Saputo Inc. (OTCPK:SAPIF) Q3 2022 Earnings Conference Call February 10, 2022 2:30 PM ET

Lino Saputo - Chief Executive Officer and Chair of the Board

Maxime Therrien - Chief Financial Officer and Secretary

Michael Van Aelst - TD Securities

Vishal Shreedhar - National Bank Financial

Irene Nattel - RBC Capital Markets

Chris Li - Desjardins Securities

Disclaimer*: This transcript is designed to be used alongside the freely available audio recording on this page. Timestamps within the transcript are designed to help you navigate the audio should the corresponding text be unclear. The machine-assisted output provided is partly edited and is designed as a guide.

0:02 Greetings, and welcome to the Saputo Inc. Fiscal 2022 Third Quarter Results. During the presentation, all participants will be in a listen-only mode. Afterwards, we’ll conduct a question-and-answer session. [Operator Instructions] As a reminder, today’s call is being recorded Thursday, February 10, 2022.

0:27 Now I would like to turn the conference over to Lino Saputo Jr. Please go ahead.

0:36 Thank you, Tommy. Good afternoon, and welcome to our third quarter fiscal 2022 earnings call. Our speakers today will be Lino Saputo, Chair of the Board, President, and Chief Executive Officer and Maxime Therrien, Chief Financial Officer and Secretary. Before we begin, I'd like to remind you that this webcast and conference calls are being recorded and the webcast will be posted on our website along with the third quarter investor presentation.

1:01 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.

1:32 I'll now hand it over to Lino.

1:32 Thank you, Nick. And good afternoon, everyone. Over the past quarter, our teams have demonstrated their agility once again, adapting quickly to changing market conditions. They've maintained a laser focus on our priorities, and I've taken decisive actions from an operational and customer service perspective. My ongoing gratitude goes to all Saputo employees for their outstanding efforts in a dynamic and competitive operating environment.

2:01 Earlier today, we reported a third quarter results, which include strong revenue growth in all sectors, and improve consolidated adjusted EBITDA when compared to last quarter. Our teams have been resilient in the face of numerous supply chain challenges, and we made good progress in addressing labor availability issues.

2:24 We’re taking several deliberate actions to improve productivity and investing in capacity, innovation and in our brands. In parallel, we've all also work to recover increasing costs to pricing initiatives in the current environment. We will be aggressive in managing inflation by driving price recovery activities. We took further steps during the third quarter to align our portfolio for stronger and more profitable growth in line with our strategic plan.

2:56 Building on our Saputo promise, we achieved a number of milestones this past quarter. First, our Dairy Division USA announced a collaborative partnership with Hyperlite Energy, the developer of Hylux, a low cost solar steam technology, which aims to cost-effectively reduced greenhouse gas emissions in an industrial setting.

3:20 This innovative renewable thermal energy system will be implemented at one of our facilities in California, allowing us to leverage the Hylux technology to help reduce the CO2 intensity of our operations. Second, through a partnership with Lightsource BP, we completed the construction of a five-megawatt solar project to provide renewable power to our Davidstow Creamery in the UK. We expect this project to deliver 10% of the plant annual electricity demand and enable us to reduce CO2 emissions by nearly 1500 tonnes annually.

4:02 Third, our Europe sector partnered with flexible packaging supplier, Wipak UK on a project which resulted in 33% of virgin plastic being replaced with post-consumer recycled or PCR material for some of our block cheese packaging. The PCR packs are being gradually introduced in Marks and Spencers stores and we expect to roll out PCR packaging to a wider range of products in the future as technology improves, and the quantity of available materials increases.

4:40 Finally, we maintained our B score in our CDP climate disclosure above the industry average. While our operating environment remains complex, strong demand across all our segments, the implementation of operational optimization activities, and the impact of our pricing initiatives will be key drivers moving forward.

5:05 We have strong and diversified cash generation capabilities. And we expect our capital allocation strategy to deliver long-term shareholder value. And I'll turn the call over to Max for the financial review before providing some additional comments. Max?

5:24 Okay. Thank you, Lino, and good afternoon, everyone. As Lino mentioned earlier, there were a number of factors that influence our results this quarter. First, we were encouraged to see that consumer demand for our product remained strong. However, we also continued to see inflation rise across a number of key inputs and this dynamic environment created challenging condition for the supply chain. To help managing increasing inflation or taking multiple pricing initiative in all of our geographies and these have been communicated to our customer.

6:06 Now, here's some of the financial highlights of the quarter. Adjusted net earnings were $0.34 per share in the third quarter, compared to $0.56, when compared to last year. Adjusted EBITDA amounted to $322 million compared to the $431 million in the third quarter of last fiscal. Of note, adjusted EBITDA improved by 14% versus last quarter, despite deuteriation in market condition in the US. Consolidated revenues improved to $3.9 billion led by higher prices in all of our geographies and the contribution from acquisition completed earlier this year. Turning to the review of our business sector, starting with Canada, adjusted EBITDA for the third quarter of fiscal ‘22 total were $121 million, compared to the $118 million for the same quarter last fiscal. Higher input costs caused by inflationary pressure continued to have an unfavorable impact. This includes the $5 million related to freight and logistical costs which were offset by the positive effect of pricing initiatives.

7:34 Furthermore, we were impacted by the floods in British Columbia which required that we incurred incremental freight in logistical costs to serve our customer. In our USA sector adjusted EBITDA for the third quarter of fiscal ’22, total $83 million, down $88 million versus last year. We continue to face rising inflation, where pricing initiative lagged, costs, surge more so than historically. This include an increase of $39 million related to freight and logistical costs.

8:16 In Q3 pricing initiative have not fully mitigated increasing input costs caused by inflation. As a result, we announced to our customer additional pricing initiative in Q4. US market factor resulted in a negative net impact of $40 million as compared to the same quarter last fiscal year. This was mostly the results of the unfavorable impact of the negative spread between the block price of cheese and the cost of milk. In the International sector, adjusted EBITDA for Q3 of fiscal ’22 total $85 million, down $20 million when compared to last year. Supply chain challenges due to container and vessel availability issues and port inefficiencies negatively impacted export sales volume.

9:17 However, the relation between the international cheese and dairy ingredient market price and the cost of milk had a positive impact, you mostly to the rolling off from the unfavorable export contract pricing. In Europe, adjusted EBITDA for Q3 of fiscal ’22 amounted to $33 million, down 4 million when compared to last year. Although higher sales volume at a positive impact on efficiencies, lower international dairy ingredient market price for our product at an offsetting negative impact.

10:01 The contribution of the due dial-in acquisition and the Wensleydale dairy product acquisition contributed positively in according to our expectation. Cash generated from operating activities amounted to $167 million for the quarter and $691 year-to-date. During the quarter, we recorded an impairment charge on intangible asset of $43 million after tax related mostly to our ERP project called Harmony. As part of the continuous evaluation of our overall activities, we decided to pause the project and delay the rollout in the Canadian Division for a minimum of three years. This will allow us to reallocate resources to support and execute on our growth initiative of our global strategic plan. We aim to shift some of our harmony team members into position that will help assist our US business with it's one USA journey and redeploy other into Canadian business activity, helping to fill existing vacancies.

11:24 We have lofty ambition in regard to our global strategic plan and we're confident that the execution of the initiative included in the plan, will help each sector deliver on their respective objectives. We are still very much committed to implementing ERP within Canada. It's a matter of timing. So this concludes my report. Lino, I will turn the call over to you.

11:54 Thank you Mac. Like many other companies were facing rising inflation, notably in consumables packaging, ingredient sourcing and transportation and logistics. We are working closely with customers to manage inflation through responsible price increases. We believe, we still have opportunities on this front specifically in our US and Europe sectors where we are still lagging cost increases. While we're working diligently to achieve optimal output, labor availability continues to impact volume and our ability to achieve optimal efficiencies across our network. As such, we continue to take actions to address this. And we're seeing improvement. As an example, on the labor front, we've made our compensation packages more competitive. We're implementing a referral and retention bonus program. And we have ramped up advertising for job openings.

12:56 To drive volume, we're optimizing our existing footprint, adding new capacity, adjusting our product mix by facility, and matching our portfolio more closely with consumer demand. We recognize how important service levels are to our customers and we're committed to improving order fill rates and reliability of supply. As we look forward, improving our shipment volumes will be key to getting back on track, with a large percentage of that coming from the US sector. In addition to network optimization initiatives, we are accelerating some of the pillars of our strategic plan.

13:36 As part of the Optimize and enhance operations pillar, we announced several major capital investments, and consolidation initiatives intended to enhance and streamline our manufacturing footprint in our US and international sectors. In our US sector, we plan to invest $169 million towards the modernization and expansion of our cheese manufacturing facilities in Wisconsin and California, to support our growth plan in the retail cheese market segment. These initiatives will begin in the fourth quarter of fiscal 2022 and will take approximately 24 months to implement.

14:18 With regards to streamlining, we plan to consolidate our cotton wrap activities on the West Coast with the closure of our Barclays Street California facility. In the International sector, we will be streamlining operations at two manufacturing facilities in Australia. These measures will optimize our product portfolio, remove complexities, enhance capacities, and enable us to pursue operational improvement initiatives to deliver against our growth objectives. The investments and network optimization activities are consistent with our global strategic plan designed to create shared value for all stakeholders.

15:05 Looking now at some of our third quarter highlights. In Canada, our business delivered solid results despite supply chain cost impacts due to the flooding in British Columbia. Following the successful startup of our new state of the art fluid milk facility in Port Coquitlam production on our first plant based line began in Q3. We continue to see a long runway for growth in dairy alternatives, beverages. We anticipate strong demand, and we believe this will be a solid contributor to growth. As part of our e-commerce strategy, we went live in September with nibble, an innovative B2C platform. Nibble delivers curated specialty cheese boxes direct to consumers in Ontario and in Quebec.

15:57 We made excellent progress during the quarter with our awareness and marketing campaigns and significantly grew our e-commerce volumes. We are now actively working on expanding our distribution across Canada. Our performance in the US improves compared to the second quarter despite a challenging operating environment, including labor availability and significant inflationary pressures. We pulled on our margin levers in the quarter including price increases in several categories.

16:33 Cost inflation nonetheless accelerated throughout the quarter. In response, we continue to implement additional price increases in the fourth quarter. Part of our strategy and our strategic plan in the US includes our streamlining efforts, specifically a reduction in the number of skews across multiple product lines. activities of this nature continued in the third quarter, allowing us to eliminate complexity and trade up lower valued categories. This should also lead to productivity and efficiency gains with fewer changeovers on our manufacturing lines.

17:16 On US labor vacancy rates improved, although we're not yet at optimal levels. The success of our US business remains a top priority. Results are still not where we want, but we are committed to streamlining operations and improving margins. We have more work to do to deliver the growth that the business is capable of. Our international sector significantly improved compared to the second quarter, notably due to a stronger performance from our dairy division Australia.

17:50 The sector benefited from increased pricing across most of the export ingredients category and improve supply chain conditions. In Europe, we had a good top line performance despite lower retail market sales volumes. Fourth quarter pricing initiatives to mitigate costs, which continued to rise are underway, which should result in margin recovery opportunities in the coming quarters.

18:16 Turning now to the fourth quarter outlook, we expect for cost inflation to remain at elevated levels but will be partially offset by ongoing pricing initiatives in all geographies. We anticipate for the operating environment that continue to be faced with labor challenges and supply chain bottlenecks. Demand for our products are expected to remain elevated with continued strength in the retail and industrial market segments and a steady improvement in foodservice.

18:49 Finally, in the US, we expect an improved supply demand backdrop and mozzarella, and for inventories to begin to revert to historical levels. In closing, while we're facing quarter to quarter headwinds, our priority is to keep a keen eye on the big picture. While the near-term headwinds are challenging, we are focused on executing our strategy to drive sustainable growth. Barring factors outside of our control, we're very confident in our strong value proposition as we move towards a more normalized situation.

19:28 We are focused on being flexible and agile as we continue to navigate this dynamic environment. We are leveraging the momentum of our strategic plan initiatives to drive growth faster than the market and to strengthen our position as a high quality, low cost processor with a relentless focus on productivity and efficiency. Our resilience is a testament to our passionate team and that diversified and robust global platform we built to our customer base, and geographic presence, we are optimistic about the opportunities ahead. And we are building on our commitment to deliver sustainable growth and long-term value for our shareholders.

20:14 Thank you for your time and for your support. And I will turn the call over to Tommy for questions.

20:22 Thank you very much. [Operator Instructions] And we will get our first question on the line from Michael Van Aelst with TD Securities. Go ahead.

20:54 Thank you. So I want to start off with your outlook statement. Because it isn't very clear to me what the net message is that you're trying to get across. Because you mentioned that the cost inflation will only be partially offset by price increase. So it sounds like cost is going to be down. But I'm not sure that's what you really mean. So I was wondering, what exactly you're trying to say for the next year or so. And at what point do you expect pricing to catch up to your inflation? And are you still chasing those that higher inflation?

21:36 Yeah, thank you, Michael. And I appreciate the opportunity to clarify. In this quarter to four, we are going to market with some very heavy cost recovery measures. In Q4, whether it's in Canada with the milk price increase, whether it's in the United States with inflationary cost recovery and in the UK, we will be at par with where inflation is by the end of Q4. So we are rolling it out in Q4, not all of those increases will happen into four. But starting our two one next fiscal year, we will be aligned with inflation. And we will have had a cost recovery in all our geographies, and we also reserve the right to go back to market if inflation continues to grow. So we feel very good about the measures we've taken to date, perhaps early on. We were not as proactive as we needed to be. By the end of Q4, we'll we will be caught up and we will be much more proactive going into next fiscal year.

22:53 That's good to hear. I mean, I know in the past, and last quarter, you thought the Q4 would mark the first quarter of growth? Is that still the case?

23:07 So Q4, I would say, from an operational perspective, the answer is yes. The only element that is out of our control are market factors in the US. But from an operating perspective in all countries, including the US, we have made substantial progress in terms of staffing, and we have made substantial progress in terms of our efficiencies. The only element that is out of our control is market factors. So I feel very good about where we are, perhaps if I can take the opportunity to talk a little bit about beyond, Q4 and into Q1 and this is a sort of a reflection of three quarters into a 14 or rather 16 quarter journey of our strat plan.

24:02 If I look at our Canadian platform, Canada has been the most resilient platform we've had, partly related to product and channel diversification. We have our own DSD network in Canada. So we're less dependent on third party transporters, we've got a stable commodity market and when of course, there is a milk price increase, we do pass those milk price increases on to our customers and on to consumers. And so in this platform, our numbers are ahead of last year, we will finish off ahead of last year, year-to-date. And we will continue to surpass our expectations in line with our a year one of the strat plan.

24:54 So going into year two, I'm very confident with the Canadian platform and I'm very confident about achieving the strat plan numbers, year-to-year four. If I move on to the next division, that has also been a staple in our profit drivers is Argentina. In Argentina, we have a very deep team that is used to dealing with domestic and global challenges. So this team knows how to pivot extremely well. Operationally, they're going to surpass last year's number, and they're in line with their first year targets relative to the strat plan. Moving into year two to year four, no risk for us to achieve the strat plan number. So I feel very, very good about about that platform.

25:51 The UK was hampered early on by some byproduct contracts that we had and year on year comps on the retail side. The inflation did impact our margins, but our team has aggressively gone to market in Q4. So this quarter that we're in now and has recovered some of the inflationary impact that they had on their margins. They also were impacted by some byproduct limitations relative to contract that we had inherited that have since been resolved. So they should end the year in really good shape. And I have very little concern about them achieving their strat plan targets year two through year four, again, a very experiment that team knows how to pull the levers that they need to pull, great brand recognition. So we are in control of our own destiny in the UK.

26:51 If I look at Australia, if you recall, Michael at the beginning of the fiscal year Q1 and Q2, we were hampered by old contracts at low prices, that we could not get containers for or could not get vessel availability. Into Q3, we were able to have access to more containers, vessels were still challenged but now we were out of the old contracts and into the new pricing. Milk decline in the country is at risk, was at risk and they had the ability both domestically and internationally to raise their prices. So the demand was robust, and the pricing was robust. So the second half for Australia has been better than the first half and we've got that momentum going into Q4.

27:49 Now, the corrective measures that have been taken will not allow us to recapture some of the losses in the first half of the year. But moving into the second year of the strat plan, year two to year four, I feel very, very good about where we sit, and they will be very close to the numbers that they will hit. Despite the fact that there is milk decline in the country. This team knows how to pivot and pivot well and as we've seen in the press release, they know how to optimize their network, and they're not afraid to take decisions as they have to take. So I feel very good about Australia.

28:27 So that leaves us with the US largest platform, biggest impact. And of course, we were challenged with labor inflation supply chain, and of course, market volatility. Market volatility still is a factor for us but we're looking at ways at de-commoditizing this platform, that's going to take a number of initiatives over a couple of years. So although we're not happy with the US number, in year two, we will be showing progress on EBITDA. And I would say good progress on EBITDA, the team has taken some very good decisions. We've been able to mitigate some of the labor loss with some of the recruitment practices that we've put in place where our staffing shortfall has come down.

29:19 Omicron unfortunately in Q3 impacted us now, hopefully, Omicron is behind us and we're getting back to a more normalized environment. So although year two will be challenged, I feel very, very good about year three and year four about the US hitting their targets in the strat plan. So overall, take a look at some of the things that impacted us in this fiscal year. I would say they are moments in time, some of the more structural challenges that are facing us in different geographies, we have found some workarounds, we have found some mitigating ways of being able to recapture EBITDA, numbers – so EBITDA dollars and margin.

30:14 So moving forward, I feel much better about the way our industry looks, I feel much better way – much better about the way our company looks, and we are truly building strong platforms and strong foundations for us to have success as we move along in our four-year strat plan. So I hope, Michael, that answers your question.

30:35 I think it does. But if you'd let me just try to summarize what I'd be writing in summarizing that if I use fiscal ’21 is the base that that was the base for your strat plan. This year, you're on track, and I'd assume that there is a little bit of growth. I know you said it was more back end weighted, but you're looking for a bit of growth, right from in every year. So Canada, Argentina, UK, sounds like you can grow off fiscal ’21 but you'll be in [Indiscernible] year two. Australia can maybe the close, US is the one that's the challenge for fiscal 20.

31:14 That is accurate. That's exactly, that is accurate. And if and if I can say going into fiscal ’23. So no concerns about Canada, Argentina, UK, and Australia. Still some headwinds in fiscal 23 relative to the USA, but certainly not a defeatist mentality in the US. In fact, we feel very good about the initiatives we're putting in place during fiscal ’23, that will definitely benefit us in fiscal ’24 and into fiscal ’25.

31:55 All right, you're much more, but I'll get back into.

32:03 Thank you. We'll get to our next question on the line – from the line of Vishal Sreedhar, National Bank Financial. Go ahead.

32:10 Hi, thanks for taking my question. I just want to follow up on that outlook commentary with respect to the US and did you hear that, that there's traction in the majority of regions, but with respect to the US, one in particular is going to continue to pressure 2023 relative to the strat plan, when your mind is going to pressure?

32:37 So you're saying for fiscal 23, which is the upcoming fiscal year. So I say so, if I can characterize the headwinds, labor, we've got mitigating factors. Again, we're probably around 90% of the staffing that we need. So, we're probably – we still have about a 10% shortfall. I suspect that that's going to improve through 2023. We've got some mitigating factors and some recruitment practices that are showing some very positive results for ourselves. On the inflationary side, with the fourth quarter price increases that we rolled out, we are quite comfortable that we caught up to inflation. If inflation continues to be a problem, we will go back to market with more price increases.

33:37 So labor and inflation, I think we're taking a very proactive approach at resolving some of those issues. Supply chain is still an issue, specifically where we're dealing with third party providers. We have some solutions there. But again, we're dependent on third party providers here. And then of course, the big caveat here is the market volatility. The market volatility would be specifically on the legacy cheese side of our business, on the legacy, Saputo dairy foods part of the business. We don't have the same volatility, we have pricing protocol that is in place that allows us to capture the commodity price increases or decreases. So really, that the factors that are out of our control, is the market volatility related to the cheese portion of our business in the US. As for the other factors, we feel comfortable about some of the practices we put in place to mitigate some of the headwinds we have.

34:47 Okay, with respect to the transportation costs, fairly significant costs in the quarter and seems to be accelerating sequentially. Those cracks if I got those details wrong, Archer price increases covering that transportation costs or is that your that's not covering?

35:07 Yes. Vishal, this is Max. The price increase intend to recover all the costs, which was not the case in the first half of this year, it got better in terms of cost recuperation during Q3. And while we're talking about our goals to recover in inflationary costs in Q4, that would include the cost associated with the logistics and transport and freight.

35:38 Okay, so as we looked at 2020 – fiscal 23 in the US, the reason why you express uncertainty is because of market volatility, predominantly, but those are factors that they're not in your control. So it's possible that they could swing for physical as well, is that is that correct?

35:59 That is correct. Again, we still have a shortfall. I want to be clear on this, going into fiscal ’23, we still have a shortfall on labor and labor is going to have an impact on our ability to run our plants effectively and efficiently and our order fill rates. We're confident about the practices in place. But I think I've stated that we've got still 10% of our positions that need to be filled. We're confident to get up to 95% within the fiscal year, but we still – our expectation is that we still will have a shortfall of about 5%, which some of our strat plan projects are going to cover the balance of the 5% shortfall, but they may not be in place through the fiscal ’23. But they will be in place for fiscal ’24 and ’25 and this is why the longer-term outlook is optimistic while we still had some challenges to face in fiscal ’23.

37:03 Okay. And maybe just an easy one here, or an easier one on the ERP project that's deferred. So I understand the rationale for deferring it, but what are the benefits that Saputo will be curtailing for the moment?

37:22 Yeah, so I'll tell you is like the very short-term benefits if access to resources. So I think about this, when we're rolling out a project as ambitious as an ERP conversion, we have to take the best elements within our platforms and put them – dedicate them to this project. Well, now by shutting down harmony, those – that talent, those elements are coming back to the divisions from which they came. That would be Canada, United States. So first and foremost, access to qualified talent. And then, of course, as a financial metrics and impact that is going to be favorable. And I'll ask Max to talk about that.

38:02 Well, there's going to be, of course, a saving relative to CapEx for this particular project. But we do intend as part of this strat plan to invest from a technology perspective and our – into our effort in the USA one initiatives. So that's going to require some of those CapEx. The amount is not as significant to readjust any of the target $2.3 billion capital investment over the four-year period. Do you recall $2.3 billion, about half is relative to maintenance capital. And there's the another half, which is more strategic in nature. So the saving from a CapEx perspective is not going to be moving the needle on that front. And relative to the OpEx as mentioned, there's a vacancy, vacancies in our operation and our business right now. We want to maximize the use of our resources. So it was not like a saving per se, it's more of a focus on our growth objectives and initiatives.

39:17 Thank you very much. For your next question on the line from Mark Petrie with CIBC. Go ahead.

39:25 Okay. Good afternoon. I just wanted to circle back to the commodity and your outlook there. I mean, if I just sort of summarize, I guess, milk production has moderated nicely, pricing has generally improved, but the spreads are, huge headwind as the block hasn't moved not –moved up as much as as the other pieces in the equation. So how does that all kind of net out for you and particularly when ingredients and WPC ad prices, for instance, are so healthy? And what do you think is needed for the block price to get hired? It's simply a matter of cycling through the elevated inventories. And yeah, some comments that would be helpful.

40:06 Okay, so when heading into or within this Q4, the spread, as it sits today are negative when we look at the Q3 negative spread of $0.10. Moving onto Q4 right now, should we close the quarter today, we will be in the negative $0.26. So the spread has been deteriorating from Q3 to Q4. This quarter in Q3, the negative 10 was delta of 27 unfavorable versus the prior year. When we look at Q4, we are sitting right now as a negative $0.26 and last year was flat. So again another negativity of about $0.26, $0.25, $0.27, so similar delta versus the prior year.

41:02 The major impact into this spread is the price of ways, the way components of the milk cost, way price are at record high and for the most part so far in this quarter was above that $0.80 mark, in reach $0.85, which is like record high and that is the benefit from the way higher pricing is not enough to absorb the impact of the cost of milk. So that's why overall it's penalizing us when we look at our overall US market factor combined.

41:44 And Mark maybe just answer a part of your question there. So you asked the question, what will it take to get the block price higher, the block price is not the issue right now. We're sitting today at a block price of $1.90. That's on the higher end of historical averages. The real issue is the way price and why is the way price is higher as it is, a lot of manufacturers in the US and around the world. That's your manufacturing cheese decided that they wanted to get into higher valued solids, which is WPC 80% and WPI. That meant that some of those waste solids were diverted from whey drying facilities over to specialized protein ingredients and so there is a shortfall of whey powder on the market. Some of that is being addressed by companies like ourselves where, when we have some flexibility to put weight into whey powder, we are doing that to the maximum ability that we have.

42:52 At some point, we're hoping that there's a better balance between the demand of whey powder and the supply of whey powder and we're hoping that the whey powder price will get back to historical levels within $0.35, $0.40, $0.45 range. Might take a while before we get there. But that would be normalized whey powder prices and if we would get there, then the milk price itself will be a lot more attractive for us. And so less relevance on the block price itself more relevant on the whey powder price.

43:30 Okay. That's, that's helpful. Appreciate it. Also, I guess just any comments that that you can share, just with regards to the review on Canada's allocation practices for TRQ under US MCA.

43:48 Yeah, so I think there was a lot more press coverage than actual change in the TRQ locations. Look, there's been this debate back and forth with every single one of the, the bilateral or multilateral trade agreements, whether it's with Europe, whether it's the TPP, whether it's the US MCA and the allocation of the TRQs. Fundamentally, each of the negotiating partners in these agreements, want to make sure that the quotas that are allocated or actually being used.

44:27 In our case, all of the quarters that we have received, we're using 100%. In fact, we're even buying quotas on the market or boring quotas in the market to be able to bring in additional product. So for Saputo, really a non-event, whether we have the quotas or not. We will service the needs that we have. So I think there was a lot more press on, this US MCA agreement and the TRQ allocation, then there will be impact on the dairy industry.

45:02 Okay, appreciate the comments. All right.

45:07 Thank you very much. Your next question on the line from Peter Sklar from DMO. Go ahead.

45:13 Lino and Max. On this, really negative cheese milk spreads that you're experiencing in Q3 and Q4. So like, that's kind of your gross profit on cheese production. So explain, but obviously, the US division, although EBITDA is down a lot year-over-year about half and still generates, $80 million of EBITDA. So, how do you make money when your gross profit for cheese manufacturing is negative?

45:44 Yeah, so there are a number of levers there that help us generate the positive cash flows and positive EBITDA in the US. I talked about the diversification of our US platform, with the acquisition of Morningstar back I believe it was in 2013, there was a strategic reason for that, we wanted to de-commoditize that business and although in large part we are co-packing for others, that those co-packing agreements are profitable, and they do protect us from a commodity swing perspective. So, the legacy [Indiscernible] businesses are truly a blessing for us in these negative spread markets. Don't forget, Peter, we also have a retail business that is quite beneficial for us. In the US with number one brands that we bring to market whether it's string cheese, blue cheese or other types of cheeses, they help mitigate some of the losses that we're seeing in the commodity products, specifically in the industrial and food service channels.

47:00 What we need to do and what is called for and our strat plan is further de-commoditization of our US platform and that will be either through CapEx allocation or M&A activity.

47:18 Okay. Next question is, in Australia like you gave a good explanation of what's going on in Australia, but there is reduced milk supply as you pointed out, so, I mean, if it's less milk, there's less cheese production and like, how does that all work? I would think that would be almost an insurmountable headwind for you. So how do you deal with the fact that there's just less milk around?

47:48 Yeah, so milk has declined about 3.5%. But it is substantial. But it's not detrimental to the, to the overall network we have there. I would say in the quarter we had on top of that COVID, so the operations and consumption were impacted, and we had to deal with some of the impacts related to the vessel shortages. So all of those elements impacted us in the quarter, and yet, we still had a decent result in Q3.

48:28 So moving forward, the corrective measures have been taken, that network optimization still is top of mind for us. And we still do have a good sizable amount of milk solids that we're passing through our facilities. So the plants that are running full, will continue to run full, the plants that are running well below their capacity utilization, at some point, we'd have to find some corrective measures there. And Richard Wallace and the team are all over that.

49:01 We also have the benefit in Australia to sell not just into the domestic market, but into the export market and volumes right now are very good. And pricing right now is robust. So pulling all those levers, the Australian platform, still is a key strategic platform for us. And there still is some more upside there for us to materialize. So, recovery began in the second half of this fiscal year, and it will continue into year two through year four of our strat plan. So I feel very good about our Australian division, even though milk has declined about 3.5%.

49:46 Okay, and then lastly, Lino with the management restructuring, you announced a short time ago, there's no Chief Operating Officer at Saputo. I think you've eliminated that level of management. So maybe you could explain, like why you eliminated that that level of the structure and who is fulfilling that role? Is that you who stepping in and assuming some of the roles that were some of some of the tasks that were undertaken by your previous CEO.

50:18 Yeah, so Peter, it is a more streamlined management structure, I am taking on those functions. I will clarify that there's no longer one CEO, but there are two CEOs. And the two CEOs are Carl Colizza are responsible for North America. And Leanne Cutts responsible for the rest of the world, which will include Argentina, Australia, and the UK. Both Carl and Leanne reporting to me now, I feel very good about being closer to the decision makers, within all our platforms and all our geographies. I've done this before I can do it again. I'm happy to be in this seat. And I have found new energy if I can say that.

51:06 And was this in any way motivated by the downturn that the company experienced? Really starting Q4 last year, and as we've run through the quarters of this year?

51:18 Yes, Peter, I am not going to hide the fact. And perhaps I would even say if I can be so bold, in the last five years, I think that we have not delivered on the expectations we had of ourselves and that the market has had of us. So let's be clear, it is partially results oriented. It is partially a result of being in an environment where we know we can do better and we should do better and so yes, it was partially motivated by our results.

51:58 Yeah. Okay. That's all I have. Thank you.

52:03 Thank you very much. We're gonna turn next question on the line from Irene Nattel with RBC Capital Markets. Go ahead.

52:10 Thanks and good afternoon, everyone. Thank you for the thorough rundown the business. Just I have a question. You mentioned M&A a minute ago, Lino. Was everything that you have going on in the businesses right now. How are you viewing M&A at this point in time?

52:30 Yeah, so M&A has been really a catalyst for Saputo over the course of last 25 years and it will continue to be part of our strategy for growth moving forward. But I will say right now our primary focus is a strat plan. Our primary focus is delivering on the deliverables for each of the divisions as they stand right now. And I'm going to take this opportunity, Irene, if you don't mind, the comment on some of the rumors that are out there, because I think it's important to clarify our orientation. We definitely want to de-commoditize our business. We're looking for businesses that are EBITDA margin focus, if we're going to make an acquisition, we're looking for valued categories. And sometimes, unfortunately, we get thrown into all kinds of deals that are happening in the world market, because most sellers and buyers know that we are a consolidator in the industry. And sometimes that is justified and sometimes it is not justified. But right now, I will tell you that we are focused on the strat plan. If we are going to make a deal, it is going to lift EBITDA and lift margins because that's what our focus is right now.

54:01And I wouldn't believe all of the press clippings that are coming out relative to Saputo being involved in certain transactions. Without naming names, I think you could read between the lines.

54:17 Absolutely. That's very helpful. Thank you, Lino.

54:23 Thank you very much. [Operator Instructions] With another follow up question in the line of Michael Van Aelst with TD Securities. Go ahead.

54:39 Thank you, can you give us an update on where you actually are on order fill rates in the US? You told us historically? I think you're normally 99.8. And you're in the 80s? A few quarters back? Where do you sit now?

54:52 Yeah, so last quarter of Michael, we were around 91%, 92% order fill rates, we have inched up to 93%, 94%. Our target is to get back to our historical levels. We will get there as we get to better staffing in our plants. Now, I can tell you within some of our facilities, we are at 100%. All the facilities might be in the 60%, 70%. So we average out to around 93%, 94%. We know exactly where we're missing the talent where we're missing the people. We've got great plans in place to fill those positions. But we have a keen desire to get back to our 98%, 99% order fill rates. And we're not quite there yet work from 93%, 94%.

55:44 Now it's not gonna – it's not going to happen through hiring alone, or do you need to get to the CapEx in fiscal 24?

55:54 A bit of both. So we think we can get part of the way there may be two thirds of the way there with staffing, the balance 1/3 will come through CapEx allocation and automation and just some realignment of our network and moving people from facility to facility to accommodate the shortfalls we have.

56:19 Okay, thank you. And then the second question is in the updates that you provided a couple of days ago to your strat plan. There was – you talked about $112 million improvement in EBITDA, which is pretty meaningful, particularly when you compare it to the CapEx number that was provided in there, which was $169 million. That's I don't know if there's more CapEx than what was discussed. But that's a huge return on investment. Is that how do you deliver that kind of return?

56:57 Yeah, well, just to clarify, the numbers are accurate. And, yeah, it's part of the $1.1 billion, $1.2 billion that is referring to our strategic initiatives. It is a critical part of our plan – network optimization pillar of the strat plan. We call it out that this is like is a big pillar for us, particularly in the US. So the whole piece around modernizing in doing more with less and our US is a key part of this initiative and this announcement. Yeah, that's what it is. And we will get the benefit, some FY23, some FY24. And also enough FY25, whether we would reach the, the full benefits.

57:54 And, Michael, I will add to that, that this is just the beginning of announcements that we will make relative to investment, return on the investments, and the impact that that will have on each of our geographies that are affected by those investments. So more to come on that front. But our ideas are very clear. As I said, earlier, we're in our third quarter of a 16 Quarter journey. Taking a step back knowing what we know, today, Omicron or no Omicron virus or non-virus, market volatility or no market volatility, we still have our foot on the gas relative to achieving the numbers on our strat plan and we know what is going to get us there.

58:49 Got it. If you can get a 65% return on capital, just spend as much as you want. Thank you. Thanks for that.

58:57 While we're glad we have your support there, Michael.

59:03 Thank you very much. We got our next question on the line from Chris Li with Desjardins Securities. Go ahead.

59:09 Hello, good afternoon. Thanks for squeezing me and Lino just wondering if you can provide a quick update on where you're at in terms of your dairy alternative cheese rollout in the US?

59:22 Chris, I'm glad you asked that question, because we do have some really exciting news that our teams are sharing with us. So on the US retail cheese, we were launching in March six skews under the VIOLIFE brand. And we have 1000 points of distribution that have been secured. So the marketing campaigns are going to begin in conjunction with our retail launch. So exciting times to come on the retail side of the plant-based cheese for our US platform.

60:06 In Canada, we also had six skews under the VIOLIFE brand that we're going to be launching we've secured now 500 points of distribution. And again, also marketing campaigns to begin as well in conjunction with a retail launch and that should be in May 2022. So that's the retail end of it. On the food service side, we have launched the vital VIOLIFE mozzarella, dairy alternative, we are seeing growth week by week, relative to some of the stores that we're going to and some of the new locations that we're gaining, the presentations continue, and I can tell you that the feedback that we have is that our product performs much better than anything else that's out there.

60:57 So there is a lot of progress that is coming. We feel very good about swapping cheese, I guess, traditional cheese volume for plant-based cheese volume and the margins are very, very healthy. On the beverage side. Poco now is commissioned, and we are processing [Indiscernible] in poco. We've secured some major private label contracts as well as code manufacturing contracts that are to begin this quarter in Q4. And Argentina continues to see growth in their plant-based beverage offerings. So also on the beverage side, the strategy that we laid out for ourselves, and co-packing and co-manufacturing are starting to hit some great numbers.

61:50 Okay, that's very helpful. And maybe a follow up on that is when do you expect time base to start to have a more meaningful net EBITDA contribution? Is it later to show do we have to wait until the following year?

62:02 Well, I'll tell you that that view Island acquisition that we made is already contributing positive EBITDA for us now, relative to the size of the UK platform. Perhaps you may say it's insignificant. But one of the things that we're looking at, especially in on the fluid side is we're targeting one liter of production of plant-based fluid for every one liter of fluid milk that is declining. And that's not insignificant, if you take a look at not to look at reduction in fluid milk consumption at the beginning of the pandemic, I think there was a little bit of growth in fluid milk. But in year two of the pandemic, the historical levels of decline have continued, I think we're closer to 2%. decline, and milk consumption, fluid milk consumption. So for every one liter of milk decline, we want to gain one liter of plant-based beverage. And I think that that's going to help our fluid operations, maintain volume, where they can have overhead absorption, and also have a positive EBITDA generation. So irrespective of whether that's a large volume or a small volume, it is substantial in our strategy at mitigating some of the dairy losses.

63:36 Okay, that's very helpful, and maybe just a quick one on the price increases. That's not like you have put through some fairly meaningful price increases in Q4. Is there a risk to the volume or not really, because price less this is the is not really high? I'm just curious to see if there's risk that the consumer may trade our reduce your consumption on the higher price prices?

63:59 Yeah, so far, we're not seeing any risk to overall dairy volumes, other than the fluid that I just spoke about, perhaps what remains to be seen is the milk price increase in Canada, I think it's like 8.4%, I would suspect that there is going to be a bigger declines in fluid milk consumption. And perhaps stabilization of cheese consumption. But it remains to be seen, we'll see where things land there. But so far, we have not seen any reduction in overall dairy consumption relative to its growth.

64:41 Great. And then my last question, just going back to M&A, if something does – something that's bigger, attractive that come up? Can you remind us what is your current balance sheet flexibility? How much that capacity do you have?

65:00 Chris, the our ability to materialize acquisition is not the same as it was like some time ago, our focus from a cash allocation perspective is certainly around the CapEx allocation. We do believe that this is going to derive a lot of benefit to our bottom line, certainly want to protect the dividend and focusing on debt reimbursement. All to say that the capacity to materialize acquisition is nowhere close to where it was. But should we have an opportunity that would certainly lift our profitability, improve our cash flow, raise our EBITDA, then we'll have to look at it.

65:44 Great. That makes sense and the best luck.

65:50 Thank you very much. And [Indiscernible] there's no further questions at this time. I'll turn the call back to you for any closing remarks.

65:57 Thank you, Tommy. So we thank you for taking part in the call and webcast. Please note that our fiscal fourth quarter and full year 2022 results will be held on June 9, 2022. Have a nice day.

66:10 Thank you very much. And this concludes the call for today. We thank you for your participation ask that you please disconnect your lines. Have a good day everyone.