Saputo Inc. (OTCPK:SAPIF) Q3 2024 Earnings Conference Call February 9, 2024 8:30 AM ET
Company Participants
Nicholas Estrela – Director of Investor Relations
Lino Saputo – Chairman, President & Chief Executive Officer
Maxime Therrien – Chief Financial Officer & Secretary
Carl Colizza – President & Chief Operating Officer, North America
Leanne Cutts – President & Chief Operating Officer, International and Europe
Conference Call Participants
Irene Nattel – RBC Capital Markets
George Doumet – Scotia Capital
Mark Petrie – CIBC
Tamy Chen – BMO Capital Markets
Vishal Shreedhar – National Bank Financial
Chris Li – Desjardins
Rob Dickerson – Jefferies
Operator
Greeting and welcome to the Saputo Incorporated Third Quarter Fiscal 2024 Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded on Friday, February 9, 2024.
I would now like to turn the conference over to Nic. Please go ahead.
Nicholas Estrela
Thank you, Frank. Good morning and welcome to our third quarter fiscal 2024 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 second — 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 and are subject to risks and uncertainties. We refer to our cautionary statements regarding forward-looking information in our annual report, press releases and filings. Please treat any forward-looking information with caution as our actual results could differ materially. We do not accept any obligation to update this information except as required under securities legislation.
I’ll now hand it over to Lino.
Lino Saputo
Thank you, Nic. And good morning, everyone. In the third quarter, we continue to execute with discipline and advanced a long-term strategy in a dynamic macroeconomic environment. We reported adjusted EBITDA of $370 million on revenues of $4.3 billion. Our Canadian sector continued to show its enduring strength, while our US sector also made good progress, notably supported by our capital projects. Higher sales volumes, coupled with the operational benefits of our capital spending programs, as well as our emphasis on cost management and continuous improvement had a favorable impact on our results. Importantly, operating cash flow during the third quarter was strong, volatile global dairy commodity markets and a challenge to consumer were persistent themes in the third quarter, much like in a fiscal year to date. But while the consumer is still shopping with value seeking behavior, we are seeing clear progress in volume recovery across our business segments.
As macroeconomic drivers impact the global economy and continue to drive commodity price volatility, we remain focused on managing the factors within our control and stabilizing the business. Our priority areas include operational excellence, successfully executing the major capital projects underway, cost containment, and cash flow generation. We are making material progress and advancing the key initiatives of our strategic plan and continue to build confidence in the next stage of our growth. We reached a critical juncture in the implementation of our global strategic plan during this quarter. I’m delighted with how projects are advancing and the impact of the actions completed to date. I expect these investments to contribute to our results starting in early fiscal 2025. With most of the heavy lifting behind us, I remain very confident in our long-term strategy. And I’m optimistic about the future. Our focus on execution will position as well to enter fiscal ‘25 with much momentum.
I will now turn the call over to Max for the financial review before providing my concluding remarks. Max?
Maxime Therrien
Thank you, Lino, and good morning, everyone. Going over financial highlights for the quarter; consolidated revenues were $4.3 billion, while adjusted EBITDA amounted to $370 million, down 16.9% versus last year. Lower year-over-year adjusted EBITDA though was driven by lower international cheese and dairy ingredient market prices, the negative impact from the US market factor also negative impact from the selling of inventory produced at high milk prices in the UK. And the unfavorable foreign exchange impact when converting foreign currency to the Canadian dollar mainly due to the significant devaluation of the Argentinian peso in December.
Positive drivers include higher sales volume in both domestic and export markets, ongoing cost containment measure, lowered logistics cost and benefits from the derived from our global strategic plan, including continuous improvement supply chain optimization and automation initiatives. We reported a net loss of $124 million in the third quarter on an adjusted basis our earnings $463 million or $0.38 per share. Third quarter results include a non-cash impairment charge of $265 million relative to the Australia division.
In performing our annual goodwill impairment testing, our dairy division Australia cash generating unit CGU estimates of future discounted cash flow were reduced due to the increasing disconnect in the relationship between international cheese and dairy ingredient market prices and farmgate milk price in a context of declining milk pool in Australia. As a result, the estimated recoverable value of the Australia CGU was determined to be lower than its carrying value and a non cash goodwill impairment charge of $265 million, which was recorded in the third quarter, representing the total value of the Goodwill for this CGU.
Third quarter results also includes closure and restructuring costs of $6 million. I’ll now take you through key highlights by sector starting with Canada revenues for the third quarter total $1.3 billion and increase a 5%. When compared to last year, revenue increased due to higher selling prices in connection with the higher cost of milk as raw material and the carryover impact of pricing initiatives mostly in the first half of 2024 implemented to mitigate ongoing inflationary pressures on our input costs. Sales volume were stable year-over-year in the retail market segment, while sales volume and the food service were higher, adjusted for the third quarter total $160 million up 1% versus the same quarter last fiscal year.
Our stable performance reflected benefits from our cost containment measure, lower logistics costs and benefits derived from our global strategic plans, which reached their stable run rate. In our US sector, revenue totaled $2.1 billion in our 5% lower versus last year. Revenue decreased due to the combined effect of the lower average cheese Blanc, butter and dairy ingredients market prices. Sales volume more stable with higher domestic sales volume despite ongoing competitive market condition, whereas export sales volume were lower.
Adjusted EBITDA declined 9% to $133 million. The year-over-year decrease was mostly driven by a $27 million negative impact from US market factor driven by the combined effect of the cheese and milk spread the inventory realisation and the RE ingredient market prices. Also $10 million of costs incurred to implement previously announced network optimization initiative was recorded in the quarter. These factors were partially mitigated by operational improvement and lower logistics costs.
In the International sector, revenues for the third quarter were $636 million down 31% versus last year, adjusted at the total $85 million down 26 versus last year. The performance of the sector was negatively impacted by the unfavorable relation between the international cheese and dairy ingredient market prices and the cost of milk as raw material. And also an unfavorable FX impact from the conversion of the functional currencies used in the international sector to the Canadian dollar, mainly due to the significant devaluation of the Argentinian peso. The impact of the effects conversion amounted to $305 million on revenue and $36 million on EBITDA.
A decrease in certain markets selling price also resulted in an inventory write down of $14 million. This was partially offset by higher milk intake Increase export sales volume and the carryover effect of previously announced pricing action in our domestic market. Our results were also positively impacted by previously announced network optimization initiatives aimed at improving our operational efficiencies and strengthening our competitiveness in Australia in the Europe sector revenue are $304 million, while adjusted EBITDA amounted to $2 million. The decline in adjusted EBITDA was due to the selling off the sell-off of inventory produce at high milk prices last fiscal year, lower international dairy ingredient market price also had a negative impact.
Net cash generated from operating activities for third quarter amounted to $388 million as compared $234 million [ph] for the same period last year. The increase was driven by ongoing working capital and inventory management initiatives. We remain on track on our capital investment plan. CapEx for the quarter total $140 million and the year to date spending is in line with our expectation. We continue to expect a significant improvement in our cash flow generation over time, as will be our investing benefits from the global strategic plan and our CapEx returning to a level similar to our depreciation and amortization expense range.
Finally, we announced yesterday the suspension of the dividend reinvestment plan. The suspension of the drift is the results of our leverage position as well as our expectation on cash flow generation going forward. This concludes my financial review.
And with that, I’ll turn the call back to Lino.
Lino Saputo
Thank you, Max. In Canada, our results reflect our relentless focus on commercial and operational execution with a diversified portfolio that offers consumers variety, convenience and value. Our Global Strategic Plan delivered continuous improvement, supply chain optimization and automation initiatives. Volume improves on the strength of the foodservice market segment, notably with QSR customers.
Our retail market segment also benefited from a busy holiday season. With everyday cheese volume supported by increased brand investments, particularly with Armstrong in the US, the business is building momentum. We have seen more operational stability and sustained improvements in customer fill rates, volume trends and our domestic market continued to recover. While our broad based capital investment plan is on track, with several major projects well underway. Dairy commodity markets remained volatile during the third quarter us dairy market pressures were only partially mitigated by higher sales volumes and lower logistics costs. But if you look past this market noise, the core business has performed well.
So far this year, the quality of our top line momentum has improved with a healthier balance across price, volume and mix. While these temporary market dynamics have certainly lasted longer than we had anticipated, markets are expected to stabilize over time. However, it is the speed of the recovery that remains unknown. We have also been making progress on our strategic plan in the US with advancements on network optimization and automation and with better visibility on our savings opportunities. New cheese red lines are in start-up mode at our Tillery page plan and we are meeting customer demand. The plant closure of our big stone, Green Bay and Southgate facilities by the end of fiscal 2025 should further support cheese network optimization plans.
In the third quarter we closed our Belmond facility and benefits from the recently converted Reedsburg [ph] goat cheese manufacturing plant should continue to increase in Q1 of fiscal 2025. Once our Lancaster facility is permanently closed, the new automated cutting route facility in Franklin is currently running with benefits expected to begin by the end of this quarter. The targeted investments made position us well to operate more efficiently and do more for our customers than we ever had before. This is expected to drive momentum going into fiscal ‘25. In the International sector, global dairy markets remain challenging due to unfavorable very commodity prices and Australia; our results were in line with the previous quarter.
We benefited from higher milk intake resulting in better operating efficiencies offset by unfavorable dairy commodity prices. Based on the milk decline and current challenging market conditions, we reviewed our estimates of future cash flow for Australian division. This resulted in a non-cash impairment of $265 million on the value of the Goodwill for the Australia division recorded in the third quarter. While there is still uncertainty in the near term market dynamics, we are dedicated to doing everything we can to maximize the results of the division. Our strategy remains unchanged. We’ve continued to advance our network optimization, and we are benefiting from the positive impact from several streamlining activities completed over the last few quarters. The business remains focused on its domestic market with Select key customers in the export market playing an important role.
We are maintaining our disciplined approach to managing the business and we are confident we will be in a much better position with the actions we are taking in Argentina, weakness in the export commodity prices and the recent devaluation of the Argentinian peso impacted our results. But our domestic business remains strong with higher pricing and volumes in the Europe sector. The selling of inventory produced at higher milk prices continued to be a headwind in the quarter as expected. Moving forward, our performance should improve sequentially, as we cycled through high cost inventory. And as we begin to ship new value added private label contracts. Efficiency benefits from the expanded non-eaten packing facilities are also expected to accelerate once the closure of the plant is completed in Q1 and fiscal 2025. We are also pleased with the rate of volume recovery in the retail branded channel and our progress around optimization initiatives.
Turning now to our outlook for the remainder of the year, we anticipate many of the trends from the third quarter will carry over into the fourth including in the international sector, notably in Australia, where there is an ongoing disconnect between the international cheese and dairy ingredient prices and farmgate milk prices. We expect the environment to remain volatile and challenging in the near term, from input costs to currencies to consumers and political dynamics. While global dairy commodity markets are not where we would like them to be, we remain focused on the factors within our control. Nonetheless, our confidence in the overall health of the business and our growth drivers remain unchanged. We are proactively reducing costs and maximizing cash flow while maintaining a broad focus on financial flexibility and operating discipline.
When we embarked on our Global Strategic Plan initiative, nearly three years ago, my priority was to steward the company through one of the most important phases in our history. And to see through the completion of our capital investments, we’ve had to realign and adjust too many challenges. And we have adapted to an ever changing environment. And now we are approaching the end our multiyear capital expansion plan with a clear line of sight to project benefits. By the end of this investment cycle, we will have built a resilient business with strong growth and earnings potential.
As I look back over the past three years, and our journey through an unprecedented time, I’m often reminded of the passionate purposeful people who make us who we are today. I can say with confidence, our foundations are solid. Our infrastructure is unique and our team is focused. Simply our best days lie ahead.
And on that note, I thank you for your time. And I will now turn the call over to Frank for questions.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] Our first question comes from Irene Nattel with RBC Capital Markets. Please proceed.
Irene Nattel
Thanks and good morning, everyone. As you outlined in your comments, there’s a lot that’s going to come together in FY25. From — let’s call it the productivity and efficiency side as a result of so many projects coming on stream, if we assume that nothing changes in the commodity backdrop, how should we think about the financial benefits? As we move through 2025 and 2026, of all of these initiatives?
LinoSaputo
So some of the things that Irene that we need to keep in mind going into fiscal ‘25, a lot of the heavy lifting has been done. So when you think about just simple things like CapEx spend, we’re going back to our normal and normalized level. So you can expect a much reduced capital expenditure. You can also assume that within at least three of our geographies where we’ve got a network optimization plans in place, that there’s going to be less overall overhead expenses, relative to the division with the same amount of volume or a little bit more volume than we’re currently processing.
So all of those factors, in addition to, you know, what we call the enabler bucket, enabler bucket is beyond network optimization, all of that SG and a expense that we have similar to what we’ve talked about in the past, relative to the consolidation of our to US businesses, we have a network that we are going to be servicing that is smaller in footprint than what we had before. So by the nature of that, there are going to be some reductions in SGA, as well. So all of these elements, you know, the things that we’ve been talking about for the last three years, and that we’ve executed on pretty effectively and efficiently through an unprecedented time, on budget, and on time, will start to deliver benefits for us in fiscal ‘25.
So I’m extremely excited about going into next fiscal year, with the infrastructure and the focus that we have. And I think that there are going to be benefits beyond, you know, just the network optimization in terms of us delivering incremental value for our shareholders.
Irene Nattel
That’s very helpful. Thank you. And, you know, switching to more sort of near term elements, can you talk through what you’re seeing out there in the various regions in terms of consumer behavior and demand and the impact that that’s having on your next and margins?
LinoSaputo
So I’ll just talk about the macro environment, and then perhaps Carl and Leanne can jump into each division. We are seeing a slowing milk production around the world, and we see this in just about every dairy producing country around the world. The economics for dairy farmers are challenged. And there are a lot more pressures relative to ESG, as well on dairy farmers and laws that they have to contend with. So the dairy farming community is resilient but the folks that are not as well invested or as efficient, are dropping off in terms of dairy farms and their contribution to milk production. We are seeing that the consumer is resilient as a whole in our domestic market, but the international market still remains a big question mark.
We’re not quite sure when the buyers are going to come back. Although we have seen signs on the GDT that have been encouraging, there’s still nothing that is sustainable for us to say that there is going to be certainty that buyers are coming back to the market as a whole, there’s a good balance between supply and demand. So that should hold up prices to at least where they are now with perhaps some slight improvement. But the focus that we have as a business is more to understand what we can control deliver on the goods and the investments that we’ve made, and make sure that we continue to drive value.
So, perhaps I’ll have Carl start off with more domestic feel for what we’re seeing within each of our Canadian and US countries.
Carl Colizza
Maybe I’ll start with our US business. So certainly we’re seeing, you know, some challenges with consumer spending capabilities with some of the economic pressures, but nonetheless Over the last couple of periods, we’ve seen consumer sentiment tick up; so very encouraging. From that standpoint, we have certainly seen a shift from full service restaurants down to QSR. So the consumer is, I’ll say, trading down in some cases, as well as the shift from some areas of branded business down to private label. But all in all, for some — I think there’s, nonetheless two bright, bright spots. And that is the scope in which we play in the US the categories and the sectors, we supply both as both our branded business as well as private label.
So we’re well positioned to be able to capture whatever gains are may be in each of those sectors. If there’s a more pronounced shift from the food service sector to retail, we’re also a much better position than we were a couple of years ago, when that shift occurred during the early days of the pandemic. So, from that perspective, we are seeing some shifts in the mindset. But I would say that overall, whether that be US or Canada, dairy is still in very good standing with consumers. So it is a very good value proposition for the consumer, as well as a value proposition for elements of the food service — menu agenda. So that would be from a US perspective in Canada and not much different. Consumers are challenges to this; you certainly would have seen and heard from other peers in the industry.
But I would say nonetheless, the strength of our brands, the strength of our value proposition in our service, in particular in Canada, as seen has continued to see share gains, both in retail and in food service, and continue to make penetrations in different market segments. So, still very optimistic about our ability to navigate these challenging consumer base.
Leanne Cutts
And Irene, it’s Leanne, I’ll build on that we’re also seeing in the UK, although the macroeconomic conditions there have been more challenged for the consumer, we are still seeing good demand for cheese. In fact, the cheese category is now growing in both value and volume over the last quarter. We are laughing significant increases in our price. But what we’re seeing now Cathedral City is that we are in a when our growing share, we’re taking share from both other brands, and private labels. Our price gap to private label is you know, is now very — quite narrow, and it’s stable. So we are seeing consumers in the category. And that is really good for it for our business in the UK, and Australia similarly, but the value and our volume for LTL cheese categories is stable. So we are seeing consumers coming in the category and continuing to buy.
LinoSaputo
Anyone of you want to — I was — sorry, I was just going to ask Leanne, if she has any other comments on Argentina, which is also a very good story, despite the volatility that is there and the change in government and such.
Leanne Cutts
That’s right. Yes, that — very excellent management team there are used to successfully navigating some of the conditions there. So despite the new government, and in fact, we’ve seen, you know, impacts to our business. And in fact, actually, we’re continuing to grow our export business in volume, and also a domestic consumption remains robust.
Operator
Our next question comes from George Doumet with Scotia Capital. Please proceed.
George Doumet
I was wondering if you can talk a little bit about the higher volumes in the US domestic market; what’s driving that? And maybe how sustainable is that in the face of the commodity market?
Carl Colizza
George, it’s Carl. I’ll take that one. I think that this is good news all around. And it’s a testament to the choices that we’ve made in our capital plan, as well as our proof position when it comes to our turnover. So we’ve materially reduced our turnover, quarter over quarter, and that puts us in a much better position to be able to supply the demand that has been present in the marketplace for us. And that demand is coming in a number of channels. One in the mozzarella space, we’re in a better position today than we were certainly last year; so some strengths in this area. We’ve reaffirmed some of our market leading positions in goat in blue cheese, as well as some of our hearty Italian positions and as well as our dairy foods items, you know, Heavy whipping creams, and other high fat products are also in good demand. And we’re in a great position to be able to supply that with the asset base that we have. So, from that perspective, we’ve been able to service the market, well are fill rates.
Now, you know, it’s been at least three to four quarters whereby our fill rates are in a great position. And we’re doing that also with a better management of our overall inventory. So we’ve got certainly the right products in the right buildings for appropriate distribution, we’re also doing that with fewer pounds, and also fewer pounds of waste overall. So, all this is to say that the domestic market, we’re cautious about the consumer force, but we’re very confident in our ability to supply the various segments and the shifts in the demand that may occur.
George Doumet
Yes, thanks for that. Maybe switching gears to kind of — I believe Q3 is seasonally the strongest quarter but we saw EBITDA margins and kind of that kind of compress sequentially. Is that just a question of timing on pricing or is there anything else kind of going on there?
Carl Colizza
No, I would say that in the Canadian business, there’s been a little bit of a shift in some of the mix. Certainly, one of the things that we don’t talk about a lot, but is beginning to creep in just a little bit in the US Canadian businesses, also the commodities markets, and that’s really associated to the way byproducts that it produces. So Canada is not fully sheltered from the value of the commodity space when it comes to its way byproducts; so some of that had a negative impact in Q3. But overall, I would say that, you know, we’re in a strong position, when it comes to the investments that we’ve put in, they are contributing almost to their fullest of degrees today, and the future outlook for the Canadian platform is for the strong Canadian team to continue with the value proposition that they bring in the various segments that we service. We have various innovations still to come. Various cost out initiatives as well. So still expect to have some, you know, some growth in the Canadian sector.
George Doumet
Okay, thanks. Last one for me. I think there’s obviously an expectation for strong free cash flow generation and good deleveraging over the next 12 months, probably positioned just below our balance sheet comfort zone. So I guess given them where the stock is today, what do you think is the priority maybe for capital deployment — kind of — over the next 12 to 18 months?
LinoSaputo
First and foremost, for us, we are focused on strong operating cash flow, and that is in all divisions in all categories, you know, just as simple as right sizing our inventories as well, making sure that working cap is in line, of course, with inflation coming back down to mourn over light levels, you know, working cap inventories, accounts payable, accounts receivables, or are coming back to a more normalized areas. CapEx is slowing down as well. We’re looking at a much reduced CapEx spend for fiscal ‘25; so free cash flow is going to be a big priority for us. As we get into fiscal ‘25, we’re looking at priorities for us. Dividend debt repayment continuing to execute on the development of our businesses as a short-term goals, and then of course, as we look at more long-term, creating value for shareholders through buybacks and such, but I think we’re, we might be a few quarters away from that yet primary focus is dividend and debt repayment.
George Doumet
Appreciate it. Thank you.
Operator
Our next question comes from Michael [ph] with TD Securities. Please proceed.
Unidentified Analyst
Good morning. Thank you. Just clarify what that CapEx number is that you’re expected to be in fiscal ‘25.
Maxime Therrien
So we’re looking at you know, about to $200 million to $250 million is lower. And what is the run rate this year, we should be finishing the year around the $650-ish million [ph]. So in around like, just slightly north of $400 million would be a number that you could work with sorry, to, you know, a $200-plus million reduction in CapEx that would fit us within our depreciation of our asset level.
Unidentified Analyst
Okay, great. And then, so look thing is Australia. With the write down that you had to take a look at, what can you tell us about the long-term EBITDA generation potential in that division? And, and to what degree would that now affect your ability to hit your $2.125 billion [ph] at some point in the future when the market and volume stay normalized? Yeah,
LinoSaputo
So the $2.125 billion [ph] is still very achievable within the structure of what we have regardless of the context of a milking — of a shrinking milk pool in Australia. So I you know, that one of the things that perhaps gets overlooked as the initiatives that our Australian division has executed on over the course of the last year. I mean, there are, you know, 10s of millions of dollars of cost reductions that we’ve done, that have only been swallowed up by, you know, negative commodity pricing in the international market relative to the milk price that we have.
Moving forward, one of the big priorities for us is to get a better balance between the milk price and the International dairy markets. And that will only happen once the new myth year starts, about when you’ve got that balance between milk price, and the commodity prices, that we wouldn’t be returning back to normalize that, but DHA levels in Australia. And then, of course, with a shrinking milk pool, we have to prioritize what categories or products we want to go in. And looking at more value added categories where that will derive a better return for us.
So we’re still very optimistic about our Australian platform, even though it will be a much smaller platform for us from a milk intake and milk perspective. But I’m really proud of the efforts and the energy that our Australian team has deployed. I mean, talk about resiliency, this, this is a really resilient group.
Leanne Cutts
And Michael, we’re already seeing the financial benefits from the network optimization that Lino referenced there, we, as you know, we’ve moved from 11 down to six sites, and we’ll be able to get a couple of strategic reviews still underway. However, the important thing is that we still got more benefits to go with, without the financial benefits from that optimization. And most recently, you know, with the investments we made in our system facility, we’re already shipping new products from that we’re on track with the benefits from that facility. So although you know that, obviously, we’re going to stable, we’ve got good milk this year, to state it’s stabilizing the milk fall, we know that there continues to be a significant disconnect between these national cheese and dairy ingredient prices, and what we’re paying as local Australian farmgate milk [ph]. So we need to carefully review that situation as we head into the new milk year. But we are very confident that we have the right most efficient portfolio and the most efficient network utilization in Australia.
Maxime Therrien
And maybe just to complement with, you know, this impairment charge, one of the elements is referring to the discount rate or you know, the interest rate that I’ve increased. And when you put that in the model, and you use the, you know, accounting ruling to make it that’s it’s part of the story as to how we come up with 265 [ph]. So doesn’t mean that we are shying away from the two one to five or put in jeopardy; there’s that piece that needs to be understood.
Unidentified Analyst
Okay, that’s helpful. And then, on the U.S. side, you’ve talked about, I think you’ve said a number of times that you expect a lot 90% or 95% of the Global Strategic Plan benefits they’re to kick in, in April. How do I square that up with the fact that three of the clients are not going to be closed until later sometime later in fiscal ‘25?
Carl Colizza
I think maybe we want to kind of clarify the position of the contribution from those capital investments in fiscal ’25. We’re going to see that ratio of 95% of the benefits kick into fiscal ’25, and not necessarily out of Q1. When we take a look at you know, the investments that have been made and the contributions to date, most of that is coming from the modernization aspects, which you know, for the most part, the lion’s share is going to start to kick in in Q4. But there are some other aspects like Franklin which does require the permanent closure of Big Stone, Lancaster in Green Bay to fully contribute, and — you know, take advantage of the capacity utilization that that is in Franklin. So we’re talking more about that kind of a ratio sometime throughout fiscal ‘25.
And I think the best way to, to anchor in when the savings come online, is closer to the date by which we have the closures. So keep in mind that we have a couple more closures by the end of the fiscal year and that in Lancaster, and in big stone, and then we’ve got Southgate and Green Bay later on in the year that will help sort of pace if you like the return that we expect to see, as well as the removal of some of the costs that we have in our in our segment today.
Maxime Therrien
And like the 95% that we voice was around the completion of the project itself was not so much related to the benefits so yet 95% of the project being completed by the end of this fiscal to set the tone set the you know, the pace for the benefit to kick in, in fiscal ‘25.
Operator
Our next question comes from Mark Petrie with CIBC. Please proceed.
Mark Petrie
Thanks. I just wanted to keep sort of following up on the on the $2.125 billion [ph]. And maybe two specific questions, one, specific to Europe, obviously, some very difficult conditions there. You’re saying it’s should be begin to be improving next quarter, or this current quarter? Can you just give us a better sense of the pace of improvement that you expect? And then what you see as an achievable sort of steady state EBITDA margin or dollar level for that segment?
Leanne Cutts
Well, we’re still we’re still selling through the inventory that we produced at high low prices, given the maturation profile of our business in the UK. But an outlook two year to go, this will continue, but to a lesser extent than we’ve seen in Q3 as that cheese product mix is being corrected. And we do expect continued improvement quarter on quarter as that inventory rebalances. We’re also signed to ship significant new private label volume now; so we can foresee a much more steady state.
Maxime Therrien
I would add to that. The situation in the UK is transitory in nature, we’re dealing with that inventories that we’re had to, let’s say liquidate on the market. Once that is over, yes, we’re looking for fiscal ‘25. To be like I say recoup here. And the when you compound up with the volume that we receive, we got from, you know, a private label, cost structure review, relative to our consolidation and uneaten from the from a cost out initiatives, you know, our branded cheese that Leanne talked about this healthy, Cathedral City [ph]. And don’t forget that, you know, the butter and spread business is doing quite well for us. So we definitely have a line of sight to grow in it for us in the UK. We have to go through this transitory in nature, we definitely feel we have the answer to the challenge ahead once the inventory is behind us.
Mark Petrie
Okay, thanks. That’s helpful. I mean, I guess just to ask it a bit differently. When in the early days, you were reporting sort of high teens EBITDA margins; is that still achievable?
LinoSaputo
Yes. If you look at the return to historical levels, as being our baseline, and then the improvements that we’re making and network optimization, and other investments, and brand, and categories; yet that is very achievable, Mark.
Mark Petrie
Okay, perfect. Thank you for that. And then, just sort of coming out the $2.125 billion [ph] in a bit of a different way. I mean, if we look at the LTM, sort of run rate, it’s about $600 million below that target. And obviously, the commodity is severely against you, but can you just give us a sense, you know, at a high level, how much of that gap do you feel like is in your control, and the payoff from all of the efficiency initiatives in network optimization and how much of that is, is commodity driven?
Maxime Therrien
I would say that the whole buckets relative to network optimization, we feel it’s, this is our, our control is under our control. Obviously, a lot of the savings that we’re The tabling for fiscal ‘25, we feel confident that the deal going to flow through, we’re not going to share guidance as it is for, you know, specifically, you know, next year or so, timing links to various things relative to the execution, you refer to market volume, we feel we’re in a good spot. We have the right infrastructure in place with the right people. And we are comfortable with all the various announcements that we’ve made over the last couple of years, with the benefit that were tagged to each of those that we’ll throw through. Now, it’s a matter of getting in that fiscal year, completing our project and get them and get them started.
Relative to the other pillars and the network optimization, Lino talked about the enabler one; there’s other elements in the strap plan that has been worked on. We put a lot of focus on the network optimization, but nonetheless, there’s another pillar that’s been worked on and we’re still working towards that line, and if markets on our site, it’s going to accelerate. If not, we continued our pace and on things that we can control.
Operator
Our next question comes from Tammy Chen with BMO Capital Markets. Please proceed.
Tamy Chen
So, I had a couple of questions. So my first question would be if you could please explain why the international segment revenues declined so much but the dollars were stable this quarter. Were there any one time unusual that affected revenues? Thank you.
Maxime Therrien
Yes. So, I’ll take that one. Okay, let’s say according to the International Standard, there’s a when an economy reached 100%, over a three year period, it’s defined as hyperinflation economy. Since Argentina has been over 100%, inflation over several year, since 2018 we’re using here as a poodle hyperinflation accounting standard. So quickly standard index, our P&L and our balance sheet per specific index that is applied that is, you know, known in Argentina. And this is typically a positive for us indexing for inflation. But the standard — the accounting standard also convert all of our year-to-date Argentinian operation at the spot rate at the end of the reporting period at the end of December. So that significant devaluation that took place in December now is definitely negatively affected or results operation for the in the EBITDA, but also on the revenue side, bring it up to spot rate.
In normal circumstances, the high for inflation, impact and the FX devaluation typically offset each other on an annual basis, you know, one goes against the other. However, in the short-term, during a major event like we like the devaluation of 59% to 60% in the single day, we could expect some timing differences. And that’s what we’re seeing right now in Q3, that’s accounting wines relative to the transaction per se. The lower value appraisal positively helps our export business in Argentina as it is mainly transacted in USD and this helped to mitigate the negative effect or the other pricing on the international market. So in a nutshell, that devaluation in December is not usual and it did negatively impacted the our results due to the spot red spot rate going down that much in December
Tamy Chen
Okay. Just to rebound on that; so then, why did they beat the dollar in winning stable compared to — why do I bid the dollar value? Why does the bid to dollar value remained stable?
Maxime Therrien
Because the devaluation of the peso forces us to retroactive, we’re Q1, Q2 and Q3 to use this up and rate; so that devaluation kicks in for the whole year since they want in April the first. So it kind of shaves off the 50% of our revenue year-to-date; that’s the $300 million that we’re talking about.
Tamy Chen
Okay, great. And my question was, in Europe revenue increased by 6.7% this quarter. Could you elaborate a bit more on what drove this? And if those private label contracts are already like, a coming in or are we have to expect them to come in more in Q4 of fiscal year?
Maxime Therrien
While revenue and Europe were impacted by the volume that we have to sell as a bulk cheese rather than — you know, there’s more of the volume that we sold through bulk cheese, obviously, at the lower price. And there’s also a piece of the ingredient market that impacted the revenue on oil. And if you have other comment on that, yeah.
Leanne Cutts
So we’re — as we said, yes, we’re still selling through that inventory that was produced at higher prices which is going to affect our revenue and our [indiscernible]. Similarly, with our ingredient business, we have got good volumes, we’re actually seeing recovering volumes around ingredients but pricing is still significantly lower versus year ago due to the overall soft demand for our ingredients for ingredients worldwide. As we said, though, we do expect continued improvement quarter-on-quarter as that inventory rebalances. Importantly, you asked for the private label, we are shipping that new private label volume now and we expect to see a significant ramp up as we go through the end of Q4 and into Q1 next year.
Operator
Our next question comes from Vishal Shreedhar with National Bank Financial. Please proceed.
Vishal Shreedhar
Thanks for taking my question. Obviously, a lot of facility improvements coming on over the next several quarters. Just I was hoping to get your comments on some kudos ability to increasingly insulate itself from commodity price volatility, it’s seemingly becoming a bigger part of the conversation, quarter after quarter. And do you anticipate that some of the initiatives that implemented will help you help insulate against commodity price volatility? And if not, what are some tactics that Saputo could employ to insulate yourself?
LinoSaputo
We’re always exposed to commodity markets. It’s the world that we live in, in dairy with the exception of Canada. Canada’s got a very stable market with the milk supply managed system but when you look at the way that milk is priced around the world, and their different regulatory environments, in Europe versus Australia versus United States. So — but we are heavily dependent on a favorable milk price, in order to derive the value, especially in the international markets from a selling perspective, so that that is part of our world. Now, some of the mitigating factors — some of the things that we can do is to create value brands, where we’re in some cases I guess insulated from moving prices on the milk and or commodity side, as well as in the case of Australia as an example, trying to sell more of our volume into the domestic market and listen to the international market, trading off in terms of categories of product from pure commodity, like skim milk powder into more value added categories of product like infant formula, and, and other dairy goods.
So there are going to be shifts into value added categories because of the investments that we made and some of the energy that we have around marketing and an innovation. But we will never get away from a commoditized environment, this is part of our world. And the more we’ve grown outside of Canada, the more that we become exposed to that that’s just the nature of our business. What we can do is produce the highest quality product at the lowest cost compete with anybody around the world. I will tell you that once this infrastructure network optimization is completed, we will be I will say most efficient dairy processes in Canada, among the top dairy processors in the United States and perhaps the most efficient in some key categories of products. There’s no one that comes close to us in Argentina, no one that comes close to us in Australia. And I will tell you with a value of the brand that we have in the UK, and our efficient network, very few cheddar companies can come close to us.
So I feel really good about the infrastructure we had, even in a commoditized world. I feel very, very good about us competing, but there is going to be volatility, there’s going to be ups, and there’s going to be downs. And that’s just the nature of our business; we can’t get away from that.
Vishal Shreedhar
Okay, thank you for that. And maybe just on the back of that comment that the $2.125 billion [ph] target. Obviously, the timeline was removed, the actual numerical figure was maintained. And now that you’re getting closer to many of the initiatives that you’re planning for many years now, do you have line of sight at least internally as to when that target can be achieved? And what are the key? What are the key factors preventing you from giving us a timeline? Is commodity price volatility — is it the enablers that you talked about? And maybe you can describe that a bit as well?
LinoSaputo
Yes. So part of it is the commodity markets. I mean, we need to be in a more normalized which we’re not — you know, we’re looking today at a block of $1.60, when more normalized levels are $1.80. I mean, we’re not talking about a stretch of $2.20. We’re talking about, you know, $1.80 market price. Well, if you look at historically, that’s typically where the US has been, I look at the same thing in the international markets, you know, we’re probably about 20% or 30%, below what the normalized levels are. I mean, we need some of that to come back. But then there’s also consumer sentiment, you know, right. Now, there’s still a lot of, you know, although there are some meaningful signs of improvement, we’re still dependent on consumers disposable income, and their ability to be able to spend money on value items like — so there are a number of different factors. And this is why it’s hard to give a timeline because there is no clarity as to when things will become more normalized. But we know that we are inching closer and closer and closer to that number, as we get, you know, every week and every month and every quarter, behind us.
So again, I feel very good about the business. I’m not at all concerned about the infrastructure that we built. I love the team, that we have the focus, the energy, you know, we just, there’s certain things in our world that we can’t control. And we can’t lose too much sleep over the stuff we can’t control but we will press hard on the things that we can.
Operator
Our next question comes from Chris Li with Desjardins Securities. Please proceed.
Chris Li
Good morning, everyone. And thanks for squeezing me in just have a few follow up questions. Maybe starting from in Canada. I think as George asked before — you know, good solid revenue growth but even though dollars were relatively flat. I think you gave some reasons as to why I didn’t want to come from going forward. You expect either the dollars to remain kind of flattish in the foreseeable future or do you expect some real acceleration in growth based on some of the initiatives that you’re working on in Canada?
Carl Colizza
The Canadian team will continue to grow the EBITDA, and by the growth, we’re talking about more subtle and steady growth, like you would have seen in prior years. And that really comes from continuing with the grind. And by the grind, I mean, winning market share in various sectors, there’s still some cost out opportunities that are in the works through some level of automation, as well as going into some of our facilities. We have some products on the retail front that are going to hit the market with some line extensions and so forth. So, certainly Canada is not going to be static. Canada will remain nonetheless, dynamic. There will be some growth in the overall EBITDA but probably more modest in nature as we navigate the Canadian consumer and the consumer challenges that are ahead.
Chris Li
Okay, that’s helpful. And then, maybe switching quickly to Europe; and again, appreciate all the colors on the drivers there. I guess my question is, you know, if all goes as planned, you know, what is your best guess in terms of by which quarter do expect profitability to burn more or less back to historical level?
Maxime Therrien
Well, it’d be starting Q1 fiscal ’25. We still have to run through the inventory within the current quarter Q4 of fiscal. So we feel will be in a much better position starting the fiscal ’25 from an inventory perspective. So yes, you should see a much more normal number for UK starting Q1.
Chris Li
Okay. And then maybe another one, it’s just when you do your budgeting for fiscal ‘25, what do you kind of pencilled in for USA market factors to expect it to be neutral or do you factor in some negative impact?
Carl Colizza
That’s a very good, very good question. Right now, there’s not a lot of clarity. So we’re getting a host of mixed signals when it comes to milk supply. So you know, the availability of milk and demand are the two factors that would drive outlooks on the block price. On the one hand, we’ve seen the overall milk production start to decline and the overall herd sizes and total count has actually declined. So that would in one respect suggests that we’re getting to a better place with regards to the milk supply versus matching demand, which would potentially augment the overall outlook on block price. But there are some competing elements to that, despite that, that milk outlook.
If the international marketplace in the commodities market on that front, if demand remains soft, it may not have that same effect in the US, it may not have the beneficial effects in the US, because the US does have growing component of export and the overall production from the US operations. And that impacts as well, the overall selling price of the block price in the US, as manufacturers who shipped in and out of the exports and come back to the domestic markets can then influence the domestic price. So, you know, in many respects, we’re not expecting anything close to a $2 [ph] block, we are expecting something slightly ahead.
And if you look at the futures, the futures markets, they’re sitting somewhere in the range of $1.75 [ph] is sort of the peak point for the next calendar year.
Chris Li
That’s okay, that’s very helpful. And then my final question is just on the network optimization benefits, just based on what you said about we should really anchor the benefits of anchoring to the plant closures, just given the fact that most of these plants are closing at the end of fiscal ’25. Is it fair to assume we should expect really, it’s really towards the end of fiscal ’25, that we should see some more meaningful pickup in in these EBITA benefits?
Carl Colizza
Not so much in the first half. I think nevertheless, we take a look at the coming closures. So by the end of this fiscal, we’re going to have two other plans closures. So I think the first half will have, you know, meaningful improvements from the network optimization. And certainly the back half of the year with the subsequent closures. And then the I’ll call it the compounding effect of full volume entering some of the sites that we consolidate into such as Franklin, you’ll see a little bit of an acceleration in the back half of the year with the overall contributions from those capital investments. So it’s not all backhand loaded. You know, considering that we do have some imminent closures here. We’ll be removing some of those duplicate costs, I’ll say in a hurry. But I you know, certainly the rate will improve in the second half.
Operator
Our next question comes from Rob Dickerson with Jefferies. Please proceed.
Rob Dickerson
Great. Thanks so much. Morning, everyone. A couple of questions. Circling back to other questions; I guess my first question was just going back to your comments on the futures prices and kind of supply demand, exports, etc. It does currently, you know, in the futures markets, like, you know, expectation is for cheese prices to block to increase kind of materially, let’s say, you know, as we get through this calendar year, milk prices may be kind of the same but a little bit less. So, kind of where you sit today, if you think through the next 12 months, would you say there’s a low probability — maybe kind of in the middle, because you’re not really sure or maybe there’s like a decent probability that we actually can get back to that positive spread dynamic that you had seen last quarter? That’s the first question.
Carl Colizza
I think — you know, despite the mixed signals, there is a reasonable chance that we’re going to see the block price overall improve. And, you know, this, the spread has a couple of other factors in their block being one of the most important, you know, there’s elements of weight and weight components. But there is a reasonable chance that with the increase in the overall block price that is projected, that we will see a better spread situation. And if that also occurs, it’s also because the man still remains on the positive side of the ledger. So I think those two things combined, there’s a reasonable chance that we’re going to see some positivity in the US business from those two factors.
Rob Dickerson
Alright, super. And then, especially given you just touched on the demand piece, just to get to ask about that, you know, I realize you don’t kind of break out price volume to the company or per segment. So I guess, got to first simple question is, you know, are there areas where you’re seeing a little bit better demand? I mean, I understand sounds like Europe’s a little weaker but they’re small sets, given new contracts, etcetera. And then, I guess — you know, just secondly, when we look at a lot of different categories, you know, specifically in the US in volume, they actually seem to still be doing pretty well, you know, relative to a lot of other categories that are, you know, clearly, you know, experiencing kind of a pocket of pressure. So, maybe if you could just kind of speak, you know, regionally on the volume side, and then maybe just some rationale as to why, why, why is the cheese category actually doing better than a lot of other categories?
Carl Colizza
Yes, it’s interesting. I think it goes back to comment I made earlier, you know, theory continues to be a very good value proposition for consumers. And from the nutritional perspective, the overall cost per pound and, and, you know, from an overall share of stomach, it offers a lot, but it also offers a lot of opportunities and capabilities in the food service sector. I mean, we dairy foods portfolio we have is almost second to none in the in the US, and that we play in all areas, and we focus a lot here on cheese. But you know, there isn’t a whole other side of our business is called the dairy food sector, which is really not influenced much by commodities pricing. And we’re talking about things like ice cream mixes, we’re talking about heavy whooping creams, aerosol, and other solutions, there are solutions that we bring to the foodservice sector. And we — that — that are — sorry, that though that supply also crosses a lot of channels, not only retail, of course, but all aspects of food service from full service restaurants, to quick service.
And I think that, you know, with the call of the US consumer being fairly resilient and having a positive output, we’re still going to see some growth in those sectors. And we have great partnerships with a lot of national brands. And, and we do expect to capture on that continued growth, albeit smaller than in historical years, we do still expect there to be demand for our products in the US.
Rob Dickerson
Alright, super. And then I guess, just lastly, kind of annoyingly, just want to circle back to the Argentina dynamic on the effects side. You know, I understand — I guess, conceptually, hyperinflationary accounting regulation — we also have had other larger US based multinationals go through that same process recently. You know, while same time some companies historically like decide to kind of adjust the results out so, you know, I guess the, you know, the simple question is, clearly there’s the impact in the third quarter, as we think, kind of — forward the next few quarters until basically that dynamic would lap is there anything we should be thinking about kind of just given how the accounting kind of works, such that — like, there shouldn’t be as much of a dynamic on the effects side going forward, or, you know, maybe it is just kind of more, you kind of just kind of stared issue year-over-year drag because of the devaluation and just trying to understand kind of the puts and takes of how you mark to market and in the delta and hyperinflationary accounting roles? And then, kind of what that implies on the go forward net [ph]?
Maxime Therrien
Okay. So just to provide some comments or try to answer your question. So the hyperinflation accounting, you know, requires you to index your, you know, your balance sheet, your P&L. So, typically, we’re running a profitable business, typically, this is a positive for us boosting our financials. On the other hand, you know, yes, you do have to convert the report into Canadian, and you use, like, the, typically the lowest rate, which is the spot rate at the end of the period is 10, tends to be lower than to offset each other. So when you say, you know, how should we think moving forward?
Well, if you would have a pair of pairs, or that would, you know, be sustainable, that would maintain itself over the course of the next future? But the high inflation that’s been going on in the country continue to rise, then yes, with this would be a positive for us. You know, from an accounting perspective, that said, you know, some economist some, you know, rational tends to say that there’s a hyperinflation because of the significant devaluation of the peso. And some would also say, well, there’s some significant devaluation of the physical because of the hyperinflation, those are linked really close together, intends to offset from an accounting perspective. This is pure straight accounting, converting, and so on, on the field transactionally.
When we sell and we try to be competitive on the market, a lower value of fizzle is positive for us. We pay our milk in a zoo, we pay our employee, we pay our own expenses in Pizzle [ph]. But yeah, we do sell in USD. So from a transactional perspective, this, this is a plus. And that serves us sort of as a, as a hedge for the International pricing volatility that we’ve seen the part from an accounting, which is a non cash base, there’s limits that we could do to protect ourselves, it’s the nature accounting principle.
Rob Dickerson
Okay. So I mean, kind of simplistically, given operations are all kind of intra country, it sounds like, what you’re saying is, they’re kind of very limited transactional dynamics, hence, the EBITDA result, even though you’re taking the translational, you know, impacts on the top line. Is that is that is that kind of a fair — broad comment?
Maxime Therrien
Yes, fair.
Rob Dickerson
And then, I guess, just lastly — kind of with that currency dynamic, and I asked that ignorance, because, you know, if you look at kind of other categories globally, you know, usually, a lot of companies will try to price at least some to offset some of the currency pressure. I mean, it sounds like for you, me, especially given there’s not much of a transactional impact, there probably isn’t as much of a need, you know, outside of like reporting optics to the public market, let’s say which you have to do, right? There really isn’t much of an incremental need to have to price intra-Argentina [ph] which keeps the price down helps global exports, and inter-country demand?
Maxime Therrien
Correct. So, you know, transactionally — you know, domestically with solid, solid business, domestic and Argentina pay our, you know, our expenses, our input costs, and Faisal, we sell in federal no concern there. And on the export, yes, it’s a positive, but it’s the issue we’re dealing with this quarter is the accounting principles to convert to Canadian into the hyperinflation accounting standard.
Rob Dickerson
Right. But I just want everyone to understand it, too. It’s like — it’s optics, because you’re even strong; that’s always your country. So it’s almost an event. All right. Thank you so much. Appreciate it.
Operator
There are no further questions at this time. I will now turn the call back to Nick. Thank you.
Nicholas Estrela
Thank you, Frank. Please know that we will release our fourth quarter and full year fiscal 2024 results on June 7, 2024. Thank you for taking part in the call and webcast. Have a nice day.
Operator
We thank you for your participation. And ask that you please disconnect your line. Have a great day everyone.
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