Greetings, and welcome to the Saputo Inc. third quarter fiscal 2023 results conference call. During the presentation, all participants will be in a listen-only mode. Later, we will conduct a question-and-answer session. At that time, if you have a question, please press the one followed by the four on your telephone. If at any time during the conference you need to reach the operator, please press star zero. As a reminder, this conference is being recorded Friday, February 10, 2023. It is now my pleasure to turn the conference over to Nick Estrela. Please go ahead.
Thank you, Tina. Good morning and welcome to our third quarter fiscal 2023 earnings call. Our speakers today will be Lino Saputo, Chair of the Board, President, and Chief Executive Officer; and Maxime Therrien, Chief Financial Officer and Secretary. For the question -and -answer session, Lino and Maxime will be supported by Carl Colizza, President and Chief Operating Officer, North America; and Leanne Cutts, President and Chief Operating Officer, International and Europe. Before we begin, I'd like to remind you that this webcast and conference call are being recorded, and the webcast will be posted on our website along with the third quarter investor presentation. Please also note that some of the statements provided during this call are forward-looking. Such statements are based on assumptions that are subject to risks and uncertainties. We refer to our cautionary statements regarding forward-looking information in our annual reports, press releases, and filings.
Please treat any forward-looking information with caution as our actual results could differ materially. We do not accept any obligation to update this information except as required under securities legislation. I'll now hand it over to Lino.
Thank you, Nick. Good morning, everyone. Following a solid first half of the fiscal year, our positive momentum has continued across all our sectors in the third quarter. We delivered strong results reflecting our focus on execution and the advancement of our strategic priorities. Our U.S. sector led the way with a significant year-over-year improvement while our Canada and international sectors continued to deliver consistent results. Our Europe sector trended better despite inflationary pressure and prolonged challenges in the consumer environment. Consolidated revenues increased 18% versus the prior year due to both inflation-driven price increases and improvements in our ability to supply ongoing demand. The broad-based inflationary pressure we are experiencing across our cost base continues to be well controlled and mitigated. We're making progress on adjusted EBITDA margin recovery with a meaningful year-over-year improvement in Q3, a positive step-up when compared to the last several quarters.
Our focus on inflation-driven pricing actions and on operational improvements position us well from a margin perspective going forward. Consumer demand for our products in the third quarter was strong. Despite increasing prices compared to last year, dairy remains an affordable, flexible, and accessible option relative to other proteins on the market. That said, consumers are value-conscious, so we're meeting their needs through tailored product offerings, pack sizes, and promotions. The operating environment remains dynamic. Consequently, we are advancing our efficiency and productivity initiatives. Like many other businesses, we have been constrained by labor shortages, especially in the U.S. Staffing levels and the impact on operational throughput have been a major challenge the past 18 months. We have responded aggressively by ramping up recruitment and retention activities and leveraging our foreign worker program.
Although labor has improved, notably with greater workforce stability, we're not out of the woods just yet. While the external environment has required a heightened focus on execution, it has not limited our ability to advance our strategic priorities. We are continuing to make progress on our Global Strategic Plan roadmap. While managing our portfolio to maximize value creation and drive organic growth, we are investing for the future. As such, several capital investments and consolidation initiatives in our U.S. sector were announced last week to further optimize our manufacturing footprint and enhance operational agility. This includes the construction of a new state-of-the-art cut-and-wrap facility in Franklin, Wisconsin, and the expansion of string cheese operations on the West Coast. This has led to the decision to permanently close our Big Stone, South Dakota; Green Bay, Wisconsin; and South Gate, California facilities.
As a result, we will increase operating efficiencies translating into lower costs, further consolidate our production capacity in world-class facilities, and increase capacity and capabilities for higher margin value-added products to meet growing demand. Specifically, we expect to yield financial benefits beginning in Q4 fiscal 2024 and reaching its full potential of approximately CAD 74 million annually by the end of fiscal 2027. This more focused footprint aims to strengthen the competitiveness and long-term performance of our U.S. operations. We reached a significant milestone with our One USA project. In April, we will have completed the combination of our legacy cheese and dairy foods divisions with the alignment of our business processes, system applications, and IT infrastructure. This will allow for a unified customer experience, easier customer and supplier transactions, support a single cheese and dairy food supply chain, and continued organizational growth.
Overall, we expect the initiatives to harmonize our processes and procedures to maximize synergies, support growth, and drive more of an integrated business model in the U.S. sector. The project will mark the culmination of several quarters of hard work by our teams to thoughtfully plan for the implementation. I'm confident we'll have a seamless transition in Q1 of fiscal FY 2024. We're pleased with what we've accomplished so far this year. Overall, we see a long runway of opportunity ahead. I've said this in the past, all of our efforts to date need to be balanced with an eye towards future profitable growth. There remains more to do as we continue unlocking our full growth potential, this quarter's results represent a strong turnaround in our performance, and we have good momentum exiting this year.
I will now turn the call over to Max for the financial review before providing concluding remarks. Max?
Thank you, Lino, and good morning, everyone. I'll cover the consolidated financial performance before moving on to the sector review. We are encouraged with the continued progress that we're making, and we delivered solid results in the third quarter. Adjusted EPS on the diluted basis was CAD 0.53 per share, up 61% when compared to the same quarter last year. Consolidated revenue were CAD 4.6 billion, an 18% increase when compared to last year. Revenue increased due to pricing initiatives implemented in all of our sector, higher average market price for cheese and butter in the U.S., and higher international cheese and dairy ingredient market price. Ongoing inflationary pressures on input costs and commodity market volatility were successfully mitigated by pricing initiatives.
Adjusted EBITDA amounted to CAD 445 million dollar, a 38% increase when compared to last year and up 21% versus last quarter. Higher year-over-year adjusted EBITDA was driven by previously announced pricing initiatives to mitigate higher input costs and the favorable impact from the relation between international cheese and dairy ingredient market price and the cost of milk as raw material. We continue to benefit from our cost containment measures aimed at minimizing the effect of inflation and our effort to prioritize efficiency and productivity initiatives. Although we are progressing with our labor initiatives, we still face labor shortages in some of our facilities and supply chain challenges, which put pressure on our ability to supply ongoing demand. These factors, along with reduced milk availability in Australia, negatively impacted efficiencies and the absorption of our fixed costs. We continue to actively manage these challenging market condition.
During the quarter, we recorded CAD 38 million of restructuring costs, which include a non-cash fixed asset write-down totaling CAD 30 million. These costs were incurred in connection with previously announced consolidation initiatives in Australia being undertaken as part of the Optimize and Enhance Operations pillar of our Global Strategic Plan. Net cash generated from operating activities amounted to CAD 134 million, up CAD 27 million versus last year. This brings our year-to-date total to CAD 604 million. I'll now take you through key highlights by sector, starting with Canada. Revenues for the third quarter total CAD 1.2 billion, an increase of 9% when compared to last year.
Revenue increased due to higher selling price in connection with the higher cost of milk as raw material and pricing initiatives implemented to mitigate increasing input and logistics costs in line with inflation. Similar to prior quarters, sales volume were higher in the food service market segment, mainly in the cheese category, partially offset by lower volume in the retail market segment, notably in the fluid milk category. Adjusted EBITDA for the third quarter total CAD 149 million, up CAD 28 million or 23% versus the CAD 121 million for the same quarter last fiscal. The improvement was driven by pricing initiatives, favorable product mix, further benefit from our continuous improvement programs, and benefit from SG&A cost containment initiatives. In our U.S. sector, revenue total CAD 2.2 billion and 34% higher versus last year.
Revenue increased due pricing initiatives implemented to mitigate increasing input costs and due to the combined effect of the higher average market price for cheese and butter. Sales volume increased due to improvement in our ability to supply ongoing demand. Adjusted EBITDA totaled CAD 146 million compared to CAD 83 million in the same quarter last fiscal. The year-over-year improvement was mostly driven by the previously announced pricing initiative to mitigate higher input costs. The negative net impact of CAD 6 million of U.S. market factor as compared to the same quarter last fiscal year was mostly the results of the negative spread between the block price of cheese and the cost of milk as raw material. On a sequential basis, comparing Q3 versus Q2, U.S. market factor was positive, approximately CAD 13 million due to the favorable trend in milk cost component and the average block market price.
We expect the commodities market to remain volatile, but they have been trending favorably since the beginning of our fourth quarter. In the international sector, revenue for the third quarter were CAD 917 million, similar to last year, while adjusted EBITDA totaled CAD 111 million, up CAD 26 million versus last year. Revenue reflected higher international cheese and dairy ingredient market price, higher sales volume in our domestic markets, along with higher domestic selling price, which were offset by lower export sales volume. Revenue also include CAD 141 million of negative foreign exchange translation relative to the weakening of the Argentinian peso.
The improvement in adjusted EBITDA was driven by a better relation between international cheese and dairy ingredient market prices. In the Europe sector, revenue in the third quarter were CAD 285 million, or 17% higher when compared to last year. Revenue increased due to pricing initiatives implemented to mitigate higher cost of milk as raw material and other input cost increases. Sales volume decreased due to the added pressure on the retail market segment from inflation-driven pricing action. Adjusted EBITDA for Q3 amounted to CAD 39 million, which was CAD 6 million higher than last year. The improvement was driven by pricing initiatives to mitigate the higher cost of milk as raw material and other input costs in line with increased commodity and energy costs. This concludes my financial review, and with that, I'll turn the call back to Lino.
Thank you, Max. The decisive actions we've taken to address some of the transitory challenges while also executing on our strategic priorities will enable us to be a much more agile, resilient, and customer-centric company. We maintained our momentum in the third quarter with effective execution across our global system, despite a macro backdrop that remains challenging. In Canada, we're building on that momentum on the strength of our balanced, flexible, and diversified business model. We had a strong revenue performance. Our top line also drove good growth in adjusted EBITDA, where we benefited from manufacturing efficiencies and cost containment efforts. New product innovations within our leading brands are showing promising early results with new flavor extensions and formats. During the quarter, we launched the Armstrong lactose-free block and shred in addition to the Saputo Mozzarella lactose-free product line.
Our efforts are being recognized by consumers and leading grocery associations. Best New Product Awards, as a leading consumer-voted awards program, recently named several of our products as winners in their respective categories. This includes Armstrong Combos, Vitalite Plant-Based Cheese Flavored Slices, Armstrong Mozz and Yellow Cheddar Swirl Cheese Snacks, and Armstrong Bacon Natural Shredded Cheese. The Armstrong Bacon Shred was also named a top 10 innovation of the year by Grocery Innovations Canada. These impactful product launches reaffirm our ability to bring innovative products to market as part of our overall growth strategy. We also continue to take meaningful action for becoming one of the most sought-after places to work. We're extremely proud to have been recently included on the Forbes list of Canada's Best Employers.
To be recognized for the efforts we make in providing the best possible work environment for our valued talent is a testament to our people-focused approach and how it has always been central to the Saputo culture. In the U.S., we realized strong sales growth and margin recovery supported by pricing initiatives. Sales volume also increased as we made headway in improving our ability to supply market demand. Although still in negative territory versus last year, U.S. market factors improved from last quarter, driven by favorable commodity market prices, which rebounded from trough levels. We continue to focus on improving staffing through investments in our people, enhancing recruiting and retention efforts, and process automation. With increased staffing levels, we're improving our ability to supply ongoing demand. We're pleased with the progress we're making around margin recovery with three consecutive quarters of improvement.
This reflects strong execution on pricing action, a better supply chain performance, and cost containment initiatives. We'll continue to narrow the margin gap as we advance on our Global Strategic Plan initiatives, which include productivity initiatives, rightsizing our manufacturing footprint, optimizing our plant operating costs, and cost savings. In the international sector, we delivered a solid performance in Argentina, driven by international cheese and dairy ingredient market prices, pricing actions, and higher domestic sales volumes. In Australia, pricing initiatives and healthy demand supported top-line results, while reduced milk availability continued to impact efficiencies, margins, and our ability to fulfill demand in our export market. We made good progress advancing on the Australia Network Optimization Plan. In Q3, we announced our intention to permanently close our Maffra facility and streamline activities at two further facilities in Leongatha and Mil-Lel. These changes take effect in Q4.
These measures are part of our roadmap to increase capacity utilization, reduce costs, and drive improved returns on invested capital in Australia. In Europe, despite persistent inflationary headwinds and a challenging consumer environment in the U.K., the business improved its performance, supported by pricing actions translating into revenue and EBITDA growth. The ongoing volatility in the operating environment, however, further pressured operating margins. Our retail volumes trended positively versus the prior quarter, with the price gap to private label continuing to narrow following additional private label price increases. In addition to the positive impact from new listings and private label wins. Cathedral City, the U.K.'s number one cheese brand, recently extended its product lineup into the dairy alternative category. The recently launched plant-based offerings have resonated well with consumers.
We're seeing incremental volumes from this product offering, as well as solid repeat purchase rates already exceeding our original demand forecast. We're also receiving positive retailer feedback with expanded distribution. Notably, we've secured several new retailer listings, and we were recently recognized by the FoodBev Awards and The Grocer as the best plant-based alternative to cheese and the Top Launch award for dairy and dairy alternative cheeses. Recognized and trusted brands like Cathedral City provide a powerful platform to offer plant-based options as well as a competitive advantage that will help us lead in this category. As we close out the fiscal year and look forward to next year, we're paying particular attention to the following areas.
First, inflationary pressures remain high across the supply chain and on wages. In response, we are focused on executing cost savings in addition to pricing initiatives to offset some of the cost pressures we cannot mitigate. Second, our elasticities are only moderately increasing, and we see good market demand, but we are closely monitoring for signs of changing consumer behaviors. Finally, our labor initiatives will need to deliver further results in what remains a challenging labor market for us to accelerate the recovery of our U.S. sector and execute our Global Strategic Plan initiatives.
In closing, I'm very pleased with our year-to-date performance. We continue to build momentum, and we are well-positioned for the current consumer economic environment. We are confident that the focus on our key initiatives will drive growth through the remainder of the year and as we continue to execute our Global Strategic Plan. I thank you for your time and for your support. I will now turn the call over to Tina for questions. Tina?
Thank you. If you would like to register a question or comment, please press the one followed by the four on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, please press the one followed by the three. One moment, please. The first question comes from Vishal Shreedhar of National Bank Financial. Please go ahead.
Hi, thanks for taking my questions. Congrats on the quarter and the momentum that the business is building. I think you alluded it to it off the top, but I'm just wondering, as you look back when you initiated the Global Strategic Plan or at least announced it to the market and you look at the various segments, if you can just update us on where each segment is versus plan or what you thought if they're ahead of plan or still some catching up that needs to be done? And if there is, how are you gonna close that gap?
Yeah, that's a great place to start, Vishal. You have to understand that when we first initiated and first designed and architected the Strat Plan, the world was a very, very different place. Labor, inflation, and supply chain impacted us over the course of the last two years, and not just us, but also our suppliers of goods, suppliers of services as well, and suppliers of equipment. We have found ourselves over the course of this last year adjusting and adapting. I'll take you back to year one, we weren't adjusting or adapting, we were just putting out fires.
Last year, this fiscal year that we're in right now, we have seen the resiliency of our, of our talents, of our people, of our team to be able to adjust and adapt effectively to the new global macro environment and the new realities, that we, that we had to contend with. The world is very, very different today than the first day that we drafted and introduced our Strat Plan. The fundamentals of our Strat Plan are intact. I will tell you that as we're moving along, there are certain elements of the Strat Plan and certain elements of the pillars within the Strat Plan that are changing as we move along. I'll give you a couple of examples of that. There are more opportunities today in the network optimization versus the original plan.
If I take a look at both the U.S. and the Australian platform, circumstances have changed dramatically in the last two years. Those opportunities are gonna be enhanced. Those opportunities are gonna be put in the forefront. The other element I would say that has changed dramatically from the initial phases of the Strat Plan is we're not focusing on the volume targets anymore, we're focusing on value over volume. This is a substantial shift to make sure that we keep our margins intact and that we continue to create a valued product for our customers in an environment where they're prepared to pay for the incremental value. That has just two examples of some of the things that have changed. There are still some moving targets.
We do evaluate on an ongoing basis what fits best for us and what will drive the best returns. There will be more details to follow. As you can appreciate right now, we are in our budget season, and these are the kinds of questions we're asking ourselves so we can look well into fiscal 2024 and fiscal 2025. I will say that Q3 is a great indication that we have turned the corner. We're well on our way to recovery. We've got great momentum, and the fundamentals of the Strat Plan are very, very much intact.
With respect to the regions that are... Is it fair to say that some regions are performing ahead of plan, maybe Canada, and some regions still have some catching up to do, maybe Europe and International? I think that's was the previous suggestion. Is that still the way we should look at it?
That is a very accurate statement. I will tell you that there are some divisions that are ahead of their plan. Others are behind their plan. There are some puts and takes. We still feel very, very good about all of the initiatives that we put on paper, even for those divisions that are lagging. Yes, there are some puts and takes, some pluses and some minuses, Vishal. That's a very fair statement.
Okay. Thank you.
Thank you. The next question comes from Mark Petrie, CIBC. Please go ahead.
Hey, good morning. Obviously, the volume recovery in the U.S. is great to see. Can you just talk about that a little bit more? Help us understand how the effect of the price increases played against the improved service levels. you know, in other words, do you think the price increases had a negative impact on volumes at all?
Hi, Mark. This is Carl. Thanks for the question. What I would say is, and I'll try and answer the question with some of our, you know, major categories, dairy foods and cheese. From a cheese perspective, overall from a you know, fill rate and service perspective, we're back on track. For the most part, there is no challenges really in supplying the market demands in most of our cheese categories. On the dairy foods side, I would say that demand has continued to increase materially. In some of our dairy foods categories, we are, I'll use the word, struggling to keep up with that demand. Our overall throughput in both categories has increased and continues to be on a good momentum.
Pricing and the pricing actions that we have taken has not negatively impacted demand from the marketplace. Really, when we take a look at our service levels, it comes down to ongoing strong demand, specifically in the dairy food sector, and some, you know, ability to adapt to that strong demand in some sectors, aerosols being one of them in particular.
Okay. On pricing, I mean, obviously, it's gonna depend on the category, but where you have a good degree of control, do you think you're effectively in balance today in terms of your operating costs and your pricing?
Yes, Mark, we've taken the necessary pricing actions across our portfolio as needed. I would say that we're effectively, I'll use the word, caught up at this point. You know, I also wanna qualify that we've done everything we can, and we continue to do everything we can to mitigate costs as they come through, and before we think of the pricing actions. Obviously, if we, you know, you roll back 18 + months, there was lots of catching up to do as the inflationary pressures were coming in fast and furious. We've since caught up.
We're on top of it. As the inflationary environment persists, and it is persisting, we will continue to look to mitigate, to offset some of those costs before considering pricing action. If we need to explore pricing action, we would do that, and it may not be across the board. We always look at it on a case-by-case basis and ensure that we're doing the right thing for our customers to keep our demand in check.
Yeah, understood. Okay. Then just the last one. I also wanted to ask about the progress toward the fiscal 2025 target, EBITDA target. Notwithstanding the challenges in exports from Australia, it seems like the commodity is now generally a tailwind for you. Can you just give us a rough sense, you know, from the run rate that you're at today, how much of the bridge to the fiscal 2025 target would come from a commodity and how much will come from work that is within your control?
Well, Mark, this is Max. I would say, you know, when we look at the market that is now recuperating all the favorable trend, we'll take it. I mean, we've been hurt in the last couple of years from a market perspective. Any benefit that we could get, absolutely we'll take it as we move forward. We feel from a pricing perspective, we're in a good spot. We now have to bring our initiatives up to the expectation, and this is will be for us the key element for us to achieve our FY 2025 target. As Lino mentioned, yeah, the labor is one of the critical component. We need labor, we need to and we're maintaining our efforts in order to achieve that target by FY 2025.
It is a stretched target. The mark remain on the wall. We're confident in our initiatives, I mean, that they will materialize, and the benefit will be there. A lot has to do with what we can control, the, you know, and everything from a market perspective, we'll absolutely take it.
Okay. That's helpful and all the best.
Thank you. The next question comes from Irene Nattel, RBC Capital Markets. Please go ahead.
Thanks. Good morning, everyone. Can we just talk for a minute about the Canada segment, which it was really nice to see that sort of very strong trend and the EBITDA margin level that we have not seen in a very long time. Can you just walk us through what the key factors were that contributed, and is there anything from the results in Canada this quarter that we can extrapolate to the other segments as time goes on?
Thanks for the question, Irene. What I would say in Canada in particular is that, from a timing perspective, what we're seeing is, you know, operational efficiencies benefiting also from prior initiated projects. Over the last several years, we've initiated, you know, a variety of, either consolidation projects, automation, all of the above. Some of that has finally come to fruition, and we're seeing that in our results, today. We're also seeing, a shift in channel. The food service sector recovered very well, in calendar 2022 here. From an overall business, that was favorable to us from a margin perspective as well.
Overall, when we take a look at mix, you know, versus cheese, versus fluid, all those pointed in the right direction, contributing to the positive results we see in Canada on top of the efficiency. I would also add that the Canadian team fared better, certainly than the American division with regards to labor attraction and retention. The gap was smaller, as in way of, you know, vacancies, and they fared better at filling those roles quicker and benefiting from the market demand and being able to supply the markets where others, competitors may have faltered as well.
That's really interesting. Thank you. Then just sort of jumping off from that point, Lino mentioned that the One USA is really gonna be sort of coming together in, let's call it, you know, in early in FY 2024. Again, any key learnings from when you merged Canadian operations? What kind of benefits or what is the magnitude of the benefits that we're expecting to see, and how should we on the outside be watching all of this, you know, to gauge the success, in quotation marks, of the One USA?
Yeah. Irene, what I would say is that, you know, when we announced the merger of the two legacy groups, you know, the very first things that we did was a management, if you want, merger at that point. We knew that the business processes and the systems in which they operate in, the ERP both being SAP at the time, and while actually the U.S. division was the cheese division, excuse me, was still going through deployments of SAP. We had to let that sort of follow its course. We're now at a point where after having, you know, unity as a team and as a group, we now need the business processes and the back office systems to merge.
That's what this One USA, if you like, and internally called Project North Star is really all about. Lino referenced the date of April.
On April 1st, we will have those systems mergers go live on us. The learnings really come from the prior go lives of, I would say from our SAP deployments. Much of the same work goes into this when it comes to change management. Ultimately, what we will see is an easier set of business practices that will allow us, truthfully, to have a combined supply chain and an easier customer interaction or ease of transaction with Saputo as we move forward. In the near term, the benefits will be small. In the longer term, this sets us up to further integrate our two legacy business practices and installations, in fact.
Thank you. Then just finally, because you'd be disappointed if I didn't ask about it. Can you update us on your current thinking around M&A and the activity levels and valuations?
Yeah. Evaluations, as you've seen in many transactions, have come down, and you could expect that if we were to make an acquisition, that we would be mindful of the current economic environment. Having said that, we continue to look at different files that do come up. As I've mentioned in previous calls, we will be extremely disciplined in our approach to evaluate them. Those acquisitions definitely have to be strategic and need to be accretive day one. You know, our primary focus, as I've also mentioned on previous calls, is the Strat Plan. We believe in the investments we're making. We believe in the returns that those investments will make.
If there is an acquisition that will allow us to enhance a part of the pillars of the Strat Plan, get us further along quicker and mitigate some of the CapEx allocation, then that's something that we're looking at. We need to stay active in the market. We need to know what's going on. We have to have the market intel as well. Our M&A teams continue to look at different files. Not all of them fit our criteria, not all of them are strategic, and not all of them are priced right. I can assure you that that discipline will continue and that focus will continue. We're just gonna be moving ahead on the Strat Plan as our primary focus.
That's great. Presumably, as you move further along in the process of implementing the Strat Plan, sort of the opportunistic element of M&A, you know, if the wheels are already in motion, the opportunistic element kind of diminishes in probability. Is that the right way to think about it?
I'm not sure I understood the question right. You know, Irene, that you've been following us long enough that acquisitions is part of our DNA. If the opportunity for the right deal to come along at the right time is there, we will take that opportunity. The criterias have tightened quite a bit. You know, multiples on transactions are not what they were even a year ago. Our willingness to buy, fixer uppers is no longer there. We have enough, you know, enough to do within our own platform that we don't need to fix someone else's problems.
It's got to be a well-run, good business that is accretive and diversification from the categories that we're currently in. That would narrow down quite a bit the number of files that we're looking at. Still, exciting for us as we think about, you know, beyond the Strat Plan of future potential growth.
That's great. Thank you.
Thank you. The next question comes from Michael Van Aelst of TD Securities. Please go ahead.
Hi, good morning. Congrats on the results. I wanted to ask you about those U.S. fill rates, because on the one hand, it sounds like you're catching up in terms of your ability to deliver. On the other hand, you're talking about labor still being a challenge, and you still have to make more progress. Can you update us as to where you are on fill rates in the U.S. in Q3? Am I right to read into the outlook statement that you expect to be back to that 99% or so by the end of Q4?
Maybe, Mike, I'll take that question in two parts. I'll speak to the labor aspect first, then I'll circle back to the impact to fill rates. From a labor perspective, we've made very important improvements since the start of the fiscal year with regards to filling our gaps in our vacancies. If I had to put a number to it, I would say we're about 2/3 of the way of where we, we filled about 2/3 of our vacancies. That's meaningful progress at this moment, and that has absolutely contributed to our ability to rebound on our fill rates since the start of that fiscal.
When we take a look at the sort of the outlook as well as the more near term of what occurred in Q3, there are some categories that and some regions where it was tougher to recruit, and we still have larger gaps than what I just referenced. That would have impacted our ability to supply the ongoing demand. Now, in Q3, there's some seasonality to contend with as well. There's some categories, in particular in the dairy food side, that have very high demand at that moment in time.
Despite increased output throughout the network in that dairy food sector, we were not able to keep up with all of that demand. On a pure percentage basis, some of our fill rates may have dropped in that sector, but we're confident with the ongoing progress that we're making with you know, talent acquisition and retention. We made some very specific changes to the way it is we onboard our teammates, the way we select candidates with compatibility to the manufacturing sector. All of those things are contributing to a more positive experience for those who join our team and a, you know, quicker contribution, if you like, from them, in way of efficiency and proficiency.
Very confident that Q4 will be able to continue with that momentum despite the U.S. continuing to be a very challenging labor market. Unemployment rates continue to drop in the U.S. as we just saw here in January. I think our proposition as an employer is attractive, and that will translate into continued improvements in the overall outputs of both categories, and then translate obviously into improved fill rate levels for most of our categories. Still very confident that we will get back to historical levels here in the near term.
Okay. Not necessarily in Q4, but in the next few quarters?
Yes, that's absolutely the target. We feel very confident that, both, you know, our mechanical installations as well as our human resourcing aspect to make it happen, are both well-positioned right now.
Okay, great. Also in the U.S., you talked about some of the dairy ingredient prices rising, and I'm wondering which ones in particular were most helpful for you.
I would say that, you know, on the surface, the higher fractions of proteins, WPC80s, we benefited from good market conditions, not just in the U.S., but globally. Also with some of the, I'll call them lower value, items or ingredients such as lactose. They were also, I'll say, a good value in the marketplace. That did benefit us, of course. Some of those highs are starting to taper off here. Maybe I can, you know, turn it over to Leanne for some commentary about sort of global demand and pricing outlook for that category.
Hi, Michael, it's Leanne. Yeah, we do expect pricing to moderate, especially in the lower protein ingredient categories, as we look ahead. However, highly specialized ingredients, as Carl referenced, that pricing continues to be quite stable. We have a lot of contracted business as well, and we've taken those prices into account. We actually have overlapping contracts that move across quarters for a number of our geographies. That market pricing has benefited a number of our geographies, however, we do expect that pricing to moderate.
Can you give us an idea of what roughly the mix is between those higher protein items and lower?
Really from, it depends on the geographies, and you look in the U.S. and Canada, which, you know, we operate fundamentally as one group when it comes to the dairy ingredient space. We have a very good balance between higher fractions of proteins as well as what we would call lower valued whey solids, which is fundamentally sweet whey protein. We have a very good balance in North America, with regards to those kind of market shares, if you want. Leanne?
The same in Australia, in particular, we operate across multiple categories, so we have tailored ingredients right through the mix. With, you know, with Argentina, it is again a mixture with more at the lower protein level.
All right. Thank you.
Thank you. As a reminder, via the phone lines, you may press the one followed by the four to register a question or comment. The next question comes from George Doumet of Scotia Capital. Please go ahead.
Yeah, good morning. Congrats on a strong quarter. I just want to talk a little bit about selling costs. They were down year-over-year. Typically, it grows with inflation over the past few quarters. Maybe you can comment there. Is it a one-time thing? Or, just maybe trying to get a sense of the sustainability of the trend over the next few quarters?
George, it's Max. Are you talking about SG&E costs? Not sure I heard the question properly.
Yes. The selling, y eah, selling costs.
Yes. on the selling costs, we've seen customer. That includes some delivery and logistical costs in that line that you're looking at. In some instance in the U.S., we do have some customer that have some pickups rather than us delivering, so that attracted the cost down. I would also say that there's of course some FX component within the line that you're looking at.
Also from an efficiency standpoint, we have a lower resupply from facility to facility, between our own plants that have been captured under that selling cost line. Those would be the elements that would reduce the selling cost.
Okay. Thanks for that, Max. Just one more for you on working capital, as the investments seem to be continuing there. Can you maybe give us a sense of how long we should expect the drag to go for and maybe any sign of reversal coming up in the next few quarters? Any color there, perhaps?
Yes. Every year in Q3, we tend to see an uptick in our working cap. Right now the level where we're at, we feel we're at a high in terms of investment. Understand that from that investment, it's mostly market driven. So we have some instance where, I mean, we're not only recovering, we're growing some of the business, so there's some logical or normal growth in the working cap. The majority of the investment we're seeing is market related. And yes, we feel we're a bit of an uptick. And we do expect the use of cap frozen into working cap should diminish over the next couple of quarters.
Okay, thanks. Just to follow up an earlier question. Lino, can you give us a sense of how much more room we have on the optimization initiatives? I think the bucket was CAD 200 million. It seems that we're running well ahead of that. Maybe any color that you can provide.
Yeah, George. We are right in our budget season. These are the types of things that we're discussing and evaluating. I would say that there is going to be more CapEx allocated to optimization, but with it, of course, will come the return on investment. We'll have more color in the future quarters. We are challenging our teams to look at those projects and those opportunities that will derive the best value for us. There are going to be some moving parts here, but more color to come.
Okay. Thanks, guys.
Thank you. Our final question comes from Chris Li, Desjardins Securities. Please go ahead.
Oh, hi. Good morning, everyone. Hi Lino. You know, I, just maybe a quick follow-up on your answer to the last question. Just, you know, when you said about you guys have identified more opportunities and optimization, and there's a shift maybe a bit more from volume to value. Is it fair to say, you know, compared to your original Strat Plan that you've essentially really pivoted to more areas of the operation where you do have greater control over so your own destiny? If that's the case, does that change kind of give you more confidence that your Strat Plan EBITDA target is achievable?
Let me start off by the achievable target. The CAD 2.125 is a solid number. That is, you know, as Max mentioned it's, you know, it's the target on the wall that we're all shooting for. The initiatives that we have are supporting the CAD 2.125. This part of the reflection that we're going through now, number one is to see how quickly can we get some of these projects done. Understand with supply chain impacts to our equipment vendors and service suppliers, in some cases has slowed down relative to the original project.
Labor also is an important element for us. We need to have the talent to be able to execute internally. That is also an element. The number CAD 2.125 billion is solid. The some of the projects and priorities may have shifted, this is what we're all working towards right now.
Okay, great. That's helpful. Maybe another question I have is, you know, I know no one has a crystal ball on, you know, where cheese milk spread is going, but can you remind us again, you know, what is your underlying spread assumption, you know, to achieve that EBITDA target? Secondly, you know, in your personal view, what are some of the risks that could drive the spread should go back to that -CAD 0.20 range?
Hey, Chris, it's Carl. I, you know, we certainly don't have that crystal ball because every time we try and forecast something, the market surprises us on spread. What I can tell you right now is that, you know, yes, the spreads are favorable to what they were last quarter. They're actually not as favorable as they were as, you know, last year, same time. You can see that there's still lots of volatility in the market space. You know, the near term, and I mean, like really near term here, one week, two weeks, three weeks, we still see some, I'll say favorable market spread environments. Overall, some of the, you know, the underlying assumptions that we do have as part of our modeling is still negative territory.
It's not as though our models consist of some sort of positive territory. You know, whether it be, you know, historical levels that we may have seen, like + CAD 0.03 or something like that's not built into our models.
Okay. Okay, that's great. Maybe a last one, just on the international side. You know, you mentioned that the export sales volumes were negatively impacted by the milk situation in Australia. Is that sort of worsened sequentially from Q2 to Q3? When do you expect that situation to start to, you know, stabilize? Or is that a growing concern?
Hi, Chris. It's Leanne here. As far as some of these things, we talked about the pricing. Yes, both the market pricing obviously did benefit our Australia division. At the same time, we still have headwinds around our lower milk intake. Actually, we now obviously just passed the flush milk season as well for Q3. Sequentially, we're seeing, you know, improvements. Of course, we'll need to keep an obviously an eye on milk in Australia. Managing our milk intake is a key priority for us, but equally as important is actually what we do with that milk. We believe we can still be profitable and maximize the value of every liter of milk from the Australian platform.
Great. Okay. All the best. Thank you, everyone.
Thank you. At this time, I'll turn the call back over to our speakers for any closing remarks.
Thank you, Tina. We thank you for taking part in the call and webcast. Please note that we will release our fourth quarter and full year fiscal 2023 results on June 8th, 2023. Thank you, and have a great day.
Thank you. This does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines. Thank you, and have a good day.