Q2 2022 Saputo Inc Earnings Call

November 4, 2021

Greetings and welcome to the Saputo Inc. Fiscal 2022 second-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 would like to register for a question. Please press the one followed by the four on your telephone. If you require operator assistance. Please press star zero. As a reminder, this conference is being recorded Thursday, November 4th 2021. It is now my pleasure to turn the conference over to Lino Saputo, Chief Executive Officer and chair of the board. Please go ahead, Sir.

Mr. For a question. Please press the one followed by the four on your telephone if you require operator assistance. Please press Star Zero as a reminder, this conference is being recorded Thursday November four 2021. It is now my pleasure to turn the conference over to Lino Saputo, Chief Executive Officer and chair of.

The board. Please go ahead Sir.

Thank you very much.

Good afternoon, everyone and thank you for joining us. Taking part in this webcast are Lino Saputo, Maxime Sofia and Kai Bockmann.

Before answering questions from our analysts, Lino, Max and Kai will provide an overview of our fiscal 2022 second-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 reckon I remind you this webcast is being recorded and will be posted on our website along with the investor presentations we are showing.

Please also note that some of the statements provided during this call are forward-looking.

Such statements are based on assumptions and are subject to risks and uncertainties. We refer to our cautionary statements regarding forward-looking information in our annual report press releases and filings.

Please treat any forward-looking information with caution as our actual results could differ materially. We do not accept any obligation to update this information except as required under securities legislation. I'll now hand it over to Lino.

Thank you, Marlene. After forging through another difficult quarter, it's clear we're still facing considerable headwinds. We continue to feel that lingering disruption of the pandemic.

After forging through another difficult quarter, it's clear we're still facing considerable headwinds we continue to feel that lingering disruption of the pandemic.

And with the economies reopening were particularly challenged with access to labor, supply chain difficulties and inflationary pressures. This situation isn't unique to Saputo or our industry. And its impact on our second-quarter performance is significant.

Max will dig deeper into the details of our results and the catalyst behind the numbers we published today. After this, I will highlight the steps we've taken to mitigate some of these headwinds and provide an update on our global strategic plan.

But before they do I'll touch on some recent company announcements. In August we grew our footprint once again with the acquisition of the Carolina Aseptic and Carolina dairy businesses. Marking our forth acquisition this fiscal year, we were delighted to welcome their talented teams to our roster in the US. By complementing our network and bringing new, innovative capacity and capabilities in house, this business will expand our presence into areas, including aseptic format, nutritional beverages, dairy snacking and long-term strategic customer partnerships. We're also adding further depth of expertise to our company's board of directors.

In August we grew our footprint once again with the acquisition of the Carolina, Aseptic and Carolina dairy businesses.

Our fourth acquisition this fiscal year, we were delighted to welcome their talented teams to our roster in the U S.

By complementing our network and bringing new innovative capacity and capabilities in house. These businesses will expand our presence into areas, including aseptic format nutritional beverages, dairy snacking and long term strategic customer partnerships.

We're also adding further depth of expertise to our company's board of directors.

We're thrilled to welcome Olu Beck who brings more than 30 years of experience in the consumer goods industry. Olu was CEO of wholesome sweeteners and has held senior executive positions at March and Johnson and Johnson.

He was CEO of wholesome sweeteners and has held senior executive positions at March and Johnson and Johnson.

Her successful track record of transformational growth and her proven leadership experience in key operational regions for Saputo, namely the US, the UK and the EU will bring tremendous value to our board.

Well bring tremendous value to our board.

Moreover, as we execute our strategic growth plans. We also aim to benefit from Olu's depth of knowledge in the areas of branding and innovation.

We also aim to benefit from old loose depth of knowledge in the areas of branding and innovation.

We're also pleased to announce Linda Capstone Gate will officially take the lead as president and CEO in the US. After successfully transitioning into this role over the last nine months.

Furthermore, Leanne Cutts officially started as president and CEO of International and Europe on September 20th.

Building on our new 2025 supply chain budget announced in August recently, we shared our support for pathways to dairy net zero, a global dairy platform initiative aimed at accelerating climate change action and the global dairy sector.

I'm passionate about this place and we are committed to doing our part to help transition to a net-zero food system by 2050.

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This initiative is helping create a sustainable and equitable food system, working together with farmers suppliers and industry partners.

With all this positive momentum propelling us forward, I strongly believe we're moving in the right direction.

Battling these short term hurdles while ensuring the long term sustainability of our business and creating shared value for all stakeholders.

Before I hand, it over to Max to provide more color on our Q2 results. I'd like to emphasize despite the headwinds our commitment to discipline and rigor has not wavered.

I'd like to emphasize despite the headwinds our commitment to discipline and rigor has not wavered.

We're channelling our efforts towards the elements within our control. And our global strategic plan has solidified our result, we stand firm in maintaining our adjusted EBITDA target of 2.125 billion by the end of fiscal 2025. In fact, we are leveraging this adversity to make us stronger.

And our global strategic plan has solidified our resolve we stand firm in maintaining our adjusted EBITDA target of two <unk> two 5 billion by the end of fiscal 2025. In fact, we are leveraging this adversity to make us stronger.

I've always been impressed by the resilience of our business and most importantly, our people. I thank them once again for their outstanding efforts during these difficult times. Their passion truly drives our success, day after day and year after year. Now to you, Max.

Thank them once again for their outstanding efforts during these difficult times their passion truly drives our success day after day and year after year.

Now to your mix.

Thanks, and as Lino alluded to, the external environment is incredibly dynamic right now and we see many of these challenges persisting within our US sector beingmpacted the most. During the second quarter, consolidated revenues were stable at $3.7 billion, while our adjusted EBITDA was at $283 million.

As Lino alluded to the external environment is incredibly dynamic right now and we see many of these challenges persisting within our U S sector.

Impacted the most.

During the second quarter consolidated revenues were stable at $3 7 billion, while our adjusted EBITDA was up $283 million.

Consolidated sales volume were stable compared to those of the second quarter of fiscal '21. Foodservice market segment sales volume are beginning to recover as COVID-19 restrictions continue to be gradually lifted by governments and vaccination rates rose.

Foodservice market segment sales volume are beginning to recover as COVID-19 restrictions continue to be gradually lifted by governments and vaccination rates rose.

This increase was offset by lower retail market segment sales volume now more in line with historical level.

COVID related supply chain disruption had a negative impact on export sales volume in the international sector. Although this situation did improve in Q2 income per reason to Q1. Input costs such as transportation, fuel, consumable. And packaging increased in all of our divisions due to inflationary pressure, but mainly impacting us in North America.

Input costs.

Such as transportation fuel consumable.

And packaging increased in all of our divisions due to inflationary pressure, but mainly impacting us in North America.

Pricing initiatives undertaken during the quarter lagged rising costs, which continue to increase. The rollout of our pricing initiatives will continue to be implemented in the back half of fiscal '22.

The rollout of our pricing initiatives will continue to be implemented in the back half of fiscal 'twenty two.

Which should further offset some of the cost pressure we are experiencing. US market factors continue to impact negatively in Q2.

U S market factors continue to impact negatively in Q2.

Although there was an improvement when compared to Q1. Our Canada sector continued to show improved results benefiting from a rebound in sales volume in the foodservice market segment.

Our Canadian Canada sector continued to show it.

Improved results benefiting from a rebound in sales volume in the foodservice market segment.

While sales volume in the retail market segment returned to historical level. In our international sector, lower export volume due to container shortages and fourth inefficiency, combined with reduced availability of milk in Australia derived from intense competition for raw material negatively impacted efficiencies. In our Europe sector.

In our international sector, lower export volume due to container shortages.

And fourth inefficiency.

Combined with reduced availability of milk in Australia.

Derived from intense competition for raw material negatively impacted efficiencies.

In our Europe sector.

Overall sales are returning to historical level. This includes higher industrial market segment sales in the ingredient categories.

Our Q2 results reflect the contribution of pricing initiatives undertaken to mitigate higher input costs by inflation.

By inflation.

Despite our best efforts to control the controllable, the magnitude of the lingering effects of the pandemic on our fiscal performance in fiscal '22 remain difficult to estimate.

That said, we anticipate our upcoming third quarter to be our strongest this fiscal. But still lower than the same period last fiscal year. Which included highly favorable US market factors that are unlikely to reach similar levels this time around.

Which included highly favorable U S market factors that are unlikely to reach similar levels. This time around.

Okay.

We do not expect to see year over year improvement before the fourth quarter of fiscal '22.

But as we move into the back half of fiscal '22, we expect to see benefits from our labor attraction and retention focused efforts. Price increases and strategic initiatives.

Price increases.

Strategic initiatives.

As Lino mentioned. We believe in the numerous initiatives we are implementing to deliver $650 million and adjusted EBITDA growth by fiscal '25 and we stand firm in maintaining our fiscal '25 adjusted EBITDA target as this is what we believe we can achieve with the assets at our disposal.

We believe in the numerous.

Initiatives, we are implementing to deliver $650 million and adjusted EBITDA growth by fiscal 'twenty, five and we stand firm in maintaining our fiscal 25 adjusted EBITDA target.

What we believe we can achieve with the assets at our disposal.

Now Kai will share some measures we are deploying to ensure we progress against our plan.

Thank you, Max, as mentioned labor challenges in the US persists and in response, we continue to deploy and test several initiatives, including wage adjustments, bonus referrals and increased advertising.

Labour challenges have been linked to the fact that many of the rural areas where we operate have lower vaccination rates, which can lead to higher infection rates and the community and higher absenteeism rates as well.

This situation should improve with the US government's vaccine mandate for companies with more than 100 employees coming into effect.

Addressing labor availability is top of mind as we deploy our global strategic plan. We are currently prioritizing network optimization initiatives in those facilities where we see a stable and sustained talent pool for the longer term.

We are focusing on a less is more approach we have begun rationalizing the number of SKUs we produce, thereby reducing complexity in our commercial manufacturing and supply chain operations.

And finally, as our plant progresses, we intend to increase automation in selected facilities. I'll now move on to our pillars and provide some concrete examples of the progress we've made in the first half of this fiscal year.

I'll now move on to our pillars and provide some concrete examples of the progress we've made in the first half of this fiscal year.

When it comes to strengthening our core business. We remained focused on the potential of our market-leading Cathedral City brand.

In the first quarter, we entered into a long term exclusive partnership with Hoffman to expand distribution of our market-leading cathedral city brand into Germany, starting in the fourth quarter of fiscal '22.

And we continue to ramp up our distribution to North America. In the US, our new filling production lines have been up and running since the end of August enabling us to manufacture aseptic nutritional products to be sold in the retail market segment under our partners very well known brand name.

In the U S. Our new filling production lines have been up and running since the end of August enabling us to manufacture a septic nutritional products to be sold in the retail market segment under our partners very well known brand name.

Also in this sector, we made progress on our simplification and SKU rationalization projects as we work to reduce the number of formats we manufacture in order to increase productivity while decreasing the complexity of our commercial and supply chain activities.

In Canada as part of our E-Commerce strategy, we launched nimble and innovative DTC platform in September. [Nimble] delivers curated specialty cheese boxes direct to consumers in Ontario and Quebec, and we are actively working on expanding our distribution across Canada.

<unk> delivers curated specialty cheese boxes direct to consumers in Ontario, and Quebec, and we are actively working on expanding our distribution across Canada.

Looking at our accelerating product innovation pillar on the dairy alternatives front, we are well on our way. With the acquisition of UK based Bute Island Foods. We're confident we have a great product that has been very well received by our North American foodservice partners during the trial phase.

We are working on converting the success into sales on a global scale, including in North America and Australia.

We continue to see a long runway for growth in dairy alternative cheese, we anticipate incredibly strong demand here and we believe this will be a significant growth driver for Saputo.

For dairy alternative beverages, we are focused on supporting existing players through private label and co packing arrangements.

We currently have two facilities in the US that have taken on additional volumes in the second quarter. And we have just added more capacity with the opening of our pork equivalent facility in Canada.

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.

Since the acquisition of the Reedsburg facility, we have begun materializing on our ingredient strategy to enhance our portfolio in the US and internationally to move up the value chain.

As a leading goat cheese manufacturer in North America, we are now well-positioned to take a leadership role in manufacturing gateway and other niche value-added products.

We've made great strides towards that goal during the first half of the fiscal year as we continue to evaluate our ingredients portfolio and develop specialized weight products to bring to market.

In Europe, we have worked diligently on diversifying our dairy ingredient customer base and we have reached a more flexible business relationship pertaining to an exclusive arrangement that hampered our ability to diversify our customer and market mix.

We expect the benefits to come through in the second half of this fiscal year. I'll now move on to the optimizing and enhancing operations pillar.

I'll now move on to the optimizing and enhancing operations pillar.

The execution of our USG's network optimization plan has begun and we have already made investments aimed at enhancing the production of our market-leading string cheese portfolio.

In Canada, we initiated several automation projects during the second quarter, which were originally slated to begin in fiscal '23.

As mentioned earlier, our new state of the art fluid milk and dairy alternative beverage facility in pork equivalent is now open following a transition period, we completed the transfer of production and stock from certain neighboring facilities over to the new plant.

In Australia, we are accelerating continuous improvement projects aimed at maximizing our yield per liter of milk that we process.

Finally, I'll touch on our create enablers to fuel investments pillar. Our global harmony deployment remains on track with the rollout within the remainder of our Australian operations and the subsequent phases of implementation within our US sector, expected to be completed by the end of this fiscal year.

In Canada, the planning for our ERP rollout is currently underway. Although we may we planned deployment activities based on the evolution of the COVID-19 pandemic and imperatives relative to our global strategic plan.

As for the merger of our two US divisions to one USA, we are making great progress as we continue to work on harmonizing our processes and procedures to maximize synergies and support our divisions' future growth.

I'll end that note and we will open the floor to your questions.

Can we have everyone queue in, please? Thank you, if you would like to register your question. Please press the one followed by the four on your telephone.

Youll have everyone QM. Please.

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You will hear a three-tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration please press the one and the three. And our first question is from the line of Irene Nattel with RBC capital markets. Please go ahead.

I would like to withdraw your registration please press the one industry.

And our first question is from the line of Irene <unk> with RBC capital markets. Please go ahead.

Thanks, and good afternoon, everyone. I guess just trying to understand how we should be thinking about the cadence of the recovery in profitability and recovery in aggregate earnings towards that the 2.125 objectives, and I'm thinking, particularly here about the US. When we look at that Q2 margin of 4.4% like I'm still having a hard time wrapping my mind around it and I'm sure you are as well. So how do we think how should we realistically think about as I said the cadence of recovery?

I guess, just trying to understand how we should be thinking about the cadence of the recovery in profitability in recovery in aggregate earnings towards that the $2 <unk> five objectives, and I'm thinking, particularly here about the U S. When we look at that Q2 margin.

Four 4% like I'm still having a hard time wrapping my mind around it and I'm sure you are as well so how do we think how should we realistically think about as I said.

The cadence of recovery.

I appreciate the question, Irene. So your question is specific to the US. But let me talk about the other platforms in the other divisions and some of the great things that are happening there as well. Our Canadian sector has not been as impacted although we've got some labor shortages in some inflationary cost within that platform as well.

Our Canadian sector.

It has not been as impacted although we've got some labor shortages in some inflationary cost within that platform as well.

The Canadian platform is one that is well balanced between retail foodservice and industrial sales.

Well balanced between retail foodservice and industrial sales.

Plus we have our own distribution network in place. That in certain respects allows us to control our own destiny.

Got.

In certain respects allows us to control our own destiny.

So the evolution of the gain relative to the Strat plan in Canada has not been hampered by the current circumstances that we're feeling. So if we parked that one on the side. Things are in very good shape in Canada.

The gain relative to the Strat plan in Canada.

Has not been hampered by the current circumstances that we're feeling so if we parked that one on the side.

Things are in very good shape in Canada.

I would say the team in Argentina has been facing all kinds of headwinds from the first day that we acquired them in 2003. There has always been some inflationary pressures there relative to foreign exchange there have always been headwinds on the political nature and on the economic nature. And our team is extremely resilient at being able to navigate through these choppy waters, so there's very little risk of them hitting the cadence that we expected of them when they first rolled out their strat plan.

It has been facing all kinds of headwinds.

From the first day that we acquired them in 2003.

There has always been some inflationary pressures there relative to foreign exchange there have always been headwinds on the political nature and the economic nature and our team is extremely resilient at being able to navigate through these choppy waters, so theres very little risk.

hitting the cadence that we expected of them when they first rolled out their strat plan.

The three sectors that were challenged on the outset relative to the pandemic were the US, Australia and the UK. So let me talk about the UK. Early on in the pandemic, the shift to retail was a real benefit for the UK business. The team responded extremely well to being able to fill the pipeline of orders that we had. And then coming out of the economy than they were hampered with less demand because retail started to tip off relative to year on year comparables.

Australia and the UK.

So let me talk about.

The U K.

Early on in the pandemic the shift to retail.

<unk> was a real benefit for the UK business the.

The team responded extremely well.

To being able to fill the pipeline of orders that we had and then coming out of the economy than they.

They were hampered with less demand because retail started to tip off relative to year on year.

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And we also had the challenge of the byproduct value. Unfortunately, which was attached to a contract that was signed prior to our ownership. We have since gotten out of that contract and how we control our own destiny on the ingredients side. So I feel very good about that. And the team has also been able to navigate well.

Prior to our ownership.

We have since gotten out of that contract and how we control our own destiny on the ingredients side. So I feel very good about that and the team has also been able to NAV.

NAV again well.

With the different cycles in demand relative to what's coming at the retail level and what was starting to open up at the foodservice level. Added to that we acquired Bute Island, which is now under their responsibility in their control and we added Wensleydale. Which was a business that unfortunately was a little distressed that they were able to bring back in line in short order. So the UK business, we feel very good about it. I am quite optimistic that coming out of this year they will hit their targets in line with what we had planned out into four-year strat plan. So that leaves us with Australia and the US. Australia initially challenged with the. Lack of milk production coming from the country, which impacted our milk intake at our plant, which of course has an effect on overhead absorption for the platform. Added to the issue of committing early on in the pandemic to lower market prices on their export volume, which they weren't able to export.

To open up at the foodservice level added to that we acquired Bute Island, which is now under their responsibility in their control and we added wensleydale.

Which was a business that unfortunately was a little distressed that they were able to bring back in line.

Sure.

in short order. So the UK business, we feel very good about it. I am quite optimistic that coming out of this year they will hit their targets in line with what we had planned out into four-year strat plan. So that leaves us with Australia and the US. Australia initially challenged with the. Lack of milk production coming from the country, which impacted our milk intake at our plant, which of course has an effect on overhead absorption for the platform. Added to the issue of committing early on in the pandemic to lower market prices on their export volume, which they weren't able to export.

I am quite optimistic that coming out of this year. They will hit their targets in line with what we had planned out into four year Strat plan. So that leaves us with Australia and the U S. Australia initially challenged with.

With the.

Lack of milk production coming from the country, which impacted our milk intake at our plant, which of course has an effect on overhead absorption for the platform.

Added to the issue of committing.

Early on in the pandemic to lower market prices on their export volume, which they werent able to export.

So we were tendered in Q1 and Q2 trying to fill those orders with the container shortages at lower prices than what we would normally sell. Until such time that we got out of that inventory on those commitments.

Until such time that we got out of that inventory on those commitments.

I will tell you that Australia has since responded extremely well. So we are out of that the pain of low contracted prices getting into October with better cadence and better volume on the container front on the export side. And the team has done what they needed to do on the domestic front in terms of taking on the inflationary cost to market. So I will tell you that Australia is still on our watch list, but certainly off of intensive care. So the one platform I would say that is still in what we would deem to be intensive care is the USA. And this is not because the initiatives arent there or haven't been executed, but it's been hard to keep up with the inflationary measures, although we've taken price margin to the market under our third [COLA] increase.

Low contracted prices getting into October with up better.

<unk> and better volume.

on the container front on the export side. And the team has done what they needed to do on the domestic front in terms of taking on the inflationary cost to market. So I will tell you that Australia is still on our watch list, but certainly off of intensive care. So the one platform I would say that is

I will tell you that Australia.

Still on our watch list, but certainly off of intensive care. So the one platform I would say that.

Still and what we would deem to be an intensive care the cheese USA and this is not because the initiatives arent there or haven't been executed, but it's been hard to keep up with the inflationary measures, although we've taken price margin.

to the market under our third [COLA] increase.

We're still lagging the inflationary percentages to keep our heads above water. Added to that were hampered with some plant inefficiencies relative to lack of labor.

Were hampered with some plant inefficiencies relative to lack of labor and.

And also hindered with lack of ability to get the transport, where we need it when we need it.

But that doesn't mean that the team has been working hard the team is working diligently.

To try to control the controllable. So this would be the platform. If I consider your question in terms of cadence, that there is going to be a lag effect in terms of their year on year performance that rather than having high single-digit incremental volume and EBITDA.

Don.

As we had expected I would say that the foundations are being built so that when the markets turn as they turn. We will have the right infrastructure and the right focus to be able to hit our numbers and perhaps that might not happen until year, two or perhaps into year three of our strat plan.

We will have the right infrastructure and the right focus to be able to hit our numbers and perhaps that might not happen until year, two or perhaps into year three of our strat plan.

But that doesn't change our focus and our resolve for this platform hitting their numbers relative to the overall strap time by 2025, so I'm just going to ask Kai if there is anything that I have omitted relative to your question, Irene. Yeah. Thank you, just to give a little bit more color when we look at the US Division in terms of the cost recovery initiatives. There were three rollouts that have taken place year to date. And there was a lag effect, which Lino talked to. We are catching up as we move into our next plant. Cost recovery initiatives, when we look at the labor initiatives, we've talked a lot about labor shortages. We are ramping up our efforts we've talked about wages, retention bonuses, we're looking at flexibility in scheduling, we're working with local high schools community colleges universities, even go into county fairs, increasing our advertising, signing bonuses looking at childcare. So a lot of different initiatives to try and mitigate some of the challenges that we faced on the labor front.

Hi.

there is anything that I have omitted relative to your question, Irene. Yeah. Thank you, just to give a little bit more color when we look at the US Division.

In terms of the cost recovery initiatives. There were three rollouts that have taken place year to date and.

There was a lag effect, which lino talk too we are catching up as we move into our next plant.

Cost recovery initiatives, when we look at the labor initiatives, we've talked a lot about labor shortages, we are ramping up our efforts we've talked about.

Pages retention bonuses were looking at flexibility in scheduling, we're working with local high schools community colleges universities, even go into county fairs, increasing our advertising signing bonuses looking at childcare. So a lot of different initiatives to try and mitigate some of the challenges that we faced on the labor front.

The Biden mandate today announced Covid vaccine mandate for employers with more than 100 employees.

Hopefully, that will provide some relief as well and when we look at some of the initiatives that the U S. Team has tackled if you look at the SKU rationalization initiatives that they are well underway. We look at the network optimization initiatives that are part of that are longer-term medium to longer-term in nature, but they are well underway.

And when you look at some of the supply chain challenges. The team has been successful in getting pass-through rate increases to customers. They're now looking at pre purchasing lanes, making routing guide adjustments. So looking at different levers to pull to mitigate some of the challenges on that front as well. So I just wanted to provide a little bit more color around some of the mitigate initiatives.

The team has been successful in getting pass through rate increases to customers. They're now looking at pre purchasing lanes, making routing guide adjustments. So looking at different levers to pull to mitigate some of the some of the challenges on that front as well. So I just wanted to provide a little bit more color around some of the some of them mitigate initial.

Lives.

That's really helpful. Thank you, just listening to what you are saying obviously the labor availability and the cost of labor are very significant issues. With what, if you're implementing retention bonuses wage increases et cetera, presumably you're going to have to implement more we'll use what we can say, presumably, will you need to implement more significant price increases?

Labor availability and the cost of labor are very significant issues.

With what.

We're implementing retention bonuses wage increases et cetera, presumably youre going to have to implement more we'll use what we can say, presumably will you need to implement more significant.

Price increases.

Yes, and that goes without saying, so even though we're into and we will be rolling out [cola4] we reserve the right moving forward to continue increasing relative to inflationary measures, which includes labor. So we are providing our teams the ability to have courage in their decision-making process.

The right moving forward.

To continue increasing relative to inflationary measures, which includes labor so.

We are providing our teams.

The ability to have courage and their decision making process.

And we are encouraging them to look at all elements of their business. And take the necessary appropriate action and we will support them. So yes, we reserve the right to continue to increase our prices relative to market conditions.

<unk> them to look at all elements of their business.

And take the necessary appropriate action and we will support them. So yes, we reserve the right to continue to increase our prices.

Relative to market conditions.

And just one final one if I may around that. What are you seeing in terms of customer response, consumer response, and are are you in lockstep with what the rest of the industry is doing?

So it's a mixed bag of what the industry is doing. Some competitors are increasing prices, others are not but we can't stop ourselves from doing the right thing because the industry isn't following.

Stop ourselves from doing the right thing because we know the industry isn't following.

Again, that's the courage that we're providing our teams to do the right thing because it's the right thing to do.

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We're very clear about it. Right now we have more orders than we have capacity to fill those orders, not because the clients don't have the infrastructure, but we just don't have the labor. And this is where we need to pick and choose our customers based on trading up value.

On trading up value.

And not just trading four quarters for one dollar. And we're very very clear with everyone in our system in all our geographies that that's what we need to do.

Everyone in our system in all our geographies that that's what we need to do.

And that's really helpful. Thank you.

Our next question is from the line of Mark Petrie with CIBC. Please go ahead.

Hey, good afternoon, and thanks for all the comments so far. Beyond the disclosed market factors for the US segment, can you please help quantify the commodity impact on your business?

Beyond the disclosed market factors for the U S segment can you. Please help quantify the commodity impact on your business.

We need to look at it from a global international and the US. We do have some favorability on the international front. When we would combine the commodity and the market pricing that we see on the international front typically would be offset by the negative impact of the US market factor those would be in the same ballpark figure, if that's going to help.

We need to look at it from a global international and the U S. We do have some favorability on the international front when we would combine the.

Commodity and the market pricing that we see on the international front typically would be offset by the negative.

impact of the US market factor those would be in the same ballpark figure, if that's going to help.

Okay, and I guess looking specifically at the US. How about the byproduct market versus what you might overall expect for contribution in a normal period, what was the impact of that in Q2?

How about the byproduct market versus what you might overall expect for.

Contribution in a normal period, what was what was the impact of that in Q2.

While overall, if you will the ingredient market in the US. Obviously, I have been a favorable. That favorability create pressure on the spread and look on the cost of milk. The overall impact to us is a negative impact.

And as we've seen on the market right now, [way] remains quite high.

<unk> remains quite high.

And that continues and within Q3 to put pressure on our spreads, so the overall impact of both is negative. Maybe Kai, you want to add something. In terms of ingredient outlook just to provide some color.

Maybe call you on something you announced in terms of ingredient outlook just to provide some color.

The commodity prices are, there as we see a positive outlook pricing. If you look at the GDT tenders and sort of where commodities are going whether it's 80 skimmed milk powder, whole milk powder all of those are looking good moving forward.

We're looking good moving forward.

That's obviously going to be quite helpful for our export platform our international platform.

One thing I would add Mark in this is that the gains that we're making in the dairy ingredients. Unfortunately in Q2, it did not offset the losses in the milk price itself.

In the dairy ingredients. Unfortunately in Q2.

It did not offset the losses in the milk price itself.

So there still is a shortfall between the milk price spread and the gains that we're making on our byproduct.

The milk price spread and the gains that we're making on our byproduct.

Understood. Thank you. I guess I also wanted to just ask about the ERP rollout or harmony. I mean, you did have some pretty big challenges in US dairy foods, and I think Australia.

I guess I also wanted to just ask about the ERP rollout or harmony. I mean, you did have some pretty big challenges in U S dairy foods, and I think Australia.

What is sort of the current net impact of that rollout in those segments? Is it now sort of at the point, where you can leverage that and dairy foods or do you have to wait until the rollout is complete and you can sort of harmonize those two together?

The <unk> rollout is complete and you can sort of harmonize those two together.

And then any update, I know you addressed it in your outlook, but what is the plan with regards to Canada? And should we expect that to be a headwind on Canadian profitability in the next sort of 12 to 18 months?

In the next sort of 12 to 18 months.

Yeah. So, Mark, I'll just take the general outlook for ERP first and then maybe Max might want to complement that with some numbers and figures.

But the ERP rollout that you are referring to in terms of dairy foods that was in past fiscal years. What I have to say quite painful and we were very expressive and communicative about the pain that we felt as we were rolling out the ERP.

In past fiscal years.

What I have to say quite painful and we were very expressive and communicative about.

The pain that we felt as we were rolling out the ERP.

Since that rollout, we have had other geographies and other platforms that have rolled out ERP with great success. So if I think about the cheese USA, we're towards the tail end of the ERP rollout, which has the deployment of that has gone quite well. I would say that in Australia, we're pretty well rolled out without any impact at all.

So if I think about the cheese USA, we're towards the tail end of the ERP rollout, which has the deployment of that has gone quite well I would say that in Australia, we're pretty well rolled out without any impact at all.

And so I think we learned from some of the mistakes in terms of how we prepared our team change management mindset after the first experience with dairy foods. And so we are mindful of what it takes to rollout efficiently.

After the.

The first experience with dairy foods and so we are mindful of what it takes to rollout efficiently.

So as we're thinking about the SAP programs moving forward, we know that it's going to be a great benefit. We know that the maestro system has a shelf life on it.

<unk>.

The SAP programs moving forward, we know that it's going to be a great benefit we know that the maestro system has a shelf life on it.

So there is no question of whether or not we're going to continue ERP. What we're asking ourselves the question right now is what is the timeframe of that.

There is no question of whether or not we're going to continue.

ERP, what we're asking ourselves. The question right now is what is the timeframe of that.

And not because we don't have confidence that we'll roll it out. But given the current context and labor shortages, we're asking ourselves the questions would the labor be better deployed in other facets of our business as opposed to an ERP rollout.

In other facets of our business as opposed to an ERP rollout.

And we're being very transparent here that these are the questions, we're asking ourselves as a management team. No decision has yet been taken but we do need to unlock all the value that we have in our business without disruption. And using our talent to the best of our ability to generate positive EBITDA.

No decision has yet been taken but we do need to.

Unlock all the value that we have in our business without disruption and using our talent to the best of our ability to generate positive EBITDA.

So all options are open at this stage, Mark. I hope that answers your question and maybe Max talk about some numbers if you don't mind. So from an ERP initiative. Year over year, we don't have a major impact to our EBITDA to our numbers.

So from.

ERP initiative.

Year over year, we don't have a major impact to our EBITDA to our numbers.

But when you're looking at it, considering the fact that Australia is now complete. F22 we'll have the USA complete.

Considering the fact that Australia is now complete.

F 'twenty two we'll have the USA complete.

Those costs are anticipated just starts to slow down as there is no deployment in those major platforms that we have. The second thing I'd like to point out also is that the fact that we would be completed in the US. This ASP system serves as an enabler to our USA one initiatives aimed at maximizing our harmonized processes within our US platform. So that will also serve as a plus looking forward.

The second thing I'd like to point out also is that the fact that we would be completed in the U S. This SAP.

system is serve as an enabler to our USA one initiatives aimed at maximizing

Our harmonized processes within our U S platform. So that will also serve as a plus. Looking forward.

Looking forward.

Okay. I appreciate all of that and then I also just wanted to follow up on the whole sort of pricing commentary and I guess, specifically with regards to Canada for. For next year.

For next year.

It's being reported that the CDC is recommending a pretty large increase in the price of milk.

Do you anticipate any issues in passing this through? And as consumers, presumably trade down do you think that affects Saputo positively or negatively?

Positively or negatively.

I don't see any negative effect to that.

We will roll out price increases raw material as you know mark is the highest cost of input costs that we have so if there is going to be a milk price increase then definitely we have to roll that out to the market.

<unk>, maybe the impact that we may see in our industry relative to that is a reduction in consumption.

But as you know a year after year at Canada has had milk price increases that had been passed onto consumers and we see that.

In many categories in the dairy space.

<unk> continues to increase, albeit on the fluid milk side.

There are reductions in consumption, perhaps sometimes related to pricing, maybe sometimes related to consumers switching onto other beverages.

But I don't see this being any different than past no price increases we faced before.

Alright, I appreciate all the comments all the best.

Thank you.

Our next question is from Michael <unk> with TD Securities. Please go ahead.

Hi, good afternoon, you've covered quite a bit.

Did they have some a few other questions.

I wanted to start on the price increases.

You talked about a number of price increases through Q2, some of them will be fully in Q3, and then there might be more to come.

And if I recall last quarter.

You indicated that the price increases were mainly to pass on the supply chain.

<unk>, rather than the labor pressures and I wonder if since then.

Started taking price increases for labor as well as some of the other industry participants.

To what extent do you expect these price increases to cover.

<unk> pressures.

Yeah, Michael It's <unk> speaking so it's not only on the supply chain side on the freight recovery sites with labor as well as the input costs that we're seeing because we are getting inflation there are inflationary pressures as it pertains to corrugate.

Aerosol cans.

All of the packaging all the key input. So we are looking to.

To rollout cost recovery initiatives to recover all of the inflationary pressures that we're facing across all inputs, which include those three components.

And where do you stand on that now? It sounded like Canada and the UK were already in a good position, is that the case?

It sounded like Canada.

And.

In the U K, where we're already.

In a good position is that the case.

That's fair that's a fair statement, Mike. Canada, UK. we had quite a bit of success to recuperate a big portion of the cost increases. In the Australian market, price increase starts to kick in Q3 in this quarter. So the situation in the US do require multiple price adjustment for all the reasons that we talked to.

Canada UK.

We had.

Quite a bit of success.

To recuperate.

A big portion of the cost increases.

The Australia market.

This increase starts to kick in Q3 in this quarter.

So the.

The situation in the U S.

Do require multiple.

Price adjustment.

For all the reasons that we talked to.

And so now the team is working on to the fourth version of our price increase to kick in in Q4. So if we're looking to recover all the costs. It all depends on the ongoing and inflation that keeps ongoing.

All the costs.

It all depends of the ongoing and inflation keeps.

Keeps ongoing.

But at this time that would be into Q4 [with our colon] number four. So if there is no more inflation beyond where we stand right today on some of these input costs and labor supply chain.

That would be.

Q4.

Poland number four.

So if there is no more.

Relation beyond where we stand right today today on some of these input costs and labor supply chain.

Would this fourth increase in the US cover where you are now, where these costs are?

Increase in the U S cover where.

Where you are now where these constant.

Correct. With the Q4 price increase we would be covered.

That.

With the Q Q4 price increase we would be covered.

Okay, so that would mean that the challenge is to get back on track on your strategic plan in the US, and you talked about maybe in year 2, maybe in year three. That has more to do with I guess volumes and competitive pressures? Not so much competitive pressures, Mike, but has to do more with labor getting our capacity through our clients. So that when I talk about capacity as the orders that we have. Right now and I think I talked about this on the previous call.

The challenge is to get back on track on your strategic plan in the U S and you talked about maybe in the near term maybe in year three.

That has more to do with I guess volumes.

Competitive pressures.

Not so much competitive pressures, Mike, but has to do more with labor getting our.

Capacity through our clients so that when I talk about capacity as the orders that we have right now and I think I talked about this on the previous call.

Normally our historical levels of order fill rates are in the 99.8%. We were at 91 in Q2. We're inching up, we're anywhere between 92%, 93% order fill rates now while we're still a long ways away from the 99.8%, 99.9% order fill rates. So a lot of our shortfall in the US. Our overhead absorption profitability on categories of product that are value-added that has a lot to do with the labor shortage. Even though we're passing on our cost inflationary issues to the market. We cannot pass on costs related to our inefficiencies or plant efficiency shortfalls.

We were at 91.

In Q2.

We're inching up were anywhere between 92%, 93% order fill rates now while we're still a long ways away from the 99.8 99, 9% order fill rates. So a lot of our shortfall in the U S. Our overhead absorption profitability on categories of product that are.

value-added that has a lot to do with the labor shortage. Even though we're passing on our cost inflationary issues to the market. We cannot pass on costs related to our inefficiencies or plant efficiency shortfalls.

Cannot pass on costs related to our inefficiencies or plant efficiency shortfalls.

Okay, and you said competition isn't as big of a factor. You did mention the oversupply situation. But generally, I think the inventories are up 7% or something in September.

You did mention the oversupply situation.

But generally.

In general I think the inventories are up 7% or something in September.

And then the overcapacity in mozzarella. What's your outlook for that? How quickly that can get absorbed and what's the catalysts?

The year.

Overcapacity.

And mozzarella.

What's your outlook for that.

<unk> get absorbed.

Catalysts.

So my statement is that the demand flow is good. We just can't keep up with the orders that so that was a reference. If we were able to fill the orders relative to what we have on our POs then a lot of the plant inefficiencies would be covered.

The demand flow is good.

We just can't keep up with the orders that so that was a reference if we were able to fill the orders.

Relative to what we have on our <unk> than.

And then a lot of the.

Plant inefficiencies would be would be covered.

So it's in reference to that, not so much in reference to previous year's volume year on year as growth or declines.

Growth or declines.

Does that make sense, Michael?

Yes. That's better, thank you.

That's better thank you.

Okay.

Our next question is from Peter Sklar with BMO. Please go ahead.

Okay. Thanks. I'm just trying to get back on the US business.

I'm just trying to get back on the U S business.

I'm just trying to understand why the business from a financial perspective deteriorated so badly versus the first quarter. So, if I'm reading my numbers right. the US segments had $96 million of EBITDA in the first quarter. That declined to 67 million of EBITDA in Q2, so quite a decline.

If I'm reading my numbers right.

The U S segments had $96 million of EBITDA in the first quarter that.

<unk> declined to 67 million of EBITDA in Q2, so quite a decline.

And then like your dairy market factors were a lot less in Q2 than they were in Q1 versus negative effect. I think US dairy market factors had a negative impact of $42 million in Q1, and a much lesser impact of $17 million when you combine those two numbers together, it's a real deterioration quarter over quarter. So what's going on that things got so much worse in Q2 versus Q1? Because when I hear your whole discussion you are talking about the same things you talked about last quarter. So what's caused the quarter over quarter deterioration?

Your dairy market factors were a lot less in Q2 than they were in Q1 versus negative effect I think U S. Dairy market factors had a negative impact of $42 million in Q1, and a much lesser impact of $17 million when you combine.

those two numbers together, it's a real deterioration quarter over quarter. So what's going on that things got so much worse in Q2 versus Q1? Because when I hear your whole discussion you are talking about the same things you talked about last quarter. So what's caused the quarter over quarter deterioration?

So just want to maybe correct something here with regard to your statement around markets factors.

The market factors were disclosing our versus the prior year sort of not versus the month or the quarter before so the.

$42 million ish that we disclose.

In Q1 wasn't relation with Q1 of last year.

The $17 million in Q2 is in relation to Q2 last year. So it's not an improvement of 25.

Cannot do that math and if we would compare the market factor from Q2 to Q1, you would not have that big huge improvement.

In fact, it was pretty much flat and also we saw an improvement at the end of the quarter, but so that you cannot do that month.

And in that same order if you will the other piece is around the impact of the.

Logistical transportation fuel costs.

Those costs.

<unk> coming.

We signaled that in Q2.

Increased I would I would say exponentially its continued to increase and the price increase were not enough to cover for those increases the net of the two was a bigger impact this quarter than in Q1, I hope to sell.

That's a good explanation.

And then just one other question just to make sure I understand so.

The U S. The negative market factors were.

Year over year, as you pointed out a negative $17 million swing, but.

Somewhere else I saw in your press release.

You talked about that the block and butter price had a negative impact on EBITDA of $119 million. So I'm just not sure how to reconcile those two numbers the $17 million U S market factors is $119 million for so crude oil globally.

How to put those two numbers together, yes, the $119 million is the revenue side and really from a revenue perspective without having the cost of milk.

To it.

It's just in fact that the.

Top line. So it's not a measure per se of profitability. So that's why we're calling out the U S market factor within our EBITDA.

Section because thats the true impact of the fluctuation of the butter of the block versus the milk and the ingredient price and the relation of the inventory so the 119.

It's not.

One for one impact in our in our EBITDAR our bottom line. This is purely strictly revenue perspective.

Okay I get it that's.

That's it thank you.

Our next question is from Vishal <unk> with National Bank Financial. Please go ahead.

Hi, Thanks for taking my questions.

I was hoping to give this one a shot just because of the <unk>.

Materiality of this issue, but can you give us context.

<unk> globally, the amount of pricing that <unk> taken.

To date.

Is that something you can provide.

I would say, we would not provide that number I would say that the increase that we're seeing in all of our jurisdictions are being tackled through price increase and as I mentioned, Australia that price increase starts now in Q3.

UK and Canada.

Our global go to market versus the inflationary costs.

We feel good about where we stand and the issue is more within the U S. We're not recovering recovering less than 50% of the incremental costs much less than that so.

I'll leave it at that.

Okay.

Yes.

I think earlier in the call it was mentioned that.

So kudos.

So we sold into the market with price increases and it's doing the right thing as it pertains to its business. Given that Sputo's price increases may be higher than the industry in the aggregate.

As it pertains to its business.

Given that.

Those price increases may be higher than the industry in the aggregate.

Are you seeing market share losses related to that? Or I understand so the orders currently but are some customers balking at these price increases.

No, we're taking those hard decisions that talk to our customers and when we tell them that we're prepared to walk away from the business.

Sometimes they tell us what name your price. So listen, a lot of our customers are also challenged with their supply.

So listen a lot of our customers are also challenged with their supply.

And so that I think puts in evidence how challenging the markets are for everyone, but we have not lost market share relative to our price increases. It's a necessary thing to do.

I think puts us.

How challenging the markets are for everyone, but we have not lost market share relative to our price increases.

A necessary thing to do.

And we're seeing that our customers although in some cases don't like to have the price increase, they understand that it's necessary because they are feeling the same pinch. Given the rural locations of many of your facilities, is that place where you at a disadvantage versus your competitors with respect to obtaining labor to get your order or the fill rates up?

Given the rural.

Grille locations of many of your facilities is that place where you at a disadvantage versus your competitors with respect to obtaining labor to get your order or the fill rates up.

Absolutely and that is a very good question and part of our strat plan will address that either through automation in those areas or, and in very extreme conditions, network optimization, which would ultimately mean plant rationalization of some sort.

I am very extreme.

Condition.

Network optimization, which would ultimately mean plant rationalization.

Some sort.

We have to take all of this information and understand what is structural in terms of change and what is temporary.

And with our read on the markets. We then put our plan in place to make sure that we have the assets in the areas in the geographies, where we can ultimately get back to the order fill rates that were historically accustomed to. And when you look at some of the initiatives that we're pursuing from a network optimization perspective, we are looking to invest Capex dollars in those communities in areas where we will have a more stable access to labor longer term.

We then put our plan in place to make sure that we have the assets in the areas in the geographies, where we can ultimately get back to the order fill rates that were historically accustomed to and when you look at some of the initiatives that we're pursuing from a network optimization perspective, we are looking to invest.

Capex dollars in those communities in areas where we will have a more stable access to labor longer term.

A more stable access to labor longer term.

Okay. With respect to the SKU rationalization, just changing topics here, is that a temporary measure? Do you expect some of these SKUs to come back when your ability to manufacture improves? And what are the sales loss associated with rationalizing?

With respect to the SKU rationalization is just changing topics here is that a temporary measure.

Do you expect some of these skus to come back when you're on.

Our ability to manufacture.

Crews and what are the sales loss associated with rationalizing.

We've.

The aggressive SKU rationalization program is taking place in the U S. But it's not to say that we don't pursue the same discipline in other geographies.

In terms of.

The sort of the.

Lower volume less profitable Skus, there's no motivation for us to return to those.

Skus.

Do have plans as part of our strategic growth plan in terms of strengthening our core which includes line extensions when we look at our new product innovation pillar there are plans to.

<unk> launched new products.

The formats packaging product types and so on that's where the focus is going to be it's going to be on.

Rolling out Skus that drive profitable growth and we're not interested in just producing excuse just for.

Just to produce volume.

Okay, and lastly here just a quick numbers question, what was $33 million of logistics pressure in North America.

Primarily overwhelmingly U S.

Absolutely yes.

Okay. Thanks, a lot.

Our next question is from Patricia Baker with Scotia, Kent. Please go ahead.

Yes. Good afternoon, everyone. Thank you so much for taking my question first of all Matt.

So up on one of your responses to Vishal.

Welcome.

In the U S. The pricing.

Probably getting less than 50% of incremental comp.

Pricing is that a structural dynamic in the U S market for that.

That would be able to cover more than that.

We do feel with the multiple go to market that is being implemented in the U S that will.

Get on top of that at some point.

So we see that our Cola number four which is our go to market number four.

<unk>.

Where we maximize if you will see the cost recovery, but this is this remain subject to the ongoing devaluation devaluation ongoing inflation.

We're seeing now so if it gets worse, then we might need a call a five.

You'll be able to capture.

Okay. Thank you. Thank you for that and just following up on the question of the simplification and the SKU rationalization and that you have started.

So how aggressive have you been high and we expect to see would we expect to see the impact of that.

Simplification start to show up.

Next fiscal year or would it come even in the back half.

I believe that it will show up in the back half because it's really helping us in terms of <unk>.

Simplifying the supply chain part of our business, whether it's on the op side or whether it's on the warehousing side.

Less is more for us so those are well on our way under Lynn's leadership together with Karl and the group they've been very aggressive in reducing those low margin skus and we're already seeing the benefits of that as we move into the next quarter, Yeah, Patricia if I could just add.

SKU rationalization is one of many initiatives that are going on especially in the U S business and it's unfortunate but the results don't show the great things that are going on in the U S platform I've had the great pleasure of traveling across the country Thankfully now I can get on a plane and get into our facilities and meet our folks.

On the operation side.

And there are so many goods little things that are going on so many little wins that quite frankly, I think we need to celebrate because it's.

It's not highlighted enough in our results.

Feel very good about this transformation that we're in our team feels very good and what I tell our team im not talking about the executive team or teams in the local areas feel very good about the strat plan, having access to the capex allocation to invest in their infrastructure gives them, great energy and great confidence that.

We will find solutions out of this mess.

And ultimately.

Yes.

Once the new equipment is installed with more automation and more throughput.

And less reliance on just having bodies and people.

On our Pac offline.

We will be set for a great great success.

Perhaps this is a moment in time that we're in right now.

Thanks.

There had been some sleepless nights not just for myself, but for the entire group.

We don't like to underperform and unfortunately that that's what we're doing right now we are underperforming.

But we got to keep the team focused on.

Controlling the controllable so the stuff that is market related whether it's labor transport inflation.

U S market factors nothing we can do about that other than trying to find ways to mitigate it.

And having the courage to take those decisions, but from an infrastructure perspective.

I feel very very good about where we are and where we're heading and I believe that the entire team in the U S feels the same way.

Okay. Thank you Scott.

Listening to the opening remarks in a manner of speaking with kind of provided some guidance for the back half, referencing the fact that Q3 will be one of the strongest quarters, but it will be below Q3 last year. And that you expect to see year over year improvement starting in Q4.

Starting in Q4.

But what level of confidence you have in both of those indications? And what degree of visibility you have on that? Because if we went back three or four months what are the discussion you would not have thought that Q2 that you just reported would have been would have had deterioration that we saw.

In both of those indications.

What degree of visibility you have on that because if we went back three or four.

Four months what are the discussion you would not have thought that Q2.

Q2 that you just reported would have been would have had deterioration that we saw.

So when we look at some of our positive within the quarter, we do expect the trend to continue from a Canadian perspective. Typically in Canada Q3 is one of our solid quarter, and we do expect that performance to maintain in Canada.

Some of our positive within the quarter, we do expect the trend to continue from a Canadian perspective.

Typically in Canada Q3 is one of our.

Solid quarter, and we do expect that performance to maintain in Canada.

I would echo the same comment.

On the UK side. So we do expect this business to perform better in the second half like it did.

Yes.

From a historical perspective so.

So we do expect that business to generate more EBITDA in Q3 and in Q4. This would also be similar story in Australia, where price increases starts to kick in and at some point the initiative that has been worked on since the beginning of the year, it starts to give some benefit.

This would also be similar story in Australia, where price increases starts to kick in and at <unk>.

The initiative that has been worked on since the beginning of the year.

<unk> to give some.

Some benefit.

As it relates to Argentina. No major up, no major down from that platform is expected. We're very satisfied with our performance. We're able to generate out of Argentina and that gives us the platform in the US, which is the main focus. I do call out that the market factor will not be positive. Last year, we have our record quarter in Q3, so the record quarter in Q3 of this fiscal is not going to happen.

No no major up no major down.

That platform is expected.

We're very satisfied with our performance.

To generate out of Argentina and that gives us.

The platform in the U S, which is.

The main focus I do call out that the market factor will not be a positive last year, we have.

Our record quarter in Q3, so the record quarter in Q3 of this fiscal is not going to happen.

Market factor will be negative as opposed to as compared to the prior year, but we're calling out the first two quarters of this year this first half.

<unk> quarter of this year this first half.

It's going to be hard to recuperate in the back half so that's why we're calling it that it's going to be lower in F20 versus F21.

In the back half so that's why we're calling it that it's going to be lower in F. 'twenty two versus F. 'twenty one.

Thank you Matt.

Our next question is from Chris Li with <unk> Securities. Please go ahead.

Hey, good afternoon, just maybe one quick follow up. With respect to Canada is the 8.4% increase in the new cost proposed by the CDC is that a good proxy for the increasing Saputo's underlying raw material costs? Or are there other factors that could impact the actual increase for Saputo?

With respect to Canada.

Eight 4% increase in the new cost.

Posed by the CDC is that a good proxy for the increasing so kudos underlying raw material costs.

Factors that could impact the actual increase for <unk>.

Yeah.

Chris I'm not sure I understood your question completely but.

80, 580% to 85% of our cost of goods are coming from the raw material.

And so whatever increase there is going to be on the raw material, we need to pass that on to the market outside of the raw material increase.

We definitely do have to pass on other inflationary costs, which have already.

Taken effect in Canada as Max.

While explained.

<unk>.

Have great confidence that whatever that percentages on the milk cost we will pass that onto the market I Hope I answered. Your question your question Chris.

Yes.

Thanks, All Lino.

Okay great.

Thank you.

Our next question is a follow up from Michael Van <unk> with TD Securities. Please go ahead.

Thank you, just finishing up on the US again. You talked about automation and network optimization strategies necessary to help you get back to where you wanted to be.

Finishing up on the U S again.

You talked about automation and network optimization strategies necessary to.

To help you get back to where you wanted to be.

Can you remind us of the timing of these major projects? And whether you've been able to accelerate them at all given the cost supply chain for equipment and whatnot?

Whether you've been able to accelerate them at all given.

Supply chain for equipment and whatnot.

Yes, so some of some of this.

Some of these initiatives have been rolled out.

We saw it in the month of September and October where we're manufacturing.

The products in those regions, where the cost of raw material is more favorable than others.

And then focusing on cotton wrap and packaging in other regions in other areas. So there are a couple of initiatives that have already taken place, but those initiatives didn't require a lot of capex allocation. It did require some innovation and turns in terms of our make and the way, we packaged product and move it to.

To different locations.

But that was pretty well internal.

Timing all of the other initiatives will be a little longer only because we have to order equipment.

And our equipment suppliers are also challenged with labor shortages and so the lead times are longer than normal.

But I would suspect by.

The end of calendar next year, we should start to see some benefit.

Some of the equipment, having arrived on our docks and having been installed and debug. So I would say some of the good benefit will be.

Towards the end of calendar 2022.

The years are all mixed up in my head right now with the pandemic, it's hard to tell what the year was 2021 and two.

But calendar at the end of calendar 2022, we should start to see some of the benefit of new equipment coming in.

Take care of automation and network optimization.

Okay and is it is it a good chunk that's coming in by the end of calendar 'twenty two or is that the initial parts and then you got more coming in the following.

The initial part and then there is more to come in 'twenty, three and 'twenty four all the way through our 25 plan so progressively.

Midway through next calendar year, that's when we'll start to see.

Some of the benefits rolling in.

Alright, perfect. Thank you.

And Mr. <unk> there are no further questions. At this time you may continue with your presentation or closing remarks.

We thank you for taking part in this webcast, we hope you'll join us for the presentation of our fiscal 2022 third quarter results on February 10, and have a nice day.

And that does conclude the conference call for today, we thank you all for your participation I would kindly ask that you. Please disconnect your lines.

Q2 2022 Saputo Inc Earnings Call

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