Saputo Inc. (SAP) Earnings Call Transcript & Summary

Greetings, and welcome to the Saputo Inc. Conference Call to provide an update on the impact of COVID-19 on activities. [Operator Instructions] As a reminder, this conference is being recorded, Thursday, March 26, 2020. I would now like to turn the conference over to Lino Saputo, Jr. Please go ahead, sir.

Thank you very much, Julie.

Good morning, everyone, and thank you for joining us. Taking part in our call today are Lino Saputo, Maxime Therrien and Kai Bockmann. They'll provide you with an overview of how we are managing our activities in light of COVID-19 before answering questions from our analysts. Before we begin, I'll remind you this call is being recorded and will be posted on our website. Before we proceed, please be reminded that some of the statements provided during this call are forward-looking. Such statements are based on assumptions that are subject to risks and uncertainties. Refer to our cautionary statements regarding forward-looking information in our annual report, press releases and filings. Please treat any forward-looking information with caution as our actual results could differ materially. We do not accept any obligation to update this information, except as required under securities legislation. I'll now hand the call over to Lino Jr.

Thank you, Sandy, and good morning, everyone. I appreciate you all being available during these very, very difficult times. We thought, however, it would be very appropriate to provide you with a perspective of what we're seeing and what we're going through on a day-to-day basis. So I'll begin with a few comments, I might ask Max to chime in a little bit with respect to our financial situation. And then I'd like to open up the floor to your questions. I want to hear from you what's on your mind. And hopefully, we'll have the answers for you. We'll give you a perspective of what we have as current as it is today. So related to COVID-19, our first and most important priority is our people, our talent. So the health and safety of our employees are the most important thing that we can think of during these trying times. And so we definitely do have some protocols and practices that are in place. And these protocols will be updated as they need to be as we have new information. But for me, what is even more important than the protocols that we have in place is providing stability and comfort to our employees during these trying times. And so we made a commitment that we will provide our employees their full wages, irrespective of whether they're working their full hours or not. Our employees will receive their full wages, the full income. So they at least have one less thing to worry about. So once we've communicated that to our employees, we were set on understanding how we could provide comfort to our customers. Understand that the product mix is changing. Our channel focus is changing relative to the stores that are open and stores that are closed and units that are functional and units that are not functional. And so there has been a little bit of shift in our delivery process. There's been a little bit of a shift in our manufacturing process. From a sales perspective, we need to make sure that we are there for our customers when it's most convenient for them. So even in terms of timing of delivery, pickup, drop-offs, we're dealing with that on an ongoing basis. And I have to say our teams are really stepping up to this challenge here. Once we get through all of that, then we have to look at our other programs, mostly internal programs, like continuous improvement through CapEx allocation, including the ERP rollout. With some of the limitations we have with respect to travel, limitations we have as well, self-imposed of third-party contractors coming into our clients. Some of our projects are either slowed down or have been put on hold. This is not a reflection of a lack of liquidity. We have plenty of liquidity to execute. It's really a precaution on safety. Of course, as all of this is happening, we have to be mindful of the inventories we have. And perhaps some of the inventory that was channeled for foodservice or industrial, may not be going to those customers, and so we have to see if there's a way that we can repurpose them. If we cannot repurpose the inventory, and we're getting close to the end of its shelf life, we'll find a way to get them to people who can consume them without having any waste within our system, and our teams are proactively working on that as well. We have the great fortune that our balance sheet is very clean. We have a great fortune that we are financially sound. They're trying times. We want to be a stabilizing force for our employees. We want to be our stabilizing force for our customers as well. And we believe that this is a great opportunity for us to distinguish ourselves. We have the fortune that we've got financial strength, so we will take the right decision at the right time, every single day. And as an organization, we're always thinking about profit and purpose. And these very, very trying times, we are putting purpose ahead of profit. That is our commitment. And so on that, I'm going to pass it on to Max, and I want him to talk a little bit about the financial strength that we have, the benefit of being able to do the right thing every single day.

Excellent. Thanks, Lino. So as Lino alluded to, the business is continuing into this turbulent period. The milk is coming through our facilities, and we have the ability to convert that milk into product. So we are generating positive cash flow. And when we couple that with some of the initiatives that took place about 6 to 7 months ago with regards to equity, $600 million -- $660 million we raised and we directed those funds to debt reduction as well as the increase in our revolving committed facility from USD 500 million to USD 1 billion, which is absolutely not drawn, and we've always had undrawn facility, but we just as a precautionary measure, we did increase it last November, I believe. So we do think that we are well positioned. We have access to liquidity, and we intend to maintain dividend, we intend to maintain CapEx to the level of our depreciation amount and the deleveraging continues and direct the free cash flow to debt reduction and perhaps other opportunity that the market could bring to us from an M&A perspective. So we intend to maintain our prudence as usual, and that allows us to stay the course getting into this crisis.

So I appreciate that, Max. With this short introduction, I would now like to turn it back to Julie, who will field and manage the questions coming in from our analysts.

[Operator Instructions] Our first question comes from the line of Peter Sklar with BMO.

Lino, can you talk about in your plants like how you're protecting your workers so that employees can come to work and ensure that the dairies continue to be up and running?

Yes. So I'll start off, and then we do have a global crisis team that meets on a regular basis that updates the protocols and practices on a regular basis. Sandy Vassiadis from communication leads the communication on that. So I will tell you that we have a heightened cycle of sanitation. Of course, understand that, Peter, we are in the food business, so our GMPs are always progressive and innovative and always up to date. And this -- under these circumstances, of course, there has to be a heightened level of sensitivity. So I'm just going to ask Sandy to go through a little bit of what we discuss as a management team every single day of the things that we have to focus on.

So indeed, we have the protocols in place and they've been standardized according to regulation and local authorities in all of the countries where we operate. We're working closely with those authorities to make sure that our -- we are following all of the recommendation. We've instilled the necessary processes in place to also deep clean all of the high-traffic places and make sure that employees are using the distancing recommendation. We also have protocols in the event that an employee would test positive, what would happen to make sure that everyone is following that same standard across the board. And so those include monitoring employees, making sure they have the reflexes to apply everything that we're hearing all of us in terms of the sanitary measures, cleaning of the hands and all of those other things, but also that they keep us abreast if they develop flu-like symptoms so that we can help them pack gather and trace back all of the people that they would have been in contact with and make sure that everyone is safe and everyone isolates or takes the necessary measures to monitor symptoms. In such an event, the plant would do a deep clean as Lino mentioned. And during that time, the operations would be shut down and reopened as soon as we got clearance that all of them had been done and that we were okay to reopen. And we estimate that, that could take a couple of hours to perhaps a day, but the operations would reopen. What we're making sure is that our employees are properly informed and that they are monitoring, and we are helping them make those decisions.

Okay. And if I -- on another topic. Lino or Maxime, like I know you don't provide guidance, but can you talk a little bit about what the demand is like from the grocery channel, which would be growing? And obviously, what the pressures would be in terms of demand from food service and industrial and like net-net, should we look for your sales to decline? How do you think this is all going to fall out going forward?

Yes. And that's a very good question. And we're dealing with that on a regular basis. So I'll start off with sort of a high level shifts and then perhaps maybe Max or Kai might want to add a little bit more color there. So we're really seeing a shift moving away from food service more into retail. So our retail plants are running hard. We're really spiking in demand on the retail. Foodservice, as I mentioned, is almost halted. With the exception of the QSR outlets, those that have takeout or drive-through are still operational. But the other QSRs that do not have takeout or drive-through pretty well have halted as well. On the industrial side, when we think about providing product to our customers as an ingredient, the frozen meal manufacturers are still operating, getting product to the retail shelves. So that has not dried up; in fact, that has enhanced. However, the industrial customers who service restaurants, like the salad dressing manufacturers, they have shut down. And so we're seeing a massive, massive shift of production moving away from our industrial plants. Our foodservice plants into our retail plants. Our retail plants are running very, very, very hard at this time. We, as Max indicated, we are still receiving milk except we're making to order. We're not building inventory the way that we used to build inventory for customers based on their patterns. And so what we need to deal with at this stage, as I talked about in my opening statement is inventory. The inventory usage and seeing how we can perhaps repurpose some of that inventory that was -- as that is an inventory for foodservice or industrial and seeing if there's a way that we can perhaps through some discussion with retailers, if they would accept certain side and formats and products and labeling, so that we can sell it to retail channel instead of the foodservice or industrial. So we're dealing with that on a day-to-day basis. Of course, somewhere along the line, Peter, to be honest with you, this is going to cost us money. But that's secondary in our thought process. We can afford to do the right thing. There might be some inventory that we will have to -- that we would have to write-down. We will try as much as possible through our communications teams and our sales teams and the local teams to get that food to foodbanks where we can, so we don't have to dump it. We'd like at least to get some use out of it, but we may have to, and we probably will have to write-down some inventory along the line that has expired. So we're dealing with this on a day-to-day perspective. That's sort of a large-scale perspective of what we're dealing with on a day-to-day basis. And maybe Kai can add a bit more color. And perhaps if you want Kai, you can go even divisionally what divisions are best suited for retail versus foodservice and industrial?

Sure. I'll start off with just highlighting the fact that where we're operating, whether it's Argentina, the U.K., Australia, the U.S. and Canada that we haven't seen any stoppages because we've been considered a critical service. So it's our job to make sure that we get food delivered to consumers. And it's a really -- it's a very rapidly evolving situation. So it's changing day by day. And it's no big surprise that the travel and leisure segment, foodservice, specifically, is taking a big hit in relation to this pandemic. So there's a lot of puts and takes, and I'll go through some of the divisions. Again, it's a rapidly changing environment. And a lot of what we've been seeing could be in relation to pantry loading, and we're going to have to wait a couple of weeks to figure out what the normal buying patterns are going to look like. So if we look at our overall business, more than 50% is retail for the entire company. When we go to Canada, we're seeing spike specifically in demand as it pertains to fluid milk and as well as in cheese on the retail side. Just to give you an example, cross-border shopping. A lot of people used to go down to the U.S. and fill up their cars with gas and pick up a gallon of milk. Well, that's stopped because people can't travel anymore. So we're actually seeing spikes in fluid milk purchases of our branded products, British Columbia is an example. We are seeing softness in foodservice and QSR and specifically smaller foodservice operators are having a bit of a challenge. We have seen specific examples of large customers, whether it's in Canada or the U.S. who are adapting their service model, in response to the new environment. So they're moving to more of a delivery model, which has helped kind of temper some of the change in demand. But again, there's a lot of puts and takes. In the U.S., we're seeing, again, strong demand on the retail side, specifically in our value-added categories, which is good news for us. Snacking categories like string cheese. People seem to be craving comfort food. So we're seeing a lot of strong sales in ricotta. It looks like a lot of people are making a lot of lasagnas at home. And on the foodservice side, again, we're seeing some softness for the U.S. sector. But again, that's changing on a daily basis. Our foodservice distributors are having big challenges right now. They're unable to forecast accurately. So there's big swings in demand. So that's causing a strong disruption to the business. We're also seeing some strength on the transportation side. So in terms of getting product to some of the key markets in the U.S., I'll call out, specifically California, Washington State of New York Metro because that's where COVID-19 has hit in those states pretty hard. When you go to the international side of our business, the U.K., we've talked about it before. It's primarily a retail business, more than 85%. We've seen very strong demand in our -- for our branded Cathedral City products as well in our butters and spreads, where we have a variety of brands. If you go to Australia, we've seen a strong surge across our retail platform, specifically in the longer shelf life items, like UHT, we're running full out. On the powder side, the milk sachets, cheese, the everyday cheese category is extremely strong, chilled milk as well. Foodservice is a smaller part of our business in Australia, but we are seeing softness there as well. There is going to be an impact on the export side as we've seen some softness in China and Southeast Asia as those countries are on lockdown. But the good news is that we're starting to see the Chinese ports and transport in that country slowly getting back to normal. So we anticipate that those markets, like China, will start to pick up steam as we enter the second and third quarter of our fiscal. We are seeing some downward pressure on GDT pricing. The global commodities are seeing an impact in relation to this pandemic. Oil prices also have an impact in terms of purchasing typically when we see oil prices come down, regions like the Middle East, we'll see softer demand from a dairy perspective. Argentina, their biggest impact is in relation to exports again. We see Brazil and Russia. Those are the 2 primary export markets for Argentina. And their currencies have taken a major hit in relation to this pandemic. And so that's softening the demand from that side. But I think from a -- if you look at our overall business, we have tremendous flexibility in many of our platforms, so we're able to have -- to the best of our abilities, we're able to move our production to different cheese types, different ingredients and catering to more of the domestic requirements at the retail level. So all the divisions are trying to produce more retail in light of the current situation. But at the same time, we've got to keep a long-term perspective in all of this and remain disciplined. Because again, this situation is changing very rapidly.

Yes. So not everything is a one-for-one trade-off. We do have some plants that are exclusively foodservice or industrial oriented. They don't have the equipment or the packaging to be able to do retail products. So there is some risk there. The plants that have the capability of doing retail are ramping up and running very, very hard. We're very, very proud of the employees stepping up to these challenges as well. So we're managing the situation the best we can on a day-to-day perspective. Max, anything you want to add on that commentary?

I would just add that although we're trying to do our best to fulfill the orders from a retail perspective, obviously, we will not undo whatever we've built to serve our foodservice customers because at the end of this whole crisis, we want to be there for our foodservice business, and we will be there as soon as the food service engine start over again. So that will be my comment.

I would just add, like there's been examples in some of our divisions where our competitors have been unable to meet the customers' requirements in terms of getting product to them. They don't have enough production and so on. And because we've been able to step up to the plate, and we're seeing opportunities to pick up some business.

So Peter, does that answer your question?

Yes, that was a really good review and very helpful.

Okay. Thank you.

Our next question comes from the line of Vishal Shreedhar with National Bank Financial.

Just on this big shift that you're seeing in these various businesses, given that the disclosure really in the past hasn't indicated this too much. Is it fair to say that from a margin standpoint, shifting into retail is favorable? Or how should we think about that?

The margins in retail versus foodservice, typically, we're not -- we were not seeing like major differences between the 2. I would throw at you that right now, from a trade spend perspective or promo or spend in that nature is kind of shut down. So we, yes, do benefit from the full margin from a retail perspective at the moment. And to see if those margin will be offset -- will offset the negative impact on the foodservice side that remains to be seen, but that's what I could provide.

Okay. And maybe some perspective on how this situation is trending? Is it -- particularly on the foodservice side and the industrial side, are you seeing -- and maybe on the retail side as well. Are you seeing the situation stabilizing a bit? Or is it foodservice side continuing to weaken and retail continuing to strengthen?

Again, it's too early to call. We've only been 2 weeks in this mess, really. But what we would say is that we have to wait and figure out whether this is a case of pantry loading on the retail side. People were panicking and stocking up on toilet paper and all these essentials. So it's too early to call, but we see strong demand on the retail front, but this is a snapshot in time, and we don't have a crystal ball at this point. And on the foodservice side, we are seeing softness. But again, we have to evaluate as the weeks progress.

Yes, for the time being what we're seeing on the foodservice side is the orders are being canceled. And so this is what we're looking at the inventories that we haven't seen if there's a way that we can repurpose the inventory on the orders that have been canceled.

And it's the ability of a lot of the foodservice operators, how are they going to adapt to the new realities? So again, I mentioned that there are some large-scale customers that have adapted their business model to provide more delivery. And there's other operators if they're not able to change as quickly, then obviously, that would have an impact.

Right. And in terms of the retail side, it's difficult for us, or at least for me to understand how much extra capacity you had to address this -- these surging demands? So are you able to meet your customer commitments last quarter? Maybe you can give us some sense of how much capacity you're running at in retail to give us some color on your ability to fulfill this demand.

Yes. So Vishal, you know that we like to run our plants quite hard on under normal circumstances. So we were running our plants close to 95%, 98% capacity utilization. And this is where I think cooperation with the retailers really does help. What we've done to try to get more capacity out of our plants is minimize the SKUs that we have. So we have fewer changeovers, less different sized products, different types of boxes. So we're trying to streamline as much as we can on the retail side, minimize the number of changeovers and formats that we're manufacturing, so we can pump out as much volume as possible. So I would say that our retail plants are running well beyond the capacity utilizations that we've seen before. They're running up close to 100%, if not beyond 100% of capacity utilization. Based on some of the initiatives that we've been able to offer our customers and they've been willing to accept.

Okay. And if you're running above 100%, are you sacrificing preventative maintenance or anything like that?

Well, in the short term, the preventive maintenance is not an issue. If this will go on beyond 2, 3, 4 weeks, then at that point in time, we will have to shut down for maintenance. I will say, though, that within the dairy space, typically, you run a plant for 20 hours a day. We shut down for washing 4 hours a day that is typical through CIP. And we're trying to do as much as we can through the 4-hour shutdown within the day. So it takes a lot of planning, a lot of organizing. Again, our teams are stepping up to the plate. But if this would go on beyond 3 or 4 weeks, then we'll have to do more half day shutdowns for the [ PM ] programs.

Our next question comes from the line of Michael Van Aelst with TD Securities.

Just wanted to try to summarize some of your comments first, guys. So I understand, your volume -- you're taking in the same amount of milk as you were before, is -- I believe that's what you said, right?

So let me clarify that. So where we have contracted milk, we are taking 100% of the contracts. In some areas, in some regions, we do not have contracted milk. And we are not taking the milk that we don't need. So the volumes are below what we normally run, but we are running all contract in milk.

Okay. So I mean, with that, and we know that your foodservice is between 35% and 50% of your sales in North America. So clearly, increasing your plants from 90% or 95% to 100% or however is not enough to make up for that lost volume by the sounds of it?

That is correct. That's correct. So what we're doing is we're looking at longer shelf life products, products that ultimately have 3 months, 6 months, in some cases, 12 months of shelf life. And we're stockpiling those products as well. So we have to be mindful of our working cap that, that is going to be growing. We're prepared for that. So we are carrying a lot more inventory of long-hold products today than we were in the past.

Okay. So to offset the lower volumes that you're going to be selling, you've got some potential for higher margins because there's not as much promo activity or retail. But then how much of an offset are these extra costs for cleaning and paying employees if they have to stay home and all that kind of thing?

Yes. So I'm going to answer perhaps the back end of that question and then Max will answer the front end of it. So our -- of course, if we're paying employees, and not getting the hours, that's costing us money without a doubt. I would say some of the other costs, the heightened cycle of sanitation that is minimal expense to us. We're already doing a very, very high level of sanitation as a food manufacturer to use more chemicals or to have more processes in place, that's not where the big money is. The money, well, of course, will be in the labor, which we're very, very happy to pay. We want to provide that security to our employees. We talk about locking arms and fighting the fight together, we need to be there when they need us because they're there when we need them. So that we have to pay higher cost of labor for less volume. I'm very happy to do that. And maybe I'll ask Max then to talk about the first half of the question.

Yes, with regards to margins, thanks for that question. Gave me an opportunity just to clarify. Our margins, whether it's food service, whether it's retail, the vast majority of our margin comes from operation excellence. And whether we manufacture a product for retail market or for foodservice, this is where we differentiate ourselves and this is where the margin is being made. So now we're going to direct those products or those operations as much as we can towards retail, but the impact to margin will not be a significant shift, if you will.

Okay. And so I guess, if you could help us, just so we can kind of gauge the impact on the foodservice side. In the U.S.A., I think almost 50% of your sales are foodservice and Canada is 35%. Can you give us an idea of how that breaks down between chains -- chain pizzerias, mom-and-pop pizzerias and then everything else, like...

Yes, that's getting into a little bit too much detail, not because I don't want to provide it to you, Michael, but then we're giving the road map to our competitors of exactly where we're selling our product and where we can be attacked. So I prefer not to get into that. So I'll respectfully choose not to answer that question.

Okay. And then from an employee standpoint, are you having trouble finding extra workers to come in and replace those that are having to stay home? Or we've seen that in other industries, even though there's a lot of unemployment, that's still tough to hire people right now. What are you seeing on that front? And what happens if your -- if COVID gets into your plant and you have to -- one of the shifts has to be self-isolated for 14 days or so?

Yes. So we haven't gotten there yet. And again, I'm knocking on wood as I say this. We have had no incidents in our manufacturing facilities. So we haven't had to face that yet. However, that might just be a question of time. But right now, I will tell you the morale in our plant is very, very, very good. We have normal levels of absenteeism. So we're not seeing that people are not showing up for work. In fact, our teams are coming in energized and asking how much more they can do. So it really has not been an issue for us finding the staffing for the plants that are running very, very hard.

It's pretty much business as usual.

Just for me to finalize this. So it sounds like some negative short-term impacts on profitability because you're doing the right thing and you're supporting your employees and customers. And of course, your business is getting impacted to a degree on the foodservice side. But if you were to take a look out to, say, calendar 2021, assuming that this is behind us, life has returned to normal. What are the positives that you can take away from -- or heading into 2021, let's say, where -- whether it be you've improved your customer relationships, taken on some new business or improve -- being able to improve your mix somehow as part of all of this, what else -- maybe M&A or others not being able to this as well? Is that going to create M&A opportunities? Can you talk about that a little bit longer term?

Yes. So Michael, a lot of what you're asking is hypothetical. But I will tell you that this type of circumstance allows us to live the Saputo culture and values on a day-to-day perspective. And when we talk to our customers and when we have town hall meetings with our employees, we like to say that this is how we distinguish ourselves. Well, we have a great opportunity to live it. And in some cases, and I would say, in a lot of cases, I think that will go a long way after this crisis is over with some of our customers. Our employees already know who we are. And I get emails. I tell you, I kid you not. I'm getting e-mails on a daily basis, 10, 20, 30 e-mails from our employees that are so appreciative that we're living the culture and the values every single day, and we're standing behind it. So where I see perhaps a silver lining, if that's a part of your question, is on the M&A front. Look, our balance sheet is clean. We still have the ability to add anywhere upward of $2 billion on our balance sheet with debt. Coming into this crisis, some of our competitors were already on very thin ice. Perhaps this might just take them over the edge. So I think that there will be coming out of this increased opportunity for M&A. I think the great fortune we have is that we can pick and choose the ones that we think will fit our strategy for development the best, be able to buy them at reasonable prices and be able to continue to develop our business as we had before, but perhaps on a much quicker pace because of this crisis. So if I think of the silver lining, to me, that is a silver lining.

Our next question comes from the line of Mark Petrie with CIBC.

I guess I'm just following up on a couple of things that you guys already talked about with quite a bit of detail. But with regards to the magnitude of the plants that you could potentially shift from foodservice to retail? I mean, how meaningful would that shift be? Is it relatively minor or is it relatively material?

For those plants that are foodservice and industrially oriented, meaning that, that's the kind of equipment and processes and formats that they can produce, they cannot shift. So that is where we have quite a bit of limitation. Now we are having discussions with our customers to see perhaps if a larger format might fit well with meeting their requirements with their customers. So this is a very fluid discussion and ongoing. If we have the flexibility and the purpose to do so, then we will do that. But I will tell you, that is part of the challenge today of trying to keep our foodservice and industrial plants running at reasonable capacities when we just can't get the product out the door.

Okay, understood. With regards to the competitive dynamics in your various geographies and channels, I mean, given that there is effectively an excess of inventory and milk out there, what are you sort of seeing with regards to competitive dynamics?

Well, from a -- and again, I'm very happy to say this and very, very proud that the dairy industry is a small industry. And right now, we're seeing that the competitors are locking arms and fighting this fight together. We're supporting each other in every different region that we're operating in. If somebody has too much milk and they can't process it, well, then we may accept to process it just like they will be there for us. And there's shifts of packaging products and things of that nature that we're working on. But the industry is coming together and making sure that they're thinking about their consumers first and foremost.

Okay. And then just my last question is with regards to the work capital, you guys are talking about inventory pretty openly. But we know you also talked about trying to be a stabilizing force for your customers and your suppliers. Does that sort of imply that receivables probably move up a bit and payables maybe come down? Or how should we think about that?

Yes. Well, from a working cap perspective, we -- we're absolutely working with customers. We have no intention to really change the terms with our customer on that case-by-case situation. From an inventory perspective, I think, Lino mentioned it. We -- we're going to watch out, absolutely and try to balance the milk coming in with the output. And obviously, from a accounts payable perspective, milk being the biggest part of our payment, and we have some specific period or time that we have to bear on a regular -- very regular basis. So is salary, so is energy. So we have a limitation in terms of extending our own terms with whoever we need, we want, and that's not our game plan. So overall, out of those aspects, I would say probably inventory is the element to watch out as we -- we're getting into this market.

Our next question comes from the line of Patricia Baker with Scotia Capital.

Just want to go back to what you're doing at retail to increase the capacity more or less simplifying operations and SKUs there. Can you just talk about how -- when did you start to do that? Is this what you're referring to being 2 weeks in as you've only started that 2 weeks ago?

Yes. It's a rapidly changing environment as we alluded to. And in fact, we've got -- we're seeing pretty rapidly changing consumer preferences in light of what's going on. And so we've got all of our divisional business development and insights teams that are looking at, whether it's ultimate packaging, extended shelf life, new product development opportunities. So really that's -- really kicked off within the last couple of weeks.

Okay. And Kai, while I have you, you mentioned that in some markets, the competition is unable to meet the demand and Saputo is stepping up, picking up the business. Are you willing to tell us what markets that might be referring to?

I would say, in Canada, we've seen a strong example of that, where a competitor was unable to ship the necessary quantities of product to a specific customer and then we stepped up to the plate we are able to deliver.

[Operator Instructions] Our next question comes from the line of Irene Nattel with RBC Capital Markets.

Let me echo everyone's thanks. This is really helpful. A couple of sort of practical types of questions. So just from a milk production perspective, do you have the right sort of supply of milk in the right areas to meet the shift in demand by channel?

Yes. So milk's supply is not an issue. As I indicated, Irene, in some areas, in some instances, we have too much milk. And we are taking in 100% of the contracted milk, anything that is not contracted, we're working with the dairy farmers or the co-ops. Anything that's patron-based is coming into our plan. We made a commitment to the dairy farmers that rely on us every single day for guidance and leadership. We're taking 100% of the milk with the different co-ops whatever is contracted, we're taking. Whatever is not contracted, the co-ops will have to find an alternate outlet. On the positive side, though, for the dairy co-ops is that there are spiking demands with their customer base as well and other categories of products that we are not manufacturing. So the milk is finding a home. And again, like I said before, the industry is working together to make sure that there's the right balance of milk in the right areas.

That's very helpful. Although it's probably reasonable to think that on a -- if we look at the U.S., on a national basis, there probably isn't quite enough capacity to supply the retail channel and probably still too much to supply the other channels. Is that a fair statement?

That's a fair statement. But in terms of raw material, there's plenty as a result of service demanding way down.

And whatever would be surplus, Irene, which is historical anyways, is going into powdered products.

Okay. That's very helpful. And would you be willing to give us an idea of what percentage of your industrial and foodservice capacity cannot be repurposed?

I would prefer to stay away from that Irene at this stage.

Fair enough. Okay. I'm going on to an easier question now. You talked about M&A a little bit. Can you just please remind us of sort of on a regional basis or on a product line basis, how you would outline what would be of greatest interest to you at this particular point in time?

Yes. So further consolidation in the U.S. would be really, really interesting to us. And again, as Max alluded to earlier, we're not going to shy away from foodservice or industrial, if there's an opportunity for acquisition in that category. Because once all of this is over, and it will be over. We believe that consumers are going to go back to their customary traffic tendencies and patterns and habits and behaviors. So I would suspect that companies globally, especially in the U.S. that are predominantly or exclusively foodservice and industrial oriented, they've got to be suffering. And so we're keeping our ears to the ground to see if potentially there could be opportunity for further consolidation there. Beyond the United States, Europe is still a very interesting platform for us. And Oceania, not so much Australia because I think we've got issues with consolidation there. We are the leading dairy processor that ultimately any further consolidation might be -- well, definitely will be reviewed by ACCC, but might not be viewed favorably by ACCC. But New Zealand, and there are a lot of industrial producers in New Zealand that perhaps in these days, might not be faring too well. Outside of that, Canada, of course, for its own antitrust issues might be a limitation. Latin America right now is not top of mind for us. Because of the economic and political instability in some countries and regions, add to this instability with this virus, not the time to look at Latin America. So again, we're looking at everything within the retail, foodservice and industrial space and perhaps an outside shot, plant-based beverages might also be very interesting for us if something would come up.

Our next question comes from the line of Chris Li with Desjardins Securities.

Just a couple of questions for me. First one is, you mentioned that you're seeing some upward pressures on transportation cost. Can you maybe please elaborate on that? And do the lower oil prices help offset some of that pressure?

It's -- what I was alluding to was the availability of trucks. Driver shortages in specific areas, and I called out California and Washington State and New York Metro as examples of that. So it's not necessarily a pure rate increase, it's more in relation to availability. And there could be short to medium-term pressure from a rate perspective if that trend continues in terms of shortages.

I would add also that following the hurricane a couple of years ago, we saw a spike in the logistics transportation. So we'll see in light of this crisis, if it's going to be another spike. It has tempered out in the last few months, maybe the last year, but we'll see how it plays out over the next few weeks and months.

Okay, that's great. And then last question is just -- I know you guys have a strong balance sheet, so this is not really an issue, but can you share with us what are your key debt covenants?

I would tell you that from a leverage perspective, end of December we were 2.9x our EBITDA. We could say that we're below that level today. We could easily get another turn on EBITDA with our covenant that we have. And that -- it excluding a USD 1 billion committed revolving facility, USD 1 billion.

Mr. Saputo, there are no further questions at this time. I will now turn the call back to you.

Thank you very much, Julie.

Thank you for taking part in this call. Have a nice day and stay safe.

That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.