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spk10: Greetings and welcome to the Saputo, Inc. First Quarter Fiscal 2024 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 1 followed by the 4 on your telephone. If at any time during the conference you need to reach an operator, please press star 0. As a reminder, this conference is being recorded on Friday, August 11, 2023. I would now like to turn the conference over to Nick. Please go ahead.
spk07: Thank you, Frank. Good morning, and welcome to our first quarter fiscal 2024 earnings call. 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 in 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 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 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 Leo.
spk02: Thank you, Nick, and good morning, everyone. Our business delivered strong results in the first quarter despite facing significant market headwinds and lower consumer demand. We reported adjusted EBITDA of $362 million, which was 4% higher versus last year on revenue of $4.21 billion. We had a strong overall performance in the Canadian sector, significant operational improvements in our Australia division, and more operational stability in the US. Notwithstanding this, there is still more work to be done. As mentioned on our recent Q4 call, the first quarter began largely as we had anticipated. We experienced a drop in global demand and significant volatility in the U.S. and the global commodities markets. This recent trend has persisted, which confirms our cautious stance on the macro environment and the consumer, particularly as it relates to customer spending levels and behavior. While it would be premature to predict when market conditions are expected to stabilize, we believe they are transitory. So we will focus on the long-term earnings potential of our business. To that end, we remain confident in our operating model and global strategic plan initiatives designed to deliver $2.125 billion in adjusted EBITDA annually. However, given the current environment, we no longer expect to achieve our adjusted EBITDA by fiscal 25. We do nonetheless anticipate dairy markets to stabilize over time. Despite these headwinds, we've made great progress around labor, operational performance, cost and margin recovery, cost containment measures, and the additional advancements within the framework of our global strategic plan. As a result, We delivered a record year in fiscal 2023, and the underlying health of our business remains intact. As always, we are focusing on the factors we can control, such as our optimization projects, which are fully on track. We will not only continue to assess opportunities to accelerate the plan, but also to broaden it, to build on the strong foundations we have in place. we expect to see meaningful benefits, notably with our optimization initiatives later this year, as expected. At this point, we are progressing extremely well, both in terms of spend and the timing of the various project ramp-ups. As an example, in the US, we're on track with the mozzarella expansion project at our Waupon facility. With the production startup on schedule, we transferred mozzarella production to Waupon from Reedsburg, which will be converted to a state-of-the-art goat cheese manufacturing facility later this year. Our Paige Tulare plant received the equipment to support its mozzarella modernization projects, and we are now in installation mode with the wrap-up scheduled in the second half of this fiscal year. By this fall, the scheduled upgrades in mozzarella will be completed, and we will start benefiting from the related cost efficacy. The construction phase of our new $240 million automated cut and wrap facility in Franklin is progressing well and we expect to begin operations in Q3. From there, we will begin to carefully transfer production from our Big Stone, Belmont and Green Bay manufacturing sites before closing those legacy factories. In the UK, The previously announced network consolidation aimed at improving operational efficiencies are progressing well. The development of the expanded Nuneaton packing facility is nearing completion, with commissioning of the first new lines underway. In the Argentina division, we're installing a new biodigester in Teopuquio. The project will be executed over three phases and will benefit our environmental footprint will treat our organic waste streams to generate biogas and drive cost savings notably around energy and gas. In the Australia Division, the construction and equipment installation for our new frozen natural cream cheese capabilities is in the final stages of commissioning with the lines due to be up and running by the end of Q2. While we are focused on ensuring effectively navigating through the current volatility We expect the benefits to represent meaningful improvement opportunities for us. These investments are significant in terms of their long-term impact on our ability to operate more efficiently as we work to create an even stronger, more resilient organization that can grow and succeed. I will reiterate, our strategy and our confidence in it remains unchanged. I will now turn the call over to Max for the financial review before providing my concluding remarks. Max?
spk12: Thank you, Lino, and good morning, everyone. Consolidated revenues were $4.2 billion, a 3% decrease when compared to last year, while adjusted EBITDA amounted to $362 million, a 4% increase. Higher year-over-year adjusted EBITDA was driven by the carryover impact of a higher average selling prices driven by previously announced pricing initiatives, cost containment measures, lower logistics costs, and efficiency and productivity initiatives aimed at minimizing the effect of macroeconomic conditions. These were partially offset by a $14 million negative impact to U.S. market factor, mainly due to the unfavorable realization of cheese inventory and a $10 million inventory write-down resulting from the decrease in certain market selling prices. Furthermore, lower sales volume negatively impacted operational efficiencies and the absorption of fixed costs. Income tax expense for the first quarter of fiscal 24 total $37 million reflecting an effective tax rate of 21% as compared to 24% for the same quarter last year. The effective income tax rate for both first quarter of fiscal 24 and 23 include the favorable effect of approximately 5 and 3% respectively relating to the tax and accounting treatment of inflation in Argentina. Adjusted EPS on a diluted basis was $0.36 per share, up 6% when compared to the same quarter last year. Net cash generated from operating activities amounted to $263 million, up $136 million from last year. I'll now take you through key highlights by sector, starting with Canada. Revenues for the first quarter totaled $1.2 billion, an increase of 6% when compared to last year. Revenue increased due to higher selling prices in connection with higher cost of milk as raw material and the carryover impact of pricing initiatives implemented to mitigate increasing costs in line with inflation. Sales volume were stable year over year in the retail market segment, while sales volume in the food service market segment were higher. Adjusted EBITDA for the first quarter totaled $144 million, up 9% versus the same quarter last fiscal year. The improvement was driven by the carryover impact of increased selling prices, a favorable product mix with increased cheese sales volume, further benefit from our cost containment measures and efficiencies and productivity initiatives, and lower logistics costs. In our U.S. sector, revenue totaled $1.88 billion and were 8% lower versus last year. Revenue decreased due to the combined effect of lower average block market price and lower average block market price as well as lower sales volume. Adjusted EBITDA increased 6% to $103 million despite a $24 million unfavorable impact from lower commodity prices and soft demand. The year-over-year improvement was mostly driven by the carryover impact from previously implemented pricing initiatives and the favorable impact of lower logistics costs, including the effect of lower fuel prices. In the international sector, revenues for the first quarter were $868 million, down 5% versus last year, while adjusted EBITDA totals $77 million, down 5 million. The decline in adjusted EBITDA was mostly driven by lower export sales volume. This was partially offset by higher milk intake, which positively impacted our efficiencies and absorption of fixed costs, and the carryover effect of pricing action previously undertaken to mitigate increasing input costs. Our results were also positively impacted by previously announced network optimization initiatives at improving our operational efficiencies and strengthening our competitiveness in Australia. In the Europe sector, revenues in the first quarter were $252 million, or 12% higher when compared to last year, while adjusted EBITDA amounted to $38 million, a 6% increase. Revenues and adjusted EBITDA increased due to carryover effect of pricing initiative previously implemented to mitigate higher cost of milk as raw material and other input cost increases in line with inflation. Lower sales volume due to lower demand for dairy ingredient, mainly in the industrial market segment, affected efficiencies and the absorption of fixed costs. From a balance sheet perspective, it continued to strengthen with our net debt to adjusted EBITDA ratio down to 2.36 times. Capital expenditure for the quarter totaled $160 million. We remain on track with our capital investment plan and year-to-date spending is in line with our current expectation for the year. Finally, Our Board of Director approved an increase to our quarterly dividend rate yesterday to $0.085 per share, effective with our September payment. This concludes my financial review, and with that, I'll turn the call back to Lino.
spk02: Thank you, Max. We are pleased with the improvements we've seen in our business. In the U.S., despite market volatility, we're continuing to optimize our existing footprint add new capabilities, implement cost containment measures and match our portfolio more closely with customer and consumer needs. We're moving in the right direction and our business is in a much better position when compared to last year. Notably, our staffing levels have reached pre-pandemic levels, we've seen more operational stability and our supply chain is also back on firmer footing. This stability has been a key driver of our improved fill rates. Operational stability and expanded capabilities will be key to unlocking future growth in the U.S., with focus areas being balancing growth, market share, margins, and volume. From a commercial perspective, renewed investments in marketing and innovation in our largest brands, including Frigo Cheeseheads, Montchèvre, and Treasure Cave, are driving market share growth. Our Canada sector had another strong quarter with year-over-year growth in both revenues and adjusted EBITDA, driven by pricing momentum, continuous improvement measures, and operational initiatives. The food service market segment remained resilient. We posted strong gains, notably in QSR, which supported our growth in key categories. On the retail side, we increased share in the everyday cheese category driven by new listings and steady fluid milk volumes. During the quarter, we continued to focus on innovation and introducing new products into the market. We launched Nibbler's flavored snacking curds, lactose-free feta cheese, and later this year, we'll be expanding our Saputo sliced cheese category. We maintain leading positions across most of our categories in Canada by leveraging our diverse portfolio across multiple market segments, brands, and price points. This really speaks to the strength of our brands and the way we're positioned within those categories. In the international sector, moderate global demand negatively impacted our export volumes. In Argentina, some of the export market volatility was offset by operating efficiencies in addition to higher domestic volumes and prices. In Australia, we benefited from higher domestic prices and improved plant efficiencies, resulting from optimization initiatives offsetting lower export volumes. On milk intake, we opened with a strong price for the new milk season, securing a sustainable uplift in our milk volume to ensure high utilization of our plans for the rest of the year. While the Australia Division still has some challenges to overcome, our transformation agenda has continued to make an impact in Q1. Our network consolidation activities, including the closure of the MAFRA site, as well as the streamlining of Milau and the Leon Gatha facilities, were completed in Q4, and benefits began to be realized in Q1, notably around freight and improved product optimization benefits. We're executing on brand an SKU portfolio strategy with a range of reductions on track aimed to simplify our portfolio to deliver strong returns. In our Europe sector, pricing momentum offset lower volumes. Despite the challenging consumer environment in the UK, Cathedral City expanded its position as the UK's number one cheddar brand as it won volume share from other brands during the period. New product launches are planned for later in the year, which are expected to further continue to drive revenue growth. Private label volumes continue to grow in the quarter due to new business wins during fiscal 2023. Turning to our outlook for the remainder of the year, as noted in my introductory remarks, the macroeconomic environment remains unpredictable. So in the meantime, we are pulling multiple levers to drive improvement in our performance, including pricing action, continuous improvement measures, efficiency initiatives, and enhancing our ability to service customers. Simply, we believe the work we are doing now will continue to benefit the business over the long term. We'll focus on actively managing the items in our control while quickly reacting to dynamic macro trends that come our way. And on that note, I thank you for your time, and I will now turn the call over to Frank for questions. Frank?
spk10: 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 Irene Nettel with RBC Capital Markets. Please proceed.
spk04: Irene Nettel, RBC Capital Markets Thanks, and good morning, everyone. If we could talk for a moment, please, about the U.S. segment. Results were really strong, particularly given the magnitude of the headwinds. Can you outline for us or can you rank for us the relative contribution of various factors that you cited and how we should think about those buildings as we move through the year?
spk02: Thank you, Irene, for that question. So let me highlight the strong work that we've done in all divisions, but particularly in the U.S. And perhaps that gets lost in some of the noise of market factors and issues. Labor has been improved dramatically. Our ability to be able to hire and retain talent has been much improved. And in fact, you know, we've changed some of the practices that we historically have done to ensure that number one, we're hiring the right people who want to work in a manufacturing environment and number two, we can retain them because of course that creates a lot of stability for us when it comes to producing high quality products and first pass quality on an ongoing basis. Operational performance has come from some of the investments that we've made that are starting to materialize in addition to having a stable workforce as well. We continuously worked on cost containment and continuous improvement initiatives within our US platform. And that, along with some of the price increases we've taken, have improved the margins that we have within the US platform. So we're executing really well on the network optimizations, and not just in the US, but in all divisions. So we're in much, much better shape. And it's part of the reason why we were able to mitigate some of the massive headwinds we had in Q1. You know, I'll remind you that we had a 50 cent or so drop in the block price, which typically is hard to overcome. But we're in much better shape than we were even pre pandemic. So I feel good about where we sit. And not just for the US platform, but for all of our platforms, we're executing extremely well. I'd like Carl to talk a little bit in some detail relative to the strength of the U.S. platform and some of the other initiatives that are ongoing there.
spk09: Thank you, Lino. Maybe just to reiterate that the strength that we have seen here in the quarter really comes from the overall supply chain. The stability that we've had in our labor has allowed us to improve our first pass quality, improve materially our fill rates, And that all comes really with the kind of stability in our workforce and as the skills are augmented and our staff and our teammates are retained. I'll say that the team is also very focused on delivering the consumers' needs today, but also focused on the initiatives, the very exciting initiatives that we have begun and are in the middle of commissioning in some cases, A lot of the investments that we have planned over the last couple of years are going to come to fruition here beginning in Q3, and the contribution of that will also be seen beginning in fiscal 24. So the team is very focused on delivering on the initiatives and on our plan, all the while focusing on customer service and supplying the consumer needs of the today.
spk04: That's really helpful, thank you. And from the demand side, where are you seeing the greatest weakness in terms of the volume piece of that? And in your view, what does it take to turn that around and start to see some volume gains again?
spk09: If the question is specific to the US, what I would say is that although consumer sentiment is lower than it had been in more recent years. The demand side in the US is not as soft as it is globally. So if we look truly at overall demand and sort of in sequence, global demand is where we see the softest of consumer sentiments, specifically in the China sector. When it comes down to the U.S., what I would say is the following. Our product portfolio is quite diverse, and it allows us to play in a number of different channels. So we service all market segments, whether that be retail, food service, industrial. And with the downturn in some areas, there are some bright spots. As an example, restaurants, despite consumer sentiment, are going to win today over the coming weeks, months, and quarters. And we do supply the sector in large quantities. So despite softer consumer sentiment, we do believe that there are opportunities in our markets here in the U.S.
spk04: That's great. Thank you.
spk10: Our next question comes from Michael Van Elst with TD Securities. Please proceed.
spk08: Good morning, and good results in a tough environment. I wanted to, I guess, focus a bit more on that $2.125 billion target. I mean, you made it clear that you're convinced you're doing all the right things to achieve that, but it's just the timing. If we can kind of put aside pricing and spreads in the U.S., for example, if we assume that commodity prices normalized at reasonable levels, spreads got back to zero and that all happened, let's call it by December, what else would have to happen for you to achieve that $2.125 billion in fiscal 25 or whenever?
spk02: Yeah, so Michael, there are two parts to the target of 2.125 by fiscal 25. One, which you well identified relative to the markets, but we're not just focused on the U.S. market, which does help move the needle, but there's also the international markets, which pricing is a little bit depressed right now because of the international consumer sentiment there and China really not being on the buying market. And then there's the other half of it, which is consumer sentiment and growth in consumption of dairy products around the world. And, you know, it's not just the dairy industry that's feeling it. I think there are a lot of consumer staples as well in other categories of products that are feeling the same kind of pinch and pain that we're feeling. Let me say this. The 2.125 is still very, very much intact. We're confident in our plan. we're confident in our ability to be able to execute effectively on those projects and those ideas and those initiatives that we set out for ourselves. So that's really not the issue. And I would also say that at the end of this quarter and going into Q3 and Q4, most of the heavy lifting on those projects will have been done. So we're extremely confident in our earnings power for the business. It's just the unpredictability of the elements relative to pricing and relative to consumer sentiment that are creating a push-out of our target date. But the target number remains unchanged, and our confidence in that is unchanged.
spk08: Okay. So you're on track with the global strategic plan. So if it wasn't for market conditions, it sounds like you'd still be comfortable with that fiscal 25 target. Right. Nobody has a crystal ball, obviously, on the commodity prices, but I'm guessing that because you're taking away the fixed timeframe on that target, you just don't have enough visibility in the short term to see either the commodity prices rebounding that quickly or demand rebounding that quickly.
spk02: That's precise, Mike. The visibility is the issue. Look, six weeks ago, we were talking about a U.S. block at $1.30. Today, we're talking about a U.S. block at $1.96. Those are massive, massive swings that historically we had never seen before. So it's the unpredictability of the markets that create that reserve for us. Let me say this, though, Mike. We are putting the pedal to the metal. there is no stoppage in our desire and our ability to get things done. So our timeline, for all intents and purposes, is as soon as possible. But with the unpredictability of the markets, it's tough to peg that date.
spk08: Okay. And just one other question. You said in your outlook statement that you expect input cost inflation to moderate but remain elevated. And I'm not quite sure if you mean that growth is expected to be elevated still, or just that the cost won't come down? And so if it's growth, does that mean you expect to have to pass these on, and when do you expect to see more price increases?
spk12: Mike, from a cost perspective, we've seen increases that are sticking with input costs, whether it's packaging, whether it's other consumables. But in other areas, on the raw material side, we see a reduction. So as much as we're managing inflation on our costs, and that includes also labor, energy, and that sort of thing, we're also managing and monitoring the raw material costs that are not consistently increasing in all of the markets. So it's a combination of both.
spk08: So do you feel the need for further price increases at this moment?
spk12: At the moment, we are, if I could say it this way, our heads are above water. So we're monitoring all the costs that are coming to us. Should we feel we need to, we will. But at this time, we feel comfortable that we're acting responsibly on the market.
spk08: Okay, great. Thank you very much.
spk10: Our next question comes from Mark Petrie with CIBC. Please proceed.
spk11: Hey, good morning and thanks for all the comments so far. I just wanted to follow up further on the US and specifically on the efficiency front. Is it fair to say fill rates and service levels are back to targeted levels?
spk09: Yes, Mark, absolutely. So our fill rates and our service level to our customers in all of our channels are back to historical rates, and that's both a combination of improvements in efficiencies and overall logistics, as well as our manufacturing efficiencies. So the combination of the two are allowing us to service the orders, the markets, and to keep pace with the demand that is out there today.
spk11: Yeah, okay, understood. I just want to clarify, and when would you say you achieved that? Was that in Q1 or was that actually in Q4?
spk09: We've been on a slow climb, but in Q4, we saw a material change in our ability to service the markets that carried through Q1, and it is carrying here today as we speak.
spk11: Yeah, okay, perfect. And similar sort of question, just trying to gauge trajectory, with regards to the volume pressures in the U.S., I mean, it had been recovering, you've been recovering volumes basically through the last year and still in a competitive market. So is the decline in this quarter a matter of sort of lapping that recovery or incrementally something is more difficult? And maybe just comments on the competitive market dynamics overall.
spk09: Yes, and thanks for the question, Mark. And let's not forget that our U.S. business also has a component of export that's calculated in our total volume. And as we talked through in June, and we've been sharing global demand being soft, that has impacted also our export sales. So there's some channels of finished goods on the cheese side that we do export, as well as a material amount of our ingredients business is exported. We have, the U.S. business has been impacted by that. Domestically, though, what I would say is we've maintained demand ground on our supply, the demand and the consumer sentiment remains softer than we would have expected. However, we're not losing track or share in the U.S. marketplace. Okay, that's helpful. Thank you.
spk11: And then I guess one final question, just with regards to, Carl, I think you had talked about trying to be responsive to you know, where there is demand and which channels, you know, demand is holding in best. But I know that, you know, there's also just sort of structural challenges in doing that with regards to package sizing and packaging and so on and so forth. So have you sort of structurally addressed some of that through these optimization initiatives? And would you say you're in a position to be more responsive than you might have been, you know, say when the pandemic hit?
spk09: It's a great question. And what I would say is the kinds of shifts in the channels and the market segments that I'm referencing are much less dramatic than it would have been during the pandemic, which was a massive shift to retail versus the food service style of packaging and sizes. Despite that comment, I would say that today's shifts in the various channels are are still very much aligned and balanced with our capabilities. We are in a much better place nonetheless. Should we ever get back to that type of ratio where, you know, retail is far stronger than food service, we will have better capabilities in those sectors as well. It is part of our initiatives and ongoing plan to augment our capabilities in the retail sector. Yeah.
spk11: Okay. Understood. Appreciate all the comments. All the best guys.
spk10: Our next question comes from George Dume with Scotiabank. Please proceed.
spk05: Yeah. Hi, good morning guys. Just a quick follow up on the volumes in the US. I'm just wondering how much they've declined by in the quarter, maybe domestically or export. And when you sit today, when do you expect those volumes to maybe be flat?
spk09: Yeah, George, I'll maybe just reiterate a little bit here. If I take a look at the quarter, overall, there isn't really a material decline in any way on the domestic side of our supply. The majority of that decline would have come from our export component. Having said that, we do have good momentum here at the start of Q2, and our outlook is for the supply side is good as well. We continue to focus in on a number of different channels for supply. There are opportunities out there. I know we've said this historically, but the U.S. market is still fragmented in many ways. There are still lots of opportunities, lots of customers and consumers who are looking for innovation, who are looking for partners for the service and the kind of growth that they're anticipating. So I would say that from quarter over quarter, sorry, over last year, it's really an export story related to the overall global demand, which is a lot softer than anticipated.
spk05: Can you share maybe how much export volumes were down? Is that something you guys want to share?
spk12: We don't want to share that information as it is sensitive from a competition perspective. So I would like you to respect that.
spk05: No problem. Just maybe shifting over to Canada, can you give us an outlook over there in terms of maybe volumes and can you talk a little bit about the sustainability of the margins going forward? Do you think we can maybe see a competitive response in the second half?
spk09: Yeah, sure. The Canadian market is more resilient than I think many of our industry peers would have anticipated. The food service market remains strong. There had been some prior outlooks suggesting a downturn in the second half of the calendar year or on the back end of the calendar year. And the most recent outlook is suggesting that we'll probably weather that storm here and look to some sort of potential downturn in that food service sector in the new calendar year. So as we sit here today, the demand on the Canadian side remains strong. in numerous channels, and most surprisingly, in the food service side. We continue to excel in the Canadian marketplace with service, with innovation, with brand strength, and we're going to continue to grow with the customers that are growing.
spk05: Just one last one for me. Max, the inventory right down in the U.S. was, I guess, pretty small, all things considered. Is that all we should expect to see?
spk12: Yeah, that's all we expect to see. And I was just qualified that there's a portion of that that is related to ingredients. So it's not only cheese. So there's a portion relative to ingredient in that. And yes, we believe we're behind. And we should not expect at this time, should markets remain the way they are today, any further write down for the foreseeable future.
spk05: Great. Thanks for your answers.
spk10: Our next question comes from Tammy Chen with BMO Capital Markets. Please proceed.
spk01: Hi, good morning. Thanks for the question. Going back to the withdrawal of the fiscal 25 EBITDA target, I guess I just wanted to ask, as you thought about that, why the withdrawal? I mean, was there a consideration of maybe lowering the target number for fiscal 25?
spk02: Yeah, Tammy, thank you for the question. So let me reiterate, there is no suggestion that we're lowering the target. The 2.125 is a solid number. And we do have plans, ideas, initiatives behind achieving that number. The timeframe of it is all related to the unpredictability of the market. You know, where we sit right now with the international demand and pricing where we sit right now relative to the swings that we've seen just in the last two months in the U.S. creates an unpredictable environment. Things that we have historically hadn't seen, to be quite honest with you, and that's the reason for the timing of it. But there has never been any doubt in management's mind relative to the figure of 2.125. We have plans, we have ideas, We have the capital to support those plans and ideas and those projects. Our teams in all geographies are delivering on the projects. As I indicated in earlier statements, the heavy lifting is done through this fiscal year. And starting in fiscal 25, we're going to be in great shape. But the markets right now are hard to predict. and the crystal ball is not so clear at this stage.
spk01: Understood. Okay. And on pricing, so I see the results continue to benefit from the carryover of price hikes you've done before. In this sort of environment, I wanted to ask if you think there might be risk that pricing could go the other way, just given... globally and I guess even to some extent in the U.S. where consumer demand and sentiment is.
spk02: Yeah, so relative to pricing, Tammy, we were first to market in all our geographies to raise pricing relative to the inflation that we had been facing. Some of our competitors took them, you know, almost six to 12 months to catch up and some of them, quite frankly, have not caught up. So we're pretty proud of the responsible nature that we've taken relative to pricing given the inflation that we were facing. At this stage, we don't see any reduction in pricing other than just the GDT value of commodities that we're selling into the international markets. So of course, as we look at pricing product to our customers around the world, we use the GDT as our barometer for pricing. As the GDP comes down, then, of course, naturally pricing will come down. But when we think about our domestic markets in all geographies, whether that would be Canada, United States, Argentina, Australia, and the U.K., we don't have the intention of bringing price down.
spk01: Okay, got it. And last one for me is I remember last quarter when we talked specifically about the U.S., there had been a comment that, the domestic supply situation was also in a bit of a rough spot. I think you referenced that you and some of your other dairy processing competitors had improved fill rates and labor staffing, so there was this increase in supply, and it was coming at a time where the market was what it was in terms of demand. it kind of sounds like specific to that sort of supply hiccup. We're kind of through that now this quarter. Is that fair to say, specifically for the U.S.? Thanks.
spk09: So, Tammy, you know, I think what I heard was the question about the imbalance or potential imbalance in the supply and demand in the U.S. earlier on in Q4 and into earlier parts of Q1. What I would say is the following. Yes, it was also, let's not forget, it was the milk flush season, so naturally we have an increase in milk coming off farm at that moment in time, and it did coincide certainly with a demand drop, specifically in the export markets, that created the situation that you likely would have read of as well in the media about oversupply of milk. There has been a much better balance that we're seeing today. I think the markets, the block market or the CME is reflecting some of that today as well. And we don't anticipate, well, actually, I'll say it this way. We anticipate a better balance between supply and demand as we move forward.
spk01: Yeah, that was what I was referring to. Got it. Thank you. Okay.
spk10: As a reminder, to register a question, please press the 14 on your telephone. Our next question comes from Vishal Sridhar with National Bank Financial. Please proceed.
spk03: Hi, thanks for taking my questions. In your press release last quarter, Saputo indicated that for fiscal 24, it was focused on organic growth, expanding EBITDA margins, maximizing cash flow, and driving operation leverage. And that language was removed in this press release. Just wondering if that's still the focus.
spk12: Hi, Vishal. There's no, per se, there's no change relative to that. I mean, we're focusing on growing our business. We look at our Q1. We're happy with the Q1, with what we've been able to put on paper and to deliver. So looking at the next few quarters, if we would take the market out, we feel our business is in a strong position to deliver growth and generate cash flow. So essentially, nothing has changed from that comment that you referred to.
spk03: Okay, great. With respect to Canada, and this may have been asked, but I just want to... Underline that. So with respect to Canada EBITDA number, were there any transient items in there or anything that I should think about as I forecast out for the remainder of the years that suggests that maybe that number can't stick for the balance?
spk09: No, I would say what you're seeing in the Canadian numbers is the ongoing strength of of its supply, some of the various initiatives that the Canadian team has undertaken as part of its strategic plan that are delivering to the bottom line and continuing to excel at servicing our customers and growing with the customer base that's growing in the Canadian marketplace.
spk03: Okay. And in the U.S., given that the exports conditions are improving, And given that the market factors, at least from our standpoint, don't look to be as punitive as they were in Q1, should we anticipate, you know, and of course, you know, I'll put the proviso of no crystal ball, but should we out there as well, but should we anticipate all else equal that Q2 should mark improvement in US trends in volume and market factors relative to Q1?
spk09: Yeah, what I would say, Vishal, is as you would have heard Lino say earlier, the markets are very unpredictable right now. For as quickly as that market and block specifically dropped and the various interrelationships between the block, the barrel, and the way price would have also changed in that timeframe, we saw a positive swing here in the last five to six weeks. If we were to use today's market conditions and extrapolate that, yes, those are conditions in which we would consider as being normal and favorable to us. But again, that predictability and volatility is something that we're not prepared to model out as the underlying sentiments are still softer global demand. And so I want to maybe correct one of the statements you made around, you know, the export situation is improving. Global demand isn't necessarily improving. And what we're seeing is still some tough conditions out on that landscape. But despite that, what I would say is the domestic U.S. market still has growth capabilities for us, growth capacity. And that's what we're focused in on with not only our initiatives, but also with the capital initiatives. I'm also saying that we are also focused on our brands, the brand campaigns that are active in the market space today, and growing our share in a variety of market segments.
spk02: So, Vishal, I would just add to that, to answer your specific question relative to all things being equal, Should the market remain where it is? Yes, you should anticipate higher EBITDA in the next quarter than we saw this quarter, given a stable market at these levels.
spk03: Saputo is a company that's been around for a long time and it's seen slowdowns in the past. You know, what do you think is causing this unprecedented volatility? Is there something you can point to, or is it difficult to put your finger on it?
spk02: Yeah, you know, the market uncertainty really is not a good thing. A lot of speculation, too much access to too much information, I think, is creating some behavior that we historically have not seen before. You know, anyone can open up the Internet now and read what's going on in different markets, whether there's a potential recession coming, whether there's, you know, China looming economic turmoil, whether it's, you know, different climate patterns going on in different countries. I mean, there's just so much going on in the world right now, not to mention, you know, also interest rates that are rising. There is a lot of speculation in the markets. And we see that also in the commodity markets. You know, buyers will buy based on where they think the markets are going to be, or they'll stay on the sidelines based on where they think that supply is going to be. This is the world that we live in today. And that increased volatility we see in the stock market is very, very similar to the increased volatility we're seeing in the commodities markets. And it's perhaps, you know, a new world we're living in, What we look at at Saputo is really the balance between supply and demand and the strength of what we can bring to market. And that's the only thing that we can control, you know, how we can process effectively and efficiently, how we can service our customers in a way that makes us their number one supplier for dairy goods. That's what we're good at. That's what we're specialized in. And I will say that once we come out of this draft plan in fiscal 2025, our network within every single one of our geographies is going to be second to none in our industry. And so, you know, there was a little bit of pain that we went through through the pandemic, perhaps some delays and some of the lift that we would have anticipated because of market uncertainty. But fundamentally, Coming out of this draft plan, going into fiscal 25 and into fiscal 26 and beyond, our infrastructure is going to be second to none in all geographies in the dairy space. So going back to, yes, the 70 years of experience that you referred to, we are shining in the things that we know we can control. And that's the confidence we have in our ability for future growth and for future optimism.
spk03: Thank you.
spk10: Our next question comes from Chris Lee with Desjardins Securities. Please proceed.
spk06: Oh, good morning, everyone. Maybe just start with one on just on capital allocation. You know, notwithstanding the current market volatility, you know, your balance sheet, your leverage continues to improve. And I'm just wondering, you know, at some point, if it does get to your leverage target and conditions start to improve and your share prices remains where it is, given your confidence in your long-term EBITDA target. Do you envision a scenario where you might actually start maybe buying back some shares?
spk12: Hi, Chris. Max here. So, you know, the focus on the capital allocation is certainly to support all the initiatives of our strat plan. The second piece is around our dividend. And as you notice, we've just increased the dividend rate starting next payment. And finally, it's a debt reduction. So for this year, this is the primary focus. Not that the share buyback is completely out of the radar, but we simply want to get our debt level to a lower level and reduce the financing costs associated with it. So that's kind of the way we're looking at cash allocation right now.
spk06: Okay, that makes a lot of sense. Thanks for that. And, you know, I apologize if we covered this in the opening remarks, Rudy, but anything sort of update in terms of what you're seeing in the M&A market since we last spoke?
spk02: Yeah, so there are companies in our space that definitely are feeling the pain and the pinch of this context. And of course, our M&A team is always aware of what's available in the market. But I want to reiterate a statement that I made in the last quarter and the quarter before that. Our primary focus is delivering on the strat plan. The use of funds for us are going to be to support those projects that we have from a CapEx perspective, and then, of course, to pay down debt. So at this stage, it is not a priority. I will tell you that our most urgent requirement, our most urgent needs are relative to delivering on the strat plan, and that's what our focus is going to be moving forward.
spk06: Okay, that makes a lot of sense. And maybe, Max, just maybe one follow-up for you. I know we're only halfway through the quarter, and obviously there are a lot of moving parts right now, but I just wanted to sort of take your temperature in terms of Q2 EBITDA. Do you expect growth in Q2 EBITDA, given where things are right now? And do you expect the rate to be higher than what you achieved in Q1, just based on what you're seeing right now in the market?
spk12: Okay, well, yeah. So, Chris, I'll piggyback on the comment that maybe we did, or I did last call. we end up the Q1 with a 4% increase year over year. We did qualify that as a modest, and it was a modest because of the market factor we had to deal with during the quarter. So should we remove the market factors, and I'm referring to the $24 million we're calling out, Now, we would not be into the modest zone from our perspective, and that's what we're looking for in fiscal 24. We're looking to grow our business aside from the market factor. So we're not going to look at Q2 differently than what we'll look at Q1.
spk06: Okay. Thanks for colors, and all the best.
spk10: There are no further questions at this time. I will now turn the call back to Nick. Please continue with your presentation or closing remarks.
spk07: Thank you, Frank. We thank you for taking part in the call and webcast. Please note that we will release our second quarter fiscal 2024 results on November 10th, 2023. Thank you and have a nice day.
spk10: 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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