Video, which will be followed by a short Q and A session to address any questions related or adjacent to the video. Then the team will provide a quick business update before we all transfer to Webex for our main Q and A period with the full management team. In addition to Lino, Max, and Kai, joining us today are Gaecan Wagne, Chief Human Resources Officer Martin Gagnon, Chief Acquisition and Strategic Development Officer Carl Kalitsa, President and COO, North America and Dairy Division USA Lynn Castongate, Deputy President and COO, Dairy Division USA Tom Atherton, President and COO, Dairy Division, UK Marcelo Cohen, President and COO, Dairy Division, Argentina Frank Guido, President and COO, Dairy Division, Canada and Richard Wallace, President and COO, Dairy Division Australia. Before we begin, I remind you this webcast is being recorded and will be available on our website. Please also note that Some of the statements provided during this event are forward looking.
Such statements are based on assumptions that are subject to risks and uncertainties. We refer you to our cautionary statements regarding forward looking information in our annual report, press release 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 to kick things off.
Thanks, Inik. Good morning to you all, and thank you for joining us today. Although we would much prefer to host you in person, we're happy still to be able to connect with you remotely. This past June, for the first time in our history, we unveiled a 4 year global strategic plan to the market. It was developed from the bottom up with each of our divisions and builds upon our strong foundations and the many lessons learned throughout the pandemic.
Over the past 5 to 7 years, our business has expanded and become more diversified and more complex. We've entered different geographies and ventured into different product categories. As we continue
To grow our business, we felt it
was important to share our plans with the market. Now historically, our business has grown primarily through acquisitions, But we have also continuously invested in different platforms through CapEx allocations to drive organic growth over the years. Since the rate of our CapEx spend will be above historical trends, to support our new plan, We felt it would be appropriate to inform the market about how and more importantly, why we are spending this money and the expected return attached to it. We believe this will help investors better understand our plans and our ambitions throughout the next 4 years. A recent example of optimizing our network through strategic investments would be the multi year projects we undertook in Canada.
Today, we will be showcasing these efforts with a plant overview video. It will take you through the recent cheese capacity expansions at our St. Leonard and Saskatoon facilities and provide a closer look at our new state of the art Fluid milk and dairy alternative beverage facility in Port Coquitlam, BC. This is a good way for us to illustrate The approach we intend to replicate in some of our other divisions as part of our strategic plan.
The objective of Project UPS Saint Leonard Was to install a new retail mozzarella cheese production line. This 50 $8,400,000 investment represent an important milestone to meet the growing demand Of our customer. With the UPS project, we are now in an excellent position to increase our market share with modern State of the art facilities and improving performance and yield. The biggest challenge of the project UPS Eleonore was the Construction of a new line within the plan. We did that While we were in operation with the existing equipment.
And because there was not only one
line, but we had multiple lines that came in at once. We had packaging, we had Our new cheese bats coming in. We had the tunnels coming in. We had robots coming in, and they were all in different places in the plant. So all the equipment before it came in Needed to be swapped, then analyzed before we start any work to make sure there was no listeria or anything like that.
Because we took the proper, measures on every aspect and we had The team that worked together, the engineers worked with production, production worked with QA, QA worked with the mechanics, And make sure that everybody knew where they were standing and what they had to do. And we did not have any issues in terms of quality because of the construction.
Our volumes were going up at a drastic rate. Year over year, we were getting 10%, 15% more volume. And the retail line on the Specialty plant is more in a small format, 500 grams, 700 grams and 1 kilograms That's where the human aspect It gets really hard to continue the packaging manually and producing manually. And that's where, you know, the whole company as a whole came together and say, if we want to continue in this business And watch it grow year over year, we have to make some capital investments also to the plant to be able to keep up with the demand.
When we start the process for the cheese making, the, we We get our standardized milk into the vats. From the vats, we have our coagulation. Once that's done, we transfer over to the tunnels. The tunnels is where the cheese gets matured and we extract the whey. Once the cheese is ready and has matured and achieved its desired pH level, it gets sent to the molding.
From the molding, it goes down into the brine. On average, depending on the product that we're doing, it could And anywhere between an hour and a half to 4 and a half hours into the brine. From the brine, you will go to the packaging and from the packaging, it will go into the Palatizing. Every department now has its own room, that makes it easier for us to, To control the product and every step in the process.
In changing our equipment, And give us, the opportunity to modify, 34 positions that were at risk in terms of, health and safety. So it's going to be a really positive change for our employees in terms of health and safety, which is one of our top
On a safety, food safety aspect, we have one day to work on gaskets, Pumps, machinery, maintenance, which we don't today. Today, it's on 7 days a week, 24 hours a day. So it's Anubhav, once it breaks, you stop, you get it fixed, start up again. The back line is we installed Three robots, okay. There's one for the industrial line, the £5 and the 4 backs, which we use for the shred line.
And the other robot is the retail line where we're putting blocks into the boxes, whereas before it was placed manually into the box. From that point on, it goes to the palletizer, which also is a robot that's putting the boxes on a pallet. So it's all automated completely. In the back, once the project's all completed, there's going to be 1 pallet of finished goods coming out of the line every minute, every 60 seconds. What's fun is a lot of the employees that were putting the product in boxes are today became operators, you know, so they have more I have a responsibility and they love being involved in the project because it helps us find the solutions to get the project working as quickly as possible.
It changed because we we used to I don't deal as much anymore with production issues. Now it's more of, Is everybody trained? Is everybody at their place? Is everybody happy? How's it going and how can we make it better?
It's great, but every day you're looking at getting bigger, better and stronger in
The good news of the project is There's no job loss for Saputo employees. We even had to hire some temporary employees to allow our employees to get the Training on the new positions, and there are some temporary employees that could become permanent Employees at Saputo in the next month, so it's a really good news for us.
We have to work in as a team more. Because before, it used to be all alone. I used to set up the orders all by myself. I had a different style of machine that would build the pallets Now I have a partner, another operator, and we work, like I said, as a team. So My job is a whole lot lighter and a whole lot better.
I have one employee that, Actually, the robot, the detail robot, and he felt really intimidated. And it was really one of his colleagues that was an operator. I told them, listen, you need to learn to love your machine. And until you don't love your machine, you'll never learn. So he goes, you know, Everything you can get taught everything you want.
But if you don't commit yourself to it, you won't learn. And today, he's one of the best operators.
For St. Leonard, the building stayed as is. So what we did there is that we increased the piping, The inlet and the outlet piping of our neutralization basin. But we are doing the groundwork now to improve pH compliance, in fiscal year 22, which is great.
I love the people I work with. I love the team That I have, I actually love everything that I ever had here at Saputo. I've worked in different departments and in every department, You meet new people, you get to know them, and you discover that no matter where you go into Pluto, you always find a family.
The UPS project stands for Ultimate Plant Setup. And the main objective of this project was to increase our capacity to produce cheddar and mozzarella cheese to support our growth In those two important product categories. So DAS was born UPS Saskatoon project, Which will allow us to double our production capacity and to replace obsolete equipment At the end of its expected life. In fact, the old cheese line was installed in 1991. So this project represent an investment of $92,000,000 for the Canadian division and it's one of the most Important investment in the recent years.
We went from 35 people in the group to 38. It's amazing what technology can do, but it's also reminding us the fact that we do need the human element to make sure we're creating a quality product.
In the design of the plant, apparently, the business had in mind the comfort of the people on one hand and productivity and Efficiency is on the order. So what we have here is a world class chase plant. We've become more automated. The employees are happy about
it. The ingredients we're putting in, we're capturing more of that into our cheese now, which all results into increased yield.
The vats in these plants were specially designed for yields improvements.
The design of them is a hot water cooking design, which is Always gentler on the curd and we'll keep you from breaking it up anymore in a nice gentle cook and that all contributes to the yield in the vat.
You have your 8 HDB vats that goes right to the roof. You have the Draining matting conveyor 1, 2, and then at the end there, you have the salting conveying bill, and then you have your curd distribution. So that blows the cheese up to the top of the block formers, right here in the middle. From the block formers, the cheese is sent To the collater, where 16 blocks are turned into a 6 40 pound block. And then the cheese is conveyed on the conveying line and into the vacuum chambers where the cheese is vacuumed for 45 minutes.
The cheese comes out of the vacuum chamber and over to the 640 packaging line. Our cheese is then shipped to Calgary Riverway or to our plant in Tavistock, Ontario.
Our oil plant was, we made good cheese, but it just wasn't as efficient anymore as the new equipment coming out.
And a lot of
the automation in the programming as well. Way more efficient. Way more efficient. I would say it's very efficient, Automated as well, with a human factor in it.
We used to do a batch style before where it was One bat at a time, it was kind of a batch. They followed each other, but there was always a little space in between them. And now we've Going to a continuous where things just flow steady for 19
and a half hours. We have more automation on screen, so we can manage the same amount of people can manage Place the amount of work because of our programming on on the HCV backs especially.
So it makes the job of the operator beautiful. It makes the job simple. And right on every screen, it is possible to see the whole of the plant rise from the silos down to the warehouse On a single screen.
We wanted to, standardize all our processes, so to make them easier to run, to All our sanitizer stations look exactly the same.
So here we have, our digest 12 for the red hose and we have our center deck, which is Sanitizer hose for the yellow and blue for water. They can visually see it. They visually know that red is The digest, the soap, they visually know that the yellow hose is the sanitizer.
It's easier, less mistakes can happen Because we have standardized processes like that.
There is 2 locations. If you're walking from the outside, there is a small area in the main Entrance from the cheese side, we change our shoes. And when you go in, they have another room to give you a proper Protective equipment to go into the cheese floor. And the other side is from the main plant to the cheese side. We will need to have disposable smog and a separate book cover to cover ourself, before we can enter the cheese plant.
We Have the metal detector is as like a physical hazard. If we have any cheese blocks, is Have potential metal, contaminants. 1st, it will show the reading here. And then when the cheese block comes here, this rejection bar We'll push that block away so we won't have those, contaminated cheese blocks into our 6
This is our bander. Both hands need to be on, and they need to stay pressed While it lowers, thus making the equipment hurt proof. We are looking at The system, it's a pull cord safety system for the conveyors and turntables. This gives the operator the ability if something bad happens for And to yank on this board and everything stops.
In this new plant, we've built the 6 40 boxing line so that the boxes are conveyed. On conveyor belts, they're no longer pushed and pulled by people.
We had an assessor come in and take a look To see what is the amount or the weight that an employee would lift in a shift, in a 12 hour shift, and it was the equivalent of lifting A standard car.
That has reduced the opportunity for repetitive strain. We have 3 large windows in the plant that supply natural light, and it's a very bright environment.
We will do a light intensity test. For this new plant, it's some 4 times higher compared to our old cheese plant.
The noise reduction in the plant alone, it's a very quiet plant.
As you can see, this is a really quiet Area of the plant, my decibel readings are not going above 80 in this new facility. 85 decibels is Is that the point where you need hearing protection? Anything lower, you do
not. Mentally, I think they feel better when they come to work. It's dark when most of Come to work and then the sun comes up, they just they just feel better.
CI is a continuous improvement. That's our daily management system. We've had some employees that make some suggestions. They've had They're quite pleased. They're happy to see that we've taken their suggestion, and we've run with it, and They were able to make their job a little easier.
They feel very empowered, right? So then that makes them feel that they own Pardon about equipment.
So in fiscal year 2020, we completed phase 1 of the project, which included upgrading our discharge Along with installing an oil water separator. In fiscal year 2021, so Phase 2 of the project, which has been completed, we installed A wastewater monitoring building. So looking into the future, Phase 3 would entail the installation of an EQ tank and a flocculator, And phase 4 would include the installation of a daff and sledge tanks.
So what I have here is a set of employees with high morale.
Every day on my way to work, I drive by the location and I can see the new facility and it's just It it makes you so proud to see it.
It is a very forward thinking plant company as well. It's an environment that fosters growth, your skill or whatever you intend to go into. The company encourages and supports that.
I enjoy what I do, so I want to keep doing it for a while yet.
Saputo definitely is a really awesome company to work with. That's why I always want to join Saputo.
I have a great sense of pride. I'm happy I got to be part of one of the biggest projects that the Canadian division
So what we have here is a is the Saputo culture in in at play. First, putting the people first, listening to the people, and then designing the people's interests and desires. So it's a win win situation for us as employees here. For me as a manager and the plant manager for this facility is a challenge. I know that, it's going to end up adding very positively to the bottom line and
The Project BIG consists of the construction of a new fluid mill plant In Poco, with the main objective of replacing our Burnaby plant that is at the end of its lifecycle, Since that plant was built beginning of the 60s and presents daily food safety challenges. This new plant will allow us The development of new products and we are already planning the implementation of a line dedicated to the production of plant based beverages. The cost of equipment and leasehold improvement represent an investment of dollars 15,000,000 for the Canadian division. The addition of the plant based beverage line represent an additional investment of $31,000,000 in that facility. So these are record investment for a new plant Design according to the highest standards of food safety, health and safety and efficiency.
In Burnaby, there is No, production for plant based. Plant based will be new for us.
Seems to be quite a growing industry. I mean, more and more people I run into are going to plant based.
It's a really good decision, the market going that way. So we need to follow the demand of the customers.
And we're only one of 3 plants in North America for Saputo that are going to be producing it. It's always nice when the business is growing. You feel good about the company when they're expanding into new things.
Behind me, this is where we start Excavating the ground end of April, early May 2019. This is where we all
The input of everybody that's on the Floor that's been gathered and bring back to their supervisors to make sure that they can do their job more efficiently. All of those things have been incorporated into the design of of this new plant.
We've been doing plant trials on milk for 5 or 6 weeks. It's a lot of equipment that has to be smart and talk To each other all the way from receiving through to to the warehouse. So there's a lot of people involved, a lot of companies involved, A lot of techs involved to make that happen.
The product flow is very important for this new plant. We really want to do a straight line and avoid any cross Contamination
and higher volume can go through there. So if you think about processing milk and how long it's in Lines say that that maybe isn't heat treated or cool treated. The milk will spend considerably less time in the line. The other thing that's really different about this plant is that all the different processing areas are segregated.
We've been to the extent of segregating the employees to make sure that we're accomplishing that.
Some opportunities to Perhaps that segregation will be communication screens in every welfare area to ensure we're all kept in the loop on current information at all times. We do have an area outside that we've designated for employees to gather. I'm excited about this. It's right at the front of the site. There's going to be some picnic tables and landscaped area for everybody to congregate on.
We're Also segregating the the way that trash and recycling will be handled inside the plant to make sure they don't cross each other between Raw areas and pasteurized area. That same thing with services and utilities, having them hidden in the interstitial.
The staff come in a separate door with a separate welfare area, with a separate change room, with a separate food A uniform area. So that won't require us to have foot foamers and, other things that create wet.
Our goal is to keep the floor dry. So the floor is not a drain. So we need to make sure every product or water needs to be trapped through A pipe and going directly to a drain.
In our plant today, it's a very manual process to go through pasteurization. Our pasteurizers come out and they blend and they take connectors and they change lines, very physically, very manually with a lot of C And in the new plant, it's all smart valves. So they will press a button and the smart valve will change the line, change the mix, And the historians built into the equipment will keep the records that they would in the past have written down.
The thing's been designed and and the Top process in regards to access to equipment was to make sure that everything was body height for the maintenance crew to be able to access it easily.
You can see here the the height of the valves are right height for it to get service. It's proper height, so our It doesn't need to go in the ladder. There is a connection are really accessible. We provided some access Platform to be able to serve all the valves. So where antennae is, is as a lot more accessibility Need to serve the 2 first row on that side, and on my side, I can serve easily these ones.
I'm standing on the main PICC line. For me, when I consider efficiencies, I consider the overall footprint that's required to move the goods and the number of touches required on the product Between manufacturing and delivery to the customer. In this layout, we have reduced our footprint considerably. We've actually eliminated an entire conveyor. And this machine here, this is the game changer.
This is a de unitizer. This machine allows us to take Any full pallet multiple of product that we produce in this building, and instead of pulling it onto that conveyor, We can drop it on this de unitizer and have it run through into our secondary palletizer. In the same footprint, Plants are actually slightly smaller. We've increased our output by upwards of 25%. We've used the space to optimize It's storage to ensure the plant can run as efficiently as possible and are not tied to the fluctuations that occur on a daily basis Between Saputo and our customers because we don't want to interrupt that supply.
And then after that, we've optimized it To make it as efficient as possible to move the goods. This setup is safer than the previous. It's safer in that we have clean travel paths for our equipment, which allows us to put some nice controls in place. And in addition to that, we've eliminated hydraulics in most of our equipment. And, in eliminating the hydraulics, you eliminate that health and safety risk that goes with it, along with the food safety risk I'm proud of this layout and how it's coming together.
There's 4 things in the bundle, Efficient boiler for steam production. There is condensing economizer for capturing energy from the stack of the boiler to transfer back
Energy emissions It's something that we always look at. However, from this plant to that plant, we're going with energy efficient equipment, energy efficient lighting, energy efficient Heating as well as looking at the waste management part and putting in a state of the art treatment facility.
The 2 most important pieces of equipment in this building are the Flocculator and the DAF,
which is a dissolved air flotation unit. All of the
water from the lift station will be pumped To this screen, it allows wastewater to flow through all while the coarse particles remain behind. After this, it'll go to the EQ Basin or the equalization basin, which is actually underground.
And that's going to be used To basically homogenize and balance and and equalize all the wastewater that's coming from the plant.
Its ultimate goal is to remove total Suspended solids, fats, oils and greases.
These fats, oils and greases, when they're captured and concentrated, it becomes kind of a thick sludge. And that sludge is very rich in organics.
These will be hauled off-site in order to be used for animal feed.
We'll be capturing rainwater from what's generated from the roof to be able to store it and use that as makeup. And we have a parade of that, So we are decreasing the amount of potable water usage that's required to be able to operate the plant. Being in Vancouver for the last 2 years for this project. I'm definitely know that's going to that was a very good idea to capture water with the amount of days of rain that we're having.
It's just amazing to see what we can do to to make our dairy facilities more environmentally friendly and the impact that it has on the world.
This is a state of the art site. It's going to be clean. It's going to be safe. It's going to be Easily accessible.
So this project basically is essentially an opportunity to overhaul our infrastructure and making sure that we meet our customer promise With regards to meeting our customers' needs and meeting our customers' expectations.
There's space for growth in the plant. And I think when you look at how long plants operate in North America, I think 50, 60, 70 years is not unusual for a plant.
Very excited. Yeah. Yeah. People are are chomping at the bit would be a good description.
It's very exciting having a brand new building, State of the art technology is going to be very exciting to work on.
The drivers are going to be, they're just thrilled about the prospect Not having to back in to the bay, it just makes things more efficient, more streamlined.
The extra technology and The ease of use is going to help out a lot, make everything run a lot faster and smoother.
Employees, are excited about the changes here that we're We're implementing.
I'm quite impressed. It's a big and it's beautiful. I say to my to my kids, I package the milk. I do that milk. You're drinking the product that I'm packaging.
So there's a number of benefits To work at the site and to attract employees and retain employees in the Coququillem facility.
It's
We hope you enjoyed the video. We'll now open the floor to your questions for the next 20 minutes. Please use the questions and answers box on your screen to submit your questions. I will read them out for the group. Similar questions will be combined to avoid repetition.
As a reminder, we ask that you keep your questions related to the plant overview video. We'll have ample time to discuss other topics later on. If we're unable to answer all of your questions in the allocated time, we'll cover them during the next Q and A period. We'll wait a few more seconds to see if we get any questions in. Our first question is from Michael Van Aelst.
With no labor reductions, can you provide some breakdown of where the savings or returns are coming from?
Yes, we've as you would have seen in the video, there's an increased The level of automation, so what we're actually able to handle process and get out the building is increased. And so it's really an efficiency gain predominantly in our Production and our warehousing operation.
Yes. So I'll add to that Frank, if you don't mind. What you have Seen in the video is that we have increased capacity at each of those locations. So Saskatoon, St. Leonard And Poco will be driving more volume through their facilities, more volume with the same Or equivalent headcount that makes for a more efficient operation.
In addition, we can't discount the fact that It allowed us to optimize our network, which means that there were plants within the Saputo system in Canada that were shuttered because of the Increased capacity that we've built into these facilities and into these projects.
All right. Our next question is from Irene Nattel. Good morning. I understand that all of the upgrades, new builds are state of the art, But how do you think about ongoing CapEx going forward?
Ongoing CapEx It's defined by each of those divisions. So because we are talking about the Canadian division, I'll ask Frank to talk about further CapEx for Here's Canadian division. And then we can get into the strat plan a little bit later on as we've talked to the other division. So Frank, why don't you continue on Canada?
Yes, perfect. Thank you. So with respect to the new buildings, obviously, new equipment, highly automated, the level of CapEx spend attached Those facility will be at a lower run rate. The balance of the network, I would say Projected CapEx beyond the strategic capital spend will be in line with historical trends.
And she just wanted to clarify that, what she meant was Going forward to maintain state
of the art. Yes. Okay.
Our next question comes from Peter Sklar. How does the capital plan you have described in the videos differ from ongoing upgrades in capital
Similar question, maybe more clarity, please.
So the capital spend, As I said earlier, the capital spend attached to the new buildings will be at a slightly lower run rate, obviously, because there's a greater degree of automation and the equipment is new. The balance, as I stated earlier, the balance of the facilities that are, I guess, at different stages in their useful life flow Are more in line with historical capital spend we have. Over and above that, we've got a projected capital spend attached to our strategic initiatives in Canada that are Expected to drive the EBITDA growth we're forecasting in the Canadian division.
Maybe a more general question as well, but Peter Sklar asks, what is your financial criteria for the CapEx? Do you have a hurdle rate for financial returns?
Thanks.
Yeah. So in terms of capital spend, We do look at it from various angles. Certainly, there's the maintenance CapEx that typically does not provide A significant ROI on those, it's more of a maintenance of the operation, replacement of obsolete equipment And stay in business type of initiatives. Relative to ROI per se, there's the other that's the other bucket. We're looking at it for payback that are typically relatively short in nature, You know anywhere from 2 to 3 year type payback.
Obviously within the rollout of our Straub plan That has been developed over 4 year. That's pretty much the the the payback period we're looking at. So we're not looking at it from A rate perspective, more from a payback, metric, if you will. That's it.
We have a question from Mark Petrie. What are the next projects in Canada? Are there other similar opportunities?
Yes. So we have a similar opportunity to look at our specialty cheese platform in Canada, which is one of our strategic pillars To look to drive the same level of automation and efficiencies that we've seen in the 3 projects that we posted on here today.
Chris Lee asks, do you expect the plant upgrades to drive higher margin percentage as a result of improved efficiency? Thanks.
Short answer is yes to that one.
Mike Banals asks, how will the start up costs tied to the BC plant be recorded? Will they detract
The answer is no. We will not backtrack or extract those start up costs out of the EBITDA. We've had start up costs for the last few months, starting in Previous quarter, and those would not significantly impact the run rate of
And I think in this particular on this particular project, we had the luxury of running Our Burnaby site in parallel, so that will minimize the disruption as we move over to the new pork equivalent facility.
The questions, I know Vishal, Patricia, you submitted questions, but they were quite, similar. So please let me know if you have any other questions. We'll wait an extra 30 seconds or so. And if we don't have any further questions at this stage, we'll move on to our next section. Mark Beegard asks, how many more plants will be fitted with plant based capabilities?
I'll have Carl speak to it because it's a more North American view we have on plant based. So it touches Not just Canada, but the United States as well.
From a beverage perspective, Right now, we feel very comfortable with the network we have. We can service East Coast, West Coast, and Central US and Canada quite well. So as a priority, we feel very comfortable with the potential we have today in the existing plants As well as utilizing some of our brick and mortar should those opportunities arise to further investments in beverage But we will be also taking a look at the cheese sector quite strongly. We have a recent acquisition Butte Island, so in the UK and we feel very strongly about the growth in this category And the need to have manufacturing in the North American territory. So I expect that over the Coming months, that plan will be formalized and we'll be able to see further investments in plant based, specifically cheese, both for size reduction, So the product cutting for the retail markets and the foodservice markets as well as make over time.
I'm going to ask Cai to speak a little bit about the regulatory environment for plant based products, how product is able to Trade be traded through different jurisdictions, geographies. And so it does influence a little bit Where we invest our funds in plant based products, maybe just talk about Regulations and borders.
As we're talking about North America, obviously, there are regulatory restrictions as it pertains to the movement of dairy goods. In the plant based category, obviously, it's a different set of assumptions. So for us, what we're doing is we're Starting our plant based cheese strategy, leveraging our Butte Island platform and we'll be looking at an import strategy While we figure out the best technology, while we optimize our recipe for the very important U. S. Market.
But in terms of where those capabilities and that capacity will be moving forward, Carl together with the team will be looking at Where do we have that access to talent? Where do we position ourselves and leverage The infrastructure that we have, whether it's being attached to an existing facility or whether it's building a greenfield site, those are all things that will be Evaluated over the coming year, but it is our intent to have local capability and capacity in North America to produce plant based cheeses.
We have a
couple of questions from Irene. First off, about duplication costs. So if you're running duplicate And then the other question relates
Yes. So Carl, maybe why don't you that's specific to POCO as we're running duplication. But Carl, maybe just talk about duplication costs And forward looking opportunities that we see to reduce those expenses.
Yeah. I mean, our first priority was to make sure that we serviced our customers and continued to provide our consumers with our products. So Certainly, we do have duplication costs today in operating both our Burnaby facility and our Port Coquitlam. But we've we've managed to make the best of it in the environment that we're in today in order to provide the right kind of training. This has really, really provided us the opportunity to train our teammates who are coming over from our Burnaby site, Have the comfort that we will have skilled operators and our Saputo team in our new location.
And we do expect that both from a manufacturing and from a warehousing operation, those costs, those duplication costs will taper off. From a warehousing perspective, I would say that's already been minimized and manufacturing over the coming weeks months We'll also be eliminated here.
And Irene's second question was, can you please remind us when you will start
Yes. So the specialty cheese project is part of our New strategic pillars moving forward that was part of the strategic priorities we announced for the organization. Work has actually already been initiated in terms of Developing the business case, so that'll take us to likely the end of the fiscal year to come forward with the recommendation. So that's
If you have any more questions, you can Submit them now. We'll take a quick pause. And then if there's no further questions, we'll move on. All right. It doesn't look like we have more questions at this stage, so we'll move on to the business update.
Before the group proceeds to answer your questions about the broader business, Kai, Max and I want Provide a quick update to frame our discussions. When the pandemic struck 18 months ago, We thought it would last a couple of weeks or months. And yet, here we are today still dealing with COVID. I'm proud of the way we've responded despite not knowing how it would affect our sales or our operations. Going into the pandemic, we had a rock solid foundation and a rock solid balance sheet.
And we knew we wanted to do the right thing for our employees, For our patron farmers and for the community. Once we got over the initial hump And understood the evolving needs and expectations of our customers and consumers, we thought we had found a new normal. But now that businesses and economies are ramping up again, despite the emergence of the Delta variant, We're faced with a different set of challenges. Exiting this latest wave of the pandemic is proving to be the most Most of the short term issues we're experiencing are not unique to Saputo or unique to our industry. And I'll ask Kai to tell you a bit more about what we're seeing across our businesses as well as the initiatives we're deploying
Thanks, Lino. The Q1 results for our Canadian and Argentinian platforms were pretty much in line with our expectations And both these divisions continue to perform well. On the flip side, the UK, Australia and the U. S. Were more heavily impacted by pandemic related challenges.
As Q2 progresses, the U. S. Business is where we're seeing the most significant headwinds. So let's start there. First off, it's looking like the food service recovery in the U.
S. May be longer than expected, and it could take up to 12 more months to fully recover. The situation continues to be volatile and remains in flux. On the retail side, demand remains strong, but 2 major headwinds Around labor and supply chain are making it difficult for us to maintain our full supply. Right now, we are well below the optimal staffing levels required to run our facilities.
We're not yet seeing the benefits from the back to school transition or the expiration of government subsidy programs as we had initially assumed. We have deployed a large number of initiatives to encourage retention, like higher pay, referral bonuses, shift flexibility And partnerships with local community colleges, but to little avail. Another reality we're contending with is that in the rural areas where we operate, Vaccination levels tend to be lower than that of the general population, allowing the Delta variant to take hold. These labor challenges do not appear to be going away anytime soon. We suspect they could persist for a year or more.
We're tackling this issue head on with some of our strategic initiatives. We're prioritizing network optimization initiatives in those facilities where we hopefully have access to a deeper and stronger talent pool for the longer term. Focusing on a less is more approach, We are in the process of reducing the number of SKUs we produce. This will allow us to reduce complexity in our operations, both from a manufacturing and supply chain perspective. And longer term, as part of our plan, we'll also be looking to increase automation in some of our facilities.
The issues related to labor to our supply chain in the U. S, leading to fewer trucks on the road and challenges in our 3rd party warehouses, which results in lower service levels at higher costs. Supply chain difficulties also extend to our export activities. There was a shortage of containers and vessels And although conditions appear to be improving, it remains difficult to find vessels to get our products to market due in part to COVID related port closures. When it comes to the inflationary pressures related to input costs like transportation, warehousing and packaging, we have deployed multiple phases of price increase in the U.
S. To mitigate the impact with the right to further pass through additional increases as required. Cost recovery initiatives have also been successfully implemented in Canada, the UK, and Australia. Keep in mind that it can take anywhere from 60 to 90 days for these increases to take effect. We discussed the negative U.
S. Market factors in Q1. We're seeing a more positive trend in the last few weeks in relation to the spread, the block barrel relationship and block pricing. Although conditions continue to be challenging in both the UK and Australia, we're making progress. In the UK, Retail remains strong, but at levels below last year's pantry loading conditions.
We had challenges relative to our ingredients business in previous quarters. In relation to an exclusive arrangement that hampered our ability to diversify our customer and market mix, we have since worked diligently to reach a more flexible In Australia, we're working through the tail end of the unfavorable export contract pricing we locked in last year. Similarly to U. S. Export volumes, challenges persist on the transport side to get products from Australia to Asia Pacific, and the team continues to mitigate Delays and constraints were possible, but we're hoping the situation improves over the coming weeks as they're slowly reopening some of those Key COVID impacted ports.
Commodity prices are on the rise, and we're seeing strong demand on both the domestic and export side. We're also moving beyond the challenges of our latest ERP implementation. From a raw material standpoint, we're continuing to leverage our 3 pronged approach, Sourcing milk from our patron base, 3rd party milk brokers and by leveraging toll manufacturing. Now shifting to our 4 year global strategic plan And the strides we've been making since June. I'll call out a few key initiatives per pillar during this presentation, but we have Our divisional president is with us today specifically to take your questions and to allow you to get first hand commentary on the progress they're making in their respective divisions.
We have been very busy when it comes to strengthening our core business. We entered into a long term exclusive partnership with Hoeghland To expand distribution of Cathedral City into Germany, and we continue to increase distribution in North America as well. In the U. S, We have plans to maximize our string cheese assets to support our market leading Frigo Cheese Heads brand. Also in the US, Our new filling production line is now up and running and we are manufacturing aseptic nutritional products sold in the retail market under a customer's well known brand.
Exciting news coming out of Canada as well this week. As part of our e commerce strategy, we launched an innovative B2C platform called Nibble. This platform will offer and showcase our specialty cheese products in a new and convenient way. When it comes to our accelerating product innovation pillar, we welcomed UK based Butte Island Foods. We intend to leverage the team's wealth of knowledge We also expect our mozzarella alternative to be available in the U.
S. Later this calendar year under the VITALYTE brand and in Canada by early calendar 20 On the dairy alternative beverage side, we are focused on supporting existing players through co packing arrangements And we continue to secure new business across North America. Relative to increasing the value of our ingredients portfolio, The Bio Original acquisition allows us to move up the value chain with new production capabilities and value added ingredients such as goat WPC55 and organic lactose. As the largest goat cheese manufacturer in North America, we now have the ability to have a Strong vertical integration. Our optimizing and enhancing operations strategic pillar is expected to drive largest contribution to grow throughout the plant.
In Canada, the Poco plant is now open and fluid dairy production started last month, As you saw in the plant overview video, plant based beverage production is still slated to begin later this fall. Over in the US, The execution of our cheese network optimization plan is well underway. In Australia, we're accelerating Finally, we have create enablers to fuel investments. The outlook for our ERP rollout remains unchanged. Once the implementation is complete within the legacy SCUSA business, we should see more synergies as our merged U.
S. Platform starts operating under a single system. Before I pass it on to Max, I am very excited to share that Leanne Cutts is officially joining our team this week in the role of President And Chief Operating Officer for International and Europe. She brings a different set of skills to the table with extensive international and marketing experience, all of which should complement and strengthen the expertise of our leadership group. Now, over to you, Max.
Thanks, Guy. As you know, with our global strategic plan, we're targeting a high single digit Adjusted EBITDA CAGR over the 4 year period to reach $2,125,000,000 by the end of fiscal 2025, Approximately 44% higher than where we ended fiscal 2021. We've been very clear in saying that our progress may not be linear And that we expect the benefits to be more significant in the second half once our plan operational efficiencies kick in. For the 4 year period of our plan, our teams, our initiative and our efforts calls for growth every year. While we continue to push for growth in year 1, there's no getting around the fact that it will be tough to get there with the current market condition we're seeing, And that I've all been over the news, particularly due to the labor factor.
The miss we had in Q1 And the slower than anticipated recovery in Q2 make it very challenging to show growth this fiscal year. The recovery we expected in Q2 is taking more time to materialize. That said, we remain focused on deploying our initiative As planned and controlling all of the elements within our power and most importantly, despite current condition, we're still very bullish about our ability to achieve our 4 year target. And I'll let Lino conclude a few thoughts on M and A.
Thanks, Max. Since our IPO in 1997, we've invested over $9,000,000,000 to complete 36 acquisitions, Each with their own strategic rationale, be it to enter a new market, increase production capacity, complement our product offering with well known brands or simply to gain expertise in a niche product just to name a few. Focusing on the last few months specifically, we've been quite active materializing strategic acquisitions that will serve as accelerators to our global The first two transactions that came to fruition in May were Butte Island Foods and the Reedsburg facility. It's important to remember that both these businesses were considered in the development of our global strategic plan And therefore, their expected contributions are embedded in our organic growth targets. Then in July, we welcomed UK based Wensleydale products and we followed this up With the acquisition of Carolina Septic and Carolina Dairy formerly operated by Ameriquel earlier this month.
By complementing our network in the U. S. And bringing new innovative capacity and capabilities in house, These latest businesses will expand our presence in attractive and growing market segments, including aseptic formats, Nutritional beverages and dairy snacking through long term strategic customer partnerships. The incremental post acquisition profitability we expect to derive over time through organic growth for these businesses We'll contribute to strengthening our core business. Looking ahead, we still have the appetite And financial agility to pursue additional accretive acquisitions, and our pipeline remains full.
We're evaluating all types of files at the moment, some small and some large. Our areas of focus include cheese, value added ingredients and products for the retail segment in the U. S. We could also have an interest in dairy alternative assets provided there is a strategic fit and they are under the right conditions. From a geographical standpoint, our regions of interest include the U.
S. And Europe, as both these regions Offer plentiful opportunities for further synergies with our current operations. Latin America and Oceania Also represent interesting avenues. Ultimately, we're positioning ourselves to be where the raw material is With access to talent and where there is the best infrastructure to produce the highest quality product at the lowest cost. And on that note, we'll take a short 5 minute break, and then we invite you to transfer to Webex If you wish to participate in the interactive Q and A period.
Instructions are now on your screen And we've also included the direct link in the chat. We look forward to taking your questions.
Welcome back, everyone. The rest of our time today until 12 pm Eastern Time, we'll be focused on answering your questions. We want this session to be as interactive possible, but we also want to make sure everything runs smoothly. So, there's just a few housekeeping items to cover before we dive in. We ask all participants to stay muted with cameras off, except when called upon to speak.
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For live questions, please wait for my queue before unmuting and activating your camera. For those joining over the phone, I won't be able to see your name or if you have a question, but I'll check-in with you periodically. In the interest of fairness, please limit yourself to 2 questions at most and stay concise. Questions can be directed to any member of our team. Some of them are joining us remotely with questionable bandwidth.
So you may not see them on screen at all times, but we promise they're there. Lastly, for those who have chosen to remain on the previous webcast platform, please note that you are in a listen only mode. You must join the WebEx meeting if you wish to ask a question. All right. So we did already get a question in from Irene.
Sounds like F2022 will be more challenging, results likely below expectations 3 to 6 months ago. Are you still confident in your F-twenty five target?
Yes. So thank you, Irene, for that question. I wish we would have been live. It would have been a much More interactive process. We'll try to make
It will, but it's just because she had submitted it during the previous
chat.
So I want
to make sure.
But if you want to open your camera, Irene, please do.
Yes, Irene. So that we can have a more interactive discussion relative to your question. So There we go, Irene. Yes, so thank you for the question. I will tell you from a high level perspective, We're extremely optimistic about our fiscal 2025 targets.
We knew that a lot of the heavy lifting would be in year 1 Of our strat plan, that means that the contracts given to our Pliers for equipment and installation would happen in year 1, which by the way continues to happen despite COVID. But we also did expect that access to labor, access to talent would be more plentiful, especially in the U. S. Then what we're uncovering here in September, our expectation was that once the kids go back to school And once the subsidy programs from the government would subside, that there would be Somewhat of a rush of people trying to find employment and that's unfortunately not happening. The lack of labor It's creating some difficulty, number 1, in operations in terms of us being able to fill the orders that we have.
So it's not a question of demand not being there. It's a question of not having the talent to run all of our facilities At the highest output levels, which means, unfortunately, that our order fill rates have dropped From our historical levels of 99.8 percent down to about 91% in the U. S. These Our challenges that the U. S.
Business is faced with, to compound that challenge, We're also having difficulty finding our 3rd party logistics providers to pick up our products At the docs, once we manufacture them and deliver them on time to our customers, this is something That the entire U. S. Consumer goods industry is facing not exclusive to Saputo. We thought that as talent comes back to their facilities and their routes That transport would have eased up. It hasn't.
And then of course to make matters worse, when we don't deliver on time Or at all to our customers, then we're faced in some instances with some penalties, which We're trying to negotiate with our customers. So that is what we're seeing in the short term. The short term, as far as I'm concerned, is a hump that we have to get over. This whole Pandemic opening up of the economies, I believe, is something that will be short term in nature, perhaps, Might last another 12 months. We're hopeful that'll be sooner than that.
But it doesn't take away from the value of the strat plan that we've put together. I'll point to a little bit of what we've accomplished in Canada With the infrastructure improvements with POCO, with the increased capacity in St. Leonard, With the increased capacity in Saskatoon and the ability for us to right size the network In Canada, today is paying dividends for us. And that's one of the reasons why our Canadian platform isn't as impacted As some of the other geographies that we operate in, and I believe that the 4 year strat plan We'll derive those same benefits in the U. S.
As what we're seeing in Canada and in other geographies where There is a rollout of CapEx allocation to increase our efficiencies and increase our ability to produce a higher quality product At an even lower cost. So again, the short and simple answer about our level of optimism for the Strat plan, The increase in EBITDA, the 44% increase in EBITDA is unwavering. We believe That we will deliver on that number after we've executed the projects and the plans that are really fundamental And really, in Saputo's nature and character to be able to deliver. Max, maybe some comments on that?
Yes. So relative to the 654,000,000, just want to put in perspective a couple of big pieces. We talked about 30% of that number being revenue generated. So this is volume based. This is our growth, on a per capita consumption that we want to beat year after year.
And when you do, let's say, a 4% On where we were in F21, that's going to bring you to about $17,000,000,000 in sales. $17,000,000,000 that's, dollars 2,000,000,000 more. So the EBITDA of 30%, this is what it comes from And this, let's say, you could quantify it at 200,000,000 kind of thing. So that leaves us with 454,000,000 to achieve. So the second bucket is relative to our optimization of our operation, which is going to be Close to half of that 450 percent, so probably in the range of 45.
So that's another 200,000,000 Relative to the operation optimization projects that we have, which we know the biggest piece is in the U. S. So once we remove the piece from a revenue perspective and the optimization of our operation, That leaves us with sort of a 250,000,000 which we quantify a similar or More or less similar contribution for the other pillars that we have, which is the strengthening of our core business, Bring value to our Ingredient portfolio, innovation as well as the enabler and the enabler being the lowest contributor. So our ability to generate that 654,000,000 big piece comes from the volumes that we We're looking to grow above per capita consumption and the operation optimization initiatives.
Thank you.
That's all very helpful. Just a few a couple of follow-up questions if I may. So I guess, first of all, the question is relative to the competitive set, do you think that you have been equally More or less impacted by what's going on? Have others seen service levels fall? Are you sustaining or Losing market share, do you think?
That would be sort of the first follow-up. And then the second one would be, if this goes on for another 12 months, Are you still confident in that 2.14
billion yen?
Yes. So let me answer the second question first. So even if this goes on for the next 12 months, we're still very confident in the number because we know that The foundations that we're building in the U. S. Are going to drive profitability for us Very much like what we've seen in Canada.
It's a question of execution, not a question of hope. And I'm very optimistic about our U. S. Team being able to execute effectively. It's stuff that we've done before.
Today, the U. S. Team has the CapEx allocation to be able to invest Similarly to what Canada has done, but at much larger scale. So yes, whether this Opening up of the economy shortfall in labor continues for 12 months or shorter. We still believe in our strat plan for 2025.
Now going to your first question, I'll ask Lynn, to speak in more detail relative to what she's seeing in the competitive landscape And perhaps maybe talk about our 91% order fill rates, how that fares relative to what the industry is delivering on.
Good morning. Good morning, Irene. I would say a couple of Thanks. 1, the pandemic does not discriminate. So when we talk about service levels, certainly, although we're not proud of of what we are seeing now, We do hear from the industry that our competitors are going through similar challenges.
Staffing and supply chain challenges for the most part are what we're all faced with in the U. S. So I would say from that perspective, you know, we're not we're competing with ourselves here because we want to go back to our historic levels. And so we want to make sure that we Provide those great levels and we're focusing on improving that. So from a service level perspective, to answer your question, I would say we're hearing that similar our competitors are having similar challenges.
From a market share perspective, in the U. S, we're very proud that we are maintaining and slightly growing in some areas. So, despite the challenges and the ebbs and flows of the pandemic, we are continuing to maintain and slightly grow our share. So that's great news as well.
Yes. So maybe, Lynn, if you could, I'm going to ask a question segueing on Irene's So if we are seeing growth in certain areas, why are we not seeing equal profitability growth? Because I'm sure that's on the minds of A lot of our investors as well. Maybe just talk about beyond the labor, just some of the other headwinds we're facing from a cost perspective.
Perfect. I would say, so specific to the US, are the there are a couple of areas that we are impacting, Impacted more so, one, I would say around market or dairy commodities. That is definitely an area that has been Putting some pressures on us, and that's somewhat out of our control. Then supply chain costs And availability has definitely put a lot of pressure on us. And because of that and because we're striving to hit our service levels, We actually have incurred costs to redistribute or resupply in different parts of the country, so that's added some costs to us.
And we've had we've seen inflationary pressures from raw materials, You know, like packaging, and stuff like that. And so those are things that are putting a tremendous amount of pressure on our bottom line. And we are continuing to focus on the things that we can control, and we're continuing to focus on staffing levels Because those are all things that we are trying to do to offset the pressures that we are seeing on our costs.
And Irene, if you don't mind, I'm going to ask Kai to give a little bit of a similar overview for the rest of the geographies because we focused a lot And your answer on the U. S, but there are other challenges andopportunities that we're seeing in the other geographies, which I'd like Kai to speak to.
Thanks, Lino. So when you look at the other geographies, we have to talk about food service, first of all, As the Delta variant takes hold and obviously it's impacted a lot of the different markets. The great thing for us in the U. K. Starting there Is that obviously, it's a predominantly retail business.
So we're kind of shielded from that volatility that's being experienced there from a foodservice perspective. On the ingredient side, we've talked about in previous calls around the recovery in our ingredients business. The great news is that our first pass quality is right up there close to 100%. So we're able to meet the specs required by our infant formula partners. And we are Seeing a recovery from a volume standpoint, albeit at the expense of lower prices.
When we flip down to Australia, Again, foodservice is a much smaller percentage of our overall business there. Retail is continues to be very strong for us there. And export, as we've called out, we're working through we've worked through the old contracted volumes And we have kind of overcome those hiccups in relation to our ERP implementation, the container shortage availability. That situation is improving now with the 3rd largest port in the world outside of Shanghai slowly reopening. And so we're seeing increased velocity on the container side there and those are at the new contracted pricing, which is in line with the GDP pricing, which is Much more favorable than what we had last tail end of last calendar year.
Last division on the international side would be Argentina. Foodservice has been impacted, but the great thing about that platform is that we have a lot of flexibility in terms of the product portfolio, But also in terms of where that milk goes and for Australia, for Argentina that have a big export component to their business, Their focus has always been on generating the highest variable rate of return per liter of milk. For Argentina, exporter. We are the largest exporter in that country. So we have the flexibility to take that milk and produce products for Key markets like Russia, key markets like Brazil, Chile and so on.
So that is in a nutshell on the international side. Perhaps Frank can talk to the Canadian landscape.
Sure, Ken. So a couple of things in terms of we're seeing similar inflationary Pressures as the rest of the world. We did take pretty decisive and progressive action to Go to market with a price increase. We started conditioning the marketplace in late June and that it was coming. So we did take an out of cycle Place around, we reserve the right to come back if that pressure doesn't subside.
So these are increases that are out of our normal February price increase rotation. On the service level front, similar challenges, although we're a couple of percentage points off our 99.5 percent historical fill rate In and around the 96%, 97%. Similar challenges with access to labor, but there's a couple of things we've done that I guess are different and are helping us a little bit in the situation. So we've made some tough choices around high complexity, Low margin SKUs and taking a pause, taking them out of the portfolio and focus more on executing the ones that have a greater volume, greater profitability attached to them. And the other thing I'll Call out is our labor challenge is different depending on the region of the country we're talking about.
So where we're not having a challenge with labor, we've We picked up people out of one region and moved them to another and have done some cross training and have really focused on getting product out the door in Regions where there's a labor challenge and high demand. So those are just some of the examples around where we're trying to be very nimble and creative about how we continue to serve the customer.
Thank you.
All right. We have Mark Petrie that would like to
I want to
ask about
the U. S. Segment mostly, and it's displayed a lot of volatility in its margin rate even before the pandemic. If we take a step back Over maybe looking at the last 5 years. Some of that obviously is explained by what you disclosed as market factors, There's still substantial swing from period to period, even when the volumes are pretty stable or growing slightly.
So can you just Maybe talk about that dynamic a little bit more. Are there a lot of commodity factors that are not included in how you calculate market factors or What else would help explain that volatility, again, pre pandemic?
Thanks for the question, Mark. It's Karl. Keep in mind that, and we've shared this with The markets before, but the ingredients side of the business has had a volatile Number of years prior to the pandemic, and that really has a lot to do with, sort of the Commoditization of some of the products that we manufactured in our ingredient size, so things like WPC80, Lactose, sweet whey powder and so forth. So I'll say that really the WPC80 when we first got into it was a value added ingredient. Today's standard WPC 80 is highly commoditized and we saw that impact our results pre pandemic.
It's also one of the reasons why in our strat plan moving forward, we have a pillar that is designed and focused on Adding value to our ingredients, investing in areas where products are going to specific to customer needs. So there is a heavy emphasis both in capital as well as resources aimed at Bringing back the value and the contribution that the ingredient side, the waste side of our business brings to the U. S.
And given the uncertainty in those sort of ingredient markets And the volatility there and the sort of opaqueness of pricing and all that kind of stuff. I mean, do you think that as you take these steps That will reduce the volatility in your profitability or do you think it will potentially add? And are there other That's you can take either with regard to customer mix or channel mix or maybe hedging to reduce volatility over the course of time.
They're all great questions, Mark. And I won't speculate on what the markets will be, but we are taking steps To ensure that, the portfolio of products that we have is more robust, That we better understand the end users as far as where they're heading. And by end users, that might mean Specifically investing in resources being more connected to the end user. A lot of what it is we do today is being an ingredients provider. And then you go back to the basics and you take a look at what it is we offer.
We have an incredible amount of raw material. So we're in a position of strength When it comes to all the raw materials we have in way, now it's a question of taking that And capitalizing on that opportunity. So whether it's technology, whether it's the right partnerships, Whether it's investing by partnerships, it could be about a co manufacturing contract much like we do in way of our cheese and or fluid businesses As well as being better connected with the end user. All of that is part of the investments and the focus that we're putting into our business today. And in fact, it goes beyond that in the U.
S. As well.
Yes. So I'll ask Max to add a bit more color there
as well.
Yes. So hi, Mark. Relative to pre pandemic impact to our U. S. Margin, I will point you maybe to 2 specific elements.
One relative to the distribution and logistics freight That, you know, following some regulation that change, we've been quite vocal as to the impact of those regulation And cost onto our business, maybe like 2 or 3 years ago. So that's one. And the other one, Also, relative to our dairy foods ERP implementation, where we've, we've struggled at some point And we had to pause, and that creates some additional challenge to, to our to our operations. So Just to complement what before the pandemic, those were elements to be in the mix in terms of our margin impact. Okay.
Helpful. Yes.
And maybe just
Sorry. Go ahead. Yes.
Sorry. One last piece maybe, Mark. And we did I've communicated this in the past, but the changes in the federal milk marketing order, so the pricing of milk in California versus the rest of the country, That was a material change for us, and we've navigated through that. But that was all pre pandemic and created a lot of volatility In the price of milk, specifically for Suppurri Cheese USA.
And could I just ask on a slightly separate topic, although maybe somewhat connected, could you expand on the potential of SKU reduction? How far are you in that process? Is that a U. S. Specific initiative or is it other regions and what channels?
And do you think that presents sort of revenue customer risk? Or is it simply about efficiency gains?
Thanks. Thanks, Mark. I'll speak to the U. S. We are well down the path of SKU reduction or and simplification.
We are about 15% to 20% in our We're making great progress. We're looking at formats and we're looking at how we can be more efficient with the volumes and our throughput in our So that is so right now, the team is down the road. We're very far down this road actually. And so it's helping us. We're starting to see Some benefits of that to help us.
We've actually in the last few weeks, we are starting to see some Improvements in our numbers on service levels, actually we were at literally over 93 yesterday. So we're seeing some good impacts and that's really driven by that. So it's helping us with Efficiencies, making sure we're utilizing the right products in the right place for our customers. So definitely we're down that road in the U. S.
And perhaps Frank if You want to talk to Canada?
Yes, sure can. So we've gone through a couple of rounds of SKU rationalization over the past, call it, 6 to 12 months. We run an integrated business planning process Which we actually review the velocity margin waste complexity on a quarterly basis and come up with the list of SKUs that really don't meet hurdle rates. And then We look to actively remove them from the portfolio. Typically, it doesn't have a very material impact to the revenue because they're low volume, low margin, But it does have a very meaningful impact to overall complexity reduction, which is allowing us to get more out of our plants today Despite some of the labor challenges you've been hearing about most of the morning.
So it's an active process and we expect it's going to continue to be an active process as we move forward.
And Mark, I would add that obviously in the other divisions, we also follow the same rigor, but the greatest opportunities are going to lie In both the U. S. And Canadian divisions when it comes to SKU rationalization.
And is that because it's mostly in food service or What channel are these mostly in?
It's across the board. We're looking at it across All channels of business, all segments for us.
Same in Canada and typically this may sound a bit odd but The customer is actually open minded to the conversation because they know that reduction in complexity means they get ultimately a better service level in a very challenging environment. So it's not They're not tough sells to get executed in the marketplace, Mark.
Okay. Thank you very much.
All right. Up next, we have Vishal Shreedhar. Vishal, you can go ahead and activate your camera if you'd like.
Hi. And thanks for taking my question and hosting this information session. In the past, management used to provide context, and they still do on the acquisition strategy indicating strategic Fit was the first thing that it looked at and valuation multiple an important factor, but not necessarily the deciding factor. If investors look at acquisition contribution or we try to look at acquisition contribution, it doesn't seem to be what it was once upon a time. Wondering if management is looking at acquisitions differently and when you make the new acquisitions, if we should see Kind of the contribution kick in like we did once upon a time with the synergies coming in and those contributing significantly.
Yes. So I'll ask Martin to talk about our strategic rationale for acquisitions and then I'll have Max talk a little bit about The uplift on EBITDA following acquisitions.
All right. Thanks, Vishal. Well, from a strategy perspective, the M and A strategy is an approach that is the same that it has been over the years So we remain very selective and focused in our approach. We've got a very thorough Due diligence process involving the different divisions having cross functional teams With the corporate the right corporate service involved in due diligence and building the plan from the ground up. So that's the basis of the plan.
We're building for REACH acquisitions And that's on the basis on which we assign value to each of the project that we're looking at. In terms of overall strategy, as it's as Lino mentioned in its business update, for us, it's very clear that the geographies I'm still very clear. We look at expanding in the core geographies in which we currently operate in. We also have interest in growing in certain other geographies in Latin America and Oceania And furthermore, in Europe and the U. S.
A. So that's also something that hasn't changed over the Of course, the next the last little while, from a core pillar perspective, so we're looking, obviously to add to our cheese Capabilities looking to add value to our ingredient portfolio. The recent Riesberg Acquisition is one great example of that where we're actually looking at leveraging some of the go to a byproduct that we generate through our business and add value to those. So this is still very much the case. We're looking at also at the real alternative selectively.
So in broad strokes, this is what we're looking at. From a contribution from past acquisition, I think I'll turn it over to Max, who's going to be better able to answer that part.
Hi, Vishal. So, yes, aside from the strategic value of all acquisition, whether it's big or small, EBITDA attracting higher margin, obviously, when we're looking at small acquisition, there's a component of capital avoidance That we it has to be part of the mix. Sometimes some acquisition were made or has been made to avoid us building our own infrastructure. Obviously, when we're talking small acquisition, the impact on the earnings Per share perspective tends to be minimal whereby when we look at bigger acquisition, obviously Strategic value is there, is continue part of the analysis, the EBITDA generating higher margin, of course, But then there's the EPS accretion that we would be looking at. So Dairy Crest, for instance, would be a great example On that front, looking at EPS growth mid to high single digit Time of expectation on EPS, but when it's we're talking about smaller acquisition, There's various elements to complement the base business that we have and there's the capital avoidance as well.
Okay. I appreciate it. And just to follow-up on that. When we're looking at the return on capital And the pressure that we've seen over the last few years, would that be due to the acquisition and the higher Being paid for acquisitions or is that more of some of the other challenges that you've highlighted the market shifts in way and so on and so forth?
Well, from an acquisition perspective, our hurdle rate hasn't changed. So we're still using internal hurdle rates that are the same. So I don't think it comes from the higher multiples that we've observed in selective case. In other cases, The acquisition multiples that we've paid are very much in line with past acquisition multiples. If we look at of course, if we're looking at Tier 1 Retail branded business, you're going to are commending higher multiples in the current market.
You look at some of the recent acquisitions we've made, Those multiples were really very much in line with the historical multiples that we have paid, but the hurdle rates remain the same. The other factor is the cost of capital that has decreased so much. If you look, for instance, at our theoretical WACC today that We don't use as a metric when we do acquisition, but it's literally below 6%. So I think all those factors, I don't think The decrease in return has come from higher multiples we've paid in the market. But maybe, Max, you want to provide more color?
No, I definitely agree with you, Martin. So I would say some of the performance that we've seen the last few years Impacted our return on capital, return on equity, All those ratio and this is the foundation of why we came up with organic strat plan over the next 4 years To build up or bring back to the level that would be more in line with our expectation.
Okay. And maybe just another one here. And you've been asked similar questions kind of with a similar flavor. But On the volume growth side, if you look at Saputo's history, most of the growth that has come has Come from acquisitions in terms of the volumes and organic growth that call it maybe market over the long term. So when you look at the volume growth, your competitors are the same, sometimes irrational competitors, sometimes some of these co ops, They don't make decisions based on their financial discipline in the interim.
How comfortable do you feel with these volume growth numbers given that the past really hasn't shown it and the competition set is what it is?
Yes. So Vishal, the activity that you speak to in terms of Competitive natures. That's really more what we've seen in Canada and in the United States. To a lesser degree, in Argentina, we have been growing well beyond per capita consumption because we have Access to the raw material and we have the ability to be able to sell that not just domestically but also into the international markets. The same thing could be said for our U.
K. Platform. We embarked on A project where we're increasing the plant's capacity and perhaps maybe Tom can speak to it a little bit in more detail as to where we are on that journey. But when we first acquired the business, we were processing about 500,000,000 liters of milk. Today, we're well beyond that.
And the growth has been in accidents Of where the markets are going. And then I'll speak to Australia. The real challenging thing in Australia Is access to raw material, not so much access to markets because 50% of its volume is sold domestically, which we're Doing quite well in. The other 50% is sold internationally, but we don't have access to the raw material because of the decline in production Just in that country from 11,000,000,000 liters of milk down to probably something like 8,500,000,000 or 9,000,000,000 liters of milk. So, what you're referring to in terms of market competition, is more related to Canada, United States.
I will ask Lynn and Frank to speak to that in a minute. I'll ask Tom to talk a bit about our evolution in the U. K. Since we've acquired the business.
Okay. Thanks, Lino. Good morning, Michel. I mean, Lino described it well. I mean, we're looking at Growing capability, production capability quite significantly.
We're 2 years into that journey with 3 or 4 more to go. There's good milk availability Within an existing type pool, we can match the whey growth to the cheese growth, so we That return as well. But most importantly, I think is finding markets for the product. And our sort of market leading brand in UK is most of our sales are UK based, But that's based on offering a point of difference to consumers. And I think that's even more true in some of the other markets we're now starting to get into, whether that be The U.
S. With the help from Lynn's team or the new deal with Hockland. So for us, it's going back to that value added branded model. And I think By pivoting from a very UK centric business to some of those other markets where Cheddar is sold, we We think we can offer a point of difference and drive organic growth. So I would agree with what Lino said.
I think we do see those organic growth opportunities certainly in Cathedral City.
Yes. So since we're talking division by division, Alaska, the other presidents to talk about as well, competitive Environment, access to raw material. So why don't we start continue on with Frank in Canada?
Perfect. Thank you. So in terms of access to raw material, that's historically not been an issue in Canada. There's a plentiful supply of milk. We've as a business, we've been very aggressive in expanding the focus on our brands.
And I'm pleased to say in many of our Cheese platforms, we're seeing market share growth and we're expecting that to continue. But I guess just from an overall strategic perspective, The piece I'm most excited and most encouraged about is if you look at our strap plan over the next couple of years, a lot of that profit expansion and enhancement Comes from the inside controllable. So really optimizing our operation, whether it's our plant manufacturing or supply chain network. There's still plenty of opportunities ahead. So I'd say less reliant on the market and revenue, more reliant on inside the House execution, which we've got I have an exceptional track record of having executed in the past and many of the investments that we shared in the earlier section Of the presentation on the 3 plant expansions, those are starting to come to fruition now and really start the profit expansion Moving forward.
So I'm excited about where we're pacing from an overall profitability outlook standpoint in Canada despite some very challenging market conditions.
We'll take it over to the U. S. In terms of market competition access to raw material.
So the volume and the demand remain strong in the U. S. So that's a great thing. We have access To milk, and so no challenges there either, just like in Canada. Where we are seeing some variability is in our portfolio, in our segment Folio, be it food service, retail, etcetera.
And so the portfolio mix varies by segment. And I would say, we are focusing on the categories right now that obviously drive efficiencies, Given the challenges that we've talked about prior, right, from a labor perspective and from a supply chain perspective, we're focusing on categories where we actually can have output and can Deliver to our customers. So efficiencies in production is what we're looking for, obviously, and and we're doing that to optimize our profitability as well. So that's really the focus in the U. S.
Yes. So since we're on A trend here going division by division. I'll ask Marcelo just to talk about access to raw material and how we are structured As a business to be able to be the home for many farmers, Our balance sheet is solid. Our checks are always clearing at the bank, and so we provide some certainty to dairy farmers, and that's Really, been a a blessing to the farming community, and has allowed us to increase our capacity To be able to collect milk and process. So, Marcelo?
And if you could put your camera on, please, Marcelo. Thank you.
Yes. Thank you, Olino. You did a good very good summary that in Argentina is It's open the market, yes. So we are working with time of payment and The farmers has a good relation with Sabuto due to what we did in the 18 years We are here. So the open the Argentina market is open.
Yes, you can deal with the farmers. Our growth was in this year was a growth like organic growth. Remember that we have 1,200,000 liter of input about the company and now we are 3 times this volume. So if possible And I think that we continue doing the same in the next years. Yes, in the last years, we are growing more than the Argentina production, It's only 1 year that we have weather condition in our area, but again, we can continue growing like this.
So that is the target that we have.
Thank you, Marcelo. And we'll finish it off with Richard in Australia. Maybe just give us a little bit of insight as to what you're seeing Relative to milk collection and organic growth there, please.
Yes. Thanks, Lino. And as you mentioned before, Lino, Milk has declined over the years. And if you look at the past 5 years
in
the Australian industry, the milk pool has gone from about 9,500,000,000 liters down to 8,500,000 liters Over that period of time, but it has stabilized over the last couple of years, but it is now largely fairly flat. While we did get off to a slow start to the season, due to a wet start to the season, the Dairy Australia outlook is forecasting Somewhere between a 0% to 2% increase for the current year. But there is because of this, there is very intense competition All raw milk, hence I think you may have heard before, but this is why we have a 3 pronged approach with our milk supply where We target our on farm milk intake to grow that as number 1. Number 2, we purchased 3rd party milk. And number 3, we continue to grow our toll manufacturing opportunities, looking for opportunities there.
So by having this 3 pronged approach, This ensures sustainable milk supply for us going forward.
So Vishal, I hope that gives you a little bit of visibility as To our level of optimism to hit the volume targets that we set for ourselves in the strat plan, Irrespective of what we're seeing in different markets, I think we're finding some mitigating ways to Increase per capita consumption growth by more than close to double anyways. And so we're still very optimistic about our plans to grow organic growth. And then of course there'll be Continued growth coming through M and A activity as well.
All right. We have some questions that came in from Peter Sklar through the chat. The first one being relative to the U. S. Business.
He says, last time you spoke, you seemed to suggest that Saputo would deemphasize the foodservice channel and focus on the retail channel and brand development. Is that an accurate statement? And can you provide an update on that strategy? And his second question, The obvious hole in your global footprint is the European continent. Can you provide an update on your thinking regarding the continent?
Thank you for the question. And I think it's important that we look back at the U. S. Market. We're most definitely not abandoning the food service sector.
What we did emphasize the last time around is that we're taking a look at our entire portfolio. And in order to Take some volatility out of of our overall financial performance. It was important for us to also Invest in the retail sector because the retail sector does have some nuances and different pricing models. It's more of a Fixed price kind of model, and therefore, if you have strong brands and you've got a product Offering that appeals to the consumer base of the retail side, you have that benefit and, it's sort of I'll use the word natural hedge for us, But it's an investment that's required and that's why it is an element of an important element in our multi year plan, our strategic plan. We are going to invest further invest in our brands and in our product diversifying our product portfolio, But the food service sector remains a very important and a very strong component of our U.
S. Business.
Europe, maybe, Nathan, you can talk to what we're seeing?
Yes, for sure. So in terms of Europe, well, Tom Atherton talked about our intentions to sell our UK made cheese in some of the key markets there, including Germany. So that's one way of addressing Continental Europe. But yes, when we did announce Derek Chris, we made it clear that it was a platform acquisition and that we intended to grow further and look at the continent and Continental Europe And go at it in a more meaningful way. So we've looked at some opportunities there, Especially in the northern part of Europe, Germany remains a very attractive market as well where we could set our eyes to.
But to this day, it's been more a question of timing and opportunity, but we still have intentions To establish ourselves in Continental Europe, and it could be M and A could certainly play a part in that.
All right. And Now we have a question from Mike Van Aelst. Go ahead, Mike.
Hi. Thanks for doing this. I guess I wanted to The first question to be very, I guess, simple and direct, but it doesn't sound like you're very confident anymore in growing EBITDA this year. So why if that's true, then why keep that as part of your strategic plan?
Well, the plan is it's an all inclusive plan, right? So we have plan for CapEx. We have initiatives that are going on right now that's going to generate Saving. So we feel despite all the challenges that we have today, our action are derived from the strap and we're all focused on those. And to remove this year, I'll say, well, we'll start the plan next year.
No, we started the plan. We're into it, and we're pushing The best we can. Is it going to be generating growth in F 'twenty two versus F 'twenty one? Tough call, tough, very tough, very difficult. But yes, we are into it.
We are planning our effective, our people, our effort into the plan. So We feel that's the the right way to go, and you'll position us stronger at the end of the 4 year Regardless of the element that are impacted impacting our business at this time.
So, are you keeping that in keeping that bullet in your presentation to keep the Management team motivated and pointing in the right direction and working through this year? Or do you still think there is The potential to see your EBITDA growth this year.
Yes. So if I look at the Strat plan itself, It is an opportunity for all of our divisions to be on the same platform shooting for the same goals. And despite the challenges we're seeing in the U. S. Platform, That doesn't preclude any of the other divisions from seeing growth in their EBITDA In their own geography.
So it's not because collectively there might be limited opportunity For growth versus last year's EBITDA number, that doesn't mean that the other divisions cannot deliver On growth, understand that the largest platform we operate in is the U. S. So it is going to have an impact On our collective number, but does not take away at all from our focus on our 4 year strat plan, especially that You know, orders have to be filled for equipment and technologies. Installations have to happen. They would happen, in The early days of the StratBank plan irregardless of whether we saw growth or didn't see growth or anticipate growth In any one of those geographies, you need to have a starting point.
We've triggered this process. We are not going to abandon the process. The good thing is that our balance sheet is clean. We've got the financial flexibility to spend the CapEx dollars. So we're not abandoning at all Our ideas or our plans for creating value within our business.
Okay. If the labor force does not return to normal, I'm assuming the supply chain will over time. But let's say the labor force has not returned to normal, how long would it take To normalize your fill rates, your production, move it to alternative geographies and normalize your margins Those actions, your price increases and whatnot in that scenario.
So because the greatest impact is in the U. S, I'm going to ask Carl and Lynn to talk about that first. And then maybe as a general comment, Kai, maybe you can speak to it as well.
So, it is our number one priority right now, And that is stabilizing our workforce. And we are very active. There are tactics that we're utilizing today And it's not all wage related. And I don't want to get into what is or isn't driving Folks to the employment market, but I'll tell you that we recognize that it's going to be tough, not just today, but in the short to medium term. And accordingly, we're taking action.
And some of those actions include what Lynn referenced earlier in around SKU rationalization, simplifying our business, Focusing in on the things that are winning horses for us but let's not forget that our our multi year plan, our STRAT plan Has a large emphasis on optimizing our network. So in fact, in many ways, the reason we are not giving up on our strat plan is that There's even more motivation, more justification to accelerate components of it, specifically the network optimization. And without getting into the details, I would even tell you that we've broadened the scope of that network optimization plan. And so we're we're looking at areas where we can increase the level of automation in order to minimize some of the impacts that we're seeing. We're taking a look at geographically where we operate, part of our plan.
And I've said this before, you know, It's becoming increasingly difficult to operate facilities in rural America and rural rural areas. Just the availability of talent and that is absolutely part of our thought process and where it is we will Land once we finalize our our network optimization. So we've got we've we're we know there's no, I'll say, Sacred cows out there, we're looking at absolutely everything and making sure that we position ourselves appropriately to supply our customer needs and demands for today and tomorrow.
Yes. So I guess, Kai's answer is going to be very similar, but maybe just a bit of color on the rest of the world. Sure.
As I was writing notes to the response, Carl was rambling them off, so I was crossing them off. So it's good to see that our teams are aligned in terms of our thought process. But I would just add that, making those tough decisions, I would stress that not only in the United States, but if, we've talked about Australia, if the milk situation Doesn't improve. We have to take a long hard look at our asset footprint and look for opportunities to rationalize those assets. And that's been part of our DNA Throughout our history, doing more with less, simplifying our business, and it will continue to be a big part of our game plan as we move forward.
So even though there's not a you didn't give a timeline on all these objectives, whether it's to rationalize the SKUs over a certain time or Bringing more automation by a certain date, but over the 4 year plan, if the labor situation does not improve And you still hit that 4 year target?
I'm going to ask our U. S. Team members Answer that because the bulk of the benefits will come from them and you'll hear from them the level of optimism because I don't think you want to hear that from me.
Well, I mean, I'll answer it this way. People are the backbone of our business. So it is our job to make sure that we continue to attract the best talent and retain them. And our our HR team has done a phenomenal job in these in these difficult times. And accordingly, you know, I'm not gonna sit here and and and and sugarcoat it.
In absence of people, it's gonna be tough, but we feel very confident that The plan we have in place and the initiatives that we're putting forward is a combination of reducing the, I'll say, the net amount of People hours against the total kilos and and and total liters of product that we're going to put out to the markets. And And accordingly, there are things that are, I'll use the word, people agnostic, okay, and that is about where we increase the margin And the categories that we focus in on. So, I'll tell you that I'm confident that over that 4 year plan and what Saputo has to offer, We'll attract the people and allow us to retain them.
In terms of the other divisions, as we've called out, we don't have The level of the gaps when it comes to the labor required to run our facility. So The issue, the challenge is specific to the U. S. We've talked about the COVID vaccination levels relative to the general population. And perhaps Gaetan could provide some more color around some of our efforts and just the current situation.
Good morning. So yes, There's been a lot of effort to put behind talent in the past few months and few years, I would say. If we look at from a global standpoint, we worked on our employer branding to make sure as we go to the market We know we go with our certain strategy. We also worked on our social media to make sure that we have everything we need. Our applicant tracking system, we were losing so many people because our system was archaic, whatever.
Okay. That's it. We also strengthened the team because honestly, it's an expertise that we need in this area. And we didn't leave it to the generalist to go find people. So we really hired some experts.
So that's from a global standpoint. Now At the division level, there was a lot of initiatives that were put in place. Some of them, Kai talked about, whether it's making some Adjustment. We have plans where the wages were low and we had a plan to catch up, but we accelerated that plan to make sure we're able to attract. We worked on schedule because as we hire new people, quite often, they're the ones who have to be available 24 hours Per day, 7 days a week and so on.
So how can we work on that to make it more attractive for our people? We looked at other initiatives, whether it's bonus Referrals, retention bonuses, attendance bonuses, partnership with local colleges to find resources and so on. In some areas, we even work with immigration. So we brought some immigrants to the country in some of our plants. We also work with our retirees.
Some of our retirees that we keep now work on a few days, We and Soso are staying with the organization. First and foremost, I think we are Continuing to work on our culture because that's definitely key. Just the way we handle the COVID really made a huge difference In your organization, whether protecting our people, making sure that we bring some financial stability Or even just the way we took care of them. The other piece that I'm hoping is with the mandatory vaccination in the U. S, That's going to reduce our level of absenteeism because 70% to 80% of our cases are in the U.
S. So brings a lot of Absenteeism. So as we go with the mandated vaccination in the U. S. As part of the executive order, That should also help at least from making sure we reduce the absenteeism and getting a higher pool of talent available or accessible to the organization.
All right.
Thank you. So and last question is just on your And to add value to your ingredients. I don't think you've ever told us which ingredients you were looking into Specifically, but I don't know if you're willing to share that or too competitive and but either way, what's your level of confidence Or how do you get confidence that by the time you put the capacity in place and get these products up and running that others Aren't doing the same thing in the background and that your I guess your runway Of these being value added versus being commoditized doesn't get shortened?
It's a good question. And I Won't get into all the specifics of which specific ingredients we're looking at other than maybe sharing a few things. It's both in the bovine As well as in the goat space. So, again, I'm going to emphasize specifically in North America on the goat side, We probably have the greatest amount of goat weight that It is generated in North America. And accordingly, we are just now beginning to truly Add value to those waste solids.
Historically, we didn't necessarily handle the drying aspect of that. And the Acquisition we recently made of the former Bio original facility in Reedsburg is a great stepping stone. We're already Materializing on our strategy and have a long runway on that front. On the bovine side of things, yes, there are a number of Global competitors, including other parts of our own operations, but the key remains that, it's about Making sure that we work with the right global partners, we have an incredible amount of waste solids That are readily available if you like and we're ready to make the investments that are required. A lot of this requires incremental dollars in tools and assets.
We have a group of individuals that are focused on this And we're quite confident that, we're expanding our markets to that of beyond just traditional ingredients. We're looking at areas that are, whether it's sports nutrition in greater detail, whether that is infant formula Or so forth, which we didn't necessarily play in the largest of scales before.
Yes. We're also seeing some ramp up in value in Other geographies, other platforms. So maybe I'll ask Tom to talk about how we're creating more value on the byproduct side, which unfortunately Coming out of the gates after the acquisition, we didn't quite materialize for reasons that preceded us. Maybe Tom, you want to go into some detail?
Yes, absolutely. And thanks, Lino. There are probably 2 major value added ingredient streams for us. The byproduct would be the demineralization of whey. That CapEx has all happened.
We're now up to sort of and I would really cross what I said about cheese. This is about creating Points of difference in global infant formula markets, right? Traceability is really important. So dedicated milk fill becomes very important. We're only making cheddar, so you get a nice System stream of way.
So we want to be seen as a quality premium customer in that market. The CapEx is mainly and that by the way is a barrier to entry, right? If you're going to invest in the sort of Filtration required to strip the minerals out of way. It's a big investment. You need a big cheese plant and there's not much new investment going down.
So I think For us, the challenge has been both COVID and globally, we've seen a lot of disruption in infant formula markets. We see it from all of the players in those sectors In China, I think it has been exacerbated by government reactions there to the COVID crisis And what it's done to birth rates. But if you look at most forecasts globally over the next few years, you'd see infant formula growth Projections across both Africa and Latin America as well. So for us, we've done all the things we can control. We're now able to contract with various partners across the globe to make sure that we're accessing the right piece of the market.
But certainly, in the same way we used to get a premium for our Suite Way, we He wants to do exactly the same on demonized way. I think the other one is galacto oligosaccharide, GOS, which is this prebiotic. Again, we're carving out really strong niches there in Organic sector of the market or high concentration levels of Goss as well. And we've got some really nice contracts based on Again, that quality or doing stuff that other people maybe struggle to do.
Yes. And so that Gauss technology, we've acquired that through some Different M and A activity, specifically in the U. K. As well as in Australia, Among other products, maybe I'll have Richard in Australia talk about the other products beyond Gauss, where we're creating value In an ingredient market.
Thanks, Leno. But in Australia, we certainly Have done a lot in the past and continue looking at commodities, how we value add commodities and this is specifically Setting up particular recipes and we have a lot of air add in milk and white powders including our premium skim But we also look at higher value milk components, we're into products such as lactoferrin, As Liana mentioned, the Goliosaccharides, by doing all these sorts of products, it makes them different from the standard commodity. So our focus continually looking forward is just adding value to these commodities that demand a premium. So We also leverage the Australian origin where we can and we're looking to further expand on these with tailor made formulations Going forward also for our infant and adult nutrition products as well.
The key is really we're able to leverage our global supply platform And we've got these capabilities in all the geographies. And our customers, if you look at China as an example, are looking for assured supply And food safety, high quality products. And so we're able to leverage our global supply platform. At the same time, we have some products that are In great demand but in limited supply, so if you to Carl's early example around the goat way, we have WPC55, which is in high demand, we'll leverage that product to penetrate The customer with other products to sell some of our other more commoditized items. So yes, you can have this product, but you're also going to have to load up on all the other items.
So So we take advantage of the global supply platform and it's going to be a big part of our strat plan as we move forward.
All right. Just a quick time check. We have about just under 15 minutes left. We did get a question in through the chat from Stephen Bolan from Ozan Brown. Can you give a sense of the profitability of Plant based beverage co packing business relative to the rest of your business.
And how do you see the competitive environment for non dairy cheese, particularly in retail unfolding? What's to prevent this from becoming a very competitive category?
Yes. So I'll ask Karl to get into that.
I'll say that, you know, the the plant based space in way of beverage is already very competitive. Okay? So We knew that when we we, we first entered the ring, and the key was to ensure that in In some of the markets, specifically in in North America where your traditional fluid milk consumption is declining, was to the use of our brick and mortar and the assets that that we have. And, you know, they're not 100% compatible, but very compatible in nature. We need we needed to make some investments, And we're satisfied with the overall EBITDA margin that we are earning from that beverage space.
On the cheese side, it's a lot more, I'll say, fragmented and in development. And there's a lot more, I'll say, IP, Intellectual property involved and the products that are out in the market have a whole host of different performance, if you like, and characteristics. And we really feel this is an area where we can make a difference With the kind of quality of the product that we're going to bring to the market, the performance characteristics, and, accordingly, the margin expectations are greater than that of
So just some further color. When we look at our beverage space, We're not focusing on branded activities. It's largely toll manufacturing opportunities. So we ensure we guarantee a margin. There's overhead absorption.
So that's really the focus there. And when we look at the dairy alternative cheese, we are currently producing a product off the coast of Scotland, Putting it on a container, shipping it all the way to the United States and overland transportation, and we're still able to generate a nice healthy margin. So once we have the assets on the ground to have the capacity and capability to produce plant based cheeses in the United States, which is our aspiration, We feel quite confident that our aspiration to become the market leader in that space is very doable within the 4 years.
All right. Chris Lee, I see you have your hand up. So please go ahead.
Hi, everyone. Can you hear me okay?
Yes, Chris, we can hear you well.
Sorry. Thanks for hosting this. I I said maybe a few numbers questions, if I may. With Q2 almost over, can you give us a sense of how EBITDA is trending Relative to Q1 fiscal 2022?
The challenge that we've seen in Q1 remain pretty much The whole quarter right now, so we're mid, let's say, mid to late September. So we don't have Cost of milk, say in the U. S, all that, but I would tell you that the trend that we've seen in Q1 remained for the most part in Q2.
Okay, that's helpful. And then maybe related to that is, obviously, understanding that It would be challenging for EBITDA growth for the entire year because first half is so tough. Is it still realistic To assume that you'll see some growth in the back half of the year as some of the pricing and other initiatives start to have a more meaningful contribution in the second half of the year.
Yeah. The answer is yes. The when we look at the Q3 of last year, That was one of our record quarter and that in, that included, you know, favorable market condition coming out of the US to a record quarter of 30 plus 34,000,000 if I recall. So assuming those, those are out of the picture, We would still believe that the initiative that undertook starts to pay in Q3, so we do expect Q3 to be better than Q2 and Q1. As it relates to Q4, we are going to get into an overlap of a weak quarter.
Q4 was a weak quarter, So we do expect to be able to recover in that quarter as well.
Okay, that's helpful. And another question I have is just Conceptually, can you help us think about how we should think about the impact of lower fill rates? How does it impact your revenues and EBITDA? I'm thinking, is it as simple as if you were doing, let's say, dollars 100 worth of sales when your fuel rate was close 100%, if it's down to 91%, then you're doing $91 of sales and that's sort of the impact on sales and then there's impact on EBITDA. Is that kind of as simple as that?
The variability of fuel does impact our results and but it's not always one For one, because it's not all of our volume is necessarily delivered, and therefore a direct Cost impact to us, specifically in the U. S, we have a business that, does swing from pickup, So customer picking up the order and us delivering. And I'll use the word they our customers will try to Summize their return as well, and and when things are favorable, they'll look to go to pick up and vice versa. So it's not a one for 1, in in in from that perspective, But certainly, the inflation that we've seen on the total logistics side, including that of the fuel rates Versus our more recent history had had
a negative impact. And then, thanks for that. And my last question is, From M and A perspective, have the current industry challenges resulted in a more favorable valuation Some of your competitors are obviously also struggling as well. Thank you.
From an M and A perspective, in terms of valuation, As I mentioned earlier, sizable branded retail businesses are still commanding fairly high multiples, But we did see a weakening in multiples when it comes to B2B business models Or I would call it 2nd tier brands in the market. So we did yes, we're starting to see a bit of weakening In terms of the multiples on that front.
Thanks, everyone, and best of luck.
Thanks, Chris. All right. We have about 5 minutes left. I know we do have one person that joined over the phone. So I just wanted Check and see maybe if ever you did have a question, you can go ahead now.
No? No question? Okay. So we, as I said, we have about 5 minutes left. If anybody has any last questions.
All right. Well, if there is no further questions then
Maybe I'll make that. Yes, if you don't mind, I'll Nick, I'll make just a final statement here. The last couple of years have been really exceptional. When I think back to March of 2020 Going into the pandemic, I can say that I'm extremely, extremely proud of the way that we manage the situation Going into the pandemic that we took care of our employees as Gaetan had indicated, I think speaks to the Saputo values and the Saputo culture. We did at the time talk about putting purpose over profit in the uncertainty of a pandemic.
We had no idea how deep or how wide this pandemic would be, nor did we have any visibility on how long it would last. But we felt it was right for us to do the right thing. Coming out Of that pandemic. And by no means am I saying that we're out of the woods yet. But as the markets open up And people get back to some sort of normalcy in their lives despite the fact that there are variants.
This is Proving to be more challenging than even going into the pandemic. We are approaching this with the same vigor And the same discipline as we had going into the pandemic. Now we need to recognize that there are certain things that are within Control and of course we have to avoid the self inflicted wounds. But our team is really focusing on these Things that we can control and not the things that we cannot control. We need to understand that it's been a difficult environment For our employees as well, the frontline workers.
And so our primary focus right now is the mental health Of the entire team, whether that would be the senior leadership group or the frontline workers we have in our facilities. And we will take the right decisions. That doesn't mean that we're giving up hope in terms of driving profitability for ourselves. I think the, strat plan is only further strengthening our resolve, and our optimism, That we are building solid foundations for generations to come. So as the markets are turbulent And the future is uncertain.
I feel very good about the certainty and the value that we are creating for Our stakeholders, which are our employees, our customers and our shareholders. So I just wanted to end on that note with a little bit of optimism That the sun will come out and we will all feel much better about ourselves And the results and the value that we will be generating in short order.
Thanks, Lino. And thanks again for taking part in today's event. We will be sending a post event survey through shortly. We would appreciate and welcome any feedback. Have a great day everyone.