Earnings Call: Q4 2020

Jun 4, 2020

Greetings. Welcome to the Saputo Inc. financial results for the fiscal year ended March 31, 2020 conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. At that time, if you have a question, please press one followed by four on your telephone. If at any time during the conference you need to reach an operator, you press the star followed by zero. As a reminder, today's call is being recorded Thursday, June 4, 2020. I would like to turn the call over to Lino Saputo Jr. Please go right ahead. Thank you very much, Tommy. Good afternoon, everyone. Thank you for joining us. Taking part in our call today are Lino Saputo Jr., Maxime Therrien, and Kai Bachmann. Before answering questions from our analysts, Lino will begin by providing an overview of our fiscal 2020 fourth quarter and year-end results, as well as an update on how we are managing our activities in light of COVID-19. Before we begin, a reminder. This call is being recorded and will be posted on our website. Please also be reminded that some of the statements provided during this call are forward-looking. Such statements are based on assumptions that are subject to risks and uncertainties. We refer to our cautionary statements regarding forward-looking information in our annual report, press releases, and filings. Please treat any forward-looking information with caution, as our actual results could differ materially. We do not accept any obligation to update this information except as required under securities legislation. I'll now hand the call over to Lino. Thank you, Sandy. I hope you're all keeping safe during these trying times. I would be remiss if I didn't start the call by addressing the challenging situation we're all experiencing at the moment. Our thoughts are with those who are ill and with those who have lost a loved one as a result of the COVID-19 pandemic. I also want to express a heartfelt thank you to every Saputo employee for their ongoing passion and dedication. Since the onset, we've understood to forge ahead successfully, we have to support one another. I'm extremely proud of what we've overcome and accomplished thus far. COVID-19 has impacted our business, but we are finding creative ways to overcome the obstacles it brings. While the situation continues to evolve, our objectives remain to ensure the safety of our employees and the continuity of our business. Notwithstanding, overall, this was a solid year for us. The pandemic only started to impact our results late in our fourth quarter. We reached new heights in terms of revenues and adjusted EBITDA, and we were thrilled to add the Europe sector to our global platform. With numerous achievements came downward pressures, many of which we met head-on over the past few years. To comment on the fourth quarter specifically, consolidated revenues increased by 14.9%, mainly related to the contribution of recent acquisitions. Additionally, adjusted EBITDA grew by 8.5%, while adjusted net earnings were down by 21.5%. The Canada sector posted healthy fourth-quarter results, benefiting from higher sales volumes, mainly in the fluid milk category. In a competitive low-growth market, the division remains keenly focused on responding to evolving consumer preferences, particularly in value-added products, while maintaining profitable volumes in all categories. In the U.S., results were negatively impacted by competitive market conditions within the mozzarella space. As a result, lower cheese sales volumes had an unfavorable effect on efficiencies and operational costs. Going forward, the division remains focused on growing its specialty and value-added products, as well as pursuing operational efficiencies. In the last two weeks of the quarter, all sectors felt the effects of the pandemic. For us, Canada and U.S. felt it the most, with increased activity in the retail segment while food service demand steeply declined. Though the impact on quarterly revenues wasn't significant, adjusted EBITDA was negatively affected by, among other things, an inventory write-down caused by a drop in certain market selling prices, as well as a loss from unsellable inventory destined for the food service trade. In our international sector, Australia had a challenging year, no doubt. First, the devastating bushfires. Now the effects of a global pandemic. Both have dealt a hard hit to the region. Lower milk production continues to pose its challenges. Over the next few quarters, the Dairy Division Australia will forge ahead, further capturing opportunities derived from combining its operating activities under a single platform. Moreover, it will leverage the impressive portfolio of brands it now has in its roster. Our Argentina platform delivered consistent results despite navigating challenging economic conditions. While COVID-19 had a negative impact on our export sales, domestic demand in Australia and Argentina has remained relatively stable. The Europe sector, anchored by long-standing and well-loved U.K. retail products, will seek growth opportunities by leveraging its brands, pursuing line extensions, and potentially expanding sales overseas. The positive impact of the lift in retail demand resulting from the pandemic benefited both revenues and adjusted EBITDA in our U.K. business. As for our 22. Although this schedule could change as a result of COVID-19, we plan to move forward with the subsequent phase of implementation within the Cheese Division USA to be completed by the end of fiscal 2022. The implementation in Canada is expected to begin during the third quarter of fiscal 2021, and all our plans will move in tandem with government guidelines. Looking ahead, we expect sustained retail sales in all of our geographies, we cannot predict how long or how significant the increased demand levels will remain. We do not anticipate the positive impact on EBITDA resulting from increased retail sales to offset decreased sales volumes in the food service and industrial market segments. We will be standing at the end of this crisis, strong and ready to pursue our growth journey as we take advantage of the opportunity the market will offer. Every sector will maintain efforts to actively manage our operations and to leverage our expertise, flexible platforms, and global footprint in order to mitigate the short and long-term negative impacts. We will remain focused on adapting our manufacturing capabilities to cater to local realities and changes. Times like these truly highlight our great fortune. Our balance sheet is solid, and our business is sound. The strong foundation we've built over 65 years affords us the luxury to do the right thing and to seize the right opportunities when they arise. We view these unique circumstances as an occasion to be a stabilizing force in the industry, and we are leading by example. True to our character, we're thrilled to lend a helping hand to others during this time. In addition to the support we've been offering our employees, we've been giving to local food banks and providing expanded services and resources to our patron farmers. Our ongoing community contributions across our divisions have reached over CAD 4.2 million and still growing. Recently, our efforts were recognized by the Canadian Business for Social Responsibility. It's remarkable how quickly the world can change. Yet I've never, ever been more confident about our people, our products, and our future. I can't acknowledge enough the exceptional passion and dedication of all our employees worldwide. I am privileged to work alongside such a talented and loyal team. Together, we will forge through this adversity and come out even stronger. I thank you for your time, and we will now proceed to answer your questions. Thank you. If you would like to register a question, 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 or to withdraw your registration, it is the one followed by the three. Once again, it is the one followed by the four for any questions or comments. One moment please for our first question. We'll get to our first question on the line from Irene Nattel from RBC Capital Markets. Go right ahead. Thanks. Good afternoon, everyone. I was wondering if you could walk us through the ways in which you've been able to adapt your production platform to date in order to sort of adjust to the new reality in terms of demand. We've heard you say many of that out of every adverse situation, you learn something. Are you rethinking at all perhaps the actual footprint and whether it makes sense to have dedicated facilities at this point in time for food service and industrial? Irene, that's a very good question. We had to tackle this early on, as early as the month of March. We saw that there was a demand shifting from retail to food service. In some cases, some of our plants were down to about 30% production capacity utilization. It was incumbent on us to see how we could repurpose some of our facilities, some of our plants, and some of our products. Of course, we had some inventory we had to dispose of, or we tried to repurpose that into other categories of products that we can sell either retail or some other channel. If we couldn't do that, we would give it to food banks. Going forward from the inventory that we were sitting on, we're saying now we have to bring in this milk. We have to produce products. How do we manufacture products to get them to consumers? We had a lot of good, constructive discussions with our customers who were, by the way, very open and collaborators in us being able to repurpose some of our products. Things like different formats, different sizes, different labeling, different brands that we would bring to market. We were successful in doing that. Perhaps, maybe Kai can add a little bit of color there. What we did learn is that we need to have, number one, first and foremost, a strong balance sheet at all times. We need to make sure that we can weather any storm at any given time. Thankfully, we've taken the right decisions over the 65 years, but more specifically over the last year or two to delever our balance sheet, to make sure we had financial flexibility. One, to guarantee all of our employees that they didn't have to worry about their income, and they didn't have to worry about their jobs. Our first priority was our people, their security, their health and safety, their protocol, and then find a way to serve those products to market for consumers. We learnt that our prudent approach is always very, very good, especially when you get into a crisis mode. Today, we're in an enviable position to be able to take advantage of these opportunities that ultimately will arise by those companies that weren't quite as prudent. Maybe I'll pass it on to Kai to see if he's got more color that he can provide you in terms of how we repurpose some of our plants or some of our products. Thank you, Lino. I would say that it really depends on the division that you're looking at, because some have a lot more flexibility than others. If you look at our international platform in Argentina and Australia, the mandate has always been about putting that milk into those products that generate the highest variable rate of return. Those divisions, those platforms offer a lot of different options in terms of market segments, whether it's retail food service, but more importantly on the export side as well. Then you look at the types of products as well. There's a lot more flexibility in those two platforms. If you move over to the U.S., we have worked with our retail partners in terms of looking at retrofitting or repurposing food service formats so that they would be accepted by cash and carry outlets or larger retail formats. We have had some success there, but limited, because, in terms of changing the capabilities of some of our platforms in the U.S., it would require a lot of CapEx investments as well as lead times to secure the necessary equipment. There are, however, other opportunities from a U.S. platform. We witnessed a low block price at the beginning of May, which allowed us to tap into some export opportunities, which we took advantage of primarily in the Asian markets. Those would be some examples in terms of using our flexibility in light of the current situation. That's really helpful. Thank you. Taking this a step further, does it make you think that over taking a longer view, you need to build a little bit more flexibility into some of your U.S. plants, or in a normal world, this just wouldn't be an issue? We don't know what a normal world is anymore, Irene. Yeah to be honest with you. Yeah. The reality is that if you've got flexibility between selling into retail food service and ingredient and a good balance between those three channels, I think you can mitigate a lot of the headwinds and perhaps the new normality of consumer patterns. That's what we're curiously looking at in all of our platforms, in all of our geographies. We will certainly not abandon the food service or ingredient. We think that that will come back. In certain geographies, we might have to think about a proper balance between the three. That's great. Thank you. Coming back to the issue of balance sheet and cash flow management, could you walk us through the thinking around introducing the Dividend Reinvestment Plan? Yeah, I'll have Max tackle that one. Sure. We came up with the DRIP program that allows the shareholder to be paid via share instead of cash. It's at the whole shareholder discretion. It does provide the opportunity for the shareholder to increase participation in the company at a discount price. From our end, it provides us with additional cash flows. We intend to use that potential cash flow to accelerate the deleveraging of our balance sheet, gain financial flexibility, moving towards our leverage of 2.25 times our EBITDA. That is our sweet spot for us to maintain our strategy of growing through acquisition. That's the first and foremost fundamentals around that. We do believe that we would create more value pursuing acquisition and maintaining our acquisition strategy. It fits absolutely well with our acquisition profile. That's all I have to say. I have just one other thing I would add, that the DRIP program is not a result of COVID. This is something that we had been contemplating for a little while. The timing of it comes out around COVID time. One is not linked to the other at all. Just so we're clear, we do not have any liquidity issue at all. This DRIP program is not liquidity issue driven. It's really deleveraging our balance sheet, getting more financial flexibility in order to be a bit more active on the M&A front. We believe coming out of this crisis, there are going to be great opportunities on the M&A front. Okay. I'm sorry. I was ready to hand it over to someone else, but you just opened the door, Lino. I can't. Could you walk through, at what point do you think about M&A opportunities? Would you be comfortable moving forward with something now? Do you need to see how things evolve over the next several months? How are you thinking about things, and how many files, how many people have been calling you? The number of files have grown. I typically say that we got three to four files on the table at any given time. You can add more files to the table because our phone has been ringing. Now, in terms of timing, Irene, we are prepared to move forward on an acquisition to the degree that we see that we're getting it at the right value, and it is strategic for our development and our orientation. The only complication, I would say, in executing a file would be the due diligence process, because we are hands-on people. There is the virtual due diligence, which we can still perform, which we are performing in many cases. We've got to get boots on the ground into the manufacturing facilities to make sure that we turn over every stone and we can visualize the opportunities that we can bring to that asset. That is going to be a bit more challenging until travel restrictions open up. That does not stop us from moving forward into phase 1 and phase 2. Phase 1 is a preliminary evaluation. Phase 2 is the due diligent analysis to get us to a letter of intent. Finally, phase 3 would be once we get into a discussion with a potential seller, then we've got to meet the management, and we've got to visit the facilities. That right now is going to be a bit more challenging, but from what I'm understanding from our government, there is going to be opening up or easing up of travel restrictions as of the end of this month. The normal course of due diligence process can continue. Nothing is stopping us right now from continuing to move on in these files. That is great. Thank you. Thank you very much. We'll get to our next question on the line. From the line of Peter Sklar from BMO. Go right ahead. Thank you. On the CAD 44.8 million of inventory write-downs and the sale of inventory at loss and all that related to what's going on in the food service channel, can you talk a little bit about the shelf life of that inventory in your warehouses by categories? Does some product have more short-term shelf life, but others have longer shelf life, so you'll be able to carry over through this issue? Do you anticipate further write-downs, or is this it? Peter, this is Max. The CAD 45 million is composed of three elements. The first element is relative to, it's a couple of million within that CAD 45 million, relates to some accounts receivable that were deemed at risk, that from our analysis perspective, from an account by account analysis, we felt that we needed to take some reserve to offset the potential loss. That's the little piece of this overall CAD 45 million. There's about CAD 24 million, which is relative to the inventory that you are referring to, that we're trying to repurpose. The vast majority of that inventory is in the U.S., it refers to goat cheeses, it refers to blue cheeses. When those inventories are packaged or produced and packaged in some format and you want to unpack and do things differently with those inventory, you're altering the texture, you're altering the product. That's the vast majority of that inventory piece. The shelf life of those products, first, we sold most of it during Q1 right now. Inventories are gone. Obviously, we're not able to repurpose the whole aspect. Those are the main taker from an inventory standpoint. Now we get to the third piece, which represent about CAD 18 million, and that's the net realizable value of the inventory we had on hand at the end of March. You know that the commodity market went down significantly, forces us to take an inventory market write-down, like we would have typically done at any given quarter, any given year, to reprice our inventory at the low level of the commodity. Of course, when the commodity starts to rise again during the Q1, the inventory on April 1st, it sits at a low value, then, yes, we are materializing additional profit relative to that in Q1. To your point, whether there's going to be another write-down popping out, it all depends of what the market's going to do. Right now, the block in the U.S. sits at the $2.50 plus. Should this thing, and it remains above the pre-COVID-19 commodity market, we do not anticipate any write-down. If it go down again to a $1 market, yeah, we would ultimately end up facing additional write-down. It all depends of the market, whether it's landing. At the current time, we, yes, enjoying The fact that the market is high and we have no issue with regards to inventory, whether it's the repurpose, we're not producing additional inventory that we anticipate having lost, and we currently do not have any expectations from a write-down perspective relative to the market where it stands today. Okay. Maxim, just to clarify, the CAD 18 million that you referred to, that's not directly related to what's happened in the food service channel. Rather, that's just related to the ups and downs of dairy commodity prices. You're absolutely correct. Driven commodity. We know that the commodity dropped because of the COVID situation, that's exactly it. It's market-driven. It's not inventory that we were not able to repurpose. That's another CAD 24 million-ish. On another issue, in your commentary and in the write-up you've talked about in the U.S. business that there was competitive market conditions in the cheese sector. You called out mozzarella, I think, Lino, in your commentary. This backdrop that you're seeing, is this COVID related or are there other factors at play here? The beginning of that was not COVID related. There was more capacity that was built into the U.S. manufacturing system by some of our competitors. COVID only exacerbated this issue. The last thing I wanted to ask you, I'm sure you obviously would notice that recently if you look, dairy commodity prices have really whipsawed in May versus April in quite a dramatic way for some of the commodities. Can you talk a little bit about how Saputo copes with that? Should we take that into account when we consider your earnings for the first fiscal quarter? The rationale behind this volatility, the U.S. government stepped up and as part of their COVID-19 assistance program, they've spent big money on dairy. They've taken a big chunk of that milk production out of the system. I talked to the exports ramping up during that load block period, that had an impact as well. What we're seeing right now in the last few weeks, as the shelter-in-place restrictions are being lifted, the food service segment is reloading their pipeline. There's a lot of uncertainty in the market, and that's what's caused that volatility. From a Saputo perspective, if you look at the U.S., 48% of our business is food service. We do have a healthy retail business, we do have a healthy ingredients business. In terms of the food service space, what we're seeing is on the QSR front, things are really picking up. If you look at the general kind of data, they're down about 15%-20% versus last year as a segment. A big part of our business, especially for SDF, is QSR driven. As that gets back online, back to more historical levels, that's obviously going to help Saputo. In terms of the general food service business, our broadline distributors are coming back online, we're starting to see a recovery in that category as well. I would say that the general trend is that things are picking up, and we're cautiously optimistic in terms of our prospects moving forward. Kai, when you say QSR is down 15%-20% year-over-year, what period are you referring to there? That would be the period, we're looking at May, for the period of May. Okay. The most recent data. Okay. Thank you for your comments. Yep. Thank you very much. We'll get to our next question on the line from Mark Petrie with CIBC. Go right ahead. Hey, good afternoon. I just wanted to follow up, I guess, on a couple of the things that you've already touched on, but specifically with regards to the comment and the outlook about potentially taking 12 months or more to recover to the levels that you guys delivered in fiscal 2020. I wonder if you could just be a bit more specific about that outlook, because it does sound like there's certain aspects of your business where the recovery has actually happened reasonably quickly. Obviously others are going to take longer. Could you just give a bit more color in terms of that outlook and what aspects of your business you think may take a while? Yeah. Mark, this comment is triggering through sort of what we're reading in the economy, is all around the food service recovery. We have the same visibility as everyone as to how the segment of all the restaurants and the food service sector will be coming back at full speed. What we're reading, what we're observing is that it will take more than a couple of quarters to get back to normal, and that's the intent that we're trying to reflect in this outlook comment there. Okay, thanks. That's mostly a U.S. segment comment then? Well, the food service has been impacted all geography that we're in. Obviously, we're a bigger player in food service in the U.S. Yes, it would apply to the U.S., but the whole food service sector, segment, whatever country you're looking at. Obviously when you look at the U.K., almost no impact. Much lower impact in Australia Argentina. We have some impact in Canada. Obviously, yes, we're impacted in the U.S. Okay, thanks. Just to come back to the sort of broader commodity complex in general, perhaps you could just give your commentary or view on how the industry has responded to the volatility in demand from a supply perspective and, as you look out over the course of the next year, what your perspective is for the commodity complex overall, understanding that there has been clearly, a huge amount of volatility. Yeah. I'll start off with the U.S., especially when the block went down from $1.90 at its high down to $1.01. There was too much milk in the system. You probably saw the same way I saw some visuals of dairy farmers in different states dumping their milk. There was something that needed to happen. I think there was good, strong leadership at the co-op level that would educate the dairy farmers to try to take off some milk at the farm level. Cows were culled, milk has come down, and then, of course, you had the government programs that supported some of the buying of some of the solids. That's what rebalanced a little bit of the supply and demand in the U.S. Having said that could be fragile. I think there could be more volatility down the road, especially, if there is a load up of inventories in different countries, which we have seen in the past through government programs, that ultimately will have to be flushed into the system. I don't think that a $2.50 block price is going to stand for a very long time. We need to be mindful of the fact that somewhere in future quarters, the block will come down, and as Max alluded to, there will be some inventory write-downs. What we are doing, Saputo, as an organization, is that we're taking on the milk that we are contracted to, but not beyond contract, and we're making to order. We are not building up high levels of inventory, just to store them in the eventuality that markets will come back. The real indication of market price is going to come with the balance of supply and demand. Europe is producing lots of milk. There's an oversupply of milk relative to demand. If I look at some of the other countries that we're in, the U.K., milk is balanced. In Australia, milk is in deficit, but growing now. Argentina, milk is balanced and growing. Ultimately, there is going to be incremental solids, I think, that are going to be in the market. Market prices, I think, are going to be volatile until we get back to some sort of normal consumer patterns as we had seen them in the past. This is going out to the 12-month recovery that we alluded to in the outlook. Okay, thanks. That's helpful. I guess you sort of touched on it, but just if you could provide a little more detail, maybe this is for you, Max, with regards to sort of the inventory position that you have now. Obviously, there's a lot of noise in the number with prices and your various acquisitions, but inventory was up but not remarkably so. Could you just sort of talk about inventory levels within the company today? Yeah. Well, the inventory, I would like to mention that everything is under control. Obviously, market going up, it tends to attract a higher investment from a working cap perspective. So are the sales. When we do sell, we have accounts receivable that are being captured and showing greater amount. Obviously, we're very close from a cash flow perspective, the ins and out. We do not have any issues from a working cap perspective, whether it's AR, AP, or inventory. The levels are within the normal range. We feel very comfortable with that situation right now. If we would not, we would have taken additional write-down, but the write-down that we taken was specifically addressed to inventory repurpose and the market drop. Okay. Appreciate all the comments, guys. All the best. Thank you, Mark. Yes. Thank you. We'll get to our next question on the line. It's from the line of Michael Van Aelst with TD Securities. Go right ahead. Hi, good afternoon. I hope you're all doing well. I guess I wanted to follow up with the earlier question. First of all, you mentioned that QSR was a big part of, I think you said Saputo Dairy Foods business. Can you give us an idea of how food service in general is split up among QSR and Broadline? From a Saputo perspective, we don't disclose those numbers, and we don't want to disclose those numbers for competitive reasons, Michael, if you want to ask some questions specific about the trends in QSR, we're happy to do so. I would just add that we're well-balanced across those three segments. If you take the U.S. as a consolidated business, it's QSR food service, it's all those segments. Well-balanced. Okay. When you look at the financial impact of COVID, and you're talking about fiscal, taking 12 months for your financial performance to get back to where it was. Are you looking at that as a pro forma fiscal 2020 level? Or is that excluding acquisitions that you made that came in only late in fiscal 2020? No, it would definitely exclude any future acquisition. When we talk about the material impact to our business, we're looking at our business to grow. FY 2021 will be a challenge year for us to grow, and that's why we're calling it as a material to the business. Appreciate it, you try to want to measure or quantify the impact. We would love to provide you with as much of info as we can. All to say that we are maintaining the course. We're staying the course. Our cash flow are positive. We have complementary platform, complementary segment and sectors, and we intend to maintain our strategy. Our strategy for FY 2021 as it is for all the years, is to grow. We see that it'll be a challenge year for us to grow from, let's say, the CAD 1.5 billion of EBITDA. It's going to be a challenge. This is what we could give you in terms of color to that effect. Okay. If you were to try and place the financial impact of COVID in various buckets, could you try and rank, like whether, if you took a look at, say, sales volume decrease, plant inefficiencies, higher employment and sanitation costs, can you rank the significance of the key buckets? I'll take a first crack at this, then maybe Max might want to complement it. By and large, the largest expenses we have is the plant inefficiencies. Either plants doing products that they were not destined to manufacture, so they're not the most efficient setups, but we are getting product out the door. Perhaps plants that are running well below their capacity utilization. That is happening. We have some also warehouse and delivery expenses, that are going to go higher on a per pound or per kilo basis, only because we're sending our trucks out on the road, but the trucks are not as full as they normally are. There, too, delivery costs on a per pound or per kilo basis is going to go up. When you talk about the incremental expenses relative to sanitation, not a massive expense. Only because we are a food safety-oriented organization, like most food manufacturers are, the protocols are in place anyways, with or without COVID, to have sanitary environment. In some areas, we have to run our plants below every line's capacity because we need fewer or we can only have fewer people on the line. That's the reality we have to live with. Normally, if a line should be running 45 bags a minute, maybe we're running 30 bags a minute to have fewer people in the pack-off area so that we have more distance between our employees. The sanitary costs themselves, no. To be consistent with the protocols, we may have to run our plants below capacity utilization. To me, that is where the largest expense for us will be in this COVID environment until we get back to our levels of throughput that our plants are used to running. Was that clear enough? Yeah, I think that's quite clear, actually. When you look at these extra costs and we can compare it to the drop in the margins in the U.S. and Canada versus the earlier parts of fiscal 2020, was that drop all COVID related or are there any other factors in play that changed versus Q2 or Q3? Most of that drop was COVID related. When Max talked about the CAD 45 million of the COVID hit, we are not even factoring the other expenses related to warehouse delivery, plant efficiency, expenses we have in our system relative to running capacities lower because of COVID. That's over and above the CAD 45 million of the COVID expenses we signaled. Okay. The other thing too, Michael, I want to also add, I said this in one of my responses to Irene. We are paying our employees in full, whether they're running or working their full hours or not. We have a no layoff policy in place. That is the security that we're providing all of our talent. There are so many different things that they need to be worried about. We don't want their wages to be one of them. Irrespective of whether people are working from a plant, an office, whether they're working their full hours or part hours or whether they're not working at all, because they may be affected or inflicted by COVID, they are getting 100% of their take-home wages. There are not going to be any layoffs through this crisis. This is a commitment we made to our employees. The labor expenses is also one of those intangibles that we did not quantify in the COVID costs that Mac signaled out. Okay, perfect. Just finally on Europe, revenues are much stronger versus Q3 as were margins. I'm wondering, did you actually have a capacity increase during that period? Because I know you're looking to increase your capacity there and capacity was tight. How did you get that lift? Was that a capacity increase or was that something like selling down inventory? Well, we're increasing our throughput. Yes, we've expanded our capacity, and that's only the first phase of our planned expansion. There's been tremendous demand on the part of the retail products that we produce there, primarily in the cheese category, also in our spread business, which we don't talk a lot about. It's been performing phenomenally well. Even our Frylight business, which is a smaller offshoot, is also performing at a very strong level. There's a lot of supply chain issues on the continent. A lot of our competitors are unable to service their retail customers in the U.K., and we've been able to take advantage of that. There's a lift across the board when you look at that platform, which has been a great success. Mike- This is it. Go ahead, sorry. I just want to add that Q4 for Dairy Crest always been the strongest quarter. We were expecting incremental volume from that division. Did we see the capacity increase in the quarter or will that start to show up in Q1? That'll show up in this current quarter, and we have plans to further increase our capacity as we move forward. Okay. Thanks very much. Thank you. We'll get our next question on the line from Vishal Shreedhar with National Bank Financial. Go right ahead. Hi, thanks for taking my questions. A few easy ones here. Is it fair to say that as food service demand comes back, retail demand commensurately fades and is that what you are seeing? Yeah. Our latest data shows that things are starting to normalize. Really depends on which part of the world you're looking at, Australia as an example, is already back to pre-COVID levels, back to historical levels. We're still seeing a lift in North America, across all three divisions, Saputo Dairy Foods, SCUSA, and Canada. When you look at the U.K., it's well ahead of historical levels. We're still seeing a lift and we anticipate that that lift will start to come down as we start to normalize, we'll see food service continue to recover as we move forward. One of the interesting things that we saw through this crisis here is that we've been one of the dairy companies that has performed extremely well in terms of order fill rates and delivery to the retail trade, and we have picked up new business because of this. We think that some of that new business is going to stick beyond this. Even though our retail volume is going to normalize, some of the lift will remain for us. That's an excellent point. Just in terms of how the teams have stepped up in North America from a supply chain standpoint, making sure that their customers are receiving the product. There's been a lot of instances, again, I mentioned the U.K. with continental Europe, it's the same thing in North America. A lot of our competitors have fallen short in terms of fulfilling their commitments, their deliveries, we've taken advantage of that. That's helpful. On your ability to fulfill the spike in retail demand, Saputo runs its capacity usually fairly tight to maximize operational efficiency. Have there been customers that have reached out to you and you had to turn away demand? And if so, was that substantial, the amount of demand that you turned away? No. We didn't have to turn away much demand. This is where, again, in my previous statement, where we had to have some discussions with some of our customers and think about getting creative, thinking about formats that are not typical for them to accept, thinking about labeling that is not usual labels that they would take, thinking about perhaps receiving product in different sizes, streamlining our operations or perhaps less SKUs, less complexity in the system so we can run our plants that much more efficiently. The retail plants with our retail-oriented customer base was very open to listening to us about how we can pump more volume out of our system, even though our plants were running prior to that close to their full capacity. That's helpful. Your comment says that there were challenges related to margin, which is understandable because of COVID-19, you're paying your employees, prioritizing purpose over profits, as you mentioned in the past. Similarly in retail, should we have anticipated because of these streamlining initiatives and because of the heightened demand that the retail profitability was also somewhat temporarily elevated and those two factors will have to converge at some point, depressed profitability in food service and elevated in retail? Well, I just want to point that the profitability from a retail versus a food service has more to do with what is the product that we're selling rather than which channel we're selling the product. Obviously, if we're looking at some product which is more commodity that we're selling in the retail market as a pure straight white milk, that would not attract much more margin or in fact, probably less margin than any other food service type product. On the flip side, if we're looking at branded cheese or value-added specialty cheese, yeah, those product from a retail perspective would attract higher margin than whatever food service products. That's the color I would give you on that. Max's point is that the product mix will affect our profit more than the channel sales. You got it. Okay, that makes sense, is it fair to say that the streamlining initiatives that you implemented to satisfy heightened demand and the heightened demand leveraging your fixed cost, that also aided your profitability in the quarter associated with COVID? Is that a fair comment? Depending on which channel. If I look at the Canadian channel, Canada, no, because we sold a lot more fluid milk, which is not the most profitable product we're selling relative to the overall basket of goods. Now, in other channels, yes, that statement would be fair. Rather, in other countries, that statement would be fair. Okay. With respect to milk, obviously an encouraging trend on milk. Is that a trend or is that just a COVID spike related to stock causing all the other cases? Yeah, the funny thing about this, I've had some conversations with different people from the dairy industry as well. It almost seemed like when COVID hit, milk became a comfort food. For some reason, the pantries could not remain full on fluid milk. Now, is this going to be sustainable? I hope so. I would suspect we would get back to the trend of milk in decline at a rate of about 1% to 1.5% per year. Okay. Do you think cross-border shopping with milk had any impact at all? Absolutely. Okay. Absolutely. We're seeing those provinces that are on the border, their milk volume has gone up because of course, travel restrictions and I guess, the U.S. dollar as well. However, travel restrictions were the biggest part of that. We did pick up new business, and I think we mentioned this before, in that some of our competitors were unable to service some of the retail accounts. We had the opportunity to pick up some of that business. Thanks for your answers. Thank you very much. We'll get to our next question on the line from Patricia Baker with Scotia Capital. Go right ahead. Thank you very much and good afternoon, everyone. Would you be willing to share with us what your food service declines were at the peak of the pandemic impact on your business? Sure. Depending on the geography, in line with the overall category down up to around 60% would've been the number. Okay. Kai, would it be fair to assume, based on some of the other things that you've said on this call, that your May trends were better than your April trends? Absolutely. Okay. Then you said, depending on the geography, I found that interesting. All of the geographies didn't have the same year-over-year % decline, there were differences? There were differences primarily in the international markets. You have to remember that in Australia and Argentina, the food service component makes up a much smaller percentage of the total business, less than 10%. The impact in those two geographies would've been a lot less severe than it would've been in North America. Okay. Thank you. Lino, in the MD&A, there is a piece of the MD&A, the outlook, talking about the fact that you tend to aggressively pursue plant-based opportunities. Two things. Can you review with us what your exposure is to plant-based currently? Secondly, are you of a mind that you believe that this current pandemic will unleash some plant-based opportunities that wouldn't have been there otherwise? In terms of exposure, it's right now minimal. We are co-packing for some brands. We've taken on some contracts that are yet to materialize. The exposure right now is limited. Good question on opportunities presenting themselves. We're seeing a lot of interest come our way. It could be through investment bankers, could be through the bankers of some companies that are operating, and it could be directly from companies reaching out to us because it's a relatively small industry. I would say the basket of opportunities would be wide and large. Okay. Thank you. Thank you very much. We'll get to our next question on the line, from the line of Christopher Li with Desjardins Securities. Go right ahead. All right. Good afternoon. Lino, I know you never want to wish bad things for your competitors, I'm just wondering, are you starting to see any of them closing down some of the weaker and smaller ones? Yeah. Going into this crisis here, we knew that there were some competitors whose balance sheets were not that solid, not that strong. Their leverage was quite high. What we're seeing right now, if not in whole, there are parts of certain businesses that are coming on the market. To me, that is a sign of stress. That is a sign of financial difficulty and a sign of folks wanting to deleverage their balance sheets. Going into the crisis, they were not in good shape. During this crisis, even worse shape, not all assets that are becoming available are good assets. There might be some junk on the market. We're not looking at the junk. I think what might happen is the junk that's available might not sell and might not be enough to save the company, eventually, I think as a second phase, once those companies realize it, they may have to put the whole thing lock, stock, and barrel for sale. We are in a fantastic position to wait on the sidelines and wait for the right opportunity to come along at the right price, for the right strategic orientation for our business. I tell you, I'm truly optimistic about what's to come after COVID-19 is behind us. Great. That's helpful. Maybe just on food service, when I listen to a lot of the food service distributors speak and read some of the industry forecasts, I think the consensus view is we're a pretty quick recovery next year, which makes sense as the restaurants and the economy gradually reopen. My question is, first, do you agree with that view? Secondly, what do you think are some of the risks? I would say it's too early to call that we're going to return to those normal levels. Right now we're seeing food service operators restocking the pipeline. This isn't the new normal yet. We're going to have to wait to see over the coming weeks and the coming months what that may look like. We can't forget that when you talk about risk, if there's going to be a second COVID wave, that's obviously going to have a huge impact, probably worse than the first wave. That's something that's definitely on our minds. Yeah, I would complement that by saying until there is a vaccine, I don't think the restaurants are going to get back to their full capacities. They're going to have to, if they open up, use perhaps one-third, maybe half at best, of their square footage, which means less capacity for the same store. Until there is a vaccine, I don't think we will get back to much normalcy at all. There's also some data that point to some food service operators that haven't been able to adjust in terms of having a focused menu, offering delivery options, takeout options, that sort of thing, that potentially up to a third of those food service operations could close permanently. That's something that is also on our minds. Okay, that's helpful. Then I guess my last question is just on the international side. There have been some trade tensions between China and Australia, and I know it's only impacting the barley and the beef segment, not the dairy product. Just wondering if you're seeing anything on the ground over there or you're hearing anything on that front. Well, dairy is considered a strategic food because they don't have the required dairy solids for their domestic requirements, so they need to rely on imports. We haven't seen any reduction in terms of import requirements from our side. From a Dairy Australia perspective, we've received the same news so far. Okay, great. I wish you and your team might continue to stay safe and healthy. That's very nice of you, Chris. I appreciate that. Thanks very much. We have one more question. There's a follow-up question on the line of Irene Nattel of RBC. Go right ahead. Thank you. Just very quickly closing out, could you remind us or could you refresh us, Lino, at this point, Lino and Kai again, what your strategic priorities would be from an M&A perspective? Yeah. The strategic orientation is to continue to build our platforms in the geographies where there is milk production. Let me highlight the different regions. We've got North America, which primarily is the United States. We have Europe, we have Australia, possibly New Zealand if there's an opportunity for us, and perhaps on the back burner is Latin America. All of those regions are dairy-producing regions. All of those regions we know extremely well. Most of those regions, with the exception of New Zealand, we have management in the field. Those regions are extremely attractive to us. Beyond that, if I look at product categories, of course it has to be in the dairy space, but the dairy space that is really within our wheelhouse. Cheese production, dairy powders, byproducts. I would exclude from that yogurt and ice cream typically for retail, although we do make ice cream mixes. I will not discriminate on food service and ingredient. If there is a great opportunity for us in food service and ingredient, we would certainly take a look at that. In some geographies, I would like to perhaps consider some diversification out of those categories and into some retail. Then of course, rounding things off, plant-based. If there is an opportunity for us to buy a brand in plant-based, that is also something that is part of our scope of strategic targets for acquisitions. Not that different from what it was pre-COVID-19. We still believe in the dairy space. I'm still bullish about growth in dairy, although some categories are down, other categories are up. Fluid milk is one that I don't have a whole lot of desire to expand our presence in other geographies. If there's an opportunity for us to take on new customers that are profitable for us, we would be more than happy to do that as well. That pretty well rounds out where our focus is. I will tell you, Irene, going back to one of your original questions, is the pipeline full? Yes, the pipeline is full with opportunities. That's great. Thank you, Lino. Thanks very much. Mr. Saputo, we have no further questions on the line. I'll turn it back to you. Thank you very much, Tommy. As we sign off, I just want to wish everybody well. Please stay safe, and I'll hand it back to Sandy. We thank you for taking part in this conference call. We hope you'll join us for the presentation of our fiscal 2021 first quarter results on August 6th. Have a nice day and stay safe. Thank you very much, and thank you, everyone. That does conclude the conference call for today. We thank you for your participation. Please disconnect your lines. Have a good day, everyone.