DBRS Assigns Rating of A (low) to Saputo with Stable Trend

DBRS Limited (DBRS) has today assigned an Issuer Rating of A (low) to Saputo Inc. (Saputo or the Company) with a Stable trend. The rating is based on the Company’s strong market position, diversification, and record of growth through acquisition. The rating also considers intense competition, exposure to commodity price volatility, and risks of regulatory changes.

Saputo’s efficient operations, combined with its successful track record of sourcing and integrating acquisitions, have contributed to a leading record of growth and profitability. Saputo’s revenue has grown to $10.2 billion in the last 12 months (LTM) ended Q2 F2015 from $5.8 billion in F2010 making it the eighth-largest dairy company in the world by dairy sales from the twelfth largest in F2010. This growth has been driven by stable organic growth and large acquisitions ($2.2 billion deployed over this period). While Saputo has invested steadily in efficiency improvement initiatives, the lower-margin nature of its acquisitions has contributed to EBITDA margin declining from a high of 13.1% in F2011 to approximately 11.1% currently. The Company has also benefited from the input cost stability provided by the regulatory policies in the dairy industry in its main markets and the relatively stable demand for dairy products. Saputo’s EBITDA has grown by a compound annual growth rate of 10.6% to $1.09 billion in the LTM ended Q2 F2015 from $692 million in F2010 while return on invested capital has remained above 20%.

Saputo’s financial profile is supported by the Company’s significant and stable free cash-generating capacity and relatively conservative financial management. Free cash flow before changes in working capital has increased significantly to $471 million in the LTM ended Q2 F2015 versus $297 million in F2010. Saputo has made three large acquisitions in the past five years, financed with internally generated cash flow and incremental debt. The Company has also repurchased approximately $670 million of shares over this period. As a result, balance sheet debt has increased to $2.02 billion in Q2 F2015 from $422 million in F2010. This contributed to lease-adjusted debt-to-EBITDAR, lease-adjusted EBITDA coverage and free cash flow as a percentage of debt to move to 1.94 times (x), 13.5x and 23% from 0.75x, 17.7x, and 67% in F2010, respectively. Current credit metrics are more indicative of the Company’s long-term targets.

DBRS expects Saputo’s earnings profile will continue to be supported by its strong industry position, earnings stability and increasing global scale. DBRS believes organic revenue will grow in the low single digits through F2017, based on consumption from population growth, inflation and modest market share gains in the United States. Volume growth in Saputo’s international sector is expected to be primarily from exports to emerging markets from Australia and Argentina. The inclusion of Warrnambool’s results should account for incremental revenue of approximately $480 million in F2015. DBRS’s forecasts do not include the impact of future acquisitions, however, DBRS expects that Saputo will continue to be active on this front. EBITDA margins are expected to remain in the 11% range despite the effect of the lower-margin Warrnambool acquisition due to ongoing cost cutting initiatives. As such, DBRS expects F2017 EBITDA to grow at a pace consistent with revenue growth and reach almost $1.2 billion.

DBRS expects Saputo’s financial profile to remain relatively stable, based on its strong free cash flow generating capacity and steady financial management intentions. DBRS anticipates that free cash flow before changes in working capital to remain at a high level, and range between $500 million and $525 million through F2017, based on growing operating income, modest capital expenditure requirements and dividend increases in line with earnings growth. DBRS expects Saputo to use its free cash flow and some incremental debt to finance any potential acquisitions (most likely in the fragmented U.S. market). If leverage increases as a result of any large acquisition(s), DBRS expects Saputo to use future free cash flows to reduce debt such that net debt-to-EBITDA remains near the Company’s long-term target of 2.0x (equivalent to lease-adjusted debt-to-EBITDAR of approximately 2.2x), within a reasonable time frame. Should acquisitions fail to materialize, DBRS anticipates that Saputo will use its free cash flow and perhaps modest incremental debt to repurchase shares such that credit metrics remain stable. However, should lease-adjusted debt-to-EBITDAR increase materially above 2.2x for a sustained period of time, resulting from either weaker-than-expected operating performance and/or more aggressive financial management, the ratings could be pressured.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The applicable methodology is Rating Companies in the Consumer Products Industry (October 2014), which can be found on our website under Methodologies.

The full report providing additional analytical detail is available by clicking on the link below or by contacting us at info@dbrs.com.