BUSINESS

Stagnant snack cake sales to blame: Saputo loses $2.6 million in Q4

06/05/2012 04:37 EDT | Updated 08/05/2012 05:12 EDT
MONTREAL - Despite stagnant snack cake sales, Canadian dairy and cheese giant Saputo says it has no plans to sell its struggling bakery division after taking a $125-million writedown that pushed its overall fourth quarter to a loss.

"Our focus right now is to continue to improve that division and it is not for sale," CEO Lino Saputo Jr. said Tuesday in a conference call.

Efforts over the last two to three years have allowed the small division to at least keep its "head above water," he added.

Montreal-based Saputo said it continues to work hard on increasing sales volumes to the United States, but the non-cash goodwill impairment reflects stagnating market growth for snack cake sales.

Saputo (TSX:SAP) operates Vachon, Canada's top snack cake brand, and the maker of such desserts as Jos. Louis, May West, Passion Flake and Ah Caramel.

The bakery division's $134 million of annual sales last year represented less than two per cent of the $6.9 billion of revenues dominated by Saputo's dairy operations in Canada, the United States and Argentina.

The writedown caused Saputo to lose $2.6 million in the final quarter of its fiscal year.

Excluding the one-time move, Saputo's earnings dipped to $122.4 million from $126.6 million of profits in the year-earlier quarter.

The adjusted earnings amounted to 61 cents per share — a penny below analyst estimates compiled by Thomson Reuters.

Revenues increased four per cent to $1.7 billion, from $1.6 billion a year ago.

Saputo said Tuesday that its earnings in Canada, Europe and Argentina increased by $9 million during the quarter due to favourable dairy markets and volume increases in South America, partially offset by higher ingredient costs in Canada.

The division's revenues increased by nearly 10 per cent to $1 billion. It was helped by price increases resulting from the higher cost of milk in Canada and Argentina.

A decrease in the average "block" market for cheese and higher cost of milk was largely responsible a decline in U.S. dairy earnings to $75.3 million from $81.4 million a year ago. However, it benefited from operational efficiencies and the acquisition of DCI Cheese Company, which helped to add $131 million in revenues to $658.9 million.

Earnings in Saputo's grocery segment increased by $3.6 million, mainly from higher sales volumes and lower operating costs. Revenues grew 9.7 per cent to $35 million.

For the full year ended March 31, Saputo earned $380.8 million on $6.9 billion of revenues, down from $450.1 million on $6 billion of sales a year earlier.

Adjusting for the writedown, earnings increased 9.8 per cent to $505.8 million or $2.47 per share, compared to $461.7 million or $2.21 per share in fiscal 2011.

The results were largely in line with forecasts. The company was expected to earn 62 cents per share in adjusted earnings in the quarter on $1.65 billion of revenues, and $2.46 per share on $6.8 billion of revenues for the year.

"Despite challenging market factors we had a good year," the chief executive told analysts.

Saputo said he expects fiscal 2013 to continue to be challenging.

It plans to target volume growth in Canada in the cheese and dairy ingredient categories and pursue opportunities in the value-added milk market such as adding flavoured products. Saputo plans to invest in specialty cheeses to "maximize exposure across Canada, with coast-to-coast distribution capabilities."

Saputo said it continues to evaluate ways to reduce excess production capacity at its plants in Canada, Europe and Argentina. But he told analysts there is limited opportunity to consolidate manufacturing production in Canada.

"In terms of manufacturing presence we're pretty well as good as we can be given the limitations of the quota system that we have in Canada," he said.

"Where there might be some further opportunities for consolidation perhaps might be in logistics, warehouse distribution and those are the types of ideas and plans that we're discussing."

He didn't specify where changes could take place. In an interview last August, Saputo said the company was looking at consolidating its Quebec distribution centres, much like it did a year earlier in Ontario.

Saputo and third-party companies operate five distribution centres in Quebec.

Irene Nattel of RBC Capital Markets said Saputo's results were "solid" in light of commodity headwinds.

"U.S. segment EBITDA ahead of forecast which should be good news for capital markets that typically focus more on US segment results," she wrote in a report.

On the Toronto Stock Exchange, Saputo's shares closed up one cent at $41.73 in Tuesday trading.