Saputo will not realise a key 2025 profit target as the Canadian dairy major encounters waning consumer demand and continuing “market headwinds”.
Despite the “positive carry-over effect” of pricing, Saputo’s first-quarter revenue in the 2024 financial year fell 2.8% to C$4.2bn ($3.1bn). Two months after president and CEO Lino Saputo Jr. emphasised a commitment to achieving an annual adjusted EBITDA target of C$2.125bn by fiscal 2025, it will not be delivered according to plan.
Even though adjusted EBITDA rose 4.3% to C$362m in the three months to 30 June, Mr Saputo painted a pessimistic view amid “significant market headwinds and lower consumer demand”.
Presenting the results last week, he said: “The first quarter began largely as we had anticipated. We experienced a drop in global demand and significant volatility in the US and the global commodities markets. This recent trend has persisted, which confirms our cautious stance on the macro-environment and the consumer, particularly as it relates to customer spending levels and behaviour.
“While it would be premature to predict when market conditions are expected to stabilise, we believe they are transitory. We will focus on the long-term earnings potential of our business.”
Refraining from elaborating on when the EBITDA profit target might be met, Mr Saputo added: “We remain confident in our operating model and global strategic plan initiatives designed to deliver C$2.125bn in adjusted EBITDA annually.
“However, given the current environment, we no longer expect to achieve our adjusted EBITDA fiscal 2025. We do nonetheless anticipate dairy markets to stabilise over time.”
Finance chief Maxime Therrien explained on the call with analysts that first-quarter EBITDA growth was spurred by “the carry-over impact of higher average selling prices, driven by previously announced pricing initiatives, cost containment measures, lower logistics costs, and efficiency and productivity initiatives aimed at minimising the effect of [the] macro-economic conditions”.
He added, however: “These were partially offset by a C$14m negative impact to [the] US market factor, mainly due to the unfavourable realisation of cheese inventory and a C$10m inventory write-down resulting from the decrease in certain market selling prices. Furthermore, lower sales volume negatively impacted operational efficiencies and the absorption of fixed costs.”
“Depressed” pricing
Mr Saputo was reluctant to expand on the volume impact for competitive reasons but was pressed for more detail on the profit miss, to which he emphasised the C$2.125bn target is “very much intact”.
Pricing in international markets “is a little bit depressed right now because of the international consumer sentiment”, he said, adding China is “really not being on the buying market”.
He explained: “We’re extremely confident in our earnings power for the business. It’s just the unpredictability of the elements relative to pricing relative to consumer sentiment that are creating a push out of our target date but the target number remains unchanged. And our confidence in that is unchanged.
“The visibility is the issue. Six weeks ago, we were talking about a US block at C$1.30. Today, we’re talking about a US block of C$1.96. Those are massive, massive swings that, historically, we had never seen before.
“Where we sit right now with the international demand and pricing, where we sit right now relative to the swings that we’ve seen just in the last two months in the US, creates an unpredictable environment.”
Asked for an outlook on further pricing, CFO Therrien said: “At the moment, we are, if I could say it this way, our head is above water. We’re monitoring all the costs that are coming to us. Should we feel we need to, we will, but at this time we feel comfortable and that we’re acting responsibly on the market,” he said.
However, Mr Saputo ruled out any price cuts. “When we think about our domestic markets in all geographies, whether that would be Canada, [the] United States, Argentina, Australia and the UK, we don't have the intention of bringing price down.”
Carl Colizza, Saputo’s divisional president and chief operating officer for North America, stepped in to field a question on where the business was feeling the impact of waning consumer sentiment the most.
“If the question is specific to the US, what I would say is that, although consumer sentiment is lower than it had been in more recent years, the demand side in the US is not as soft as it is globally,” he explained.
“If we look truly at overall demand and sort of in sequence, global demand is where we see the softest of consumer sentiments, specifically in the China sector.”
It was a mixed bag for Saputo’s first-quarter revenues by region. In Canada, they rose 9% to C$1.2bn and were up almost 12% in Europe at C$252m. However, in the US they fell 6.8% to C$1.9bn and were down 5.2% in the international segment at C$868m.
