Efficiency, innovation drive Saputo

by Editorial Staff
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Based in Montreal, the reach of Saputo, Inc. is long. The company has dairy-related interests in Canada and the United States as well as Argentina and Europe. Given the disparate regulatory structures in place in each country to manage the local dairy economy, Saputo is challenged to bring balance and profitability from its dairy-related business interests in each region.

Growth of the company is rooted in the global growth of cheese and dairy product consumption. In its recently published 2012 annual report, Saputo noted that the demand for dairy products is expected to grow worldwide by about 2% per year in the foreseeable future. Expanding wealth in developing nations is expected to translate into increased disposable income for consumers.

“Dairy products are increasingly traded around the world and have doubled in trade within the last 10 years,” the company said. “Our international market strategy for growth is based on efficiency and innovation, while keeping in mind regional differences.”

Saputo’s Canadian, European and Argentinean (C.E.A.) business unit makes up 58.5% of the company’s total revenues and consists of 30 facilities. Its USA Dairy Products division makes up 39.6% of revenues and has 16 facilities.

During fiscal year 2012, Saputo’s earnings were hindered not by its dairy assets, but by its bakery division, which accounts for 1.9% of annual sales. A C$125 million write-down related to the company’s struggling bakery division led to a fourth-quarter loss and lower year-over-year earnings for the company. The company said the write-down reflected stagnating growth for snack cake sales.

Net earnings in the year ended March 31 totaled C$380,840,000 ($366,911,000), equal to C$1.89 per share on the common stock, down 15% from C$450,051,000, or C$2.18 per share, in fiscal 2011. Sales for the year were C$6,930,370,000 ($6,676,699,000), up 15% from C$6,002,932,000 during fiscal 2011.
The C.E.A.’s EBITDA increased 4% to C$514.8 million compared with fiscal year 2011. EBITDA for the USA Dairy Products business increased 8% to C$303.4 million during the year.

The company said the increased EBITDA for the C.E.A. was due to a more favorable dairy ingredients market and volume increases in the Argentinean division both in the domestic and export markets. Partially offsetting the increases were higher ingredient costs in both Canada and Argentina, according to the company. Operating income for Saputo’s European dairy products division remained stable compared to the previous year. The USA Dairy Products sector benefited from Saputo’s acquisition of the DCI Cheese Co. in 2011.

In a conference call with financial analysts on June 5, Lino Saputo, vice-chairman and chief executive officer of the company, said Canada remains one of Saputo’s stable markets due to its lack of growth.
“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,” he said. “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. It really has not been any different this past quarter than it has been in previous years.”

Mr. Saputo added that he sees the DCI Cheese acquisition bringing additional volume potential. During fiscal 2012, cheese volume for the USA Dairy Products division increased 1%.

On a positive note for the company, milk availability in the United States appears to be on the rise, Mr. Saputo said.

“I’ve seen some numbers recently where butter production has been up somewhere around 7% and cheese production up about 3.5%, nonfat dry milk is going up and inventories are growing,” he said. “So, there is quite a bit of milk in the U.S. system as we speak. I think some of that is related to, I guess, the expectation that the international markets will be rising.

“So, I would suspect that some dairy groups and co-ops have opened up their valve to be able to supply those markets. But the reality is that within the domestic market there is more milk that needs to be processed within the U.S. The way we see the markets going forward, there will be increased competition because milk will be plentiful.”

Looking ahead to fiscal 2013, the company said it also will spend fiscal 2013 evaluating opportunities from the DCI cheese acquisition as it relates to the USA Dairy Products sector.

“This will allow the sector to further penetrate the specialty cheese category, benefit from possible synergies, as well as improve and expand its product offering to all customers,” Saputo said.
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