DBRS Confirms Saputo Inc. at A (low), Stable

DBRS Limited (DBRS) has today confirmed the Issuer Rating and Senior Unsecured Notes rating of Saputo Inc. (Saputo or the Company) at A (low) with Stable trends. The ratings continue to be based on the Company’s strong market position, geographic diversification and conservative financial management. The ratings also consider intense competition, exposure to commodity price volatility and risks of regulatory changes.

Earnings have been pressured recently because of tightening of the cheese-milk spread in international markets as well as intensifying competition in Canada, which DBRS believes is in conjunction with consolidation among its customer base. Despite increased revenues mainly from acquisitions, EBITDA has remained relatively flat year over year at $1.05 billion for the last 12 months (LTM) ended Q1 F2016. Saputo continued to generate strong free cash flow which it used to make $167 million of acquisitions and repay $221 million of debt. As such, lease-adjusted debt-to-EBITDAR, lease-adjusted EBITDA interest coverage and free cash flow as a percentage of debt remained relatively flat at 1.88 times (x), 13.6x and 18%, respectively, for the LTM ended Q1 F2016.

DBRS believes that organic revenue will grow in the low-single digits in F2016 based on population-driven consumption growth in Canada and the United States, inflation and modest market share gains in the United States. Volume growth in Saputo’s International Sector is expected to be in the mid-single digits as a result of exports to emerging markets from Australia and Argentina. EBITDA margins should remain flat in the near term due to the expectation that selling prices in the international cheese and dairy ingredient markets will remain depressed and competition in Canada will remain intense. As a result, DBRS believes that F2016 EBITDA will grow in line with revenue growth and reach almost $1.1 billion. DBRS notes that the reported Trans-Pacific Partnership agreement does not currently affect Canada’s dairy supply management system. DBRS believes that the agreement could have a modestly negative impact on Saputo’s earnings profile, but further allotment of Canada’s dairy production to foreign producers in the future could have a more material effect on earnings quality.

DBRS anticipates that free cash flow will remain strong at approximately $450 million in F2016 as operating cash flow increases in line with earnings, capital expenditures increase slightly because of the Company’s Enterprise Resource Planning implementation and the dividend payout ratio remains stable. DBRS expects Saputo to use its free cash flow and some incremental debt to finance acquisitions, which would most likely be 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 flow 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; 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, which can be found on our website under Methodologies.

The full report providing additional analytical detail is available by clicking on the link under Related Research at the right of the screen or by contacting us at info@dbrs.com.