Q2 2023 Saputo Inc Earnings Call
Okay.
Greetings and welcome to <unk>, Inc, second quarter fiscal 2023 results.
During the presentation, all participants will be in a listen only mode. Afterwards, we will conduct a question and answer session.
At that time, if you would like to register for a question. Please press. The one followed by the four if you require operator assistance at any time. Please press Star Zero as a reminder, this conference is being recorded today Friday November 11, 2022. It is now my pleasure to turn the conference so virtually no support Joe.
Chairman and Chief Executive Officer of Saputo. Please go ahead.
If at all.
Good morning, and welcome to our second quarter fiscal 2023 earnings call. Our speakers today will be Lino Saputo chair of the board President and Chief Executive Officer, and makes them 10, Yang Chief Financial Officer and Secretary.
For the question and answer session Lino when a Maxim will be supported by Carl <unk>, President and Chief Executive Chief Operating Officer, North America, and Leon cuts, President and Chief operating Officer International and 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 second 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 and we refer to our cautionary statements regarding forward looking information in our annual report press releases and filings. Please treat any forward looking information with caution as our actual results could differ materially we do not occur.
Sept any obligation to update this information except as required under securities legislation.
I'll hand, it over to Liam.
You, Nick and good morning, everyone first I'd like to recognize today is remember and stay in the Commonwealth and veterans day in the U S.
I'd like to take a moment to honor the brave veterans and troops who have dedicated their lives to serve our communities and to remember the sacrifices they made for our freedom.
Turning now to our second quarter results.
We delivered strong growth across all key metrics revenues net earnings adjusted EBITDA and adjusted EPS, driven by our successful efforts to mitigate inflation, our efficiency and productivity initiatives and sustained consumer demand.
Consolidated revenues increased 21% versus the prior year with each sector delivering year over year growth.
From a pricing perspective, we.
We had good momentum as we realized higher broad based pricing, reflecting higher input and logistics costs.
We expect our pricing protocols, along with our ongoing productivity and cost containment initiatives to mitigate the effects of inflation and commodity market volatility overtime.
Beyond pricing investments in our people are making an impact.
Higher paid and enhanced benefit offerings referral and retention bonuses modified work schedules and improve the onboarding training programs have all led to increased applicant flow and hiring in our production facilities, notably in the U S.
As a result, our service levels and fill rates are improving.
We continue to accelerate our productivity and efficiency actions across all sectors.
In our U S sector for example, where it has been more challenging order fill rates are getting closer to historical levels.
Consumer demand for dairy has remained relatively steady and price elasticity has held up better than expected and most of our markets.
But we are monitoring closely for signs of changing consumer behaviors with.
With the average cost of the consumer basket continuing to increase in some cases demand is still outpacing our ability to fill supply.
There are several category trends that should benefit us in a more challenging and highly inflation of torrey macro environment.
This includes greater at home consumption with hybrid work only accelerating this behavior.
Our diverse portfolio also allows us to meet consumer and customer needs across a broad range of products and price points.
While we continue to navigate this dynamic environment, we are not losing focus on the long term.
As we think about the long term, we're keeping ESG top of mind.
That's a poodle promise remains a key pillar of our global strategic plan and there is another important way we are investing for the future for our employees our communities and for our planet.
We recently reached an important milestone celebrating the fifth anniversary of our promise.
Over the last five years, we have embedded environmental social and governance factors into operational and business decisions and in our long term incentive plans.
Our targeted initiatives support our global strategic plan.
And our new three year. So poodle promised plan will enable us to continue to drive and support sustainable growth.
Execution is already underway to meet our new three year goals with a focus on among other things, reducing environmental impacts by delivering on our 2025 environmental pledges.
Supporting the transition to a sustainable food system.
Through our supply chain pledges, notably with the recent launch of our sustainable agricultural policy.
Improving gender representation diversity and inclusion.
And improving the nutritional quality and performance of our global product portfolio to meet consumer needs.
We look forward to updating you on our progress towards these goals as we continue to take the necessary steps to offset macro headwinds through pricing productivity cost containment and capital deployment.
These actions leave us well positioned to benefit when our markets stabilize.
We will continue to prudently manage our business and focus on the things we can control and what remains a volatile operating environment, while executing on our global strategic plan initiatives to accelerate our business momentum.
I will now turn the call over to Max for the financial review before providing concluding remarks.
Thank you Lino and good morning, everyone I will cover the consolidated financial performance before I move on to the sector review.
We are encouraged with the continued momentum of our business and we delivered good results in the second quarter adjusted EPS was <unk> 42 per share.
Up to 50% when compared to the same quarter last year.
Consolidated revenue.
$4 $46 billion.
Representing a 21% increase.
Revenues increased due to pricing initiatives implemented in all of our sectors.
Higher average block market price and the higher average butter market price in the U S sector and.
Higher international cheese, and dairy ingredients market prices.
Ongoing inflationary pressure on input costs and commodity market volatility were successfully mitigated by pricing initiatives.
Adjusted EBITDA amounted to $369 million at.
A 30% increase when compared to last year and up 6% versus last quarter.
Our improved results were led by continued solid performance in the international and Canada sector and the further recovery in our U S sector.
Higher year over year, adjusted EBITDA was driven by previously announced pricing initiatives to mitigate higher input costs and the favorable impact from the relation between international cheese, and dairy ingredients market prices and the cost of milk as raw material.
We continue to benefit from our cost containment measures aimed at minimizing the effect of inflation and all of our efforts to prioritize efficiencies and productivity initiatives.
Although we are progressing with our labor initiatives, we're still face labor shortages in some of our facilities and.
In supply chain challenges, which put pressure on our ability to supply ongoing demand.
These factors along with reduced milk availability in Australia negatively impacted the efficiencies and the absorption of our fixed cost.
We continue to actively manage these challenging market condition as well as U S. U S market factors that continue to be negative.
During the quarter, we recorded $22 million $16 million after tax of restructuring costs, which included a noncash fixed asset write downs totaling $19 million.
These costs were incurred in connection with previously announced capital investment and consolidation initiatives in the U S sector being undertaken as part of our network optimization pillar of our global strategic plan.
Net cash generated from operating activities amounted to $343 million up $79 million compared to the $2 64 in the same quarter last fiscal year.
I'll now take you through key highlights by sector, starting with Canada.
Revenue for the second quarter increased 10% when compared to the same quarter last fiscal.
Revenue increased due to higher selling prices in connection with the higher cost of milk as raw material and pricing initiatives implemented to mitigate increasing input and logistical costs in line with inflation.
Sales volumes were higher in the foodservice market segment, mainly in the cheese category, partially offset by lower volume in the retail market segment, notably in the fluid milk category.
Adjusted EBITDA for the second quarter total total $136 million up $12 million versus the 124 of last year.
Pricing initiatives, a favorable product mix.
Further benefit from continuous improvement program and lower SG&A costs stemming from our cost containment initiatives also contributed to our improved results.
And our U S sectors revenue were 35% higher rent.
Revenue increased due to pricing initiatives implemented to mitigate increasing input costs and due to the combined effect of the higher higher average block market price for cheese.
The higher average butter market price.
Sales volume increased due to improvements in our ability to supply ongoing demand and the contribution from recent acquisition.
Adjusted EBITDA in the U S sector totaled 102 million dollar compared to $67 million in the same quarter last year.
Year over year improvement was mostly driven by previously announced pricing initiative.
To mitigate higher input cost.
The negative net impact of $27 million of U S market factor as compared to the same quarter last fiscal year was mostly the results of the negative spread between the block price of cheese and the cost of milk as raw material.
And the international sector.
Revenues for the second quarter increased by 15%.
Adjusted EBITDA totaled $97 million up $41 million versus last year.
The improvement in revenues were due to higher international cheese, and dairy ingredients market price.
Revenue also increased due to higher sales volumes in our domestic markets.
Along with higher domestic selling prices, mainly in connection with the higher cost of milk as raw material.
Fulfilling the demand for our product in our export markets was challenged by reduced milk availability in Australia and.
And resulted in lower export sales volumes.
The improvement in adjusted EBITDA was driven by a better relation between international.
Cheese, and dairy ingredient market prices and the cost of milk as raw material.
This was partially offset by the negative impact.
Of the reduce milk on our operating efficiencies.
Our dairy Division Australia.
In Europe .
Revenues were 4% higher when compared to the same quarter last fiscal.
Revenue increased due to pricing initiatives implemented to mitigate the higher cost of milk as raw material and other input cost increases.
Sales volume decreased due to the added pressure on the retail market segment from inflate inflation driven pricing action.
Sales volume also decrease in the industrial market segment, mainly in the dairy ingredients category.
Adjusted EBITDA in Europe for Q2 amounted to $34 million, which was $2 million lower.
Than the same quarter last fiscal year.
And unfavorable product mix due to lower retail volume was partially offset by pricing initiatives set in place to mitigate the iron cost of milk as raw material and other input costs in line with increased commodity and energy costs.
With regards to energy costs, we did see a rapid increase in energy costs during the quarter.
We expect these costs to remain elevated for the balance of the year.
Finally.
The impact of the fluctuation of the British pound versus the Canadian dollar had an unfavorable impact of $4 million.
So this concludes my financial review and with that I'll turn the call back to arena.
Thank you Mac.
We are pleased by our continued revenue and adjusted EBITDA growth, we entered the second quarter with optimism having implemented the necessary pricing actions to further mitigate inflation.
We are also making progress on the labor attraction and retention front as well as our productivity initiatives. These are critical components that drive margin recovery and ramped up our adjusted EBITDA in the back half of the year.
Turning to the business review, beginning with Canada.
We are building on the momentum of the business led by our balanced flexible and diversified business model.
We had another strong quarter, posting solid revenue growth with positive price and product mix.
Our topline performance also drove good growth in adjusted EBITDA, while we benefited from strong manufacturing efficiencies and cost containment from our continuous improvement programs.
On volume.
Growth was driven by the foodservice.
<unk> segment led by both full service and quick service restaurants.
New product innovations within our leading brands are showing promising early results with new flavor extensions and formats.
For example, our Armstrong combos and strings and the Vitalize dairy free lineup further expanded distribution across Canada with new listings at major retailers.
And we have a strong exciting lineup of product launches setup for Q3, notably in the shreds and lactose free categories.
In the U S. Despite a challenging operating environment ongoing inflationary pressures and a volatile commodities market, we significantly improve both revenues and adjusted EBITDA.
We are taking decisive action to offset inflation with pricing and cost containment initiatives.
We are also sticking with our approach of prioritizing value over volume.
Working to strategically sell our volume, where we can improve or protect margins, even if that means walking away from some volume opportunities, where we do not see acceptable returns.
This allows for a stronger and higher margin revenue base from which to grow.
These elements serve as guiding principles to drive efficiencies at all levels of the company.
As mentioned in my opening remarks, we are seeing a recovery in labor with staffing level levels, reaching over 90% as of October .
This was better than we were earlier in the year, but still below where we need to be.
Nevertheless, the improvement has contributed positively to our production volumes and order fill rates no, but notably in the cheese category.
Increasing production.
And filling ongoing demand remains a critical priority for us.
We believe that our recovery in the U S sector sits on solid footing as we enter the second half and we expect to build on this foundation.
Although we recognize that current margins reflect some of the ongoing inflationary pressures and suboptimal productivity and fill rates. We are confident in our plans to improve results and margins over time.
On the commercial side.
Frigo cheese hedge brand back to school campaign was launched in September and we are seeing strong results.
The cross platform videos have generated over 12 million impression so far while premium streaming video partnerships have led to over 52 million impressions and.
In addition phase II of our vital liked dairy free campaign is set to begin with a focus on continuing to drive awareness across our key markets, where we have distribution.
In the international sector, we had an excellent quarter in Argentina, we benefited from strong international cheese, and dairy ingredient market prices ongoing price increases and higher shipment volumes following our mozzarella capacity expansion.
And Australia results improved versus last year, despite a competitive milk supply, which continues to negatively affect our operating efficiencies and increases the farm gate milk prices.
The sector benefited from higher commodity prices in the export channel and from broad based price increases across most product categories and the domestic market.
As part of our global strategic plan, we announced earlier this week further consolidation initiatives intended to enhance our operational efficiency and strengthen our competitive position in Australia.
These initiatives include the intention to permanently close our Mafra facility.
Additionally, while the sites will remain operational and we will also streamline activities at our facilities and Leon Gasser and mill L South Australia.
These right sizing measures are part of our roadmap to increase capacity utilization reduce costs and drive improved returns on invested capital in Australia.
We continue to reevaluate, our Australia network and all our global platforms to make sure that we have the right infrastructure in place for the total milk that we have today and that we anticipate over the next few years.
In Europe .
Results were in line with our expectation considering rising milk and energy costs.
And the overall cost of living challenges in the U K.
Pricing actions drove revenue growth in the quarter, which were offset somewhat by volume declines were as expected.
We have seen signs of increasing price elasticity.
We expect volume recovery in the second half of the fiscal year. However.
As the overall demand for cheese remained strong in the U K and the price gap to private label is narrowing.
Moreover.
We have several new volume wins within our private label business in the pipeline.
We continue to further differentiate our cathedral city brand and leverage its Brian power.
To meet the growing consumer demand for a lighter mature cheese that delivers on taste and quality, we launched in select retailers, the new Cathedral city light with 30% less fat in our new easy to open resealable packaging.
I'm also excited to announce that we launched the cathedral city plant based range exclusively at Tesco stores with a national launch planned for next year.
Sales to date have significantly exceeded our expectations.
Our international expansion of the brand continues with increased distribution in the U S and in Canada additional new listings are planned for Germany, and Austria, and we've identified several new target markets for potential expansion.
Looking ahead to the second half of fiscal 2023, we expect to see continued strength in our revenues driven by the impact of pricing actions and progress on operating efficiencies.
We are assuming a moderate level of volume elasticity, although thus far we have seen a marginal impact.
On the input cost side, we expect for them to remain elevated.
Operationally, we are making progress in our areas of focus in what remains a highly volatile operating environment.
Execution will be key going forward.
I'm happy with the progress that we're making.
We recognize that there is more work to do but we believe that we have sustained momentum in our first and most of our business sectors. We.
We feel good about our year to date performance and we feel confident about our second half outlook. We remain focused on our global strategic plan initiatives delivering on our fiscal 2023 priorities and driving sustainable profitable growth for our shareholders.
Hi, Thank you for your time and I will now turn the call over to <unk> for your questions.
And thank you Mr <unk>.
I would like to register a question. Please press the one followed by the four on your telephone you'll hear with Sweet home prompt like knowledge. Your request. If your question has been answered and you would like to withdraw. Please press the one followed by industry.
Our first question is from the line of George <unk> with Scotiabank. Please go ahead.
Yeah. Good morning, Lino I was wondering if you can elaborate a little bit on your comments on price elasticity, increasing moderately in the second half maybe any segments in end markets that you could point to there just give us a little bit of color there.
Yes, George so that price elasticity.
Comment would be different from different geographies.
So what I would like to do is perhaps.
Pass this question over to Karl for the United States, and Canada, and then also get a feel for what's happening internationally with <unk> platform. So call wanted to kick this off.
Thank you Lino.
So maybe we'll start off with Canada, and maybe speak to a little bit about the areas in which we supply products and so of course, we have a branded business as well as a large supplier to the private label space.
And there is some elasticity of course in our product offerings.
But if consumers and we are seeing a bit of a trade down from branded to private label.
We continue to have strong volumes and strong demand from that marketplace.
So from that perspective, and from a general profitability standpoint.
Both private label and the retail offerings are important for <unk> in the U S. I would say the same thing.
Again, the breadth of our portfolio allows us to play in a number of spaces, both branded and private label in nature. So despite the elasticity that we are seeing.
Across the board and all of the grocery sector for that matter.
We feel we're in a good position based on how it is.
Product offerings are segmented in the U S.
Yes.
And in the U K George.
We're seeing consumers trading down to private label.
At the same time, what we are saying is that that gap between retail and private label pricing is narrowing and.
And we've seen private label pricing on shelf driving quite recently and at the same time in a similar fashion. We also from a portfolio perspective have a range of products in both retail and also private label and in the U K, we're continuing to win new private label contracts and that's on the back of our quality and.
Service levels, and we are getting good margin for that private label. So yes, although we are seeing.
We are seeing some moderate price elasticity, we do actually have the portfolio.
That diversification of the portfolio, where we can match the consumers expectations to the right product both across <unk> and Allstate spreads in the U K. The cheese category actually is performing better than overall grocery as consumers still see Gary as an affordable source of protein.
Yes, George the only thing I would add to that is that we don't only sell at retail.
We do sell our products, whether they would be dairy foods in nature or cheese.
<unk> products, we do sell them at that.
Different sales channels in the foodservice space, including <unk> and full service restaurants.
And what we're seeing is that consumer traffic patterns are changing and shifting relative to their disposable income.
And we fill the gap at every level on the foodservice trade.
So if consumers are going less to full service restaurants and more to <unk>. We're in that space. So we're not overly concerned at all about price elasticity moving forward.
First thing is that we found historically that in challenging economic environments.
Dairy products have fared extremely well so crude oil has fared extremely well in those environments and irrespective of where the consumer consumes at dairy we have.
Customers and contacts and products and all of those channels and I would say that the levels of profitability.
Pretty similar channel to channel.
<unk>.
Product.
And I would also say from.
Branded to private label so.
We're not overly concerned however, we do watch traffic patterns and customer behaviors very very closely.
Great. Thanks, just one more if I may on the Canadian margins, they were down a little bit quarter over quarter can you maybe talk a little bit about the pricing versus the cost dynamic there and maybe the path to margin how should we think about the margin expansion path maybe over the next little bit.
Good morning, George.
So margins in Canada.
Yes, there's a bit of a.
Sort of a little contraction there.
As a result of price increase.
When everything goes up.
The percentage.
By nature tends to narrow down we don't see any issues on that front.
The level of profitability, we're generating in Canada.
Is to our expectation.
And we.
The momentum that we built over the last couple of years, we're starting to see some benefit this year. This current year and we don't we don't see any.
Obstacle to maintain at this time.
That trend at all.
Although.
Economy.
Remain always uncertain.
As always the labor piece.
We're facing and.
Yes, that's what I would say I don't know if you have anything to you'd like to have here.
I would just add that.
With those input costs and inflationary pressures that continue.
To put pressure on us we did yeah.
Go to the market with a price increase towards the end of Q2. So in the September range, we did adjust some of our pricing to reflect the ongoing.
Pressures that we have on some ingredients costs as well as specifically.
Specifically in the logistics space as well.
Alright, guys. Thanks, a lot great quarter.
Thank you George.
Our next question is from Irene <unk> with RBC capital markets. Please go ahead.
Thanks, and good morning, everyone.
I'd like to focus for a second on the U S. Please so really nice improvement in dollar earnings, but obviously margins remain extremely depressed can you. Please talk us through where you are now in terms of the labor you said service levels are up but not where they need.
Need to be and where are we in terms of productivity and efficiency from a labor perspective, and then I guess finally, how we should think about bridging the gap between the current level of profitability and where you need to meet.
Thank you.
Thank you Irene for the question.
I would answer your I mean, you hit all the points that will really help the U S business drives its margin improvements and we are making.
Month to month improvements in all of those areas.
Starting first with labor so across the board.
Like I said, we are making improvements.
In attracting the right talent as well as retaining it.
And this is not just I'll use the word head count. It's also attracting the right talent and ensuring that the appropriate skills are in place. So that we can have the types of efficiency that we expect from our business.
And in embedded inefficiency of courses first pass quality, which in itself then helps us drive our fill rates forward in our overall margin structure.
I can say that constantly.
We are making headway on the labor front, which will have an immediate impact on our overall OE or efficiency and.
And subsequently our fill rates will continue to improve as they have been quarter over quarter, we're heading into Q3 period, which is seasonally for us an important quarter.
For the U S.
Lots of demand and we're seeing are the resilience in our supply.
And we.
We look forward to building off of that momentum into Q4 as well.
That's really helpful. Thank you and then another question on a different.
Different topic M&A.
M&A is something that we know that.
Can you talk about <unk>.
Current thinking around M&A and <unk> recently floated as a potential acquirer of certain assets in Chile can you talk about how youre seeing different markets and whether you would go into a new market at this point in time.
Yes, so the pipeline for M&A remains quite full and I would say that I would think that the activity on files would only increase with uncertain economic futures.
It is important for us to remain disciplined it is extremely important for us to be selective.
And so your point on what geographies do makes sense for us and what geographies don't make sense for us.
I would say first and foremost.
Whatever we do needs to be immediately accretive to the organization.
We need to be able to generate positive cash flow from any potential acquisition that we would make so that that is one criteria I think that.
Has differed from perhaps past.
Potential targets.
Fix or uppers, the kinds of businesses that require a lot of time and attention and capex are not really on the radar screen for US right now the time and attention relative to Capex and execution of.
More improvements will be relative to our current platforms.
As stated in our strategic plan, but if there is a opportunity for us to get into.
A category of product within a region that makes sense for us that gets us further along in our strat plan than we currently are then yes that is something that we're going to take a look at and we do and we will find a.
The ability to be able to make that happen.
When we look at a.
Different countries and regions there might be some nice things to have.
But are they must have perhaps not.
Then either the price has to be extremely extremely good where those assets are accretive day, one or are we just pass along and move on to other things.
Right now the primary focus for US is the execution of our Strat plan that is what we think about every morning, when we wake up and.
And we don't stop thinking about it until we go to bed at night.
But we can't forgo the opportunity to make a very good nice acquisition that will further solidify our foundations, but again as I mentioned, we will be extremely disciplined and extremely focused.
And extremely selective.
What assets make sense for us.
Don't get me wrong, I mean wont be involved in all of those files will look at them, our M&A team knows how to shift through our files and and do a proper triage of what we should be looking at and what we should not be looking at and so youll see from time to time that we will be linked to certain assets that are available on the market.
It doesn't always mean that our level of interest is extremely high and every single one of those files.
Thank you very much for that very comprehensive answer Lee now Ed.
Confirming what we think what we think we know already.
Thank you.
Our next question is from Vishal <unk> with National Bank Financial. Please go ahead.
Hi, Thanks for taking my question.
<unk>.
Just wondering.
We're always in some of these productivity and efficiency initiatives and maybe when we should start seeing them.
In the P&L flow through in a bigger way I know they are expected in <unk>, but in terms of can you give us a sense of magnitude is Q3 Q4.
And and how meaningful we should really start to see these starting to improve the results.
Yes, so vishal there are two platforms that.
Need to crank up their levels of efficiencies for different reasons. One is the U S. The other one is Australia.
And there are very different initiatives going on to reach the same goals in each of those countries. So I'm going to ask.
Leann that speak to Australia, as you've seen we made some announcements.
This week relative to the network optimization I'd like to talk about that in a little bit more detail and then I'll pass it onto Carl to talk about similar initiatives that are going on in the U S. Liang.
Hello, Lenny Vishal, yes, so the announcements that we've made this week in relation to Australia platform really does improve both our efficiency and also our capacity utilization. So the assets. We've made around the closure of one of our sites and streamlining it to others means that we can actually in the number of production and package.
<unk> functions to be integrated into other facilities, that's going to improve our overall utilization its going to reduce our cost and really it gives us a chance it gives an opportunity to be able to improve our competitiveness.
And we value we want every liter of milk. So it's important that we're focused on putting those into the right product.
In the right spaces in the right markets. So that's that's really why we made those decisions and that allows us to be able to make the most of every liter of milk.
The industry is adapting to I read.
<unk> milk supply overall, and importantly, Australia has high quality milk, it's still an extremely strong demand worldwide and therefore right now our priority is to make sure we are being increasingly competitive.
And so it's important that what we do with that milk, where do we put it and thats the basis for the decisions that we've made this week.
Well, maybe tag further on that Leon timelines on where we're going to start to see some benefits of these actions that's right.
This will start to happen for that in the first three months of 2023.
Vishal are you satisfied with the review of Australia, before we get onto the U S.
Absolutely. Thank you.
Carl.
So maybe in the U S. Maybe two buckets.
Two areas that will fundamentally improve our margins.
And I'll speak to them separately, so from a capex perspective, we have made some.
Facility consolidation announcements.
In late summer and the benefits of those types of activities will only come to fruition.
12 to 18 months from now.
The other announcements that we have made and other things that we are contemplating in a way of our network optimization.
We'll deliver primarily in fiscal 'twenty four in fiscal 'twenty five.
But.
Prior to that there are lots of things that we're doing on the basic efficiency side of our business that will continue to deliver.
EBITDA margin to tour and into our bottom line and those are along the lines of what I've described before Irene earlier.
Which is augmenting the throughput and the output with the existing assets that we have.
In itself the demand is there.
Need to be able to deliver on it and we're making progress every week every month at being able to do that and we should see that deliver here through Q3 onwards.
A greater base.
Okay. Thank you.
And just sorry, just another question.
If it's okay.
Pick up on M&A.
Sure.
How could that in industrial look at so kudos M&A.
Aspirations, and and and understand that put us still can execute on this global strategic plan, which is a very detailed lots of lots of leavers are very complicated to execute.
And.
And while still making doing M&A in a tough time period.
Some of the deals in the past may not have worked out as anticipated. So wondering if there's any I know you said you want to be disciplined and diligent, but I presume thats. The intent every every acquisition that you make so I guess I'm asking how do you know that it is too soon in New York can handle it in the actual deal that you make will.
Be accretive not just on EPS or EBITDA, but on ROIC, as well and pushing tire business.
Yeah, Vishal Thats, a very fair question.
Uh huh.
<unk>.
Ah.
To inherit in new business that is operating well in a different category or perhaps a value added product.
That would offset some of the.
Sure.
Our headwinds that we have now would be an easy tuck in type of.
Opportunity for us our sales and marketing teams, although they're busy with SKU rationalization and some promotional activity are not burden the same way that our engineering and operational team is and so we need to be extremely selective as I said one more.
Looking at files, if it is going to further tax the engineering and the operational team that I'd much prefer that theyre focusing on the strat plan.
But if we're going to make an acquisition, that's going to energize and excite our sales and marketing team with new categories of product, perhaps new branding.
More diversification that allows them to have leverage.
When they are bringing other products to market.
The things that we would.
Now, let me say that not all of our divisions are taxed the same way.
Canada has got a platform that is just rolling.
And this team is doing extremely well with what they have and they can take on more responsibility I would say the same thing for Argentina.
Argentinian platform.
As you know this is a group.
That deals with turmoil and headwinds in a way that I have never seen any other group deal with.
Since 2001 since we've been in Australia, they've had to deal with so much instability and they've always been able to deliver on the promises that they've made us and so if there is an acquisition in a region or a country that would enhance that platform.
The Argentinean group would be very very well equipped.
To tackle that challenge.
It would be a bit more careful about.
Doing some acquisitions in the U S and in Australia and in the U K.
Because of the U K right now is integrating.
The the Butte Island, and the <unk> acquisition and on top of that they are dealing with are uncontrollable circumstances.
That none of us had anticipated prior to even the beginning of last fiscal year with the war in Ukraine, and changing some of their ingredients because we can have access to sunflower oil. We've gotta go to grape seed oil now so all the recipes have to change in their butters and spreads and oil based products are in addition to <unk>.
<unk> costs.
So I would just allow the UK business.
Focus on integrating what they currently have I would have the U S platform focused on.
Investing and capital dollars from an operational perspective to get our plants running well I would have the Australia team look at our you know.
How we can optimize our network with the amount of milk that we have so our captive capacity utilization get back to historical levels that would be the top priority.
But if there is an opportunity for us to take on a category a product or brand that would not take the focus away from the operation of our engineering team is something we have to take a look at.
And again, we'll be disciplined.
It will be a focus on making sure that those acquisitions. If we do then that they are accretive.
Michelle you made one comment.
I'd like to touch upon in a bit more detail relative to our past acquisitions.
I I there there is perhaps maybe one or two acquisitions I can point to that perhaps have not.
Materialized, but.
The benefits that we would have.
Expected.
Historically.
Sure.
I would say in the I'm not sure how many acquisitions we've done since we went public maybe 36% 37, Oh, okay, I'll get that or more accurately.
But every single one of those acquisitions with the exception of one or two have driven a benefit for us.
Whether it is again product diversification and getting into new categories getting into new regions into new countries.
They all made sense for us and I would include in there.
Murray Goldberg.
<unk> Goldberg.
Was a distressed asset none of us would have predicted the pandemic coming none of us would've predicted.
The massive decline in milk, but there are some real great assets that.
That we inherited through the Murray Goulburn acquisition, which today are going to drive the value for our Australian platform. If we had to do Murray Goldberg and again I would do it in a heartbeat, perhaps not in this context right now, but as things stabilize I would certainly do Murray Goldberg in a heartbeat. There are some brands that we picked.
That resonate not just with domestic consumers by consumers around the world, especially in the Pacific rim. There are assets in categories of product that we're in that are going to allow us to streamline our operations in a way, where we're going to be creating high value category products are not just domestically, but also.
So internationally.
So.
I take exception, a little bit vishal to the commentary that some of the acquisitions have not worked out.
The way that we had projected or anticipated.
I would say, perhaps there is one or two that I can point to that I'd say, maybe they you know they werent the right acquisitions for us.
That didn't derive the right value.
Other than that within the number of of our acquisitions. We've done I feel very very good about where we sit right now and how theyre going to be delivering for the future.
Thank you.
Our next question is from Michael Van <unk> with TD Securities. Please go ahead.
Thank you so just on the U S. This was the best USA EBITDA.
Print and about seven quarters, but the margins remain about half.
Of its historical highs so I'm wondering.
With all the.
With all the efficiency programs.
Rationalization and everything that you've discussed today and in the past how close do you think you can get to historical margins.
Seeing.
Right.
Spreads improved from where they are.
Yeah, So I'm going to ask Karl to speak to that but really Michael I just want to qualify that where the margins are one thing EBITDA.
Cash generation is another and so really our focus is on EBITDA and cash generation. Although the margins you are absolutely right they need to get better they will get better.
But it's not a margin of focus that we have it's an EBITDA cash value generation that that we're looking at so on that note tomorrow. Please take us through.
Michael's question. Please.
Yes.
Yes.
Much of the answer revolves around the same thing we have a fixed number of assets to date.
Where we're invested.
Through our Capex plan.
A number of network optimization projects, which will ultimately see us do more with less.
So in that in that space, we are confident that that will drive our margins by cost out will also be employing different technologies through this capital investment program that will further enhance our overall cost base.
There is we are investing also in automation that will help us.
With our overall cost structure. So we're confident that our margin structure will rebound. Despite the current commodities market now specific to the commodities market of course, it has an impact.
We're not going to deny that we certainly have explained where the market.
Was is and where it's going.
The current outlook on the market is better than Q2, Q1 and last year as a whole so from that perspective, although its an uncontrollable.
We do feel that the short term outlook here.
Is favorable versus the current quarter.
But again I want to emphasize we don't control that component.
What we are focused on are the things that we do control and right now that is all about our overall efficiency.
And in order for us to be able to augment our outputs. It is entirely related to labor attraction and retention delivering on our Capex plan, which will lower our cost base.
And get cost out of our system, allowing us to bring that margin back.
Two more comfortable places.
Alright Thats helpful. Thank you and then on the international side again, very good profit growth there.
Are you able to compare and contrast, the the operating and perform and.
And profit trend for Australia versus Argentina, So that we can get a better sense as to.
What's driving that big improvement.
Well the big improvement Mike did come from.
A better relation between the international prices and the cost of milk.
That incremental benefit applies to both Australia and Argentina, So both platform benefited from those pricing.
And in Australia perspective.
Recall last year, we were.
And paired by some of the previous old pricing contracts.
That has been unlocked during the first half of last year. So now that it's gone away. So that is part of the benefit that we're seeing.
I would say the major benefits applies to both platform.
Okay.
As far as Australia is concerned.
Some material floods in parts of Australia, I'm wondering how that's affecting your milk collection and as we.
Go through Q3 here.
Yeah the floods.
There's no operational issues now with the floods. It was a short term issue and we obviously supported our communities with that and in fact paid for any of the tip to milk.
What's required but it was a very short term issue and at the moment, we are managing through that so there'll be no impact for future quarters.
Okay perfect. Thank you.
Our next question is from Mark Petrie with CIBC. Please go ahead.
Yes. Thanks, Good morning, I, just wanted to follow up actually on a couple of the topics that you've already touched on but specifically with international.
I had the same question is Mike and I guess, maybe.
Take it one step further with regards to Australia, specifically I mean, how much how could you gauge how much of the improvement in Australia has already been achieved I'm just trying to get a handle on where international EBITDA margins could settle out.
Once all of your initiatives in Australia have.
Have sort of been achieved.
In March the benefit from.
Initiatives.
For this article or half year has been minimal on that front.
So we do expect some benefit to come in.
Latter part of this fiscal Q4 and moving onto F. 'twenty four so.
There is minimal.
Benefit accounted into our number this fiscal relative to strap plan initiatives. If you will.
And maybe just specific to sort of pricing being more in line with your cost base has that been achieved has that balanced energy.
Yes in all of our sector, we do feel we have an appropriate balance of pricing versus.
Cost of milk commodity fluctuation and inflationary costs.
Okay.
We're facing.
Yeah Okay.
And then Karl you touched on sort of the commodity hoping you could provide maybe a little bit more commentary just with regards to sort of the outlook.
With regards to.
Pricing.
And demand and then related I guess, what kind of progress have you been able to make with regard to revising contract terms I think specifically in the U S to reduce reliance strictly on the block.
Let me maybe start with the commodity markets. So the the commodity markets for me from a spread perspective, theres been a progression from quarter over quarter and our current outlook is also favorable.
So we are optimistic about that component.
But when it comes to overall prices.
Where the business is quite resilient.
Certainly the market is the index by which we priced on sort of pricing protocols are absolutely a function of these indices and we're not seeing any real demand destruction because of it at all.
So from a demand standpoint, as it relates to pricing that we're seeing on the CME no issues there as far as.
The.
Changes to the terms and conditions with customers.
So that would be specific to customers by which we may have tolling rates with ore that we produce private label with FDA.
If they are not priced on on on those indices in question. We have in some cases made important improvements.
In the terms and conditions and these are ultimately to better reflect.
The real operating environment that we're all in from the fluctuations in volatility of the supply chain, which impacts our ability to receive packaging materials and ingredients and so forth. Those are the types of things that are better reflected in our tolling rates.
So in a number of key coupled with a number of key customers, we have been able to make those changes.
And as far as those who had been traditionally priced.
On block or other components of the CME.
We continue to work with them.
And ensuring that we have better visibility on their demand. So that we can do what we can internally from an efficiency perspective on supply.
Okay. That's helpful. Thanks, and then just one other one.
Maybe specific to Canada, and the U S, where do foodservice volume sit today versus pre pandemic, if youre able to comment on that.
Yes.
Foods actually foodservice.
Certainly rebounding so we've seen the rebound in Canada, we've seen the rebound in the U S and despite some of the <unk>.
Some of the language that we're seeing in various publications about the potential for foodservice to slow down in these inflationary.
Markets.
We are quite diversified in foodservice, both in Canada, and the U S and it's a great strength of ours, because many of the channels in foodservice aren't created equal and you know <unk>. So quick service restaurant is not the same as full service dining.
The hospitality industry.
Two in particular are doing very well and they are still doing well and the outlook is very good.
So from the foodservice perspective, we do believe that.
The rebound that we've seen from pre pandemic.
We're not overly concerned with any material kind of slowdown.
They are not at the levels that they were prior from a volume necessarily perspective.
But we're quite confident that we're getting there and in some cases, depending on the channel we will have already crossed over our pre pandemic levels.
Okay I appreciate all the comments all the best.
Thank you.
Our next question is from Peter Sklar with BMO. Please go ahead.
Okay. Thank you.
Just looking at the strength of the international sector.
You called out the favorable relationship between cheese and dairy ingredients relative to the.
Cost of the raw milk.
And what I find interesting is while you have seem to have a very favorable spread there in the U S. As you've mentioned like the the cheese milk spread remains highly negative. So I'm just kind of surprised that in some markets you get such a favorable spread in other markets you get such a negative spread to understand in the U S. The market is much more regulated with milk marketing orders, but I would.
That.
You know.
Markets globally are somewhat integrated and product does flow back and forth and I'm just surprised that.
These two markets to be so out of whack and I just wonder Kevin your comments about demand supply dynamics of what's going on in each of these markets.
You expect them to merge together in terms of the economics.
Peter one element relative to our export whether it's coming from Australia, but particularly in Argentina is the fluctuation of the Argentinian pesos that puts us definitely in.
In a much better position from an export perspective therefore.
Selling product on the U S dollar perspective versus if Israel, where we do buy our milk and we do manufacturer with those costs do create that that's a favorable gap. So we've been pretty vocal over the years to mentioned that.
As part of color situation out of Argentina is favorable to us.
And we do benefit from a better spreads internationally.
That's certainly part of the mix.
Anything you would like to have there yeah, when we're talking about right.
Very different dynamic of what we face in the U S platform specific to cheese.
Cause dairy foods.
Has different pricing protocols altogether.
But.
You know the dynamics and the infrastructure for dairy pricing on cheese categories and cheese products in the U S. It is nothing like we faced in any other.
Part of the world, including if you look at the that the increase in price of milk in Australia over the course of this last year, we've gone to market with two.
Price increases.
Last one being not that long ago, two weeks ago.
15% increase on 1% or 15% increase on the other so a total of 30% increase that's all reflective of the of the increased milk price.
<unk> cheese business does not operate the same way.
And we cannot unfortunately get ourselves.
Out of sync with how the market prices.
Cheese products in the U S. Because then we'll be out of step.
With our competitors and they are and then we will allow the buyers are shrewd buyers in the market to play us against our competitors when it's to their benefit. So it's you know when you think about spread.
Not all spread is equal.
US being perhaps the most complicated and and the most challenging.
So lino like this negative.
Classic cheese milk spread.
You have in the U S as measured against the you know the.
Chad the block on the CME could you explain like how you see this coming back into positive territory. Eventually in terms of demand and supply for milk and other factors I'm. Just wondering how does this things swing to positive what happens to happen what needs to happen in markets and supply demand.
<unk>.
Peter maybe I would answer a.
I wouldn't hold my breath on it being positive as far as the spread goes but we definitely are are seeing improvements and the path to that.
Really it comes down to.
Actually let me take one step back when it comes to international in the U S. The only thing I would say is you're absolutely right. There they are and have been intertwined.
But the reality is that in the U S. You know there is there is a buffer and at some point in time those markets will align but theres been a large volume of cheese in inventories a large amount of commodities in inventories that have.
Had influences on the CME on that market in particular, so the path forward if.
If you like when it comes to the U S to a better spread is having normality in demand less volatility those markets will improve naturally.
One of them one of the reasons why we also have these larger negative spreads isn't necessarily the absolute values.
Of the product that are traded on the CME its actually the fluctuation of them over a short period of time.
That causes in itself.
Quite a discrepancy in the price of milk and ore.
The block price of cheese.
Had been created created the environment that we're in so the path forward ultimately.
He is going to be an environment, where inventories are a more manageable level for everybody.
More predictable demand from the marketplace.
That sorts itself out when it comes to the overall price of each of the components that goes into the milk price with that in place we will see the stability, whether it's favorable or not from a spread very difficult to say, but it will certainly improve from the negative territories that we've been operating in for the last 12 to 18 months.
Yeah, and then brought up not really good.
Alright, sorry, Peter I, just wanted to add to what Carl said, because I think it's an important point.
We're not hopeful that the spread will go positive in fact, we're not banking on it all of our projections that we're making are that we will trade in a negative spread environment. We think that that is a new reality.
And despite that we believe that we can hit the targets that we've set for ourselves.
Yeah. So that was my last question I mean.
The spread I remember when the spread was positive so what's changed in the world, but now you're anticipating a permanent negative spread.
There is a factor that is relatively new to the U.
USDA system of calculation.
And that is the variable that includes our way.
And now that that that factor Hasnt. It has been in place at Carl Correct Me, if I'm wrong, I believe 2015, or so, but it's only impacted us in the last two years, because the way variable the weight factor in the way pricing has only exponentially increased overtime.
Way at 25, even 30 is a neutral cost to our milk anything beyond that it's actually costing us money.
And in a way of a negative spread.
And we saw going back to Q4 of last year and negative 41 spread while the way was at 85.
Okay.
Got it. Thank you weigh it sitting now at around 44 cents.
I don't expect the way, it's going to go back to 25.
Where it had been historically and this is why were thinking that we.
We will not get into positive spread territory anytime in the near future and so all of our initiatives ideas projections and somewhat pricing has to keep that in mind.
Okay.
Thank you.
Thank you very much Peter.
Our next question is from Chris <unk> with Jefferies. Please go ahead.
Thanks for squeezing me in I just have one question.
Thanks for all your comments on the progress you're making on optimizing the manufacturing platform. It's very helpful. I was wondering can you provide a similar update on the progress that you guys are making on the other key strategic pillars, I'll, just wrap time and maybe tie them to your confidence in achieving door to come 1 billion target.
EBITDA target by fiscal 'twenty five.
Yeah, Chris that that is very a very appropriate question because really the challenges we've had over the course of the last year had been related to operational efficiencies and that's why a lot of our verbiage in and focus has been especially on these calls has been tied to that.
But youre right there are other pillars that.
That we can speak to that.
That will drive some value and again I'd like perhaps not in great detail because I think in the next quarter, we'll go into a little bit more detail with that are for the market, but just that get paint as sort of a broad brush on the other pillars Karl in your markets and Leon in your markets.
If you don't mind.
Okay well.
Great question, Kristen and we our first focus is we are on R. R.
Operational platform, both manufacturing and in our supply chain, we absolutely have very exciting things going on the commercial space as well.
Just to give you some some some examples in Canada in particular, we've been very focused on our press cheese category.
So our Cheddars and Armstrong brand the Armstrong brand has made tremendous strides.
Over the last 18 to 24 months.
And a very exciting use for where it is positioned in the marketplace and some recent launches.
I have come to market like a what we call and Bacon, which is essentially a shred with with bacon in it so.
We actually have a very exciting aspects on the commercial side coming along same in the U S. We continue to invest in our in our string cheese and a market leading brand cheese heads.
Our strong positions in leading positions in both cheese and in Blue cheese as well so we havent forgotten the you know the.
Areas that make us successful from a branded perspective, and we have a number of innovations.
That are that are coming to market have come and will continue to be on the radar for us to come to market. Some of it will be capital expenditure enabled.
Others is portfolio expansion and just a question of time.
And in the <unk> I'll touch on the U K and in particular, when we have a very strong innovation.
<unk> pipeline for the U K in the most recent example of that was the launch of Cathedral City plant based.
Which as we said based on the on the quality or Cathedral city. It has it exceeded all of our expectations and is actually driving incremental category growth and that's just one example, with the integration of Wensleydale. We now have new variants from the Wednesday, Dow site spiked across the Wednesday to our brand and also cathedral city, which have been successful.
So we have a number of very strong innovation pipeline in the U K.
In Australia with Devin Dell and also with <unk>, we continue to be appetite to put new products and new formats into the market, which at which if successful.
Also continuing to renovate our core our core brands as well. So yes, there are areas, but also our co brand as well as continually like read that and.
And the other example around that that core business is around a lot Paulina brand in Argentina, which most recently is now the highest awareness brown of chair of the Chase brand in Argentina, So that alongside our successful pilot ingredients platform, where again, we have a strong pipeline of ingredients that are tailored to individual mark.
It's individual customers.
We believe that other pillars of continuing to drive incremental growth for us into the future.
And Chris this is on top of.
Some analysis that every division is doing relative to SKU rationalization to have a more focused and.
And targeted.
Promotional and marketing spend program and every single one of our geographies. There is the ingredient portfolio as well that we're working on in terms of going up the value chain.
So there are other initiatives that we will speak to.
In more detail coming in the.
The next quarters.
Absolutely now that we feel comfortable about.
US moving forward on the operational initiatives, there is going to be a lot more discussion verbiage and documentation are relative to the other pillars because that they also do matter in us achieving the strategic planned goals that we have set for ourselves.
Great Yeah that makes sense. Thanks, thanks, very much and all the best.
Thank you Chris.
And Mr. Estrela I'll turn the call back to you for your closing comments.
Thank you Carlos so we thank you for taking part in the call and webcast. Please note that we will release, our third quarter fiscal 2023 results on February the ninth.
23, Thank you and have a nice day.
And that does conclude the conference call for today, we thank you all for your participation and ask that you. Please disconnect your lines have a great day everyone.
Okay.
Okay.
Okay.