Dairy food company Saputo looks beyond Canada for continued growth

MONTREAL – Dairy food giant Saputo Inc. sees limited growth in Canada and will keep an eye out for acquisitions in the United States and Latin America, chief executive Lino Saputo Jr. said Wednesday.

Australia is also a possibility for acquisitions, he said, after the Montreal company reported a slightly improved quarterly profit of $129.7 million.

“Canada is a great stable market and I’ve said this for a number of years, the downside with Canada is that there is no growth,” Saputo Jr. told financial analysts.

Milk prices continue to increase year-over-year in Canada and even with a growing population, consumption decreases on a year-over-year basis, he said on a conference call.

Saputo Jr. said there are three to four potential acquisitions “on our table” at any given time.

“The only thing that we will say, is that we still believe there is great opportunity for us to further consolidate the U.S. dairy industry,” he said.

“We believe that Latin America, namely Brazil, would be a good target and I also believe and I would like to see, one day, us have a platform in Australia.”

Saputo Jr said if Canada’s supply management of milk remains or eventually ends, the company will be prepared to deal with either scenario.

He reiterated that Saputo (TSX:SAP) is looking to further improve the efficiency of its Canadian operations by consolidating its Quebec distribution centres, much like it did last year in Ontario.

Saputo closed a plant in Brampton, Ont., in 2010 and consolidated its distribution activities in a facility in Vaughan, north of Toronto. About 120 of the 190 employees affected were able to seek relocations within Canada.

Saputo didn’t say how many jobs could be impacted by the distribution changes in the Montreal area, which will be implemented gradually at the end of fiscal 2013 and completed in March 2014.

In its financial results, Saputo reported a slightly improved profit in its latest quarter on a modest drop in revenue, missing analysts’ expectations.

The Quebec-based company says it earned net income of $129.7 million, or 65 cents per diluted share, in its fiscal second-quarter compared to $127.1 million, or 61 cents per diluted share, in the year-earlier period.

Revenue slipped to $1.75 billion from $1.79 billion year over year.

Adjusted earnings were the same for both periods.

Saputo was expected to report adjusted earnings per share of 66 cents on $1.8 billion of revenue in the quarter, according to estimates compiled by Thomson Reuters.

The company noted that in the U.S., the average block market per pound of cheese — the average daily price of a 40 pound block of cheddar on the Chicago Mercantile Exchange — decreased by 26 cents U.S. compared to the same period last fiscal year, negatively affecting revenue.

Saputo’s dairy products division also faced lower sales volumes and selling prices, mainly in the export market.

It did note, however, that the weakening of the loonie versus the U.S. dollar during the quarter had a positive impact on revenues and EBITDA, or earnings before interest, taxes, depreciation and amortization.

Saputo Jr. also said that the company has begun a three-year project in Argentina to increase its manufacturing capacity for future growth.

“We continue to recognize the importance of developing new markets within the global diary industry, specifically Latin America and Oceania.”

RBC Capital Markets analyst Irene Nattel said U.S.-based deal Foods announced in September it was considering the sale of Morningstar Goods and she expected Saputo to “window shop” this.

“While we put a relatively low probability on this transaction, we expect Saputo to be at least looking at the assets,” Nattel wrote in a research note.

Growth by acquisition continues to integral to Saputo’s earnings growth, she said.

Saputo is the world’s 12th-largest dairy processor and Canada’s largest with more than 10,200 employees.

It produces, markets and distributes cheese, milk, yogurt and dairy products at 47 plants in Canada, the United States, Europe and Argentina. It is also Canada’s largest snack cake producer.

Shares in Saputo closed down 79 cents to $43.49 Wednesday on the Toronto Stock Exchange.