Saputo not worried by prospect of new trade deals with Europe and Asia

MONTREAL – Canadian cheese giant Saputo says it’s not worried that trade talks with Europe and Asia will result in additional foreign competition that could hamper its profitability.

“I think that we have an ability to respond quite rapidly and react quite effectively to any changes in system,” CEO Lino Saputo Jr. said Wednesday when asked by an analyst during a conference call about the impact of such political efforts.

He said the federal government’s priority is to reach a deal with Europe that would change the dynamics of the Canadian system by increasing quotas of imported dairy products. Europeans want the threshold for exports to nearly double, adding 10,000 tonnes annually to the 13,500 tonnes currently permitted.

The Quebec government opposes any increase and Canada’s largest dairy co-operative also criticized the proposed increase Wednesday.

“It would be bad news for our industry,” Agropur president Serge Riendeau said at a news conference following its annual meeting in Montreal.

He said the best way for governments to live up to their commitments to support the industry is by controlling imports.

“Each extra tonne that enters (Canada) will be a tonne that won’t be produced with milk from Canadian producers and which will not be transformed by our industries in Canada.”

But Saputo refrained from joining the chorus of opposition to Europe’s efforts, or another set of trade negotiations — the Trans-Pacific Partnership — that could threaten Canada’s dairy supply management system.

He said the Montreal-based company’s recent US$1.45 billion acquisition of U.S. dairy producer Morningstar positions Saputo best to take advantage of any trade changes that would spur increased trade between Canada and the United States.

“There is no company better suited than Saputo to take advantage of north-south trade as opposed to east-west trade,” he said.

Canada’s largest dairy processor (TSX:SAP) could take advantage of its large position in the United States to reduce costs by eliminating duplicative operations and save money as the price of milk is reduced to world levels.

Saputo added the company has the financial resources to take advantage of whatever changes occur, but said it can’t really plan because it’s not clear what system Canada would adopt to replace the current supply system model.

Earlier, the company reported that it eked out a only slightly higher profit and revenue in its latest quarter, coming in slightly below analyst estimates.

The cheese, dairy and bakery company had $130 million or 65 cents per share of net income, a penny short of analyst estimates.

Its revenue was $1.8 billion, about $100 million less than the consensus estimate compiled by Thomson Reuters.

The profit was up $200,000 or one cent per share from a year earlier while revenue was up by just $4.1 million from $1.796 billion.

The chief executive said he’s not troubled by the limited growth in its quarterly results of late.

“Perhaps historically this year has not been as prosperous as other years but I’m looking at it from a longer-term perspective and I’m glad my father and my grandfather chose this industry.”

He said the company will primarily grow through acquisitions and Morningstar, which specializes in specialty dairy products such as ice cream, coffee creamers and cottage cheese, opens the doors to additional opportunities in the United States.

Saputo said the company has the financial flexibility for one or several deals anywhere in the world totalling up to about $2.5 billion.

Its Canadian, European and Argentina segments’ profit decreased nearly 2.8 per cent to $128.1 million despite a 1.5 per cent lift in revenues to almost $1.06 billion.

The U.S. segment earned $81.4 million on $708.9 million of sales, compared to $72.7 million on $722.7 million of revenues a year ago.

A 20 cents per pound increase in the average block price for cheese and favourable market factors offset volume decreases. The strengthening of the Canadian dollar decreased revenues by about $30 million.

Saputo said it is trying to offset the impact of a temporary increase in California’s milk pricing formula announced last month that will increase some types of milk through the end of May and reduce operating profits by US$4 million.

The bakery division earned $3 million on $34.1 million of sales, compared to $2.7 million on $31.6 million of revenues in the prior year.

The bankruptcy of Twinkies maker Hostess Brands is opening new sales opportunities that are encouraging in the U.S., Saputo added.

“The bleeding has stopped and I think there’s quite a bit of progress that’s been made in the bakery division.”

Martin Landry of GMP Securities described the results as “somewhat lacklustre.”

“For the second quarter in a row, the EBITDA derived from the Canada/Europe/Argentina operations were down year over year,” he wrote in a report.

Faced with challenging conditions in Canada and the United States, he said investors will likely focus on Saputo’s acquisition of Morningstar and its integration plan.

“We continue to believe that synergies will be limited given that there will be no merger of manufacturing operations.”

The company is Canada’s largest dairy processor and the 12th biggest in the world and producer of several brands of snack cakes.

On the Toronto Stock Exchange, Saputo’s shares closed down $1.12, or 2.2 per cent, to $49.70 in Wednesday trading.

— With files from Sylvain Larocque.