Marlene Robillard - IR Lino Saputo - President & CEO Maxime Therrien - CFO

Michael Van Aelst - TD Securities Mark Petrie - CIBC Irene Nattel - RBC Capital Markets Peter Sklar - BMO Keith Howlett - Desjardins Securities Patricia Baker - Scotiabank Bank

Ladies and gentlemen, thank you for standing by, and welcome to the Saputo Fiscal 2019 Second Quarter Results Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards we will conduct a question-and-answer session [Operator Instructions] As a reminder, this conference is being recorded on Thursday, November 1, 2018. I would now like to turn the conference over to Mr. Lino Saputo, Jr. Please go ahead, sir.

Thank you very much, Frank.

Good afternoon, everyone, and thank you for joining us today. A press release detailing our 2019 second 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] Members of the media are invited to ask their questions by phone after this call. 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 statement regarding forward-looking information in our Annual Report and our 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 laws. Mr. Lino A. Saputo, Jr., our Chairman of the Board and Chief Executive Officer, will begin this conference by providing a brief overview of key highlights relating to the second quarter of fiscal 2019, after which he, along with Mr. Maxime Therrien, our Chief Financial Officer, will proceed to answer your questions.

Thank you, Marlene, and good afternoon to you all. Our fiscal 2019 second quarter results were released this morning, and it reflects the challenges we anticipated. Our adjusted EBITDA totaled $318.5 million, a decrease of 3.4%, while adjusted net earnings declined by 12%, whereas consolidated revenues grew by 18.6% due to higher sales volumes from the activities of our recent acquisitions. This quarter, we faced depressed dairy ingredient markets, increased warehousing and logistical costs, intensified competitiveness and higher administrative expenses related to the ERP initiative. As such, we focused on numerous initiatives aimed at mitigating these factors. We geared efforts for the integration of recent acquisitions. Shepherd Gourmet is progressing well, increasing our specialty cheese and yogurt offerings in Canada. We continue to benefit from the Montchevre acquisition, which enables us to broaden our presence in specialty cheeses in the U.S. As for the extended shelf life dairy product activities of southeast milk, they continue to positively impact revenues in the dairy foods platform. In Australia, the combination of our two operating units into one single platform is advancing extremely well. We remain focused on increasing our milk intake, reviewing operations and maximizing our network. We've demonstrated our long-term commitment to our suppliers by treating them with respect and loyalty and by offering market-leading milk prices. In August, we also completed the sale of the Koroit plant in Victoria, as planned. Furthermore, we continue to seize growth opportunities through strategic acquisition despite operating and difficult times. This is a testament to our strong foundations, the expertise of our teams and our healthy balance sheet. As such, late last week, we announced our intention to acquire the activities of F&A Dairy Products, a manufacturer of natural cheeses with operating facilities in Wisconsin and New Mexico. The transaction is expected to close by the end of 2018. As an update on our ERP implementation, I am pleased to confirm the new SAP system has been implemented in 3 of our divisions. We have carefully evaluated the experiences from each of the rollouts and have learned a great deal, including best practices. We also noted potential areas for further improvements. As our next step, we'll deploy our ERP program into the recently acquired activities of Murray Goulburn. This will allow our Australian operations to be aligned under a single system. We anticipate this phase to be completed in fiscal 2020, after which deployment in the remaining North American divisions will follow. On the regulatory front, since the announcement of the new United States-Mexico-Canada Agreement, we're reviewing the proposed changes affecting the dairy sector and will evaluate their impacts on our activities. As I've said on many occasions, we operate successfully in various regulatory environments around the world, including Canada and the United States. We're confident we will continue to do so in light of the new USMCA. With regards to the impact of the federal milk marketing order adopted in California, we plan to take the appropriate actions to minimize its effects on our cost structures. We will review our strategy with respect to customer pricing. Remaining flexible, adaptable and disciplined, we will continue to take advantage of our global footprint and high levels of cash generated by our operations. As always, across all our divisions, we're committed to getting better at everything we do. Profitability enhancement and shareholder value creation continue to lay the foundation for our objectives. With that, I thank you for your time, and we will now proceed to answer your questions. Frank?

[Operator Instructions] Our first question comes from the line of Michael Van Aelst with TD Securities.

Just some clarifications to start. I think you talked about $27 million hit from warehousing, logistics and transportation. How much of that would be tied to ERP disruptions at all -- and considered temporary?

I would say the majority of that would be related to ERP, in function of the rollout within SDS specifically. One of the things that we recognized early on in the process is that there would be a lot of rigidity in the new SAP program. And so we're running roughly about 13 warehouses more than we normally had under the old Maestro system. Of course, added to that, we've got labor, and we've got overtime related to labor. So I think that as we're rolling out the ERP program, we need to be mindful of the fact that we still need to supply our customers. And as rigid as that system is, we took a lot of precaution. So I would say that a good deal of that amount is related to the ERP rollout. However, moving forward in time, perhaps not in the next year but somewhere down the road beyond that, some of that cost structure will be taken out. Perhaps, Max, can add a bit more color on that a bit as well.

Yes, Mike, just to give you a bit of flavor. When we're in North America, whether it's Canada or in the U.S., there's a new normal or a new set of level of expense that we are putting plans together to go get on the market. So yes, there is absolutely kind of, let’s call it this way, inefficiency related to the ERP deployment, but there's none of that in Canada. There's in the portion -- in the U.S., there is still a portion that we will go get on the market is the new level, and those are along the lines that -- fuel, delivery and the freight costs that we talked earlier about.

So the fuel -- so the part that's kind of market-driven rather than your company issues, the fuel, the transportation and you'll try and get that back.

Yes.

Can you give us an idea of how much that was? I think -- I seem to remember $7 million number in prior quarters.

Yes. Well, if we take just the U.S. per se, roughly about 60% is the new normal cost structure that we will need to go get on the market. So that remains...

60% of that 27?

60%, yes.

Okay. So 60% of that 27 is new normal that you got to try and offset or go get -- pass along, and the rest has to do with the actual warehouse and stuff like that tied to ERP?

Correct.

And then when we -- as you shift out to Murray Goulburn and do the ERP there, do you expect similar type of access costs?

No. In fact, actually, I think it'll be a smoother rollout. One, because the WCB platform has already been rolled out, and we do have expertise there; but also, secondly, and equally important is that MG already has an SAP program. The unfortunate thing in MG is that they didn't roll it out fully 100%. I think they stopped around somewhere at 75%. I think they saw some challenges there. So there already is a mindset of SAP, and there is the whole change management aspect of it already has been converted. So we don't anticipate that the MG rollout will be as challenging as what SDS was.

Okay. And then U.S. starts sometime in fiscal 2020, can you give us any more time frame for that?

Well, we think we will be in a position to start the rollout and the implementation in Murray Goulburn after Christmas, and that will be around a 12-month period. And just in terms of spending, when we look into Canada, the actual spending in F '19 will likely be the same at the high level -- high-level spend, I mean, in F '20. So there would not be a significant decline or increase in Canada. When you're looking in the U.S., our Cheese Division has started to ramp up. We will expect next year as well to have the similar level of expense that we have in this current fiscal year. As far as SDS, because the rollout has been completed, we're getting into the mode of optimizing the system and the tools. So we would expect -- we are expecting the next year to have a lower spend on the SDS front, having people going back and returning to the business. And on the Saputo Dairy Australia part, yes, we have to ramp up our resources, and we're making this assessment, as we speak. So globally, from an OpEx perspective, F '19 and F '20, we are not expecting a significant decline in spend, so remaining quite what our close to our peak spend because of a lot of activity going on. So that's the OpEx side. And if I can, we'll give you a bit of color around the CapEx. At the end of March, we had $196 million that we had drawn in this project as far as capital. F '19, we were planning for $55 million; and F '20, 22 -- $22 million. So that gives a total of $273 million. We're probably running about 5% above that $273 million. And then once we got to get to the third quarter results, we'll be in a position to share a bit more color around the additional CapEx that will be required, along with the SDS implementation.

Okay. And then on the U.S. as -- continuing on the U.S., when you look at the competitive pressures out there, how much of that, do you think, is tied to Mexican tariffs?

I think some of that had trickled back into the U.S. because of the time that we were going through the U.S.-Canadian-Mexican negotiation. There could have been some product that was rather than being sent to Mexico, brought back into the U.S. platform. Of course, there's also an oversupply of production in the global market, so there's also other international markets that the U.S. was selling to, including China, by the way. That didn't find a home in the international market. So it wasn't only related to the Mexican trade issue. I think it's a global trade issue, depressed prices around the world, a price war or tariff war with China. I think all of those have an impact on milk and/or dairy solids remaining in the U.S. If I look at a little bit where the block market has been in this last quarter, we're looking at a lot of volatility as high as $1.70 and as low as $1.50. And we have seen now into this quarter here, the bulk has gone as low as $1.45. So I think volatility will continue, if that's your question, Mike. Even with this tariff war behind us between Canada, United States and Mexico, I think there are other larger issues around the world that would create the volatility that we're seeing in the U.S.

Our next question comes from the line of Mark Petrie with CIBC.

Just a follow-up on that with the U.S. Are you seeing heightened competitive activity in any particular channel? Or is it just widespread and more driven by the supply side as opposed to the demand side?

It's really driven by the supply side. There are way too many solids in the system right now that the solid -- that the system cannot absorb. So yes, indeed, you've got manufacturers that are still processing the product and have to find a home for the milk. So yes, that continues to persist. Perhaps, if I can give a little bit of an outlook of where we think things will settle out. There is going to have to be some production taken off the table. Economics will drive that. I believe, and I'll be consistent with my comment I've made in previous quarters, where we believe that towards the beginning of calendar '19, things should balance out to a more normal basis, not just in the U.S., but around the world.

Okay. That's helpful. And then my question actually is just on international. You're able to hold margins relatively flat year-over-year despite the tough commodity environment, and what I presume was some margin pressure as a result of the inclusion of Murray Goulburn. And I just want to understand the dynamics a little bit there. How much of the improvement was Argentina versus Australia? Any benefit from sort of timing of pricing contracts that we'll see pressure escalate? Just trying to understand that a little more, please.

So in Australia, we have seen some improvements related to the integration of MG into the Warrnambool system. I think there are some synergies that we're deriving now, perhaps earlier than what we had anticipated, and that's showing up in the bottom line. Argentina, of course, with the investments that we made in the past and the incremental milk that we're taking, that overall platform is becoming more efficient by virtue of having more milk that is being processed. But you can't forget either that we are selling into the international markets in the U.S. dollar currency. And right now, the U.S. versus the Argentinian peso and versus the Australian dollar is favorable, so there was some impact on that as well.

Okay. And then just following up in terms of the progress that you've made at Murray Goulburn. I'm interested specifically if there's been any change in terms of the product mix that you're able to sell at this point or if it's just too early for efficiencies there.

Yes, that's too early right now. Understand when you're going to change the -- what the plants are producing, you do need some equipment and some installation, and that typically takes 18 to 24 months. Really, what we've done is we've been managing the infrastructure a little bit better, a little bit more efficient. We have been trying to go to market with better prices, at least on the international level, which is part and parcel of what our international team looks at, trying to find the best-value solids to sell into the best, most responsible market. So some of that has taken place, even though there hasn't been much change on the operational level when it comes to product differentiation or diversification.

Okay. And can you give us a sense in terms of milk intake run rate that you're seeing at MG now?

Yes. So we -- when we went out to the market in July, there was some milk that we had picked up early on, and then there's other milk that we had lost. So I would say we're pretty well balanced to where MG was last year, somewhat balanced to where WCB was last year. With the decline of overall production in the country, there's been a lot more competition for milk. And so we understood that it would take probably up to 3 years before we get to the run rate that we would be comfortable with. We're not quite there yet. I would say we're relatively flat versus where MG ended the year last year and where WCB ended the year last year.

Our next question comes from the line of Irene Nattel with RBC Capital Markets.

Just with regard to everything that's going on from the cost side of things. So we're not that different from anyone else and probably needing some pricing relief on the part of -- into customers. But of course, with the overhang, that makes it challenging. So can you talk a little bit about some of the discussions that you're having with your customers and what sort of your thinking, at this point, in terms of any ability to pass on price as we look ahead sort of into the next year?

Yes, that's a very good question, Irene. The cost increases are not exclusive to Saputo. When you think about labor shortages, especially in the U.S., when you think about the transport charges that not only that we're absorbing but a lot of our competitors and other folks in different fields are absorbing, this can only go on so long. We are currently having discussions with our customers based on the cost of living increases and increases in transport costs, changes to the federal order as well in the U.S. from California into the U.S., the system, so those conversations are ongoing. I'll take an example. Even in terms of the milk price increase in Canada, we got to a point in Canada where there -- we're close to the bottom of where we need to be in terms of having a business that -- where we can generate profits to invest in. And so that milk price increase has to be transferred onto our customers. It's not that we're increasing our costs. It's that we're being imposed some increases within the market that have to be passed on to our customers and our consumers. So we have been active in the last couple of quarters, having those conversations and those negotiations. And I would say they're going quite well.

So if we think about sort of different ways to offset the costs, do you think that you'll be able to get like a low single-digit pricing relief that will enable you to offset, say, half of the costs and the rest you're going to have to offset with productivity?

Yes. And that's typically how we've done in the past as well. We understand that our customers and our consumers cannot bear the full burden. And part of our ongoing CapEx allocation has everything to do with becoming more efficient, so we can mitigate the other half of those cost increases.

And as you have the price increases, are you doing it in the usual let's talk about volume, let's talk about product, let's -- in that whole -- within that whole context?

A little bit different than, perhaps, some of the other conversations we've had in the past where there were RFPs that came up. This is even outside of the RFP activity. We are going back to our customers and talking about increases related to cost of living trends.

Okay. And I know this one may be tough to answer, but are you finding them -- they need inflation, too, right? Are you finding them slightly more receptive than maybe they have been in the past to these discussions?

Well, I think because a lot of these factors are very well known in all industries, yes, it's not like they don't comprehend or like they don't understand what the background is of that. So yes, as receptive as we would like them to be, they have.

Okay, that's great. And can you also talk a little bit on F&A? I mean, what was it in particular about this asset that appealed to you? You now have a small footprint in New Mexico, what the plants might be there. And also, just sort of generally, how you're thinking about acquiring production capacity in other regions of the U.S.

F&A was one of those assets that we had targeted probably 10 or 12 years ago. And Jeff Terranova and I know each other extremely well, and we've had on and off discussions for the better part of 12 years. So it was an accident that we were looking at in the Saputo Cheese platform even before we were as large as we are. We still think that there's some great value in F&A in terms of having a manufacturing footprint in a state that is very, very different than California and Wisconsin. So when we were approached this time by their investment banker, we knew the asset extremely well. We knew that we would be the right fit for F&A., and F&A would be the right fit for us. So it's just that continued evolution of our manufacturing platform on the cheese side in the U.S. Again, we gained a cheese plant in a state like New Mexico, so a new milk shed, not only with manufacturing capability but also with by-product processing capabilities. So they are producing whey powder. So those kinds of assets still are very strategic. Even though they're very small, still very strategic for us, and we're delighted that after 12 years, we have the opportunity to acquire F&A.

That's great. Patience pays off yet again. I know you'd be very disappointed if I didn't ask a broader M&A question. So can you please update us on the number of files and where and what you're looking at most intently?

So I'm glad you asked the question, Irene. And in fact, I expected that you would ask that question. So as you think about, over the course of the last two fiscal years, we have made 4 acquisitions we materialized, and then, of course, the fifth one is F&A. In the majority of those cases, I would call them tuck-in businesses like SMI, Montchevre and Shepherd. Those were -- that's a nice -- they were nice, beautiful tuck-in businesses just like F&A will be a very, very nice tuck-in businesses. And then we have the acquisitions that I would call transformational like the MG. So that's a nice, transformational business. Now as I look forward into the pipeline of potential acquisitions, I would tell you that there are probably 4 or 5 files that are active right now that we're looking at, that I would deem, of the 4, 5, maybe 3/4 of them would be transformational kinds of acquisitions, things that would either get us in new geographies or, perhaps, get us new platforms in current geographies. So we're extremely excited about the potential of these acquisitions. We're extremely excited about the fact that the pipeline remains full. Now having said that, with the 5 that I indicated that we materialized, we probably looked at maybe another 10 others that we passed on for one reason or another, either because of price was too high or the conditions were not appropriate or, perhaps, the expectations from the selling side were not quite where we were ready to commit to. So again, going back to your point, patience, yes, does pay off. Discipline does pay off. I think we're going to have an opportunity to be involved in a number of different files all over the world because people recognize us as being consolidators in the dairy space. We have that great fortune. So I'm still very, very optimistic about transformational deals that are in the pipeline now that we hope we can materialize over the course of this fiscal year and, perhaps, even into next fiscal year. So there's no shortage of files. Again, we need to be disciplined. We need to be responsible. We need to make sure that those assets are going to be generating value for Saputo, not just for the short term, but for the long haul. And that's always been our perspective, and I think it's a winning recipe for us.

Our next question comes from the line of Peter Sklar with BMO Capital Markets.

Lino, on the Canadian business, I believe you said in the write-up you had lower fluid milk volumes in Canada. Does that reflect -- like is Saputo pulling back because of just the economics are not there? Or are you just -- or does that just reflect the overall market decline?

No, we haven't pulled back yet, and I say yet because we still have to develop that strategy. That decline is really consumption declining in the space. And I will say that our percentage of decline was less than what we would see in the industry standard. So we lost less consumption than what the industry lost over the course of the last three quarters. But to your point, Peter, at a certain point in time, we have to understand the viability of every single category of product that we manufacture, the energy, the effort, the risk that we entail every time that we process a product and bring it to shelf, and we have to ask ourselves if the returns are worth it. So yes, we are in reflection mode, understanding what categories of product we want to bring to market and, of course, the fluid analysis will be part of that.

Okay. And I noticed that Coca-Cola seems to be developing a fluid milk plant in Peterborough. It's for the U.S. brand.

The fairlife brand.

Yes, yes. And I'm just wondering like that just doesn't seem to make sense to me in the context of the overall fluid milk volume -- the market in Canada. And is this plant going to be big enough to affect the market? Or is the supply limited?

Well, look, we welcome that kind of innovation in the space. fairlife, different from some other competitors we have, are creating a product that is value added. So it's a high protein, low sugar, and they do that through an ultrafiltration process or some other kind of process that allows them to have from a natural process, natural ingredient to produce a value-added product. And they sell it as a premium on the shelves. That's great competition. So there is a space for that kind of product in the market. It is a niche market because the product is sold probably three or four times higher than traditional milk, but that's the kind of competition that we welcome. So is it viable? I think there is a niche market for that. How big their plant is going to be? I don't know. But just as a counterbalance to that, we've also introduced our own high-protein, low-lactose product, which I would say will give fairlife a run for their money, which is called Joya. And that is being produced with 100% milk out of our plant here in Canada, with 100% Canadian milk. So I think that we've got some great values, and we've got some great attributes to the product. And again, that kind of competition is very, very welcome.

Yes, but on the fairlife, like I believe they are bringing in milk from the U.S., which is what you're alluding to. But I think they ultimately plan to source the milk from the eastern milk pool. Isn't that the way how it's going to play out?

Eventually, yes. So that's their plan. From what I understand and what I'm reading the papers as well is that, ultimately, they will source their milk from Canada, and they will process that milk in a Canadian facility. That is their longer-term plan.

Our next question comes from the line of Keith Howlett with Desjardins Securities.

I just had a question on the transportation and ERP costs. The segmented results talked about $26 million of costs in the U.S. and $17 million in Canada, which adds up more than the $31 million. So I'm wondering what other items are within the segment descriptions.

Well, in the U.S., we're talking about $26 million just for the quarter. In Canada, we're talking about $7 million. So there's some favorability on the international front. So I'm not sure what you're alluding to.

Okay. And then just on the inventory level. The -- it's up about, I think, 30% year-over-year. I'm wondering how much of that relates to the acquisition of Murray Goulburn versus just the increase of inventory.

Yes. The vast majority of the increase. In fact, inventories are tracking below last year level, and that's why we're generating cash out of our cash flow statement and nonworking capital items. So last year, we were -- as we were building inventory, it is not the case this year. So more than the difference that you see on the balance sheet refers to MG and the other acquisition.

So inventory ex MG is down actually?

Yes, exactly.

Right. And just to clarify, it might to be a typo then in -- on the costs in Canada. The segment said there was $17 million of higher warehousing and logistical costs in Canada. Is that supposed to read $7 million maybe?

Let me check it out. So Max is looking at it. So Keith, do you have another question while we look at that?

Yes, I'll carry on. Just in terms of the intake in Australia, you mentioned it's the same as last year at both Goulburn and Warrnambool. Do you mean by that sort of the dairy year or the fiscal -- the calendar year or...

That's a rolling run rate because, again, if you think about the dairy year that starts in July, we did not own that business. So we're talking about run rate moving forward sort of a 12-month run rate of the facilities.

And okay. Do you -- can you share with us roughly what that is in liters or hectoliters or...

Yes. So in liters, we've got over 1 billion liters of milk in the Warrnambool facility. MG was running 1.9 billion with Koroit. You remove the Koroit, that's 300 million. So we're looking about 1.6 billion liters of milk. So all told, we're looking at around 2.6 billion liters of milk roughly in that vicinity.

And then...

I think Max might have an answer for you.

Just to confirm. The -- what we have in the disclosure is okay in the sense that $7 million is the Q2 number, and $17 million is the year-to-date for warehouse, logistics and ERP.

Okay, great. And during the -- the one last question on Australia is are you too large basically to participate in the bids or in the search for a bidder for the line assets? Or could you buy part of them or what...

Yes, that's a very good question. There might be parts of the business that we might be able to be able to scoop up. Again, depending on where the region and where their plants are, we might have too much concentration a little bit like what we did when we looked at the MG assets. We knew that there would be an issue in the Allansford Koroit area. So that's part of our analysis as well. If we ever do look at files, and I'm not saying that we're in and out of any files, but if we ever do look at files, we have to be mindful of the fact what our size is within the region, what our milk take is in -- not only within the country but different dairy-producing sectors. And it's part of our analysis as we move forward, and we understand how ACCC evaluates their files. So we have a lot more knowledge today than we did even a year ago.

Our next question comes from the line of Patricia Baker with Scotia Capital.

Three quick questions. First, let's go back to the discussion on pricing. And Lino, I'm just curious whether or not there is some typical pattern or time frame or lead time when you start having discussions with your customers. Is there -- how long does the process go on? Is there any typical process that you could start the discussions and you know that, typically, when you've gotten price increases in the past, it's taking x months or whatever?

Yes. So that has a lot to do with where the increases are coming from. Typically, when it's raw material increase, that needs to be passed on as quickly as possible. So for instance, in Canada, on the fluid milk side, it has to be passed on within weeks because there is little inventory, and it's a highly perishable product. When you think about products that have longer shelf life, maybe three weeks or three months, then you have an opportunity to roll out the old inventory before you get into new, higher-cost inventories. So you can negotiate that with your customers or they can negotiate that with us. So it depends on the category of product, and it depends on where the cost structure is. So when you think about raw material, it's in function of product that is produced. When you're thinking about other expenses, whether it would be labor, whether it would be transport, whether it would be warehousing, then those typically are a longer negotiation, and you pick a time. You set a moment in time where you can roll out those increases, and typically, they might be 3 months out of the discussion.

Okay, fair enough. So when you start the beginning of the discussion, you kind of set the time frame with the customer?

Correct. Yes.

Okay, excellent. And just returning to Peter's discussion on the fluid milk. And I take your point very well that value add is critical, and it's important that, that's where you are. Can you give us any granularity or share with us any data? Fluid milk volumes are down, but are there any differentiated trends with value-added milk? Are they -- is value-add -- are the value-added products from a volume perspective in the industry performing better than the overall fluid milk volumes?

So if you think about the category that we're leading in, which will be the single serve flavored milk, I would say that's flat to slowly increasing, especially when you have launches like the Milk2Go Sport and Milk2Go Sport Pro. So we see a little bit of lift there because they are innovative products, and they are products that appeal to consumers. So you have either flat to growing trends there. When you think about some of the other categories like the lactose-free, that's in rapid rise. So there are areas within the milk space that are quite attractive, I think about even in creams. Cream seems to be on the rise as well. So there are areas within the fluid milk space that are pretty attractive to maintain and to grow. It's more on the commoditized product, the traditional white milk that is really, unfortunately, under cut in the market that is in rapid decline, probably at a rate of maybe over 1%, close to 2% per year.

Okay. And then my last question, just you referenced on the U.S.-Mexico-Canada agreement that you were going to be evaluating the potential impact there. When do you think you'll finish the evaluation? And when can we look forward to hearing what you think the impact is going to be on Saputo?

It all depends on when the government comes out with their allocations for licenses. And I think that the USMCA is not as bad as it could have been. And this is -- Class 7, we knew, is going to be a problem for Americans as well as a problem for countries around the world. It was not a fair system. I said it publicly before, I'll say it publicly again. Class 7 did not make any sense. So that was no surprise to us. What was a little bit of a surprise was the amount of access Canada granted to the U.S. into our market. So when I think about the CPTPP, when I think about the USMCA, when I think about the CETA deal, all collective, we're looking at over 10%, 10% of our market was given to these trading partners. Now I don't typically have an issue with that as long as those licenses, the import quotas, are in the hands of dairy people, people who can add value in the dairy space. If there is an opportunity for us to bring in a value-added product, either from the U.S. or, perhaps, in the case of TPP, bring it in from some country like Australia, bring in some value-added products, well, then I think we can enhance the product portfolio that we're bringing to market rather than destroy value in the category. So it all depends on how government is going to treat this file. I think that there's going to be great value in this deal if there is an ability for the dairy stakeholders to control their own destiny. I think value will come out of the category if these licenses are in the wrong hands and all we think about doing is bringing cheaper products in from other countries. So our assessment on the impact has already been determined. It just depends on who gets the import licenses. Would it be dairy stakeholders? Or would it be people outside the dairy space that don't have an interest in maintaining value in dairy?

I really appreciate your answer, Lino. Is the government doing any consultation with the dairy stakeholders?

Yes, they are. In fact, I read 2 days ago that there is a consultation group made up of dairy processors and dairy producers. I believe, this is my sense, that Canada realized that they made a mistake in CETA, that the value of the quotas were not given to the right players. In fact, I don't think the quotas have been utilized to their full extent. I will tell you, Saputo as a company, not only have we used 100% of the quotas that we were allocated, but we went and borrowed other people who had no clue what to do with those quotas. And these are the messages we're sending to the government. If you would like these quotas to be fully utilized with great value, then make sure that they're in the hands of the dairy industry.

We have a follow-up question from Michael Van Aelst with TD Securities.

When you look at the competition impact in the U.S., is it all visible in, basically, the movement of the cheese price? Or are you seeing -- are there other impacts that are less noticeable like increased promo spend support, discounting, things like that, that is less visible?

There is some discounting going on. The promotional aspect of it is subjective. We can choose to promote or not promote, depending on what the traction is and what the value of dairy goods are. When you think about discounts, a lot of that has to do with competitive nature of the space. Of course, understand that we do have competitors that want to fill their plants and get their product to market. So sometimes that -- those price discounts are unsolicited by the buyers and offered by the sellers. So we sometimes have to defend ourselves, and that's all over the map in every single category of product we're manufacturing in the U.S.

Okay. And then on your blue cheese plant, it's state of the art from what I recall. Can you quantify the impact that's having right now, that the inefficiencies are having right now and maybe explain a little bit of what's happening and how long it's going to take to get these out of the plant?

Yes. I'm glad you asked that question, Mike. The plant itself, the manufacturing platform is running as well as we have expected. In fact, the closure of E. Scott St. in Fond du Lac moved the production over to Almena. Almena was able to absorb that very, very easily from a manufacturing standpoint. The inefficiency that we're facing in Almena has everything to do with our curing cells and curing rooms. So essentially, when you've got the curing rooms that are running at 20% of their capacity, the exhaust of moisture is much easier than when you have the curing room running at 100% of this capacity. Over the course of this last quarter, our curing rooms were not running as efficiently as we expected. So the extraction of moisture was not as good as we needed or wanted or required. And so we did have, unfortunately, some product that has a wrong kind of mold on it. Rather than having the blue mold, we had some of brown mold, we had some black mold and we had some product, unfortunately, that needed to be disposed. And that -- you saw that in this quarter here. Those are the inefficiencies we're talking about. Nothing to do with manufacturing. Everything to do with our curing cells, and of course, downstream of the curing cells with the packaging room and packaging people and extra labor related to handle all those issues. I would say that towards the end of this quarter here, we've started to have a better run rate in our curing cells and curing rooms. And I'm more confident moving into this next quarter with the efficiency of those curing cells than I was going into the quarter.

But would you be running at a pretty high level of capacity now in those rooms?

Yes. So we're close to our full run rate. The only thing that remains is the old Almena plant production that has to be moved into the new Almena plant. We chose to delay that not because of the manufacturing capability, but we didn't want to overtax the curing cells with incremental volume until we got that sorted out. So understand, as you're running the old plant, you've got incremental labor and overhead that you've got to absorb longer than what you expected.

Okay. Are you able to quantify the overall impact in the quarter?

No. No. It's just to say that we do expect to generate more savings in the upcoming quarters.

Mr. Saputo, there are no further questions at this time. Please continue with your presentation or closing remarks.

Thank you very much, Frank.

We thank you for taking part in this conference call. We hope you'll join us for the presentation of our fiscal 2019 third quarter results on February 7. Have a nice day.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines. Have a great day, everyone.