Q1 2023 Saputo Inc Earnings Call

[music].

Screening.

Welcome to the <unk>, Inc, first quarter fiscal two.

123 results conference call.

Presentation, all participants are in a listen only mode. Afterwards, we'll conduct a question and answer session.

At that time, if you have a question. Please press star one by the four on your telephone if any time the conference to reach operator.

The star followed by zero.

As a reminder, today's call is being recorded Thursday August 4th 2022.

I would like to turn the conference.

But you know so putto junior please go right ahead.

Thank you Tommy.

Good afternoon, and welcome to our first quarter fiscal 2023 earnings call.

Our speakers today will be Lino Saputo chair of the board, President and Chief Executive Officer, and Mexican Ted Young Chief Financial Officer and Secretary.

For the question and answer session Leno, and Mexican will be supported by Carl <unk>, President and Chief Operating Officer, North America, and Leann 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 the webcast will be posted on our website along with the first quarter investor presentation.

Please also note that some of the statements provided during this call are forward looking such statements are based on assumptions 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 different could differ materially did not accept any obligation to update this information except as required under securities legislation.

Now I'll hand, it over to Lino.

Nick and good afternoon, everyone.

This morning, we reported a strong first quarter with adjusted EBITDA.

$347 million on revenues of $4 $3 billion.

Our improved results reflect a solid performance in our Canadian and international sectors as well as a recovery in our U S business.

On pricing momentum across all sectors, and higher international cheese, and dairy ingredients market prices.

<unk> contributed favorably to our strong performance.

Our teams continue to execute well, while navigating the ongoing challenges notably inflation.

That said.

We are doubling our efforts to mitigate cost.

In addition to the carryover impact from last year's pricing actions each sector implemented additional price increases.

In June and in July .

We are confident that these actions combined with our cost efficiency and productivity initiatives.

Help us effectively manage inflation.

We are monitoring consumer price elasticity.

But our sales volumes have remained stable year to date. Despite recent price increases thanks to our broad and diverse portfolio.

We are focused on building and maintaining our strong brand.

We continue these efforts in the first quarter through product innovation and by growing our most popular brands.

Overall consumer demand has remained good.

Our service levels are slowly recovering.

Ported by successful hiring initiatives the.

Enabling us to better meet the demand.

Increasing production and filling existing capacity remains a critical priority, especially in the U S.

We are pulling multiple levers to drive sequential progress and I'm confident that we're looking towards further volume performance improvement throughout the year.

While the external environment has required a heightened focus on execution. It has not limited our ability.

Also advance our key strategic priorities.

We are moving ahead with the implementation of our global strategic plan roadmap.

Managing our portfolio to maximize value creation drive organic growth.

And investing for the future.

We are prioritizing optimization and productivity improvement project.

Designed to operate with fewer more efficient facility.

Yesterday, we announced our plans to further streamline our manufacturing footprint in the U S to increase efficiency and productivity and provide a more sustainable cost base.

Forward.

Yeah announcement marks the continuation of our network optimization program that plays an integral role in our broader strategy to enhance operations and accelerate organic growth across our platform.

Plans include converting our mozzarella cheese manufacturing facility and reads Berg, Wisconsin, but goat cheese manufacturing plant to increase capacity.

Proved productivity and expand our position in the growing specialty cheese category.

In line with our strategy to modernize the mozzarella operations.

Current chief manufacturing from this facility will be transferred to other existing facilities in the U S, thereby increasing capacity utilization.

Proving operational efficiencies and reducing costs.

Finally.

We will cease operations at our goat cheese production facility in Belmont, Wisconsin.

All of our employees have made commendable efforts over the years to keep our for Chile operating efficiently.

And I want to thank all affected employees for the hard work and dedication.

These initiatives will begin in the current quarter and are expect it expect it to take up to 18 months to implement.

This more focused footprint.

To strengthen the competitiveness and long term performance of our U S cheese operation.

We remain equally focused on the brutal promise our ESG strategy.

This morning, we released our annual Saputo promise report in which we share the progress we've made on our ambitious ESG goals and.

<unk> introduced a new three year plan.

Report outlines our long term commitment associated with each of our seven strategic pillars, which includes food quality and safety our people business ethics.

Sponsor, both sourcing environment nutrition, and healthy living and finally community.

Focusing on key areas.

Where we look to create meaningful measurable change over the next decade highlights and achievements from this year's report include.

An 8% reduction in <unk> intensity.

And a 2% reduction in energy intensity versus our fiscal 'twenty baseline.

Community program investment efforts totaling $16 million and $1 7 million kilos of donated food, reducing our food waste and reducing C. O two intensity by 8000 tonnes.

While we still have much to do to achieve our commitment.

I'm proud of the work we've done so far.

Our progress demonstrates our commitment to doing what is right for the environment and for communities in alignment with our values.

We are forging ahead, while building on our long history of doing good.

And with a sense of pride focused on further integrating so poodle promise initiatives across our business.

I will now turn the call over to Max for the financial review before providing concluding remarks.

Thank you Lee and good afternoon, everyone.

I'll start with our consolidated financial performance and I will then move onto sector review.

Adjusted net earnings were 39 cents per share in the first quarter compared to 30 for the same quarter last year.

Until the data revenues were $4 3 billion.

A 24% increase when compared to last year.

Revenues increased due to a higher domestic selling prices in line with the higher cost of milk.

Together with pricing initiatives.

Rented in all of our sectors mitigate increasing input costs.

Higher international cheese, and dairy ingredient market prices.

It was also favorable to revenues.

Adjusted EBITDA amounted to $347 million compared to 290 $290 million in the first quarter last year.

Our improved adjusted EBITDA was driven by previously announced pricing initiatives.

Mitigate higher input and logistical costs.

And the favorable impact from the relation between international cheese, and dairy ingredients market prices and the cost of milk.

Material.

These factors.

Were partially offset by labor shortages in some of our facilities.

And supply chain disruption.

Which put pressure on our ability to supply ongoing demand.

Which also negatively impacted the efficiencies and the absorption.

Uh huh.

U S market factor had a negative effect of $7 million as compared to the same quarter last fiscal year, mainly due to the effect of the negative spread.

Net cash generated from operating activities amounted to $127 million, which was comparatively stable to last year.

I'll now take you through key highlights by segment, starting with Canada.

Revenues for the first quarter increased 11% when compared to the same quarter last fiscal year.

Revenue increased due to higher selling prices in connection with the higher cost of milk and pricing initiative and cement that to mitigate higher input costs.

Sales volumes were lower in the retail market segment, mainly due to fluid milk sales volume.

Partially offset by a rebound in sales.

All of you in the foodservice market segment, mainly in the cheese category, which boats.

Returning closer to their pre pandemic levels.

Adjusted EBITDA for the first quarter totaled 132 million dollar when compared to the hundreds.

$13 for the same quarter last fiscal year as the business continues to build on the momentum from recent quarters.

Pricing initiatives.

Both product mix and lower SG&A costs stemming from our cost containment initiative also contributed to improved results.

In our U S sector.

Revenues were 36% higher.

Revenue increased due to pricing initiatives implemented to mitigate increasing input costs.

Due to the combined effect of the higher average block market price will cheat.

And of the higher average butter market price.

Sales volume increased mainly due to the contribution from recent acquisition.

Similar demand from what's the rollout continued to be stable, but still subject to competitive bid.

If market conditions.

Just to maybe even though in the U S totaled $97 million.

We benefited from previously announced pricing initiative mitigate higher input and logistical costs.

Continue to face challenges with labor shortages and some of our facilities.

Supply chain disruption, we continued to put pressure on our ability to supply ongoing demand.

Which negatively impacted.

You get nothing back up $7 million of U S market factor as compared to the same quarter of last fiscal year was mostly as a result of the unfavorable impact from the negative spread between the block price of cheese in the Costco mill.

Sure.

I've said.

Hunting you expect volatility in the U S moving forward.

Overall market Ebola.

In the international sector.

Revenues for the first quarter increased by 22% when compared to the last fiscal year, while adjusted EBITDA totaled $82 million and $37 million increase when compared to the same.

The improvement in adjusted EBITDA was driven by higher sales volume in exports and domestic market. In addition to their relation between international cheese and dairy ingredients market prices.

And the cost of milk as well.

In our export markets.

Reduced milk availability in Australia, you get heavily impacted efficiencies.

The absorption of our fixed cost our dairy division failure while.

Milk intake and the dairy division, Argentina had a positive impact.

In Europe .

Revenues were 16% higher when compared to the same quarter last fiscal year.

Revenue increased.

Due to the new pricing initiatives implemented mitigate higher cost of milk and.

And other input cost increases.

Increases in addition to the cause.

<unk> of the Butte Islands, and the Wensleydale every product acquisition.

Overall sales volume were stable as compared to the same quarter last year.

Detailed market segment sales volume decreased.

While industrial markets.

Segment sales volume increased representing.

And unfavorable mix from a profitability.

Hello.

Our pricing initiative.

Mitigated higher cost of milk as raw material and other input cost increases in.

In line with inflation and increased.

Adjusted EBITDA in Europe for Q1 amounted to $36 million.

Which was in line with the same quarter.

This concludes my financial review with that I'll turn the call back to Lou.

Thank you Max.

But we're off to a good start to this fiscal year.

Execution has improved and we're working closely with our customers to effectively and thoughtfully deploy inflation driven price increases.

While we expect the environment to remain dynamic.

We're confident that we are in a much better position to navigate the volatility moving forward.

Canada remains our strongest and most consistent performer.

In Q1, we delivered solid year over year sequential growth driven by a strong recovery in foodservice efficiency.

Efficiency gains from prior year initiatives and from the flow through our previously announced pricing.

On the commercial side.

We are leveraging our balanced portfolio of branded and private label products.

Canada also benefited from a healthy mix of strong well established foodservice and retail customers.

Both are providing to be significant drivers to the sector's performance, especially in the current environment.

We continue to see recovery in the foodservice segment with full service restaurants eating the growth that's post COVID-19 demand remains strong while quick service restaurants performed well.

Our recovery and strength in foodservice allowed us to further improve our product mix with more to sales volumes versus fluid milk.

During the quarter. We also secured some wins in the plant based beverage category and ramped up marketing efforts around the vital like brand spending distribution on our newly launched retail lineup and growing our foodservice business.

In the U S.

We began to see a recovery in profitability in Q1, driven mostly by strong pricing contribution.

In addition to announced price increases were.

We are making good progress shifting towards more dynamic pricing protocols.

More agile in response to market condition.

This will support sequential improvement in operating margins throughout the year.

Although our volumes improved we continue to be impacted by labor and supply chain challenges.

Nevertheless.

We are beginning to see some signs of stability on turnover and absenteeism, which is translating into increasing production.

We are still below our goal of 99% order fill rate, but we are seeing gradual progress throughout the quarter, notably in our cheese manufacturing operation.

Bill.

Customer demand continues to outpace our ability to supply products.

To better meet this demand and realize our volume goals.

We must increase our staffing levels across the business.

As a result, we are taking further targeted action to achieve this goal.

We are fully committed to improving profitability in the U S business, despite a persistently challenging operating environment.

In the international sector, we had a good performance and.

In global commodity prices reflected strong market trends.

In Argentina, we benefited from strong international cheese, and dairy ingredients market prices.

Ongoing price increases and higher shipment volumes following our mozzarella capacity expansion.

Recently, the division surpass the 3.7 million liters of average milk per day, reinforcing our leadership position as a top dairy processor in Argentina.

I am incredibly proud to see the growth and expansion of the business.

And today represents an important milestone towards our next era of growth.

In Australia, we had good pricing momentum in domestic and export market, but lower milk and taken the quarter continued to impact efficiency.

Managing our milk intake is our top priority for this business.

As part of our global strategic plan, we are continuously reevaluating, our Australia network to make sure that we have the right infrastructure in place for the total milk that we have to date and that we anticipate over the next few years.

We're identifying new opportunities to streamline the operating model and we are confident that our diversified platform will further support earnings as we assess our footprint.

In Europe , although stable our retail volumes were slightly below our expectation, but we expect to see some momentum in the coming quarters from new products and packaging innovation.

We also expect the relaunch of the Cathedral City brand.

Port volume growth with a compelling new global campaign, highlighting the brand's commitment to the cheese, making crafts and becoming part of everyone's everyday life.

In closing, we remain confident in our plans and full year outlook.

Monitoring the challenges of supply chain labor and inflationary pressures very very closely.

We have strong momentum going into the balance of the year.

We are focused on implementing our most recent pricing actions.

Productivity improvement and cost containment initiatives across all of our sector.

Given our first quarter results. We expect continued recovery this fiscal year with progress both on margins and adjusted EBITDA.

As we move forward, we will focus on the things we can control.

Maintaining our position as the supplier of choice with winning customers.

Managing our costs.

<unk> strong cash flow from operations.

In operating our plants as efficiently as possible.

Although we expect the operating environment to remain volatile we will continue to deploy our time and our resources to our strategic plan initiatives.

Extract the full potential of our business.

Thank you for your time and for your support.

I will now turn the call over to tell me for questions.

Amit.

Thank you very much.

You'd like to register a question. Please press the one who by the four on your telephone Urethrotome protect nosh requests.

<unk> has been answered I could draw your registration is the one by this week.

One moment please for our first question.

And we'll get to our first question on the life of Mark Petrie.

CIBC go right ahead.

Okay.

Yes, thanks, good afternoon.

I guess, the Canadian volume trends.

We're somewhat as expected with retail down in foodservice up but can you just talk about your market share today versus a I guess, probably a year ago and also pre pandemic just to give us some sense of the of the progress that evolution there.

Yeah, I'll have Bob Carl answer that question.

Yes. Thank you for the question and I think I'll answer it in the sort of two different categories cheese and milk.

From a fluid milk perspective, the share is basically has not moved so we haven't lost ground. We haven't gained ground on that on that side of the business. Although the sector itself continues to decline at a at about 2% per year from the Qis perspective, we have made some gains.

Specifically in the retail side with Armstrong branded products.

Products, which is well accepted well received by the marketplace with the various innovation as well as our ability to supply the demand in that market space. So the Canadian team has done an exceptional job in bringing that to market both from a brand support as well as the execution side and the manufacturing.

And how about in foodservice correct.

From a foodservice perspective.

Once again, I'll say that meeting coming out of the I'll call. The pandemic our team did an exceptional job of supplying the market and along the way we have gained share in this space as well and we continue to perform quite well.

Okay. Thanks.

And could also you could you could you also give an update just in terms of.

The labor picture in the U S. I mean as you as you've highlighted a couple of quarters in a row now your service levels are improving but could you help us sort of get a sense of where you're at in the spectrum of that improvement and what are what your expectations are for you know say by the end of this year.

Yes, so we have made some some improvements and we do make improvements week to week on the net number of people.

That join our team.

At this stage, what I would say is on the bright side we.

We are getting people coming to our to our team with so joining the team. The question now is ensuring that we can retain them.

So we have a number of different initiatives that are that have been put forth to ensure that first and foremost the candidates understand very clearly what the world. The manufacturing is about so that the right candidates to apply to the time that we do spend training them and onboarding them or a value and they can contribute more quickly.

Having said all of that we have adjusted some of our.

Our practices are the onboarding and they are beginning to deliver the results as we can see as are all our overall fill rate levels also are increasing so I'm optimistic that by the end of the fiscal year, we will be in a position where staffing is going to be less of our daily focus because right.

Now it is one of the number one priority that we have.

So incrementally quarter to quarter, we should see that continue to contribute well to our bottom line as our fill rates increase.

Okay. Thanks, and then just last one I guess.

With regards to the progress on the capital spending plans I know you've announced a.

Select number of projects.

First is there any negative net impact to their relative capacity for goat cheese in the U S. As a result of the changes you announced yesterday and then I guess my main question I think we're up to just over $200 million of the $550 million of capital.

You stated would be above and beyond sort of the normal run rate any commentary about the balance and where and when that will be deployed.

Yeah, So I'm going to ask Max to talk about the macro picture on capital spend and then specific to your question I'll have Carl answer they've got to go to questions.

So mark relative to the overall expense our.

Our commitment around a $2 3 billion.

The duration of the snap on to remain we certainly see some costs.

Costs are elevated.

Relative to furniture.

The real the equipment.

But we are sticking to the investment that we made it.

The timing of the spend varies.

With our.

Our plans are from sector to sector. It's a the money will be spent.

We're aligned with the.

Global picture that are paid out.

Now, we're just executing on her.

So if that answers my question, maybe ill answer the question around capacity for growth.

At the end of the day the changes being proposed here alright, sorry that is being.

Executed is going to see the net capacity for go chiefs make increase both the go chiefs, Kurt as well as our ability to package more effectively and more efficiently.

The different varieties as the market continues to demand of us and for our innovation agenda. So there'll be a net increase in the capacity to manufacture and to package go chiefs.

Well what might be lost and in the release then is the impact also of mozzarella and how that's going to positively impact. The other facilities that are gonna be inheriting. This volume can you speak to that please.

Yes so.

Part of the objective of our network optimization was also to maximize the use of the assets and tools that we have in various facilities. We have made investments over the years in other mozzarella pasta July locations and with the.

With the Repurposing of our REIT Berg site, we're going to see that volume transferred over to existing mozzarella facilities further augmenting the capacity utilization that is currently available.

Yeah understood I appreciate all the comments getting all the best.

Thank you Mark.

Thank you.

Our next question on the line from Vishal sweetheart, with National Bank Financial go right ahead.

Hi, Thanks for taking my questions.

With respect to the U S and the.

In the sequential improvement that we saw and I know theres some seasonality there, but I was just hoping you could give us what the biggest driver of the improvement was sequentially was it pricing or the labor situation is there anything else there quite yet.

Go ahead Carl.

Okay. Yeah. So it's a combination of things I would say certainly the pricing action that we've taken.

Has helped us mitigate the inflationary pressures that we have been absorbing four for several months and years. So that has definitely a positive contribution but beyond that no.

Thank you heard Max is sure.

Sure that the market factors were negative despite those negative market factors.

The factoring side perform more efficiently some of that is absolutely related to the efforts and the gains that we have made in labor. Some of it is also associated to not just the head count and labor, but also the <unk>.

You'll see the experience and the maturity.

Our new teammates and employees in the plants, who are better understanding the roles and responsibilities and how to effect change positive change on a daily basis.

Okay.

Okay. Thank you and with respect to the pricing actions should we expect more benefit to flow through next quarter, and then you'll you'll be caught up on a run rate to where our inflation. Currently is or is there is it going to continue to roll out through the fiscal year.

The most recent announcements to our customers was for a July 4th price increase.

And that has been I'll say trickling through.

Our network with the full effect happening sometime in August and are fundamentally we will continue to monitor very closely the effects of our <unk>.

<unk> on our input costs, and we will go back to the market if need be.

Our signs of some relief.

Inflationary pressures continue to occur but at a different rate I think that slope. If we were to look at it from that perspective is beginning to soften a little bit. So we are optimistic that.

The actions that we have taken.

Might be enough for us here in the near term.

Okay, and several quarters ago gave us kind of an overview of region by region of how he thought about the business and and where where each business was.

With respect to plan I think the U S was singled out as one of the businesses with the most opportunity. So as you look at the U S. Today and you look at your your your fiscal 2025 goal of where the U S. Should go can you maybe give me a rank order of a peek at the things that need to happen to get the U S to where it needs to be so pricing is one staffing is now.

But I was hoping to get a better understanding of the magnitude of what needs to change in order to get that business, where it is the other is obviously the efficiency initiatives being implemented.

Yes, so vishal I have.

I'll take this opportunity to talk about some.

Some of them are good.

Good performing platforms that we have and then I'm going to ask lianne and call to speak to those two.

Platforms that were hampered either by labor inflation logistics and or milk.

Hi.

Let me start off by saying that we're in year two of our four year Strat plan.

I don't want to minimize the effort that the Canadian folks are putting into driving their numbers, but Canada is well on its way to achieve.

Its objectives relative to the Strat plan.

And very much in line and perhaps beyond what we have is that our internal target numbers that they're they're hitting so I I I I I again, I don't want to minimize the amount of effort that's being put in but I I don't have a high level of concern for Canada, achieving a this year's budget.

As well as what we have planned for a year two year, three and year four of the Strat plan.

I would say the same thing for our Argentinean platform for folks in Argentina, as I've mentioned before on previous calls.

Volatility is part of their operating environment pre pandemic.

And so they have found a.

Ways to mitigate any of the headwinds any other challenges that they've had and they have actually been performing extremely well relative to budgets and relative to the strat plan, so very little concern about them hitting their numbers.

Into year, three and year four of the Strat plan. So we have two platforms.

That we feel very very confident about the achievement of their targets and their results in the short term medium term and the longer term for the Strat plan.

Ah the platforms that had.

Some challenges I would include the U K.

Australia.

In the U S.

UK for all intents and purposes, I think they've come over.

Oh was it that the challenges that they have seen early on in the pandemic. They have gone to market proactively to raise prices. We felt we were first to market to raise prices.

That had impacted volumes early on but now we're starting to see our competition follow our lead with price increases.

So we are well ahead of the curve.

And I feel quite good about the balance of this fiscal year and I also feel very very good about a the U K platform are keeping their fiscal our strat plan objectives for year, three and year four.

Are the two divisions that required a lot more focus and perhaps different strategies would be Australia, and the United States and I will ask Leon to go into specific a specific.

<unk> initiatives of what we're doing to mitigate.

Some of the challenges, we had namely the milk environment as well as inflationary cost.

Cost increases, including raw material price increases, but Dan why don't you start us off on that.

Yes. Thank you Lena Michele as you know for Australia milk price is at record levels.

Now we have already in this new milk season that began the first of July .

Yeah. The next 12 months, we've already successfully passed on a substantial portion of the mill cost increase and we will continue to increase prices as needed to recover those input costs.

At the same time food service demand continues to rebound in Australia after Covid and domestic retail performance actually is very solid.

We've also got an ongoing pipeline of a number of new products across the portfolio and as you know we have a very diverse portfolio within the Australian business.

No it's part of our full year plan.

Lately, we will need to review that.

For all our footprint, it's clear that the milk pool has declined and therefore, we will need to ensure that network going forward absolutely reflects this reality.

Now critically we have that flexibility to adjust our portfolio because of that diversity not only within the domestic retail sectors of retail and industrial but also with our export we have benefited from a good export pricing, we see that as a benefit for F. 'twenty three.

And at the moment, we don't see significant price erosion in those key ingredients that we supply to many markets because we operate across multiple categories and export.

Price points with tightened ingredient that gives us an opportunity to be out of it said to manage the input costs.

And also to be able to look at our portfolio and adjust that portfolio.

And then just the footprint to the reality of that milk pool, and that's how we believe in it.

There may be some different profile to that overall for the stat plan, but we have confidence that we are able to be out of it just continuously to be able to make that teacher golf.

And.

Maybe here forgotten.

Yeah, So I called I likely to do the same thing for the U S are not so much for the short term, but for the medium and longer term for the U S relative to stop on our calls.

Sure basically what I would say.

Michelle is that if you were to look at these sort of in rank order.

And.

They do apply to what will the impact most.

Most beneficially, our bottomline today and tomorrow.

They are sort of in this order, it's going to be our ability to attract and retain labor.

That in itself will translate into as we can appreciate.

Increases in our OE, which includes first pass quality, so the efficiency of our plants.

It's doing it right the first time.

And what that means on a cost of manufacturing and the benefits that that brings.

I'd say the second item is our capital investments the capital investments are ramping up we heard yes.

Yesterday with regards to the announcements <unk> Berg and our.

Facilities, there are more invasive investments to come and the return on those investments as we've described in the past will begin in 'twenty four 'twenty five but a much larger scale.

And then I would say lastly, the continued discipline in way of our pricing to ensure that one we continue to combat inflationary pressures with red whether those are cost containment initiatives.

And our SG&A, whether it is things that we can do operationally.

But beyond that we need to ensure that our pricing to the market reflects.

Those input costs as they come to us so sort of in that order is how are we believe that we will be able to achieve the targets that we set for ourselves here in the U S.

Thank you.

Yeah. So that is the region by region analysis I I hope we answered your question, but if you have any more clarity we'd be happy to answer more specific specificity if you need.

Thank you.

And we'll proceed to our next question on the line.

Irina tower with RBC capital markets go right ahead.

Okay.

Thanks, and good afternoon, everyone I'm, just listening to the answers to the prior couple of questions.

And thinking about the fact that we're in year two of the Strat plan.

It seems to me that.

You must know pretty much exactly what you want to do.

And given the lead in terms of sort of where you need to do network optimization in both the U S and in Australia. So given the lead time to actually implement the announcement that youre, making and you'll be spring being let's say 18 months.

Should we be expecting to hear Sir.

So more of these types of announcements over the next let's say six to nine months.

Yes that would be an accurate.

Reflection of what's to come understand Iran. That every time, we do take a decision relative to network optimization. It does impact a group of employees are around the globe for us and so we need to be sensitive to how when and.

And what is the right time for us to make those announcements.

That doesn't mean that the.

Projects have not been defined that doesn't mean that that capital has not been spent.

We just need to find the right time.

To be able to.

Inform the market of our decisions are always you know, allowing our employees to be first to know about.

Now about our plans and our ideas.

So some of the road map has been set the the the eye off the execution of that roadmap. We are very very confident in that.

Especially that we've carved out the capex required to execute effectively on all of those projects.

There are going to be more announcements to come.

It would would be simpler and nicer Ah you know to set the half one announcement that covers everything for one division or one sector.

Unfortunately in an operating environment, where we need to be mindful of our talent, our we've got to do things.

The right way and at the right time.

Yeah, absolutely okay.

Completely understand.

Makes perfect sense.

But I'm very glad to clarify that yeah, you guys know exactly what is going to be coming.

Switching gears for a moment.

There was a pretty significant step up in the cadence of ramping your gross.

Year over year from Q1 to Q2 in part you know presumably on price.

And it was great to see the improvement in the U S. EBIT dollar.

But I'm still a little bit perplexed by by that margin, which again had anyone checked me youre going to have two quarters of margins color you know in that range that would be like.

So how should we be thinking about.

Sure. It is taking that large and from mid single digits high.

High single digits or low double digits over the period over the next sort of.

As we head towards F 'twenty five.

Yeah, I read it smacks a ribbon you do increase.

You too.

You're seeing initiatives.

And in that regard pricing increased due to raw material increases. So does it mean, it's it's a margin up oh.

Pieces.

And it's the same thing with the commodity market.

Although commodity market to bring additional revenue blocks.

Neither.

And in the U S. It's the block market is up a broader market is up it's still offer some challenges from a profitability see profitability standpoint, so the increase in revenue attributable to market or inflation doesn't attract team amount of EBITDA percentage generation. It does create a little bit.

An erosion from a percentage perspective.

Although we do feel.

We have the pricing protocol in place.

Either recover from the inflation.

And to be ahead of the curve and right now we have our head above water.

We do feel good about our pricing.

To bring back to the level. We are now the intent is to of course maintain the alert.

John .

First to input costs that were facing them.

As the market can be.

And so how should we be thinking that's a bad thing.

The evolution of the margin profile in the U S. Because obviously that is a very significant source of getting you from your current EBITDA run rate to the tier one tier two five target.

Is it really a year three.

Three and four.

Particularly for the U S.

Yeah, well yeah. This year when we were looking at it compared to a comparable figure whether it's sequentially or whether it's through prior year.

We clearly have some.

Additional EBITDA relative to pricing.

That is basically the offset of the negative that we've seen the prior year.

And this should be the level that we're in and now it's up to us to have our initiatives to kick in.

And those were.

Mostly materialize itself during the.

24 and 25.

We're looking at this fiscal 'twenty three we will show some progress from quarter to quarter.

This quarter, we have that.

<unk> up a little bit like Oh, we have are our pricing that.

No.

So you couldn't balder has to have to be given.

Sure no it's more of a monitoring and now the compounding effect of our pricing.

You know what.

It would be beneficial to us in the schools.

Thanks, and then just one final question, if I might and this goes to consumer demand, we're hearing a lot of that.

Consumer price sensitivity.

Taking their lead in the U S markets, notably in the U S market have you seen any shifts in what consumers are buying or any any pushback whatsoever from consumers on the price increase it.

Carlo.

Yeah, Thanks Lino hiring.

Before I answer that question, maybe just one thing to add to the comments Max was making I would say that if we look at the EBITDA margin looking forward.

The game that we will see in this sector will absolutely be about the ability for our facilities to improve the overall efficiency and.

And I see that quite confidently because there aren't many of our locations that are operating at historical run rate and demonstrated run rates. So we know we can get there. We know our assets are capable of doing way better than what they are doing so that's where some of our confidence comes from when it comes to improving our overall margin structure and it is not.

Not.

Necessarily on the backs if you like of our pricing initiatives and everything is is really focused in and around our efficiency and demonstrated historically efficiency.

Maybe going back to the demand the question around demand, yes, we are absolutely seeing demand shift within channels, we are seeing the restaurant sector, but begin to slow down.

And within that restaurant sector, we are seeing the shifts beginning to occur from full service restaurants.

To fast food in nature, which have not really lost momentum, but we have seen the full service restaurants.

<unk> actually moved quite a bit of steam recently.

It has increased.

The demand in the retail sector is for.

For general groceries in general food and within that specific sector. We're also seeing some of the discount banners.

And the club stores, winning the day.

Within each of what I've just described we have a <unk>.

Good balance in our portfolio.

<unk> products to service each of those channels.

And we're ready to adapt to those needs as far as dairy demand as a whole.

We have seen some important increases in inflation theory upwards of 13%.

And Thats dairy combined cheese is sitting in and around the 9% Mark with food at around 12 and a bit.

So with that.

Certainly dairy.

Is it more expensive this year than it was last year.

But it has yet to translate into real demand destruction of any sorts okay.

We're really seeing it in the shift of the channels, we are keeping a very close eye on it and ensuring that we adapt and where we can and we need to.

That's really helpful. Thank you Carl.

Thank you very much.

Our next question on the line comes.

Cause from Peter Sklar with BMO go right ahead.

Okay. Thanks.

Want to talk about.

U S dairy market factors, which still appear to be a considerable negative particularly the.

No the cheese milk spread.

Which did not improve quarter over quarter.

I'm just wondering if you could talk about.

No.

The fundamentals whats, causing the negative spread I noticed the weight price came down and.

My understanding is that's a critical input into the milk marketing order so.

I'm surprised that didn't dragged down the milk price and you know improve the spread or at least make it more negative and just kind of what your so what your thoughts are around that and what are you seeing on the spreads since the quarter end is it getting worse better study.

So Peter maybe to answer the question around.

Despite decreasing.

Price of way and its influence on the class III milk price.

What we have seen is fat and the cost of fat increase.

Fact, probably negate the overall benefits of a reduced.

Whey powder price so that in itself is kept at class III milk price high.

And has negatively impact the spread.

So those are the dynamics that are working in the background. Unfortunately, it's not just one variable there are multiple barriers variables excuse me that impact that class III milk price.

And as far as the cost or sorry, the trading price of AV block cheese, we've seen some decline here in the last couple of weeks.

From the highs of around $230, we're sitting in and around the 188 Mark to date.

Some of that is coming from global sentiment if you like around dairy demand is China.

<unk> continues with its it's sort of rolling Lockdowns and demand is not improving from that perspective.

But if we take a look here.

Here in the coming weeks and months, we don't expect that spread to improve materially.

And really what we're looking for is stability.

Because the the volatility also hurts.

In either direction to be honest.

In the short term.

What we're looking for is a degree of stability and I think the I'll say the global picture is starting to get clear on demand and I think what we will see is the U S commodity prices begin to stabilize.

And in itself will be beneficial for us in the ordering patterns from our customers the confidence that they will have and putting in their orders and so on and so forth.

And when you might Wanna antibiotics.

Sorry, just one when you say the fat costs Youre talking about butterfat right. So.

Yes.

Butterfat being a component of our class III milk price.

That in itself.

Influences the next spring.

Okay.

When the theaters.

Just to comment them.

Yes, Mark its factor from the Wentzville what have you.

One.

In fact, it was a it.

It was negative.

Most of your models.

Sure.

We're.

Navigating.

In this current Q2.

So.

Yeah.

In addition, there were seen in Q1.

Whatsoever Okay.

So I think you're saying no change.

Alright.

I'm actually been cutting in and out of having trouble hearing you, but I think you're saying no change in the quarter to date.

Correct.

Yes.

Well I've got you I have an accounting question.

With regard to this reorganization and Youre doing the U S. I think it's a $15 million after tax restructuring charge can you give.

Give us the pre tax number and how are you going to be handling it from an accounting perspective is that going to be an adjustment or is that going to be embedded in your EBITDA that you report for the U S segment next quarter this coming quarter yeah yeah.

Yeah, we typically would do a restructuring costs below the EBITDA line as our restructuring costs.

The part that is for either salary continuance or a retention of employees.

During the duration of the project will flow to the EBITDA, which is a smaller piece of the restructuring costs.

So so in a sense that this is earlier.

We were handling.

Okay. So most of it will be below the EBITDA line I think is what youre right.

Correct.

Second part of it that is a noncash.

Makes sense.

Yeah.

Okay and then just lastly, when you talk about the strength of the international business.

You're talking about like in terms of export markets Youre seeing good cheese price realization and ingredients.

Wanted to clarify when you're when you're talking ingredients. What products are you talking about just talking about kind of commodity way or are we talking about other products and what did you say ingredients.

Yeah, Hey, Peter it's Leann.

We have a well probably actually across multiple categories. So intend to those ingredients. It can't it does include some commodity items, but it also includes a number of premium and tailored items that we supply to customers.

And longer term contracts and two specific recipes and we have continual high demand for a number of those things I think for example, like lactoferrin.

Okay, but its all way product.

Uh huh.

It's not a byproduct of lactoferrin is they are high valued protein that we extract from milk itself right.

Which has a high value on the market, but then when you think about other infant formula or other specialized powders, yes that would be byproduct in nature. So it's a combination of all of them are Peter.

That's a basket of different kinds of ingredients pizza.

Which gives us that flexibility okay.

Alright, okay. Thank you.

Okay.

Thank you very much.

Our next question on the line from Michael Van <unk> with TD Securities go right ahead.

Can I ask you. So you made some comments.

I think in the press release and on the last call about additional price increases in all divisions.

I just wanted to make sure that I got them all because I know last quarter, you talked about your aspiration injuries as of mid April and then.

July .

And I think you did tell US you did clarify that you don't expect to have to have additional price increases there is that correct.

So Michael.

Michael you're referring to me.

As it stands today, and our and our and our current outlook.

We don't see that happening, but again the market changes in front of us so rapidly that.

We are always watching that very closely so yes, you did hear that correctly for me.

Okay and there was also a price increase coming in international in Q2 from what you said last quarter and then in Europe and in June and I would assume Canada.

Or given the milk cost increase so is there anything I'm missing.

Michael It's leann as far as the international markets are concerned.

With Argentina, we continue let's say to hyperinflation environment, and we continue to take prices as needed to cover our costs.

In the U K, we have had a number of significant price increases.

And of course, we will look to recover any incremental cost in milk.

And five Australia is concerned we have.

A significant price increase that went in the beginning of July and we have recently announced that we will be looking for further increases in the back half of the year.

Okay, so more in the Pilbara.

For Europe , there isn't there's more coming in as well I guess.

Yes.

That is likely.

And Michael maybe just to confirm for Canada, yet with the announced mill price increase.

From the CDC the Canadian business is taking pricing action to the market to recover those input costs.

Okay great.

And then you touched on the cheese prices in the U S.

Right.

Happened in Europe as well as.

So our international as well.

Does that change your confidence at all in the short term and.

How can you talk a bit more about the.

The lag time that we should expect given the contractual nature on your international exports coming out of Australia and Argentina.

As far as we are as far as our input costs for international export customers. We have seen pulsing on today's customers to reflect that increased milk cost.

So that's come whether it's coming out of Argentina or out of Australia.

We have not locked in a number of those different contracts.

Towards the back half and back half of the year and obviously, we will look to be able to continue that with further contracts. Obviously the further we go out in terms of the Cortez.

The last of the contracts that kind of locked in but we are confident around that basket of all the ingredients that we supply that international customers that we'll be able to meet our forecast with the current pricing that we say.

Okay. So you're so.

Are those international markets, you're pricing off you have no cost, but not necessarily the.

Global commodity prices.

Hi, all found milk cost.

I don't mean to say yeah correct.

Yeah, and Michael I'm going to add a little bit of color to that as well, especially in the Australia platform, where dairy solids are limited. This is where the team in Australia is looking at putting those solid since it's the highest valued category products and if that.

Meaning that perhaps there might be some international market that is not as profitable as some of the domestic sales. We have now we are going to ship those solids into the domestic market. So that's how the team is looking at leveraging margin and leveraging the limited amount of solid as they have.

So if they cannot extract the full value of the milk price in the international Commoditized market, then they'll sell those those solids into the domestic market didn't take price increases.

Correct, Okay, the Australian market.

You had said earlier that you're taking price increases domestically as well.

How are those sticking because I know, it's quite competitive there regardless of the milk supply.

Under supply this year.

Yes look we we are seeing some change they'll talk about changes in milk separately. I mean, we are seeing some cheese price elasticity, but it is in line with our expectations because it often from short term bumping us in volumes, but they are settling and we gave them. We've got a diverse portfolio in terms of that portfolio of brands.

Our cross sell across the Australian portfolio, whether its everyday cheese or whether it's all about specialty cheese brands.

Particularly around everyday cheese yell at me, saying volumes I can just continue to be stable value is higher, especially cheat a little bit less ties a bit tougher there was softness there as far as our fluid milk is concerned yes competitors well are significantly increasing pricing on fluid milk. So we are seeing price increases being passed on.

Not just ourselves.

Alright, Thank you very much.

Thank you.

And what could turn next question on the line.

From Chris Li from their job. They go right ahead.

Hi, good afternoon. Thanks for squeezing me in I'm, just curious you know annually.

In your experience how sticky are the price increases.

If you assume cost start to stabilize or even come down a bit next year is that going to create a nice tailwind for margins assuming prices hold.

Yeah.

Yeah that that's an answer that perhaps that we might need to go around the different geographies.

Uh Huh understand just how sticky those price increases are and it's it's relative to our competition domestic competition. So maybe wajid will go around the horn, maybe it will start off with a call in the U S and Canada and then Leon can talk about the three platforms that she's responsible for.

Yeah, It's a great question and we don't have a lot of moment in our history, where we would have had that kind of deflation or potential deflation occur.

But what I can say specifically for <unk>.

The lion's share of the cost increase.

Passed on to customers is coming from the raw material and very rarely have we seen that.

Sort of.

Reduced on a year over year basis.

But.

Should that be the occurs at some moment in time, we will actually we will absolutely be looking at overall cost structure and doing what's best for our customers and consumers to ensure that our brands that are in our.

And our volumes remained competitive in the marketplace in the U S.

A number of dynamics behind our pricing.

And we are regularly reviewing our cost with our customers. So Chris in the end what I would say is.

Should that occur where we start to see a material amount of deflation. We will ensure that we remain competitive in the marketplace and do what we need to protect our brands our customers.

And our volumes.

Well first of all Chris with we thought with Australia.

Thank you.

As we know it's the milk supply is constrained there and therefore, it's I'd say, it's a V.

Very high milk, it's a high milk price than we've seen historically and yeah, and having said that the domestic returns for that price being a significant part of the input costs. Instead is being passed on to onto consumers and through the brands and the returns that are reasonable therefore, we.

Don't anticipate there being any rollback from a pricing perspective.

And of course, there are opportunity for us within the portfolio to make sure that we can provide the right price point to continued wins from the different brands that we have.

In Argentina.

Being a hyperinflationary environment, they are very familiar with passing on price and and that continues to be the case.

And in the U K again.

Yeah, we are seeing some some change price elasticity, but we are investing behind our brands and we expect to continue to invest in them whether that surround innovation that's coming in from flight profit neutral city brand in particular.

And as with our without others in spreads you know we are the number one spreads business and in fact actually out.

Our volumes are very strong there at the moment with parcel pricing because he's had also increasing.

I think we have the right portfolio and the flexibility to be able to do that and in addition, then be able to have private label availability at good margins.

So we can manage that.

And as far.

As prices adjust and the inflation of just over the next 12 months.

Yeah, Chris the only other color that I would add to your question is that in all geographies, where we operate we are not seeing any irresponsible behavior by any of our competitors.

I think everybody has suffered over the course of the last 18 to 24 months.

Especially with inflation in labor and logistical costs.

There is no irresponsible behavior, I think everyone's been pretty responsible about taking price where they need to take price to.

To cover some of their <unk>.

Increased costs.

We're no different than that in fact in many cases, we are leading the market.

All of those initiatives.

Great. That's very helpful. Maybe just one last question for me you know you've been quite transparent with quantifying the EBITDA benefits from the optimization of manufacturing processes, which I think account for about a third of the 650 million of EBITDA as part of the Strat plan.

My short question is are you on track.

For the other two thirds of EBITDA.

Do you have good visibility on that and is that also going to be more weighted in the last two years of the strat plan in terms of realizing these EBITDA benefits.

Yeah. So Chris the simple answer is yes, we are on track, we feel very very good about our initiatives and achieving the optimization initiatives.

Initiatives.

In fiscal 'twenty, four and fiscal 'twenty five.

I had indicated in previous calls.

Early fiscal 'twenty two 'twenty three we're calling for the investment plan.

And the purchase or the polls on on purchased equipment.

Somewhere within fiscal 'twenty, three there is going to be some installation beginning but the real benefit of those plans will be in fiscal 'twenty, four and fiscal 'twenty five and our level of confidence to achieve the optimization that is called for in the Strat plan is very very high.

Thank you and all the best.

Thank you.

Thank you very much and once again on the phone so if you'd like to register a question on your follow up questions.

So one follow by the four on your telephone keypad.

And Mr. Struggles there are no further questions at this time I will now turn the call back to you.

Thank you Tommy so we thank you for taking part in the call and webcast. Today. Please note that we will release our second quarter.

This school 2023 results on November 32022.

Thank you and have a great day.

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

Have a good day everyone.

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