TD commentsEvent
Saputo reports Q3/F24 results February 8 after market close. We now forecast adjusted EPS (f.d.) of $0.41, down from $0.46 previously as USA market factors finished on a weak note, and we now build in a large inventory hit in Europe and temporary duplicative overhead costs in USA (through Q4/F24). These factors are expected to more than offset solid performance in Canada and Argentina, and strong execution on controllables in all geographies. LY was $0.53 and consensus is $0.44 (range: $0.41-$0.49). Our Q3/F24E EBITDA is $388mm, 13% below LY's record $445mm and consensus of $402mm.
Impact: SLIGHTLY NEGATIVE
Most of Saputo's retail cheese in Europe is aged for ~10-12 months, and the company is now selling inventory made with substantially higher (record) milk costs. Until this high-cost inventory is sold (expected by Mar/2024), Europe profits will be under significant pressure — we forecast Europe Q3/F24 EBITDA to decline 85%. The good news is that U.K. farmgate milk prices have declined over 28% from the Dec/2022 peak (exhibit 2), and inventory costs beginning in Q1/F25 should be better matched with current selling prices, leading to profit normalization.
U.S. commodity cheese/powder prices averaged ~20%/~40% lower y/y in Q3/ F24, while butter prices averaged slightly higher (+2%), all of which are unfavourable moves. The cheese-milk spread improved y/y (est. -US$0.04/lb in Oct/Nov vs. -US$0.12 LY) but this, plus anticipated market-share gains, are not expected to offset the unfavourable commodity price action and duplicate overhead costs tied to plant rationalization/modernization (expected to persist through much of Q4/F24); as such, we see USA EBITDA declining 6% in Q3/F24.
Soft export demand is weighing on International EBITDA, which we forecast to decline 18% in Q3/F24. We expect solid performance in Canada to continue, with 3% EBITDA growth y/y.
TD Investment Conclusion Current challenges are not operational (as was the case throughout COVID-19), they are tied to temporary market factors and duplicate overhead costs. Internal catalysts (e.g., Global Strategic Plan returns) should surface by Q1/F25, and industry conditions should normalize over the next few years; consequently, we see significant share-price upside over the next few years led by higher EBITDA and FCF, and lower debt.