Greeting and welcome to the Saputo Inc. First Quarter Fiscal 2023 Results Conference Call. [Operator Instructions] As a reminder today’s call is being recorded Thursday August 4, 2022. I would now like to turn the conference over to Lino Saputo Jr. Please go ahead.

Thank you, Tommy. Good afternoon and welcome to our first quarter fiscal 2023 earnings call. Our speakers today will be Lino Saputo, Chair of the Board, President and Chief Executive Officer; and Maxime Therrien, Chief Financial Officer and Secretary. For the question and answer session Lino and Maxime will be supported by Carl Colizza, President and Chief Operating Officer, North America; and Leanne Cutts, President and Chief Operating Officer, International and Europe. Before we begin, I'd like to remind you that this webcast and conference call are being recorded. The webcast will be posted on our website along with the first quarter investor presentation. Please also note that some of the statements provided during this call are forward-looking. Such statements are based on assumptions and are subject to risks and uncertainties. We refer to our cautionary statements regarding forward-looking information in our annual report, press releases and filings. Please treat any forward-looking information with caution as our actual results could differ materially. We do not accept any obligation to update this information except as required under securities legislation. I'll now hand it over to Lino.

Thank you, Nick, and good afternoon, everyone. This morning, we reported a strong first quarter with adjusted EBITDA of $347 million on revenues of $4.3 billion. Our improved results reflect a solid performance in our Canadian and international sectors as well as a recovery in our U.S. business. Strong pricing momentum across all sectors and higher international cheese and dairy ingredient market prices contributed favorably to our strong performance. Our teams continue to execute well while navigating the ongoing challenges, notably inflation. That said, we are doubling our efforts to mitigate the cost [inflation]. In addition to the carryover impact from last year's pricing actions, each sector implemented additional price increases in June and in July. We are confident that these actions, combined with our cost, efficiency and productivity initiatives will help us to effectively manage inflation. We are monitoring consumer price elasticity, but our sales volumes have remained stable year-to-date despite recent price increases, thanks to our broad and diverse portfolio. We are focused on building and maintaining our strong brands. We continued these efforts in the first quarter through product innovation and by growing our most popular brand. Overall, consumer demand has remained good. Our service levels are slowly recovering, supported by successful hiring initiatives, enabling us to better meet this demand. Increasing production and filling existing capacity remains a critical priority, especially in the U.S. We are pulling multiple levers to drive sequential progress, and I'm confident that we're looking towards further volume performance improvement throughout the year. While the external environment has required a heightened focus on execution, it has not limited our ability to also advance our key strategic priorities. We are moving ahead with the implementation of our global strategic plan road map, managing our portfolio to maximize value creation, drive organic growth and investing for the future. We are prioritizing optimization and productivity improvement projects designed to operate with fewer, more efficient facilities. Yesterday, we announced our plans to further streamline our manufacturing footprint in the U.S. to increase efficiency and productivity and provide a more sustainable cost base going forward. The announcement marks the continuation of our network optimization program that plays an integral role in our broader strategy to enhance operations and accelerate organic growth across our platform. Clients include converting our mozzarella cheese manufacturing facility in Reedsburg, Wisconsin to a gold cheese manufacturing plant to increase capacity, improve productivity and expand our position in the growing specialty cheese category. In line with our strategy to modernize our mozzarella operations, the current cheese manufacturing from this facility will be transferred to other existing facilities in the U.S., thereby increasing capacity utilization, improving operational efficiencies and reducing costs. Finally, we will cease operations at our goat cheese production facility in Belmont, Wisconsin. Our employees have made commendable efforts over the years to keep our facilities operating efficiently. And I want to thank all affected employees for their hard work and dedication. These initiatives will begin in the current quarter and are expected to take up to 18 months to implement. This more focused footprint aims to strengthen the competitiveness and long-term performance of our U.S. cheese operations. We remain equally focused on the Saputo Promise, our ESG strategy. This morning, we released our annual Saputo Promise report in which we share the progress we've made on our ambitious ESG goals and introduced our new 3-year plan. Report outlines our long-term commitments associated with each of our 7 strategic pillars, which includes food quality and safety, our people, business ethics, responsible sourcing, environment, nutrition and healthy living and finally, community, focusing on key areas where we look to create meaningful, measurable change over the next decade, highlights and achievements from this year's report include an 8% reduction in CO2 intensity and a 2% reduction in energy intensity versus our fiscal '20 baseline. Community program investment efforts totaling $16 million, and 1.7 million kilos of donated food, reducing our food waste and reducing CO2 intensity by 8,000 tonnes. While we still have much to do to achieve our commitment, I'm proud of the work we've done so far. Our progress demonstrates our commitment to doing what is right for the environment and for communities in alignment with our values. We are forging ahead while building on a long history of doing good and with a sense of pride, focused on further integrating Saputo Promise initiatives across our business. I will now turn the call over to Max for the financial review before providing concluding remarks.

Thank you, Lino, and good afternoon, everyone. I'll start with our consolidated financial performance, and I will then move on to sector review. Adjusted net earnings were $0.39 per share in the first quarter compared to $0.30 for the same quarter last year. Consolidated revenues were $4.3 billion, a 24% increase when compared to last year. Revenues increased due to higher domestic selling prices in line with the higher cost of milk together with pricing initiatives cemented in all of our sectors mitigate increasing input costs. Higher international cheese and dairy ingredient market prices was also favorable to revenues. Adjusted EBITDA amounted to $347 million compared to $290 million in the first quarter last year. Our improved adjusted EBITDA was driven by previously announced pricing initiatives, mitigate higher input and logistical costs and the favorable impact from the relation between international cheese and dairy ingredient market prices and the cost of milk as raw material. These factors were partially offset by labor shortages in some of our facilities and supply chain disruption, which put pressure on our ability to supply ongoing demand, which also negatively impacted efficiencies and the absorption of fixed costs. U.S. market factor had a negative effect of $7 million as compared to the same quarter last fiscal year, mainly due to the effect of the negative spread. Net cash generated from operating activities amounted to $127 million, which was comparatively stable to last year. I'll now take you to key highlights by segment, starting with Canada. Revenues for the first quarter increased 11% when compared to the same quarter last fiscal year. Revenue increased due to higher selling prices in connection with the higher cost of milk and pricing initiatives implemented to mitigate higher input costs. Sales volume were lower in the retail market segment mainly due to fluid milk sales volume, partially offset by a rebound in sales volume in the food service market segment, mainly in the cheese category, which both returning closer to their pre-pandemic level. Adjusted EBITDA for the first quarter totaled $132 million when compared to the [$113 million] for the same quarter last fiscal year as the business continues to build on the momentum from recent quarters. Pricing initiatives, a favorable product mix and lower SG&A costs stemming from our cost containment initiative also contributed to improved results. In our U.S. sector, revenues were 36% higher. Revenue increased due to pricing initiatives implemented to mitigate increasing input costs and due to the combined effect of the higher average block market price for cheese and up the higher average butter market price. Sales volume increased mainly due to the contribution from recent acquisitions, while consumer demand for mozzarella continue to be stable but still subject to competitive market conditions. Adjusted EBITDA in the U.S. totaled $97 million. We benefited from previously announced pricing initiatives, mitigate higher input and logistical costs. Continue to face challenges with labor shortages in some of our facilities and supply chain disruption, we continue to put pressure on our ability to supply ongoing demand, which negatively impacted efficiently. Negative net impact of $7 million of U.S. market factor as compared to the same quarter last fiscal year was mostly as a result of the unfavorable impact from the negative spread between the block price of cheese and the cost of milk [technical difficulty]. That said, continue to expect volatility in the U.S. moving forward until overall market stabilizes. In the international sector, revenues for the first quarter increased by 22% when compared to the last fiscal year, while adjusted EBITDA totaled $82 million, a $37 million increase when compared to the same [technical difficulty]. The improvement in adjusted EBITDA was driven by higher sales volume in export and domestic market in addition to the relation between international cheese and dairy ingredient market prices and the cost of milk as raw material in our export market. Reduced milk availability in Australia negatively impacted efficiencies and the absorption of our fixed costs, our Dairy Division in Australia, while higher milk intake in the Dairy Division, Argentina had a positive impact. In Europe, revenues were 16% higher when compared to the same quarter last fiscal year. Revenue increased due to the pricing initiative implemented to mitigate higher cost of milk and other input cost increases in addition to the contribution of the Bute Island and the Wensleydale Dairy Products acquisition. Overall, sales volume were stable as compared to the same quarter last year. Retail market segment sales volume decreased while industrial market segment sales volume increased, representing an unfavorable mix on the profitability standpoint. Our pricing initiatives mitigated higher cost of milk as raw material and other input cost increases in line with inflation and increase [technical difficulty]. Adjusted EBITDA in Europe for Q1 amounted to $36 million, which was in line with the same quarter of last year. This concludes my financial review. With that, I'll turn the call back to Lino.

Thank you, Max. So we're off to a good start to this fiscal year. Execution has improved, and we're working closely with our customers to effectively and thoughtfully deploy inflation-driven price increases. While we expect the environment to remain dynamic, we are confident that we are in a much better position to navigate the volatility moving forward. Canada remains our strongest and most consistent performer. In Q1, we delivered solid year-over-year sequential growth driven by a strong recovery in foodservice, efficiency gains from prior year initiatives and from the flow-through of previously announced pricing. On the commercial side, we are leveraging our balanced portfolio of branded and private label products. And it also benefited from a healthy mix of strong well-established foodservice and retail customers. Both are providing to be significant drivers to the sector's performance, especially in the current environment. We continue to see recovery in the foodservice segment with full service restaurants, leading the growth as post-COVID demand remains strong, while quick service restaurants performed well. The recovery and strength in foodservice allowed us to further improve our product mix with more cheese sales volumes versus fluid milk. During the quarter, we also secured some wins in the plant-based beverage category and ramped up marketing efforts around the Vitalite brand, expanding distribution on our newly launched retail lineup and growing our foodservice business. In the U.S., we began to see a recovery in profitability in Q1, driven mostly by strong pricing contribution. In addition to announced price increases, we are making good progress shifting towards more dynamic pricing protocols, to be more agile in response to market conditions. This will support sequential improvement in operating margins throughout the year. Although our volumes improved, we continue to be impacted by labor and supply chain challenges. Nevertheless, we are beginning to see some signs of stability on turnover and absenteeism which is translating into increasing production. We are still below our goal of 99% order fill rate, but we have seen gradual progress throughout the quarter, notably in our cheese manufacturing operation. Still, customer demand continues to outpace our ability to supply products. To better meet this demand and realize our volume goals, we must increase our staffing levels across the business. As a result, we are taking further targeted actions to achieve this goal. We are fully committed to improving profitability in the U.S. business despite a persistently challenging operating environment. In the international sector, we had a good performance and global commodity prices reflected strong market trends. In Argentina, we benefited from strong international cheese and dairy ingredient market prices, ongoing price increases and higher shipment volumes following our mozzarella capacity expansion. Recently, the division surpassed the 3.7 million liters of average milk per day, reinforcing our leadership position as a top dairy processor in Argentina. I am incredibly proud to see the growth and expansion of the business and today represents an important milestone towards our next era of growth. In Australia, we had good pricing momentum in domestic and export markets, but lower milk intake in the quarter continued to impact efficiency. Managing our milk intake is our top priority for this business. As part of our global strategic plan, we are continuously reevaluating our Australia network to make sure that we have the right infrastructure in place for the total milk that we have today and that we anticipate over the next few years. We're identifying new opportunities to streamline the operating model, and we are confident that our diversified platform will further support earnings as we assess our footprint. In Europe, although stable, our retail volumes were slightly below our expectations, but we expect to see some momentum in the coming quarters from new products and packaging innovation. We also expect the relaunch of the Cathedral City brand to support volume growth with a compelling new global campaign, highlighting the brand's commitment to the cheese making craft and becoming part of everyone's everyday life. In closing, we remain confident in our plan and full year outlook. We're monitoring the challenges of supply chain, labor and inflationary pressures very, very closely. We have strong momentum going into the balance of the year. We are focused on implementing our most recent pricing actions, productivity improvements and cost containment initiatives across all our sectors. Given our first quarter results, we expect continued recovery this fiscal year with progress both on margins and adjusted EBITDA. As we move forward, we will focus on the things we can control, maintaining our position as a supplier of choice with winning customers, managing our costs, generating strong cash flow from operations and operating our plants as efficiently as possible. Although we expect the operating environment to remain volatile, we will continue to deploy our time and our resources to our strategic plan initiatives to extract the full potential of our business. Thank you for your time and for your support. I will now turn the call over to Tommy for questions. Tommy?

[Operator Instructions] And we'll get to our first question on the line from Mark Petrie with CIBC.

I guess the Canadian volume trends were somewhat as expected with retail down and foodservice up. But can you just talk about your market share today versus, I guess, probably a year ago and also pre-pandemic, just to give us some sense of the progress and evolution there?

Yes, I'll have Carl answer that question.

Yes. Thank you for the question. And I think I'll answer it in sort of 2 different categories, cheese and milk. From a fluid milk perspective, the share is basically has not moved. So we haven't lost ground. We haven't gained ground on that side of the business, although the sector itself continues to decline at about 2% per year. From a cheese perspective, we have made some gains, specifically in the retail side with our Armstrong branded products, which is well accepted, well received by the marketplace with the various innovation as well as our ability to supply the demand in that market space. So the Canadian team has done an exceptional job of bringing that to market, both from a brand support as well as the execution side on the manufacturing.

And how about in foodservice, Carl?

From a foodservice perspective, once again, I'll say that meeting -- coming out of the -- I'll call the pandemic, our team did an exceptional job of supplying the market and along the way we have gained share in this space as well, and we continue to perform quite well.

Okay. And could also -- could you also give an update just in terms of the labor picture in the U.S.? I mean, as you've highlighted a couple of quarters in a row now, your service levels are improving. But could you help us sort of get a sense of where you're at in the spectrum of that improvement? And what your expectations are for, say, by the end of this year?

Yes. So we have made some improvements and we do make improvements week-to-week on the net number of people that join our team. At this stage, what I would say is on the bright side, we are getting people coming to our team, so joining the team. The question now is ensuring that we can retain them. So we have a number of different initiatives that have been put forth to ensure that, first and foremost, the candidates understand very clearly what the world of manufacturing is about so that the right candidates do apply. So the time that we do spend training them and onboarding them are of value, and they can contribute more quickly. Having said all of that, we have adjusted some of our practices at the onboarding and they are beginning to deliver the results as we can see as our overall fill rate levels also are increasing. So I'm optimistic that by the end of the fiscal year, we will be in a position where staffing is going to be less of our daily focus because right now, it is one of the #1 priority that we have. So incrementally, quarter-to-quarter, we should see that continue to contribute well to our bottom line as our fill rates increase.

Okay. And then just last one, I guess, with regards to the progress on the capital spending plans, I know you've announced a select number of projects. First, is there any net impact to the relative capacity for goat cheese in the U.S. as a result of the changes you announced yesterday? And then I guess my main question, I think we're up to just over $200 million of the $550 million of capital that you stated would be above and beyond sort of the normal run rate. Any commentary about the balance and where and when that will be deployed?

Yes. So I'm going to ask Max to talk about the macro picture on capital spend. And then specific to your question, I'll have Carl answer the goat question.

So Mark, relative to the overall spend, our commitment around $2.3 billion over the duration of the [southbound] remain. We certainly see some costs elevated relative to furniture, the material, the equipment, but we are sticking to the investment that we've committed. The timing of the spend varies with our plans from sector to sector. It's -- the money will be spent. We're aligned with the global picture that we laid out. We're just executing on our --

So if that answers Mark's question, maybe I'll answer the question around capacity for goat. At the end of the day, the change that's being proposed here -- sorry, that is being executed is going to see the net capacity for goat cheese may increase, both the goat cheese curd as well as our ability to package more effectively and more efficiently, the different varieties that the market continues to demand of us and for our innovation agenda. So there will be a net increase in the capacity to manufacture and to package goat cheese.

Carl, what might be lost in the release then is the impact also of mozzarella and how that's going to positively impact the other facilities that are going to be inheriting in this volume. Can you speak to that, please?

Yes. So part of the objective of our network optimization was also to maximize the use of the assets and tools that we have in various facilities. We have made investments over the years in other mozzarella [paste fill] locations. And with the repurposing of our Reedsburg site, we're going to see that volume transferred over to existing Mozzarella facilities, further augmenting the capacity utilization that is currently available.

Yes. Understood. Appreciate all the comments and all the best.

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

With respect to the U.S. and the sequential improvement that we saw, and I know there's some seasonality there. But I was just hoping you could give us what the biggest driver of the improvement was sequentially? Was it pricing or the labor situation? Is there anything else you'd point to?

Go ahead, Carl.

Yes. So it's a combination of things. I would say, certainly, the pricing action that we've taken has helped us mitigate the inflationary pressures that we have been absorbing for several months and years. So that has definitely a positive contribution. But beyond that, and I think you heard Max share that the market factors were negative despite those negative market factors, the manufacturing side performed more efficiently. Some of that is absolutely related to the efforts and the gains that we have made in labor. Some of it is also associated to not just the head count and labor but also the, I'll say, the experience and the maturity of our new teammates and employees in the plants who are better understanding the roles and responsibilities and how to effect positive change on a daily basis.

Okay. And with respect to the pricing actions, should we expect more benefit to flow through next quarter and then you'll be caught up on a run rate to where inflation currently is? Or is there -- is it going to continue to roll out through the fiscal year?

The most recent announcements to our customers was for a July 4 price increase. And that has been, I'll say, trickling through our network with the full effect happening sometime in August. And fundamentally, we will continue to monitor very closely the effects of our inflation on our input costs, and we will go back to the market if need be. There are signs of some relief. Inflationary pressures continue to occur but at a different rate. I think that slope, if we would look at it from that perspective is beginning to soften a little bit. So we are optimistic that the actions that we have taken might be enough for us here in the near term.

Okay. And several quarters ago, Lino gave us kind of an overview of region by region of how we thought about the business and where each business was with respect to plan. And I think the U.S. was singled out as one of the businesses with the most opportunity. So as you look at the U.S. today and you look at your fiscal 2025 goal of where the U.S. should go, can you maybe give me a rank order of the things that need to happen to get the U.S. to where it needs to be? So pricing is one, the staffing is another, but I was hoping to get a better understanding of the magnitude of what needs to change in order to get that business where it is. The other is obviously the efficiency initiatives being implemented.

Yes. So Vishal, I'll take this opportunity to talk about some of the good performing platforms that we have. And then I'm going to ask Leanne and Carl to speak to those 2 platforms that were tempered either by labor inflation, logistics and/or milk. But let me start off by saying that we're in year 2 of our 4-year strat plan. I don't want to minimize the effort that the Canadian folks are putting into driving their numbers. But Canada is well on its way to achieve its objectives relative to the strat plan and very much in line and perhaps beyond what we have as our internal target numbers that they're hitting. So again, I don't want to minimize the amount of effort that's being put in, but I don't have a high level of concern for Canada achieving this year's budget as well as what we have planned for year 2, year 3 and year 4 of the strat plan. I would say the same thing for our Argentinian platform. The folks in Argentina, as I've mentioned before on previous calls, volatility is part of their operating environment pre-pandemic. And so they have found ways to mitigate any of the headwinds, any of the challenges that they've had, and they have actually been performing extremely well relative to budgets and relative to the strat plan. So very little concern about them hitting their numbers into year 3 and year 4 of the strat plan. So we have 2 platforms that we feel very, very confident about the achievement of their targets and their results in the short term, medium term and the longer term for the strat plan. The platforms that had some challenges would include the U.K., Australia, and the U.S. U.K., for all intents and purposes, I think they've come over the challenges that they have seen early on in the pandemic. They have gone to market proactively to raise prices. We were first going to market to raise prices. That had impacted volumes early on, but now we're starting to see our competition follow our lead with price increases. So we are well ahead of the curve, and I feel quite good about the balance of this fiscal year. And I also feel very, very good about the U.K. platform, achieving their fiscal strat plan objectives for year 3 and year 4. The 2 divisions that required a lot more focus and perhaps different strategies would be Australia, and the United States. And I will ask Leanne to go into specific initiatives of what we're doing to mitigate some of the challenges we have, namely the milk environment as well as, as inflationary cost increases, including raw material price increases. So Leanne, why don't you start us off on that?

Yes. Thank you, Lino. Vishal, as you know, for Australia, milk price is at record levels. Now we have already in this new milk season that began the 1st of July of this year, for the next 12 months. We've already successfully passed on a substantial portion of the milk cost increase, and we will continue to increase prices as needed to recover those input costs. At the same time, foodservice demand continues to rebound in Australia after Covid and domestic retail performance actually very solid. We've also got an ongoing pipeline of a number of new products across the portfolio. And as you know, we have a very diverse portfolio within the Australian business. Now as part of our 4-year plan, clearly, we will need to review our overall footprint. It's clear that the milk pool has declined. And therefore, we will need to ensure that our network going forward absolutely reflects this reality. Now critically, we have that flexibility to adjust our portfolio because of that diversity, not only within the domestic retail sectors of retail and industrial, but also with our export. We have benefited from a good export pricing. We see that as a benefit for '23. And at the moment, we do not see significant price erosion in those key ingredients that we supply to many markets because we operate across multiple categories and exports at different price points with tailored ingredients. That gives us an opportunity to be able to manage the input costs and also to be able to look at our portfolio and adjust that portfolio and adjust the footprint to the reality of that milk pool. And that's how we believe -- there may be some different profile to that overall for the strat plan, but we have confidence that we are able to be able to adjust continuously to be able to meet that future goal.

So Carl, I'd like you to do the same thing for the U.S., not so much for the short term, but for the medium and longer term for the U.S. relative to strat plan, Carl.

Sure. Basically, what I would say, Vishal, is that if you were to look at the sort of enranked order and they do apply to what will impact most beneficially our bottom line today and tomorrow. They are sort of in this order. It's going to be our ability to attract and retain labor. That in itself will translate into as we can appreciate increases in our OEE, which includes first pass quality. So the efficiency of our plants, doing it right the first time and what that means on a cost of manufacturing and the benefits that, that brings. I would say the second item is our capital investments. The capital investments are ramping up. We heard yesterday with regards to the announcement to Reedsburg and our goat facilities. There are more investments to come and the return on those investments, as we've described in the past, will begin in '24 and '25 at a much larger scale. And then I would say, lastly, the continued discipline in way of our pricing to ensure that, one, we continue to combat inflationary pressures with whether those are cost containment initiatives at -- in our SG&A, whether it is things that we can do operationally. But beyond that, we need to ensure that our pricing to the market reflects those input costs as they come to us. So sort of in that order is how we believe that we will be able to achieve the target that we set for ourselves here in the U.S.

So Vishal -- yes, so that is the region-by-region analysis. I hope we answered your question. But if you have any more clarity, we'd be happy to answer more specificity if you need.

And we'll proceed to our next question on the line is from Irene Nattel with RBC Capital Markets.

Just listening to the answers to the prior couple of questions and thinking about the fact that we're in year 2 of the strat plan, it seems to me that you must know pretty much exactly what you want to do. And given the -- in terms of sort of where you need to do network optimization in both the U.S. and in Australia. So given the lead time to actually implement the announcement that you're making and your respiring let's say, 18 months, should we be expecting to hear several more of these types of announcements over the next, let's say, 6 to 9 months?

Yes. That would be an accurate reflection of what's to come. Understand Irene, every time we do take a decision relative to network optimization, it does impact the group of employees around the globe for us. And so we need to be sensitive to how, when and what is the right time for us to make those announcements. That doesn't mean that the projects have not been defined. That doesn't mean that the capital has not been spent. We just need to find the right time to be able to inform the market of our decisions, always allowing our employees to be first to know about our plans and our ideas. So the road map has been set. The execution of that road map, we are very, very confident in, especially that we've carved out the CapEx required to execute effectively on all of those projects. So there are going to be more announcements to come. It would be simpler and nicer to have one announcement that covers everything for one division or one sector. Unfortunately, in an operating environment where we need to be mindful of our talent, we've got to do things the right way and at the right time.

Absolutely, Lino, completely understood and makes perfect sense. But I'm very glad you clarified that, yes, you guys know exactly what is going to be coming. Just switching gears for a moment. There was a pretty significant step up in the cadence of revenue growth year-over-year from Q1 to Q2, in part, presumably on price. And it was great to see the improvement in the U.S. EBITDA dollar. But I'm still a little bit perplexed by that margin, which, again, had anyone said to me, you're going to have 2 quarters of margins covered in that range. I would be like [indiscernible]. So how should we be thinking about sort of taking that margin from mid-single digits, let's say, high single digits or low double digits over the period, over the next sort of -- as we head towards F '25?

Yes, Irene, it's Max. So revenue do increase due to pricing initiatives. In that regard, pricing increased due to raw material increases. So it doesn't mean it's a margin up -- have a price increases. And it's the same thing with the commodity market, although commodity markets do bring additional revenue blocks in the U.S., let's say the block market is up or butter market is up. It still offers some challenges from a profitability standpoint. So the increase in revenue attributable to market or inflation doesn't attract same amount of EBITDA percentage generation. It does create a little an erosion from a percentage perspective, although we do feel that we have the pricing protocol in place to either recover from the inflation and to be ahead of the curve. And right now, we have our head above water. We feel good about our pricing to bring back to the level we are now. The intent is to, of course, maintain the alert, [guide us] to input costs that we're facing as the market [comes].

And so how should we be thinking, Max about the evolution of the margin profile in the U.S. because, obviously, that is a very significant source of getting you from your current EBITDA run rate to [$2.1 billion to $2. 5 billion] target. Is it really a year 3 and particularly year 4 for the U.S.?

Yes. Well, this year, when we were looking at comparable figure, whether it's sequentially or whether it's through prior year, we clearly have some additional EBITDA relative to pricing. That is basically the offset of the negative that we've seen in the prior year. And this should be the level that we're in. And now it's up to us to have our initiative to kick in, and those were mostly materialized itself during the fiscal '24 and '25. We're looking at this fiscal '23 to show some progress from quarter-to-quarter. This quarter, we have that level up a little bit, like we have our pricing that say, a good ball that had to be given. So it's there. Now it's more of a monitoring and now the compound effect of our pricing will be beneficial to us in fiscal '23.

And then just one final question, if I might. And this goes to consumer demand. We're hearing a lot about consumer price sensitivity, particularly in the U.S. markets or notably in the U.S. market. Have you seen any shift in what consumers are buying or any pushback whatsoever from consumers on the price increases?

Carl?

Thanks, Lino. Irene, before I answer that question, maybe just one thing to add to the comments Max was making. I would say that if we look at the EBITDA margin looking forward, the gain that we will see in this sector will absolutely be about the ability for facilities to improve the overall efficiency. And I say that quite confidently because there aren't many of our locations that are operating at historical run rates and demonstrated run rates. So we know we can get there. We know our assets are capable of doing way better than what they're doing. So that's where some of our confidence comes from when it comes to improving our overall margin structure. And it's not necessarily on the back, if you like, of pricing initiatives. Everything is really focused in and around our efficiency and demonstrated historical efficiency. Maybe going back to the demand, the question around demand. Yes, we are absolutely seeing demand shift within channels. We are seeing the restaurant sector begin to slow down. And within that restaurant sector, we are seeing the shifts beginning to occur from full-service restaurants to fast food in nature, which have not really lost momentum, but we have seen the full service restaurants, actually, lose quite a bit of steam recently. It has increased the demand in the retail sector for general groceries and general food. And within that specific sector, we're also seeing some of the discount banners and the club stores winning the day. Within each of what I've just described, we have a good balance in our portfolio of products to service each of those channels, and we're ready to adapt to those needs. As far as dairy demand as a whole, we have seen some important increases in inflation in dairy, upwards of 13%, and that's dairy combined. Cheese is sitting in and around the 9% mark with food at around 12% and a bit. So with that, certainly, dairy is more expensive this year than it was last year, but it has yet to translate into real demand destruction of any sorts, okay? We're starting -- we're really seeing it in the shift of the channels. We are keeping a very close eye on it and ensuring that we adapt where we can and where we need to.

We'll get to our next question on the line is from Peter Sklar with BMO.

Okay. I want to talk about U.S. dairy market factors, which still appear to be a considerable negative, particularly the cheese milk spread, which did not improve quarter-over-quarter. I'm just wondering if you could talk about the fundamentals, what's causing the negative spread. I noticed the whey price came down and my understanding is that's a critical input into the milk marketing order. So I'm surprised that didn't drag down the milk price and improve the spread or at least make it more negative? And just kind of what your -- what your thoughts are around that? And what are you seeing around the spreads since the quarter end? Is it getting worse, better, steady?

So Peter, maybe to answer the question around despite decreasing price of whey and its influence on the Class III milk price. What we have seen is fat and the cost of fat increase, in fact, probably negate the overall benefits of a reduced whey powder price. So that in itself has kept the Class III milk price high and has negatively impacted the spread. So those are the dynamics that are working in the background. And fortunately, it's not just one variable. There are multiple variables, excuse me, that impact that Class III milk price. And as far as the cost -- or sorry, the trading price of block cheese, we've seen some decline here in the last couple of weeks from the highs of around $230. We're sitting in and around the $188 mark to date. Some of that is coming from global sentiment, if you like, around dairy demand as China continues with its sort of rolling lockdowns and demand is not improving from that perspective. But if we take a look here in the coming weeks and months, we don't expect that spread to improve materially. And really, what we're looking for is stability because the volatility also hurts in either direction, to be honest, in the short term. And what we're looking for is a degree of stability. And I think that I'll say the global picture is starting to get clearer on demand. And I think what we will see is the U.S. commodity prices begin to stabilize and in itself will be beneficial for us in the ordering patterns from our customers, the confidence that they will have in putting in their orders and so on and so forth.

Maybe Max, maybe want to add something, there?

Sorry, just on -- when you say the fat cost, you're talking about butter fat, I assume.

Yes. It's butter fat being a component of our Class III milk price. That in itself influences the net spread.

Peter, just to comment. Yes, market factor from a sequential point of view has not -- in fact, it was negative last year, but [technical difficulty] as we're navigating in this current Q2. So same condition that we're seeing if you want to have whatsoever.

Okay. So I think you're saying no change.

Sorry?

I'm actually been cutting in and out. I have a trouble hearing you, but I think you're saying no change in the quarter to date?

Correct.

Yes. Okay. Well, I've got you. I have an accounting question. This -- with regard to this reorganization you're doing in the U.S., I think it's a $15 million after-tax restructuring charge. Can you give us the pretax number and how you're going to be handling it from an accounting perspective? Is that going to be an adjustment? Or is that going to be embedded in your EBITDA that you're [technical difficulty] for the U.S. segment next quarter -- this coming quarter?

Yes. Yes, we typically we do our restructuring costs below the EBITDA line as a restructuring cost. The part that is for either salary continuance or retention of employees during the duration of the project will flow to the EBITDA, which is a smaller piece of the restructuring costs. So in a sense, this is where we were handling it.

Okay. So most of it will be below the EBITDA line? I think is what you're saying?

Correct. And there's a significant part of it that is a noncash expense.

Yes. Okay. And then just lastly, when you talk about the strength of the international business, you're talking about like in terms of export markets, you're seeing good cheese price realization and ingredients. I just want to clarify, when you're talking ingredients, what products are you talking about? Are you just talking about kind of commodity whey? Or are we talking about other products when you say ingredients?

Leanne?

Yes, Peter, it's Leanne. We have quite actually across multiple categories. So in terms of those ingredients, it does include some commodity items, but it also includes a number of premium and tailored items that we supply to customers on longer-term contracts and to specific recipes. And we have continual high demand for a number of those things. I'll take for example like lactoferrin.

Okay. But it's all whey product?

Lactoferrin is not a byproduct. Lactoferrin is a high-valued protein that we extract from milk itself, which has a high value on the market. But then when you think about other infant formula or other specialized powders, yes, that would be byproduct in nature. So it's a combination of all of them, Peter.

So it's a basket of different kinds of ingredients, Peter, which gives us that flexibility.

We'll get to our next question on the line from Michael Van Aelst with TD Securities.

So you made some comments, I think, in the press release and on the call about additional pricing increases in all divisions. And I just want to make sure that I got them all because I know last quarter, you talked about U.S. pricing increases in mid-April and then July 5. And I think you did tell us you did clarify that you don't expect to have to have additional price increases there. Is that correct?

So Michael, if you're referring to me, as it stands today in our current outlook, we don't see that happening. But again, the market changes in front of us so rapidly that we are always watching that very closely. So yes, you did hear that correctly from me.

Okay. And there's also a price increase coming in international in Q2 from what you said last quarter. And then in Europe in June. And I'd assume Canada in September given the milk cost increase. So is there anything I'm missing?

Michael, it's Leanne. As far as the international markets are concerned, with Argentina, we continue obviously the hyperinflation environment, and we continue to take prices as needed to cover our costs. In the U.K., we have had a number of significant price increases. And of course, we will look to recover any incremental costs in milk. And as far as Australia is concerned, we have a significant price increase that went in the beginning of July. And we have recently announced that we will be looking for further increases in the back half of the year.

So more in the back half -- for Europe, there's more coming as well, I guess.

Yes. That is likely.

And Michael, maybe just to confirm for Canada, yes, with the announced milk price increase from the CDC, the Canadian business is taking pricing action to the market to recover those input costs.

Okay. Great. And then you touched on the cheese prices in the U.S. flipping lately and it happened in Europe as well -- sorry, international as well. Does that change your confidence at all in the short term? And how -- can you talk a bit more about the lag time that we should expect given the contractual nature on your international exports coming out of Australia and Argentina?

As far as we are -- as far as input costs for our international export customers, we have been passing on costs to those customers to reflect that increased milk cost. So that's -- whether it's coming out of Argentina or out of Australia. Now we have locked in a number of those different contracts towards the back half -- the back half of the year. And obviously, we will look to be able to continue that with further contracts. Obviously, the further we go out in terms of the quarters, the less of our contracts are kind of locked in, but we are confident around the basket of the ingredients that we're supplying to international customers that will be able to meet our forecast with the current pricing that we see.

Okay. So your -- so for those international markets, you're pricing off your milk cost did not necessarily the global commodity prices?

Part of our milk cost. It will be slides, yes.

Yes. And Michael, I'm going to add a little bit of color to that as well, especially in the Australian platform where dairy solids are limited. This is where the team in Australia is looking at putting those solids into the highest valued category products. And if that means that perhaps there might be some international market that is not as profitable as some of the domestic sales we have, then we are going to ship those solids into the domestic market. So that's how the team is looking at leveraging margin and leveraging the limited amount of solids they have. So if they cannot extract the full value of the milk price in the international commoditized market, then they'll sell those solids into the domestic market and take price increases.

Correct.

Okay. The Australian market, you had said earlier that you've taken price increases domestically as well. How are those sticking? Because I know it's quite competitive there regardless of the milk supply under supply this year?

Yes. Look, we are seeing some cheese, I'll talk about cheese and milk separately. I mean, we are seeing some cheese price elasticity, but it is in line with our expectations because there's often some short-term bumpiness in volumes, but they are settling. And again, we've got a diverse portfolio in terms of the portfolio of brands across the Australian portfolio, whether it's everyday cheese or whether it's some of our specialty cheese brands. So particularly in everyday cheese, yes, we're seeing volumes continue to be stable, value is higher. Our special cheese a little bit less so, little bit soft -- the more softness there. As far as fluid milk is concerned, yes, competitors as well are significantly increasing pricing on fluid milk. So we are seeing price increases being passed on, not just ourselves.

And we'll get to our next question on the line is from Chris Li from Desjardins.

I'm just curious, in your experience, how sticky are the price increases? If you assume costs start to stabilize or even come down a bit next year, is that going to create a nice tailwind for margins assuming prices hold?

Yes, that's an answer that perhaps that we might need to go around the different geographies to understand just how sticky those price increases are. And it's relative to competition, domestic competition. So maybe we'll go around the horn, maybe we'll start off with Carl in the U.S. and Canada, and then Leanne can talk about the 3 platforms that she's responsible for.

Yes, it's a great question, and we don't have a lot of moments in our history where we would have had that kind of deflation or potential deflation occur. But what I can say specifically for Canada is the lion's share of the cost increase passed on to customers is coming from the raw material. And very rarely have we seen that sort of reduced on a year-over-year basis. But should that be the occur at some moment in time, we will actually -- we will absolutely be looking at overall cost structure and doing what's best for our customers and consumers to ensure that our brands and our volumes remain competitive in the marketplace. In the U.S., there's a number of dynamics behind our pricing, and we're regularly reviewing costs with our customers. So Chris, in the end, what I would say is should that occur where we start to see a material amount of deflation, we will ensure that we remain competitive in the marketplace and do what we need to protect our brands, our customers and our volumes.

Well, first, Chris, with Australia, I think the -- as we know, the milk supply is constrained there. And therefore, it's a very high -- it's a higher milk price than we've seen historically. And having said that, the domestic returns for that price being the significant part of the input costs instead is being passed on to consumers and through the brands. And the returns for that are reasonable. Therefore, we don't anticipate there being any rollback from a pricing perspective. Of course, there is opportunity for us within the portfolio to make sure that we can provide the right price points for consumers from the different brands that we have. I mean in Argentina, being a hyperinflationary environment, they're very familiar with passing on price, and that continues to be the case. And in the U.K., again, we are seeing some cheese price elasticity, but we are investing behind our brands, and we expect to continue to invest in them, whether that's around innovation that's coming in from our Cathedral City brand in particular. And as with our butters and spreads, we are the #1 spreads business. And in fact, actually, our volumes are very strong there at the moment with butter pricing, as you've heard also increasing. So we think we have the right portfolio and the flexibility to be able to do that. In addition, then be able to have private label availability at good margins. So we can manage as price -- as price adjusts and the inflation adjusts over the next 12 months.

Yes. Chris, the only other color that I would add to your question is that in all geographies where we operate, we are not seeing any irresponsible behavior by any of our competitors. I think everybody suffered over the course of the last 18 to 24 months, especially with inflation and labor and logistical costs. There is no irresponsible behavior. I think everyone is being pretty responsible about taking price where they need to take price to cover some of their increased costs. We're no different than that. In fact, in many cases, we are leading the market on those initiatives.

Great. That's very helpful. Maybe just one last question for me. You've been quite transparent with quantifying the EBITDA benefits from the optimization of manufacturing processes, which I think account for about 1/3 of the $650 million of EBITDA as part of the strat plan. I guess my short question is, are you on track for the other 2/3 of the EBITDA? Do you have good visibility on that? And is that also going to be more weighted in the last 2 years of the strat plan in terms of realizing the EBITDA benefits?

Yes. So Chris, the simple answer is yes, we are on track. We feel very, very good about our initiatives and achieving the optimization initiatives in fiscal '24 and fiscal '25. As I had indicated in previous calls, early fiscal '22 and '23, we're calling for the investment plan and the purchase or the POs on purchased equipment. Somewhere within fiscal '23, there is going to be some installation beginning, but the real benefit of those plans will be in fiscal '24 and fiscal '25 and our level of confidence to achieve the optimization that is called for in this strat plan is very, very high.

[Operator Instructions] And Mr. Estrela, there are no further questions at this time. I'll now turn the call back to you.

Thank you, Tommy. So we thank you for taking part in the call and webcast today. Please note that we will release our second quarter fiscal 2023 results on November 3, 2022. Thank you, and have a great day.

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