Lino Anthony Saputo - Vice Chairman and Chief Executive Officer Kristel Alexandra Salesse Louis-Philippe Carrière - Executive Vice President of Finance & Administration and Secretary

Irene Nattel - RBC Capital Markets, LLC, Research Division Patricia A. Baker - Scotiabank Global Banking and Markets, Research Division Peter Sklar - BMO Capital Markets Canada Michael Van Aelst - TD Securities Equity Research Mark Petrie - CIBC World Markets Inc., Research Division

Ladies and gentlemen, thank you for standing by. Welcome to the results for Saputo's Second Quarter of Fiscal 2013 Conference Call. [Operator Instructions] As a reminder, this conference is being recorded Wednesday, November 7, 2012. I would now like to turn the conference over to Mr. 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 results for the second quarter of fiscal 2013 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, I'll remind you that certain statements made during this call may constitute forward-looking statements within the meaning of securities laws. Caution should be used in the interpretation of such statements since management has made certain assumptions, including, among others, assumptions regarding projected revenues and expenses and references to beliefs, expectations, objectives and strategies that are subject to a number of risks and uncertainties, which should cause actual results to differ materially from those presented in such forward-looking statements. For more information on these risks and uncertainties, please refer to the materials filed with the Canadian Securities Regulatory Authorities available on SEDAR. Any forward-looking statement made during this call is based on management's current reasonable estimates, expectations and assumptions, and we do not undertake to update or revise such forward-looking statements, except as required under securities laws. The speakers today are Mr. Louis-Philippe Carrière, our Executive Vice President, Finance and Administration; and Mr. Lino A. Saputo Jr., our 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, Kristel, and good afternoon. I will now present our results for the second quarter of fiscal 2013 in comparison to the corresponding quarter last fiscal year. Net earnings totaled $129.7 million, an increase of $2.6 million or 2% for the quarter. Earning before interest, income taxes, depreciation and amortization, EBITDA, amounted to $215.6 million, an increase of $2.5 million or 1.2%. EBITDA for the Canada, Europe and Argentina Dairy Products sector totaled $122 million, a decrease of $13.7 million. In the Dairy Products Division (Canada), a better product mix and a slightly favorable dairy ingredients product mix were insufficient to offset increased operational costs. EBITDA for the Dairy Products Division (Argentina) decreased due to a lower sales volume and selling prices, mainly in the export market, as well as increases in the cost of milk and labor and other factors. EBITDA for the Dairy Products Division (Europe) remains stable. EBITDA for the USA Dairy Products sector totaled $92 million, an increase of $15.8 million. During the quarter, market factors combined have had a positive impact of approximately $10 million on EBITDA. These factors include a favorable spread, a favorable inventory realization, better ingredients, product mix, non-favorable fixed cost absorption and a non-favorable dairy ingredient market. EBITDA was positively impacted by approximately $4 million due to operational improvements, higher sales volume and a better product mix net of certain cost increases. EBITDA for the Grocery Products sector amounted to $3.4 million, a $0.5 million increase, mainly due to increased sales volume. Consolidated revenue was amount to $1,745,000,000, a decrease of $46 million. This is mainly due to a lower average block market per pound of cheese in the USA Dairy Products sector. Cash generated from operating activities amounted to $218.7 million, a decrease of $2.6 million. During the quarter, we added about $29 million to property, plant and equipment. And as part of the normal-course issuer bid, we purchased share capital for a total of $60.4 million. The Board of Directors approved a quarterly dividend of $0.21 per share, payable on December 14, 2012, to common shareholders of record on December 4, 2012. Lino, Jr. will now proceed with the presentation of our outlook.

Thank you, LP, and good afternoon to you all. As Louis-Philippe mentioned, our second quarter results are slightly above those of the same period last fiscal year. Several market factors, nonetheless, impacted our results, more specifically: the challenges faced in the Canadian dairy market, primarily in the fluid milk category; obtaining milk as raw material at competitive prices both in Europe and in Argentina; lower sales volumes and selling prices, as well as increases in the cost of milk and labor in Argentina; market fluctuations in the United States and the higher cost of milk resulting from the amendments to the milk pricing formula in California. As always, we continue to be on the lookout for increased efficiencies. We are staying the course with respect to our growth objectives while continuing to be optimistic about our future. We have the people, the financial resources and the passion to keep moving forward. As I've mentioned in the past, we recognize the importance of developing new platforms within the global dairy industry. We are confident, however, Canada, the United States, Argentina and Europe still offer many opportunities. As such, in Canada we have initiated a project to consolidate the distribution activities of the Greater Montreal area into one distribution center located in Saint-Laurent, Québec. This new center will comprise the distribution and logistics activities currently being conducted at our Saint-Laurent, Boucherville and Saint-Leonard locations, as well as some administrative offices of the Canadian dairy division. These changes will be implemented gradually as of the end of fiscal 2013 and should be completed in March 2014. As well, in Argentina, we've begun a 3-year project to increase our manufacturing capacity, leading the way to face future market growth. These capital expenditures will be part of our normal annual spending. And finally, we continue to recognize the importance of developing new markets within the global dairy industry, specifically in Latin America and Oceania. On that note, I thank you for your time, and we will now proceed to answer your questions. Tommy?

[Operator Instructions] And our first question is from the line of Irene Nattel from RBC Capital Management in Montréal. Irene Nattel - RBC Capital Markets, LLC, Research Division: We discuss this every quarter, but wondering if you could give us an update on the acquisition pipeline, on what you're seeing out there on acquisition multiples and where you're spending your time these days.

Well, thank you for that question, Irene. The -- as far as the pipeline, regarding acquisitions, as we've always indicated, we normally have in the order of 3 to 4 files on our table at any given time. No exception today. We are looking at some good, strategic potential acquisitions. As you know, Irene, we've never disclosed what types of acquisitions we're looking at or in what area of the world. The only thing that we're saying is that we still believe that there's some great opportunity for us to further consolidate the U.S. dairy industry. We believe that Latin America, namely Brazil, would be a good target. And I also believe, and I would like to see, one day, us have a platform in Australia. I think that would be the majority of the focus of our time when it comes to M&A at this stage. That being said, if there are any assets available anywhere in the world that are in the dairy space, more often than not, we're involved in that type of evaluation, that type of process. Irene Nattel - RBC Capital Markets, LLC, Research Division: And if I could turn just momentarily to Canada, would you be able to talk to us a little bit about how the consolidation of the distribution operations went in Toronto, whether the benefits were equal to or failed to live up to your expectations, and what we might expect once you're done here in Montréal?

Well, the strategic orientation for that consolidation in Toronto was executed pretty much in line with our expectation. If you recall, we had 4, 5 different locations within the Greater Toronto Area that we've consolidated after acquisitions of Neilson and Dairyland and the Saputo base business. The teams integrated quite well. It was not without challenges, but we never missed supply to any of our customers. And from an execution standpoint, we have materialized the benefits that we expected to. Now it's just ongoing normal EBITDA generation. Our outlook for Montréal will be about the same, where we've got 3 or 4 different locations coming in under 1 roof. I think there are a couple of lessons that we learned through the Toronto consolidation. We are mindful of some of the challenges that come about when you're bringing 3 or 4 different groups together. We believe that the benefits that we've identified for ourselves will be similar of what we've identified in Toronto, and we're pretty optimistic about that whole program and that whole process. Irene Nattel - RBC Capital Markets, LLC, Research Division: That's great. And one final one question if I may, and it's just -- this pertains to the quarterly results here in Canada. In the release, and I think LP, in his comments, referred to rising costs in Canada. Wondering what specifically, other than milk costs, seemed to go up this quarter? Louis-Philippe Carrière: Nothing. I would say nothing specific into that quarter, keeping in mind that it's always increased salary from 1 year to another, and I would say general increase in costs more than anything else.

We'll proceed with our next question, the line of Patricia Baker, Scotia Capital in Montréal. Patricia A. Baker - Scotiabank Global Banking and Markets, Research Division: Lino, can you share with us a little bit more information on the 3-year project in Argentina and what sort of things we should be looking for there, and maybe sort of the pace or the cadence of what you're going to be doing?

The 3-year project in Argentina is not unlike that project that we did going back, I believe it was in 2003. Essentially, you've got the dairy farmers that continue to grow their milk production. We are committed to the growth of dairy production in Argentina. We're encouraging our dairy farmers to continue to consider dairy farming as their key priority, and so we need to make sure, as we are their plans of last resort, we need to make sure that we keep up with their growth. So the investments in Argentina will provide us a lot more flexibility than we currently have, streamlining some of the assets and lines that we have in the production facility in addition to increasing capacities at the plant. So it's just a continuous improvement that we're making in Argentina that, one, would provide us flexibility; two, provide us efficiency; and three, provide us capacity.

We'll proceed with our next question from the line of Peter Sklar from BMO Capital Markets in Toronto. Peter Sklar - BMO Capital Markets Canada: Lino, on the DC consolidation in Montréal, are you in a position to let us know what your targeted savings would be from a project of that nature?

No, at this stage, we haven't disclosed that number. I mean, we have our pro formas built in-house, but we do not share that information with the market at this stage. Peter Sklar - BMO Capital Markets Canada: Right. And you never disclosed what it was for Toronto, did you? Louis-Philippe Carrière: Yes, we did, and honestly, I can't recall at the time. It's been 2 years almost. Peter Sklar - BMO Capital Markets Canada: Okay. I'll move on to something else. EBITDA in the CEA division was down 10%. You attributed it to the performance of Argentina, and specifically, soft export markets. It sounds like you experienced a softness in both volume and price. Can you talk a little bit about what's going on in international dairy markets and why you're optimistic that those markets are going to improve as you go through the year?

Sure. Well, a couple of things hit us in Argentina in terms of overall volumes. There are floods in the region that we're operating in that reduced the amount of milk that was being produced. So the overall volume over this quarter was down below last year same time quarter. So we had less volume that we were processing, and of course, with less volume, then it has an impact on our overall overhead absorption. But beyond that, the international dairy markets, dairy solids markets, were depressed in Q2. The outlook for the dairy markets, whether that would be powders and/or cheeses, look more favorable into Q3 and into Q4. So the double effect of lower volume and lower prices had an impact on our EBITDA generation in Argentina specifically. Peter Sklar - BMO Capital Markets Canada: Right. And okay, and the last thing I wanted to ask you about is more of a broader question, but in terms of in Canada, the demand side of equation, it -- I don't know if you agree with this, but it appears that dairy consumption is in a very slow decline in Canada, or at least fluid milk consumption is. So -- I'm just wondering what the endgame is for the industry. It's already consolidated. We're down to 3 major players, and we see your efforts to really wring out every last dollar of SG&A savings through your consolidation programs. What -- where do you think we're going ultimately in Canada?

That's a very good question and a very good point. And this is why we believe that early on, back in the 1990s, late '90s, that our growth is going to come primarily through acquisitions outside of Canada. Now Canada, it's a great, stable market. And I've said this for a number of years: the downside with Canada is that there is no growth. If you look at, as you well indicate, the consumption of commodity products like the traditional white milk and also commodity cheeses, when we looked at mozzarella and even cheddar for that matter, there's very little growth. Milk price continues to increase on a year-over-year basis and consumption continues -- even with the growing population, consumption decreases on a year-over-year basis. So for us, we're looking outside of Canada for growth. I can speculate, perhaps, going forward, there is talk within Canada about the supply managed system. Right now, we don't have a whole lot of indication coming from the -- our politicians as to what kind of system Canada will adopt in 5 years or 10 years from now. The only thing we can say is that no matter what that system will look like, we will be ready for it. Whether it remains the same and consumption continues to decline, we will get bigger outside of Canada. If the industry would move away from supply managed, well, then I think we would also be prepared for that in that, where the boarders would open up, we would trade perhaps North and South as opposed to East and West. So in any eventuality, whether the system would remain the same or the systems would change, I think we're prepared for both of those scenarios.

We'll proceed to our next question from the line of Michael Van Aelst with TD Securities in Montréal. Michael Van Aelst - TD Securities Equity Research: I guess just quickly, to follow up on the Canadian side, did the competitive environment change in the quarter at all? Or is it still just going along as reasonably tough?

It's going along as reasonably tough. As you know, Michael, there are 3 players that have about 75% of the milk intake. Each one of those 3 players on an ongoing basis tries to either hold on to their market share or try -- they eat away at somebody else's market. And unfortunately, we have to defend ourselves when we do that. So it's not tougher now than it was a year ago or 2 years ago. We're finding great creative ways to defend our positions within our space. Michael Van Aelst - TD Securities Equity Research: Okay. And then in Argentina, you talked about a challenge of getting milk at competitive prices. Is that simply because the -- your international or your export selling prices have come down so much with the drop in the cheese price on a year-over-year basis? Or is it because your milk costs are going up? And have they gone up recently?

Well, the milk cost, if I look at it on a historical basis when we first got into Argentina, they have dramatically risen. But that being said, so too, has the prices of -- selling prices on the international market. The real challenge over the course of this last quarter in Argentina has less to do with milk costs, more to do with the selling price of our products internationally. Michael Van Aelst - TD Securities Equity Research: All right. So milk prices in Argentina did not go up -- milk costs in Argentina didn't go up in the last couple of quarters?

No, they have not. No. Michael Van Aelst - TD Securities Equity Research: And then I just wanted to touch on your comments with respect to the dairy ingredient mix, and I think this is one of the first times I've seen you talk about a shifting mix benefiting you the way -- to that extent. So can you maybe give us some color as to what products you're shifting towards and what your level of flexibility is, going forward?

With our investment in Land O'Lakes and Alto Dairies and also other investments we made in our Canadian operation and Argentina operation, we have, years ago, 4, 5 years ago, made the commitment to adding value to our byproducts. Historically, we were making whey powders and -- exclusively, whey powders or whey solids that we were using as ingredients internally. We are now shifting our focus onto other categories of product, the WPC, whey protein concentrates, in a number of different forms. Whether it will be WPC 35%, WPC 60%, WPC 80% and also marketing WPIs. That mix allows us to be able to cater to those markets that are in higher demand and higher selling prices. So when we talked about product mix, it's essentially shifting volume from the lower-priced commodity products into the higher-priced, value-added products in the byproducts spaces. And we do have some flexibility there, and we continue to make more investments on the byproducts side in all of our facilities, in all of our divisions. Michael Van Aelst - TD Securities Equity Research: Is this just a function of where the relative values for these dairy ingredients were in this specific quarter, and that's why you made that shift? Or is that something -- or is it generally more profitable to make the 60% and the 80%, for example, than the 35%?

Those trends had been there historically, and that's why it was easy for us in the past to consider making those types of investments. So it's nothing new for the quarter. But as you look at the whey prices, whey powder coming down. On the value-added side, they haven't come down quite as much, and that's why the mix is better for the quarter. Michael Van Aelst - TD Securities Equity Research: And then just finally, summarizing on the U.S. side, you -- I think you had something like a $16 million bump in your EBITDA year-over-year, and you talked about a $10 million market impact. Does that mean the other $6 million is what comes from the operational efficiencies, the improved volumes in the mix and the lowered transportation costs that you highlighted?

Absolutely. That's exactly where it comes from. We look at our U.S. operations, there were a couple of initiatives we've started at the beginning of the fiscal year that actually materialized themselves in Q2. So it's a combination of operational efficiencies in addition to sustained volumes. Michael Van Aelst - TD Securities Equity Research: And can you clarify what materialized in Q2?

In terms of initiatives? Michael Van Aelst - TD Securities Equity Research: Yes.

Well, we had -- we may have talked about this in the past, but we had our West Coast distribution center that we brought in-house that is now part of our California manufacturing facility. A couple of initiatives, not to get too specific, but in shredding and dice, we're looking at new equipment and better runs and throughputs, new technologies that we've employed that have materialized in this quarter here, and again, better throughputs through some of the more value-added products. So a combination of initiatives that we started at the beginning of fiscal 2013 that we just started to see the impact of in second quarter.

We'll now proceed to the next question from the line of Mark Petrie, CIBC World Markets in Toronto. Mark Petrie - CIBC World Markets Inc., Research Division: I just wanted to ask about the U.S. market, particularly in the context of higher milk prices, and sort of the shift or potential shift you're seeing between channels and what impact that has on your business.

Yes, and that's a also very good question. This is why I stated our platform in the U.S. is actually quite solid, because irrespective of where the channel trends are going, we cater to all of those markets. But to answer your question specifically, retail has been flat over the last quarter or 2, and we're seeing the food service channel starting to grow. So the indication there for us is that there are fewer people eating in the homes, more people eating outside of the homes. Those are the trends we've seen over the last 2 quarters. Mark Petrie - CIBC World Markets Inc., Research Division: And have you seen any change in your volumes as the cheese prices ticked higher?

No, actually. Surprisingly, I thought with the block going over $2 a pound that there would be some pullback on cheese purchases, but we have not seen that this time around. Mark Petrie - CIBC World Markets Inc., Research Division: And in terms of the gap between the U.S. cheese price and the international cheese price, do you think one has room to move up or one has room to move down? How do you see that dynamic playing out over the next few months?

I see the international prices increasing, and I see the U.S. prices decreasing. Right now, with the cost of milk in the United States at the block of -- well, it was $2 -- I think it was $2.10. It went down $0.11 today to $1.99. The milk price still is actually quite high compared to the international pricing. What I'm seeing going forward is the U.S. milk price coming down and the international cheese prices going up. Mark Petrie - CIBC World Markets Inc., Research Division: And from an M&A perspective, we've seen a few assets come up for sale that are sort of outside of your sort of core competencies or core product offering at the current time. You said in the past that you're not really interested in diversifying from a product perspective. Is that still the case?

I will not comment on any one specific acquisition, but I have always said it, and I've been saying this for probably the last 10 years: we are in the dairy space. If we look at our assets around the world, with the exception of the U.S., because that's the only one where we're really producing mainly and only cheese, but within Canada, we're processing milk in a number of different dairy products. Our primary foundation is that we are processors of dairy. If we can take this fluid milk and process it into a product that is in demand by customers and can generate a healthy EBITDA margin for us, that's what we look to do. So as we look at dairy assets around the world, we're looking at dairy processing assets. We are not dairy farmers, and we are not retailers. We're in between the 2. And so if there are assets available anywhere in the world that are dairy processing assets, we will definitely take a look at them.

[Operator Instructions] And Mr. Saputo, we seem to have no further questions queued up on the phone.

Okay.

We thank you for taking part in this conference call. We hope you'll join us for the presentation of our fiscal 2013 third quarter results on February 13, 2013. Have a nice day.

Thank you.

Thank you very much, and ladies and gentlemen, that does conclude the call for today. We thank you for your participation and ask you to disconnect your lines. Have a great day, everyone.