Q3 2023 Saputo Inc Earnings Call
Greetings and welcome to this a poodle, Inc. Third quarter fiscal 2023 results conference call.
During the presentation, all participants will be in a listen only mode. Later, we will conduct a question and answer session.
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As a reminder, this conference is being recorded Friday February 10 2023.
It is now my pleasure to turn the conference over to Nick Estrela. Please go ahead.
Thank you Tina.
And welcome to our third quarter fiscal 2023 earnings call.
Speakers today will be Lino Saputo chair of the board President and Chief Executive Officer, and makes them to have Yang Chief Financial Officer and Secretary.
A question and answer session Leno, and Maxim will be supported by Carl Cleats up President and Chief Operating Officer, North America, and Latin cuts, President and Chief operating officer of International in Europe .
Before we begin I'd like to remind you that this webcast and conference call are being recorded and the webcast will be posted on our website along with the third quarter investor presentation.
Please also note that some of the statements provided during this call are forward looking such statements are based on assumptions that are subject to risks and uncertainties.
We refer to our cautionary statements regarding forward looking information in our annual report press releases and filings. Please.
Please treat any forward looking information with caution as our actual results could differ materially we do not accept any obligation to update this information except as required under securities legislation I'll now hand, it over to Leo.
Thank you Nick and good morning, everyone.
Following a solid first half of the fiscal year, our positive momentum has continued across all of our sectors in the third quarter we.
We delivered strong results, reflecting our focus on execution and the advancement of our strategic priorities.
Our U S sector led the way with a significant year over year improvement, while our Canada and international sectors continued to deliver consistent results.
Our Europe sector trended better despite inflationary pressure and prolonged challenges in the consumer environment.
Consolidated revenues increased to 18% versus the prior year.
Both inflation driven price increases and improvements in our ability to supply ongoing demand.
The broad based inflationary pressure, we are experiencing across our cost base continues to be well controlled and mitigated.
We're making progress on adjusted EBITDA margin recovery with a meaningful year over year improvement in Q3, a positive step up when compared to the last several quarters.
Our focus on inflation, driven pricing actions and operational improvements.
Position us well from a margin perspective going forward.
Consumer demand for our products in the third quarter was strong despite.
Despite increasing prices compared to last year theory remains an affordable flexible and accessible option relative to other proteins on the market.
That said consumers are value conscience. So we're meeting their needs through a tailored product offerings pack sizes and promotions.
The operating environment remains dynamic consequently, we are advancing our efficiency and productivity initiatives.
Like many other businesses, we have been constrained by labor shortages, especially in the U S.
Staffing levels and the impact on operational throughput had been a major challenge the past 18 months.
We have responded aggressively by ramping up recruitment and retention activities and leveraging our foreign worker program.
Although labor has improved notably with greater workforce stability, we're not out of the woods just yet.
The external environment has required a heightened focus on execution that has not limited our ability to advance our strategic priorities.
We are continuing to make progress on our global strategic plan roadmap.
While managing our portfolio to maximize value creation and drive organic growth, we are investing for the future.
As such several capital investments and consolidation initiatives in our U S sector were announced last week to further optimize our manufacturing footprint and enhanced operational agility.
This includes the construction of a new state of the art Cotton rats facility in Franklin, Wisconsin.
And the expansion of string cheese operations on the West Coast.
This has led to the decision to permanently close our Big Stone, South Dakota, Green Bay, Wisconsin, and Southgate, California facilities.
As a result, we will increase operating efficiencies translating into lower cost.
Further consolidate our production capacity and world class facilities.
That increase capacity and capabilities for higher margin value added products to meet growing demand.
Specifically.
We expect to yield financial benefits beginning in Q4 of fiscal 2024, and reaching its full potential of approximately $74 million annually by the end of fiscal 'twenty seven.
This more focused footprint.
Aims to strengthen the competitiveness and long term performance of our U S operations.
We reached a significant milestone with our one USA project.
In April we will have completed the combination of our legacy cheese and dairy foods divisions with the alignment of our business processes system applications and it infrastructure.
This will allow for a unified customer experience.
As your customer and supplier transactions support a single cheese and dairy food supply chain and continued organizational growth.
Overall, we expect the initiatives to harmonize our processes and procedures to maximize synergies support growth and drive more of an integrated business model in the U S sector.
The project will Mark the culmination of several quarters of hard work by our teams to thoughtfully plan for the implementation. So I'm confident we'll have a seamless transition in Q1 of fiscal 'twenty four.
We're pleased with what we've accomplished so far this year and overall, we see a long runway of opportunity ahead.
I've said this in the past all of our efforts today need to be balanced with an eye towards future profitable growth.
Although there remains more to do as we continue unlocking our full growth potential. This quarter's results represent a strong turnaround in our performance.
And we have good momentum exiting this year.
I will now turn the call over to Max for the financial review before providing concluding remarks.
Max.
Thank you Elena and good morning, everyone I will cover the consolidated financial performance.
Before moving on to the sector review.
We are encouraged with the continued progress that we're making and we delivered solid results in the third quarter adjusted EPS on a diluted basis was 53 per share up 61% when compared to the same quarter last year.
Consolidated revenue or $4 6 billion dollar.
An 18% increase when compared to last year.
Revenue increased June .
Two pricing initiative implemented in all of our sector.
Higher average market price for cheese and butter in the U S and higher international cheese and dairy.
Market price.
Ongoing inflationary pressures.
Input costs and commodity market volatility were successfully mitigated by pricing initiatives.
Adjusted EBITDA amounted to $445 million or 38% increase when compared to last year and up 21% versus last quarter.
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 price and the cost of milk as raw material.
We continued to benefit from our cost containment measures aimed at minimizing the effect of inflation.
And all of our effort to prioritize efficiency and productivity initiatives.
Although we are progressing with our labor initiatives, we still face labor shortages in some of our facilities.
And supply chain challenges, which put pressure on our ability to supply ongoing demand.
These factors along with reduced milk availability in Australia.
The impact of deficiencies and the absorption of our fixed costs.
We continue to actively manage these challenging market conditions.
During the quarter, we recorded $38 million of restructuring costs, which include a noncash fixed asset write downs totaling $30 million. These.
These costs were incurred in connection with the previously announced consolidation initiative in Australia being undertaken as part of the optimize and enhance operation pillar of our global strategic plan.
Net cash generated from operating activities amounted to $134 million up $27 million versus last year. This brings our year to date total to $604 million.
I'll now take you to the true key I liked it by sector, starting with Canada revenues for the third quarter totaled $1 2 billion.
An increase of 9% when compared to last year revenue increased due to higher selling price in connection with the higher cost of milk as raw material and pricing initiatives implemented to mitigate increasing input and logistics costs in line with inflation.
Similar to prior quarters.
Sales volume were higher in the foodservice market segment, mainly in the cheese category.
Partially offset by lower volume in the retail market segment segment, notably in the with milk category.
Adjusted EBITDA for the third quarter total of $149 million.
Up $28 million or 23% versus the $121 million for the same quarter last fiscal.
The improvement was driven by pricing initiatives favorable product mix.
The benefit from our continuous improvement programs.
Benefits from SG&A cost containment initiatives.
In our U S sector revenue total $2 $2 billion, and 34, two or 4% higher versus last year.
Revenue increased due pricing initiatives implemented to mitigate increasing input costs.
Due to the combined effect of the higher average market price for cheese and butter.
Sales volume increased due to improvement in our ability to supply ongoing demand.
Adjusted EBITDA totaled $146 million compared to $83 million in the same quarter of last fiscal year.
The year over year improvement was mostly driven by the previously announced pricing initiatives to mitigate higher input costs.
The negative net impact of $6 million of U S market factor as compared to the same quarter last fiscal year was mostly the result of the negative spread between the block price of cheese and the cost of milk as raw material.
On a sequential basis.
Comparing Q3 versus Q2 U S market factor was positive <unk>.
Approximately $13 million due to the favorable trend in milk cost component and the average block market price.
We expect the commodities market to remain volatile.
But do you have do you have been trending favorably since the beginning of our fourth quarter.
In the international sector.
Revenue for the third quarter or.
$917 million similar to last year, while adjusted EBITDA total of $111 million up 26 million versus last year.
Revenue reflected higher international cheese, and dairy ingredients market price.
Higher sales volume in our domestic markets, along with higher domestic selling prices, which were offset by lower export sales volumes.
Revenue also include a $141 million of negative.
Foreign exchange translation relative to the weakening of the Argentinian peso.
The improvement in adjusted EBITDA was driven by a better relation between the international cheese and dairy ingredients market prices.
And the cost.
Okay.
In the Europe sector revenue in the third quarter were $285 million or 17% higher when compared to last year.
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 inflation driven pricing action.
Adjusted EBITDA for Q3 amounted to $39 million, which was six.
$6 million higher than last year.
The improvement was driven by pricing initiatives to mitigate the higher cost of milk as raw material and other input costs in line.
With increased commodity and energy costs.
So this concludes my financial review and with that I'll turn the call back to Leno. Thank.
Thank you Max.
Decisive actions, we've taken to address some of the transitory challenges while also executing on our strategic priorities will enable us to be a much more agile resilient and customer centric company, we maintained our momentum in the third quarter with effective execution across our global system. Despite a macro backdrop that remains a challenge.
King.
In Canada, we're building on that momentum on the strength of our balanced flexible and diversified business model.
We had a strong revenue performance.
Our top line also drove good growth in adjusted EBITDA, while we benefited from manufacturing efficiencies and cost containment efforts.
New product innovations within our leading brands are showing promising early results with new flavor extensions and formats.
During the quarter, we launched the Armstrong lactose free block in Shred. In addition to the support of Mozzarella lactose free product line.
And our efforts are being recognized by consumers and leading grocery associations.
Best New product awards.
As a leading consumer voted awards program recently named several of our products as winners in their respective categories. This includes Armstrong combos Vitalize plant based cheese flavored slices Armstrong months, and yellow Cheddar swirled cheese snacks, and Armstrong Bacon natural shredded cheese.
The Armstrong Bacon Shred was also named a top 10 innovation of the year by gross renovations Canada.
These impactful product launches reaffirm our ability to bring innovative products to market as part of our overall growth strategy.
We also continued to take meaningful action towards becoming one of the most sought after places to work.
So we're extremely proud to have been recently included on the Forbes list of Canada's best employers.
To be recognized for the efforts, we make in providing the best possible work environment for our value talent is.
As a testament to our people focused approach and how it has always been central to this a poodle culture.
In the U S. We realized strong sales growth and margin recovery supported by pricing initiatives.
Sales volume also increased as we made headway in improving our ability to supply market demand.
Although still in negative territory versus last year U S market factors improved from last quarter, driven by favorable commodity market prices, which rebounded from trough levels.
We continue to focus on improving staffing through investments in our people enhancing recruiting and retention efforts and process automation.
With increased staffing levels were improving our ability to supply ongoing demand.
We're pleased with the progress, we're making around margin recovery with three consecutive quarters of improvement.
This reflects strong execution on pricing action, a better supply chain performance and cost containment initiatives.
We will continue to narrow the margin gap as we advance on our global strategic plan initiatives, which include productivity initiatives right sizing, our manufacturing footprint optimizing our plant operating costs and cost savings.
In the international sector, we delivered a solid performance in Argentina, driven by international cheese, and dairy ingredients market prices pricing actions and higher domestic sales volumes.
And Australia pricing initiatives.
And healthy demand for the topline results while.
While reduced milk availability continued to impact efficiencies margins and our ability to fulfill demand in our export market.
We made good progress.
Advancing on the Australia networks optimization plan and.
In Q3, we announced our intention to permanently close our macro facility and streamline activities at two further facilities and land got that envelope.
These changes take effect in Q4.
These measures are part of our roadmap to increase capacity utilization reduce costs and drive improved returns on invested capital in Australia.
In Europe , despite persistent inflationary headwinds and a challenging consumer environment in the U K.
The business improved its performance supported by pricing actions translating into revenue and EBITDA growth.
The ongoing volatility in the operating environment. However, further pressured operating margins.
Our retail volumes trended positively versus the prior quarter with the price gap to private label continuing to narrow following additional private label ink price increases in addition to the positive impact from new listings and private label wins.
Cathedral City, the Uk's number one cheese brand recently extended its product lineup into the dairy alternative category.
The recently launched plant based offerings have resonated well with consumers, we're seeing incremental volumes from this product offering.
As well as solid repeat purchase rates already exceeding our original demand forecast.
We're also receiving positive retailer feedback.
With expanded distribution.
Notably we secured several new retailer listings and we were recently recognized by the food Bev Awards and the grocer at the best plant based alternative to cheese and a top launch award for dairy and dairy alternative cheeses.
Recognized and trusted brands like Cathedral city provide a powerful platform to offer plant based options as well as a competitive advantage that will help us lead in this category.
As we close out the fiscal year and look forward to next year, we're paying particular attention to the following areas first.
Inflationary pressures remain high across the supply chain and on wages.
In response, we are focused on executing cost savings in addition to pricing initiatives to offset some of the cost pressures we cannot mitigate.
Second.
Alright are elasticities are only moderately increasing and we see good market demand, but we are closely monitoring for signs of changing consumer behaviors.
Finally, our labor initiatives will need to deliver further results in what remains a challenging labor market for us to accelerate the recovery of our U S sector and execute our global strategic plan initiatives.
In closing I'm very pleased with our year to date performance, we continued to build momentum and.
And we are well positioned for the current consumer economic environment.
We are confident that the focus on our key initiatives will drive growth through the remainder of the year.
And as we continue to execute our global strategic plan.
Hi, Thank you for your time and for your support.
I will now turn the call over to Tina for questions Tina.
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The first question comes from Vishal sweetheart of National Bank Financial. Please go ahead.
Hi, Thanks for taking my questions.
Congrats on the quarter and the momentum that the business is building.
And I think you alluded it to it off the top but I'm just wondering as you look back when you initiated the global strategic plan or at least announced it to the market and you look at the various segments. If you can just update us on on where each segment is versus plan or what you thought if they're ahead of plan or still some catching up that needs to be done and if there is how are you doing.
Hi, Ken.
Yes, that's a great place to start Michelle.
You have to understand that when we first initiated the first designed and Architected the strat plan.
The World was a very very different place a labor inflation and supply chain impacted us over the course of the last two years and not just us, but also our suppliers' suppliers of goods suppliers of services as well and suppliers of equipment. So we have found ourselves over the course of this law.
Last year, adjusting and adapting so I'll take you back to a year one.
We weren't adjusting or adapting we were just putting out fires last year.
Our this fiscal year that we're in right now.
We have seen the resiliency of our of our talents of our people of our team to be able to adjust and adapt effectively.
The new global macro environment, and the new realities.
That we.
That we had to contend with so the world is very very different today than the first day that we drafted and introduced our strat plan.
The fundamentals of our Strat plan are intact.
Now I will tell you that as we are moving along there are certain elements of the strat plan and certain elements of the pillars within the strap plan that are changing as we move along and I'll give you a couple of examples of that.
There are more opportunities today, and then network optimization versus the original plan and if I take a look at both the U S and.
The.
The Australia platform circumstances have changed dramatically in the last two years and so those opportunities are going to be enhanced those opportunities are going to be put in the forefront.
The other element I would say that has changed dramatically from.
The initial phases of the Strat plan is were not focusing on the volume targets anymore, we're focusing on value over volume and this is a substantial shift to make sure that we keep our margins intact and that we continue.
Continue to create a valued product for our customers.
In an environment, where they're prepared to pay for the incremental values.
And so that has just two examples of some of the things that have changed so.
There are still some moving targets.
We do evaluate on an ongoing basis of what fits best for us and what will drive the best returns.
But there will be more details to follow.
As you can appreciate right now we are in.
And our budget season, and these are the kinds of questions. We're asking ourselves. So we can look well into fiscal 'twenty four and fiscal 'twenty five.
But I will say that Q3 is a great.
Indication that we have turned the corner.
We're well on our way to recovery, we've got great momentum.
And the fundamentals the fundamentals of the Strat plan are very very much intact.
Okay.
So with respect to the.
Yes.
The regions that are is it fair to say that some regions are performing ahead of plan, maybe Canada in some regions saw some catching up to do maybe Europe and international I think that was the previous suggestion.
Is that is that still the way we should look at it.
That is a very accurate statement. So I will tell you that there are some divisions that are ahead of their plan.
Others are behind their plan there are some puts and takes.
We still feel very very good about all of the initiatives that we put on paper even for those <unk>.
Divisions that are lagging, but yes, there are some puts and takes some pluses and some minuses with shell that's a very fair statement.
Okay. Thank you.
Yes.
Thank you.
The next question comes from Mark Petrie at CIBC. Please go ahead.
Okay.
Hey, good morning.
The volume recovery in the U S. It's great to see can you just talk about that a little bit more help us understand how the effect of the price increases played against the improved service level. So in other words do you think the price increases had a negative impact on volumes at all.
Yeah.
Hi, Mark this is Carl.
Thanks for the question no I, what I would say is and I'll try and answer the question with <unk>.
Some of our major categories dairy foods and cheese from the Qis perspective.
Overall from a fill rate and service perspective.
Back on track so for the most part.
There is no challenge is really in supplying the market demands.
In most of our cheese categories on the dairy foods side.
I would say that demand has continued to increase materially so in some of our dairy foods categories.
I'll use the word struggling to keep up with that demand, but our overall throughput in.
In both categories has increased and continues to be on a good momentum pricing and the pricing actions that we have taken has not negatively impacted demand from the marketplace. So really when we take a look at our service level is it comes down to ongoing strong demand specifically in the dairy foods sector.
And some you know.
Our ability to adapt to that strong demand in some sectors aerostar <unk> being one of them in particular.
Okay, and so on pricing I mean, obviously, it's going to depend on the category, but where you have a good degree of control do you think you are effectively in balance today in terms of your operating cost in your pricing.
Yes, Mark we've taken the necessary pricing actions across our portfolio as needed.
And I would say that we're effectively I'll use the word caught up at this point and.
I also want to qualify that we've done everything we can and we continue to do everything we can to mitigate costs as they come through.
And before we think of the pricing actions, obviously, if you roll back 18, plus months and there was lots of catching up to do as the inflationary pressures coming in fast and furious.
Since caught up we're on top of it.
And as the inflationary environment persists and it is persisting we will continue to look to mitigate to offset some of those costs before considering pricing action and if we need to do if we need to explore pricing action, we would do that and it may not be across the board, we always look at it.
On a case by case basis, and ensure that we're doing the right thing for our customers to keep our demand in check.
Yeah understood. Okay, and then just the last one I also wanted to ask about the progress toward the toward the fiscal 'twenty five target maybe.
EBITDA target and notwithstanding the challenges in exports from Australia. It seems like the commodity is now generally a tailwind for you can you just give us a rough sense from the run rate that you are.
At today, how much of the bridge to the fiscal 'twenty five target would come from a commodity and how much will come from work that is within your control.
Okay.
Well Mark this is Mac, so I would say when we look at the market that is now recuperating.
All the favorable trend.
Well, we'll take it I mean, we've been hurt in the last couple of years from a market perspective, any benefit that we could get absolutely we'll take it as we move forward.
We feel from a pricing perspective.
We're in a good spot.
We now have to bring our initiatives.
Up to.
The expectation and this is will be for us the key element for us to achieve our F. 'twenty five target.
As Deno mentioned.
And the labor is one of the critical components, we need the labor we need two main end, we're maintaining our efforts in order to achieve that.
Target by <unk> 25, it is a stretch target.
Mark remained on the wall.
We're confident in our initiatives I mean that they will materialize and the benefits will be there.
And a lot has to do with what we can control.
Yeah.
Everything from the market perspective, we will absolutely take it.
Okay, that's helpful and all the best.
Thank you.
The next question comes from Irene <unk> of RBC capital markets. Please go ahead.
Thanks, and good morning, everyone.
Let's talk for a minute about the Canada segment.
It was really nice to see that that sort of very strong trend.
And the EBITDA margin level that we have not seen in a very long time. So can you just walk us through what the key factors word that contributed and is there anything from the results in Canada. This quarter that we can extrapolate to the other segments as time goes on.
Yeah.
Thanks for the question Larry.
What I would say in Canada in particular is that from a timing perspective, what we're seeing is operational efficiencies benefiting also from prior initiated projects. So over the last several years, we've initiated a variety of of.
Either consolidation projects automation all of the above some of that has finally come to fruition and we're seeing that in our results.
Today, we're also seeing a shift in channel. So the foodservice sector recovered very well in calendar 'twenty two here and from an overall business.
That was favorable to us from a margin perspective as well.
So.
Overall, when we take a look at mix.
<unk> cheese versus fluid all of those.
Pointed in the right direction are contributing.
Contributing to the positive results, we see in Canada on top of the efficiency and I would also add that the Canadian team fared better certainly than than the American.
Division with regards to labor attraction and retention.
The gap was smaller.
And way of vacancies.
And they fared better at filling those those rules quicker and benefiting from the market demand and being able to supply the markets, where others competitors may have faltered as well.
That's really interesting. Thank you and then just sort of jumping off from that point.
Lino mentioned that the one USA is really going to be sort of coming together in let's call. It.
In early in F 'twenty four.
Again, any key learnings from when you merged Canadian operations, what kind of benefits or what is the magnitude of the benefits that we're expecting to see and how should we on the outside would be watching all of this to gauge the success in quotation marks of the one USA.
Yeah, I mean, what I would say is when we when we announce the merger of the two legacy groups.
The very first things that we did was a management if you want merger at that point, and we knew that the business processes and the systems into which they operate in.
The ERP, both being <unk> at the time and watch the U S Division was the cheese Division excuse me, we're still going through deployments of S&P. So we had to let that sort of.
Following its course, we're now at a point, where after having unity as a team and as a group we now need the business processes in the back office systems to merge that's what this one USA. If you like an internally called project North Star is really all about and.
Lino referenced that date of April so on April 1st we will have those systems mergers go live on us and the learnings really come from the prior go lives.
I'd say from our from our SAP deployments. So much of the same work goes into this when it comes to change management and ultimately what we will see is an easier set of business practices that will allow us truthfully to have a combined supply chain and an easier.
<unk> interaction or ease of transaction with <unk> as we move forward. So in the near term the benefits will be small.
In the longer term this sets us up to a.
Further integrate our two legacy business practices and installations in fact.
Thank you and then just just finally, because you'd be disappointed if I didn't ask about it can you update us on your current thinking around M&A and any activity levels and valuation.
Yes, so evaluations as you've seen in many transactions have come down and you could expect that if we were to make an acquisition that we would be mindful of the current economic environment, having said that we continue to look at different files that do come up as I've mentioned in.
Previous calls, but we will be extremely disciplined.
Our approach to evaluate them those acquisitions definitely has to be strategic and need to be accretive day one.
Our primary focus as I've also mentioned on previous calls is the strat plan.
We believe in the investments, we're making we believe in the returns that those investments will make but if there is an acquisition that will allow us to enhance on that.
A part of the pillars of the Strat plan get us further along quicker.
And mitigate some of the Capex allocation then that's something that we're looking at we need to stay active in the market we need to know what's going on we have to have them market Intel as well our M&A teams continue to look at different files not all of them fit our criteria not all of them are strategic and not all of them are priced right.
I can assure you that that discipline will continue.
That focus will continue.
And Oh, we're just going to be moving ahead on the Strat plan.
As our primary focus.
That does great presumably as you move further along in the process of implementing the strat plan sort of the opportunistic elements of M&A.
Those are already in motion the opportunistic element kind of diminished probability is that the right way to think about it.
I'm not sure I understood the question right, but.
But.
You know Irene that you've been following us long enough that acquisitions as part of our DNA.
And so if the opportunity for the right deal to come along at the right time is there.
We'll take that opportunity.
But the criteria have tightened quite quite a bit.
You know multiples on transactions are not what they were even a year ago.
N R R.
Our willingness to buy a fixer uppers is no longer there we have enough.
Enough to do within our own platform that we don't need to fix someone else's problems.
So it's got to be a well run good business that is accretive and diversification.
The categories that we're currently in.
That would narrow down quite a bit the number of files that we're looking at but still.
It's exciting for us.
As we think about.
Beyond the Strat plan of <unk>.
Future potential growth.
Okay. That's great. Thank you.
Thank you.
The next question comes from Michael Van <unk> of TD Securities. Please go ahead.
Hi, good morning, Congrats on the results.
Wanted to ask you about those U S bill rates because.
On the one hand, it sounds like Youre catching up in terms of your ability to deliver on the other hand talking about labor still being challenged and you still have to make more progress. So can you update us as to where you are on fill rates in the U S. In Q3.
And am I right to <unk>.
Read into the outlook statement that you expect to be back to the 99% or so by the end of Q4.
So maybe Michael I'll take that question two parts ill speak to the labor aspect first and then I'll call circle back to the impact too.
Fill rates so from a labor perspective, we've made very important improvements since the start of the fiscal year with regards to filling our gaps in our vacancies and if I had to put a number to it I would say we're about two thirds of the way and where we we've filled about two thirds of our vacancies. So that's meaningful progress at this moment and that has absolutely contributed to our ability.
To rebound on our fill rates since you started that fiscal.
When we took when we take a look at the sort.
Sort of the outlook as well as the more near term of what occurred in Q3.
There are some categories that and some regions, where it was tougher to recruit.
And we still have larger gaps in what I just referenced.
And that would have impacted our ability to supply the ongoing demand now in Q3, there is some seasonality to contend with as well, there's some categories and particularly in the dairy foods side that have very high demand at that moment in time.
And despite increased output throughout the network and that dairy food sector.
We were not able to keep up with all of that demand.
And so on a pure percentage basis, some of our fill rates may have dropped in that sector, but we're confident with the ongoing progress that we're making with acquisition talent acquisition and retention and we've made some very.
Very specific changes to the way it is we onboard our teammates.
Hey, we select candidates with compatibility to the manufacturing sector.
All of those things are contributing to a more positive experience for those who joined our team.
And a quicker contribution if you like from them in a way the efficiency and proficiency so.
Very confident that Q4 will be able to continue with that momentum despite.
The U S continuing to be a very challenging labor market unemployment rates continue to drop in the U S.
As we just saw here in January but I think our proposition as an employer is is attractive and that will translate into continued improvements in the overall outputs of both categories.
And then translate obviously into improved fill rate levels are for most of our categories. So im very confident that we will get back to historical levels.
Here in the near term.
Okay. So not.
Not necessarily in Q4, but in the next few quarters.
Yes, that's absolutely the target we feel very confident that.
Both our mechanical installations as well as our human Resourcing aspect to make it happen are both wells are well positioned right now.
Okay, Great and then also in the U S you talked.
Both.
Some of the dairy ingredient prices.
Rising.
And I'm wondering which ones in particular were most helpful for you.
Yeah.
I would say that on the surface the higher fractions of proteins. So WPC <unk>.
We benefited from good market conditions, not just in the U S but globally.
Also with some of the I'll call them lower value items or ingredients such as lactose.
We're also.
I will say a good value in the marketplace. So that did benefit us of course, but some of those highs are starting to taper off here and maybe I can turn it over to Leann for some commentary about.
Sort of global demand and pricing outlook for that category.
Hi, Michael it's Leann.
So we do expect pricing to moderate.
And especially in the lower protein ingredient categories as we look ahead.
However, highly specialized ingredients as Colin referenced that pricing continues to be quite stable.
And we have a lot of contracted business as well and we've taken that into today's prices into account and we actually have overlapping contracts that move across quarters for a number of geographies.
So that market pricing has benefit a number of all of our geographies.
Whenever we do expect that pricing to moderate.
Can you give us some idea of what.
Roughly the mixes between those higher protein items and lower.
Hi.
Really it depends on the geographies and you look in the U S and Canada, which.
We operate fundamentally as one group when it comes to the dairy ingredients space.
We have a very good balance between higher fractions of proteins as well as what we would call lower lower valued.
Waste solids, which is fundamentally sweet whey protein.
So we have a very good balance in North America.
With regards to are those kind of market shares if you want.
And the same in in Australia in particular, we have we operate across multiple categories.
So we have tailored ingredients right through through the mix and with Argentina.
It.
It is again a mixture.
With more at the protein level.
Alright, thank you.
Thank you.
As a reminder, via the phone lines you May press. The one followed by the <unk> registered a question or comment and the next question comes from George <unk> of Scotia Capital. Please go ahead.
Yes, good morning, Congrats on a strong on a strong quarter.
I just want to talk a little bit about selling costs, they were down year over year. It typically.
It grows with inflation over the past few quarters, maybe you can comment there is that a onetime thing or just maybe trying to get a sense of the sustainability of the trend over the next few quarters.
George its Max are you talking about.
SG&A costs.
I'm not sure I heard the question properly.
Yes coming call.
Yes, Oh on the selling costs, we are we have seen customer.
That includes some delivery.
And logistical costs in that line that you're looking at.
And in some instance in the U S. We do have some customer that ive, some pickups are rather than us delivering.
So that attracted the and the costs down.
I would also say that there is of course, some FX component within the line that you're looking at.
And also from an efficiency standpoint, we had a lower resupply from facility to facility between our own.
Plans had been captured under the selling cost line. So those would be the key elements that would reduce the selling cost.
Okay. Thanks for that and then just one more for you on working capital and the investments seem to be continuing there can you maybe give us a sense of.
How long we should expect the drag to go for and maybe any sign or a reversal coming up in next quarter. So any color there perhaps.
Yes.
Every year in Q3, we tend to see an uptick in our working cap.
Right now the level, where we're not we feel at a high in terms of investment.
Understand that from that investment, it's mostly market driven.
So we have some instance, where I mean, we were.
We're not only recovering we're growing some of the business so theres some logical or.
In a normal growth in the in the working cap.
The majority of the investment we're seeing is market related.
And yes, we feel we're a bit of an uptick and we are we do expect the use of cash are frozen into working cap should diminish over the next couple of quarters.
Okay. Thanks, and just a follow up an earlier question.
Can you give us a sense of how much more room you have on the optimization initiatives I think the bucket was $200 million seems that we're running well ahead of that so maybe any color that you can provide.
Yes, George So we are right in our budget season. These are the types of things that we're discussing and evaluating.
I would say that there is going to be more capex allocated to optimization, but with it of course will come the return on investment.
We'll have more color in the future quarters.
We are challenging our teams to look at those projects and those opportunities that will derive the best value for us. So there are going to be some moving parts here.
But more color to come.
Okay. Thanks, guys.
Thank you.
Our final question comes from Chris Li does all day Securities. Please go ahead.
Oh, Hi, good morning, everyone, Hey, Linda.
Just maybe a quick follow up on your answer to the last question.
When you said about you guys have identified more opportunities in optimization and ambitious shifts maybe a bit more from volume to value is it fair to say compared to your original strap plan.
Essentially really attributed to two more areas.
I will be your operation, where you do have.
To control.
Over so your own destiny and if that's the case does that change kind of give you more confidence that your strat plans EBITDA target is achievable.
Yeah. So let me start off by the achievable target of $2 125 is a solid number that is.
As Max mentioned it today.
It's the it's.
It's the target on the wall that where were all shooting for and the initiatives that we have are supporting the $2 125.
This part of the reflection that we're going through now.
And number one is to see how quickly can we get some of these projects done understand with supply chain impacts.
Two our equipment vendors and service suppliers are in.
In some cases has slowed down a relative to the original project.
Labor also is an important element for us we need to have the talent to be able to execute internally.
And so that is also an element are the number two one to five is solid.
Are the some of the projects and priorities may have shifted.
But this this is what we're all working towards right now.
Okay, Great that's helpful.
The question I haven't seen I know no one has a crystal ball on.
Cheese, no spread is going but can you remind us again, what is your underlying spread assumption.
To achieve that EBITDA target and secondly in your personal view what are some of the risks that could drive the spread should go back to that minus 20.
Range.
Hey, Chris This is Carl.
We certainly don't have that crystal ball, because every time, we try and forecast something that as the market surprises on spreads so.
What I can tell you right now is that yes. The spreads are are favorable to what they were last quarter.
They're actually not as favorable as they were.
Last year same time.
So you can see that there's still lots of volatility in the market space.
You know the near term and I mean like really near term here one week two weeks three weeks, we still see some some I'll say favorable market spread environments.
But overall so many.
Underlying assumptions that we do have as part of our modeling is still negative territory. So it's not as though our models.
Consist of some sort of positive territory.
And whether it would be.
Historical levels that we may have seen like positive three or something like that that's not built into our models.
Okay. Okay. That's great and then maybe last one just on the international side, you mentioned that the export sales volumes were negatively impacted by the new situation in Australia is that sort of worsened sequentially from Q2 to Q3 and also when do you expect that situation to start to stabilize.
Or is that a going concern.
Hi, Chris It's Leann here, so as far as.
I mean, I think we talked about the pricing side, yes space that the market pricing obviously, it did benefit out of Australia Division at the same time, we still have headwinds around our lower milk intake.
Actually we know obviously just passed a flush milk season as well for Q3 sequentially. We're seeing you know improvement.
And of course, we need to keep an eye, obviously, an eye on milk in Australia.
Managing our milk and takes a key priority for us, but equally as important is actually what we do with that milk.
We believe we can still be profitable and maximize the value of every liter of milk from the Australian platform.
Great. Okay. All the best Thank you everyone.
Thank you at this time I'll turn the call back over to our speakers for any closing remarks.
Thank you Tina.
Thank you for taking part in the call and webcast. Please note that we will release, our fourth quarter and full year fiscal 2023 results on June eight 2023, Thank you and every day.
Thank you. This does conclude the conference call for today, we thank you for your participation and ask that you. Please disconnect. Your lines. Thank you and have a great day.
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