareholders investment as a proportion of the Company s total assets. To calculate the shareholders equity to total assets ratio, the shareholders equity presented on the Condensed Consolidated Statement of Financial Position is divided by total assets. (in thousands of dollars, unless otherwise indicated) July 2, 2016 Dec. 31, 2015 $ $ Shareholders equity 525, ,800 Total assets 1,086,974 1,143,848 Shareholders equity / total assets ratio (in %) Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization Adjusted earnings before interest, taxes, depreciation and amortization ( Adjusted EBITDA ) is a financial measure used by the Company and investors to assess its capacity to generate future cash flows from operating activities and pay financial expenses. Adjusted EBITDA consists of operating profit, the depreciation and amortization shown in the Consolidated Statements of Cash Flows and (Gains) losses on capital assets, if applicable. Second quarters ended First six months ended (in thousands of dollars) July 2, 2016 June 27, 2015 July 2, 2016 June 27, 2015 $ $ $ $ Operating profit 30,326 29,303 57,756 46,264 Depreciation and amortization 10,801 10,512 22,048 21,006 (Gains) losses on capital assets Adjusted EBITDA 41,372 39,879 80,044 67,339 Depreciation and amortization expense went from $10.5 million in the second quarter of 2015 to $10.8 million in the second quarter of This increase is explained by a $0.3 million unfavourable foreign exchange impact. For the first six months, depreciation and amortization expense went from $21.0 million in 2015 to $22.0 million in Accounting Policies and Future Accounting Changes The interim consolidated financial statements were prepared using the same accounting policies as those described in Note 2 to the consolidated financial statements for the year ended December 31, The future accounting changes are presented in Note 4 to the consolidated financial statements for the year ended December 31, Disclosure Controls and Procedures ( DC&P ) The Company s Chief Executive Officer and the Executive Vice-President and Chief Financial Officer are responsible for setting and maintaining disclosure controls and procedures, as set out in National Instrument issued by the Canadian Securities Administrators. Assisting them in this responsibility is the Disclosure Committee, which consists of key management personnel. The Disclosure Committee must be kept fully informed of any significant information relating to the Company so that it can evaluate said information, determine its importance, and decide on timely disclosure of a press release, where applicable. Management regularly reviews disclosure controls and procedures; however, they cannot provide an absolute level of assurance because of the inherent limitations in control systems to prevent or detect all misstatements due to error or fraud. The Company s Chief Executive Officer and the Executive Vice-President and Chief Financial Officer have concluded that the design of the disclosure controls and procedures as at July 2, 2016 provides reasonable assurance that significant information relevant to the Company, including that of its subsidiaries, is reported to them during the preparation of disclosure documents. 10

11 Internal Control Over Financial Reporting ( ICFR ) Management is responsible for establishing and maintaining adequate internal control over financial reporting in order to provide reasonable assurance as to the reliability of the financial information and reasonable assurance that the financial statements were prepared, for financial reporting purposes, in accordance with IFRS. All internal control systems have inherent limitations and therefore internal controls over financial reporting can only provide reasonable assurance and may not prevent or detect misstatements due to error or fraud. Under the supervision of the Chief Executive Officer and the Executive Vice-President and Chief Financial Officer, the Company has conducted an evaluation of the design of the Company s internal control over financial reporting as at July 2, 2016, based on the framework issued by the Committee of Sponsoring Organizations ( COSO ) of the Treadway Commission. For the six-month period ended July 2, 2016, there have been no changes to the internal control over financial reporting that would have significantly affected or been likely to have significantly affected the Company s internal control over financial reporting. Off-Statement-of-Financial-Position Arrangements July 2, 2016, the Company had letters of credit outstanding totalling $1.4 million. Commitments are presented in Note 27 to the audited consolidated financial statements for the year ended December 31, Events After the Reporting Period As of August 12, 2016, there was no subsequent event to report. Outlook The Company is seeing moderate growth in industry sales in the U.S. fruit juice and drink market. The situation is different in the Canadian market, as industry sales remain lower. As a result, the competitive environment in Canada remains challenging, and the Company does not see any signs of competitive activity diminishing by the end of The Company is seeking to limit the impact of this increased competition through national brand product innovation and continued private label customer development. During the first quarter of 2016, the Company s sales and profit had increased significantly year over year. Part of this increase came from the fact that, in the first quarter of 2016, there were five more delivery days than in the first quarter of Since the number of delivery days will remain constant for the year as a whole, this increase is expected to partially reverse, especially in the fourth quarter of Barring any significant external shocks (and excluding foreign exchange impacts to maintain a comparable basis), the Company remains optimistic about its ability to slightly increase its consolidated sales in 2016 compared to those of As for sourcing, the Company is seeing a period of continued price stability for most of its concentrate purchases. The price of pineapple concentrate, which had risen sharply in the last quarters of 2015, has returned to levels close to the recent historical averages. However, the price of orange concentrate has increased significantly in recent months as a result of disappointing crops. The conversion rate on purchases made by Canadian subsidiaries in U.S. dollars is also expected to have an unfavourable impact on results over the next six months of 2016 compared to those of fiscal 2015, despite the use of foreign exchange forward contracts. This unfavourable impact is partly offset by a favourable impact of exchange rate movements on the conversion of the U.S. entities financial results into Canadian dollars. Foreign exchange forward contracts help the Company to partially stabilize the impact of currency fluctuations on its results, but the durations of these forward contracts generally do not exceed twelve months. Lastly, it should be noted that the Company expects to conclude, before the end of 2016, a new credit agreement to finance its U.S. operations. Such an agreement would result in the derecognition of approximately US$2.0 million in deferred financing costs. This non-cash charge would be partly offset by a decrease in interest expense of approximately US$0.5 million per quarter. Additional Information July 2, 2016, the issued and outstanding capital stock of the Company consisted of 3,235,300 Class A subordinate voting shares and 3,752,620 Class B multiple voting shares. This Management s Discussion and Analysis was prepared as of August 12, 2016 and is available on the Lassonde Industries Inc. website. Readers will also find this MD&A, the Annual Information Form, additional documents, press releases, and more information about the Company on the SEDAR website at 11