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

DBRS Limited (DBRS) confirmed the Issuer Rating and the Senior Unsecured Notes rating of Saputo Inc. (Saputo or the Company) at A (low) with Stable trends. The confirmations acknowledge Saputo’s debt reduction since the Murray Goulburn Co-operative Co. Limited (Murray Goulburn) acquisition (the Acquisition) and expectations that earnings will improve from the weaker-than-anticipated results as of the first half (H1) of F2019. The ratings continue to consider the Company’s strong market position, geographic diversification and strong free cash flow generation as well as the intense competitive environment, exposure to commodity price volatility and the risks of regulatory changes.

Despite the Acquisition, Saputo’s earnings before interest, taxes, depreciation and amortization (EBITDA) decreased to $626 million in H1 F2019, from $685 million in H1 F2018, driven by higher administrative costs and lower dairy ingredient and cheese market prices, due to an oversupply of milk solids. For the last 12 months (LTM) ending Q2 F2019 free cash flow (before changes in working capital) was $325 million for LTM Q2 F2019 versus $337 million in F2018. Credit metrics weakened and pro forma the full impact of the Acquisition, credit metrics for LTM Q2 F2019 were 2.1 times (x) lease-adjusted debt-to-EBITDAR and 21.3x lease-adjusted EBITDAR coverage.

DBRS expects Saputo’s revenue to grow in the mid- to high teen range for F2019, due to the full contribution of Murray Goulburn. For F2020, DBRS believes revenue will grow in the low-single-digit range in Canada and the United States and the mid-single-digit range for International. EBITDA margins are expected to improve in H2 F2019, as DBRS expects lower dairy ingredient and cheese market prices will persist and Saputo will realize the impacts of its acquisitions and cost controls. DBRS expects EBITDA margins to improve in F2020 as Saputo can raise its dairy ingredient and cheese market prices. As such, DBRS expects EBITDA in F2019 will grow modestly to $1.3 billion and to $1.4 billion in F2020.

DBRS expects free cash flow to remain strong at $380 million in F2019 and $400 million in F2020, as cash flow from operations increases in line with operating income, capital expenditure is at $365 million in F2019 and $405 million in F2020 from strategic projects and the dividend payout ratio remains stable. DBRS expects that Saputo will continue to allocate its free cash flow toward debt reduction and acquisitions. 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, resulting from weaker-than-expected operating performance and/or further debt-financed acquisitions, the ratings could be pressured.

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

The principal methodology is Rating Companies in the Consumer Products Industry, which can be found on dbrs.com under Methodologies.

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 under Related Documents or by contacting us at info@dbrs.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

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