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spk10: Greetings and welcome to the Saputo, Inc. Fiscal 2022 third quarter results. The presentation participants will be in a listen-only mode. Afterwards, we'll conduct a question-and-answer session. At the time, if you have a question, please press the 1 by the 4 on your telephone. If you need time to conference, you need to reach the operator. You may press the start or the zero. As a reminder, today's call has been recorded Thursday, February 10, 2022. Now, I would like to turn the conference over to Lino Saputo, Jr. Please go right ahead.
spk01: Thank you, Tommy. Thank you, Tommy. Good afternoon and welcome to our third quarter fiscal 2022 earnings call. Our speakers today will be Lino Saputo, Chair of the Board, President and Chief Executive Officer, and Maxime Therrien, Chief Financial Officer and Secretary. Before we begin, I'd like to remind you that this webcast and conference call are being recorded and the webcast will be posted on our website along with the third quarter investor presentation. Please also note that some of the statements provided during this call are forward-looking. Such statements are based on assumptions that are subject to risks and uncertainties. We refer to our cautionary statements regarding forward-looking information in our annual report, press releases and filings. Please treat any forward-looking information with caution as our actual results could differ materially. We do not accept any obligation to update this information except as required under securities legislation. I'll now hand it over to Lino.
spk04: Thank you, Nick, and good afternoon, everyone. Over the past quarter, our teams have demonstrated their agility once again, adapting quickly to changing market conditions. They've maintained a laser focus on our priorities and have taken decisive actions from an operational and customer service perspective. My ongoing gratitude goes to all Saputo employees for their outstanding efforts in a dynamic and competitive operating environment. Earlier today, we reported our third quarter results, which include strong revenue growth in all sectors and improved consolidated adjusted EBITDA when compared to last quarter. Our teams have been resilient in the face of numerous supply chain challenges, and we made good progress in addressing labour availability issues. We're taking several deliberate actions to improve productivity and investing in capacity, innovation and in our brands. In parallel, we've also worked to recover increasing costs through pricing initiatives in the current environment. We will be aggressive in managing inflation by driving price recovery activities. We took further steps during the third quarter to align our portfolio for stronger and more profitable growth in line with our strategic plan. Building on our CIFUDO promise, we achieved a number of milestones this past quarter. First, our Dairy Division USA announced a collaborative partnership with Hyperlite Energy. the developer of Hilux, a low-cost solar steam technology which aims to cost-effectively reduce greenhouse gas emissions in an industrial setting. This innovative renewable thermal energy system will be implemented at one of our facilities in California, allowing us to leverage the Hilux technology to help reduce the CO2 intensity of our operations. Second, Through a partnership with Light Source BP, we completed the construction of a five megawatt solar project to provide renewable power to our David Stowe Creamery in the UK. We expect this project to deliver 10% of the plant's annual electricity demand and enable us to reduce CO2 emissions by nearly 1,500 tons annually. Third, Our Europe sector partnered with flexible packaging supplier WePak UK in a project which resulted in 33% of virgin plastic being replaced with post-consumer recycled or PCR material for some of our block cheese packaging. The PCR packs are being gradually introduced in Marks and Spencer stores. and we expect to roll out PCR packaging to a wider range of products in the future as technology improves and the quantity of available materials increases. Finally, we maintained our B-score in our CDP climate disclosure above the industry average. While our operating environment remains complex, strong demand across all our segments The implementation of operational optimization activities and the impact of our pricing initiatives will be key drivers moving forward. We have strong and diversified cash generation capabilities, and we expect our capital allocation strategy to deliver long-term shareholder value. I'll now turn the call over to Max for the financial review before providing some additional comments. Max?
spk03: Okay, thank you, Lino, and good afternoon, everyone. As Lino mentioned earlier, there were a number of factors that influenced our results this quarter. First, we were encouraged to see that consumer demand for our product remained strong. However, we also continued to see inflation rise across a number of key inputs, and this dynamic environment created challenging conditions for the supply chain. To help managing increasing inflation, we're taking multiple pricing initiatives in all of our geographies, and these have been communicated to our customers. Now, here are some of the financial highlights of the quarter. Adjusted net earnings were $0.34 per share in the third quarter, compared to $0.56 when compared to last year. Adjusted EBITDA amounted to $322 million compared to the $431 million in the third quarter of last fiscal. Of note, adjusted EBITDA improved by 14% versus last quarter, despite deterioration in market condition in the U.S. Consolidated revenues improved $3.9 billion led by higher prices in all of our geographies and the contribution from acquisition completed earlier this year. Turning to the review of our business sector, starting with Canada, adjusted EBITDA for the third quarter of fiscal 22 total $121 million compared to the $118 million for the same quarter last fiscal. Higher input costs caused by inflationary pressure continue to have a non-favorable impact. This includes $5 million related to freight and logistical costs, which were offset by the positive effect of pricing initiatives. Furthermore, we were impacted by the floods in British Columbia, which required that we incurred incremental freight and logistical costs to serve our customers. In our U.S.A. sector, adjusted EBITDA for the third quarter of fiscal 22 total $83 million, down $88 million versus last year. We continue to face rising inflation where pricing initiatives lagged cost surge more so than historically. This includes an increase of $39 million related to freight and logistical costs. In Q3, pricing initiatives have not fully mitigated increasing input costs caused by inflation. As a result, we announced to our customers additional pricing initiatives in Q4. U.S. market factor resulted in a negative net impact of $40 million as compared to the same quarter last fiscal year. This was mostly the result of the unfavorable impact of the negative spread between the block price of cheese and the cost of milk. In the international sector, adjusted EBITDA for Q3 of fiscal 22 total $85 million, down $20 million when compared to last year. Supply chain challenges due to container and vessel availability issues and port inefficiencies negatively impacted export sales volume. However, the relation between the international cheese and dairy ingredient market price and the cost of milk had a positive impact due mostly to the rolling off from the unfavorable export contract pricing. In Europe, Adjusted EBITDA for Q3 of fiscal 22 amounted to $33 million, down $4 million when compared to last year. Although higher sales volume had a positive impact on efficiencies, lower international dairy ingredient market price for our product had an offsetting negative impact. The contribution of the Butte Island acquisition and the Wensleydale dairy product acquisition contributed positively and according to our expectations. Cash generated from operating activities amounted to $167 million for the quarter and $691 year-to-date. During the quarter, we recorded an impairment charge on intangible asset of $43 million after tax related mostly to our ERP project called Harmony. As part of the continuous evaluation of our overall activities, we decided to pause the project and delay the rollout in the Canadian Division for a minimum of three years. This will allow us to reallocate resources to support and execute on our growth initiative of our global strategic plan. We aim to shift some of our Harmony team members into positions that will help assist our U.S. business with its One USA journey and redeploy others into Canadian business activity, helping to fill existing vacancies. We have lofty ambition in regard to our global strategic plan, and we're confident that the execution of the initiative included in the plan will help each sector deliver on their respective objectives. We are still very much committed to implementing ERP within Canada. It's a matter of timing. So, this concludes my report. Lino, I'll turn the call over to you. Thank you, Max.
spk04: Like many other companies, we're facing rising inflation, notably in consumables, packaging, ingredients sourcing, and transportation and logistics. We are working closely with customers to manage inflation through responsible price increases. We believe we still have opportunities on this front, specifically in our US and Europe sectors, where we are still lagging cost increases. While we're working diligently to achieve optimal output, Labor availability continues to impact volume and our ability to achieve optimal efficiencies across our network. As such, we continue to take actions to address this, and we're seeing improvements. As an example, on the labor front, we've made our compensation packages more competitive. We're implementing a referral and retention bonus program, and we have ramped up advertising for job openings. To drive volume, we're optimizing our existing footprint, adding new capacity, adjusting our product mix by facility, and matching our portfolio more closely with consumer demand. We recognize how important service levels are to our customers, and we're committed to improving order fill rates and reliability of supply. As we look forward, improving our shipment volumes will be key to getting back on track with a large percentage of that coming from the U.S. sector. In addition to network optimization initiatives, we are accelerating some of the pillars of our strategic plan. As part of the optimize and enhance operations pillar, we announced several major capital investments and consolidation initiatives intended to enhance and streamline our manufacturing footprint in our U.S. and international sectors. In our U.S. sector, we plan to invest $169 million towards the modernization and expansion of our cheese manufacturing facilities in Wisconsin and California to support our growth plan in the retail cheese market segment. These initiatives will begin in the fourth quarter of fiscal 2022 and will take approximately 24 months to implement. With regards to streamlining we plan to consolidate our cut and wrap activities on the West Coast with the closure of our Bardsley Street, California facility. In the international sector, we will be streamlining operations at two manufacturing facilities in Australia. These measures will optimize our product portfolio, remove complexities, enhance capacities, and enable us to pursue operational improvement initiatives to deliver against our growth objectives. The investments and network optimization activities are consistent with our global strategic plan, designed to create shared value for all stakeholders. Looking now at some of our third quarter highlights. In Canada, our business delivered solid results despite supply chain cost impacts due to the flooding in British Columbia. Following the successful startup of our new state-of-the-art fluid milk facility in Port Coquitlam, production on our first plant-based line began in Q3. We continue to see a long runway for growth in dairy alternative beverages. We anticipate strong demand, and we believe this will be a solid contributor to growth. As part of our e-commerce strategy, we went live in September with Nibble, an innovative B2C platform. Nibble delivers curated specialty cheese boxes direct to consumers in Ontario and in Quebec. We made excellent progress during the quarter with our awareness and marketing campaigns and significantly grew our e-commerce volume. We are now actively working on expanding our distribution across Canada. Our performance in the U.S. improved compared to the second quarter despite a challenging operating environment, including labor availability and significant inflationary pressures. We pulled on our margin levers in the quarter, including price increases in several categories. Cost inflation nonetheless accelerated throughout the quarter. In response, we continue to implement additional price increases in the fourth quarter. Part of our strategy and our strategic plan in the U.S. includes our streamlining efforts, specifically a reduction in the number of SKUs across multiple product lines. Activities of this nature continued in the third quarter, allowing us to eliminate complexity and trade up lower valued categories. This should also lead to productivity and efficiency gains with fewer changeovers on our manufacturing lines. On U.S. labor, vacancy rates improved, although we're not yet at optimal levels. The success of our U.S. business remains a top priority. Results are still not where we want, but we are committed to streamlining operations and improving margins. We have more work to do to deliver the growth that the business is capable of. Our international sector significantly improved compared to the second quarter, notably due to a stronger performance from our dairy division, Australia. The sector benefited from increased pricing across most of the export ingredients category and improved supply chain conditions. In Europe, we had a good top line performance despite lower retail market sales volumes. Fourth quarter pricing initiatives to mitigate costs, which continue to rise, are underway, which should result in margin recovery opportunities in the coming quarters. Turning now to the fourth quarter outlook, we expect for cost inflation to remain at elevated levels, but we'll be partially upset by ongoing pricing initiatives in all geographies. We anticipate for the operating environment to continue to be faced with labor challenges and supply chain bottlenecks. Demand for our products are expected to remain elevated with continued strength in the retail and industrial market segments and a steady improvement in food service. Finally, in the U.S., we expect an improved supply-demand backdrop in mozzarella and for inventories to begin to revert to historical levels. In closing, while we're facing quarter-to-quarter headwinds, our priority is to keep a keen eye on the big picture. While the near-term headwinds are challenging, we are focused on executing our strategy to drive sustainable growth. Barring factors outside of our control, we're very confident in our strong value proposition as we move towards a more normalized situation. We are focused on being flexible and agile as we continue to navigate this dynamic environment. We are leveraging the momentum of our strategic plan initiatives to drive growth faster than the market and to strengthen our position as a high-quality, low-cost processor with a relentless focus on productivity and efficiency. Our resilience is a testament to our passionate team and the diversified and robust global platform we've built to our customer base and geographic presence. We are optimistic about the opportunities ahead, and we are building on our commitment to deliver sustainable growth and long-term value for our shareholders. Thank you for your time and for your support, and I will turn the call over to Tommy for questions.
spk10: Thank you very much. And if you'd like to register a question, please press the one followed by the four on your telephone. You will get a three-tone prompt to acknowledge your request. If your question has been answered, you'd like to draw your registration as the one followed by the three. Using a speakerphone, you'll set your hands up to enter your request. Once again, you'll see one four for any questions or comments. One moment, please, for our first question. And we'll get to our first question on the line from Michael Van Elst with TD Securities. Go right ahead.
spk07: Thank you. So I want to start off with your outlook statement because it isn't very clear to me what the net message is that you're trying to get across. You mentioned that the cost inflation will only be partially offset by price increase. So it sounds like profit's going to be down, but I'm not sure that that's what you really mean. So I was wondering, you know, what exactly you're trying to say for the next year or so and And, you know, at what point do you expect pricing to catch up to your inflation? And, you know, are you still chasing those, that higher inflation?
spk04: Michael Heaney Yeah, thank you, Michael. And I appreciate the opportunity to clarify. In this quarter, Q4, we are going to market with some very heavy cost recovery measures. In Q4, whether it's in Canada with the milk price increase, whether it's in the United States with inflationary cost recovery and in the UK, we will be at par with where inflation is by the end of Q4. So we are rolling it out in Q4. Not all of those increases will happen in Q4, but starting our Q1 next fiscal year, we will be aligned with inflation. And we will have had a cost recovery in all our geographies. And we also reserve the right to go back to market if inflation continues to grow. So we feel very good about the measures we've taken to date. Perhaps early on, we were not as proactive as we needed to be. By the end of Q4, we will be caught up and we will be much more proactive going into next fiscal year.
spk07: That's good to hear. I mean, I know in the past and last quarter you had thought that Q4 would mark the first quarter of growth. Is that still the case?
spk04: So Q4, I would say from an operational perspective, the answer is yes. The only element that is out of our control are market factors in the U.S., But from an operating perspective, in all countries, including the U.S., we have made substantial progress in terms of staffing, and we have made substantial progress in terms of our efficiencies. The only element that is out of our control is market factors. So I feel very good about where we are. Perhaps if I can take the opportunity to talk a little bit about beyond Q4 and into Q1, and this is sort of a reflection of three-quarters into a 16-quarter journey of our strat plan. If I look at our Canadian platform, Ken has been the most resilient platform we've had, partly related to product and channel diversification. We have our own DSC network in Canada, so we're less dependent on third-party transporters. We've got a stable commodity market, and when, of course, there is a milk price increase, we do pass those milk price increases on to our customers and on to consumers. And so in this... platform. Our numbers are ahead of last year. We will finish off ahead of last year, year to date, and we will continue to surpass our expectations in line with our year one of the strat plan. So going into year two, I'm very confident with the Canadian platform, and I'm very confident about achieving the strat plan numbers year two to year four. If I move on to the next division that has also been a staple in our profit drivers is Argentina. In Argentina, we have a very deep team that is used to dealing with domestic and global challenges. So this team knows how to pivot extremely well. Operationally, they're going to surpass last year's number, and they're in line with their first-year targets relative to the strat plan. Moving into year two to year four, no risk for us to achieve the strat plan number, so I feel very, very good about that platform. The U.K. was hampered early on by some byproduct contracts that we had and year-on-year comps on the retail side. Inflation did impact our margins, but our team has aggressively gone to market in Q4, so this quarter that we're in now, and has recovered some of the inflationary impact that they had on their margins. They also were impacted by some byproduct limitations relative to a contract that we had inherited that has since been resolved. So they should end the year in really good shape. and I have very little concern about them achieving their strat plan targets year two through year four. Again, a very experimented team, knows how to pull the levers that they need to pull, great brand recognition, so we are in control of our own destiny in the UK. If I look at Australia, If you recall, Michael, at the beginning of the fiscal year, Q1 and Q2, we were hampered by old contracts at low prices that we could not get containers for or could not get vessel availability. uh into q3 uh we were able to have access to more containers vessels were still challenged but now we were out of the old contracts and into the new pricing milk decline in the country uh is at risk was at risk And they had the ability both domestically and internationally to raise their prices. So the demand was robust and the pricing was robust. So the second half for Australia has been better than the first half, and we've got that momentum going into Q4. Now, the corrective measures that have been taken will not allow us to recapture some of the losses in the first half of the year. But moving into the second year of the strat plan, year two to year four, I feel very, very good about where we sit. And they will be very close to their numbers that they will hit, despite the fact that there is milk decline in the country. This team knows how to pivot and pivot well. And as we've seen in the press release, they know how to optimize their network, and they're not afraid to take decisions as they have to take. So I feel very good about Australia. So that leaves us with the U.S., our largest platform, biggest impact. And, of course, we were challenged with labor, inflation, supply chain, and, of course, market volatility. Market volatility still is a factor for us, but we're looking at ways at decommoditizing this platform. That's going to take a number of initiatives over a couple of years. So although we're not happy with the U.S. number, In year two, we will be showing progress on EBITDA, and I would say good progress on EBITDA. The team has taken some very good decisions. We've been able to mitigate some of the labor loss with some of the recruitment practices that we've put in place. where our staffing shortfall has come down. Omicron, unfortunately, in Q3 impacted us. Now, hopefully Omicron is behind us and we're getting back to a more normalized environment. So although year two will be challenged, I feel very, very good about year three and year four about the U.S. hitting their targets in the strat plan. So overall, you know, if you take a look at Some of the things that impacted us in this fiscal year, I would say they are moments in time. Some of the more structural challenges that are facing us in different geographies, we have found some workarounds, we have found some mitigating ways of being able to recapture EBITDA numbers, so EBITDA dollars, and margin. So moving forward, I feel much better about the way our industry looks. I feel much better about the way our company looks. And we are truly building strong platforms and strong foundations for us to have success as we move along in our four-year strat plan. So I hope, Michael, that answers your question.
spk07: I think it does, but let me just try to summarize briefly. would i be right in in summarizing that if i use fiscal 21 as the base because that was the base for your strat plan just you're you're on track and i'd assume that there is a little bit of growth i know you said it was more back-end weighted but you're looking for a bit of growth um right from the in every year so canada argentina uk sounds like you can grow off fiscal 21 because you'll be in line with year two australia you can maybe be close The U.S. is the one that's the challenge for fiscal 20.
spk04: That is accurate. That's exactly, that is accurate. And if I can say going into fiscal 23, so no concerns about Canada, Argentina, U.K., and Australia. Still some headwinds in fiscal 23 relative to the U.S.A. but certainly not a defeatist mentality in the U.S. In fact, we feel very good about the initiatives we're putting in place during fiscal 23 that will definitely benefit us in fiscal 24 and into fiscal 25. All right.
spk07: Thank you very much. I have more, but I'll get back into you.
spk04: All right. Thank you, Michael.
spk10: Thank you. We'll get to our next question on the line. from the line of Vishal Sridhar from National Bank Financial. Go right ahead.
spk09: Hi. Thanks for taking my question. I just wanted to follow up on that outlook commentary with respect to the U.S. And good to hear that there's traction in the majority of regions. But with respect to the U.S., What in particular is going to continue to pressure 2023 relative to the strat plan? What in your mind is going to pressure it?
spk04: So you're saying for fiscal 23, which is the upcoming fiscal year. So I would say, so if I can characterize the headwinds. Labor, we've got mitigating factors. Again, we're probably around 90% of the staffing that we need. So, you know, we're probably, we still have about a 10% shortfall. I suspect that that's going to improve through 2023. We've got some mitigating factors and some recruitment practices that are showing some very positive results for ourselves. On the inflationary side, with the fourth quarter price increases that we've rolled out, we are quite comfortable that we've caught up to inflation. If inflation continues to be a problem, we will go back to market with more price increases. So labour and inflation, I think we're taking a very proactive approach at resolving some of those issues. Supply chain is still an issue, specifically where we're dealing with third-party providers. We have some solutions there, but again, we're dependent on third-party providers here. And then, of course, the big caveat here is the market volatility. The market volatility would be specifically on the legacy cheese side of our business. On the legacy Saputo Dairy Foods part of the business, we don't have the same volatility. We have pricing protocol that is in place that allows us to capture the commodity price increases or decreases. So really the factors that are out of our control is the market volatility related to the cheese portion of our business in the U.S.,
spk09: as for the other factors uh we feel comfortable about uh some of the practices we put in place uh to mitigate some of the headwinds we have okay with respect to the transportation costs um you know fairly significant costs in the quarter and seems to be accelerating sequentially um those uh you know correctly if i got those uh details wrong um Aren't your price increases covering that transportation cost, or is that not covering it?
spk03: Yeah, Vishal, this is Max. The price increase intends to recover all the costs, which was not the case in the first half of this year. It got better in terms of cost recuperation during Q3. And while we're talking about our goals to recover inflationary costs in Q4, that would include the costs associated with the logistics and transport and freight.
spk09: Okay. So as we look to 2020 fiscal 23 in the U.S., the reason why you expressed uncertainty is because of market volatility predominantly. But those are factors that are not in your control, so it's possible that they could swing favorable as well. Is that correct?
spk04: That is correct. Again, we still have a shortfall. I want to be clear on this. Going into fiscal 23, we still have a shortfall in labour, and labour is going to have an impact on our ability to run our plants effectively and efficiently and our order fill rates. We're confident about the practices in place, but I think I stated that we've got still 10% of our positions that need to be filled. We're confident to get up to 95% within the fiscal year, but our expectation is that we still will have a shortfall of about 5%. which some of our strat plan projects are going to cover the balance of the 5% shortfall, but they may not be in place through the fiscal 23, but they will be in place for fiscal 24 and 25. And this is why the longer-term outlook is optimistic, while we still have some challenges to face in fiscal 23.
spk09: Okay. And maybe just an easy one here, or an easier one. On the ERP project that's deferred, So understand the rationale for deferring it, but what are the benefits that Saputo will be curtailing for the moment?
spk04: Yeah, so I'll tell you, like, the very short-term benefits is access to resources. So think about this, when we're rolling out a project as ambitious as an ERP conversion, We have to take the best elements within our platforms and put them, dedicate them to this project. Well, now by shutting down Harmony, that talent, those elements are coming back to the divisions from which they came. That would be Canada and the United States. So first and foremost, access to qualified talent. And then, of course, there's the financial metrics and impact that is going to be favorable, and I'll ask Max to talk about that.
spk03: well there's going to be uh of course a saving relative to capex for this particular project but we do intend as part of the straw plan you know to invest from a technology perspective uh our into our effort in the our usa one initiative so that's going to require some of those capex the amount is not as significant to readjust any of the the target 2.3 billion capital investment over the four-year period. You recall $2.3 billion, about half is relative to maintenance capital, and there's another half which is more strategic in nature. So the saving from a CAPEX perspective is not going to be moving the needle on that front. And relative to the OPEX, as mentioned, there's vacancies in our operation and our business right now, We want to maximize the use of our resources. So it was not like a saving per se. It's more of a focus on our growth objectives and initiatives.
spk10: Thank you. Thank you very much. We'll pursue our next question on the line. From the line, Mark Petrie with CIBC. Go right ahead.
spk05: Okay, good afternoon. I just wanted to circle back to the commodity and your outlook there. I mean, if I just sort of summarize, I guess, you know, milk production has moderated nicely, pricing has generally improved, but the spreads are a huge headwind as the block hasn't moved up as much as the other pieces in the equation. So how does that all kind of net out for you? And particularly when, you know, ingredients and WPC 80 prices, for instance, are so healthy.
spk03: um and and what is what do you think is needed for the block price to get higher is it simply a matter of cycling through the elevated inventories and and um yeah some comments there would be helpful okay so when heading into or within this q4 the spreads as it sits today are negative when we look at the q3 negative spread of 10 cents um Moving on to Q4, right now, should we close the quarter today, we would be in the negative 26 cents. So the spread has been deteriorating from Q3 to Q4. This quarter in Q3, the negative 10 was delta of 27 unfavorable versus the prior year. When we look at Q4, We are sitting right now at the negative 26 cents and last year was flat. So again, another negativity of about 26, 25, 27 cents. So similar delta versus the prior year. The major impact into this spread is the price of waste, the waste component of the mill cost. The whey prices are at record high, and for the most part so far in this quarter was above that $0.80 mark. It reached $0.85, which is record high. And that is the benefit from the whey higher pricing is not enough to absorb the impact of the cost of milk. So that's why overall it's penalizing us when we look at our overall US market factor combined.
spk04: And Mark, maybe just to answer part of your question there. So you asked the question, what will it take to get the block price higher? The block price is not the issue right now. We're sitting today at a block price of $1.90. That's on the higher end of historical averages. The real issue is the whey price. And why is the whey price as high as it is? A lot of manufacturers in the U.S. and around the world, as they're manufacturing cheese, decided that they wanted to get into higher valued solids, which is WPC 80% and WPI. That meant that some of those whey solids were diverted from whey drying facilities over to specialized protein ingredients. And so there is a shortfall of whey powder on the market. Some of that is being addressed by companies like ourselves, where when we have some flexibility to put whey into whey powder, we are doing that to the maximum ability that we have. We're hoping that there's a better balance between the demand of whey powder and the supply of whey powder. And we're hoping that the whey powder price will get back to historical levels within the $0.35, $0.40, $0.45 range. Might take a while before we get there, but that would be normalized whey powder prices. And if we would get there, then the milk price itself would be a lot more attractive for us. And so less relevance on the block price itself, more relevance on the whey powder price.
spk05: Okay, that's helpful. Appreciate it. Also, I guess just any comments that you can share just with regards to the review on Canada's allocation practices for TRQ?
spk04: under USMCA yeah so I think there was a lot more press coverage than actual change in the TRQ allocations look there's been this debate back and forth with every single one of the you know the the bilateral or multilateral trade agreements whether it's with Europe or whether it's the TPP, whether it's the USMCA, and the allocation of the TRQs. Fundamentally, each of the negotiating partners in these agreements want to make sure that the quotas that are allocated are actually being used. In our case, all of the quotas that we have received, we're using to 100%. In fact, we're even buying quotas on the market or borrowing quotas on the market to be able to bring in additional product. So for Saputo, really a non-event. Whether we have the quotas or not, we will service the needs that we have. So I think there was a lot more press on, you know, this USMCA agreement and the TRQ allocation, then there will be impact on the dairy industry.
spk05: Okay. Appreciate the comments. All the best.
spk10: Thank you very much. We've got our next question on the line from Lion Peter Scalar from BMO. Go right ahead.
spk06: Lino and Max, on this, you know, really negative cheese milk spread that you're experiencing in Q3 and Q4, Like that's kind of your gross profit on cheese production. So explain, you know, but obviously the U.S. division, although EBITDA is down a lot year over year, about half, it still generates, you know, $80 million of EBITDA. So how do you make money when your gross profit for cheese manufacturing is negative?
spk04: Yeah, so there are a number of levers there that help us generate money. the positive cash flows and positive EBITDA in the U.S. You know, I talked about the diversification of our U.S. platform with the acquisition of Morningstar back, I believe it was in 2013. There was a strategic reason for that. We wanted to decommoditize that business. And although in large part we are co-packing for others, those co-packing agreements are profitable and they do protect us from a commodity swing perspective. So the legacy SDF businesses are truly a blessing for us in these negative spread markets. Don't forget, Peter, we also have a retail business that is quite beneficial for us in the U.S. with number one brands that we bring to market, whether it's string cheese, blue cheese, or other types of cheeses. They help mitigate some of the losses that we're seeing in the commodity products, specifically in the industrial and food service channels. What we need to do and what is called for in our strat plan is further decommoditization of our U.S. platform, and that will be either through capex allocation or M&A activity.
spk06: Okay. The next question is, In Australia, you gave a good explanation of what's going on in Australia, but there is reduced milk supply, as you pointed out. If it's less milk, there's less cheese production. How does that all work? I would think that would be almost an insurmountable headwind for you. How do you deal with the fact that there's just less milk around?
spk04: Yeah, so milk has declined about 3.5%. It is substantial. but it's not detrimental to the overall network we have there. You know, I would say in the quarter we had on top of that COVID, so the operations and consumption were impacted. And we had to deal with some of the impacts related to the vessel shortages. So all of those elements impacted us in the quarter, and yet we still had a decent result in Q3. So moving forward, the corrective measures have been taken. The network optimization still is top of mind for us. uh and and we still do have a good sizable amount of uh milk solids that we're passing through our facilities uh so the the plants that are running full will continue to run full the plants that are running well below their capacity utilization at some point we'd have to find some corrective measures there and and richard wallace and the team are all over that We also have the benefit in Australia to sell not just into the domestic market but into the export market and volumes right now are very good and pricing right now is robust. Pulling all those levers, the Australian platform still is a key strategic platform for us, and there still is some more upside there for us to materialize. So recovery began in the second half. of this fiscal year, and it will continue into year two through year four of our strat plan. So I feel very good about our Australian division, even though milk has declined about 3.5%. Okay.
spk06: And then lastly, Lino, with the management restructuring you announced a short time ago, there's no chief operating officer at Saputo. I think you've eliminated that level of management, so maybe you could explain Why you eliminated that level of the structure and who is fulfilling that role? Is that you who's stepping in and assuming some of the tasks that were undertaken by your previous COO?
spk04: Yeah, so Peter, it is a more streamlined management structure. I am taking on those functions. I will clarify that there's no longer one COO, but there are two COOs, and the two COOs are Carl Kalica, responsible for North America, and Leanne Cutts, responsible for the rest of the world, which will include Argentina, Australia, and the U.K., Both Carl and Leanne report into me now. I feel very good about being closer to the decision-makers within all our platforms and all our geographies. I've done this before. I can do it again. I'm happy to be in this seat, and I have found new energy, if I can say that.
spk06: And was this in any way motivated by – you know, the downturn that the company experienced, you know, really starting Q4 last year and as we've run through the quarters of this year?
spk04: Yes, Peter. I'm not going to hide the fact And perhaps I would even say, if I can be so bold, in the last five years, I think that we have not delivered on the expectations we had of ourselves and that the market has had of us. So let's be clear, it is partially results-oriented. It is partially a result. of, you know, being in an environment where we know we can do better and we should do better. And so, yes, it was partially motivated by our results.
spk10: Yeah.
spk06: Okay, that's all I have.
spk04: Thank you.
spk10: Thank you very much. We'll get to our next question on the line from Irene Nattel with RBC Capital Markets. Go right ahead.
spk00: Thanks, and good afternoon, everyone. Thank you for the thorough rundown of the business. I have a question. You mentioned M&A a minute ago, Lino. With everything that you have going on in the businesses right now, how are you viewing M&A at this point in time?
spk04: Yeah, so M&A has been really a catalyst for Saputo over the course of the last 25 years. And it will continue to be part of our strategy for growth moving forward. But I will say right now our primary focus is the strat plan. Our primary focus is delivering on the deliverables for each of the divisions as they stand right now. And I'm going to take this opportunity, Irene, if you don't mind, to comment on some of the rumors that are out there because I think it's important to clarify our orientation. We definitely want to decommoditize our business. We're looking for businesses that are EBITDA margin focused if we're going to make an acquisition. We're looking for valued categories. And sometimes, unfortunately, we get thrown into all kinds of deals that are happening in the world markets because most companies Sellers and buyers know that we are a consolidator in the industry and sometimes that is justified and sometimes it is not justified. But right now, I will tell you that we are focused on the strat plan. If we are going to make a deal, it is going to lift EBITDA and lift margins because that's what our focus is right now. And I wouldn't believe all of the press clippings that are coming out relative to Saputo being involved in certain transactions. Without naming names, I think you could read between the lines.
spk00: Absolutely. That's very helpful. Thank you, Lino.
spk10: Thank you very much. Once again, on the phone, if you'd like to ask a question, you may do so now by pressing the 1-4 on your telephone. We do have another follow-up question from the line of Michael Van Elst with TD Securities. Go right ahead.
spk07: Thank you. Can you give us an update on where you actually are on your fill rates in the U.S.? You told us historically I think you're normally 99.8 and you're in the 80s a few quarters back. Where do you sit now?
spk04: Yeah, so last quarter, Michael, we were around 91%, 92% order fill rate. We have inched up to 93%, 94%. Our target... is to get back to our historical levels. We will get there as we get to better staffing in our plants. Now, I can tell you within some of our facilities, we are at 100 percent. Other facilities might be in the 60, 70 percent, so we average out to around 93, 94. We know exactly where we're missing the talent, where we're missing the people. We've got great plans in place to fill those positions, but we have a keen desire to get back to our 98%, 99% order fill rate, and we're not quite there yet. We're 93%, 94%.
spk07: Now, is that going to happen through hiring alone, or do you need to get to the CapEx in fiscal 24th?
spk04: A bit of both. So we think we can get part of the way there, maybe two-thirds of the way there with staffing. The balance one-third will come through CAPEX allocation and automation and just some realignment of our network and moving people from facility to facility to accommodate the shortfalls we have.
spk07: Okay, thank you. And then the second question is in the the update that you provided a couple of days ago to your strat plan. You talked about $112 million improvement in EBITDA, which is pretty meaningful, particularly when you compare it to the CapEx number that was provided in there, which was 169 million. I don't know if there's more CapEx than what was discussed, but that's a huge return on investment. How do you deliver that kind of return?
spk03: Just to clarify, the numbers are accurate. It's part of the 1.1, 1.2 billion that is referring to our strategic initiative. it is a critical part of our network optimization pillar of the strat plan we called it out that this is like a big pillar for us particularly in the us so the whole piece around um modernizing uh in in doing more with less in our us is a key part of this uh this is this initiative and this announcement um Yeah, that's what it is. And we will get the benefit, some in F23, some in F24, and also in F25, where we would reach the full benefit.
spk04: And, Michael, I will add to that that this is just the beginning of announcements that we will make relative to investments, return on the investments. And the impact that that will have on each of our geographies that are affected by those investments. So more to come on that front. But our ideas are very clear. You know, as I said earlier, we're in our third quarter of a 16-quarter journey. Taking a step back, knowing what we know today, Omicron or no Omicron, virus or no virus, market volatility or no market volatility, we still have our foot on the gas relative to achieving the numbers on our strat plan. And we know what is going to get us there.
spk07: If you can get a 65% return on capital, just spend as much as you want. Thanks a lot.
spk04: Well, we're glad we have your support there, Michael.
spk10: Thank you very much. We'll get to our next question on the line from Chris Lee with Desjardins Securities. Go right ahead.
spk08: Good afternoon. Thanks for squeezing me in. Lino, just wondering if you can provide a quick update on where you're at in terms of your dairy alternative chiefs. rollout in the U.S.?
spk04: Chris, I'm glad you asked that question because we do have some really exciting news that our teams are sharing with us. So on the U.S. retail cheese, we were launching in March six SKUs under the Vitalite brand. And we have 1,000 points of distribution that have been secured. So the marketing campaigns are going to begin in conjunction with our retail launch. So exciting times to come on the retail side of the plant-based cheese for our U.S. platform. In Canada, we also have six industries. SKUs under the Vitalite brand that we're going to be launching. We've secured now 500 points of distribution. And again, also marketing campaigns to begin as well in conjunction with a retail launch. And that should be in May 2022. So that's the retail end of it. On the food service side, we have launched the Vitalite mozzarella dairy alternative. We are seeing growth week by week relative to some of the stores that we're going to and some of the new locations that we're gaining. The presentations continue, and I can tell you that the feedback that we have is that our product performs much better than anything else that's out there. So there is a lot of progress that is coming. We feel very good about swapping cheese I guess traditional cheese volume for plant-based cheese volume, and the margins are very, very healthy. On the beverage side, POCO now is commissioned, and we are processing almond and oat in POCO. We've secured some major private label contracts as well as co-manufacturing contracts that are to begin this quarter in Q4. And Argentina continues to see growth in their plant-based beverage offering. So also on the beverage side, the strategy that we laid out for ourselves in co-packing and co-manufacturing are starting to hit some great numbers.
spk08: Okay, that's very helpful. And maybe a follow-up on that is when do you expect plant-based to start to have a more meaningful net EBITDA contribution? Is it later this year or do we have to wait until the following year?
spk04: Well, I'll tell you that the Butte Island acquisition that we made is already contributing positive EBITDA for us. Now, relative to the size of the UK platform, perhaps you may say it's insignificant, but one of the things that we're looking at, especially on the fluid side, is we're targeting EBITDA. one liter of production of plant-based fluid for every one liter of fluid milk that is declining. And that's not insignificant. You know, if you take a look at reduction in fluid milk consumption at the beginning of the pandemic, I think there was a little bit of growth in fluid milk. But in year two of the pandemic, the historical levels of decline have continued. I think we're closer to 2% decline in milk consumption, fluid milk consumption. So for every one liter of milk decline, we want to gain one liter of plant-based beverage. And I think that that's going to help our fluid operations maintain volume where they can have overhead absorption and also have a positive EBITDA generation. So irrespective of whether that's a large volume or a small volume, it is substantial in our strategy at mitigating some of the dairy losses.
spk08: Okay, that's very helpful. And maybe just a quick one on the price increases. So that looks like you have put through some fairly meaningful price increases in Q4. Is there a risk to the volume or not really because price elasticity is not really high? I'm just curious to see if there's risk that the consumer might trade on or reduce their consumption on the higher prices.
spk04: Yeah, so far we're not seeing any risk to overall dairy volumes, other than the fluid that I just spoke about. Perhaps what remains to be seen is the milk price increase in Canada. I think it's like 8.4%. I would suspect that there is going to be bigger declines in fluid milk consumption. and perhaps stabilization of cheese consumption, but it remains to be seen. We'll see where things land there, but so far we have not seen any reduction in overall dairy consumption relative to its growth.
spk08: Great. And then my last question, just going back to M&A, if something that's big or attractive does come up, can you remind us what is your current balance sheet flexibility? that capacity do you have?
spk03: Chris, our ability to materialize acquisition is not the same as it was like some time ago. Our focus from a cash allocation perspective is certainly around the CapEx allocation. We do believe that this is going to derive a lot of benefit to our bottom line. Certainly you want to protect the dividend. and focusing on debt reimbursement. All to say that the capacity to materialize acquisition is nowhere close to where it was, but should we have an opportunity that would certainly lift our profitability, improve our cash flow, raise our EBITDA, then we'll have to look at it.
spk08: Great. That makes sense, and best of luck. Thank you very much.
spk10: And Mr. Estrella, there's no further questions at this time. I'll turn the call back to you for any closing remarks.
spk01: Thank you, Tommy. So we thank you for taking part in the call and webcast. Please note that our fiscal fourth quarter and full year 2022 results will be held on June 9th, 2022. Have a nice day.
spk10: Thank you very much. And this concludes the call for today. We thank you for your participation. I ask you to disconnect your lines. Have a good day, everyone.
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