DBRS Morningstar Confirms Saputo Inc. at BBB (high), Stable Trends

DBRS Limited (DBRS Morningstar) confirmed Saputo Inc.’s (Saputo or the Company) Issuer Rating and Senior Unsecured Notes ratings at BBB (high), with Stable trends. The rating actions reflect DBRS Morningstar’s expectation that Saputo’s earnings profile will remain within the BBB (high) rating category over the medium term, despite the stress on near-term earnings as a result of the Coronavirus Disease (COVID-19) pandemic. Saputo’s current ratings continue to be supported by its leading market position, diversification of operations by distribution channel and geography, and strong free cash flow generation. The ratings also continue to reflect the Company’s exposure to volatile commodity prices, the highly competitive industry, and the risks associated with the mature markets in which Saputo operates, all of which are highly regulated.

In F2021, DBRS Morningstar believes that Saputo’s topline will be pressured by the contraction in demand from the food-service channel due to the restrictions placed on onsite dining in its key operating markets, which will likely more than offset earnings growth from the retail channel. Although DBRS Morningstar’s outlook will remain fluid as the coronavirus pandemic unfolds, F2021 revenue is currently forecast to be $13.8 billion compared with $14.5 billion in the last twelve months (LTM) ended December 31, 2019 (Q3 F2020), which reflects a deteriorating first and second quarter followed by stabilization in the second half of the year. EBITDA margins are expected to contract as weaker consumer spending drives a shift in product mix from premium to inexpensive products. Furthermore, DBRS Morningstar anticipates the impact of commodity price volatility will more than offset benefits from efficiency improvements. As such, DBRS Morningstar forecasts EBITDA to contract to $1.2 billion in F2021 from $1.5 billion in the LTM ended Q3 F2020. While Saputo’s earnings should begin to improve over the medium term, DBRS Morningstar believes that the Company could remain challenged to recover earnings to the levels reported in the LTM ended Q3 F2020 due to a weaker macro-economic environment.

DBRS Morningstar believes that the near-term decline in operating income and corresponding contraction in free cash flow (FCF) will weaken Saputo’s financial profile and key credit metrics. FCF after dividends and before changes in working capital is forecast to contract to $290 million in F2021 from approximately $390 million in the LTM ended Q3 F2020. The Company has no debt maturities in F2021 and is expected to preserve FCF for near-term operating liquidity requirements. As such, DBRS Morningstar forecasts leverage to weaken beyond the 2.75 times (x) level considered appropriate for the current BBB (high) rating. The maintenance of the Stable trend over the medium term would require leverage to improve below 2.75x, based primarily on the recovery in operating income. A negative rating action could result if the operating performance deteriorates well beyond current expectations, whether or not the Company uses capital conserving measures to improve credit metrics through debt reduction. Additionally, any debt-funded acquisitions in the current environment could also lead to a negative rating action. Conversely, DBRS Morningstar believes that a positive rating action is unlikely in the current environment, due to the uncertainty surrounding the coronavirus pandemic.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

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

The principal methodologies are Rating Companies in the Consumer Products Industry (August 15, 2019) and DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Relationships (November 25, 2019), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

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 [email protected].

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

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

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