Sap Executive Insights: Canadian Stability and U.S. Dairy, Food Service and Retail Growth

On Tuesday, Sap AG ADR (NYSE:SAP) reported its fourth quarter earnings and discussed the following topics in its earnings conference call. Here’s what executives shared.

Canadian Stability and U.S. Dairy:

Irene Nattel – RBC Capital Markets: Recognizing that there is lots of growth potential for you, both in your existing markets and in new markets, wondering a little bit about what happened in the CEA segment in the quarter. It sounds like from the press release, Argentina had a good quarter, Europe had a stable quarter, so kind of what was going on here in Canada?

Lino A. Saputo, Jr. – President, CEO and Vice Chairman of the Board: Canada was and we’ve been saying this for quite some time as it’s probably the most stable market we have. That stability brings with it a lack of potential growth, but it does also bring with it quite a bit of stability in terms of EBITDA generation. So, again, Canada because of its stability and lack of per capita consumption growth, the markets do remain very, very competitive. We defend ourselves extremely well both at the retail and the food service levels and it really has not been any different this past quarter than it has been in previous years.

Irene Nattel – RBC Capital Markets: That’s great, and can you talk a little bit in terms of the U.S. segment, you saw very nice sequential recovery quarter-to-quarter despite the lower year-over-year cheese prices, lower inventory realizations. I mean despite a lot of headwinds, you had a nice sequential recovery in margins, so I was just wondering if you could talk us through that a little bit, please?

Lino A. Saputo, Jr. – President, CEO and Vice Chairman of the Board: The U.S. dairy business is one where we feel that we’ve got a very good platform, great quality of personnel there. We’re able to invest not only in our infrastructure, but in our people as well. The DCI acquisition, of course did bring with it some volume potential, although the margins in DCI were less than what we’re accustomed to in the U.S. business. There were still some improvements that we could have made in DCI and some synergies that we could have recaptured between DCI and the Saputo Cheese USA business through the administrative functions and things like that. So, again just clear-cut initiatives are provided to our folks in the U.S. trying to find new ways to be yet more effective and more efficient, and again, as usual they rose to the challenge.

Irene Nattel – RBC Capital Markets: Absolutely. Just in terms of those efficiency potential, is there still more to come in subsequent quarters do you think, or are we sort of — did you kind of get what you were going to get in Q4?

Lino A. Saputo, Jr. – President, CEO and Vice Chairman of the Board: Irene, you’ve been following us for a while and it’s probably not the first time you hear me say this, but this is really not a sprint, it’s a marathon. We believe that on an ongoing basis, there are opportunities and ways to do better. Again, as we look forward, there are plans on the table as we speak that would encourage and initiate our folks both in the U.S. and in Canada as well as internationally to focus on trying to find new ways to be yet more creative and more efficient and more effective. I don’t think we’ll ever reach that finish line. I think that this will be an ongoing marathon and it’s great to see that our management, both at the presidential level and at the middle management level, they are always coming up with new ideas and new ways to do better.

Irene Nattel – RBC Capital Markets: Then just one final question if I may. The $125 million goodwill write-down in the Grocery segment, that’s an awfully big number for that segment, and I am just wondering what we should be reading into what that implies for the future of the segment, either as part of Saputo or just in terms of potential divestiture?

Lino A. Saputo, Jr. – President, CEO and Vice Chairman of the Board: Well let me answer the second part of your question and then I’ll have LP talk about the write-down itself. But at this stage Bakery is part of Saputo entities. We have a great person leading that division by Lionel. I think there have been some incredible initiatives, that Lionel and his group have put forward over the course of last two or three years, that have allowed that division at least to keep their heads above water. There are initiatives on the table for this upcoming fiscal year that will allow us to penetrate the U.S. market and drive more volume to that division. For the time being our focus right now is to continue to improve that division and it is not for sale. But specifically related to the write down I will have LP speak to that.

Louis-Philippe Carriere – EVP, Finance and Administration: In light of the write-down certainly on a yearly basis we are establishing, we are doing some analysis, putting our review expectations (trim off) and establishing essentially a plan, let’s refer to Bakery and as well for any division in term of the (bluff) and specifically in the Bakery for development for Canada, for the U.S., market penetration which will include also cost of raw material and essentially to be revived as the (20-year old business) and the revision this year. The performance of the division did meet essentially the plan or the kind of targets and we have to do the write-down in accordance with that.

Food Service and Retail Growth:

Martin Landry – GMP Securities: Could you discuss a little bit your volumes in the U.S. and may be giving us a breakdown per channel that would be greatly appreciated?

Lino A. Saputo, Jr. – President, CEO and Vice Chairman of the Board: Martin as you know, we don’t give a definition by channel, but I can talk in a lump sum numbers. Overall volume within our U.S. business and I’m talking base business beyond the DCI were about 1% ahead of last year in terms of overall volume. Now one other thing that could be confusing in the numbers is of course the revenue number is heavily influenced by the block price itself irrespective of volume, but if I look at apples-to-apples base business Saputo Cheese USA, year-over-year about a 1% growth.

Martin Landry – GMP Securities: Can you give us maybe just a broad idea of which channel is it that the growth’s coming from? I believe in your last quarter, you had mentioned that food service was doing really well. Is this still the case?

Lino A. Saputo, Jr. – President, CEO and Vice Chairman of the Board: Food service is doing quite well as is retail. Again, we do see within any given year, shifts between food service and retail. In terms of the last quarter, specifically it was more shift over from the retail over to food service.

Martin Landry – GMP Securities: Can you give us the EBITDA contribution generated from the DCI acquisition during the quarter?

Lino A. Saputo, Jr. – President, CEO and Vice Chairman of the Board: We don’t split out that number specifically. If you look at our historical EBITDA generation, DCI, the platform of DCI that we acquired was generating less EBITDA margins than what we had in the Saputo Cheese USA.

Martin Landry – GMP Securities: You have discussed in your outlook the fact that the dairy farmers in California are petitioning for a change again in the milk pricing formula. What’s your view on this? What’s the likelihood that they can be successful at that change again once more?

Lino A. Saputo, Jr. – President, CEO and Vice Chairman of the Board: It’s very hard to try to predict what the likelihood would be. Again, as you look at it, it almost seems like it could be a flip of the coin. So, it would be very, very hard for me to predict, we had Representatives out in California last week throughout the hearings, I think there was a very good representation from both sides, both the dairy farmer side and from the processing side, I think both are making compelling arguments for in favor of their best interest, but it is very, very hard to predict what the outcome of that will be.

Martin Landry – GMP Securities: Just maybe, Louis-Philippe, any guidance on CapEx and tax rate for the year would be appreciated?

Louis-Philippe Carriere – EVP, Finance and Administration: CapEx for this year, we are at about $225 million that we have in our plan. In term of tax rate you can work with 28%, but again it is depending on the source of the revenue, it could vary, but I think 28 could be a number that you got to work with.