Greetings and welcome to the Saputo Inc. Fiscal 2021 Second Quarter Results. [Operator Instructions] As a reminder, today’s call is being recorded Thursday, November 5, 2020. Now, I would like to turn the conference over to Lino Saputo, Jr. Please go ahead.

Thank you very much, Tommy.

Good afternoon, everyone and thank you for joining us. Taking part on our call today are Lino Saputo, Jr., Maxime Therrien and Kai Bockmann. Before answering questions from our analysts, Lino and Kai will begin by providing an overview of our fiscal 2021 second quarter results and an update on our operational initiatives. Before we begin, I remind you this call is being recorded and will be posted on our website. 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 will now hand the call over to Lino.

Thank you, Sandy. I hope everyone is keeping safe. It’s important that I begin by acknowledging our frontline workers and the broader Saputo team who continue to ensure our business runs smoothly and safely despite these trying times. As we contend with second waves and varying restrictions in many of our geographies, our team’s ongoing dedication and the resilience of our global platform ensure we keep delivering a high-quality, essential products people rely on. As seen in our second quarter results released today, the effects of the pandemic continue to influence our business. During the quarter, consolidated revenues remained relatively stable compared to the corresponding quarter last fiscal year. However, temporary mandated closures in the foodservice space impacted consumer demand for our products. Sales volumes in the foodservice segment remained lower than historical levels, which impacted efficiencies in the U.S. sector in particular and negatively affected adjusted EBITDA. Fortunately, as we moved through Q2, there were signs of recovery instead with a gradual easing of government-imposed restrictions. And while economic indicators have generally started rebounding, we are adapting to a new world in many of the areas where we do business, particularly as authorities adjust their strategies in response to the pandemic’s evolution. There’s no doubt we’re still facing headwinds in the foodservice segment, which will persist as long as restrictions remain in place. With this in mind and with key learnings from the last 7 months under our belt, we’re actively doing what we can to minimize efficiency losses through enhanced integrated production planning, overhead cost containment as well as the repurposing of raw material to serve the healthy retail market. Since last quarter, the surge in our retail sales started to level off, but it continues to perform well. As such, we have not shied away from taking advantage of the situation, and we’re ensuring our innovation and marketing pipeline is well positioned to seize opportunities and drive future growth. With that brief overview, I would like to invite Kai to provide further details on our divisional activities.

Thank you, Lino. I’ll start with Saputo Dairy USA. The sector was the most impacted by lower sales volumes as a result of the shift in consumer demand, especially in the foodservice segment, which impacted the division’s efficiencies and the absorption of fixed costs. There have also been challenges in relation to staffing some of our retail facilities, which has made it difficult to meet some of our retail requirements. We are, however, seeing improvements in having the appropriate level of plant staffing. We are also currently in the process of retrofitting and adjusting limited portions of our network, shifting elements of our primarily foodservice product-specific facilities to adapt to retail requirements in order to take advantage of available labor and processing capacity and to position us effectively in another major COVID wave. We continue to see healthy retail volumes relative to historical levels and challenges in the foodservice space. There have, however, been some bright spots in the foodservice space, specifically as it pertains to some of our key strategic QSR partners as well as some of our foodservice partners that have been able to adapt their restaurants to more pickup and delivery. Another example on the foodservice side is through our legacy – SDF legacy business is our refocused effort on specialty milk due to its extended shelf life versus HTST, which has helped operators deal with fluctuations in demand. We will continue to adapt to a quickly changing environment, whether related to COVID or whether related to customer and consumers’ rapidly evolving tastes. And it’s because of this that we announced the merger of our legacy divisions, Saputo Cheese USA and Saputo Dairy Foods. The merger is being led by Carl Colizza and a highly capable seasoned leadership team. The team is working on a strategic growth plan, leveraging the best of what Saputo Cheese USA and Saputo Dairy Foods has to offer to create a bigger, better and stronger Saputo Dairy USA. This plan will include efforts to greater emphasize our market-leading brands in the retail space. Brands like Frigo Cheese Heads, which is the number one retail-branded – retail snacking cheese; Montchevre, which is the number one retail brand in goat cheese; Salemville and Treasure Cave, which are the market leaders in the blue cheese categories. Our strategic growth initiatives will also tackle the challenge of increasing the value of our whey and protein ingredients. We will also be ramping up our dairy alternative initiatives to meet the changing demands of our customers and consumers. We are looking to leverage our existing infrastructure, our filling and processing know-how and technology, together with our strong customer relationships to accelerate our growth in this category. On the plant-based beverage side, we have successfully rolled out almond and oat beverages and have landed our first contracts. It is our goal to have a national footprint in the United States as well as having a platform in Canada, where we will leverage our existing customer and distributor relationships to accelerate growth in this fast-growing category. On the dairy alternative cheese side, we have leveraged our UK innovation center to develop a product that is currently being introduced to some of our key partners in the United States. Our goal is to develop a product that performs well on a pizza that could serve as a substitute for mozzarella for those consumers that prefer a nondairy alternative, a product that tastes and performs like cheese with the ultimate goal of offering a product that delivers on nutritional qualities as well. As we have experienced first-hand in the U.S. during this COVID crisis, it is becoming more and more challenging to attract, retain and develop our manufacturing talent. As a result, we will continue to focus on operational efficiencies and continue to optimize our manufacturing network. This will include ramping up our IBD processes, leveraging our SAP platform as it comes to fruition, increasing automation in our plants as we develop our future capital expansion projects. We look forward to sharing more insights into our strategic plan as we move into fiscal 2022. In Canada, new restrictions will have an impact on foodservice as in-room dining has been eliminated across a number of provinces. Our commercial teams are joined at the hip with our foodservice and retail partners, resulting in a much better understanding of supply and demand requirements. We anticipate seeing a less severe impact to what we’ve seen so far. Foodservice operators have adjusted their business models, simplifying their menus, catering to pickup and delivery. Our teams have been focused on growing our value-added products portfolio. An example includes the repositioning of the Armstrong brand, one of Canada’s top everyday cheese brands through new packaging, new formats that cater to convenience, such as slices and grated formats, that includes snacking formats as people continue to cook and eat more at home. In addition to new formats, new flavors like Smoked Cheddar Habanero have been launched as consumers look for bold new flavors. In an environment where retail will continue to play a key role in our continued success, the teams have the great advantage of carrying a portfolio of market-leading brands in the marketplace, whether it’s in fluid milk, where we have Dairyland in the West and Neilson in the East; whether it’s our leading Alexis de Portneuf in the high-value specialty cheese space; whether it’s Saputo, which holds a dominant position in the mozzarella and Italian cheese space, we have a tremendous array of brands that our teams will look to continue to develop to meet the fast-changing customer and consumer preferences. Similarly to the U.S., we have shifted some foodservice processing capabilities and capacities over retail to adjust to the changing market demands. As with the U.S., the Canadian team has adapted their lineup to help our customers. We converted our ultra-filtered milk lineup Joyya to shelf-stable, meaning no refrigeration is required and communicated this benefit in both foodservice and retail for customers looking to stock up and load the pantry. On the foodservice side, we have promoted our IQF for quick frozen mozzarella as a great alternative for pizzerias coping with fluctuations in demand. E-commerce continues to be an important outlet for consumers, and the Canadian team has successfully rolled out Le Frigo in Québec and The Saputo Fridge in Ontario and is now looking to roll it out across Canada. Not only are we diving into B2C but putting in investments to ramp up our B2B and our B2C through B2B platforms, in other words, reaching consumers directly to retailers, online channels and through third-party online channels as well. We’ve got a lot more exciting things coming our way, and we’ll be sharing those with you in due course. Combined with the company’s strong customer service and supply chain execution, it is our ability to produce consistent high-quality products at the lowest cost that continues to drive our strong performance. In terms of our large-scale capital projects, we are on track to complete our Saint-Leonard and Saskatoon projects by the end of next month, which will give us increased capacities on a variety of higher value-add products. Our pork equipment fluid and future plant-based facility is also on track to be completed by the end of next summer. These are tremendous accomplishments in light of COVID restrictions. Moving down under, milk supply in Australia continues to improve, and we are on plan from a total milk intake perspective. Favorable weather conditions have helped increase milk production for our current base of suppliers. We’ve seen increased milk purchases from third-party milk brokers, and we continue to increase our toll manufacturing opportunities. Volumes are performing better than prior year, albeit mix between channels and within channels has seen more volumes of lower-margin products sold, particularly on the export side. We have seen phenomenal growth in our Coon brand, which is the market-leading brand for everyday cheese. We anticipate that we’ll be changing the brand name in time for next fiscal. The key is to ensure we do it in a strategic way that is fully aligned with our customer expectations. Liddells is doing phenomenally well in the lactose-free cheese side as are our specialty cheese brands we inherited as a result of our last acquisition of Lion’s Specialty Cheese division. Brands like South Cape, which is the market leader in the total specialty category, Mersey Valley, King Island and a host of other amazing brands. On the foodservice side, most volumes continue to be stronger than forecast even during the current lockdown. COVID-19 has seen a significant impact on export prices, particularly on the butter side and in our ingredients business. On a more positive note, closer to Australia, we’re starting to see signs of improvement in Japan, which is one of our most critical markets. Moving over to the UK Cathedral City continues to perform very well for us. It’s been voted 1 of the top 10 most trusted brands in the UK for all food. We’ve gained over 1 million more customers versus a year ago. We’re supporting this top brand with a substantial TV advertising campaign, which articulates great reasons to tuck into the nation’s favorite cheddar. We are leveraging the power of this brand and by bringing it to our other platforms. By the end of this calendar year, we’ll have Cathedral City available in over 6,000 stores in North America. And so far, the results have been tremendous with volumes more than double our original projections. Clover is our top spreads brand. It’s been a game changer and that it doesn’t carry any artificial ingredients. The brand is up significantly over last year, Frylight, another great brand that we inherited, the biggest spray oil brand in the UK. In the UK, it has seen healthy growth as well. The one area of our business that poses a challenge for us is on the ingredients side. The IS space has taken a hit internationally, and ingredient sales have suffered as a result. Our teams, however, are in the process of diversifying our customer mix, and it’s expected that we will see improved volumes as we move into the second half of this fiscal year. In Argentina, overall market consumption is down 6% to 8%, and we have seen a plethora of smaller competitors that have had to exit the industry due to the COVID situation. And as a result, our teams have been very aggressive in terms of picking up more milk. And we’ve seen nice growth year-over-year. Foodservice channels are down versus last year. However, on the retail side, the business performs – continues to perform very well with La Paulina, which is the number one cheese brand in soft cheese, mozzarella, semi-hard and hard cheese as well. We are seeing better forecast for the next couple of quarters on the export side. In fact, this month, we are on pace to ship record volumes from our Argentinian platform. So that’s a quick look at some of our divisional activity, Lino.

Much appreciated, Kai. Very nice. Before we open up the floor to questions, let me end with a short progress report on our corporate responsibility efforts and initiatives during the quarter. Despite the challenges of COVID-19, our priorities remained intact in each of the seven pillars comprising our Saputo promise. Our people pillar remains of the utmost importance. And we continue to put employee well-being and safety first and always first through enhanced measures that complemented the already robust protocols we have in place. When it comes to our commitment to diversity in the workplace, our efforts have not wavered either. Recently, I was pleased to join over 70 CEOs in publicly pledging to accelerate progress for gender equality, diversity and inclusion with a nonprofit organization, Catalyst for Change. Regarding our climate, water and waste performance, we’re making strides towards our 2025 goals and have allocated $50 million towards various projects aimed at reducing our annual energy consumption, CO2 emissions, water usage and waste globally despite the pandemic. For us, doing the right thing is the only way. And in true Saputo character, we maintain both a short- and long-term perspective on the future health of our planet and our society as a whole. As we round out the first half of the fiscal year, I am confident in our ability to adapt to new realities. We are ready to face any subsequent phases of the pandemic. We are determined to stay the course, and we are poised for future growth. Our solid financial foundation and strong cash flow allows us the benefit of being able to seize growth prospects in the context of acquisitions while navigating the current landscape. In short, if we can get the right assets at the right price, we are ready to move ahead. Profitability enhancement and shareholder value creation remain the cornerstone on which all our strategies are built. I will end by once again thanking our talented and highly devoted team who continue to impress me every single day. And on that note, we will now proceed to answer your questions. Tommy?

Thank you very much. [Operator Instructions] And we will get to our first question on the line from Peter Sklar with BMO Capital Markets. Go ahead.

Okay, good afternoon. My first question is about the Cathedral brand that you are bringing here. It’s impressive that you are going to be in 6,000 retail outlets. So, can you talk a little bit, like how do you introduce an established brand from another market and bring it here and get all those listings? The brand really has limited brand awareness here. Is it a question of paying the listing fees or is it through relationships with distributors and retailers, just how does it work?

Yes. Peter, so not just Cathedral City brand, but we have got a wide range of brands that resonate with consumers in all markets and all categories. And perhaps sometimes we don’t talk about that enough. We talk about our proficiency and cost reductions and our ability to be able to navigate through a lot of choppy waters with high-quality, low-cost manufacturing sites. But our brands can carry the day with consumers. We are very fortunate that through many of the acquisitions, we inherited some brands that have a great following. And there’s great value in being able to share these brands with new consumers around the world. Through some of the trade agreements, we’ve been fortunate enough to inherit some of the licenses to import products. And Cathedral City does have a following around the world. We’ve got the UK stamp on those products Cathedral City. And our products are being served in Buckingham Palace. So we use that as part of our leverage to be able to resonate with some of the retailers that want to have a very unique product on the shelves. But maybe in more granularity I will ask Kai to go into some strategies and ideas that we have to roll this out not only in Canada but through the U.S. as well?

Well, the U.S. – through our DCI acquisition, we were able to inherit a whole host of brands that we were sourcing from Europe. And that allows us to tap into the relationships that we have with a lot of the major retailers. Because Cathedral City is not just going to go on your regular everyday cheese shelf, it will be more in the specialty category. And when you look at the types of cheddars that are available in the United States, frankly, most of them don’t taste very good. So this is a product that has won prizes in cheese fares, is very well-known in the industry. And so it’s a high-quality product, and Lino mentioned it’s got the Buckingham stamp on it. But more importantly, we have the U.S. sales force come together. And we created a market blitz with the team, creating some excitement around the brand to be able to bring another brand, another type of cheese to the product portfolio that’s already being sold to our existing customer base, a lot of strong POS also at the store level. So a lot of marketing activities directed ground-level efforts, if you will, rather than the TV advertising that we’re seeing in the UK. So it’s a combination of all those factors that have allowed us to kind of start off successfully with Cathedral City in the U.S.

And Kai is there an initial investment that Saputo needs to make in terms of trade allowance or otherwise or is the economics similar to...

It’s minimal at this point as we ramp up. Obviously, if we’re looking to increase those volumes significantly, there would likely be some investments required. But we always look at every investment on an ROI basis. So we’ll evaluate it at that time. But so far, it looks very promising. So we’re prepared to invest behind the brand.

Okay. And then just my last question is – and I almost hate to ask this because it’s kind of an ongoing thing in the industry that seems to flare-up every once in a while. But with the announcements everyone’s seeing from Walmart, Loblaw, Metro, etcetera, on how they’re imposing additional fees or discounts on their suppliers, can you talk a little bit about how the dairy industry reacts to this or is this just normal course, more of the same that is always going on, it just happens to get caught in the papers every once in a while?

Yes. So we really don’t care what the dairy industry is doing with respect to response. We really care about what Saputo is doing in terms of our response. Look, I think we offer some things to retailers that no one else can offer. When we’re talking about the networking and we’re looking at the – our integrated business plan from distribution to innovation as well as a brand recognition, connection with consumers, market intel, I mean, we’re not just a provider of dairy, we are a full-fledged provider of goods that make our retailers better. And we remind them of that. And then there are certain things that we would deem as non-negotiables and part of those non-negotiables are for better – for lack of a better word, an imposed tax. Look, everyone’s hit with COVID-19, and everyone’s costs are going up. And so we don’t see that there’s any real value in an imposed tax, especially in a very tough difficult environment. So we push back. And at the end of the day, we make it very clear that we want to be partners in a long-term sustainable business plan. And if we’re not treated as partners, well, then we’re prepared to walk away. And we have in the past, Peter, you’ve known. Only to find that our competitors cannot service the market the way that we can service the market, and so some of the retailers come back to us. And so we are very disciplined in that approach. If there is going to be incremental costs, there’s got to be an offset of incremental volume. And if there isn’t an offset that allows us to be bigger and better with a partner, then perhaps it’s best for us to walk away and we have done that before. And this is part of the Saputo character, irrespective of what’s going on in the industry.

Yes. I recall that you walked from some business in the fluid milk, and it came back to you, if I recall correctly.

That is precise.

And it’s not isolated to Canada, but we’re starting to see the similar behaviors in our other jurisdictions. So whether it’s in the UK, and you’re all aware of how strong the retailers are in that market; whether it’s in Australia, where it’s the consolidated market from a retailer standpoint as well. So we have seen those same pressures. But again, to Lino’s point, I mean, when you provide the service and you provide a consistent quality product, they need you as much as we need them.

Okay. Thank you for your comments.

Thank you, Peter.

Thank you very much. We will proceed with our next question on the line from Irene Nattel with RBC Capital Markets. Go ahead.

Thanks and good afternoon. Kai, as you were reading everything that you were doing on the innovation side, both sort of product innovation and in terms of categories, in terms of – all of it and also the shift of some of the changes that you implemented in the production network, it seems as though you’ve really accelerated sort of the innovation plans very broadly defined innovation, adaptability and flexibility plans. Can you just walk us through whether some of these are new? Whether you, in fact, just accelerated them? How are you able to accelerate them and the magnitude of the incremental flexibility that you now are going to be able to have between channels that really should be helpful, particularly in the U.S.?

Yes. I’d just like to clarify that, again, we have limitations. We can’t switch overnight from foodservice to retail. But we are doing the best we can in terms of situations where we may have some labor shortages in one part of the country because we’re seeing a second wave in certain states in the United States, as an example; the ability to take some of the production from those impacted facilities to foodservice-specific facilities, where we have the availability of labor, where we have the availability of processing capacity, we’re doing that as best we can. And – but we’re not going to be able to just overnight flip the switch. So I just wanted to clarify that. In terms of the innovation part of the question, I would say that it’s always been there for us. It’s a matter of taking that and being able to roll it to other parts of our business. And that’s why we did the merge for the one USA with SDF and then SCUSA, SCUSA, traditionally very strong from an operations perspective; SDF, very strong from a customer consumer solution-selling perspective. So in terms of diving into the market intel, the insights work that’s being pulled from consumers, we’re taking that, adopting the SDF model, leveraging the expertise from an operations standpoint from our SCUSA platform to be able to accelerate our push into those priority areas that I outlined, whether it’s retail, whether it’s plant-based and other areas.

So if I can add maybe a bit of color there with some more specificity to your question, COVID has provided us a license to change, a license to explore things we never have explored before, so some of the more concrete examples of our innovation, the e-commerce business. We are looking at a business that is either B2B2C or direct B2C. That’s something that we never would have explored in the past had we not gotten into this COVID environment. And these are things that are going to last beyond the pandemic. We’re looking at packaged formats that are perhaps more appropriate for consumers in today’s context and repurposing or retooling some of our plants to be able to get there. I’m looking at also dairy alternatives. We’re on the fast track now of developing a nondairy mozzarella for the pizza trade. We will be first in market with that. We’re leaders in the pizza trade. And if there is going to be a vegan pie in the market, we want our product to be the number one product on that pie. We are looking at co-packing arrangements as well. We would never have considered co-packing arrangements in the past. Now we’re setting up our plants with long-term contracts where we can do some co-packing for others in our space. So these are all things that are creating innovation within the organization that allow us to be able to utilize our footprint, be able to utilize our spaces and maximize the full-capacity value that we bring to market, all the while offering solutions, as Kai had mentioned, to our customers, whether they would be competitors in the industry or whether they would be end sellers to consumers or to end consumers directly. So I have to say, I’m very excited about the things that we’ve learned over this – the course of these last 7 months. And the programs that we’re putting in place that are going to outlast this pandemic that are going to be here once there is going to be a vaccine and everybody gets back to normal life. Irene, I am just so excited about where we sit right now.

I can hear it in your voice, Lino. It’s going – I think you are going to be making Limoncello out of these lemons, let alone lemonade. But just a question, if I may. I was looking back through the last couple of – last few conference calls. And it’s been a while since we’ve taken a tour of the world on M&A, so you can let us know where you’re interested, particularly by geography. And where you kind of might have some challenges in terms of market share or not?

Yes, so there too, Irene. I’m so excited about the potential that we have from an M&A front. I’ve said this on previous conference calls. We – our pipeline has been so full with potential opportunities. Back then, we were talking about 6 or 7 live files. And I would say that we do have some very, very live files going on right now. So the areas that are of interest to us, of course, is the United States. And in the U.S., there still is potential for consolidation. Look, you may have seen some deals be materialized, and we were not the winning bidders on some of those deals. And that’s okay. Because we’re always going to approach our business with lots of discipline, discipline when we go to market with our strategies and also discipline when we make acquisitions. But when one door closes, I think there are three windows that open up, and I’m delighted about the windows that are open for us right now. So North America, United States, a very, very important platform for us, a hotbed of potential opportunities that could come somewhere down the road. Australia, Australia, there still are pockets of areas where we think there might be opportunity for us to further enhance our platforms that we have there. Our team is so diverse. Our team has been able to navigate through these challenging waters. First, you have the bushfires, then you’ve got the COVID, then you’ve got the economics, then you got the milk that’s declining, and yet our milk base is growing. I’m so proud of our team in Australia, and I think they need to be rewarded by more acquisition. And so if there are files that will allow us to continue to expand in Australia, I think our team there deserves it. And then I’ll move on to Europe. Tom Atherton and his team have done such a great job with the brand and the platform that we inherited in the UK. And now we are fully integrated, and they’re chomping at the bit that, think about other enhancements of that platform through acquisitions. So we’re also looking at Europe. The EU 27, the largest milk pool in the world, is an area that we think we could be further consolidating in. So – and then finally, I don’t want to exclude Latin America. Our team, Marcelo and his team are just navigating really through, I would say, triple threats in their country: one is COVID, the other one is economic crisis and then the other one is the political instability. And this team continues to navigate extremely well with all of those headwinds. And so if there is an opportunity for us to make an acquisition, we need to be smart about how and where we invest in Argentina. But we need to reward them as well for the fine job that they’re doing. So my final thought to you, Irene, is that the pipeline remains full. Our balance sheet is good, and I’m just so excited about what’s to come.

That’s great. And just one final sort of question on the subject, when you bought MG, you did have to divest at Koroit because of market share issues. Are you confident that you still would have room to make an acquisition in Australia?

I am quite confident that there still is room. Of course, ACCC will have their final stamp on that because we are the largest dairy processor in Australia. But you need to look at it from the different geographies, where we are and where we are not. So I think there is room for us to make acquisitions. However, if there are pockets where we would have to consider a Koroit-style remedy, then that’s perhaps something that we would need to do if it would come to that.

That’s wonderful. Thank you.

Thank you very much. We’ll go to our next question on the line from the line of Michael Van Aelst with TD Securities. Go ahead.

Hi, good afternoon. I wanted to focus on Canada to start. You had a very nice lift in sales and particularly in EBITDA this quarter, and continues a nice upward trend from what we saw the last few quarters. So I’m trying to understand, though, how much of this lift is from business that you recovered in prior quarters or in recent quarters and from the price increase? And how much of this might just be temporary due to COVID?

So in Canada, what we’ve seen is a strong recovery on the foodservice side. If we looked at the first quarter, obviously, out of the gates from the first wave of COVID, that had a significant impact. But now as we just come off of the second quarter, we saw a significant improvement over the last quarter. And on the retail front, as we’ve shared with you in the past, the volumes continue to be quite healthy in that space. Pricing-wise, the price increases have stuck we’ve shared that with you before. Those would be some of the core elements in terms of the performance.

How about the – like how much of this do you think is permanent though or like the retail lift, I guess, is mostly tied to COVID, I’d assume although you also had one back to new customers. So how can you – how do you figure out like how much of this you think is going to stick around?

Well, one would expect that this would be sort of the base level because we still are seeing an impact from a COVID perspective. So the COVID, obviously, is the wildcard. And as I mentioned earlier, the – we do anticipate with the new lockdown in Québec and Ontario, Manitoba that, that would have an impact, but not as strong an impact as we have seen in the first quarter. So that will definitely impact our foodservice business negatively.

Okay. And how meaningful are your lower admin costs or your cost controls during COVID?

Okay. Mike, this is Max. The elements that you’re mentioning are all part of the good story in Canada, the elements such as the performance of the Armstrong brand is to note. Our ability to serve the market, use our supply chain and to deliver on time, most of all the locations every time, is part of the success. We do believe that it is sustainable, so is the volume. Whether it’s – whether the category is on the fluid or on the cheese side, we feel very comfortable about that. And relative to price increase, price increase really talks about the increase in the raw material. So yes, there’s not so much we can do. At some point, we’ve got to recover our costs. And at some point, we – this helped to offset some loss of efficiencies due to some softness in the fluid – foodservice segment. But all in all, that’s the story in the Canadian for this quarter.

But how – Max, how about the admin costs that you’re – like the lower travel or – how much is that contributing?

Yes. The overall, if you look at it from an SG&A perspective, they’re all favorable, let’s say, to prior year in almost all of the sectors. So it’s not so much that we cut project, but certainly, there was some deferred in terms of spending. No, I’m not going to quantify the exact amount of the lift that is relative to SG&A, but it is part of the – our discipline to running our business, and it’s as important as the other element that I’ve been mentioning.

Michael, if I could just maybe get to the heart of your question. So there are some offsets in cost containment relative to the COVID cost increase that we have within our facilities. But once we get back and life is normal and people start to travel again, including our teams to go see their customers or we get back to a higher level of promotion and trade spend, well, then that will be offset favorably with a decrease in COVID-style cost at the plant. So it is irrelevant what our cost savings are relative to COVID increases right now because I think that, ultimately, when we get back to a normal life, there should be a similar offset the other way.

Great. That’s helpful. And then on the European side, I don’t know if you mentioned, I might have missed it. But your revenues were lower, particularly when you back out FX. And kind of surprising given that COVID is still going on out there and you’re heavily weighted to retail. So can you kind of give us more color as to why it’s down? And how long do you think this is going to last?

Max, you will take that one?

Yes, well, in the retail segment, sales has leveled off. The reduced, let’s say, revenue in the UK is not so much from a retail perspective. It has more to do with the industrial business. We have roughly 16%, 17%, 18% of our business on the industrial front. And we’ve been facing some challenge from both volume and pricing perspective during the quarter. So our cheese, Cathedral City, retail remain solid, considering the fact that it has leveled off in Q2. And maybe, Kai, you want to comment on that industrial part?

Sure. So at the time we acquired the business, we actually inherited an exclusive arrangement to market and commercialize all of our ingredient sales out of the UK Our partner has been unable to meet the volume commitments. And we’ve had an open dialogue with them, and they have allowed us to look to expand our portfolio of customers and markets so that we’re not dependent on just the one partner. So the team is currently working with other major infant formula players in the international markets. And we anticipate that in the third and fourth quarters, you’ll see a significant lift from an ingredients perspective. The good news is, also, I just wanted to share that last year, we did have some difficulties in first-pass quality on that IS grade on the ingredient side. And this year, we’re hitting all of our targets, which is great news. Now it’s just a matter of going out and securing the markets and the customer contracts.

So those volumes that you didn’t ship in this quarter, will you may – will you actually – were you building inventories and shipping it out next quarters?

We are building inventories, and we anticipate shipping those out in Q3 and 4.

Great. Thanks very much guys.

Thank you. We will get our next question on the line from the line of Mark Petrie with CIBC. Go ahead.

Yes thanks a lot. Just specifically regarding the U.S. market, could you talk about the competitive dynamics you are seeing in both the retail and foodservice channels, notwithstanding the broader sort of industry trends? I was surprised to see the comment that retail volumes have declined. So just any color there would be helpful?

Well, you have to look at both of our businesses from a Saputo Cheese USA and a Saputo Dairy Foods perspective. On the SDF legacy side, the retail volumes are very healthy. On the SCUSA side, much of the challenge that we’re facing, I shared some comments in the opening statement, was around some of the labor shortages that we faced, specifically in some of our retail plants. Fortunately, we are seeing that level off, and we’ve taken various initiatives to address the gaps when it comes to labor shortages. So we do not anticipate to see the same level of disruption as it pertains to fulfilling our retail commitments.

Okay. Thanks. And then with regards to the commodities, the market factors sort of benefit was actually pretty minimal despite the high block and the best milk cheese spread we’ve seen in a while. I understand sort of inventory realizations weren’t maybe as favorable. Was that the main factor? Or was it also because of sort of weaker ingredient markets? Help – would be helpful to hear a bit about that.

Yes. Yes, Mark, the two main elements with regards to market factor was around the favorable spread that we’ve been able to enjoy during the quarter. But those favorable spreads were almost all offset by a negative inventory realization. We started the quarter with a block price that was quite high. And as we were selling the inventory that was built in Q1, the inventory were realized at a much lower gap. So therefore, that benefit of the lower spread – the better spread was kind of mitigated. And the ingredient piece was also negative for this quarter but to a lesser extent. So the two big pieces were the favorable spread and the negative inventory realization. As we are getting into Q3, the block remains stable all the way through the month of October. So the inventory realization, we can expect that there would be less of a negative impact, but so is the spread as well. So the two and the ingredients also work hand-in-hand together.

Okay, understood. And if I could just, just with regards to the Australian market. It was good to hear milk volumes have improved. But I am interested to know just sort of broadly, supply and demand in the market overall, how that is evolved sort of current run rate on volume versus capacity. And then also in the retail market, I know it can be quite a competitive market. Just sort of curious how that’s evolved through the pandemic?

Yes. From a total market perspective, domestically, we have seen increases in volumes across the board for all the various product categories. Especially on the cheese side, we’ve seen very strong numbers on our everyday cheese sales, especially on the Coon side. Foodservice-wise, not as impacted as in other jurisdictions. And remember that foodservice is a small percentage, a small proportion of our total business in Australia, where we’re continuing to develop that space. The lockdown that we just went through was focused around the Melbourne area. So the rest of the country remained open. So we actually saw increased sales of our mozzarella product specifically. So foodservice, we have actually seen some good numbers. So I would say domestically, overall, both in retail and foodservice, good growth. The challenge, as I mentioned earlier, has largely been on the export side, but we see a better picture as we enter Q3 and 4.

And where are you now in terms of your throughput versus your capacity?

I am not prepared to disclose the particulars around our capacity. I would just say that with one of our facilities moving to seasonal production, that relieved a lot of the excess capacity that we had prior when we acquired the business. And now that our milk intake is actually on the rise and with increased opportunities on the toll manufacturing side, we’re well positioned to bring on more volume to run through our facility. So I would say that we’re in a much better position than we were at the time of the MG acquisition.

And Mark, I would say that we’re on target with our three year plan to get to 90%, 95% capacity utilization. So we are actually, I would say, probably ahead of the three year plan.

Okay good stuff. Thanks.

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

Good afternoon, everyone. First of all, I just want to make a comment on Kai, I want to thank you for the review that you gave going market by market, in particular with your emphasis on the portfolio and the brand and the innovation. I found that perspective very, very helpful. I also have three questions. The first one, I think, is for you, Lino. It just sounds like the last 7, 8 months and the challenges that you have been facing with the pandemic really forced the company to look differently at many elements of the business and to do a rethink. I’m just wondering if you believe that, that created an even better culture within Saputo that you think will stay with the company and, in fact, deliver some improvements to the business in the long run that perhaps you wouldn’t have – and that wouldn’t have happened in the absence of those challenges?

Yes. I really do appreciate your question, Patricia, because culture is so important to us. Look, we live and breathe the culture and the values every single day. And it’s only in crisis where you’re able to show your employees that you’re going to stand behind what you say. Words are cheap. Action is priceless. And so for us, to be able to stand in front of our employees and take the right decisions for them every single day allows us to be able to live the culture breathe the culture but relay the culture, which I think is even more important. The fact that our employees are the most important asset we have and we demonstrate that through all the actions we take despite COVID, I think does resonate with our employees. And we do, I would say, have a better culture – or a living culture that is being witnessed by everyone in all of our divisions around the world. So – and I hate to say this out loud because I know a lot of people are suffering with COVID-19, but I would say this pandemic has allowed us to elevate our game and to think about things that we never would have. I would say it’s been a transformational year for us. And I talked about my excitement before in Irene’s question. But coming out of this, there is no doubt in my mind that we are going to be so much better for it.

That’s kind of what I suspected. It looks like that from the outside. And from the outside, you don’t always know what’s really going on in the inside. My second question is around the plant-based opportunities. And you noted that you are already producing almond and oat milk. You already have secured a customer. So can you talk about sort of what capacity – production capacity you’re putting towards that? And I would assume that you’re actively pursuing incremental customers for the plant-based beverage?

Absolutely. We created a team led by Larry MacGillivray. And from a network perspective, we’re already out of the gates with our Florida platform in Plant City. But we are also looking to introduce plant-based capability and capacity in Newington, Connecticut as well as Port-Coquitlam as part of our Project Big. So the Canadian platform actually is not only going to be for Canada, but we’re looking at a North-South strategy for that platform. So what we are trying to do is replicate the strategy that we rolled out with our U.S. platform, having a national network that our customers can tap into and leveraging, obviously, the high levels of customer service that we have been able to deliver. From a capacity standpoint, for competitive reasons, I am not going to share the numbers. But I would just say that there’s going to be plenty of capacity available, and our teams are already starting to fill that capacity up as we speak.

And we are not shy in reinvesting in capacity once we get full, and we will get full.

And forgive my ignorance, I don’t know the answer to this question, but what brand are these under?

We will largely focus on – because it takes – you have to adopt a different business model to create a brand from scratch. It would require heavy investments. We feel that with the customer relationships that we have, both on the foodservice side, retail-wise, we have great relationships; QSR-wise, we have great relationships. So it’s leveraging those relationships and focusing on private label, focusing on the manufacturing side of the equation is the strategy we’re going to adopt.

Okay, excellent. And then my final question is just on automation. You referenced that that will be an opportunity and something that you will have to do more of. And I’m just wondering, with respect to automation, where or which market do you see the biggest opportunity?

Well, we see automation as an opportunity for all of our platforms. And we’ve already introduced a variety of automation initiatives as part of our standard strategic capital that we have in the various markets. And so it’s not going to be isolated to a specific division. It’s our intent to accelerate our investments when it comes to automation across all of the divisions.

Thank you very much, Kai.

Thank you.

[Operator Instructions] Our next question on the line from Chris Li of Desjardins. Go ahead.

Just a few quick ones. Lino, you mentioned in the outlook section that you expect the volatility in the commodities to moderate in the second half of the year and into next year as well. And I’m just wondering if you can share with us what you are seeing in the marketplace or what do you expect to see that would help that moderation going forward?

Actually, I am going to hand this one off to Kai.

Well, what we are seeing in the markets, and I spoke to it briefly, if you look at Asia Pacific, as an example, Japan is one of our critical markets. And we’re starting to see a lifting of restrictions and the market opening up a bit. And that’s been reflected in what we’re seeing in our Q3 and Q4 shipments. So we are seeing a recovery in some of our key markets. So that’s why we’re expecting to see less volatility because we’re seeing increased activity as there continues to be reopening of some of those critical markets.

Okay, that’s helpful. And then in the U.S., obviously, the block price has been partly supported by the government’s Food Box program. Do you have a sense if that program will be extended into next year? I know it’s been recently extended to the end of this year. But how about for next year, do you have a sense on that?

We do not have any confirmation that it will be extended beyond where it’s currently at. I think the Food Box program is in its fourth phase. The U.S. government, obviously, has provided billions in support to farmers as well. So the dairy industry has been heavily supported in an election year. I would anticipate – if I had to guess, I don’t think that we’ll be seeing that support extended, unless COVID continues to spike and there’s still difficulties out there in the markets.

Okay. And also in the U.S., have you – has there been any sort of meaningful pullback in sales volume because of the high block prices and customers just not wanting to be stuck with a lot of high-priced inventories?

No. Actually, we are seeing an increased velocity in terms of our volumes. So that’s not the case from our perspective.

Okay, that’s helpful. And then just on the U.S. again. If you can maybe share with us just the sales volumes for each of the three customer channels in the U.S., how did they perform versus the pre-COVID level?

So I would say that the – from a foodservice perspective, we’ve seen growth from a volume standpoint quarter – Q2 versus quarter 1. And that would be the case in our SDF legacy, our Saputo Cheese legacy. On the – pretty much across all of our divisions, we’re seeing improved performance quarter 2 versus quarter 1 from a foodservice perspective.

And then in terms of – on the foodservice, I think last quarter, you mentioned you were sort of back to 80% of the pre-COVID level in terms of foodservice volume in the U.S. Has that improved through the quarter or is it more or less the same?

It’s – that would be sort of the benchmark, if you will. But there are certainly – you have to look at foodservice from a QSR, from a foodservice distributor and from some of the key accounts that we split out as a separate category. So it really depends. But what we’re seeing is stronger performance. It depends on the geography, but we’re seeing stronger – the area where we’re seeing continued weakness is on the foodservice distribution side. So that’s the foodservice that’s primarily focused on independents. But we are seeing good volume from a QSR perspective in most of our geographies as well as some of our key accounts.

Perfect. And then my last question, just on the International side. The decline in the EBITDA margin, you mentioned I think in the opening remarks that it was partly because of the strong export sales growth, which tend to be lower margin. How big of an impact was that in the decline this quarter?

From an international perspective, Kai.

Yes.

So maybe just give a little bit of scope of what we saw in the quarter and perhaps even going into the next two quarters.

We did have a sizable hit on the export side out of the gates, which carried from the first quarter to the second quarter, one of our – in South Korea specifically. That will come off as we move into the third and fourth quarters. And I think Max has some more color he’d like to provide.

Yes. On the international front, yes, there is a decline from a margin perspective as it relates to the pricing that we sell our products on the international market, and the price of milk that we’ve paid during the quarter. Inventory that have been sold in – let’s say, from our business in Australia has been built at a higher milk cost in the year – or the milk year that ended in June. So it created some pressure in the margin as we were depleting that inventory during the Q2. Is that helpful?

That’s very helpful. And hope you have a strong finish to the year. And stay safe.

Thank you very much, Chris. Very, very much appreciated.

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

Thank you very much, Tommy.

We thank you for taking part in this conference call. We hope you’ll join us for the presentation of our fiscal 2021 third quarter results on February 4. Have a nice day.

Thank you very much. And that does conclude the conference call for today. We thank you for your participation and ask that you disconnect your lines. Have a good day, everyone.