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Greetings, and welcome to the Saputo Inc. Fiscal 2020 Third Results. [Operator Instructions] As reminder, today's call is being recorded, Thursday, February 6, 2020. Now I would like to turn the conference over to Lino Saputo, Jr. Please go right ahead.
Thank you very much, Tommy.
Good afternoon, everyone, and thank you for joining us today. A press release detailing our 2020 third quarter results was issued earlier today and is also available as we speak on our website at www.saputo.com. This call is being recorded and will be posted on our website for future reference. [Operator Instructions] Before we proceed, please be reminded 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. Refer to our cautionary statements regarding forward-looking information in our annual and quarterly 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. Lino Saputo, Jr., our Chair of the Board and Chief Executive Officer, will begin this conference by providing a brief overview of key highlights relating to the third quarter of fiscal 2020. After which he, along with Maxime Therrien, our Chief Financial Officer; and Kai Bockmann, President and Chief Operating Officer of Saputo Inc. and the International Sector, will proceed to answer your questions.
Thank you, Marlene, and good afternoon to you all. We released our fiscal 2020 third quarter record results this morning, and I am delighted. Despite challenges facing the industry, our team remained agile, proactively managing headwinds. Consolidated revenues increased by 8.8% related to the contribution of recent acquisitions, higher international selling prices of cheese and dairy ingredients and active pricing initiatives to mitigate costs. And although we experienced lower sales volumes in the fluid milk category in Canada, and in the cheese category in the U.S. as well as reduced raw milk availability in Australia, our results are solid. Adjusted EBITDA reached $417 million, a growth of 29.8% for the third quarter. In Canada, the landscape remains competitive. We steadfastly continue to focus on profitability, not volume, and to service our customers in the best way possible with a long-term perspective in mind. This sector will control the controllables by focusing on operational efficiencies and rightsizing the business as required. Though never an easy decision to make, this includes the upcoming closures of our facilities in Trenton, Ontario and Saint John, New Brunswick, which we announced today. The U.S. Sector posted improved results this quarter despite challenging domestic commodity market conditions. Specifically, the Cheese division is focused on optimizing product mix and growing its specialty and value-added business while supplying customer orders in our commodity products. And the Dairy Foods division delivered another outstanding performance. In Australia, the recent bushfires have been devastating to many. And in response, we've put in place a number of support initiatives to assist affected farmer suppliers. So far, these events have had minimal impact on our business, and we've been able to continue operations as usual. Strong competition for milk as raw material persists. However, we've put in place measures to mitigate this, such as co-packing and third-party sourcing. Moreover, we're benefiting from synergies related to our recent acquisitions and our newly broadened product range. In Argentina, we're seeing unsettled economic conditions. However, our seasoned management team is in place and has the experience to take the right decisions in a volatile landscape. In both Australia and Argentina, we intend to remain nimble and flexible, leveraging both platforms to develop additional international markets. We will maintain efforts on controlling costs, evaluating overall activities and maximizing operational flexibility to mitigate the effects of market fluctuations. In the Europe sector, the dairy division U.K. is performing as expected, and milk intake is strong. For the remainder of fiscal 2020, we will continue the integration process. The Saputo promise also remains a key priority for us and the future of our business. We're focused on the execution of our 3-year plan, which we launched in 2019. We're ramping up our commitment to responsible environmental practices with a central focus on climate, water and waste. We're also dedicated to diversifying our product portfolio and pursuing more plant-based opportunities. In this regard, we plan to leverage a common customer base, technology, manufacturing expertise, assets and supply chain in order to benefit from this important consumer trend. As you can see, it's been a very, very busy yet rewarding time for Saputo. With immense pride felt by our entire organization, we were named the Dairy Foods Magazine 2019 Processor of the Year at the IDFA's Annual Dairy Forum last week. I'd like to congratulate our entire team for this outstanding accomplishment. Their dedication, expertise and passion continue to elevate our company, and we are leading the dairy industry. I am tremendously proud of what we've achieved together. I'm also bullish about the long-term prospects for the dairy industry. I'm certain we have the right people, the right focus and the right infrastructure in place to capitalize on growing markets and evolving trends. The appointments in senior management announced today reflect this sentiment as we lay the groundwork for future success in the industry. With that, we will now proceed to answer your questions. Tommy?
[Operator Instructions] And we'll get our first question on the line from Irene Nattel with RBC Capital Markets.
I was looking at the appointment of the Senior VP business development plant-based food. And clearly, that's a sign to me at least that you're making a serious commitment to this category. Can you walk us through what we can expect in terms of presence, footprint and the magnitude of the investment you're thinking about?
Yes, that's a very good question. The plant-based business for us, as we defined it in previous conference calls, is not that different from the dairy infrastructure that we use to process milk. We need to be where consumers are. And we need to leverage all of the expertise that we have, including manufacturing expertise. So the facilities that we have within our infrastructure, have the capacity to be able to process more fluid products, whether that would be dairy or non-dairy products. And as long as we've got a long-term commitment at fair transformation revenues, we are prepared to make those investments for the long-haul and the long-term viability of our business. So as an example, our plant in Port-Coquitlam in British Columbia is being built with the opportunity and the ability to segregate nondairy products from dairy products and process efficiently. And we're looking for volume to fill that up. Similarly, we have other plants within our system within our structure in the United States and also in Argentina, where we can leverage our know-how and our expertise and the manufacturing footprint that we have. So the naming of a Senior VP is really another step forward for us to become more active in discussions with industry players as well as non-industry players about us being able to provide a good resource for them as a [ co-packer ] for their products. We've had some very good, very fruitful discussions. We have some volume that's already entering our system that is non-dairy oriented. We believe that there is even further opportunity along those lines. I'm going to hand it off to Kai and see maybe if he's got anything else you want to add on that strategy.
So in terms of the specific segments, retail-wise, we've got a pretty strong private label business with our SDF platform, so we'll look to leverage those relationships with the key accounts. The toll manufacturing is going to be another big one for us. We also have great experience on the cheese side in terms of non-dairy cheeses in our Vitalite brands in the U.K. And we'll be looking to take advantage of the innovation center we have in the U.K. in terms of the resources and know-how there to look at developing some products that have a better taste, better performance in foodservice and better nutritional attributes because the stuff that's out there today is pretty blah. So we think it's a tremendous opportunity for the group.
And I just want to specify that we are still and will always be a dairy-focused organization. But why not use our expertise and innovation capabilities to be able to go where consumers are going. And I think that we're on the right track here.
That's great. And just to be absolutely crystal clear, there's no intention at this time to invest heavily in brand building in the plant-based segment?
No, that's not our focus at this stage. Ultimately, if there's an opportunity for us to make an acquisition of brands, we would seriously consider it. But at this stage, we are looking at partnering with folks that are already in that space and being a great partner for them.
That's very helpful. Just wondering if you could talk a little bit about what's happening right now in Australia in terms of the success that you're having on the milk intake side? And where you might be along the process of improving the capacity utilization in your facilities there?
Sure. This is Kai. I'll take that question. First off, just to give you some perspective in terms of what's going on in Australia. We've heard a lot about the fires and Lino, in his opening comments, talked about the minimal impact on our operations. But when you look at the overall milk production developments that are occurring there because of the severe weather and the high input costs that producers have to deal with, lower water and less feed availability, it's causing some strain in the system, which is leading to a lot of culling of cows, reduction in farm sizes, people getting out of the farming business. So what we've seen in terms of national production, if you look at a couple of years ago, total production was at about 9.3 billion liters of milk. And 2 years later, it's now projected to land at 8.3 billion liters of milk for this current milk year. And we feel that this is going to be the new normal. And there's going to be continued intensified competition around milk supply. So I think we mentioned it in previous calls, but for us, it's really about looking for opportunities to process more milk. So working closely with other companies in Australia around total manufacturing opportunities. We're also taking advantage of milk supplied by third-party milk brokers. And we're also taking a page off of our playbook in North America in terms of how do we extend the milk, how do we use our technology and recipe optimization to produce more of the products that we make with less milk. So those are the things that we're tackling. And if we look at the milk intake numbers that we had called out a few years ago, we're probably about 10% down from what we called out in terms of our ambition as we move forward. A lot of the milk that we've lost, again, is as a result of the decline in the milk pool and that intensified competition. We have recouped the majority of the milk that's been lost to competition through those arrangements that I talked to, the third-party milk brokers, the total manufacturing and those types of arrangements. So we feel pretty confident that we're in pretty good shape at this point when it comes to our milk intake and fully utilizing our assets. On the asset utilization, we have -- we just announced that one of our facility would move to a seasonal facility. So operating only 5 months of the year. This is our Maffra site. And by doing so, it allows us to make sure that we move our milk to those facilities and those products that generate the highest variable rate of return per liter of milk.
We will get to our next question on the line, it's from Michael Van Aelst with TD Securities.
I just want to continue on those 2 topics, first of all -- first. So the -- you talked about utilizing -- you mentioned that you feel good about your utilization rates right now in Australia. Can you give us a sense as to how much co-packing you've actually taken on or total manufacturing, whatever you want to call it? How much you've actually taken on, how many different companies you're doing it for right now?
For competitive reasons, I can't divulge the number of companies we're working with, but I would say that we're working with some of the largest enterprises in the dairy space in Australia. And if you follow the news, you'll have seen that some of these major players have shuttered some of their facilities and would have taken the milk that was originally processed in those facilities. A lot of that milk has been diverted to us. And we are -- we have been manufacturing products for those 2 majors. We have a lot of opportunities in the pipeline as well as it pertains to our fluid milk business as antiquated assets get taken out of the system. And so there are ongoing talks with not only larger players, but also some of the smaller ones as well.
So Mike, if I can add maybe just a bit of color there to give you some satisfaction. If you recall, when we first acquired the Australian platform, we were targeting after the sale of Koroit around 3.1 billion liters of milk. That new normal is 2.7 billion liters of milk. And the reason for that is really the decline in production in the country. So anything we lost to competition we picked up through third party. We're still very confident that the other third-party discussions and negotiations we're having are going to be fruitful in addition to co-packing arrangements that we believe will be fruitful. So the new normal for us from the historic number of 3.1 billion liters is 2.7 billion liters. With the partial closure of Maffra, we still think we're going to be around the 95% to 98% capacity utilization.
And just to add to that point as well, our most recent acquisition was the Lion specialty business. The great thing about being in Tasmania is that it is the highest milk-producing region from a growth perspective. So getting more milk in that part of the country is not going to be an issue for us.
Okay. Great. That's helpful. So when you look at the international business then, you had a pretty big, I think, $14 million increase in the EBITDA year-over-year. Can you give us an idea of the biggest drivers between -- if you want to break it out between like the Lion acquisition, something Argentina and what the factors were there and then Australia?
Yes, I can provide you with some detail. And I would say the major contributor to the EBITDA would be the prices that were higher on the international market, whether it's on the cheese or on the powder side. That would be the main driver. Obviously, the contribution of the specialty cheese for a couple of months during the quarter helped on that as well. But I would say, definitely, it would be the impact of the prices on the international market.
Okay. Great. And then on the plant-based side, are you willing to discuss the brands that you're producing for?
No. And that is for really confidential reasons. As we get into these discussions with some of the partners that we're dealing with, out of respect to them, we will not talk about their brands without their consent.
And you said you are already starting to process. Is that true?
That is correct. Yes. So we've got some installations going on. Plant City in Florida has set up a new line that is in the process of being commissioned. So volume will be going through that very, very shortly. In addition to some other capacities that we had in the U.S. that is now doing some non-dairy products. So we've got -- wherever our customers have a requirement, we will find the capacity to be able to service them effectively as long as we're working on long-term contracts and long-term relationships.
You didn't mention Australia as one of the targets for plant-based. Is there a reason for that?
Yes, I did that in my -- one of my statements, I said we do have the capacity to be able to do that in Australia. And again, there, too, we're in preliminary discussions for that. We are not doing any non-dairy products in Australia, but we certainly do have the square footage and the capacity to do it.
Okay. So it's Australia. I think you mentioned Argentina as well though, didn't you?
If I said Argentina, I meant to say Australia. So the 3 geographies that we're looking at would be Australia, United States and Canada as plant-based capacities that we can co-pack for others or perhaps look at acquisitions.
And then the plant-based cheese, already we're doing that in the U.K. But in terms of plant-based beverages, it would be the 3 regions that Lino mentioned.
And plant-based cheese, is that something you could make in Canada, for example?
Eventually, yes. Right now, we are marketing that product in the U.K., our innovation center is looking at improving on that product. And when we think we've got something that is appropriate for either Canada or for the United States, we will definitely roll that out.
We'll get to our next question on the line from Peter Sklar with BMO.
On the bushfires, I understand a lot of the center of gravity for the bushfires is in New South Wales and Victoria, where you have a lot of your plants located, a lot of your dairies located. So how is it that you're not being disruptive and -- disrupted in terms of procuring milk by the bushfires?
So I'll answer that question. In terms of the bushfires, they're largely focused in the area of New South Wales, south of Sydney. And also in the eastern part of Victoria. So if you look at a map of Victoria and New South Wales, you'll see there our facilities are on sort of the fringe areas of those fires. If we look at the impact to Saputo since the bushfires started, we had impact of about 700,000 liters of milk on a base of 2.3 billion liters of milk on an annualized basis. So you can see that, that's a minimal impact, and we don't expect any further losses as we move forward. We had a total of 33 farms that were impacted but they're -- they've since gotten back online. So the -- again, the impact has been minimal.
And Peter, just on that note, we have assisted some of our competitors in the industry either to collect milk in regions where they couldn't collect or perhaps to take on some additional capacity when they were not able to take on that capacity. So I think the industry itself has locked arms and supported each other in this very difficult time.
Meaning you're collecting on their behalf?
Yes.
You're processing it or you're delivering it to their dairies?
Both. Both. So it depends on if their plant was affected by the bushfire, we would process the milk. If not, we can collect the milk and send it to their facilities. At this stage, we're putting competition on the side, and we're looking really at what's in the best interest of the dairy industry.
Okay. Different topic. In your commentary in the press release, you indicated that you're expecting volatility in the dairy ingredients market like when you're talking -- discussing international commodity prices. But at the same time, you're expecting stability in terms of cheese price. And I'm just wondering why you're expecting that volatility for dairy ingredients. Is that because of the China situation?
Yes. So China is an unknown factor. Just as you had the listing of some of the tariffs and the trade war is getting better, you've got the coronavirus. And so the reality is, a lot of our dairy ingredients are going into that part of the world. And so that's the volatility that is unknown to us, even though we're seeing the numbers tell us that the consumption is firming up and the supply is also very stable. So it's perhaps a tale of 2 different cities here.
At a macro level, we're seeing -- we're definitely seeing better equilibrium in the global dairy markets from a demand-and-supply standpoint. We project that demand will actually exceed supply for calendar 2020.
Okay. And then just lastly, on the Canada-U.S.-Mexico trade agreement, when do you expect the allocation of the import licenses? And maybe Lino could be a little more specific on how you did in TPP? Could you maybe quantify it? Did you get your fair share in the new TPP? And what are you expecting for this trade agreement?
Yes, that's a very good question. So I think that, especially with the minority government, this will not be ratified in Canada until sometime later this summer, probably by June or July, probably in effect for the month of August. I think August is an important milestone, especially for the dairy farmers because it's a new milk year. And the easiest way to trigger these allocations would be at the beginning of a new milk year. So I don't suspect anything will happen before August in terms of ratification and implementation. On the quota side or TRQs, yes. So we had discussions with governments related to the initial CETA allocations. And unfortunately, the CETA allocation, in large part, went to people outside of the processing dairy industry. And as it turned out, the majority in the first year of those allocations were not used. And so that created a difficulty for Canada because their trading partners were saying, well, that's really not in the spirit of the trade agreement itself. I think at the time, under 50%, maybe something like 46% or 48% of the total quotas were used. And so with that information, we went to government, and we said, look, under this new deal, the CPTPP, if the quotas were allocated to processors, then we would have the ability to bring in either raw material or finished goods that we can bring into our system and create value in the dairy space. And effectively, that's exactly what we did. We used 100% of the allocation of the quotas that we had, and we brought in value-added products and created great value here in Canada. So my discussion now with government is related to Canada, U.S. and Mexico's trade deal, that we would like to see more of the same with the CPTPP, where over 80% of the allocation went to processors pro rata by their production capability numbers. And so that's what we would like to see with Canada, the U.S. and Mexico. I'm optimistic that, that's what will happen. I did indicate to the government that we'd like to be held to account. So that if we're not using those licenses, then they have the right to take them away from us and give them to others, perhaps distributors and retailers. But for the time being, as long as we're honoring the commitments that we made, we believe that we should be in a position to control our own destiny.
And we'll get to our next question on the line from Vishal Shreedhar from the National Bank.
Just wanted to circle back to this plant-based announcement that you made. Just looking at your business and the nature of the activities you indicated you want to get involved with, it seems like this opportunity, in reference to the scale of your current business, will be incremental for now. Is that a fair way of thinking about it?
That is exactly the way we should look at it. Because let me make one general statement that I hope everybody will hear, dairy is not dead. There is still great life in dairy. Dairy continues to grow at a rate of 1.5% to 2% per year, and we're still very, very, very bullish on dairy. However, if we have the expertise and we have the infrastructure to leverage our capabilities to do a product other than dairy, something as simple as beverages that would go into our stream and create an opportunity for us to mitigate some overhead expenses, then we will do that. That's very entrepreneurial. So I want to, again, reiterate my comment that we are and will be a dairy-focused organization. Anything we do in plant-based is going to be an add-on to be able to leverage some of our expenses.
Okay. And just on the back of the comment that you made about you're seeing a lot of opportunity in dairy for the foreseeable future. Throughout the release, there were several markets that experienced kind of -- a little bit of softness in volume outside of Australia, which had a specific issue. Just wondering if you can comment on that? And where -- when you see that volume growth turning around?
Yes. So look, if you look at the general markets, there is growth in the emerging markets, much greater than the domestic markets. So I would say that the emerging markets are growing at a rate of maybe 3% or 4% per year. And then domestically, we might have 1.5% or 2% growth in very specific categories like cheese, and value-added ingredients. So the opportunities that we see in the markets are global as well as domestic outside of some key areas like Australia, because of the fires. But in general terms, on the non-fluid products, we see that there is growth in just about every single one of those categories. Kai, you want to add to that?
Yes. Sure. So if I look at the different geographies, our SDF platform is performing very well across all segments. So volume is very strong in that division. In our cheese division in the U.S., our volumes have been pretty strong in most segments, except the industrial segment, where we've seen a lot of bottom feeders that are trying to -- there's a race to the bottom from a pricing standpoint. And then in Canada, we've done pretty well from a volume standpoint. We have talked about in previous calls where we've walked away from accounts or business that was unprofitable for us. It's really about profitable growth and not just chasing volume for the sake of volume. So we have made decisions to walk away from business opportunities when the margin structure doesn't make sense.
And the first thing we do before walking away when the cost structure doesn't make sense is we take proactive pricing initiatives. And if they stick, we'll continue with that customer. And if they don't stick, well then we'll walk away from that business. And I would say that sometimes we walk away from business, only to capture it back 3 or 6 months later at favorable pricing. So it's a question of having the right discipline to know when to walk away and when to service your customers.
Okay. In the industry in the U.S., there have been high-profile announcements from milk players regarding the viability of their business. And I'm wondering, number one, if there are any adjacent impacts that Saputo experienced because of those players? And number two, if you could just help us give us some sense of the materiality of your fluid business just given that it's so topical recently?
Yes. So let me just say that within the U.S. platform, we don't do any commodity traditional fluid milk. If we were going to be in the fluid milk space, it would be value-add like the lactose-free products and some other products that we bring to market, generating a better return than just commodity products. And the adjacent impact to us is minimal. We have a good working relationship with Dean Foods, but we don't have any liability with respect to accounts receivable or any operational liability. So our team really has been managing that division extremely well. We made sure that we get paid when we're supposed to get paid. And so there isn't much negative impact related to either the bankruptcy of Dean Foods or the bankruptcy of Borden.
It's actually created an environment to make dairy more economically sustainable, and it's resonating with our key stakeholders, and we're seeing that across both sides of the border. Because they don't want to see another major fluid manufacturer go out of business if the economics aren't right. So it's actually been helpful in the situation.
We'll get to our next question on the line from Patricia Baker with Scotiabank.
I have 2 questions, and they actually both are related to your most recent acquisitions. So firstly, going to Australia and looking at Lion's specialty cheese. Can you talk a little bit about the positioning of the portfolio of brands there and what the experience has been in the last little while of whether these brands are gaining market share and how well they're positioned in the marketplace?
Yes. It's pretty fresh since it's our last acquisition, but we're seeing real strong growth in the category. It's actually the fastest-growing category in the cheese space in Australia. We've got a strong market share position already out of the gates, obviously, with the brands that we've picked up. We're also looking at some opportunities to leverage some of the pages from our playbook in our North American platform because we have the largest goat cheese business in SCUSA, in our Saputo Cheese USA division. And we have a history with specialty cheeses in our Canadian divisions. So we're looking to take some of those experiences and some of those product ideas over to Australia to continue to grow that category. And the assets that we picked up as well. It's -- again, we're trying to implement the processes and systems that we have in our other facilities. So it's early going, but there's a lot of available capacity when it comes to the hard cheeses. So the parmesan-style cheeses, which will open up opportunities for us on the export side as well.
Okay. That's very helpful. And then secondly, with respect to Dairy Crest. So great to continue on with the integration, but you do note that you're going to be making some capital investments there to improve the cheese making capabilities. Can you talk about exactly what you're going to be doing and what we can expect to see over the course of the next 2 years with respect to all the investments?
Yes. So Dairy Crest model is going to follow the WCB model, and I'll take you back in time. We acquired, in WCB, a platform that was very, very efficient. At the time Warrnambool Cheese & Butter was processing about 750 million liters of milk when we acquired and we thought that the only way that we were able to reduce the expenses there was to bring in more volume. So we made an appeal to the different dairy farmers that were in the area. And we said, if you will sell us your milk, we will grow the capacity at that plant. And sure enough, we had about 200 or so million liters of milk that was offered to us. We spent $40 million to increase the manufacturing footprint. We executed that I think it was in about 18 months or so. And we then leveraged that new volume to the existing overhead costs and reduced our cost per kilo of production. So when we took a tour for the very first time at Dairy Crest through the due diligence process, we realized it was a very, very similar setup. So a plant that was running very, very close to 98% capacity utilization. Very efficient operation, producing a high-quality product and we saw that the only way that we can reduce some of the expenses on our per kilo cost was to increase capacity. And so at that point in time, Kai and I met with the Dairy group that's representing the dairy farmers, and we appealed to them about us wanting to increase the capacity and the footprint of the plant, but we would only do so if their milk was available. They made a commitment to us that the milk would be available. And in short order, we picked up this year alone, 50 million liters of milk incremental and we have the potential to increase another 150 or close to 200 million liters of milk, but that would now require further CapEx allocation and some more time to get that installed. And so what we're doing at the Dairy Crest plant and Davidstow is not so much changing what they're doing but rather adding more capacity so we can lower our cost per kilo operational efficiencies.
We'll go to our next question on the line from Mark Petrie with CIBC.
This is actually Krishna Ruthnum on the line for Mark. My first question is on Dairy Foods. You called out higher volumes in the U.S. Dairy Foods business. Can you speak to the competitive dynamics in the Dairy Foods segment and highlight the drivers behind your improved performance? And while we're on the subject, can you also give us an update on the stage of recovery of the Dairy Foods business following the ERP rollout?
Sure with pleasure. So first of all, there's limited capacity in the system when it comes to the products that SDF produces. So we have that advantage. Also, we're the only player that has a national footprint from coast to coast. And with the proven track record that we've had with a lot of these large-scale players, whether it's foodservice or retail, that's really helped us out in terms of when they're looking at new product -- new products, new formats, we tend to be that first phone call. And when you look at our supply chain side of the business as well, our fill rates and our customer service levels are back to, if not better than historical levels, especially now that we've had time to digest the Harmony or ERP deployment that did cause a lot of noise for us in that platform, but that's far behind us at this point.
Okay. Great. And I had another question on Dairy Crest, just to follow-up on Patricia's question. Can you highlight any of the benefits that you're seeing in Dairy Crest, particularly on the byproduct side? And have you been able to leverage any of the learnings from Dairy Crest, particularly from their investments in demineralized whey across the rest of the Saputo platform?
It's a good question. The D90 product that you're referring to is a capability that we did not have in the system. And we have actually been able to leverage that capability to grow our business with some of the majors that are in the infant formula space. So there's limited capacity in the world when it comes to D90s. We're able to leverage that limited capacity to try and gain more business with some of these large multinational players.
We'll get to our next question on the line from Chris Li with Desjardins.
Just a couple of quick questions. Lino, last quarter, you mentioned Argentina, in terms of potential increase in export taxes as a potential headwind. It seems like you guys just kind of dodged the bullet on that one, looking at some of the taxes applied to other agricultural products. Do you have an update on that situation?
Sure. The -- this is Kai. In terms of the taxes, the -- they've only been imposed on a few items, primarily whole milk powder and the rate is 5%. So the impact to our export business has been minimal at this point.
Maybe Max might have something to add on that?
No. There's some price control mechanism on the domestic side as well. Just to keep some of the products affordable for the consumer in Argentina. So ultimately, with the cost of milk that we're seeing there, we remain absolutely competitive and there's no minimal impact to us.
And as I mentioned in my opening statements, we've got a very, very seasoned management team in Argentina. They know how to navigate through those waters better than anybody else. And so whatever government throw at them, they know how to deal with it very, very effectively.
Okay. That's great. That's helpful. And then just on -- a question on Capex. Are you still on track to achieve or to spend the target that you expect, I think, just over $600 million for the full fiscal year? It seems like you're now sort of a bit below that run rate.
Well, good question, Chris. Yes, our target for the year was $611 million. So we do anticipate a strong Q4 in terms of investment in our capital expenditure. Will we get to the $600 million? We'll be close to that. So we certainly have a good quarter currently proceeding our CapEx.
And how about the outlook for next fiscal year? Is that too early to talk about that? Or directionally, do you expect it to be similar?
Well, this year is the last year of our 3-year cycle. So next year is going to be the first year of a new cycle. We will have quite a bit -- we expect to have quite a bit of CapEx. Will that be the $600 million? Probably not, but it's too early to give you a number at this time.
Okay. And then my last question, just with respect to some of the cost savings from the plant closures in Canada, is the way to think about the savings is that they will be reinvested to continue to drive top line growth? Or will we see some of that flowing to the earnings line?
Well, typically, those savings will provide us the -- well, basically, those plant closure is to get more efficient, and this will be starting late this current calendar year and the following year, and we do have investment plans in other facility to be able to attract -- to transfer the volume.
So essentially, Chris, if I can elaborate on that. Most of the monies to accommodate that additional capacity has already been spent through these last few fiscal years. So we had a project in Saskatoon, that we were able to increase capacity to be able to accommodate more volume and shifting volume from Trenton over to other facilities and ultimately into Saskatoon. And we also have a major CapEx allocation that is underway right now in our Saint-Leonard facility also to accommodate more capacity there. So we weren't [ waiting ] for the plant closure savings to ultimately spend the money and new CapEx capacity. The new CapEx capacity was built into previous CapEx budgets.
I think the saving -- from your question, Chris, the saving is more around the capital that will not be spent in those facilities that we're shutting down. That, yes, will be invested throughout the rest of our network.
[Operator Instructions] And we do have another follow-up question from line of Michael Van Aelst from TD.
I have a few quick ones. Your depreciation jumped in Q3 versus Q2, and a lot of it, I think, $8 million was in the U.K. sequentially. Were there some like a purchase price allocation adjustment or something in the quarter that caused it to pop temporarily?
Yes, right, brand value, final assumption were -- will conclude during the quarter increasing our depreciated asset base. So that's why the number is up as compared to the Q2. If you compare it to last year, you also have to figure out the IFRS 16, the lease accounting. That has an impact on the depreciation.
Right. But the number in Q3, does that include some retroactive catch-up for the first half of the year?
There's a little bit of that, and you have that also in Q4. But in terms of going forward, let's say, for F '21, the mid-20 is going to be a good number for U.K. And it all depends on the CapEx project evolution. And there's also an FX consideration to that number, but the mid-20 would be a number that would make sense.
And then Dairy Foods USA, I think in the press release, you say that you increased some capacity or added capacity. When did that kick in?
The capacity that we're looking at was over the course of this fiscal year. And it will bring us right to the end of this fiscal year with the Plant City startup, which is going to be happening in Q4. So this is ongoing throughout this fiscal year and will continue to the end of this fiscal year.
And then just finally, for that division, it seems like it's taking a long time to find a permanent replacement to run that -- lead that business? What's the challenge there?
There's no challenge. As a business that continues to evolve. We need to see where the right structure will be. And again, with Carl, the lead of the North American platform, he thought that it would be the right opportunity for him to immerse himself in that business so that he can understand exactly where the -- where the key points are and eventually have a North American platform that will be that much more effective and that much more efficient. So that was actually Carl's decision to step into the Dairy Foods platform to better assess where the potential is going to be in the future for a synergistic North American operation.
Okay. And one last question, actually. The demineralized whey that you're doing in the U.K., is that something that you would be able to do as well in Canada or the U.S. or another market where -- do you have the capacity to do that or the technology at this time?
We do not have the technology, and it would require significant capital to build that capability at this point.
And the other thing we need to keep in mind, Michael, is we don't want to over-inundate the market with overcapacity of a product that's creating value. So even before we would spend that money, we need to see if there's a market for it, first and foremost. Oversupply is not good for any category of products. So we'll be very careful about the places we invest money to produce additional capacity.
Thank you very much. And Mr. Saputo, I have no further questions on the line. I'll now turn the call back to you.
Thank you very much, Tommy.
We thank you for taking part in this conference call. We hope you'll join us for the presentation of our fiscal 2020 fourth quarter and year-end results on June 4. Have a nice day.
Thank you. That does conclude the conference call for today. We thank you for your participation. I ask that you please disconnect your lines. Have a good rest of the day, everyone.