Operator: Thank you for standing by, and welcome to the SAPUTO second quarter fiscal 2027 financial results call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question, press star followed by the number 1 on your telephone keypad. If you would like to withdraw your question, press star 1 again. Thank you. I will now turn the call over to Nicholas Estrela, Head of Investor Relations. Please go ahead.
Nicholas Estrela: Good morning, and welcome to our second quarter fiscal 2027 earnings call. Our speakers today will be Carl Colizza, President and Chief Executive Officer, and Maxime Therrien, Chief Financial Officer and Secretary. Before we begin, I would like to remind you that this webcast and conference call are being recorded. The webcast will be posted on our website along with the second quarter investor presentation. Please also note that some of the statements provided during this call are forward-looking. Such statements are based on assumptions that are subject to risks and uncertainties. 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 obligation to update this information, except as required under securities legislation. Following our prepared remarks, we will open the line for questions.
Nicholas Estrela: I will now hand it over to Carl.
Carl Colizza: Thanks, Nick. Good morning, everyone, and thank you for joining us. We delivered a strong Q2. A supportive market helped, but the result also reflects the actions we have taken to strengthen the business. The investments we've made, from higher value products and added capacity to operational efficiency and digital capabilities, positioned us to take full advantage of it. The result was 14% growth in adjusted EBITDA from continuing operations and margin expansion to over 10%. Our portfolio also continued to sharpen with the sale of our Dairy Division UK. Dairy ingredients led the way. High protein ingredients remained the primary driver of adjusted EBITDA growth and margin expansion in the quarter. Markets were supportive, but increasingly, the benefit is coming from higher sales volumes and growing demand for high protein ingredients.
Carl Colizza: The capacity and production capabilities we added are being absorbed by customers, which is what we built them to do. That demand is structural, and it continues to outpace supply growth. We have the dairy scale, the milk procurement, and the cheese operations to be successful in that environment, and we are building a more specialized ingredients platform, one that goes well beyond WPCs and will unlock new products and opportunities. To support that, we've created a dedicated ingredients division, led by Steve Douglas, to sharpen our commercial focus, accelerate innovation, and expand our opportunities in global markets. Within our dairy portfolio, ingredients were an important contributor this quarter, helping offset volatility in broader US dairy markets. Our overall volumes held up, supported our commercial initiatives, increased production capabilities, and continued demand for value-added products. In the US, execution keeps getting better.
Carl Colizza: Network optimization, warehouse consolidation, and manufacturing efficiencies are delivering productivity gains and lower costs. Together, these levers have delivered an adjusted EBITDA margin of 9.6% this quarter. There are more opportunities ahead, and we intend to capture them. In Canada, demand remained resilient despite market and cost pressure, with volume growth in food service and value-added dairy, and a strong ingredients market. Australia continued to perform well, delivering year-over-year adjusted EBITDA growth for the eighth consecutive quarter. The business has evolved from network optimization to improving product mix quality, and the results becoming increasingly evident. None of this came without headwinds. Inflation remained a challenge across labor, fuel, transportation, and packaging, and we are managing it through mitigation initiatives and pricing actions. We also stepped up investment in our brands and in our digital technologies, which are deliberate choices that strengthen our commercial engine and support future growth.
Carl Colizza: To get more from those investments, Haig Poutchigian, as Chief Enterprise Transformation Officer, is bringing our enterprise services together to accelerate technology adoption, improve productivity, and speed up execution. Taken together, this quarter reflects the quality of the platform we have built. We are a more focused business, executing with greater consistency. Cheese, dairy foods, and fluid milk remain the foundation of who we are, and we bring to that foundation a low-cost manufacturing platform that delivers high-quality dairy solutions. What is evolving is our protein exposure and the breadth of applications for the dairy we make across protein solutions, functional dairy, convenience and snacking, and sports and active nutrition. We are applying the scaling capabilities we already have to higher value uses. That is where we see demand growing fastest, and we will keep investing behind it, alongside the core that anchors it.
Carl Colizza: These organizational changes do not alter our strategic priorities. They sharpen our focus, accountability, and execution. With that, I will turn the call over to Maxime Therrien for the financial review, and I will return with some concluding remarks.
Maxime Therrien: Thank you, Carl Colizza, and good morning, everyone. I will start with a few comments on the portfolio. The previously announced sale of the Dairy Division UK to Lactalis is expected to close in H2 of fiscal 2027 for estimated proceeds of approximately CAD 1.7 billion. The Dairy Division UK is now presented as a discontinued operation, as is the Dairy Division Argentina, which transaction closed in June. Prior periods are represented accordingly. All figures I will discuss reflect continuing operation, and we now report 3 sectors: Canada, US, and International. We also continue to expect the sale of our interest in the Danone-SAPUTO Dairy Australia joint venture to close in Q3 of fiscal 2027. Proceeds associated with this transaction is estimated to be approximately CAD 250 million. Okay.
Maxime Therrien: Q2 results reflect strong earning growth and margin expansion led by the US and International, with Canada holding steady. Adjusted EBITDA increased approximately 14% or CAD 53 million to CAD 438 million. Margin expanded to 10.3%, up from 9.4% last year. For the first 6 months, adjusted EBITDA was CAD 832 million, up nearly 11%, with margin of 9.9%. Revenues were CAD 4.3 billion, up approximately 4% in Q2. The increase was driven primarily by pricing from strong dairy ingredient market prices, along with volume growth and higher selling prices to mitigate inflationary pressures. These were partially offset by lower US cheese block and butter market prices in US. Net earnings from continuing operation were CAD 213 million or CAD 0.53 per share. On an adjusted basis, net earnings increased 24% to CAD 221 million, and adjusted EPS increased 28% to CAD 0.55, reflecting stronger earnings and the impact of our share repurchases.
Maxime Therrien: Including discontinued operation, net earnings were CAD 259 million. Carl Colizza covered the operating driver. In short, high protein ingredient pricing coupled with our added capacity, higher volume, and US productivity more than offset softer cheese markets, inflation, and higher SG&A. Net cash from operating activity from continued operation was strong at CAD 374 million. The increase from last year reflects higher adjusted EBITDA and favorable working capital management. For the first 6 months, operating cash flow amounted to CAD 503 million. Capital expenditure were CAD 78 million in the quarter and CAD 131 million year-to-date, in line with our plans. For fiscal 2027, we continue to expect approximately CAD 500 million in CapEx from continuing operation, which now exclude UK. We returned approximately CAD 300 million to shareholder in the quarter through the repurchase of 5.3 million shares for approximately CAD 216 million under our NCIB and dividend of CAD 83 million.
Maxime Therrien: Year-to-date, we have repurchased 12.5 million shares for approximately CAD 516 million and paid CAD 163 million in dividend. Supported by the strength of our balance sheet, we expect to remain active in repurchasing shares, and we intend to file with the Toronto Stock Exchange to renew our NCIB, which expire on 18 November 2026. The board also declared a quarterly dividend of CAD 0.21 per share payable on 11 December. Our net debt to adjusted EBITDA ratio ended the quarter at 1.55x. By including the estimated net proceeds of the UK transaction, that ratio would be 0.52x. Our long-term target remains 2.25x. We have considerable capacity to fund growth initiatives and capital project, and we are committed to taking a balanced approach to capital return. Revenue in Canada were CAD 1.4 billion, up 3%. Sales volume were stable.
Maxime Therrien: We had a strong sales of value-added beverages and cultured products on consumer demand for high-protein offerings. Targeted A&P investment behind the Armstrong and the SAPUTO brands also supported sales. Higher selling prices to mitigate inflation and increased cost of milk as raw material and higher ingredient market prices also contributed. Adjusted EBITDA was CAD 179 million, flat to last year, with margin of 12.7% compared to 13% last year. Dairy ingredient prices, a favorable mix, and the benefit of our automation and capacity investment were offset by inflation in labor, logistics, and packaging, and higher SG&A. US revenues were CAD 2.1 billion, down approximately 1%. Lower average cheese block market and butter market prices were largely offset by higher dairy ingredient prices and higher selling prices implemented to mitigate inflation. Higher sales volume and a favorable mix reflected increased sale of high-protein ingredient and cheese categories.
Maxime Therrien: Adjusted EBITDA increased 23% to CAD 205 million, and margin expanded to 9.6% from 7.8%. Higher market prices for our high-protein ingredient, along with our recent capacity investment, drove the improvement, and favorable ingredient market conditions more than offset a softer cheese market. Results also reflect operational progress, efficiencies from our consolidated Midwest warehousing facility, the elimination of duplicate costs across plants, and disciplined customer fulfillment. Onto International, which consists of our Dairy Division Australia, revenue were CAD 701 million, up 20%. Higher international dairy ingredient prices, higher domestic selling prices to offset milk costs and inflation, and higher volume in both domestic and export markets all contributed. Adjusted EBITDA was CAD 54 million, up 39%, with margin of 7.7% compared to 6.7% last year. Greater milk availability, mostly from improved weather, improved sales volume, efficiencies, and fixed cost absorption. The Q2 reflects strong earnings growth and margin expansion.
Maxime Therrien: Revenues up 4%, adjusted EBITDA up 14%, adjusted net earnings up 24%, and adjusted EPS up 28%, all led by high-protein ingredient, operational efficiencies, and strong execution. With that, I'll turn the call back to Carl.
Carl Colizza: Thank you, Maxime. Beginning with Canada, this was a resilient quarter in a demanding environment. Revenues grew, and our team continued to win where it matters. Commercially, we are partnering with the right customers. Food service remained a strength, growing ahead of the market through deep partnerships with our national accounts. In retail, shoppers are looking for both value and quality, and our portfolio is built to serve both. Value-added milk, cottage cheese, yogurt, and butter all outpaced their categories, and protein is increasingly the engine of growth. Our brands are performing. Armstrong held the number 1 position in everyday cheese for the 10th consecutive period, and Dairyland and Neilson both delivered growth. We are backing them with innovation, including new high-protein beverages arriving in the coming months. Operationally, fuel and packaging costs were a headwind.
Carl Colizza: Dave Paradis now leads our Canadian division with a clear mandate: strengthen commercial execution, deepen our customer partnerships, and drive operational excellence. Canada remains the steady, demand-driven anchor of this business. We like our position, and we like the runway ahead. Turning to the US, this was a strong quarter and a clear reflection of how the platform is performing. Adjusted EBITDA increased 23%, with high-protein ingredients leading the way, supported by strong global demand and excellent execution across our assets. What I would highlight is the pull from our customers. Demand is running ahead of our capacity in categories like cottage cheese and string cheese, and our brands are responding. Cheese Heads and Saputo Gold both continue to grow, and as we say, that is a good problem to have. It is also why we are investing.
Carl Colizza: New string capacity at Las Cruces is in startup, and our cottage cheese expansion at Friendship is moving forward. Operationally, the network is performing at a higher level, and we continue to find opportunities. Fuel and freight remain a headwind, and we are managing them through productivity and pricing actions. The US is developing a protein-aligned platform with real momentum, and we intend to keep building on it. Turning to international, the Australian team delivered another strong quarter. The shift we have been driving away from baseline commodities and toward higher-value domestic and export categories is clearly showing up in the business. Commercially, we are winning where it matters. A growing share of our milk is going to higher value domestic and export channels, supported by strong relationships with our retail, private label, and food service customers. In retail, Devondale continues to build household penetration and share.
Carl Colizza: We are extending it into protein with our new high-protein launches under Devondale and Liddells, and CHEER is moving into snacking. Operationally, our plants ran well against a stronger milk supply and produced more of the products that matter, including high-protein ingredients and cream cheese. The result is a more resilient, mix-led Australian platform and a team that continues to execute so well. Now, let me turn to the portfolio. Over the past several months, we have taken decisive steps to sharpen our focus. These were choices about where we can win. Each of these businesses reflects years of investment and operational improvement, and we are pleased with the value realized with the divestments we have made. What this yields is a more focused Saputo, with a streamlined footprint, a simpler structure, and a greater financial flexibility.
Carl Colizza: Capital and management attention that had been spread across more geographies can now go to stronger opportunities where we can compete from a position of strength. We have additional capacity to accelerate growth, and we intend to use it with discipline. Let me close with how we think about the road ahead. Our approach to capital allocation is unchanged, and it is disciplined. We invest in the business first. High-return organic projects and productivity, commercial and digital initiatives. We maintain a strong balance sheet, giving us the flexibility to pursue strategic investments, including acquisitions that strengthen our connection to consumers while retaining optionality across the market cycles. We return capital to shareholders through a consistent dividend and also share repurchases. We remain disciplined in evaluating every opportunity, with a clear focus on strategic fit, expected returns, and long-term value creation. We recognize that volatility is the new normal.
Carl Colizza: Market swings, trade uncertainty, and cost pressures will continue. This is a business built to operate through it. We continue to invest in the resilience of our network, from our manufacturing and warehouse footprint to automation and digital capabilities, because in a volatile environment, that resilience matters to our customers and our results. We also have the scale and a broad set of customers and end markets, and a growing specialized ingredients platform. Together with volume and mix and internal initiatives, that gives us a wider set of earnings drivers, so we depend less on any single market, and we have a team that executes. We are well-positioned to win in this environment, and we intend to keep making progress. Said simply, we like where we are, and we like the runway ahead. This concludes our formal remarks. I will now turn the call over for questions.
Operator: As a reminder, if you would like to ask a question, press star, then the number 1 on your telephone keypad. Your first question comes from the line of Irene Nattel with RBC Capital Markets. Please go ahead.
Irene Nattel: Thanks, and good morning, everyone. Great quarter. Congratulations. We hear a lot, or the market perception at this point is that it is ingredients and strong whey pricing that are driving the results, and certainly those contribute. Can you walk through your assessment of what the conditions are and what the profitability looks like, or what the demand looks like across your key categories, so we can get a better view of the degree to which it is balanced or not, which I think is the market perception? Thank you.
Carl Colizza: Thank you, Irene, for the question. Good morning. I would categorize it this way. What we are seeing absolutely from the marketplace is consumers that are, of course, focused on affordability and value, but also on health and wellness. Having said that means that many choices are being made on the overall nutritional profile of products. Ingredients certainly is a component of that health and wellness choice, but it goes well beyond that of the traditional ingredients market, as we've described it or described here in our results. It goes to products like cottage cheese. It goes to other cultured products like yogurt, to cheeses, to a variety of value-added and fortified beverages that we also make.
Carl Colizza: In many respects, what we're seeing today in the strong demand for ingredients, which is really coming from a health and wellness perspective, our portfolio is very complete in order to satisfy customers in all of the channels in which they want to consume those benefits of dairy. To be more specific, when it comes to the ingredients sector, certainly the business made some choices over 2 years ago to continue to invest in the platform in order to capitalize and process all of the whey solids that we manufacture from our cheese business. I kind of underscore that because we, as a reminder, the ingredients business is not in isolation. It is absolutely a function of our cheese business as well, and that's the general notion of whey ingredients.
Carl Colizza: Having said that, we made the important choice to invest in our Waupun facility to increase our capacity and capabilities in refining higher fractions of proteins. The market is certainly pulling from the processing community at a larger scale than what the supply capabilities are. We are, and have experienced in many respects, a real high, a real peak, I would even say, with regards to pricing in this sector. But none of our assumptions, either in CapEx returns or in our confidence as we move forward, is built on those peak returns. Our business is built on the diversification and the strength of the dairy portfolio, and ensuring that we continue to meet the aspects that are associated to affordability and value, as well as health and wellness. We have a number of tools in our toolbox to work with.
Carl Colizza: We are very pleased, and I guess in a nutshell, we're very pleased with the returns that we are seeing in the ingredients market for some of the choices that we have made in this sector. In fact, it's coming from all platforms. Canada, US, and Australia are benefiting from this. But none of this was, I can use the word gimme or hand-me-down. It was fundamentally based on the choices we made to be able to invest in those categories to capture the market opportunity that's present today.
Irene Nattel: That is really helpful. Thank you, Carl. Just one follow-up, just taking another step back. We go back to F22 when you embarked on this capital project. The market was not where it is today in terms of demand for proteins, certainly not where the forecasts are in terms of growth and demand for protein. Is it possible, notwithstanding the puts and takes in some of the underlying commodities, are you thinking, or is it reasonable to think at this point that the returns that we may see actually could exceed some of the F22 assumptions?
Carl Colizza: It is a great question, and it has taken us back to prior calls and some of the interfaces that we have had with our investment community in the past. One phrase that comes to mind immediately is we always believed in the earnings power of the plan, the investments that we put into our business. We knew that our teammates, first and foremost, and the capital we deployed would return, not within the, obviously, the timelines that we had established back in the day, without rehashing all of that, but we absolutely believed that it would come to fruition. We are here today, certainly benefiting from those choices. I think the short answer is yes, I do believe that there will be some of those sectors that will outperform, and ingredients is likely one of them that we would have otherwise anticipated.
Irene Nattel: That is great. Thank you.
Operator: Your next question comes from the line of Derek Lessard with TD Cowen. Please go ahead.
Derek Lessard: Yeah, good morning, Carl and Maxime. Again, congratulations. Strong results. I wanted to follow up or keep on the high-protein ingredients theme. I guess, with the strong demand and pricing for these high-protein ingredients, could you give us a sense maybe from a customer perspective, like the commitment, how commitments and pricing are evolving into the H2?
Carl Colizza: Sure. What I can tell you is the following. Today's, a combination of things. One, there are some contracts that are lagging and will continue in the coming months at some of the peak pricing. Some of the volume will be sold more on a spot basis, and we have seen some of the pricing come off of its ultimate highs. But we are still well, well ahead of certainly last year and well ahead of expectations. So, we feel very good about that. But what we are more encouraged about beyond that of simply the price is the continued demand for those very same protein ingredients. And it is coming in many different forms. As customers are having some difficulty accessing certain types of fractions, and whether you want to call those WPCs and/or other, some are reformulating with other fractions of whey proteins.
Carl Colizza: And of course, this sector is not new to Saputo. You all know very well that it is always been a part of our business, and we manufacture just about every and all protein fractions and variations and formats that are needed in the marketplace. And fundamentally, each of those sectors are having success as the demand shapes. So in the end, whether it is pricing remains on its highs or comes off slightly, we do feel very good about the ongoing structural demand here in this space, and we have the tools globally to respond to whatever the reformulations that might occur from the end-user community might be.
Derek Lessard: Yeah, thanks for that, Carl. And I guess, I know, and you just said it too, that obviously your return metrics are not assuming peak prices, but are you seeing any additional cheese capacity in the industry coming on stream that could put any pressure on pricing?
Carl Colizza: Well, what I can say is, as we had shared in the more recent past, specifically the US dairy industry had invested, I think the numbers we had quoted in the past were around CAD 8 billion into the processing community over a period of three to four years. There is new numbers circulating that would suggest that there is a total of CAD 16 billion going into the US dairy industry to 2030. But keep in mind that a lot of that is certainly geared towards cultured products, value-added beverages, and proteins, as well as investing in innovation and ingredients categories. From a cheese capacity perspective, most of what we understand is being put in was in that first wave I just referenced. All sort of part of how we have already assessed market capacity, supply, and demand dynamics.
Carl Colizza: Cheese continues to grow as a category, but it is certainly growing at a much lower rate than that of the ingredients sector, and the two are fundamentally tied. In many respects, it will continue to be the rate-limiting step, and that would be cheese-making particular, for the ingredients business to keep growing at the same rate. I do expect that fundamentally, the supply and demand dynamics will improve over time here, specifically in the cheese side as well.
Carl Colizza: But we feel very good fundamentally about not only the capacity of cheese that we have available in the marketplace to generate the whey solids in question, but also some of the runway that we have that Steve Douglas will be focusing on in order to move up the value chain on the ingredient side of our business, as well as fundamentally and wholly process all the whey solids we produce from our cheese operations. Because today, not all those solids are processed through our own operations, and we certainly are looking at improving that vertical integration to its maximum.
Derek Lessard: Appreciate your thoughts, Carl. Congrats again, guys.
Carl Colizza: Thank you.
Operator: Your next question comes from the line of Chris Li with Desjardins. Please go ahead.
Chris Li: Oh, good morning, everyone. Carl, I know I've asked you this in the past. In the US, milk production remains very healthy and continues to exceed consumption. This is obviously contributing to some of the price volatility. What is sustaining the, in your view, the robust milk production, and how sustainable is it? When do you think the supply-demand dynamics for cheese gets a bit better? Thanks.
Carl Colizza: Thank you, Chris. You are absolutely correct. I will say this. I do believe that the resilience in the supply through the various cycles that have occurred in the US is surprising to the processing community as well, but in many respects, welcomed. Because for the dairy industry to keep growing and for us to be able to capitalize on the international market opportunities as well, we need the resilience of our dairy farming, the health of that very same community. So, we welcome the supply that's been coming off of production. Is it fully aligned with the more immediate needs of the domestic markets or other?
Carl Colizza: There is a slight, I will say, somewhat of a slight disconnect, but the reality is that there is a lot of export opportunities and demand. The supply from the US farming community has found a home in a number of different channels and allowed us to maximize our own platform as well. This is not just about the entire industry, but Saputo. You have heard us, Chris, in the past talk about the comfort we now have in the three milk sheds in which we operate from, Canada, US, and Australia. Fundamentally, we need the US. We are banking on the US to be a platform where we can export to the greatest extent from. We feel good about that. There is always a balance.
Carl Colizza: The US farming community benefited, of course, from, I will say, some lagging lower costs in feed, some favorable weather conditions that certainly help milk production at an acceptable and reasonable cost. Some aspects and continued work in genetics is helping them with the overall yield, as well as a healthy beef market is certainly subsidizing some of the operations and capabilities on farm. All that said, there are some headwinds. Here they are coming, but the American dairy farmer, I continue to truly believe, is in a healthy position to be able to supply the processing needs and the processing community's needs.
Chris Li: That is very helpful. Thank you. Also in the US, I know you guys have a longer-term adjusted EBITDA margin target of 10% to 12%. I think you almost got there in Q2, so congrats on that. In your opening remarks, you did mention about more US margin capture opportunities ahead. I apologize if you already answered this in the previous questions, but can you elaborate what are some of the other opportunities ahead will be?
Carl Colizza: Sure. Yes, in this quarter, our Ingredients operations have contributed an important amount to the overall margin structure. Underlying, and in addition to that, our continued volume and the supply first, and the fill rates, as well as the pull from the marketplace in a variety of other categories, has certainly kept our margin structure and results healthy, as well as the operational focus and execution. The US team keeps getting better by the week, and delivering on the investments that we have put into that. Certainly, we feel good about the way forward with some of the cultured demand and the pull. That is why we have chosen to invest capital in our Friendship operation for increased cottage cheese. We have a number of other value-added beverage initiatives that are underway, and we do believe that in select areas, we will be increasing CapEx to unlock those opportunities.
Carl Colizza: All very exciting in the sustainable consumer forum, and we feel good about the US playing an important role in all channels, whether it be retail or food service, to capture those opportunities.
Chris Li: That is great. My last question, I guess, is more modeling-related, also still in the US. I appreciate your comments earlier about some of the high-protein ingredients, some of the contracts, there is a lag impact, so you are still benefiting from high prices. I guess just from a modeling perspective, when do you expect you guys to start to lap some of those pricing tailwinds, just to make sure we are not too aggressive on our forecast in the outer quarters? Thank you.
Carl Colizza: The best I can tell you, and it varies by country, so whether that be Canada, US, or Australia, but you typically do not have pricing contracts that are longer than, call it, three, four months. That would be sort of the extent of how you would look at my qualifying, if you like, my term of lag, okay? I will not get into the specifics of which geography, how much quantity is attached to which lag, but I can say that the highs of the WPC80 market will not necessarily be there in the more immediate future. But keep in mind that we are in a dairy ecosystem, and if those highs, as I mentioned, sit where they are today, which are well ahead of last year, well ahead of our projections, there is the potential for other sectors within our business to also outperform.
Carl Colizza: Max did speak about the soft dairy market, CME in the US. Block price was fundamentally depressed, and accordingly, the returns on the cheese side were. The results reflect that softness, if you will, in the cheese market. We are already beyond that today. We are in a better position as we sit today in the marketplace, but that is absolutely interconnected with the ingredients pricing as well. So, it is a bit of a, I will use the word slippery slope to just model one aspect in the dairy ecosystem versus the other, hence why we continue to be confident about our outlooks.
Chris Li: Very helpful. Thanks, Carl, and all the best.
Operator: Your next question comes from the line of Vishal Shreedhar with National Bank. Please go ahead.
Vishal Shreedhar: Hi, thanks for taking my question. Wanted to get your thoughts on the impact of GLP-1s on your products. My understanding is, and while there are benefits in protein and certain snacking categories, my understanding was pizza categories were under some pressure, but the volume I am seeing in your business doesn't necessarily demonstrate that. I was hoping you could give me some color and context on that.
Carl Colizza: Thanks, Vishal, for the question. GLP-1s are creating some new opportunities for the dairy community to capitalize on. I come back to my comments about health and wellness, the push for higher protein foods. We have a combination of products in our portfolio that respond very well to that, and we are absolutely seeing the benefit of that as we move forward. I will further answer the question in just a sec, but to come back to Chris's question earlier, it is also why we feel comfortable about our ongoing business performance, because it isn't all about the ingredients market either. There are some very healthy categories that we continue to invest in, and we see a runway ahead of us that includes those that service the GLP-1 market.
Carl Colizza: Now, coming back to other aspects of our business, including that of, call it, mozzarella and pizza cheese, certainly the pizza category has had some moments of softness here over the last consecutive quarters, as you would have seen and heard maybe from some of the large players out there. Is it related to GLP-1s? Is it related to value, affordability? It is a combination of both, but we have found a number of different channels for our mozzarella and associated stretch cheese products to continue to find a home, whether that be domestic or from an export perspective.
Carl Colizza: I cannot sit here and tell you that the pizza category is in a positive territory of growth, but I can tell you with confidence that we continue to make inroads in a number of other food service channels that utilize cheese as a whole, including mozzarella, not just pizza, as well as different markets, like the export market, where we can find a profitable growth with as well. Feel good about those prospects as well.
Vishal Shreedhar: I appreciate that. I was hoping you could give us more quantitative understanding of the benefit of these ingredients on your year-over-year EBITDA, given the materiality of protein and related agreements to your future strategies. I understand it is not just protein, and the strength is more broad-based, but in the context of market questions, I was hoping you could give us some quantification of the benefit that you received year-over-year on EBITDA.
Carl Colizza: Yeah. We will not disclose the profitability of our products, as you know, Vishal, in a category-by-category and geography-by-geography basis. But I can tell you that the high-protein ingredients were the primary driver of our earnings growth this quarter, and that was kind of broad-based across all of our divisions. But I need to underscore that it is not just about the pricing. It is about the execution. Our teams were able to fundamentally deliver on that demand, and certainly the utilization of our capacity and the effort that goes behind sourcing the whey solids and ensuring that we can get to our customer base and working with our customers, who, of course, are now dealing with inventories and products of much higher value.
Carl Colizza: I can tell you that there is a broad range of contributions, positive contributions, obviously, by the overall performance we have had in our business, coming from exciting categories like cultured and value-added beverages and cheese. Yes, ingredients, by design, I guess, for our assets, we capitalized on those markets.
Vishal Shreedhar: Thank you.
Operator: Your next question comes from the line of John Zamparo with Scotiabank. Please go ahead.
John Zamparo: Thank you. Good morning. I wanted to ask about the Australian business. I think that surprised many of us, and you highlighted some of the areas that drove the growth. I wondered if you could elaborate on what changed specifically in the quarter or what inflected in the quarter to better unlock this sector.
Carl Colizza: I think one of the best ways to underscore where the Australian business is at is we have moved from all that heavy lifting of network optimization and that difficult work to now we are very pleased with the assets we have. We are continuing to be focused on developing and growing our product set as well as our brands in both domestic and export markets, and we are firing on all cylinders. We are moving every drop of available milk in the Australian platform to the highest return categories possible, with the likes of course, premium cheddars, cream cheeses, value-added beverages, and of course, CHEER cheese. The team is executing very well and responding very well to market needs.
Carl Colizza: What also helped us beyond that of the excellent execution, we did have access to more milk year-to-date in Australia, combination of certainly weather conditions cooperating, but also resilience from our farming community and translating some of those environmental benefits into milk production, as well as the recruitment process, of course, that our team worked very hard at on an annual basis. So, combination of incremental milk allowing us to maximize capacity, volume, overhead, and fixed cost absorption, but on and in a business that is very stable at this point with its operations and looking to optimize and capitalize as best as possible.
John Zamparo: Okay. Thank you for that. Then switching to capital allocation. Your prepared remarks reference the favorable balance sheet position you are in. I wonder if you can update us on your latest big picture view here on the discussion of buy versus build when thinking about capacity expansion in your most important categories. I know you are not going to guide to next year, but might CapEx move up next year to create a runway for future growth in the categories that are most important to Saputo?
Carl Colizza: I will provide a bit of a context to capital allocation, and Maxime Therrien will enhance a little bit of that with regards to quantification in some ways. But at the end of the day, yes, we are prepared, and our business is one where we are focused on growth. That we were clear in our priorities over the last several quarters and periods where we say we will invest in ourselves to be able to capture and meet the consumer where they are at, and we are doing that. We have signaled and indicated clearly that we are investing in capacities in cottage cheese, but there are a number of other areas which we will also share with you all that we are going to continue to invest in.
Carl Colizza: Our first area of priority is ensuring we grow in the categories, the likes of the cultured products, which include, of course, yogurts and cottage cheese. There are other areas like value-added and fortified beverages in all our territories, and aseptic milks that we are very interested in as well. Of course, our Ingredients category and platform is in a great place with regards to consumer demand. We will be investing incremental capital dollars beyond that of what we have shared with you all before in order to keep maximizing our returns. Max, can you maybe
Maxime Therrien: Yes
Carl Colizza: help quantify some of this?
Maxime Therrien: Sure. John, the leverage we are at and the target that we set for ourself in order to support growth and run our business of 2.25x our adjusted EBITDA remains appropriate for us. Yes, we are running below at this time, which is we are in a good place. We have ample financial flexibility that comes not only with the cash that we generate from the business, but also from the proceeds that we expect to receive in the next couple of months or next quarter. We absolutely will pay attention to our hungry platforms that are looking for capital to maintain and pursue growth organically. That is certainly going to be an element that we intend to invest in CapEx. From share repurchases, we are to file the renewal of our NCIB program, so we will be remaining quite active in that front.
Maxime Therrien: That program itself served us quite well over the last two years and will continue to do so. Relative to debt repayment, there is absolutely no concern at this point on that. Dividend, typically, we take care of that dividend in August, so that remains the plan. That leaves us with ample flexibility to address any M&A transaction or other strategic investment that would be benchmarked against the use of funds that we are planning to do.
John Zamparo: Okay. Very good. Thank you. All the best.
Operator: Your next question comes from the line of Tamy Chen with BMO Capital Markets. Please go ahead.
Tamy Chen: Hi, good morning. Thanks for the question. Can you help us understand how much of your exposure when it comes to the whey sales is on those commitments, contracted 3 to 4 months pricing versus just on spot?
Carl Colizza: I will tell you that for the most part, we have a large quantity of our volume that we make in today's world, literally, if we talk about real time here, that are contracted. But again, it is not as though the market has shifted with regards to going to spot versus that of the contractual space. It is the normal cycle. We still see our strong partnerships continuing to put in the necessary orders, but we are also making some deliberate choices to not necessarily lock everything up either, and ensure that we have the flexibility to keep growing and, I will say, exploring new geographies and new markets with our products. So, it is not something that is top of mind for us in the context of whether or not we will be maximizing our returns.
Carl Colizza: We do feel that the position that we are in with our inventory and the choices we are making with customer commitments and new explorations are very well balanced.
Tamy Chen: Okay, I understand. Typically more on the contracted side. Okay. For your US sales to the industrial channel, when it comes to the various refined whey outputs, whether it is WPC34, WPC80, or even WPI, do you do all three in equal magnitude, or what matters more to you? Does your profitability differ materially between the three?
Carl Colizza: We play in just about all of them, and I will not get into all of the details. Realistically, there are a number of other fractions in there that we also manufacture. It is not just the fraction or the concentration levels. Some of it has to do with the specializations in and around heat stability. Some of it has to do with the way they are texturized. It has everything to do with the end markets. They each, in their own rights, offer a different type of return as well as a different secondary byproduct. Again, I do not want to get overly technical, but each have pros and cons in creating either the maximum return in the protein space, but others also offer the opportunity to generate a greater degree of secondary byproducts like lactose, which are also in demand in the ingredients market.
Carl Colizza: That is why we call it an ingredients business as such. In that very same statement and breadth that I have shared, I am also only talking about whey ingredients, but our ingredients business also includes a number of other powdered-based products that are milk-based, like milk protein concentrates, as well as skim milk powder and whole milk powder, and things of that nature. It is a very broad range, and one that we are continuing to refine, maximize. I will say it this way, the beauty of it is that we have the tools and capabilities to do many of those products for various channels, as well as, and this might be the most important part, the flexibility to move from one stream to another in order to adapt to the market needs.
Tamy Chen: Got it. Okay. If I just squeeze in one last more. I get this a lot from investors, this debate. Carl Colizza, how should we think about the puts and takes in the US between ingredients and cheese. If these elevated ingredients-type pricing go back to levels we have seen 2 years ago, and the block comes back, is that a pretty neutral one-for-one offset when it comes to your US profitability, i.e., margin specifically? Thank you.
Carl Colizza: Yeah. What you are kind of describing is a bit of the kind of cycles we live through. What I can tell you is, if I would try to create a visual for you, I do not believe by any means that the cycle with regards to the pricing in and around whey-based ingredients is going to come, flow back down to a reference point that you asked here of 2 years ago by any means. We are well beyond that. I will say it is a structural change to a higher price point. When it comes to cheese, I believe that we also hit a floor, and we are on our sort of our way back up, if I can say. So, I see cheese being more representative of what we saw over the last couple of years, and that is kind of same cycle.
Carl Colizza: I do believe very strongly that the ingredients business has moved up to a new tier, a new plateau.
Tamy Chen: Thank you.
Operator: Your next question comes from the line of Scott Marks with Jefferies. Please go ahead.
Scott Marks: Hey, good morning all. Thanks for taking our questions, and again, congrats on a nice quarter. First thing I wanted to ask about, we heard certainly a lot about the structural demand. We continue to hear about that for ingredients, supported by the health and wellness narrative. Wondering if we look at it from another lens in terms of, are there any areas where you are actually seeing weakness in that demand or a slowdown in that demand relative to what you have been experiencing for the past year or so?
Carl Colizza: If the question is specific to whether in the health and wellness sphere we are seeing softness in any of our offerings, is that it? Or in our broad portfolio?
Scott Marks: Yeah, more so tied to the ingredients demand.
Carl Colizza: Generally speaking, no. Ingredients demand is, like I said, still very strong, and over a period of 12 months, we are not seeing softness. What we are seeing is, I will say it this way, based on the peak pricing that customers and formulators were faced with, they also proactively are looking at, I am going to use the word reformulations in some of their end products. But those reformulations all pass through dairy components. So, some may be looking at lower fractions, different blends, looking at milk powders in combination with whey solids. It really depends on the functionality and the brand essence, if you want, the value proposition of the product that consumes this as a component of its recipe.
Carl Colizza: Yes, we are seeing it kind of move around in the demand from not just one item such as WPC80, but the demand for whey-based ingredients, and all ingredients for that matter, continues to be quite strong. So, I would not call it a weakness in any area. I would just call it more of a remapping in some instances.
Scott Marks: Appreciate the thoughts there. Then maybe just as we think about the current state of the portfolio, how much of your mix would you say is currently more value-add products and ingredients versus more maybe commoditized products? How do you think about that mix evolving over time? Do you have kind of a target that you want to get to, and where you think you can get to?
Carl Colizza: I guess I would hesitate to share a percentage of what we would call commoditized versus value added. But what I can tell you with a lot of encouragement and passion is that we are very, very focused on investing in the growing categories of value-added dairy, and in two ways. Value-added dairy is not all about the high protein fractions, as you well know. It also includes some aspects of cheese and cheese snacking. It includes value-added beverages such as either protein or other functionality additions in this space, as well as the packaging format and shelf stability. There are other areas, of course, of cultured products. These are the areas where we know that we need to continue, need to invest a disproportionate amount of our capital towards.
Carl Colizza: But one thing that we are not forgetting in the process, we are not afraid to continue to invest in, and sometimes we say our anchor, if you like. You may have heard us say our anchor, and some of the more everyday products in the portfolio that are really about value and affordability. Because we cannot forget that there is the lion's share of our customer base, of our consumer base, are still absolutely looking for value and affordability. And our portfolio, as you have heard me say before, is very well built to service both those consumer streams, which are not all that different. In many respects, you are going to get consumers looking for value and affordability, and that makes them gravitate to some private labels, which we are absolutely focused on ensuring to support our customers in that space.
Carl Colizza: And in other instances, they are being driven to either branded products, and as long as your brand has a value proposition, then you absolutely will continue to have success with your brand. And we know which ones of our brands have a value proposition, and those are the ones that we continue to invest incrementally in A&P on. And lastly, we have some of the higher margin, if I can say, products associated to the higher end health and wellness that we also continue to invest dollars and time behind. So, I guess the short of it is very well balanced. We are very comfortable with the balance in our portfolio to address every stream and consumer need in the dairy complex.
Scott Marks: Appreciate it. We will pass it on.
Carl Colizza: Thank you.
Operator: Your next question comes from the line of Bahamin Abdolpanah with Ventum Financial. Please go ahead.
Bahamin Abdolpanah: Good morning, everyone. Congrats on the quarter, and thank you for taking my question. I want to get back to maximizing the return on the ingredients. You mentioned flexibility that you have. Can you double-click on that? Is this different plants that you have or one plant that is flexible in providing different products? An explanation there.
Carl Colizza: We have a couple of facilities that have flexibility for different fractions, as well as, in some respects, being able to produce either milk-based proteins as well as whey-based proteins. Whether that is in Canada has some of that flexibility, the US, as well as Australia. Now there is varying degrees of milk throughput, and/or processing, water removal capacities, and things of that nature. But we feel good about being able to adapt our platform to the market needs. Now, these things do not get switched on and off overnight, but certainly with production planning and cycles, we can adapt responsibly to that. Maybe to double-click on one of the aspects associated to processing all of our solids. Today, some of our solids, just by choice, optimization, capabilities, things of that nature, we did not process. We would sell it in liquid form to another refiner of sorts.
Carl Colizza: Part of that was a function of available capacity, but as the capacity has been increased, specifically in Waupun, we now have excess capacity, and we will be looking at different avenues to fill up that capacity. Part of where the optimism on the runway comes from is a combination of our flexibility, excess capacity that exists, as well as the continued dairy whey solids that we generate from our core business, cheese business.
Bahamin Abdolpanah: Understood. On Waupun, what is keeping Waupun from running at capacity? If there is a gap, can it be closed by redirecting whey from other US plants? Was it planned on Canadian whey that probably got banned?
Carl Colizza: It is both.
Bahamin Abdolpanah: At these prices, would you consider buying from other cheesemakers to fill this capacity, or it does not make sense?
Carl Colizza: That is a great question, and that is exactly what Steve Douglas is focused on. It is why we created the Ingredients platform in part, is to ensure that we are maximizing any and all of those opportunities. The Waupun facility was built with excess capacity, well beyond that of the whey solids it generates from its own cheese and regional supply from Saputo plants. That was very intentional, and the way forward for filling that capacity will be both a combination of internalizing some solids, contemplating procuring liquid solids in the reasonable region, as well as, let us not kid ourselves, cheese continues to grow, albeit at a different rate. Cheese has been at the one, two, maybe 3%, and the odd year percent growth, but it is still growing, and it is a core area of expertise of ours, and we will continue to invest responsibly in this space.
Carl Colizza: And we know now with a greater degree of certainty that the returns for cheese growth also include that of the whey solids that comes with it.
Bahamin Abdolpanah: Thank you very much. I will pass the line.
Operator: Your next question comes from the line of Tal Woolley with CIBC Capital Markets. Please go ahead.
Tal Woolley: Hi. Good morning, everybody. Just in the Ingredients business, I am just wondering if you could talk a little bit about the shape of the market. What is the customer concentration? Is it a situation where your best five customers are 50% of your volume, or is it much more diversified than that?
Carl Colizza: Yeah. We won't go into those specifics, but I can tell you it's very well diversified. Very well diversified, both in a healthy balance between supplying the domestic markets in which those ingredients are generated, whether that be in Australia or the US or Canada for that matter, as well as in the markets where we can export. We certainly are exporting to, if I'm not mistaken, I think the last number is 30 or 40 different countries is where we export to, or through an intermediate. So, very well diversified. The underlying answer here or takeaway is that demand is not just in North American markets or in fully developed markets, if you like. There are many emerging markets as well that are pulling on protein in various forms, and we're well-positioned to continue to capture that opportunity.
Tal Woolley: Okay. Is it all feeding into I think we sort of classically kind of think here it's feeding into sort of consumer products, but I'm just wondering, is it also making its way into sort of infant nutrition and things like that worldwide?
Carl Colizza: Yes. Not all of our products are qualified for that, but some of our products do absolutely go into infant nutrition. Some of them go into quasi-pharmaceutical products, things of that nature. Again, that is all a function of the degree of refinement tools, capabilities, qualification partnerships that you have. I know it sounds like a bit of a roundabout way to cover the entire portfolio, but that's exactly how we're built. We're built with quite a bit of flexibility to be able to, in many respects, capture, I'll say, the most interesting of markets, or said differently, to continue to grow with the customers that continue to partner with us.
Tal Woolley: Okay. Just lastly, obviously a big election in the States this week, and Mark Carney continues to, here in Canada, continues to make moves to find other trade agreements. I'm just wondering how, versus say three or six months ago, you're feeling about the tariff outlook and possibilities of supply management in Canada becoming a trade chip.
Carl Colizza: My position is, my sentiment, I guess, is no different than it was over the last several periods and quarters, whereby I still feel good about Canada's supply managed system and where it is at and why it works for Canada and why it is important for Canada. Equally, that it is not at the core by any means of what is being negotiated. There are some other aspects of trade, agricultural trade, that includes dairy, that probably has a very reasonable way forward for resolution. Confident that that is what will occur. But more specifically, from what the impact has been for Saputo, it has not been material in any way to date, inclusive of the most recent ban with regards to whey solids from Canada entering the US. That has created a scenario that is not optimal.
Carl Colizza: If going back to everything I have said about optimizing the dairy ingredients platform, that ban has created a wrinkle in that and optimizing, but we are still benefiting from and adding value to those whey solids domestically in Canada.
Tal Woolley: Okay, that is great. Thanks for your time, everybody.
Carl Colizza: Thank you.
Operator: That concludes the question and answer session. I will now turn the call back to Nick Estrela for closing remarks.
Nicholas Estrela: Thank you, Jeannie. We will release our fiscal 2027 Q3 results on 5 February 2027. We appreciate your participation in today's call and webcast. Thank you for your continued interest in Saputo, and have a great day.
Operator: This concludes today's call. Thank you all for joining. You may now disconnect.
