Saputo (TSX:SAP) is a Montreal-based dairy company and one of the largest dairy processing companies in the world.
The last two years have been challenging for Saputo because of falling milk prices, increased competition, and rising logistical costs. Despite the boost in revenues from recent acquisitions, Saputo missed analysts’ revenue expectations for Q4 2019.
Despite the rocky past few years, the future is promising for Saputo. Changes in the global dairy market are working in Saputo’s favour. The company has a strategic advantage in two key markets. Saputo is examining its cost structure and is exploring different product and service offerings.
The dairy industry at a glance
For the past several years, there has been a global oversupply of milk. Low milk prices have pushed many farmers out of the industry and have hurt Saputo’s bottom line. Some governments have adjusted their quotas to ensure stricter supplies, and other companies have reduced their production. The combination of these actions has helped stabilize the global price of milk.
Since February 2019, there is an upward trend on the price of skim milk powder. The price of butter fluctuates but remains higher than the 2015 price.
Saputo’s 2019 Q1 profits beat analysts’ expectations in part because of the upswing in milk prices.
China and the Middle East
I’ll give you some numbers to put into context the growing demand for dairy. In 2019, Chinese dairy imports are expected to grow by 11%. By 2027, it is anticipated China will import 13% of the world’s dairy production. By 2027, it’s expected the Middle East will import 35% of the world’s butter and 19% of the world’s cheese production.
Many countries in the Middle East lack the cold storage logistics chain necessary to handle and process milk over long distances. Moreover, Middle Eastern producers have problems with access to quality water, which means their herds don’t produce as much milk as those in other regions.
Saputo is well positioned to access both the Chinese market with its 2017 acquisition of Australia’s Murray Goulburn Co-operative. Saputo also owns Australia’s Warrnambool Cheese and Butter, giving it broader access to China and the Middle East. Keep in mind 50% of Warrnambool Cheese and Butter’s exports go to Asia and the Middle East.
The company needs to aggressively pursue the growing dairy markets in the Middle East to cement its role as the dominant dairy company in the region.
Investments in Canada
In June 2019, Agriculture and Agri-Food Canada announced an investment of $1,933,060 in Saputo’s new dairy processing plant in St. Marys, Ontario. The investment is to purchase and install new equipment and increase the production capacity of the facility.
Saputo has also invested $240 million in a new dairy processing facility in Port-Coquitlam, British Columbia. The facility is scheduled to be completed by 2021. The strategy behind the new facility is to lower production costs by moving to a cheaper location.
These investments increase the value of Saputo’s assets while creating the capacity to meet future market demands.
In August 2019, Saputo CEO Lino Saputo announced the company is exploring ways of entering the plant protein market. Mr. Saputo said the company was in negotiations to process other company’s products.
This is an exciting development because it takes advantage of Saputo’s processing capacity while offloading the costs of logistics to another company. Higher logistics costs were cited as a reason for the Q4 2019 drop in profits.
Processing another company’s product alters Saputo’s business model to serve other companies while not having to change Saputo’s infrastructure. It’s a clever strategy to acquire new revenues.
Saputo has had a rough few years, but the company continues to invest in processing facilities, integrate its acquisitions, and make headway into the Chinese and Middle Eastern markets. More importantly, the leadership admits the difficulties in the market and is experimenting with products and strategies to continue growing. Saputo is a world leader in dairy processing and is taking steps to ensure its continued success.
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Fool.ca contributor Renée Gendron has no position in the stock mentioned. Saputo is a recommendation of Stock Advisor Canada.