Saputo Earnings Call Nuggets: Morningstar Plans and Volumes

Saputo, Inc. (NYSE:SAP) recently reported its third quarter earnings and discussed the following topics in its earnings conference call.

Morningstar Plans

Irene Nattel – RBC: Just following up on your Morningstar comments, Lino, I was wondering if you could just spend a couple minutes and talk a little bit about the Morningstar plans. Where in your second visit, you saw specific areas that maybe you’re just doing a little bit differently and a little bit more efficiently than those plants do and perhaps vice-versa and how should think about Morningstar as part of Saputo on a go forward basis?

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Lino A. Saputo, Jr. – President and CEO; Vice Chairman of the Board: That’s actually a great way to start, because we’re really excited about this acquisition. I’ve told the employees while I had the opportunity to visit our plants the second time around that I believe we have got that jewel in the old Dean Foods system. Operationally, I think these clients and we identify this in our due diligence process that the plants are running actually quite well. In terms of real low hanging fruit for opportunity for improvement, there aren’t all that many to make. Of course there are some opportunities I think on the corporate side, sharing some services like accounts payable and account receivable and human resource structures and things like that. I’m sure there is a lot that we can benefit from by bringing the Saputo Cheese USA and the Morningstar functions together. But from an operational perspective, the plants were running quite well. Where we see the value in this business is now, we’ve got two different platforms in the U.S., one which is a cheese platform that still has a great opportunity for growth, growth either organically and/or through acquisitions, and now a new platform with products that are dairy-oriented products, but not products that we had been historically producing or processing in the U.S., things like the ice-cream mixes to some customers that are very, very familiar to us, north of the border. When you look at creamers and non-dairy creamers, those products are very familiar to us north of the border. Now we have those products in those plants and that infrastructure in the U.S. Our Sour cream, cottage cheese, again we are leaders in Canada in those categories of products and now with the Friendship brands, we have an opportunity to sell those products to retail in the U.S. So again if you are thinking about synergies or cost reductions, perhaps not a lot of opportunity as we may have seen in, say the Land O’Lakes or Alto acquisition. But in terms of opportunity or just ability for us to consider other assets in the U.S for acquisitions that would be easy tuck into either Morningstar or Saputo Cheese USA. I think we’ve just opened up the dairy world for ourselves to be able to consider other acquisitions and more product categories.

Irene Nattel – RBC: And just clearly also in your opening remarks you once again highlighted acquisition, so should we be expecting more tuck-in acquisitions either served on the Morningstar side or Saputo USA and how should we think about the DCI platform and where that all fits in now?

Lino A. Saputo, Jr. – President and CEO; Vice Chairman of the Board: Again with this $1.45 billion acquisition we still maintain the flexibility of anywhere from $2 billion to $2.5 billion of acquisition funds. So, if there is an acquisition available to us whether that would be in the U.S. or anywhere else one acquisition or multiple acquisitions we still have that appetite to make those types of acquisitions. Again our management team is well aware of our desire to grow through acquisitions. I think again with the structure of Morningstar we inherit an incredible management team. President, Kevin Yost is onboard with us. His entire management team is onboard with us and again we have identified to the entire management team that if there are other opportunities for us to make acquisitions in the U.S. that would further complement Morningstar we are prepared to make those acquisitions. The same could be said for Saputo Cheese USA. Terry Brockman and his team there are very well aware that we have an appetite to grow. We are not afraid to invest in our business whether that would be through capital expenditure, return on investment type of initiatives or again through acquisitions for specialty oriented platforms that would further complement DCI. So, again I think as we move forward we further strengthened our platform. I have been asked the question many times before how do I see Saputo’s future; I see as bigger, I see as better and I see us stronger, and I’m even more optimistic today than I have ever been before in terms of our ability to materialize other acquisitions and continue to grow every single one of our platforms.

Irene Nattel – RBC: But before I give it up, one other question on a related but different topic, and that’s volumes in the U.S. during the quarter. If we back out the movements in the cheese prices and the FX, it looks like volumes were down kind of low to mid-single-digits. I’m just wondering what was going on in the quarter and whether that’s something that we on a constant business basis that is likely to persist in the current and future quarters?

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Lino A. Saputo, Jr. – President and CEO; Vice Chairman of the Board: That’s a very good analysis, Irene, and you’re spot on the volume in the U.S. business has been, Saputo Cheese USA. I would say it’s mostly related to retail oriented business. We saw food service increased over the course of last quarter and our ingredient business is pretty well stable. So, most of the decline was related to retail business. I think some of that is cyclical. That perhaps could come back over the next few quarters. We are not overly concerned about the volume, again we’re not – how can I say this in the right way, we’re not volume-oriented we’re profit-oriented as a primary focus, but right now there are no signs that are overly concerning for me.

Irene Nattel – RBC: So you don’t think that, you think it’s something more specific to the market as opposed to your position within the market?

Lino A. Saputo, Jr. – President and CEO; Vice Chairman of the Board: I would think so, yes.


David Hurley – Credit Suisse: Just want to ask a little bit about those volumes. You talked you are not too concerned about it. Can you maybe characterize, is it a question of pricing. The pricing has gone up demand has come down, some kind of elasticity. Could you give us a little bit more detail around that?

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Lino A. Saputo, Jr. – President and CEO; Vice Chairman of the Board: If I look at the U.S. marketplace, there again, shifts between the retail and the food service business on an ongoing basis, then again sometime has to do with the economic factors, sometimes it has to do with factors non-relevant to economics and I guess the trends of patterns of consumers. On the food service side, we saw the volume increase. We saw the block market decrease and I’m not sure if there is a real correlation between on and the other. On the retail side, the block market decrease really did not have a whole lot of bearing on retail pricing, but there was a lot more competition related to retail sales. Again we, we’ve got great products, great brands, great diversification in terms of our overall product portfolio and I certainly don’t want to use Hurricane Sandy as an excuse, but it did have a little bit of an impact on us in terms of allocation of product coming in from overseas in a period where it is the most I guess the most active period for us which is the holiday period. I’m not going to use that as an excuse. So, the overall sales have been down, but I would suspect that most of that would come back.

David Hurley – Credit Suisse: And just on efficiency initiatives you are certainly aware of what you are working on today. So, you foresee yourself – do you have some kind of projects in the pipeline that you expect will commence – that are new that would commence in the next fiscal year?

Lino A. Saputo, Jr. – President and CEO; Vice Chairman of the Board: Absolutely, we are currently in our budgeting process. Our fiscal year end is March 31 and usually we start our budgeting process January and February and there are always ideas and opportunities for us to be that much more effective and that much more efficient. Sometimes it requires some capital investments and other times they don’t it is just the question of doing things little bit differently and perhaps more proactively; this year little different than years in the past. I think we have more idea than we have time to execute then, so I am not saying that we’ve come to the end of the line here, I think, there is still quite a bit of road here for us to make further improvements in just about all of our operations and all of our divisions.

David Hurley – Credit Suisse: And just on international trade talks whether it would be Trans Pacific, Europe or otherwise South America. Can you give us any thoughts on that and what you’ve heard and how it may impact your business?

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Lino A. Saputo, Jr. – President and CEO; Vice Chairman of the Board: We probably don’t have more information on you might be having. We read the same papers you would read. What I am understanding though is that Feta is high on the priority list for our government. Feta meaning that there would be a trade agreement with Europe. That could change the dynamics in terms of the import allocations or the quantities allocated in (Koda) for important dairy products. Again, we don’t have any more information there anybody out there. I think that we have an ability to be able to respond quite rapidly and react quite effectively to any changes in the system, but my understanding is that Feta is pretty high up there in terms of the list priority list for our government. Following Feta, there are other discussions which is TPP, Trans-Pacific Partnership, which would I would say have an effect or could have some sort of an effect on Canada’s milk supply management system. But there again it’s all theoretical. We don’t have more insight than anybody else. All I can say is whatever happens either with Feta or the TPP, especially now with the assets we have with Morningstar there is no company better suited than Saputo to take advantage of North South trade as opposed to East West trade. And if there is a change in the system, I know we have the resources both infrastructure as well as capital resources and human resources to be able to take the right decision at the right time to take advantage of whatever changes occur.

David Hurley – Credit Suisse: I guess I’m being a little sneaky by asking this. But do you spend more of your time and resources in terms of how you’re aligning system and preparing for the day that potentially changes come, particularly North South of the Canadian-U.S. border.

Lino A. Saputo, Jr. – President and CEO; Vice Chairman of the Board: Not any more than usual and the only reason for that is because we don’t know what shape or form that will take. For instance, if there is a dissolution of milk supply manage system in Canada what kind of system would Canada adopt, would it be U.S. style system, will it be an Argentinian style system, will it be an Australian style system we don’t know. So, it’s tough to start to coordinate or organize ourselves for one of four or five different potential systems without really understanding what the impact was. Again, we deal extremely well in Canada. We deal extremely well in the U.S. We’re very, very, very comfortable in Argentina. Any one of those system would suit us and we would just take and make the best of it.

David Hurley – Credit Suisse: Just final question, given that and the last two acquisitions in the U.S. haven’t necessarily generated huge amount of operational synergies as you’ve mentioned but, how hopeful are you that you can layer in other assets to change that where you can leverage this platform?

Lino A. Saputo, Jr. – President and CEO; Vice Chairman of the Board: Very hopeful. I mean if I look at where we’re placed in the U.S. specifically, on the cheese side, we’re less than 10% of the cheese manufactured and sold, that would be either commodity or specialty, so and I think that there still are some great opportunities for further consolidation. Again, if I look at the Morningstar assets and what we’ve acquired and perhaps some other potential, other companies that are out there making similar type product, I think there could be some neat tuck-ins that could make us again bigger, better and stronger. So, I’m fairly optimistic and again I’m not going to give a timeframe here, because we’re looking at the long haul, we’re not looking at the short term. I think that there will be some opportunity for further acquisition and further consolidation within the U.S.