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Saputo Reports Financial Results for the Third Quarter of Fiscal 2023 Ended December 31, 2022
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Saputo Reports Financial Results for the Third Quarter of Fiscal 2023 Ended December 31, 2022






MONTRÉAL, Feb. 09, 2023 (GLOBE NEWSWIRE) — Saputo Inc. (TSX: SAP) (we, Saputo or the Company) reported today its financial results for the third quarter of fiscal 2023, which ended on December 31, 2022. All amounts in this news release are in millions of Canadian dollars (CDN), except per share amounts, unless otherwise indicated, and are presented according to International Financial Reporting Standards (IFRS).

“Our third quarter results reflected a step-up in our execution, as evidenced by our robust top-line growth, margin recovery, and earnings results. Our continued focus on inflation-driven pricing actions, operational improvements, and cost containment initiatives has enabled us to further mitigate inflationary pressures while continuing to provide quality and value to our customers,” said Lino A. Saputo, Chair of the Board, President and CEO. “Although there remains more to do, this quarter’s results represent a strong turnaround in our performance, and we have good momentum exiting the year. Our clear, near-term focus is executing on our Global Strategic Plan priorities, which will strengthen our core businesses, scale our growth platforms, and improve efficiency, keeping a view on maximizing long-term value creation.”

Fiscal 2023 Third Quarter Financial Highlights

  • Revenues amounted to $4.587 billion, up $686 million or 17.6%.
  • Net earnings totalled $179 million and net earnings per share (EPS) (basic and diluted) were $0.43, up from $86 million and $0.21, respectively.
  • Adjusted EBITDA1 amounted to $445 million, up $123 million or 38.2%.
  • Adjusted net earnings1 totalled $221 million, up from $139 million, and adjusted EPS1 (basic and diluted) were $0.53, up from $0.34 and $0.33, respectively.
(unaudited) For the three-month periods
ended
December 31

For the nine-month periods
ended
December 31

2022 2021 2022 2021
Revenues 4,587 3,901 13,375 11,078
Adjusted EBITDA1 445 322 1,161 895
Net earnings 179 86 463 237
Adjusted net earnings1 221 139 559 377
EPS        
Basic 0.43 0.21 1.11 0.57
Diluted 0.43 0.21 1.11 0.57
Adjusted EPS1        
Basic 0.53 0.34 1.34 0.91
Diluted 0.53 0.33 1.34 0.91
  • Increased adjusted EBITDA1 in all our sectors was led by significant improvement in the USA Sector and continued solid performances in the Canada Sector and International Sector.
  • Increased revenues reflected:
    • Pricing initiatives implemented in all our sectors;
    • Higher average block market price2 and higher average butter market price2 in the USA Sector; and
    • Higher international cheese and dairy ingredient market prices.
  • USA Market Factors2 continued to put pressure on adjusted EBITDA, although to a lesser degree than in previous quarters. Meanwhile, international cheese and ingredient market prices were favourable.
  • Restructuring costs of $27 million after tax, which included non-cash fixed assets write-downs totalling $21 million, negatively impacted net earnings. These costs were incurred in connection with previously announced consolidation initiatives in Australia being undertaken as part of the Optimize and Enhance Operations pillar of our Global Strategic Plan.
  • Building on our previously announced optimization initiatives, we announced consolidation initiatives intended to further streamline and enhance our manufacturing footprint in our USA Sector. As part of the Optimize and Enhance Operations pillar of our Global Strategic Plan, our announcement includes the construction of a new cut- and-wrap facility to consolidate and modernize packaging activities, representing an investment of $240 million, and our intention to invest $75 million to expand string cheese activities. As a result of these initiatives, we intend to permanently close three facilities. Costs related to these capital investments and consolidation initiatives will be approximately $23 million after tax, which include a non-cash fixed assets write-down of approximately $13 million. These costs will start to be recorded in the fourth quarter of fiscal 2023.
  • The Board of Directors approved a dividend of $0.18 per share payable on March 17, 2023, to shareholders of record on March 7, 2023.
1 This is a total of segments measure, a non-GAAP financial measure, or a non-GAAP ratio. These measures and ratios do not have a standardized meaning under IFRS. Therefore, they are unlikely to be comparable to similar measures presented by other issuers. See the “Non-GAAP Measures” section of this news release for more information, including the definition and composition of the measure or ratio as well as the reconciliation to the most comparable measure in the primary financial statements, as applicable.
2 Refer to the "Glossary" section of the Management’s Discussion and Analysis.

OUTLOOK

  • We anticipate that input and logistics costs, such as consumables, packaging, transportation, and fuel, which have been subject to ongoing inflationary pressures, will remain at elevated levels, but we expect strong pricing contribution across all sectors in line with price increases.
  • We will implement further price increases as deemed necessary, as part of our pricing protocols, if inflation continues to persist.
  • Labour initiatives, fewer supply chain constraints, and the acceleration of our productivity and operational improvement projects are expected to further enhance our ability to service customers and return to historical order fill rate levels, particularly in the USA Sector.
  • We expect the Europe Sector to continue to be negatively impacted by the volatility in energy costs resulting from the European energy crisis.
  • We expect to continue to benefit from cost containment measures aimed at minimizing the effect of inflation and our efforts to prioritize efficiency and productivity initiatives.
  • Given broader macroeconomic trends and changes in consumer spending, we expect that the impact of pricing elasticity will continue to increase moderately in the remainder of the fiscal year and into the beginning of fiscal 2024. We anticipate the retail market segment to remain strong as at-home food spending should remain elevated, while the foodservice market segment is expected to remain competitive, particularly in the USA Sector.
  • USA Market Factors2 have been trending favourably but they are expected to remain volatile.
  • International cheese and dairy ingredient markets have recently moderated but we expect them to remain volatile in nature.
  • While we continue to face macro-economic challenges, we expect a meaningful recovery in earnings in fiscal 2023, driven by the full impact of previously announced price increases, improved productivity and fixed cost absorption, a return to historical order fill rates, and benefits stemming from our Global Strategic Plan.

2 Refer to the "Glossary" section of the Management’s Discussion and Analysis.

GLOBAL STRATEGIC PLAN HIGHLIGHTS

We announced additional capital investments and consolidation initiatives intended to further streamline and enhance our manufacturing footprint in our USA Sector. Highlights of the announcement include the construction of a new, state-of-the-art cut-and-wrap facility in Franklin, Wisconsin, the expansion of string cheese operations on the West Coast of the USA, and the permanent closure of our Big Stone, South Dakota, Green Bay, Wisconsin, and South Gate, California, facilities.

These capital investments and consolidation initiatives in our USA Sector are expected to yield financial benefits beginning in the fourth quarter of fiscal 2024 and contribute to their full potential of approximately $74 million ($55 million after taxes) annually by the end of fiscal 2027. Costs related to these capital investments and consolidation initiatives will be approximately $23 million after taxes, which include a non-cash fixed assets write-down of approximately $13 million. These costs will start to be recorded in the fourth quarter of fiscal 2023.

THE SAPUTO PROMISE

The Saputo Promise is our approach to social, environmental, and economic performance based on seven Pillars: Food Quality and Safety, Our People, Business Ethics, Responsible Sourcing, Environment, Nutrition, and Community. It is an integral part of our business and a key component of our growth. As we seek to create shared value for all our stakeholders, it provides a framework that ensures we manage ESG risks and opportunities successfully across our operations globally.

Anchored in the most pressing ESG issues for our business, our current three-year plan (FY23-FY25) builds on the momentum of the past few years, so our Saputo Promise continues to drive, enable, and sustain our growth.

Highlights for the third quarter of fiscal 2023 include:

  1. Continued execution of our Environmental Pledges, including the completion of eight additional capital projects aimed at reducing the energy and water intensities of our operations.
  2. Maintained our B score for our CDP Climate disclosure, above industry average. We also obtained a B score for our CDP Water Disclosure, compared to C last year, reflecting our continuous progress in improving our ESG disclosure.
  3. Expanded our low fat cheese range in the Dairy Division (UK) with the release of Cathedral City’sOur Lighter‘ Extra Mature block which has 30% less fat than our standard Extra Mature Cheddar.
  4. Continued to support the communities where we operate through financial and food donations.

Additional Information

For more information, reference is made to the condensed interim consolidated financial statements, the notes thereto and to the Management’s Discussion and Analysis for the third quarter of fiscal 2023. These documents can be obtained on SEDAR under the Company’s profile at www.sedar.com and in the “Investors” section of the Company’s website, at www.saputo.com.

Webcast and Conference Call

A webcast and conference call will be held on Friday, February 10, 2023, at 8:30 a.m. (Eastern Time)

The webcast will begin with a short presentation followed by a question and answer period. The speakers will be Lino A. Saputo, Chair of the Board, President and Chief Executive Officer, and Maxime Therrien, Chief Financial Officer and Secretary.

To participate:

  • Conference line (audio only): 1-800-954-0584
    Please dial-in five minutes prior to the start time.

Replay of the conference call and webcast presentation
For those unable to join, the webcast presentation will be archived on Saputo’s website (www.saputo.com) in the “Investors” section, under “Calendar of Events”. A replay of the conference call will also be available until Friday, February 17, 2023, 11:59 p.m. (ET) by dialing 1-800-558-5253 (ID number: 22025772).

About Saputo

Saputo produces, markets, and distributes a wide array of dairy products of the utmost quality, including cheese, fluid milk, extended shelf-life milk and cream products, cultured products, and dairy ingredients. Saputo is one of the top ten dairy processors in the world, a leading cheese manufacturer and fluid milk and cream processor in Canada, and the top dairy processor in Australia and Argentina. In the USA, Saputo ranks among the top three cheese producers and is one of the largest producers of extended shelf-life and cultured dairy products. In the United Kingdom, Saputo is the largest manufacturer of branded cheese and a top manufacturer of dairy spreads. In addition to its dairy portfolio, Saputo produces, markets, and distributes a range of dairy alternative cheeses and beverages. Saputo products are sold in several countries under market-leading brands, as well as private label brands. Saputo Inc. is a publicly traded company and its shares are listed on the Toronto Stock Exchange under the symbol “SAP”. Follow Saputo’s activities at www.saputo.com or via Facebook, LinkedIn and Twitter.

Investor Inquiries
Nicholas Estrela
Director, Investor Relations
1-514-328-3117

Media Inquiries
1-514-328-3141 / 1-866-648-5902
media@saputo.com

CAUTION REGARDING FORWARD-LOOKING STATEMENTS

This news release contains statements which are forward-looking statements within the meaning of applicable securities laws. These forward-looking statements include, among others, statements with respect to our objectives, outlook, business projects, strategies, beliefs, expectations, targets, commitments, goals, ambitions and strategic plans including our ability to achieve these targets, commitments, goals, ambitions and strategic plans, and statements other than historical facts. The words “may”, “could”, “should”, “will”, “would”, “believe”, “plan”, “expect”, “intend”, “anticipate”, “estimate”, “foresee”, “objective”, “continue”, “propose”, “aim”, “commit”, “assume”, “forecast”, “predict”, “seek”, “project”, “potential”, “goal”, “target”, or “pledge”, or the negative of these terms or variations of them, the use of conditional or future tense or words and expressions of similar nature, are intended to identify forward- looking statements. All statements other than statements of historical fact included in this news release may constitute forward-looking statements within the meaning of applicable securities laws.

By their nature, forward-looking statements are subject to a number of inherent risks and uncertainties. Actual results could differ materially from those stated, implied, or projected in such forward-looking statements. As a result, we cannot guarantee that any forward-looking statements will materialize, and we warn readers that these forward- looking statements are not statements of historical fact or guarantees of future performance in any way. Assumptions, expectations, and estimates made in the preparation of forward-looking statements and risks and uncertainties that could cause actual results to differ materially from current expectations are discussed in our materials filed with the Canadian securities regulatory authorities from time to time, including the "Risks and Uncertainties" section of the Management’s Discussion and Analysis dated June 9, 2022, available on SEDAR under the Company’s profile at www.sedar.com

Such risks and uncertainties include the following: product liability; the COVID-19 pandemic and related ongoing impacts; the availability of raw materials (including as a result of climate change, extreme weather, or global or local supply chain disruptions caused by the COVID-19 pandemic, geopolitical developments, military conflicts and trade sanctions) and related price variations, along with our ability to transfer those increases, if any, to our customers in competitive market conditions; supply chain strain and supplier concentration; the price fluctuation of our products in the countries in which we operate, as well as in international markets, which are based on supply and demand levels for dairy products; our ability to identify, attract, and retain qualified individuals; cyber threats and other information technology-related risks relating to business disruptions, confidentiality, data integrity business and email compromise-related fraud; the increased competitive environment in our industry; consolidation of clientele; unanticipated business disruption; changes in consumer trends; changes in environmental laws and regulations; the potential effects of climate change; increased focus on environmental sustainability matters; the failure to execute our Global Strategic Plan as expected or to adequately integrate acquired businesses in a timely and efficient manner; the failure to complete capital expenditures as planned; changes in interest rates and access to capital and credit markets.

Forward-looking statements are based on Management’s current estimates, expectations and assumptions regarding, among other things; the projected revenues and expenses; the economic, industry, competitive, and regulatory environments in which we operate or which could affect our activities; our ability to identify, attract, and retain qualified and diverse individuals; our ability to reach our staffing level targets; our ability to attract and retain customers and consumers; our environmental performance; the results of our sustainability efforts; the effectiveness of our environmental and sustainability initiatives; the availability and cost of milk and other raw materials and energy supplies; our operating costs; the pricing of our finished products on the various markets in which we carry on business; the successful execution of our Global Strategic Plan; our ability to deploy capital expenditure projects as planned; reliance on third parties; our ability to gain efficiencies and cost optimization from strategic initiatives; our ability to correctly predict, identify, and interpret changes in consumer preferences and demand, to offer new products to meet those changes, and to respond to competitive innovation; our ability to leverage our brand value; our ability to drive revenue growth in our key product categories or platforms or add products that are in faster-growing and more profitable categories; the contribution of recent acquisitions; the anticipated market supply and demand levels for our products; the anticipated warehousing, logistics, and transportation costs; our effective income tax rate; the exchange rate of the Canadian dollar to the currencies of cheese and dairy ingredients. Our ability to achieve our environmental targets, commitments, and goals is further subject to, among others, our ability to access and implement all technology necessary to achieve our targets, commitments, and goals, as well as the development and performance of technology, innovation and the future use and deployment of technology and associated expected future results, and environmental regulation. Our ability to achieve our 2025 Supply Chain Pledges is further subject to, among others, our ability to leverage our supplier relationships.

Management believes that these estimates, expectations, and assumptions are reasonable as of the date hereof, and are inherently subject to significant business, economic, competitive, and other uncertainties and contingencies regarding future events, and are accordingly subject to changes after such date. Forward-looking statements are intended to provide shareholders with information regarding Saputo, including our assessment of future financial plans, and may not be appropriate for other purposes. Undue importance should not be placed on forward-looking statements, and the information contained in such forward-looking statements should not be relied upon as of any other date.

All forward-looking statements included herein speak only as of the date hereof or as of the specific date of such forward-looking statements. Except as required under applicable securities legislation, Saputo does not undertake to update or revise forward-looking statements, whether written or verbal, that may be made from time to time by itself or on our behalf, whether as a result of new information, future events, or otherwise. All forward-looking statements contained herein are expressly qualified by this cautionary statement.

SELECTED QUARTERLY FINANCIAL INFORMATION

Fiscal years 2023
2022 2021
  Q3   Q2   Q1   Q4   Q3   Q2   Q1   Q4  
Revenues 4,587   4,461   4,327   3,957   3,901   3,689   3,488   3,438  
Adjusted EBITDA1 445   369   347   260   322   283   290   303  
Adjusted EBITDA margin1 9.7 % 8.3 % 8.0 % 6.6 % 8.3 % 7.7 % 8.3 % 8.8 %
Net earnings 179   145   139   37   86   98   53   103  
UK tax rate change3             50    
Acquisition and restructuring costs2 27   16   6   51     (1 ) 1   2  
Gain on disposal of assets2         (8 )      
Impairment of intangible assets2         43        
Amortization of intangible assets related to                                
business acquisitions2 15   16   16   20   18   19   18   19  
Adjusted net earnings 1 221   177   161   108   139   116   122   124  
Adjusted net earnings margin1 4.8 % 4.0 % 3.7 % 2.7 % 3.6 % 3.1 % 3.5 % 3.6 %
EPS basic 0.43   0.35   0.33   0.09   0.21   0.24   0.13   0.25  
EPS diluted 0.43   0.35   0.33   0.09   0.21   0.24   0.13   0.25  
Adjusted EPS basic1 0.53   0.42   0.39   0.26   0.34   0.28   0.30   0.30  
Adjusted EPS diluted1 0.53   0.42   0.39   0.26   0.33   0.28   0.29   0.30  


Selected
factor(s) positively (negatively) impacting Adjusted EBITDA1

Fiscal years 2023 2022 2021
  Q3   Q2   Q1   Q4   Q3   Q2   Q1   Q4  
USA Market Factors4,5 (6 ) (27 ) (7 ) (19 ) (40 ) (17 ) (42 ) (4 )
Foreign currency exchange5,6 (7 ) (12 ) (7 ) (12 ) (18 ) (21 ) (21 ) (2 )

1 This is a total of segments measure, a non-GAAP financial measure, or a non-GAAP ratio. These measures and ratios do not have a standardized meaning under IFRS. Therefore, they are unlikely to be comparable to similar measures presented by other issuers. See the “Non-GAAP Measures” section of this news release for more information, including the definition and composition of the measure or ratio as well as the reconciliation to the most comparable measure in the primary financial statements, as applicable.
2 Net of income taxes.
3 On June 10, 2021, the UK Finance Act 2021 was enacted, increasing the UK tax rate from 19% to 25%, effective April 1, 2023. Refer to Note 11 to the condensed interim consolidated financial statements for further information.
4 Refer to the ‘‘Glossary’’ section of the Management’s Discussion and Analysis.
5 As compared to the same quarter of the previous fiscal year.
6 Foreign currency exchange includes the effect of conversion of US dollars, Australian dollars, British pounds sterling and Argentine pesos to Canadian dollars.

CONSOLIDATED RESULTS FOR THE THIRD QUARTER AND FISCAL PERIOD ENDED DECEMBER 31, 2022

Revenues

Revenues for the third quarter of fiscal 2023 totalled $4.587 billion, up $686 million or 17.6%, as compared to $3.901 billion for the same quarter last fiscal year.

Revenues increased due to higher domestic selling prices in line with the higher cost of milk as raw material, together with pricing initiatives implemented in all our sectors to mitigate increasing input costs.

The combined effect of the higher average block market price2 and of the higher average butter market price2 had a positive impact of $275 million in the USA Sector. Higher international cheese and dairy ingredient market prices, as well as the effect of the fluctuation of the Argentine peso and the Australian dollar on export sales denominated in US dollars were favourable.

Overall sales volumes were stable, despite reduced milk availability in Australia which continued to negatively impact our export sales volumes.

The fluctuation of foreign currencies versus the Canadian dollar had an unfavourable impact of $33 million.

Revenues for the nine months of fiscal 2023 totalled $13.375 billion, up $2.297 billion or 20.7%, as compared to $11.078 billion for the same period last fiscal year.

Revenues increased due to higher domestic selling prices in line with the higher cost of milk as raw material, together with pricing initiatives implemented in all our sectors to mitigate increasing input costs.

The combined effect of the higher average block market price2 and of the higher average butter market price2 had a positive impact of $918 million in the USA Sector. Higher international cheese and dairy ingredient market prices, as well as the effect of the fluctuation of the Argentine peso and the Australian dollar on export sales denominated in US dollars were favourable.

Overall sales volumes were stable, despite reduced milk availability in Australia negatively impacting export sales volumes.

The fluctuation of foreign currencies versus the Canadian dollar had an unfavourable impact of $52 million.

Operating costs excluding depreciation, amortization, and restructuring costs

Operating costs excluding depreciation, amortization, and restructuring costs for the third quarter of fiscal 2023 totalled $4.142 billion, up $563 million or 15.7%, as compared to $3.579 billion for the same quarter last fiscal year. Operating costs excluding depreciation, amortization, and restructuring costs for the nine months of fiscal 2023 totalled $12.214 billion, up $2.031 billion or 19.9%, as compared to $10.183 billion the same period last fiscal year. These increases were due to higher input costs in all our sectors in line with inflation. Dairy commodity market volatility and higher input costs contributed to the higher cost of raw materials and consumables used. Employee salary and benefit expenses increased due to inflation and wage increases.

Net earnings

Net earnings for the third quarter of fiscal 2023 totalled $179 million, up $93 million or 108.1%, as compared to $86 million for the same quarter last fiscal year. The increase is primarily due to higher adjusted EBITDA1, as described below, the impairment of intangible assets, and the gain on disposal of assets recorded in the third quarter of last fiscal year, partially offset by higher restructuring costs, financial charges, and income tax expense.

Net earnings for the nine months of fiscal 2023 totalled $463 million, up $226 million or 95.4%, as compared to $237 million for the same period last fiscal year. The increase is primarily due to higher adjusted EBITDA1, as described below, lower income tax expense, the impairment of intangible assets and the gain on disposal of assets recorded in the third quarter of last fiscal year, partially offset by higher restructuring costs, depreciation and amortization, and financial charges.

1 This is a total of segments measure, a non-GAAP financial measure, or a non-GAAP ratio. See the “Non-GAAP Measures” section of this news release for more information, including the definition and composition of the measure or ratio as well as the reconciliation to the most comparable measure in the primary financial statements, as applicable.
2 Refer to the "Glossary" section of the Management’s Discussion and Analysis.

Adjusted EBITDA1

Adjusted EBITDA1 for the third quarter of fiscal 2023 totalled $445 million, up $123 million or 38.2%, as compared to $322 million for the same quarter last fiscal year.

Increased adjusted EBITDA was led by significant improvement in the USA Sector and continued solid performances in the Canada Sector and International Sector.

We continued to benefit from previously announced pricing initiatives implemented to mitigate higher input costs, such as consumables, packaging, transportation, and fuel, in line with ongoing inflationary pressures and commodity market volatility.

The relation between international cheese and dairy ingredient market prices and the cost of milk as raw material in the International Sector had a positive impact.

USA Market Factors2 had a negative impact on adjusted EBITDA of $6 million, as compared to the same quarter last fiscal year.

Labour shortages in some of our facilities and supply chain disruptions continued to put pressure on our ability to supply ongoing demand. These factors, along with reduced milk availability in Australia, continued to negatively impact efficiencies and the absorption of fixed costs. We continued to actively manage these challenging market conditions.

We continued to benefit from our cost containment measures aimed at minimizing the effect of inflation and our efforts to prioritize efficiency and productivity initiatives.

The fluctuation of foreign currencies versus the Canadian dollar had an unfavourable impact of $7 million.

Adjusted EBITDA1 for the nine months of fiscal 2023 totalled $1.161 billion, up $266 million or 29.7%, as compared to $895 million for the same period last fiscal year.

Improved results reflected solid performances in the International Sector and Canada Sector and recovery in the USA Sector.

We benefited from previously announced pricing initiatives implemented to mitigate higher input costs, such as consumables, packaging, transportation, and fuel in line with ongoing inflationary pressures and commodity market volatility.

The relation between international cheese and dairy ingredient market prices and the cost of milk as raw material in the International Sector had a positive impact. In the same period last fiscal year, fulfilling sales contracted at depressed commodity prices in our International Sector had an unfavourable impact.

USA Market Factors2 continued to put pressure on adjusted EBITDA, as compared to the same period last fiscal year, with a negative impact of $40 million mainly due to the effect of negative spread2 in the first half of the fiscal year.

Labour shortages in some of our facilities and supply chain disruptions put pressure on our ability to supply ongoing demand. These factors, along with reduced milk availability in Australia, negatively impacted efficiencies and the absorption of fixed costs. We continued to actively manage these challenging market conditions.

We benefited from our cost containment measures aimed at minimizing the effect of inflation and our efforts to prioritize efficiency and productivity initiatives.

The fluctuation of foreign currencies versus the Canadian dollar had an unfavourable impact of $26 million.

1 This is a total of segments measure, a non-GAAP financial measure, or a non-GAAP ratio. See the “Non-GAAP Measures” section of this news release for more information, including the definition and composition of the measure or ratio as well as the reconciliation to the most comparable measure in the primary financial statements, as applicable.
2 Refer to the "Glossary" section of the Management’s Discussion and Analysis.

Depreciation and amortization

Depreciation and amortization for the third quarter of fiscal 2023 totalled $147 million, up $3 million, as compared to $144 million for the same quarter last fiscal year. Depreciation and amortization for the nine months of fiscal 2023 totalled $438 million, up $26 million, as compared to $412 million for the same period last fiscal year. These increases were mainly attributable to additional depreciation and amortization related to the Recent Acquisitions2, as well as additions to property, plant, and equipment, which increased the depreciable base.

Acquisition and restructuring costs

Acquisition and restructuring costs for the third quarter of fiscal 2023 totalled $38 million and included a non-cash fixed assets write-down of $30 million, and employee-related costs in connection with consolidation initiatives in Australia being undertaken as part of our Global Strategic Plan.

There were no acquisition and restructuring costs for the same quarter of last fiscal year.

Acquisition and restructuring costs for the nine months of fiscal 2023 totalled $67 million and comprised costs described above in relation to initiatives undertaken in Australia, as well as a non-cash fixed assets write-down of $19 million, accelerated depreciation, and employee-related costs in connection with capital investments and consolidation initiatives in our USA Sector and site closure costs of $9 million relating to the consolidation activities in the Europe Sector as part of our Global Strategic Plan. Restructuring costs also include a $2 million gain on disposal of assets related to the sale of a closed facility in the Canada Sector.

During the same period last fiscal year, acquisition and restructuring costs amounted to nil, as they included costs incurred for the Recent Acquisitions2 which were offset by a favourable purchase price adjustment.

Gain on disposal of assets

In the third quarter of fiscal 2022, the Company recorded a gain on disposal of assets of $9 million mainly from the sale of a facility in the Canada Sector.

Impairment of intangible assets

In the third quarter of fiscal 2022, an impairment of intangible assets charge of $58 million was recorded. The charge includes $50 million related to software assets following the Company’s decision to pause the ERP implementation within the Dairy Division (Canada) for a minimum of three years and $8 million as a result of the application of an agenda decision of the International Financial Reporting Interpretations Committee (IFRIC) related to the capitalization of cloud-based software costs.

Financial charges

Financial charges for the third quarter of fiscal 2023 totalled $37 million, up $20 million, compared to the same quarter last fiscal year. This increase reflected higher interest rates, and included a decreased gain on hyperinflation of $14 million derived from the indexation to inflation of non-monetary assets and liabilities in Argentina.

Financial charges for the nine months of fiscal 2023 totalled $62 million, up $8 million, compared to the same period last fiscal year. This increase reflected higher interest rates, and was partially offset by an increased gain on hyperinflation of $11 million derived from the indexation to inflation of non-monetary assets and liabilities in Argentina.

For the third quarter of fiscal 2023, the net effect of the hyperinflation in Argentina, which increased the value of net non-monetary assets on the consolidated statement of financial position, and of the devaluation of the Argentina peso, which decreased the value of the net non-monetary assets, resulted in a minimal gain on hyperinflation ($14 million gain in the third quarter of fiscal 2022). For the nine month periods of fiscal 2023 and 2022, the net effect of these two elements resulted in a gain on hyperinflation of $44 million and $33 million, respectively.

Income tax expense

Income tax expense for the third quarter and nine months of fiscal 2023 totalled $44 million and $131 million, respectively. The effective tax rates for the third quarter and nine months of fiscal 2023 were 19.7% and 22.1% as compared to 23.2% and 37.6%, respectively, in the corresponding periods last fiscal year.

The effective income tax rate is impacted by the tax and the accounting treatments for inflation in Argentina. This impact varies from quarter to quarter. For the third quarter and nine months of fiscal 2023, this impact was positive resulting in a reduction of the effective tax rate.

The effective tax rate for the nine months of last fiscal year included a one-time non-cash $50 million income tax expense incurred to adjust deferred income tax liability balances due to the enactment on June 10, 2021, of an increase from 19% to 25% of the UK tax rate which will be effective as of April 1, 2023. Excluding the effect of this one-time non-cash expense, the effective income tax rate for the nine-month period ended December 31, 2021, would have been 24.2%.

The effective tax rate varies and could increase or decrease based on the geographic mix of quarterly and year-to- date earnings across the various jurisdictions in which we operate, inflation in Argentina, the amount and source of taxable income, amendments to tax legislations and income tax rates, changes in assumptions, as well as estimates we use for tax assets and liabilities.

Adjusted net earnings1

Adjusted net earnings1 for the third quarter of fiscal 2023 totalled $221 million, up $82 million or 59.0%, as compared to $139 million for the same quarter last fiscal year. This is mainly due to an increase in net earnings, as described above, excluding higher acquisition and restructuring costs after tax and the non-recurring impairment on intangible assets after tax and gain on sale of assets after tax that were recorded in the same quarter last fiscal year.

Adjusted net earnings1 for the nine months of fiscal 2023 totalled $559 million, up $182 million or 48.3%, as compared to $377 million for the same period last fiscal year. This is mainly due to an increase in net earnings, as described above, excluding higher acquisition and restructuring costs after tax, as well as the one-time non-cash expense to adjust deferred income tax liability balances to reflect the increase in the corporate income tax rate in the UK and the non-recurring impairment on intangible assets after tax and gain on sale of assets after tax that were recorded in the same period last fiscal year.

1 This is a total of segments measure, a non-GAAP financial measure, or a non-GAAP ratio. See the “Non-GAAP Measures” section of this news release for more information, including the definition and composition of the measure or ratio as well as the reconciliation to the most comparable measure in the primary financial statements, as applicable.

INFORMATION BY SECTOR

CANADA SECTOR

Fiscal years 2023
2022
  Q3   Q2   Q1   Q4   Q3   Q2   Q1  
Revenues 1,213   1,185   1,142   1,055   1,112   1,081   1,033  
Adjusted EBITDA 149   136   132   117   121   124   113  
Adjusted EBITDA margin 12.3 % 11.5 % 11.6 % 11.1 % 10.9 % 11.5 % 10.9 %

USA SECTOR

Fiscal years 2023 2022
  Q3   Q2   Q1   Q4   Q3   Q2   Q1  
Revenues 2,172   2,062   2,043   1,743   1,627   1,533   1,506  
Adjusted EBITDA 146   102   97   42   83   67   96  
Adjusted EBITDA margin 6.7 % 4.9 % 4.7 % 2.4 % 5.1 % 4.4 % 6.4 %

Selected factor(s) positively (negatively) impacting Adjusted EBITDA

Fiscal years 2023 2022
  Q3   Q2   Q1   Q4   Q3   Q2   Q1  
USA Market Factors1,2 (6 ) (27 ) (7 ) (19 ) (40 ) (17 ) (42 )
US currency exchange2 8   3   3     (6 ) (8 ) (18 )

Refer to the ‘‘Glossary’’ section of the Management’s Discussion and Analysis.
As compared to same quarter last fiscal year.

Other pertinent information

(in US dollars, except for average exchange rate)

Fiscal years 2023
2022
  Q3   Q2   Q1   Q4   Q3   Q2   Q1  
Block market price1                            
Opening 1.968   2.195   2.250   1.980   1.873   1.553   1.738  
Closing 2.135   1.968   2.195   2.250   1.980   1.873   1.553  
Average 2.077   1.927   2.287   2.005   1.805   1.706   1.657  
Butter market price1                            
Opening 3.145   2.995   2.700   2.453   1.760   1.740   1.818  
Closing 2.380   3.145   2.995   2.700   2.453   1.760   1.740  
Average 2.904   3.035   2.808   2.692   1.975   1.716   1.805  
Average whey powder market price1 0.432   0.469   0.600   0.759   0.622   0.522   0.626  
Spread1 (0.120 ) (0.222 ) (0.261 ) (0.253 ) (0.099 ) (0.034 ) (0.164 )
US average exchange rate to Canadian                            
dollar2 1.357   1.306   1.275   1.266   1.260   1.259   1.231  

Refer to the ‘‘Glossary’’ section of the Management’s Discussion and Analysis.
2 Based on Bank of Canada published information.

INTERNATIONAL SECTOR

Fiscal years 2023 2022
  Q3   Q2   Q1   Q4   Q3   Q2   Q1  
Revenues 917   989   916   922   919   858   754  
Adjusted EBITDA 111   97   82   62   85   56   45  
Adjusted EBITDA margin 12.1 % 9.8 % 9.0 % 6.7 % 9.2 % 6.5 % 6.0 %

Selected factor(s) positively (negatively) impacting Adjusted EBITDA

Fiscal years 2023 2022
  Q3   Q2   Q1   Q4   Q3   Q2   Q1  
Foreign currency exchange1 (13 ) (9 ) (6 ) (12 ) (13 ) (14 ) (4 )

1 As compared to same quarter last fiscal year.

EUROPE SECTOR

 Fiscal years 2023 2022
  Q3   Q2   Q1   Q4   Q3   Q2   Q1  
Revenues 285   225   226   237   243   217   195  
Adjusted EBITDA 39   34   36   39   33   36   36  
Adjusted EBITDA margin 13.7 % 15.1 % 15.9 % 16.5 % 13.6 % 16.6 % 18.5 %


Selected factor(s) positively (negatively) impacting Adjusted EBITDA

 Fiscal years 2023 2022
  Q3   Q2   Q1   Q4   Q3 Q2 Q1
Foreign currency exchange1 (2 ) (4 ) (2 ) (1 )

As compared to same quarter last fiscal year.

NON-GAAP MEASURES

We report our financial results in accordance with GAAP and generally assess our financial performance using financial measures that are prepared using GAAP. However, this news release also refers to certain non-GAAP and other financial measures which do not have a standardized meaning under GAAP, including the following.

Term Used Definition
Adjusted EBITDA Net earnings before income taxes, financial charges, acquisition and restructuring costs, gain on disposal of assets, impairment of intangible assets, and depreciation and amortization.
Adjusted net earnings Net earnings before the UK tax rate change, acquisition and restructuring costs, gain on disposal of assets, impairment of intangible assets, and amortization of intangible assets related to business acquisitions, net of applicable income taxes.
Adjusted EBITDA margin Adjusted EBITDA expressed as a percentage of revenues.
Adjusted net earnings margin Adjusted net earnings expressed as a percentage of revenues.
Adjusted EPS basic Adjusted net earnings per basic common share.
Adjusted EPS diluted Adjusted net earnings per diluted common share.

We use non-GAAP measures and ratios to provide investors with supplemental metrics to assess and measure our operating performance and financial position from one period to the next. We believe that those measures are important supplemental metrics because they eliminate items that are less indicative of our core business performance and could potentially distort the analysis of trends in our operating performance and financial position. We also use non-GAAP measures to facilitate operating and financial performance comparisons from period to period, to prepare annual budgets and forecasts, and to determine components of management compensation. We believe these non-GAAP measures, in addition to the financial measures prepared in accordance with IFRS, enable investors to evaluate the Company’s operating results, underlying performance, and future prospects in a manner similar to management. These metrics are presented as a complement to enhance the understanding of operating results but not in substitution of GAAP results.

These non-GAAP measures have no standardized meaning under GAAP and are unlikely to be comparable to similar measures presented by other issuers. Our method of calculating these measures may differ from the methods used by others, and, accordingly, our definition of these non-GAAP financial measures may not be comparable to similar measures presented by other issuers. In addition, non-GAAP financial measures should not be viewed as a substitute for the related financial information prepared in accordance with GAAP. This section provides a description of the components of each non-GAAP measure used in this news release and the classification thereof.

NON-GAAP FINANCIAL MEASURES AND RATIOS

A non-GAAP financial measure is a financial measure that depicts the Company’s financial performance, financial position, or cash flow and either excludes an amount that is included in or includes an amount that is excluded from the composition of the most directly comparable financial measures disclosed in the Company’s financial statements. A non-GAAP ratio is a financial measure disclosed in the form of a ratio, fraction, percentage, or similar representation and that has a non-GAAP financial measure as one or more of its components.

Below are descriptions of the non-GAAP financial measures and ratios that we use as well as reconciliations to the most comparable GAAP financial measures, as applicable.

Adjusted net earnings and adjusted net earnings margin

We believe that adjusted net earnings and adjusted net earnings margin provide useful information to investors because this financial measure and this ratio provide precision with regards to our ongoing operations by eliminating the impact of non-operational or non-cash items. We believe that in the context of highly acquisitive companies, adjusted net earnings provides a more effective measure to assess performance against the Company’s peer group, including due to the application of various accounting policies in relation to the amortization of acquired intangible assets.

We also believe adjusted net earnings and adjusted net earnings margin are useful to investors because they help identify underlying trends in our business that could otherwise be masked by certain write-offs, charges, income, or recoveries that can vary from period to period. We believe that securities analysts, investors, and other interested parties also use adjusted net earnings to evaluate the performance of issuers. Excluding these items does not imply they are non-recurring. These measures do not have any standardized meanings under GAAP and are therefore unlikely to be comparable to similar measures presented by other companies.

The following table provides a reconciliation of net earnings to adjusted net earnings.

  For the three-month periods 
ended December 31
  For the nine-month periods
ended
December 31
 
  2022   2021   2022   2021  
Net earnings 179   86   463   237  
UK tax rate change2       50  
Acquisition and restructuring costs1 27     49    
Gain on disposal of assets1   (8 )   (8 )
Impairment of intangible assets1   43     43  
Amortization of intangible assets related to        
business acquisitions1 15   18   47   55  
Adjusted net earnings 221   139   559   377  
Revenues 4,587   3,901   13,375   11,078  
Margin 4.8 % 3.6 % 4.2 % 3.4 %
1 Net of income taxes.
2 On June 10, 2021, the UK Finance Act 2021 was enacted, increasing the UK tax rate from 19% to 25%, effective April 1, 2023. Refer to Note 11 to the condensed interim consolidated financial statements for further information.

Adjusted EPS basic and adjusted EPS diluted

Adjusted EPS basic and adjusted EPS diluted are non-GAAP ratios and do not have any standardized meaning under GAAP. Therefore, these measures are unlikely to be comparable to similar measures presented by other issuers. We define adjusted EPS basic and adjusted EPS diluted as adjusted net earnings divided by the basic and diluted weighted average number of common shares outstanding for the period. Adjusted net earnings is a non-GAAP financial measure. For more details on adjusted net earnings, refer to the discussion above in the adjusted net earnings and adjusted net earnings margin section.

We use adjusted EPS basic and adjusted EPS diluted, and we believe that certain securities analysts, investors, and other interested parties use these measures, among other ones, to assess the performance of our business without the effect of the UK tax rate change, acquisition and restructuring costs, gain on disposal of assets, impairment of intangible assets, and amortization of intangible assets related to business acquisitions. We exclude these items because they affect the comparability of our financial results and could potentially distort the analysis of trends in business performance. Adjusted EPS is also a component in the determination of long-term incentive compensation for management.

TOTAL OF SEGMENTS MEASURES

A total of segments measure is a financial measure that is a subtotal or total of two or more reportable segments and is disclosed within the notes to Saputo’s consolidated financial statements, but not in its primary financial statements. Consolidated adjusted EBITDA is a total of segments measure.

Consolidated adjusted EBITDA is the total of the adjusted EBITDA of our four geographic sectors. We report our business under four sectors: Canada, USA, International, and Europe. The Canada Sector consists of the Dairy Division (Canada), the USA Sector consists of the Dairy Division (USA), the International Sector consists of the Dairy Division (Australia) and the Dairy Division (Argentina), and the Europe Sector consists of the Dairy Division (UK). We sell our products in three different market segments: retail, foodservice, and industrial.

Adjusted EBITDA and adjusted EBITDA margin

We believe that adjusted EBITDA and adjusted EBITDA margin provide investors with useful information because they are common industry measures. These measures are also key metrics of the Company’s operational and financial performance without the variation caused by the impacts of the elements itemized below and provide an indication of the Company’s ability to seize growth opportunities in a cost-effective manner, finance its ongoing operations, and service its long-term debt. Adjusted EBITDA is the key measure of profit used by management for the purpose of assessing the performance of each sector and of the Company as a whole, and to make decisions about the allocation of resources. We believe that securities analysts, investors, and other interested parties also use adjusted EBITDA to evaluate the performance of issuers. Adjusted EBITDA is also a component in the determination of short-term incentive compensation for management.

The following table provides a reconciliation of net earnings to adjusted EBITDA on a consolidated basis.

  For the three-month periods 
ended December 31

  For the nine-month periods
ended
December 31
 
  2022   2021   2022   2021  
Net earnings 179   86   463   237  
Income taxes 44   26   131   143  
Financial charges 37   17   62   54  
Acquisition and restructuring costs 38     67    
Impairment of intangible assets   58     58  
Gain on disposal of assets   (9 )   (9 )
Depreciation and amortization 147   144   438   412  
Adjusted EBITDA 445   322   1,161   895  
Revenues 4,587   3,901   13,375   11,078  
Margin 9.7 % 8.3 % 8.7 % 8.1 %

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