Saputo Inc
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Saputo Inc
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Ladies and gentlemen, thank you for standing by, and welcome to the fiscal 2018 third quarter results conference call. [Operator Instructions] As a reminder, this conference is being recorded, Thursday, February 1, 2018. Now I'd like to turn the conference over to Lino Saputo, Jr. Please go right ahead, sir.
Thank you very much, Tommy.
Good afternoon, everyone, and thank you for joining us today. A press release detailing our 2018 third quarter results was issued earlier today, and is also available as we speak on our website at www.saputo.com. This call is being recorded, and will be posted on our website for future reference. [Operator Instructions]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 and our quarterly 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 laws. Mr. Lino A. Saputo Jr., our Chairman of the Board and Chief Executive Officer, will begin this conference by providing his brief overview of key highlights relating to the third quarter of fiscal 2018 after which he, along with Mr. Maxime Therrien, our Chief Financial Officer, will answer your questions.
Thank you, Sandy, and good afternoon to you all. This has been a solid quarter, despite adverse market conditions in the U.S., and the impact of an unfavorable foreign exchange. Revenues are up 1.9%, while adjusted EBITDA is down 8.3%.We haven't slowed our pace. We've continued to target operational efficiencies and raw material optimization across all divisions. And we've not shied away from difficult decisions aimed at rightsizing our business or from walking away from unprofitable product categories or volumes. We stay focused on controlling the controllables as we adjust and adapt to the things we can't control, including market factors and changes in the competitive landscape. The ERP project continues to progress well, though it has impacted short-term results as planned. Australia and Argentina have completed their implementations, and the U.S. division has begun their own processes towards the ERP integration. We remain confident in the long-term benefits ERP will generate. This important transformation will support our future growth for decades to come.The third quarter was marked by the completion of the Montchevre acquisition. It allows us to broaden our presence in the U.S. specialty cheese category, and it solidifies our position as a leader in processing goat cheese in North America. As for the Murray Goulburn acquisition in Australia, we're expecting the Australian Competition and Consumer Commission and the Foreign Investment Review Board to render decisions later this month, after which a shareholder vote can take place. We remain confident in our offer and expect to complete the acquisition in the first half of calendar 2018. On the regulatory front, the biggest development this quarter has been the tax reform in the United States, which translates into a notable onetime benefit for Saputo as well as a significant reduction to our U.S. federal income tax rate going forward.Concerning the announced revival of the Trans-Pacific Partnership, it's now expected to be signed the first week of March by the 11 nations who have agreed to the new trade deal. We expect our government will ensure decisions relating to the allocation of quotas are reflective of the impact on Canadian dairy stakeholders affected by the influx of imported dairy products into Canada.As for NAFTA, the recent negotiations taking place in Montréal have been highly mediatized. That said, we still don't know what or if any changes to the agreement will be concluded. Whatever happens, I remain convinced we'll adapt to any revised regulatory environment in North America or anywhere in the world we operate. We can do this, thanks to the entrepreneurship, innovation and passion shown by our employees across all divisions. What they accomplish every day is not only inspiring, it is delivering steady results.With that, I conclude my formal remarks, and thank you for your time. We will now proceed to answer your questions. Tommy?
[Operator Instructions] And we'll get to our first question on the line from Mark Petrie with CIBC.
Lino, I'm wondering if you could just go into a bit more detail with regards to the U.S. market, and maybe some more color in terms of how the channel mix, customer mix and product mix may have evolved through the quarter?
Sure. So the U.S. division, which includes cheese and Dairy Foods, EBITDA was down 23.1% versus the same time last year. A lot of that has to do with market conditions. We had a block market that dropped dramatically over the course of the quarter, and at the same time, we had a butter market that also dropped, impacting our overall results. If I look at what's going on in both of those markets, I would tell you that the volume has been good, steady in the cheese business and growing in the Dairy Foods space. We have lost a little bit of volume in certain categories and areas, but overall, not a dramatic impact to the overall results of the U.S. business. Having said that, the mix is positive. So the types of products that we lost were more commodity and the types of products that we've gained have been in value-added. The market in the U.S. continues to be challenging, only because there's more milk in the system than consumers can consume. That's putting pressure on some of the inventories we have in products like byproducts, WPC and whey. And so there are some impacted elements there to the EBITDA number. Overall, if I look at the division, how it's performing, our plants are performing extremely well. We've had some initiatives and projects that are going on, on an ongoing basis in terms of cost-cutting initiatives. Our plant in Almena, the blue cheese plant, is starting up extremely well. We announced, after the end of last quarter, the closure of our Fond du Lac blue cheese plant, which is scheduled for the first half of this calendar year, at which point in time we will have one mega plant producing blue cheese in the United States, which as far I'm concerned, will be the most effective and most efficient blue cheese plant, I think, in North America and perhaps around the world. So I think we're investing in the right elements. I think we're promoting the products that are driving some great value for us. I'm not overly concerned with our results in the U.S. business, specifically because they do come from the impact of market conditions that were unfavorable for this quarter. I think if I look at the operating business and I look at our management team and I look at our decision-making process, we do have a very, very healthy solid platform, both in cheese and in Dairy Foods.
Okay. That's helpful. I guess, just in terms of the outlook from here, I mean, is it fair to say that the absolute decline of the commodity prices in Q3 was a significant factor? And even if commodity prices remain kind of flat from here on, which is just not great but okay, EBITDA margins would improve from Q3?
Yes. That would be a fair statement. So anytime you're in a quarter and you have a block market that declines, of course there's the impact on inventory realization, which was a factor that affected us this quarter here. All things being equal, if the market stays stable, even at these low block market levels, and I believe the block market today is somewhere around $1.46, yes, I would say that the margin should be better as we move forward.
We'll get to our next question on the line from Irene Nattel with RBC Capital Markets.
Thank you, Lino, for your answer to Mark's question. Just continuing with the U.S., the ERP-related expenses in the quarter, I guess, number one, would you able to quantify them? And what level of expenses should we be anticipating on a go-forward basis as you continue the rollout in the U.S.?
Yes. I'll ask Max to answer that question.
Okay. So typically -- for this particular quarter, we're talking about $8 million of additional spend that we had to face in this quarter as the program migrated from the prior quarter from the international divisions. And that is bringing us about in line with what we targeted for the year. We're targeting an additional $30 million on an annual basis above last year in terms of our ERP spend. And that's -- if you look at the next -- the following year, that additional expense, we're not anticipating that it's going to be up again, but more like on a plateau-type thing. So definitely, we had impacted from ERP this quarter to the tune of $8 million, and specifically, to the U.S. divisions.
That's really helpful. And just continuing, it sounds as though, Lino, your U.S. business, you're pleased with your volume. You're pleased with your competitive positioning. Would you agree with that? Number one. And number two, can you speak to those elements in your other geographies, please?
Yes. Okay. So I appreciate the question, and I am extremely pleased with the way our team is managing our assets in the U.S. There's -- we always talk about controlling the controllable, and I believe our team is doing a phenomenal job doing that. When you have a block decline year-over-year of $0.30 a pound, there's nothing you can do to mitigate any of that. And so again, we're not discouraged by a 23% reduction in EBITDA in the U.S. We're motivated by the initiatives that our team employs on a daily basis. If I look at our other divisions, as you had requested, EBITDA in Canada is up 9.4%. That's related to operational efficiencies and raw material optimization. We have lower administrative costs in that division for this quarter compared to the same quarter last year, even though we have external warehousing and logistics costs that are slightly higher. The division in Canada also is performing extremely well. Again, rightsizing is important for us. We have announced in the past some plant rationalization to properly reflect the amount of milk that we process and the customers that we're servicing. Of course, if I look forward, the Canadian market continues to be very competitive. There are always requests for new prices from some of our customers, and so it seems like we're always up for renegotiation on pricing. I think we've defended ourselves extremely well in the past, and I think that we can defend ourselves extremely well going forward. Having said that, we need to take a look at every category or product that we manufacture and recognize what's profitable and what's not profitable. And those nonprofitable categories, if there's no way for us to be able to make them profitable, well then, we have to perhaps consider rightsizing those products as well and exiting some of the strategies -- categories that we're currently in. This is an evaluation that we do on an ongoing basis. Nothing new to Saputo. We've been doing this for the last 20 years and we continue to do it moving forward. I will tell you that a lot of these circumstances and situations that we're in make us better and stronger, I would say. Forces us to be yet more effective and yet more efficient. And I have great confidence that our team has the ability to be more nimble and more impactful in the decision-making process. So I guess, in short, the Canadian division is focusing on optimizing, innovating and finding solutions for those nonprofitable categories. If I look at the international platform, the international platform is up 22.3% on EBITDA year-over-year. Market conditions are better -- were better in Q3 than they were in Q3 last year. Revenues are up. Milk intake is up. Some of our competitors in both Argentina and Australia are having difficulties. We're capitalizing on that. We're taking on more milk. We're gaining more credibility with supply and community. And we've also strengthened and leveraged our brands in the domestic market, not just the international market. In Argentina, we've got very, very strong presence in the domestic market which helps mitigate some of the volatility in the international market. And we've done the same thing in Australia, with -- especially with the acquisition of the everyday cheese and the brands that we're bringing to market. So I think we've gained a lot of credibility. I think our foundations are very, very good. Perhaps, if I can just say a couple of words on trends and outlook. The economists are telling us that there is more supply in the world market than there is demand for that. So we're expecting Q4, and perhaps into Q1 and Q2 of the following fiscal year, to be challenging, but I welcome this challenge. I think these kinds of challenges bring up opportunity for us. Again, opportunity to rethink about our overall structure, our product categories, rethink about where and how we want to sell our products. But I think, even more encouraging than that, it does present opportunities for potential acquisitions. The pipeline for us, in terms of files that we have on our table, is probably greater than we've ever seen before. And as long as we stay responsible fiscally and financially, we will have the balance sheet to be able to capitalize on all of those. Even after the MG acquisition, even after the Southeast Milk acquisition, and even after the Montchevre acquisition, we still have financial flexibility of upwards of CAD 3 billion to materialize other acquisitions. So I'm not overly concerned about this dynamic. I think that this dynamic, this context, these challenges and the headwinds will present some great opportunities for a company like Saputo.
We'll get to our next question on the line, from the line of Michael Van Aelst from TD Securities.
I wanted to first clarify a few things on prior questions. First of all, the ERP cost, Max, in the U.S. alone though, how much did they go up there? Because I know you had -- they came down in international, but they kicked in, in the U.S. How much was it there?
For this quarter, it's $8 million. There was additional costs as well in prior quarter, but certainly not to the tune of $8 million. It was much lower than that as the program was more focused on international.
Okay. All right. And then, in the U.S., 3 of the last 4 quarters have been unusually weak, I would say, from a Saputo perspective. And usually, we see some consistency, you see a little -- a weakness from the market factors here and there. Was there anything else from a -- like plant startup costs or anything like that, that may have affected the U.S. business? And if not, what has changed? Is it strictly because there's inventories out there, and the buyers are getting a little more picky and moving to the sideline a little quicker than they have in the past?
Well we did announce -- yes, sorry, Michael. But we did announce last quarter that there were some startups of a few key projects. We had a couple of plants in California that were renewing their technology. So there were some plant shutdowns that were actually in this quarter here and startup, which was every -- things that were planned, in addition to the startup costs with our Almena plant. And the Almena plant, we wanted to be extremely careful about the startup there because it's not a fresh product that turns in a matter of 14 days. The blue cheese typically will be stored from 60 to 90 days. And so every day of production that is being stored, you don't know the result of that until 60 or 90 days after it's been cured. And so the startup of Almena has been slower than, say, other plant startups. Not uncommon for us. Not unexpected for us, but of course, they do hit the quarter, they hit the numbers. And as we're starting up the new plant in Almena, we still have to staff the old plant in Almena. And so you've got perhaps some overtime, and you have some incremental expenses there like safety, security, cleansing of the plant and -- before you even start up. So there was some of that in our tail end of Q2 going into Q3, which ultimately, when the Almena plant is going to be at full production, will no longer be an issue. So there was some of that. But I would say by and large, it's the volatility of the market and the market factors that had a heavy, heavy impact on the results within our U.S. cheese sector and very, very little in the dairy food space.
So is that volatility though, like a -- it seems to be more pronounced lately in the last few years or the last year, in particular, and I know there's a lot of inventories out there. So is it -- are the buyers just moving to the sidelines quicker like we saw in Q4 of fiscal '17 and -- when they see the prices falling off?
Yes. That's a very good question, Michael. So I think there are 2 elements there. There's the production element, where sometimes, when the markets are good, producers in the industry get overzealous and put on too much production, more than the markets can support. And then of course on the other end, you have buyers who are more shrewd and perhaps more strategic. I don't think, to be honest with you, that it's rocket science in our industry. I think if we had the right balance between supply and demand, there would be less volatility in the system. Unfortunately, the major co-ops around the world don't seem to have tapped into that. And so this is the pendulum that keeps on moving from side to side, where when the markets are good, everybody wants to capitalize it and everyone has the fear of missing out, so they put on more production. And then once that happens, they exceed the ability for consumers to consume those solids and everything goes into inventory stocks, and those inventory stockpiles are published, and of course the buyers are going to be smart enough not to buy when there's too much inventory in the system. Not more complicated than that. And so we have seen that there's been a lot more volatility, not just in the U.S., but there is a lot more volatility even in the international markets. The waters have been choppy, I think, for the last 4, 5 years, up and down. We've had record quarters in terms of our EBITDA generation, and we've had quarters where our EBITDA was less than our -- than average for us. This is par for the course as we move forward. And especially as we get into heavier weighting into the international space, we should expect that going forward. We should expect that there's going to be volatility, and we should expect that there's going to be high markets and low markets. It's what we do with that, how we respond to it, that's going to distinguish us from the rest. And again, as I said, as long as we keep our balance sheet clean, there are going to be casualties in the market. We've seen it. We just have to be ready to capitalize on that.
And then, just finally, on the international segment. Prices in international did fall off in the back half of the quarter. But in the past, you've talked about some pricing contracts that have allowed you to hold prices higher initially, at least. So did you see any real market pressures at the end of the quarter? Or is that something that we'll see more of in the next few quarters like you kind of pointed to?
Yes. You'll probably see more of that in Q4 than you saw in Q3. Although even in Q4, where there are some longer-term contracts with more, I would say, loyal customers that we have around the world, and that's -- again, as we look at our product portfolio and our customer base, we like to be with the loyal customers. So there is going to be some benefit to having longer-term contracts with those customers in Q4, but you should start to see the overall profit margins in international come down in the fourth quarter because of the influence on the market prices.
We'll get to our next question on the line, from the line of Peter Sklar with BMO.
Lino, if this TPP agreement is signed and Canada is a party to that agreement, do you have an opinion on how much TRQ Canada would have to give as part of that overall deal?
Well, do I have an opinion? The odd thing is in this TPP without the U.S., they're giving the same access to this new TPP deal that they give to the old one with U.S. included. So it -- I would be -- yes, my opinion is that I think that Canada overshot, but I'm not at the negotiating table. So I don't have any influence there. The only thing I would say though is I'm hoping that the government would be responsible enough to give the allocation of those new quotas to stakeholders of the dairy industry, specific, which was not done in the CETA deal. So my opinion would be that if you're going to grant so much access to the 10 other members of this new TPP to come into Canada and sell dairy products, at least let the stakeholders in Canada be able to have a strong say by way of controlling quota for those products coming into our country.
And why do you think, under the CETA deal, they gave so much to the retailers?
I'm not sure. I would suspect that there were lobby groups on all sides. I mean, we went at it through our dairy association, which was DPAC. I know Dairy Farmers of Canada went through it with -- through Dairy Farmers of Canada. And perhaps, there were lobby groups from the distribution and retail side that were lobbying for their share of quotas. The reality is, is anytime you've got these new incremental volumes of dairy coming into our country, it does put pressure on dairy pricing domestically. And of course, the casualties there would be the dairy producers and the dairy processors. And so I think it's only fair that if you want to maintain value in dairy, then I think the real stakeholders of dairy should own the new allocations of quotas. That's my position.
Okay. On another topic, when you were discussing the Canadian segment, you talked about raw material optimization. What does that mean? Are you talking about reformulation?
So raw material optimization is the types of ingredients that we can use to be able to standardize our products, so standardize fat and protein. And as you well know, Peter, we have access to fat and proteins from many countries around the world, including Argentina and Australia. We also had, at one time, access to some of those solids from the United States before Class 7. So what we look at on an ongoing basis, and as part of our DNA, is at what level do we need to acquire protein and fat from countries outside of Canada as well as what we're acquiring inside of Canada. And we standardize according to our make recipes, making sure that we have, number one, the highest quality solids going into our vats; and number two, the lowest cost solids that we can generate a good return for ourselves. So when we talk about raw material optimization, it's a question of ingredients that we use, number one; and number two, making sure that we get the maximum value out of every liter of milk that we're processing. So making sure it doesn't go down the drain. Making sure that we control giveaway. Making sure that we control our spoils and waste. And if we do that effectively, then our cost of raw material comes down, and then we can be much more competitive than most of our competitors in this space, and we do that effectively well.
Okay. And if I may, just one last question, on Murray Goulburn. I saw a report that Murray Goulburn recently had some -- it was baby formula and some -- I believe it was some UHT product that they were exporting into China, and it was stopped at the dock and the suggestion, it was politically motivated. I'm just wondering, is this something you thought about in terms of your due diligence when you acquired Murray Goulburn? And just wondering how you addressed that issue.
Not at all. And I think there's a lot of speculation there on both sides of the border, whether it would be China getting into Australia or Australia getting into China. Look, we've said this many times before. If everyone is chasing the same markets and expecting to derive value out of it, they might be completely disappointed with the end result. And I think infant formula, yes, there is a demand for infant formula in China. However, there's probably 4 or 5 key brands in China and there's about 105 different companies trying to get on the shelves. I think there's a better way of going to market than just trying to create a new brand of infant formula into the Chinese market. I think some of those solids could have a better value in other categories or product, and perhaps in other markets. So I'm not overly concerned about some of that speculation about Australia being blocked into China or China being blocked into Australia. I think we've got a pretty good strategy. It's worked well for us. And irrespective of what MG has done in the past, I think that we'll come up with the right solutions to maximize value and create value with those assets.
And we'll get to our next question on the line from Vishal Shreedhar from National Bank Financial.
On the volatility of the results that you commented on earlier in the call about increasing volatility as you enter into more and more international markets, is there anything management can do to reduce the volatility and increase the predictability of earnings? I know you took actions in the past to reduce the volatility of the North American earnings through different product categories and countercyclical categories. Wondering if there's any option like that or if there's some hedging strategies management can engage in? Or even if that's of interest to you.
Yes. We do some hedging, but we do mostly hedging for our customers. We don't do much hedging for ourselves. It's not -- we're not trying to beat the market. We're just trying to get supply of product to our customers as effectively as possible. Volatility, there are certain things that we can do to mitigate volatility. It depends on how deep the volatility is. If you got a drop in the block of $0.03 or $0.05, I think there's some efficiencies that we can derive in our operations that can perhaps mitigate the $0.03 to $0.05 drop. When you got a $0.30 drop in the block, there's very little we can do, even on the hedging front, to mitigate that type of volatility. Again, it all boils down to supply and demand. It's not complicated. I'm hoping that somewhere along the line, the co-ops around the world will understand that this volatility doesn't -- I mean, it affects us, but I don't think they're very concerned about us. It has a much bigger impact on the producer, on our suppliers. And any time I travel around the world and I talk to dairy farmers, I feel their pain. I understand exactly where they're at when there's so much volatility. And they can't do their budgets effectively because the price at the farm gate is changing so rapidly and so dramatically, it becomes tough for them to even convince their kids to take over the family farm. I get all of that. Unfortunately, we don't have a lot of influence on the co-ops. The co-ops have influence on the farmers. And I think it's about time that they look at rightsizing the amount of solids in the system for consumers. The markets are growing now at a rate of 1.5% to 2% per year. We cannot have milk production growing beyond that because then we create more volatility. It's not complicated. Unfortunately, we're not a producer. We are a processor. And perhaps we don't have the same credibility that a co-op might have. So I'm hoping somewhere along the line there's going to be some leadership in this industry on the producing side that will understand that the economics for the dairy farmer could get better, should get better, should they balance that out. In the meantime, we can do the best that we can do at being a low cost, high-quality producer, keeping our balance sheet clean and picking up those assets where people are not managing their business effectively. That's the best that we can do right now.
Okay. Just on -- a little bit of a different question here. On the consumer appetite for dairy, there seem to be so many diet trends nowadays, particularly I guess I'm talking from a North American perspective, and many of them shy away from dairy. Just wondering if you're seeing any impact on -- related to that, on your production, and if there's anything management can do to address that if it, in fact, is a problem? I'm talking about diversifying into some of these dairy alternative categories, perhaps.
Yes. That's a very good question. What we're seeing, and not just in Canada, we see it also in the United States and in other parts of the world, where fluid milk, traditional fluid milk, is in decline. And yes, you've got some of the plant-based beverages that are growing, although soya now is in decline, but you've got almond milk and other kinds of plant-based beverages that are on the rise. I think they are trends that ultimately will plateau, but we can't neglect the fact that consumers are getting away from traditional white milk. It's something that we have to be mindful of. Having said that, other dairy categories like cheeses, specialty cheeses, and powders, are on the rise and continue to be on the rise. So not overly concerned with consumption on the cheese and powder side. But yes, there is some concern on the fluids side. Would we consider divestiture in some other kind of category of fluid? Possibly. If the right opportunity came along with the right brands and the right business model for us to get into plant-based beverages, we would certainly take a look at it. But we're not going to completely discount the value of fluid milk. There are some categories that are still very, very attractive for us and we will continue to remain in those categories. If you look at the value-added products, whether they would be flavored products, or they would be lactose-free type products or products that have a differentiating value to them, like the high-protein product for athletes, I mean those are on the rise, and they're in high demand. So we need to pick and choose our battles. And when I talked about, in my previous answer, about understanding those categories of products that are going to generate a profit for us, that's the full analysis that we're doing. There might be some bids that we may just not entertain anymore in some of those white milk categories because they just don't make sense anymore from a profit perspective. We're not going to exchange 4 quarters for $1. We can't do that. It would not be responsible to our employees or to our shareholders if we did that. So we have so take some hard decisions as we move forward. We'll gravitate and move into those value-added categories and products and perhaps we'll make some investments in other categories that use the same equipment and allow us to get to market with new consumers on other beverages. So we're looking at everything. The great thing is that we control our own destiny. We have the ability to be able to financially afford to get into other categories or products and invest in them. We have the resources, the human resources, to be able to adapt quite effectively and quite efficiently. So I'm not overly concerned about the trends. We just need to understand them, we need to know them, and we need to take appropriate action in function of that.
I just want to clarify a statement you made. You said you are seeing changing consumer perceptions around fluid milk, but not so much in other categories like cheese or protein supplements. Wondering if there's any concern that those attitudes that you're seeing in milk, if they can in fact transfer over to those other categories. Or is that not on the radar?
So far, that is not on the radar. If I look at all of the platforms, whether it would be Canada, whether it would be United States, or in the international platforms, cheese is on the rise. It continues to rise and we continue to outpace the market with respect to growth in those categories.
And we'll get to our next question on the line from the line of Patricia Baker from Scotia Capital.
Lino, just on the back of that discussion of plant-based alternatives, before I ask my question, I'll just make a comment. And I'm sure you've probably seen it, but I was reading about this study that was done out of McGill recently. The results just came out, looking at the nutritional value of the plant-based products versus cow's milk, with the finding being that cow's milk is the most nutritious. So I thought that was kind of interesting in the context of your discussion. With respect to my question, I want to come back to international and specifically Australia. And I do understand that you were in Australia, I think, in November and meeting with the co-ops and meeting with farmers. Can you talk about what progress you think you may have made with the town halls there? What was your key messaging, and how you're doing -- how you think you're doing building up credibility, not only with the farming community, but perhaps with the co-ops?
Yes, Patricia. Thanks for that question. I think for the last 3 years since we've been operating in Australia, we've gained a lot of credibility with the supplying community. What we were not exposed to were the farmers specific to MG. And our message was very, very simple and very consistent with what we've told our WCB farmers: number one, we're going to pay leading prices for milk; number two, we are going to invest in the infrastructure to be able to accommodate more milk if milk would come to us; and number three, we would promote people from within, local people from within. Very much the same commitments that we made to WCB when we first acquired them, and we've honored every single one of those commitments in the last 3 years. So it wasn't empty words that we were telling these farmers in a town hall setting, but they were actions that we've implemented over the course of the last 3 years. I would say we came away from those meetings and we met probably I'd say a good 60% of the MG supplier community in those town hall meetings. And we came away with a very, very good sense that number one, they understood the Saputo story. They liked our heritage in dairy. They liked the fact that we were honorable and we're in our third-generation of a family business because understand, most of them are family businesses. They came away with a good understanding that we would be frank and open and honest, and quite frankly, there's some questions and commitments that they asked of us to make, which we said we cannot make those commitments. They liked the fact that we were open and honest about what we can do and what we cannot do. So our sense was that the vote is not going to be our biggest issue in this deal. I think we have to get through the ACCC and the FIRB. And once we get through the ACCC and FIRB, then we got to go to vote, and we're pretty optimistic that the vote will be favorable for us. And again, this is not something that -- it's a onetime event. [ Kai ], myself, and my management team have been going, getting out to Australia on a regular basis, even with our WCB suppliers. Every year, at the opening up of the new milk price, we get out there physically. We do town hall meetings with them. We explain why we're opening up at the price that we chose. We give them an opportunity to ask us questions, and we also encourage them to take a 2 x 4 and knock us over the head if we haven't honored our commitments. And so far, so far, I haven't gotten a headache yet. So I think the story is very good. I think our credibility is very good. I think our heritage is very good. So -- and more of the same with MG.
[Operator Instructions] We'll get to our next question on the line from Keith Howlett with Desjardins Securities.
I had some questions on the U.S. market. I wondered if you could break down the $19 million of market factors in the quarters in terms of inventory revaluation and overhead absorption, et cetera?
Okay. So -- well, inventory is certainly the big ticker, and that applies not only on the cheese side, but also on the Dairy Foods side where the closing block price when you compare Q2 versus the closing block price in Q3. As compared to last year, there's a significant gap, and that's the bulk of the $18 million, $19 million that we are referring to. Spread was not as much as an impact, considering the California spread that was a bit more favorable than the one on the east side with the federal order. So spread for impact on Saputo was not like a material amount. It was mainly the inventory side and slightly offset the dairy ingredients that the market, despite going down, was still favorable to last year.
And just in terms of the corporate -- or the plant overhead, is it a percentage of the selling price that's allocated to plant overhead absorption?
Well, at the end of the day, this is a factor of the block price. When Lino referred that when the block price is down, there's less of the selling price we're getting to be able to absorb those fixed costs. So that's mainly what -- part of the impact [ impending ] within this quarter. So I'm not sure I get to your question.
I'm just wondering how the -- you allocate the fixed cost, whether it's a percentage of the selling price or a certain amount per pound? Or how it...
Well -- yes, we definitely work on a per-pound basis across the organization, and basically, there's all kinds of mechanism pending the products. So we cannot use like a -- one formula that would apply to all of our products, but it's not based on the selling price. It's mainly based on the milk intake.
Milk intake. Okay. And then I had a question on the administrative expenses in the U.S., and ERP was the big part of that. It was also mentioned that logistics, warehouse and freight costs were up. And I wondered if that was a transitory thing or it reflects trucking and driver shortages in the U.S.? Or what that relates to?
Yes. You hit that right on the head, Keith. Since the Hurricane Harvey and Irma, we haven't got back to the historical rates to distribute our product. There is a short supply of transport, and we have never recovered from those hurricanes to get back to historical levels of transportation rates. The other thing as well that we need to be mindful of, in terms of warehouse, is that as we've got milk intake that's going up in Australia and in Argentina, not all of that product is sold immediately. Some of it is warehoused and this is where you might find some warehouse incremental costs for product that's stored. So when we talk about warehouse and delivery incremental charges, those are the 2 major factors there. Of course, there are also some fuel increases, but minimal compared to our transportation rates and warehouse costs.
And I was just wondering, on the tax rate for fiscal '19, what you think that might look like, given U.S. tax reform?
Well, it will likely be somewhere around 5% lower than our usual rate. Our usual rate would be typically shy of the 31%. So we're expecting that the U.S. tax reform kind of you reduce that overall rate for Saputo starting April 1 going forward by 5%-plus.
Great. And I was just wondering, on the Montchevre acquisition, it appeared to be more -- well, from the data we had, more expensive than the Woolwich acquisition, sort of on a price to sales. I was just wondering if you could speak to the Montchevre business, and what the potential there is?
Yes. So we didn't disclose the multiple that we paid more because it was a family business and that was the request of the selling party. I will tell you that the multiple was more than what we would've paid other businesses, but you need to recognize that, number one, Montchevre is in the specialty category, with branded products, and they are leaders in their category. So we thought that the multiple was well justified. I will tell you, without going into great detail, out of respect to the seller, it was more than a 10x, but certainly not -- I've heard some speculative numbers at 17x. It was certainly not at the 17x number.
And just finally, on the branded business, I guess you've got branded businesses with many of your cheese products, and I guess with Montchevre and your blue cheese. But just more broadly, on branded products and value-added, do you still prefer to keep your view that you're a processor? Or you feel you could shift into some branded -- more branded products?
Well, the DNA of our company is a high-quality, low-cost dairy processor, and I will tell you that even when we make some non-branded products, they could still be very profitable. Non-branded doesn't mean non-value-added. We do process in the value-added space in other people's brands, and we do that quite effectively. Having said that, we've got great expertise in sales and marketing. And if there are brands that become available for sale beyond the brands that we bring to market, we would certainly take a look at it because I think we're quite good at that as well. But I would not shy away from dairy processing only because they didn't have a brand, because there is a lot of dairy processing that is also value-added that could generate good profits for us.
Mr. Saputo, we have no further questions on the line. I'll turn it back to you.
Thank you very much, Tommy.
And thank you for taking part in this conference call. We hope you'll join us for the presentation of our fiscal 2018 fourth quarter and year-end results on June 7. Have a nice day.
Thank you very much. And ladies and gentlemen, this concludes the conference call for today. We thank you for your participation and ask that you disconnect your lines. Have a good day, everyone.