‘We’re playing offence now’: Saputo planning more price hikes as profits slump

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Dairy giant Saputo Inc. is planning another round of price hikes on grocers and restaurants in an attempt to offset production cost increases.

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“We’re playing offence now,” chief executive Lino Saputo Jr. told analysts on June 9 after the Montreal-based company reported that profits sagged in the fourth quarter because of higher input costs.

Saputo said inflationary pressures in the supply chain are making it more and more expensive to makes dairy products, with the cost of everything from milk to packaging skyrocketing. Freight and logistics costs alone jumped $41-million in the quarter, the company said in an earnings update.

Saputo, like almost every other food manufacturer, has been trying to pass on the added costs to its customers. Grocery chains in Canada say they’ve been facing an unprecedented wave of requests from suppliers, all asking for more money for the same products. Those negotiations can turn ugly, as seen in the recent price dispute between Loblaw Companies Ltd. and PepsiCo Inc. that cleared out chip aisles across Canada’s biggest grocery chain. But despite the squabbling, it’s clear that much of the cost increases are making their way onto Canadians’ grocery bills, resulting in the worst food inflation since 1981.

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Saputo, a global dairy processor that includes the Neilson brand, said its price increases led to better-than-expected revenue of $3.96 billion in the quarter ended March 31, up more than 15 per cent compared with the same quarter last year. But the extra revenues weren’t enough to keep profits from slipping.

Saputo’s adjusted EBITDA fell to $260 million, down 14.2 per cent compared to $303 million last year. The company said its price hikes “were not sufficient to mitigate the ongoing impact of inflation on our costs.”

RBC analyst Irene Nattel said Saputo’s performance amounted to ending its fiscal year “with a whimper.” Still, results matched expectations, which “could come as a relief to investors,” she wrote in a report to investors titled “Soft cheese.”

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Saputo management promised its profits will make a “meaningful recovery” in the coming fiscal year, as more price increases start to kick in across the network. Saputo increased its prices in the United States in April, with another hike scheduled for July. In Canada, Saputo said it is waiting to see whether the federal body that manages the national dairy supply will raise prices for a second time this year.

The Canadian Dairy Commission (CDC) — a Crown corporation that controls the “farm-gate” price that processors like Saputo pay to farmers for their milk — already increased prices by a record 8.4 per cent in February. The annual increase was meant to offset rising costs for feed, fertilizer and fuel. But last week, the CDC announced it was mulling an uncommon “mid-year” price increase, after the Dairy Farmers of Canada reported that production costs have continued to soar in the wake of Russia’s invasion into Ukraine.

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Carl Colizza, president of Saputo’s North American operations, said the company expects the CDC will side with the farmers and raise prices again.

“The likelihood of that is high,” Colizza said.

Saputo last raised prices in Canada in February, in line with CDC’s farm-gate increase. If CDC raises prices again, so will Saputo.

“We will absolutely be recovering costs from our milk price inputs,” Colizza said.

Dairy prices rose by eight per cent in April compared to the same period last year, just below the overall food inflation rate of 9.7 per cent, according to the latest Consumer Price Index report from Statistics Canada.

The company booked net earnings of $37 million, or nine cents per share — a drop of about $66 million or 64 per cent, though Saputo said that included restructuring costs of $51 million after tax. On an adjusted basis, fourth-quarter profits were $108 million, down $16 million, or 12.9 per cent, compared to last year.

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