Saputo put on defensive by intense competition in Canada and U.S.

MONTREAL – Saputo says intense competition that accelerated in the fourth quarter should persist as its cheese and dairy rivals try to steal market share amid stagnant consumption.

“We see it continuing, but we’ve taken some action trying to now play some offence,” CEO Lino Saputo Jr. said Wednesday.

“The pie is not getting any bigger but everyone’s trying to steal someone else’s slice of the pie.”

The company’s sales volumes were hurt in the quarter as competitors tried to expand their reach at retail and food service customers in Canada and the United States.

Most affected were white milk and commodity cheeses such as mozzarella and cheddar, while specialty products, including flavoured milks, remained strong, the CEO said in an interview.

Canada’s largest dairy processor has about 36 to 38 per cent market share in Canada and about 10 per cent in the more fragmented U.S.

Saputo was forced on the defensive to present a “compelling argument” to customers in terms of quality and service.

“At the end of the day we need to be competitive as well from a pricing standpoint and that means we have to get creative on the research and development side perhaps to lower our costs and pass those savings on to our customers,” Lino Saputo said.

The company recently moved to improve efficiencies by closing two plants and consolidating its Montreal distribution centre.

Saputo said there are no imminent plans for further cuts.

“But we’ve got to continuously look at how effective and how efficient we are and sometimes we’ve got to take some tough decisions.”

The dairy giant reversed last year’s losses to earn $100.5 million in the fourth quarter on an acquisition-fuelled boost to U.S. revenues, but still fell short of analyst expectations.

The cheesemaker said the profit amounted to 51 cents per share for the quarter ended March 31 compared with a loss of $2.6 million or zero cents per share a year ago when then company took a $125-million goodwill charge.

Adjusted for one-time items, Saputo (TSX:SAP) said it earned $129.2 million, or 65 cents per share, compared with $122.4 million, or 61 cents per share, in the prior year.

Revenues increased 20 per cent to $2.05 billion, from $1.7 billion a year ago, following the $1.4-billion acquisition in January of Morningstar Foods.

Saputo was expected on average to earn 72 cents per share on $2.15 billion of revenues in the quarter, according to analysts polled by Thomson Reuters.

The chief executive said he’s satisfied with the results given the heightened competition and international milk prices that lowered profits at its Argentine operations.

“We are by no means panicking. We’re pretty optimistic about where we are right now and the potential that this company has going forward.”

For the full year, it earned $481.9 million, or $2.41 per share, compared to $380.8 million, or $1.86 per share, in 2012.

Adjusted profits were $510.6 million, or $2.55 per share.

Revenues increased 5.3 per cent to $7.3 billion from $6.9 billion a year ago.

Irene Nattel of RBC Capital Markets said the year ended with “more of a whimper than a bang.”

In a report, she said the acquisition of Morningstar should deliver long-term value but some very near-term share price pressure.

Saputo is changing its reporting segments to more clearly separate its Canadian, U.S. and international operations.

The international segment will include Argentina and all international sales from North America.

Lino Saputo said the change reflects its desire to expand its global business but isn’t being done because of an imminent acquisition.

The Canadian segment will include the struggling grocery business, which comprises its Vachon snack cake operations.

Snack cake results will no longer be disclosed. Operating profits have only recently improved but sales have slipped.

“I think that the hemorrhaging has stopped and the initiatives over the last three years are now starting to bear some fruit for us so we’re in no rush to divest,” Saputo added.

The company incurred acquisition costs during the quarter totalling $9.6 million, while restructuring costs from plant closures in Europe and Canada were $32.6 million.

On the Toronto Stock Exchange, Saputo shares closed at $49.66, down 86 cents or 1.7 per cent.