Lino Saputo - CEO Sandy Vassiadis - IR Louis-Philippe Carriere - CFO

Irene Nattel - RBC Capital Markets Mark Petrie - CIBC Michael Van Aelst - TD Securities Peter Sklar - BMO Capital Markets Keith Howlett - Desjardins Securities Patricia Baker - Scotiabank David Hartley - Credit Suisse

Welcome to the Fiscal 2017 First Quarter Results Conference Call. [Operator Instructions]. Now I would like to turn the conference over to Mr. Lino Saputo, Jr. Please go right ahead, sir.

Good afternoon, everyone and thank you for joining us today. A press release detailing our 2017 first 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'd like to specify that our listeners on the phone and on the Internet, 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, 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 don't accept any obligation to update this information except as required under securities laws. Mr. Lino A. Saputo, Jr., our Chief Executive Officer and Vice Chairman of the Board, will begin this conference by providing his brief overview of key highlights relating to the first quarter of fiscal 2017, after which he and Mr. Louis-Philippe Carriere, our Chief Financial Officer, will proceed to answer your questions.

Thank you, Sandy and good afternoon to you all. I'm proud of our results. They demonstrate remarkable accomplishments in very difficult market conditions. More specifically, our divisions have done an outstanding job controlling the controllables. In Canada, revenues and EBITDA increased due to higher sales volumes, a favorable product mix, the inclusion of Woolwich, as well as lower operating costs. In the U.S., solid results were reported again this quarter, notably due to higher sales volumes, better efficiencies and lower ingredient costs. The cheese division benefited from higher sales volumes and the inclusion of Woolwich acquisition which generated additional revenues. For the dairy foods division, a higher-average butter market increased sales volumes and a favorable product mix contributed to the growth in revenues. Additionally, our innovative teams continue to develop various new flavors and products in collaboration with customers to satisfy and surpass evolving consumer trends. The international sector was impacted by lower international cheese and dairy ingredient market prices. In Australia, revenues increased due to higher sales volumes in both the export and domestic markets. In Argentina, numerous efforts were made to mitigate the effect of negative market conditions. However, lower volumes in the export and domestic markets and lower selling prices in the export market decreased revenues. These prices are anticipated to remain low for the first nine months of fiscal 2017. That said, we will continue to pursue sales volume growth in existing markets and develop additional international markets. During the quarter, we faced numerous challenges, including a recall of Neilson-branded chocolate milk products in Canada. The investigation is now completed. Corrective measures have been put in place and production has resumed. Nothing is more important to us than the safety of our products. I am thankful to our dedicated teams, who came together once again to ensure our products meet the high quality standards consumers and customers expect from us. Moving forward, we will continue to focus on reviewing overall activities to improve our operational efficiency and mitigate downward margin pressure. We will also keep optimizing and maximizing our investments to further expand our activities, notably through acquisitions. We remain committed to our long term growth strategy and strive to strengthen our global presence by seizing new opportunities. On that note, I thank you for your time and we will now proceed to answer your questions. Tommy?

[Operator Instructions]. We will proceed with our first question from Irene Nattel from RBC Capital Markets. Please go ahead.

Just looking at the tone of the release, it really does seem as though things are continuing along the same trajectory as they were in the prior quarter. Would you agree with that?

I would say so, yes. If you think about what we've achieved, I would say over the course of the last fiscal year -- and let me remind you that last year we ended our fiscal year with a 10.6% growth in EBITDA, a lot of which came toward the second half of the year. So some of those plans and ideas and projects that we initiated at the beginning of last fiscal year really materialized towards the end of the year. We're seeing that same trend moving forward in this fiscal year. Q1, we were posting EBITDA growth year over year at 23%. Net adjusted earnings are at 29% ahead of last year, beginning of the fiscal year. And so a lot of what we initiated over the course of last fiscal year is starting to materialize now. And I would say that that would be true not only for one division, but I would say for all divisions. The Canadian business is performing well. Our U.S. cheese business is performing well. The dairy foods business is performing really outstandingly for us. And where we find some difficulty in the international markets, I would say that there's some great initiatives and great ideas and great execution, both in Australia and Argentina. So I'm pretty proud of how far we've come in a very short time.

When you look ahead as, putting aside the commodity price backdrop, when you look at where we're today, where do you see the greatest upside in terms of potential improvements in contribution on a geographic basis?

Well, I think we started off the fiscal year with a very low block price in the U.S. I think that there's still some upswing there. So I think that that could be favorable for the cheese division. On the dairy food side also, there's some great initiatives that still continue to be materialized on an ongoing basis, although not so much market conditions, but rather pure initiatives within that platform. Of course, the Canadian market is very, very stable, but I think that we've come off the heels of some very, very difficult conditions in the market with respect to competition and I think we've handled that extremely well. And I see some upside coming in the beginning of calendar 2017 in terms of pricing at the international level. So I would say now I would have the wind at our back as opposed to the wind in front of us.

And just one final question, if I may. There's been a lot of discussion within the context of the Canadian market around retailers looking for concessions in terms of pricing from their suppliers. I know that you typically -- you are willing to give a little if you can get some. Are those the types of conversations that you are having at this point in time?

Well, I think that the most important thing is that the retailers recognize that we're very good, valuable suppliers to them. At the end of the day, we need to make sure that we're made whole when it comes to processing and delivering product to the retailers. So these are ongoing discussions we have with them. Typically, if we have to give up something, we like to get something in return. And we saw that through the periods where there were price wars in the dairy industry, where we did gain some volume and gave up some concessions and were able to mitigate some of the erosion on the EBITDA margins. So, again, without disclosing too much information, I think we need to have some of the similar types of conversations as we move forward.

We will proceed to our next question from the line of Mark Petrie with CIBC. Please go ahead.

I just wanted to follow up, actually, on the U.S. market. Obviously some strong demand growth there. And so are you seeing that volume growth spread across cheese and dairy foods? And maybe you could just give a volume number? And how about across channels, be it food service or retail, etc.?

Yes, so if I look at the two distinct platforms, the cheese division had stronger volume growth than the dairy foods. Dairy foods saw a growth of about 1% year over year and on the cheese side we saw growth at 6%. Now, if I break it down into the different channels, we're seeing growth in every channel. Again, some of them -- some of these channels are growing at a quicker rate, like the specialty division. And don't forget, we do also have within the specialty division the Woolwich acquisition. But beyond the Woolwich acquisition, we're seeing anywhere from 4% to 11% growth in the respective channels.

And the U.S. segment EBITDA margin was the strongest since the acquisition of Morningstar. Obviously some -- you've made significant improvements there. But could you just discuss the relative profitably of those segments, maybe in terms of improvement on a year-on-year basis and what the biggest drivers of that margin expansion would be, obviously you lapping a strong Q1 last year?

Yes, I would say that the U.S. cheese business has been running well for a number of years. You know, Terry Brockman is a very experienced leader of that division. And quite frankly, he continues to surprise us with the ideas and the opportunities to further lower costs and improve quality and improve the margins there. The dairy foods business is a little newer to us. And I think that with the leadership of Paul Corney there and, of course, some of the work that Dino and Maksim had put in prior to Paul being there are starting to pay some dividends, things as simple as looking at product mix and the margin focus. At the end of the day, we can't process a product and not be able to generate a profit with it. And so sometimes we have to sit down with our customers and look at the pricing protocol which they were very successful at doing. But by the same token, they also looked at the raw material costs and utilization. We looked at the giveaway and the spoils. And if you have too high a percentage of spoils and too high a percentage of giveaway, well, that's not beneficial to the business. So we're fine-tuning a lot of those little things. Other things we're looking at here is warehouse management and administrative controls. So when you have a lot of little initiatives that are beneficial to the division, that's when you see the progress in terms of the EBITDA margins and the profitability.

We will proceed to our next question from the line of Michael Van Aelst with TD Securities. Please go ahead.

Just following up on the comment that cheese grew 6%, was that before or after the Woolwich acquisition?

That was including Woolwich, but understand that Woolwich is a small percentage. So if I exclude Woolwich from there, we might be probably a little over 5% growth, volume growth year over year in the cheese business.

So looking at the global markets, I guess both U.S. and international in particular, you talked about pricing expected to stay low over the next few quarters still. To what degree do you expect the inventories, the high inventory levels in these markets to delay any kind of dairy commodity price recovery?

Well, the inventories are depleting. If you think about the different buyers that are coming back to the market, buyers from Brazil and buyers from China, are back in the market. That's an indication that the inventories are depleting. Now, think about as we price our product out, sometimes you've got anywhere from two months to six months of pricing for contracts. So even if there is a short term recovery, we may not always see the effects of that immediately. We might see that into perhaps Q3 or even our Q4. But there is some improvement on pricing that we're seeing now. We're seeing -- and that's a portion of production being down in the EU and New Zealand and buyers coming back to the market to start buying solid. So we see a full recovery closer towards Q1 2017 that were going to impact our Q4 results.

So Q1 calendar 2017?

Q1 calendar 2017 which is our Q4, yes.

All right. And then when you look at the Canadian operation, that was a big jump in the improvement in the operating or the profit improvement. Can you talk a little bit about the big buckets of where the improvement is coming from, whether it's operational or pricing or mix?

Well, there are a number of things that have happened there. And I would say that our priorities are pretty well focused. There are three main areas that we're focusing on. One is driving cost improvements. The other one is innovation. And the third one is actually building for success. And within each of those terms, there are some great initiatives that Carl and his team are capitalizing on. On driving cost improvements, of course you know we had some projects that we began more than a year ago that are starting to materialize, CapEx allocations at some of our facilities, plant rationalization that's starting to take effect. The supply chain issues that we would've experienced in Montreal and BC now are coming to fruition and we're starting to see some benefit with respect to our order fill rates, as well as our efficiencies there. So, that's highlighting the cost improvements. When we think about innovation, we're looking at measuring performance. So, essentially, we're looking at the trade spend and making everyone accountable for the trade spend. Not every promotion makes sense. Not every promotion is going to give us the returns that we need to have. Well, we're making everybody more accountable to those things. And so that's kind of the innovation that we're looking at, is coming up with new categories of products that are going to drive a positive bottom line and back-ending it with promotion if the promotion makes sense. And then when we're thinking about building for success, it goes back to my original point when, in our ratings question, looking at the customers and we understand at certain times of the year, we've got to give up some margin. Well, working with customers for the future in terms of perhaps offsetting some of the margin erosion with some increased volume and increased categories of products. And then finally, of course, within building for success, we have to right-size. I did talk about in the last quarter the announcement of three plant closures, the Sydney plant, the Princeville plant and the Ottawa plant. This is all a question of building for the future and building for future success. So we're not relying on market conditions to make us better. We're really relying on controlling the controllables, as I've said many times before and controlling our destiny.

And are you able to comment at all about what the anticipated impact of CIDA will be, should it get implemented early next year?

Well, you know, I'm not quite sure if CIDA is going to be implemented. Maybe I'll start off with that, especially with what's happening now in Brexit and in Europe. The CIDA has to be ratified still. Then there's going to be a period of integration if it does happen. So we're still -- if you are asking me to look a year down the road, I don't think there's going to be any change. Perhaps if there is going to be a change with CIDA, it might happen in three to five years. And if there is going to be a change, it's an increase of import allocation to Canada. It might displace some local product, but by the same token, I don't think it's going to have a material impact on our business.

We will proceed to our next question from the line of Peter Sklar with BMO. Please go ahead.

Lino, you've explained why you expect international dairy commodity prices to firm around the time of your fourth fiscal quarter. But I'm just wondering how you can be so precise about it. There's just so many moving parts. And, like, why do you expect the recovery to happen then? Does it relate to forward contracts that you've entered into or --?

Well, while we do follow the cycles of understanding where the inventory levels are at on a global scale and there are some publications out there that we do follow, but I think more important than that is you have to follow the trends. We've got a very experimented international team that understands whether buyers are on the market or off the market. We have some indications from time to time, just based on some habits that some of the buyers have, to know whether they are in the market or out of the market. And of course, we also track production around the world and who is producing how much volume. If you think about what's going on now in Oceania with the reduction of the farmgate pricing, that's detracting some farmers from producing more milk. So we see in countries like New Zealand, where production volumes are down. We see in the EU, where you've got some of the co-ops that are paying premiums to the dairy farmers not to produce milk, that has an effect on the amount of milk that the EU is going to be producing. I look at Latin America, specifically Argentina with the drought -- sorry, with the flood that happened over the course of last year, there's about 30% of production that is off the table and it might take about a year or a year and a half before that production comes back. And then I look at domestic markets that we play in in the U.S. If you think about some of the heat that we're experiencing in the U.S., there's certain regions in the U.S. where they are producing less milk. So when you think about this balance between supply and demand and you have a pretty good indication of whether the buyers are in the market or out of the market, it gives us a pretty good roadmap of what to expect for the future. We don't hedge. We don't typically forward contract, but there are some customers that we have long term long-standing relationships with, that perhaps we have an indication in future quarters how much volume they are going to be expecting and at what price we think we should be pricing. So it's a lot of little factors, a lot of little indicators, that give us a pretty good understanding or pretty good feel of where the markets are at.

Okay. And I noticed that towards the end of May, the CME cheese futures really spiked up. Do you think that reflects some of these fundamental factors or it was just some kind of other irregularity?

Well, the CME is really focused on supply and demand within the U.S. So, yes, going back to the point I just made, we see that there are some areas within the U.S., different states within the U.S., where production is down. So I think that that has a little bit of an effect, if not an influence, on where the CME futures are going to be placed.

Okay. And then just lastly, like, in your writeup you talked about that you've implemented your business management model at the dairy foods division. What does that mean? Is that some of the initiatives that you were talking about in your previous discussion when you talked about raw material costs, spoil, giveaway, etc.?

Exactly. That's exactly it. It's the Saputo model and Saputo approach. Number one, we have to control the raw material costs. 85% of our cost of production is in raw material. So if you've got high giveaways and high percentage of spoils, then that's going to cost you more to produce that product. And so given the experience that we have within our Canadian platform and other platforms, we try to benchmark according to what is reasonable and what is acceptable, but beyond that, you look at just being disciplined in the market. We're not volume drivers. We don't want to wave the flag saying here we're, we're number one in this category and that category, if we're losing money. We prefer to give up volume if that volume is not profitable. And so from time to time, we've got to go out to market and we've got to say, look, we need to increase prices because the prices that we're selling at just don't cut it for us in the sense that we can generate a profit to reinvest in the business. So it's a question a little bit also business discipline and supporting our sales folks that when they go out there and they raise prices and they lose the volume, that we're all okay with that. So, it's a fundamental approach that we have at Saputo where we need to be responsible if we want to be in the business for the next 10, 20, 30, 40 years. You know, we're the caretakers of the business for the next generation. We have to take the right decisions and I think that that's part of the Saputo business approach.

We will proceed to our next question from the line of Keith Howlett with Desjardins Securities. Please go ahead.

I just wanted to ask about your acquisition focus. In the context of I guess the state of the dairy fields that you are interested in, can you advise us as to whether you are still interested in the same geographies, meaning Brazil, Oceana and maybe Europe?

Yes. And I would add the United States to that as well. You know, if you think about the makeup and the infrastructure of the dairy-producing countries, nothing really changes dramatically from quarter to quarter or year to year. So if you think about the dairy-producing countries around the world, you are relegated to maybe five different places. You've got United States, you've got Latin America, you've got Europe, you've got Australia and you've got New Zealand. That's about it. And we're not in the business of building infrastructure. We're not co-ops. We're in the business of identifying those regions around the world that have milk for us to process and then from that base, we will look for infrastructure to process that milk and get those products into different types of end products that consumers are consuming. So whether it would be in liquid form like dairy foods, whether it would be in a solid form like cheese or whether it would be in a powdered form like protein isolates or milk powders and there is a market for those products, that's where we want to be. So, again, there is much talk about the emerging markets around the world. And they are great markets for us to cater to. But it doesn't necessarily mean that we have to have a manufacturing platform in those markets. I think about the Middle East. I think about the Pacific Rim. They are not ideal countries to operate in because the infrastructure still is not very developed. But they are very good target markets for us. And so if we can get products that are produced at a high quality and low cost in one of those five regions that I talked about, then the world is our market to service. And that is really what our strategy is all about.

And in the sense that you are well positioned in the U.S. and Australia and Argentina now, do you need other -- the other two regions, so to speak, like New Zealand or Europe or you are sufficient as you are now?

Well, the great thing about what we've built over the course of the last 15 or so years is that there's nothing that we need to have anymore. All the must-haves, we have them. Had I -- three years ago, I would've said a must-have was Australia and I was talking about Australia for 12 years prior to that. Now we've got a great platform in Australia. So we're in the best regions in the world as a dairy processor. Canada has its anomalies with the milk supply management system, but it is a good region with great-quality milk and good consumers. We're the number one in Canada and very profitable in Canada. We've got a great platform in the United States. We represent about 10% of the cheese manufacturers and sold about 15% of the dairy foods space. There is no must-haves in the U.S. There are a few nice-to-haves for sure and we'd like to further consolidate in the U.S. But we're in a very, very, very good position. I think about Latin America; Latin America, we're in Argentina, with one of the lowest milk bases in the world, a great platform for international trade. And we've got two incredible plants that we've invested CapEx dollars in over the course of the last 10 years, over CAD120 million. I don't think there's anybody as efficient as us in Latin America. And we can cater those products to the world markets. I think about the platform we just acquired in Australia, an incredible, really, really good platform that we had been eyeing for 12 years prior to the acquisition. And I would say it's among the most efficient in its region. So, again, the must-haves I think have really been checked off our list. Now we've got some nice-to-haves. And so, if I think about the nice-to-haves, would be further consolidation in the U.S., perhaps a platform in Brazil, perhaps under the right conditions a platform in Europe and further development in Oceania. And I think that there still is quite a bit a runway there for us to materialize acquisitions. Our balance sheet is very, very clean. We have the ability to raise anywhere from CAD3 billion to CAD3.5 billion. But we can be patient and we can be very disciplined in our approach because we're sitting on a very, very, very good dairy platform here.

[Operator Instructions]. We will proceed to our next question from the line of Michael Van Aelst with TD. Please go ahead.

Can you touch base or can you fill us in on the volume trends in Canada and international as well, please?

The volume trend in Canada, as you may know, Michael, is that per-capita consumption is at best flat. So you won't see a whole lot of development with respect to consumer consumption. What we're doing and what we have done is we've identified those retailers and those banners that we would like to be with at the retail level. We might be able to find the -- at the food service level the chains and the companies we want to be with, whether that would be in terms of distribution or end-use. And I think we're picking the winning horses in the stable. So, even though the dairy industry in Canada isn't growing, we've seen year-over-year growth. I think it's two consecutive years now year-over-year growth in our Canadian platform. So, I'm delighted to see just some of the innovation and the progress out of our Canadian platform. In the international markets, it's up and down. I've seen as high as 12% growth in countries like China at one time, where they probably now come back to 6% or 7% growth. But the emerging markets around the world are growing at a much, much quicker rate than some of the more developed markets and some of the more mature markets, perhaps double or triple of what we might see in some domestic, mature markets, maybe 6% per year.

And, sorry, how are your volumes doing in the international market?

Well, our volumes, to be honest with you, we're growing. And again, in Australia we're growing at a rate of about 15%. That has to do with the milk purchasing. You know, we have benefited from great credibility over the course of the last two or two-and-a-half years that we've been operating in Australia. I think we've gained the confidence of the dairy farmers. We have a lot more milk than we can process in Australia. And this is why we've just approved a CAD40 million CapEx allocation for the plant in Australia, so that we can increase capacity and we can accommodate the suppliers that want to bring their milk to our plant. If you think about Australia, the milk production market is down about 4%. We grew 15%. That tells us -- that tells a great story. I was in Australia in July and I went to the different farming community regions and had town hall meetings with our suppliers. And I will tell you that we have got great credibility and we have more suppliers than we can handle at this stage. And we're going to build the capacity to accommodate them all. So, despite what's going on in the microclimate of some of these countries, I think we have a great opportunity and great ability to go beyond what the industry itself is growing.

And when should this capacity come on stream in Australia?

I would say by the beginning of next fiscal year. So by April 2017, we should have picked up the incremental volume. Now, this will be progressive between now and April 2015. Of course, understand, as we do in other projects, we have to design the project. We have to order the equipment. We have to install the equipment. And in some cases, that takes 12 to 18 months. In this case here, because the infrastructure is very good, it might take less than 12 months. So we think that the opportunity for us to pick up volume will be in the order of between now and April 2017.

Okay and final question. On the depreciation, can you give us an idea of what it would look like for fiscal 2017 at current FX rates? Louis-Philippe Carriere: Yes. The depreciation would be about CAD190 million for this fiscal year.

CAD190 million? Louis-Philippe Carriere: Yes.

And is that down because of FX or is that down because of the plants that you are closing? Louis-Philippe Carriere: It's not down. Essentially, depreciation and amortization for last year was about CAD182 million. This year, essentially we're budgeting about CAD190 million.

We will proceed to our next question from the line of Patricia Baker with Scotia. Please go ahead.

Most of my questions have been answered, but Lino, I just want to come back to something that you talked about when you were discussing sort of the strategy in Canada, the innovation and the fact that you are going to -- one of the things you are working hard for on this measuring performance is to go for trade spend accountability. And it seems to me that that resonates quite well with some of the commentary that we're hearing from the major food retailers in Canada, that they want to go to some more simple pricing and less reliance on promotion, to a degree. Is this a conversation, then, given where they are coming from now and what you want to do, that's an easier one to have with them, to go forward in this manner than it might have been a few years ago?

Yes, I think that some of these ideas and initiatives our shared with the banners that we deal with. But I think it starts with our own discipline. I think we need to be very thoughtful and very structured when it comes to trade spend and promotion. We need to make sure that somewhere along the line, there is going to be a return on our investment. So when we talk about accountability, we're talking about internal accountability. And then once we have that internal accountability and we know exactly where we want to head, then it's a lot easier to have those discussions with the banners.

We will proceed to our next question from the line of David Hartley with Credit Suisse. Please go ahead.

Just on Australia, you talked about the CAD40 million CapEx plan. Can you talk to that in terms of volumes that you can add with that?

Yes, so, look this is public information, because I've had discussions with the dairy farmers out there. So right now, the plant has taken on about 900 million liters of milk, that's where we're at right now. You have to consider in Australia, there is seasonality and some -- there are seasonal farmers. So we need to have, if we're going to make a commitment to a dairy farmer, we need to be able to take on their milk at peak. But we're processing about 900 million liters of milk. We have the ability to take on upwards of 250 million incremental liters.

Okay. And I just want to be clear on something. When Saputo bought EDC, was it Saputo that bought it or was it yourself that bought it?

So EDC was purchased by Warrnambool, WCB. And one of the reasons why we went out for the rights offering was to deleverage the balance sheet. So the course of last year, we've had the acquisition of everyday cheese, plus we're adding another CAD40 million of CapEx allocation which gave a pretty heavy leverage on the balance sheet at WCB. We went out for a rights offering. Our goal was to raise CAD142 million to deleverage the balance sheet. We raised CAD141 million of the CAD142 million. So WCB is in very, very good shape to continue on their plans and their projects as we move forward.

And I just wanted to ask the age-old question around acquisitions and the environment out there. How does the current environment, with weaker commodity prices and the trends involved there, affect the market for acquisitions? And what kind of files are you currently looking at, in any way you can speak about them?

No different than what I've mentioned in previous conference calls. In good markets and in bad markets, there are always assets for sale. I remind you in the last, what is it, 18, 19 years that we've been public, we've materialized about 24 or 25 acquisitions, but we looked at 250 files. So, we're looking at files on an ongoing basis. There are always assets available for sale. Not all the assets are strategic. Not all the assets are priced right. But we're always active. Our M&A team is always looking at something. And I hate to say this because I've said it a thousand times before but we normally have three or four files on our table at any given time. Now is no different.

How long have those files been on your table?

Well, they are recurring -- there are files that close and others that open up. So in short order, within three months, if we haven't materialized an acquisition, we will move on to another file. So they do rotate. And I have to say that sometimes, at the first pass a file doesn't make it to completion, from time to time and I can point to some examples in the past where it maybe may have taken three go-arounds before we materialized an acquisition. I can think about Fromage Cote back in the -- I think it was 2005. We had looked at them about four or five times before we materialized that acquisition. The same thing with Land O'Lakes; I think we only materialized an acquisition after the third time around. So, it does sometimes have to close before it reopens again favorably.

We will proceed to our next question from the line of Keith Howlett with Desjardins. Please go ahead.

Yes, I had a question on innovation. I guess there's process innovation and product innovation. Wonder if you could just speak to the projects you have ongoing there.

So process innovation has a lot to do with just using the right types of ingredients that are available to us to manufacture a product. There are ingredients that are available all over the world. You've got ingredients that can come in from Australia, from New Zealand, from Europe, from U.S., from Latin America. And so we have an R&D team that identifies the highest-quality, lowest-cost ingredient and then at a research level, they do some analysis of how these ingredients react to milk domestically produced, through our process and through our equipment. Sometimes there needs to be some equipment modifications to process those ingredients, sometimes not. So that to me would be more of a process kind of innovation, always focusing on how do we get more with less? How do we improve the quality of the product and lower the cost? That's something that we've got a group of researchers that they look at on an ongoing, consistent basis. When you think about product innovation, product innovation to me would be line-extension-type items, thinking about products that, within respective consumer markets, what's the next best trend? And the product innovation really would reside at the divisional level, where process innovation would reside at the corporate level. And so each President has to be aware of what trends are happening within their markets and then get their teams focused on creating new products for those consumers. So that's the difference between our process and our product innovation.

And then when it comes to something like the dairy foods division, I think their sales are, I could be wrong there, predominantly in the U.S. Is that a business that you would need to develop production elsewhere to take their products elsewhere or you could export it?

It's very tough to export product from dairy foods because a lot of what you are transporting is water. Dairy foods is a liquid product. When you think about ice cream mixes and blends, when you think about lactose-free milk, when you are thinking about creams and creamers, there is a lot of water that you are transporting. So, dairy foods would primarily be a domestic business. There's not much international activity there.

And is that a business that you could see taking to build production capacity elsewhere in Australia or Argentina?

Absolutely, if the markets are there, if some of the same customers are there, we can follow customers around. I'll just point to maybe some examples between Canada and the United States. We do have a dairy food business in Canada. And the reason why the Morningstar business was so appealing to us is because there are some of the same customers in Canada that we would now inherit through the Morningstar acquisition in the U.S. If there were similar opportunity in Australia or similar opportunity to expand in some other country like Latin America, then definitely, we're in the business to grow. And if our customers want us in a new country and we can find the infrastructure to process products that we can sell to them, by all means, yes, we can take this model and move it to a different country.

Mr. Saputo, we have no further questions on the line. I'll turn it back to you.

Excellent. Thank you very much, Tommy.

We thank you for taking part in this conference call. We hope you'll join us for the presentation of our fiscal 2017 second quarter results on November 3. Have a nice day.

Thank you very much. Ladies and gentlemen, this concludes the conference call for today. We thank you for participation and ask that you disconnect your lines. Have a good day, everyone.