Q2 2024 Saputo Inc Earnings Call

Okay.

Greetings and welcome to diesel Poodle incorporated second quarter fiscal 2024 results conference call. During the presentation, all participants will be in a listen only mode.

Afterwards, we will conduct a question and answer session at that time. If you have a question. Please press the one followed by the four on your telephone if at any time during the conference you need to reach an operator, Please press star zero How's.

As a reminder, this conference is being recorded on Friday November 10 2023.

I would now like to turn the conference over to Nick. Please go ahead.

Thank you Frank Good morning, and welcome to our second quarter fiscal 2024 earnings call or.

Our speakers today will be Lino Saputo chair of the board President and Chief Executive Officer, and makes Intel Yang Chief Financial Officer and Secretary.

For the question and answer session Leno, and Maxim will be supported by Carl <unk>, President and Chief Operating Officer, North America, and Leon 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 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. We refer to our cautionary statements regarding forward looking information in our annual report press releases and filings. Please treat any forward looking information with caution as our actual results could differ materially we do not accept any.

<unk> obligation to update this information, except as required under securities legislation.

I'll now hand, it over to Lino.

Thank you Nick and good morning, everyone.

As it has been publicly reported the global operating environment remains dynamic and our industry is not immune from it.

Despite this we delivered 8% adjusted EBITDA growth this quarter, driven mostly by favorable commodity markets in the U S and higher domestic sales volume.

While we also continued to benefit from our ongoing cost containment initiatives and benefits from our global strategic plan.

We enjoyed a better performance in our U S and Canadian sectors, which partially offset a decline in Europe and international sectors.

As consumer sentiment continues to vary around the world overall spending has held up quite well however in some markets and categories consumers are feeling cost pressure and have shifted towards discount channels and private label.

Notwithstanding the consumer inflationary environment and the broader market experiencing some levels of trade down our brands performed well and we grew volume and keep private label channels.

With our broad portfolio offering an array of products from value to premium we're able to meet consumers wherever they shop or consume.

Our team is successfully managing price and cost dynamics as margin recovery continues to be a top priority.

This said much of our inflationary driven pricing across our channels has either already been announced or is part of pricing protocols within existing contracts.

Additionally, we're leaning harder into operational efficiencies and taking action on cost containment.

From a strategic perspective, we executed well during the first half of the fiscal year and implementation of our global strategic plan is on track.

We are focusing on the factors, we can control such as our streamlining and optimization projects, which are going as planned both in terms of spend and timing of the various project ramp ups.

We expect most of our capital projects to be completed by the end of this fiscal year and benefit to begin to flow through our results early next year.

Amid a volatile environment and with various puts and takes across our business.

Our second quarter results were broadly in line with our expectations.

Simply we.

We are making good progress supported by volume improvements operational efficiencies and our capital projects.

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

Thank you Elena and good morning, everyone.

Consolidated revenues were $4 $3 billion, while our adjusted EBITDA amounted to $398 million, an 8% increase.

Higher year over year, adjusted EBITDA was driven by higher domestic sales volume and the positive impact from the U S market's factor.

Also contributing to higher EBITDA or cost containment measures lower logistical costs and the benefit from the global strategic plan.

These were partially offset by lower export sales volume due to the softening of global demand for dairy products.

Lower international dairy ingredients and cheese prices and an inventory write down resulting from a decrease in certain market selling prices.

Income tax expense for the quarter totaled $44 million, reflecting an effective tax rate of 22% as compared to 23 for the same quarter last fiscal.

Adjusted EPS on a diluted basis was <unk> 43 per share up 19% when compared to the same quarter last year.

I'll now take you through key highlights by sector.

In Canada revenue for the second quarter totaled $1 3 billion, an increase of 5%.

Revenues increased due to higher selling prices in connection with the higher cost of milk as raw material and the carryover of impact the carryover impact of pricing initiatives implemented to mitigate ongoing inflationary pressures on our input cost.

Sales volume were stable year over year in the retail market segment, while sales volume in the foodservice and industrial segments or higher.

Adjusted EBITDA for the second quarter totaled $148 million up 9% versus the same quarter of last fiscal year.

The improvement was driven by mitigation of inflation true carryover impact of previously increased selling price.

Further benefits from our cost containment measure.

Lower logistics costs and the benefit derived from the global strategic plan, including continuous improvement supply chain optimization and automation initiatives.

In our U S sector revenue total of $1 $95 billion and were 5% lower versus last year.

Revenue decreased due to the combined effect of lower average cheese block and butter market price offsetting an increase in sales volume and pricing versus last year.

Adjusted EBITDA increased 44% to $147 million.

And the year over year improvement was mostly driven by a $32 million positive impact from better market factor driven by the favorable cheese milk spread.

The carryover impact from previously implemented pricing initiatives initiatives.

Higher sales volume, mostly in the dairy foods products category.

And the favorable impact of lower logistics costs, including the effect of lower fuel.

Price.

The international sector.

Revenues for the second quarter were $879 million down, 11%, while adjusted EBITDA totaled $83 million down 14% versus last year.

The decline in revenue.

And adjusted EBITDA was mostly driven by lower export sales volume and the unfavorable relation between the international cheese, and dairy ingredient market prices and the cost of milk as raw material as our commodity selling prices are down versus last year.

A decrease in certain markets selling prices also resulted in an inventory write down of $7 million.

This was partially offset by the carryover effect of pricing action in our domestic markets previously undertaken to mitigate increasing input costs and higher milk intake.

Our results were also positively impacted by previously announced network optimization initiatives aimed at improving our operational efficiency and strengthening our competitiveness.

In Australia.

Should the international pricing environment stabilize at current levels, we would begin to see an improvement in our export business towards the end of the fiscal year, given the lag effect on our customer contracts.

In the Europe sector revenue in the second quarter were $246 million, while our adjusted EBITDA amounted to $20 million.

The decline in adjusted EBITDA was due to a negative product mix and by the selling of inventory produced at high milk prices last fiscal.

Lower international dairy ingredients market prices also had a negative impact.

Given our stable volumes. So far this year, we expect high cost inventory not to be depleted until at least the end of the fiscal year before our inventory return to balance.

From a balance sheet perspective, it continued to strengthen with our net debt to adjust adjusted EBITDA ratio down to 234 times.

Capital expenditure for the quarter totaled $149 million.

We remain on track with our capital investment plan and year to date spending is in line with our current expectation for the year.

We continue to expect an improvement in our cash flow generation over time as well as we'll be harvesting the benefits from the global strategic plan.

And capex allocation returning to levels similar to our depreciation and amortization.

<unk>.

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

Thank you Max.

In the Canadian sector, our results continue to reflect the division's relentless focus on commercial and operational execution.

With a diversified portfolio that offers variety convenience and good value to consumers.

We had another strong quarter with year over year growth in both revenues and adjusted EBITDA.

Volume and product mix improved with higher volume of everyday and specialty cheese.

This growth was driven by our strengthening position in <unk>, where we saw an uptick in traffic as people return to the office more frequently and to other non restaurant away from home food channels.

We had a nice performance from the retail segment driven by a strong back to school season.

This was also supported by increased brand investments, notably with our Armstrong brand.

And the U S. We generated strong adjusted EBITDA growth and delivered margin expansion.

Results improved versus last year on pricing momentum and the recovery in commodity markets, notably the milk cheese spread.

Dairy commodity markets remained volatile during the quarter with a block price of cheese closing nearly 30% higher from the June average however.

It has trended at a more moderate level since the end of the quarter.

We believe that market volatility remains transitory and will stabilize over time.

Our domestic volumes increased across many categories. This quarter driven by a strong performance in dairy foods.

Our year to date volumes are still slightly below our expectations given the slower start of the year, while we expect volume trends to improve as we execute our strategic and commercial initiatives.

Marketing and innovation activities drove strong results across several of our key retail brands, including frequent she said treasure cave, most Heather and stellar for example.

We are solidifying, our leading blue cheese, retail offering, including growing and strengthening our treasurer cave brand. The new you might love. It here campaign was launched to much industry, a claim helping to drive double digit year on year retail volume growth and making it the fastest growing brand in the blue cheese category over the.

Last year.

We also celebrated the 100th anniversary of our stellar brand with a nationwide tour showcasing the product and recipes using stellar cheese.

We visited 10 cities partnered with 12 major retailers and gained $6 6 million impressions via several social media platforms.

In the snacking category.

We're growing the frigo cheese hedge brand and taking actions to be the everyday dairy snacking category leader.

The second year of that we are all cheese heads campaign.

Continued to support brand penetration during the key back to school period with last 12 month volumes up 9%.

We are building out our go cheese offering for the future, including shoring up and growing the most evident brand.

The new makers of mischief campaign started strong helping to increase our brand share in the high teens.

In addition, we introduced new innovations in goat cheese with the launch of several new products, including duos and tie Sweet chili.

With respect to capital investments, we're making good progress with the projects that are currently in startup mode or will be ramping up over the next few months.

One example is our new recently converted state of the art go cheese manufacturing facility in <unk>, Wisconsin.

It's successful startup will allow us to consolidate go cheese production from both our Lancaster and Belmont facilities to Reed's Burger and subsequently close those two facilities.

The <unk> plant is set to increase capacity expand our position in growing specialty cheese categories and improve productivity.

Belmont and Lancaster employees have made commendable efforts over the years to keep their facility operating efficiently.

And I want to take this opportunity to thank them all.

For their hard work and their dedication.

In addition, we're on schedule to permanently close our previously announced Big Stone Green Bay and Southgate facilities by the end of next fiscal year, which will further support our overall cheese optimization roadmap.

Another capital investment project is our new cheese, shred lines, which are up and running at our page to Larry plant and currently meeting customer demand.

Finally, the startup of our new $240 million automated cotton rats facility in Franklin, Wisconsin is fast approaching.

All of these actions are critical to the execution of our global strategic plan.

With most of the projects underway. We also remain focused on enhancing our network to optimize output margin efficiency and service levels.

These priorities are more relevant than ever as we are working towards producing the same output with a much smaller footprint.

This evolution in our business and the investments that we're making will position us well to operate more efficiently.

And do more for our customers than we've ever done before.

In the international sector Global dairy markets remained challenging due to unfavorable dairy commodity prices and lower export volumes. However, we do believe the bottom of the price cycle is behind us.

Global market fundamentals are improving while China has become more active.

In Argentina, lower results were impacted by export market price volatility.

In Australia, our performance improved year over year on a sequential basis due to higher pricing in the domestic markets and higher milk intake, resulting in better operating efficiencies.

Our optimization agenda has continued to make strong progress with project timelines on track and several streamlining activities completed over the last couple of quarters.

As part of our roadmap, we have decided to commence a review of strategic alternatives related to our King Island facility in Tasmania.

We intend to keep the operations running at regular capacity, while we assess possible future scenarios for the facility, including a potential sale.

Once our optimization agenda is completed we will have reduced our footprint from 11 to six facilities.

We have a solid long term vision for Australia and its business.

Taking these necessary actions will help us refocus its core business improve its operating cost structure and provide a solid foundation for success.

In Europe results were below our expectations.

Consumers are still facing heightened cost pressures and retail volumes are taking longer to recover while chief supply remains relatively high.

Our performance was also impacted by a negative product mix.

As retail sales volumes were weaker than expected.

The selling of inventory produced last fiscal year at higher milk prices and lower international ingredient prices and volume.

Some of this EBITDA pressure was offset by the carryover effect of pricing initiatives, our focus on cost reduction measures and additional actions initiated during the second quarter of this year.

We are now cycling through some high cost inventory.

We expect to close this gap.

For our performance to improve towards the end of this fiscal year.

Earnings should also recover from further.

Earnings should also recover further as we began shipping new private label contracts in the fourth quarter of this fiscal year.

Despite the dynamics Cathedral city gained market share from private label and competing brands through advertising campaigns, and new innovations, including Cathedral city lunch packs and the dip in go format, a new best of British lineup as.

As well as several new plant based launches.

Now turning to our outlook for the remainder of the year, we expect volatile consumer and market dynamics to continue and we anticipate consumers to remain highly intentional and theyre spending, but we believe our broad portfolio of products and diversified channel exposure to position us well in consumer shopping carts.

We will leverage our supply chain with a relentless focus on driving efficiencies in our business optimizing our network and driving out costs.

We remain focused on execution and fully realizing the benefits from our strategic plan related projects.

We are confident in our strategy and the results that they are expected to deliver.

With this quarter, we moved another step closer to the inflection point in our global strategic plan journey.

Okay.

We're looking forward to seeing some of our capital investments transition from cash outflow to inflow and leveraging the strength of the platform that we're building.

Finally, we are delighted to have announced yesterday the appointment of Victor Crawford and Stanley Ryan to our board of directors.

Victor has a vast experience in the food and beverage industries logistics and supply chain management and brings valuable insights and consumer retail to the board.

Stanley has extensive leadership experience across a range of operational intensive multinational businesses and multiple geographies, particularly in.

In the international commodities market.

These appointments will strengthen the depth and the diversity of skills and experience of our board.

I. Thank you all for your time, and we'll now turn the call over to Frank for questions Frank.

Thank you.

If you would like to register a question. Please press the one four on your telephone.

You will hear a three ton problem to acknowledge your request.

Your question has been answered and you would like to withdraw your registration. Please press the one followed by the three.

One moment please for the first question.

Our first question comes from Irene <unk> with RBC capital markets. Please proceed.

Thanks, and good morning, everyone.

Nice to see the performance out of the U S really interesting to hear.

<unk> gains.

It's like really an enhanced direct to consumer innovation and communication approach.

Yet at the same time.

It really was market factors that drove a lot of improvement in the earnings. So how should we be thinking about all of that and is it really F. 'twenty five that we start to harvest the financial benefit.

At this time.

Yeah.

Thanks, everyone for the questions Carl.

Yeah, I would take a few things specifically around the <unk>.

Consumer marketing campaigns, we've put forward.

We've gained some important market share in a number of specialty cheese categories.

And despite that.

Our results did improve.

But it was somewhat muted by the commodities markets that are still tough in the ingredient side, so although the cheese.

And milk spread was favorable.

The ingredient side was also more difficult this quarter.

When it comes to the strategic growth plan.

And the.

Investments that we're putting into our plants.

The majority of those benefits will come in fiscal 'twenty five.

We're <unk>.

Performing quite well right now with commissioning.

We do believe that the performance of our plants.

We will step up.

During.

Use me.

Sorry, Gary.

We do believe that the commissioning will.

Continue to proceed quite well over the coming months and we're going to reap the benefits of that in our in our fiscal 'twenty five.

That's great. Thank you and then in terms of the volume gains.

Gary.

Gary.

Was that market share gains.

In addition to Jeff.

Better better industry tone.

And the dairy foods sector, we had a great year when it comes to ice cream mix in particular.

We continue to expand our channels in a number of <unk> areas. So overall it was a successful quarter.

<unk> for the business, we continue that momentum into Q3, and we don't see.

Any reason for that not to continue as we move forward in the dairy foods sector.

Would you called out dairy foods sector in particular, but Theres also a lot of good momentum in the <unk> sector, whether it's in the consumer space, the retail side, but as well as in our industrial channels.

And in our foodservice channel.

That's great. Thank you and then just one other question, if I might and it's around <unk>.

European business.

K seems to be really challenged and certainly I understand the complexity of what's going on with the consumer there with 30% food price inflation over 10 years.

But can you talk about sort of.

How and when we see a path.

We've been more sustained and more sustainable.

Earnings at higher level.

Good morning, Irene It's Leann, yes, as you mentioned the macroeconomic conditions in the UK has been difficult. So they can see them on general inflation is running high and.

Grocery inflation is at double digit rates still which is significantly higher than some of our other jurisdictions that consumer confidence continues to be quite fragile.

Despite this cathedral city is growing share, which we're very pleased about and we do have the other significant development is that in Q4.

We will be bringing on a large private label as well So cathedral city is stable we're investing in the brand.

And in Q4 will have significant private label.

Private label coming on stream. In addition to that our milk price has already been significantly reduced so that will help in being able to do you're correct.

The inventory position as we go through to the end of the fiscal.

Thank you.

Our next question comes from Michael Van <unk> with TD Cowen. Please proceed.

Alright, thank you.

But in the press release, you did talk about an increasingly dynamic and competitive environment and I'm wondering if that.

Slide to all of Q2 or did you see it get worse as the quarter progressed and what should we expect as far as the impact on earnings in future quarters is it going to are we already seeing that impact now or do you expect that part of it to get worse.

So overall, Michael yes, the markets are competitive understand that certain channels are down in volume other channels are up in volume and everyone's trying to compete for the same.

Share of space that they or share of stomach that.

That they historically had and that's true for all divisions.

As you've heard in the intro and some of the commentary that both Leann and Carl made we're competing extremely well.

We feel very good about the brands both at retail.

We're bringing to market and at the foodservice level.

We are.

The overall volume for us in terms of the more competitive dynamic is on the international side, where we're seeing that.

The historical buyers or have had been on the sidelines for quite some time.

And there are solids that people are trying to place wherever they can.

That's creating a dynamic that is unique and new for the industry.

But again, there too I think we're competing extremely well.

Yes.

We've got.

Challenges are related to the byproduct sales of our products, which do impact.

So the domestic business that we have when we manufacture cheese and we have solid we have to sell.

But again I think we're competing well.

As we talked about also in the opening statements, we think that the Internet international markets I've hit a bottom on the encouraging side, we're seeing that China is back.

And in the bidding for for dairy solids.

Supply of.

Solids has been mitigated as well, which is also very positive for the industry, where we see that there has not been the growth in production that we had seen historically, so there's a good balance between supply and demand.

But the markets are still very fragile when you look at the overall geopolitical issues, what's going on in the Middle East when you look at the economic issues, what's going on in Europe and in China. It is creating a fine a fragile state within the world and we just have to navigate through it while we've got great <unk>.

Infrastructure and all of our countries, we've got great brands domestically and we're dealing with the international headwinds that we have to deal with so.

This is what we're talking about the dynamics and the competitiveness it within our industry. It is a combination of a number of different things, but we think we have the tools in our belt to deal with them really effectively.

Alright, Thank you and then.

With respect to the GSP.

I know you mentioned that you expect the benefits.

To start showing up early in fiscal 'twenty five.

But in the U S where a lot of those are going to come some of your facilities are opening up I believe.

I believe some of them opened I think theres three economic mistaken and one of them open up already and some others are opening in the coming months. So are you expecting to see.

Any benefits in the second half of the year from these facilities or is the ramp up.

The time needed to.

To get through some inefficiencies.

So in general terms I'll talk a little bit about the initiatives that we've taken and then maybe more specifically I would like carling the <unk> to jump in but overall.

It's not just a question of the plants that are closing down. It's also plants that have received capital investment to increase their capacity or.

Increased their level of automation, which ultimately takes cost out of the system.

But I will tell you going into next fiscal year, Michael we will have and through the fiscal year as we are.

As we work through some of the startups and the projects.

We will have roughly about 10 plants less in our system in the operations of next fiscal year than we had at the beginning of this fiscal year.

So we are heading in the right direction.

Benefits of that will come mostly in fiscal 'twenty, five, but I'd like maybe Karl and Leann speak to some of the projects more specifically so you get a good feel in a good context for just some of the advancement and some of the efforts that have been put towards operational excellence.

Thankfully so maybe if we stick to the U S for a second.

Those facilities that have been commissioned and are currently operating there is a limited number that will contribute in the back half year for fiscal specifically in the Q4 space.

We do expect that our investments in the Gucci space and reads Burke will contribute positively net as you know two of our facilities will be closing in the early calendar year.

As we consolidate into Reedbird.

Furthermore, in the mozzarella modernization.

Each of the work that was initially scheduled and upon is completed.

We continue to perform progressed well in page to Larry with similar shred lines operating so we might catch some.

Very late benefits from that in Q4, and the mozzarella side.

And based on the others investments that have been ongoing and our business specifically Franklin that's going to be something that's going to kick in.

In the late first half of.

Fiscal 'twenty five.

There are a number of facilities that will be scheduled for closure and integration into Franklin. The Franklin facility itself is going to begin operations very slowly in December.

So we're quite confident that we will see some of those very late wins in Q4.

With the majority of our Strat plan and capital investments contributing in fiscal 'twenty five and maybe it is a small reminder that too.

Today, as we speak as well as the ongoing here for the next couple of quarters, but there are some duplicate costs that we're carrying.

That's all part of the plan, it's all part of how it is we.

Migrate to shutdowns and commissioning of a new facility. So that too will will come off the books, if you like and we will see some of those benefits later on this fiscal late fiscal <unk> and into 'twenty five.

Alright, and then should we be modeling in.

More duplicate costs.

In the second half of the year than what we just saw in the quarter.

Youre going to see built into our model right now youll see much of the same cost being carried until such time.

Probably the best marker is when our two facilities.

Two boat facilities Belmont in Lancaster are officially closed in the.

Early part of the calendar will start to see some of that benefit come through.

Alright, Thank you very much.

And in Australia are Michael to touch on that one we're already seeing the financial benefits from the network optimization that we had already announced.

And in fact with that you know we have the we've got the milk that we need and in fact, we actually went back to historical utilization levels.

At all plants as an example, we've also invested significantly announcements soon facility in Tasmania.

And that has come on stream as planned during October and is already delivering the benefits that we expected.

So that with.

Australia from consolidation from a 11 facilities to six we believe that that will continue to deliver financial benefits, both now and into 'twenty five and beyond.

As far as the U K is concerned we had announced previously the consolidation of our parking facility into Nuneaton that has that has all of the capital investment. There has been has been completed we're approaching final completion of the commissioning and the many new lines are underway. So again that will be more in 'twenty five and beyond.

And that will give us.

Efficient packing facility for the U K.

Okay. Thank you and since you just brought it up.

Utilization in the Australia back up to historical levels.

I did note that your.

International sales volumes are down, but your milk intake was higher.

Does that mean, you're building inventories and do you have.

Have a home for this.

Coming quarters.

Mike It smacks, so the lower volume we have from an export perspective in our export channels do create and certain inventory right now and Thats Whats you are you've probably seen our AR and our cash flow.

And those all it would be both on the cheese or the powder side.

Alright, thank you.

Our next question comes from Mark Petrie with CIBC. Please proceed.

Yes. Good morning, I just wanted to follow up I think you've summarized it and I think I get it but I just wanted to understand the dynamics specifically around dairy ingredients in the international market. So essentially demand from China is starting to return.

And youre seeing more rational behavior from the large global co ops and supply growth as being more constrained in sort of in better balance does that is that the right way to think about it.

Yes, Mark that is exactly the way to think about it you know when you when you look at what's going on around the world.

On the farming side and this is not exclusive to the U S or Europe or New Zealand, It's general context of the dairy farming community production costs are weighing on the farmer sentiment.

And that is what's driving slowing milk production.

The economics for the dairy farmers right now are very very tough and then compounded with that you've got a high interest environment. So we don't see production.

Off the farm level.

Increasing dramatically in any way shape or form at least for the next six nine possibly even 12 months.

At the same time.

Demand has been soft.

I think we hit the bottom.

And.

We're starting to see some buyers come back to the market and starting to contemplate long term supply of goods. Those are all very very good science, but the overall markets are still from a pricing perspective softer than the historical levels and that's what we're contending with both on the cheese side as well as on the ingredient.

Syed.

And that does affect the portions of the businesses.

That we are exporting so even though domestically we've got a solid wins.

In the U K relative to private label solid wins.

In Australia with respect to the domestic market solid wins in Argentina, as well with the domestic market U S. I can say the same thing.

Up new contracts, both on the commodity and on the retail side, we still have the offshoot of the ingredients that have to go into into the international markets and that does have an impact on some of the profitability for those domestic platforms.

Okay. That's helpful. Thank you and I guess specific to <unk>.

Could you just talk about your positioning within dairy ingredients are there steps that you need.

Need to or want to take to sort of shift that positioning.

And are there any notable projects within the GSP specific to ingredients.

Yeah. So that's a really amazing question, Mark and I will tell you it.

Pre COVID-19 outlook for ingredients is much much different in the context that we're seeing today.

I might have Carl go go into some specifics there.

But the original plans that we had defined in our strat plan on the ingredient side.

Or no longer all that relevant and what we're doing as a management team as we're looking at these changes if they are transitory or their actual infrastructure changes.

And before we make some heavy capital investments in any one.

Product or area, we need that really understand how the markets have changed how they've shifted how permanent they are or how transitory they might be but maybe Karl can you give a little bit of insight on that.

Sure.

What I.

Say a little bit further is we are absolutely committed to increasing the value.

Of our ingredients business and our first steps taken was the acquisition of a facility in Reed's Berg called Greenway.

Which gave us some capabilities enhanced capabilities in the gateway space. So we continue to work with that site to augment the value of the products and on the waste stream specifically for <unk>.

Our gateway and on the bovine side. It also has capabilities for us to bring new products to market.

As far as larger capital investments.

As part of our strategic growth plan, we did have dollars reserve for that purpose.

We had one idea in mind in particular and as we did our due diligence recognized quickly that there was also lots of investments in capacity coming online and some of these specific channels. So we've decided not to enter that ring with our original intent.

However.

We are committed once again too.

Finding additional areas, where we can bring value from an ingredient perspective, bringing our expertise our capabilities and probably most importantly, the raw materials that we have available from our <unk> operations to this forum.

So we're currently exploring a number of options.

In order for us to invest in we will invest further capital in this category.

And as we're reviewing this we're also changing and looking at our go to market strategies. So lianne and I are working more closely together with our teams to ensure that we're maximizing how it is we.

Bring our products to market.

The geographies in which we service how we service our customers all of that is also being explored modified and executed on as we speak so I guess I'd leave us with we're committed to growing and improving the overall contribution from this category in our business.

Okay. That's very helpful. Thank you and specific to Canada.

Have you have you observed any shifts in the competitive environment with regards to sort of pricing or promotional intensity and I guess I'm asking about retail and foodservice.

I would say candidly.

<unk> has remained competitive.

Not a whole lot changed on this front theres been a lot of promotional activity that we would have seen in the in the more recent.

Once some of that is us as well on the Armstrong side. So our Armstrong brand is being very well received by customers and consumers were continuing to invest.

To increase household penetration and some very specific geographies as well.

The more recent I'll see ask from from the government around controlling inflation and around food.

We've continued to work with our retailing partners in particular to bring cost effective products to the market.

So overall, yeah it remains competitive.

<unk>, but.

But nothing you know we're not in a territory, we haven't seen before.

Okay. That's all very helpful. Thanks very much.

Yeah.

Our next question comes from Tami, Chen with BMO capital markets. Please proceed.

Hi, Thanks for the question a couple of clarification one.

I noticed that in the U S segment.

At the commodity level has been quite a bit can you just remind us.

Is that a negative headwind for that division and was that what you were alluding to in your prepared remarks.

So the cycle that youre seeing on butterfat.

Just add its a seasonal cycle, we see this regularly at this time of the year.

The demand for Butterfat is high in the U S market.

With the fall season with the approaching Thanksgiving.

Holiday meeting into Christmas. So there is a high demand for fats of butterfat in this time of the year and it already has tapered off materially so from the time that we close the quarter.

To today's call.

Come down significantly over 60, so it's the normal cycle for us.

And.

Like many things, whether it's butterfat or whether it's the the price of the block.

Or solid non fat.

Volatility is not good so whether it's the rapid rise of rapid decline, it's not something that.

It is good for our business overall.

So all I would say is that it.

Not unexpected for us.

And the go forward as the butterfat.

<unk> trend more normal in the coming months, we will see the stability in our overall results as well.

Okay got it and well go to Europe, and the U K I'm just wondering first between.

Brands, such as procedural versus I guess, some of that larger private label contracts coming on.

Q4 is there a notable difference.

Margin between those two.

Tell me, it's it's leann.

We have private label contracts.

Hum.

Of course the portfolio.

And as far as what.

What we're looking for is what we call kind of.

Value added private label, where we can offer distinctive consistently high quality.

We are very confident in the margin structure across the entire portfolio.

Paul.

Bundled pricing quite volatile.

Laura.

Of course in regulated markets like Canada.

And I'm just wondering is it always been like this what are some of the nuances there and I guess is there anything you can do to further.

Does that impact on your business or is this something that just from time to time about possibly going to see.

Quite high volatility.

Okay. Thank you.

Yes, so if we look at all of our geographies with the exception of Canada.

Which has a milk supply managed system there is going to be volatility in the input costs of our raw materials a lot of it is predicated on supply versus demand.

Last year in the U K.

We had historical high prices.

On the on the raw materials side.

Over the course of <unk>.

A higher inflationary environment and slowing demand.

We had the opportunity.

A lot of other processors to renegotiate prices downwards, and also based on where commodity prices were.

Typically if you look at outside of Canada.

Most of the geographies will follow commodity prices around the world. So if commodity prices are high then there'll be the raw material price that will follow and then as commodity prices decline. The raw material also this follow up.

The specific circumstance that we're dealing with right now in the U K is that we.

The types of products, we manufacture in the U K, our long shelf life. So we we.

Keep them in inventory for 12.

To 18 months.

So we have to cycle through high cost inventory at a time when commodity prices are probably at the lowest we've seen in a number of years.

And what I would add Toni is that you also know we have a very.

Very high quality milk pool in the U K.

And very good quality of milk for them for the product.

We are very confident that we'd be able to continue to just supply the right kind of note two to our sites.

Got it thank you.

Our next question comes from George <unk> with Scotia Capital. Please proceed.

Yes, hi, good morning, guys I, just wanted to get a bit of an update on the argentinean business given the political kind of currency situation, there and how should we think of the performance in the second half versus the first half.

Yes.

So the performance from four Argentina goes per our expectation.

This business in Argentina has been impacted by the lower volume on the export market.

And due to the softening of the demand.

Nothing to highlight in terms of.

Current condition despite election.

That will take place within the next couple of weeks.

So at the moment.

Nothing to flag.

Performance is for expert to expectation I don't know Leon if you have anything you want to have the ear.

We continue to operate actually very well, having a quite stable results in what is a volatile environment, we continue to to actually maintain and grow share in certain parts of the country with local arena a major brand.

And our efficiencies at sites already start historically excellent levels.

So we don't anticipate any particular disruption, we're just managing through the.

Hi, Yeah that was the lower commodity prices, but we are shipping good volume.

Okay. That's helpful and maybe if im looking at the optimization initiatives. It feels out we don't really expect.

Much of a contribution in Q3, but it's more of a kind of a Q4 in <unk>.

Fiscal 'twenty five timing is that accurate.

So Georgia yeah.

Yes.

<unk>.

We spoke a little bit earlier about the U S contributions.

A network optimization perspective, so if I can.

It being the largest share of the contribution to our projected returns I'll say that in the U S. The very tail end of the fourth quarter, we'll see some of those benefits, but the lion's share of the returns is going to come in fiscal 'twenty five that'd be true of the U S. A that will be.

True also of our other platforms globally.

Okay, I'm, just trying to get a sense I guess of what the.

Q3, EBIT I can look like there's a lot of moving parts.

It seems to be on a sequential basis now because we could see kind of up because of seasonality but.

Should we think of other geographies as being maybe flattish or slightly up given that we're not going to see most of your optimization tools.

Latter part of Q4.

Yes George.

When we look at our geographical.

Performance, we do believe Q3 to be one of our it's always been a good quarter. Historically, we have no reason to believe that the Canadian sector would be different.

<unk> the U S. When you look at the commodity.

It will be tainted by the commodity markets no question despite.

All of our effort continues operationally, we're much more efficient than we've been.

So.

Above the U S. So we feel we are having good momentum in this we believe the momentum will continue a relative to the U K I think we've been quite vocal as to we need to cycle through so it's going to be the same thing similar to the.

In our Q3 and in international.

Perspective.

We would like the GDT with like the export prices to two two to provide us some support.

At this time.

We do feel that the the challenges relative to export.

We're still gonna be therefore, the Q3 performance.

Great. Thanks, a lot I appreciate it offline.

Our next question comes from Vishal <unk> with National Bank. Please proceed.

Hi, Thanks for taking my questions.

Regard to the benefits that are coming particularly in the U S. B.

Variety of.

Optimization and efficiency initiatives.

On a broad basis are they are they all on track or its some big pushback or deferred.

While we had some delays in <unk>.

Getting off the ground at the very early stages of the project.

We began a lot of this and difficult to supply chain environments by supply chain I'm talking about.

The steel environment and just the ability for some of the suppliers of key suppliers.

To get their products out to us, but that's that's behind us and since that moment in time and the reset in the schedule we're right on track.

So.

We always said that the returns on this capital investment specifically in the U S would be there.

The very late stages of the strategic growth plan.

Here, we are going through that at this moment, so exciting times from the commissioning perspective.

Lots of things on the go and I'll.

I will say as per plan, we're expecting the returns to come through in large share in fiscal 'twenty five.

But what is the level of the duplicative costs in your P&L right now.

Sorry, Michele can you repeat the question.

What is the level of duplicative costs in your P&L.

So we have duplicate costs in our P&L.

I think the easiest things to sort of.

Two anchor to our facilities as an example, reedbird. So a reasonable facility. Today is commission we are manufacturing it, albeit at lower capacities. Some go cheese, we still operate with our Belmont in Lancaster facility. So that's.

That's it.

Easier one to point to another cases, such as Franklin, we're slowly ramping up.

The hiring process.

Our our new teammates for the operation.

While we are still operating with big stone in Green Bay and in and our network.

We're phasing in the labor.

And the Onboarding of new team mates as the volume transitions.

Diligent with minimizing that impact.

But most certainly its presence in our numbers.

Do you have a dollar value you can share with us.

In terms of the duplicative costs in your P&L currently.

Yes.

While we're not prepared to share a number relative to the dual cost.

Embedded in our number but as Carl mentioned.

Those costs that are going to take out they're all figured out within the expected benefits the benefits are there too.

They're to materialize, we're not budgeting on any of those expectation and.

We will start to see the.

Kicking in next fiscal.

Okay, and I think lino set off the top.

Q2 was broadly in line with expectations, given the various gyrations in the commodity markets and and.

In regions of operation.

Do you have you altered your internal plan for <unk> or is it.

Do you anticipate results to be different than when it started the quarter.

We have not altered our plans.

No. We are we maintain of course, we're staying the course.

We've constantly.

Indicated.

The markets are.

Element that is no.

Not under.

On the controllable aspects whatever is under our control we feel very comfortable we feel very comfortable with the volume in all of the.

Our U S, particularly in the U S sector, where you're comfortable that our plants are running better more efficiently. We have the labor who have the fill rates.

We're back to normal we feel confident about about that the wildcard still remain.

The market and at this time, we do not feel we need to change.

Our plans to execute on the things infusion perspective.

Okay, and maybe just one last one here given given the number of initiatives that are seeming to culminate in the next several quarters regarding transitions and facility changes.

Based on your past experience to what degree is there a likelihood that there's going to be hiccups or challenges associated with all these commissioning initiatives happening all at once.

Presumably all management time.

Yeah.

Michelle it's Karl again.

And over the years, we've commissioned a whole host of Av.

Plant expansions and even greenfield so it's not new territory by any means for management and for our subject matter experts and those who or are the project teams and I'll say, it's no different this time around in fact I have.

Even more confidence as we move forward. This has been a a plan in the making for quite some time, we put the most appropriate resources more skilled individuals behind this.

I'm very confident that we will be successful with our commissioning all commissioning.

Does it tick ups it surprises.

Part of it.

Par for course, if you like.

And I'll.

I'll say that that I'm quite confident despite numerous activities that are ongoing we have the appropriate resources divided up geographically as well.

No I.

I don't think this is going to be a factor.

As we move forward.

Thank you.

Vishal just to finalize.

On the point and if we would change our plans or not.

Relative to our capital expenditure.

We will be spending the $2 3 billion that we talked about the fact that we will have a lower spend over the next.

Next year on the next couple of years as part of our of our view of this is this was planned so it's not a change in plan for site.

Considering that the dynamic where in that.

On the foundation that we've seen.

And we are all experiencing on the market uncertainty, we do have a cash focus we do want to reduce our inventory level that explains some of the actions that we're doing in our UK sector. So we feel on that working cap management.

<unk> is a key priority and that fits well within the current dynamic and with our plans right now.

Thank you.

Our next question comes from Chris Li with the short any securities. Please proceed.

Hi, good morning, everyone. Thanks, very much for squeezing me in maybe just a couple of quick ones for me of.

First question I think you've already covered this already but I just wanted to ask.

Some of the major economies like the U S are starting to see this inflation or perhaps deflation next year can you just remind us how <unk> historically perform in such an environment and is this a key risk to watch for for next year. Thank you.

Yes, Hi, Chris.

So we've gone through economic cycles before one of the great things about our business and in all geographies is that we deal and we trade in different channels.

Channels, a sale, but even within the channels, we deal with different types of customers. So you've got you know and I've said this before you've got the white tablecloth restaurants, and you've got the <unk>.

And typically consumers are still going to consume dairy and that's a positive thing.

We are going to be where the consumer consumes.

So irrespective of economies irrespective of trade downs irrespective of.

Geographies that really is not a massive massive concern for us.

I think the bigger issue that we're dealing with now.

As a global.

Trade on dairy.

And having a lot to do with China being in or out of the buying market.

Domestically.

Not at all concerned about the the horizons.

That everyone's talking about.

The interest rate environment, the consumer sensitivity pricing power disposable income.

I think we're in the right categories of product I think we're in the right channels of sales and we actually see growth in our volume as opposed to a decline in volume.

With all of the economy.

<unk> that.

That are that we're seeing on the horizon.

Great. Thanks, and maybe just a quick follow up just within the U S. Retail segment can you remind us how much exposure you have sort of discounting and private label channels, just want to get a sense of how well youre capturing some of these are pay down in the U S retail division.

Well, Chris as Carl we're very well diversified in the U S.

Four as proud of and it's as strong as the brands that we have are specifically in the Chi side. We also.

Provide some some private label.

To some key retail partners in the same category they reproduce our Brandon on the dairy foods side in particular were.

Over 90, 95% non branded so from that perspective, it's always been our operating model. So whether it's the traditional grocer or whether it's a discount banners and channels, we're well covered to be able to supply that.

And I would also maybe add that unlike the earlier days, maybe two or three years ago nearly part of the pandemic.

We're very well positioned right now.

To fulfill the demand that may come from the retail side with the increased demand that may come from the retail side, if there's a more material shift from the foodservice sector over to retail.

Great. Thanks, Thanks, very much and all of this.

There are no further questions at this time, Nick I will now turn the call back to you.

Thank you Frank Thank you for taking part in the call and webcast. Please note that we will release, our third quarter fiscal 2024 results on February 19, 2024 have a nice day.

That does conclude the conference call for today, we thank you for your participation and ask that you. Please disconnect your lines have a great day everyone.

Okay.

Yes.

[music].

Okay.

Okay.

Okay.

Okay.

Okay.

Okay.

[music].

Okay.

Sure.

Sure.

[music].

Okay.

Uh huh.

Okay.

Okay.

Yes.

Uh huh.

Yes.

Perfect.

Okay.