DBRS Morningstar Confirms Saputo Inc.’s Ratings at BBB with Stable Trends

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and the rating on the Senior Unsecured Notes of Saputo Inc. (Saputo or the Company) at BBB, both with Stable trends. The rating confirmations acknowledge that the Company's operating performance during the fiscal year ended March 31, 2023, exceeded DBRS Morningstar's expectations amid a challenging operating environment. The Stable trends reflect DBRS Morningstar's expectation that, while the uncertain macroeconomic backdrop could pressure Saputo's operating performance, its overall credit risk profile will remain strong for the current rating category in the near term and strengthen in the medium term. Saputo’s current ratings continue to be supported by its leading market position, diversification of operations by distribution channel and geography, and strong free cash flow (FCF) generation. The ratings also continue to reflect the Company’s exposure to volatile commodity prices, the highly competitive industry, and the risk associated with the mature geographies in which Saputo operates, all of which are regulated.

DBRS Morningstar forecasts revenue to increase to approximately $18.0 billion in F2024 from $17.8 billion in F2023 as previous pricing initiatives, coupled with further potential pricing increases, should more than offset modest volume declines. Conversely, DBRS Morningstar expects volumes to recover and grow in F2025 and, as such, forecasts revenue to increase above $18.6 billion. DBRS Morningstar believes that the network optimization initiatives as outlined in Saputo's Global Strategic Plan (Strategic Plan), coupled with contributions from pricing initiatives, should more than offset commodity and inflationary cost pressures in F2024, resulting in modest EBITDA margin growth. These initiatives should drive further EBITDA margin growth in F2025. Consequently, DBRS Morningstar projects EBITDA to grow modestly above the F2023 level of approximately $1.6 billion in F2024 and toward $1.9 billion in F2025.

In terms of the financial profile, DBRS Morningstar projects FCF after dividends but before changes in working capital to be approximately $400 million in F2024 and $500 million in F2025 as (1) operating cash flows continue to trend in line with earnings; (2) capital expenditure remains elevated as Saputo continues to invest in network optimization, capacity expansion initiatives, and automation per its Strategic Plan; and (3) the dividend policy remains consistent with prior years. DBRS Morningstar believes that the Company will continue to use its FCF after changes in working capital and principal lease payments, and proceeds from its Dividend Reinvestment Plan participation, in a balanced manner. DBRS Morningstar does not expect the Company to undertake material debt-funded acquisitions in the near term, but instead believes that Saputo will continue to focus on the execution of its Strategic Plan. As such, DBRS Morningstar forecasts debt-to-EBITDA to improve modestly below the F2023 level of 2.7 times (x) in F2024 and to improve further by F2025.

In light of the current uncertain macroeconomic backdrop, DBRS Morningstar could take a positive rating action should debt-to-EBITDA improve below 2.5x on a normalized and sustainable basis, based on growth in operating income. Although unlikely, should debt-to-EBITDA increase meaningfully above 3.25x as a result of weaker-than-expected operating performance and/or more aggressive financial management, the ratings could be pressured.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/416784 (July 4, 2023).

Notes:
All figures are in Canadian dollars unless otherwise noted.

DBRS Morningstar applied the following principal methodology: Global Methodology for Rating Companies in the Consumer Products Industry (https://www.dbrsmorningstar.com/research/417460; July 21, 2023).

The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

A description of how DBRS Morningstar analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/397223.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at info@dbrsmorningstar.com.

The credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

DBRS Morningstar had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar trends and credit ratings are under regular surveillance.

Information regarding DBRS Morningstar credit ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

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