Q4 2022 Saputo Inc Earnings Call
Yeah.
Greetings and welcome to diesel Poodle, Inc, fourth quarter and fiscal 2022 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 one followed by the four on your telephone.
Any time during the conference you need to reach an operator. Please press star Zero now as a reminder, this conference is being recorded on Thursday June 19th 2022.
I would now like to turn the conference over to Nick. Please go ahead.
Thank you Frank good afternoon, and welcome to our fourth quarter and full year fiscal 2022 earnings call.
Our speakers today will be Lino Saputo chair of the board President and Chief Executive Officer, and makes sense to have Yang Chief Financial Officer and Secretary.
A question and answer session. They will be supported by park, Carl <unk>, President and Chief Operating Officer, North America, and OEM cuts, President and Chief operating Officer International in Europe .
Before we begin I'd like to remind you that this webcast and conference call are being recorded and the webcast will be posted on our website along with the fourth quarter investor presentation.
Please also note that some of the statements provided during this call are forward looking.
Such statements are based on assumptions that are subject to risks and uncertainties.
We refer to our cautionary statements regarding forward looking information in our annual report press releases and filings.
Please treat any forward looking information with caution as our actual results could differ materially we.
We do not accept any obligation to update this information except as required under securities legislation.
Now I'll hand, it over to Neil.
Thank you Nick and good afternoon to you all.
We appreciate everyone joining us here today in fiscal 2022 we navigated a complex and volatile business environment.
And once again, our team rose to the challenge.
The care and passion that have always been a part of our DNA was evident and I applaud all of our employees for their ongoing contributions.
Throughout this difficult year I witnessed a strong sense of cooperation dedication and creativity from our people guided by our clear strategy and a highly engaged leadership team.
We continue to adapt and evolve to one of the most challenging operating environments in our history.
Input costs escalated at a pace well beyond historical levels.
We also faced labor challenges.
As well as bottlenecks and shortages.
From materials to freight and more.
This limited our ability to fully meet growing consumer demand for our products.
I created inefficiencies that were difficult to plan for.
But we also kept our sites on the longer term.
We embarked on a new journey to deliver accelerated organic growth with our global strategic plan.
Sharing with our stakeholders, our roadmap and targets.
While our overall financial results for fiscal 2022 were disappointing we took decisive action to offset some of the challenges and to better position to put out for the future.
This included implementing pricing actions to offset higher costs, taking measures to improve our productivity and efficiency levels.
And investing in capacity innovation and in our strong brands.
And in Canada, Argentina, and the U K.
All performed well.
And delivered results in line with our expectations.
For its part Australia had to contend with a defining melt pool, which significantly impacted efficiency and costs.
But the platform, where we faced the most adversity, whereas the U S where challenges have been more acute in terms of labor inflation and supply chain.
We also faced significant volatility in commodity markets.
A factor beyond our control.
But we are confident that by increasing our branded retail offering and diversifying our product mix, we will be able to respond to the new market dynamics.
And then sue and ensuing opportunities for growth.
In China, we're making headway on the labor front, and finding new ways of working with our supply chain partners.
Despite this backdrop, we generated nearly $700 million of net operating cash flows a testament to our diversified foundations.
Acquisitions continue to be at the core of our strategy in fiscal 2022.
We completed the integration of four recent acquisitions, which will reinforce our efforts to strengthen our core business drive product innovation and it.
Increase the value of our ingredients portfolio.
We've also progressed on our ESG agenda, driven by our support of promise, which underpins everything we do and serves to drive enable that sustain our growth.
We completed our first three year plan in fiscal 2022, and we're heading into the next phase with a firm dedication to delivering on our objectives.
On the environmental front, we made further commitments to reduce the environmental impact of our operations.
Our near term focus is executing on a series of projects to deliver on our climate water and waste targets.
We undertook 24 projects in fiscal 'twenty two.
That are going to bring productive wins with a further 32 projects slated for next fiscal year.
Beyond the scope of our operations. We also believe we have a key role to play.
To ensure a sustainable and equitable food system working in partnership with our farmers suppliers and industry partners to support the industry towards a transition to net zero by 2050.
To that end, we launched and began executing on our supply chain pledges. This past year, which include sourcing 100% of our principal ingredients sustainably.
In addition, we signed onto pathways to dairy net zero alongside several industry players to stimulate climate efforts and drive action to reduce greenhouse gas emissions across the dairy sector.
From a social perspective, we.
Made great progress with our <unk> initiatives with a focus on training and development and talent acquisition to promote an inclusive and diverse workforce.
Our next three year plan, which will be released in August together with our upcoming Saputo progress promise report will build on the momentum of the past few years with execution already underway.
Turning now to our growth strategy.
While the external environment has required a laser focus short term execution.
This has not detracted us from advancing on our key initiatives.
We are confident in our strategic plan target and we continue to lay the groundwork for our next chapter of sustained growth.
In fiscal 'twenty, two we announced the first of a series of investments and consolidation activities that will optimize and enhance our manufacturing footprint.
This included a major capital investment plan towards the modernization and expansion of our chief manufacturing facilities in Wisconsin and California.
And to support our growth plan in the retail market.
It also included several key streamlining initiatives in the U S and Australia to optimize and enhance our manufacturing footprint.
In the U K the business undertook plans to outsource our Nuneaton facility warehouse and distribution activities to a long term partner.
We will close our Fremont facility.
Entrail lies chiefs packaging at Nuneaton over the next two years, creating a center of excellence and providing both operational and cost synergies, while offering plenty of scope for growth.
We're poised for a recovery in fiscal 'twenty three.
And we are well underway with a full scale rollout of our growth cost and productivity initiatives.
Together.
This should set the stage for accelerated growth in the back half of our strategic plan with a clear line of sight to our adjusted EBITDA target of two <unk> two $5 billion by the end of fiscal 2025.
We're aggressively working our plan keeping a view on maximizing long term value creation.
I will now turn the call over to Max.
For the financial review.
Before providing my final remarks Max.
Thank you Dino and good afternoon, everyone.
I'll start with our consolidated financial performance and I will then move on to the sector review.
Adjusted net earnings were 26 cents per share in the fourth quarter compared to 30.
For the same quarter last call.
Consolidated revenues were $3 96 billion, a 15% increase when compared to last year.
Revenue increased due to higher domestic selling prices together with pricing initiatives implemented in all of our sector to mitigate increasing input costs as well as higher cheese, and then dairy ingredient market prices in the U S and also in the export market India Internet.
<unk> sector.
Adjusted EBITDA amounted to $260 million compared to $303 million.
Dollar in the fourth quarter last year.
During the quarter, we recorded 71 million of restructuring charges.
Which include a noncash impairment charge of fixed assets of $60 million.
These charges were related to the previously announced capital investment in tons validation initiative in our U S and international sectors, and our plans to outsource the new uneaten facilities warehouse and distribution activities, allowing full network optimization.
On a year over year basis.
Our results were negatively impacted by challenging market conditions, including labor shortages.
Supply chain disruption and inflationary pressures with the U S sector being the most impacted.
U S market factor at a negative effect of $19 million as compared to the same quarter last fiscal mainly due to the effect of the negative spread.
The fluctuation of the Canadian dollar versus the foreign currency negatively impacted.
Adjusted EBITDA by $12 million.
Depreciation and amortization for the fourth quarter total of $148 million up $13 million when compared to the same quarter last fiscal due to our capital expenditure program.
And the inclusion of our recent acquisition.
Income tax record re totaled $12 million, which reflects the lower level of taxable earnings in the fourth quarter and the favorable effect of the tax adjustment for inflation in Argentina.
Cash flow generated from operating activities amounted to $184 million for the quarter up $33 million versus the $151 last year.
Turning to the review of our business sector, starting with Canada.
Revenue for the fourth quarter increased 5%.
Revenue increased due to higher selling prices in connection with the higher cost of milk and pricing initiatives implemented to mitigate higher input cost <unk>.
Sales volumes were lower in the retail market segment, mainly due to fluid milk sales volume returning closer to their pre pandemic level.
Actually offset by a rebound in sales for sales volume in the foodservice market segments.
Adjusted EBITDA for the fourth quarter totaled $117 million when compared to the $108 million for the same quarter last fiscal as the business continued to build on the momentum from recent quarter.
Pricing initiatives and a favorable product mix were partially offset by higher input and logistical costs.
In all of our U S sector revenue were 25% higher.
Revenue increased due to pricing initiatives implemented to mitigate increasing input costs.
And due to the combined effect of higher average blood market prices and the higher average butter market price.
Sales volume were stable in all of our market segment.
Demand for <unk> continues to be subject to competitive market conditions.
Adjusted EBITDA in the U S totaled $42 million, a decrease of $51 million versus last year.
We continue to be challenge in the quarter by inflationary pressures, which include an increase of $33 million related to freight and logistics cost.
Also commodity market volatility as well as labor availability issues.
In Q4 pricing initiatives undertaken were not sufficient to mitigate all of the impact of inflation on our cost.
As a result.
<unk> to our customer additional pricing initiatives into Korea in Q1.
Okay.
The negative net impact of $19 million of U S market factor as compared to the same quarter last fiscal year was mostly the result of the unfavorable impact from the negative spread between the block price of cheese in the cost of milk as raw material.
India International sector revenues for the fourth quarter increased by 12% when compared to last fiscal year.
Revenue increased due to higher domestic selling prices in Argentina.
Pricing initiatives implemented in Australia in response to the higher cost of milk and input costs.
Disrupted market condition and supply chain challenges due to containers and vessel availability issues and port inefficiencies they get heavily impacted export sales volume.
Adjusted EBITDA totaled $62 million, which was in line with our results in the same quarter last year.
Pricing initiatives undertaken in the domestic market.
Were not sufficient to mitigate increased input costs, notably the increased farm gate milk price in Australia.
However.
In our export market the relation between international cheese, and dairy ingredients market prices and the cost of milk out a positive and back.
In our Europe revenue were 12% higher when compared to the same quarter last year.
Revenue increased due to pricing initiatives implemented to mitigate higher input costs and the contribution of the Butte Island, and the Windsor Dale dairy product acquisition.
Sales volume were stable as compared to the same quarter last fiscal.
Although retail market segment sales volume decreased as they return to historical level.
Adjusted EBITDA for Q4 amounted to $39 million down 1 million when compared to last year.
The impact from the loss of a retail market segment sales volume were partially offset by pricing initiatives.
So this conclude my financial review and with that I'll turn the call back selenium.
Thank you Mac.
Let's take a closer look at the fourth quarter.
As expected Q4 was challenging mostly due to transitory factors that impacted our margins, notably in the U S. First we had a high rates of absenteeism made even tougher by the omicron surge, which disrupted production schedules and impacted service levels.
Second accelerated inflation following the escalation of the conflict in Ukraine added further downward pressure on margins.
As we started to see this latest wave of inflation coming we took action on pricing just as we did throughout the year consistent with our objective for pricing to cover higher input costs. So while we experienced near term pressure on our margins. We expect this new round of pricing actions to alleviate the impact of near term inflation.
Finally, we continue to manage through supply chain challenges, especially in the U S. Due to labor shortages and a continuing gap between supply and demand of trucking capacity and containers.
To offset these challenges we continue to improve our manufacturing and warehousing capacity.
<unk> key skus and implementing new measures to support our employee retention.
Our sales volumes were stable in the quarter, despite an uneven recovery in the U S foodservice channel, but overall consumer demand remained positive, especially in retail as at home food spending continues to trend well versus pre pandemic levels.
We're taking deliberate actions by sector.
Prove our volumes to better meet customer needs.
Improving our shipment volumes will be key to getting back on track with a large percentage of that coming from the U S sector.
Now allow me to briefly comment on each of our four sectors before we get to your questions.
The Canadian sector delivered strong results driven by a balance of pricing momentum good cost control and steady volume recovery in certain channels, notably foodservice.
In addition, some of the recently deployed.
Automation projects drove efficiencies within our operations and supply chain, helping our facilities to minimize labor related supply challenges.
On the commercial side, we continue to expand and grow our most popular brands.
I'm strong cheese introduce new innovations and it's high growth value added segments of Fred's snacks and slices.
And were already receiving recognition with our two newest Armstrong retail slice products jointly winning the 2022 best New product award in the sliced cheese category. According to Brian Spark.
I'm also pleased to report for the fourth consecutive year, our dairyland and Nielsen fluid milk brand were voted by consumers as the most trusted milk brand in Western Canada, and Ontario, respectively.
In the U S sales increased year over year due to higher prices and recently announced price increases.
But our margins were negatively impacted by substantial commodity volatility sub optimal output due to labor availability and significant inflationary pressures.
We have more work to do to deliver the growth that the business is capable of but these are clearly unprecedented transitory effects.
We're working our way out of that.
In Europe , we saw strong sequential improvements as the business continued to benefit from higher international dairy ingredients market prices.
Cathedral City maintained its position as the number one cheddar brand in the U K and we've partnered with a major British grocery chain to launch a branded ready to ready meal range with initial sales exceeding expectations.
During the quarter. The business also won several top tier private label Cheddar contracts with UK supermarkets, as well as new branded and private label wins and cheese spreads.
These wins.
The continued expansion of Cathedral city in North America, and the startup of our Heartland partnership in Germany, which began in January .
<unk> set the business up for strong growth in the upcoming year.
And finally, the international sector performs well in Argentina, the business benefited from a strong international cheese and dairy ingredients market price.
In addition to plant efficiencies from higher milk intake and the recent mozzarella plant upgrade.
International market prices continued to reflect strong market trends. However, Australia was negatively impacted by a substantial increase in farm gate milk price.
No.
Turning to our outlook.
Below inflation and supply chain disruptions are likely to persist we nonetheless expect a recovery in fiscal 'twenty, three and we see a clear path towards it.
First we've taken significant pricing actions throughout 2022 to offset inflation and we expect these initiatives to be fully reflected in our results next year.
We are continuously monitoring input costs and are preparing.
Turning to ourselves and our customers to possibly go for further pricing rounds should we need it.
Critical to improving our profitability is maximizing our fixed cost leverage and being back to our usual levels to run our plants full specifically in the U S. We.
We expect improved staffing levels in the U S. In fiscal 'twenty three following our aggressive hiring and retention initiatives and assuming lower COVID-19 related as absenteeism.
This should translate into better output improved productivity and the beginning of a return to more normal sales volume levels.
As we begin to fully support demand for our products and recover volume, we expect to return to our historical order fill rates by year end with a gradual step up throughout the year.
These are key points as we transition from supply cost recovery to now running the business effectively and what we believe will be more predictable conditions as we come into fiscal 2023.
Accordingly, we expect a meaningful improvement in adjusted EBITDA.
And recovery in margins over time.
And we remain confident in our plans and full year outlook.
In closing our teams are laser focused on addressing the short term challenges while delivering on our long term plan.
We're continuing to face a dynamic environment.
We're being thoughtful with actions to offset macro headwinds.
Wincing price volume and costs, while we work to improve and expand our margins.
Our global strategic plan is in motion.
And we expect the momentum to gradually build.
Our performance driven culture fuels our team everyday.
By harsh a poodle promise to drive our growth and to build and to deliver long term shareholder value.
On that note I. Thank you for your time and I will turn the call to Frank for your questions Frank.
Thank you.
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Yeah.
Yeah.
Our first question comes from Patricia Baker with Scotiabank. Please proceed.
Oh, yes. Good afternoon, everyone. Thank you for taking my question I just wanted to follow up on that discussion that you. Just ended your assertion with where you're talking about is that he has a clear path to recovery and obviously a critical element here was getting most kill rates up in the U S and you know.
That doesn't happen, we won't be able to reach the targets.
I'd say that that would be that you'd get back to normalized by the end of year, a gradual step up throughout the year can you tell us where the fill rates are now and did you have any progress with the improvement in Q4 over Q3 already on this one.
Or you could put a dent in that works.
Yeah. Thank you very much for the question Patricia So I have the greatest pleasure. This afternoon are being supported by Lee and cut our COO of international and call Kalitta T. All of North America.
Again, I say I am privileged to be with two individuals that are action oriented people that are going to deliver results for our company.
So before I pass it on to call to answer your specific question related to order fill rate.
I'm very very optimistic about this year the mood the tone the focus the understanding of where our business is that is so much more clear this year than it was last year as the economies were opening up if you recall last year when the economies were opening up many companies we're looking for labor many company.
<unk> had to get product to market in terms of our supply chain and distribution.
And it seems like everybody was looking for the same resources all at the same time, all the while while demand was a rabbit and very very strong.
This year, our site are clear about our realistic headwind.
But also very clear about our mitigating factors and what we need to do to make sure that we have success. So on that note I'm going to pass it onto Carl he'll talk to you a little bit about maybe some of the success that we've had and getting up in terms of a more respectable levels of order fill rate Carl.
Lino.
So more specifically in the U S and we've made some significant progress post are all mccaughan, which was a certainly a handicap for us in January and February .
We've since rebounded and contributors to a positive celebrating to continue on the momentum that we have right. Now are really lies in a few factors. The first one is continuing to be successful with hiring and filling the vacancies that we have across our.
<unk>.
We are making some.
Progress on in that space, both from attracting the talent as much as it is retaining the talent.
As that progresses, we will also see.
We reduced turnover a greater proficiency and then ultimately a better OA if you like from our operating platform.
Which will contribute to continuing.
With our positive.
Bill rate momentum the other aspect I would also say is that the demand from the marketplace is beginning to stabilize.
Becoming a little bit more predictable in nature and that has lots of positive effects in our planning.
Makes planning.
More efficient for us and accordingly, our operations. So a combination of these factors and the continued momentum here.
We are confident that our fill rates will by year end and get back to historical levels.
So Patricia I'm going to add one other question that I.
You didn't ask directly but indirectly so a clear path to recovery also includes Australia.
If I look back at last year, our Canada, Argentina U K performed relatively well.
Two rough spots, where USA, which Karl talked about I'd like to talk about what our recovery plan for this fiscal year is specifically for Australia.
Thank you Dana and yet the SDA the key opportunity there is around managing our milk intake.
The market for supply of milk, we now remains extremely competitive in Australia, we have set a strong opening price for the new 'twenty, two and 'twenty three season, and we do expect competition to remain strong at.
At the same time, we've recently announced streamlining our operations in two of our manufacturing facilities in Australia and as part of a four year plan will continue to review that network.
The available milk supply, what we need over the next few years.
So I hope, who went above and beyond your question Patricia and satisfy.
Your curiosity.
Oh, absolutely. Thank you to all three of you I'll get back in the queue.
Thank you very much.
Our next question comes from Michael Van <unk> with TD Securities. Please proceed.
Hi, good afternoon.
You talked about.
Announcing price increases for your customer base I guess it was over the course of fiscal 'twenty two.
But the latest price increases that you expect.
Okay.
Hi, Jeff.
Cost inflation can you go geography by geography, and let US know when these are going to become effective.
I certainly will do that will start off with Leann and your geographies and then we'll go to Karl with North America.
Yes. So we are often first to market with price increases in our industry in the U K, Australia and Argentina.
And yes, we have seen increases in a number of alcohol milk and milk.
We have a process to recover those costs, that's well understood by all key retailers.
In Argentina, we are used to managing hot for inflation.
And in the UK and Australia, we do have a process, it's well understood I know we are in the process of recovering that.
Input costs.
And so we are seeing.
Our retail customers do you accept that principle of inflation, we are seeing a very rational response, and thats, becoming business as usual for us to recover costs regularly. So our next round of increases maybe it's more specifically.
And at the moment in the U K, we are at that price increase goes effective this week.
And in Australia, It will be in the second quarter.
So Michael what you are seeing is a little bit of a change from our last fiscal year, where we were playing defense now we're playing offense.
We are progressive and more proactive at passing the increases that we need to pass irrespective of what impact that might have on volume, but we don't suspect that volume will be impacted greatly and maybe on that note I'll pass it to Carl for Canada, and the United States.
So let's start with Canada. The last price increase was effective in February in line with the annual CDC price increases.
Currently there is discussions about a mid cycle, increasing Canada on the milk front.
The CDC the likelihood of that is high and it would be effective in August and we will absolutely.
Be recovering costs from our milk price inputs.
In the U S a.
The back in January we had announced price increases that came into effect in mid April .
We have materialized on those price increases.
Inflation has continued to.
To put lots of pressure on our overall cost of goods, we have announced early may.
<unk> July finished another round of price increases in the U S.
So that has been communicated to our customer base and we are taking pricing and next pricing action will be July 15.
So you see a Michael in Q1 of this year, we are seeing some of the benefit of those price increases we took in January going starting into Q2.
There is going to be further price action.
So again, we're playing offense now.
Okay. So playing offense means you got here Youre looking ahead to the cost that you have coming in you're passing that on now that.
That is correct.
Okay. So if you look at so if you combine these price increases, but that had been amounts center and should become effective.
With the.
Film right.
Improvement that you expect during the year.
Is that enough to get you back to say fiscal 'twenty one profitability.
That is the plan, yes, yeah. So when we talk about a recovery here, that's getting back to plan to where we were.
Setting our sights on our fiscal 'twenty, four where some of the capital expenditure will come to fruition in terms of equipment installation and then catapult us into achieving the numbers, we need and we are expecting.
<unk> within the four year plan.
Okay, great. Thank you I'll get back to me here.
All right Michael Thank you.
Okay.
Our next question comes from Irene <unk> with RBC capital markets. Please proceed.
Thanks, and good afternoon, everyone. A couple of questions essentially on similar topics. So if we look at the U S.
Yes, if I went back even a year and said you're going to have a two 4% EBITA margin in the U S.
I think you I said why I didn't even see how that happens or maybe not but so what is reasonable to expect in terms of the cadence of recovery and what do you think I guess, a new normal EBIT margin level would be in the U S.
Yeah. So.
Irene as we've mentioned in the past the EBITDA margin.
Not.
Apples to apples.
Our comparable and I'll explain why.
You're probably very familiar with this.
Higher the block prices.
The lower the margin will be all with the same amount of EBITDA cash generation. So our real focus is on EBITDA cash generation, but to answer your questions under these markets in these block prices I would say about a 9% EBITDA.
Margin collective for the U S platform would be reasonable that would be different from in different geographies because of the profile of our business, our branding versus non branding retail versus foodservice and industrial but I would say to your question was specific to the U S. Under.
<unk> the current block market environment, I would say about nine ish percent would be reasonable.
Yeah.
That's that's very helpful and is that 9% the fiscal 'twenty.
By targeting like how should we think about the path.
From here to there so so assuming the prices that the price increases that you've taken hold and assuming you can get your fill rates up and we won't hold you to this but just trying to understand what the slope of that line looks like me now because obviously the U S is a big market right.
What is reasonable to expect in F 'twenty three.
Yeah, So for me that.
The focus that I have and what I'm pressing upon Karl and his team.
Is the cash generation EBITDA, but I'll pass it onto Max I'll talk about the percentage of allocation.
25, okay. Good.
Good afternoon hiring so when we look at the recovery year for F. 'twenty three we can look at it from three big buckets.
The first buckets around price increase.
It is something that we are looking to not be lagging.
As of Q1.
So all of the shortfall that we've seen in fiscal 'twenty two is not going to reoccur in F. 'twenty three and that's a big bucket that will help us to bring us to those F. 'twenty F 'twenty one level.
The other big bucket is around all of the.
Efficiencies within our operation.
It has to do with you know.
But that bucket around volume and stability of supply in the market and that sort of thing.
We do see in that bucket and improvement from quarter to quarter, so not fully.
Built into the Q1, but we see a ramp up.
Other elements to factor in when we look at the fiscal 'twenty three.
Elements around market, we do see international market remaining to the level that they are currently within the Q4 results. So we don't see sign of.
It did whatsoever.
This will help us to get to that level of F. 'twenty three alongside with the contribution of our acquisition, we get into the U two within.
Within fiscal 'twenty three so we expect an upside on that front. So those would be the big buckets to bridge F. 'twenty two 'twenty three with the gradual ramp up from quarter to quarter, specifically around operation improvement fill rate and labor related issues.
That's really helpful. Thank you and if I could just come back to the whole notion of <unk>.
Demand in elasticity or elasticity, we've seen some pretty aggressive price hearing Canada.
Lets called milk price eight and a half retail prices that plus a little bit more you said youre going to take another round consumers are facing all kinds of.
Personal cost increases.
But how confident are you that we won't start to see volume and what's the response been.
Service and then it's sort of in the others in each of the three segments because the IGF cost increases.
Yeah. So I'll take that question on a division by Division basis, we'll start off with Carl Yes.
Yes.
I think I read your question is specific to the U S O U S and Canada as well because there might be another milk price increases Alan Yeah, exactly yeah, Canada as well.
So I'll speak to the U S first and I would say that.
Dairy still continues to be.
For <unk>.
Pound for pound basis of protein.
Still a value for the consumer.
Accordingly, we do feel strongly that despite the pricing pressure.
Pressures and the general economy.
Dairy will continue to fair well.
In this space.
Dairy plays in a number of channels and in a number of occasions throughout the day.
So what we will likely see is a shift.
And where consumers are are procuring their dairy how they're procuring it throughout the day and so the diversification of our portfolio both in Canada, and the U S. I will set us up well for that but on an overall basis I would say that specifically in the U S. You from a pricing perspective.
I don't see a demand destruction because of the current environment.
In Canada, certainly dairy are from a price point perspective.
And in the basket is more important than it is in the U S to the consumer.
Once again I will say that.
The occasions for consuming dairy out of home.
And in home.
We'll likely see a shift in.
In Canada, right now I would say that from me.
Foodservice perspective, there is still a bit of a honeymoon effect.
We're not seeing a slowdown in that space as we speak.
But I think that as.
As the summer rolls over we might see changes to that as the continued inflation and economic pressures happening, but a little bit like in the pandemic phase, we are ready to supply or the retail markets as needed.
Now the rest of the world.
Sorry, Irene did you have a follow up question for Carl.
Yeah, Yeah, I did okay before it gets to the rest of the world and that is you know.
In previous periods, where we've had a sharp increase in dairy and cheese pricing.
Has there been any pushback on volume from your foodservice partners in terms of maybe trying to use a little less cheese or anything like that.
Sure.
Yes, maybe Irene I can speak to I'll speak in North America, because it's very similar.
Service channels and.
There is some trading off that does happen at times, depending on price.
And.
Recipes.
Change customers may move over from higher cost or higher value cheeses as an example blue cheese.
Two other products.
And we do see that kinds of shifts on a regular basis.
Is it a potential as we move forward. The answer is yes, but again our portfolio is quite broad.
So we can continue to supply with the demand is.
Yeah.
So Irene and we can go on to the other markets. If you have no further questions for North America.
Alright, great. Thank you. Thank you.
Irene I'm Similarly, dairy remains an affordable source of protein in each of our key platform in the U K, Australia, and Argentina and in addition to that we haven't seen cheese category declined as we have put forward price increases.
And we haven't I think that's also because we haven't very diverse portfolio of strong brands in these markets and that enables us to provide value with different price points, Let's say for example in the U K, we have cathedral city and now Wednesday.
In Australia, our 7000 share in Argentina Latina. So in addition to in addition to that we're also successfully we need new private label contracts.
And what we're looking for a private label is value added private label, where we also have distinctive and consistently high quality.
It's not a me too and it's and it's very good margin. So therefore, we're able to operate this portfolio at different price points and provide different value for all consumers.
And I'll add one more positive dynamic.
On a global dairy industry front.
There is less milk being produced.
Then there is demand growth.
So so the markets have shifted to a very positive supply demand ratio.
Where the dairy producing countries aren't producing quite as much.
Coming off the farm and yet demand continues to grow so that bodes well, even on a pricing perspective and on a demand perspective, and our ability to supply the world markets not just the domestic market.
All the arrows are pointed in the right direction for us right now.
Yeah.
That's great. Thank you.
Yeah.
Our next question comes from Peter Sklar with BMO capital markets. Please proceed.
Maxine and Lino when you talk about that.
Recovery, you're expecting this year in the U S market.
I'm surprised that.
Okay.
You also as part of that recovery, you don't need a turnaround in the cheese milk spread you know what.
She has been significantly negative.
And I'm, just wondering how you're seeing.
But if you agree with that statement is that part of your assumption that we'd go back to a positive spread and how is that playing out I think.
What's happening is as explained in the past is that you know the way prices high and so that's you.
You know increasing the milk price in terms of the milk marketing orders, but on the other hand cheese block hasn't moved up sufficiently to compensate for that so if you could just talk a little bit about what your expectations are for the spreads and how you see it unfolding this year.
Okay, Yes that does that's a very good question.
Peter So.
If you think about the historical range.
Our ranges and spread.
And I'm talking pre pandemic historical we had seen.
Upwards of.
<unk> positive to <unk> negative spread in a range probably within 10 cents there.
What we saw in January and February minus 41 spread that is unprecedented.
In the current environment, we're looking at somewhere around minus 20 spread at which is which is not great.
For our cheese businesses.
But it still is better than what we saw in Q4.
And we're adjusting our expectations about spread moving forward relative to the new environment with the weight factor I don't think that the historical levels will come back the neutral spreads or the plus five or negative five it's not.
A a hope that we have that we will get back to that so what do we need to do to counter balance that while it renegotiating some of the contracts that we have with some of our customers.
Rethinking our pricing protocols, how we go to market because it's a different reality today than it was even two years ago three years ago.
So we're not hanging our hat.
It hit the Strat plan for the spreads to come back to you know.
Normalized levels of what we saw three years ago, but we're expecting that there's going to be a negative spread now minus 20 spread still is painful.
We suspect it's going to get better than that.
The indications of weight pricing is signaling that.
Bob.
Got to make sure that we're proactively looking at the things that we can control and omitting the things that we can't control.
I think Max might want to add a bit of color to that good afternoon theater, so from a spread perspective.
Looking at the curve in Q1.
We're still within the range of negative 25, so we're still in negative territory.
Our assumption is built around the fact that we would remain negative territory.
But fun from a year over a year not to be as their tremendous ah versus the prior year. During the course of the fiscal 'twenty. Two we were on a regular basis 25, 30, <unk> below the year before from a spread perspective, now just having some stability around <unk>.
Negative.
Provide us sufficient not buffer, but sufficient room for us to be able to to achieve our objective for F. 'twenty three so at the moment. When you look at Q1, where we would be closing the quarter at a negative 25.
If you compare to Q4, it will be stable negative 25. So it has some stability from a sequential Q4 to Q1.
But if you would be taking into Q1 this year versus the Q1 last year, we would still be negative last year was around negative <unk> 16.
So although as a stabilized we're just looking for that stability.
It will certainly help us to achieve our target so hopefully that helps with.
Okay. No those are good answers. Thanks, and then just one other.
The other question on a different topic I guess, it's for Leann.
It just seems that Australia has been problematic for a number of years now because of the.
And adequate.
Supply of milk coming off the farm and the things you announced today.
And the company has announced in the past like co packing and streamlining your operations and the more aggressive.
Pricing like it just seems to me that.
Like you're just making the best of a challenging situation. So I'm just wondering ultimately.
Does this milk shortage, you're going to be resolved in Australia.
You know the agricultural element going to come back in the farmer is going to produce more milk or down the road or are you going to have to take more significant actions. Because clearly you know I don't think Australia is generating the type of returns.
You anticipate that.
When you initially bought those businesses or whats the long term plan here.
Okay.
Ill answer here is the back half of your question and then I'll ask Leon to.
To give you some color on what she's seen in the market.
But for US Peter what were looking at in terms of our Australian platform is not volume its value and I believe that there is a way with the amount of milk that we're processing or we expect to process Theres still drive very healthy profitability. So if you recall.
<unk> targets of about 2.728 billion liters of milk to be processed.
We're probably somewhere around $2 2 billion liters of milk. So it's still quite good amount of volume.
But what is important for us is to make every single leader almost 2.2 billion Tech.
To account for us and so the shift is going to happen.
Number one.
Improving our manufacturing footprint to be as efficient as possible and number two.
Put those solid into categories of product that are going to drive a healthy profitability. So it doesn't mean that we have reduced our expectation for EBITDA generation, because we have less milk now let me ask Leon to answer the first half of your question.
So yes as far as milk supply is concerned we do see that being constrained, we don't see that coming back to.
The industry is down.
I foresee that coming back anytime soon so we do need to work with the milk supply that we have.
Having said that as I mentioned, we do have also a very diversified platform not just for domestic retail, which is performing well, but also with food service and industrial and also with our export business.
With our export business with the prices that we are seeing in international markets. We are now looking in new contracts at better prices. So we believe it is a diversified platform that yes well.
We do for example round out our cost price recovery, what we're doing there as being very very intentional about recovering some of those cost increases being more offensive hopefully a fence around that and ensuring that we do get the right value for our products and our brands in the market.
Okay.
Thank you. Thank you for your comments those are my questions.
Thank you. Peter next question comes from Vishal <unk> with National Bank Financial. Please proceed.
Hi, Thanks for taking my question.
Just on with respect to some of the consumer.
Changes that Youre seeing.
Are you seeing increased demands for private label from your retailers and is the if so is that impacting our margins or should we anticipate it to and also the the.
Trade down from the more higher end cheese cheese is is that a meaningful impact to margin.
This is Carl and Michelle.
I would say that in North America in particular, there are two things one we're already a private label supplier.
In many spaces.
So we continue to have a healthy relationship there with our customers I would say that we also have to be careful because for as much as a potentially private label.
<unk> would be the go to for some customers in tough economic times. It's also a question of supply and right now you know as much as it is supportable and or other CPG.
Cpg's are food space.
Efficiency.
And.
SKU rationalization and all of the above are front and center for all of Us.
So.
Reintroducing if you like additional skus for private label space versus branded isn't it isn't top of mind and the first one on our priority list, but absolutely we have a great customer base and the private label space, We continue to supply.
And but I would say that overall focusing on growing our private label offerings is not our first priority.
And what about the other markets.
If I could here on the U K, where we had a very successful retail brand business and what we are doing in addition to that it's actually successfully winning new private label contracts now when we talk about the private label in the U K. What we are looking for specifically is value added private label.
As I mentioned before where we can actually offer a really distinctive and consistently high quality not how we're managing to be able to win these contracts and.
And also it's actually a very good margin. So it yourself at the high end private label. It is difficult to coffee, we are noticing that going for me too on a private label. So we've actually been very successful then to be up to optimize the full portfolio of both branded and private label in the U K.
Okay. Thank you for that color and with respect to the U S segment. The U S sector. If you look at adjusted EBITDA was $42 million last year at 93 and.
And $19 million of that GAAP is explained by market factors, some by FX and I know last quarter.
Our scooter was talking about improving.
Labour fill rates, although its a longer term plan you talked about taking pricing covering transportation pressure.
And I think at that time, you had said that.
Pricing and would cover inflation by the end of Q4 for what you saw at that period of time. So I understand inflation has increased further so if you could maybe help me bridge.
Because there's so many moving parts. If you could help me bridge the delta of that U S deterioration, which isn't explained by market factors and maybe give me an understanding of what the buckets are.
Yes, Vishal this is Mike.
Yes, there was $19 million relative to the market factors.
That would help reducing the got the other two elements are refers to the inflation that was not recovered and there was and particularly to the spike that the Ukraine and Russia conflict brought to the table, we weren't in our weight.
To recover all of our costs.
But that's a piece that.
Ultimately that spike was not recover.
And the other portion to bridge is around our overall efficiencies.
Relative to our labor the overtime that we are.
We have to absorb.
Within our facility in the U S. So if you remove the 19.
Or any any anything around FX, the remainder would be.
Let's say a half half between price inflation and efficiencies.
Okay, so that pressure related to labor, that's going to gradually improve through the maybe the upcoming fiscal year.
Correct.
Yes specific to the U S where the the biggest gap is with regards to the required Ftes, we are making headway here on a week to week basis with a variety of initiatives both in recruiting and retention so absolutely and I just wanted maybe call out that typically this it's not a linear scale.
So small improvements small percentage improvements in labor.
Can generate a much bigger return for us so it's part of the reason why.
We're confident in our fiscal 'twenty three objectives, because we are pacing with where we need to be.
And with respect to the pricing initiatives is management was the comment that management is looking at where costs are going to go and that's the pricing that it intends to take or should we anticipate if there is continued inflation there will be a constant lag lag effect as it takes several months to implement pricing to get caught up.
Well, what we've taken price action in April .
That if the Ukraine war would not have impacted our supply on many goods not just ingredients, but also packaging.
We would have been caught up is.
As the quarter evolved when we realized that inflation was continuing so we triggered immediately.
Price increase announcements for the month of July .
Now inflation is not growing.
As quickly as it was.
At the beginning of the calendar year.
So I think the the increase in July will get us to.
I would say, perhaps an even level, but if inflation continues we reserve the right to go back to market.
And take more price.
Thank you for the color.
Thank you Vishal.
Our next question comes from Mark Petrie.
With CIBC. Please proceed.
Yeah. Thanks, Good afternoon, I just wanted to follow up again on the on the whole pricing discussion and we know you.
Likely your comments with regards to expectations that the spread would remain sort of you know materially negative and below sort of historic levels.
Does that mean that you've sort of adjusted your pricing contracts such that you can make kind of historic levels of margin at lower spreads. So is it still priced I think historically, you've been kind of priced off the block is that still the case, just with a wider buffer or hope the contracts actually changed in terms of that pricing mechanism.
Yes. So we are reopening all of our contracts and maybe I'll have Carl give some color on that.
Yeah, Mark we still we still have.
A material amount of our contracts and supply that is based off of block.
And the movers can be on a weekly basis monthly indoor quarterly even annual need some cases so.
Ultimately.
Our pricing is still very much a function of that block price and despite the negative spread spread is one of the elements that contribute to our overall cogs.
We are looking at pricing somewhat differently and some of that is in and around what it is we charge for the services around supply.
So there are a number of things that we're looking at and to further leno's point on contracts of course, you know the spirit and the intent of a contract tend to reflect the environment in which we're operating in a lot of those terms and conditions for the most part no longer apply.
So we are having healthy conversations with our customers about ensuring that we can have conditions that are sustainable for the two of us. So a combination of those things make the spread.
I'll say more attainable for us but.
But nonetheless, we continue to focus on the the most controllable aspects.
Of our operations, which is our overall OE until right.
Yeah, Okay makes sense and do those conversations are those adjustments are the easier or more difficult in different channels. So I guess, specifically retail and foodservice.
Yep.
They are never easy.
To start selling off the block is typically not a retail.
Sort of pricing protocol.
I would say that it's more of an industrial channel foodservice channel.
Sure.
You know when you have a branded product it tends to be more fixed price in nature.
But I guess the short answer is that there are tough conversations no matter, who what channel you're right.
Yeah, Okay I understood and also just wanted to follow up on the fill rate or service level kind of conversation.
And the last couple of quarters, you've sort of given us a sense of where you were and I think you know our Q3, you had said sort of now around 90, 394% for U S fill rates.
Is that kind of where you are or are you sort of you know I think adding a percent or maybe improving by a percent each quarter or is that the idea or or or where are you out today.
Yes. Your recollection is correct and we are slightly ahead of that as we move forward here in week eight of the of our fiscal 'twenty. Three so we are making progress are the number is higher than the one you've quoted.
And we have a we still see a clear path to making a material change here in our in our fill rates and it is embedded in.
US filling our vacancies.
Stabilization.
The demand.
Those factors will be key for us as well as maybe one item I didn't speak to earlier.
On the supply chain front, so the logistics and transportation we are seeing.
Availability.
Freight lanes.
And labor, so truck drivers or other.
Actually I will say, even much more favorable than what we experienced all of last year and in the early part of this calendar year. So those three elements combined we feel confident that our fill rates will be back to what our targeted expectations are.
Okay. Thanks, and then I did just want to ask one another question just with regards to your sort of fiscal 'twenty five earnings target.
What kind of assumptions about the commodity market are sort of embedded into that and can you give us a sense of the impact that you know but.
<unk> here and there in terms of dollars that that kind of normalized commodity environment. You know if if if that is the assumption what that would actually mean.
You know on a dollar basis between here and there because I know you disclosed market factors, but that's relative to past periods in and I. Just you know I just kind of wanted to get a sense of that from your perspective.
Yes, you're correct the market factors that were disclosing as always compared to the prior year and so on the assumption built into the model to bring us to the $2 125 is whatever relative to inflationary cost that we are recuperating and so it is the same thing with regards to <unk>.
Monty at mill cost, whether it's in Australia, or whether it's in the U S or Canada or any jurisdiction. So that's the basis of our of the assumption for us to achieve the two 1% to five and not get behind whatsoever in any of those margins.
Margin generation.
In that regard.
So it implies that the commodities neutral effectively in terms of in terms of your in terms of your profitability.
The impact of commodity is absolutely neutral because we would have mitigated through pricing adjustments.
Accordingly.
<unk>.
Okay, Okay I'll follow up thanks.
Okay.
Nick There are no further questions at this time.
Thank you Frank we thank you for taking part in the call and webcast. Please note that our first quarter fiscal 2023 results will be held on August 4th 2020 to have a nice day.
That does conclude the conference call for today, we thank you for your participation and ask that you. Please disconnect. Your line. Thank you.
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