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spk08: Greetings and welcome to the Saputo, Inc. fourth quarter and full year fiscal 2023 results conference call. During the presentation, all participants will be in the listen-only mode. Afterwards, we will conduct a question and answer session. At that time, if you have a question, please press the one followed by the four on your telephone. If at any time during the conference you need to reach an operator, please press star zero. As a reminder, this conference is being recorded on Friday, June 9th, 2023. I would now like to turn the conference over to Nick. Please go ahead.
spk09: Thank you, Frank. Good morning and welcome to our fourth quarter and full year fiscal 2023 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. For the question and answer session, Lino and Maxim will be supported by Carl Kalitsa, 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, and the webcast will be posted on our website along with the fourth 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 reports, 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.
spk07: Well, thank you, Nick, and good morning, everyone. Let me start by saying our hard work and determination have certainly paid off. Fiscal 2023 reflected a strong turnaround and a return to growth for our business as we delivered record revenue and a significant increase in adjusted EBITDA compared to last year. We also generated over a billion dollars of cash from operating activities, a testament to our diversified global platform. We achieved this. while navigating a difficult and volatile environment with ongoing inflation and supply chain disruptions, mindful of the many challenges facing our consumers but never losing sight of the future and our strategic agenda. Our U.S. sector led the way with higher year-over-year adjusted EBITDA and margin recovery, while our Canada and international sectors delivered consistent, strong results throughout the year. We made progress against many of our key priorities, including cost and margin recovery. And on the labor front, we benefited from improved employee onboarding, training, and retention, which have positively impacted our service levels. We saw strong underlying demand from consumers and pricing elasticities, despite ongoing elevated levels of inflation. We capitalized on this strong demand with better supply chain performance, enabling us to recover from a challenging fiscal 2022. With customers and consumers as value conscious as ever, we leveraged our diverse portfolio across multiple market segments, brands, and price points. In addition, we took actions across each of our sectors to drive volume growth with investments in innovation to enhance our value added portfolio. This included strengthening the category-leading brands in the U.S., such as Frigo, Frigo Cheeseheads, Monchev, and Stella through new flavor introductions. In Canada, we further grew our Armstrong cheese portfolio with an expanded assortment in addition to new offerings and formats in Cathedral City, supported by a refreshed marketing campaign. We leveraged our strong momentum in the growing everyday cheese snacking categories by launching innovations in string cheese, flavored snacking curds, and combo packs. Finally, we made considerable progress on our journey to build category-leading and plant-based cheeses portfolio with several launches across leading brands such as Cathedral City, Vitalite, Cheese, and Cheer. These investments in research, product development, and innovation continue to be recognized by consumers and leading grocery associations and reaffirm our ability to bring innovative products to market in support of our overall growth strategy. As you're aware, we have an ambitious growth plan which is expected to simplify and strengthen our manufacturing footprint, further reduce complexities, streamline our operating model, and unlock new growth opportunities. This past year, we continue to execute against this plan. We announced several capital investments and consolidation initiatives across our global platforms. We took some tough decisions across each of our sectors to optimize our network. We're investing in new capacity and capabilities. We're accelerating efforts to modernize our operations, and we're repurposing capacity in areas in which we have the highest demand. As we aim to reach our adjusted EBITDA target, we are beginning to hit our stride with significant potential expected to be realized over the next two years and beyond. While our target remains unchanged, we have updated some elements of the plan to reflect the changing global macro environment. For example, at the operational level, our plan now allows for more opportunities around network optimization versus at the plan's inception. There's still more work to be done, but with the foundation that has been laid, I'm very optimistic for what the future holds for us, even if we hit a few bumps along the way. Near term, we will focus on execution and accelerating growth, particularly as the operating environment further stabilizes. We will then transition to harvesting investments and driving operating leverage to unlock the full earnings potential of our global strategic plan. We will continue to manage a range of risks across the business, including a very tight labor market and persistent inflationary cost pressures with the volatility in commodities remaining a big wild card. As we grow our business, we will also want to play a key role in caring for and supporting our employees and the communities where we operate. In addition, we strive to mitigate our impact on the planet working in partnership with our farmers, our suppliers, and other industry partners while offering products that are part of a healthy lifestyle. These goals are integral to our business and guide our everyday actions. To update you on our progress areas in the Saputo Promise, we will have a release in the month of August. We're proud of what we've accomplished thus far. but recognize there is still opportunity ahead, and we strive to act collectively with our key stakeholders to drive progress towards our ESG goals. I will now turn the call over to Max for the financial review before looking back at Q4 results and providing my concluding remarks. Max?
spk06: Thank you, Alino, and good morning, everyone. As usual, I'll cover our quarterly consolidated financial performance before moving on to the sector review. Adjusted EPS on a diluted basis was 47 cents per share, up 81% when compared to the same quarter last year. Consolidated revenues were $4.468 billion, a 13% increase when compared to last year. Revenues increased due to higher average selling price across all of our sectors, reflecting the full-year impact of the fiscal 2023 pricing action. The favorable combined effect of fluctuation in the average market prices for cheese and butter in the U.S. and higher international cheese and dairy ingredient market prices. Adjusted amounts to $392 million a 51% increase when compared to last year. Higher year-over-year adjusted EBITDA was driven by previously announced pricing initiatives to mitigate higher input costs and the favorable impact from the relation between international cheese and dairy ingredient market prices and the cost of milk as raw material. U.S. market factors at a favorable impact of $29 million as compared to the same quarter last fiscal, mainly due to the favorable impact of fluctuation of the average butter market price on our pricing protocol for our dairy foods product. Despite the positive spread, realization of inventory for our cheese product was negative due to the fluctuation in the average market price and also due to the drop in the ingredient market. U.S. market factors have remained volatile so far in Q1 of fiscal 24, with block price down nearly 20% from the end of Q4. This has resulted in a negative spread territory, again, ranging from negative 10 to 13 cents so far in the current quarter. In Q4, we continued to benefit from our cost containment measures aimed at minimizing the effect of inflation and our efforts to prioritize efficiency and productivity initiatives. During the quarter, we recorded $28 million of restructuring costs, which included a non-cash fixed assets write-down totaling $9 million. The $28 million of pre-tax, $21 million after tax. These costs were incurred in connection with previously announced consolidation initiatives in our U.S. sector as part of our global strategic plan. Income tax expense for the fourth quarter of fiscal 2023 totaled $22 million compared to an income tax recovery of $12 million for the same quarter last fiscal year. The increase in income tax expense is mainly due to a higher taxable earning and their geographic mix. Net cash generated from operating activities amounted to $421 million, up $237 million from last year. The full year cash generated from operating activities amounted to $1 billion, a 48% increase. I'll now take you through key highlights by sector, starting with Canada. Revenues for the fourth quarter total $1.2 billion, an increase of 10% when compared to last year. Revenues increased due to higher selling prices in connection with the higher cost of milk as raw material, and pricing initiatives implemented to mitigate increasing input and logistical costs in line with inflation. Consistent with the trend observed since the beginning of fiscal 23, sales volume were higher in the food service market segment, mainly in the cheese category, partially offset by lower volume in the retail market segment, notably in the fluid milk category. Adjusted EBITDA for the fourth quarter total 134 million, up 15 percent versus 117 for the same quarter last fiscal. Improvement was driven by pricing initiatives, favorable product mix, further benefits from our continuous improvement program, and from benefits from cost containment measures. In our U.S. sector, revenue totaled $2.1 billion and were 18% higher than last year. Revenue increased due to pricing initiatives implemented to mitigate increasing input costs and due to the combined favorable effect of fluctuation in average market price for cheese and butter. Adjusted EBITDA totaled $143 million compared to $42 million in the same quarter last fiscal. The year-over-year improvement was mostly driven by previously announced pricing initiatives to mitigate higher input costs. and favorable U.S. market factors, which had a positive impact of $29 million. Sales volume increased as a result of continued improvement in our ability to supply ongoing demand. Finally, supply chain initiatives we implemented were also favorable to our results. Although we continue to improve fill rate, we found market conditions in cheese to be more challenging in Q1, notably due to the competitive market dynamics and softening demand negatively impacting utilization rate at some of our facilities. In the international sectors, revenues for the fourth quarter were $963 million, up 4% versus last year, while adjusted at the total 84 million, up 22 million versus last year. Revenue reflected higher international cheese and dairy ingredient market price, although export sales volume were lower. Higher sales volume in our domestic market, along with higher domestic selling prices. Revenue also includes $115 million of negative FX translation mainly due to the weakening of the Argentinian pheasant. The improvement in adjusted EBITDA was driven by pricing initiatives in the domestic market and a better relation between international cheese and dairy ingredient market prices and the cost of milk as raw material. This was partially offset by the negative impact of reduced milk availability in Australia on our ability to fulfill export market demand and on operating efficiencies. In the Europe sectors, revenues for the fourth quarter were $287 million, or 21% higher to last year. Revenue increased due to pricing initiatives implemented to mitigate the higher cost of milk as raw material and other input cost increases. Revenue also increased due to higher sales volume, mainly in the industrial market segment, in the bulk cheese category, in addition to higher sales volume of private label product. Adjusted EBITDA for Q4 amounted to $31 million, which was $8 million lower than last year. Our year-over-year results were impacted by an inventory write-down of $7 million related to reduction in the net realizable value of cheese finished goods originally produced for the retail market segment, but now will be sold through the industrial channel. Excluding this one-time inventory write-down, Q4 would have been relatively stable versus last year in what remains a volatile environment in the UK. Relative to capital allocation, our immediate priorities include investing in our business through capex, returning cash to shareholder through dividend, as well as debt reduction. Capital expenditures are expected to remain a similar level versus last fiscal, driven by a global strategic plan optimization and capacity expansion initiatives and investment in automation. Our continued focus on managing costs and other initiatives are underway to generate good cash flow once again this year, as we're committed to building financial strength and flexibility. Our net to EBITDA long-term target ratio of 2.25 times remain unchanged. Looking at Q1 of fiscal 24, as mentioned, Commodity market prices remain very volatile and are putting some pressure on our US margin. Competitive market condition and softening demand in cheese is also negatively impacting our volume in the US as well as operational efficiencies and absorption of fixed costs. Overall, we see some volatile market factors, volume challenges, and additional cost impacting our first quarter results. Lito, this concludes my financial review. I'll turn the call to you.
spk07: Thank you, Max. We're pleased with our Q4 performance. The decisive actions we continue to take to address some of the transitory challenges while also executing on our strategic priorities will enable us to be much more agile and resilient and will allow us to further enhance our customer focus. Results improved notably through pricing initiatives, and we benefited from favorable commodity and export market prices. Fourth quarter revenue increased 13% year over year, while adjusted EBITDA of $392 million was 51% higher than last year. Consolidated adjusted EBITDA margins reached 8.8%. In Canada, Our higher year-over-year performance was due to previously announced price increases, in addition to a strong recovery in the food service market segment, which improved our product mix to greater cheese sales volumes. Despite the ongoing challenging labor environment, further stability in our volumes and continuous improvement initiatives led to operational enhancements. During the quarter, we reached several milestones with a continued rollout of our automation projects and digital capabilities. This included the completion of several cheese slicing, shredding, and packing automation projects at our St. Leonard, Tavistock, and Calgary plants to take advantage of new business opportunities and to continue to grow with some of our national retail customers. We still have some room to optimize our cost structure in Canada, and a portion of these investments are focused on this. In the U.S. sector, revenue increased 18%, and adjusted EBITDA and margins were significantly higher versus the prior year. Our strong performance in the U.S. was a result of our pricing protocols and new supply chain initiatives. I would highlight, while we have mostly caught up to inflation, the inflationary dynamic is not over, and we implemented new pricing actions this past March. We are benefiting from the positive impact of operational stability and the gradual recovery in labor on our plant efficiency and fill rates, which were above prior year levels. This allows us to further improve our ability to meet our customers' needs. Our year-over-year results also improved due to favorable U.S. market factors. However, so far in Q1, we continue to operate under a very volatile commodity market with the current block price reaching a two-year low in this quarter. We do not believe that the current trend is sustainable and markets should move back into balance. As mentioned in my opening remarks, we continue to lay the groundwork for our global strategic plan, specifically in the US, which we expect to be the largest contributor to our growth target. Our broad-based capital investment plans remain on track with several substantial projects in progress at many of our flagship facilities with a focus on optimizing our cheese network. First, many of our mozzarella modernization projects are in startup mode, and we expect for those benefits to begin ramping up this year. Our goat cheese revitalization plan includes the conversion of our Riesberg facility from mozzarella to goat. This is in progress and expected to be completed by the second quarter of fiscal 24. We've already reached several milestones with the construction of our new cut and wrap facility in Franklin, Wisconsin. This greenfield facility will become the center of our expanded cut and wrap capabilities in the U.S. Midwest. Finally, we will be expanding our string cheese operations to support growth and sustain our leading market position in this category, notably through the conversion of the Barclays Street facility into a string cheese packing plant. This facility is slated to be operating at full capacity by the third quarter of fiscal 2025. These state-of-the-art operating sites will result in increased efficiencies as well as bolster capacity and capabilities for higher margin value-added products to meet our growing demand. We expect further operational stability at these strategic initiatives and it is going to be a critical part of unlocking the growth in the U.S. sector, as well as driving significant margin improvement. As you may recall, on April 1, we delivered the go-live of our OneUSA project across former chief and dairy foods divisions. The conversion and implementation have been very successful, and our business processes, system applications, and IT infrastructure are now fully integrated. This project will help us work more efficiently and accelerate decision-making. In addition, we are able to work with greater speed and agility to service our customers, improve our supply chain, and maximize our ability to grow the business. In the international sector, improved results were driven by continued strength in domestic and international cheese and dairy ingredient prices. Although reduced milk availability in Australia continued to negatively impact the export volumes, as well as our operating efficiencies, we began to see initial benefits from previously announced consolidation initiatives late in the quarter. Production out of Mafra ceased in February. Much of its production was absorbed by other locations. This had a positive impact on our costs and utilization rates for other plants in our network. We expect additional cost savings to ramp up throughout the year as some of the other previously announced projects and initiatives approach their completion dates. Another initiative which better positions the division for the long term, we recently announced the sale of two fresh milk processing facilities. The divestiture will further streamline our operating model and allow us to reinvest in areas of the business that result in more value creation opportunities. Our optimization roadmap in Australia is not about short-term and easy fixes, but about making sure the division gets back to where it belongs, that is, a low-cost, efficient dairy processor that maximizes the return on every liter of milk. In Argentina, we had another strong performance. Domestic and export volumes increased year over year. This was driven by our investment in capacity, innovation and brand to support market share growth. These investments reinforce our leadership position as a top dairy processor in Argentina and further improves our ability to capture additional milk intake. In Europe, despite the volatile market conditions, the UK division continues to execute on our global strategic plan. The outsourcing of all the divisions warehousing in Q3 allowed us to prepare the space in Nuneaton in Q4 as we consolidate all cheese packing into one center of excellence in fiscal 24. In the fourth quarter, our UK division also won new branded listings and high-end private label customers in both cheese and spread. Also supporting our commercial plan, the gap between branded and private label markets has reached a two-year low. We expect this dynamic to begin to drive additional volume opportunities supported by innovation and more advertising. Near term, we believe these factors will allow for more higher margin retail and private label sales and reduce our exposure to volatile bulk cheese volumes. Now turning to our fiscal 2024 outlook. Although the current macro backdrop remains challenging, we anticipate earnings growth driven by the carryover impact of the price increases, operating efficiencies, and additional capacities and capabilities. We expect our overall input cost inflation to moderate but remain at elevated levels. As such, we will continue to manage the current inflationary environment through the cost containment and productivity measures in addition to our pricing protocols. Competitive market dynamics and softening demand in the U.S. are expected to negatively impact our volumes, as well as our operational efficiencies and the absorption of fixed costs in the U.S. Our outlook for U.S. market factors remains mixed. We believe that the long-term environment is likely to be relatively supportive for commodity prices but with continued volatility in the short to medium term. We expect the international sector to be negatively impacted by lower export cheese and dairy ingredient market prices. As Max indicated, fiscal 24 is off to a slower start than anticipated, with Q1 facing challenges, notably competitive market conditions, softening demand, and volatile commodity market prices in our US sector. However, we are very encouraged by the progress we made this past year and our business momentum. We believe we will be able to successfully navigate these headwinds to deliver further growth in fiscal 24 and to execute well through the balance of our global strategic plan. On that note, I thank you for your time, and I will now turn the call over to Frank for questions.
spk08: Thank you. If you would like to register a question, please press the 1-4 on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, please press the 1 followed by the 3. One moment, please, for the first question. Our first question comes from George Dumais with Scotiabank. Please proceed.
spk11: Yeah, good morning. Can you please give us a sense of where the extra $150 million in savings from network optimization will be coming from, and if you have enough time to maybe get the benefits in by the end of fiscal 25?
spk07: Yeah, so, George, that's a great place to start. I'm going to reiterate some comments that I made in the last quarter or previous quarter calls. When we put this draft plan together, the world was a very different place. We went through some challenges through the pandemic and then coming out of the pandemic, there was labor, inflation, supply chain that had an impact on us and had an impact on our suppliers. And so we felt compelled to adjust and adapt to reflect the new global macro environment. So the fundamentals of the plan, the Strat plan, are still intact, but certain elements, which I'm going to ask Carl and Leanne to speak to in some detail, But the elements have changed. So more opportunities and network optimization versus the original plan. Because understand that in a context and in an environment where the sensitivity for pricing relative to inflation has changed, we're putting more value on the goods that we're manufacturing over the volume of the quantity that we're getting out the door. So there have been some moving targets. Our teams in all countries have gone back to the drawing board to look at the usable cash available to them in their CAPEX allocations and remodeled some of the ideas and some of the projects and some of the plans to derive a better value from operations and optimization. So on that note, I'll kick it off to Carl, and Carl can go into some detail with respect to U.S. and Canada. And then Leigh-Anne can talk a little bit more about some of the initiatives internationally.
spk05: Thank you, Lino. So maybe just to add a little bit more color to what Lino was suggesting, with the volatile and ever-changing consumer demand scenario and the expectations that they have of products that come to market, we have pivoted in some areas and decided that the best use of our capital, our time, and our resources may not be in innovating in some sectors that we would have quantified under the pillar of core business. And so we've decided in some areas to move that capital and limited resource to greater degrees of investment in automation, greater degrees of investments in our processing technologies that will deliver better returns to our bottom line. And yes, in some cases it meant that we would forego some innovation and some skew proliferation in some of our categories. But that is really a read of the market. And I think that's the key is that we're regularly looking at what do consumers need, want, and are responding to that. And in a high inflationary environment, investing in products that might be of a higher shelf price in nature is probably not the best return for our investments at this time. So that is absolutely part of what is driving the delta for increased investment in network optimization. And I would also add that as we re-look at some of the areas of investment, it's clear that as we add capacity to various sectors of our business, the timelines and the capital are very much intertwined with the network rationalization and optimization that we've already announced. And so in some cases, in order for us to be able to achieve the growth and the strengthening of our core business. Because the timelines are intertwined with our network, we have shifted that capital allocation under the umbrella of the network optimization. Leanne?
spk03: Yes, good morning. So yeah, I'll focus on two particular divisions as it relates to our changes in network optimization, where we've looked at the industry dynamics. Firstly, Australia. We recognize there that the dairy industry continues to adapt to a declining national milk pool. And through our strategic plan, we wanted to make sure that we were really evolving to that new reality. So as a result, we've announced a number of initiatives over the past few months around rationalizing some of our facilities, as you've already heard. But also, that means that we're allowing us to be able to then focus on being able to get the best value out of every liter of milk. And that allows us to be able to invest in other value creation opportunities. We've been able to streamline our portfolio, invest in our key brands, such as Devon, Dahl & Scheer, and also NPD. We've been able to roll out, whether it's food service or whether it's around brands like Mersey Valley, to be able to take opportunities that having a more streamlined network allows us. As far as the UK is concerned too, we've been able to accelerate some of the rationalization opportunities around Lunditon, and that will allow us to become a center of excellence for our future growth.
spk11: Great. Yeah, thanks for that. So I'm just wondering, will that come with a higher CapEx perhaps than initially expected? And just a clarification, is that 2-1-2-5 target, is that an annual number or is it a run rate for fiscal 25?
spk07: Yeah, so the CapEx allocation remains unchanged. So there's no new capital going into this plan. It's just a reallocation of those funds that are going into projects that are going to derive a better value for us. The 2.125 at this stage right now, unfortunately, is unclear. And I'll explain exactly what the environment is. This is not the environment of fiscal 2022. Labor, supply chain, and inflation through our initiatives have all been covered. So our operating foundations are in much, much better condition. So we feel very confident about delivering on the promises that we made relative to our operating foundations, network optimization, and cost structures of being a high-quality, low-cost processor. However, what we've seen since the beginning of this fiscal year, and we're talking about six, seven weeks, the tone in the markets are a bit more cautious and I would say somewhat uncertain. Now, if I look at the dairy landscape around the world, whether it is domestically in the U.S. or internationally in the five dairy producing countries around the world, The projections are still in line with expectations. So the major dairy-producing countries are still down on volume. And so there isn't this overcapacity of solids coming off the farms. What we're seeing, though, is that consumer sentiment has turned somewhat negative. A number of reasons for that. China opening is slower than expected. And this has an impact on the GDP commodities prices. And they're mixed. You know, in some categories of product, commodity prices are down. In other categories of product, commodity prices are up. But there is a mixed bag of impacts that we have relative to the consumer sentiment and buyers just waiting on the sidelines. In addition to that, we've seen since the beginning of the fiscal year a massive drop in the block price in the U.S., Max talked about 20%. I think in real numbers, we're talking about as high as $1.85 when we started the fiscal year, down to as low as $1.43. So where I would say, so the fundamentals of the plan are still intact. The 2.125, we're working like hell to achieve that number, but I would call out the two risks. One is related to demand, which is softer than we had anticipated and softer than what our projections were showing for at the beginning of the start of our fiscal year. And the commodity value as well in terms of the U.S. pricing relative to block, barrel, and weigh, and the international pricing relative to the goods that we're manufacturing in our international platforms and selling them into the international markets. On that note, I'd like, because I think it's important enough, we made incredible progress operationally within all of our divisions. And I'd like maybe Carl and Leanne to speak to the operational improvements that we made and the level of confidence we have relative to executing on the plans that are in our control.
spk05: Yes, thanks, Lionel. So as Lino mentioned, we're absolutely not operating in the same environment as we did in fiscal 22. We've accomplished quite a bit as a business, specifically in the U.S., where we had the most challenging of environments with regards to labor in particular. And that shortage of labor, as you well know, presented a number of challenges for us in our fill rates, and our first pass quality and our ability to basically meet demand. We've made a lot of progress with recruiting, retention, and that has absolutely created and contributed, in fact, to what you're seeing in Q4 with regards to our ability to supply our customer base and to meet our customer expectations. Our fill rates have improved materially. The overall maturity and proficiency of our teammates and our plants as they gain experience is absolutely translating to an operating environment and the cost per pound that is favorable to what we would have seen in the past. So we are certainly benefiting from that stability that we are now seeing in our operations. In addition to that, We've also been very focused on ensuring that the capital dollars that are allocated to our network optimization, which is a big piece of the US's strategic growth plan and success, are delivered on time and on budget. And I'm very happy to share that that is the case today. We are on time, we are on budget. The expectations that we have for the consolidated footprint The incremental tools, capacities, and capabilities that we're affording ourselves through this plan will come to fruition. And so all positive momentum on the things that we are controlling without minimizing, unfortunately, what we're currently seeing here with regards to the block market, the CME, the commodities, and the softening of demand due to consumer sentiment at this point. Ben?
spk03: Yes, in our international and Europe markets, we do have a diversified portfolio of strong brands, and we've been focusing there on being able to continue to increase value of those brands. And that can provide value for consumers at different price points. Cathedral City, which is our lead brand in the UK, actually, household penetration for Cathedral City is now at a two-year high. And that's come off innovation around the relaunch we did over the last few months. and around the continued investment behind that brand. Also, our new innovation around plant-based continues to do very well with Cathedral City. We are now a clear number two in the UK market with our Cathedral City plant-based brand, and we are at this stage launching new variants as I speak. Also, if we look at Argentina, La Polina is now the leading cheese brand in Argentina, as we continue to invest behind that brand, and we're growing volume there. And as far as Australia is concerned, as I mentioned, that consolidation and optimization activities has really enhanced our efficiency. And it means that we're doing the work that we need to do to ensure that we're running the plants at optimum capacity utilization. So we have a real focus on being able to run those plants at full capacity during the peak.
spk07: Yeah, so George, if I can just answer your question very simply, you know, when we were in our budgeting process in January and February, even into March, we felt very, very good about the line of sight we had on the 2.125. Fundamentals are still solid, but it's a little early to tell just if it's a run rate or a final destination of fiscal 25.
spk11: Understood. Thanks for all the color offline. Thank you.
spk08: Our next question comes from Irene Natel with RBC Capital Markets. Please proceed.
spk02: Thanks, and good morning, everyone. Thank you for all the color. It's really, really helpful. So I'm trying to kind of get my mind around what the objective is, which is to deliver organic growth in F24. And what I'm hearing from you guys which is it's not pretty out there. So is it realistic for us to expect that we could actually see a step down in performance in the first quarter of the year or the first half of the year before we see an acceleration in the back half? Or can you still deliver improved year-over-year results even in the current environment?
spk06: So, Irene, it's Max. You know, what we're seeing, the evolution during the quarter is a rapid change in the markets. I mean, the block, as sharp was the decline recent, could go up very significantly. We have signs that give us, you know, the indication that the current level would not be sustainable. So at this time, we're certainly looking forward to fiscal 24 with growth objectives and growth ambition and growth. We feel it's realistic for fiscal 24, despite the fact that the Q1 might be modest in terms of growth.
spk02: Modest in terms of growth facts or possibly not able to deliver growth? modest okay understood thank you and can you talk about a little bit about you know the competitive activity in the us is it really just a result of you know sort of lower volumes because of sort of consumer behavior and too much product and can you can you talk please about the dynamics in the market right now sure hi irene it's carl um
spk05: Maybe just a little bit more color around that. And I would say that it's a combination of things. So much like Saputo, when we struggled through the last couple of fiscal years with our ability to bring products to market for a variety of reasons we all know, our competition did as well. But they've been focused as much as we have in making sure that they have improvements in their sector. And what we're finding ourselves in right now is an environment where our sector, our competitors, are performing better than they have been, have the necessary labor in place, have the capacity of bringing products to market at a time when we're seeing consumer sentiment and demand softening. So that is creating, of course, the environment that we're operating with. I'll call it and qualify it as an oversupply versus a demand that's there. Equally hitting us at this moment in time is the U.S. exports were extremely high. In fact, their record highs over the last couple of years and just in the last two to three months have fallen off a cliff in many respects. So what you're seeing is the milk is still present in the system. You don't have the kinds of exports that the U.S. sector had enjoyed, and now that milk, those goods, the incremental capacity is finding itself in the domestic market, and hence we have this scenario by which there's some competition out there.
spk02: That's really helpful. Thank you. And then just one last question, if I might, and this has to do with the European segment. You know, clearly, clearly under pressure, even if we make the adjustment for the inventory right down in Q4. What needs to happen to get the margins back to where they were, and will they get there as a result of the strat plan?
spk03: Irene, it's Leanne here. Yes, so as far as our ongoing margin, we do expect our margins to improve. We have a diversified portfolio that includes both our retail and our private label and industrial segments. So what we're seeing is that at the end of last year, because we regularly release cheese into those different channels. And in fact, what we're seeing at the moment, we've just recently also won private label business. So a few things that are looking as some tailwinds for us, Irene. First one is around the gap between our retail brands and our private label is actually significantly reduced. And so that's one factor. The other one, you said, is they're winning up the new private label, which also means that we sell less bulk. So with a number of those things, plus our investments behind our brands, we believe we're a good place to be able to start to see those margins improve.
spk02: Thank you.
spk08: Our next question comes from Tammy Chen with BMO. Please proceed.
spk01: Hi, good morning. My first question, sorry to beat the dead horse a little bit here, but, you know, I recall you previously talked about that you, you know, the global strat plan is, uh, like you can achieve it even with, you know, some volatile commodity prices, including a negative spread. So it sounds like the consumer demand environment is what's really changed. Um, but I'm just, I just want to go back again. Like how were you able, or how could you identified 150 million of incremental potential gains from network optimization? Like it just seems a lot.
spk07: Yeah. So, um, the network optimization is producing more product and fewer plants. And those plants are being executed. Now, what that also means is that as you increase the capacity of a plant that is inheriting more volume, you also need that volume to help drive down overhead absorption. When the volume isn't there, that has an impact to us. So the consumer demand is impacting the volumes that we're producing, which impacts our overhead absorption. So in a scenario where we laid out the optimization of our networks, we had planned for and we're executing on having fewer plants in our system, but producing more product. That more product has to come into our system, which right now, given the consumer sentiment, has been challenged and hampered. And we believe that this is a temporary situation, that consumer demand, in our expectation, not just domestically but globally, will return. And once it does return, we will have the infrastructure to be able to derive the value that we had originally anticipated.
spk01: Okay. And the softening that we've seen in the last couple of months on international dairy prices, is that also under the same umbrella of this much more challenging consumer demand environment, or are there other factors that's been driving the international dairy prices down recently?
spk07: Yeah, there are a couple of other factors. A lot of the Dairy economists had projected that China would have opened up, and China is a huge consumer of dairy products and has an impact on the global market and the global pricing. China has been a lot slower than everybody had anticipated. Again, there too, we believe that those markets will open up, and once they do open up, then China will be back buying on the market, and as they do, then the prices will firm up quite a bit. But understand that it's not on all categories of products where there's a softening of prices or a softening of demand. There are areas still within the dairy space that are still growing and still generating positive sales prices and positive returns.
spk01: Okay, thank you.
spk08: Our next question comes from Michael Van Elst with TD Securities. Please proceed. Thank you. Good morning.
spk10: When you mentioned that the U.S. exports are falling off a cliff, I'm trying to figure out, is that simply a demand issue in areas like China, or is it also a competition coming from others like Europe? I've read that the European... processors have gotten more aggressive in export international markets.
spk05: Yeah, so maybe what I would add to that is the commentary around fall off the cliff. I'm talking about the sector as a whole, right? This isn't Saputo necessarily. We're talking about the entire sector. And those are not my words. Those are actually some of the words that we read from our dairy peers. But the reality is that a couple of things have occurred. With, and now I'm going to use the word, or the very consumer sentiment, with the sentiment that the demand is going to be soft, what we're seeing is buyers, end users, brokers are not prepared to inventory products to the same degree that they had been during the last couple of years. And in the last couple of years, due to fear of supply chain interruptions, lack of understanding truly of the pricing and pricing volatility, what we saw was a lot of the end users buying inventory regularly and keeping their inventories higher than usual. We find ourselves today with this mixed signal around consumer sentiment, demand, inflation, the cost of working capital, all of the above. And probably one of the most important elements is there's a much higher degree today of certainty of supply. So whether that's in the domestic markets or international markets, people feel comfortable that when they are going to need product, they're going to be able to order it and receive it. And there's not going to be this interruption or delay. Hence, they're bringing down their own inventories materially in order to uh to mitigate some of the effects of inflation and and the cost of working capital and so forth so what we saw in the last couple of months is the effect of that with a lot less exports and buying out of the u.s market across the board cheese is only one of the components of export but they all contribute to the i'll say the excess milk that then finds itself into the domestic market so That's one. And two, on the point of the European activity and competitiveness, you're absolutely right. In many respects in Europe, it's cheaper to bring milk and convert it into cheese than to take milk and convert it into powder due to the cost of energy and the availability, quite frankly, of energy in some parts of Europe and Eastern Europe. Hence, we had an overabundance, if you like, of cheese products. at low cost, finding its way into markets that traditionally would have also been strongholds for the US.
spk10: Okay, and are you able to gauge where global inventories are for cheese and things like that at this stage relative to historical levels? Are we starting to see a bottom?
spk05: I think one of the best indicators is the GDP. So, that index and the trading value of that gives us a better indication of what the overall demand than implied inventories may be.
spk07: Yeah. So, Michael, you know, you were around in the years of 2014, 15, and 16 when the quotas in Europe had dissipated and a lot of the European dairy farmers were producing more solids, and then we ended up with a glut of product in inventory, and that lasted probably two or three years, which reflected in depressed prices. This is not the scenario. This is not the environment we're in. Around the world, dairy farmers are reducing their production capabilities. Prices around the world as well on the raw material are coming down. And that would probably even further imply that dairy farmers are having trouble making end meat, and then they will further take down production. So it's not a 2015 scenario. It's not a 2015 environment. It's not related to supply at all. It's really related to demand. And this is why we believe, and again, given the cloudy crystal ball we have now, we think that this is going to be a temporary blip It might impact us a quarter or perhaps two, but the second half of the year does look more favorable than the context and the environment we're living now, also because we're coming out of a flush season and we're going into more regular production levels. I hope that gives you clarity.
spk10: That's helpful. And when you say a flush season, are you talking specifically in the US or in other markets?
spk07: Yes, in the northern hemispheres, we're just coming out of a flush.
spk10: Okay, thank you. And then if I look at the buckets in that revised strategic plan numbers, can you just help us understand of that $650 million broken up into the three buckets, how much of that has been achieved to date in each of those buckets and then the ramp up of the timing for the remainder.
spk06: Yeah, Mike, the majority of that increase in our EBITDA target still remains to be achieved. Some have been materialized at the tailoring of our fiscal 23. but it's more towards either in fiscal 24 and F25 and beyond that.
spk05: Maybe I can just add one thing, and it was also a question, I believe it was Irene, who asked around how can we expect to have a growth environment, and as Max qualified, a modest growth environment despite this backdrop of softening demand. We're also coming into this call of the season and the timing by which some of our capital investments are going to start to deliver. Not all are based on demand either. Some of it is automation-based, and that automation in many respects, I'll say, pays with or without the volatility in the demand. So that is also part of the confidence we bring here today is that some of those capital investments are now going to come to fruition and are going to start to deliver the bottom line through reduced costs of operation. And that is absent volume or consumer sentiment.
spk10: Okay. And then just finally, you talked about inflation moderating but continuing. And I think you pointed to a March price increase in the U.S. When does that actually take effect? How big is it, and are you seeing the need for price increases elsewhere?
spk05: Well, I'll qualify it this way. Specifically in the U.S. market and even in Canada, we're caught up. So we're not looking as of now as we understand the contracted prices we have for a variety of inputs and commodities. We're not looking to move on price. Some of the announced pricing that have taken an effect have happened throughout the tail end of Q4 and into Q1, but some of these were announced to our customers, of course, earlier in the calendar year. There isn't anything new coming to market for our customer base. A lot of it is just lapping contractual obligations and protocols that we would have in place. I think the best way to sum it up is that as we sit here today and we understand the inflationary environment, our pricing and the efforts that we continue to put to mitigate that are balanced against the expectations we have for a fair return. All right.
spk10: Thank you.
spk08: Our last question comes from Chris Lee with Desjardins Securities. Please proceed.
spk04: Good morning, everyone. I apologize if you mentioned this already, but I just wanted to check in and see what your thoughts are on M&A in this environment. I noticed that that was not something that you kind of noted in the press release in terms of use of free tax, but I just wanted to see where you are on M&A. Thank you.
spk07: Yeah, Chris, thank you for asking that question. M&A, I would have to say, and be very candid and clear, especially in this high-interest environment and with a backdrop of uncertainty, M&A is not part of our immediate priorities. We want to execute this scrap plan without any distraction. So if you ask about capital allocation priorities, number one is the growth, CapEx, and initiatives as per our plan. We're looking at shareholder dividends and debt repayment. That is really what our focus is right now. I think we've got quite a bit on our plate right now. We feel very confident about the focus and the energy that our team has, and that's where our priorities are going to be right now.
spk04: Okay, that's helpful. And then maybe just a follow-up question on pricing. Maybe the flip side of that is, you know, as commodities maybe start to decline, are you getting some requests for price reduction from some of your customers? And if so, how are you managing that sort of volume versus not selling at a loss?
spk05: Yes. The answer is yes. And we regularly have conversations about value with our customers and our partners. We need to make sure that what we bring to market is suitable and at the quote-unquote the right price for consumers to continue to enjoy dairy. So for sure, in areas where we're starting to see some better pricing in way of, as example, I mean, I think we can all agree that fuel is in probably a better place than we would have expected. Is there some benefits to that? Yes. Are there some other areas of the business that it's costing us more? Yes, as well. But those do... generate the conversations with our partners about where is the best landing price, and we continue to have those conversations to ensure that we're bringing the right products and are not curbing demand because of pricing.
spk04: Okay, thank you, and all the best. Thank you, Chris.
spk08: There are no further questions at this time.
spk09: We thank you for taking part in the call and webcast. Please note that we will release our first quarter fiscal 2024 results on August 11, 2023. Have a nice day.
spk08: That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line. Have a great day, everyone.
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