Q2 2021 Saputo Inc Earnings Call
[music].
Greetings and welcome to the support are critical 2021 second quarter results.
During the presentation, all participants will be in listen only mode. Afterwards, we will conduct a question and answer session. If.
If you have a question just passed the one where the four on your telephone good friend you termed a car to reach operating their press the star by this year.
As a reminder, today's call is being recorded Thursday November <unk> 2020.
Now I would like to turn the call over to Leno's to put a junior destroyed ahead. Thank you very much Tony.
Good afternoon, everyone and thank you for joining us.
Moving part in our call today, our leno's to put a junior Mexico and Kai Bachman before answering questions from our analysts.
I will begin by providing an overview of our fiscal 2021 second quarter results and an update on our operational initiatives.
Before we begin I remind you this call is being recorded and will be posted on our website. 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 would 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 to Liam.
Thank you Sally I hope everyone is keeping safe.
It's important that I begin by acknowledging our frontline workers and the broader the poodle team, who continue to ensure our business run smoothly and safely. Despite these trying times.
As we can trend, which second waves in varying restrictions in many of our geographies our team's ongoing dedication and the resilience of our global platform to ensure we keep delivering a high quality essential products people rely on.
As seen in our second quarter results released today the effects of the pandemic continue to influence our business.
During the quarter consolidated revenues remained relatively stable compared to the corresponding quarter last fiscal year. However.
Murray mandated closures in the foodservice space impacted consumer demand for our products.
Sales volumes in the foodservice segment remained lower than historical levels, which impacted efficiencies in the U.S. sector in particular and negatively affected adjusted EBITDA.
Fortunately.
As we move through Q2, there were signs of recovery in the <unk> with a gradual easing of government imposed restrictions.
And while the economic indicators are generally started rebounding.
We are adapting to a new world and many of the areas, where we do business, particularly as authorities adjust their strategies in response to the Pandemics evolution.
There's no doubt, we're still facing headwinds in the foodservice segment.
Which will persist as long as restrictions remain in place.
With this in mind and with key learnings from the last seven months under our belt, we're actively doing what we can to minimize efficiency losses through enhanced integrated production planning.
Overhead cost containment.
As well as the repurchasing of raw material to serve the healthy retail market.
Since last quarter the surge in our retail sales started to level off.
But it continues to perform well.
As such we have not shied away from taking advantage of the situation on we're ensuring our innovation and marketing pipeline is well positioned to seize opportunities and drive future growth.
With that brief overview I'd like to invite chi to provide further detail on our divisional activities.
Thank you Leanne I'll start with the support of dairy USA.
Since we are however, seeing improvements in having the appropriate level of plant staffing.
We are also currently in the process of retrofitting and adjusting limited portions of our network shifting elements of our primarily foodservice products specific facilities to adapt to retail requirements in order to take advantage of available labor and processing capacity and to position us effectively in another major coated wave.
We continue to see healthy retail volumes relative to historical levels and challenges in the foodservice space. There have however, been some bright spots in the foodservice space, specifically as it pertains to some of our key strategic QSR partners as well as some of our foodservice partners that have been able to adapt their restaurants to more pickup and delivery.
Another example on the foodservice side is through our legacy SDF legacy business is our refocused effort on specialty mill due to its extended shelf life versus HST, which has helped operators deal with fluctuations in demand.
We will continue to adapt to a quickly changing environment, whether related to covance for weather related to customer and consumers rapidly evolving tastes.
And it's because of this that we announced the merger of our legacy divisions support achieves USA and Super food dairy foods.
The merger is being led by Carl call, Lisa and a highly capable seasoned leadership team. The team is working on a strategic growth plan leveraging the best of whats the poodle cheese, USAID and support of dairy foods has to offer to create a bigger better and stronger supported their USA.
This plan will include efforts to greater emphasize our market, leading brands and the retail space brands like Frigo cheese heads, which is the number one retail branded retail snacking cheese, Marcia, which is the number one retail brand and go cheese Salem, Bill Treasure cave, which are the market leaders in the blue cheese categories.
Our strategic growth initiatives will also tackle the challenge of increasing the value of our way and protein ingredients we.
We will also be wrapping up our dairy alternative initiatives to meet the changing demands of our customers and consumers were looking to leverage our existing infrastructure are filling and processing know, how and technology together with our strong customer relationships to accelerate our growth in this category.
On the plant based beverage side, we have successfully rolled out allmand, an old beverages and have landed our first contracts. It is our goal to have a national footprint in the United States as well as having a platform in Canada, where we will leverage our existing customer and distributor distributor relationships to accelerate growth in this fast growing category on.
The dairy alternative cheese side, we have leveraged our UK innovation center to develop a product that is currently being introduced to some of our key partners in the United States. Our goal is to develop a product that performs well on a pizza that can service as a substitute for months around for those consumers that prefer a non dairy alternative approach.
Our product that taste and performs like cheese with the ultimate goal of offering a product that delivers on nutritional qualities as well.
As Weve experienced first hand in the western as Koby crisis, it is becoming more and more challenging to attract retain and develop our manufacturing talent.
As a result, we will continue to focus on operational efficiencies and continue to optimize our manufacturing network.
This will include wrapping up our IBP processes, leveraging our safety platform as it comes to fruition increasing automation in our plans as we develop our future capital expansion projects, we look forward to share to sharing more insights into our strategic plan as we move into fiscal 20.2.
In Canada, New restrictions will have an impact on food service as in room dining has been eliminated across a number of provinces are coming from commercial teams are joined at the hip with our foodservice and retail partners, resulting in a much better understanding of supply and demand requirements.
We anticipate seeing a less severe impact to what we've seen so far foodservice operators have adjusted their business models, simplifying their menus catering to pickup and delivery.
Our teams have been focused on growing our value added products portfolio. And example includes the repositioning of the Armstrong brand one of Canada's top everyday cheese brands through new packaging, new formats that cater to convenience such as slices and grated formats that includes snacking formats as people continue to cook and eat more at home.
In addition to new formats, new flavors like Smoky Cheddar Habanero had been launched as consumers look for bold new flavors in an environment, where retail will continue to play a key role in our continued success. The teams have the great advantage of carrying a portfolio of market leading brands in the marketplace.
Whether it's in fluid milk, where we have dairy land in the west and Nielsen in the east whether whether it's our leading Alexis footnote in the high value specialty cheese space.
Whether its support of which holds a dominant position in the mozzarella and Italian cheese space. We have a tremendous array of brands third teams will look to continue to develop to meet the fast changing consumer customer and consumer preferences. Similarly to the U.S., we have shifted some foodservice processing capabilities and capacities over to retail to adjust to the changing market demands.
As with the U.S. the Canadian team has adapted their lineup to help our customers we converted our ultra filtered milk lineup Julia to shelf stable, meaning no refrigeration is required and communicated this benefit in both foodservice and retail for customers looking to stock up in low the pantry.
On the foodservice side, we promoted our eye QSR quick frozen mozzarella as a great alternative for pizzerias coping with fluctuations in demand.
E Commerce continues to be an important outlet for consumers and the Canadian team has successfully rolled out literally go in Quebec, and the support of Fridge in Ontario, and is now looking to roll it out across Canada.
Not only are we dropped diving into b to C, but putting in investments to ramp up our b to b and our B to C. B to b platforms in other words, reaching consumers directly through retailers online channels and through third party online channels as well.
We've got a lot more exciting things coming our way and we will be sharing those with you in due course comes.
Combined with the company's strong customer service and supply chain execution. It is our ability to produce consistent high quality products at the lowest cost that continues to drive our strong performance.
In terms of our large scale capital projects. We are on track to complete our same monarch in Saskatoon projects by the end of next month, which will give us increased capacities on a variety of higher value add products, our pork equipment fluid and future plant based facility is also on track to dictate to be completed by the end of next summer. These are tremendous.
Its accomplishments in light of coated restrictions.
Moving down under milk supply in Australia continues to improve and we are on plan from a total milk intake perspective.
Favorable weather conditions have helped increase mill production form for our current base of suppliers. We've seen increased no purchases from third party milk brokers and we continue to increase our toll manufacturing opportunities.
Volumes are performing better than prior year, albeit mix between channels and within channels has seen more volumes of lower margin products sold particularly on the export side.
We've seen phenomenal growth in our COO and brand, which is the market leading brand for everyday cheese, we anticipate that we'll be changing the brand name in time for next fiscal the key is to ensure we do it in a strategic way that is fully aligned with our customer expectations Love Dallas is doing phenomenally well in the lactose free cheese side as our specialty cheese brands, we inherited as a result.
Of our last acquisition of Lions specialty cheese Division.
Brands like South Cape which is the market leader in the total specialty category Mercy Valley, King Island, and a host of other of other amazing brands.
On the foodservice side must volumes continue to be stronger than forecast even during the current lockdown.
COVID-19 has seen a significant impact on export prices, particularly on the butter side and in our ingredients business on a more positive note closer to Australia, we're starting to see signs of improvement in Japan, which is one of our most critical markets.
Moving over to the UK Cathedral City continues to pour performed very well for US. It's been voted one of the top 10, most trusted brands in the UK for all food.
We've.
Gained over a million more customers versus a year ago.
We're supporting this top brand with a substantial TV advertising campaign, which articulate is great reasons to tuck into the nation's favorite chatter.
We are leveraging the power of this brand and by bringing it to our other platforms by the end of this calendar year, we will have cathedral city available in over 6000 stores in North America, and so far the results have been tremendous with volumes more than doubled our original projections.
Clover as our top spreads brand, it's been a game changer in that it doesn't carry any artificial ingredients. The brand is up significantly over last year Friday like another great brand that we inherited the biggest Springfield brand in the UK in the UK has seen healthy growth as well.
The one area of our business that poses a challenge for us is on the ingredient side.
The IMF space has taken a hit internationally an ingredient sales have suffered as a result, our teams. However are in the process of a diversifying our customer mix and it's expected that we will see improved volumes as we move into the second half of this fiscal year.
In Argentina overall market consumption is down 68% and we've seen a plethora of smaller competitors that have had to exit the industry due to the covance situation and as a result, our teams have been very aggressive in terms of picking up more milk and we've seen nice growth year over year.
Foodservice channels are down versus last year. However, on the retail side that business performs continues to perform very well with lapel Lena which is the number one cheese bran in soft cheese, mozzarella semi hard and hard cheese as well.
We are seeing better forecast for the next couple of quarters on export side. In fact this month, we are on pace to ship record volumes from our Argentinian platform. So.
So thats a quick look at some of our divisional activity level much appreciated chi very nice.
Before we open up the Florida questions. Let me end with a short progress report on our corporate responsibility efforts and initiatives during the quarter.
Despite the challenges of COVID-19, our priorities remained intact in each of the seven pillars, comprising our supplemental promise.
Our people pillar remain how the upmost importance and we continue to put employee wellbeing and safety first and always first through enhanced measures that.
That company complemented the already robust protocols, we have in place.
When it comes to our commitment to diversity in the workplace our efforts have not wavered either.
Recently I was pleased to join over 70, Ceos and publicly pledging to accelerate progress for gender equality diversity and inclusion with a nonprofit organization catalyst for change.
Regarding our climate water and waste performance, we're making strides towards our 2025 goals and have allocated $50 million towards various projects aimed at reducing our annual energy consumption.
Two emissions water usage and waste globally, despite the pandemic.
For us doing the right thing.
Is the only way.
And intrusive little character, we maintain both a short and long term perspective on the future health of our planet and our society as a whole.
As we round out the first half of the fiscal year I'm confident in our ability to adapt to new realities.
We are ready to face any subsequent phases of the pandemic we.
We are determined to stay the course.
And we are poised for future growth.
Our solid financial foundation, and strong cash flow allows us the benefit of being able to seize growth prospects in the context of acquisitions, while navigating the current landscape.
In short if.
If we can get the right assets at the right price we are ready to move ahead.
Profitability enhancement and shareholder value creation remain the cornerstone on which all our strategies are built.
I'll end by once again thanking our talented and highly devoted team who continue to impress me every single day.
And on that note I will now proceed to answer your questions Tommy.
Thank you very much and if you like to register a question. Please press the one followed by the four on your telephone urea her three from prompt Nox requests.
My question has been answered to draw your distribution is the one for Bethree.
One moment please for our first question.
And we'll go to our first question on the line from Chris Clark BMO capital markets go ahead.
Okay. Good afternoon.
First question is about the Cathedral brand that's your.
Youre running here, it's impressive that you.
Are going to be in 6000 retail outlets. So can you talk a little bit like how do you introduced.
Outlet brands from another market and bring it here and get all those things you know what the brand really has limited brand awareness here is it a question of paying the listing fees or is it through relationships with distributors and retailers just just how does that work.
Yes, Peter so.
Not just cathedral, Brian Cathedral City, Brian.
But we've got a wide range of of brands that resonate with consumers in all markets in all categories.
And perhaps sometimes they don't talk about that enough you know we talk about our proficiency in.
And at cost reductions and our ability to be able to navigate through a lot of choppy waters with high quality low cost.
Manufacturing site.
But our brands can carry the day with consumers, we're very fortunate that through many of the acquisitions. We inherited some brands that have a great. Following and there is great value and being able to share these brands with new consumers around the world.
Through the some of the trade agreements, we've been fortunate enough to inherit some of the licenses to import product.
And.
Cathedral City.
Does have a following around the world.
We've got you know the.
UK stamp on those.
On on those products, if they do a study and our products are being served in Buckingham Palace. So we use that as part of our leverage.
Are you able to resonate with some of the the retailers I want to have a very unique product on the shelves, but maybe in more granularity I'll ask high to go into some strategies and ideas that we have to roll this out not only in Canada, but through the U.S. as well well be us.
Through our DC acquisition, we were able to inherit a whole host of brands that we were sourcing from Europe and that allows us to tap into the relationships that we have with a lot of the major retailers because cathedral city. Its not just going to go on that your regular everyday cheese shelf it will be more on the specialty category and when you look at the time.
EPS of shutter that are available in the United States frankly, most of them don't pace very good. So this is a this is a product that has won prizes in in cheese fares is very well known in the industry and so it's a high quality product and Leno mentioned, it's got the Buckingham stamp on it but more importantly, we.
We had the use salesforce come together and we created a market blitz with the team, creating some excitement around the brand.
To be able to bring another brand another type of of cheese to the product portfolio Thats already being sold to our existing customer base a lot of strong Pos also at the store level, so lot of marketing activities directed.
Ground level efforts, if you will rather than the TV advertising that we're seeing in the UK. So it's a combination of all those factors that have allowed us to kind of.
I'll start off successfully with the Cathedral city in the U.S.
And Cai is there an initial investment that's who don't need to make in terms of trade allowance or otherwise or is the economics similar to it.
Minimal at this point as we ramp up obviously if were looking to.
To increase those volumes significantly there would likely be some investments required but we always look at every investment on an ROI basis. So we'll evaluate it at that time, but so far it looks very promising so we're prepared to invest behind the brand.
Okay and then just my last question is now almost hate to ask this because it's kind of an ongoing thing in the industry that seems to flare up every once in a while but.
With the announcements everyone seeing from Walmart lot lot Metro et cetera on how they are imposing additional fees or discounts on their suppliers can you talk a little bit about how the dairy industry reacts to this or is this just normal course.
More of the theme that is always going on its just happens to get caught in the papers every once in a while.
Yes, so we really don't care, what the dairy industry is doing with respect to response, we really care about with the photos doing in terms of our response look I think we we offer some things to retailers that no one else can offer.
When we're talking about that networking and we're looking at.
The our integrated business plan from distribution.
Innovation as well as.
Brand recognition.
Connection with consumers market Intel I mean, we're not just the provider of dairy we are a full fledged provider of goods that make our retailers better and we remind them of that and then there are certain things that we would deem as non negotiables.
And harlows non negotiables are far better.
For lack of a better word on imposed tax law.
Everyone till the COVID-19, and everyone's costs are going up.
So.
The we don't see that there's any real value.
In an imposed tax.
Especially in a very tough difficult environment, So we pushed back.
And at the end of the day, we make it very clear that.
We want to be partners.
In a long term sustainable business plan and therefore not treated as partners. Well then we are prepared to walk away and we have in the past Peter you've known.
Only to find that our competitors cannot service the market the way that we can service the market and so some of the retailers come back to life.
So we are very disciplined in that approach.
If there is going to be incremental costs, there's got to be an offset of incremental volume and if there isn't an offset that allows us to be bigger and better with a with a partner and then perhaps it's best for us to walk away and we've done that before and.
This is part of the poodle character irrespective of what's going on in the industry.
Yes, I recall that.
You walk from some business in the fluid milk and it came back to you if I recall correctly that is per site and.
Not isolated to Canada, but we're starting to see the similar similar behaviors in our other jurisdiction. So whether it's in the UK and you're all aware of how strong the retailers are in that market, whether it's in Australia, where it's a consolidated market from a retailer standpoint as well. So we have seen those same pressures, but again to lean on.
I mean, when you provide the service and you provide a consistent quality product they need you as much as we need them.
Okay. Thank you for your comments.
Thank you Peter.
Thank you very much. We'll proceed with our next question on the line from Irene Nattel with RBC capital markets.
Thanks, and good afternoon.
And Kai as you were reading everything that you are doing on the innovation side, both server product innovation in terms of categories.
In terms of.
All of it and also that the shifts in some of the changes implemented into production network.
It seems as though youve really accelerate and.
The sort of neat innovation plans very broadly defined innovation adaptability and flexibility plant can you just walk us through whether it's.
Some of these are new lender you intact, just accelerated down how you were able to accelerate them and the magnitude of the incremental flexibility that you now we're going to be able to have between channels that really should be helpful, particularly in the us.
Yes, just like to clarify that again, we have limitations. We can't you know switch overnight from foodservice to retail, but we are doing the best we can in terms of situations, where we may have some labor shortages in one part of the country because we're seeing a second wave in certain states in United States as an example.
The ability to take some of the production from those impacted facilities to foodservice specific facilities, where we have the availability of labor, where we have the availability of processing capacity, we're doing that as best we can and but we're not going to be able to just overnight flip the switch so I just wanted to.
Clarify that in terms of the innovation.
Part of the question I would say that it's always been there for us it's a matter of you know.
Taking that and being able to roll it to other parts of our business and that's that's why.
We did the merge a further one USA with the STS and then SCUSA SCUSA traditionally very strong from an operations perspective, SDF very strong from a customer consumer solution selling perspective, so in terms of.
Diving into the.
The market Intel the insights work.
Thats being pulled from from from consumers, we're taking that adopting the SDF model leveraging the expertise from an operation standpoint from from our schools a platform to be able to accelerate.
Our push into those.
Priority areas that out like whether it's retail whether its plant based and other areas.
So if I can add maybe a bit of color there with some more specificity to your question.
Covanta has provided us a license to the change a license to explore things we never have explored before so some of the more concrete examples of our innovation. The E. Commerce business. You know we're looking at a business that is either b to b to C or direct me to see.
Thats something that we never would have explored in the past had we not gotten into this current environment and these are things that are going to last.
Beyond the pandemic.
We're looking at package formats that are perhaps more appropriate for consumers in todays context.
And re purposing or retooling some of our plants to be able to get there.
Looking at also dairy alternatives, we're on the fast track now developing a.
Non dairy mozzarella for the fee to trade, we will be first to market with that we're leaders in the pizza trade and if there is going to be have begun pie on the market, we want our products to be the number one product on that pipe.
We're looking at co packing arrangements as well.
I would never have considered co packing arrangements in the pack now we're setting up our plans with long term contracts, where we can do some co packing for others in our space. So these are all things that are creating to innovation within the organization.
That allow us to be able to utilize our footprint maybe.
They will utilize our spaces and maximize.
The the full capacity value that we bring to market all the while offering solutions as I had mentioned to our customers whether they would be competitors in the industry or whether they would be.
And sellers to consumers or to end consumers directly so I have to say I'm very excited about.
The thing that we've learned over this the course of this these last seven months and the programs that we're putting in place that are going to outline. This pandemic that are going to be here. Once there is going to be a vaccine everybody gets back to normal life.
Irene I am just so excited about where we sit right now.
I can hear anything youve likely noticed I think we'd be getting making them the chello editing.
Laminate.
Hi.
Just one of them.
A question if I may I was looking back.
Through the last couple last few conference calls and it's been a while since Weve taken a tour of the world on M&A. So you can let us know where you're interested particularly by geography, and where you kind of might have some challenges in terms of market share we're in.
Yeah. So there are two Irene I'm I'm. So excited about the potential that we have from an M&A front.
You know I've said this on previous conference calls, we our pipeline has been soulful with potential opportunities back then we were talking about six or seven alive files and and I would say that we do have some very very light files going on right. Now so the areas that are of interest to us of course of the United States and in the U.S.
That there still is a potential for consolidation.
Look you may have seen some deals.
Be materialize and we were not the winning bidders on some of those deals and that's okay. Because we're always going to approach our business with a lot of discipline.
Discipline, when we go to market with our strategies and also disciplined when we make acquisitions.
But when one door closes I think there are three windows that open up and I'm delighted about the windows that are open for us right now so.
North America.
The United States very very important platform for us a hotbed of potential opportunities that could come somewhere down the road.
Australia.
Australia, there are still our pockets of areas, where we think there might be opportunity for us to further enhance our platforms that we have there. Our team is so diverse our team has been able to navigate through these challenging waters first you have the Bush fire then you've got the Covance.
Then you've got the economics, then you've got the mills thats declining and yet our mill base is growing.
I am so proud of our team in Australia, and I think they need to be rewarded by more acquisition and so if there are.
A file that will allow us to continue to expand in Australia, I think our team there deserves it.
And then I'll move on to Europe, It's Tom ascertain and his team have done such a great job.
When with the the brand and the platform that we inherited in the UK and now they're fully integrated and they're chomping at the bit that's how to think about you know other enhancements of that platform through acquisitions. So we're also looking at here of the EU 27, the largest no pull in the world.
It is an area that we think we can be further.
Further consolidating in Seoul, and then finally I don't want to exclude Latin America, our team Marcelo.
And his team are just navigating really through I would say triple.
Threats in their country. One is covance. The other one is economic crisis and then the other one is the political instability and this team continues to navigate extremely well.
With all of those headwinds and so if there is an opportunity for us to make an acquisition, we'd be smart about how and where we invest enough in Argentina, but we need to reward them as well for the find other they're doing so.
My final thought to you Irene is that.
The pipeline remains full our balance sheet is good and I'm just so excited about what's to come.
That's great and just one final question on 10 check.
When you bought Angie you didn't have to divest currently because of market share issues.
And are you confident that you still would have room to make an acquisition in Australia.
I am quite confident that there is still is room of course, the triple C will have their final stamp on that because we are the largest dairy processor.
In Australia, but you need to look at it.
From from the different geographies, where we are and where we are not.
So.
I think that there is room for us to make acquisitions.
However, if there are pockets, where we would have to consider occur all occur ROI style remedy that perhaps something that we would need to do it.
It would come to that.
That's wonderful thank you.
Thank you very much.
Well go to our next question on the line from the line of Michael Van Aelst with TD Securities go right ahead.
Hi, Good afternoon, I wanted to focus on Canada didn't start you had a very nice lift in sales and particularly Italy and EBIT da this quarter.
Continues a nice upward trend from what we saw last few quarters. So.
I'm trying to understand how much of this.
Lift is from Seth business that you recovered.
And in prior quarters or in recent quarters.
And from the price increase and how much of this might just be temporary due to cope.
So in Canada, where we have seen is a strong recovery on the foodservice side, if we looked at.
The first quarter.
To see out of the gates from the first wave of covert that had a significant impact.
But now as we just come off of the second quarter, we saw a significant improvement over the last quarter.
And on the retail front as we've shared with you in the past the volumes continue to be quite healthy in that space.
Price pricing wise, the price increases have stuck weve shared that with you before those would be some of the core elements in terms of the performance.
How about the.
How much of this do you think is permanent dollar to like the retail lift I guess is.
Is mostly tied to Covance I assume although you also had one back to new customers. So how can you how do you figure out like how much of this you think is going to stick around.
Well, one would expect that this would be sort of the base level, because we still are seeing an impact from a corporate perspective.
So the cobot, obviously is the wildcard and as I mentioned earlier, the we do anticipate with the with the new Lockdown in Quebec, and Ontario, Manitoba that that would have an impact but.
Not as strong an impact as that we had seen in the first quarter, so that will definitely.
Impact our foodservice business negatively.
Okay and how.
Meaningful or your and lower admin costs or your cost controls during cold it.
Okay. Michael this is Max.
The elements that you're mentioning all part of the the good story in Canada.
The elements such as you know the the performance of the Armstrong Brian is to note.
Our ability to serve the market use our supply chain and to deliver on time most to.
All the locations every time is part of the success. We do believe that is sustainable. So is the volume whether it's where the category is on the fluids or on the cheese side, we feel very comfortable about that and relative to price increase.
Price increase really talks about the increase in the raw material, so theres not so much.
We you know we can do at some point, we got a recovery recover or costs.
And at some point, we did help to upset so.
Loss of efficiencies due to some softness in the fluids foodservice segment.
But all in all that's the story in the Canadian.
For this quarter.
But how much how about the admin costs that you're like the lower travel Laura.
How much is that contributing.
The the overall, if you look at it from and as Ginny perspective.
They are all favorable let's say to prior year in almost all of the sectors.
So it's not so much that.
We we we cut project, but certainly there was some differed in terms of spending no I'm not going to quantify the exact amount of the lift that is relative to as ginny, but.
But it is part of the our discipline to running our business and it's as important as the other element that I've been mentioning.
Michael if I could just maybe I guess of the heart of your question.
So there are some offsets.
In cost containment relative to the coal would cost increase that we have within our facilities.
But once we get back to life is normal and people start to travel again, including our teams to go see their customers or we get back to a higher level of promotion and trade spend well then that will be offset favorably.
With a decrease in coal bid style cost at the plant. So I think it's it's irrelevant what our cost savings are relative to pull that increases right now because I think that ultimately when we got back to a normal life there should be a similar offset the other way.
Great. That's helpful and then on the European side.
I don't know if you mentioned I might have missed it but your revenues were lower particularly when you back out FX and.
Kind of surprising given that cobot still going on out there and you are heavily weighted to retail so.
So can you kind of give us more color as to why it's down and and house. How long you think this is going to last.
Not so thanks Ellen.
Yes, well in the retail segment sales.
As leveled off.
The reduced.
It's a revenue in the UK is not so much from a.
Retail perspective, it has more to do with the industrial business. We have roughly is 16 17, 18% of our business on the industrial front.
And we've been facing some challenge from both volume and.
And pricing perspective during the quarter, so our cheese Cathedral city retail remain.
Solid.
Considering the fact that it has leveled off in Q2, and maybe Cai you want to comment on the industrial part sure.
So at the time, we acquired the business, we actually inherited an exclusive arrangement to market and commercialize Oliver ingredient sales out of the UK.
Our partner has been unable to meet to the the volume commitments and we've had an open dialogue with them and they have allowed us to look to expand our portfolio of customers and markets. So that we're not dependent on the on just the one partner. So the team is currently working.
With other major infant formula players in international markets, and we anticipate that in the third and fourth quarters, you'll see a significant lift from an ingredients perspective. The good news is also I just wanted to share that last year. We did have some difficulties in first passed quality on that I have great on the ingredient side and this year.
Sure we are hitting all of our targets, which is great news now, it's just a matter of going out and securing the markets and the customer contracts.
So those volumes that you Didnt ship in this quarter will you may well, you actually and what were your building inventories in shipping in the next quarters.
We are building inventories and we anticipate shipping those out in Q3 and four.
Great. Thanks, very much guidance.
Thank you very much well get to our next question on the line from the line of Mark Petrobras NBC permit.
Yes, Thanks a lot.
Specifically regarding the U.S. market could you talk about the competitive dynamics, you're seeing in both the retail and foodservice channels, notwithstanding the broader sort of industry trends I was surprised to see the comment that retail volumes to decline. So just.
Any color there would be helpful.
Well you have to look at both of our businesses from a support achieves USA and superior foods, a perspective on the STS legacy side, the retail volumes are very healthy.
On the SCUSA side much of the challenge that we're facing.
I shared some comments in the opening statement was around some of the labor shortages that we faced specifically in some of our retail plants.
Fortunately, we are seeing that level off and we've taken various initiatives to address the gaps when it comes to a labor shortages.
So we do not anticipate to see the same level of disruption as it pertains to fulfilling our retail commitments.
Okay. Thanks, and then with regards to the commodities.
The market factors sort of benefit was was actually pretty minimal despite the high block and the best mill to spread weve seen in a while I understand sort of inventory realizations work may be as favorable.
Was that the main factor.
Or was that also because of sort of weaker ingredient markets.
Uh huh.
It would be helpful to hear a bit about that yet.
Yes, Mark the two main element with regards to market factor was around the favorable spread that we have been able to to enjoy due during the quarter.
But those favorable spreads were almost all offset by a negative inventory reval realization, we started the quarter with a block price that was quite high and as we were.
He was telling the inventory that was built.
In Q1, the inventory were realized at a much lower.
Lower GAAP, so therefore that the benefit of the lower spread at.
The better spread was a kind of mitigated the in the ingredient piece. It was also negative for this quarter, but to a lesser extent. So the two big pieces was the favorable spreads and the negative inventory realization.
As we're getting into.
The Q3.
The the block remains stable all the way to the month of October.
So the inventory realisations.
We can expect that they would be a less of a negative impact, but so is the spread as well so the two.
Andy ingredient also work hand in hand together.
Okay understood, Thank you and and if I could just.
Just with regards to the Australian market.
It was good to hear you know milk volumes have improved but I'm interested to know just sort of broadly supply and demand in the market overall, how that's evolved sort of current run rate and on on volume versus capacity and then also in the retail market I know it can be a quite a competitive market just sort of curious how that's evolved through the pandemic.
Yes from a from a total market perspective domestically, we've seen increases in volumes across the board for all the various product categories.
Especially on the cheese side, we've seen a very strong numbers on our everyday cheese sales.
Sales, especially on the Coon side.
Foodservice wise not as impacted as in other jurisdictions and remember that foodservice is a small percentage of small proportion of our total business in Australia, we're continuing to develop that space.
The lock down that we just went through was focused around the Melbourne area. So the rest of the country remained open. So we actually saw increased sales of our amount of of our must or other products. Specifically, so foodservice, we've actually seen some good numbers. So I would say to me.
Yes, typically overall, both in retail and foodservice good growth the challenge as I mentioned earlier is largely been on the export side, but we see a better picture as we enter Q3 and four.
And where are you now in terms of your throughput versus your capacity.
I'm not prepared to disclose the particulars around the capacity I would just say that with.
One of our facilities moving to a seasonal production.
That relieved a lot of the excess capacity that we had a prior when we acquired the business and now that our mill can take is actually on the rise and with increased opportunities on the toll manufacturing side, we're well positioned to bring on more volume to to run through our facility.
So I would say that we're in a much better position than we were.
At the time of the MG acquisition, and Mark I would say that we're on target with our three year plan to get to 90, 95% capacity utilization. So we're actually I would say probably ahead of the three year plan.
Okay. Good stuff. Thanks, all bye thank you.
Thank you very much.
Our next question on the line from Patricia Baker with Scotia go right ahead with your question.
I'll get back to that.
First of all I, just want to make a comment and I want to thank you for the review that you gave going market by market in particular.
On the portfolio and the brand and innovation I found that perspective very very helpful.
I also have three questions first of all I think is for you.
Just sounds like the last seven eight months and the challenges that you've been facing.
With the with the pandemic really forced the company to you.
You know.
Differently at many elements.
Of the business and to do a refi just wondering if you believe that create it and even better culture within poodle that you think will stay with the company and in fact.
Lever some improvements to the business in the long run that perhaps you would Miss you Mike.
Wouldn't have happened in the absence of those challenges.
Yeah, I really do appreciate your your question Patricia because culture is so important to us.
Look we live and breathe the culture and the values every single day, and it's only in crisis, where you're able to show your employees that you are going to stand behind what you say words are cheap.
Action is priceless and so for us to be able to stand in front of our employees and take the right decisions.
Four then every single day allows us to be able to.
Lives of culture breed, the culture, but really the culture, which I think is even more important.
The fact that our employees are the most important asset we have.
And we demonstrate that through all the actions we take despite Colin I think does resonate with our employees than we do I would say have a better culture or.
Living culture.
That is being.
I I witnessed by everyone and all of our divisions around the world.
So.
And I hate to say this out loud because I know a lot of people are suffering with COVID-19, but I would say this pandemic has allowed us to elevate our game and to think about things that we never would have I would say, it's been a transformational year for us and.
I talked about my excitement before in Irene's question, but coming out of this thereof.
There is no doubt in my mind that we are going to be so much better for it.
Thank you for that.
Kind of what I suspected it.
So it looks like that.
From the outset, you don't always know what's really going on you.
My second question is around the plant based opportunities.
Opportunities and you noted that you are already producing almonds and Oh milk you already have secured a customer. So can you talk about sort of what capacity production capacity, you're putting towards that and I would assume that you're actively pursuing incremental customers for the plant based beverage.
Absolutely. We we created a team led by Larry Mcgilvery and from a network perspective, we're already out of the gates with our Florida a plan.
Platform and plant city, but we are also looking to introduce plant based capability and capacity in Newington, Connecticut, as well as port equipment as part of our project Big So the Canadian platform actually is not only going to be for Canada, but we're looking at a north south strategy for for that platform. So what we're trying to do is replicate the strategy.
That we rolled out with with our US platform, having a national network that our customers can tap into and leveraging obviously the high levels of customer service that we've been able to deliver from a capacity standpoint, so for competitive reasons I'm not going to share the the numbers, but I would just say that there's going to be plenty of capacity.
Salable and our teams are already starting to fill a fill that capacity up as we speak and were not shy in and reinvesting in capacity once we get full and we will get filled.
And forgive my ignorance I don't know the answer to this question, but what brand.
Under.
We are largely focused on because it takes.
You'd have to adopt a different business model to create a brand from scratch require heavy investments, yes, we feel that with the customer relationships that we have both on the foodservice side.
Retail wise, we have great relationships QSR wise, we have great relationships, so leveraging those relationships and focusing on private label focusing on the Max manufacturing side of the equation is the strategy, we're going to adopt.
Okay.
And then my final question is just on automation.
Reference that that will be an opportunity something that you will have to do more of and I'm. Just wondering with respect to automation, where do you where or which markets do you see the biggest opportunity.
Well, we see automation as an opportunity for all of our platforms and we've already introduced a variety of.
Automation initiatives as part of our standard strategic capital that we have in the various markets and so it's not going to be isolated to a specific division. It's our intent to accelerate our investments when it comes to automation across all the divisions.
Thank you very much.
You're welcome.
Thank you.
And once again the folks on the phone to understand one forward to ask a question. Our next question comes from Chris Lee.
Uh huh.
Oh good afternoon, so two quick ones.
I mean, we mentioned in the outlook section that you expect the volatility in the commodity to moderate in the second half the year going into next year as well and then just wondering if you can share with US what you are seeing in the marketplace. So what do you expect to see that will help that moderation going forward.
Actually I'm going to hand, this one off the guy.
Well, what we're seeing in the market I spoke to it briefly Oh, if you look at you know.
Asia Pacific as an example, Japan is one of our critical markets and we're starting to see a lifting of restrictions and the market opening up a bit and thats been reflected in what we're seeing in our Q3 and Q4 shipments. So we are seeing a recovery in some of our some of our key markets.
So that's why we're seeing we're expecting to see less volatility because we're seeing increased activity as there continues to be reopening of some of those critical markets.
Okay. That's helpful and then in the U.S., obviously, the block places being partly supported by the government does with bumps program do you have a sense if that program will be extended into next year I know, it's been recent extended to the end of this year, but how about for next year do you have a sense on that well.
We do not have any confirmation that it will be extended beyond where it's currently I think that where the food box program is in its fourth.
Fourth phase.
The U.S. government, obviously has provided billions and support to farmers as well. So the dairy industry has been heavily supported in an election year I would anticipate if I had to guess I don't think that there will be seeing that support extended unless covanta continues to spike and ER and you know theres.
Still difficulties out there in the markets.
Okay and then.
Also in the U.S. have you has there been any sort of meaningful pullback in sales volume because of the high blood prices and customers just not wanting to be stuck with a lot of high price inventories.
No actually we are seeing a weren't seeing an increased velocity in terms of our volumes. So that's not the case so from our perspective.
Active.
Okay. That's helpful. And then just on just on the U.S. again.
If you can maybe share with us just the sales volumes for each of the three customer channels in the U.S. how did they perform.
The people the level.
So I would say that.
You know the from a foodservice perspective, we've seen growth from a volume standpoint quarter Q2 versus quarter one.
And that would be the case in our in our SDF legacy or societal cheese legacy.
On the.
Pretty much across all of our divisions.
We're seeing improved performance.
Quarter, two versus quarter, one from a food service perspective.
And then in terms of on the facilities I think last quarter you mentioned.
It was sort of back to 80% of the prequels the level in terms of full service volumes. The U.S. has that improved through the quarter or is it more or less the same it's.
So that would be sort of the benchmark. If you will but there are certain you have to look at food service from a QSR from a foodservice distributor and from some of the key accounts that we split out.
As a separate category so it really depends but what we're seeing is stronger performance. It depends on the geography, but we're seeing stronger for the area, where we're seeing continued weakness is on the foodservice distribution side. So thats the foodservice that's.
Primarily focused on independence, but.
But we are seeing good borrowing from a from a QSR perspective and in most of our geographies.
As well as some of our key accounts.
Perfect and then my last question just on the international side.
The decline in the EBITDA margin you mentioned that in the opening remarks that it was partly because of the strong export sales, which tend to be low margin.
How how big of an impact was that in India in the decline this quarter.
Up.
From an international perspective, Cai, Yes, maybe just give a little bit a scope of what we saw in the quarter and perhaps even going into the next.
Two quarters, we did have we did have a sizeable.
Hit on the export side out of the gates, which occurred from the first quarter to the second quarter whatever in South Korea, specifically.
That will come off as we move into the third and fourth quarters and I think Max has some more color if he'd like to provide.
Yeah on the international front.
Yeah, there was a decline from a margin perspective as it relates to the pricing that we sell our products on the international market and the price of milk that that we've paid during Q.
During the quarter inventory that had been sold in and save from our business in Australia has been built at the higher mill costs in the year. The milk year that ended in June so that created some pressure in the margin as we were depleting that inventory during the Q2 if.
If that's helpful.
That's very helpful. Thanks for all your answers and hope you have a strong finish to the year and then Stacy. Thanks.
Thank you very much Chris very very much appreciate it.
Thank you very much and this is pretty we have no further questions on the line I'll turn it back to you. Thank.
Thank you very much Tommy.
We thank you for taking part in this conference call. We hope you will join us for the presentation of our fiscal 2021 third quarter results on February each point haven't anything.
Thank you very much and that does conclude the conference call for today. We thank you for your participation of the disconnect. Your lines have a good day everyone.