Greeting and welcome to Saputo Inc. Second Quarter Fiscal 2023 Results. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session [Operator Instructions] As a reminder, this conference is being recorded today Friday, November 11, 2022. It is now my pleasure to turn the conference over to Lino Saputo, Chairman and Chief Executive Officer of Saputo. Please go ahead.

Thank you, France. Good morning and welcome to our second 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 second 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. I'll now hand it over to Lino.

Thank you Nick, and good morning, everyone. First, I'd like to recognize today is Remembrance Day in the Commonwealth and Veterans Day in the US. I'd like to take a moment to honor the brave veterans and troops who have dedicated their lives to serve our communities and to remember the sacrifices they've made for our freedom. Turning now to our second quarter results, we delivered strong growth across all key metrics; revenues, net earnings, adjusted EBITDA and adjusted EPS, driven by our successful efforts to mitigate inflation, our efficiency and productivity initiatives and sustained consumer demand. Consolidated revenues increased 21% versus the prior year with each sector delivering year-over-year growth. From a pricing perspective, we had good momentum as we realized higher broad-based pricing, reflecting higher input and logistics costs. We expect our pricing protocols along with our ongoing productivity and cost containment initiatives to mitigate the effects of inflation and commodity market volatility over time. Beyond pricing, investments in our people are making an impact, higher paid and enhanced benefit offerings, referral and retention bonuses, modified work schedules and improved onboarding training programs have all led to increased applicant flow and hiring in our production facilities, notably in the US. As a result, our service levels and fill rates are improving. We continue to accelerate our productivity and efficiency actions across all sectors. In our US sector, for example, where it has been more challenging, order fill rates are getting closer to historical levels. Consumer demand for dairy has remained relatively steady and price elastic elasticity has held up better than expected in most of our markets, but we are monitoring closely for signs of changing consumer behaviors, with the average cost of the consumer basket continuing to increase. In some cases, demand is still outpacing our ability to fill supply. There are several category trends that should benefit us in a more challenging and highly inflationatory macro-environment. This includes greater at home consumption with hybrid work only accelerating this behavior. Our diverse portfolio also allows us to meet consumer and customer needs across a broad range of products and price points. While we continue to navigate this dynamic environment, we are not losing focus on the long term. As we think about the long term, we're keeping ESG top of mind. The Saputo promise remains a key pillar of our Global Strategic Plan and is another important way, we are investing for the future for our employees, our communities, and for our planet. We recently reached an important milestone celebrating the fifth anniversary of our promise. Over the last five years, we have embedded environmental, social and governance factors into operational and business decisions, and in our long term incentive plans. Our targeted initiative support our Global Strategic Plan and our new three-year Saputo promise plan will enable us to continue to drive and support sustainable growth. Execution is already underway to meet our new three-year goals with a focus on, among other things, reducing environmental impacts by delivering on our 2025 environmental pledges, supporting the transition to a sustainable food system through our supply chain pledges, notably with the recent launch of our sustainable agricultural policy, improving gender representation, diversity and inclusion, and improving the nutritional quality and performance of our global product portfolio to meet consumer needs. We look forward to updating you on our progress towards these goals as we continue to take the necessary steps to offset macro headwinds through pricing, productivity, cost containment, and capital deployment. These actions leave us well-positioned to benefit when our markets stabilize. We will continue to prudently manage our business and focus on the things we can control in what remains a volatile operating environment while executing on our Global Strategic Plan initiatives to accelerate our business momentum. I will now turn the call over to Max for the financial review before providing concluding remarks. Max?

Thank you, Lino, and good morning, everyone. I will cover the consolidated financial performance before I move on to the sector review before I move on to the sector review. We are encouraged with the continued momentum of our business and we delivered good results in the second quarter. Adjusted EPS was $0.42 per share, up 50% when compared to the same quarter last year. Consolidated revenue were $4.46 billion representing a 21% increase. Revenues increased due to pricing initiatives implemented in all of our sectors, higher average block market price and a higher average butter market price in the US sector and higher international cheese and dairy ingredient market prices. Ongoing inflationary pressure on input cost and commodity market volatility were successfully mitigated by pricing initiatives. Adjusted EBITDA amounted to $369 million, a 30% increase when compared to last year and up 6% versus last quarter. Our improved results were led by continued solid performance in the International and Canada sector and a further recovery in our US sector. Higher year-over-year adjusted EBITDA was driven by previously announced pricing initiatives to mitigate higher input costs and the favorable impact from the relation between international cheese and dairy ingredient market prices and the cost of milk as raw material. We continue to benefit from our cost containment measures aimed at minimizing the effect of inflation and our efforts to prioritize efficiencies and productivity initiatives. Although we are progressing with our labor initiatives, we still face labor shortages in some of our facilities and supply chain challenges, which put pressure on our ability to supply ongoing demand. These factors, along with reduced milk availability in Australia negatively impacted efficiencies and the absorption of our fixed costs. We continue to actively manage these challenging market condition as well as US market factors that continues to be negative. During the quarter, we recorded $22 million, $16 million after tax of restructuring costs, which included a non-cash fixed asset write-downs totaling $19 million. These costs were incurred in connection with previously announced capital investment and consolidation initiatives in the US sector being undertaken as part of our network optimization pillar of our Global Strategic Plan. Net cash generated from operating activities amounted to $343 million up $79 million compared to the $264 in the same quarter last fiscal year. I'll now take you through key highlights by sector, starting with Canada. Revenue for the second quarter increased 10% when compared to the same quarter last fiscal. Revenue increased due to higher selling prices in connection with the higher cost of milk as raw material and pricing initiatives implemented to mitigate increasing input and logistical costs in line with inflation. Sales volume were higher in the food service market segment, mainly in the cheese category, partially offset by lower volume in the retail market segment, notably in the fluid milk category. Adjusted EBITDA for the second quarter totaled $136 million up $12 million versus the $124 million of last year. Pricing initiatives, a favorable product mix, further benefit from continuous improvement program and lower SG&A costs, stemming from our cost containment initiatives also contributed to our improved results. In our US sectors, revenue were 35% 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 of the higher average butter market price. Sales volume increased due to improvements in our ability to supply ongoing demand and the contribution from recent acquisition. Adjusted EBITDA in the US sector totaled $102 million, compared to $67 million in the same quarter last year. The year-over-year improvement was mostly driven by previously announced pricing initiative to mitigate higher input cost. The negative net impact of $27 million of US market factor as compared to the same quarter last fiscal year was mostly the results of the negative spread between the block price of cheese and the cost of milk as raw material. In the international sector, revenues for the second quarter increased by 15% while adjusted EBITDA totaled $97 million up $41 million versus last year. The improvement in revenues were due to higher international cheese and dairy ingredient market price. Revenue also increased due to higher sales volumes in our domestic markets, along with higher domestic selling prices, mainly in connection with the higher cost of milk as raw material. Fulfilling the demand for our product in our export market was challenged by reduced milk availability in Australia and resulted in lower export sales volumes. The improvement in adjusted EBITDA was driven by a better relation between international cheese and dairy ingredient market prices and the cost of milk as raw material. This was partially offset by the negative impact of the reduced milk on our operating efficiencies in our dairy division Australia. In Europe, revenues were 4% higher when compared to the same quarter last fiscal. Revenue increased due to pricing initiatives implemented to mitigate the higher cost of milk as raw material and other input cost increases. Sales volume decreased due to the added pressure on the retail market segment from inflation driven pricing action. Sales volume also decreased in the industrial market segment, mainly in the dairy ingredient category. Adjusted EBITDA in Europe for Q2 amounted to $34 million, which was $2 million lower than the same quarter last fiscal year and unfavorable product mix due to lower retail volume was partially offset by pricing initiative set in place to mitigate the higher cost of milk as raw material and other input costs in line with increased commodity and energy costs. With regards to energy costs, we did see a rapid increase in energy costs during the quarter. We expect these costs to remain elevated for the balance of the year. Finally, the impact of the fluctuation of the British pound versus the Canadian dollar had a unfavorable impact of $4 million. So this concludes my financial review and with that, I'll turn the call back to Lino.

Thank you, Max. We are pleased by our continued revenue and adjusted EBITDA growth. We entered the second quarter with optimism, having implemented the necessary pricing actions to further mitigate inflation. We are also making progress on the labor attraction and retention front as well as our productivity initiatives. These are critical components to drive margin recovery and ramp up our adjusted EBITDA in the back half of the year. Turning to the business review beginning with Canada, we are building on the momentum of the business led by our balanced, flexible and diversified business model. We had another strong quarter posting solid revenue growth with positive price and product mix. Our top line performance also drove good growth in adjusted EBITDA where we benefited from strong manufacturing efficiencies and cost containment from our continuous improvement programs. On volume, growth was driven by the food service market segment led by both full service and quick service restaurants. New product innovations within our leading brands are showing promising early results with new flavor extensions and formats. For example, our Armstrong combos and strings and the Vitalite dairy free lineup, further expanded distribution across Canada with new listings at major retailers, and we have a strong exciting lineup of product launches set up for Q3, notably in the shreds and lactose free categories. In the US, despite a challenging operating environment, ongoing inflationary pressures and a volatile commodities market, we significantly improve both revenues and adjusted EBITDA. We are taking decisive action to offset inflation with pricing and cost containment initiatives. We are also sticking with our approach of prioritizing value over volume, working to strategically sell our volume where we can improve or protect margins, even if that means walking away from some volume opportunities where we do not see acceptable returns. This allows for a stronger and higher margin revenue base from which to grow. These elements serve as guiding principles to drive efficiencies at all levels of the company. As mentioned in my opening remarks, we are seeing a recovery and labor with staffing level levels reaching over 90% as of October. This is better than we were earlier in the year, but still below where we need to be. Nevertheless, the improvement has contributed positively to our production volumes and order fill rates, no notably in the cheese category. Increasing production and filling ongoing demand remains a critical priority for us. We believe that our recovery in the US sector sits on solid footing as we enter the second half and we expect to build on this foundation. Although we recognize that current margins reflect some of the ongoing inflationary pressures and suboptimal productivity and fill rates, we are confident in our plans to improve results and margins over time. On the commercial side, the Frigo Cheese Heads brand Back-to-School campaign was launched in September and we are seeing strong results. The cross-platform videos have generated over $12 million impressions so far, while premium streaming video partnerships have led to over $52 million impressions. In addition, phase two of our Vitalite dairy free campaign is set to begin with a focus on continuing to drive awareness across our key markets where we have distribution. In the international sector, we had an excellent quarter 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 in Australia. Results improved versus last year despite a competitive milk supply, which continues to negatively affect our operating efficiencies and increases the farm gate milk prices. The sector benefited from higher commodity prices in the export channel and from broad based price increases across most product categories in the domestic market. As part of our Global Strategic Plan, we announced earlier this week further consolidation initiatives intended to enhance our operational efficiency and strengthen our competitive position in Australia. These initiatives include the intention to permanently close our Maffra facility. Additionally, while the sites will remain operational, we will also streamline activities at our facilities in Leongatha and Mil-Lel, South Australia. These right sizing measures are part of our roadmap to increase capacity utilization, reduce costs, and drive improved returns on invested capital in Australia. We continue to reevaluate our Australia network and all our global platforms 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 in Europe results were in line with our expectation considering rising milk and energy costs and the overall cost of living challenges in the uk. Pricing actions drove revenue growth in the quarter, which were offset somewhat by volume declines, where as expected we have seen signs of increasing price elasticity. We expect volume recovery in the second half of the fiscal year. However, as the overall demand for cheese remains strong in the UK and the price gap to private label is narrowing. Moreover, we have several new volume wins within our private label business in the pipeline. We continue to further differentiate our Cathedral City brand and leverage its brand power to meet the growing consumer demand for a lighter mature cheese that delivers on taste and quality. We launched in select retailers, the new Cathedral City Light with 30% less fat in our new easy to open resealable packaging. I'm also excited to announce that we launched the Cathedral City plant-based range exclusively at Tesco stores with a national launch plan for next year. Sales to date have significantly exceeded our expectations. Our international expansion of the brand continues with increased distribution in the US and in Canada. Additional new listings are planned for Germany and Austria, and we've identified several new target markets for potential expansion. Looking ahead to the second half of fiscal 2023, we expect to see continued strength in our revenues driven by the impact of pricing, actions and progress on operating efficiencies. We are assuming a moderate level of volume elasticity, although thus far we have seen a marginal impact on the input cost side. We expect for them to remain elevated operationally, we are making progress in our areas of focus and what remains a highly volatile operating environment. Execution will be key going forward, and I'm happy with the progress that we're making. We recognize that there is more work to do, but we believe that we have sustained momentum in our first and most of our business sectors. We feel good about our year to date performance and we feel confident about our second half outlook. We remain focused on our Global Strategic Plan initiatives delivering on our fiscal 2023 priorities and driving sustainable profitable growth for our shareholders. I thank you for your time and I will now turn the call over to Frans for your questions.

[Operator instructions] And our first question is from the line of George Doumet with Scotiabank. Please go ahead.

Guys, good morning. Lino, I was wondering if you can elaborate a little bit on your comments on, on price elasticity increasing moderately in the second half, maybe any segments, any end markets that you could point to that just give us a little bit of color in there.

Yes, George, so that price elasticity comment would be different from different geographies. So what I would like to do is perhaps pass this question over to Carl for United States and Canada and then also get a feel for what's happening internationally with Leanne's platform. So Carl, why don't you kick this off.

Thank you, Lino. So maybe we'll start off with Canada and maybe speak to a little bit about the areas in which we supply products in. So of course we have a branded business as well as a large supplier to the private label space, and there is some elasticity of course in our product offerings. But if consumers and we are seeing a bit of a trade down from branded to private label, we continue to have strong volumes and strong demand from that marketplace. So, from that perspective and from a general profitability standpoint both private label and the retail offerings are important for Saputo. In the US, I would say the same thing. Again, the breadth of our portfolio allows us to play in a number of spaces, both branded and private label in nature. So despite the elasticity that we are seeing across the board in all of the grocery sector for that matter we feel we're in a good position based on how it is, our product offerings are segmented in the US

And in the UK, George, we are seeing consumers trading down to private label. At the same time, what we are seeing is that that gap between retail and private label pricing is narrowing. And we've seen private label pricing on shelf rising quite recently. And at the same time in a similar fashion, we also from a portfolio perspective, have a range of products in both retail and also private label. And in the UK, we are continuing to win new private label contracts, and that's on the back of our quality and service levels, and we are getting good margin for that private label. So yes, although we are seeing we are seeing some moderate price elasticity, we do actually have the portfolio that, that diversification of the portfolio where we can match the consumer's expectations to the right product, both across cheese and also spreads. In the UK the cheese category actually is performing better than overall grocery, as consumers still see dairy as an affordable source of protein.

Yeah. George, the only thing I would add to that is that we don't only sell at retail. We do sell our products whether they would be dairy foods in nature or cheese products. We do sell them products. We do sell them at different sales channels in the food service space including QSR and full service restaurants. And, and what we're seeing is that consumer traffic patterns are changing and shifting relative to their disposable income. And we fill the gap at every level on the food service trade. So if consumers are, are going less to full service restaurants and more to QSRs, we're in that space. So we're not overly concerned at all about price, elasticity moving forward. First thing is that we found historically that in challenging economic environments dairy products have fared extremely well. Saputo has fared extremely well in those environments, and irrespective of where the consumer consumes that dairy we have customers and contacts and products in all of those channels. And I would say that the levels of profitability are pretty similar channel to channel product to product. And I would also say from branded to private label. So we're not overly concerned, however, we do watch traffic patterns and customer behaviors very, very closely.

Great. Thanks for that Lino. Just one more, if I may. On the Canadian margins, they were down a little bit quarter-over-quarter. Can you maybe talk a little bit about the pricing versus the cost dynamic there and maybe the path to margins? How should we think about the margin expansion path, maybe over the next little bit? Thanks.

Good morning, George. So margins in Canada yeah, there's a bit of a sort of a little contraction there as a result of price increase, when everything goes up the percentage, by nature tends to narrow down. We don't see any issues on that front. The level of profitability we're generating in Canada is to our expectation. And the momentum that we built over the last couple of years, we're starting to see some benefit this year, this current year. We don't see any obstacle to maintain at this time that trend. Although, economic, remain always uncertain there's always the labor piece that we're facing. And that's what I would say. I don't know if Carl, you have anything to you'd like to add here?

I would just add that with those input costs and inflationary pressures that continue to put pressure on us, we did go to the market with a price increase toward the end of Q2. So in September range we did adjust some of our pricing to reflect the ongoing pressures that we have on some ingredients costs, as well as specifically in the logistics space as well. All right, guys, thanks for that great order.

Our next question is from Irene Nattel with RBC Capital Markets. Please go ahead.

Good morning, everyone. Let's just focus for a second on the US please. So, really nice improvement in dollar earnings, but obviously margins remain extremely depressed. Can you please talk us through where you are now in terms of the labor? You said service levels are, are up, but not where they need to be and where are we in terms of productivity and efficiency from a labor perspective? And then I guess finally, how we should think about bridging the gap between the current level of profitability and where you need to be. Thank you.

Thank you, Irene, for the question. I would answer, I mean, you hit all, all the points that will really help the US business drive its margin improvements and we are making month to month improvements in all of those areas. Maybe starting first with labor, so across the board like I said, we are making improvements in attracting the, the right talent as well as retaining it. And this is not just, I'll use the word headcount. It's also attracting the right talent and ensuring that the appropriate skills are in place so that we can have the types of efficiency that we expect from our business. And in embedded in efficiency of courses first pass quality which in itself then helps us drive our fill rates forward in our overall margin structure. I can say that confidently we are making headway on the labor front, which will have an immediate impact on our overall OEs or efficiency and subsequently our fill rates will continue to improve as they have been quarter over quarter. We're heading into Q3 period, which is seasonally for us an important quarter for the US lots of demand and we're seeing the resilience in our supply and we, we look forward to building off of that momentum into Q4 as well.

That's really helpful, thank you and then another question on a different topic. M&A is something that we know that, I shouldn't say that. Can you talk about your current your current thinking around M&A and Saputo is recently floated as a potential acquirer, certain assets in Chile. Can you talk about how you're seeing different markets and whether you would go into a new market at this point in time?

Yeah, so the pipeline for M&A remains quite full. And, I would say that I would think that the activity on files would only increase with uncertain economic futures. It is important for us to remain disciplined. It is extremely important for us to be selective. And so your point on what geographies do make sense for us and what geographies don't make sense for us, I would say first and foremost whatever we do needs to be immediately accretive to the organization. We need to be able to generate positive cash flow from any potential acquisition that we would make. So that is one criteria I think that has differed from perhaps past potential targets. The fixer-uppers, the kinds of businesses that require a lot of time and attention and CapEx are not really on the radar screen for us right now. The time and attention relative to CapEx and execution of more improvements will be relative to our current platforms as stated in our strategic plan. But if there is an opportunity for us to get into a, a, a category of product within a region that makes sense for us, that gets us further along in our strategy plan than we currently are, then yes, that is something that we're going to take a look at. And we, we do and we will find the ability to be able to make that happen. So when we look at different countries and regions, there might be some nice things to have but are they must haves; perhaps not. Then either the price has to be extremely, extremely good where those assets are day one or we just pass along and move on to other things. Right now the primary focus for us is the execution of our strategic plan. That is what we think about every morning when we wake up and we don't stop thinking about it until we go to bed at night. But we can't forego the opportunity to make a very good, nice acquisition that will further solidify our foundations. But again, as I mentioned, we will be extremely disciplined and extremely focused and extremely selective as what assets make sense for us. Don't get me wrong, I mean, we'll be involved in all those files. We'll look at them. Our M&A team knows how to sift through files and do a proper triage of what we should be looking at and what we should not be looking at. And so you'll see from time to time that we will be linked to certain assets that are available on the market. Doesn't always mean that our level of interest is extremely high in every single one of those files.

Thank you very much for that. Very comprehensive, and we know and confirming, we think what we think we know already. Thanks.

Our next question is from Vishal Shreedhar with National Bank Financial. Please go ahead.

Hi. thanks for taking my questions. Just wondering where Saputo is in some of these productivity and efficiency initiatives, and maybe when we should start seeing them in the P&L flow through in a bigger way. I know they're expected in H2, but in terms of, can you give us a sense of magnitude of Q3, Q4 and how meaningful and we should really start to see these improved the results.

Yeah. So Vishal, there are two platforms that need to crank up their levels of efficiencies for different reasons. One is the us the other one is Australia and there are very different initiatives going on to reach the same goals in each of those countries. So I'm going to ask Leanne to speak to Australia. As you've seen, we made some announcements this week relative to the network optimization. I'd like Leanne to talk about that in a little bit more detail, and then I'll pass it on to Carl to talk about similar initiatives that are going on in the US. Leanne?

Morning, Vishal. Yeah. So the announcements that we've made this week in relation to our Australia platform really does improve both the -- both our efficiency and also our capacity utilization. So the assets we've made around the closure of one of our sites and streamlining it at to others means that we can actually move a number of production and packaging functions to be integrated into other facilities. That's going to improve overall utilization. It's going to reduce our cost, and really it gives us a chance, it gives an opportunity to be able to improve our competitiveness. And we value, we want every leader of milk. So it's important that we're focused on putting those into the right products, in the right spaces, in the right markets. So that's really why we've made those decisions and that allows us to be able to make the most of every leader of milk. The industry is adapting to a, a reduced milk supply overall. And importantly, Australia has high quality milk. It's still an extremely strong demand worldwide, and therefore, our priority is to make sure we are being increasingly competitive. And so it's important that what, what do we do with that milk? Where do we put it and that's the basis for the decisions that we've made this week. Or maybe further on that Leanne timelines on where we are, we're going to start to see some benefits of these actions.

That's right. So, this will start to happen for in the first three months of 2023.

Michelle, are you satisfied with the review of Australia before we get onto the US.

Absolutely. Thank you.

So maybe in the US they be two buckets in two areas that will fundamentally improve our margins. And I'll, and I'll speak to them separately. So from a CapEx perspective, we have made some facility consolidation announcements in, in late summer. And the benefits of those types of activities will only come to fruition, 12 to 18 months from now. The other announcements that we have made and other things that we are contemplating in a way of our network optimization will deliver primarily in fiscal '24, in fiscal '25. But prior to that, there are lots of things that we are doing on the basic efficiency side of our business that will continue to deliver EBITDA margin and into our bottom line. And those are along the lines of what I've I described for Irene earlier which is augmenting the throughput and the output with the existing assets that we have in itself, the demand is there. We need to be able to deliver on it, and we're making progress every week, every month at being able to do that. And we should see that delivered here through Q3 onwards at a greater pace.

Okay. Thank you. And just another question to if it's okay, to pick up on M&A, how could an investor look at Saputo M&A aspirations and, and understand that Saputo still can execute on this Global Strategic Plan, which is very detailed, lots of levers very complicated to execute, and while still making, doing M&A in a tough time period, some of the deals in the past may not have worked out as anticipated. So wondering if there's any, I know you said you're going to be disciplined and diligent, but, I presume that's the intent every, every acquisition that you make. So I guess, I'm asking how do you know that it isn't too soon and the org can handle it, and the actual deal that you make will be accretive not just on EPS or EBITDA, but on ROIC as well, and push the entire business up?

Yeah, Vishal, that's a very fair question. For us to, to inherit a new business that is operating well in a different category or perhaps a value added product that would offset some of the headwinds that we have now, would be an easy tuck in type of opportunity for us. Our sales and marketing teams, although they're busy with SKU rationalizations and some promotional activity, are not burdened the same way that our engineering and operational team is. And so we need to be extremely selective, as I said when we're looking at files, if it is going to further tax the engineering and the operational team, then I'd much prefer that they're focusing on the strategic plan. But if we're going to make an acquisition that's going to energize and excite our sales and marketing team with new categories of product, perhaps new branding more diversification that allows them to have leverage when they're bringing other products to market, then those are types of things that we would consider. Now, let me say that not all of our divisions are taxed the same way. Canada's got a platform that is just rolling and, and this team is doing extremely well with what they have, and they can take on more responsibility. I would say the same thing for Argentina, our Asian platform. This is a group that deals with turmoil and headwinds in a way that I have never seen any other group deal with. Since 2001, since we've been in Australia, they've had to deal with so much instability, and they've always been able to deliver on the promises that they've made us. And so if there is an acquisition in a region or a country that would enhance that platform the Argentinian group would be very, very well equipped to tackle that challenge. I would be a bit more careful about doing some acquisitions in the us and in Australia and in the uk. Because the UK right now is integrating the, the Bute Island and the Wensleydale Acquisitions. And on top of that, they're dealing with uncontrollable circumstances that none of us had anticipated prior to even the beginning of last fiscal year with the war in Ukraine, and changing some of their ingredients because we can have access to sunflower oil. We've got to go to grape seed oil now. So all the recipes have to change, and there's butters and spreads and oil based products in addition to energy costs. So I would just allow the UK business to focus on integrating what they currently have. I would have the US platform focus on investing in capital dollars from an operational perspective to get our plants running. Well, I would have the Australia team look at how we can optimize our network with the amount of milk that we have. So our cap capacity utilization get back to historical levels. That would be the top priority. But if there is an opportunity for us to take on a category of product or a brand that would not take the focus away from the operational or engineering team, it's something we have to take a look at. And again, we'll be disciplined. We'll be focused on making sure that those acquisitions, if we do them, that they are accretive. Vishal, you made one comment that I'd like to touch upon in a bit more detail relative to our past acquisitions. I, I, there there's perhaps maybe one or two acquisitions I can point to that perhaps have not materialized. But the benefits that we would have expected historically I would say in the, I'm not sure how many acquisitions we've done since we went public, maybe 36 or 37. I'll get that for more accurately. But every single one of those acquisitions, with the exception of one or two, have driven a benefit for us, whether it is, again, product diversification, getting into new categories, getting into new regions, into new countries they all made sense for us. And I would include in there Murray Goulburn. Murray Goulburn was a distressed asset. None of us would have predicted the pandemic coming. None of us would've predicted the, the massive decline in milk. But there are some real great assets that we inherited through the Murray Goulburn acquisition, which today are going to drive the value for our Australian platform. If we had to do Murray Goulburn burn again, I would do it in a heartbeat, perhaps not in a heartbeat, perhaps not in this context right now. But as things stabilized, I would certainly do Murray Goulburn in a heartbeat. There are some brands that we picked up that the resonate, not just with domestic consumers, but consumers around the world, especially in the Pacific Rim, there are assets and categories of product that we're in that are going to allow us to streamline our operations in a way where we're going to be creating high value category products not just domestically, but also internationally. So I take exception a little bit Vishal to the commentary that some of the acquisitions have not worked out the way that we had projected or anticipated. I would say perhaps there's one or two that I can point to that I'd say maybe they weren't the right acquisitions for us that didn't derive the right value. Other than that within the number of acquisitions we've done, I feel very, very good about where we sit right now and how they're going to be delivering for the future.

Our next question is from Michael Van Aelst with TD Securities. Please go ahead.

Thank you. So, just on the us this was the best US EBITDA print in about seven quarters, but the margins remain about half of its historical highs. So I'm wondering that with all the with all the efficiency programs and rationalization and everything that you've discussed today and in the past, how close do you think you can get to historical margins without seeing the, the spreads improve from where they are?

Yeah, so I'm going to ask Carl to speak to that. But really Michael, I just want to qualify that we're the margins are one thing. EBITDA cash generation is another. And so really our focus is on EBITDA and cash generation. Although the margins are absolutely right, they need to get better, they will get better but, but it's not a margin focus that we have. It's EBITDA cash value generation that, that we're looking at. So on that note, Carl, please take us through Michael's question, please.

Yeah, and much of the answer revolves around the same thing. We have, a fixed number of assets today. We're, we're invested through our CapEx plan in a, a number of network optimization projects, which will ultimately see us do more with less. So in that, in that space, we are confident that that will drive our margins by cost out. We'll also be employing different technologies through this capital investment program that will further enhance our overall cost base. There's -- we are investing also in automation that will help us with our overall cost structure. So we're confident that our margin structure will rebound despite the current commodities market. Now, specific to the commodities market, of course, it has an impact. We're not going to deny that we, we certainly have explained where the market was, is, and, and where it's going. The current outlook on the market is better than Q2, Q1 and last year as a whole. So from that perspective, although it's an uncontrollable we do feel that the short term outlook here is favorable versus the current quarter. But again, I want to emphasize we don't control that component. What we are focused on are the things that we do control. And right now that is all about our overall efficiency. And in order for us to be able to augment our, our outputs, it is entirely related to labor attraction and retention, delivering on our CapEx plan, which will lower our cost base and get costs out of our system, allowing us to bring that margin back to more comfortable places.

All right. That's helpful, Thank you. And then on the international side, again, very good profit growth there. Are you able to com compare and contrast the, the operating and performer and profit trends for Australia versus Argentina so that we can get a better sense as to what's driving that big improvement?

Well, the big improvement Mike did come from a better relation between the international prices and the cost of milk. That incremental benefit applies to both Australia and Argentina. So both platform benefited from those pricing. From an Australia perspective recall last year we were impaired by some of the previous old pricing contracts that has been unlocked during, the first half of last year. So now that it's, it's gone away. So that is part of the benefit that we're seeing. But I would say, the major benefit applies to both platform.

Okay. And as far as Australia's concerned there's some material floods in, in parts of Australia. I'm wondering how that's affecting your milk collection and as we're go through Q3 here?

Yeah, the floods we actually, there's no operational issues now with the floods. It was a short term issue, and we obviously supported our communities with that and in fact paid for any of the tipped milk that was required, but it was a very short term issue. And at the moment we are managing through that, so there'll be no impact for, for future quarters.

Okay, Perfect. Thank you.

Our next question is from Mark Petrie with CIBC. Please go ahead.

Yeah, thanks. Good morning. I just wanted to follow up actually on a couple of the topics that you've already touched on, but specifically with international. I had the same question as Mike, and I guess maybe to take it one step further, with regards to Australia specifically, how much, how could you gauge how much of the improvement in Australia has already been achieved? I'm just trying to get a handle on where international EBITDA margins could settle out, once all of your initiatives in in Australia have sort of been achieved.

Yeah, Mark, the benefit from initiatives for this particular half year has been minimal on that front. So we do expect some benefit to come in the latter part of this fiscal Q4 and moving on to FY'24. So there's minimal benefit accounted into our number this fiscal relative to strap plan initiatives, if you will.

And maybe just specific to sort of pricing being more in line with your cost base, has that been achieved? Has that balance been achieved?

Yes, in all of our sector we do feel we have appropriate balance of pricing versus cost of milk, commodity fluctuation and inflationary cost that we're, we're facing.

Yeah. Okay. And then Carl, you touched on sort of the commodity. Hoping you could provide maybe a little bit more commentary just with regards to sort of the outlook with regards to pricing and demand. And, and then related, I guess, what kind of progress have you been able to make with regards to revising contract terms? I think specifically in the US to reduce reliance strictly on the block price? Thanks.

Let me maybe start with commodity markets. So the commodity markets from a spread perspective, there's been a progression from quarter, quarter and a current outlook is also favorable. So that we are optimistic about that component, but when it comes to overall prices we're, the business is quite resilient. Certainly the market is the index by which we price on. So pricing protocols are absolutely a function of these indices, and we're not seeing any real demand destruction because of it at all. So from a demand standpoint as it relates to pricing that we're seeing on the CME no issues there as far as the changes to the terms and conditions with customers. So that would be specific to, customers by which we may have tolling rates with, or that we produce private label with if they are not priced on, on those indices in question. We have in some cases made important improvements in the terms and conditions. And these are ultimately to better reflect the real operating environment that we're all in from the fluctuations and volatility of the supply chain, which impacts our ability to receive packaging materials and ingredients and so forth. Those are the types of things that we've better reflected in our tolling rates. So in a number of key with a number of key customers, we have been able to make those changes, able to make those changes. And as far as those who are, have been traditionally priced on block or other components of the CME we continue to work with them in ensuring that we have better visibility under demand so that we can do what we can internally from the efficiency perspective on supply.

Okay. That's helpful. Thanks. And then just one other one maybe specific to Canada and the US, where do food service volumes sit today versus pre pandemic? If you're able to comment on that.

Yeah. The food, actually food service has, is certainly rebounding. So we've, we've seen the rebound in, in Canada, we've seen the rebound in the US and despite some of the some of the language that we're seeing in various publications about the potential for food service to slow down in these inflationary markets we're quite diversified in food service, both in Canada and the US and it's a great strength of ours because many of the channels in food service aren't created equal and QSR so quick service restaurant is not the same as full service dining. The hospitality industry, those two in particular are doing very well, and they're still doing well, and the outlook is very good. So from the food service perspective, we do believe that the rebound that we've seen from pre pandemic we're not overly concerned with any material kind of slowdown. They are not at the levels that they were prior from a volume necessarily perspective. But we're quite confident that we're getting there. And in some cases, depending on the channel, we, we will have already crossed over our pre pandemic levels.

Okay. Appreciate all the comments. All the best.

Our next question is from Peter Sklar with BMO. Please go ahead.

Okay, thank you. Just looking at the strength of the international sector, you called out, the favorable relationship between cheese and dairy ingredients relative to the, cost of the raw milk. And what I find interesting is, well, you have seem to have a very favorable spread there in the US as you've mentioned, like the, the cheese milk spread remains highly negative. So, I'm just kind of surprised that in some markets you get such a favorable spread in other markets, you get such a negative spread. Now I understand the US the market's much more regulated with milk marketing orders, but I would think that, markets globally are somewhat integrated and product does flow back and forth, and I'm just surprised that these two markets could be so out of whack. And I just wonder if you have any comments about demand supply dynamics and what's going on in each of these markets, and if you expect them to merge together in terms of the economics

Peter one element relative to our export, whether it's coming from Australia, but particularly in Argentina, is the fluctuation of the Argentina pesos. That puts us definitely in in a much better position from an export perspective, therefore selling product on the US dollar perspective versus peso where we do buy our milk and we do manufacture with those costs do create that favorable gap. So we've been pretty vocal over the years to mention that particular situation out of Argentina is favorable to us. And we do benefit from a better spread internationally that's certainly part of the mix. Anything you would like to add here?

Yeah, when we're talking about spread, it's a very different dynamic of what we face in the US platform specific to cheese because dairy foods has different pricing protocols altogether. But, the dynamics and the infrastructure for dairy pricing on cheese categories and cheese products in the US is nothing like we face in any other part of the world including, if you look at the increase in price of milk in Australia over the course of this last year, we've gone to market with two price increases. The last one being not that long ago, two weeks ago 15% increase on one and 15% increase on the other. So a total of 30% increase, that's all reflective of the of the increased milk price. The US cheese business does not operate the same way. And we cannot unfortunately get ourselves out of sync with how the market prices achieve products in the US because then we'll be out of step with our competitors, and they, and then we will allow the buyers to shoot buyers on the market, to play us against our competitors when it's to their benefit. So it, it, it's, when you think about spread not all spread is equal US being perhaps the most complicated and, and the most challenging.

So, Lino like this negative, classic cheese milk spread that you have in the US as measured against the block on the CME, could you explain like how you see this coming back into positive territory eventually in terms of demand supply for milk and other factors? I'm just wondering how does this thing swing positive? What happens to happen? What needs to happen in markets and supply demand balances? Lino Saputo Peter, maybe I would answer. I, I wouldn't hold my breath on it being positive as far as the spread goes, but we definitely are seeing improvements and, and the path to that really it comes down to actually, let me take one step back. When it comes to international and the US the only thing I would say is you're absolutely right. There they are and have been intertwined. But the reality is that in the US there's, there's a, a buffer and at, at some point in time, those markets will align, but there's been a large volume of cheese and inventories, a large amount of commodities and inventories that have had influences on the CME on that market in particular. So the path forward if you like, when it comes to the US to a better spread is having normality in demand, less volatility, those markets will improve naturally. One of the reasons why we also have these larger negative spreads isn't necessarily the absolute values of the, of the, of the of the product that I traded on the CME. It's actually the, the fluctuation of them over a short period of time that causes in itself quite a discrepancy in the price of milk and or the block price of cheese that has been created, created the environment that we're in. So the path forward ultimately is going to be an environment where inventories are a more manageable level for everybody, more predictable demand from the marketplace that sorts itself out when it comes to the overall price of each of the components that goes into the milk price. With that in place, we will see the stability, whether it's favorable or not from a spread, very difficult to say, but it'll certainly improve from the negative territories that it's we've been operating in for the last 12 to 18 months. Yeah, and Carl brought up a really good.

Sorry, Peter. I just want to add to what Carl said, because I think it's an important point. We we're not hopeful that the spread will go positive. In fact, we're not banking on it. All of our projections that we're making are that we will trade in a negative spread environment. We think that that is a new reality and despite that we believe that we can hit the targets that we set for ourselves.

Yeah, Lino, so that was my last question. I mean, the spread, I remember when the spread was positive. So what's changed in the world that now you're anticipating a permanent negative spread?

There is a factor that is relatively new to the USDA system of calculation. And that is the variables that includes whey and now that factor has been in place, Carl, correct me if I'm wrong, I believe 2015 or so, but it's only impacted us in the last two years because the whey variable, the whey factor, and the whey pricing has only exponentially increased over time. Whey at $0.25, even $0.30 is a neutral cost to our milk. Anything beyond that, it's actually costing us money in way of a negative spread. And we saw, going back to Q4 of last year, a negative $0.41 spread while the weight was at 85 cents.

Okay, got it. Thank

Whey is sitting now at around $0.44. I don't expect whey is going to go back to $0.25 where it had been historically. And this is why we're thinking that we will not get into positive spread territory anytime in the near future. And so all of our initiatives, ideas, projections and, and somewhat pricing sends and somewhat pricing has to keep that in mind.

Our next question is from Chris Li with Desjardins. Please go ahead.

Thanks for us using me in. I just have one question, know thanks for all your comments on the progress you're making on optimizing the manufacturing platform. It's very helpful. I was wondering, can you provide a similar update on the progress that you guys are making on the other key strategic pillars of your strat plan and maybe tie them to your confidence in achieving your $2.1 billion target EBITDA target by fiscal 25? Thank you.

Yeah, Chris, that, that is very a very appropriate question because really the challenges we've had over the course of the last year have been related to operational efficiencies. And that's why a lot of our verbiage and focus has been especially on these calls has been tied to that. But you're right, there are other pillars that we can speak to that will drive some value. And again, I'd like perhaps not in great detail because I think in next quarter we'll go into a little bit more detail with that for the market. But just to paint a sort of a broad brush on the other pillars Carl in your markets and Leanne in your markets, if you don't mind.

Okay. Well great question, Chris, and we are for, as focused as we are on our, our operational platform, both manufacturing and in our supply chain, we absolutely have very exciting things going on in the commercial space as well. Just to give you some, some, some examples in, in Canada in particular, we've been very focused on our press cheese category. So our Cheddars and our Armstrong brand, the Armstrong brand, has made tremendous strides over the last 18 months to 24 months. And very exciting use for where it is positioned in the marketplace in some recent launches that have come to market like a what we call Bacon, which is essentially a shred with bacon in it. So we actually have very exciting aspects on the commercial side coming along. Same in the US. We continue to invest in our, in our string cheese and our market leading brand cheese heads. Our, our, our strong positions in leading positions in in goat cheese and in blue cheese as well. So we haven't forgotten the areas that make us successful from a branded perspective. And we have a number of innovations that are coming to market have come and or continue to be on the radar for us to come to market. Some of it will be capital expenditure enabled others is, is portfolio expansion. And just a question of time And in the, I'll touch on the UK in in particular we have a very strong innovation pipeline for the UK and the most recent example of that was the launch of Cathedral City plant based, which is recent based down on the, on the quality of Cathedral City. It has, it exceeded all of our expectations and is actually driving incremental category growth. And that's just one example with the integration of Wensleydale we now have new variants from the Wesley do site both across the Wensleydale brand and also Cathedral City, which have been successful. So we have a number of, a very strong innovation pipeline in the UK. In Australia with Devondale, and also with Cheers, we continue to be able to, to put new products and new formats into the market which are, which are successful. And it's about also continuing to renovate our core our core brands as well. So yes, there are variants, but also our core brand as well as continually like revamped. And the other example around that, that core business is around our La Paulina brand in Argentina, which most recently is now the highest awareness brand of, of the cheese brand in Argentina. So that's alongside our successful tailored ingredients platform where again, we have a strong pipeline of ingredients that are tailored to individual markets, individual customers. We, we believe those other pillars are continuing to drive incremental growth for us into the future. And Chris, this is on top of some analysis that every division's doing relative to skew rationalization to have a more focused and targeted promotional and marketing spend program in every single one of our geographies. There's the ingredient portfolio as well that we're working on in terms of going up the value chain. So, there are other initiatives that we will speak to in more detail coming in the next quarters. But absolutely now that we feel comfortable about us moving forward on the operational initiatives there is going to be a lot more discussion, verbiage and documentation relative to the other pillars because they also do matter in us achieving the strategic plan goals that we have set for ourselves.

Great. Yeah, that makes sense. Thanks. Thanks very much. And all the best.

And Mr. Estrela, I'll turn the call back to you for your closing comments.

Thank you, Frans. So we thank you for taking part in the call in webcast. Please note that we will release our third quarter fiscal 2023 results on February 9, 2023. Thank you and have a nice day.

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