A big step in the right direction

Sollio Cooperative Group has again demonstrated its great resilience, posting financial results that contrast with those of the last two years. With consolidated sales of $8.3 billion, Sollio Cooperative Group generated net earnings of $115.4 million for fiscal 2023. The business turnaround plan and the asset optimization plan have been successes. Our many efforts were not in vain.

The sale of assets has allowed us to reduce our debt and reposition certain sectors, depending on their strategic nature, for the future. Choices had to be made to ensure our actions were as targeted as possible, with the least amount of collateral damage.

We were determined to succeed and rebuild solid foundations. With the optimization plan now completed, the situation has improved, but there are still many challenges. Optimization, operational efficiency and consolidation efforts will need to continue.

The good results of the last fiscal year are encouraging, but we need to remain vigilant. Rising interest rates, inflationary pressures, the labour shortage, market fluctuations and our debt ratio are all factors that call for caution.

To lead us into the future, strategic planning is underway to optimize our performance and make our divisions stronger. The gains anticipated by strategic planning initiatives are structural and are expected to generate benefits, not only in the short term, but more importantly, over the long-term.

Challenges for Sollio and the network 

Over the course of the past year, I had the privilege of touring cooperatives in our network. I made great discoveries and enjoyed inspiring encounters with people who love their work. People for whom cooperation and wealth creation, across all our regions, are priorities at all times: hard-working employees, dedicated leaders and committed producers. Managers and elected representatives are on the lookout for business opportunities to create wealth for their members.

These discussions also provided an opportunity for us to take stock of important issues. Among the major challenges that Sollio Cooperative Group and its network must face is the realignment of hog production and its profitability chain. This is a major challenge for all stakeholders in the pork industry.

Hog production has gone through a serious crisis. No link in the chain has been spared, both in production and processing. Sector consolidation has not only hit Québec, but also the United States, Europe, and the rest of Canada, where farms and plants have had to shut down due to a lack of profitability.

It’s never pleasant to manage negative growth. Independent pork producers have been hit particularly hard. We had to reorganize the supply chains and slaughter infrastructure. The decision to close our pork processing plant in Vallée-Jonction, in the Beauce region, was undoubtedly one of the hardest in the history of Sollio Cooperative Group.

We are proud of the contribution of hog production and proces­sing to the economy of Québec and Canada. It is a highly dynamic sector, driven by people with passion from every angle. Let’s make sure that this sector continues to be a major contributor to the economy and development of the regions for years to come. 

The strengths of the cooperative model

We are both owners and users of the cooperative, which is one of the biggest strengths of the cooperative model on which we can and must rely. As owners of the cooperative, we are its directors and the decision makers of its strategic orientations. As users of the cooperative, we take a critical look at the organization. 

Being owners-users pushes us to constantly rethink our methods. It’s this strength that makes the business model relevant to our members and contributes to the sustainability of the cooperative model. 

For 100 years now, agricultural producers have been investing in the cooperative, 100 years of believing in this business model. And in the world of agriculture, one of our greatest prides and one of our greatest values is the next generation. 

Sollio Cooperative Group has always prided itself on supporting the next generation. Our various succession programs have been a success, and we continue to improve them on an ongoing basis, as evidenced once again this year by the increase in the amounts paid to the Fonds coopératif d’aide à la relève agricole. 

As farmers, we always want to pass on an improved business to the next generation. As members of one of the largest agri-food cooperatives, this is also what we want for our organization: to bequeath to future generations a cooperative that is always in a better position, always stronger and more successful. 

Sollio Cooperative Group is a flagship of the agri-food sector, which contributes to the prosperity of farming families. I am convinced that our cooperative model, our size, our track record, our human resources and our equity will enable us to be mains­tays of prosperity for farming families for many years to come. 

To do this, we cannot ignore major environmental and societal issues. We must participate in and contribute to the fight against and adaptation to climate change. As we saw again this year, agriculture is on the front line when dealing with the vagaries of weather. When it comes to climate change, agriculture is both a victim and a source of solutions. 

Sollio Cooperative Group and its network are well positioned to be a mobilizing force to feed the world in a sustainable way. 

Our cooperative model, our corporate responsibility approach, our research efforts, our quality human resources and our presence across the territory are all assets that allow us to continue to improve our environmental performance and support agricultural producers by offering them innovative solutions. I deeply believe in this collective strength fuelled by passion, pride, commitment and altruism. 

In closing, I must emphasize that I am surrounded by an excep­tional and talented team of managers and directors. It is a great privilege to be able to count on the solidarity, experience and competence of the directors, managers and employees of Sollio Cooperative Group and the cooperative network. 

On behalf of myself and the Board of Directors, I would also like to thank the network for its support as well as Pascal Houle, Chief Executive Officer, his teams, and all employees. It is their efforts, dedication and perseverance that allow Sollio Cooperative Group to embark on the next 100 years of its existence in style.

The Sollio Cooperative Group returns to profitability

After two particularly difficult years for our finances, we are pleased to see our cooperative return to profitability at the end of fiscal 2023. Consolidated results, up sharply this year, are gratifying and testify to the major turnaround work undertaken. For the fiscal year ended October 28, 2023, Sollio Cooperative Group recorded sales of $8.3 billion and net earnings of $115.4 million, including a loss from discontinued operations. In fiscal 2022, sales totalled $8.4 billion, while the Cooperative recorded a net loss of $336.9 million. Sollio Cooperative Group’s balance sheet also significantly improved with a decrease of $610.5 million in long-term debt. 

The disciplined strategic approach we opted for two years ago is now paying off. This resulted in an overall asset optimization plan that does not jeopardize the marketing tools and services available to member-producers or the organization’s strategic capabilities. The decisions taken in this context, whether to sell assets or downsize certain operations, have enabled us to significantly improve our financial position and report much more satisfactory results this year. 

Sollio Food

The most significant turnaround occurred at Sollio Food with the division’s net earnings up $584.4 million compared to fiscal 2022. The actions implemented to improve performance of the fresh pork sector, such as renegotiations of agreements, the difficult decision to reduce slaughtering and the massive influx of foreign workers, made it possible to generate higher value-added products, thereby improving operating margins. Other factors contributing to improved results included the reopening of market access to China. 

Sollio Agriculture

Sollio Agriculture reported a $77.3 million decrease in its net earnings compared to fiscal 2022. This difference is mainly due to the write-down of long-term assets and the exceptional results recorded last year in the crop production sector. The repositioning of the grain sector has also generated significant positive effects. 

Sollio Retail

Sollio Retail also reported satisfactory results given the economic situation, with net earnings down by $6.5 million. After many prosperous years, the construction and renovation industry is currently operating in an unfavourable economic context. The key to success will be an increase in housing starts, which we hope to see over the coming year. 

Needless to say, I’m proud of the implementation of our optimi­zation and turnaround plan, which is the fruit of the unwavering commitment of all our teams and which was implemented without affecting our core business. I am also satisfied with the results of our divisions, which met or exceeded expectations. The work carried out on the organization’s financing and capital has also enabled us to position ourselves more favourably in relation to our creditors and generate substantial savings. This turnaround illustrates our organization’s ability to transform, adapt and evolve in a constantly changing economic landscape. 

Our pride in this achievement, however, must also be matched by our desire to continue the work. Despite this return to overall profitability, the coming year will be marked by the continuation of the various initiatives undertaken over the past fiscal year, and the logical follow-up to our turnaround and optimization plan. We must continue to build up our foundations and put in place the mechanisms to ensure we are a resilient, disciplined and sustainable organization.

Strategic planning, currently underway at Sollio Cooperative Group and within each division, will enable us to confirm our orientations and priorities for the coming years. Several initiatives have been identified to optimize our performance and strengthen our divisions to face the challenges ahead. One of the major projects that awaits us is improving operational efficiency, an essential pillar to ensure our sustainability and competitiveness, and which will enhance our agility and relevance. 

Cooperative values are at the heart of our projects

The financial challenges we had to quickly surmount over the last years have inevitably limited the number of projects undertaken by the organization. Nonetheless, we have carefully selected promising and essential projects on which to focus in order to remain a player of choice in the industries in which we operate. Such is the case with our proactive and committed approach to corporate responsibility, which reached significant milestones during the year. Firstly, to ensure that our future actions were well founded, we consulted our internal and external stakeholders. The information gathered will enable us to integrate a diversity of perspectives into an action plan, which will constitute a strategic roadmap for the years to come. In the same vein, we carried out an in-depth assessment of our environmental impact by carrying out our water and greenhouse gas (GHG) emission reviews. The crucial data collected was the fruit of meticulous work and will form an important basis for setting our targets. 

The embodiment of our cooperative values was reflected in many other ways over the past year. In particular, we are continuing to implement an ethical approach within the organization, in order to reiterate to employees the importance of ethical conduct, which is fundamental to an organization’s long-term success. Equity, one of Sollio Cooperative Group’s four cooperative values, takes on its full meaning as we move towards a more equitable, diverse and inclusive corporate culture (EDI). A 2023-2025 action plan has been drawn up to help bring this culture to life on a daily basis in our cooperative. 

Sollio Cooperative Group’s new century began with a landmark year. Fiscal 2023 has been a challenging one financially, but it has also been marked by exceptional resilience and significant achievements for our organization. We’re not at the end of the tunnel but we’re certainly entering a new phase. Unwelcome as they were, there’s no doubt that the challenges we’ve faced of late have strengthened our commitment to excellence and shaped our vision for a more prosperous future. 

In closing, I would like to extend my sincere thanks to the members of Sollio Cooperative Group’s Board of Directors, including our President, Richard Ferland, for their constant support. Many thanks also to the elected representatives and managers of the cooperatives in our network for their solidarity and trust over the past few years. Special thanks to my colleagues on the Executive Committee, and to our divisional managers, who have faced adversity with leadership, courage and determination. Finally, I would like to acknowledge the work of all the employees of Sollio Cooperative Group and its divisions – competent and dedicated people who take pride in carrying out our mission.

Repositionned for the future

The results reported in this financial review clearly demonstrate the significant turnaround achieved by Sollio Cooperative Group [the “Cooperative”]. Our balance sheet is once again aligned with our long-term objectives and given the financing projects completed this year, our overall financing cost will be significantly lower in the upcoming fiscal years. 

Market trends

Since 2020, the Cooperative’s results have been greatly impacted by turbulent capital markets. 

Foreign exchange and interest rates

In fiscal 2023, the U.S. dollar exchange rate was favourable for exports, remaining above 1.3100 throughout the year, with an average of 1.3485 compared to 1.2874 in fiscal 2022. The Japanese yen exchange rate had the opposite effect with an average of 0.0102 in 2023 compared to 0.0971 in 2022, and in addition was highly volatile. 

Interest rates continued to rise in 2023. The Bank of Canada’s prime interest rate rose from 3.75% to 5.00% during the year, affecting the Cooperative’s cost of borrowing. 

Commodity prices

The average price of pork cuts was US$90.73/100 pounds for 2023, down 12.3% from the previous fiscal year. The 11.5% decline in corn prices partially offset the decline in pork prices, but average hog production margins during the fiscal year were lower than in 2022, impacting the results of hog production sectors. However, the resumption of exports in some markets and actions taken to increase the value of our operations generated higher profits in the fresh pork business. 

In terms of agricultural inputs, fertilizer prices dropped sharply in 2023 to average US$638.90/metric tonne, down 40.5% compared to fiscal 2022 when the conflict in Ukraine had a direct impact on world prices. This price decline had a significant favorable effect on the reduction of Sollio Agriculture’s working capital. 

Housing starts 

Housing starts in Québec plunged 32% in 2023, a historic decline that significantly impacted Sollio Retail, particularly in the contractor segment. 

Review of 2023 financial results 

The Cooperative’s consolidated sales totalled $8.3 billion in 2023, down $177 million or 2.1% from fiscal 2022. This decrease is mainly attributable to Sollio Retail with market interest rate hikes affecting demand for building materials and hardware products. 

Cost of sales and selling and administrative expenses totalled $8.1 billion compared with $8.6 billion for the previous year. This decline was observed across all divisions, but to a greater extent within Sollio Food, owing to lower hog supply costs in 2023 and the decrease in slaughtering during the year. 

Net financial expenses increased to $90.7 million in fiscal 2023 from $84.0 million for the previous fiscal year, driven primarily by hikes in the Bank of Canada’s prime interest rate. The reduction in debt allowed to significantly limit the increase in total interest expense. 

Based on the results of its divisions, Sollio Cooperative Group reported consolidated operating earnings of $35.5 million, compared with an operating loss of $227.5 million in fiscal 2022. 

Other income and expenses include the share of results of joint arrangements, namely businesses in which Sollio Cooperative Group has joint control. This share totalled $63.5 million in 2023 compared with $60.0 million in the previous fiscal year. Although the shares of joint arrangements in the fertilizer sector were down compared to the exceptional results of 2022, a Sollio Food joint arrangement posted an exceptional loss in 2022 that was not repeated in 2023. 

The share of results of entities subject to significant influence, namely businesses in which the Cooperative has an investment of less than 50%, amounted to $7.4 million in fiscal 2023, compared with $12.4 million in 2022. This decline is mostly explained by a smaller share of results of an entity operating in the slaughterhouse by-product valorization sector. 

Investment income, which represents interest and dividend income from investments, totalled $2.7 million in 2023 compared with $2.8 million for the prior fiscal year. 

Le poste « gains nets (pertes nettes) à la cession et dévaluation d’actifs » s’établit à 24,7 millions de dollars en 2023, compara-tivement à une perte de 161,4 millions de dollars en 2022.Le gain de 2023 provient majoritairement de la disposition d’un placement détenu par Sollio Alimentation, compensé par la dévaluation de certains actifs. La perte de 2022 provenait quant à elle de réévaluations d’actifs incorporels et de l’écart d’acquisition de Sollio Alimentation. 

Net gains (losses) on disposal and write-down of assets amounted to $24.7 million in fiscal 2023 compared with a loss of $161.4 million in 2022. The 2023 gain was mostly generated by the disposal of an investment held by Sollio Food, partly offset by the writing down of certain assets. The 2022 loss resulted from the impairment of intangible assets and goodwill in Sollio Food. 

Gains on remeasurement of interest rate swaps represented a gain of $9.4 million in 2023 compared with $22.3 million for the previous fiscal year. The significantly higher value in 2022 was driven by the sharp rise in interest rates during the year. All swaps were settled during the year to realize gains. A new series of financial instruments covering a $250 million debt was entered into since then. 

In 2023, gains arising from insurance benefits amounted to $3.8 million, compared with $2.1 million in 2022. These were amounts received from insurance claims. 

Balance sheet 

As at October 28, 2023, the consolidated balance sheet of Sollio Cooperative Group showed assets totalling $3.8 billion compared with $4.6 billion as at the end of the previous fiscal year. This decrease is reflected in both current assets, down $475.0 million, and in long-term assets, down $351.9 million. The change in current assets resulted mainly from the decrease in Sollio Agriculture’s agricultural and other inventories, due primarily to the difference in the fertilizer volume, in line with the division’s objective to limit its exposure to price fluctuations until the next season, as well as to the significant reduction in the grain sector following the discontinuation of grain export activities. The decline in long-term assets was mainly due to disposals made under the ambitious asset sale program aimed at divesting non-strategic assets. The plan to reposition activities also led to the recognition of impairment losses on the Cooperative’s infrastructures, further reducing long-term assets. 

The disposal of assets during the year significantly reduced the level of utilization of the consolidated credit facility, which improved the Cooperative’s debt-to-equity ratio. This ratio stood at 26:74 at the end of fiscal 2023 compared with 41:59 as at the end of the previous fiscal year. Share capital, contributed surplus and reserve totalled $1.8 billion as at the fiscal year-end compared with $1.7 billion as at the previous fiscal year-end. These items represented 47.1% of total assets in 2023 compared with 37.9% as at the previous fiscal year-end. 

For its long-term debt, as at October 28, 2023, Sollio Cooperative Group had secured, through agreements with Canadian financial institutions, the financing required for ensuring the smooth running of its operations. Our primary agreement with a syndicate of financial institutions consists of an overall credit facility of $1.1 billion, maturing in December 2026. Drawdowns amounted to $302.2 million at the end of fiscal 2023 compared with $858.9 million in 2022. 

The Cooperative also entered into a term loan agreement of $270 million on December 22, 2023. This loan, secured by hypothecs on some agricultural assets, has the same maturity as the bank syndicated facility and will enable the Cooperative to replace a term loan maturing in 2024 for Sollio Food and repurchase preferred investment shares at the beginning of fiscal 2024. For the financing in the form of preferred investment shares, on December 7, 2022, the Board of Directors approved the issuance of a new series of shares to settle dividends payable in respect of fiscal 2022 and the first six months of fiscal 2023. All the shares issued under this series were repurchased on August 1, 2023, while 10% of all outstanding series were repurchased in January 2024. 

Cash flows 

Operating activities generated cash inflows of $457.6 million in 2023, up $699.2 million from fiscal 2022. In 2023, the Cooperative generated earnings adjusted for non-cash items of $133.6 million, up $164.6 million from fiscal 2022. The net change in non-cash working capital items was up $534.6 million, due mainly to the decline in value and reduction of inventories. 

Investing activities generated cash inflows of $275.8 million in 2023, up $168.3 million from fiscal 2022. This increase was driven by the disposal of assets, particularly an investment in Sollio Food, and by the receipt of higher dividend proceeds from interests in joint arrangements in the crop production sector related to 2022. 

These significant inflows allowed for repayments of $728.8 million under financing activities, of which $597.9 million was used to repay debts. The redemption of preferred shares and dividends and interest on preferred investment shares resulted in disbursements of $92.2 million and $48.4 million, respectively. 

Accordingly, fiscal 2023 ended on a much more positive note as far as the Cooperative’s financial position is concerned. Debt reduction efforts having been successful, we can now work with a much more robust balance sheet than at this time last year. I would like to acknowledge the support of our financial partners and the efforts made by the internal teams to achieve this ambitious turnaround. We’re now in a favourable position to invest in our operational efficiency projects and thereby make our Cooperative even more resilient in the face of market fluctuations and the global environment in which we operate.