DBRS Limited (DBRS Morningstar) confirmed Saputo Inc.'s (Saputo or the Company) Issuer Rating and Senior Unsecured Notes rating at BBB (high) with Stable trends. The rating actions reflect DBRS Morningstar's expectation that the Company's earnings profile will remain within the BBB (high) rating category in the medium term, despite the near-term pressure on earnings as a result of the Coronavirus Disease (COVID-19) pandemic. The rating confirmations also incorporate DBRS Morningstar's expectation that, through its operating performance and financial management, Saputo's credit metrics will improve to a level more appropriate for the current rating category in the medium term following a delay in its deleveraging strategy caused by the coronavirus pandemic. 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 risks associated with the mature markets in which Saputo operates, all of which are regulated.
On April 27, 2020, DBRS Morningstar confirmed Saputo's ratings at BBB (high) with Stable trends. At that time, DBRS Morningstar forecast EBITDA to contract to $1.2 billion in F2021 from $1.5 billion in the last 12 months (LTM) ended December 31, 2019, because of the anticipated impact of the coronavirus pandemic on foodservice sales volumes, consumer spending, and commodity price volatility. DBRS Morningstar also commented that the Company could remain challenged to recover earnings to pre-pandemic levels in the medium term because of a weaker macroeconomic environment. Consequently, DBRS Morningstar forecast that the expected recovery in leverage to below 2.75 times (x), the level considered appropriate for the current rating category, would be delayed beyond F2021.
Since then, Saputo has reported its full-year F2020 results, as well as its results for the first half of F2021 (H1 F2021). The impact of the coronavirus pandemic on Saputo's earnings and financial profile in H1 F2021 was partially defended by its diversified business model and operating efficiencies. EBITDA contracted to $737 million in H1 F2021 compared with $752 million in H1 F2020. Global government-mandated shutdowns in response to the coronavirus pandemic negatively affected Saputo's foodservice and export sales volumes, resulted in a decrease in international cheese and dairy ingredient market prices as well as a decline in block butter commodity prices. This was partially offset and moderated by higher retail and industrial sales volumes and benefits from efficiency-improving efforts, including cost-saving initiatives. Despite the contraction in earnings, leverage in the LTM ended H1 F2021 was relatively stable at 3.04x compared with 3.06x in F2020 as a result of capital-conserving measures undertaken by the Company to reduce debt. While leverage remained outside the 2.75x threshold considered appropriate for the current BBB (high) rating category, DBRS Morningstar acknowledges that Saputo's deleveraging strategy was delayed as a result of the coronavirus pandemic.
Looking ahead to H2 F2021, DBRS Morningstar forecasts revenue to decline in the low single digits compared with H2 F2020 as government-mandated lockdowns continue to negatively affect foodservice sales volumes, albeit to a lesser extent compared with H1 F2021. Furthermore, DBRS Morningstar anticipates that retail sales volumes will likely normalize following the surge at the beginning of the coronavirus pandemic. Consequently, DBRS Morningstar forecasts full-year F2021 revenue to be approximately $14.5 billion versus $14.9 billion in F2020. DBRS Morningstar believes that EBITDA margins in H2 F2021 will be pressured by commodity price volatility and a change in mix because of weaker consumer spending, which could more than offset efficiency-improving efforts including cost-saving initiatives. DBRS Morningstar now expects F2021 EBITDA to be just under $1.4 billion compared with its previous forecast of $1.2 billion in F2021. In the medium term, DBRS Morningstar believes that EBITDA will grow above $1.5 billion as the impact of the coronavirus pandemic on retail and foodservice sales volumes and commodity price volatility normalizes. Furthermore, the Company’s earnings should continue to benefit from operating efficiencies and contributions from new, small-scale acquisitions.
While the decline in earnings will negatively affect operating cash flows in F2021, DBRS Morningstar believes that this will be partially offset by the deferral of discretionary capital expenditure (capex) and a lower cash dividend outlay as a result of the adoption of the Dividend Reinvestment Plan. As such, DBRS Morningstar forecasts FCF after dividends and before changes in working capital to be above $400 million in F2021. Conversely, DBRS Morningstar forecasts FCF after dividends and before changes in working capital to decline below $400 million in F2022 as Saputo's capex normalizes. The Company has no debt maturities in F2021 and is expected to refinance its $300 million Series 2 Senior Unsecured Notes, which mature in F2022. DBRS Morningstar expects Saputo to use its FCF to invest in growth while maintaining stable debt levels. As such, DBRS Morningstar forecasts leverage to remain at approximately 3.00x by the end of F2021 and improve toward 2.75x in F2022, primarily based on growth in operating income. A negative rating action could result if the operating performance deteriorates beyond current expectations, regardless of capital-conserving measures used by the Company to improve credit metrics through debt reduction. Additionally, any large-scale debt-funded acquisitions in the current environment could also lead to a negative rating action. Conversely, DBRS Morningstar believes that a positive rating action is unlikely in the current environment because of the uncertainty surrounding the coronavirus pandemic.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.
All figures are in Canadian dollars unless otherwise noted.
The principal methodologies are Rating Companies in the Consumer Products Industry (July 30, 2020), DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (November 2, 2020), and DBRS Morningstar Criteria: Guarantees and Other Forms of Support (January 22, 2020), which can be found on dbrsmorningstar.com under Methodologies & Criteria.
For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.
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