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Saputo (TSX:SAP) is one of the top 10 dairy processors in the world, a leading cheese manufacturer and fluid milk and cream processor in Canada, the top dairy processor in Australia, and the second-largest dairy processor in Argentina. In the United States (U.S.), it ranks among the top three cheese producers and one of the largest producers of extended shelf-life and cultured dairy products. In the United Kingdom (U.K.), it is the largest manufacturer of branded cheese and a top manufacturer of dairy spreads.

During fiscal 2021, Saputo operated the company’s business through four sectors, namely Canada, U.S., International, and Europe, which represented 29%, 43%, 23%, and 5% of Saputo’s total revenues. It currently operates 61 manufacturing facilities and processes approximately 11 billion litres of milk per year. The company employs approximately 17,300 employees and sells Saputo’s products in more than 60 countries.

Robust global strategic plan

The company’s global strategic plan includes a four-year capital-expenditure plan pursuant to which it plans to allocate capital expenditure amounts of approximately $2.3 billion starting in fiscal 2022. On an annual basis, the company intends to continue to invest in capital expenditures at a level which is similar to Saputo’s depreciation and amortization expense.

As Saputo is involved in the production, sale, and distribution of food products, it relies on brand recognition and loyalty from the company’s clientele in addition to relying on the quality of Saputo’s products and focusing on certain established brands. Saputo’s trademarks are recognized by consumers for quality and reliability.

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Valuable intellectual property

Also, as innovation forms part of Saputo’s growth strategy, new technologies, products, and process optimization methods have been developed by the company’s research and development teams in recent years. The protection of these assets includes patenting certain technologies when appropriate. Hence, the company takes appropriate measures to protect, maintain, and enforce Saputo’s intellectual property.

In Canada, the dairy industry operates under a national milk supply management system. The objective of this system is to ensure that the overall supply of dairy products to the Canadian market is sufficient to meet consumer demand. This objective is met by regulating domestic milk production used for manufacturing dairy products in Canada. Saputo is well positioned to meet consumer milk demand.

Lucrative milk supply agreements

Further, the company has significant international operations and benefits from multiple milk supply agreements. Independent processors usually negotiate with local cooperatives or they may procure milk directly from individual farms. Processors are charged a price that reflects the current month’s milk class price plus a negotiated handling charge. In Australia, Argentina and the U.K., milk prices are negotiated between processors and producers.

Internationally, there are no limitations or restrictions as to the volume of milk that is produced and processed. Moreover, processors are not limited regarding the volume of milk that can be purchased and are free to negotiate milk supply agreements with any company. Hence, the price of milk has a strong correlation to the world price of traded dairy products.

Overall, Saputo benefits from secular revenue growth trends and operates in a recession-proof industry.

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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Nikhil Kumar has no position in any of the stocks mentioned.

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