DBRS Downgrades Saputo Inc. and Removes Ratings from Under Review with Negative Implications

DBRS Limited (DBRS) downgraded the Issuer Rating and Senior Unsecured Notes rating of Saputo Inc. (Saputo or the Company) to BBB (high) from A (low), both with Stable trends; following the completion of the acquisition of all shares of Dairy Crest Group plc (Dairy Crest; the Acquisition) for GBP 975 million. This action removes the Company’s ratings from Under Review with Negative Implications, where they were placed on February 26, 2019, when Saputo announced that it had entered into an agreement to undertake the Acquisition. The Under Review with Negative Implications status reflected DBRS’s view that the Acquisition would be debt funded and could increase the Company’s financial leverage to a level no longer acceptable for the previous A (low) ratings.

On April 15, 2019, Saputo announced that the Acquisition was financed through funds drawn on a new bank term loan facility. As a result, DBRS estimates that the Company’s balance sheet debt will increase to about $4.5 billion from approximately $2.5 billion as at December 31, 2018. This would result in lease-adjusted debt-to-EBITDAR of about 3.5 times (x), which is consistent with the BBB rating category (versus 2.2x in the last 12 months (LTM) ended Q3 F2019). The downgrade reflects DBRS’s view that the increase in financial leverage outweighs the moderately positive benefits to the business profile from increased size and scale, as well as enhanced geographic and product diversification. Notably, DBRS only downgraded the rating by one notch on account of Saputo’s free cash-generating capacity and DBRS’s expectation of deleveraging in the near to medium term.

The acquisition of Dairy Crest, a leading dairy processor, gives Saputo presence in the U.K. market, thereby expanding its scale and strengthening its geographic diversification. In the LTM ended September 30, 2018, Dairy Crest generated revenue of approximately GBP 460 million and EBITDA of GBP 90 million. Following the acquisition, DBRS estimates that Saputo will generate revenue and EBITDA of approximately $14.0 billion and $1.4 billion, respectively, in F2020. EBITDA is forecast to increase toward $1.45 billion in F2021, driven by organic growth.

DBRS expects Saputo’s operating income to trend in line with earnings, averaging around $1.0 billion to $1.1 billion in the near to medium term. Capital expenditures are expected to average around $350 million over the next two fiscal years. This forecast is inclusive of Dairy Crest’s planned GBP 85 million expansion of its cheese factory over the next three years, as well as Saputo’s continued investment in strategic projects aimed at increasing plant capacity and the implementation of the Company’s enterprise resource planning system. Cash outlays relating to dividends are forecast to be in the range of $240 million to $260 million per year, as the Company continues to target a dividend payout ratio of 30% to 35% of net earnings. As a result of the above, DBRS expects Saputo to generate free cash flows after dividends of between $400 million and $550 million in both F2020 and F2021. DBRS believes that the Company will apply free cash flows primarily toward debt reduction such that leverage drops below 2.75x in F2021, which is considered to be acceptable for the BBB (high) rating category. However, should Saputo generate lower-than-expected operating income, undertake further debt-financed acquisitions and/or not deleverage its balance sheet such that lease-adjusted debt-to-EBITDAR remains above 2.75x for a sustained period, the ratings could come under pressure.

Saputo’s ratings are supported by its leading market position, diversification of operations by distribution channel and geography, and strong free cash flow generation. The ratings also reflect that Company’s exposure to volatile commodity prices while operating in a highly competitive industry; and the risks associated with the mature markets in which Saputo operates, all of which are highly regulated.

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 & Criteria.

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.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada