Canadian Manufacturing

Cheesemaker Saputo hunting monster mergers to fuel growth

Saputo told analysts that deals up to $4 billion "would not be out of the question" if the right opportunity came along

MONTREAL—Saputo, Canada’s largest cheese and dairy processor, plans to offset lower profits in Canada by seeking more global acquisitions and convincing Australian dairy farmers to boost their output.

Growth prospects for the dairy are in the fragmented United States, where it controls about 10 per cent of the cheese market; Australia; and new markets such as Brazil, which is seeing a growing middle class.

Saputo told analysts that deals up to $4 billion “would not be out of the question” if the right opportunity came along.

The company would also like to replicate its successful foray in Argentina by encouraging Australian dairy farmers to feel confident about their futures and increase milk production. It has vowed to invest in the infrastructure of Warrnambool Cheese & Butter, which it recently acquired for $450 million, to take on more milk. WCB is the oldest dairy in Australia, where seven or eight players control 90 to 95 per cent of the industry.

A similar drive over the past decade in Argentina has seen the volume of milk processed more than double and in excess of one billion litres from 400 million litres in 2003. Any additional organic growth in supply would be in addition to some smaller acquisitions.

The Montreal-based company said it benefited during the fourth quarter from higher block cheese prices in the U.S., a lower Canadian dollar and increased international volumes and prices, which offset higher costs in Canada. It said a focus to lower costs at home will continue as it seeks to grow volumes of basic and specialty-type cheeses, along with higher margin flavoured milk

The latest earnings, which included the operations of Warrnambool and a previous large merger in the U.S., helped Saputo cap off a strong year by boosting net earnings by more than 19 per cent to $119.8 million in the final quarter of its fiscal year. It earned 61 cents per diluted share for the period ended March 31, compared to 51 cents or $100.5 million a year earlier.

Revenues were $2.49 billion, up 21 per cent from $2.05 billion in the fourth quarter of 2013.

Saputo said the Canadian division’s pre-tax operating profits decreased 8.6 per cent to $108.9 million, despite higher revenues at $881.4 million. Higher ingredients and operational costs offset increased sales volumes, in both retail and food service segments.

Meanwhile, the company is consolidating its distribution activities at a new facility in Montreal and has announced plans to close three facilities across the country, which will result in about $8 million in annual savings, of which $6 million should start next fiscal year. It will also evaluate cost-saving opportunities from its recent acquisition of Scotsburn dairy in the Maritimes.

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