Saputo Inc.

Lino Anthony Saputo - Vice Chairman, Chief Executive Officer and Member of Environmental Committee Sandy Vassiadis - Director of Corporate Communications Louis-Philippe Carrière - Chief Financial Officer, Executive Vice President of Finance & Administration and Secretary

Irene Nattel - RBC Capital Markets, LLC, Research Division Michael Van Aelst - TD Securities Equity Research David Hartley - Crédit Suisse AG, Research Division Mark Petrie - CIBC World Markets Inc., Research Division Keith Howlett - Desjardins Securities Inc., Research Division

Thank you very much, Tommy.

Good afternoon, everyone, and thank you for joining us today. A press release detailing our results for the third quarter fiscal 2014 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 remind you that certain statements that will be made during this call may constitute forward-looking statements within the meaning of securities laws.

Cautions should be used in the interpretation of such statement, 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, including our most recent annual report 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 statement 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 the third quarter of fiscal 2014, in comparison to those of the corresponding quarter last fiscal year.

At the beginning of this fiscal year, we realigned our reporting structure, consistent with our operating structure and are since reporting under 3 geographic sectors, specifically, the Canada sector, USA sector and International sector. The comparative figures have been reclassified to reflect this reporting structure.

Net earnings total $144.1 million, an increase of $14.1 million or 10.8%. Earning before interest, income taxes, depreciation and amortization, EBITDA, amounted to $260 million, an increase of $47.5 million or 22.4%.

EBITDA for the Canada sector total $116.1 million, a decrease of $7.1 million or 5.8%. In the Dairy division Canada, higher ingredients and operational costs offset the positive contribution of increased sales volume on EBITDA.

The Bakery division EBITDA increased slightly for the quarter due to lower operational cost. EBITDA for the USA sector were $121.1 million, an increase of $40.1 million or 49.5%.

The increase was mainly due to the inclusion of the Morningstar acquisition. During the quarter, combined market factors had a positive impact of approximately $9 million on EBITDA.

Such market factors include the more favorable relationship between the average black market per pound of cheese and the cost of milk as raw material, a more favorable realization of inventories and non-favorable absorption of fixed cost. During the quarter, EBITDA was negatively affected by lower cheese sales volume, increased ingredient and operational cost, as well as our milk cost, resulting from the temporary revised milk pricing formula in California, partially offset by slightly favorable product mix.

The weakening of the Canadian dollar versus the U.S. dollar had a positive impact on EBITDA of approximately $5 million.

EBITDA for the International sector amounted to $22.8 million, a $14.5 million increase. EBITDA of the Dairy division Argentina increased mainly due to increased sales volume and higher selling prices on the export market.

EBITDA for the Dairy Ingredients division was comparable to the corresponding quarter last fiscal year, as it benefited from better product mix, offsetting lower selling prices in the International market and increased operational cost. Consolidated revenue was -- amount to $2,343,000,000, an increase of $552.6 million or 30.1%.

This increase was mainly due to the inclusion of the revenues derived from the Morningstar acquisition. Net cash generated from operating activities amounted to $209.8 million in comparison to $156.2 million for the corresponding quarter last fiscal year, an increase of $53.6 million.

During the third quarter, $46.1 million were invested into addition to property, plant and equipment. And also, during the quarter, we repaid $39.9 million of long-term debt, issued shares as part of stock option plan for cash consolidation of $7.9 million, paid $14.4 million for the repurchase of share capital as part of the normal course issuer bid and paid $44.7 million in dividend.

The Board of Directors approved a dividend of $0.23 per share payable on March 14, 2014, to common shareholders of record on March 3, 2014. Lino Jr.

will now proceed with the presentation of our outlook.

Thank you, LP, and good afternoon to you all. It has been a very busy quarter, and I'm quite enthusiastic about our accomplishments and excited about the future.

Net earnings, EBITDA and revenues are up in the double digits, this mainly due to the inclusion of the Morningstar acquisition. Much like the previous quarter, Q3 was marked by continued competitiveness in our respective markets, especially in Canada.

The Dairy division Canada has therefore continued to implement measures to subside the erosion on volume losses and on profit generation. As such, we now see a stabilization of EBITDA.

But the reality is dairy consumption is declining in Canada. Therefore, our team continues to look for opportunities that bring additional value for our customers and our consumers.

In the Cheese division USA, we've maintained our focus on recuperating lost volume. We are now better aligned and are starting to reap the benefits of our actions.

As always, we will continue to closely monitor market fluctuations, and we'll implement appropriate measures to mitigate any negative operational impacts when necessary. As for the Dairy Foods division USA, we've seen an increase in volumes in comparison to last year.

Notwithstanding, the division's profitability was impacted by an unfavorable product mix and other expenses. Concerning the International sector, we've witnessed another strong quarter, both from a volume and profit perspective.

On the mergers and acquisitions front. In early October, we announced the takeover bid for the Australian dairy company, Warrnambool Cheese & Butter.

For months, we were 1 of 3 bidders vying for WCB. This battle was, without a doubt, the most public acquisition process we've ever experienced.

And although there have been many twists and turns, today, I'm delighted to report we've acquired 79% of the WCB shares. Our offer is slated to close on February 12, unless we reach a relevant interest of more than 90%, in which case the offer is automatically extended pursuant to Australian law.

For quite some time, I've stated acquiring a platform in Australia was something we've worked to accomplish for the better part of the last decade. We've been patient and have spent time in Australia.

And over the years, we've gotten to know the team at Warrnambool quite well. We now look forward to officially welcoming them to our team soon.

Last month, we also announced having entered into an agreement to acquire the Fluid Activities of Scotsburn Co-Operative Services Limited based in Atlantic Canada. The transaction is expected to close in March.

It will enable our Canadian dairy division to increase its presence in Atlantic Canada. Now can we expect to see more acquisitions?

I would certainly hope so. We continue to evaluate possibilities, our balance sheet remains strong and we have the necessary resources to integrate multiple acquisitions at the same time.

We will continue to look for growth opportunities and will aim to find ways to develop new markets, while always remaining disciplined. On that note, I thank you for your time, and we will now proceed to answer your questions.

Tommy?

If we could just start with WCB. Yes, many twists and turns, although we certainly seem to be pretty close to the finish line.

Just wondering, I guess, number one, if you don't quite get to the 90% by February 12, what happens? And number two, assuming that it still nonetheless all goes forward, can you just walk us through what we should expect over the next several quarters in terms of visibility on our side around WCB?

I'll give you perhaps maybe a general outlook on that, and then, I think, LP can add in some color with some technicalities on the legal side. But our hope is that we do get beyond the 90% by February 12.

But if we don't get beyond the 90% February 12, this will be a subsidy of Saputo, Inc. and will have to operate as a separate entity with an operating structure.

Again, we believe that irrespective of whether we have 100% or 90% or 80%, we're still very delighted with this transaction. We think as a subsidy, it could be a very, very good platform for us, and I think we can leverage some of the strength that Saputo has to making Warrnambool a much stronger player in the International markets.

On the technicalities, I'll ask LP to give a bit more color.

As you certainly saw, as of January 21, we essentially surpassed the 50% threshold. So that mean that essentially, as of that date, we're going to start to consolidate even the balance sheet and, more importantly, the result into our numbers.

So we should expect, certainly, for, let's say, the quarter ending in March for which we're going to consolidate the entire balance sheet with the numbers from their purchase price with the allocation as we usually do, certainly, depending if we end up with 100%, or if we end up to a lower level. A lower level, that would mean, essentially, minority interest on the balance sheet.

And the same kind of method will be true from a P&L or result perspective. So that means that, essentially, we're going to add the revenue, EBITDA, all the expense from a P&L perspective and depending for the period of January 21 up to the end of March and depending, again, if we're ending up with 100%, that's an easy one.

If we're ending up with less than 100%, we, again -- we're going to have a line for minority [ph] interest for the proportion of the net earning. So that would be essentially it.

But everything will be consolidated into Saputo as of -- for the next publication, which is going to be our year end and the fourth quarter.

And just, LP, will it be in the International segment, or will you add another segment?

Yes, it will be in the International segment, as we were contemplating when we reorganized or realigned our structure last year. That would be part from the financial reporting aspect.

It will be part certainly of the International segment.

That's great. And from an integration perspective -- but what are the current plans?

Or is it too early to talk about it?

It's a little early to talk about integration plans. Of course, it'll all be heavily dependent upon whether we're at 80% or 100%.

But our message has been very, very clear from the very beginning in terms of our intentions. We would like to be facilitators for the organization to ramp up on some of the plans that they've had for a very long time and, perhaps, didn't have the finances to execute.

Again, I think Warrnambool can leverage on the strength that Saputo has in the international markets. Instead of being price takers, they can be price drivers, so I think that there could be some benefit there.

But from an operating standpoint, we have a lot of confidence in David and his team. Like I said in my opening remarks, I've had the opportunity over the course of last 10 years to get to know Warrnambool and their management quite well.

And, in fact, over the course of last 1.5 months, I've had more intense discussions with them. I have full confidence that David can manage that division very, very well.

With our financial support and perhaps some sales guidance, I think that the division can flourish.

That's great. And one more question, if I might, and this is going back to your small North American business.

Could you just talk a little bit about the evolution of competitive intensity and some of the steps that you've taken to, I guess -- to strengthen your business in the face of that competitive intensity, and how it might have changed since the last quarter?

Well, Canada, the unfortunate thing about this market is that it's in a decline mode. Now having said that, despite the fact that Canada's per capita consumption is declining around 2% per year, we at Saputo have seen growth in our volume.

So we're defending our position extremely well. The unfortunate thing, again, is that it comes at the expense of some margin.

We've got the right people in place. We know this business inside out.

We know our customers extremely well. We know our competitors extremely well.

And I think that we've leveraged on our strength to be able to grow the market, even though consumption is declining. And, of course, that would make our competitors that much more aggressive in terms of trying to find ways that they can grow their market share.

This is the nature of the beast in Canada. It, unfortunately, is a characteristic of a market that's not in growth.

And I think we're defending ourselves extremely well here.

Just to continue on Canada for now, you mentioned during your comments something about profit having stabilized in Canada. Can you just explain that?

Well, initially, at the -- when we looked at the beginning of our fiscal year, we were coming right off of a milk price increase that, typically, is an uneventful experience in Canada. This year, unfortunately, some of that milk price increase was not able to be passed on to some of our customers, again, because of the competitive nature of the landscape here.

We have since had a chance to relook at our product mix and product portfolio, had a chance to -- even at times, look at some contracts with some of our long-standing customers and extend those beyond this year and next. And so I think that we've taken good concrete measures to look at controlling our own destiny for the foreseeable future.

And so despite, again, some of the competitive nature that we've seen in the industry, our folks have taken some proactive measures to try to give us some stability as we look into 2015.

So when you say your profit stabilized, doesn't mean it's stabilized on a year-over-year basis. You mean that you've kind of hit a level where you think it can be sustained, given your contracted business and things like that?

Yes. And certainly, if we're referring to, let's say, from the beginning of the year, certainly, it's -- they can't -- not be more than stable than that from $115.7 million to $116.1 million.

So we're pretty stable since the beginning of the year. Certainly, in Q1, we were, certainly, below the preceding year.

And that was essentially the trend in Q2 and Q3, but on a stable basis, we delivered in the $115 million to $116 million back-to-back the first 3 quarters.

Okay. And the transaction cost of $6.6 million for Warrnambool, have those been capitalized, or are those in another line item?

No. You're going to find out in the OCI, that's the sheet on the other comprehensive income.

It's a technicality in light of, essentially, we end up in the end of December with 12% of the shares for Warrnambool. So the investment, first, is qualifying that as a portfolio investment.

That's the nature of accounting at that point, so it's a portfolio investment. There's a mark-to-market.

There was a smaller gain on that, in comparison to the stock price at the end of December. And also, the expense related to the transaction which account for about 6.5 were globalized into a net kind of loss on which you can find out in the statement of other comprehensive income.

Just to continue on that, position for next quarter, certainly in light of being a full subsidiary of Saputo and all the consolidation and all that stuff, certainly, the acquisition costs will be revert to, again, into the P&L, so we'll find out into the expense. Similarly, as we saw in Q4 of last year, when we account for the Morningstar acquisition, for which there was an acquisition cost.

So they would be revert in Q4 into the -- as expense into the profit and loss statement.

Okay. And in the International business, in particular, in Argentina, can you explain how the milk in the operating costs, labor and energy, are affected in U.S.

dollar terms, as the peso devaluates? So are they decreasing at the -- are they decreasing as -- in U.S.

dollar terms as the peso goes down? Or is the inflation there offsetting and then keeping those costs in U.S.

dollar terms similar? So just trying to gauge, I guess, how it's affecting your profitability, both in the domestic market in Argentina versus the profitability on the international market.

Well, first aspect, we're buying -- let's say, for electricity, or any goods that we're buying in Argentina, they are essentially purchased into pesos. So at the end of the devaluation of the currency per se is not being effect.

We're not trading, we're not buying on the internet -- let's say, in the U.S. dollar.

So everything that's in pesos is in pesos, essentially. Certainly, even though the devaluation, as you see, there's certainly some impact in term of the revenue being impact globally speaking.

But certainly, dealing on the international market, we are recapturing, I would say, a good portion of it in term of the net impact.

So when you talk about the higher -- the issues with the rising cost of raw milk in Argentina. I mean, your profits surged in this quarter on the International side.

Is that mostly or almost entirely then because of the high export prices?

I would say both -- a bit of both, the volume and export prices.

Okay. So was volume just -- as rebound off of the floods last year?

Or was there also some growth on top of that?

We had some growth on top of that. We had announced a capital project that would give us the potential to take on more milk, run more capacity to our plants.

We're in the mode now of start up for that new incremental capacity. And so we are actually processing more milk, and we are collecting more milk off the farms.

And is there enough growth in the supply to keep pace with the capacity that you're adding?

Yes. Understand that we are the plant of last resort of all the farmers that we've committed to.

So there is some upside in terms of ability for us to produce a more product -- run more capacity to our plants. But everything is going pretty much as we had expected it would be.

We should close off this year with the amount of milk processed that we budgeted at the beginning of our fiscal year.

I just want to ask you a bit about profitability in the U.S. Over the past 4 quarters, EBITDA margins have been in around the 10% to 11% range and finishing up on the high end in the quarter.

What do you see as we move forward here for the U.S. merge and the volatility or the range of profitability that you would expect in that business?

Well, there are 2 aspects to our U.S. business.

One is the Cheese side, the other one is the Dairy Foods side. The Dairy Foods side, you probably noticed that at the time of acquisition, the margins typically and historically had been lower.

And again, that is heavily influenced by product mix as well. If I look at the Cheese side, this quarter, we were positively impacted by inventory realization, with the run-up of the block price.

Operationally, we're doing extremely well. In terms of volume, we have recaptured a lot of the volume that we had lost at the beginning of the fiscal year.

So the U.S. Cheese side is really running at a very good pace and had a nice little bump up at the end of the quarter, because of the high block price.

On the Dairy Foods side, our volumes are greater than what Morningstar had achieved last year. However, the product mix was unfavorable.

We sold a lot more of the less than value-added product, more commodity products than we would have liked. Again, we're in tight with a lot of our customers.

And on the one hand, we're following the trends of our customers, and on the other hand, we're bringing new categories of products in front of them. And so our expectation, as we move forward, is to focus more on value-added products for the Dairy Foods division.

Okay. So when I think about that and the unfavorable product mix you just mentioned, is that kind of macroeconomic-driven, if you will, consumer-driven?

And do you expect that to kind of change around as times get better, if you will, in the U.S.?

I think it's driven by the menu items that our customers are actually promoting. Over the course of the last couple of quarters, a lot of promotion on just driving volume through the QSRs.

And again, we're following our customers in terms of their quantities and volumes that they would require. Again, it's our responsibility as a progressive innovative dairy company to come up with new recipes that could not only drive volume through the QSR, but also add value.

And then those are the types of initiatives we're working on now with Dairy Foods.

I noticed that you're spending some time reaching and packaging and introducing new higher-end products in the channels. Is that accurate description for what's going on in the U.S.

now? And how is that going so far?

That is precise, yes. And so we do have -- and especially since we have acquired the platform of DCI a couple years ago, we are looking at value-added categories of products.

Sometimes that would be new product development in a way of cheeses. And other times, it would be product development in terms of packaging and packaging formats.

So yes, it's a combination of the 2 that would allow us to have categories of products that are less commodity-driven and more value-driven.

Okay, that's helpful. And just thinking about Canada a little bit, given the state of affairs that you described.

And I noticed the Scotsburn acquisition and some of your competitors -- or one of your competitors, in particular, buying up a lot of small operations in Canada. Is that what you expect the trend will be for the last year, that a lot of small operations will come on to the market and will get purchased by the likes of yourself or your other 2 big Canadian competitors?

Yes, I think so. I mean, there's 3 of us that have about 75% of the milk intake here in Canada.

Again, the characteristic of this market is that the only way that you can find growth, really, is either to steal volume from your competitor or perhaps even to make some acquisition. So I'm not overly surprised to see ourselves and perhaps some of our competitors making acquisitions.

Okay. And in terms of major acquisitions in a global sense, whether it be Brazil or further Australia, is there anything pressing -- could you give a -- characterize kind of the state of affairs for a big acquisition right now for Saputo?

Well, David, I've said that we always have 3 or 4 files on our desk at any given time. For us, they're all pressing, and they're all exciting.

We materialized 2 acquisitions in the span of maybe 3 or 4 months: Warrnambool and Scotsburn. These are files that we've had on our table and ideas and priorities that we've been thinking about, in some cases, in Warrnambool for the better part of 10 years.

And the opportunity came along for us to actually make a play for it. So again, we've always -- we always have files on our table.

I would say, the runway, still, is very, very long. I see that in the U.S.

space, both on the Cheese and on the Dairy Foods side, despite our size, we represent a small percentage of the overall volume. So I think that there could be some other potential acquisitions in the U.S.

You talked about Brazil. I did mention that in previous conference calls that we have taken trips out to Brazil on a number of occasions.

We're exporting product from Argentina into Brazil, and so it's a natural evolution for us to be a player with manufacturing infrastructure in Brazil. We just need to find the right one at the right price with the right strategic value for us.

Beyond that, I'd say, now, with Warrnambool, we have a strong, solid platform in Australia. Perhaps, if there could be some other small tuck-in businesses in Australia, we would be more than happy to look at it now that we have a management team that would be able to absorb it and manage it and run it.

And I would also say that New Zealand looks pretty interesting for us as well, now that in Oceania, we do have that infrastructure. So again, I'm very bullish on the market.

I feel very, very good about our position on the world stage in Dairy. I feel very good about the industry in dairy.

In fact, I just came from a conference in California, where the dairy players meet on a yearly basis, and all of the economists that are talking about the dairy space right now are extremely bullish about supply and demand. I believe that the demand will outpace supply.

And in fact, we're seeing some of that right now. And this is why we're seeing the international prices as strong as they are.

And we're also seeing the effects of that on the U.S. market.

So we feel very good about our position. We've always tried to keep our balance sheet extremely clean, so we can capitalize on some of those acquisition opportunities that come about.

And LP and I work on a regular basis of planting seeds to see, perhaps, if a tree can grow somewhere.

You actually just sort of touched on my first question, but it was -- could you just give your sort of outlook for the dairy prices in the dairy market in general over the rest of the year?

Well, the timing is actually quite good for me to do that, because I have insights from a few of the economists that I spoke to and listened to at the dairy conference. What everyone is looking at right now is that there is a rising demand of dairy protein around the world.

And if you look at what's going on in China, China, in fact, is declining in their own domestic production of milk. Economic conditions as well as other factors have made it such that from 35 billion liters in milk were they once were, now they're starting to receive below that.

In addition to that, you got a rising demand from the middle class that continues to grow. That is present, not only in China, but we're starting to see a lot of interest from Japan, Taiwan, the Middle East.

Russia continues to be a strong platform of net import of dairy products. Brazil is a strong importer of dairy products.

And there are only so many countries around the world that have the infrastructure and the capability to produce the milk. And this is why we thought that Australia was so key for us in terms of our long-term outlook as a dairy player on a global scale.

If I look at the different countries around the world that have the infrastructure, it's got the U.S. that went from 10 years ago, 2% of its total production being exported, now it's up closer to 15% or 16%.

Argentina, our platform, in the 10 years that we've been there, we've doubled our throughput, our capacity. And yet, 50% of our production is still going to the export market, and so that has grown quite substantially.

And then you look at New Zealand, with their milk base, that's been growing. And Australia, over the course of the last 10 years, had been either stable or declining.

But again, those are the real platforms of dairy production. And so if you want to be a player on a global scale, provide the tools to your workforce to be able to get out there -- your sales force to be able to get out there, and offer product from different regions.

There are only maybe 4 or 5 regions in the world that make sense, and this is why Australia, the WCB made a whole lot of sense for us.

And in terms of WCB and the Australian milk production, is it just a matter of the international price holding in to see production in Australia grow?

I think so. I had the chance in the month of November and early December to talk to a lot of different farmers.

And quite frankly, they've been beaten down. And I think that the level of optimism was actually quite low.

I talked about, with the dairy farmers while I was there, what I'm seeing on the market. It's not that we're creating it, but this is what we've seen.

And I shared with them my optimism about the dairy industry. I think that if dairy demand continues, the prices will hold firm.

And if the prices hold firm, then all stakeholders in the dairy industry will benefit, including dairy farmers. Now we need to make sure that the dairy farmers are making money, if we want dairy farmers to be in business long term.

So I think that the high international pricing does and will have an effect on the milk production in Australia.

Okay, that's helpful. And just on Australia, just sort of taking a step back, can you just talk about Warrnambool and their production capacity and what they're actually producing, their product mix and how that fits into the Saputo portfolio now internationally, as you kind of think about serving those international markets over the course of time?

Like is there synergy opportunity, really, I guess, between Australian production and Argentina and even the U.S.?

I think there is a lot of synergy. And again, with my conversations that I've had over the course of the last few months more intensively with David and Terry, who's the Chairman of the Board.

I think that some of the synergies, to their own admission is that they're making commodity products, and they're price takers on the market. We are specialty oriented, and perhaps, we can make some products that would have derived of a higher value on the market.

I think our sales force at Saputo has a very, very good understanding of the different markets, the growing markets, the specialty markets. And I think that there could be some synergies there just by sharing ideas and allowing that management team to flourish under some of our guidance and perhaps some of our fiscal support.

Some of the products of categories are similar. When we look at block cheese or pressed-type cheeses, we're making those in Argentina, as well as in the United States and in Canada.

WCB produces pressed-type cheeses. But there are also other categories of product that WCB produces that we don't produce.

They have a specialized byproduct that they're selling in partnership with FrieslandCampina, which is a great innovative product. They manufacture a lactoferrin, which is a specialized protein, which Saputo does not have access to.

So I think there are going to be some synergies in what WCB does in terms of them adding value to the Saputo portfolio, and perhaps Saputo adding value to the go-to-market strategies that WCB can employ.

Okay. And then just one quick question.

In Argentina, I mean, talked about it already, but just to sort of be clear, with -- forgetting international pricing and then the movement of the peso, fundamentally, there, it seems like things have improved and stabilized. I mean, is the outlook -- forgetting those external factors, is the outlook for that business to continue to improve profitability?

What's usual, and certainly in light of in addition to what Lino was mentioning, adding capacity, getting more milk, and certainly it's -- everything is aligned in a good direction.

Yes, I have some questions on Argentina. The first one was what do you mean that you're the plant of last resort there?

What, I mean, essentially, is that the system is unlike any that we operate in. When we make a commitment to a dairy farmer, we make a commitment to take 100% of his milk, and there is some seasonality and some fluctuation in his milk production.

And so, ultimately, if he's going to be growing his base of milk production by, say, 10% or 15% or 20%, he has no other place to go. We are his plant of last resort, so we need to make sure that we have the capacity to take on his incremental volume.

And so the reference to that was that we had built additional capacity in Argentina to make sure that when we're at the peak of production, we are taking all of our farmers' milk, even if that means certain times of the year, we're running below our 100% capacity utilization.

Nice. And then just on Australia, what percentage of the -- I don't know whether volume or dollars is a better way to do this, is exported versus domestically consumed?

I would say about 50% of their volume goes to the international market.

And when you mentioned the currency effect is about $17 million from the decline in the Argentine peso, is that just looking at the domestic portion of the Argentine business? Or does that include the benefit of the International as well?

Two aspect, even if we're -- we think on the international level with the U.S. currency, you need to keep in mind that, let's say, in Argentina, I would say, the ledger are all in pesos at the end of the day.

And certainly, we're taking those ledger, and we're converting them into Canadian dollar. So there's -- this is where the variation is created.

Great. And then just on the China market, is -- where is Australia in that?

Do they need a free trade agreement to access the China market, or they don't need that, or...

No, there's no free trade agreement as it stands, but they have access to the markets. So it's really based on competitive pricing of their solids that they can manufacture and sell into the market.

But there is no free trade agreement right now with China. But, again, let me make something clear here.

China is one market. China is not the only market.

We're selling into 40 or 50 different countries around the world, and that's the way we like it. I mean, we're not going to put all of our eggs into one basket, whether that would be from the platform of United States, whether that would be from Argentina and in the future, in Australia as well.

We don't believe that there's only one market for us. There are 40, 50 different countries around the world that are net importers of dairy product.

Our sales force is experienced enough to understand those markets and understand where we can derive the best value for our solids.

And when it comes to Argentina, are they pretty much fully booked as it were just exporting within Latin America? Or are they sending things to Asia as well?

Argentina is sending things all over the world. Of course, the proximity to Brazil makes it easy for us to export product into Brazil, but it certainly is not the only market that we're selling into.

We are selling into 40, 50 different countries around the world from the Argentinian base right now.

And I just had a -- some questions on the Canadian market. The -- in terms of product lineup, there was a mozzarella company that was recently sold.

Is -- are you still interested in expanding mozzarella by acquisition? Or are you already sort of too large to make an acquisition there?

I think if there are dairy assets that become available in Canada, we will definitely look at them, mozzarella included. We are leaders in mozzarella in Canada, but that doesn't mean that we wouldn't look at acquiring another asset that would have a mozzarella platform.

So I think there still are some small tuck-in businesses that could make sense for us, including other mozzarella manufacturers.

And then just on the yogurt category, which, I guess, is one that's experienced growth, what is -- is that anything that you'd like to get into, or not really?

Well, I have to be clear about our strengths and our weaknesses. We're very, very strong R&D folks on the cheese side.

I think we're very, very strong R&D focus on the byproduct side. I think we've grown our platforms substantially there.

We work in every category of dairy that could derive a very good profit for us, where we can serve our customers. The categories that we're not in, in dairy would be things like ice cream.

We had ventured into ice cream. I think it was in 1999 or 2000 or so, around that timeframe when we bought [indiscernible].

They were manufacturing ice cream. And we realized the dynamics of the ice cream market are very competitive, and perhaps, we were in a position where we were not controlling our own destiny.

And quite frankly, we were not innovators in that category of product, and we decided to exit that. We have the same reflection with yogurt.

There are some big very innovative companies that do a very, very good job in yogurt. We are yogurt manufacturers, but I would not say that we are the most innovative company when it comes to yogurt.

I think our energy and our resources and our focus will be perhaps better suited in cheeses and in other dairy solids.

And just finally on the sports drink, milk products that you've been innovating on in the last few years, how is that process or projects going?

That's very good. In fact, in the single-serve value-added milk, we are the #1 player with a wide range of flavored products.

We did launch, and you're probably referring to the Milk 2 Go Sport. We're capitalizing on the value of the Milk 2 Go brand, but really segmenting it towards athletes that are looking for a recuperation drink after physical activity.

It's very much in line with what we stand for as a company in terms of having a full profile of healthy eating and physical activity to stay active and stay healthy. And so Milk 2 Go really follows that channel and follows that focus.

Just understanding Morningstar. Did some of the cost -- did some of those unusual cost that you had in, I think, it was in Q2, did those fall off in Q3, or were they still present?

I would say for the vast majority, they fall off.

Okay. And the -- is the performance of cottage cheese and sour cream that you highlighted last time being a little weaker in Q2, how did -- what happened in Q3 with those products?

Cottage cheese and sour cream is a flat category. We've got some good brands.

I mean, Friendship is a very recognized brand in East Coast USA, but quite frankly, it's a flat category.

But you didn't see the drops that you saw in Q2?

No. Those drops have stabilized.

And then just, finally, I guess, if I -- I'm still trying to understand that huge jump in the International profit. Can you just give us an idea of the conditions that need to be in place for that level of dollar profit to be sustainable?

That would be to give you our recipe, and we will not give you the recipe. At the end of the day, certainly, in light of additional volume, and there's not much more that I can say.

Additional volume is certainly the pricing that we are getting for our product on the International, certainly helped throughout the quarter. Again, if we're comparing quarter to probably weaker quarter last year, so we're improving.

The market is giving, certainly, us a reward for that, and there's not much more that I can give you in term of the recipe for our numbers.

Okay. But is there anything that was timing in the quarter that might -- that where the prices ran up and that had other costs, and the costs are just catching up?

Or is that just normal market?

You need to keep in mind also that we are recapturing from pricing in a sense that pricing is evolving in the right direction. Certainly, we're not producing only product in the same month, so milk price is rising also in Argentina.

So certainly, out of it, we're benefiting from better price from inventory that were certainly probably manufactured at a lower cost. So all in all, that's what essentially we were able to generate throughout the quarter, on which we're very happy.

Just a question on the Morningstar. Are you now completely disengaged from the Dean Foods infrastructure?

Yes. From a system perspective, on which we were -- connect until, I would suspect, mid-November, so everything were by on our own, actually, on which we're okay with that and which going -- good actually, so we can plan for the future, working only on our own infrastructure.

Thank you very much, Tommy.

We thank you for taking part in this conference call. We hope you will join us for the presentation of our 2014 fourth quarter and year-end results on June 5, 2014.

Have a nice day.