Lino Anthony Saputo - Vice Chairman of the Board, Chief Executive Officer and President Sandy Goldberg - Louis-Philippe Carrière - Executive Vice President of Finance & Administration and Secretary

Irene Nattel - RBC Capital Markets, LLC, Research Division Martin Landry - GMP Securities L.P., Research Division Michael Van Aelst - TD Securities Equity Research Peter Sklar - BMO Capital Markets Canada Mark Petrie - CIBC World Markets Inc., Research Division

Ladies and gentlemen, thank you for standing by, and welcome to Saputo's Inc. Third Quarter Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded, Tuesday, February 7, 2012. It is now my pleasure to introduce Mr. Lino Saputo, Jr., chief Executive Officer and Vice Chairman of the Board. You may begin, sir.

Thank you, Franz.

Good afternoon, everyone, and thank you for joining us today. A press release detailing our fiscal 2012 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. I would like to underline that our Internet listeners, as well as journalists are on a listen-only mode. Members of the media are invited to ask their questions by phone after this call. Before we proceed, I'll remind you that certain information that will be discussed during this call may constitute forward-looking information within [Audio Gap] The speakers today are Mr. Louis-Philippe Carrière, our Executive Vice President, Finance and Administration; and Mr. Lino A. Saputo, Jr., our President and Chief Executive Officer, and Vice Chairman of the Board. After a brief presentation, we will conclude the call with your questions. Louis-Philippe will now begin the conference followed by Lino Jr. Louis-Philippe Carrière: Thank you, Sandy, and good afternoon. I will now present the highlights of our results for the third quarter of fiscal 2012 in comparison to those of the corresponding quarter last fiscal year. Net earnings totaled $129.8 million, an increase of $17.7 million. Earnings before interest, income taxes, depreciation and amortization, EBITDA totaled $207.3 million, an increase of $16.2 million. EBITDA for Canada, Europe and Argentina Dairy Products Sector totaled $131.9 million, an increase of $5.9 million. In the Dairy Products Division in Canada, favorable dairy ingredients and market conditions contribute to the EBITDA increase. EBITDA for the Dairy Products Division in Europe and division in Argentina remained stable. EBITDA for the U.S. Dairy Products Sector totaled $72.7 million in comparison to $61.4 million. Initiative undertaken in current and prior fiscal years with regards to operational efficiencies, the inclusion of EBITDA derived from the DCI acquisitions and higher sales volumes offset increased operational costs and the Canadian impact of higher milk costs resulting from the revised milk pricing formula in California. These factors combined increased EBITDA by approximately $22 million. During the quarter, the combined market factors had an indicative impact of approximately $8 million on EBITDA. These market factors include a less favorable spread, a better inventory realization and better fixed cost absorption. Also inventory was written down by $3.9 million in accordance with the sudden drop in the block market at the end of the quarter. EBITDA for the Grocery Products Sector amounted to $2.7 million, a $0.9 million decrease. Consolidated revenue has totaled $1,796,000,000, an increase of 17.1%, mainly due to the inclusion of revenue was derived from the DCI acquisition, a higher average block market per pound of cheese, increased sales volume and a more favorable dairy ingredients market in the U.S. Dairy Products sector. Higher selling price in relation to the higher cost of milk in the Canadian and Argentinian divisions, and higher sales volume in the Argentinian division also increased revenues. Cash generated by operating activities amounted to $218.8 million, a 5% increase. The company purchased share of capital totaling $49.6 million in accordance with its normal course of issuer bid and paid $38.1 million in dividends. Finally, the Board of Directors approved a dividend of $0.19 per share payable on March 16, 2012 to common shareholders of record on March 5, 2012. Lino Jr. will now proceed with the presentation of our outlook.

Thank you, LP, and good afternoon to you all. In our third quarter, we've increased revenues and sales volumes in certain markets. We've strengthened operational efficiencies and experienced a more favorable dairy ingredients market. And customary to our character, we pursued our efforts at finding ways to increase operational efficiencies and to reduce operational costs. Specifically this quarter, we continued to focus on maximizing synergies from our consolidation activities. We continued our investment strategy in product categories offering growth potential such as specialty cheeses and value-added milk products in Canada's stable markets. We continued to promote our leading retail brands and we deployed our efforts to maintain current volumes in the export market. Additionally, we continued to focus on evaluating opportunities related to the DCI acquisition. As well in our ongoing effort to increase sales volumes in the Grocery Products Sector, we pursued sales development in the U.S. During this quarter, we also announced changes to our senior management structure. Effective April 1, 2012, Dino Dello Sbarba, who has been with our company for over 22 years, will hold the position of President and Chief Operating Officer, Saputo Inc. In his new role, he will continue to report to me. With this change, Lorenzo Spinelli will be named President and Chief Operating Officer, Dairy Products Division Canada. Lorenzo joined the company in 1998 and has held various senior management positions in operations. We also welcome Kai Bockmann to the position of President and Chief Operating Officer, Dairy Products Division International, formerly known as the Dairy Products Division Europe and Argentina. Our last structural change to senior management was in 2001 and has served us well over the years. We are confident this new structure will support our current and future developments. This said, we will continue to concentrate our efforts on providing dairy products to meet and exceed customer demand, domestically and internationally, with the overall objective to maintain our flexibility and our capacity as we adapt to market shifts and to pursue growth. On that note, I thank you for your time, and we will now proceed to answer your questions. Franz?

[Operator Instructions] Our first question is from the line of Irene Nattel in Montréal from RBC Capital Markets. Irene Nattel - RBC Capital Markets, LLC, Research Division: With the recent pickup, albeit modest, in economic activity and employment levels in the U.S., have you seen any changes in terms of consumer purchasing patterns? Are you seeing any pickup at all in the QSR or I guess in the food service space or industrial and decline in retail?

Specific to the U.S. business, within the profile of customers that we have, we have seen growth in our volumes at the food service level. So I believe that there is a more disposable income in the United States, and it's reflecting in more consumption of our types of products within the U.S. quick service restaurant categories. Irene Nattel - RBC Capital Markets, LLC, Research Division: That's great. And I suppose it will be too much to hope for to think that maybe that could have taken a little bit of the pressure off in retail.

It did take the pressure off on retail from a volume perspective, but we were still quite aggressive at defending our positions especially in the leading category products. So it's not because the food service volume is growing that we're not focusing on retail products. We have sales people that are focused on food service like we have people, separate people focused on retail and each one has to make their budgets in terms of volume, so one does not exclude the other. Irene Nattel - RBC Capital Markets, LLC, Research Division: That's great. And just turning up for a moment to DCI. If you could just update us on how that integration is proceeding and also whether you've seen a pickup in the number of files that are coming your way for smaller specialty cheeses that maybe could be added onto the platform.

DCI is a great platform for us. We're very happy to have that platform in terms of the breadth of products that it allows us to offer our customers in addition to the categories or channels that we're selling into. We were not as present as we would have liked to have been prior to the DCI acquisition in the bulk retail categories. We now, with DCI, have the ability to meet with them, get in front of those buyers and offer them new and exciting products that we have within our product portfolio. Leading to your second question, definitely, there are opportunities for us to get into other acquisitions within this category either on the manufacturing side and/or on the selling side. We do have files on our table, and we're very excited about them. Again, I have to caution everyone that we've always been extremely patient. We've been disciplined. And we believe if there's a strategic or synergistic value, we'll pay a fair price for those assets.

Our next question from the line of Martin Landry from Montréal with GMP Securities. Martin Landry - GMP Securities L.P., Research Division: So discussing -- sorry, you're discussing MD&A, you're making mention of increased operational cost in the U.S. Can you expand a little bit and give us a little more details on that?

Operational costs, of course, if you got the standard of living cost that continue to increase whether that would be fuel, energy, labor, as an example. Specifically, in terms of increased costs, we also do have the California milk costs related to the new formula and based on whey variables, so those costs have increased. Again, it's not new for this year. It's something that we have been dealing with for as long as we've been in business, we've been dealing with those increased operational costs. The great thing about our company and our character is we always seem to find ways to mitigate some of those costs and become more efficient as we go along. Martin Landry - GMP Securities L.P., Research Division: Okay. And how confident are you that you'll be able to offset these rising costs especially in terms of the California pricing formula going forward?

We're quite confident in the level of experience we have with our management team. One of the things, again, that I will always pride myself on is that we have a relatively young management team with quite a bit of experience in the dairy industry. We are dairy specialists. We are specialists in processing farmers' milk. And I would rank our team against anybody's in the dairy space anywhere around the world. So I'm quite confident that we will find solutions, and have found solutions at mitigating a lot of these costs. I think our track record has proven that and there's no different today, and I don't see any difference for the future. Martin Landry - GMP Securities L.P., Research Division: Are you a little bit behind schedule in terms of mitigating that impact or what are the reasons why you have not been able to fully mitigated that impact as of yet?

The way I look at it, I mean it's not a question of schedule. It's not a sprint, it's a marathon. And on an ongoing basis, we always find new ways to be more effective and more efficient. Some of those solutions require some capital expenditure and there are some lead times for equipment. But by and large, I wouldn't say that we're behind schedule. I'm actually quite satisfied with where we're at.

Our next question, from the line of Michael Van Aelst from Montréal with TD Securities. Michael Van Aelst - TD Securities Equity Research: First question is on, I guess, on the retail side. To what degree did you see some retail demand and profitability recovery in Q3 considering the drop in the milk cost during the quarter?

Well, we've seen actually, and I believe you're referring specifically to Canada, within the first quarter, first 2 quarters of this fiscal year, we saw that there were some declines in fluid milk consumption and a pickup. Although our market share was growing, volumes were declining. We saw some stabilization of that in Q3, which is a very favorable trend. Even though it's not growing, at least the erosion has stopped. Michael Van Aelst - TD Securities Equity Research: Okay. And actually, that was the question that I was coming, but I was talking more about in the U.S. when in prior quarters where the prices or the commodity cost prices were high, and therefore it seemed to be squeezing your margins at retail and cutting off some promotional activity. As the prices come back, have you been able to promote more and get volume growing and profitability improving again on a sequential basis?

We have, yes. And again, you brought up a very good point. A lot of times what we look at when we -- when the block market comes down, as we look at the promotional activity. And again, as I mentioned earlier, we defend ourselves actually quite well in that space. There are other dairy processors that would like to have some of the market share that we have specifically when it comes to items like string cheese. So the volume is there, promotional activity has been there and again, thereto, we're quite satisfied with the margins we're generating in those categories of products. Michael Van Aelst - TD Securities Equity Research: And when you look at the strong byproduct prices, particularly whey and lactose, are you seeing demand ease up at all as you have in prior years when they got up to these levels or are the substitute products also seeing prices increase?

Demand has actually been quite strong on a by-product side when you look at the WPC and the WPIs, there is -- I think there are new products and new categories of products that are coming out. And so I don't see that there is a whole lot of drop in demand for those products even at these prices. So I'm quite optimistic about the by-products profitability as we move forward. Michael Van Aelst - TD Securities Equity Research: So with the price over $0.65 on the dry whey side, does that mean you start getting better profitability now in California?

Yes. Unfortunately, some of that is offset by the milk price itself. But yes, as we prefer to have a higher milk rather higher whey pricing to the market, even though it does have an impact on our milk costs. Michael Van Aelst - TD Securities Equity Research: Okay. So I guess if we take a look at the bigger picture in the U.S. though, year-to-date I think your operating -- your EBITDA is up about $28 million. It seems to be just a little bit more over the first 9 months, a little bit more than what DCI was supposed to add. So even with the much higher by-product prices, we're not seeing a ton of profit growth beyond that. Is that -- I mean, I know you've talked about some of the higher operational costs and we've got the higher California milk cost. Is there anything else from a competitive standpoint or anything else that might be holding back profit growth?

Not from a competitive standpoint. I mean the markets are as competitive as they've always been. And again, thereto, whether it would be on the food service, on the retail side, we're competing against other manufacturers especially on the U.S. that have excess capacity. But I wouldn't say that the -- we have to lower prices to maintain our volume. We prefer to focus on the quality and service, and we've done quite well at doing that. So outside of increased operational costs, fuel costs, labor costs -- and don't forget I mean over the course of time, we've driven out a lot of the low-hanging fruit. We will continue to find ways to lower our costs. But as the years go by, it becomes more and more challenging to find those great opportunities. I'm not saying that we're at the end of this marathon, but we have to really search a little bit deeper to find those economies within our operations. Michael Van Aelst - TD Securities Equity Research: Okay. And LP, actually on the tax rate, can you give us some guidance? I think the last thing you told us was it should be 29-something for this year, but clearly it looks like it might be coming down. So what would be the update for that? Louis-Philippe Carrière: Yes. It's been -- was reduced essentially close to 27%. And I think that going forward until there's some -- any readjustment in light of source of revenue, in light of assumption that we're taking, I think that the 27% could be used. Michael Van Aelst - TD Securities Equity Research: So that's the right rate going forward or that's the right rate for this fiscal year? Louis-Philippe Carrière: For this fiscal year and we'll reassess that in June for the 2013.

[Operator Instructions] Our next question from the line of Peter Sklar from Toronto, Ontario with BMO Capital Markets. Peter Sklar - BMO Capital Markets Canada: On the fluid milk recall in Canada, I wonder if you could give us an update on any developments since you issued the press release and how all that is unfolding.

Well, as far as I'm concerned, that recall is behind us. We did have that incident where we had some sanitation fluid that had gotten mixed in with a day tank for fluid milk. Again, small quantities but still a serious issue for us. And this is why we elected to go with a voluntary recall, with a Class 2 recall, not a Class 1 recall. I think we took the right steps. We were very responsible as a company, and our team responded extremely well. For all intents and purposes, that recall is behind us. Peter Sklar - BMO Capital Markets Canada: Is that tank up and running in production now?

Yes, it is. It never went down. It was -- we were looking at a valve and programming issue, which has been resolved. Peter Sklar - BMO Capital Markets Canada: Okay. On the spread between the cheese price and the cost of milk to produce the cheese, that spread has been at an extraordinarily low level for a couple of quarters now. I get the sense from what you're saying it's primarily related to the new milk pricing formula in California, which I believe is because whey is no longer a fixed factor but it takes into account the current price of whey. Is that what's really driving this low margin as the whey price has been increasing, it's driving down this spread? Louis-Philippe Carrière: Most certainly the spread, as we said before, needs to be taken into consideration. Probably more with the combined business with the whey price also, certainly the spread are low, but we're cooperating certainly on the whey price in the market. Peter Sklar - BMO Capital Markets Canada: Yes. But what I'm asking is why has the spread been so persistently low over the last couple of quarters? Does it relate to this new milk pricing formula in California, which addresses the whey price in a different way than it did prior to the change? Louis-Philippe Carrière: Yes. Well, that's worth for Wisconsin also because the whey price is higher, certainly, being a factor in the milk price, it's impacting the spread. Peter Sklar - BMO Capital Markets Canada: But is there any other structural changes in the industry that's causing this or is it just new pricing...

No. No other structural changes other than we have been in the declining cheese block market. And so that, of course, is going to have an effect on the negative spread. But no structural changes in the industry that has come up that is affecting that spread. Peter Sklar - BMO Capital Markets Canada: Okay. And so what would it take for the spread to go back to where it used to be? Would it take an increasing cheese price or declining whey price or just the dynamics need to move in the other direction?

Correct. On both counts, yes, you need a block market that would go up and a whey market that would come down. But that doesn't mean that we would be more profitable. Again, I've said this many times before, the way that we've balanced out our system and our structure in the U.S., the spread has less impact on our profitability. Ultimately, if the whey prices come down and the block price for cheese goes up, we may make more money on the cheese but we'll make less money on the byproducts. And at the end of the day, we may end up with the same EBITDA margin. Peter Sklar - BMO Capital Markets Canada: Right. No, I assume you would want, overall, you'd prefer the high byproduct price.

The high byproduct price has been a benefit for us over the course of the last couple of quarters, if not years. Peter Sklar - BMO Capital Markets Canada: Right. You also alluded though that there's certain steps you can take to mitigate the new milk pricing formula in California, what would that be? Would you try to procure milk out of state or are there other things you can do?

The California does have, I would say, one of the lowest milk costs in the U.S., so it would not be procuring milk out of state. It would be running our plants with an innovative and proactive system in terms of using solids in order to make our cheese and maintain our quality. Peter Sklar - BMO Capital Markets Canada: Okay. And lastly, can you tell us how much of your milk -- on your U.S. business, how much of your milk is procured in California? I believe it used to be around 55%. Can you give us some guidance on what that waiting represents now? Louis-Philippe Carrière: I would say about 50%-50%.

Our next question from the line of Mark Petrie in Toronto with CIBC World Markets. Mark Petrie - CIBC World Markets Inc., Research Division: Just a question on your capital plans for the next little while, not necessarily the next year but for your sort of outlook period, whether you see any specific opportunities, be it expansion in Argentina or improvement in the distribution infrastructure. Just sort of looking for some color on specific initiatives that you see in the next little while?

We've always believed in investing in our business over the course of the last couple of years. You've seen upwards of about $100 million or more dollars of CapEx dollars going towards our operations. Some of that is related to infrastructure improvements, some of that is related at capacity growth. Milk in Argentina has been growing, and so we do have to reflect upon what our next steps are. One thing is sure, we are going to continue to invest in our business. Mark Petrie - CIBC World Markets Inc., Research Division: And are there more specific things that you can talk about? I mean obviously, you've gone through the sort of D.C. consolidation here in the GTA, Argentina has essentially ramped up as far as I know in terms of your current capacity. Are there specific things -- and the U.S. acquisitions you've made are essentially at a -- it sounds like they're at a place that you're happy with in terms of those assets. Are there specific things you can talk about that are going to be upcoming?

I can't talk to them specifically yet because they have not been announced, but we are currently in our budgeting process. Our fiscal year ends March 31. Our new fiscal year begins on April. Presidents of each division are looking at opportunities within their respective divisions and we will, over the course of next couple of months, be talking about strategies going forward. But at this stage unfortunately, I cannot provide you any details with that. Mark Petrie - CIBC World Markets Inc., Research Division: Would it be fair to say that CapEx is not going to be materially different than it's sort of been on the track for the last few years?

It would be fair to say that we will be consistent with our character.

Our next question is a follow-up question from the line of Irene Nattel with RBC Capital Markets. Irene Nattel - RBC Capital Markets, LLC, Research Division: Just looking at the new structure and certainly understand why it makes sense to separate Canada from international. But does this mean that we should look to an acceleration possibly of your development in international markets?

That's actually a very good question, Irene. First, let me talk about this new structure with respect to Dino. Dino is a longtime veteran with our organization, understands our culture, our values, our business approach and really is of the same mindset as the rest of our management team, and I'm quite sure that Dino will continue to carry on the character and the passion, the vision that was set out by those before him. When we announced this business unit structure, we were selling for -- in the order of about $2 billion, $2.5 billion a year, and so we thought that the business unit presidents reporting to a CEO who reported into a chairman made a lot of sense for that size of business. We are a company that has been expanding. We are in expansion, and we need to create entrepreneurs within our system. And the only way we can do that is by creating vacancies and voids within our structure. We have, I would say, a strong tenure of professionals and entrepreneurs within our business. And by Dino moving up, we've created 2 vacancies which we have filled with people either within the Saputo system or fresh blood from the outside. The Canadian business, a very easy one for us to fulfill. Lorenzo coming in, also, another veteran within the Saputo system, an operationally-minded person. That allows us to have a lot of continuity within our Canadian dairy business. On the international side, I've said this before, there are only a handful of platforms of dairy-producing countries. Even though the markets are evolving and even though the markets are in expansion, Kai brings to the table a world of knowledge and experience in those emerging markets. And so if I look at the disassociation of Europe and Argentina from Canada, it really is in light of capitalizing on those emerging markets and allowing us to get a little bit more aggressive at being an international player. So I think the time is right for us, we're at $6.5 billion in sales, the fact that we have a CEO and a COO provides us great comfort in terms of having the right people in the right place, focusing on the right opportunities at the right time, being able to promote people from within, I think is also a very good thing in motivating for all those people that have the opportunity to take on new responsibility. And every once in a while to bring somebody in from the outside that has a different experience I think will also inject a little bit of excitement within the platforms that we're operating in. So I'm really excited about this new structure. I think we have the right people in place. And as far as I'm concerned, I think we're well set for more growth and more expansion domestically and internationally.

Our next question is a follow-up question from the line of Michael Van Aelst with TD Securities. Michael Van Aelst - TD Securities Equity Research: On that topic of international, I guess, if you look at the global demand, the way it's growing particularly in China and India and where it's going to be over the next decade, let's say, clearly, there's that big opportunity that you talked about. But if you look at the regulatory changes that they could be coming, whether it be in Canada over that time frame, the U.S. or other international markets, what platform -- where do you think you'll be able to supply that international market the best from -- and whether it's 5 years or 10 years from now?

To be honest with you, Michael, I'm not concerned at all about regulatory changes. Whatever the changes are, we'll find a way to adapt. I have -- there's no doubt in my mind that we will adapt to regulatory changes. Whether those regulatory changes happened in Canada, in the U.S., in Argentina or anywhere else around the world, we have to consider one thing. There are very few platforms around the world that have the infrastructure and the knowledge to produce milk. The U.S. is one of them. Somehow, some way, with the U.S. platform, there will be and there is opportunity for us to expand internationally with that base of operation. Same thing with Argentina. Argentina's milk has been growing -- I think, in the last year, grew at a rate of 14%. That's great opportunity for us to be able to produce dairy solids and export them anywhere around the world. So when you look at those countries that are emerging where the middle class is coming up and they're looking for dairy proteins as part of their -- as part of a staple in their diet, they don't have the ability to be able to produce that dairy protein on their own. They've got to source that from other countries. And I believe that we have the great platform to be able to source, to be a supplier of that source of protein. Again, regulatory changes, they've happened before, we've adapted, they'll happen again and I will tell you, we will adapt to that. But again, it doesn't -- dairy infrastructure does not fall out of the sky. There's years and years and years of knowledge, of CapEx, of ability and experience that would make a country a dairy producer or not a dairy producer. I believe we're sitting on very good platforms to be able to feed the world. Michael Van Aelst - TD Securities Equity Research: Okay. So I mean do you see that opportunity coming in Canada at some point, being able to export from Canada or is that still kind of a hope?

That's still up in the air. We've been talking about this. And Michael, as long as you've been following us since 1997, that's somewhere along the line, we think that the Canadian system may change. It hasn't really happened to the degree that we thought. If it does happen, I tell you that there are very few companies that are better placed than what we are. We have assets in Canada. We have assets in the States. We have assets in Latin America. We can shift, bring milk up from the United States into our Canadian facilities. We can trade dairy solids, north and south as opposed to east and west. When you're on the coast, you can ship overseas. So again, there are very few companies that are set up the way that we're set up. And whatever the changes are, I would assume that there would be a period of transition. I think we'll be ahead of the curve on that if that ever does happen. Michael Van Aelst - TD Securities Equity Research: Okay. And getting back to Argentina, actually you had some growth by the looks of it in the export side of the business, but your profits were flat you said, year-over-year. Is that strictly due to higher milk costs and -- or is there other drivers?

That is a primary driver. And even though Argentina has still one of the lowest milk costs in the world, that cost has grown exponentially over the course of the last 2 years. So that is a major, major factor in our cost structure. Michael Van Aelst - TD Securities Equity Research: Has there been anything new in the last 3 or 6 months?

Anything new in terms of growth? Michael Van Aelst - TD Securities Equity Research: Yes, on the milk cost increases?

No. I mean -- no, it has -- but it has been progressively growing. You've got inflation in Argentina that's growing at a double-digit rate. That too has an impact on our cost. And again, we typically have found ways to mitigate some of those increases. In Argentina, we're no less progressive than we are in Canada or in the United States. Our team has responded extremely well and we haven't missed a beat on our margin generation. Michael Van Aelst - TD Securities Equity Research: Okay. And last question on the bakery side, what's the status of the U.S. initiative? Is there any chance that, that becomes a meaningful portion of your volumes over the next year?

There has been some great development although it's been slower than what we would like. We in the past quarters have had meetings with buyers in the U.S at the tail end of the last quarter into this quarter here, we have made some stocks, some shelves in the U.S. We have had repeat orders. It's going well, but it's going slower than what we expected but we're still optimistic about that.

Mr. Saputo, there are no further questions at this time. You may resume with your presentation or closing remarks.

Thank you very much, Franz.

We thank you for taking part in this conference call. We hope you will join us for the presentation of our fiscal 2012 fourth quarter results on June 5. Have a nice day.

Ladies and gentlemen, this does conclude the conference call for today. We thank you for your participation and kindly ask that you please disconnect your lines. Have a great day, everyone.