LAVAL, Que. – Dairy and cheese giant Saputo boosted its dividend Tuesday but warned that stagnant domestic growth and intense competition will eat into the benefits of a recent acquisition in the United States.
“We’re used to seeing year over year increases in profit, but Canada is very, very challenging and we’re fighting every single day to keep our markets and to keep our margins so it will be a challenge going forward,” said chief executive Lino Saputo Jr. in an interview at the company’s annual meeting.
With limited per capita consumer growth for decades and several key players fighting to steal market share, Saputo has been fighting back to preserve its leading position.
The company cut costs by closing two Canadian plants last year and is opening a new large distribution centre in Montreal to replace several smaller facilities. Additional efforts could be considered over the coming year depending on volumes, cross-border shopping and competition, he said.
“I think the low-hanging fruit, we’ve picked them. Right now we don’t have anything else to announce but I guess we’ll have to be creative to see where else we can cut. Sometimes it could be just synergizing a couple of activities together.”
The Quebec-based company had also been expected to benefit from its US$1.45 billion acquisition in January of Morningstar Foods, a subsidiary of Dean Foods Company.
However, the most recent quarter also saw higher non-cash charges related to the Morningstar deal, as will as higher interest expenses. The company’s income tax rate was also higher than last year, rising to 29 per cent from 28.1 per cent.
Saputo (TSX:SAP) raised its dividend 9.5 per cent or two cents per share to 23 cents per share as it earned $136.7 million in the first quarter. This was up from $121.8 million for the same period last year.
The company earned 69 cents per diluted share, up from 60 cents a year earlier, on both a net and adjusted basis.
However, Saputo missed analyst forecasts as its adjusted profit was expected to surge to 73 cents per share, according to analysts polled by Thomson Reuters.
Saputo’s revenue did slightly better than analysts expected — rising to $2.17 billion in the three months ended June 30, up from $1.7 billion a year earlier and $2.05 billion in the quarter ended March 31.
Saputo said he is evaluating several acquisition opportunities but declined to say if any are imminent or will materialize. The company has $2.7 billion in financing to support one or several deals. The United States remains a focus for expansion, along with Latin America and Oceania.
“We have an appetite for acquisitions, but it has to be the right acquisition at the right time (and) at the right price.”
Even without a transaction, Saputo’s U.S. division hasn’t yet fully capitalized on Morningstar, which produces dairy and non-diary products, including creams and creamers, ice cream mixes, whipping cream, aerosol whipped toppings, iced coffee, half and half and value-added milk.
Saputo’s global expansion has reduced the contribution of its Canadian operations to about 48 per cent of revenues, from 85 per cent when the company went public. Those numbers should continue to dwindle, the CEO noted.
With a large processing capacity on both sides of the U.S. border, Saputo stands to prosper and adjust to stagnant consumption if the Canadian government adjusts the milk supply management system. But Saputo said it’s tough to make decisions while several trade deals remain unresolved.
“There is still a lot of uncertainty there and a lot of the rules of the game that have not been specified to us yet,” he said.
Earlier, Saputo reassured shareholders that the company’s future remains bright despite the challenges in Canada. He also said the company has turned around its Vachon operations and has no plans to sell the bakery division.
“What the future holds in five years or 10 years from now, I don’t know, but at this present time we’re holding onto that division and we’re going to continue to exploit its resources.”
Saputo is Canada’s largest dairy processor and among the top 10 in the world. Its products are sold in more than 40 countries.
On the Toronto Stock Exchange, its shares lost 45 cents at $47.24 on Tuesday.