Q4 2020 Saputo Inc Earnings Call

Greetings and welcome to <unk> financial results for the fiscal year ended March 31st 2020 Conference call.

The presentation. All participants will then the listen only mode outdoors will conduct a question answer session.

At the time, if you have a question. Please press the one for about a four on your telephone.

When you turn the call for future Rechartered Your press the star followed by this year.

It might or to these cars being recorded Thursday June 4th 2020.

No I would like to turn the call so were to leaner support a junior. Please go ahead.

Thank you very much Tommy.

Good afternoon, everyone and thank you for joining us.

Taking part in our call today, our leno's to put a junior mezz, Cynthia and CPI Bachman.

Before answering questions from analysts leaner will begin by providing an overview of our fiscal twentytwenty fourth quarter and yearend results as well as an update on how we are managing our activities in light of Coogan 19.

Before we begin I remind you. This call is being recorded and will be posted on our website. Please also be reminded 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 inner annual report press releases and filing.

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, the call over Toledo.

Thank you Sandy I.

I hope you're all keeping safe during these trying times.

I wouldn't be remiss, if I didn't start the call by addressing the challenging situation, we're all experiencing at the moment.

Our thought Oh with those who are ill and with those who have lost the loved one as a result, other cobot 19 pandemic.

I also want to express a hard heartfelt. Thank you every support all employees for their ongoing passion and dedication.

Since the onset we've understood. The forger had successfully we have to support one another.

I'm extremely proud of what we've overcome and accomplished thus far.

Cobot 19 has impacted our business, but we are finding creative ways to overcome the obstacles that brings.

Well the situation continues to evolve our objectives remain to ensure the safety our employees and the continuity of our business.

Notwithstanding.

Overall this was a solid year for us.

And the pandemic only started to impact our results late in our fourth quarter.

We reached new heights in terms of revenues and adjusted EBITDA.

When we were thrilled to add the Europe sector to our global platform.

With numerous achievement came downward pressures many of which we met head on over the past few years.

To comment on the fourth quarter, specifically consolidated revenues increased by 14.9% mainly related to the contribution of recent acquisitions.

Additionally, adjusted EBITDA grew by 8.5%, while adjusted net earnings were down by 21.5%.

The counted effect or posted healthy fourth quarter results benefiting from higher sales volumes, mainly in the fluid milk category.

In a competitive low growth market.

The division remain keenly focused on responding to evolving consumer preferences.

Particularly in value added products, while maintaining profitable volumes in all categories.

In the U.S.

Results were negatively impacted by competitive market conditions within the mozzarella space.

As a result, lower cheese sales volumes had an unfavorable effect on efficiencies and operational costs.

Going forward.

The division remains focused on growing its specialty in value added products as well is pursuing operational efficiencies.

And the last two weeks of the quarter all sectors felt the effects of the pandemic.

But for US, Canada, and U.S. felt that the most with increased activity in the retail segment, while foodservice demand steeply declined.

So the impact on quarterly revenues wasn't significant.

Adjusted EBITDA was negatively affected by among other things on inventory write down caused by a drop in certain markets selling prices.

As well that a lot from on Sellable inventory destined for the foodservice trade.

In our international sector, Australia had a challenging year no doubt first the devastating bushfires and now the effects of the global pandemic.

Both have dealt a hard hit to the region.

And lower milk production continues to pose challenges.

Over the next few quarters, the dairy Division, Australia will forge ahead further capturing opportunities derived from combining its operating activities under a single platform.

Moreover.

It will leverage the impressive portfolio of brands and now has been this roster.

Argentinian platform delivered consistent results, despite navigating challenging economic conditions.

Well pull that 19 had a negative impact on our export sales.

Domestic demand in Australia in Argentina has remained relatively stable.

The Europe sector anchored by longstanding and well loved UK retail products will seek growth opportunities by leveraging its brand pursuing line extensions and potentially expanding sales overseas.

The positive impact of the lift in retail demand, resulting from the pandemic benefited both revenues and adjusted EBITDA in our UK business.

As for our ERP rollout due to travel restrictions, we modified the deployment, which includes postponing the balance of the rollout in Australia for fiscal 2022.

Although this schedule could change as a result of cobot 19, we plan to move forward with the subsequent phase of implementation within that she's division USA to be completed by the end of fiscal 2022.

The implementation in Canada is expected to begin during the third quarter fiscal 2021.

And all our plans will move in tandem with governments guidelines.

Looking ahead.

We expect sustained retail sales in all of our geography, but we cannot predict how long or how significant the increased demand levels will remain.

We do not anticipate the positive impact on EBITDA, resulting from increased retail sales to offset decreased sales volumes in the foodservice and industrial market segment.

But we will be standing at the end of this crisis strong and ready to pursue our growth journey.

We take advantage of the opportunity to market will offer.

Every sector will maintain efforts to actively manage our operations and to leverage our expertise.

A couple platforms and global footprint in order to mitigate the short and long term negative impacts.

We will remain focused on adapting our manufacturing capabilities to cater to local realities and changes.

Times like these truly highlight our great fortune.

Our balance sheet is solid and our businesses sound.

The strong foundation, we've built over 65 years affords us the luxury to do the right thing.

The fees are right opportunities when they arise.

We view these unique circumstances I don't know occasion to be a stabilizing force in the industry and we are leading by example.

True to our character, we're thrilled to lend a helping hand to others. During this time.

In addition to the support we've been offering our employees, we've been giving to local food banks, and providing expanded services and resources to our patron farmers.

Our ongoing community contributions across our divisions have reached over $4.2 million and still growing and recently our efforts were recognized by the could Canadian business for social responsibility.

It's remarkable how quickly the world can change yet I've never ever been more confident about our people our products and our future.

I can acknowledge enough the exceptional passion and dedication of all our employees worldwide.

I am privileged to work alongside such a talented and loyal team.

Together, we will afford us through this adversity and come out even stronger.

Hi, Thank you for your time.

We will now proceed to answer your questions.

[noise]. Thank you.

Have you like to register a question just press a one oh by the four on your telephone.

<unk> technology requests <unk>.

Just a question husband, that's what drives restoration and just a 1.3.

Once again it just your one for any questions or comments one moment. Please reference question.

And we'll get to our first question on the life from every Natal from RBC capital markets correct had.

Thanks, and good afternoon, everyone I.

If you could walk us through the ways in which you've been able to went down your production platform, but to date in order to serve adjust to the new reality in terms of.

And I heard you, saying you know that out of every adverse adverse situation you learn some things. So are you rethinking it all perhaps.

The actual transient and whether it makes sense to have dedicated facilities at this point in time certain service and industry.

Yeah, I read that's a very good question and so we had to toggle that tackle this early on as early as the Muslim March.

You know we saw that there was a demand shifting from retail to foodservice.

And in some cases some of our plants were down to about 30% production capacity utilization.

And so it wasn't incumbent on us to see how we could re purpose some of our facilities some of our plans and some of our products of course, we got some inventory we had to dispose up or we try to re purpose that into other categories of products that we can sell either retail or some other channel and if we couldn't do that then we would give it to food banks.

Ah, but going forward from the inventory that we were sitting on we're seeing now we have to bring in the smell we have to produce products.

And how do we manufacture products to get them to consumers.

That's what we had a lot of good.

Constructive discussions with our customers who are by the way very very open and collaborators and us being able to re purpose some of our products. So things like different formats different sizes different labeling different brands that we would bring to market.

And so we were successful in doing that and perhaps maybe I can add a little bit of color there.

Well, what we did learn is that we need to have number one first and foremost a strong balance sheet at all times.

We need to make sure.

That we can weather any storm at any given time.

Thankfully, we've taken the right decisions over the 65 years, but more specifically over the last year or two to Delever, our balance sheet to make sure we had financial flexibility wanting to guarantee all of our employees.

They didn't have to worry about their income and they didn't have to worry about their job.

Our first priority with our people their security.

Their health and safety there protocol, and then find a way to service products to market for consumers.

So we learnt that are prudent approach.

It's always very very good, especially when you get into a crisis mode. That's a day, where net enviable enviable position to be able to take advantage of these opportunities that ultimately will arise by those companies that weren't quite as prudent, but maybe I'll pass it on the guide.

He if he's got more color that he can provide you in terms of how we re purpose some of our plan or some of our products.

Thank you Lino I would say that it really depends on the division that you're looking out because some have a lot more flexibility than others. If you look at our international platform on Argentina in Australia.

The mandate has always been about.

Putting that milk into those products that generates the highest variable rate of return.

Those divisions those platforms offer a lot of different options in terms of market segments, whether its retail food service, but more importantly on the export side as well.

And then you look at the types of products as well, there's a lot more flexibility in those two platforms. If you move over to the U.S.. We have worked with our retail partners in terms of looking at retrofitting or re purpose in foodservice formats. So that there would be a accepted by cash and carry outlets or larger retail formats. So.

We have had some success there, but limited because in terms of changing the capabilities of some of our platforms in the U.S. It would require a lot of capex investments as well as lead times to to secure the necessary equipment.

There are however, other opportunities from a U.S. platform, we witnessed a low block price at the beginning of May which allowed us to tap into some export opportunities, which we took advantage of primarily in the Asian Asian markets. So those would be some examples in terms of are using our flexibility in light of the current situation.

That's that's really helpful. Thank you so so taking a step further.

Does it make you.

I think that over the longer sort of taking a longer view meet you need to build a little bit more flexibility into some of your U.S. plants or in a normal world. This just wouldn't be an issue.

We don't know what are normal world is anymore I am going beyond now.

But the reality is that if you've got a flexibility between selling into retail food service and ingredient and a good balance between those three channels. I think you can mitigate a lot of the headwinds and perhaps a new normality of consumer patterns.

And that's what we're seriously looking at and all of our platforms and all of our geography.

We will certainly not abandoning the foodservice or ingredient, we think that that will come back.

But in certain geographies might have to think about a proper balance between the three.

That's great. Thank you.

And coming back to the issue out of balance sheet and cash flow management could you walk us through the thinking around introducing beach and reinvest that.

Yeah, I'll have max or tackle that one sure. So we we came up with.

Drip program that allows the shareholder to be paid via share and set up gosh.

The whole shareholder this could the discretion and it it does provide the unfortunately for the shareholder who increased participation in the company at a discount rights.

Tamara Tomorrow it provides us with additional cash flows.

We intend to use that potential cash flows into a to accelerate the deleveraging of our balance sheet.

James financial flexibility moving towards our or leverage to appoint 25 times.

Our EBITDA and that's is the that is our sweet spot for us to maintain or strategy growing to acquisition and that's the first and foremost.

On the fundamentals around that.

We and we do believe that.

I would create more value pursuing acquisition.

And maintaining your acquisition strategy.

Its fifth absolutely well, where our acquisition profile.

And that's.

Lets just say so I have just one other thing I would add that Oh. The drip program is not a result of cobot. A this is something that we had been contemplating for a little while a the timing of it comes out around cold at times. So one is not linked to the other at all.

So just the solar clear.

We do not have any liquidity issue.

At all so there's a drip program is not liquidity issue driven it's really deleveraging our balance sheet getting more financial flexibility in order to be I'm a bit more active on the M&A front.

And we believe coming out of this crisis, there are going to be great opportunities on the M&A front.

Okay, I'm, sorry, I was ready to handed over to someone else you just opened the door I mean I call. So could you walk through [laughter].

At what point do you think about M&A opportunities right would you be comfortable moving forward with something now do you need to see how how things evolve over the next several months and you know how are you thinking about thinking how many pilot how many people been calling yet.

So.

The number of files have grown so I typically say that we've got three to four files on the table at any given time or you can add more files to the table because our phone has been running now in terms of timing Irene.

We are prepared.

To move forward on an acquisition or to the agree that we see that we're getting it at the right value and it is strategic for our development in our orientation. The only complication I would say.

Okay, and executing a file would be the due diligence process because we are hands on people. So there is a virtual due diligence, which we can still before which we are performing and in many cases.

But then we've got to get boots on the ground in terms of manufacturing facilities to make sure that we turned over every stone and we.

Can visualize the opportunities that we can bring to that asset that.

It's going to be a bit more challenging until travel restrictions open up.

But that does not stop us from moving forward into phase one in phase two so phase one is a preliminary evaluation phase two is the due diligence analysis to get us to a letter of intent.

And then finally phase three would be once we get into a a up discussion where their potential sellers that we've got to meet the management well we've got to visit the facilities that right now is going to be a bit more challenging but from what I'm understanding from our government.

There is going to be opening up a or easing up travel restrictions as though they end up this month. So the normal course of due diligence process can continue so nothing stopping us right now.

Continuing to move on and these files.

That is pretty thank you.

[noise] [noise], thanks very much.

Our next question remember line.

From the line or Peter Sklar from BMO <unk>.

Okay. Thank you.

On the a 44.8 million of inventory write downs and the sale of inventory at Los and all that related to what's going on in the food service channel can you talk a little bit about.

Like the.

The shelf life of that.

Of that inventory in your warehouses.

Hi categories was like is the some of the product like this is some product have more short term shelf life, but others have longer shelf life, so you'll be able to carry over through fruit through through this issue and.

Do you anticipate further write downs it or is this it.

Okay. So a theater this is Matt.

The 45 million is composed of three elements.

The first element is relative to a and it's a couple of million within the that 45 relates to some accounts receivable that were deemed as risk and that's it from a our analysis perspective from an account by account.

And now this is Ah we felt that we needed to take some.

Some some reserves to.

Offset the potential us and that's it the little a piece of this this overall.

45 million.

There is about 24 million, which is a relative to the inventory that you are referring to that we're trying to repurchase the vast majority of that inventory is in the U.S. and it refers to go cheeses. It refers to blue cheeses when those inventories are.

Package are producing package in some format and you want to unpack and do things differently with those inventory you altering the fixture you altering the product. So that's the vast majority of that inventory piece.

So the shelf life of those brought up whether we first we sold most of it during the.

Q1, right now.

So with inventories are gone, but obviously, we're not able to repurchase the whole the whole aspect, but those are the main ticker from an inventory standpoint, no get to the third piece what is it represent about 80 million and that's the net realizable value of the ER the inventory we had on him.

At the end of March.

You know that the committee commodity market went down significantly forces us to take inventory market right now like we would typically done at any given quarter and you given year.

Due to reprice, our inventory at the low level of the commodity and of course, when the commodities starts to rise again during the Q1 or the inventory Ah Onez pulled the first it sits at the low value and then yes, where we are materializing.

Additional profit relative to that in Q1.

To your point, whether theres going to be another you know write down popping up it all depends of what the market is going to do.

Right now the block in the U.S. sits at the two dollar 50, plus a should this thing and it remains above the three coal good a commodity market, we do not anticipate any any write down but if it go down again two adult.

For a market yeah, we would ultimately end up facing additional write down so it all depends up the markets whether it is lending but at the current time, we yes enjoying the fact that the market is Han and we have no issue with regards to inventory whether it's the re purpose, we're not producing it.

Additional inventory that we anticipate having lunch and we currently do not have any.

Expectations from a a write down perspective relative to the market where distance to the.

Hi, So maxime just to clarify the 18 million that you referred to that's not directly related to what's happened in the foodservice channel rather that just related to the ups and downs of dairy commodity prices.

It's absolutely it you're absolutely correct driven commodity we know that the commodity drop because of the coldest situation, but that's exactly it. It's a it's market driven thats not the inventory to that we're we're not able to resurfaced that's another 24 million issue okay.

And then on another issued a in your commentary in the right up you've talked about in the U.S. business.

That there was competitive market conditions in the cheese sector, you called out Mozzarella I think lead on your commentary is this like this backdrop that you're seeing is this covert related or are there other factors at play here.

So the beginning of that was not kobin related there was was more capacity that was built into the U.S. manufacturing system like some of our competitors.

Coal that only exacerbated this issue.

Okay.

Then the last thing.

I wanted to ask your like I'm sure you've you obviously wouldn't notice that.

Like recently, if you look dairy commodity prices have really whipsawed, you know and in May versus April on quite a dramatic way for some of the commodities can you talk a little bit about like how suppose though copes with that Eric and should we take that into account when we consider your earnings for the.

For the first fiscal quarter.

So the rationale behind this volatility I mean, the U.S. government stepped up and a as part of their covert assistance program. They've spent big money on dairy so they've taken a big chunk of a of the milk production out of the system I talk to the a exports wrapping up during that low blocked period, so that had an end.

Talked as well and then not what we're seeing right now and the last few weeks as the a shelter in place restrictions are being lifted that the foodservice segment is reloading their pipeline.

And there's a lot of uncertainty in the market and that's what's caused that that volatility.

From a support of perspective, if you look at the U.S., 48% of our business is foodservice. So we do have a healthy retail business. We do have a healthy ingredients business in terms of the foodservice space. What we're seeing is on the QSR front Ah things are really picking up if you look at the general kind of data up there were down about.

15% to 20% versus last year as a as a segment and a big part of our business, especially for US. The up is QSR driven so as that get back online back to more historical levels. That's obviously going to help helps the poodle.

In terms of though the general foodservice business, our broad line distributors are coming back online and we're starting to see a recovery it in that category as well. So I would say that the general trend is that things are things are picking up and we're cautiously optimistic in terms of or prospects moving.

For.

Hi, when you say QSR is down 15% to 20% year over year, what period are you referring to there.

That would be the period, we're looking at may for the for the period may.

Okay data.

Okay. Thank you for your comments, yes.

Thank you very much.

Our next question on the line from Mark Petru Sad BC card ahead.

Hi, Good afternoon, I just wanted to follow up I guess on a couple of things that you've already touched on but specifically with regards to the common and the outlook about you know taking potentially taking 12 months or more to recover too.

Levels that you guys delivered in in fiscal 2020, I Wonder if you could just be a bit more specific about that outlook because it does sound like there are certain aspects of your business.

Where you know the recoveries actually happened reasonably quickly, but obviously others are going to take longer. So could you just give a bit more color in terms of in terms that outlook and what aspects of your business.

You think may take awhile.

Yeah. So mark we are the this comment is triggering true the sort of what we're reading in the economy is all around the foodservice.

Recovery, we have you know into seen visibility as everyone as to how the segment of the older restaurants in the food service sector will be coming back a full speed on what we're reading what we're observing is that it will take more and then.

A couple of quarters to get back to normal and so that's the intent. That's we're trying to reflect in this helped with common there.

Okay. Thanks, So that's so that's mostly a U.S. segment comments them.

Well they the foodservice is has been impacted.

Well, Joe Griffey that we're in.

Obviously were.

Bigger player in foodservice in the U.S.. So yes, it would apply to the U.S., but the whole food service sector segmented whatever country, you're looking at obviously when you look at the UK.

Almost none no impact.

Much lower in fact in Australia, Argentina, we have some impact in Canada.

And obviously, yes, we do were impacted in the U.S.

Okay. Thanks, and then just to come back to.

A broader commodity complex in general you know, perhaps you could just given your commentary or view on sort of how the industry is risk responded to the volatility in demand from a supply perspective, and and you know as you look out over the course of the next year you know what your what your perspectives is.

Perspective is for us for the commodity complex overall understanding that there has been clearly a huge amount of volatility.

Yeah, So I'll start off with the U.S., especially when the block went down from a dollar NAIAD tied down to a dollar one a there was a too much milk in the system you probably saw the same way I saw some individuals of dairy farmers in different states dumping their milk.

And told there was something that needed to happen I think there was good strong leadership at the co-op level that when educate the dairy farmers to try to take off some milk or add to find level I feel a cows were called.

Milk has come down and then of course, you had the government programs that supported some of the buying of some of the solids and that's what rebalanced the little bit all the supply and demand in the U.S.

Uh huh.

Having said that.

That could be fragile.

I think there could be more volatility.

Down the road, especially if there is a load up all the inventories and different countries, which we have seen in the past through government programs.

That ultimately we'll have to be flushed into the system. So I you know I don't think that a $2.50 block price is going to stand for a very long time, and so we need to be mindful of the fact that somewhere in future quarters, the block will come down and as Mike alluded to there so there wont.

Some inventory write downs, what we are doing so brutal as an organization.

We're taking on the milk or that we are contracted too, but not be on contract and we're making to order. So we are not building up a high levels of inventory or just the store then India eventuality that market's won't come back.

But the real indication of market price is going to come with the balance of supply and demand Europe is producing lots of milk, there's an oversupply of milk relative to demand if I look at somebody other countries that we're in.

The UK milk is balanced a in Australia, MELK isn't that benefit but growing now.

And then Argentina milk is balanced and so and growing a and so ultimately a there are going there is going to be incremental solid I think that are going to be up in the market.

And market prices I think are going to be volatile until we get back to some sort of normal consumer patterns as we had seen them in the past and this is going out to the 12 month recovery that that we alluded to in the outlook.

Okay. Thanks, that's helpful and I guess, you sort of touched on it but just if you could provide a little more detailed maybe maybe this is for you Max with regards to sort of the inventory position that you have now obviously, there's a lot of noise in the number with with prices and your.

Various acquisitions, but you know inventory was up but but not remarkably so but could you just sort of talked about inventory levels. So within within the company today.

Yeah, well the inventory I would like to mentioned that everything is under control.

Obviously markets going up it tends to attract a higher investment from the work and got perspective. So are the sales when we do sale or you know, we I've accounts receivable that are being captured and showing greater mm.

Obviously, we're very close from a cash flow perspective, yes or no.

We do not have any issues from the working cap perspective, whether its they are a b or inventory the levels are within the you know a normal range, we do not feel very comfortable with.

With that situation right now and if we would know we would have taken that additional write down but they write downs that we've taken what specifically address too.

Inventory refurbished and the the market drop.

Okay. Appreciate all the comics go so all the best.

Thank you Mark.

[music].

Thank you.

Turning next question on the line.

Line of Michael for announced with TD Securities cardiac.

Hi, good afternoon.

Well.

So I.

I guess I want to fall off of <unk> earlier question personally mentioned that QSR was a big part of I think you said simply with dairy foods business.

But you can you give us.

An idea.

How.

Foodservice in general is split up among QSR in broad line.

So from from a up from <unk> perspective, we don't disclose those numbers and we don't want to disposals numbers for competitive reasons, Michael but if you want to add some question specific about the trends in a and ER QSR, we're happy to do Phil.

And I would just sat that were well balanced across those three segments. So it's if you take the U.S. as a consolidated business. It's QSR foodservice, it's all those segments, so well balanced.

All right.

Okay. So when you look at the financial impact It call then you're talking about this goal taking 12 months for for your.

Financial performance to get back to a wise.

Are you looking at that as a pro forma fiscal 20 level or like is that excluding acquisitions that you made that came in only late in fiscal 2000.

Well.

No it would definitely exclude any future acquisition, when we talked about the material impact to our business I mean, we're looking at it on our business to grow.

We have 21 will be a challenge year for us to growth and that's what we're calling it as a material to the business.

You know I appreciate you try to want to measure what quantify the impact so.

We will we would love to provide you with as much of in so as we can but also say that we are maintaining the of course, we're staying the course or cash flow are positive. We are complimentary lots for complimentary segment and sectors.

And we intend to maintain our strategy now our strategy for F 21 as it. It is for older years is to grow we see that it'll be a challenge year for us to grow thrown that say the 1.5 the.

Billion dollar that as though it's going to be a challenge.

But.

I mean this is a what's we we could give you in terms of color today.

Okay.

If you.

Would work to try in place the financial impact of coal, but in various buckets could you try and rank like.

Whether it be took a look at say sales volume decrease plant inefficiencies higher employment in sanitation cost like can you rank the significance of the key buckets.

All tick up first crack at this and then maybe Max might want to complement it but by and large the largest expenses. We have yes. The plant inefficiencies I either appliance doing products that they were not destined to manufacture so they're not the most efficient set up but we are getting product out the door or perhaps.

Clients that are running well below their capacity utilization that is happening.

We have some also warehouse and delivery expenses that are going to go higher on a per pound or per hilo basis, only because we're sending our trucks out in the road, but the trucks are not as far as they normally art. So there are two delivery costs on a per pound or per kilo basis, it's going to go up.

When you talk about the incremental expenses relative to sanitation not a massive massive expense.

Not only because we are a food safety oriented organization like most food manufacturers are and the protocols are in place anyways with or without Kogut, that's kinda sanitary environment.

Now I in some areas, we have to run our plants below or every lines capacity, because we need fewer or we can only happy where people on the line. That's a reality we have to live with.

So normally if they line should be running 45 bags a minute, maybe we're running 30 bags a minute have fewer people in the pack off area. So that we have more distance between our employees so that the sanitary cost themselves no but to be.

Consistent with the protocol, we may have to run our plant below capacity utilization and to me that is where the largest expense for us will be in this coven environment until we get back to our levels of throughput a that our plants are used to running.

Well that clear enough.

Yes, I think that's quite clear actually and.

When you. So when you look at these extra costs and we and that compares to.

The drop in the margins and you asked in Canada.

Versus the earlier part since fiscal 20.

Was it was that drop all posted related or are there any other factors in play that changed versus Q2 in Q3.

Most of that drop with pulpwood related and so when Max.

ER talked about a 45 million Oh, the Kobe the hit we are not even factoring the other expenses related to warehouse delivery plant efficiency expenses, we had been in our system relative to running capacity is lower because its cobot.

That's over and above the 45 million of the corporate expenses, we Oh, we signal.

Okay.

And the other thing too Michael I want to also add a and I said this in my one of my responses to a Irene we are playing paying our employees in full whether they're running or working their full hours or not we have a no layoff policy in place that is the security that weren't.

Providing all of our talent there so many different things that they need to be worried about we don't want their wages to be one of them. So irrespective of whether people are working from a plant on office, whether they are working their full hours or part hours or whether they're not working at all.

Because they may be affected or inflicted by cobot. They are getting 100% of their take home wages and there are not going to be any layoffs through this crisis. This is the commitment we made to our employees that is also you won't be the labor expenses is also one of those intangibles that we did not quantify and the cobot car.

That that Mac signals out.

Okay Perfect and then just finally on Europe revenues are much stronger versus Q4 Q3.

The margins and I'm wondering if that's and did you actually have a capacity increase during that period or is that was that I know you're looking to increase your capacity there and capacity was tight.

So how did you get that list or was that it costs the increase or is that something like selling down inventory.

Well were increasing our throughput so yes, we have a center capacity and that's only of the first phase of our plant expansion a there's been tremendous demand on the part of the retail products ever produced there primarily in the cheese category, but also in our spreads business, which we don't talk a lot about its been performing phenomenally well.

And even our Fry like business, which is a smaller a smaller offshoot is also performing at a very strong level. There's a lot of supply chain issues on the continent, a lot of our competitors are unable to service their retail customers in UK and we've been able to take advantage of that so there's a lift across.

The board or when you look at that platform, which has been a great success and nicely.

Yes.

Just want to us that Q4 for dairy Chris always been the strongest quarter. So.

We were expecting incremental volume.

Though from the from that Division.

Okay. So did we see the capacity increase in the corner oral batch start to show up in Q1 that.

It'll show up in this quarter. This current quarter and we have plans to further increase or capacity as we move forward.

Thanks very much.

[noise] acute.

Our next question on the line from Vishal Shreedhar with National Bank financial correct.

Hi, Thanks for taking my questions I'm, a few Q easy ones here.

It's it's fair to say that as food service demand comes back retail demand, that's commensurately states and is that what you're seeing.

Yeah. So their latest data shows that things are starting to normalize I really depends on which part of the world you're looking out but Australia. As an example is already back to pre called at levels back to historical levels, We're still seeing a lift in North America. So across all three divisions put a very foods SCUSA and Canada.

And then when you look at the UK, It's a well ahead of historical levels. So we're still seeing a lift and we anticipate that that lift will start to come down as we start to normalize and then we'll see foodservice continue to recover as we move forward, but one of the things are interesting things that we saw through this crisis here is that.

Where we've been one of the dairy companies that has performed extremely well in terms of Ah ah or to fill rates and delivery to our the retail trade and we have picked up new business because of this and we think that some of that new business is going to stick beyond this so even though our retail volume is going to normalize.

Some of the lift will remain for us.

That's an excellent point or just in terms of how the teams have stepped up in a in North America from a supply chain standpoint.

Making sure that their customers are receiving the product there's been a lot of instances again I mentioned, the UK with Continental Europe, but it's the same thing in North America lot of our competitors have fallen short in terms of.

Fulfilling their commitments their deliveries so we've taken advantage of that.

Okay.

Thats helpful. So on on your ability to fulfill the spike in retail demand I mean koodo.

You know runs its capacity usually scare the pretty tight to maximize operational efficiency. So how how different customers that have some reach out to you and let's turn to wait too long and if so was that substantial amount of demand that you turned away.

No. So we didn't have to turn away much demand Oh. This is where a again in my previous statement, where we had to have some discussions with some of our customers and think about getting creative.

Thinking about formats that are not a typical for them to accept thinking about labeling a that has not a usual labels that they would take.

Thinking about or perhaps a.

Receiving product and and and and Ah Ah different cited a streamlining our operations or perhaps less.

Ah SK use less complexity in the system. So we can run our plants that much.

More efficiently I saw the retail plan with our retail oriented customer base wasn't very very open to a listening to our about how we can pump more volume out of our system, even though our plants are running a prior to that close to their full capacity.

Okay.

Okay. That's helpful. So commented that they were there were challenges later to margin which is understandable.

Because of so called at 19, you're paying employees prioritizing.

Purpose of a profit since you mentioned in the Pos.

But similarly in retail so we had anticipated because of the streamlining initiatives because at the height demand at the retail profitability was also somewhat temporarily elevated and so those two factors will have to converge at some point depressed chronicling foodservice and elevated in retail.

Well I just want to point that the profitability from the retail versus foodservice.

As more to do with what is the product that we're selling rather than the which channel we're selling the product.

So obviously, if we're looking at some product, which is more commodity that we're selling in the retail market as a.

Fewer straight like mill.

That would not attract a much more margin by all the less margin than any of the service type product on the flip side. If we're looking at you know branded cheese or value added specialty cheese, yeah. Those products on the retail perspective would attract.

Higher margin does whatever and service.

So that's the color I will give you on that so Mac has pointed out that the product mix will affect our profit more than the channel sales.

Got it.

Okay that makes sense, but is it fair to say that the steam nice initiatives that you implemented to satisfy heightened demand and the heightened demand leveraging the fixed cost that also into profitability in the quarter. So she would come in is that fair comment.

No depending on which channel I, if I look at the Canadian Channel, Canada, No because we sold a lot more fluid milk, which is not the most profitable product, we're selling relative to overall basket of goods now in other channels, yet that statement would be fair I rather another.

Countries that statement would be fair.

Okay, and with respect to milk, obviously encouraging troms on milk is is that a a trend or is that just a co. Good spike relates to stop.

Yeah, the funny thing about their thing I've I've got some conversations with a different people from the dairy industry as well.

It almost seems like a win win a covanta hit a mill became a comfort food.

And for some reason or the pantries could not remain full on fluid milk now is this going to be sustainable I hope, so [laughter] Ah, but I would suspect we would get back to that the trend of milk in decline at a rate of about one to one and a half per cent per year.

Okay, and do you think cross border shopping with military impossible.

Absolutely absolutely. So we're seeing a you know those up provinces that are on the border their milk volume has gone up because of course travel restrictions.

I guess, the U.S. dollar as well however, I travel restrictions were the biggest part of that.

And but however, we did pick up new business and I think we mentioned this before and that some of our competitors were unable to a service some of the retail accounts. So we are you have the opportunity to pick up some of that business.

Thanks, Thanks for your answers.

Yes.

That's very much well go term next question on the line from a Patricia Baker with Scotia capital correct.

Thank you very much and good afternoon, everyone would you be willing to share with us what your food service declines were at the at the peak of the you know pandemic impact on your business.

Sure I mean are depending on the the geography.

In line with the overall category down up to around 60% would've been the number.

Okay, and Chi would it be fair to assume based on some of the other things. He said on this call that your may trends were better than your April trends.

Absolutely.

Okay, and then you said depending on the geography I find I found interesting. So all of the geography Didnt have the same a year over year percent decline there were differences.

There were differences are primarily in the international markets.

After remember that a in Australia, and Argentina, the food service component makes up a much smaller percentage of the total business less than 10%.

But the impact and those two geographies would've been a lot less severe than it would have been in North America.

Okay. Thank you and then let me know in the Mdna you do you did a there is that a piece of the MD mdna the outlook talking about the fact that you tend to aggressively pursue plant based opportunities. So two things can review with US what your exposure is to plant based currently and then secondly are you love of mindset.

You believe that Didnt Miss a current pandemic well I'm you know on unleash some plant based opportunities that wouldn't have been there otherwise.

So in terms of exposure, it's right now minimal a we are co packing for some up brands and we've taken on some contracts that are yet to materialize told exposure right now is limited.

Good question on opportunities presenting themselves a we're seeing a lot of interest.

Come our way now it could be through investment bankers could be through the bankers have some companies that are operating and it could be directly from companies reaching out to us because it's a relatively small small industry. So I would say the oh, the basket of opportunities would be wide.

Enlarge.

Okay. Thank you.

Thank you very much.

Turning next question on the line.

From the line or Chris Sliva doesn't matter Securities right.

Hi, Good afternoon, and you know I know you never want to wish that seems where your competitors, but I'm. Just wondering how are you starting to see any of them closing down that some of the weaker in smaller ones.

Yeah, so going into this crisis here, we knew that there were some competitors that were whose balance sheets.

We're not that solid not that strong their leverage is quite high and and what we're seeing right now if not in a hole there are parts all certain businesses that are coming on the market.

ER and so to me that is a sign of stress that is a sign of financial difficulty and assign all folks wanting to de leveraged their balance sheets.

So going into the crisis they were not in good shape.

During this crisis, even worse shape and not all assets that are becoming available are good assets there might be some junk on the market. We're not looking at the junk and I think what might happen. It's the job that's available might not sell and might not be enough to save the company and then eventually I think.

Because the second phase once those companies realize it they may have to put the whole thing lock stock and barrel for sale and we are in a fantastic position. So weighed on the sidelines and wait for the right opportunity come along at the right price for their rights strategic orientation.

For our business. So I tell you I'm truly optimistic about what's to come after Ur Cobot 19 is behind us.

Great. That's that's helpful. And then maybe just on foodservice you know when I listen to a lot of this was surface. The troops distributor speak and read some of the industry forecast I mean, I think the consensus view is were pretty quick recovery next year, which I guess makes sense as the restaurants in the economy Bratcher you open.

My question is first do you do you agree with that few and then secondly, what you're seeing on some of the risk.

I would say, it's too early to call that are going to return to those normal levels.

Right now, we're seeing a foodservice operators kind of restocking the pipeline. So this isn't the new normal yet we're gonna have to wait to see a overcoming weeks in the coming months, what that may look like and we can't forget that when you talk about risk if there's going to be a second coal that way. That's obviously going to have a huge impact probably worse than the first wave.

So that's something that's definitely on our minds, yeah, I would guy would complement that by saying until there is a vaccine I don't think their restaurants are going to get back to their full capacity either going to have to if they open up a use perhaps one third maybe half I back of their square footage which means.

Lets capacity for the same.

Store or until there is a vaccine I don't think we won't get back to a much normalcy at all.

Theres also data that a point to some foodservice operators that haven't been able to adjust in terms of oh, having a focus menu offering delivery options.

Take out auctions that sort of thing that potentially up to a third of those foodservice operations close permanently. So that's something that a is also in our minds.

Okay. That's helpful. And then I guess my last question is I'm, just wondering if international sites. So there's been some trade tensions between China, and Australia, and I know, it's only impacting the bars in the beach segment lots of dairy products, but just wondering if you're seeing anything on the ground up or down here and everything.

On that front.

Well dairy is considered a strategic oh food or because they don't have the the required dairy saw its further domestic requirements. So they need to rely on the imports. So we haven't seen any reduction in terms of import requirements from our side and from a dairy Australia perspective Weve Ah.

She the same us and use so far.

Okay, Great and wish you in your team I continue to stay safe and healthy.

That's right next to Chris I appreciate that.

Thanks, very much I would have one more question or as a follow up question. The right if I read Natal RBC correct.

Thank you just very quickly closing out could you remind us or could you give the social casino at this point I guess I'll, let your strategic priorities would be from an M&A perspective.

Yeah. So a other strategic orientation, if the continue to build our platforms in the geographies, where there is milk production. So let me highlight the the different regions. We've got a North America, which primarily is the United States.

We have Europe [noise].

We have a Australia.

Possibly New Zealand, if there's an opportunity for us and perhaps on the back burner is Latin America.

All of those regions are dairy producing regions all of those regions, we know extremely well.

And most of those regions with the exception of New Zealand, we have a management in the field. So those regions are extremely attractive to us.

Oh.

Beyond that if I look at a product category of course, it has to be in the dairy space, but the dairy space that is a really within our wheel house.

So she's production dairy powders byproducts.

So I would exclude from that.

Yogurt and I screamed typically for retail, although we do make ice cream mixes.

I will not discriminate on foodservice, an ingredient if there's a great opportunity for us and foodservice ingredient, we would certainly take a look at that.

But in some geographies I would like to perhaps consider a some diversification out of those categories and into some retail.

And then of course rounding things off.

Plant based if there's an opportunity for us to buy a brand and plant based.

That is also something that is part of our scope a of of targets strategic targets for acquisitions.

So not that different from what it was pre cobot 19.

We still believe in a dairy space I'm still bullish about growth in dairy although some categories are down other categories are up fluid milk is one that I don't have a whole lot of desire to expand our presence in in other geographies.

But if there's an opportunity for us to take on new customers that are profitable for us a we would be more than happy to do that as well.

Well that pretty well rounded out where our focus is and I will tell you Irene going back to one of your original question is the pipeline full yet the pipeline is full with opportunities.

That's great. Thank you rumor.

Thanks, very much put away I'm no further questions on the line I'll turn it back you know.

Thank you very much Tommy and as we sign off I, just want I wish everybody well, please stay safe and I'll hand, it back to Sandy.

We thank you for taking part in this conference call. We hope you'll join us for the presentation of our fiscal 2021 first quarter results on August six haven't they stay in stay safe.

Thank you very much and thank you everyone that does conclude the conference call for today. Thank you for participation. Please disconnect your lines.

Good day everyone.

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