Saputo Inc
TSX:SAP
Earnings Call Analysis
Q3-2024 Analysis
Saputo Inc
In the backdrop of a dynamic economic environment, the company has pursued its long-term strategy with unwavering discipline. This approach yielded an adjusted EBITDA of $370 million against a revenue backdrop of $4.3 billion. A display of strength in the Canadian sector was particularly notable, complemented by encouraging progress in the U.S. These positive outcomes have been underpinned by capital investments, higher sales volumes, and an emphasis on cost management. An added layer of success was evident in the strong operating cash flow seen during the quarter. Despite the market being plagued by volatility in global dairy commodity prices and consumer challenges, the company has stayed course, focusing on operational control and stabilization. Looking ahead, the culmination of major capital projects and initiatives from the strategic plan mark a critical juncture, paving a confident path towards growth expected to materialize in early fiscal 2025.
The persistent strength in the Canadian sector, alongside headway in the U.S. driven by strategic capital projects, stood out this quarter. Despite the challenge of volatile dairy commodity markets and cost-conscious consumers, the company observed a rebound in volume across all business segments. Key priorities remain anchored in operational excellence, project execution, cost containment, and cash flow generation. These material progress indicators in the company's strategic plan are expected to solidify the next growth phase.
Financials were met with mixed results, with a 16.9% decrease in adjusted EBITDA primarily driven by broader market adversities, notably in international cheese and dairy ingredient markets, and unfavorable foreign exchange impacts. Despite these headwinds, growth in sales volumes and cost containment measures offered a counterbalance. Additionally, the company took a significant impairment charge in its Australian division due to a disconnect between market prices and farm gate milk prices. The business sustained its momentum with efficient working capital management, which, paired with the suspension of the dividend reinvestment plan, reflects prudent financial stewardship aimed at optimizing leverage and cash flow as part of the broader strategy.
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Greetings and welcome to the Saputo Inc. Third Quarter Fiscal 2024 Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded on Friday, February 9, 2024. I would now like to turn the conference over to Nic. Please go ahead.
Thank you, Frank. Good morning and welcome to our third quarter fiscal 2024 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. For the question-and-answer session, Lino and Maxime will be supported by Carl Colizza, President and Chief Operating Officer, North America; and Leanne Cutts, President and Chief Operating Officer, International and Europe. Before we begin, I'd like to remind you that this webcast and conference call are being recorded and the webcast will be posted on our website along with the second -- along with the third quarter investor presentation. Please also note that some of the statements provided during this call are forward looking. Such statements are based on assumptions that are subject to risks and uncertainties. We refer to our cautionary statements regarding forward-looking information in our annual report, press releases and filings. Please treat any forward-looking information with caution, as our actual results could differ materially. We do not accept any obligation to update this information except as required under securities legislation. I'll now hand it over to Lino.
Thank you, Nic, and good morning, everyone. In the third quarter, we continue to execute with discipline and advanced our long-term strategy in a dynamic macroeconomic environment. We reported adjusted EBITDA of $370 million on revenues of $4.3 billion. Our Canadian sector continues to show its enduring strength, while our U.S. sector also made good progress, notably supported by our capital projects, higher sales volumes, coupled with the operational benefits of our capital spending program, as well as our emphasis on cost management and continuous improvement had a favorable impact on our results. Importantly, operating cash flow during the third quarter was strong. Volatile global dairy commodity markets and a challenged consumer were persistent themes in the third quarter, much like in the fiscal year-to-date. But while the consumer is still shopping with value-seeking behavior, we are seeing clear progress in volume recovery across our business segments. As macroeconomic drivers impact the global economy and continue to drive commodity price volatility, we remain focused on managing the factors within our control and stabilizing the business. Our priority areas include operational excellence, successfully executing the major capital projects underway, cost containment and cash flow generation. We are making material progress in advancing the key initiatives of our strategic plan and continue to build confidence in the next stage of our growth. We reached a critical juncture in the implementation of our global strategic plan during this quarter. I'm delighted with how projects are advancing, and the impact of the actions completed to date. I expect these investments to contribute to our results starting in early fiscal 2025. With most of the heavy lifting behind us, I remain very confident in our long-term strategy, and I'm optimistic about the future. Our focus on execution will position us well to enter fiscal '25 with much momentum. I will now turn the call over to Max for the financial review before providing my concluding remarks. Max?
Thank you, Lino, and good morning, everyone. Going over to financial highlights for the quarter, consolidated revenues were $4.3 billion, while adjusted EBITDA amounted to $370 million, down 16.9% versus last year. Lower year-over-year adjusted EBITDA was driven by lower international cheese and dairy ingredient market prices, the negative impact from the U.S. market factor, also negative impact from the selling of inventory produced at high milk prices in the U.K. and an unfavorable foreign exchange impact when converting foreign currency to the Canadian dollar, mainly due to the significant devaluation of the Argentinian peso in December. Positive drivers include higher sales volume in both domestic and export markets, ongoing cost containment measures, lower logistics costs and benefits from derived from our global strategic plan, including continuous improvement, supply chain optimization and automation initiatives. We reported a net loss of $124 million in the third quarter. On an adjusted basis, our earnings were $163 million or $0.38 per share. Third quarter results include a non-cash impairment charge of $265 million relative to the Australia division. In performing our annual goodwill impairment testing, our Dairy division Australia cash generated unit, CGU, estimates of future discounted cash flow were reduced due to the increasing disconnect in the relationship between international cheese and dairy ingredient market prices and farm gate milk price in a context of declining milk [ pool ] in Australia. As a result, the estimated recoverable value of the Australia CGU was determined to be lower than its carrying value and a non-cash goodwill impairment charge of $265 million was recorded in the third quarter, representing the total value of the goodwill for the CGU. Third quarter results also include closure and restructuring costs of $6 million. I'll now take you through key highlights by sector, starting with Canada. Revenues for the third quarter totaled $1.3 billion, an increase of 5% when compared to last year. Revenue increased due to higher selling prices in connection with the higher cost of milk, as raw material and the carryover impact of pricing initiatives, mostly in the first half of 2024, implemented to mitigate ongoing inflationary pressures on our input costs. Sales volumes were stable year-over-year in the retail market segment, while sales volume in the food service were higher. Adjusted EBITDA for the third quarter totaled $150 million, up 1% versus the same quarter last fiscal year. Our stable performance reflected the benefit from our cost containment measures, lower logistics costs and benefits derived from our global strategic plan, which reached their stable run rate. In our U.S. sector, revenue totaled $2.1 billion and or 5% lower versus last year. Revenue decreased due to the combined effect of the lower average cheese block butter and dairy ingredient market prices. Sales volumes were stable with higher domestic sales volume despite ongoing competitive market condition, whereas export sales volume were lower. Adjusted EBITDA declined 9% to $133 million. The year-over-year decrease was mostly driven by a $27 million negative impact from U.S. market factors, driven by the combined effect of the cheese milk spread, the inventory realization and dairy ingredient market prices. Also $10 million of costs incurred to implement previously announced network optimization initiative was recorded in the quarter. These factors were partially mitigated by operational improvement and lower logistics costs. In the international sector, revenues for the third quarter were $636 million, down 31% versus last year. Adjusted EBITDA totaled $85 million, down $26 million versus last year. The performance of the sector was negatively impacted by the unfavorable relation between the international cheese and dairy ingredient market prices and the cost of milk, as raw material. And also, an unfavorable FX impact from the conversion of the functional currencies used in the international sector to the Canadian dollar, mainly due to the significant devaluation of the Argentinian peso. The impact of the FX conversion amounted to $305 million on revenue and $36 million on EBITDA. A decrease in certain market selling price also resulted in an inventory write-down of $14 million. This was partially offset by higher milk intake, increased export sales volume and the carryover effect of previously announced pricing action in our domestic market. Our results were also positively impacted by previously announced network optimization initiatives aimed at improving our operational efficiencies and strengthening our competitiveness in Australia. In the Europe sector, revenues were $304 million, while adjusted EBITDA amounted to $2 million. The decline in adjusted EBITDA was due to the selling of -- the sell off of inventory produced at high milk prices last fiscal year. Lower international dairy ingredient market price also had a negative impact. Net cash generated from operating activities for the third quarter amounted to $388 million, as compared to $134 million for the same period last year. The increase was driven by ongoing working capital and inventory management initiatives. We remain on track on our capital investment plan. CapEx for the quarter totaled $140 million, and the year-to-date spending is in line with our expectation. We continue to expect a significant improvement in our cash flow generation over time, as will be harvesting benefits from the global strategic plan and our CapEx returning to a level similar to our depreciation and amortization expense range. Finally, we announced yesterday the suspension of the dividend reinvestment plan. The suspension of the DRIP is the result of our leverage position, as well as our expectation on cash flow generation going forward. This concludes my financial review. And with that, I'll turn the call back to Lino.
Thank you, Max. In Canada, our results reflect our relentless focus on commercial and operational execution with a diversified portfolio that offers consumers variety, convenience and value. Our global strategic plan delivered continuous improvement, supply chain optimization and automation initiatives. Volume improved on the strength of the food service market segment, notably with QSR customers. Our retail market segment also benefited from a busy holiday season with everyday cheese volumes supported by increased brand investments, particularly with Armstrong. In the U.S., the business is building momentum. We have seen more operational stability and sustained improvements in customer fill rates. Volume trends in our domestic market continue to recover, while our broad-based capital investment plan is on track with several major projects well underway. Dairy commodity markets remained volatile during the third quarter. U.S. dairy market pressures were only partially mitigated by higher sales volumes and lower logistics costs. But if you look past this market noise, the core business has performed well so far this year. The quality of our top line momentum has improved with a healthier balance across price, volume and mix. While these temporary market dynamics have certainly lasted longer than we had anticipated, markets are expected to stabilize over time. However, it is the speed of the recovery that remains unknown. We have also been making progress on our strategic plan in the U.S. with advancements on network optimization and automation and with better visibility on our savings opportunities. New cheese red lines are in start-up mode at our Tulare Paige plant, and we are meeting customer demand. The planned closure of our Big Stone Green Bay and South Gate facilities by the end of fiscal 2025 should further support cheese network optimization plans. In the third quarter, we closed our Belmont facility and benefits from the recently converted Reedsburg goat cheese manufacturing plant should continue to increase in Q1 of fiscal 2025 once our Lancaster facility is permanently closed. The new automated cut and wrap facility in Franklin is currently running with benefits expected to begin by the end of this quarter. The targeted investments made position us well to operate more efficiently and do more for our customers than we ever had before. This is expected to drive momentum going into fiscal '25. In the international sector, global dairy markets remain challenging due to unfavorable dairy commodity prices. In Australia, our results were in line with the previous quarter. We benefited from higher milk intake resulting in better operating efficiencies, offset by unfavorable dairy commodity prices. Based on the milk decline and current challenging market conditions, we reviewed our estimates of future cash flow for our Australian division. This resulted in a non-cash impairment of $265 million on the value of the goodwill for the Australia division recorded in the third quarter. While there is still uncertainty in the near-term market dynamics, we are dedicated to doing everything we can to maximize the results of the division. Our strategy remains unchanged. We've continued to advance our network optimization, and we are benefiting from the positive impact from several streamlining activities completed over the last few quarters. The business remains focused on its domestic market with select key customers in the export market playing an important role. We are maintaining our disciplined approach to managing the business, and we are confident, we will be in a much better position with the actions we are taking. In Argentina, weakness in the export commodity prices and the recent devaluation of the Argentinian peso impacted our results, but our domestic business remains strong with higher pricing and volumes. In the Europe sector, the selling of inventory produced at higher milk prices continue to be a headwind in the quarter, as expected. Moving forward, our performance should improve sequentially, as we cycle through high-cost inventory and as we begin to ship new value-added private label contracts. Efficiency benefits from the expanded Nuneaton packing facility are also expected to accelerate once the closure of the c is completed in Q1 of fiscal 2025. We are also pleased with the rate of volume recovery in the retail branded channel and our progress around optimization initiatives. Turning now to our outlook for the remainder of the year. We anticipate many of the trends from the third quarter will carry over into the fourth, including in the international sector, notably in Australia, where there is an ongoing disconnect between the international cheese and dairy ingredient prices and farm gate milk prices. We expect the environment to remain volatile and challenging in the near term from input costs to currencies to consumer and geopolitical dynamics. While global dairy commodity markets are not where we would like them to be, we remain focused on the factors within our control. Nonetheless, our confidence in the overall health of the business and our growth drivers remain unchanged. We are proactively reducing costs and maximizing cash flow, while maintaining a broad focus on financial flexibility and operating discipline. When we embarked on our global strategic plan initiative nearly 3 years ago, my priority was to steward the company through one of the most important phases in our history and to see through the completion of our capital investments. We've had to realign and adjust to many challenges, and we have adapted to an ever-changing environment. And now we are approaching the end of our multiyear capital expansion plan with a clear line of sight to project benefits. By the end of this investment cycle, we will have built a resilient business with strong growth and earnings potential. As I look back over the past 3 years and our journey through an unprecedented time, I'm often reminded of the passionate, purposeful people, who make us who we are today. I can say with confidence, our foundations are solid. Our infrastructure is unique, and our team is focused. Simply, our best days lie ahead. And on that note, I thank you for your time. And I will now turn the call over to Frank for questions. Frank?
[Operator Instructions] Our first question comes from Irene Nattel with RBC Capital Markets.
As you outlined in your comments, there's a lot that's going to come together in F '25 from, let's call it, the productivity and efficiency side, as a result of the so many projects coming onstream. If we assume that nothing changes in the commodity backdrop, how should we think about the financial benefits as we move through '25 and '26 of all of these initiatives?
Yes. So some of the things, Irene, that we need to keep in mind going into fiscal '25, a lot of the heavy lifting has been done. So when you think about just simple things like CapEx spend, we're going back to our normalized level, so you can expect a much reduced capital expenditure. You can also assume that within at least 3 of our geographies, where we've got a network optimization plans in place, that there's going to be less overall overhead expenses relative to the division with the same amount of volume or a little bit more volume than we are currently processing. So all of those factors, in addition to what we call the enabler bucket, enabler bucket is beyond network optimization, all of that SG&A expense that we have, similar to what we've talked about in the past relative to the consolidation of our 2 U.S. businesses, we have a network that we are going to be servicing that is smaller in footprint than what we had before. So by the nature of that, there are going to be some reductions in SG&A as well. So all of these elements, the things that we've been talking about for the last 3 years and that we've executed on pretty effectively and efficiently through an unprecedented time on budget and on time will start to deliver benefits for us in fiscal '25. So I'm extremely excited about going into next fiscal year with the infrastructure and the focus that we have. And I think that there are going to be benefits beyond just the network optimization in terms of us delivering incremental value for our shareholders.
That's very helpful. And switching to more near-term elements. Can you talk through what you're seeing out there in the various regions in terms of consumer behavior and demand and the impact that that's having on your mix and margins?
Yes. So I'll just talk about the macro environment and then perhaps, Carl and Leanne can jump into each division. We are seeing a slowing milk production around the world. And we see this in just about every dairy-producing country around the world. The economics for dairy farmers are challenged. And there are a lot more pressures relative to ESG as well on dairy farmers and laws that they have to contend with. So the dairy farming community is resilient, but the folks that are not as well invested or as efficient are dropping off in terms of dairy farms and their contribution to milk production. We are seeing that the consumer is resilient as a whole in our domestic market, but the international market still remains a big question mark. We're not quite sure when the buyers are going to come back, although we have seen signs on the GDT that have been encouraging, there's still nothing that is sustainable for us to say that there is going to be certainty that buyers are coming back to the market. As a whole, there is a good balance between supply and demand, so that should hold up prices to at least where they are now with perhaps some slight improvement. But the focus that we have as a business is more to understand what we can control, deliver on the goods and the investments that we've made and make sure that we continue to drive value. So perhaps I'll have Carl start off with more domestic feel for what we're seeing within each of our Canadian and U.S. countries.
Thanks, Lino. Maybe I'll start with our U.S. business. So certainly, we're seeing some challenges with consumer spending capabilities with some of the economic pressures. But nonetheless, over the last couple of periods, we've seen consumer sentiment tick up. So very encouraging from that standpoint, we have certainly seen a shift from full-service restaurants down to QSR. So the consumer is, I'll say, trading down in some cases, as well as the shift from some areas of branded business down to a private label. But all in all, for Saputo, I think there's nonetheless, 2 bright spots, and that is the scope in which we play in the U.S., the categories and the sectors, we supply both on -- both on our branded business, as well as private label. So we're well positioned to be able to capture whatever gains there may be in each of those sectors. If there's a more pronounced shift from the food service sector to retail, we're also much better positioned than we were a couple of years ago when that shift occurred during the early days of the pandemic. So from that perspective, we are seeing some shift in the mindset. But I would say that overall, whether that be U.S. or Canada, dairy is still in very good standing with consumers. So it is a very good value proposition for the consumer, as well as a value proposition for elements of the food service menu agenda. So that will be from a U.S. perspective. In Canada, not much different. Consumers are challenged, as you certainly would have seen and heard from other peers in the industry. But I would say, nonetheless, the strength of our brands, the strength of our value proposition and our service, in particular, in Canada, has seen us continue to see share gains, both in retail and in food service and continue to make penetration in different market segments. So still very optimistic about our ability to navigate these challenging consumer base.
And Irene, it's Leanne. I'll build on that. We're also seeing in the U.K., although the macroeconomic conditions there have been more challenged for the consumer, we are still seeing good demand for cheese. In fact, the cheese categories is now growing in both value and volume over the last quarter. We are [ lapping ] significant increases in our price. But what we're seeing now at Cathedral City is that we're now growing share. We're taking share from both other brands and private label. Our price gap to private label is now quite narrow, and it's stable. So we are seeing consumers in the category, and that is really good for our business in the U.K. And in Australia, similarly, but the value and our volume for our cheese categories is stable. So we are seeing consumers -- they're coming in the category and continuing to buy.
Anyone, do you want to [indiscernible].
Yes. I was just -- sorry, I was just going to ask Leanne, if she has any other comments on Argentina, which is also a very good story despite the volatility that's there and the change in government and such.
That's right. Yes. That -- we have very excellent management team there, who are used to successfully navigating some of the conditions there. So despite the new government, and in fact, we're seeing no impact to our business. And in fact, actually, we're continuing to grow our export business in volume and also our domestic consumption remains robust.
Our next question comes from George Doumet with Scotia Capital.
I was wondering if you can talk a little bit about the higher volumes in the U.S. domestic market. What's driving that? And maybe how sustainable is that in the face of the tough commodity market?
Well, George, it's Carl. I'll take that one. I think that it's good news all around, and it's a certainly a testament to the choices that we've made in our capital plan, as well as our improved position when it comes to our turnover. So we've materially reduced our turnover quarter-over-quarter, and that puts us in a much better position to be able to supply the demand that has been present in the marketplace for us, and that demand is coming in a number of channels. One in the Mozzarella space, we're in a better position today than we were certainly last year. So some strengths in this area. We've reaffirmed some of our market-leading positions in Gold and Blue Cheese, as well as some of our [ hearty ] Italian positions and as well as our dairy foods items, heavy whipping creams and other high fat products are also in good demand. And we're in a great position to be able to supply that with the asset base that we have. So from that perspective, we've been able to service the market well. Our fill rates now it's been at least 3 quarters to 4 quarters, whereby our fill rates are in a great position, and we're doing that also with a better management of our overall inventory. So we've got certainly the right products and the right buildings for appropriate distribution. We're also doing that with fewer [ pounds ] and also fewer pounds of waste overall. So all this to say that the domestic market, we're cautious about the consumer of course, but we're very confident in our ability to supply the various segments and the shifts in the demand that may occur.
Yes. Maybe switching gears to Canada. I believe Q3 is seasonally the strongest quarter, but we saw EBITDA margins in Canada kind of compress sequentially. Is that just a question of timing on pricing? Or is there anything else kind of going on there?
No, I would say that in the Canadian business, there's been a little bit of a shift in some of the mix, certainly. One of the things that we don't talk about a lot, but is beginning to creep in just a little bit in the U.S. and the Canadian business is also the commodities markets, and that's really associated to the way byproduct that it produces. So Canada is not fully sheltered from the value of the commodity space when it comes to its way byproducts. So some of that had a negative impact in Q3. But overall, I would say that we're in a strong position when it comes to the investments that we've put in. They are contributing almost to their fullest of degrees to date. And the future outlook for the Canadian platform is for the -- the strong Canadian team to continue with the value proposition that they bring in the various segments that we service. We have various innovations still to come, various cost-out initiatives as well. So I still expect to have some growth in the Canadian sector.
Okay. And then maybe last one for me, Lino. I think there's obviously an expectation for strong free cash flow generation and good deleveraging over the next 12 months, you're probably positioned just below our balance sheet [ comp result ]. So I guess, given where the stock is today, what do you think is the priority maybe for capital deployment kind of over the next 12 months to 18 months?
Yes. First and foremost, for us, we are focused on strong operating cash flow, and that is in all divisions in all categories, just as simple as rightsizing our inventories as well, making sure that working cap is in line. Of course, with inflation coming back down to more normalized levels, working cap, inventories, accounts payable -- accounts receivables are coming back to more normalized areas, CapEx is slowing down as well. We're looking at a much reduced CapEx spend for fiscal '25. So free cash flow is going to be a big priority for us, as we get into fiscal '25. We're looking at priorities for us, yes, dividend, debt repayment and continuing to execute on the development of our businesses, as a short-term goals. And then, of course, as we look at more long term, creating value for shareholders through buybacks and such. But I think we're -- we might be a few quarters away from that yet. Primary focus is dividend and debt repayment.
Our next question comes from Michael Van Aelst with TD Securities.
Just -- can you just clarify what that CapEx number is that you expect it to be in fiscal '25?
Okay. So Mike, this is Max. So we're looking about $200 million to $250 million lower than what it is the run rate this year. We should be finishing the year around the [ 650-ish ] -- so in and around like just slightly north of $400 million would be a number that you could work with. So it's a $200-plus million reduction in CapEx that would fit us within our depreciation of our asset level.
Okay. Great. And then so looking at Australia, with the write-down that you had to take, what can you tell us about the long-term EBITDA generation potential in that division? And to what degree would that now affect your ability to hit your [ $2.125 billion ] at some point in the future when the market and volumes stay normalize?
Yes. So the [ $2.125 billion ] is still very achievable within the structure of what we have, irregardless of the context of milking of a shrinking milk pool in Australia. So one of the things that perhaps gets overlooked is the initiatives that our Australian division has executed on over the course of the last year. I mean, there are tens of millions of dollars of cost reductions that we've done that have only been swallowed up by a negative commodity pricing in the international market relative to the milk price that we have. Moving forward, one of the big priorities for us is to get a better balance between the milk price and the international dairy markets, and that will only happen once the new milk year starts. But when you've got that balance between the milk price and the commodity prices, then we would be returning back to normalized EBITDA levels in Australia. And then, of course, with the shrinking milk pool, we have to prioritize what categories of products we want to go in and looking at more value-added categories that will drive a better return for us. So we're still very optimistic about our Australian platform, even though it will be a much smaller platform for us from a milk intake and milk process perspective. But I'm really proud of the efforts and the energy that our Australian team have deployed. I mean, talk about resiliency. This is a really resilient group.
And Michael, it's Leanne. We're already seeing the financial benefits from the network optimization that Lino referenced there. As you know, we've moved from 11 down to 6 sites, and we obviously have a couple of strategic reviews still underway. However, the important thing is that we still got more benefits to go with the financial benefits from that optimization. And most recently, with the investments we made in our [ system ] facility, we're already shipping new products from that. We're on track with the benefits from that facility. So although there's obviously a bit of stable -- we've got good milk this year, it's stabilizing the mill pool. We note that there continues to be a significant disconnect between the international cheese and dairy ingredient prices and what we're paying as local Australian farm gate milk. So we need to carefully review that situation, as we head into the new milk year, but we are very confident that we have the right, most efficient portfolio and the most efficient network utilization in Australia.
And Mike, just to complement with this impairment charge, one of the element here is referring to the discount rate or the interest rates that have increased. And when you put that in the model, and you use the internal accounting ruling to make it that -- it's part of the story as to how we come up with [ 265 ]. So it doesn't mean that we are shying away from the [ $2.125 billion ] or put in jeopardy. There's that fees that needs to be understood as well.
Okay. That's helpful. And then on the U.S. side, -- you talked about -- I think you've said a number of times that you expect 90% or 95% of the global strategic plan benefits there to kick in, in April. How do I square that up with the fact that 3 of the plants are not going to be closed until later, sometime later in fiscal '25?
Yes. Michael, it's Carl. I think maybe we want to kind of clarify the position of the contribution from those capital investments in fiscal '25. We're going to see that ratio of 90%, 95% of the benefits kick into fiscal '25, not necessarily out of Q1. When we take a look at the investments that have been made and the contributions to date, most of that is coming from the Mozzarella modernization aspects, which, for the most part, the lion's share is going to start to kick in, in Q4. But there are some other aspects like Franklin, which does require the permanent closure of Big Stone Lancaster and Green Bay to fully contribute and take advantage of the capacity utilization that is in Franklin. So we're talking more about that kind of a ratio sometime throughout fiscal '25. And I think the best way to anchor and when the savings come online is closer to the dates by which we have the closures. So keep in mind that we have a couple more closures by the end of the fiscal year and that in Lancaster and in Big Stone. And then we've got South Gate and Green Bay later on in the year. That will help sort of pace, if you like, the return that we expect to see, as well as the removal of some of the [ duplicate ] costs that we have in our segment today.
And Mike, the 95% that we voiced was around the completion of the project itself was not so much related to the benefit. So yes, 95% of the project being completed by the end of this fiscal to set the tone, set the pace for the benefit to kick in, in fiscal '25.
Our next question comes from Mark Petrie with CIBC.
I just want to keep sort of following up on the [ $2.125 billion ] and maybe 2 specific questions. One, specific to Europe, obviously, some very difficult conditions there. You're saying it should be -- begin to be improving next quarter or this current quarter. Can you just give us a better sense of the pace of improvement that you expect? And then what you see as an achievable sort of steady state EBITDA margin or dollar level for that segment?
Well, Hi, it's Leanne, Mark. We're still sailing through the inventory that we produced at high milk prices, given the maturation profile of our business in the U.K. But the -- and the outlook to you to go, this will continue, but to a lesser extent than we've seen in Q3, as that cheese product mix is being corrected. And we do expect continued improvement quarter-on-quarter, as that inventory rebalances. We're also starting to ship significant new private label volume now, so we can foresee a much more steady state.
Yes. I would add to that, the situation in the U.K. is transitory in nature. We're dealing with that inventory that we have to, let's say, liquidate on the market. Once that is over, yes, we're looking for fiscal '25 to be like, let's say, a recoup year. And when you compound that with the volume that we received, we got from a private label cost structure review relative to our consolidation in Nuneaton from the Frome cost-out initiative, our branded cheese that Leanne talked about that's healthy on Cathedral City. And don't forget that the butter and spread business is doing quite well for us. So we definitely have a line of sight to grow in -- for us in the U.K. We have to go through this transitory in nature. We definitely feel that we have the answer to the challenge ahead once the inventory is behind us.
Okay. That's helpful. I mean, I guess, just to ask it a bit differently, when -- in the early days, you were reporting sort of high teens EBITDA margins. Is that still achievable?
Yes. If you look at the return to historical levels as being our baseline and then the improvements that we're making in network optimization and other investments in brand and categories, yes, that is very achievable, Mark.
Okay. Perfect. And then just sort of coming at the [ $2.125 billion ] in a bit of a different way. I mean, if we look at the LTM sort of run rate, it's about $600 million below that target, and obviously, the commodity is severely against you. But can you just give us a sense at a high level, how much of that gap do you feel like is in your control and a payoff from all of the efficiency initiatives and network optimization? And how much of that is commodity driven?
Well, I would say that the whole bucket relative to network optimization, we feel it's -- this is our control, it's under our control. Obviously, a lot of the savings that we're tabling for fiscal '25, we feel confident that they're going to flow through. We're not going to share guidance, as it is for specifically next year or so, timing links to various things relative to the execution. You referred to market. The volume, we feel we're in a good spot. We have the right infrastructure in place with the right people. And we are comfortable with all the various announcements that we've made over the last couple of years with the benefits that were tagged to each of those that will flow through. Now it's a matter of getting in that fiscal year completing our projects and get them started. Relative to the other pillars and the network optimization, Lino talked about the enabler one. Yes, there's other elements in the strat plan that has been worked on. We've put a lot of focus on the network optimization. But nonetheless, there's other pillar that's been worked on. And yes, we're still working towards that line. And if markets on our site, it's going to accelerate. If not, we continued our pace and on things that we can control.
Our next question comes from Tamy Chen with BMO Capital Markets.
This is Riad on for Tamy Chen. So I have a couple of questions. So my first question would be, if you could please explain why the International segment revenues declined so much, but the EBITDA dollars was stable this quarter. Were there any onetime unusual that affected revenues, but not EBITDA?
Yes. Yes. So I'll take that one. Okay, let's say, according to the international standard, there's -- once an economy reached 100% over a 3-year period, it's defined as hyperinflation economy. Since Argentina has been over 100% inflation over several years since 2018, we're using here as a poodle like hyperinflation accounting standard. So quickly, standard index, our P&L and our balance sheet for a specific index that is applied, that is known in Argentina, and this is typically a positive for us, indexing for inflation. But the standard -- the accounting standard also convert all of our year-to-date Argentinian operation at the spot rate at the end of the reporting period at the end of December. So that significant devaluation that took place in December now it's definitely negatively affected our results operations for the -- in the EBITDA, but also on the revenue side, bringing that to spot rate. In normal circumstances, the hyperinflation impact and the FX devaluation typically offset each other on an annual basis, one goes against the other. However, in the short term during a major event like we -- like the devaluation of 59% to 60% in a single day, we could expect some timing differences, and that's what we're seeing right now in Q3. That's accounting-wise. Relative to the transaction per se, a lower value of peso positively helps our export business in Argentina, as it is mainly transacted in USD, and this helped to mitigate the negative effect of the pricing on the international market. So in a nutshell, the devaluation in December is not usual, and it did negatively impacted our results due to the spot rate going down that much in December.
Okay. And just to rebound on that. So then why did the EBITDA dollars remain stable compared to like quarter-over-quarter, why did EBITDA dollar value -- why did the EBITDA dollar value remained stable?
Because the devaluation of the peso forces us to retroactively for Q1, Q2 and Q3 to use the spot end rate. So the devaluation kicks in for the whole year since day 1, [ since ] April the 1st. So it kind of shaves off like 50% of our revenue year-to-date. That's the $300 million we're talking about though.
Okay. Great. And my following question was, in Europe, revenues increased by 6.7% this quarter. Could you elaborate a bit more on what drove this? And if those private label contracts are already like coming in or we have to expect them to come in more in Q4 of fiscal '24?
Yes. Well, revenue in Europe, they were impacted by the volume that we have to sell as a bulk cheese, rather, there's more of the volume that we sold through bulk cheese, but obviously, at a lower price. And there's also a piece of the ingredient market that impacted the revenue. I don't know, Leanne, if you have any other comment on that?
Yes. So as we said, yes, we're still [ sailing ] through that inventory that was produced at higher milk prices, which is going to affect our revenue and our EBITDA. Similarly with our ingredient business, we have got good volumes. We're actually seeing recovery in volumes around ingredients, but pricing is still significantly lower versus a year ago due to the overall soft demand for our ingredients -- for ingredients worldwide. As we said, though, we do expect continued improvement quarter-on-quarter, as that inventory rebalances. Importantly, you asked about, yes, the private label, we are shipping that new private label volume now, and we expect to see a significant ramp up, as we go through the end of Q4 and into Q1 next year.
Our next question comes from Vishal Shreedhar with National Bank Financial.
Obviously, a lot of facility improvements coming on over the next several quarters. Just I was hoping to get your comments on Saputo's ability to increasingly insulate itself from commodity price volatility. It's seemingly becoming a bigger part of the conversation quarter-after-quarter. And do you anticipate that some of the initiatives that implemented will help you help insulate against commodity price volatility? And if not, what are some tactics that Saputo can employ to insulate yourself?
Yes. Vishal, we're always exposed to commodity markets. It's the world that we live in, in dairy with the exception of Canada. Canada has got a very stable market with the milk supply managed system. But when you look at the way that milk is priced around the world and there are different regulatory environments in Europe versus Australia versus the United States. So -- but we are heavily dependent on a favorable milk price in order to derive the value, especially in the international markets from a selling perspective. So that is part of our world. Now some of the mitigating factors, some of the things that we can do is to create value brands, where we're, in some cases, I guess, insulated from moving prices on the milk and/or commodity side as well, in the case of Australia, as an example, trying to sell more of our volume into the domestic market and less into the international market, trading up in terms of categories of product from pure commodity like skim milk powder into more value-added categories of product like infant formula and other dairy goods. So there are going to be shifts into value-added categories because of the investments that we made and some of the energy that we have around marketing and innovation. But we will never get away from a commoditized environment. This is part of our world. And the more we've grown outside of Canada, the more that we become exposed to that, that's just the nature of our business. What we can do is produce the highest quality product, the lowest cost to compete with anybody around the world. I will tell you that once this infrastructure network optimization is completed, we will be, I will say, most efficient dairy processors in Canada, among the top dairy processors in the United States and perhaps the most efficient in some key categories of products. There is no one that comes close to us in Argentina, no one that comes close to us in Australia. And I would tell you with the value of the brand that we have in the U.K. and our efficient network, very few [ cheddar ] companies can come close to us. So I feel really good about the infrastructure we had even in a commoditized world. I feel very, very good about us competing, but there is going to be volatility. There's going to be ups, and there's going to be down, and that's just the nature of our business. We can't get away from that.
Okay. And maybe just on the back of that comment, the [ $2.125 billion ] target. Obviously, the timeline was removed, the actual numerical figure was maintained. And now that you're getting closer to many of the initiatives that you're planning for many years now, do you have line of sight, at least internally as to when that target can be achieved? And what are the key factors preventing you from giving us a timeline? Is it commodity price volatility? Is it the enablers that you talked about? And maybe you can describe that a bit as well?
Yes. So part of it is the commodity markets. I mean, we need to be in a more normalized -- at more normalized levels, which we're not. We're looking today at a block of [ 1.60 ] when more normalized levels are [ 1.80 ]. I mean, we're not talking about a stretch of [ 2.20 ]. We're talking about $1.80 market price, which is -- if you look at historically, that's typically, where the U.S. has been. I look at the same thing in the international markets. We're probably about 20% to 30% below what the normalized levels are. I mean, we need some of that to come back. But then there's also consumer sentiment. Right now, there's still a lot of -- although there are some meaningful signs of improvement, we're still dependent on consumers' disposable income and their ability to be able to spend money on value items like dairy. So there are a number of different factors, and this is why it's hard to give a timeline because there is no clarity as to when things will become more normalized. But we know that we are inching closer and closer and closer to that number, as we get every week and every month and every quarter behind us. So again, I feel very good about the business. I'm not at all concerned about the infrastructure that we've built. I love the team that we have, the focus the energy. We just -- there are certain things in our world that we can't control. And we can't lose too much sleep over the stuff we can't control, but we will press hard on the things that we can.
Our next question comes from Chris Li with Desjardins Securities.
Thanks for squeezing me in. Just have a few follow-up questions. Maybe starting from in Canada. I think as George asked before, good solid revenue growth, but EBITDA dollars were relatively flat. I think, Carl, you gave some reasons as to why. I just want to confirm, going forward, do you expect EBITDA dollars to remain kind of flattish in the foreseeable future? Or do you expect some [ reacceleration ] in growth based on some of the initiatives that you're working on in Canada?
I think in Canada, the Canadian team will continue to grow the EBITDA. And by growth, we're talking about more subtle and steady growth like you would have seen in prior years, and that really comes from continuing with the grind. And by the grind, I mean, winning market share in various sectors. There are still some cost-out opportunities that are in the works through some level of automation, as well that's going into some of our facilities. We have some products on the retail front that are going to hit the market with some line extensions and so forth. So certainly, Canada is not going to be static. Canada will remain nonetheless dynamic. There will be some growth in the overall EBITDA, but probably more modest in nature, as we navigate the Canadian consumer and the consumer challenges that are ahead.
Okay. That's helpful. And then maybe switching quickly to Europe. And again, I appreciate all the colors on the drivers there. I guess, my question is, if all goes as planned, what is your best guess in terms of by which quarter do you expect profitability to return more or less back to historical level?
Well, it'll be starting Q1 fiscal '25. We still have to run through the inventory within the current quarter, Q4 of fiscal. So we feel we'll be in a much better position starting the fiscal '25 from an inventory perspective. So yes, you should see a much more normal EBITDA number for U.K. starting Q1.
Okay. And then just maybe another one just when you do your budgeting for fiscal '25, what are you kind of penciling for U.S.A. market factors? Do you expect it to be neutral? Or do you factor in some negative impact?
That's a very good question. Right now, there's not a lot of clarity. So we're getting a host of mixed signals when it comes to milk supply. So the availability of milk and demand are the 2 factors that would drive outlooks on the block price. On the one hand, we've seen the overall milk production start to decline, and the overall herd sizes and total count has actually declined. So that would, in one respect, suggests that we're getting to a better place with regards to the milk supply versus matching demand, which would potentially augment the overall outlook on block price. But there are some competing elements to that, despite that milk outlook, if the international marketplace and the commodities market on that front, if demand remains soft, it may not have that same effect in the -- it may not have the beneficial effect in the U.S. because the U.S. does have a growing component of export and the overall production from U.S. operations, and that impacts as well the overall selling price -- or the block price in the U.S., as manufacturers, who ship in and out of the exports and come back to the domestic markets can then influence the domestic price. So in many respects, we're not expecting anything close to a $2 block. We are expecting something slightly ahead. And if you look at the futures market, they're sitting somewhere in the range of $1.75 is sort of the peak point for the next calendar year.
Okay. That's very helpful. And then my final question is just on the network optimization benefits. Just based on what you said about we should really anchor the benefits anchoring to the plant closures just given the fact that most of these plants are closing at the end of fiscal '25, is it fair to assume we should expect really -- is really towards the end of fiscal '25 that we should see some more meaningful pickup in these EBITDA benefits, not so much in the first half?
I think nevertheless, when you take a look at the coming closures, so by the end of this fiscal, we're going to have 2 other plant closures. So I think the first half we will have meaningful improvements from network optimization and certainly the back half of the year with the subsequent closures. And then, the -- I'll call it the compounding effect of full volume entering some of the sites that we consolidate into such as Franklin, you'll see a little bit of an acceleration in the back half of the year with the overall contributions from those capital investments. So it's not all back-end loaded. Considering that we do have some eminent closures here, we'll be removing some of those duplicate costs, I'll say, in a hurry. But certainly, the rate will improve in the second half.
Our next question comes from Rob Dickerson with Jefferies.
Great. Good morning, everyone. A couple of questions circling back to other questions. I guess, my first question was just going back to the -- your comments on the futures prices and kind of supply/demand exports, et cetera. I mean, it does look currently in the futures markets like expectation is for cheese prices to block to increase kind of materially, let's say, as we get through this calendar year, milk prices may be kind of the same, but a little bit less. So kind of where you sit today, if you think through the next 12 months? Like would you say there's a low probability, maybe kind of in the middle because you're not really sure or maybe there's like a decent probability that we actually can get back to that positive spread dynamic that you had seen last quarter? That's the first question.
I think despite the mixed signals, there is a reasonable chance that we're going to see the block price overall improve. And the spread has a couple of other factors in there, block being one of the most important. There's elements of weight and weight components. But there is a reasonable chance that with the increase in the overall block price that is projected that we will see a better spread situation. And if that also occurs, it's also because demand still remains on the positive side of the ledger. So I think those 2 things combined, there's a reasonable chance that we're going to see some positivity in the U.S. business from those 2 factors.
All right, super. And then especially given you just touched on the demand piece, just to kind of ask about that. I realize you don't kind of break out price volume for the company or per segment. So I guess, kind of first simple question is, are there areas, where you're seeing a little bit better demand? I mean, I understand, it sounds like Europe is a little weaker, but there are some offsets given new contracts, et cetera. And then, I guess, just secondly, when we look at a lot of different categories, specifically in the U.S. volumes actually seem to still be doing pretty well relative to a lot of other categories that are clearly experiencing kind of a pocket of pressure. So maybe if you could just kind of speak regionally on the volume side and then maybe just some rationale, as to why is the cheese category actually doing better than a lot of other categories?
Yes. It's interesting. I think it goes back to comment I made earlier. Dairy continues to be a very good value proposition for consumers. And from a nutritional perspective, the overall cost per pound and from an overall share of stomach, it offers a lot, but it also offers a lot of opportunities and capabilities in the food service sector. I mean, we -- the dairy foods portfolio we have is almost second to none in the U.S. in that we play in all areas. And we focus a lot here on cheese, but there is a whole other side of our business is called the dairy food sector, which is really not influenced much by commodities pricing. And we're talking about things like ice cream mixes, we're talking about heavy whipping creams, aerosol and other solutions, various solutions that we bring to the food service sector. And we -- that -- sorry, that supply also crosses a lot of channels, not only retail, of course, but all aspects of food service from full-service restaurants to quick service. And I think that with the, call it, the U.S. consumer being fairly resilient and having a positive outlook, we're still going to see some growth in those sectors. And we have great partnerships with a lot of national brands, and we do expect to capture on that continued growth, albeit smaller than in historical years, we do still expect there to be demand for our products in the U.S.
All right. Super. And then, I guess, just lastly, kind of annoyingly, just want to circle back to the Argentina dynamic on the FX side. I understand, I mean, I guess, conceptually hyperinflationary accounting regulation. We also have had other larger U.S.-based multinationals go through that same process recently. While at the same time, some companies historically like decide to kind of adjust the results out. So I guess, the simple question is, clearly, there's the impact in the third quarter, as we think kind of forward the next few quarters until basically that dynamic would lap. Is there anything we should be thinking about kind of just given how the accounting kind of works such that like there shouldn't be as much of a dynamic on the FX side going forward? Or maybe it is just kind of more kind of just kind of [ stared ] issue year-over-year drag because of the devaluation. I'm just trying to understand kind of the puts and takes of how you mark to market and the delta into hyperinflationary accounting [ rules ], and then kind of what that implies on the go forward?
Okay. So just to provide some comments or I'll try to answer your question. So the hyperinflation accounting requires you to index your balance sheet, your P&L. So typically, we're running a profitable business. Typically, this is a positive for us, boosting our financials. On the other hand, yes, you do have to convert the report into Canadian. And you use like the -- typically the lowest rate, which is the spot rate at the end of the period. It tends to be lower. They 2 offset each other. So when you say how should we think moving forward, well, if you would have a peso that would be sustainable, that would maintain itself over the course of the next future, but the high inflation that's been going on in the country continue to rise, then yes, this would be a positive for us from an accounting perspective. That said, some [ economists ], some rationale tends to say that there is a hyperinflation because of the significant devaluation of the peso, and some would also say, well, there's some significant devaluation of the peso because of the hyperinflation. Those are linked really close together and tend to offset from an accounting perspective. This is pure straight accounting, converting and so on. On the field transactionally, when we sell and we try to be competitive on the market, a lower value of peso is positive for us. We pay our milk in peso, we pay our employees, we pay all of the expenses in peso. But yes, we do sell in USD. So from a transactional perspective, this is a plus, and that serves us sort of as a hedge for the international pricing volatility that we've seen. The part from an accounting, which is a non-cash piece, there's a limit that we could do to protect ourselves. It's just the nature of accounting principles.
Okay. So I mean, kind of simplistically, given operations are all kind of intra-country, it sounds like what you're saying is there kind of very limited transactional dynamics, hence, the EBITDA result, even though you're taking the translational impacts on the top line. Is that kind of a fair broad comment?
Yes. Yes, fair. Yes, I agree.
Okay. And then I guess, just lastly, kind of with that currency dynamic, and I [ ask ] at ignorance because if you look at kind of other categories globally, usually a lot of companies will try to price at least some to offset some of the currency pressure. I mean, it sounds like for you, especially given there's not much of a transactional impact. There probably isn't as much of a need outside of like reporting optics to the public market, let's say, which you [ shouldn't ] have to do, right?
Right.
But there really isn't much of an incremental need to have to price intra-Argentina, which keeps the price down, helps global exports and intra-country demand.
Yes. Correct. So transactionally, domestically, we have solid, solid business, domestic and Argentina pay, our expenses, our input cost in peso, we sell in peso, no concern there. And on the export, yes, it's a positive, but it's the -- that the issue we're dealing with this quarter is the accounting principle to convert to Canadian into the hyperinflation accounting standard.
Right. But I just want everyone to understand it, too. It's like, it's optics because your EBITDA is still strong. It's all intra-country. So it's almost a non-event.
Right.
There are no further questions at this time. I will now turn the call back to Nic. Thank you.
Thank you, Frank. Please note that we will release our fourth quarter and full year fiscal 2024 results on June 7th, 2024. Thank you for taking part in the call and webcast. Have a nice day.
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