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Operator
Greetings and welcome to the Saputo Incorporated second 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 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, November 10, 2023. I would now like to turn the conference over to Nick.
Nick
Please go ahead. Thank you, Frank. Good morning, and welcome to our second quarter fiscal 2024 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 Maxime will be supported by Carl Kolitsa, President and Chief Operating Officer, North America, and Leanne Cutts, President and Chief Operating Officer, International and Europe. Before we begin, I'd like to remind you that this webcast and conference call are being recorded, and the webcast will be posted on our website along with the second quarter investor presentation. Please also note that some of the statements provided during this call are forward-looking. Such statements are based on assumptions that are subject to risks and uncertainties. We refer to our cautionary statements regarding forward-looking information in our annual report, press releases, and filings. please treat any forward-looking information with caution as our actual results could differ materially. We do not accept any obligation to update this information except as required under securities legislation. I'll now hand it over to Lino.
Frank
Thank you, Nick. And good morning, everyone. As it has been publicly reported, the global operating environment remains dynamic and our industry is not immune from it. Despite this, we delivered 8% adjusted EBITDA growth this quarter driven mostly by favourable commodity markets in the US and higher domestic sales volume, while we also continue to benefit from our ongoing cost containment initiatives and benefits from our global strategic plan. We enjoyed a better performance in our US and Canadian sectors, which partially offset a decline in Europe and international sectors. As consumer sentiment continues to vary around the world, overall spending has held up quite well. However, In some markets and categories, consumers are feeling cost pressure and have shifted towards discount channels and private label. Notwithstanding the consumer inflationary environment and the broader market experiencing some levels of trade down, our brands performed well and we grew volume in key private label channels. With our broad portfolio offering an array of products from value to premium, we're able to meet consumers wherever they shop or consume. Our team is successfully managing price and cost dynamics as margin recovery continues to be a top priority. This said, much of our inflationary-driven pricing across our channels has either already been announced or is part of pricing protocols within existing contracts. Additionally, we're leaning harder into operational efficiencies and taking action on cost containment. From a strategic perspective, we executed well during the first half of the fiscal year and implementation of our global strategic plan is on track. We are focusing on the factors we can control, such as our streamlining and optimization projects, which are going as planned, both in terms of spend and timing of the various project ramp-ups. We expect most of our capital projects to be completed by the end of this fiscal year and benefits to begin to flow through our results early next year. Amid a volatile environment and with various puts and takes across our business, our second quarter results were broadly in line with our expectations. Simply, we are making good progress, supported by volume improvements, operational efficiencies, and our capital projects. I will now turn the call over to Max for the financial review before providing concluding remarks. Max?
Nick
Thank you, Lino, and good morning, everyone. Consolidated revenues were $4.3 billion, while adjusted EBITDA amounted to $398.8 million increase. Higher year-over-year adjusted EBITDA was driven by higher domestic sales volume and the positive impact from the U.S. market factor. Also contributing to higher EBITDA were cost containment measures, lower logistical costs, and the benefit from the Global Strategic Plan. These were partially offset by lower export sales volume due to the softening of global demand for dairy products, lower international dairy ingredient and cheese prices, and an inventory write-down resulting from a decrease in certain market selling prices. Income tax expense for the quarter total $44 million, reflecting an effective tax rate of 22% as compared to 23 for the same quarter last fiscal. Adjusted EPS on a diluted basis was 43 cents per share, up 19% when compared to the same quarter last year. I'll now take you to key highlights by sector. In Canada, revenue for the second quarter totaled $1.3 billion, an increase of 5%. Revenues increased due to higher selling prices in connection with the higher cost of milk as raw material and the carryover impact of pricing initiatives implemented to mitigate ongoing inflationary pressures on our input costs. Sales volume were stable year over year in the retail market segment, while sales volume in the food service and industrial segments were higher. Adjusted EBITDA for the second quarter totaled $148 million, up 9% versus the same quarter last fiscal year. The improvement was driven by mitigation of inflation through carryover impact of previously increased selling price, further benefits from our cost containment measure, lower logistics costs, and the benefit derived from our global strategic plan, including continuous improvement supply chain optimization, and automation initiatives. In our U.S. sector, revenue totaled $1.95 billion and were 5% lower versus last year. Revenue decreased due to the combined effect of lower average cheese block and butter market price, offsetting an increase in sales volume and pricing versus last year. Adjusted EBITDA increased 44% to $147 million. And the year-over-year improvement was mostly driven by a $32 million positive impact from better market factor driven by the favorable cheese milk spread. The carryover impact from previously implemented pricing initiatives, higher sales volume, mostly in the dairy food products category, and the favorable impact of lower logistics costs, including the effect of lower fuel price. The international sector revenues for the second quarter were $879 million, down 11%, while adjusted EBITDA total $83 million, down 14% versus last year. The decline in revenue and adjusted EBITDA was mostly driven by lower export sales volume and the unfavorable relation between the international cheese and dairy ingredient market prices and the cost of milk as raw material as our commodity selling prices are down versus last year. A decrease in certain market selling prices also resulted in an inventory write-down of $7 million. This was partially offset by the carryover effect of pricing action in our domestic markets previously undertaken to mitigate increasing input costs and higher milk intake. Our results were also positively impacted by previously announced network optimization initiatives aimed at improving our operational efficiency and strengthening our competitiveness in Australia. Should the international pricing environment stabilize at current levels, we would begin to see an improvement in our export business towards the end of the fiscal year, giving the lag effect on our customer contracts. In the Europe sector, revenue in the second quarter were $246 million, while adjusted EBITDA amounted to $20 million. The decline in adjusted EBITDA was due to a negative product mix and by the selling of inventory produced at high milk prices last fiscal year. Lower international dairy ingredient market prices also had a negative impact. Given our stable volume so far this year, we expect high-cost inventory not to be depleted until at least the end of the fiscal year before our inventory returns to balance. From a balance sheet perspective, it continued to strengthen with our net debt to adjusted EBITDA ratio down to 2.34 times. Capital expenditure for the quarter totaled $149 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. We continue to expect an improvement in our cash flow generation over time, as well as we'll be harvesting the benefit from the global strategic plan. and capex allocation returning to levels similar to our depreciation and amortization range. This concludes my financial review, and with that, I'll turn the call back to Lino.
Frank
Thank you, Max. In the Canadian sector, our results continue to reflect the Division's relentless focus on commercial and operational execution, with a diversified portfolio that offers variety, convenience, and good value to consumers. We had another strong quarter with year over year growth in both revenues and adjusted EBITDA. Volume and product mix improved with higher volume of everyday and specialty cheese. This growth was driven by our strengthening position in QSR, where we saw an uptick in traffic as people returned to the office more frequently and to other non-restaurant away from home food channels. We had a nice performance from the retail segment driven by a strong back to school season. This was also supported by increased brand investments, notably with our Armstrong brand. In the U.S., we generated strong adjusted EBITDA growth and delivered margin expansion. Results improved versus last year on pricing momentum and the recovery in commodity markets, notably the milk cheese spread. Dairy commodity markets remained volatile during the quarter, with the block price of cheese closing nearly 30% higher from the June average. However, it has trended at a more moderate level since the end of the quarter. We believe that market volatility remains transitory and will stabilize over time. Our domestic volumes increased across many categories this quarter, driven by a strong performance in dairy foods. Our year-to-date volumes are still slightly below our expectations, given the slower start of the year. but we expect volume trends to improve as we execute our strategic and commercial initiatives. Marketing and innovation activities drove strong results across several of our key retail brands, including Frigo Cheeseheads, Treasure Cave, Montchevre, and Stella. For example, we are solidifying our leading blue cheese retail offering, including growing and strengthening our Treasure Cave brand. The new You Might Love It Here campaign was launched to much industry acclaim, helping to drive double-digit year-on-year retail volume growth and making it the fastest-growing brand in the blue cheese category over the last year. We also celebrated the 100th anniversary of our Stella brand, with a nationwide tour showcasing the product and recipes using Stella cheese. We visited 10 cities, partnered with 12 major retailers, and gained 6.6 million impressions via several social media platforms. In the snacking category, we're growing the Frigo Cheeseheads brand and taking actions to be the everyday dairy snacking category leader. The second year of the We Are All Cheeseheads campaign continued to support brand penetration during the key back-to-school period, with last 12-month volumes up 9%. we are building out our goat cheese offering for the future, including shoring up and growing the Montchevre brand. The new Makers of Mischief campaign started strong, helping to increase our brand share in the high teens. In addition, we introduced new innovations in goat cheese with the launch of several new products, including Duos and Thai Sweet Chili. With respect to capital investments, we're making good progress with the projects that are currently in startup mode or will be ramping up over the next few months. One example is our new recently converted state-of-the-art goat cheese manufacturing facility in Reedsburg, Wisconsin. Its successful startup will allow us to consolidate goat cheese production from both our Lancaster and Belmont facilities to Reedsburg and subsequently close those two facilities. The Reedsburg plant is set to increase capacity expand our position in growing specialty cheese categories and improve productivity. Belmont and Lancaster employees have made commendable efforts over the years to keep their facility operating efficiently. And I want to take this opportunity to thank them all for their hard work and their dedication. In addition, we're on schedule to permanently close our previously announced big stone Green Bay and Southgate facilities by the end of next fiscal year, which will further support our overall cheese optimization roadmap. Another capital investment project is our new cheese shred lines, which are up and running at our page to Larry plant and currently meeting customer demand. Finally, the startup of our new $240 million automated cut and wrap facility in Franklin, Wisconsin is fast approaching. All of these actions are critical to the execution of our global strategic plan. With most of the projects underway, we also remain focused on enhancing our network to optimize output, margin, efficiency, and service levels. These priorities are more relevant than ever as we are working towards producing the same output with a much smaller footprint. This evolution in our business and the investments that we are making will position us well to operate more efficiently and do more for our customers than we've ever done before. In the international sector, global dairy markets remain challenging due to unfavourable dairy commodity prices and lower export volumes. However, we do believe the bottom of the price cycle is behind us. Global market fundamentals are improving, while China has become more active. In Argentina, lower results were impacted by export market price volatility. In Australia, our performance improved year over year on a sequential basis due to higher pricing in the domestic markets and higher milk intake resulting in better operating efficiencies. Our optimization agenda has continued to make strong progress with project timelines on track and several streamlining activities completed over the last couple of quarters. As part of our roadmap, we have decided to commence a review of strategic alternatives related to our King Island facility in Tasmania. We intend to keep the operations running at regular capacity while we assess possible future scenarios for the facility, including a potential sale. Once our optimization agenda is completed, we will have reduced our footprint from 11 to six facilities. We have a solid long-term vision for Australia and its business. Taking these necessary actions will help us refocus its core business, improve its operating cost structure, and provide a solid foundation for success. In Europe, results were below our expectations. Consumers are still facing heightened cost pressures and retail volumes are taking longer to recover, while chief supply remains relatively high. Our performance was also impacted by a negative product mix as retail sales volumes were weaker than expected. The selling of inventory produced last fiscal year at higher milk prices and lower international ingredient prices and volume. Some of this EBITDA pressure was offset by the carryover effect of pricing initiatives, our focus on cost reduction measures, and additional actions initiated during the second quarter of this year. We are now cycling through some high-cost inventory. We expect to close this gap and for our performance to improve towards the end of this fiscal year. Earnings should also recover further as we begin shipping new private label contracts in the fourth quarter of this fiscal year. Despite the dynamics, Cathedral City gained market share from private label and competing brands through advertising campaigns and new innovations, including Cathedral City lunch packs and the dip and go format a new best of British lineup, as well as several new plant-based launches. Now, turning to our outlook for the remainder of the year, we expect volatile consumer and market dynamics to continue, and we anticipate consumers to remain highly intentional in their spending, but we believe our broad portfolio of products and diversified channel exposure to position us well in consumer shopping carts. We will leverage our supply chain with a relentless focus on driving efficiencies in our business, optimizing our network and driving out costs. We remain focused on execution and fully realizing the benefits from our strategic plan related projects. We are confident in our strategy and the results that they are expected to deliver. With this quarter, we moved another step closer to the inflection point in our global strategic plan journey. We're looking forward to seeing some of our capital investments transition from cash outflow to inflow and leveraging the strength of the platform that we are building. Finally, we are delighted to have announced yesterday the appointment of Victor Crawford and Stanley Ryan to our board of directors. Victor has a vast experience in the food and beverage industry, logistics and supply chain management, and brings valuable insights in consumer retail to the board. Stanley has extensive leadership experience across a range of operational intensive multinational businesses in multiple geographies, particularly in the international commodities market. These appointments will strengthen the depth and the diversity of skills and experience of our board. I thank you all for your time and will now turn the call over to Frank for questions.
Operator
Frank. 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 Mattel with RBC Capital Markets. Please proceed.
Frank
Thanks, and good morning, everyone. Nice to see the performance out of the U.S. Really interesting to hear about volume gains and what sounds like really an enhanced sort of direct-to-consumer innovation and communication approach. But yet, at the same time, it really was market factors that drove a lot of the improvement in the earnings. So, How should we be thinking about all of that? And is it really F25 that we start to harvest the financial benefits of the Strat plan?
Carl
Thanks, Irene, for the question. It's Carl. Yeah, I would say a few things specifically around the consumer marketing and the campaigns we've put forward. We've gained some important market share in a number of specialty cheese categories. And despite that, our results did improve, but it was somewhat muted by the commodities markets that are still tough in the ingredient side. So although the cheese and milk spread was favorable, the ingredient side was also more difficult this quarter. When it comes to the strategic growth plan and the investments that we're putting into our plants, the majority of those benefits will come in fiscal 25. We're performing quite well right now with commissioning. We do believe that the performance of our plants will step up during, excuse me. Sorry, Irene. We do believe that the commissioning continue to proceed quite well over the coming months. And we're going to reap the benefits of that in our fiscal 25.
Frank
That's great. Thank you. And in terms of the volume gains in dairy foods, was that market share gains in addition to just sort of better industry tone?
Carl
In the dairy food sector, We had a great year when it comes to ice cream mix in particular. We continue to expand our channels in a number of QSR areas. So overall, it was a successful quarter two for the business. We continue that momentum into Q3, and we don't see any reason for that not to continue as we move forward in the dairy food sector. We do call out dairy food sector in particular, but there's also a lot of good momentum in the cheese sector. whether it's in the consumer space, the retail side, but as well as in our industrial channels and in our food service channels.
Frank
That's great, thank you. And then just one other question, if I might, and it's around the European business. The UK seems to be really challenged and certainly understand the complexity of what's going on with the consumer there with 30% food price inflation over two years. But can you talk about sort of how and when we see a path to really more sustained and more sustainable earnings at higher levels?
Tammy
Morning, Irene. It's Leanne. Yes, as you mentioned, the macroeconomic conditions in the UK have been difficult for the consumer. General inflation is running high and Gross inflation is at double digit rates still, which is significantly higher than some of our other jurisdictions. So consumer confidence continues to be quite fragile. Despite this, Cathedral City is growing share, which we're very pleased about. And we do have the other significant development is that in Q4, we will be bringing on a large private label as well. So Cathedral City is stable. We're investing in the brand. And in Q4, we'll have significant private label coming on stream. In addition to that, our milk price has already been significantly reduced. So that will help in being able to correct the inventory position as we go through to the end of the fiscal.
Frank
Thank you. Thank you.
Operator
Our next question comes from Michael Van Elst with TD Cowen. Please proceed.
Michael Van Elst
Thank you. In the press release, you did talk about an increasingly dynamic and competitive environment. And I'm wondering if that applied to all of Q2, or did you see it get worse as the quarter progressed? And what should we expect as far as the impact on earnings in future quarters? Are we already seeing that impact now? or do you expect part of it to get worse?
Frank
So overall, Michael, yes, the markets are competitive. Understand that certain channels are down in volume, other channels are up in volume, and everyone's trying to compete for the same share of space or share of stomach that they historically had. And that's true for all divisions. As you've heard in the intro and some of the commentary that both Leanne and Carl made, we're competing extremely well. We feel very good about the brands, both at retail that we're bringing to market and at the food service level. The overall volume for us in terms of the more competitive dynamic is on the international side, where we're seeing that the Historical buyers have been on the sidelines for quite some time, and there are solids that people are trying to place wherever they can. That's creating a dynamic that is unique and new for the industry. But again, there too, I think we're competing extremely well. We've got challenges related to the byproduct sales of our products, which do impact parts of the domestic business that we have where we manufacture cheese and we have solids we have to sell. But again, I think we're competing well. As we talked about also in the opening statements, we think that the international markets have hit a bottom. On the encouraging side, we're seeing that China's back in the bidding for dairy solids. Supply of solids has been mitigated as well, which is also very positive for the industry, where we see that there has not been the growth in production that we had seen historically. So there's a good balance between supply and demand, but the markets are still very fragile. When you look at the overall geopolitical issues, what's going on in the Middle East, when you look at the economic issues, what's going on in Europe and in China, it is creating a fragile state within the world, and we just have to navigate through it. But we've got great infrastructure in all of our countries. We've got great brands domestically, and we're dealing with the international headwinds that we have to deal with. So this is what we're talking about, you know, the dynamics and the competitiveness within our industry. It's a combination of a number of different things, but we think we have the tools in our belt to deal with them really effectively.
Michael Van Elst
All right, thank you. With respect to the GSP, I know you mentioned that you expect the benefits to start showing up early in fiscal 25. But in the U.S., where a lot of those are going to come, some of your facilities are opening up. I believe some of them opened up. I think there's three, if I'm not mistaken, and one of them opened up already, and some others are opening in the coming months. So are you expecting to see any... benefits in the second half of the year from these facilities, or is the ramp-up time needed to get through some inefficiencies?
Frank
In general terms, I'll talk a little bit about the initiatives that we've taken, and then maybe more specifically, I'd like Carl and Leanne to jump in. Overall, it's not just a question of the plants that are closing down. It's also plants that have received capital investment to increase their capacity or increase increase their level of automation, which ultimately takes cost out of the system. But I will tell you, going into next fiscal year, Michael, we will have, and through the fiscal year, as we work through some of the startups and the projects, we will have roughly about 10 plants less in our system in the operations of next fiscal year than we had at the beginning of this fiscal year. So we are heading in the right direction. The benefits of that will come mostly in fiscal 25, but I'd like maybe Carl and Leanne to speak to some of the projects more specifically so you get a good feel and a good context for just some of the advancement and some of the efforts that have been put towards operational excellence.
Carl
Thanks, Lionel. So maybe if we stick to the U.S. for a second, Those facilities that have been commissioned and are currently operating, there's a limited number that will contribute in the back half here for fiscal, specifically in the Q4 space. We do expect that our investments in the Gochi space in Reedsburg will contribute positively net. As you know, two of our facilities will be closing in the early calendar year as we consolidate into Reedsburg. Furthermore, in the mozzarella modernization, much of the work that was initially scheduled in Waupon is completed. We continue to perform and progress well in Page Solari with some of our shred lines operating. So we might catch some very late benefits from that in Q4 on the mozzarella side. And based on the other investments that have been ongoing in our business, specifically Franklin, that's going to be something that's going to kick in in um in the late first half of fiscal 25 there are a number of facilities that will be scheduled for closure and integration into franklin the franklin facility itself is going to begin operations very slowly in december so we're quite confident that we'll see some of those very late wins in q4 with the majority of our strat plan and capital investments contributing in fiscal 25. And maybe as a small reminder that today, as we speak, as well as, you know, ongoing here for the next couple of quarters, there are some duplicate costs that we are carrying. That's all part of the plan. It's all part of how it is we migrate to shutdowns and commissioning of our new facilities. So that too will come off the books, if you like, and we'll see some of those benefits later. later on this late fiscal and into 2025. Great.
Michael Van Elst
Should we be modeling in more duplicate costs in the second half of the year than what we just saw in the quarter?
Carl
You're going to see built into our model right now, you'll see much of the same cost being carried until such time. Probably the best marker is when our two facilities two GOAT facilities, Belmont and Lancaster, are officially closed in the early part of the calendar, we'll start to see some of that benefit come through. All right. Thank you very much.
Tammy
And in Australia, Michael, to touch on that, we're already seeing the financial benefits from the network optimization that we had already announced. And in fact, we have the We've got the milk that we need. And in fact, we actually are, we're back to historical utilization levels at our plants. As an example, we've also invested significantly in our Smithton facility in Tasmania. And that has come on stream as planned during October and is already delivering the benefits that we expected. So that with Australia from consolidation from our 11 facilities to six, that will continue to deliver financial benefits both now and into 2025 and beyond. As far as the UK is concerned, we'd announced previously the consolidation of our packing facility into Nuneaton. All of the capital investment there has been completed. We're approaching final completion of the commissioning and many new lines are underway. So again, that will be more in 2025 and beyond. And that will give us a very efficient packing facility for the UK.
Michael Van Elst
Thank you. And since you just brought it up, your utilization in Australia back up to historical levels. I did note that your international sales volumes are down, but your milk intake was higher. Does that mean you're building inventories? And do you have a home for this in the coming quarters?
Nick
Mike, it's Max. So the lower volume we have from an export perspective and our export channel do create a certain inventory right now. And that's what you probably see in our cash flow. And those would be, you know, both on the cheese or the powder side.
Operator
Thank you. Our next question comes from Mark Petrie with CIBC. Please proceed.
Mark Petrie
Good morning. I just wanted to follow up. I think you've summarized it and I think I get it, but I just want to understand the dynamics specifically around dairy ingredients in the international market. So essentially demand from China is starting to return and you're seeing more rational behavior from the large global co-ops and supply growth is being more constrained and sort of in better balance. Is that the right way to think about it?
Frank
Yes, Mark, that is exactly the way to think about it. When you look at what's going on around the world on the farming side, and this is not exclusive to the US or Europe or New Zealand, it's the general context of the dairy farming community, production costs are weighing on the farmer sentiment, and that is what's driving slowing milk production. The economics for the dairy farmers right now are very, very tough. And then compounded with that, you've got a high interest environment. So we don't see production off the farm level increasing dramatically in any way, shape or form, at least for the next six, nine, possibly even 12 months. At the same time, demand has been soft. I think we hit the bottom. And we're starting to see some buyers come back to the market and starting to contemplate long-term supply of goods. Those are all very, very good signs. But the overall markets are still, from a pricing perspective, softer than the historical levels. And that's what we're contending with, both on the chief side as well as on the ingredient side. And that does affect the portions of the businesses that we are exporting. So even though domestically we've got solid winds in the UK relative to private labels, solid winds in Australia with respect to the domestic market, solid winds in Argentina as well with the domestic market. U.S., I can say the same thing, picking up new contracts both on the commodity and on the retail side. We still have the offshoot of the ingredients that have to go into the international markets. And that does have an impact on some of the profitability for those domestic platforms.
Mark Petrie
Okay, that's helpful. Thank you. And I guess specific to Saputo, could you just talk about your positioning within dairy ingredients? Are there steps that you need to or want to take to sort of shift that positioning? And are there any notable projects within the GSP specific to ingredients?
Frank
Yeah, so that's a really amazing question, Mark. And I'll tell you, pre-COVID outlook for ingredients is much, much different than the context that we're seeing today. I might have Carl go into some specifics there, but the original plans that we had defined in the strat plan on the ingredient side are no longer all that relevant. And what we're doing as a management team, as we're looking at these changes, if they're transitory, or their actual infrastructure changes uh and and before we make some heavy capital investments in any one uh product or area we need to really understand uh how the markets have changed how they've shifted how permanent they are or how transitory they might be but maybe carl can give a little bit of uh of insight on that sure um what i
Carl
say a little bit further is, you know, we were absolutely committed to increasing the value of our ingredients business. And our first steps taken was the acquisition of a facility in Reedsburg called Greenway, which gave us some capabilities, enhanced capabilities in the goat waste space. So we continue to work with that site to augment the value of the products and on the waste stream specifically for our goat way, and on the bovine side, it also has capabilities for us to bring new products to market. As far as larger capital investments, as part of our strategic growth plan, we did have dollars reserved for that purpose. We had one idea in mind in particular, and as we did our due diligence, recognized quickly that there was also lots of investments and capacity coming online in some of these specific channels. So we've decided not to enter that ring with our original intent. However, we are committed once again to finding additional areas where we can bring value from an ingredients perspective, bringing our expertise, our capabilities, and probably most importantly, the raw materials that we have available from our cheese operations to this forum. So we're currently exploring a number of options in order for us to invest in. We will invest further capital in this category. And as we're reviewing this, we're also changing and looking at our go-to-market strategies. So Leanne and I are working more closely together with our teams to ensure that we're maximizing how it is we bring our products to market, the geographies in which we service, how we service our customers. All of that is also being explored modified and executed on as we speak. So I guess I'd leave us with we're committed to growing and improving the overall contribution from this category in our business.
Mark Petrie
Okay, that's very helpful. Thank you. And specific to Canada, have you observed any shifts in the competitive environment with regards to sort of pricing or promotional intensity? And I guess I'm asking about retail and food service.
Carl
I would say, you know, Canada has remained competitive and not a whole lot's changed on this front. There's been a lot of promotional activity that we would have seen in the more recent months. Some of that is us as well on the Armstrong side. So our Armstrong brand is being very well received by customers and consumers. We're continuing to invest to increase household penetration and supply some very specific geographies as well. The more recent, I'll say, ask from the government around controlling inflation and around food. We've continued to work with our retailing partners in particular to bring cost-effective products to the market. So overall, yeah, it remains competitive, but nothing, you know, we're not in a territory we haven't seen before.
Mark Petrie
Okay, that's all very helpful. Thanks very much.
Operator
Our next question comes from Tammy Chen with BMO Capital Markets. Please proceed.
Tammy Chen
Hi, thanks for the question. A couple of clarification ones. Notice that in the U.S. segment, the butterfat price at the commodity level has seen quite a bit of a rally. Can you just remind us, is Is that a negative headwind for the dairy food division? And was that what you were alluding to in your prepared remarks?
Carl
So the cycle that you're seeing on butterfat is just that. It's a seasonal cycle. We see this regularly at this time of the year. The demand for butterfat is high in the U.S. market with the fall season, with the approaching Thanksgiving holiday leading into Christmas. So there is a high demand. for fats or butterfat in this time of the year. And it already has tapered off materially. So, you know, from the time that we closed the quarter to today's call, it's come down significantly over 60 cents. So it's the normal cycle for us. And, you know, like many things, whether it's butterfat or whether it's the price of the block or solid nonfat, volatility is not good. So whether it's a rapid rise or rapid decline, it's not something that is good for our business overall. So all I would say is that it's not unexpected for us, and to go forward as the butterfat values trend more normal in the coming months, we'll see the stability in our overall results as well.
Tammy Chen
Okay, got it. And moving to Europe and the UK, I'm just wondering first between, you know, your brand, such as Cathedral versus, I guess, some of that larger private label contracts coming on in Q4. Is there a notable difference in your margin between those two?
Tammy
Tammy, it's Leanne. We have private label contracts across the portfolio. What we are looking for is what we call value-added private label, where we can offer distinctive, consistently high quality. We are very confident in the margin structure across the entire portfolio.
Tammy Chen
And in the UK, it seems like the farm gate price is quite volatile, certainly more so than, of course, a regulated market like Canada. And I'm just wondering, has it always been like this? What are some of the nuances there? And is there anything you can do to further, I guess, dull that impact on your business? Or is this something that just from time to time we're just possibly going to see some quite high volatility on the farm gate price there? Thank you.
Frank
Yeah, Tammy, so if we look at all of our geographies, with the exception of Canada, which has a milk supply managed system, there is going to be volatility in the input costs of our raw materials. A lot of it is predicated on supply versus demand. You know, last year in the UK, we had historical high prices on the raw material side. Over the course of a higher inflationary environment and slowing demand, we had the opportunity, as did a lot of other processors, to renegotiate prices downwards and also based on where commodity prices were. So typically, if you look at outside of Canada, most of the geographies will follow commodity prices around the world. So if commodity prices are high, then there will be the raw material price that will follow. And then as commodity prices decline, the raw material also does follow. The specific circumstance that we're dealing with right now in the UK is that the types of products we manufacture in the UK are long shelf life. So we keep them in inventory for 12 to 18 months. So we have to cycle through high cost inventory at a time when commodity prices are probably at the lowest we've seen in a number of years.
Tammy
And what I would add, Tammy, is that we also have a very high-quality milk pool in the UK and a very good quality of milk for the product. So we're very confident we'll be able to continue to supply the right kind of milk to our sites.
Tammy Chen
Got it. Thank you.
Operator
Our next question comes from George Dumais with Scotia Capital.
George Dumais
Please proceed. Yeah, good morning, guys. I just wanted to get a bit of an update on the Argentinian business, given the political kind of currency situation there. How should we think of the performance in the second half versus the first half? Thanks.
Nick
Yeah, George. So the performance for Argentina goes per our expectation. This business in Argentina has been impacted by the lower volume on the export market due to the softening of the demand. Nothing to highlight in terms of different conditions, despite elections that will take place within the next couple of weeks. So at the moment, Nothing to flag. Performance is per expectation. I don't know, Leanne, if you have anything you want to add here.
Tammy
We continue to operate actually very well, have quite stable results in what is a volatile environment. We continue to actually maintain and grow share in certain parts of the country with La Polina, our major brand. And our efficiencies at site are at historically excellent levels. So we don't anticipate any particular disruption. We're just managing through the lower commodity prices, but we are shipping good volume.
George Dumais
Okay, that's helpful. And maybe for Max, looking at the optimization initiative, it feels that we don't really expect much of a contribution in Q3, but it's more of a kind of a Q4 and fiscal 25 timing. Is that accurate?
Carl
So, George, yeah, we spoke a little bit earlier about the U.S. contributions from a network optimization perspective. So if I can, you know, it being the largest share of the contribution to our projected returns, I'll say that in the U.S., the very tail end of the fourth quarter, we'll see some of those benefits. But the lion's share of the returns is going to come in fiscal 25. That would be true of the U.S. That would be true also of our other platforms globally.
George Dumais
Okay. I'm just trying to get a sense, I guess, of what the Q3 EBITDA could look like. There's a lot of moving parts. It seems to be on a sequential basis that we could see Canada up because of seasonality. But should we think of other geographies being maybe slattish or slightly up, given that we're not going to see most of the optimization until, I guess, the latter part of Q4? Okay.
Nick
Yeah, George, we, you know, when we look at our geographical performance, we do believe Q3 to be one of our, it's always been a good quarter, historically. We have no reason to believe that the Canada sector would be different. This time, the U.S., when we look at the commodity, It will be tainted by the commodity market, no question. Despite that, all of our effort continues. Operationally, we're much more efficient than we've been. So that's about the U.S., so we feel we're having good momentum, and we believe the momentum will continue. Relative to the UK, I think we've been quite vocal as to we need to cycle through, so it's going to be the same thing similar to the NRQ3. And in international perspective, we would like the GDT, we would like the export prices to provide us some support. At this time, you know, we do feel that the the challenges relative to export are still going to be there for the Q3 performance.
George Dumais
Great. Thanks for that.
Nick
Appreciate it.
Operator
Last line. Our next question comes from Vishal Sridhar with National Bank. Please proceed.
Michel
Hi. Thanks for taking my questions. With regard to the benefits that are coming, particularly in the U.S., for the variety of optimization and efficiency initiatives on a broad basis. Are they all on track or have some been pushed back or deferred?
Carl
Well, we had some delays in, you know, getting off the ground at the very early stages of the project. We began a lot of this in difficult supply chain environments. By supply chain, I'm talking about, you know, the steel environment and just the ability for some of the suppliers, the key suppliers, to get their products out to us. But that's behind us. And since that moment in time and the reset in the schedule, we're right on track. So, you know, we always said that the returns on this capital investment, specifically in the U.S., would be in the very late stages of the strategic growth plan. And here we are going through that at this moment. So exciting times from a commissioning perspective, lots of things on the go. And I'll say as per plan, we're expecting the returns to come through in large share in fiscal 25.
Michel
What is the level of duplicative costs in your P&L right now?
Carl
Sorry, Vishal, can you repeat the question?
Michel
What is the level of duplicative costs in your P&L?
Carl
The duplicate costs in our P&L, I think the easiest things to anchor to are the facilities. As an example, Reedsburg. Our Reedsburg facility today is commissioned. We are manufacturing, albeit at lower capacities, some goat cheese. We still operate with our Belmont and Lancaster facilities. That's an easier one to point to. In other cases, such as Franklin, we're slowly ramping up the hiring process for our new teammates for the operation while we're still operating with Big Stone and Green Bay in our network. We're phasing in the labor and the onboarding of new teammates as the volume transitions. We're diligent with minimizing that impact. but most certainly it's present in our numbers.
Michel
Do you have a dollar value you can share with us in terms of the duplicate of costs in your P&L currently?
Nick
Yeah, Michel, we're not prepared to share a number relative to the dual cost that's embedded in our number, but as Carl mentioned, those costs that are going to take out, they're all figured out within the expected benefit. The benefits are there to are there to materialize. We're not budging on any of those expectations. And we'll start to see the kicking in next fiscal.
Michel
Okay. And I think Lino said off the top that Q2 was broadly in line with expectations. Given the various gyrations in the commodity markets and regions of operation, do you have you altered your internal plan for for h2 or is it um do you anticipate results be different than uh than say at the start of the quarter we we have not altered our plans like no we we maintain the course we're staying the course we've continuously indicated
Nick
You know, the markets are an element that is not under, you know, the controllable aspect. Whatever is under our control, we feel very comfortable. We feel very comfortable with the volume in all of the, in our U.S., particularly in the U.S. sector, where you're comfortable that our plants are running better, more efficiently. We have the labor, we have the fill rates that are back to normal. We feel confident about that. The wildcard still remains the market. And at this time, we do not feel we need to change our plans on an execution perspective.
Michel
Okay. And maybe just one last one here. Given the number of initiatives that are seeming to culminate in the next several quarters regarding transitions and facility changes, Based on your past experience, to what degree is there a likelihood that there's going to be hiccups or challenges associated with all these commissioning initiatives happening all at once, requiring presumably all management time?
Carl
Michelle, it's Carl again. Over the years, we've commissioned a whole host of plant expansions and even greenfields. So it's not new territory by any means for management and for our subject matter experts. and those who are the project teams. And I'll say it's no different this time around. In fact, I have even more confidence as we move forward. This has been a plan in the making for quite some time. We put the most appropriate resources, the most skilled individuals behind this. I'm very confident that we will be successful with our commissioning. All commissioning has its hiccups, its surprises. It's part of the course, if you like. And I'll say that I'm quite confident, despite the numerous activities that are ongoing, we have the appropriate resources divided up geographically as well. So I don't think this is going to be a factor as we move forward.
Michel
Thank you.
Nick
Vishal, just to finalize on the point and if we would change our plans or not, relative to our capital expenditure, we will be spending the $2.3 billion that we talked about. The fact that we'll have a lower spend over the next year or the next couple of years is part of our view. This was planned, so it's not a change in plan per se. And considering the dynamic we're in, the economic condition that we've seen and we're all experiencing on the market, uncertainty, we do have a cash focus. We do want to reduce our inventory level. That explains some of the action that we're doing in our UK sector. So we feel that working cap management is a key priority. And that fits well within the current dynamic and with our plans right now.
Michel
Thank you.
Operator
Our next question comes from Chris Lee with Desjardins Securities. Please proceed.
Chris Lee
Hi, good morning, everyone. Thanks very much for squeezing me in. Maybe just a couple of quick ones for me. My first question, I think you've already covered this already, but I just wanted to ask, You know, as some of the major economies like the U.S. are starting to see this inflation or perhaps deflation next year, can you just remind us, you know, how did Saputo historically perform in such an environment? And is this a key risk to watch for next year? Thank you.
Frank
Yeah. Hi, Chris. So we've gone through economic cycles before. One of the great things about our business and in all geographies is that we deal with and we trade in different channels of sale. But even within the channels, we deal with different types of customers. So you've got, and I've said this before, you've got the white tablecloth restaurants, and you've got the QSRs. And typically, consumers are still going to consume dairy, and that's a positive thing. We are going to be where the consumer consumes. So irrespective of economies, irrespective of trade downs, irrespective of geography, that really is not a massive, massive concern for us. I think the bigger issue that we're dealing with now is a global trade on dairy and having a lot to do with China being in or out of the buying market. Domestically, we're not at all concerned about the horizons that everyone's talking about, you know, the interest environment, the consumer sensitivity, pricing power, disposable income. I think we're in the right categories of product. I think we're in the right channels of sales. And we actually see growth in our volume as opposed to decline in volume with all of the economy risks that we're seeing on the horizon.
Chris Lee
Great. Thanks, Lino. And maybe just a quick follow-up, just within the U.S. retail segment, can you remind us how much exposure you have to the discount and private label channel? Just want to get a sense of how well you're capturing some of these trade-on in the U.S. retail division.
Carl
Well, Chris, as Carl, we're very well diversified in the U.S. So for as proud and as strong as the brands that we have are, specifically in the cheese side, We also provide some private label to some key retail partners in the same category that we produce our brands in. On the dairy food side in particular, we're over 90%, 95% non-branded. So from that perspective, it's always been our operating model. So whether it's the traditional grocer or whether it's a discount banners and channels, we're well covered to be able to supply that. And I would also maybe add that unlike the earlier days, you know, maybe two or three years ago, nearly part of the pandemic, we're very well positioned right now to fulfill the demand that may come from the retail side, the increased demand that may come from the retail side, if there's a more material shift from the food service sector over to retail.
Chris Lee
Great. Thanks very much in all of this.
Operator
There are no further questions at this time. Nick, I will now turn the call back to you.
Nick
Thank you, Frank. Thank you for taking part in the call and webcast. Please note that we will release our third quarter fiscal 2024 results on February 9th, 2024. Have a nice day.
Operator
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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