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Saputo turns to loss on Australia dairy division impairment

Saputo booked a loss in its third quarter on the back of a C$265m ($196.8m) impairment charge related to the Canadian giant’s Australia dairy division.

Chairman, president and CEO Lino Saputo Jr. explained the non-cash impairment charge in Australia in the context of falling milk supply and a mismatch in cheese and ingredients prices.

“In performing our annual goodwill impairment testing, our dairy division Australia cash-generating unit (CGU) estimates of future discounted cash flow were reduced due to the increasing disconnect in the relationship between international cheese and dairy ingredient market prices and the farmgate milk price in the context of a declining milk pool in Australia.

“While there is still uncertainty in the near-term market dynamics, we are dedicated to doing everything we can to maximise the results of the division.”

Saputo has been “optimising” its manufacturing network in Australia, with the number of plants reduced to six from 11 but the CEO said the company’s “strategy remains unchanged”.

He added with respect to Australia: “We’ve continued to advance our network optimisation and we are benefiting from the positive impact from several streamlining activities completed over the last few quarters. The business remains focused on its domestic market with select key customers in the export market playing an important role.“

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By GlobalData

Mr Saputo also described, in the overall framework, the continuing “dynamic macroeconomic environment”, with a December devaluation in the Argentina peso and hyperinflation in that country also presenting headwinds.

While Saputo’s volumes rose in the quarter to 31 December, the CEO told analysts on a call that “volatile global dairy commodity markets and a challenge to [the] consumer were persistent themes in the third quarter, much like in the fiscal year to date”.

Saputo delivered a net loss of C$124m, compared to a C$179m profit a year earlier. Adjusted net earnings were also down at C$163m from C$221m, while adjusted EBITDA fell 16.9% to C$370m.

While third-quarter revenue dropped 7% to C$4.3bn, Mr Saputo said that “with most of the heavy lifting behind us, I remain very confident in our long-term strategy”. That entails reaching an adjusted EBITDA target of C$2.125bn by 2025, although in August he raised doubts over achieving it on schedule.

“While the consumer is still shopping with value-seeking behaviour, we are seeing clear progress in volume recovery across our business segments,” he said.

“As macroeconomic drivers impact the global economy and continue to drive commodity price volatility, we remain focused on managing the factors within our control and stabilising the business. Our priority areas include operational excellence, successfully executing the major capital projects underway, cost containment, and cash flow generation.”

Saputo is now seeing a “healthier balance” between price, mix and volume, and “markets are expected to stabilise over time”. Nevertheless, Mr Saputo explained “it is the speed of the recovery that remains unknown”.

Discussing the outlook for the rest of the year, the CEO said the market trends experienced in the third quarter are likely to continue.

“We expect the environment to remain volatile and challenging in the near term, from input costs to currencies to consumers and political dynamics,” he said.

“While global dairy commodity markets are not where we would like them to be, we remain focused on the factors within our control. Nonetheless, our confidence in the overall health of the business and our growth drivers remain unchanged.”

Fielding questions during a Q&A session with analysts last week, Mr Saputo also had a warning about the status and challenges faced by global dairy players, as was evident by a number of protests by farmers in some European countries in February.

“We are seeing a slowing milk production around the world and we see this in just about every dairy-producing country around the world,” he explained.

“The economics for dairy farmers are challenged. And there are a lot more pressures relative to ESG as well on dairy farmers and laws that they have to contend with. So the dairy farming community is resilient but the folks that are not as well invested or as efficient, are dropping off in terms of dairy farms and their contribution to milk production.

“We are seeing that the consumer is resilient as a whole in our domestic market but the international market still remains a big question mark.”

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