While Wall Street focuses on Lassonde's U.S. volume rebuild and the upcoming single-serve expansion, a subtle shift in the Q1 2024 earnings call transcript reveals a potentially game-changing strategy: the strategic stockpiling of apple juice and concentrate. This seemingly mundane inventory adjustment might hold the key to mitigating the persistent sting of high orange juice prices, a factor that has plagued the industry and hampered Lassonde's profitability.

For years, Lassonde's Canadian business, with its heavy reliance on orange juice, has been particularly vulnerable to the volatile citrus market. The recent surge in orange juice prices, reaching an all-time high last October, has forced the company to implement price increases, risking consumer pushback and potential volume erosion. But Lassonde appears to have a plan – a delicious, apple-flavored plan.

During the Q1 earnings call, Eric Gemme, Lassonde's CFO, revealed a strategic decision to increase DIO (Days Inventory Outstanding) by purchasing apple juice and concentrate in advance. This move, while temporarily impacting working capital, signals a deliberate attempt to leverage apple juice as a cost-effective alternative to orange juice.

Why Apples?

Apples offer several advantages in Lassonde's current context. First, they are a readily available and cost-stable commodity compared to oranges, which are facing global supply constraints and sustained demand. Second, apple juice blends well with other juices, offering a palatable alternative for consumers seeking 100% juice options. This aligns with Lassonde's commitment to innovation, as highlighted by Vince Timpano, the President and COO, who emphasized the company's efforts to reduce commodity exposure through diversified product offerings.

Hypothesis: The Apple-OJ Substitution

Lassonde's increased reliance on apple juice could be a strategic maneuver to create a more cost-flexible and consumer-friendly product portfolio. By strategically substituting a portion of orange juice with apple juice in blends, Lassonde can potentially achieve several objectives:

Mitigating Price Increases: Reducing the proportion of orange juice in blends helps absorb the impact of high orange juice prices, potentially limiting further price increases to consumers. Expanding Consumer Options: Apple juice blends provide consumers with more affordable 100% juice options, appealing to value-conscious shoppers in a challenging economic environment. Strengthening Profitability: By leveraging a cost-stable commodity like apple juice, Lassonde can stabilize gross margins and improve overall profitability.

The Numbers Game

While Lassonde hasn't explicitly quantified the planned apple-to-orange substitution, a few clues point to the potential impact. Firstly, Eric Gemme stated that the increased apple inventory is expected to normalize by the end of Q2, suggesting a temporary surge to facilitate product reformulation. Secondly, Vince Timpano highlighted new product innovations slated for launch in the second half of the year, likely featuring these apple-based blends.

Assuming a hypothetical scenario where Lassonde substitutes 10% of its orange juice volume with apple juice, the potential cost savings could be significant. With orange juice prices hovering around $3 per gallon and apple juice concentrate at approximately $1.50 per gallon (equivalent to a gallon of juice after reconstitution), Lassonde could realize substantial savings on raw material costs. These savings, combined with improved production efficiency and potentially stable pricing, could contribute to a significant boost in profitability.

Projected Cost Savings from Apple Juice Substitution

This chart illustrates potential cost savings if Lassonde substitutes 10% of its orange juice volume with apple juice.

Beyond the Bottom Line

Lassonde's strategic move with apples could have a ripple effect beyond just financial performance. It reflects a proactive approach to navigating volatile commodity markets and a commitment to offering consumers affordable and innovative choices. This consumer-centric strategy, coupled with Lassonde's relentless focus on operational efficiency and portfolio diversification, could position the company for continued growth and market leadership in the years to come.

"Fun Fact: Did you know that Lassonde's Oasis brand, renowned for its quirky and playful marketing, is Canada's most trusted juice brand for the second year in a row? It seems Canadians not only love their juice, but they also appreciate a brand that doesn't take itself too seriously."