Greetings, and welcome to the Saputo Inc. Fourth Quarter and Fiscal 2022 Results Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we’ll conduct a question-and-answer session. [Operator Instructions] As a reminder, today’s call is being recorded Thursday, June 09, 2022. I would now like to turn the conference over to Nick. Please go ahead.

Thank you, Frank. Good afternoon, and welcome to our fourth quarter and full year fiscal 2022 earnings call. Our speakers today will be Lino Saputo, Chair of the Board, President and Chief Executive Officer; and Maxime Therrien, Chief Financial Officer and Secretary. For the question-and-answer session, they will be supported by Carl Colizza, President and Chief Operating Officer, North America; and Leanne Cutts, President and Chief Operating Officer, International and Europe. Before we begin, I'd like to remind you that this webcast and conference calls are being recorded and the webcast will be posted on our website along with the fourth quarter investor presentation. Please also note that some of the statements provided during this call are forward-looking. Such statements are based on assumptions that are subject to risks and uncertainties. We refer to our cautionary statements regarding forward-looking information in our annual report, press releases and filings. Please treat any forward-looking information with caution as our actual results could differ materially. We do not accept any obligation to update this information, except as required under securities legislation. Now, I'll hand it over to Lino.

Thank you, Nick and good afternoon to you all. We appreciate everyone joining us here today. In fiscal 2022, we navigated a complex and volatile business environment. And once again, our team rose to the challenge. The care and passion that have always been a part of our DNA was evident, and I applaud all of our employees for their ongoing contributions. Throughout this difficult year, I witnessed a strong sense of cooperation, dedication, and creativity from our people, guided by our clear strategy and our highly engaged leadership team. We continue to adapt and evolve through one of the most challenging operating environments in our history. Input costs escalated at a pace well beyond historical levels. We also faced labor challenges, as well as bottlenecks and shortages from materials to freight and more. This limited our ability to fully meet growing consumer demand for our products and created inefficiencies that were difficult to plan for. But we also kept our sites on the longer term. We embarked on a new journey to deliver accelerated organic growth with our global strategic plan, sharing with our stakeholders our roadmap and targets. While our overall financial results for fiscal 2022 were disappointing, we took decisive action to offset some of the challenges and to better position Saputo for the future. This included implementing pricing actions to offset higher costs, taking measures to improve our productivity and efficiency levels and investing in capacity innovation and in our strong brands. In Canada, Argentina, and the U.K., all performed well and delivered results in line with our expectations. For its part, Australia had to contend with a declining milk pool, which significantly impacted efficiency and costs. But the platform where we faced the most adversity was the U.S. where challenges have been more acute in terms of labor, inflation and supply chain. We also faced significant volatility in commodity markets, a factor beyond our control, but we are confident that by increasing our branded retail offering and diversifying our product mix, we will be able to respond to the new market dynamics and ensuing opportunities for growth. In tandem, we're making headway on the labor front and finding new ways of working with our supply chain partners. Despite this backdrop, we've generated nearly $700 million of net operating cash flows, a testament to our diversified foundations. Acquisitions continued to be at the core of our strategy in fiscal 2022. We completed the integration of four recent acquisitions, which will reinforce our efforts to strengthen our core business, drive product innovation, and increase the value of our ingredients portfolio. We've also progressed on our ESG agenda, driven by our Saputo Promise, which underpins everything we do and serves to drive, enable and sustain our growth. We completed our first three-year plan in fiscal 2022, and we're heading into the next phase with a firm dedication to delivering on our objectives. On the environmental front, we made further commitments to reduce the environmental impacts of our operations. Our near-term focus is executing on a series of projects to deliver on our climate, water and waste targets. We undertook 24 projects in fiscal 2022 that are going to bring productive wins with a further 32 projects slated for next fiscal year. Beyond the scope of our operations, we also believe we have a key role to play, to ensure a sustainable and equitable growth food system working in partnership with our farmers, suppliers, and industry partners to support the industry towards a transition to net-zero by 2050. To that end, we launched and began executing on our supply chain pledges this past year, which include sourcing 100% of our principal ingredients sustainably. In addition, we signed on to pathways to dairy net-zero alongside several industry players to stimulate climate efforts and drive action to reduce greenhouse gas emissions across the dairy sector. From a social perspective, we make great progress with our DE&I initiatives with a focus on training and development and talent acquisition to promote an inclusive and diverse workforce. Our next three-year plan, which will be released in August together with our upcoming Saputo Progress Promise Report will build on the momentum of the past few years with execution already underway. Turning now to our growth strategy. While the external environment has required a laser focus short-term execution, this has not been detracted us from advancing on our key initiatives. We are confident in our strategic plan target, and we continue to lay the groundwork for our next chapter of sustained growth. In fiscal 2022, we announced the first of a series of investments and consolidation activities that will optimize and enhance our manufacturing footprint. This included a major capital investment plan towards the modernization and expansion of our chief manufacturing facilities in Wisconsin and California, and to support our growth plan in the retail market. It also included several key streamlining initiatives in the U.S. and Australia to optimize and enhance our manufacturing footprint. In the UK, the business undertook plans to outsource our Nuneaton facility warehouse and distribution activities to a long-term partner. We will close our Frome facility and centralize chief packaging at Nuneaton over the next two years, creating a center of excellence and providing both operational and cost synergies while offering plenty of scope for growth. We're poised for a recovery in fiscal 2023. And we are well underway with the full scale rollout of our growth, cost and productivity initiatives. Together, this should set the stage for accelerated growth in the back half of our strategic plan with a clear line of sight to our adjusted EBITDA target of $2.125 billion by the end of fiscal 2025. We're aggressively working our plan, keeping a view on maximizing long-term value creation. I will now turn the call over to Max for the financial review before providing my final remarks. Max?

Thank you, Lino and good afternoon, everyone. I'll start with our consolidated financial performance, and I will then move onto the sector review. Adjusted net earnings were $0.26 per share in the fourth quarter compared to $0.30 for the same quarter last quarter. Consolidated revenues were $3.96 billion, a 50% increased when compared to last year. Revenue increased due to higher domestic selling prices together with pricing initiatives implemented in all of our sector to mitigate increasing input cost, as well as higher cheese and then dairy ingredient market prices in the U.S., and also in the export market in the international sector. Adjusted EBITDA amounted to $260 million compared to $303 million in the fourth quarter of last year. During the quarter, we recorded $71 million of restructuring charges, which include a non-cash impairment charge of fixed asset of $60 million. These charges were related to the previously announced capital investment and consolidation initiative in our U.S. and international sectors and our plans to outsource the Nuneaton facility’s warehouse and distribution activities, allowing full network optimization. On a year-over-year basis, our results were negatively impacted by challenging market condition, including labor shortages, supply chain disruption, and inflationary pressures with the U.S. sector being the most impacted. U.S. market factor had a negative effect of $19 million as compared to the same quarter last fiscal, mainly due to the effect of the negative spread. The fluctuation of the Canadian dollar versus the foreign currency negatively impacted adjusted EBITDA by $12 million. Depreciation and amortization for the fourth quarter totaled $148 million, up $13 million when compared to the same quarter last fiscal due to our capital expenditure program and the inclusion of our recent acquisition. Income tax recovery totaled $12 million, which reflects the lower level of taxable earnings in the fourth quarter and the favorable effect of the tax adjustment for inflation in Argentina. Cash flow generated from operating activities amounted to $184 million for the quarter, up $33 million versus the $151 last year. Turning to the review of our business sector, starting with Canada. Revenue for the fourth quarter increased 5%. Revenue increased due to higher selling prices in connection with the higher custom milk and pricing initiatives implemented to mitigate higher input cost. Sales volume were lower in the retail market segment, mainly due to fluid milk sales volume, returning closer to their pre-pandemic level, partially offset by a rebound in sales volume in the foodservice market segment. Adjusted EBITDA for the fourth quarter totaled $117 million when compared to the $108 million for the same quarter last fiscal, as the business continued to build on the momentum from recent quarter. Pricing initiative and a favorable product mix were partially offset by a higher input and logistical cost. In our U.S. sector, revenue were 25% higher. Revenue increased due to pricing initiative implemented to mitigate increasing input cost and due to the combined effect of the higher average block market prices and the higher average butter market price. Sales volume were stable in all of our market segment, while demand for mozzarella continued to be subject to competitive market condition. Adjusted EBITDA in the U.S. totaled $42 million, a decrease of $51 million versus last year. We continued to be challenged in the quarter by inflationary pressures, which include an increase of $33 million related to freight and logistic costs, but also commodity market volatility, as well as labor availability issues. In Q4, pricing initiative undertaken were not sufficient to mitigate all of the impact of inflation on our cost. As a result, we announced to our customer additional pricing initiative in the current Q1. The negative net impact of $19 million of U.S. market factor as compared to the same quarter last fiscal year was mostly the results of the unfavorable impact from the negative spread between the block price of cheese and the cost of milk as raw material. In the international sector, revenues for the fourth quarter increased by 12% when compared to last fiscal year. Revenue increased due to higher domestic selling prices in Argentina, as well as pricing initiative implemented in Australia in response to the higher custom milk and input cost. Disrupted market condition and supply chain challenges due to container and vessel availability issues and port inefficiencies, negatively impacted export sales volume. Adjusted EBITDA totaled $62 million, which was in line with our results in the same quarter last year. Pricing initiative undertaken in the domestic market were not sufficient to mitigate increased input costs, notably the increased farm gate milk price in Australia. However, in our export market, the relation between international cheese and dairy ingredient market prices and the cost of milk had a positive impact. In a Europe, revenue were 12% higher when compared to the same quarter last year. Revenue increased due to pricing initiative implemented to mitigate higher input costs and the contribution of the Bute Island and the Wensleydale Dairy Product acquisition. Sales volume were stable as compared to the same quarter last fiscal. Although, retail market segment, sales volume decreased as they returned to historical level. Adjusted EBITDA for Q4 amounted to $39 million down $1 million when compared to last year. The impact from lower retail market segment sales volume were partially offset by pricing initiatives. So, this concludes my financial review. And with that, I'll turn the call back to Lino.

Thank you, Max. Let's take a closer look at the fourth quarter. As expected Q4 was challenging, mostly due to transitory factors that impacted our margins, notably in the U.S. First, we had high rates of absenteeism, made it even tougher by Omicron surge, which disrupted production schedules and impacted service levels. Second, accelerated inflation, following the escalation of the conflict in Ukraine, added further downward pressure on margins. As we started to see this latest wave of inflation coming, we took action on pricing just as we did throughout the year, consistent with our objective for pricing to cover higher input costs. So, while we experience near-term pressure on our margins, we expect this new round of pricing actions to alleviate the impact of near-term inflation. Finally, we continue to manage through supply chain challenges, especially in the U.S. due to labor shortages and a continuing gap between supply and demand of trucking capacity and containers. To offset these challenges, we continue to improve our manufacturing and warehousing capacity, prioritizing key skews and implementing new measures to support our employee retention. Our sales volumes were stable in the quarter, despite an uneven recovery in the U.S. foodservice channel, but overall consumer demand remain positive, especially in retail, as at home food spending continues to trend well versus pre-pandemic levels. We are taking deliberate actions by sector to improve our volumes to better meet customer needs. Improving our shipment volumes will be key to getting back on track, with a large percentage of that coming from the U.S. sector. Now allow me to briefly comment on each of our four sectors before we get to your questions. The Canadian sector delivered strong results driven by a balance of pricing momentum, good cost control, and steady volume recovery in certain channels, notably foodservice. In addition, some of the recently deployed automation projects drove efficiencies within our operations and supply chain, helping our facilities to minimize labor-related supply challenges. On the commercial side, we continue to expand and grow our most popular brands. And strong cheese introduced new innovations in this high growth value added segments of spreads, snacks and slices. And we're already receiving recognition with our two newest Armstrong retail slice products jointly winning the 2022 best new product award in the slice cheese category according to BrandSpark. I'm also pleased to report for the fourth consecutive year our Dairy Line and Nielsen fluid milk brands were voted by consumers at the most trusted milk brands in Western Canada and Ontario, respectively. In the U.S., sales increased year-over-year due to higher prices and recently announced price increases. But our margins were negatively impacted by substantial commodity volatility, suboptimal output due to labor availability and significant inflationary pressures. We have more work to do to deliver the growth that the business is capable of, but these are clearly unprecedented transitory effects, and we're working our way out of that. In Europe, we saw strong sequential improvements as the business continued to benefit from higher international dairy ingredients, market prices. Cathedral City maintained its position as the number one cheddar brand in the U.K. And we partnered with a major British grocery chain to launch a branded ready to -- ready meal range with initial sales exceeding expectations. During the quarter, the business also won several top tier private label cheddar contracts, with U.K. supermarkets, as well as new branded and private label wins into cheese spreads. These wins, the continued expansion of Cathedral City in North America and the startup of the Hochland partnership in Germany, which began in January, should set the business up for strong growth in the upcoming year. And finally, the international sector performed well. In Argentina, the business benefited from a strong international cheese and dairy ingredient market price, in addition to plant efficiencies from higher milk intake and their recent mozzarella plant upgrade. International market prices continue to reflect strong market trends. However, Australia was negatively impacted by a substantial increase in farm gate milk price. Now turning to our outlook. Although, inflation and supply chain disruptions are likely to persist, we nonetheless expect a recovery in fiscal 2023, and we see a clear path towards it. First, we've taken significant pricing actions throughout 2022 to our offset inflation, and we expect these initiatives to be fully reflected in our results next year. We are continuously monitoring input costs and are preparing ourselves and our customers to possibly go for further pricing rounds should we need it. Critical to improving our profitability is maximizing our fixed cost leverage and being staffed to our usual levels to run our plants full specifically in the U.S. We expect improved staffing levels in the U.S. in fiscal 2023, following our aggressive hiring and retention initiatives and assuming lower COVID-19 related absenteeism. This should translate into better output, improved productivity and the beginning of a return to more normal sales volume levels. As we begin to fully support demand for our products and recover volume, we expect to return to our historical order fill rates by year-end with a gradual step-up throughout the year. These are key points as we transition from supply, cost recovery to now running the business effectively in what we believe will be more predictable conditions as we come into fiscal 2023. Accordingly, we expect a meaningful improvement in adjusted EBITDA and recovery in margins over time, and we remain confident in our plans and full year outlook. In closing, our teams are laser-focused on addressing the short-term challenges while delivering on our long-term plan. We're continuing to face a dynamic environment. We're being thoughtful with actions to offset macro headwinds, balancing price, volume and costs, while we work to improve and expand our margins. Our global strategic plan is in motion, and we expect the momentum to gradually build. Our performance driven culture fuels our team every day, guided by our Saputo Promise to drive our growth and to deliver long-term shareholder value. On that note, I thank you for your time, and I will turn the call to Frank for your questions. Frank?

Thank you. [Operator Instructions] Our first question comes from Patricia Baker with Scotiabank. Please proceed.

Yeah. Good afternoon everyone. Thank you for taking my question. I just want to follow-up on that discussion that you just ended your session with where you're talking about that you see a clear path to recovery. And obviously, the critical element here is getting those fill rates up in the U.S. And if that doesn't happen, you won't be able to reach the target. So, you did say that, that would be -- that you get back to normalized fill rates by the end of the year and a gradual step-up throughout the year. Can you tell us where the fill rates are now? And did you have any progress of the improvement in Q4 over Q3? Or did Omicron sort of the variant put a dent in that work?

Yeah. Thank you very much for the question, Patricia. So, I have a great pleasure this afternoon of being supported by Leanne Cutts, our COO of International; and Carl Colizza, COO of North America. Again, I am privileged to be with two individuals that are action-oriented people, that are going to deliver results for our company. So, before I pass it on to Carl to answer your specific question related to order fill rates, I feel very, very optimistic about this year. The move, the tone, the focus, the understanding of where our business is at is so much more clear this year than it was last year as the economies were opening up. If you recall last year, when the economies were opening up, many companies were looking for labor. Many companies had to get product to market in terms of supply chain and distribution, and it seems like everybody was looking for the same resources, all at the same time, all the while, while demand was rapid and very, very strong. This year, our sites are clear about our realistic headwinds, but also very clear about our mitigating factors and what we need to do to make sure that we have success. So, on that note, I'm going to pass it on to Carl, who'll talk to you a little bit about maybe some of the success that we've had and getting up in terms of more respectable levels of order fill rates. Carl?

Thank you, Lino. So, more specifically in the U.S., we made some significant progress post Omicron, which was certainly a handicap for us in January and February. We've since rebounded. And the contributors to a positive fill rate and to continue on the momentum that we have right now, really lies in a few factors. The first one is continuing to be successful with hiring and filling the vacancies that we have across our operations. We are making some progress in that space, both from attracting the talent as much as it is retaining the talent. As that progresses, we will also see with a reduced turnover, a greater proficiency and then ultimately, a better OEE, if you like, from our operating platform, which will contribute to continuing with our positive fill rate momentum. The other aspect I would also say is that the demand from the marketplace is beginning to stabilize, becoming a little bit more predictable in nature, and that has lots of positive effects in our planning, makes planning more efficient for us and accordingly our operations. So, a combination of these factors and the continued momentum here, we are confident that our fill rates will by year-end and get back to historical levels.

So, Patricia, I'm going to add one other question that you didn't ask directly, but indirectly. So, a clear path to recovery also includes Australia. If I look back at last year, Canada, Argentina and U.K. performed relatively well. The two rough spots were USA, which Carl talked about. I'd like Leanne to talk about what our recovery plan for this fiscal year is specifically for Australia.

Thank you, Lino. And yes, the -- for FCA, the key opportunity there is around managing our milk intake. The market for supplier milk, we know remains extremely competitive in Australia. We have set a strong opening milk price for the new 2022 and 2023 season, and we do expect competition to remain strong. At the same time, we recently announced streamlining our operations in two of our manufacturing facilities in Australia. And as part of our full year plan, we'll continue to review that network to [technical difficulty] milk supply what we need over the next few years.

So, I hope we went above and beyond your question, Patricia, and satisfied your curiosity.

Absolutely. Thank you to all three of you. I'll get back in the queue.

Thank you very much.

Our next question comes from Michael Van Aelst with TD Securities. Please proceed.

Hi. Good afternoon. You talked about announcing price increases to your customer base. I guess, it was over the course of fiscal 2022. But the latest price increases that you expect to allow you to catch-up to the cost inflation, can you go geography-by-geography and let us know when these are going to become effective?

Certainly, we'll do that. We'll start off with Leanne in your geographies and then we'll go to Carl with North America.

Yeah. So, we are often first to market with price increases in our industries in the U.K., Australia and Argentina. And yes, we have seen increases in a number of our costs, both milk and non-milk. We have a process to recover those costs, that's well understood by our key retailers. In Argentina, we are used to managing hyperinflation. In the U.K. and Australia, we do have a process. It's well understood, and we are in the process of recovering those input costs. So, we are seeing -- our retail customers do accept that principle of inflation. We are seeing a very rational response and that's becoming -- because as usual for us to recover costs regularly.

So, the next round of increases, maybe more specifically--

Yeah. And at the moment in the U.K., we are -- our price increase goes effective this week. And in Australia, it will be in the second quarter.

So, Michael, what you're seeing is a little bit of a change from last fiscal year where we were playing defense. Now, we're playing offense. We are progressive, and we're proactive at passing the increases that we need to pass, irrespective of what impact that might have on volume, but we don't suspect that volume will be impacted greatly. And maybe on that note, I'll pass it to Carl for Canada and the United States.

Thank you. So, let's start with Canada. The last price increase was effective in February, in line with the annual CDC price increases. Currently, there is discussions about a mid-cycle increase in Canada on the milk front with the CDC. The likelihood of that is high and it would be effective in August. And we will absolutely be recovering costs from our price inputs. In the U.S., the -- back in January, we had announced price increases that came into effect mid-April. We have materialized on those price increases. Inflation has continued to put lots of pressure on our overall cost of goods. We have announced early May, effective July 5, another round of price increases in the U.S. So that has been communicated to our customer base and we are taking pricing and next pricing action will be July 5.

So, you see, Michael, in Q1 of this year, we are seeing some of the benefit of those price increases we took in January going -- starting into Q2, there is going to be further price action. So, again, we're playing off it right now.

Okay. So, playing off that means you're looking ahead to the cost that you have coming and you're passing that on now.

That is correct.

Okay. So, if you look at -- so if you combine these price increases that have been announced and should become effective with the fill rate improvement that you expect during the year, is that enough to get you back to, say, fiscal 2021 profitability?

That is the plan, yes. Yeah. So, when we talked about a recovery year, it's getting back to plan to where we were. Shedding our sites on fiscal 2024, where some of the capital expenditure will come to fruition in terms of equipment installation and then catapult us into achieving the numbers we need and we're expecting within the four-year that line.

Okay. Great. Thank you. I'll get back in the queue.

All right. Michael, thank you.

Our next question comes from Irene Nattel with RBC Capital Markets. Please proceed.

Thanks and good afternoon everyone. A couple of questions essentially on similar topics. So, if we look at the U.S., if I went back even a year and said, you're going to have a 2.4% EBITDA margin in the U.S., I think you were said, well, I don't even see how that happens or maybe not. But -- so what is reasonable to expect in terms of cadence of recovery? And what do you think, I guess, a new normal EBITDA margin level would be in the U.S.?

Yeah. So, Irene, as we've mentioned in the past, the EBITDA margin is not apples-to-apples comparable and I'll explain why. And you're probably very familiar with this. The higher the block price is the lower the margin will be with the same amount of EBITDA, cash generation. So, our real focus is on EBITDA, cash generation. But to answer your questions under these markets and these block prices, I would say about a 9% EBITDA margin collective for the U.S. platform would be reasonable. That would be different from -- in different geographies, because of the profile of our business, branding versus non-branding retail versus foodservice and industrial. But I would say if your question was specific to the U.S. under the current block market environment, I'd say about 9%-ish would be reasonable.

That's very helpful. And is that 9% the fiscal 2025 target? Like how should we think about the path from here to there? So, assuming the prices -- the price increases that you've taken hold and assuming you can get your fill rates up, and we won't hold you to this, but just trying to understand what the slope of that line looks like me now, because obviously the U.S. is a big market, right? What is reasonable to expect in F 2023?

Yeah. So, for me, the focus that I have and what I'm pressing upon Carl and his team is the cash generation EBITDA, but I'll pass it on to Max to talk about the percentage allocation by fiscal 2025.

Okay. Good afternoon, Irene. So, when we look at the recovery year for F 2023, we can look at it on three big buckets. The first bucket is around price increase is something that we are looking to not be lagging on -- as of Q1. So all the shortfall that we've seen in fiscal 2022 is not going to reoccur in F 2023, and that's a big bucket that will help to bring us to those F 2021 level. The other big bucket is around all of the efficiencies within our operations. It has to do with -- I would put that bucket around volume and stability of supply in the market and that sort of thing. We do see in that bucket an improvement from quarter-to-quarter, so not fully built into the Q1, but we see a ramp up. Other elements to factor in when we look at the fiscal 2023, elements around market, we do see international market remaining to the level that they are currently within the Q4 results. So, we don't see a sign of a dip whatsoever. This will help us to get to the level of F 2023 alongside with the contribution of our acquisition. We get into the year two within fiscal 2023. So, we expect an upside on that front. So, those would be the big buckets to bridge F 2022 to F 2023, with a gradual ramp up from quarter-to-quarter, specifically around operation improvement, fill rate and labor related issues.

That's really helpful. Thank you. And if I could just come back to the whole notion of, I guess, demand inelasticity or elasticity. We've seen some pretty aggressive price here in Canada -- let's call it milk price 8.5%, retail prices back plus a little bit more. You said you're going to take another round. Consumers are facing all kinds of personal cost increases. What -- how confident are you that we won't start to see volume? And what's the response been at foodservice? And then sort of in the other -- I guess, each of the three segments to the idea of cost increases.

Yeah. So, we'll take that question on a division-by-division basis. We'll start off with Carl.

Yes. And I think, Irene, your question specifically in the U.S. or...

U.S. and Canada as well because there might be another milk price increase, Irene?

Yeah. Exactly. Yeah. Canada as well.

So, I'll speak to the U.S. first. And I would say that, dairy still continues to be for -- on a pound-for-pound basis of protein, still a value for the consumer. And accordingly, we do feel strongly that despite the pricing pressures and the general economy, dairy will continue to fare well in this space. Dairy plays in a number of channels and in a number of occasions throughout the date. So, what we will likely see is a shift in where consumers are procuring their dairy, how they're procuring it throughout the day. So, the diversification of our portfolio, both in Canada and the U.S. will set us up well for that. But on an overall basis, I would say that specifically in the U.S. From a pricing perspective, I don't see a demand destruction because of the current environment. In Canada, certainly dairy from a price point perspective and in the basket is more important than it is in the U.S. to the consumer. So, once again, I'll say that the occasions for consuming dairy out of home and in home, we will likely see a shift to occur. In Canada, right now, I would say that from a foodservice perspective, there's still a bit of a honeymoon effect. So, we're not seeing a slowdown in that space as we speak. But I think that as the summer rolls over, we might see changes to that as the continued inflation and economic pressures happen. But a little bit like in the pandemic phase, we are ready to supply the retail markets as needed. Now the rest of the world -- sorry, Irene, did you have a follow-up question for Carl.

Yeah. I did. Okay. from the rest of the world, and that is in previous periods where we've had a sharp increase in dairy -- in cheese pricing, has there been any pushback on volume from your foodservice partners in terms of maybe trying to use a little less cheese or anything like that?

Yeah. Maybe Irene, I can speak to -- I'll speak to North America, because it's very similar in the foodservice channels. And there is some trading off that does happen at times, depending on price, and recipes can change. Customers may move over from higher cost or higher value cheeses, as an example, blue cheese to other products. And we do see that kind of shift on a regular basis. Is it a potential as we move forward? The answer is yes. But again, our portfolio is quite broad. So, we can continue to supply what the demand is. So, Irene, we can go on to the other markets if you have no further questions for North America.

Yes. Great. Thank you.

Thank you.

So, Irene, similarly, dairy remains an affordable source of protein in each of our key platforms in the U.K., Australia and Argentina. And in addition to that, we haven't seen cheese category declines as we have put forward price increases. And we haven't -- I think that's also because we have a very diverse portfolio of strong brands in these markets, and that enables us to provide value at different price points. So, for example, in the U.K., we have Cathedral City and now Wensleydale. In Australia, it's [indiscernible]; in Argentina, La Paulina. So in addition -- in addition to that, we're also successfully winning new private label contracts. And what we're looking for in private label is value added private label, where we offer distinctive and consistently high quality. It's not [indiscernible] and it's very good margin. So, therefore, we're able to operate this portfolio at different price points and provide different value for our consumers.

And Irene, I'll add one more positive dynamic on a global dairy industry front. There is less milk being produced than there is demand growth. So, the markets have shifted to a very positive supply/demand ratio where the dairy producing countries aren't producing quite as much milk coming off the farm and yet demand continues to grow. So that bodes well even on a pricing perspective and on a demand perspective, and our ability to supply the world markets, not just the domestic markets. So, the arrows are pointed in the right direction for us right now.

That’s great. Thank you.

Our next question comes from Peter Sklar with BMO Capital Markets. Please proceed.

Maxime and Lino, when you talk about the recovery you're expecting this year in the U.S. market. I was surprised that, that you also -- as part of that recovery, you don't need a turnaround in the cheese milk spread, which has been significantly negative. And I'm just wondering how you're seeing -- if you agree with that statement, is that part of your assumption that we go back to a positive spread? And how is that playing out? I think, what's happening is, as you explained it in the past is that the way price is high, so that's increasing the milk price in terms of the milk marketing orders. But on the other hand, the cheese block hasn't moved up sufficiently to compensate for that. So, if you can just talk a little bit about what your expectations are for the spread? And how you see it unfolding this year?

Okay. Yeah. That's a very good question, Peter. So, if you think about the historical ranges in spread -- and I'm talking pre-pandemic historical -- we had seen upwards of $0.05 positive to $0.05 negative spread in the range probably within $0.10 there. What we saw in January and February, minus $0.41 spreads, that is unprecedented. In the current environment, we're looking at somewhere around minus $0.20 spread, which is not great for our cheese businesses, but it still is better than what we saw in Q4. And we're adjusting our expectations about spread moving forward relative to the new environment with the way factor. I don't think that the historical levels will come back. The neutral spreads were the plus 5% or negative 5%, it's not a hope that we have that we'll get back to that. So, what do we need to do to counterbalance that? Well, it's renegotiating some of the contracts that we have with some of our customers, rethinking our pricing protocols, how we go-to-market, because it's a different reality today than it was even two years ago, three years ago. And so, we're not hanging our hat to hit the strat line for the spreads to come back to normalized levels of what we saw three years ago, but we're expecting that there's going to be a negative spread. Now, minus $0.20 spread still is painful. We suspect it's going to get better than that. The indications of way pricing is signaling that. But we've got to make sure that we're proactively looking at the things that we can control and omitting the things that we can't control. I think Max might want to add a bit of color to that.

Yeah. Good afternoon, Peter. So, from a spread perspective, looking at the current Q1, we're still within the range of the negative $0.25. So, we're still in negative territory. Our assumption is built around the fact that we would remain negative territory, but from a year-over-year, not to be as detrimental versus the prior year. During the course of fiscal 2022, we were, let's say, on a regular basis, $0.25, $0.30 below the year before from a spread perspective. Now just having some stability around a $0.20 negative would provide us sufficient -- not buffer, but sufficient room for us to be able to achieve our objective for F 2023. So, at the moment, when you look at Q1, we would be closing the quarter at a negative $0.25. If you compare to Q4, it will be stable, negative $0.25. So, it has some stability from a sequential Q4 to Q1. But if you would be taking to Q1 this year versus the Q1 last year, we would still be negative. Last year was around negative $0.16. So, although, it's that stabilized, we're just looking for that stability that will certainly help us to achieve our target. So, hopefully, that helps with.

Okay. No, those are good answers. Thanks. And then just one other question on a different topic. I guess, it's for Leanne. Leanne, it just seems that Australia has been problematic for a number of years now because of the inadequate supply of milk coming off the farm and the things you announced today and the company has announced in the past like co-packing and streamlining our operations and more aggressive pricing. Like it just seems to me that like you're just making the best of a challenging situation. So, I'm just wondering, ultimately, is this milk shortage going to be resolved in Australia? Is the agricultural element is going to come back and the farmer is going to produce more milk? Or down the road, are you going to have to take more significant actions, because clearly I don't think Australia is generating the type of returns Lino, you anticipated when you initially bought those businesses. So, what's the long-term plan here?

Okay. So, I'll answer the back half of your question, and then I'll ask Leanne to give you some color on what she's seeing in the market. But for us, Peter, what we're looking at in terms of our Australian platform, is not volume, it's value. And I believe that there is a way with the amount of milk that we're processing or we expect to process to still drive very healthy profitability. So, if you recall, we had targets of about 2.7 million, 2.8 billion liters of milk to be processed. We're probably somewhere around 2.2 billion liters a month. So, still quite good amount of volume. But what is important for us is to make every single leader almost 2.2 billion to account for us. And so, the shift is going to happen. Number one, at improving our manufacturing footprint to be as efficient as possible. And number two, to put those solid into categories of products that are going to drive healthy profitability. So, it doesn't mean that we have to reduce our expectation for EBITDA generation because we have less milk. Now let me ask Leanne to answer the first half of your question.

So, Peter, yes, as far as milk supply is concerned, we do see that being constrained. We don't see that coming back to -- the industry is down, and we don't foresee that coming back anytime soon. So, we do need to work with the milk supply that we have. Having said that, as Lino mentioned, we do have also a very diversified platform, not just for domestic retail, which is performing well, but also with foodservice and industrial and also with our export business. With our export business with the prices that we are seeing in the international markets, we are now looking in new contracts at better prices. So, we believe it is a diversified platform that yes, well -- as we do, for example, around our cost price recovery, what we're doing there is being very, very intentional about recovering some of those cost increases, being more offsetting these pricing around that and ensuring that we do get the right value for our products and our brands in the market.

Okay. Thank you. Thank you for your comments. Those are my questions.

Thank you, Peter.

Our next question comes from Vishal Shreedhar with National Bank Financial. Please proceed.

Hi. Thanks for taking my questions. Just on -- with respect to some of the consumer changes that you're seeing. Are you seeing increased demand for private label from your retailers? And is the -- if so, is that impacting our margins, or should we anticipate it to? And also the trade-down from the more higher end cheeses, is that a meaningful impact to margin?

This is Carl, Vishal. I would say that in North America, in particular, there are two things. One, we are already a private label supplier in many spaces. So, we continue to have a healthy relationship there with our customers. I would say that we also have to be careful because for as much as potentially private label would be the go-to for some customers in tough economic times. It's also a question of supply. And right now, as much as it is Saputo and/or other CPGs or food space, efficiency and SKU rationalization in all of the above are front and center for all of us. So, reintroducing, if you like, additional SKUs for private label space versus branded isn't top of mind and first on our priority list. But absolutely, we have a great customer base in the private label space that we continue to supply. And -- but I would say that overall, focusing on growing our private label offerings is not our first priority.

And Leanne, what about the other markets?

I'll focus here on the U.K., where we have a very successful retail brands business. And what we are doing in addition to that is actually successfully winning new private label contracts. Now when we talk about the private label in the U.K., what we are looking for specifically is value-added private label. As I mentioned before, where we can actually offer really distinctive and consistently high quality, and that's how we're managing to be able to win these contracts. And also, it's actually a very good margin. So, ends up at the high end of private label, it is difficult to copy. We are not going for a need-to kind of private label. So, we'll actually be very successful then to be able to optimize the full portfolio, both branded and private label in the U.K.

Okay. Thank you for that color. And with respect to the U.S. segment, the U.S. sector, if you look at adjusted EBITDA, it was $42 million last year, $93 million and $19 million of that gap is explained by market factors, some by FX. And I know last quarter, Saputo was talking about improving labor fill rates, although it's a longer term plan, and it talked about taking pricing covering transportation pressure. And I think at that time, you had said that pricing would cover inflation by the end of Q4 for what you saw in that period of time. So, I understand inflation has increased further. So, if you can maybe help me bridge like -- because there are so many moving parts, if you could help me bridge the delta of that U.S. deterioration, which isn't explained by market factors. And maybe give me some understanding of what the buckets are.

Yeah. Vishal, this is Max. So, yeah, there's $19 million relative to the market factors. So that would help reducing the gap. The other two elements refers to the inflation that was not recovered, and it was in particularly to the spike that the Ukraine and Russia conflict brought to the table. We were in our way to recover all of our costs. But that's a piece that -- ultimately that spike was not recovered. And the other portion to bridge is around our overall efficiencies relative to our labor, the overtime that we are -- we have to absorb within our facility in the U.S. So, if you remove the $19 million or anything around FX, the remainder would be, let's say, half-half between price inflation and efficiencies.

Okay. So that pressure related to labor that's going to gradually improve through the upcoming fiscal year?

Correct.

Okay.

Yeah. Specifically the U.S., where the biggest gap is with regards to the required FTEs. We are making headway here on a week-to-week basis with a variety of initiatives, both in recruiting and retention. So, absolutely. And I just want to maybe call out that typically, it's not a linear scale. So, small improvements, small percentage improvements in labor can generate a much bigger return for us. So, it's part of the reason why we're confident in our fiscal 2023 objectives, because we are pacing with where we need to be.

And with respect to the pricing initiatives, is management -- was the comment that management is looking at where costs are going to go and that's the pricing that it intends to take? Or should we anticipate if there's continued inflation, there will be a constant lag effect? Does it take several months to implement pricing to get caught up?

Well, we've taken price action in April that if the Ukraine war would not have impacted supply on many goods, not just ingredients, but also packaging. We would have been caught up. As the quarter evolved, we realized that inflation was continuing. So, we triggered immediately a price increase announcement for the month of July. Now inflation is not growing as quickly as it was, say, at the beginning of the calendar year. So, I think the increase in July will get us to a -- I would say, perhaps an even level. But if inflation continues, we reserve the right to go back to market and take more price.

Thank you for the color.

Thank you, Vishal.

Our next question comes from Mark Petrie with CIBC. Please proceed.

Yeah. Thanks. Good afternoon. I just wanted to follow-up again on the whole pricing discussion. And Lino, specifically, your comments with regards to expectations that the spread would remain sort of materially negative and below sort of historic levels. Does that mean that you've sort of adjusted your pricing contracts such that you can make kind of historic levels of margin at lower spreads? So, is it still priced? I think historically, you've been kind of priced off the block. Is that still the case, just with a wider buffer? Or have the contracts actually changed in terms of that pricing mechanism?

Yeah. So, we are reopening all of our contracts, and maybe I'll have Carl give some color on that.

Yeah. Mark, we still have a material amount of our contracts and supply that is based off of block. And the movers can be on a weekly basis, monthly and/or quarterly even annually in some cases. So, ultimately, our pricing is still very much a function of that block price. And despite the negative spread, spread is one of the elements that contributes to our overall COGS. We are looking at pricing somewhat differently. And some of that is in and around what it is we charge for the services around supply. So, there are a number of things that we're looking at. And to further Lino's point on contracts. Of course, the spirit and the intent of a contract tend to reflect the environment in which you're operating in. A lot of those terms and conditions for the most part, no longer apply. So, we are having healthy conversations with our customers about ensuring that we can have conditions that are sustainable for the two of us. So, a combination of those things make the spread, I'll say more tenable for us. But nonetheless, we continue to focus on the most controllable aspects of our operations, which is our overall OEE and fill rate.

Yeah. Okay. Makes sense. And do those conversations or do those adjustments, are they easier or more difficult in different channels, I guess, specifically retail and foodservice?

They're never easy to start. Selling off the block is typically not a retail sort of pricing protocol. I'd say that it's more of an industrial channel and foodservice channel. When you have a branded product, it tends to be more fixed price in nature. But I guess the short answer is that there are tough conversations, no matter what channel you're in.

Yeah. Okay. Understood. Also, I just wanted to follow-up on the fill rate or service level kind of conversation. And in the last couple of quarters, you've sort of given us a sense of where you were. And I think at Q3, you had said sort of now around 93%, 94% for U.S. fill rates. Is that kind of where you are? Or you're sort of, I think, adding a percent or maybe improving by a percent each quarter. Is that the idea? Or where are you at today?

Yeah. Your recollection is correct, and we are slightly ahead of that as we move forward here in week eight of the -- of our fiscal 2023. So, we are making progress. The number is higher than the one you've quoted. And we have -- we still see a clear path to making a material change here in our fill rates. And it is embedded in us filling our vacancies, stabilization of the demand. Those factors will be key for us as well as maybe one item I didn't speak to earlier. On the supply chain front, sort of logistics and transportation, we are seeing availability of freight lanes and labor, so truck drivers or other being -- actually, I'll say even much more favorable than what we experienced all of last year and in the early part of this calendar year. So, those three elements combined, we feel confident that our fill rates will be back to what our targeted expectations are.

Okay. Thanks. And then I did just want to ask one other question. Just with regards to your sort of fiscal 2025 earnings target, what kind of assumptions about the commodity market are sort of embedded into that? And can you give us a sense of the impact that between here and there in terms of dollars that, that kind of normalized commodity environment, if that is the assumption, what that would actually mean on a dollar basis between here and there? Because I know you disclosed market factors, but that's relative to past periods. And I just kind of wanted to get a sense of that from your perspective.

Yeah. You're correct. The market factors that we're disclosing is always compared to the prior year and so on. But the assumption built into the model to bring us to the 2.125 is whatever relative to inflationary costs that we are recuperating. And so, it is the same thing with regards to commodity at mill cost, whether it's in Australia or whether it's in the U.S. or Canada or any jurisdiction. So that's the basis of the assumption for us to achieve the 2.125 and not yet behind whatsoever, any of those margin generation in that regard.

So, it implies that the commodity is neutral effectively in terms of your profitability?

The impact of commodity is absolutely neutral, because we would have mitigated into pricing adjustments accordingly.

Okay. Okay. I'll follow-up. Thanks.

Nick, there are no further questions at this time.

Thank you, Frank. We thank you for taking part in the call and webcast. Please note that our first quarter fiscal 2023 results will be held on August 4, 2022. Have a nice day.

That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line. Thank you.