Greetings, and welcome to the Saputo Inc. Financial Results for the Fiscal Year Ended March 31, 2020 Conference Call. During the presentation, participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, today's call is being recorded Thursday, June 4, 2020. Now, I would like to turn conference over Lino Saputo Jr. Please go right ahead.

Thank you very much, Tommy.

Good afternoon, everyone, and thank you for joining us. Taking part in our call today are Lino Saputo Jr., Maxime Therrien, and Kai Bockmann. Before answering questions from our analysts, Lino will begin by providing an overview of our fiscal 2020 fourth quarter and year-end results, as well as an update on how we are managing our activities in light of COVID-19. Before we begin, I'll remind you this call is being recorded, and will be posted on our Web site. Please also 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. 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 the call over to Lino.

Thank you, Sandy. I hope you're all keeping safe during these trying times. I would be remiss if I didn't start the call by addressing the challenging situation we're all experiencing at the moment. Our thoughts are with those who are ill, and with those who have lost a loved one as a result of the COVID-19 pandemic. I also want to express a heartfelt thank you to every Saputo employee for their ongoing passion and dedication. Since the onset, we've understood to forge ahead successfully we have to support one another. I'm extremely proud of what we've overcome and accomplished thus far. COVID-19 has impacted our business though we are finding creative ways to overcome the obstacles it brings. While the situation continues to evolve, our objectives remain to ensure the safety of our employees and the continuity of our business. Notwithstanding, overall this was a solid year for us, and the pandemic only started to impact our results late in our fourth quarter. We reached new heights in terms of revenues and adjusted EBITDA, and we were thrilled to add the Europe sector to our global platform. With numerous achievements came downward pressures, many of which we met head-on over the past few years. To comment on the fourth quarter specifically, consolidated revenues increased by 14.9%, mainly related to the contribution of recent acquisitions. Additionally, adjusted EBITDA grew by 8.5%, while adjusted net earnings were down by 21.5%. The Canada sector posted healthy fourth quarter results benefiting from higher sales volume, mainly in the fluid milk category. In a competitive low-growth market, the division remains keenly focused on responding to evolving consumer preferences, particularly in value-added products, while maintaining profitable volumes in all categories. In the U.S., results were negatively impacted by competitive market conditions within the mozzarella space. As a result, lower cheese sales volumes had an unfavorable effect on efficiencies and operational costs. Going forward, the division remains focused on growing its specialty and value-added products, as well as pursuing operational efficiencies. In the last two weeks of the quarter, all sectors felt the affects of the pandemic, but for us, Canada, and U.S. felt it the most, with increased activity in the retail segment, while foodservice demand steeply declined. While the impact on quarterly revenues wasn't significant, adjusted EBITDA was negatively affected by among other things on inventory write-down caused by a drop in certain markets selling prices, as well as a loss from unsellable inventory destined for the foodservice trade. In our International Sector, Australia had a challenging year, no doubt. First, the devastating bushfires, and now the effects of a global pandemic, both have dealt a hard hit to the region, and lower milk production continues to pose its challenges. Over the next few quarters the Dairy Division Australia will forge ahead, further capturing opportunities derived from combining its operating activities under a single platform. Moreover, it will leverage the impressive portfolio of brands it now has in its roster. Our Argentina platform delivered consistent results despite navigating challenging economic conditions. While COVID-19 had a negative impact on our export sales, domestic demand in Australia and Argentina has remained relatively stable. The Europe Sector anchored by longstanding and well-loved U.K. retail products will seek growth opportunities by leveraging its brand, pursuing line extensions and potentially expanding sales overseas. The positive impact of the lift in retail demand resulting from the pandemic benefited both revenues and adjusted EBITDA in our U.K. business. As for our ERP rollout, due to travel restrictions, we've modified the deployment, which includes postponing the balance of the rollout in Australia to fiscal 2022. Although this is scheduled to change as a result of COVID-19, we plan to move forward with the subsequent phase of implementation within the Cheese Division USA to be completed by the end of fiscal 2022. The implementation in Canada is expected to begin during the third quarter of fiscal 2021, and all our plans will move in tandem with government guidelines. Looking ahead, we expect sustained retail sales in all of our geographies, but we cannot predict how long or how significant the increased demand levels will remain. We do not anticipate the positive impact on EBITDA resulting from increased retail sales to offset decreased sales volumes in the foodservice and industrial market segments, but we will be standing at the end of this crisis, strong and ready to pursue our growth journey as we take advantage of the opportunity the market will offer. Every sector will maintain efforts to actively manage our operations and to leverage our expertise, flexible platforms, and global footprint in order to mitigate the short and long-term negative impacts. We will remain focused on adapting our manufacturing capabilities to cater to local realities and changes. Times like these truly highlight our great fortune. Our balance sheet is solid, and our business is sound. The strong foundation we've built over 65 years affords us the luxury to do the right thing and to seize the right opportunities when they arrive. We view these unique circumstances as an occasion to be a stabilizing force in the industry, and we are leading by example. True to our character, we're thrilled to lend a helping hand to others during this time. In addition to the support we've been offering our employees, we've been giving to local food banks and providing expanded services and resources to our patron farmers. Our ongoing community contributions across our divisions have reached over $4.2 million and still growing, and recently, our efforts were recognized by the Canadian Business for Social Responsibility. It's remarkable how quickly the world can change, yet, I've never ever been more confident about our people, our products, and our future. I can't acknowledge enough the exceptional passion and dedication of all our employees worldwide. I am privileged to work alongside such a talented and loyalty team. Together, we will forge through this adversity and come out even stronger. I thank you for your time, and we will now proceed to answer your questions.

Thank you. [Operator Instructions] And we'll get to our first question on the line from Irene Nattel from RBC Capital Markets. Go right ahead.

Thanks, and good afternoon everyone. I was wondering if you could walk us through the ways in which you've been able to adapt your production platform to-date in order to sort of adjust to the new reality in terms of demand, and we've heard you saying, Lino, that out of every adverse situation you learned something. So, are you rethinking at all perhaps the actual footprint and whether it makes sense to have dedicated facilities at this point in time for foodservice and industrial?

Yes, Irene, that's a very good question, and so, we had to tackle this early on, as early as the month of March. We saw that there was demand shifting from retail to foodservice, and in some cases some of our plants were down to about 30% production capacity utilization, and so it was incumbent on us to see how we could repurpose some of our facilities, some of our plants, and some of our products. Of course, we had some inventory we had to dispose of, or we tried to repurpose that into other categories of products that we can sell either at retail or some other channel, and if we couldn't do that then we would give it to food banks, but going forward from the inventory that we were sitting on, we're seeing now we have to bring in this milk, we have to produce product, and how do we manufacture products to get them to consumers? And so, we had a lot of good constructive discussions with our customers who were, by the way, very, very open and collaborators in us being able to repurpose some of our products. So things like different formats, different sizes, different labeling, different brands that we would bring to market, and so we were successful in doing that, and perhaps maybe Kai can add a little bit of color there, but what we did learn is that we need to have, number one, first and foremost, a strong balance sheet at all times. We need to make sure that we can weather any storm at any given time, and thankfully, we've taken the right decisions over the 65 years, but more specifically over the last year or two to de-lever our balance sheet to make sure we had financial flexibility, one, to guarantee all of our employees that they didn't have to worry about their income and they didn't have to worry about their jobs. Our first priority was our people, their security, their health and safety, their protocol, and then find a way to service products to market for consumers. So, we learnt that our prudent approach is always very, very good, especially when you get into a crisis mode, and today we're in an enviable position to be able to take advantage of these opportunities that ultimately will arise by those companies that weren't quite as prudent, but maybe I'll pass it on to Kai to see if he's got more color that he can provide you in terms of how we repurpose some of our plants or some of our products.

Thank you, Lino. I would say that it really depends on the division that you're looking at because some have a lot more flexibility than others. If you look at our international platform, on Argentina and Australia, the mandated has always been about putting that milk into those products that generate the highest variable rate of return. Those divisions, those platforms offer a lot of different options in terms of market segments, whether it's retail foodservice, but more importantly on the export side as well, and then you look at the types of products as well, there's a lot more flexibility in those two platforms. If you move over to the U.S., we have worked with our retail partners in terms of retrofitting or repurposing foodservice formats so that they would be accepted by cash and carry outlets or larger retail formats. So, we have had some success there, but limited because in terms of changing the capabilities of some of our platforms in the U.S. it would require a lot of CapEx investments as well as lead times to secure the necessary equipment. There are however other opportunities from a U.S. platform. We witnessed a low block price at the beginning of May, which allowed us to tap into some export opportunities which we took advantage of, primarily in the Asian markets. So those would be some examples in terms of using our flexibility in light of the current situation.

That's really helpful, thank you. So taking this a step further, does it make you think that over the longer -- sort of taking a longer view maybe you need to build a little bit more flexibility into some of your U.S. plants or in a normal world this just wouldn't be an issue?

We don't know what a normal world is anymore; I need to be honest with you, but the reality is, is that if you've got flexibility between selling into the retail foodservice an ingredient and a good balance between those three channels I think you can mitigate a lot of the headwinds and perhaps the new normality of consumer patterns, and that's what we're curiously looking at in all of our platforms, in all of our geographies. We will certainly not abandon foodservice or ingredient. We think that that will come back, but in certain geographies we might have to think about a proper balance between the three.

That's great, thank you. And coming back to the issue of the balance sheet and cash flow management, could you walk us through the thinking around introducing the different reinvestment plan?

Yes, I'll have Max tackle that one.

Sure. So, we came up a DRIP program that allows the shareholder to be paid here a share instead of cash. It's at the whole shareholder discretion and it does provide the opportunity for the shareholder to increase participation in the company at a discount price. From our end, it provides us with additional cash flow. We intend to use that potential cash flow to accelerate the deleveraging of our balance sheet, gain financial flexibility moving towards our leverage of 2.25 times our EBITDA, and that's at the -- that is our sweet spot for us to maintain our strategy of growing through acquisition, and that's the first and foremost fundamental around that. We do believe that we create more value pursuing acquisition and maintaining our acquisition strategy. It's just absolutely well worth our acquisition profile, and that's what I'd like to say.

So, I have just one other thing I would add, that the DRIP program is not a result of COVID. This is something that we had been contemplating for a little while. The timing of it comes out around COVID time, so one is not linked to the other at all.

So, just so we're clear, we do not have any liquidity issue at all. So this DRIP program is not liquidity issue driven. It's really deleveraging our balance sheet, getting more financial flexibility in order to be a bit more active on the M&A front.

And we believe, coming out of this crisis, there are going to be great opportunities on the M&A front.

Okay, I'm sorry, I was ready to hand you over to someone else, but you just opened the door, I can't. So, could you walk through sort of at what point do you think about M&A opportunities? Would you be comfortable moving forward with something now? Do you need to see how things evolve over the next several months? And how are you thinking about things, and how many files, how many people have been calling you?

So, the number of files have grown, so I typically say that we got three to four files on the table at any given time. You can add more files to the table because our phone has been ringing. Now, in terms of timing, Irene, we are prepared to move forward on an acquisition to the degree that we see that we're getting it at the right value, and it is strategic for our development and our orientation. The only complication I would say in executing a file would be the due diligence process, because we are hands-on people. So there is a virtual due diligence, which we can still performing, which we are performing in many cases, but then we've got to get boots on the ground into the manufacturing facility to make sure that we turn over every stone, and we can visualize the opportunities that we can bring to that asset. That is going to be a bit more challenging until travel restrictions open up, but that does not stop us from moving forward into Phase 1 and Phase 2. So Phase 1 is the preliminary evaluation, Phase 2 is the due diligence analysis to get us to a letter of intent, and then finally, Phase 3 would be once we get into a discussion with a potential seller, that we've got to meet the management, and we've got to visit the facilities, that right now is going to be a bit more challenging, but from what I'm understanding from our government, there is going to be opening up or easing up of travel restrictions as of the end of this month. So, the normal course of due diligence process can continue. So, nothing is stopping us right now from continuing to move on in these files.

That is great. Thank you.

Thank you very much. We will get to our next question on the line, from the line of Peter Sklar from BMO. Go ahead.

Okay, thank you. On the $44.8 million of inventory write-downs and the sale of inventory at loss and all that related to what's going on in the foodservice channel, can you talk a little bit about like the shelf life of that inventory in your warehouses by categories was -- like some of the product -- like some products have more short-term shelf life, but others have longer shelf life, so you'll be able to carry over through this issue, and do you anticipate further write-downs, or is this it?

Okay. So, Peter, this is Max. So the $45 million is composed of three elements. The first element is relative to -- and it's a couple of million within that $45 million relates to some accounts receivable that were deemed at risk from our analysis perspective. From an account-by-account analysis, we felt that we needed to take some reserves to offset the potential loss and that's the little piece of this overall $45 million. There's about $24 million, which is relative to the inventory that you're referring to, that we're trying to repurpose. The vast majority of that inventory is in the U.S., and it refers to Go Cheeses, it refers to Blue Cheeses. When those inventories are packaged or produced and packaged in some format and you want to unpack and do things differently with those inventory. You're altering the texture, you're altering the product. So that's the vast majority of that inventory piece. So, the shelf life of those products, whether we first we sold most of it during them in Q1 right now. So, inventories are gone, but obviously we're not able to repurpose the whole aspect, but those are the main tickers from an inventory standpoint. Now, we get to the third piece, which represent about $80 million and that's the net realizable value of the inventory, we had on hand at the end of March. The commodity market went down significantly, forces us to take inventory market write-down like we would have typically done at any given quarter, any given year to re-price our inventory at the low level of the commodity and of course, when the commodity starts to rise again during the Q1, the inventory on April the 1st, it sits at the low value, and then yes, we are materializing additional profits relative to that in Q1. Now to your point, whether there's going to be another write-down popping out, it all depends on what the markets going to do. Right now, the blocks in the U.S. sits at the $2.50 plus should this thing and it remains above the pre-COVID commodity market, we do not anticipate any write-down, but if it goes down again to $1 market, yes, we would ultimately end-up facing additional write-down. So it all depends on the market where it is landing, but at the current times, yes enjoying the fact that the market is high. We have no issue with regards to inventory, whether it's the repurpose, we're not producing additional inventory that we anticipate having loss, and we currently do not have any expectation from the write-down perspective relative to the market, what it tends to be.

And so, Maxime, just to clarify the $18 million that you referred to, that's not directly related to what's happened in the foodservice channel rather that's just related to the ups and downs of dairy commodity prices?

You're absolutely correct, driven commodity, we know that the commodity dropped because of the COVID situation, but that's exactly it's market-driven, that's not inventory to that we were not able to repurpose, that's another $24 million-ish.

Okay. And then, on another issue in your commentary, and in the write-up, you've talked about in the U.S. business that there was competitive market conditions in the cheese sector you called up mozzarella, I think Lino in your commentary. Is this like this backdrop that you're seeing, is this COVID-related, are there other factors at play here?

So, the beginning of that was not COVID-related. There was more capacity that was built into the U.S. manufacturing systems by some of our competitors. COVID only exacerbated this issue.

Okay. And then the last thing, I wanted to ask you like, I'm sure you obviously would notice that like recently, if you look dairy commodity prices have really whipsawed in May versus April, in quite a dramatic way for some of the commodities. Can you talk a little bit about like, how Saputo copes with that, and should we take that into account when we consider your earnings for the first fiscal quarter?

So, the rationale behind this volatility, I mean the U.S. government stepped up and as part of their COVID Assistance Program they've spent big money on dairy. So they've taken a big chunk of that milk production out of the system. I talked to the exports ramping up during that low block period. So that had an impact as well, and then what we're seeing right now in the last few weeks, as the shelter-in-place restrictions are being lifted, that the foodservice segment is reloading their pipeline, and there's a lot of uncertainty in the market. That's what's caused that volatility. From a support perspective, if you look at the U.S., 48% of our business is foodservice, so we do have a healthy retail business, we do have a healthy ingredients business. In terms of the foodservice space, what we're seeing is on the QSR front, things are really picking up, if you look at the general kind of data, they're down about 15% to 20% versus last year as a segment, and a big part of our business especially for SDS is QSR-driven. So as that gets back online, back to more historical levels, that's obviously going to help Saputo. In terms of the general foodservice business, our broad line distributors are coming back online, and we're starting to see recovery in that category as well. So, I would say that the general trend is that things are things are picking up and we're cautiously optimistic in terms of our prospects moving for.

And Kai, when you say QSR is down 15% to 20% year-over-year, what period are you referring to there?

That would be the period; we're looking at May for the period of May [indiscernible] data.

Okay, thank you for your comments.

Yes.

Thank you very much. We'll get to our next question on the line from Mark Petrie with CIBC. Go ahead.

Hey, good afternoon. I just wanted to follow-up, I guess on a couple of things that you've already touched on, but specifically with regards to the comment and the outlook about taking, potentially taking 12 months or more to recover to the levels that you guys delivered in fiscal 2020. I wondered if you could just be a bit more specific about that outlook, because it does sound like there're certain aspects of your business where the recoveries actually happened reasonably quickly, but obviously, others are going to take longer. So, could you just give a bit more color in terms of that outlook and what aspects of your business you think may take a while?

Yes. So, Mark, this comment is triggering through the sort of what we're reading in the economy is all around the foodservice recovery. We have the same visibility as everyone as to how the segment of the all the restaurants in the foodservice sector will be coming back full speed. What we're reading, what we're observing is that it will take more than a couple of quarters to get back to normal, and so that's the intent, that's we're trying to reflect in this outlook comment there.

Okay, thanks. So that's mostly a U.S. segment comment, then?

Well, the foodservice has been impacted all geographies that we're in. Obviously, we're a bigger player in foodservice in the U.S. So, yes, it would apply to the U.S., but the whole foodservice sector segment whatever country you're looking at, obviously when you look at the U.K., almost no impact, much lower impact in Australia, Argentina. We have some impact in Canada, and obviously, yes we do. We're impacted in the U.S.

Okay, thanks. And then just to come back to the sort of broader commodity complex in general, Lino perhaps you could just give your commentary or view on sort of how the industry has responded to the volatility in demand from a supply perspective, and as you look out over the course of the next year, what your perspective is for the commodity complex overall, understanding that there has been clearly, a huge amount of volatility?

Yes, so I'll start-off with the U.S. especially when the block went down from $1.90 at its high down to $1.01. There was too much milk in the system. You probably saw the same way, I saw some visuals of dairy farmers in different states dumping their milk and so there was something that needed to happen. I think there was good strong leadership at the coop level that would educate the dairy farmers to try to take-off some milk at the farm level, and so, a cow's recalled milk has come down, and then of course, you have the government programs that supported some of the buying of some of the solids, and that's what rebalanced a little bit of the supply and demand in the U.S. Having said that, that could be fragile, I think there could be more volatility down the road, especially if there is a load-up of inventories in different countries which we have seen in the past through government programs that ultimately will have to be flushed into the system. So I don't think that $2.50 block price is going to stand for a very long time, and so, we need to be mindful of the fact that somewhere in future quarters, the block will come down, and as Max alluded to, there will be some inventory write-downs. What we're doing Saputo as an organization is that we're taking on the milk that we're contracted to, but not beyond contract, and we're making the order. So we're not building up high levels of inventory, just to store them in the eventuality that markets will come back, but the real indication of market price is going to come with the balance of supply and demand. Europe is producing lots of milk. There's an oversupply of milk relative to demand. If I look at some of the other countries that we're in, the U.K. milk is balanced. In Australia, milk is in deficit, but growing now and then Argentina, milk is balanced, and so and growing, and so, ultimately, there is going to be incremental solids, I think that are going to be in the market, and market prices, I think are going to be volatile until we get back to some sort of normal consumer patterns as we had seen them in the pack, and this is going out to the 12-months recovery that we alluded to in the outlook.

Okay, thanks. That's helpful. And I guess you sort of touched on it, but just, if you could provide a little more detail, maybe this is for you, Max with regards to sort of the inventory position that you have now obviously, there's a lot of noise in the number with prices and your various acquisitions, but inventory was up, but not remarkably so, but could you just sort of talk about inventory levels within the company?

Yes. Well, the inventory I would like to mention that everything is under control. Obviously markets going up, it tends to attract a higher investment from the working cap perspective. So the sales -- when we do sale, we have accounts receivable that are being captured and showing greater amount. Obviously, we're very close from a cash flow perspective, the ins and out. We do not have any issues from a working cap perspective, whether it's AR or AP or inventory. The levels are within normal range. We feel very comfortable with that situation right now. And if we would not, we would have taken the additional write down, but the write down that we taken was specifically addressed to inventory repurpose and the market drop.

Okay. I appreciate all the comments guys, all the best.

Thank you, Mark.

Thank you. We will get our next question on the line from the line of Michael Van Aelst with TD Securities. Go ahead.

Hi, good afternoon. I hope you're all doing well. So I want to follow up with the earlier question. First of all, you mentioned that QSR was a big part of, I think, you said [indiscernible] dairy foods business, but can you give us an idea of how foodservice in general is split up among QSR in broad line?

So, from a Saputo perspective, we don't disclose those numbers, and we don't want to disclose those numbers for competitive reasons Michael, but if you want to ask some questions specific about the trend in QSR, we're happy to do so.

And I would just add that we're well balanced across those three segments. So if you take the U.S. as a consolidated business, it's QSR foodservice, it's all of those segments, so well balanced.

All right, okay. So when you look at the financial impact of COVID and you're talking about fiscal -- taking 12 months for your financial performance to get back to where it was. Are you looking at that as a pro forma fiscal '20 level, or like is that excluding acquisitions that you made that came in only late in fiscal '20?

Well, no it's would definitely exclude any future acquisition. When we talk about the material impact to our business, I mean, we're looking at our business to grow. F'21 will be a challenge year for us to grow. And that's why we're calling it as a material to the business, appreciate if you try to want to measure what or quantify the impact, so we would love to provide you with as much of info as we can, but all to say that we are maintaining the course, we're staying the course, our cash flow are positive. We have complimentary platform, complimentary segments and sectors, and we intend to maintain our strategy. Now our strategy for F'21, as it is for all the years is to grow. We see that it will be a challenge year for us to grow from there. Say that $1.5 billion of business. It's going to be a challenge, but I mean, this is - once we could give you in terms of color to that effect.

Okay. If you were to try and place the financial impact of COVID in various buckets, could you try and rank like, whether -- if you took a look and say sales volume, decrease, plant inefficiencies, higher employment in sanitation costs like, can you rank the significance of the key buckets?

I'll take a first crack at this, and then maybe max might want to compliment it, but by and large, the largest expenses we have is the plant inefficiencies, either plants doing products that they were not destined to manufacture, so they're not the most efficient setups, but we are getting product out the door or perhaps plants that are running well below their capacity utilization that is happening. We have some also warehouse and delivery expenses that are going to go higher on a per pound or per kilo basis only because we're sending our trucks out in the road, but the trucks are not as full as they normally are. So there are two delivery costs on a per pound or per kilo basis is going to go up. When you talk about the incremental expenses relative to sanitation, not a massive, massive expense, only because, we are a food safety oriented organization like most food manufacturers are, and the protocols are in place anyways with or without COVID to have sanitary environment. Now, in some areas we have to run our plants below every lines capacity because we need fewer, or we can only have fewer people on the line. That's the reality we have to live with. So normally if a line should be running 45 bags a minute, maybe we're running 30 bags a minute to have fewer people in the pack off area so that we have more distance between our employees. So the sanitary costs themselves, no, but to be consistent with the protocols, we may have to run our plants below capacity utilization, and to me, that is where the largest expense for us will be in this COVID environment until we get back to our levels of throughputs that our clients are used to running. Was that clear enough?

Yes, I think that's quite clear actually. So when you look at these extra costs and we compare it to the drop in the margins in the U.S. and Canada versus the earlier parts of fiscal '20, was that dropped all COVID related or are there any other factors in play the change versus Q2 or Q3?

Most of that drop was COVID related. And so when max talked about the $45 million of the COVID hit, we are not even factoring the other expenses related to warehouse delivery, plant efficiency expenses we have in our system relative to running capacities lower because it's COVID, that's over and above the $45 million of the covert expenses we signaled.

Okay.

And the other thing too, Michael, I want to also add, and I said this in one of my responses to Irene, we are paying our employees in full, whether they're running or working their full hours or not. We have a no layoff policy in place that is the security that we're providing all of our talent. There are so many different things that they need to be worried about. We don't want there way just to be one of them. So irrespective of whether people are working from a plant, an office, whether they're working their full hours or part hours, or whether they're not working at all, because they may be affected or inflicted by COVID, they are getting 100% of their take home wages. And there are not going to be any layoffs through this crisis. This is a commitment we made to our employees. That is also the labor expenses is also one of those intangibles that we did not quantify in the COVID costs that max signaled out.

Okay, perfect. And then just finally on Europe, revenues are much stronger versus Q3, as were margins. And I'm wondering, is that -- did you actually have a capacity increase during that period, or is that -- was that because I know you're looking to increase your capacity there and capacity was tight. So how did you get that lift, was that a capacity increase or was that something like selling down inventory?

Well, we're increasing our throughput, so yes, we've expanded our capacity and that's only the first phase of our plan expansion. There's been tremendous demand on the part of the retail products that were produced there primarily in the cheese category, but also in our spreads business, which we don't talk a lot about. It's been performing phenomenally well, and even our Frylight business, which is a smaller offshoot, is also performing at a very strong level. There's a lot of supply chain issues on the continent. A lot of our competitors are unable to service their retail customers in U.K., and we've been able to take advantage of that. So there's a lift across the board when you look at that platform, which is been a great success.

Thanks, Lino.

Oh sorry, just want to add that in Q4 for Dairy Crest always been the strongest quarter. So we were expecting an incremental volume EBITDA from that division.

Okay. So, did we see the capacity increase in the quarter or that start to show up in Q1?

That'll show up in this current quarter, and we have plans to further increase our capacity as we move forward.

Thanks very much.

Thank you. We'll get to our next question on the line from Vishal Shreedhar with National Bank Financial. Go ahead.

Hi, thanks for taking my questions. A few easy ones here, is it fair to say that as foodservice demand comes back, retail demand commensurately faiths, and is that what you're seeing?

Yes, so our latest data shows that things are starting to normalize. It really depends on which part of the world you're looking at, but Australia as an example is already back to pre-COVID levels, back to historical levels. We're still seeing a lift in North America, so across all three divisions, Dairy Foods [SCUSA] [Ph] and Canada. And then when you look at the U.K., it's a well ahead of historical levels. So we're still seeing a lift and we anticipate that that lift will start to come down as we start to normalize, and then we'll see foodservice continue to recover as we move forward.

But one of the interesting things that we saw through this crisis here is that where we've been one of the dairy companies that has performed extremely well in terms of order fill rates and delivery to the retail trade. And we have picked up new business because of this, and we think that some of that new business is going to stick beyond this. So even though our retail volume is going to normalize, some of the lift will remain for us.

That's an excellent point, just in terms of how the teams have stepped up in North America from a supply chain standpoint, making sure that their customers are receiving the product. There's been a lot of instances again I mentioned the U.K. with Continental Europe, but it's the same thing in North America. A lot of our competitors have fallen short in terms of fulfilling their commitments, their deliveries. So we've taken advantage of that.

Okay. That's helpful. So on your ability to fulfill the spike and retail demands, I mean, Saputo runs its capacity usually fairly, fairly tight to maximize operational efficiency. So have there been customers that have reached out to you, and you have to turn away demand, and if so, was that substantial the amount of demand that you turned away?

No. So we didn't have to turn away much demand. This is where again in my previous statement, where we had to have some discussions with some of our customers and think about getting creative, thinking about formats that are not typical for them accept, thinking about labeling that is not a usual labels that they would take, thinking about perhaps receiving product in different sizes, streamlining our operation or perhaps less SKUs, less complexity in the system, so we can run our plants that much more efficiently. So the retail plant with our retail oriented customer base was very, very open to listening to us about how we can pump more volume out of our system, even though our plants were running prior to that close to their full capacity.

Okay. That's helpful. So you commented that there were challenges lay at some margin, which is understandable because of COVID-19, you're paying your employees prioritizing purpose of profits as you mentioned in the past, but similarly in retail, so we have anticipated because of these streamlining initiatives and because of the heightened demand that the retail profitability was also somewhat temporarily elevated. And so those two factors will have to converge at some point, depress profitability in foodservice and elevated in retail?

Well, I just want to point that the profitability from the retail versus a foodservice has more to do with what is the product that we're selling rather than which channel we're selling the product. So obviously if we're looking at some product, which is more commodity that we're selling in the retail market as a pure straight white milk, that would not attract a much more margin or in fact, probably less margin than any of the foodservice type product. On the flip side, if we're looking at branded cheese or value added the specialty cheese. Yes, those products on their retail perspective would attract higher margin than whatever foodservice products. So that's the color, I will give you on that.

So Max's point is that the product mix will affect our profit more than the channel sales.

Got it, okay, and that makes sense, but is it fair to say that the streamlines initiatives that you implemented to satisfy heightened demand and the heightened demand leverage in your fixed costs that also led to profitability in the quarter associated with COVID? Is that a fair comment?

Depending on which channels, if I look at the Canadian channel, Canada, no, because we sold a lot more fluid milk, which is not the most profitable product, we're selling relative to the overall basket of goods. Now in other channels yes, that statement would be fair. Rather in other countries, that statement would be fair.

Okay. And with respect to milk, obviously in encouraging trends on milk, is that a trend, or is that just a COVID spike related to stockpile, and what are the cases?

Yes, the funny thing about this and I've had some conversations with different people from the dairy industry as well, it almost seemed like when COVID hit, milk became a comfort food, and for some reason, the pantries could not remain full on fluid milk. Now is this going to be sustainable? I hope so, but I would suspect we would get back to the trend of milk in decline at a rate of about 1% to 1.5% per year.

Okay. And do you think cross-border shopping with milk had any impact at all?

Absolutely, absolutely.

Thank you.

So we're seeing those provinces that are on the border, their milk volume has gone up because of course travel restrictions, and I guess the U.S. dollar as well. However, travel restrictions were the biggest part of that.

But however, we did pick-up new business, and I think we've mentioned this before, and that some of our competitors were unable to service some of the retail accounts. So we had the opportunity to pick up some of that business.

Thanks. Thanks for the answers.

Thank you very much. We'll get to our next question on the line from Patricia Baker with Scotia Capital. Go ahead.

Thank you very much and good afternoon everyone. Would you be willing to share with us what your foodservice declines were at the peak of the pandemic impact on your business?

Sure, I mean depending on the geography in line with the overall categories down up to around 60% would have been the number.

Okay, and Kai, would it be fair to assume based on some of the other things that you've said on this call that your May trends were better than your April trends?

Absolutely.

Okay. And then you said, depending on the geography, I found that interesting. So, all of the geographies didn't have the same year-over-year percent decline, there were differences?

There were differences primarily in the International markets. You have to remember that in Australia and Argentina, the foodservice component makes up a much smaller percentage of the total business less than 10%, but the impact in those two geographies would have been a lot less severe than it would have been in North America.

Okay, thank you. And then, Lino, in the MD&A, did there is a piece of the MD&A outlook, talking about the fact that you tend to aggressively pursue plant based opportunities. So two things, can you review with us what your exposure is to plant base currently and then secondly, are you out of mind that you believe that this current pandemic will unleash some plant based opportunities that wouldn't have been there otherwise?

So, in terms of exposure, it's right now minimal. We're co-packing for some brands, and we've taken on some contracts that are yet to materialize. So the exposure right now is limited. Good question on opportunities presenting themselves. We're seeing a lot of interest come our way. Now, it could be through investment bankers, could be through the bankers of some companies that are operating, and it could be directly from companies reaching out to us because it's a relatively small, small industry. So, I would say the basket of opportunities would be wide and large.

Okay, thank you.

Thank you very much. We'll get to our next question from the line Chris Li with Desjardins Securities. Go right ahead.

All right, good afternoon. Lino, I know you never want to wish bad things for your competitors, but I'm just wondering are you starting to see any of them closing down there some of the weaker and smaller ones.

Yes, so going into this crisis here, we knew that there were some competitors whose balance sheet were not that solid, not that strong. Their leverage is quite high. And what we're seeing right now, if not in whole, there are parts of certain businesses that are coming on the market. And so to me that is a sign of stress. That is a sign of financial difficulty, and a sign of folks wanting to deleverage their balance sheets. So going into the crisis they were not in good shape, during this crisis even worse shape. And not all assets that are becoming available are good assets. There might be some junk on the market. We're not looking at the junk, and I think what might happen is the junk that's available might not sell, and might not be enough to save their company. And then eventually, I think as a second phase, once those companies realize it they may have to put the whole thing, lock, stock, and barrel for sale. And we are in a fantastic position to wait on the sidelines and wait for the right opportunity to come along at the right price for the right strategic orientation for our business. So I tell you I'm truly optimistic about what's to come after COVID-19 is behind us.

Great, that's helpful. And then maybe just on foodservice. When I listened to a lot of the foodservice distributors speak and read some of the industry forecast. I mean I think the consensus view is for a pretty quick recovery next year, which I guess makes sense as the restaurants and the economy gradually reopen. I guess my question is, first, do you agree with that? And then secondly, what do you think are some of the risk?

I would say it's too early to call that we're going to return to those normal levels. Right now, we're seeing foodservice operators, kind of, restocking the pipeline, so this isn't the new normal yet. We're going to have to wait to see over the coming weeks and the coming months what they may look like, and we can't forget that when you talk about risk if there's going to be a second COVID wave that's obviously going to have a huge impact, probably worst than the first wave, so that's something that's definitely on our minds.

Yes, I would compliment that by saying until there is a vaccine I don't think the restaurants are going to get back to their full capacities. They're going to have to, if they open up, use perhaps one-third, maybe half, at best, of their square footage, which means less capacity for the same store. Until there is a vaccine I don't think we will get back to much normalcy at all.

And there's also some data that point to some foodservice operators that haven't been able to adjust in terms of having a focused menu, offering delivery options, takeout options, that sort of thing, that potentially up to a third of those foodservice operations could close permanently. So that's something that is also on our minds.

Okay, that's helpful. And then I guess my last question is just on the international side. There have been some trade tensions between China and Australia. And I know it's only impacting in the barley and the beans segment, not the dairy products, but just wondering if you're seeing anything on the ground over there or you're hearing anything on that front?

Well, dairy is considered a strategic food because they don't have the required dairy salts for their domestic requirements, so they need to rely on imports. So we haven't seen any reduction in terms of import requirements from our side. And from a dairy Australia perspective we've received the same news so far.

Okay, great. Wish you and your team continue to stay safe and healthy.

That's very nice of you, Chris. I appreciate that.

Thanks very much. And we do have one more question, and it is a follow-up question from the line of Irene Nattel of RBC. Go right ahead.

Thank you. Just very quickly closing out, could you remind us or could you give [indiscernible] what your strategic priorities would be from an M&A perspective?

Yes, so the strategic orientation is to continue to build our platforms in the geographies where there is milk production. So let me highlight the different regions. We've got North America, which primarily is the United States. We have Europe; we have Australia, possibly New Zealand if there's an opportunity for us. And perhaps on the backburner is Latin America. All of those regions are dairy producing regions. All of those regions we know extremely well. And most of those regions, with the exception of New Zealand, we have management in the field. So those regions are extremely attractive to us. Beyond that, if I look at product categories, of course it has to be in the dairy space, but the dairy space is really within our wheelhouse. So, cheese production, dairy powders, byproducts, so I would exclude from that yoghurt and ice-cream typically for retail, although we do make ice-cream mixes. I will not discriminate on foodservice and ingredient. If there is a great opportunity for us in foodservice and ingredient we would certainly take a look at that, but in some geographies I would like to perhaps consider some diversification out of those categories and into some retail. And of course rounding things off, plant-based. If there is an opportunity for us to buy a brand in plant-based that is also something that is part of our scope of strategic targets for acquisitions. So, not that different from what it was pre COVID-19. We still believe in the dairy space. I am still bullish about growth in dairy, although some categories are down, other categories are up. Fluid milk is one that I don't have a whole lot of desire to expand our presence in geography, but if there's an opportunity for us to take on new customers that are profitable for us we would be more than happy to do that as well. So that pretty well rounds out where our focus is. And I will tell you, Irene, going back to one of your original questions, is the pipeline full. Yes, the pipeline is full with opportunities.

That's great. Thank you, Lino.

Thanks very much. Mr. Saputo, we have no further questions on the line. I'll turn it back to you.

Thank you very much, Tommy. And as we sign off I just want to wish everybody well. Please stay safe, and I'll hand it back to Sandy.

We thank you for taking part in this conference call. We hope you'll join us for the presentation of our fiscal 2021 first quarter results, on August 6. Have a nice day, and stay safe.

Thank you very much, and thank you everyone. That does conclude the conference call today. We thank you for your participation. You may disconnect your lines. Have a great day everyone.