Saputo Inc.

Lino Anthony Saputo - Vice Chairman and Chief Executive Officer Sandy Vassiadis - Director of Corporate Communications 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 Peter Sklar - BMO Capital Markets Canada Michael Van Aelst - TD Securities Equity Research Mark Petrie - CIBC World Markets Inc., Research Division Patricia A. Baker - Scotiabank Global Banking and Market, Research Division

Thank you, Jeff Michael.

Good afternoon, everyone, and thank you for joining us today. A press release detailing our results for the first 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. I would like to specify that our listeners 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, I'll remind you that certain statements that will be 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 could 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.

Thank you, Sandy, and good afternoon. I will now present our results for first quarter of fiscal 2013 in comparison to those of the corresponding quarters last fiscal year.

Net earnings totaled $121.8 million, a decrease of $4.8 million or 3.8%. Earning before interest, income taxes, depreciation and amortization, EBITDA, amounted to $203 million, a decrease of $6.6 million or 3.1%.

EBITDA for the Canada, Europe and Argentina Dairy Products Sector totaled $127.8 million, an increase of $2.5 million or 2%. The better dairy ingredient mix and additional sales volumes offsetting a less favorable dairy ingredients market condition mainly contributed to the EBITDA increase and the Dairy Product Division (Canada).

EBITDA for the Dairy Product Division (Argentina) decreased slightly due to an inventory write-down of $2.5 million related to a drop in selling prices towards the end of the quarter, mainly in the export market, as well as increases in the cost of milk and labor and other costs, which were not entirely offset by higher selling prices. EBITDA for the Dairy Product Division (Europe) remains stable.

EBITDA for the USA Dairy Products Sector totaled $72.2 million, a decrease of $8.6 million or 10.6%. Market factors combined had a negative impact of approximately $14 million on EBITDA.

This included a less pronounced increase of the block price, causing a less favorable impact on the realization of inventories and absorption of fixed cost, as well as a less favorable relationship between the average block market per pound of cheese and the cost of milk as raw material. Better dairy ingredient market product mix offsetting a less favorable dairy ingredient market contributed positively to EBITDA.

Better operational efficiencies, higher sales volume, net of increased operational costs and the weakening of the Canadian dollar versus the U.S. dollar increased EBITDA by approximately $5 million.

Following hearings held in late May, the California Consolidation Stabilization and Marketing Committee decided that effective August 1, 2012, the whey factor will continue to vary in accordance with changes in the whey market prices, based on a new sliding scale. Had the revised formula been in effect since the beginning of the fiscal year, the resulting negative impact on EBITDA would have totaled $0.6 million based on actual whey market price during the quarter.

EBITDA for the Grocery Products sector amounted to $3.1 million, a decrease of $0.3 million. Consolidated revenue amounted to $1,698,000,000, an increase of $59.3 million or 3.6%.

This is due to higher sales volume in Canada and better dairy ingredient product mix despite less favorable dairy ingredient market. Higher selling prices in relation to the higher cost of milk in the Canadian and Argentinian division of the CEA Dairy Products Sector also increased revenues.

The decrease in the average block market per pound of cheese in the USA Dairy Products Sector decreased revenues. Also, the weakening of the Canadian dollar compared to the U.S.

dollar affect positively our revenues. Cash generated from operating activities amounted to $222.6 million, an increase of $99.6 million, mainly due to a change in noncash working capital item, which, in turn, is in part attributed to a lower average block market in the U.S.

The company invested $29.6 million in addition to property, plant and equipment. The company issued shares for cash conservation of $7.8 million as part of the stock option plan, as well as purchases share capital for a total of $55.7 million, in accordance with the company normal course issuer bid.

Finally, the Board of Directors reviewed the dividend policy and increased the quarterly dividend from $0.19 per share to $0.21 per share, representing a 10.5% increase. The $0.21 per share dividend will be payable on September 17, 2012 to common shareholders of record on September 6, 2012.

Lino, Jr. will now proceed with the presentation of our outlook.

Thank you, LP, and good afternoon to all. As indicated, our first quarter results are slightly lower than the same period last fiscal year, mainly related to market factors.

Nonetheless, we did see market share gains and improved efficiencies. Today, Saputo has 47 plants in 5 countries, servicing our customers and consumers in more than 50 countries worldwide, and our opportunities are numerous.

Consistent with our character, we are always looking for new ways to work more efficiently. We constantly adjust our approach to take full advantage of opportunities, working together to push the company forward and pursue our growth through strategic acquisitions.

We are a major dairy player, one with considerable experience and flexibility, and are staying the course with respect to our growth objectives while forging ahead to further develop our platforms. We offer healthy, stable products, which are easy to include in every meal, and our goal is to feed families all over the world with tasty, nutritious, high-quality products.

We continue to promote our brands regionally, nationally and worldwide. We have the knowledge, the resources and the skills to understand the importance of remaining vigilant and disciplined to reach our objectives.

Canada, the United States, Argentina and Europe offer many opportunities. We recognize, however, the importance of developing new markets within the global dairy industry, specifically in Latin America and Oceania.

We are known for our ability to effectively seek out, assess and integrate acquisitions. And with our low debt level and strong financial condition, we are well-placed to maintain our growth.

We are in an ideal position to face the future, thanks to our geographically well-diversified infrastructure, our leadership position in our various markets, brands with a solid reputation, continued investments in research and development and a healthy balance sheet. We've capitalized on our ability to offer high-quality products at the right price and have the proper experience in our industry to evaluate targeted acquisitions, turning them around and incorporating them into our activities.

Our growth strategy will remain focused on a defined and disciplined expansion program. Our many achievements are a testament to our know-how.

And finally, we are not only inspired by our past, but we are optimistic about our future. We have the people, the financial resources and the passion to move forward.

And on that note, I thank you for your time, and we will now proceed to answer your questions. Jeff Michael?

Lino, following up on your comments about your proven track record and your strong balance sheet and your experience, with which all of I -- which I concur wholeheartedly, I was wondering if you could give us an update on what you're seeing right now in terms of M&A opportunities as the global economies appear to be slowing and the outlook is becoming a little bit uncertain, whether that's giving rise to any incremental opportunities, and how you're thinking about things right now?

That's a great question, Irene. Irrespective of the economic condition around the world, we've always seen that there's been a lot of opportunity for us to be able to engage in different files for acquisition.

Now is no different than any other time. There are a number of assets available all over the world.

One of the things that we are focused on is identifying those opportunities that would have the best value and best strategic integration for us. There are a lot of assets available, but not all assets do make sense for us.

One of the things that we need to be conscious of is that the bigger we get, the more focused we need to become in terms of identifying those targets. So again, the opportunities for acquisitions do exist.

We will engage in those files where we see that there could be some strategic synergistic value for us. And from that point, if all of the conditions are met, then we will proceed to make acquisitions.

We announced last quarter that we have a new structure in place. I think that new structure does lend itself well to be able to further capitalize on opportunities for acquisition.

So again, we have the human capital to be able to do it. We have the financial resources to be able to materialize acquisitions.

We just need the right opportunity at the right price with the right strategic value to allow us to move forward.

And again, just sort of checking in here, Lino. But in the past, you said that to a certain degree, the easiest, the most profitable acquisitions, not that anything is easy, but for you to integrate, are those in the U.S.

because you have the existing platform? So as you think about acquisitions in the U.S.

but also building your platform globally, can you walk us through what different considerations you might factor in there? And whether, in fact, you still think that the U.S.

are still your most profitable acquisition target.

Well, the U.S. does present a lot of opportunities for potential acquisitions.

I've indicated previously as well that with the fragmentation of the U.S. Dairy business within, even specifically cheese, creates some great potential to identify targets for us.

And again, we are a current player there with the third largest cheese manufacturer in the U.S., and yet we represent less than 10% of the cheese manufactured and sold. So the U.S.

definitely is on our radar screen, but we need to recognize beyond the U.S. platform that there are a number of key dairy-producing countries around the world that would present to us milk sheds or milk basins that could be extremely attractive even for a domestic platform or for a platform whereby we can process those solids into finished goods and supply the emerging markets around the world.

And this is why I specifically identified in this call, Latin America and Oceania. Latin America, beyond Argentina, there's a neighboring country, which is Brazil, which has a very strong, very good economy.

We are currently selling product into Brazil through our Argentinian platform. If we would be able to find the right manufacturing platform in Brazil, that could be a good target country for us.

Beyond that, we've been talking since 2002 that Oceania, namely Australia, New Zealand will be incredible platforms for us, because the milk pool is so abundant and priced at international levels that they would be ideal locations to have manufacturing infrastructure to supply the emerging markets around the world. And so when we look at the opportunity for growth, it's not exclusively for the emerging markets.

It's not exclusively for the domestic market but maybe a combination of the 2, and this is where we're setting our sites.

That's great. Just my last 1 question.

About your existing operation, certainly, what we're seeing across the board is yet another shift and another tightening of the belt in terms of consumer demand and consumer purchasing trend. I'm just wondering what you're seeing in terms of the types of products that are selling through, whether you're seeing trade down.

What your volume trends have been in your different categories in both Canada and the U.S.

Yes. That is a great question, Irene.

I mean, if we look at our first quarter of this fiscal year and just about every one of our market segment, whether that would be in Canada, in the United States and in the international business platforms, our volumes did grow. If I look at this year's performance, and I'm talking about operational performance, versus Q1 of last year's operational performance, we are ahead of where we were last year from an efficiency standpoint.

The unfortunate thing, I mean, when you compare Q1 this year versus Q1 last year is that the markets are not as strong. I'm talking about the selling markets.

Whether it's domestically or internationally, they're not as strong as they were. So even though our volumes are greater, even though our efficiencies are greater, unfortunately, our results are not as strong as they were Q1 last year.

But I've always said this, you better look at this business not on a quarter-to-quarter basis, you've got to look at it on a year-over-year basis. And over time, I would say that the markets themselves would stabilize, and I feel very, very good about where we sit as an industry player within the dairy business.

There's been some discussion about -- in your MD&A about the ingredient market being unfavorable or being challenging. Can you maybe give us a little bit of color on that?

Has there been any structural changes that made that market more challenging recently?

Well, again, the byproducts market is -- or ingredient market is a commodity market. Whether we play in whey powder or WPC or lactose or permeate, those are all commodities.

There are published commodity prices. And similar to the CME but not the CME for an ingredient, but similar to the CME, we base our products off of those markets.

So again, if I look at a year-over-year basis, there's been a decline both in WPC and whey prices versus Q1 of last fiscal year.

Okay. So there's no overcapacity or anything like that?

Well, again, overcapacity in terms of relative terms over a longer haul, I'd say no. In fact, a lot of the economists within the industry are saying by 2014 or 2015, there might be a short supply.

But again, you can't look at this business on a quarter-over-quarter basis. You've got the demand that is increasing and demand that is decreasing on a quarter-to-quarter basis.

But if you look at consumption on a global scale, a lot of the economists within our industry are indicating that there will be a short supply of dairy solids. Whether that would be primary products or secondary products, there will be a short supply on a global scale heading into 2015 and beyond.

Okay. Okay.

And again, on the dairy ingredients, you've mentioned that there's been unfavorable product mix shift amongst the dairy ingredients this quarter. Can you just give us a bit of color on which product has gained a bit more traction in that mix?

Well, when we look at our product mix, and again, this is part of our research and development and our capital expenditure, you could make just very basic simple products like whey powder, which we do make some of, but then you can get into some more higher-valued products like the WPC35 or WPC46 or WPC80 or even WPI. Again, as well as a byproduct to the byproduct, there is lactose and permeate, and you can channel those products into other value-added products, which we have been doing over time.

So if I look at this year versus last year, we're making more value-added products than we're making just straight commodity products on the ingredient side.

Okay. Okay, that's helpful.

And then in Canada, you're mentioning in your outlook that there are challenges in the dairy Canadian market, but I guess, I think as well in your opening remarks, you're talking about your volumes being up in Canada. So precisely, what exactly -- what challenges are you referring to in your outlook section?

Well, the challenges are related to having 3 players with about 75% of the market share, and the pie is not growing. The pie is staying the same size, and everyone is going after market share.

So we have competitive challenges on a day-to-day basis. Every single day, we got to go out there.

We can't take for granted that we are supplying a certain number of customers. We have to make sure that we service them well and service them appropriately.

And so even though we're doing, I would say, a relatively good job of maintaining our market share, in fact, in some cases, both in cheese and in fluid milk, we're growing our market share, it doesn't mean that it's not without competition. Competition is ferocious.

I think we have enough experience to be able to defend ourselves well. And this is why I think that we're able to grow our volume even though the Canadian market is stagnant.

Not growing per capita consumption remains the same, and we've got the other competitors out there that would like to have our space.

Okay. So there hasn't been any changes recently in the market, it's just that it continues to be very competitive?

Absolutely.

On your U.S. business, obviously, feed prices are going to go up, given the drought and the heat.

That's going to put pressure on dairy farmers. Can you talk a little bit about, Lino, how you see this playing out for Saputo?

On the one hand, the milk supply might be challenging, but on the other hand, dairy prices should be firming. So not too sure net-net how Saputo sees this and how you're going to end up.

I think on the short-term, and when I say short-term, I'd say the quarter that we are in and perhaps the next quarter, there would be a depletion of inventories. So there is enough product to supply the requirements for the domestic market and then some.

I think if this drought continues as it looks like it might continue, I would say that there would be a reduction of production within the U.S. milk pool.

And you're absolutely right, as the milk supply shrinks, there will be a firming up of prices. And again, this is why I always say you can't look at this business on a quarter-to-quarter basis.

You've got to look at it on a year-over-year basis and understand that milk is not like a faucet that you can open and close at will. Last year and 2 years ago, as the U.S.

began to export a large percentage of their production, they went from something like 4% or 5% of the total milk solids processed going to export market up to about 14%. When that international market price declines and sales dry up, well then there's a shift back to the domestic market, and these dairy solids will find their way into products that will be sold within the U.S.

That would increase inventories and would decrease prices. And I think that's the pressure that we're seeing in this quarter here and perhaps into Q2.

Over the long haul, though, my expectation is that demand for dairy solids internationally will continue to grow. Because of the drought, there may be less available solids.

And I would suspect that by Q3 and into Q4, there would be a rise of dairy prices.

Have you ever -- in your U.S. business, has there ever been an occasion where you haven't been able to obtain adequate dairy solids for your cheese business?

We're fortunate enough that we're in a large number of categories of products. And so what our folks in the U.S.

do on a weekly basis, they look at their milk intake volumes and their capacities, and they play with their inventories. We do have long-hold products, things like hard cheeses and blue cheeses, while we're holding product for anywhere from 3 months to 6 months, to 9 months to 12 months.

And we do play with inventory when milk is tight. Have we ever been in a position where we were not able to supply our customers?

No. That's never happened to us.

I think we're pretty resourceful, and I think we can find the solids that we need to have in order to supply our customers.

Yes. Just getting back to the Canadian business a little bit.

It does seem like revenues in Canada alone were up mid single digits, and I think the raw milk costs went up about 2% in February. So that would mean some reasonably decent volume growth.

But we saw -- we also saw margins come off, by the looks of it, in Canada. So can you kind of explain, is this -- is the revenue growth or the volume growth, combined with the declining margins, simply a factor of the competitiveness?

There is a portion of that, Michael. As I did indicate in my earlier comment, the Canadian business continues to be very, very competitive.

We have had, in some cases, some increased promotional activity, specifically on the cheese side, and some of our current customers have been growing, again, specifically on the fluid milk side. Overall, our Canadian business has performed well.

We have generated some increased efficiencies. And on a year-over-year basis, there isn't a huge impact on our margin that we're generating from our Canadian business.

Okay. I also noticed that your depreciation went up.

It doesn't tend to go up much, but it did this quarter. And it seemed to go up in all divisions.

So has there been, I guess, a change in what you're investing in, what your CapEx was spent on in the last little while to justify that jump in depreciation?

No change specifically as I would see have -- might have added calculation. There's nothing specific or special to mention on that.

But this would be more the run rate for this year?

I would say so, yes.

And the tax rate as well, would it be similar to the, I think it was 28%?

Yes, 28%. Yes.

I'm wondering if you could just talk a little bit about how external factors and, specifically, the regulatory environment in any given geography affects your outlook on M&A. I saw some comments in the briefing in California that alluded to that affecting your decision to maybe expand plants there.

And just wondering about how uncertainty around the direction of the Farm Bill or potentially direction in Argentina might affect decisions to allocate capital there. And then maybe just a comment on the regulatory environment in Brazil or Australia since you mentioned those as potential areas.

Okay. Now I'll try to address those one by one.

With respect to the California Farm Bill, this is not the first time -- California hearing, rather. This is not the first time that this kind of petition has been circulated.

In fact, I think it's the second one in a span of 1 year. And again, if you look back at the history of the California dairy industry and business, there has historically been a gap or difference between the USDA milk price and the California milk price.

That differential has encouraged processors like ourselves to set up shop in California. And when you look at the cost to process that milk into a product, because our facilities can be, in some cases, larger, they might be a little bit cheaper to process because of the milk cost and the size of the facilities.

But most of that cheese that is being produced in California is not consumed in California. It's got to be shipped all over the U.S.

And so those are the types of arguments that processors like ourselves are making, and we have built that infrastructure in California and we're very, very happy and satisfied that those assets are there and performing well. Going forward, in terms of potential acquisitions, we have to be mindful of where the milk is and what the cost of that milk is and what all the other inherent costs are.

So it does factor into our analysis for acquisition. Has the California hearing deterred us at this stage from looking at potential acquisitions, should they arise in California?

No, not at this stage. But we need to be mindful of that, and if that would change in the future, then perhaps some of our growth in the U.S.

might come outside of California. But again, we look at this on a monthly basis, quarterly basis and yearly basis, and we want to be right-sized for the size of our business within the U.S.

platform. Today, a little over 50% of our milk in the U.S.

is purchased and processed in California, and it does serve us well. Should the regulatory environment change, well then we might have to -- we may have to reassess that.

The Farm Bill in the U.S., the way that I read it and the way that it's being presented will not have, I believe, in my perspective, a material impact to Saputo Cheese USA. It will affect all of those processors that are producing cheese within the U.S., USDA system, and it will affect all processors and it will affect all players within the dairy industry, but again, not a material impact to our day-to-day operation.

So will that deter us from expanding in the U.S.? Absolutely not.

What we need to look at is what milk bases are growing, what the cost of that milk base is, and can we produce products within those states that would allow us to export product into and around the other states within the United States of America. Now if I look at -- to answer your question on the international side, the regulatory environment definitely is key for us in terms of identifying whether we want to set up shop in one country or another.

A lot of people have talked about the emergence of China and how their milk base is growing. At this stage, for us, given the information that we have, it doesn't make a whole lot of sense for us to consider a manufacturing platform in China, even though we do have a selling platform in that country.

There is not enough disposable milk to supply a plant the size that we would like to have. So that's probably years down the road.

And so we've got to look at those countries that are current dairy-producing countries. We're not in the business of building dairy farming infrastructure.

That's not what we do. What we're in the business of doing it, being able to identify milk bases around the world, identify areas where we can have a manufacturing platform, process that milk into solids that we can either sell domestically or internationally.

That's why Brazil does make sense for us, neighboring country to Argentina. Oceania, the attraction there is a regulatory environment that is based on international pricing for milk, whereby we can manufacture products and virtually export them anywhere in the world because of its international pricing on the raw material side.

And so Australia, New Zealand, still are incredible targets for us. New Zealand exports, I believe, something like 90% of their milk production, Australia exports, 50% of their milk production, they are minded and they are built for export.

They are built for feeding the world, the emerging parts of the world that don't have the infrastructure to supply themselves with their own dairy solid. And that's why those countries are important for us.

But again, as you say, we have to reevaluate the regulatory environment on an ongoing basis and rightsize our business for us to be successful and profitable wherever we decide to manufacture.

Lino, before I ask, I have 3 very simple questions, but I must say that you're giving us a very good overview today of what you believe the future of this company is looking like. You're making some very interesting statements, so thank you for that.

Just on a more detailed level. When you talk about the promotional activity in Canada, are you seeing more promotional activity in the Canadian market than you are in the U.S.

or are they about equivalent?

Each and every one of our markets operate on a standalone basis when it comes to the domestic orientation and domestic practices. In the U.S., depending on where the block market is, we will have more or less activity.

This quarter, specifically, in Canada, we have had a little bit more promotional activity. More to promote our products, our brands.

And I would say it would be equivalent to our strategy that we've had in the U.S. for quite some time on the retail side.

So I would say that one is heavier placed on promotion than the other. I think each of them, for their own specific reasons, continue to promote their own brands.

Okay, that's pretty fair. And just sticking with the segue from, you mentioned the retail there.

I think in the fourth quarter, you indicated that in the U.S. market, the food service was behaving a little bit better than retail.

Has that trend continued in the first quarter?

I would say that they're -- I see that the trends do continue. But again, I hate to answer those questions in isolation because those markets do tend to shift and sometimes shift quite rapidly.

So what we're seeing today may not be what we might be seeing in a month or 2 months from now. Again, the great thing about our platform in the United States is that we are heavily invested in retail, and we're heavily invested in food service, and we're heavily invested in ingredient.

Wherever those markets shift, we are able to service the growth that our customers require.

Okay, that's good. And on the ingredient side, you indicated earlier that you've got more, your mix is more value add on the ingredient side.

I think you said that in answer to an earlier question.

Yes, that is correct.

Is there room to take that even further over time?

Through our initiative on research and development, absolutely. I think that -- of course, in some cases, they require some capital investments, which we're, by the way, not afraid to make if we have to make them.

We're a company that generates considerable amount of cash, and we're in it for the long haul. So on an ongoing basis and in our management meetings, we often talk about what is the next potential product that we should be making, both on the primary side and on the secondary side, which would be the byproducts.

So again, if we see that there is an opportunity for us to invest some money to generate a highly specialized product, we will do so, and there are opportunities out there for us to do that.

Thank you very much.

Okay. Thank you for taking part in this conference call.

We hope you will join us for the presentation of our fiscal 2013 second quarter result on November 7, 2012. Have a nice day.