Saputo Australia suffers indigestion, crashing to a $54m loss

Saputo had big plans for Australia and Asia when it took over Warrnambool Cheese and Butter in 2013. Now it is shutting down factories after crashing to a $54m loss.

Lino Saputo hoped to use the Warrnambool Cheese and Butter takeover to springboard Saputo’s business into Asia.

When Saputo edged out Murray Goulburn and Bega to take over Warrnambool Cheese & Butter – a 134-year-old factory at the end of Victoria’s Great Ocean Road – in 2013, its chief executive hailed the acquisition as a springboard for growth into Asia.

Nine years later those big plans have curdled into a partial retreat, rather than a march across the region, with the Canadian dairy giant shutting down local factories.

The latest accounts for Saputo’s Australian business reveal it sunk to a $54.4m annual loss for the 12 months to March 31 from a $30.6 net profit the previous financial year. Revenue remained steady at $2.76bn.

The company is suffering from indigestion after it bought Murray Goulburn for $1.3bn in 2016 and Lion’s specialty cheese business for $280m three years ago. Suppliers have walked away as Australia’s national milk pool shrinks. In the past three years, Saputo’s Australian milk collections have slumped from a forecast 3.1 billion litres to about 2 billion, with its charismatic chief executive, Lino Saputo Jr, who wooed Warrnambool Cheese & Butter shareholders with a slick presentation, now looking at potentially offloading assets.

Meanwhile, a big portion of the milk it has secured comes from third-party providers – also known as brokers – which command higher prices than buying from farmers directly.

“Managing our milk intake is our top priority for this business. As part of our global strategic plan, we are continuously re-evaluating our Australia network to make sure that we have the right infrastructure in place for the total milk that we have today and that we anticipate over the next few years,” Mr Saputo told investors in August. “We’re identifying new opportunities to streamline the operating model.”

Saputo has already closed two milk dryers at its Maffra factory in Victoria’s Gippsland region and shut down its individual wrapped cheese slice factory in Cobram on the Murray River.

Leanne Cutts, Saputo’s president and chief operating officer for its international business, which includes Australia, said a lower milk intake “continued to impact efficiency”. “As part of our four-year plan, clearly, we will need to review our overall footprint. It‘s clear that the milk pool has declined. And therefore we will need to ensure that our network going forward absolutely reflects this reality,” Ms Cutts said.

Adding to the company’s woes is record farm gate milk prices, which have surged 30 per cent to around $9.40 a kilogram.

The higher prices have flowed through to supermarkets, with shoppers paying more for cheese, milk and other dairy products.

“With Australia … as we know, the milk supply is constrained there. It’s a higher milk price than we’ve seen historically. Having said that, the domestic returns for that price being the significant part of the input costs instead is being passed on to consumers and through the brands,” Ms Cutts said.

As prices have been rising, so have private label sales as consumers look to save, with Bega Cheese executive chairman Barry Irvin urging shoppers to stick with branded products to help keep milk processors in business.

Bega’s annual net profit slumped 69 per cent to $24.2m, with pandemic costs and supply chain and flooding disruptions also weighing on the result.

Fonterra has managed to maintain milk collections at 1.4 billion litres, giving it 15.9 per cent market share. This compares with 21.6 per cent market share in 2018.

The New Zealand co-operative – the world’s biggest dairy exporter – has also shelved a $1.2bn float of its Australian business, which produces brands including Western Star butter, Perfect Italiano and markets Bega under licence. The business, however, is profitable, with annual Australian earnings before interest and tax jumping 43 per cent to $NZ106m ($93.8m), while margins rose to 5.1 per cent from 3.8 per cent.

Rabobank analyst Michael Harvey said there was a “rapid fall” in milk production towards the end of the dairy season. In the past 20 years, milk production in Australia has slumped more than 21 per cent to 8.5 billion litres.

“Milk production finished the 2021/22 season 3.9 per cent lower, with the declines worsening over the final three months. Production was down year-on-year in every state/region,” Mr Harvey said. “While, the footings are in place for a supply recovery in 2022/23, the recovery will be modest, with a slow herd rebuild being the major handbrake. Rabobank is forecasting a marginal increase in milk production.”

Mr Harvey said he did not expect farm gate prices to rise above $10 a kilogram.

“Rabobank does not foresee further upside in milk prices in the current season given the weaker commodity market settings,” Mr Harvey said.