The Negative trends reflect the Company's deteriorating operating performance that began in the fourth quarter of F2021 and worsened over the first half of F2022. As Saputo's most recent performance was meaningfully below DBRS Morningstar's expectations, the concern is heightened that near-term recovery may be difficult to achieve amid challenging market conditions, including commodity price volatility, inflationary pressure on input costs, labour shortages, and supply chain disruptions.
DBRS Morningstar's confirmation of Saputo's ratings on
Saputo's earnings in the last 12 months (LTM) ended
DBRS Morningstar believes that these difficult market conditions will continue to pressure Saputo's operating performance such that F2022 EBITDA will be below that of F2021. DBRS Morningstar is also concerned that EBITDA recovery could be challenged in F2023.This view is based on the expectation that, while the Company has and will continue to take pricing actions to mitigate commodity, inflationary, and operating pressures, this could adversely affect volumes. Furthermore, DBRS Morningstar believes that margins and EBITDA could remain pressured by higher operating costs and operational inefficiencies as a result of sustained labour shortages in some geographies, as well as ongoing supply chain disruptions. Saputo has taken steps to address these challenges, including network optimization initiatives in facilities that have stable access to labour, SKU rationalization, and investments in automation. However, DBRS Morningstar anticipates that these initiatives will be EBITDA accretive only at the end of F2023. The lack of a meaningful recovery in EBITDA will result in near-term credit metrics that persist at levels that are not supportive of the BBB (high) rating category.
Should a meaningful recovery in EBITDA from a combination of margin and/or volume growth not occur in the next one to two quarters, DBRS Morningstar could downgrade the ratings, regardless of capital-conserving measures undertaken by the Company to improve credit metrics through debt reduction. Conversely, if price increases, input and operating cost relief, and efficiency improvements lead to restored growth in EBITDA and consequently recover lease-adjusted debt-to-EBITDA to at least below 2.75x over the next four quarters, the ratings outlook could stabilize. DBRS Morningstar notes that the threshold for Saputo's credit metrics have become more sensitive to the current macroeconomic environment, as the range of probable outcomes for key variables, including pricing and input and operating costs, have widened.
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 generation. The ratings also continue to reflect the Company's exposure to volatile commodity prices, the highly competitive industry, and the risk associated with the mature geographies in which Saputo operates, all of which are regulated.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.
Notes:
All figures are in Canadian dollars unless otherwise noted.
The principal methodologies are Rating Companies in the Consumer Products Industry (
The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at info@dbrsmorningstar.com.
The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.
Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.
For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.
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Ratings
Date Issued Debt Rated Action Rating Trend Attributesi
US = Lead Analyst based in USA
CA = Lead Analyst based in
EU = Lead Analyst based in EU
E = EU endorsed
U =
Unsolicited Participating With Access
Unsolicited Participating Without Access
Unsolicited Non-participating
19-Nov-21 Issuer Rating Trend Change BBB (high) Neg CA
19-Nov-21 Issuer Rating Confirmed BBB (high) Stb CA
19-Nov-21 Senior Unsecured Notes Trend Change BBB (high) Neg CA
19-Nov-21 Senior Unsecured Notes Confirmed BBB (high) Stb CA
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