Volatile markets result in softer earnings at Saputo

by Eric Schroeder
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MONTREAL — Unsettled market dynamics, including declining cheese and dairy ingredients prices throughout the year, weighed on fiscal 2009 earnings at Saputo Inc. Net income in the year ended March 31 totaled C$278,948,000 ($250,721,000), equal to C$1.35 per share on the common stock, down 3% from C$288,200,000, or C$1.40 per share, in fiscal 2008.

Sales during the year were C$5,793,263,000 ($5,208,862,000), up 15% from C$5,058,900,000 in fiscal 2008.

For the fourth quarter ended March 31 net earnings totaled C$69,198,000 ($62,304,000), or C$0.33 per share, down from C$75,211,000, or C$0.37 per share. Sales were C$1,460,352,000 ($1,315,195,000), up 15% from the fourth quarter of fiscal 2009.

"Over the last few months we were faced with volatile market dynamics," said Lino Saputo Jr., president and chief executive officer, during a conference call with financial analysts on June 9. "The cheese and dairy ingredients prices in the international markets fell throughout the year and more dramatically in the last quarter, as did the block per pound of cheese in the U.S. Despite these difficult conditions, we maintained our objective to be at the forefront of innovation and operational efficiency, while continuing to grow through acquisitions. The downturn in the global economy this past fiscal year proved that it’s equally imperative for our company to be financially sound, as it is to be operationally flexible."

Within Saputo’s CEA Dairy Products division, which includes company interests in Canada, Europe and Argentina, operating income rose 3% to C$337,338,000 on a 12% gain in sales to C$3,323,541,000. Saputo attributed approximately C$200 million of the C$288 million increase in sales to the Neilson Dairy acquisition, which the company completed on Dec. 1, 2008. The other factor contributing to the sales increase was higher selling prices stemming from the increase in the cost of milk as raw materials.

The company’s U.S. dairy group posted operating income of C$93,157,000 in fiscal 2009, down 16% from C$110,698,000 in fiscal 2008. The decline in operating income was due in large part to a downward trend in the price of the average block market per lb of cheese, which fell to $1.20 in the fourth quarter of fiscal 2009 from $1.98 in the first quarter of fiscal 2009. Similar steep declines were noted in dairy ingredients, including whey, which saw its average price drop to 22c in fiscal 2009 from 52c in fiscal 2008.

U.S. dairy sales, meanwhile, rose 20% to C$2,304,613,000. The increase was primarily due to the acquisition of the Alto Dairy Cooperative, which was completed on April 1, 2008, as well as to selling price increases.

During fiscal 2009, the retail, food service and industrial segments accounted for 35%, 47% and 18%, respectively, of total sales volumes within U.S. dairy. This compared with 29%, 46% and 25%, respectively, in fiscal 2008, Saputo said, noting the difference from year to year primarily was due to the acquisition of Alto Dairy.

In the retail segment, Saputo concentrated its marketing effort during fiscal 2009 to its Frigo Cheese Heads and Treasure Cave brands, which rank No. 1 in their respective categories of string cheese and blue cheese. The company also relaunched the Black Creek brand of premium aged cheddar into the retail deli market, a brand inherited as part of the Alto acquisition, as well as its Lorraine cheese.

Saputo identified increasing product awareness as a marketing goal for the food service segment during 2009. To that end, the company continued to promote and advertise its cheese offerings within the pizza industry. Saputo also introduced a new Alto brand into the food service segment, and said innovative reclosable packaging, aimed at improving convenience and product quality, was developed and introduced during fiscal 2009.

Looking ahead, Mr. Saputo in the conference call provided perspective on what the company expects to achieve in fiscal 2010. Specific to U.S. dairy operations, he said the company expects to benefit from various capital projects realized last fiscal year.

"These projects have contributed to place this division in a better position to grow, and become yet more efficient in the future," he said. "In fiscal 2010, we will continue to monitor market changes, and we’ll make appropriate decisions aimed toward profitability. We will continue to promote our leading brands with the objective to increase our market share. And despite the challenges that come with a recession, we enter fiscal 2010 with optimism, due primarily to the relentless efforts of our employees and product quality, operational efficiency and customer service."

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