GLOBAL dairy giant Saputo booked a loss in its third quarter on the back of a A$196.8m impairment charge related to the Canadian company’s Australian dairy division.
An impairment charge is an accounting term and process used by businesses to write off worthless goodwill or the drastic reduction or loss in the recoverable value of an asset.
Chairman, president, and CEO Lino Saputo Jr explained the non-cash impairment charge in Australia in the context of falling milk supply and a mismatch in cheese and ingredients prices during his Saputo global investor presentation and Q&A.
Mr Saputo released the company’s fiscal 2024 third quarter financial results on February 8.
“In performing our annual goodwill impairment testing, our dairy division Australia cash-generating unit (CGU) estimates of future discounted cash flow were reduced due to the increasing disconnect in the relationship between international cheese and dairy ingredient market prices and the farmgate milk price in the context of a declining milk pool in Australia,” he said.
“While there is still uncertainty in the near term market dynamics, we are dedicated to doing everything we can to maximise the results of the division.”
Saputo has been “optimising” its manufacturing and factory network in Australia, with the number of plants reduced from 11 to six and the CEO said the company’s “strategy remains unchanged”.
Last November the company launched a strategic review of the King Island Dairy business with an option of selling the business.
“We’ve continued to advance our network optimisation and we are benefiting from the positive impact from several streamlining activities completed over the last few quarters,” Mr Saputo said.
“The business remains focused on its domestic market with select key customers in the export market playing an important role,” he said regarding Australia.
The CEO reaffirmed the company’s strategic focus on value products.
“The consumer is still shopping with value seeking behaviour, we are seeing clear progress in volume recovery across our business segments,” he said.
Mr Saputo framed his reporting within the continuing “dynamic macroeconomic environment”. In a Q&A with global analysts, he said that while Saputo’s volumes rose in the quarter to December 31, volatile global dairy commodity markets and a challenge to the consumer were persistent themes in the third quarter, much like in the fiscal year to date.
“As macroeconomic drivers impact the global economy and continue to drive commodity price volatility, we remain focused on managing the factors within our control and stabilising the business,” he said.
“Our priority areas include operational excellence, successfully executing the major capital projects under way, cost containment and cash flow generation.”
While third-quarter revenue dropped 7 per cent to C$4.3bn, Mr Saputo said that “with most of the heavy lifting behind us, I remain very confident in our long-term strategy”.
The company has an adjusted EBITDA target of C$2.125bn by 2025, although last year he raised doubts about achieving it on schedule.
“Markets are expected to stabilise over time,” Mr Saputo said, adding that “it is the speed of the recovery that remains unknown” and he expects market trends to stay “volatile” and “challenging”.
Mr Saputo also warned about the status and challenges faced by global dairy players.
“We are seeing a slowing milk production around the world, and we see this in just about every dairy producing country … the dairy farming community is resilient but the folks that are not as well invested or as efficient, are dropping off in terms of dairy farms and their contribution to milk production,” he said.