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spk01: Greetings and welcome to the Saputo, Inc. First Quarter Fiscal 2023 Results Conference Call. The presentation will be in a listen-only mode. Afterwards, we'll conduct a question-and-answer session. At that time, if you have a question, just press the 1 by the 4 on your telephone. If at any time of the conference you reach an operator, you can press the star followed by the 0. As a reminder, today's call is being recorded Thursday, August 4, 2022. I would now like to turn the conference over to Lino Saputo, Jr. Please go right ahead.
spk09: Thank you, Tommy.
spk05: Good afternoon and welcome to our first quarter fiscal 2023 earnings column. Our speakers today will be Lino Saputo, Chair of the Board, President and Chief Executive Officer, and Maxime Terrien, Chief Financial Officer and Secretary. For the question and answer session, Lino and Maxime will be supported by Carl Kolitsa, President and Chief Operating Officer, North America, and Leanne Cutts, President and Chief Operating Officer, International and Europe. Before we begin, I'd like to remind you that this webcast and conference call are being recorded. The webcast will be posted on our website, along with the first 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.
spk09: Thank you, Nick, and good afternoon, everyone. This morning we reported a strong first quarter with adjusted EBITDA of $347 million on revenues of $4.3 billion. Our improved results reflect a solid performance in our Canadian and international sectors, as well as a recovery in our U.S. business. Strong pricing momentum across all sectors and higher international cheese and dairy ingredient market prices contributed favorably to our strong performance. Our teams continue to execute well while navigating the ongoing challenges, notably inflation. That said, we are doubling our efforts to mitigate cost. In addition to the carryover impact from last year's pricing actions, each sector implemented additional price increases in June and in July. We are confident that these actions combined with our cost efficiency and productivity initiative will help us to effectively manage inflation. We are monitoring consumer price elasticity but our sales volumes have remained stable year to date, despite recent price increases, thanks to our broad and diverse portfolio. We are focused on building and maintaining our strong brand. We continued these efforts in the first quarter through product innovation and by growing our most popular brand. Overall, consumer demand has remained good. Our service levels are slowly recovering, supported by successful hiring initiatives enabling us to better meet this demand. Increasing production and filling existing capacity remains a critical priority, especially in the US. We are pulling multiple levers to drive sequential progress, and I'm confident that we're looking towards further volume performance improvement throughout the year. While the external environment has required a heightened focus on execution, It has not limited our ability to also advance our key strategic priorities. We are moving ahead with the implementation of our global strategic plan roadmap, managing our portfolio to maximize value creation, drive organic growth, and investing for the future. We are prioritizing optimization and productivity improvement projects designed to operate with fewer, more efficient facilities. Yesterday, we announced our plans to further streamline our manufacturing footprint in the U.S. to increase efficiency and productivity and provide a more sustainable cost base going forward. The announcement marks the continuation of our network optimization program that plays an integral role in our broader strategy to enhance operations and accelerate organic growth across our platform. Plans include converting our mozzarella cheese manufacturing facility in Reedsburg, Wisconsin, for a goat cheese manufacturing plant to increase capacity, improve productivity, and expand our position in the growing specialty cheese category. In line with our strategy to modernize our mozzarella operations, the current cheese manufacturing from this facility will be transferred to other existing facilities in the US, thereby increasing capacity utilization improving operational efficiencies and reducing costs. Finally, we will seize operations at our Gold Sheets production facility in Belmont, Wisconsin. Belmont employees have made commendable efforts over the years to keep our facility operating efficiently, and I want to thank all affected employees for the hard work and dedication. These initiatives will begin in the current quarter and are expected to take up to 18 months to implement. This more focused footprint aims to strengthen the competitiveness and long-term performance of our USGs operation. We remain equally focused on the Saputo Promise, our ESG strategy. This morning we released our annual Saputo Promise report in which we share the progress we've made on our ambitious ESG goals and introduced our new three-year plan. The report outlines our long-term commitments associated with each of our seven strategic pillars, which includes food quality and safety, our people, business ethics, responsible sourcing, environment, nutrition and healthy living, and finally community. Focusing on key areas where we look to create meaningful, measurable change over the next decade, Highlights and achievements from this year's report include an 8% reduction in CO2 intensity and a 2% reduction in energy intensity versus our fiscal 20 baseline. Community program investment efforts totaling $16 million and 1.7 million kilos of donated food reducing our food waste and reducing CO2 intensity by 8,000 tons. While we still have much to do to achieve our commitment, I'm proud of the work we've done so far. Our progress demonstrates our commitment to doing what is right for the environment and for communities in alignment with our values. We are forging ahead while building on a long history of doing good and with a sense of pride focused on further integrating Saputo Promise initiatives across our business. I will now turn the call over to Max for the financial review before providing concluding remarks.
spk11: Thank you, Lino, and good afternoon, everyone. I'll start with our consolidated financial performance, and I will then move on to sector review. Adjusted net earnings were $0.39 per share in the first quarter compared to $0.30 for the same quarter last year. Consolidated revenues were $4.3 billion, a 24% increase when compared the last year. Revenues increased due to higher domestic selling prices in line with the higher cost of milk, together with pricing initiatives cemented in all of our sectors mitigate increasing input costs. Higher international cheese and dairy ingredient market prices was also favorable to revenues. Just a little bit amounted to $347 million compared to $290 million in the first quarter last year. Our improved adjusted EBITDA was driven by previously announced pricing initiative, mitigate higher input and logistical costs, and the favorable impact from the relation between international cheese and dairy ingredient market prices and the cost of milk as raw material. These factors were partially offset by labor shortages in some of our facilities and supply chain disruption, which put pressure on our ability to supply ongoing demand, which also negatively impacted efficiencies and the absorption of the cost. U.S. market factor had a negative effect of $7 million as compared to the same quarter last fiscal year, mainly due to the effect of the negative spread. Net cash generated from operating activities amounted to $127 million, which was comparatively stable to last year. I'll now take you to key highlights by segment, starting with Canada. Revenues for the first quarter increased 11% when compared to the same quarter last fiscal year. Revenue increased due to a higher selling prices in connection with the higher cost of milk and pricing initiative implemented to mitigate higher input costs. Sales volume were lower in the retail market segment, mainly due to fluid milk sales volume, partially offset by a rebound in sales volume in the food service market segment, mainly in the cheese category, which both returning closer to their pre-pandemic levels. Adjusted EBITDA for the first quarter totaled $132 million when compared to the $113 for the same quarter last fiscal year as the business continues to build on the momentum from recent quarters. Pricing initiatives, favorable product mix, and lower SG&E costs stemming from our cost containment initiative also contributed to improved results. In our U.S. sector, Revenues were 36% higher. Revenue increased due to pricing initiative implemented to mitigate increasing input costs and due to the combined effect of the higher average block market price for cheese and of the higher average butter market price. Sales volume increased mainly due to the contribution from recent acquisition, while consumer demand for mozzarella continued to be stable. but still subject to competitive market conditions. Just a dividend in the US totaled $97 million. We benefited from previously announced pricing initiative, mitigate higher input and logistical costs. Continue to face challenges with labor shortages in some of our facilities and supply chain disruption, we continued to put pressure on our ability to supply ongoing demand, which negatively impact efficiency. Negative net impact of $7 million of U.S. market factor as compared to the same quarter last fiscal year was mostly as a result of the unfavorable impact from the negative spread between the block price of cheese and the cost of milk. That said, continue. expect volatility in the U.S. moving forward until overall markets stabilize. In the international sectors, revenues for the first quarter increased by 22% when compared to the last fiscal year, while adjusted EBITDA totaled $82 million, a $37 million increase when compared to the same quarter. The improvement in adjusted EBITDA was driven by higher sales volume in export and domestic market in addition to the relation between international cheese and dairy ingredient market prices and the cost of milk as well in our export market. Reduced milk availability in Australia negatively impacted efficiencies and the absorption of our fixed costs in our dairy division in Australia while Higher milk intake in the dairy division in Argentina had a positive impact. In Europe, revenues were 16% higher when compared to the same quarter last fiscal year. Revenue increase due to the pricing initiative implemented mitigate higher cost of milk and other input cost increases in addition to the contribution of the Butte Islands and the Wensleydale dairy product acquisition. Overall sales volume were stable as compared to the same quarter last year. Retail market segment sales volume decreased, while industrial market segment sales volume increased, representing an unfavorable mix from a profitability standpoint. Our pricing initiative mitigated higher cost of milk as a material and other input cost increases in line with inflation and increased . Adjusted EBITDA in Europe for Q1 amounted to $36 million, which was in line with the same quarter . This concludes my financial review. With that, I'll turn the call back to Leo.
spk09: Thank you, Max. So we're off to a good start to this fiscal year. Execution has improved, and we're working closely with our customers to effectively and thoughtfully deploy inflation-driven price increases. While we expect the environment to remain dynamic, we are confident that we are in a much better position to navigate the volatility moving forward. Canada remains our strongest and most consistent performer. In Q1, we delivered solid year-over-year sequential growth, driven by a strong recovery in food service. efficiency gains from prior year initiatives, and from the flow through of previously announced pricing. On the commercial side, we are leveraging our balanced portfolio of branded and private label products. Canada also benefited from a healthy mix of strong, well-established food service and retail customers. Both are providing to be significant drivers to the sector's performance, especially in the current environment. We continue to see recovery in the food service segment with full-service restaurants leading the growth, as post-COVID demand remains strong while quick-service restaurants perform well. The recovery and strength in food service allowed us to further improve our product mix with more cheese sales volumes versus fluid milk. During the quarter, we also secured some wins in the plant-based beverage category and ramped up marketing efforts around the Vitalite brand expanding distribution on our newly launched retail lineup and growing our food service business. In the U.S., we began to see a recovery in profitability in Q1, driven mostly by strong pricing contributions. In addition to announced price increases, we are making good progress shifting towards more dynamic pricing protocols to be more agile in response to market conditions. This will support sequential improvement in operating margins throughout the year. Although our volumes improved, we continue to be impacted by labor and supply chain challenges. Nevertheless, we are beginning to see some signs of stability on turnover and absenteeism, which is translating into increasing production. We are still below our goal of 99% order fill rate, but we have seen gradual progress throughout the quarter, notably in our cheese manufacturing operations. Still, customer demand continues to outpace our ability to supply products. To better meet this demand and realize our volume goals, we must increase our staffing levels across the business. As a result, we are taking further targeted actions to achieve this goal. We are fully committed to improving profitability in the U.S. business despite a persistently challenging operating environment. In the international sector, we had a good performance, and global commodity prices reflected strong market trends. In Argentina, we benefited from strong international cheese and dairy ingredient market prices, ongoing price increases, and higher shipment volumes following our mozzarella capacity expansion. Recently, the division surpassed the 3.7 million liters of average milk per day, reinforcing our leadership position as a top dairy processor in Argentina. I am incredibly proud to see the growth and expansion of the business, and today represents an important milestone towards our next era of growth. In Australia, we had good pricing momentum in domestic and export markets, but lower milk intake in the quarter continued to impact efficiency. Managing our milk intake is our top priority for this business, As part of our global strategic plan, we are continuously reevaluating our Australian network to make sure that we have the right infrastructure in place for the total milk that we have today and that we anticipate over the next few years. We're identifying new opportunities to streamline the operating model, and we are confident that our diversified platform will further support earnings as we assess our footprint. In Europe, although stable, Our retail volumes were slightly below our expectations, but we expect to see some momentum in the coming quarters from new products and packaging innovation. We also expect the relaunch of the Cathedral City brand to support volume growth with a compelling new global campaign highlighting the brand's commitment to the cheesemaking craft and becoming part of everyone's everyday life. In closing, we remain confident in our plans and full year outlook. We're monitoring the challenges of supply chain, labor, and inflationary pressures very, very closely. We have strong momentum going into the balance of the year. We are focused on implementing our most recent pricing action, productivity improvement, and cost containment initiatives across all our sectors. Given our first quarter results, we expect continued recovery this fiscal year, with progress both on margins and adjusted EBITDA. As we move forward, we will focus on the things we can control, maintaining our position as a supplier of choice with winning customers, managing our costs, generating strong cash flow from operations, and operating our plants as efficiently as possible. Although we expect the operating environment to remain volatile, we will continue to deploy our time and our resources to our strategic plan initiatives to extract the full potential of our business. Thank you for your time and for your support. I will now turn the call over to Tommy for questions. Tommy?
spk01: Thank you very much. And if you'd like to register a question, please press the 1 followed by the 4 on your telephone. You are a three-tone prompt at NOSH request. If your question has been answered, I'd like to draw your registration as the 1 followed by the 3. One moment, please, for our first question. And we'll get to our first question on the line from Mark Petrie with CIBC. Go right ahead.
spk10: Yeah, thanks. Good afternoon. I guess the Canadian volume trends were somewhat as expected with retail down and food service up, but can you just talk about your market share today versus, I guess, probably a year ago and also pre-pandemic, just to give us some sense of the of the progress and evolution there?
spk09: Yeah, I'll have Carl answer that question.
spk06: Yes, thank you for the question. And I think I'll answer it in sort of two different categories, cheese and milk. From a fluid milk perspective, the share is basically has not moved. So we haven't lost ground, we haven't gained ground on that side of the business. Although the sector itself continues to decline at, at about 2% per year. From a cheese perspective, we have made some gains, specifically in the retail side with our Armstrong branded products, which is well accepted, well received by the marketplace with the various innovation, as well as our ability to supply the demand in that market space. So the Canadian team has done an exceptional job of bringing that to market, both from a brand support as well as the execution side of the manufacturing.
spk10: And how about in food service?
spk06: From a food service perspective, once again, I'll say that leading, you know, coming out of what I'll call the pandemic, our team did an exceptional job at supplying the market, and along the way we have gained share in this space as well, and we continue to perform quite well.
spk10: Okay, thanks. And could you also give an update just in terms of, the labor picture in the U S I mean, as you've, as you've highlighted a couple of quarters in a row now, uh, your service levels are improving, but could you help us sort of get a sense of where you're at in, in the spectrum of that improvement and what are, what your expectations are for, you know, say by the end of this year?
spk06: Yes. Uh, so we have made some, some improvements and we do make improvements week to week on the net number of people. that join our team. At this stage, what I would say is on the bright side, we are getting people coming to our team, so joining the team. The question now is ensuring that we can retain them. So we have a number of different initiatives that have been put forth to ensure that, first and foremost, the candidates understand very clearly what the world of manufacturing is about so that the right candidates do apply. The time that we do spend training them and onboarding them are of value and they can contribute more quickly. Having said all of that, we have adjusted some of our practices at the onboarding and they are beginning to deliver the results as we can see as our overall fill rate levels also are increasing. So I'm optimistic that by the end of the fiscal year, we will be in a position where staffing is going to be less of our daily focus, because right now it is one of the number one priorities that we have. So incrementally, quarter to quarter, we should see that continue to contribute well to our bottom line as our fill rates increase.
spk10: Okay, thanks. And then just last one, I guess. With regards to the progress on the capital spending plans, I know you've announced a select number of projects. First, is there any net impact to the relative capacity for goat cheese in the U.S. as a result of the changes you announced yesterday? And then I guess my main question, I think we're up to just over $200 million of the $550 million of capital that you stated would be above and beyond sort of the normal run rate. Any commentary about the balance and where and when that will be deployed?
spk09: Yeah, so I'm going to ask Max to talk about the macro picture on capital spend. And then specific to your question, I'll have Carl answer the gold question.
spk11: So, Mark, relative to the overall spend, our commitment around $2.3 billion over the duration of the strapland remains. We certainly see some costs elevated relative to furniture, the material, the equipment. But we are sticking to the investment that we committed. The timing of the spend varies with our plans from sector to sector. The money will be spent. We're aligned with the global picture that we laid out and we're just executing on our
spk06: So if that answers Mark's question, maybe I'll answer the question around capacity for goat. At the end of the day, the change that's being proposed here, or sorry, that is being executed, is going to see the net capacity for goat cheese make increase, both the goat cheese curd as well as our ability to package more effectively and more efficiently the different varieties that the market continues to demand of us. and for our innovation agenda. So there'll be a net increase in the capacity to manufacture and to package goat cheese.
spk09: What might be lost in the release then is the impact also of mozzarella and how that's going to positively impact the other facilities that are going to be inheriting this volume. Can you speak to that, please?
spk06: Yes. So part of the objective of our network optimization was also to maximize the use of the assets and tools that we have in various facilities. We have made investments over the years in other mozzarella or pasta filada locations. And with the repurposing of our Reedsburg site, we're going to see that volume transferred over to existing mozzarella facilities, further augmenting the capacity utilization that is currently available.
spk10: Yeah, understood. Appreciate all the comments and all the best. Thank you, Mark.
spk01: Thank you. We'll get to our next question on the line from Vishal Sridhar with National Bank Financial. Go right ahead.
spk08: Hi. Thanks for taking my questions. With respect to the U.S. and the sequential improvement that we saw, and I know there's some seasonality there, but I was just hoping you could give us what the biggest driver of the improvement was, was it pricing or the labor situation? Is there anything else that you'd point to?
spk06: Go ahead, Carl. Yeah, so it's a combination of things. I would say certainly the pricing action that we've taken has helped us mitigate the inflationary pressures that we have been absorbing for several months and years. So that had definitely a positive contribution. But beyond that, and I think you heard Max share that the market factors were negative. Despite those negative market factors, the manufacturing side perform more efficiently. Some of that is absolutely related to the efforts and the gains that we have made in labor. Some of it is also associated to not just the headcount in labor, but also the, I'll say the experience and the maturity of our new teammates and employees in the plants who are better understanding the roles and responsibilities and how to affect change, positive change on a daily basis.
spk08: Okay, thank you. And with respect to the pricing actions, should we expect more benefit to flow through next quarter and then you'll be caught up on a run rate to where inflation currently is? Or is it going to continue to roll out through the fiscal year?
spk06: The most recent announcement to our customers was for a July 4th price increase. And that has been, I'll say, trickling through recently. our network with the full effect happening sometime in August. And fundamentally, you know, we will continue to monitor very closely the effects of our inflation on our input costs. And we will go back to the market if need be. There are signs of some relief. Inflationary pressures continue to occur, but at a different rate. I think that slope, if we were to look at it from that perspective, is beginning to soften a little bit. So we are optimistic that the actions that we have taken might be enough for us here in the near term.
spk08: Okay. And several quarters ago, Lino gave us kind of an overview of region by region of how he thought about the business and where each business was with respect to plan. I think the U.S. was singled out as one of the businesses with the most opportunity. So as you look at the U.S. today and you look at your business, your fiscal 2025 goal of where the U S should go. Can you maybe give me a rank order of, of the, of the things that need to happen to get the U S to where it needs to be. So pricing is one, you know, the staffing is another, but I was hoping to get a better understanding of the magnitude of, of what needs to change in order to get that business where it is. You know, the other is obviously the efficiency initiatives being implemented.
spk09: Yeah. So we shall, I'll take this opportunity to talk about, uh, some of the good-performing platforms that we have. And then I'm going to ask Leanne and Carl to speak to those two platforms that were hampered either by labor inflation, logistics, and or milk. Let me start off by saying that we're in year two of our four-year strat plan. I don't want to minimize the effort that the Canadian folks are putting into driving their numbers. But Canada is well on its way to achieve its objectives relative to the strat plan and very much in line and perhaps beyond what we have as our internal target numbers that they're hitting. So, again, I don't want to minimize the amount of effort that's being put in. But I don't have a high level of concern for Canada achieving this year's budget, as well as what we have planned for year two, year three, and year four of the Strat plan. I would say the same thing for our Argentinian platform. The folks in Argentina, as I've mentioned before on previous calls, volatility is part of their operating environment pre-pandemic. And so they have found... ways to mitigate any of the headwinds, any of the challenges that they've had. And they have actually been performing extremely well relative to budgets and relative to the strat plan. So very little concern about them hitting their numbers into year three and year four of the strat plan. So we have two platforms that we feel very, very confident about the achievement of their targets and their results in the short term, medium term, and the longer term for the strat plan. The platforms that had some challenges would include the UK, Australia, and the US. UK, for all intents and purposes, I think they've come over the challenges that they have seen early on in the pandemic. They have gone to market proactively to raise prices. We were first going to market to raise prices. That had impacted volumes early on, but now we're starting to see our competition follow our lead with price increases. So we are well ahead of the curve, and I feel quite good about the balance of this fiscal year, and I also feel very, very good about the U.K. platform achieving their fiscal goals strat plan objectives for year three and year four. The two divisions that required a lot more focus and perhaps different strategies would be Australia and the United States. And I will ask Leanne to go into specific initiatives of what we're doing to mitigate some of the challenges we have namely the milk environment, as well as inflationary cost increases, including raw material price increases. So Leanne, why don't you start us off on that?
spk02: Yes, thank you, Lino. Vishal, as you know, for Australia, milk price is at record levels. Now, we have already in this new milk season that began the 1st of July this year, the next 12 months, we've already successfully passed on a substantial portion of the milk cost increase, and we will continue to increase prices as needed to recover those input costs. At the same time, food service demand continues to rebound in Australia after COVID and domestic retail performance actually very solid. We've also got an ongoing pipeline of a number of new products across the portfolio. And as you know, we have a very diverse portfolio within the Australian business. Now, as part of our four-year plan, clearly we will need to review our overall footprint. It's clear that the milk pool has declined and therefore we will need to ensure that our network going forward absolutely reflects this reality. Now, critically, we have that flexibility to adjust our portfolio because of that diversity, not only within the domestic retail sectors, of a retail and industrial, but also with our export. We have benefited from a good export pricing. We see that as a benefit for F23. And at the moment, we do not see significant price erosion in those key ingredients that we supply to many markets because we operate across multiple categories and exports at different price points with tailored ingredients. That gives us an opportunity to be able to manage the input costs And also to be able to look at our portfolio and adjust that portfolio and adjust the footprint to the reality of that milk pool. And that's how we believe, you know, there may be some different profile to that overall for the strat plan, but we have confidence that we are able to be able to adjust continuously to be able to meet that future goal.
spk06: And Michelle, maybe here for you. Yeah.
spk09: Yeah, so Carl, I'd like you to do the same thing for the U.S., not so much for the short term, but for the medium and longer term for the U.S. relative to strapline, Carl.
spk06: Sure. Basically, what I would say, Vishal, is that if you were to look at these sort of in ranked order, and they do apply to What will impact most beneficially our bottom line today and tomorrow? They are sort of in this order. It's going to be our ability to attract and retain labor. That in itself will translate into, as we can appreciate, increases in our OEE, which includes first pass quality. So the efficiency of our plants, doing it right the first time, and what that means on a cost of manufacturing and the benefits that that brings. I would say the second item is our capital investments. The capital investments are ramping up. We heard yesterday with regards to the announcements, Reedsburg and our GOAT facilities, there are more investments to come. And the return on those investments, as we've described in the past, will increase. begin in 24 and 25 at a much larger scale. And then I would say, lastly, the continued discipline in way of our pricing to ensure that, one, we continue to combat inflationary pressures with whether those are cost containment initiatives in our SG&A, whether it is things that we can do operationally. But beyond that, we need to ensure that our pricing to the market reflects those input costs as they come to us. So sort of in that order is how we believe that we will be able to achieve the targets that we set for ourselves in the U.S. Thank you.
spk09: Yeah, so that is the region by region analysis. I hope we answered your question, but if you need more clarity, we'd be happy to answer more specificity if you need.
spk01: Thank you. And we'll proceed to our next question on the line. It is from Irina Tal with RBC Capital Markets. Go right ahead.
spk00: Thanks, and good afternoon, everyone. Just listening to the answers to the prior couple of questions and thinking about the fact that we're in year two of the Strat plan, it seems to me that you must know pretty much exactly what you want to do And given the in terms of sort of where you need to do network optimization in both the US and in Australia. So given the lead time to, you know, actually implement the announcements that you're making, and you'll be spurred being, let's say, 18 months, should we be expecting to hear several more of these types of announcements over the next, let's say, six to nine months?
spk09: Yes, that would be an accurate reflection of what's to come. Understand, Irina, every time we do take a decision relative to network optimization, it does impact a group of employees around the globe for us. And so we need to be sensitive to how, when, and what is the right time for us to make those announcements. That doesn't mean that the projects have not been defined. That doesn't mean that the capital has not been spent. We just need to find the right time to be able to inform the market of our decisions, always allowing our employees to be first to know about our plans and our ideas. So the roadmap has been set. The execution of that roadmap we are very, very confident in, especially that we've carved out the capex required to execute effectively on all of those projects. So there are going to be more announcements to come. It would be simpler and nicer to have one announcement that covers everything for one division or one sector. Unfortunately, in an operating environment where we need to be mindful of our talent, we've got to do things the right way and at the right time.
spk00: Absolutely, Lino. Completely understood and makes perfect sense. But I'm very glad that you clarified that, yes, you guys know exactly what is going to be coming. Just switching gears for a moment, there was a pretty significant step up in the cadence of revenue growth year over year from Q1 to Q2, in part presumably on price. And it was great to see the improvement in the U.S. EBITDA dollar, but I'm still a little bit perplexed by that margin. which again, had anyone said to me, you're going to have two quarters of margins in that range, I would be like, what? So how should we be thinking about sort of taking that margin from mid-single digits to say high single digits or low double digits over the period, over the next sort of, as we head towards F25?
spk11: Yeah, Irene, it's Max. So revenue do increase due to pricing initiatives. In that regard, pricing increased due to raw material increases. It doesn't mean it's a margin up price increases. And it's the same thing with the commodity market. Although commodity markets do bring additional revenue, blocks... In the U.S., let's say the block market is up or quarter market is up, it still offers some challenges from a profitability standpoint. So the increase in revenue attributable to market or inflation doesn't attract the same amount of EBITDA percentage generation. It does create a little erosion from a percentage perspective. Although we do feel that we have the pricing protocol in place, to either recover from the inflation and to be ahead of the curve. And right now we have our head above water. We feel good about our pricing to bring back to the level we are now. The intent is to, of course, maintain the alert as far as the input cost that we're pricing. That's the market condition.
spk00: And so how should we be thinking, Max, about the evolution of the margin profile in the U.S.? Because obviously that is a very significant source of, you know, getting you from your current EBITDA run rate to the 2.125 target. You know, is it really a year three and particularly year four for the U.S.?
spk11: Yeah, well, the... This year, when we were looking at a comparable figure, whether it's sequentially or whether it's through prior year, we clearly have some additional EBITDA relative to pricing. That is basically the offset of the negative that we've seen the prior year. And this should be the level that we're in. And now it's up to us to have our initiative to kick in. And those will mostly materialize itself during the fiscal 24 and 25. We're looking at this fiscal 23 to show some progress from quarter to quarter. This quarter, we have that level up a little bit. We have our pricing that has to be given. So it's there. Now it's more of a monitoring. And now the compound effect of our pricing, you know, will be beneficial to us in fiscal 2020.
spk00: Thanks, Max. And then just one final question, if I might, and this goes to consumer demand. We're hearing a lot about consumer price sensitivity, you know, particularly in the U.S. markets or notably in the U.S. markets. Have you seen any shift in what consumers are buying or any pushback whatsoever from consumers on the price increases?
spk06: Thank you, Irene. Before I answer that question, maybe just one thing to add to the comments Max was making. I would say that if we look at the EBITDA margin looking forward, The gains that we will see in this sector will absolutely be about the ability for facilities to improve their overall efficiency. And I say that quite confidently because there aren't many of our locations that are operating at historical run rates, at demonstrated run rates. So we know we can get there. We know our assets are capable of doing way better than what they're doing. So that's where some of our confidence comes from when it comes to improving our overall margin structure. And it's not necessarily on the backs, if you like, of pricing initiatives. Everything is really focused in and around our efficiency and demonstrated historical efficiency. Maybe going back to the demand, the question around demand, yes, we are absolutely seeing demand shift within channels. We are seeing the restaurant sector begin to slow down. And within that restaurant sector, we are seeing the shifts beginning to occur from full-service restaurants to fast food in nature, which have not really lost momentum, but we have seen the full-service restaurants actually lose quite a bit of steam recently. It has increased the demand in the retail sector for general groceries and general food. And within that specific sector, we're also seeing some of the discount banners and the club stores winning the day. Within each of what I've just described, we have a good balance in our portfolio of products to service each of those channels, and we're ready to adapt to those needs. As far as dairy demand as a whole, We have seen some important increases in inflation in dairy, upwards of 13%, and that's dairy combined. Cheese is sitting in around the 9% mark, with food at around 12 and a bit. So with that, certainly dairy is more expensive this year than it was last year, but it has yet to translate into real demand destruction of any sorts, okay? We're really seeing it in the shift of the channels. We are keeping a very close eye on it and ensuring that we adapt where we can and where we need to.
spk00: That's really helpful. Thank you, Carl.
spk01: Thank you very much. We'll get to our next question on the line. This is from Peter Scolar with BMO. Go right ahead.
spk10: Okay, thanks. I want to talk about U.S. dairy market factors, which still appear to be a considerable negative, particularly the cheese milk spread, which did not improve quarter over quarter. I'm just wondering if you could talk about the fundamentals, what's causing the negative spread. I noticed the way price came down, and my understanding is that's a critical input into the milk marketing order. So I'm surprised that didn't drag down the milk price and improve the spread or at least make it more negative. Just kind of what your thoughts are around that and what are you seeing on the spread since the quarter end? Is it getting worse, better, steady?
spk06: So Peter, maybe to answer the question around despite decreasing price of whey and its influence on the Class III milk price, what we have seen is fat and the cost of fat increase, in fact, probably negate the overall benefits of a reduced whey powder price. So that in itself has kept the Class III milk price high and has negatively impacted the spread. So those are the dynamics that are working in the background. Unfortunately, it's not just one variable. There are multiple variables. variables, excuse me, that impact that class three milk price. And as far as the cost or sorry, the trading price of block cheese, we've seen some decline here in the last couple of weeks from the highs of around 230. We're sitting in around the 188 mark today. Some of that is coming from global sentiment, if you like, around dairy demand as China continues with its sort of rolling lockdowns and demand is not improving from that perspective. But if we take a look, you know, here in the coming weeks and months, we don't expect that spread to improve materially. And really what we're looking for is stability because the volatility also hurts in either direction, to be honest, in the short term. And what we're looking for is a degree of stability. And I think that I'll say the global picture is starting to get clearer on demand. And I think what we will see is the U.S. commodity prices begin to stabilize and in itself will be beneficial for us in the ordering patterns from our customers, the confidence that they will have in putting in their orders, and so on and so forth.
spk10: I think Max might want to add something there. Sorry, just one. When you say the fat cost, you're talking about butter fat, I assume.
spk06: Yes, butter fat being a component of our Class III milk price. That in itself influences the net spread.
spk11: Okay. Peter, just to comment, yes, market factor from the successful production point of view as not one in fact it was it was negative last year but also as we're navigating in this current q2 um still have same condition that we're seeing if you want to whatsoever okay so i'm I think you're saying no change.
spk10: Sorry? Matt, you've been cutting in and out. I'm having trouble hearing you, but I think you're saying no change in the quarter to date. Correct. Yeah. Okay. Well, I've got you. I have an accounting question. With regard to this reorganization you're doing in the U.S., I think it's a $15 million after-tax restructuring charge. Can you Give us the pre-tax number and how you're going to be handling it from an accounting perspective. Is that going to be an adjustment or is that going to be embedded in your EBITDA that you're reporting for the U.S. segment this coming quarter?
spk11: Yeah, we typically would do our restructuring costs below the EBITDA line as a restructuring cost. The part that is for either salary continuance or retention of employee contributions during the duration of the project will flow to the EBITDA, which is a smaller piece of the restructuring cost. So in a sense, this is the way we're handling it.
spk10: Okay. So most of it will be below the EBITDA line, I think is what you're saying. Correct. Correct. And the significant part of it is a non-cash expense. Yeah. Okay. And then just lastly, when you talk about the strength of the international business, you're talking about like in terms of export markets, you're seeing good cheese price realization and ingredients. I just want to clarify, when you're talking ingredients, what products are you talking about? Are you just talking about kind of commodity way or are we talking about other products when you say ingredients? Leanne?
spk02: Yes, Peter, it's Leanne. We operate actually across multiple categories. So in terms of those ingredients, it does include some commodity items, but it also includes a number of premium and tailored items that we supply to customers on longer-term contracts and to specific recipes. And we have continual high demand for a number of those things. I'll take, for example, like lactoferrin.
spk10: But it's all whey product, right?
spk09: Lactoferrin is not a byproduct. Lactoferrin is a high-valued protein that we extract from milk itself, which has a high value on the market. But then when you think about other infant formula or other specialized powders, yes, that would be byproduct in nature. So it's a combination of all of them, Peter.
spk02: So it's a basket of different kinds of ingredients, Peter, which gives us that flexibility. Okay.
spk10: Right. Okay, thank you.
spk01: Thank you very much. We'll get to our next question on the line from Michael Van Elst with TD Securities. Go right ahead.
spk07: Hi, yes, thank you. So you made some comments, I think, in the press release and on the call about additional price increases in all divisions, and I just want to make sure that I got them all, because I know last quarter you talked about U.S. price increases in mid-April and then
spk06: july 5th and i think you did tell us you did clarify that you don't expect to have to have additional price increases there is that correct so i i uh michael if you're referring to me um as it stands today in our in our in our current outlook uh we don't see that happening but again the market changes in front of us so rapidly that We are always watching that very closely. So, yes, you did hear that correctly from me. Okay.
spk07: And there's also a price increase coming in international in Q2 from what you said last quarter, and then in Europe in June, and I'd assume Canada in September, given the milk cost increase. So is there anything I'm missing there?
spk02: Michael, it's Leanne. As far as the international markets are concerned, you know, with Argentina, we continue with the hyperinflation environment and we continue to take prices as needed to cover our costs. In the UK, we have had a number of significant price increases. And of course, we will look to recover any incremental costs in milk. And as far as Australia is concerned, we have a significant price increase that went in the beginning of July. And we have recently announced that we will be looking for further increases in the back half of the year.
spk07: So more in the back half of the year? For Europe, there's more coming as well, I guess.
spk02: Yes, that is likely.
spk06: And Michael, maybe just to confirm for Canada, yes, with the announced milk price increase, from the CDC, the Canadian business, is taking pricing action to the market to recover those input costs.
spk07: Okay, great. And then you touched on the cheese prices in the U.S. slipping lately, and it's happened in Europe as well, sorry, international as well. Does that change your confidence at all in the short term? And how... Can you talk a bit more about the lag time that we should expect given the contractual nature on your international exports coming out of Australia and Argentina?
spk02: As far as input costs for our international export customers, we have been passing on costs to those customers to reflect that increased milk cost. So whether it's coming out of Argentina or out of Australia, Now we have locked in a number of those different contracts towards the back half of the year. And obviously we will look to be able to continue that with further contracts. Obviously the further we go out in terms of the quarters, the less that our contracts are kind of locked in. But we are confident around the basket of the ingredients that we're supplying to those international customers that we'll be able to meet our forecasts with the current pricing that we see.
spk07: Okay, so for those international markets, you're pricing off your milk cost and not necessarily the global commodity prices?
spk02: Off our milk cost. And obviously, yeah.
spk09: Yeah, and Michael, I'm going to add a little bit of color to that as well, especially in the Australian platform where dairy solids are limited. This is where the team in Australia is looking at putting those solids into the highest valued category products. And if that means that perhaps there might be some international market that is not as profitable as some of the domestic sales we have, then we are going to ship those solids into the domestic market. So that's how the team is looking at leveraging margin and leveraging the limited amount of solids they have. So if they cannot extract the full value of the milk price in the international commoditized market, then they'll sell those solids into the domestic market and take price increases.
spk07: Correct. Okay. The Australian market, you had said earlier that you've taken price increases domestically as well. How are those sticking? Because I know it's quite competitive there, regardless of the milk supply, undersupply this year.
spk02: Yes, look, we are seeing some cheese. I'll talk about cheese and milk separately. I mean, we are seeing some cheese price elasticity, but it is in line with our expectations because there's often some short-term bumpiness in volumes, but they are settling. And again, we've got a diverse portfolio in terms of the portfolio of brands across the Australian portfolio, whether it's everyday cheese or whether it's some of our specialty cheese brands. So particularly in everyday cheese, we're seeing volumes continue to be stable, value is higher. Special cheese, a little bit less so, a little bit more softness there. As far as fluid milk is concerned, yes, competitors as well are significantly increasing pricing on fluid milk. So we are seeing price increases being passed on, not just ourselves.
spk07: Great.
spk01: Thank you very much. Thank you. And we'll get to our next question on the line. It is from Chris Lee from Déjà Vu. Go right ahead.
spk04: Hi, good afternoon. Thanks for squeezing me in. I'm just curious, you know, in your experience, how sticky are the price increases? You know, if you assume costs start to stabilize or even come down a bit next year, is that going to create a nice tailwind for margins assuming prices hold?
spk09: Yeah, that's an answer that perhaps we might need to go around the different geographies to understand just how sticky those price increases are. And it's relative to competition, domestic competition. So maybe we'll go around the horn. Maybe we'll start off with Carl in the U.S. and Canada, and then Leanne can talk about the three platforms that she's responsible for.
spk06: Yeah, it's a great question. And we don't have a lot of moments in our history where we would have had that kind of deflation or potential deflation occur. But what I can say specifically for Canada is, you know, the lion's share of the cost increase passed on to customers is coming from the raw material. And very rarely have we seen that sort of reduced on a year-over-year basis. But should that be the occurrence at some moment in time, we will absolutely be looking at overall cost structure and doing what's best for our customers and consumers to ensure that our brands and our volumes remain competitive in the marketplace. In the U.S., there's a number of dynamics behind our pricing, and we're regularly reviewing costs with our customers. So, Chris, in the end, what I would say is – Should that occur, where we start to see a material amount of deflation, we will ensure that we remain competitive in the marketplace and do what we need to protect our brands, our customers, and our volumes.
spk02: Well, first, Chris, with Australia, I think, as we know, the milk supply is constrained there. And therefore, it's a higher milk price than we've seen historically. And having said that, the domestic returns for that price being the significant part of the input costs is that it's being passed on to consumers and through the brands. And the returns for that are reasonable. Therefore, we don't anticipate there being any rollback from a pricing perspective. Of course, there are opportunities for us within the portfolio to make sure that we can provide the right price points for consumers from the different brands that we have. I mean, in Argentina, being a hyperinflationary environment, they're very familiar with passing on price, and that continues to be the case. And in the UK, again, we are seeing some cheese price elasticity, but we are investing behind our brands, and we expect to continue to invest in them, whether that's around innovation that's coming in from our Cathedral City brand in particular. And as with our butters and spreads, we are the number one spreads business. And in fact, actually, our volumes are very strong there at the moment with butter pricing, as you've heard, also increasing. So we think we have the right portfolio and the flexibility to be able to do that. In addition, then be able to have private label availability at good margins. so we can manage as price adjusts and the inflation adjusts over the next 12 months.
spk09: Yeah, Chris, the only other color that I would add to your question is that in all geographies where we operate, we are not seeing any irresponsible behavior by any of our competitors. I think everybody suffered over the course of the last 18 to 24 months, especially with inflation and labor and logistical costs There is no irresponsible behavior. I think everyone's being pretty responsible about taking price where they need to take price to cover some of their increased costs. We're no different than that. In fact, in many cases, we are leading the markets on those initiatives.
spk04: Great. That's very helpful. Maybe just one last question for me. You've been quite transparent with quantifying the EBITDA benefits from the optimization of manufacturing projects. processes, which I think account for about a third of the $650 million EBITDA as part of your strapline. I guess my short question is, are you on track for the other two-thirds of the EBITDA? Do you have good visibility on that? And is that also going to be more weighted in the last two years of the strapline in terms of realizing the EBITDA benefits?
spk09: Yeah. So, Chris, the simple answer is yes, we are on track. We feel very, very good about our initiatives and achieving the optimization initiatives in fiscal 24 and fiscal 25. As I had indicated in previous calls, early fiscal 22 and 23, we're calling for the investment plan and the purchase or the POs on purchased equipment. Somewhere within fiscal 23, there is going to be some installation beginning. But the real benefit of those plans will be in fiscal 24 and fiscal 25, and our level of confidence to achieve the optimization that is called for in the strat plan is very, very high.
spk04: Thank you, and all the best.
spk09: Thank you.
spk01: Thank you very much. And once again, on the phones, if you'd like to register a question or any follow-up questions, it is the 1 followed by the 4 on your telephone keypad. And Mr. Estrella, there are no further questions at this time. I'll now turn the call back to you.
spk05: Thank you, Tommy. So we thank you for taking part in the call and webcast today. Please note that we will release our second quarter fiscal 2023 results on November 3rd, 2022. Thank you, and have a great day.
spk01: Thank you very much, and thank you, everyone, that has concluded the call for today. We thank you for your participation as we disconnect your lines. Have a good day, everyone.
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