Q1 2022 Saputo Inc Earnings Call
Alright.
Yeah.
Greetings and walk on to the Saputo incorporated fiscal 2022 first quarter results conference call. During the presentation. All participants will be in a listen only mode. Afterwards, we will conduct a question and answer session at that time. If you have a question. Please press the 1 followed by the 4 on your telephone.
If at any time during the conference you need to reach on operator, Please press Star Zero, how as a reminder, this conference is being recorded on Thursday August 15.2021.
I'd now like to turn the conference over to Marlene. Please go ahead.
Good afternoon, everyone and thank you for joining us.
Taking part in the webcast are Lino saputo Maxime until he yeah, and Kai Bachman before answering questions from our analysts Lino Max and Kai will provide an overview.
Of our fiscal 'twenty 'twenty, 2 first quarter results and an update on our operational initiatives.
Please note that if you are joining us by phone you will not be able to see the visual component of the presentation you must join the webcast for full access to the content.
Before we begin I remind you. This webcast is being recorded and will be posted on our website along with the investor presentation. We are showing 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 release and filings.
Please treat any forward looking information with caution as our actual results could differ materially we do not accept any obligation to update this information except as required under securities legislation on.
I'll now hand, it over to Leo.
Okay.
Thank you Marlene.
We round out the first quarter of fiscal 'twenty, 2 we're beginning to see signs of recovery in many of the regions, where we operate.
But we are definitely not yet in next year.
We faced some difficult headwinds.
Things look more hopeful as each day passes.
The impacts of the pandemic still resonate in our business.
Before Max digs deeper into this and our fiscal 'twenty 2 financial results I'll share. Some brief highlights from our 2021 Seppuku promise report published this morning.
Of note. This year, we aligned our report with the recognized disclosure frameworks FASB and Juicy ft.
Among many other accomplishments it details our considerable efforts towards our environmental pillar.
Although our metrics trended negatively this year, mainly as a result of the pandemic.
We still made tremendous strides towards our 2025 environmental plan targets.
In fiscal 'twenty, 1 reallocated investments to complete 12 projects across our network and I am pleased to announce a further 24 projects will be funded in fiscal 'twenty 2.
In fact to day, we amended our 1 billion U S dollar revolving credit facility, which now include a sustainability linked loan structure.
This introduces an annual pricing adjustments based on the achievement of key climate and water targets in line with our 2025 commitments.
Beyond the scope of our own operations. We're also dedicated to doing our part in creating a sustainable food system.
Our passion for this led to the development of our supply chain pledges on it.
Exciting initiative coming to reality this fiscal year.
As part of these pledges, which we announced a day by 2025, we aim to source on 100% of our principal ingredients sustainably.
And to contribute $10 million to find relevant projects in this area.
With so many forward thinking elements underway in our business some of which <unk> will cover shortly as part of our organic our global strategic plan I strongly believe we're moving in the right direction, creating shared value for all stakeholders and ensuring the long term sustainability of our business.
I want to thank every <unk> employee for their resilience and for their care for each other.
And for their care for our business.
Their passion truly drives our success.
Our team has gallantly adapted to the changes and challenges of the last year and a half and I strongly believe we're in a great position to seize the opportunities which are coming our way.
Aspiring to become bigger better and stronger.
We're already making solid progress towards our goals.
With that Max I'll pass it over to you to provide an overview of our financial results.
Thanks, Lino and as Lino mentioned, the lingering effects of the pandemic continue to impact our sectors to varying degrees.
We continue to face challenges related to global economy condition commodity pricing consumed.
Consumer demand supply chains and labor productivity.
During the first quarter of fiscal 'twenty 2.
Consolidated revenue reached close to $3.5 billion dollar.
An increase of 2.9%.
While our adjusted EBITDA declined 21% to $290 million.
Overall foodservice sales volumes were higher than those of the first quarter of fiscal 'twenty 1.
However, our results were negatively impacted by.
U S market condition.
Number 2 inflationary pressure on input costs in all of our division, especially as it relates to freight transportation and logistical costs.
Also supply chain challenges in our end international sector, which negatively impacted our export sales volume and finally, the fluctuation of the Canadian dollar versus foreign currency, particularly particularly the U S dollar.
And our Canadian Canada sector sales volume were good as the foodservice market segment showed signs of recovery.
This was tempered by lower retail market segment as volume, but still contributed positive positively overall to growth to both revenue and adjusted EBITDA.
Higher selling price specifically in connection with the increased cost of milk as raw material and increases in dairy ingredient market prices also had a positive contribution.
In our U S sector, Covid related oversupply and ongoing overcapacity in the market of mazzarella destined for foodservice market segment as further increased competition.
The volatility in the dairy commodities market also remain low.
Led by an unfavorable spread.
U S market factor a negative impact of 42 million on adjusted EBITDA.
Yeah.
These conditions will continue to fluctuate from quarter to quarter, but based on the current trend, we expect start seeing better market condition in the second quarter of fiscal 'twenty 2.
And our international sector, we face some obstacles for sure we felt the weight of supply chain challenges.
On the export side, such as container container shortages and port inefficiencies.
Adding to this in Australia.
The competition for raw materials as intensified pressuring boat milk intake and pricing.
Accordingly, we are continuing to leverage our diversified approach, which combines milk purchases from our petro on farmers.
Third party brokers.
As well as toll manufacturing agreements. However, we expect to continue to experience some disruption in the next quarter in relation to export volumes.
In our Europe sector sales volume in the retail market segment were lower than the comparative quarter last fiscal does decrease was offset by the positive impact from a higher industrial market segment sales volume mainly in the dairy ingredient category.
The acquisition of <unk> Island on May 25 on.
Although positive provide a minimal contribution to the sector force.
Performance of the quarter.
As we move our business forward, we still expect our retail market segment to perform well and to exceed pre pandemic levels.
Input costs in general including transportation.
Fuel consumables packaging are expected to remain at sustained high level due to inflationary pressures.
As mitigating measure we are currently implementing pricing initiative that will take effect starting as early as the second quarter of this fiscal.
On our foodservice side, we will continue to work closely with our customers to adapt our offering to new consumer trends.
Such as takeout for in home dining.
In our industrial market segment volume are expected to continue to recover however, the pace will depend on the ups and downs of the export market and on the evolution of the shipping constraints, we felt during the last quarter.
Yeah.
Today, our board of directors reviewed our dividend policy and increased the quarterly dividend from 17, and a half cents to 18 cents per share representing a $2.9 per cent increase.
Finally, as we look towards the rest of the year. We are focused on controlling the controllable as we state of course under the roadmap of our global strategic plan, which is designed to deliver accelerated organic growth.
All of our platform.
Chi I will pass it on to you to provide an update on this.
Thank you Max as previously shared our global strategic plan is designed to deliver accelerated organic growth across all of our platforms.
From a financial perspective, we aim to reach 2.125 billion and adjusted EBITDA by the end of fiscal 2025.
This represents a total increase of $650 million or approximately 44% compared to our fiscal 2021 performance.
To go a little deeper approximately 70% of the growth is expected to be generated by initiatives to optimize and enhance our operations.
The remaining 30% is expected to come from initiatives aimed at driving our top line.
We aim to increase profitable sales volumes at more than double the rate of global per capita dairy consumption in all regions.
The exception to this is Australia, where we do not expect the milk pool to grow.
Of note the anticipated cost efficiencies that will come from optimizing and enhancing our operations are expected to come to fruition in the second half of our plan.
Therefore periodic increases to adjusted EBITDA are not expected to be linear, but we are confident that we will see bottom line growth and every year of our plan. Despite the challenging market conditions in the first quarter of this fiscal year.
I'll now move on to our pillars and provide some color around each 1.
When it comes to strengthening our core business I'll share some concrete examples of the progress we are making.
To start the ramped up cheese capacity art are David stone facility in the U K, allowing us to further bolster our market leading cathedral city brand through additional export avenues. In fact during first during the first quarter of fiscal 'twenty..2 we were thrilled to enter into a long term exclusive partnership with a key dairy.
Player that will allow us to expand distribution of the cathedral city into the EU starting in the fourth quarter of this fiscal year.
On top of that we are gearing up to ramp up our distribution of Cathedral city in the United States and Canada. Following the brand's successful introduction into those markets in fiscal 'twenty 1.
Another example, I'm pleased to share comes from 1 of our U S facilities, where we implemented a new filling production line, which is expected to be up and running by the end of this month.
This investment will enable us to manufacture a septic nutritional products to be sold in the retail market segment under a partners well known brand name.
To further enhance our customer solutions in the USA, we appointed a new senior Vice President of sales during Q1.
In this role he will seek to build on our solid sales and business development experience and our business.
Talking about the next pillar, which is accelerating product innovation on the dairy alternatives front, we are well on our way in the dairy alternative cheese category, where we intend to take a leadership position.
During the quarter, we were very happy to acquire UK based build island foods and innovative manufacturer marketer and distributor of a variety of dairy alternative cheese products on the award winning vegan cheese brand.
Prior to the acquisition Butte Island Foods was a key partner manufacturing the dairy alternative mozzarella, we have been successfully trialing with several current and potential foodservice customers in North America.
Now that we have the manufacturing capabilities in house, and a very compelling product with the right taste texture and performance. We are working on leveraging this innovative recipe into sales on a global scale.
On the dairy alternative beverage side, we are focused on supporting existing players through co packing arrangements and we continued to secure new business across North America in the first quarter.
Right now we have 2 facilities in the U S that will be taking on additional volume in the second quarter, and we'll be adding more capacity to our network with our new facility in pork equivalent of British Columbia.
When we look at the next pillar, which is to increase the value of our ingredients portfolio. We have some interesting progress to share as well.
Acquiring the <unk> facility in Wisconsin specialty protein was a key component of our plan.
This facility provides our dairy division USA with new manufacturing capabilities for value added ingredients, such as gateway organic lactose and other dairy powders.
We made great strides on the integration process during the first quarter as we look to develop specialized weight products to bring to market.
Across the pond, our dairy Division U K has been enthusiastically working on diversifying our dairy ingredient customer base and we expect the benefits of this to come through in the second half of fiscal 'twenty 2.
Note. The first 3 pillars I just covered will all contribute to our growth at similar levels.
I'll now move on to the optimizing and enhancing operations pillar, which is expected to drive the largest contribution to our adjusted EBITDA growth throughout the plan.
Under this pillar, we are undertaking specific operations focused initiatives in our manufacturing supply chain and logistics activities in.
In Canada, the construction of our state of the art facility in Port Clinton on British Columbia is on track to open this month with fluid dairy production starting by the end of August and plant based beverage production. Beginning later this fall.
The execution of our cheese network optimization plan in the U S is underway and the initial phase and the related capital expenditures are progressing according to our timeline.
We have already made investments aimed at enhancing the production of our market, leading frigo cheese had strength <unk> portfolio.
Over in Australia, we're accelerating continuous improvement initiatives aimed at maximizing our yield per liter of milk with a specific focus on the recovery of byproducts.
Finally, I'll touch on our create enablers to fuel investments pillar, which comprises initiatives some of which are ongoing that will allow us to materialize synergies and reduce overhead costs.
Our global ERP implementation falls under this pillar and the rollout within the remainder of our dairy Division, Australia and the subsequent phases of the implementation within the dairy Division USA are expected to be completed by the end of fiscal 'twenty 2.
And the dairy Division, Canada, the planning for our ERP rollout is currently underway.
As for the merge of our 2 USA divisions into 1 USA, we are continuing to work on our processes and procedures aiming to maximize synergies and support our division's future growth.
Underpinning our global strategic plan is the deployment of $2.3 billion in capital investments.
Approximately 50% of this amount will be allocated to base capital expenditures, including those related to our ERP initiative.
The balance will be supporting the planned initiatives with a larger portion of investments expected to be deployed in the first 2 years optimize and enhance our operations, which should act as a catalyst for increased margins through cost efficiencies and contribute significantly to the achievement of our growth target.
On the topic of acquisitions last week, we officially added wensleydale dairy products and its talented team of over 210 employees to our support on dairy U K roster.
With this acquisition, we aim to expand our brand portfolio and diversify our existing range of British cheeses with a leading UK brand. We are very optimistic we will have further traction during this fiscal year.
As we stand we are well positioned to seize more growth opportunities with a tank that is full and a pipeline of files that are exciting.
And I'll end on that note and we'll open the floor to your questions I'll now hand, it over to Frank to Tee it up.
Thank you.
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1 moment please for the first question.
Our first question comes from Patricia Baker with Scotia Capital. Please proceed.
Well. Thank you very much and good afternoon, everyone. Just 2 quick questions..1 on the mozzarella situation on the challenge there in the U S market, maybe you can talk about what your outlook is.
Bear in mind do you think we'll see some somewhat of a recovery.
Recognizing that you don't have full visibility on that and then secondly can you talk about the dynamics behind the increase.
Competitive intensity around the milk uptake in Australia, what is driving that growth.
Okay.
Okay, Patricia I'll answer the first question in terms of the mozzarella outlook.
Good news is that we're seeing.
Stronger volumes on the foodservice side.
So that.
What we saw in Q1 was healthy growth over last year, albeit that was the first quarter out of the gates with the pandemic.
There is intensified competition as a result of their continuing to be excess supply in the system.
But with the improvement in the foodservice sector, we see conditions, improving as we move into the second and third quarters.
In terms of your question around Australia, and the milk supply situation.
There has been intensified competition and and and in terms of milk supply and our strategy has always been to have a 3 pronged approach, where we're looking to continue to build on our base of of our farmer supplier base and together with <unk>.
Manufacturing opportunities, which is going to be absolutely critical for US. We are currently working on sizable opportunities, which we hope to share some more news.
During our next quarterly call and then finally, we will also look to leverage third party milk brokers to make up for some of that lost volume. The good news is that we have.
Stop the bleeding if you will.
We are seeing a stabilization in terms of the total milk supply that we have we will carefully reevaluate our network to make sure that we have the right infrastructure in place. So the total milk that we have today as well as what we anticipate to have over the next 2 to 3 or 4 years as part of our Strat plan.
Thank you very much that's helpful.
Youre welcome.
Our next question comes from Irene Mattel with RBC capital markets. Please proceed.
Okay.
Thanks, and good afternoon, everyone.
Just continuing on with the U S. Please so clearly.
Getting rid of a lot of that excess inventory and mozzarella is a big piece of improvements from the U S segment, but can you walk us through what the other big pieces are and cadence that we should expect.
Expect as we move through fiscal 'twenty, 2 and enter fiscal 'twenty 3.
Yes, the 3 the 3 or the 4 big factors that have impacted our business in the U S. And we will continue to impact our business are really for for the following 4 big buckets..1 we talked about the U S market factors and we're seeing a inc.
<unk> and our relationship when we look at.
Whether it's the block barrel spread you see a way pricing coming down we see ingredients pricing firming up so that bodes well from a market perspective.
Next big bucket would be around inflation and the U S team has developed cost recovery initiatives, which are currently being rolled out.
We're currently in the second phase and will return to market with further initiatives to continue to recover those inflationary pressures.
And that's across all of the all of the inputs, whether it's packaging resin on the supply chain side as well in terms of.
The higher freight rates and so on the third big bucket is around supply chain and that's the availability of trucks.
Similar to ourselves we have other players in the AR and the logistics warehousing.
Side of the side of the industry that are having the same challenges from a labor standpoint, and so we're looking at different contingency plans are 1 of the big initiatives for the U S. As SKU rationalization to reduce the complexity in our operations not only out of manufacturing level, but obviously on the supply chain side as well and the elastic book.
It would be around labor.
And the good news is that we've seen that progress at 16 of our 26 facilities. During this past fiscal and we feel that with the government subsidies and support programs coming offline in September that that should help.
Provide an incentive for people to return to work so those would be the 4 big buckets and how we're tackling all of those.
Yeah, So irina.
Like to chime in here on this cause.
We talked.
At length about the strat plan over 4 years.
The biggest catalyst for growth in EBITDA is going to come from our U S platform.
We as a management team has been spending quite a bit of time in the U S. A in fact myself personally I've been.
Back in force.
To the U S. Since the beginning of the calendar year and more intensely since the month of June.
There are some things that are beyond our control and like U S market factors, there's not much. We can do about you know the type of conditions. We saw in Q1, but theres a lot of things that we can do a relative to the other elements like inflation in supply chain and the network optimization.
I will say that.
That over the course of the last months of discussions that we've had with the team here had been so encouraging.
On the types of discussions we've had.
On the ideas that are that we've put on paper for the Strat plan of course, which require a capex allocation are very very clear, we know exactly where we're going and I will tell you Irene.
The energy I have makes me feel like back in 2001 to 2004, when I was the president of the U S business I feel like on 10 or 15 years younger.
There is great energy the team is coming together you know Cai talked about are the sales focus team that we have if not by mistake that we took a veteran from Canada.
Brought them out here into the U S. A and we're applying very much the support our principles of the Super low character and this approval approach.
Things like you know.
Recapturing some of the inflationary measures going out to market and taking price we have to do that and you need to have the courage to do that Dominic Bambano had that courage with the rest of the team and so we're seeing great things happening.
Again.
It's a 4 year strat plan, but the foundations are being built for us to be able to capitalize on the net worth that we have the brands that we bring to market. The relationships, we have with our customers. So I'm I'm I'm delighted that we are we have this office in Miami, we're spending quite a bit of time here.
Ah, we're walking the corridors, where we're having meetings beyond the structured meetings.
Corridor conversation is engaging I feel like I'm back in Chicago in 2001 in and I'm I'm really truly excited about the us rolling out.
All of these initiatives.
Initiatives within the U S. So I wanted to give you a little bit of color there as well there are going to be some some short term issues labor is probably the biggest.
When you've got a manufacturing site that Scott 5 lines that could run at full capacity and you only have employees to run 3 lines.
2 things happened there number 1.
Don't have the overhead absorption that you should normally have and number 2 we're short shipping our customers and so we need to find a solution to this labor issue that is not just affecting saputra, but it's affecting a lot of companies all.
All over the U S.
Kai mentioned that.
You know we have had some initiatives so we're seeing better numbers our employees.
Our turnover is going down.
The absenteeism numbers are going down.
And I'm also hopeful that once the subsidy checks.
Expire in the U S, which should be around the month of September when the kids are going back to school, we will start to see the labor coming back to the plants, so still a little bit of head ways or headwinds in Q2.
But we are starting to see the light here now.
And Irene I, just wanted to add 2 additional points to give some more color.
When you look at the milk supply situation in the United States, We're coming off the first time in 11 months, where there is a decline in the herd size.
Combine that together with rising input costs for farmers and we will see a leveling off in terms of milk production. So that's going to help create some more equilibrium when it comes to supply and demand and the great news for US is that we're seeing robust healthy demand across a lot of the categories that we plan. So that's great news for us.
Absolutely and thank you for that extremely cognizant to that and certainly I wish I can see you're walking those halls me every day, but I just did have 1 other question on a.
A small question about cathedral city and that contract per U K exports and just wondering.
Whether you can give us any more color about how that rolls through what the magnitude of that is like the on site might be and even maybe who the partner is.
Yeah for confidentiality reasons I'll provide as much color as I can but it is a.
It is our largest export win to date. It is 1 of them in the most important.
UK cheddar market outside of the UK and a fast growing market with a healthy population again healthy growth rates.
We're kicking into the contract will kick in in December.
The great thing about this partner is that they are a very strong player on the continent, and theyre, putting significant investment dollars behind the brand. So this isn't simply on transaction, it's a strategic partnership to.
To help elevate cathedral city in a very very important export market for us.
Yeah.
That's great. Thanks, so much.
Our next question comes from Mark Petrie with CIBC. Please proceed.
Yeah. Good afternoon, I wanted to just ask about the U S. Specifically in the foodservice segment.
And when you think about recovery.
Is it is it is the best benchmark for that the fiscal 2019 sort of foodservice business or is that a realistic target or has something structurally changed when you think about the opportunity to rebuild your foodservice business.
Well I think that.
If we look historically at where we've played in it was predominantly in the mozzarella category, we're not going to abandon our what got us to where we are today, but in terms of the initiatives tied to the strat plan, we are moving into more retail oriented initiatives.
We talked a lot about string cheese, and when we talk about strengthening our core if.
If you look at the first quarter a lot of initiatives.
Or just crossing the line in terms of bringing more of that product on line. So for us really its about focusing on those categories that are going to drive profitable growth and then it'll be in those segments that will offer higher margins, obviously, we're not going to shy away from intensified competition.
But we will be strategic in terms of where we want to play in and where we're going to focus our efforts.
And Mark maybe if I can just talk a little bit about the infrastructure on foodservice in the U S. The things that we're seeing so there are.
Independent.
Restaurant operators that did not make it through.
This pandemic so they have shut down.
The broad line distributors are actually doing quite well in terms of being able to increase their velocity on their volumes.
But it is true even for those that are small to medium chains in the U S. They're also having labor shortages labor issue. So they may not be working at full capacity just yet.
But we think it's a matter of time before we get back to historical levels of of velocity and foodservice are a part of the business and this is why I made the statement that although we have a lot of initiatives that are going into retail we are not going to abandon the foodservice trade.
Understood, Thanks, and with regards to the status of our of the price increases that are underway in your business can you just give us a sense of the magnitude of that I'm sure. It varies a lot by <unk>.
Panel or geography, but but any high level commentary would be appreciated and then also is it your intention that that's basically completed in fiscal Q2 and that any sort of volume.
Impact as a result of that would also be in Q2 or do we expect this to take a couple of quarters to play out.
Well in terms of our pricing are on the market. We do expect a benefit to start to kicking in this current Q2.
But then we will have them.
On other positive effect that will kick in in Q3 as inflation continue to.
To raise them.
So we have programs in place and planning with our customers to properly schedule those price increase.
Obviously from a logistical standpoint, we have other Mitch.
Mitigation that we're looking at trying.
Trying to stay away from spot market to get them.
You know on deliveries and availability.
To ship with the with trucks and so on.
But from a pricing perspective benefit in Q2 incremental benefit also in Q3, So we would expect to at least recover.
Not only from the logistical transportation and fuel, but also on the other input costs that we have to face.
Okay I appreciate the comments thanks a lot.
Our next question comes from Peter Sklar with BMO capital markets. Please proceed.
Okay. Thanks.
I noticed in your guidance that you are still saying your EBITDA is going to be up this fiscal year versus the previous fiscal year end.
Just look at the.
The math of the arithmetic of it already in the first quarter.
You're down about over $75 million of EBITDA year over year and.
Some of these issues that you're facing or like as you indicated theyre not going to go away like the freight and logistics costs the strength of the Canadian dollar.
The ports and container issue.
So like I'm, just wondering like what states you on side here that youre going to get.
But you know that youre going to get back to.
EBITDA growth for the full year, you're going to be growing year over year, which means the later quarters theyre going to be quite strong as it is at all price or is it the accumulation of factor. So if you could just kind of enter into that discussion and so we have a better understanding.
Galena will kick in and you will jump in.
Yeah.
Tough start of the year, certainly Q1 has been a you know a challenge but.
We're certainly shooting for growth in this current fiscal so that means our teams are our plans are built so that we deliver growth might not be the.
The percentage of growth.
Maybe initially we anticipated in year, 1, but certainly we are not giving up because we're losing 3.1 in the first period. So we will definitely.
Be pushing in forging ahead.
For growth. This fiscal we have full confidence that we will be in a position to deliver growth.
Certainly on the for the 4 year plan, but the 4 year plan implies that there's growth every single year.
So to that on yeah.
Yeah, we're forging ahead.
But my question is my question is like how are you going to do that you need to have a really strong Q3 and Q4. So what are the underlying factors that are going to give you that strength.
Yeah. So let me give you a perhaps a bit more color on on what we're seeing now and some of the initiatives and perhaps maybe kai might talking to.
A little bit more detail with respect to some of the initiatives that are undergoing are underway right now.
The way we're looking at the business is that if we defined by different sectors. Our Canadian sector, others is perhaps 1 of the sectors that has the best balanced.
So whatever shifts are happening relative to retail foodservice and industrial are our Canadian platform is equipped to be able to service all of those markets.
Add to that in Canada with.
With the recent Capex investments in the network optimization that we rolled out over the course of last 3 years, which are actually taking effect this year.
The Poco plant, our St Leonards upgrade and our SaaS attune upgrade as well allowed us to close 3 plants in the system. So that's actually rolling out as we are as we speak.
So not a lot of risk to the growth projections that we have for our Canadian platform.
Argentina is actually running extremely well so this group.
This team has lived through so many different crises and their existence since we've owned them.
That for then a pandemic is par for the course, there, they're navigating well through the pandemic, they're navigating well through the FX fluctuations are navigating well through the political changes.
And so the Argentinean group is.
<unk> is delivering on the deliverables with the increase in milk further projects they have going on in their plants again don't forget we still have the same 2 plants running more milk, so very little risk in Argentina.
When I look at the European sector.
With the are our group Inc.
The U K.
First and foremost their base business with what we the former dairy crest. She used to be there are great things going on Chi spoke to the increased capacity on David Stone.
The ability to be able to find a home for our the incremental cheese thats coming out of that system into the EU not just into the U K, but into the EU 27 with Great partners. In addition to our initiatives.
In the U S and in Canada.
That the.
The point that was holding the U K business back historically was on the byproduct side.
We're coming to the end of that contract that we had with the partner that was not delivering on their.
End of the bargain, we're coming out of that and going into the end of Q2 into Q3 that should very well be resolved. So we're optimistic about the U K. So that takes care of 3 of the 5 sectors, where the level of risk for us to achieve higher.
Our EBITDA margins than previous year are pretty well, we feel pretty comfortable with that so the 2 divisions that are at risk would be Australia and the UK. So let me talk about Australia first and foremost.
Heavily.
On challenged relative to the milk intake.
This is what is creating a problem for that division are right. Now in addition to the fact that our historically and when I say historically I am saying in Q4 and Q1 we.
We werent able to get the containers, we needed to ship product that was at a low price.
That.
A good portion of that volume is out of our system and out the door and there is some relief on the containers not back to historical levels, but there is some relief there.
Pick up of volume in the Pacific Rim, that's happening there.
The firming up of prices that happening and then we're looking at some initiatives that maybe <unk> can speak to in Australia that the team is undergoing to try to get more capacity in our system more volume that we can that we can process to.
Manage the overhead absorption and also other initiatives with respect to our network optimization, maybe before I move on to the U S and when I talk about Australia, specifically Cai Yeah, just on us on Australia, it's really around the toll manufacturing opportunities and I touched on that a little bit.
We still have assets that are not at full utilization, but we are in advanced discussions with a major dairy industry players to look to bring their milk to process in our facilities, which would result in increased efficiencies overhead absorption.
And a positive impact to the bottom line in terms of the original question around a positive Q3, and 4 and how we're going to recover from Q1.
I think it's important to highlight that if you look at the global dairy markets from.
From a supply and demand perspective, the first 6 months saw incredible growth and all of the major dairy producing regions of the world.
I mentioned that the U S. We're seeing are that milk production.
Starting to stabilize and not grow at the accelerated clip we saw on the first half.
In the EU, we're seeing moderate to little growth in New Zealand, we're seeing very little growth as we enter the second half.
And Australia is pretty much flat so when you combine that.
All of the major dairy exporting regions of the World, we're going to see again, better equilibrium from a supply and demand perspective, which equates to a better pricing.
Cost recovery initiatives.
You know those have all been rolled out the first phases and across all the divisions. There are our plans and they're currently being executed so that will have a big impact in terms of recovering some of that inflationary pressure we saw in Q1.
And then on the labor recovery side I talked to the U S, where we're seeing improvement.
In 16 of our 26 plants and we anticipate that that's going to continue which will help.
Increase our productivity across all of our assets and then layered on touched on the exports from Australia that had a big lag in Q4 and Q1, we have confirmed pricing and shipments going in August September at <unk>.
Increased velocities.
Getting those containers are out the door at a much faster clip.
Much higher pricing and then we can't discount the fact that we're coming off of.
Another harmony deployment on Australia, which debt caused a bit of turbulence out of the gates in Q1.
Which we will not have as we move into the third and fourth quarters.
So let me continue on and then on the U S and and again look there there are some actionable items.
On that are happening as we speak.
We talked about the price increase activity that are that we've rolled out into our debt is going to affect us positively in Q2 and.
And we also advise our customers that we reserve the right to further increase the selling price of our products should this inflation continue so we're optimistic that we can rollout in Q3 and Q4 should the need arise.
Price increases, but then there are also some operational.
<unk> that we took advantage of.
When you think about the lack of labor in certain areas. We have moved some production over to areas, where we do have the ability still to staff close to 100%.
And so those activities happened in Q1 that will start to see the positive impact of it into Q2, and then should carry on into Q3 and Q4.
The only issue I would say that I would be somewhat concerned about in terms of us achieving the plan for the rest of the year.
Is access to labor.
And our anticipation of people actually coming back to work in September.
It's not for a lack of orders the orders that even though we've taken price increases the orders are still there. We just cannot meet the orders right now we're.
We're running at where historically, we were at 99.8.99.9 order fill rates were averaging somewhere around 96% order fill rates. So.
So we were not hitting the numbers that we need to be hitting a because of the shortage in labor.
What that means again as I talked about earlier overhead absorption that affects us negatively also the ability not to be able to deliver on time with some customers creates penalties for us.
So.
We are mindful of the fact that we don't control everything, but we're doing as much as we can to control the controllable and Thats what gives us the optimism for the second half of Q2, and I clarify that second half of Q2 because in July.
We thought.
Some of the same.
Repetitive negative headwinds in July that ultimately August and September look like they are getting better.
I'm keeping my fingers crossed that this variant is not going to create.
Further shortages in labor in the overall pool in the U S.
But based on what we're seeing right now second half of Q2.
We should start to see some recovery then we get into Q3, which typically is our best season year going into the holidays and a buyer.
By that time, we should have more projects underway that have been either executed or in the process of being executed going into Q4.
I hope Peter that that gives you enough color.
To allow you to have visibility on what we see it's not going to be on easy trick, but.
We have to shoot for progress and that is what our where we're pushing and pressing upon with all of our teams across all of our divisions specifically in the U S.
That is very comprehensive and helpful. Thank you and just 1 follow up then based on your comments on the U S. Foodservice channel like the messaging seems to have changed a little bit from last quarter last quarter. You said that there was this overhang of mozzarella.
Because there is all these other day areas, who couldn't sell into the REIT don't sell into the retail channel. So they are sitting on all of this is mozzarella dumping it into the market pricing was under pressure and you had to walk away from contracts, but now you seem like by your commentary today.
You see much more optimistic about your opportunity in the foodservice channel I forget if it was you or Cai said that you expect to get back to historic levels of volume. So I'm. Just wondering what has caused the change in messaging on the U S foodservice.
Yeah. So there still is on the oversupply of mozzarella on the market.
Thankfully our mozzarella consumption continues to grow so that's 1 thing that I.
Is is a positive.
The other thing too is you know having sat down with our with our sales team.
I think they've got a keen focus on.
The recovery of that volume now, it's not going to happen all in 1 quarter.
But back to over the next few quarters, we have a recovery plan some of it might be large contracts some of it might be very small.
You know a store to store a wins.
And and that.
That is the the focus that the team has a you know we talked about the change in the in the sales lead in the U S. We've taken a very experimented a very knowledgeable.
Foodservice.
And industrial focused share.
<unk> lead and Dominic Bambino over to the U S. A.
And you know.
We have the street fight every single day in Canada.
It gets arent growing as rapidly as in the United States there aren't as many customers as they are on in the United States.
And he is looking at this as a you know a world of opportunities for us to be able to get out to the market and to pick up Oh, 1 pound at a time.
That's the challenge ahead of US that's the task ahead of Us again.
Again, we're not going to get all that volume back.
But where we believe with the.
Quality of product that we manufacture with the focus that we have the servicing our customers.
That over time, we will recapture the volume that has been lost.
In addition to that of course, we've got to look at our Mozzarella network and part of our Strat plan calls for increased capital.
Activity.
And we have to look at the entire network of of the manufacturing and of our business and in some cases, we have some.
The plants that are not quite as sophisticated or automated at some other plants.
You know at some point.
Some investment will have to be made to make sure that whereas efficient and as effective as we need to be so all of these things are working in tandem.
Yes.
Optimism or showing for mozzarella is a recovery to get back that volume that we lost it may not all come this fiscal year, but.
Every journey starts with 1 step and I think we're probably about 4 steps ahead of where we were where we were last quarter.
Okay. Thanks for the comprehensive answers that was very helpful.
Our next question comes from Michael Van <unk> with TD Securities. Please proceed.
Hi, good afternoon, there and those are some pretty comprehensive answers in theaters.
I don't have a lot on that but I just wanted to circle back on the M&A side.
And the pathway and I use that.
You've got pretty much everything.
It seems that our need to have and now you're on to the nice to have acquisitions and I wonder.
I'm wondering.
Where youre seeing the best opportunities and what are you trying to accomplish strategically with our future.
Physicians that are nice to have.
Yeah. So we did.
Materialize the Butte Island.
On the buyer original or the reeds Berg facility Wensleydale. So those were all on our checklist.
And if I speak to each 1 of them.
Did that they bring to us of course, the Butte Islanders gives us the in house capability of manufacturing.
Non dairy cheeses, so checkmark on that value added ingredients, especially in the U S. Checkmark on that with the reads per plant other retail in Europe, and the U K. So that we can further leverage the cathedral city brand Wensleydale gets us that a check on that so.
There are assets that would be available whether it would be in North America, Latin America or Europe.
That would further amplify our plan a.
For the strategic orientation of our business are perhaps more assets in the U S that will allow us to be a stronger co packer or perhaps a stronger a foodservice or industrial provider of product, but we're not hiding the fact, a michael that in the U S.
We need to be better weighted on the retail side. So if there are assets that become available.
That our retail driven that gave us a strong presence in the retail market with brands that.
That we are.
Our debt that resonate with consumers.
That is on our checklist does as a nice to haves.
We're looking at our.
Assets that allow us to export, perhaps a little bit stronger and better from Argentina as well. So perhaps you know in Latin America. There are some opportunities there to be able to get into other countries beyond our Argentina.
And Europe to fall right now our teams are busy integrating both debuted island on Wednesday, So we might take a pause in Europe for now so I would say that the majority of our focus at this stage would be U S and Latin America.
Okay.
Meeting I think you said the pipeline is plentiful so on.
Are these lots of small kind of.
Strategic acquisitions are there are there large opportunities as well.
I would say both so there are small strategic tuck in businesses.
As well as I would deem transformational.
So large acquisitions, yes are also on the pipeline.
Okay.
Alright, thank you.
Yes.
Our next question comes from Chris Li with D. Var day. Please proceed.
Hi, Good afternoon, just wondering if you can maybe talk a little bit more about your progress on the dairy alternative Chi side I remember last quarter. You mentioned that you have made significant progress on security listings with some of the major foodservice distributors as well as some of the regional pizza chain. So wondering if there is any update on on that front. Thank you.
Okay. Thanks for the question, Chris So on the dairy alternative side, obviously, we just acquired the Butte Island.
Assets and as a result of that acquisition. They have done some tremendous work with some U S. Based chains are both on the sandwich category as well as the pizza category and it is our intent to leverage the experience that they've had on the U K to see whether they're on.
Opportunities to bring that over to the U S. Because obviously the U S is a big pot of gold at the end of the Rainbow in terms of the share market size and and opportunities from a volume standpoint.
We have in this past quarter landed some wins with multi unit regional chains in the United States as well as independent operators. If we look at up in Canada and the Atlantic on.
On the beverage side, we've also secured some private label wins with some large retailers in United States.
And we're actually getting into what we just signed an agreement with another player that is getting us into the Pea protein beverage space. So are we were focused on all of them and to note and this gives us an opportunity to get into the Pea protein, which is you know.
Obviously, you're going to be a part of the next wave of innovation in that category. So a lot of a lot of irons in the fire. We are currently developing a strategic roadmap as it pertains to Butte Island on how that fits in our overall growth aspiration. Our intent is to use that platform to help accelerate our efforts.
But ultimately we would like to have assets on the ground and in the key markets that we're going to be growing this segment, namely the United States and potentially down the road and some of other on some of our other divisions.
Okay. That's really helpful. I guess my follow up to that would be it sounds like the EBA.
EBITDA contribution from all everything you just mentioned, it's going to be more for next fiscal year not a meaningful contribution for this fiscal year.
Is that right.
That is correct, it's wrapping up where early going on.
On the plant based cheese side Theres, a long sort of lead time required with a lot of these large <unk> foodservice chains that are based on the U S and they have to work through their R&D and their menu development.
Program and so on so.
It's just you know we got a lot of lines on the water and it's just a some of these require some some time and effort, but we're optimistic that as we enter the next fiscal year that will have more material wins too to share with you.
Okay. Another question I have is how far along on you on your SKU rationalization initiatives in the retail channel and does that is that gonna be on meaningful cost benefits from that.
Initiatives.
Well, we're just getting going and we anticipate that it's going to bring a lot of benefits because again, it's going to reduce our complexity at the manufacturing level, but more importantly, as well on the supply chain side. You know you heard about the shortages around trucks and are the issues, we're facing and the <unk>.
[noise] houses and from a logistical standpoint, so if we can simplify and again focus more of our efforts around those categories, where we have a market leading position, where we have a point of differentiation, which also have less.
You know.
Where there's less price elasticity, such as Blue cheese Provolone. Those are areas, we can really command a stronger price premium. So what we're trying to do again as part of our strengthening our core strategic pillar is reducing the level of complexity around our brands, reducing the number of skus.
So that we can strengthen our overall core business.
That's helpful and my last question is.
With respect to the overcapacity issue and the mozzarella space is that mainly a function of competitors just building capacity before depend on making them being stuck with.
Yes.
Unused capacity when the pandemic hit or are you seeing competitors actually adding new capacity.
During the pandemic.
There was a sizable capacity that was added to the system yeah within the last 12 months and that's what caused that caused a bit of an uptick in terms of inventory in the system.
Also we have not just mozzarella, but there is a there is an indirect impact when you have a capacity coming online and other chiefs types. So there are sizable investments that were made in the past 12 months to 18 months, which brought a lot of additional cheese capacity into the system.
And why do you think they are doing it is because although the mix on smoked.
Mentioned or are they seeing expecting the strong because it just curious just given how low.
Competitive spaces like lighting, adding even more capacity.
Yeah, Chris are part of that answer is because the milk production in the U S is growing.
And some people have commitments with their milk provider. They are co ops their patron base that they've got to take on the milk that is coming off the farm. So as long as no continues to grow.
In excess of consumption.
That's where those dynamics come in maybe Kai why don't you give a little bit of update on what we saw on the last month in terms of overall milk production in the U S.
I mentioned it earlier, you know where we're starting to see for the first time in on 11 months, we're seeing a reduction in the cow herd numbers.
Albeit the yield per cow productivity wise has increased over the last over the last year, which has caused an influx of milk into the system, but when we look at the U S production leveling off as we move forward that's going to help bring some more equilibrium from a supply and demand perspective, and I also mentioned the <unk>.
Cost escalating and Theres also a shortage of labor just doesn't apply to our industry, but even on a farming community. They are having a tougher time getting the necessary labor to help in terms of.
Knocking those cows and running their farms, so from a U S perspective overall.
More equilibrium and I talked earlier about sort of the supply and demand.
Situation from the World dairy market perspective, we're seeing better equilibrium and ultimately that means.
Our debt that will result in more positive.
Price appreciation in the commodities that we operate on.
Great that's very helpful and all the best.
Okay.
I appreciate your sentiment Chris.
Mr. Saputo as there are no further questions at this time.
Yeah.
We thank you for taking part in this webcast, we hope you'll join us for the presentation of our fiscal 2022 second quarter results on November 4th have a great day.
That does conclude the conference call for today, we thank you for your participation and ask that you. Please disconnect. Your line have a great day everyone.
Okay.
[music] growth.
Gross.
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