Saputo Annual Report 2005

FY2005 Annual Report · Saputo

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CRAFTING OUR FUTURE

2 0 0 5 A N N U A L R E P O R T

CUMULATIVE TOTAL RETURN SINCE MARCH 31, 2000

The following graph compares, on a yearly basis, the total cumulative shareholder return of $100 invested in the Saputo
Common Shares with the S&P/TSX Composite Total Return Index of the TSX during the five fiscal years ending March 31, 2005.

0
0
1
$
=
0
0
0
2
,
1
3
h
c
r
a
M

$300

$250

$200

$150

$100

$50

03/31/00

03/31/01

03/31/02

03/31/03

03/31/04

03/31/05

Saputo

S&P/TSX Composite Total Return Index

Revenues
(in millions of dollars)

3,883.1

EBITDA(1)
(in millions of dollars)

407.8

Net earnings
(in millions of dollars)

232.1

2
.
0
7
5
,
3

1
.
8
9
3
,
3

3
.
3
0
4

8
.
2
5
3

4
.
2
1
2

7
.
3
7
1

Cash flow generated
by operations
(in millions of dollars)

276.5

6
.
7
8
2

5
.
3
2
2

2003 2004 2005

All amounts in this report are in Canadian dollars, unless otherwise stated.

Table of Contents

1 Highlights / 8 Message from the Chairman of the Board / 10 Message from the President and Chief Executive Officer
12 Corporate Management / 13 Saputo at a Glance / 14 Dairy Products Division (Canada)
14 Dairy Products Division (Argentina) / 16 Cheese Division (USA) / 17 Bakery Division
19 Management’s Analysis / 42 Consolidated Financial Statements / 45 Notes to the Consolidated Financial Statements
58 Social Responsibility / 60 Board of Directors / 61 Shareholder Information

HIGHLIGHTS

Years ended March 31
(in thousands of dollars, except per share amounts and ratios)

2005

2004

2003

Revenues

Dairy Products Sector
Canada and Other
United States

Grocery Products Sector

Earnings before interest, income taxes,
depreciation and amortization (EBITDA)(1)

Dairy Products Sector
Canada and Other
United States

Grocery Products Sector

Net earnings

Cash flows generated by operations
Working capital
Total assets
Long-term debt (including current portion)
Shareholders’ equity

Per share
Net earnings
Basic
Diluted

Dividends declared
Book value

$ 2,415,541
1,308,735
3,724,276
158,793
$ 3,883,069

244,161
137,043
381,204
26,555
407,759

232,145

276,485
$
$
452,635
$ 2,133,072
$
302,521
$ 1,315,850

$
$
$
$

2.23
2.20
0.60
12.59

$ 2,161,852
1,240,954
3,402,806
167,384
$ 3,570,190

209,855
160,887
370,742
32,515
403,257

212,365

287,572
$
$
297,202
$ 2,069,548
$
371,911
$ 1,156,829

$
$
$
$

2.05
2.03
0.48
11.15

Financial ratios
Interest bearing debt(2)/Shareholders’ equity
Return on average shareholders’ equity

0.21
18.8 %

0.39
19.5 %

$ 2,017,383
1,212,810
3,230,193
167,919
$ 3,398,112

199,561
120,069
319,630
33,165
352,795

173,728

223,532
$
$
269,326
$ 1,970,686
$
521,135
$ 1,016,504

$
$
$
$

1.68
1.66
0.40
9.83

0.53
18.1 %

(1) Measurement of results not in accordance with generally accepted accounting principles
The Company assesses its financial performance based on its EBITDA, this being earnings before interest, income taxes, depreciation and amortization. EBITDA is not a measurement of performance as
defined by generally accepted accounting principles in Canada, and consequently may not be comparable to similar measurements presented by other companies.
(2) Net of cash

Transformation

TO TRANSFORM is to change something from one form to another.

Every day our employees demonstrate that not only do they know how to
transform raw materials into cheese, yogurt or snack cakes, but also, and most
impor tantly, that they have what it takes to transform challenges into
opportunities. It was through this invaluable ability that the little family
company transformed itself into a leader in its industry. Today, Saputo is the
largest dairy processor and the largest snack cake manufacturer in Canada, one
of the most important cheese producers in North America and the third largest
dair y processor in Argentina. Recognizing the impor tant role that our
employees play in our daily success, we consciously strive to create a working
environment that is as stimulating as possible, where employees have the
opportunity of transforming their jobs into continuously evolving careers.

2 0 0 5 A N N U A L R E P O R T / S A P U T O 3

Innovation

TO INNOVATE is to introduce something new.

Thanks to the daily contribution of our employees, innovation lies at the heart
of the entrepreneurial culture that is our greatest source of pride. Passion is
transmitted from generation to generation, at every level of the Company.
Since the very beginning, we have always considered it a duty to of fer our
customers the flexibility required to respond to their specif ic needs. This
constant concern with innovation motivates us not only to create new
products, but also to think continuously about new ways of improving our day-
to-day activities.

2 0 0 5 A N N U A L R E P O R T / S A P U T O 5

Growth

TO GROW is to become stronger, more numerous, more pervasive.

At Saputo, we are f irmly committed to growth. In taking careful steps on
consolidating our resources at every stage, we are getting closer to our goal of
becoming a world-class dairy processor. Our employees are the driving force of
this growth. Our commitment is to provide them with an environment
conducive to self-fulfilment, in which they can develop along with the organization.
In applying this winning recipe we have turned our Company into one that is
traded publicly with sales of close to four billion dollars, a company that is now
leaving its mark from one end of the Americas to the other. Saputo today has
approximately 8,500 employees bringing their talents, skills and passion to its
46 plants and its distribution centres.

Transform and innovate to grow

2 0 0 5 A N N U A L R E P O R T / S A P U T O 7

MESSAGE FROM THE CHAIRMAN OF THE BOARD

As you know, I have been shouldering the responsibilities of
Chairman of the Board for more than a year since Lino Saputo, Jr. has
been appointed President and Chief Executive Officer. Before, I was
overseeing the day-to-day operations of the Company. Today my new
role has given me a different perspective. It has made me realize how
much progress has been made in the Company that my family and
I founded over 50 years ago.

Saputo has grown at more than one level. As satisfied as I am with our
financial results, which have enjoyed steady improvement since our
founding, I am equally proud of the working environment we have
succeeded in creating. The family spirit that prevails at our Company
is the embodiment of our values and our business culture, and this
remains the source of my greatest pride.

Our business approach, although it may have evolved over the years,
has remained fundamentally the same. At all levels of the Company,
our actions are considered on a daily basis. As true and enthusiastic
entrepreneurs, we take care to always act quickly and always in the
best interests of our shareholders, our customers and our employees.

I take pleasure in reporting the activities of the Board during the
course of the past fiscal year.

The Board of Directors is responsible for overseeing the stewardship of
the Company affairs to ensure that its resources are managed so as to
increase share value and create economic wealth.

The Company believes in the importance of sound corporate
governance and considers that the interest held by its majority
shareholder ensures that its interests are in line with those of the
other shareholders. The Company’s Board of Directors is composed of
a majority of unrelated and independent directors and the two Board
committees are composed solely of unrelated and independent
directors. The positions of Chairman of the Board and President and
Chief Executive Officer are separate and the Board also has a Lead
Director whose responsibilities include holding quarterly meetings of
the unrelated and independent directors.

During the year, the Board of Directors and its committees fulfilled
their mandates and oversaw the application of many policies and
the new regulatory
procedures adopted last year in light of
requirements. In addition, consistent with the process adopted last
fiscal year, we conducted our first formal evaluation of the performance
of the Board of Directors, its committees and its directors. We also
adopted a formal evaluation process of the performance of the
President and Chief Executive Officer, which will be implemented this
fiscal year.

8 2 0 0 5 A N N U A L R E P O R T / S A P U T O

The Board is pleased with the corporate governance practices in
place within the Company and continues to monitor changes in
legislation and in market trends to determine whether additional
measures should be implemented. Please refer to the Information
Circular dated June 6, 2005 for additional information on Board and
committee mandates and accomplishments as well as corporate
governance practices.

My thanks

I wish to thank the members of the Board of Directors for their
invaluable advice throughout the past fiscal year.

Lastly, as you know so well, we are all one big family at Saputo. And
at the heart of that family are about 8,500 men and women who
devote themselves day after day to the success of our Company. The
passion and the commitment that characterize their daily work
remain for me the greatest source of pride, and once again I wish to
extend my warmest thanks to them.

In closing, my colleagues on the Board of Directors and I intend
to carry on with the same efforts in fiscal 2006 to assist the Company
in its growth.

Secondly, my most heartfelt thanks go out to our customers and to the
consumers of our products, who have appreciated us for over 50 years.
We will continue to make good on the same promise of quality, in
terms of both products and service, and at a competitive price.

(signed)

Lino Saputo
Chairman of the Board

2 0 0 5 A N N U A L R E P O R T / S A P U T O 9

MESSAGE FROM THE PRESIDENT AND CHIEF EXECUTIVE OFFICER

We are proud to present net earnings of $232.1 million for the fiscal
year ended March 31, 2005, up 9.3% compared to last fiscal year. Total
revenues for fiscal 2005 amounted to $3.883 billion, up 8.8% over
the preceding fiscal year.

Building on a very solid base supported by strong values and a
defined corporate culture, I have had the privilege to take over the
responsibilities as President and CEO on April 1, 2004, the very same
year that marked our 50th anniversary.

Our storied past and humble beginnings remind us every day,
that the true pillars of our foundations are the men and women in
our organization that remain the driving force behind our
consistent progress.

As the global dairy industry undergoes an evolution through
consolidation, and with world consumption of dairy products growing
at historical rates of one to two percent per year, our quest of becoming
an increasingly important dairy player, remains unchanged. In the
United States, we still remain active towards potential acquisitions of
cheese operations. The industry is still fragmented and we believe that
there are good opportunities for our Company. We will also continue
to seek out opportunities in countries that could provide us a solid
platform by which we would be able to increase our presence as a
dairy player on a world-wide scale, very much as we have done in
Argentina, our first foray outside of North America.

It is very important for us to remain a company that is not spoiled
by past success. Although we have posted strong financial results,
prior to and since our entrance into the public domain, we cannot
rest on our laurels. We cannot, and we will not, allow ourselves to
become complacent.

As such, our commitment to dairy products innovation is stronger than
ever. Be it in diverse cheese and milk technologies, dairy solids
enhancements, or by-products extensions, we will explore new
avenues that further improve our product variety and manufacturing
efficiencies, consistent with, and capitalizing on, the ever-changing
desires of our customers and consumers. I recently established a team
of individuals reporting directly to me whose mandate is to seek
innovation at a quicker pace. Their support and commitment will allow
our Company to become a leader in dairy initiatives and innovation.

Notwithstanding, every individual business unit will maintain
the focus on product quality, cost effectiveness, and commitment to
service that continues to distinguish our Company from the rest.

This being said, fiscal 2005 was another great year for Saputo.

In our Dairy Products Division (Canada), we have worked towards the
final stages of the integration of our two former Cheese and Milk
divisions into one single unit. Both our cheese and milk activities
have seen increases in their sales volumes. We also started to see the
benefits from the rationalization project we undertook in this division.
As well, after the fiscal year-end, we concluded the acquisition of
the activities of Fromage Côté S.A. and Distributions Kingsey Inc.,
Québec-based companies specializing in both fresh curds and
specialty cheeses. The specialty cheese category has seen interesting
growth in fiscal 2005 and we expect that this trend will continue as
consumers are increasingly looking for specialty products.

In Argentina, we have successfully completed the integration of the
division into Saputo’s systems and values. As we have mentioned
during the last fiscal year, we invested significant capital in new
technologies and equipment that will allow us to extend our product
offering and improve our profitability. We also experienced growth in
both our national and international sales. For us, Argentina is a
significant step in our goal to become a world-class dairy processor.
We are learning everyday and this knowledge is already bearing fruit
and will continue to do so in the future.

In the United States, our Cheese Division performed well considering
the ever-changing and volatile market conditions. Overall, we
experienced a decrease in our sales volumes, as the average block
market per pound of cheese, as traded daily on the Chicago
Mercantile Exchange (CME), was US$0.28 higher this fiscal year
over the prior fiscal year. The majority of the volume decline was
concentrated in commodity type cheeses where the industry
struggled with over-capacity issues. Volumes in the string cheese,
hard cheese and other cheese categories all experienced increases
over the prior fiscal year. In order to capitalize on the string cheese
popularity, we announced in May 2005, the acquisition of the
activities of Schneider Cheese, Inc., a manufacturer of string cheese
and cheese sticks under the Schneider brand name and other private
labels. We see great opportunities in the United States both from
internal growth, where innovation is a key factor, as well as growth
through acquisitions.

1 0 2 0 0 5 A N N U A L R E P O R T / S A P U T O

In the Bakery Division, we increased the base selling price for our
economy- and family-size products, which resulted in a slight
decrease in our sales volumes. Despite the volume decrease, we
believe the decision was necessary to ensure the continued
profitability of the division. This division evolves in a competitive
industry where innovation drives most of the growth. We have made
a commitment towards the development of this division. In that
regard, we have initiated the introduction of products with reduced
or no trans fat content, thus pursuing our leadership in the snack
cake and cereal bar categories.

For fiscal 2006, we intend to increase our revenues, EBITDA and net
earnings. This increase will be through organic initiatives in each
division supported through capital investments. In Argentina, we will
solidify our position by dedicating specific capital investments to
increase production capacity as well as to optimize our by-products
derived from cheese manufacturing. For our Bakery Division, fiscal
2006 will mark the first year of our three-year investment plan for
which we committed approximately $20 million in February 2004.

This investment should be covered by additional profitability generated
within the same three-year period. In addition, we are evaluating
potential cheese operations acquisitions in the United States.

Looking at all the projects we are working on at the beginning of
fiscal 2006, I am reminded of all the possibilities and promise the future
holds for our Company. Given our financial stability and strength, we
control our destiny. In the coming year, we will make the appropriate
decisions and take all necessary actions to continue our successful
ways, which all stakeholders have been accustomed to for over half
a century.

Day after day, we are crafting our future.

(signed)

Lino Saputo, Jr.
President and Chief Executive Officer

2 0 0 5 A N N U A L R E P O R T / S A P U T O 1 1

CORPORATE MANAGEMENT

From lef t to right, in the back:

Dino Dello Sbarba, President and Chief Operating Of f icer, Cheese Division (USA)
Carmine De Somma, President and Chief Operating Of f icer, Dairy Products Division (Argentina)
Randy Williamson, President and Chief Operating Of f icer, Dairy Products Division (Canada)
Lino Saputo, Jr., President and Chief Executive Of f icer

From lef t to right, in the front:

Pierre Leroux, Executive Vice President, Human Resources and Corporate Af fairs
Louis-Philippe Carrière, Executive Vice President, Finance and Administration

1 2 2 0 0 5 A N N U A L R E P O R T / S A P U T O

SAPUTO AT A GLANCE

Solid foundations, a commitment to excellence and dedication to growth are the keystones that have

enabled Saputo to evolve as the largest dairy processor in Canada, one of the most important cheese

producers in North America, the third largest dairy processor in Argentina and the largest snack cake

manufacturer in Canada. Our products, manufactured in 46 plants that stretch from one end of the Americas

to the other, are marketed under such well-known brand names as Saputo, Armstrong, Caron, Cayer,

Kingsey, Dairyland, Baxter, Nutrilait, Stella, Frigo, Dragone, Treasure Cave, La Paulina, Ricrem and Vachon.

Saputo Inc. is a public company whose shares are listed on the Toronto Stock Exchange under the

symbol SAP. Propelled by the same sense of dedication that motivates our 8,500 employees to surpass

themselves day after day, we will continue to successfully craft our future.

CANADIAN AND OTHER DAIRY PRODUCTS SECTOR

Revenues (%) per market segment
Canadian Cheese Activities

DAIRY PRODUCTS DIVISION (CANADA)

Retail

Foodservice

Industrial

Revenues (%) per market segment
Canadian Fluid Milk Activities

Retail

Foodservice

Revenues (%) per geographic segment
Dairy Products Division (Argentina)

International

Domestic

Types of products
Mozzarella, Cheddar, Fluid Milk, Butter, Blue, Bocconcini, Brick, Brie,
Caciocavallo, Camembert, Colby, Cream, Flavoured Coffee Creamers, Sour
Cream, Farmer, Feta, Friulano, String Cheese, Cottage Cheese, Goat Cheese,
Havarti, Juices and Drinks, Milk Powder, Evaporated Milk, Lactose, Margarine,
Monterey Jack, Munster, Parmesan, Pastorella, Whey Protein, Provolone,
Ricotta, Romano, Swiss, Trecce, Dips, Tuma, Yogurt

Sales
• Diversified range of dairy products
• Leader in supplying the pizzeria market
• Wide variety of specialty cheeses

Distribution
• Direct delivery in all regions of Canada
• The largest dairy product distribution infrastructure in Canada

Activities
• Producing 38% of all natural cheese manufactured in Canada
• Processing 20% of all fluid milk in Canada
• Excess production capacity of 18% for cheese activities
• Excess production capacity of 31% for fluid milk activities

DAIRY PRODUCTS DIVISION (ARGENTINA)

Types of products
Mozzarella, Parmesan, Milk Powder, Butter, Cheddar, Cream, Dulce de Leche
(Caramelized Milk), Edam, Emmenthal, Gouda, Goya, Monterey Jack,
Soft Cheeses, Swiss, UHT Milk, Prato, Reggianito

Sales
• Nearly 44% of sales are in the domestic market
• Cheese and milk powder exported to over 30 countries

Distribution
Independent distribution network comprising 150 distributors in 9 branches

Activities
• Processing 5% of all milk in Argentina
• Excess production capacity of 20%

CANADIAN AND OTHER DAIRY PRODUCTS SECTOR

Revenues
(in millions of dollars)

2,415.5

EBITDA(1)
(in millions of dollars)

244.2

9
.
1
6
1
,
2

4
.
7
1
0
,
2

9
.
9
0
2

6
.
9
9
1

2003 2004 2005

US DAIRY PRODUCTS SECTOR

Sales volumes (%) per market segment

Foodservice

Industrial

Retail

Revenues
(in millions of dollars)

1,308.7

EBITDA(1)
(in millions of dollars)

137.0

0
.
1
4
2
,
1

8
.
2
1
2
,
1

9
.
0
6
1 1
.
0
2
1

2003 2004 2005

CHEESE DIVISION (USA)

(2)

Types of products
Mozzarella, String Cheese, Asiago, Blue, Whey Protein Concentrate, Feta,
Fontinella, Gorgonzola, Kasseri, Sweetened Condensed Milk, Eggnog,
Condensed Whey, Whey Powder, Parmesan, Provolone, Ricotta, Romano, Swiss

Sales
• Large range of products and well-balanced sales segmentation

Distribution
• Independent regional and national distributors
• 3 distribution centres: East, Midwest, West

Activities
• Producing 6% of all natural cheese manufactured in the United States
• Excess production capacity of 10%

(2) Crayola, Twistables, chevron, and serpentine are registered trademarks, smile design is a trade-

mark of Binney & Smith.

GROCERY PRODUCTS SECTOR

Revenues (%) per market segment

Mainly
retail

Revenues
(in millions of dollars)

158.8

EBITDA(1)
(in millions of dollars)

26.6

9
.
7
6
1

4
.
7
6
1

2
.
3
3

5
.
2
3

2003 2004 2005

BAKERY DIVISION

Types of products
Snack Cakes, Tarts, Cereal Bars

Sales
• Largest snack cake manufacturer in Canada and one of the leaders in the

cereal bar market in Québec

Distribution
• Direct-to-store delivery

Activities
• Dominant market share in all regions of Canada
• Excess production capacity of 31%

SAPUTO AT A GLANCE

Revenues
(in millions of dollars)

3,883.1

2
.
0
7
5
,
3

1
.
8
9
3
,
3

EBITDA(1)
(in millions of dollars)

407.8

3
.
3
0
4

8
.
2
5
3

Net earnings
(in millions of dollars)

232.1

4
.
2
1
2

7
.
3
7
1

2003 2004 2005

Number of employees per sector*

Number of plants per sector

Revenues (%) per sector

1,100

Grocery
Products
Sector

5,300

Canadian and
Other Dairy
Products
Sector

Grocery
Products
Sector

Canadian and
Other Dairy
Products
Sector

Grocery
Products
Sector

Canadian and
Other Dairy
Products
Sector

2,100

US Dairy
Products
Sector

*Approximate

number

Visit us at w w w. s a p u t o . c o m .

US Dairy
Products
Sector

MANAGEMENT’S ANALYSIS

The goal of the present management report is to provide a better understanding of our activities and should be read while referring to our

audited consolidated financial statements and the accompanying notes, which are prepared in accordance with Canadian Generally Accepted

Accounting Principles. In addition to containing an analysis of the year ended March 31, 2005, this report addresses any material element to

be considered between March 31, 2005 and June 6, 2005, the date on which this report was approved by the Board of Directors of Saputo Inc.

(the "Company" or "Saputo"). Additional information about the Company, including the Annual Information Form for the year ended

March 31, 2005, can be obtained on SEDAR at www.sedar.com.

This disclosure document contains management’s analysis on forward-looking statements. Caution should be used in the interpretation of

management’s analysis and statements, since management often makes reference to objectives and strategies that contain a certain element

of risk and uncertainty. Due to the nature of our business, the risks and uncertainties associated with it could cause the results to differ

materially from those stated in such forward-looking statements.

GLOBAL OVERVIEW

Fiscal 2005 marked Saputo’s first full year of operations as a major
player in both the North and South American dairy industry.
Saputo’s operations are carried out in 46 plants and numerous
distribution centres across Canada, United States, and Argentina.
Saputo is proud to employ approximately 8,500 employees whose
efforts and dedication have enabled the Company to excel.

Saputo is active in two sectors: dairy products, which accounts for
95.9% of consolidated revenues, and grocery products, with 4.1%
of consolidated revenues. Saputo manufactures almost all of the
products it commercializes.

Our Dairy Products Sector consists of the following: Canadian and
Other Dairy Products Sector and US Dairy Products Sector. The
Canadian and Other Dairy Products Sector consists of our Dairy
Products Division (Canada) and our Dairy Products Division
(Argentina). The US Dairy Products Sector consists of our Cheese
Division (USA). Saputo’s dairy products are available in all
segments of the food market: retail, foodservice and industrial.
Saputo is the largest dairy processor in Canada, among the top
five in the United States and the third largest in Argentina.

The foodservice segment accounts for 33% of total revenues
within the Dairy Products Sector. Sales are made to distributors of
both specialty cheeses and complete product lines as well as to
restaurants and hotels under our own brand names and under
various private labels. Through our Canadian distribution
network, we also offer non-dairy products manufactured by third
parties. We also produce dairy blends for fast-food chains.

The industrial segment accounts for 16% of total revenues
within the Dairy Products Sector. Sales are made to food
processors that use our products as ingredients to manufacture
their products. In Canada, we supply cheese to frozen pizza
manufacturers while in the United States, we supply cheese to
numerous large food manufacturers.

Our Canadian and US cheese manufacturing facilities also produce
by-products such as lactose, whey powder and whey protein.
Through our Canadian industrial segment, we sell cheese, lactose,
whey powder, ice cream mixes and whey protein to numerous
international clients. Our Argentina facilities also supply many
international clients primarily with milk powder and cheese.

The retail segment accounts for 51% of total revenues within the
Dairy Products Sector. Sales are made to supermarket chains,
independent retailers, warehouse clubs and specialty cheese
boutiques under our own brand names as well as under private
labels. Products manufactured and sold in this segment include
dairy products as well as non-dairy products such as non-dairy
creamers, juices and drinks.

Our Grocery Products Sector consists of our Bakery Division which
manufactures and markets snack cakes, tarts and cereal bars. Our
products are sold almost exclusively in the Canadian retail segment,
through supermarket chains, independent retailers, and warehouse
clubs. On a smaller scale, the Bakery Division is also present in the
northeastern United States. Saputo is the largest snack cake
manufacturer in Canada and a leader in Québec’s cereal bar market.

2 0 0 5 A N N U A L R E P O R T / S A P U T O 1 9

Revenues (% ) per market segment
Dairy Products Sector

Retail

Foodservice

Industrial

Financial Orientation

Over the years, Saputo has been synonymous with financial
stability and performance growth. This is due to the strong
foundations instilled in every facility in Canada, United States,
and more recently, Argentina. Our sound business model has
enabled the Company to grow both organically and through
acquisitions, while maintaining profit margins.

Our goal of creating value for our employees and shareholders
remains our most important objective. Our discipline and
thorough approach has enabled us to achieve this goal. This
approach is present in all facets of our business. From
manufacturing to sales activities, Saputo employees’ belief in this
approach is the cornerstone to the Company’s success.

The Company continually monitors and questions financial results
in order to ensure that optimal results are achieved. The strong
financial stability of the Company is a result of such actions. In
fiscal 2005, Saputo fully repaid the long-term debt relating to the
Dairyworld acquisition (February 2001). Our balance sheet is
stronger than ever.

Our goal of becoming a world-class dairy processor remains intact.
Whether it be via organic growth or future acquisitions, Saputo
will continue to apply the same principles and methodologies that
have proven to be successful.

Elements to Consider when Reading
Management’s Analysis for Fiscal 2005

During fiscal 2005, we experienced solid financial performance:

• Net earnings totalled $232.1 million, up 9.3%

• Earnings before interest, income taxes, depreciation and

amortization (EBITDA)(1) totalled $407.8 million, up 1.1%

• Revenues reached $3.883 billion, up 8.8%

• Cash flows generated by operations of $276.5 million, slightly

lower compared to last fiscal year

The improved performance in fiscal 2005 is the result of increased
volumes and savings achieved from rationalization activities
undertaken in prior fiscal years in our Dairy Products Division
(Canada), as well as the inclusion of a full year of results from our
operations in Argentina compared to only 18 weeks in the previous
fiscal year.

The continued rise of the Canadian dollar affected fiscal 2005
results. During fiscal 2005, the appreciation of the Canadian
dollar eroded approximately $3 million in net earnings, $8 million
in EBITDA, and $70 million in revenues.

In the United States, we were affected by a less favourable
relationship between the average block market (2) per pound of
cheese and the cost of milk as raw material. The higher average
block market per pound of cheese in the United States had a
positive effect of approximately $148 million on revenues. The
overall average block market per pound of cheese of US$1.67 this
fiscal year was higher compared to US$1.39 last fiscal year. This
benefited the EBITDA this fiscal year by providing a better basis of
absorption for our fixed costs, while a less favourable relationship
between the average block market per pound of cheese and the
cost of milk as raw material was observed this fiscal year compared
to last fiscal year. With regards to inventories, we started the
fiscal year with a block market per pound of cheese at US$2.09 and
ended the year at US$1.62, causing an unfavourable impact on the
realization of inventories. These combined factors had a negative
impact of $29.7 million on EBITDA.

The Company also benefited from a one-time tax reduction to
adjust future tax balances, due to a reduction in US tax rates, thus
increasing net earnings by $3.5 million.

(1) Measurement of results not in accordance with generally accepted accounting principles
The Company assesses its financial performance based on its EBITDA, this being earnings before interest, income taxes, depreciation and amortization. EBITDA is not a
measurement of performance as defined by generally accepted accounting principles in Canada, and consequently may not be comparable to similar measurements presented
by other companies.

(2) “Average block market” is the average daily price of a 40 pound block of Cheddar cheese traded on the Chicago Mercantile Exchange (CME), used as the base price for the cheese.

2 0 2 0 0 5 A N N U A L R E P O R T / S A P U T O

Selected Consolidated Financial Information

Years ended March 31
(in thousands of dollars, except per share amounts and ratios)
Statement of earnings data
Revenues

Dairy Products Sector
Canada and Other
United States

Grocery Products Sector

Cost of sales, selling and administrative expenses
Dairy Products Sector
Canada and Other
United States

Grocery Products Sector

EBITDA

Dairy Products Sector
Canada and Other
United States

Grocery Products Sector

EBITDA margin (%)

Depreciation of fixed assets

Dairy Products Sector
Canada and Other
United States

Grocery Products Sector

Operating income

Dairy Products Sector
Canada and Other
United States

Grocery Products Sector

Interest on long-term debt
Other interest, net of interest income
Earnings before income taxes

Income taxes
Net earnings
Net earnings margin (%)

Net earnings per share
Diluted net earnings per share
Dividends declared per share

2005

2004

2003

$ 2,415,541
1,308,735
3,724,276
158,793
$ 3,883,069

$ 2,171,380
1,171,692
3,343,072
132,238
$ 3,475,310

244,161
137,043
381,204
26,555
407,759
10.5%

29,743
31,175
60,918
5,147
66,065

214,418
105,868
320,286
21,408
341,694

28,026
1,064
312,604

80,459
232,145
6.0%

2.23
2.20
0.60

$
$
$

$ 2,161,852
1,240,954
3,402,806
167,384
$ 3,570,190

$ 1,951,997
1,080,067
3,032,064
134,869
$ 3,166,933

209,855
160,887
370,742
32,515
403,257
11.3%

29,854
31,550
61,404
4,634
66,038

180,001
129,337
309,338
27,881
337,219

34,792
1,218
301,209

88,844
212,365
5.9%

2.05
2.03
0.48

$
$
$

$ 2,017,383
1,212,810
3,230,193
167,919
$ 3,398,112

$ 1,817,822
1,092,741
2,910,563
134,754
$ 3,045,317

199,561
120,069
319,630
33,165
352,795
10.4%

29,697
35,704
65,401
5,488
70,889

169,864
84,365
254,229
27,677
281,906

43,672
(1,351)
239,585

65,857
173,728
5.1%

1.68
1.66
0.40

$
$
$

Balance sheet data
Total assets
Long-term debt (including current portion)
Shareholders' equity

Statement of cash flows data
Cash flows generated by operations
Amount of additions to fixed assets,
net of proceeds on disposal

$ 2,133,072
$
302,521
$ 1,315,850

276,485

76,345

$ 2,069,548
$
371,911
$ 1,156,829

287,572

84,520

$ 1,970,686
$
521,135
$ 1,016,504

223,532

66,531

2 0 0 5 A N N U A L R E P O R T / S A P U T O 2 1

Saputo’s consolidated revenues totalled $3.883 billion, an
increase of $313.0 million or 8.8% compared to $3.570 billion
posted in fiscal 2004. The increase is attributed to our Dairy
Products Division (Canada), as a result of increased sales volumes
and higher selling prices, along with the inclusion of a full year of
activity from our Dairy Products Division (Argentina) compared to
only 18 weeks in fiscal 2004. These two factors contributed
approximately $254 million of additional revenues in fiscal 2005.
Our US Dairy Products Sector benefited from a US$0.28 higher
average block market per pound of cheese, increasing revenues by
approximately $148 million compared to last fiscal year. However,
the appreciation of the Canadian dollar eroded about $70 million
in revenues. Furthermore, a 3% decrease in sales volumes in our
US Dairy Products Sector negatively affected revenues. The
Grocery Products Sector revenues were approximately $9 million
or 5.1% lower compared to fiscal 2004.

Earnings before interest, income taxes, depreciation and
amortization amounted to $407.8 million, an increase of
$4.5 million compared to $403.3 million in fiscal 2004. The
increase is attributed to our Canadian and Other Dairy Products
Sector. Increased sales volumes and the benefit of the
rationalization activities undertaken in fiscal 2004 from our Dairy
Products Division (Canada) combined with the benefit from a full
year of results from our Dairy Products Division (Argentina)
contributed approximately $34 million in additional EBITDA. Our
US Dairy Products Sector EBITDA decreased by approximately
$24 million in fiscal 2005. The overall average block market per
pound of cheese of US$1.67 this fiscal year was higher compared to
US$1.39 last fiscal year. This benefited the EBITDA this fiscal year by
providing a better basis of absorption for our fixed costs, while a
less favourable relationship between the average block market per
pound of cheese and the cost of milk as raw material was observed
this fiscal year compared to fiscal 2004. With regards to inventories,
we started the fiscal year with a block market per pound of cheese
at US$2.09 and ended the year at US$1.62, causing an unfavourable
impact on the realization of inventories. These combined factors
had a negative impact of $29.7 million on EBITDA. The appreciation
of the Canadian dollar also eroded approximately $8 million of
EBITDA in fiscal 2005. These factors offset an increase of
approximately $12 million in our US Dairy Products Sector EBITDA
generated by continued improvements in our manufacturing

Net earnings
(in millions of dollars)

232.1

4
.
2
1
2

7
.
3
7
1

processes, price increases implemented on fixed price items and
better product mix within the retail segment. The EBITDA for our
Grocery Products Sector decreased by $5.9 million in fiscal 2005
caused by the reduced revenues, additional pension charges as well
as increased ingredient and labour costs.

EBITDA margin decreased from 11.3% in fiscal 2004 to 10.5% in
fiscal 2005, mainly as a result of reduced margins in our US Dairy
Products Sector. The US Dairy Products Sector was affected
negatively in terms of the relationship between the average block
market per pound of cheese and the cost of milk as raw material,
which decreased by US$0.063 per pound of cheese this fiscal year
compared to fiscal 2004.

Depreciation expense totalled $66.1 million, stable compared to
$66.0 million for the last fiscal year. The increase attributed to the
inclusion of a full year depreciation from our Argentina operations
was offset by a decrease in our Cheese Division (USA) depreciation
caused by the appreciation of the Canadian dollar.

Net interest expense decreased to $29.1 million in fiscal 2005 from
$36.0 million in fiscal 2004. The reduction is attributed to the
decrease in interest on long-term debt following repayments made.
The appreciation of the Canadian dollar also reduced the interest
expense on our US dollar debt.

Income taxes totalled $80.5 million for an effective tax rate of
25.7%, compared to 29.5% in fiscal 2004. The following two
factors explain the change in the effective tax rate. Firstly, a
greater portion of our taxable earnings was generated in Canada,
which is subject to lower tax rates than the United States.
Secondly, the Company benefited from a one-time tax reduction to
adjust future tax balances, due to a reduction in US tax rates, thus
reducing income taxes by $3.5 million.

For the year ended March 31, 2005, net earnings amounted to
$232.1 million, a 9.3% increase over $212.4 million in fiscal 2004.
The appreciation of the Canadian dollar eroded net earnings by
approximately $3 million, while the one-time tax adjustment
added $3.5 million to net earnings. Excluding these two factors,
net earnings would have risen by 9.0% compared to fiscal 2004.

Diluted net earnings per share
Dividends declared per share
(in dollars)

2.20

0.60

3
0
.
2

6
6
.
1

0
4
.
0

8
4
.
0

2003 2004 2005

2 2 2 0 0 5 A N N U A L R E P O R T / S A P U T O

INFORMATION BY SECTOR

Canadian and Other Dairy Products Sector

specialty products will continue and we are dedicating our
energies and resources in such a way as to capitalize on
opportunities in the current market.

The sector consists of our Dairy Products Division (Canada) and
our Dairy Products Division (Argentina).

Revenues (Canadian and Other Dairy Products Sector)

Our sales in the retail segment grew at the same pace as our
overall volumes, notably in Québec with our specialty and string
cheeses. The retail segment accounts for 48% of the revenues in
our Canadian cheese activities, the same as the previous fiscal year.

Revenues of the Canadian and Other Dairy Products Sector amounted
to $2.416 billion, an increase of $254 million or 11.7% over the
$2.162 billion in revenues for the previous fiscal year. Of the
$254 million increase in revenues in fiscal 2005, approximately 58%
or $148 million stems from our Dairy Products Division (Canada),
representing a 7% increase over last fiscal year. The remainder of
approximately $106 million is attributed to our Dairy Products
Division (Argentina), which contributed a full year to the revenues in
fiscal 2005 compared to only 18 weeks in fiscal 2004.

Relating to the $148 million increase in revenues from our Dairy
Products Division (Canada), approximately $49 million relate to
higher selling prices as a result of the increase in the cost of milk
as raw material. The rest is mainly related to volume growth in our
cheese, yogurt, cream and juice categories compared to the
previous fiscal year.

Saputo is the leader in cheese production in Canada, with about
38% of all the natural cheese manufactured in the country. On the
fluid milk side, Saputo’s production accounts for approximately
20% of the Canadian total, while in Argentina the Company ranks
third among dairy processors.

As for our Canadian cheese activities, our volumes showed a good
increase for fiscal 2005, driven by sales of specialty cheeses that
continued to grow. This fiscal year the specialty cheese sales
volumes rose by almost 10%. We are paying special attention to
this category by focusing on promotions and by continuing to
support our brands. We believe that consumer interest for these

Our cheese marketing activities focused on building strong national
brands, and driving sales of higher margin specialty cheeses. In
Canada, our flagship cheese brands include Saputo, Cheese Heads,
Armstrong, Cayer and Caron. All of these brands received significant
advertising and promotional support in fiscal 2005. This included
the use of television, print and radio advertising at both the
regional and national levels. One of our most successful television
campaigns aired in the first quarter in the Québec market, and
reinforced Saputo as a leader of Italian cheeses. We also utilized a
wide variety of promotional vehicles to support our cheese brands,
including in-pack promotions, demos, coupons and promotions
customized for specific grocery banners. We launched a number of
new cheese products in fiscal 2005, focusing on Italian, Canadian
and French specialty cheeses. Our specialty products continue to be
recognized for outstanding quality. For example, Cayer Bleubry was
the Blue Cheese Category Champion at the 2004 Canadian Cheese
Grand Prix. Moreover, eight of our cheeses finished first in their
respective categories at the British Empire Cheese Competition held
in Ontario in November 2004.

We maintained our predominance in the foodservice segment.
Sales growth in the segment is the result of the addition of new
clients during the course of the fiscal year and higher selling
prices caused by the increase in the cost of milk as raw material.
This segment accounts for 39% of the revenues in the Canadian
cheese activities, same as the previous fiscal year. In fiscal 2005,
we increased our specialty cheese market share in this segment.
We are pursuing opportunities in specialty cheeses through our
national accounts.

Revenues (% ) per market segment
Dairy Products Division (Canada)

Retail

Foodservice

Industrial

Revenues (in millions of dollars)
Canadian and Other Dairy Products Sector

2,415.5

9
.
1
6
1
,
2

4
.
7
1
0
,
2

2003 2004 2005

2 0 0 5 A N N U A L R E P O R T / S A P U T O 2 3

At close to 13% of revenues from our Canadian cheese activities,
our industrial segment consists of cheese and by-product sales.
The increase in our revenues is attributed to more favourable prices
on the international by-product market and to the additional sales
of skim milk powder, since we serve as a processor of last resort for
all excess milk in the three most western Canadian provinces.

Our Canadian fluid milk activities enjoyed a slight volume
increase over fiscal 2004. The bulk of the increase in revenues is
derived from the production and commercialization of Sunny Delight(3)
drinks under license for the total Canadian market. This
commercialization began in the final quarter of last fiscal year,
and we therefore benefited from a full year’s contribution to
revenues in fiscal 2005.

Our fluid milk and cream market share has remained relatively
stable in the Canadian provinces, with the exception of Québec
and Ontario, where we are continuing to increase our presence.
Breakdown of our revenues remains stable between the retail
segment (80%) and the foodservice segment (20%).

Our milk marketing resources are deployed in order to maximize
our profitability. More precisely, our value-added products such as
our yogurts, non-dairy creamers, functional milks and flavoured
milks received significant advertising and promotional support.
Some examples of such products include Milk 2 Go / Lait’s Go,
Dairyland Plus / Nutrilait Plus, Dairyland yogurts and International
Delight(3) non-dairy creamers.

We continue to focus on product innovation to enhance our
reputation as a market leader and to drive incremental revenue
and profit. For example, Dairyland Cottage Cheese Combos was
launched in the first quarter of fiscal 2005 and is the first and only
flavoured single-serve cottage cheese available in Canada.
Similarly, Dairyland Li’l Ones Yogurt, launched in the fourth
quarter of fiscal 2005, is the first Canadian yogurt specifically
formulated for babies and toddlers.

In fiscal 2005, we continued with our vending-machine program,
with over 500 machines in service across Canada. We intend to
pursue the growth potential and increase the number of vending-
machines throughout Canada into appropriate locations.

The dairy products market in Canada is both stable and competitive.
No trend was observed in the market that would necessitate
alternate ways of managing either our prices, rebates or discounts.

In Argentina, our activities continue to develop at an interesting
pace. Revenues from these activities for fiscal 2005 amounted to
$150.3 million, surpassing the revenue trend for the division at the
acquisition date. Strong product demand from the international
market has allowed us to grow our export revenues throughout the
fiscal year. Our domestic market also benefited from strong local
conditions. These factors were the major contributors allowing the
division to achieve the fiscal 2005 revenues.

(3) Trademarks used under license.

2 4 2 0 0 5 A N N U A L R E P O R T / S A P U T O

Revenues (% ) per geographic segment
Dairy Products Division (Argentina)

International

Domestic

EBITDA (Canadian and Other Dairy Products Sector)

At March 31, 2005, our earnings before interest, income taxes,
depreciation and amortization (EBITDA) totalled $244.2 million,
as compared to $209.9 million a year earlier, an increase of
$34.3 million or 16.3%. The EBITDA margin in this sector climbed
from 9.7% in the previous fiscal year to 10.1% in fiscal 2005. Our
Argentina activities throughout the fiscal year have continued to
improve their EBITDA margins, although inferior to comparable
Canadian activities. Included in our EBITDA for fiscal 2005 is a
$2.6 million gain on disposal of fixed assets held for sale.

The increase in the EBITDA is attributed to several factors. In fiscal
2005, we worked on further consolidating our manufacturing
operations
in response to the rationalization measures
implemented during fiscal 2004. Important changes were
implemented so that we would be in a position to secure the
savings that were anticipated from those rationalization
measures. These savings began to materialize in the second
quarter, and amounted to roughly $5 million for fiscal 2005. We
have improved our operational efficiencies and expect to generate
annual savings of approximately $7 million. Fiscal 2004 EBITDA
included rationalization expenses of $7.8 million. In addition, the
increase in our cheese volumes contributed to the EBITDA.
Furthermore, serving as a processor of last resort for all excess
milk in the three most western Canadian provinces, we had access
to milk surpluses that enabled us to increase our sales volumes of
skim milk powder, which contributed to the results but do not
generate the same EBITDA margins as our cheese revenues. Also
our EBITDA benefited from a full year’s contribution of Sunny Delight(3)
drinks, which began commercialization in the final quarter of last
fiscal year. Finally, during fiscal 2005 the market for by-products,
although volatile, had a favourable impact of $1.3 million
compared with fiscal 2004.

Despite the delay in the realization of savings relative to certain
rationalization measures, the Canadian and Other Dairy Products
Sector performed well. The progress made in sales volumes of our
cheeses, juices, yogurts and flavoured milks enabled the sector to

EBITDA (in millions of dollars)
Canadian and Other Dairy Products Sector

244.2

9
.
9
0
2

6
.
9
9
1

2003 2004 2005

strongly position the Company in the Canadian market. We believe
there are other opportunities for growth in the market, especially in
Québec and in Ontario, where we have a relatively small presence.

Furthermore, the merger of the former Cheese and Milk divisions
(Canada) into a single operating unit, enabled us to identify
certain opportunities that should generate additional savings
both in administrative terms and at the logistics, transportation
and distribution levels. We are currently working on taking full
advantage of every targeted opportunity.

Outlook (Canadian and Other Dairy Products Sector)

The consumer excitement over specialty cheeses observed in
fiscals 2004 and 2005 prompted us to redefine the positioning of
those products in our operations. We plan to take advantage of
that consumer enthusiasm by increasing our marketing support
through redefining our packaging and brand names among other
things. Our manufacturing processes being stable, reliable and
efficient, we believe that we are in a position to expand the
Company through this developing niche.

The recent acquisition of the activities of Fromage Côté S.A and
Distributions Kingsey Inc. will complement our specialty cheese
business and provide opportunities for growth. The acquisition will
add approximately $110 million to revenues. The purchase price was
$52.9 million on a debt-free basis. We will, in the coming fiscal year,
prepare an action plan covering all aspects of this operation.

As for our Canadian fluid milk activities, we will be concentrating
on developing our customer base, with our juice, yogurt and
flavoured milk products generating more favourable EBITDA
margins. At the same time, our manufacturing efficiency remains a
priority and we will continue to be a low-cost processor. We are also
carrying on with our vending-machine program as well as with our
efforts to increase our market share in Québec and in Ontario.

During fiscal 2005, certain fixed asset investments were completed
in our Dairy Products Division (Canada) in relation to plant
capacity. These capital investments started in fiscal 2004. Taking
into consideration that sales volumes have increased both in the
cheese and fluid milk activities, our excess production capacity
went from 20% to 18% in our Canadian cheese activities and from
32% to 31% in our fluid milk activities.

For our Argentina activities, great progress has been made this
current fiscal year. We were successful in integrating the Saputo
systems and values. Capital investments have been made with the
installation of new technologies and equipment that will allow us
to extend our product offering and improve our profitability. We
are committed in the following fiscal year to continue the capital
investments required to make this division a success. We plan to
add $30 million of capital investments for our Argentina
operations in fiscal 2006. This will allow the Company to manage
its by-products and take full advantage of the opportunities, on
both the international and domestic markets.

2 0 0 5 A N N U A L R E P O R T / S A P U T O 2 5

US Dairy Products Sector

Our Cheese Division (USA) performed well under difficult
conditions in fiscal 2005. Although the division experienced a
more favourable average block market per pound of cheese, it was
negatively affected by the relationship between the average block
market per pound of cheese and the cost of milk as raw material.

In fiscal 2005, we were able to maintain a good balance among our
three market segments: retail, foodservice and industrial.

Revenues (US Dairy Products Sector)

Fiscal 2005 revenues totalled $1.309 billion, an increase of
$68 million or 5.5% over the $1.241 billion in revenues attained in
fiscal 2004. The higher average block market per pound of cheese
this fiscal year had a positive impact of $148 million on the
revenues we generated in the United States. The average block
market per pound of cheese during fiscal 2005 was US$1.67, a
US$0.28 increase over the average US$1.39 in fiscal 2004.

The high market at the end of fiscal 2004 along with early price
increases implemented on fixed price items took their toll on
overall volumes in fiscal 2005. Overall sales volumes declined by
3.0% for the fiscal year. Most of the decline took place within the
fiscal 2005 second quarter following the effect of a high block
market along with price increases. The majority of the volume
decline was concentrated in commodity type cheeses where the
industry struggled with over-capacity issues. Retail volumes
suffered slightly in light of the higher prices during the fiscal year.
On the other hand, volumes in the string cheese, hard cheese and
other specialty cheese categories all experienced increases over
the previous fiscal year.

The appreciation of the Canadian dollar throughout the fiscal year
negatively affected revenues by approximately $70 million.

We market our products in three market segments: retail,
foodservice and industrial. Our pricing, rebating and discounting
practices in all three segments were unchanged throughout the
fiscal year.

The retail segment accounts for 30% of our total sales volume in
the United States, same as the previous fiscal year. In the last
fiscal year, we concentrated our marketing efforts on supporting
our brands with distinctive promotions to increase market share in
several highly competitive retail cheese categories. Frigo Cheese
Heads remains the number one brand of string cheese in the
United States. This brand is supported with consumer promotion,
utilizing on-pack offers, coupon distribution, and Web and print
advertising. In the summer we offered the Crayola Twistables(4)
crayon promotion and followed up in the fall with a Simpsons(5)
promotion. Several new line extensions were introduced to take
advantage of consumer trends within the cheese category such as
Frigo Cheese Heads Snack Sticks containing mild Cheddar and Colby
jack stick cheeses to complement our Cheese Heads line. Stella
Shaved Parmesan Deli Cups were introduced in a format that helps
satisfy consumers’ desires for a restaurant-quality dining
experience at home, as salads topped with shaved Parmesan have
been featured on many restaurant menus. We also launched a line
extension of flavoured fetas under the Treasure Cave brand
including tomato and basil, garden herb and reduced fat. Feta
cheese consumption continues to grow and new flavours broaden
consumer trial and repeat purchasing. Our marketing efforts were
recognized at the International Dairy Foods Association 2005
Achieving Excellence Awards by winning Best Overall Promotion,
Best Overall Website, Best New Cheese Product, Best Cheese Package
Redesign, and Best Cheese Package Design.

Sales volumes (% ) per market segment
US Dairy Products Sector

Foodservice

Retail

Industrial

Revenues (in millions of dollars)
US Dairy Products Sector

1,308.7

0
.
1
4
2
,
1

8
.
2
1
2
,
1

2003 2004 2005

(4) Crayola, Twistables, chevron, and serpentine are registered trademarks, smile design is a trademark of Binney & Smith.
(5) THE SIMPSONSTM & ©2004 Twentieth Century Fox Film Corporation. All Rights Reserved.

2 6 2 0 0 5 A N N U A L R E P O R T / S A P U T O

The foodservice segment accounts for 44% of our total sales
volume in the United States, a slight increase compared to last
fiscal year. We experienced volume growth in this segment due to
the quality of our products, the quality of our customer service,
and the quality of our people at every level throughout the
organization. During the fiscal year we concentrated on national
accounts and were successful in landing new customers in that
channel. At the same time, we worked hand in hand with our
distributors to enhance their sales.

The industrial segment represents 26% of our total sales volume
in the United States, a slight decrease compared to last fiscal year.
Market volatility and excess production capacity in the industry
inhibited our ability to meet our volume growth targets for this
segment. The price-sensitive, large industrial customer typical to
this segment is an attractive target for companies looking to fill
idle capacity quickly. In the short run, we do not sacrifice
profitability for the sake of market share. In the longer term
however, we work to develop more effective formulations that
meet larger customers’ expectations for product performance and
price. Products in the industrial segment also include whey
by-products, sweetened condensed milk and eggnog. Prices of
by-products in the international market rebounded in fiscal 2005.

EBITDA (US Dairy Products Sector)

During fiscal 2005, earnings before interest, income taxes,
depreciation and amortization totalled $137.0 million, a
$23.9 million or 14.9% decrease compared to $160.9 million
posted in fiscal 2004. Fiscal 2005 was a volatile year. The overall
average block market per pound of cheese of US$1.67 this fiscal
year was higher compared to US$1.39 last fiscal year. This
benefited the EBITDA this fiscal year by providing a better basis of
absorption for our fixed costs, while a less favourable relationship
between the average block market per pound of cheese and the
cost of milk as raw material was observed this fiscal year compared
to last fiscal year. Fiscal 2004 started with a block market per
pound of cheese of US$1.08 and ended with US$2.09, setting the

stage for major declines from that peak and extreme volatility in
fiscal 2005 which ended the year at US$1.62. The margin is
compressed in a declining market because the milk cost follows the
block market on a delayed basis. In theory, these are timing
differences which balance out over time. There is no guarantee
however, that the balancing will occur within any particular fiscal
year. Moreover, the balancing depends on volume remaining
relatively constant throughout the period. With regards to
inventories, we started the fiscal year with a block market per
pound of cheese at US$2.09 and ended the year at US$1.62,
causing an unfavourable impact on the realization of inventories.
These combined factors had a negative impact of $29.7 million on
EBITDA. Prices of by-products on the international markets
rebounded in fiscal 2005, generating a positive impact on EBITDA
of $1.4 million. However, the appreciation of the Canadian dollar
created a shortfall in EBITDA of $7.6 million. These factors offset an
increase of approximately $12 million in our EBITDA generated by
continued improvements in our manufacturing processes, price
increases implemented on fixed price items and better product mix
within the retail segment.

Outlook (US Dairy Products Sector)

US Dairy Product Sector continues to produce quality products
that meet the needs of our clientele. During the past fiscal year,
we are particularly proud to have increased our sales in specialty
and branded products such as string cheeses, Parmesan cheeses,
Asiago cheese and others. This is a testimony to the continuous
quality of products and services provided by Saputo people from
plant floor right up to the customer’s location. We are looking
forward to the upcoming fiscal year with optimism as we are
poised to launch several new products to complement our Frigo
Cheese Heads line, our specialty Stella hard and blue cheeses. We
also embrace the new fiscal year with a mandate to be innovative
at every level. First at the operations level as we will apply
innovative processes and techniques to diminish the impact of raw
material and overhead cost increases, then at the marketing level
with innovative promotions, product creation and packaging, and

EBITDA (in millions of dollars)
US Dairy Products Sector

137.0

9
.
0
6
1 1
.
0
2
1

2003 2004 2005

2 0 0 5 A N N U A L R E P O R T / S A P U T O 2 7

at the sales level to enhance service to our clients and finally,
internally, to continually improve the training of our employees.

The recent acquisition of the activities of Schneider Cheese, Inc. in
May 2005 will further increase our presence in the string cheese
category. These assets will complement our current cheese-
making activities in the United States. The acquisition will add
approximately US$40 million to revenues. The purchase price was
US$24.4 million on a debt-free basis. During fiscal 2006, we will
prepare an action plan covering all aspects of this operation in
order to bring added-value to its activities.

During fiscal 2005, we completed projects that increased our
capacity in certain manufacturing locations and enhanced the
production capabilities of our specialty plants for greater efficiency
and quality so that we can remain competitive despite rising energy,
ingredients and other manufacturing costs. In the upcoming fiscal
year, we will continue to evaluate our operations and will
accordingly invest in projects that will enhance our profitability and
better serve the needs of our clients. We are currently running at
90% capacity after having completed the investment projects. If
necessary, we could add additional manufacturing capacity to our
plants with minimal capital investments.

Once again in fiscal 2005, the fluctuations in the pricing of dairy
products on the Chicago Mercantile Exchange (CME) significantly
affected the results of our Cheese Division (USA). As mentioned in
prior fiscal years, base prices are set according to daily
transactions conducted at the CME. The CME acts as an auction
market for certain commodity products where brokers represent
buyers and sellers. Cheese is bought and sold on a daily basis,
whereas butter is traded three days a week. The prices established
at the end of a session serve as the reference price for most cheese
and butter sales made in the United States. The CME market for
Cheddar cheese blocks began fiscal 2005 at US$2.09, ranged from
a low of US$1.36 to a high of US$2.20 during fiscal 2005, and
closed at US$1.62 at March 31, 2005. These fluctuations in the
cheese block market have had a significant effect on the results of
our Cheese Division (USA). To remain successful, we must
continually monitor the cheese block market and react
accordingly. We are sensitive to the situation and we will actively
search for permanent solutions that could provide more stability.

For a second consecutive fiscal year, the appreciation of the
Canadian dollar negatively affected our results in fiscal 2005. It is
extremely difficult to predict fluctuations in the US or Canadian
currencies as exchange rates can be affected by many factors.

2 8 2 0 0 5 A N N U A L R E P O R T / S A P U T O

Grocery Products Sector

The Grocery Products Sector consists of the Bakery Division and
accounts for 4.1% of the Company’s revenues.

Revenues (Grocery Products Sector)

Revenues from the Grocery Products Sector totalled $158.8 million
for the fiscal year ended March 31, 2005, down $8.6 million in
comparison with the previous fiscal year. During fiscal 2005,
sales volumes also fell by 4.9% in comparison with the previous
fiscal year.

The decrease in volume is attributable to several factors. In the
third quarter of fiscal 2005, we took over the distribution network
in the Maritimes, which was previously operated by a third party.
Although a positive step, it had a slight downward effect on our
revenues due to the transition period. In addition, the arrival of
Easter in April 2004 and March 2005 this fiscal year, has negatively
affected our revenues twice, since this is traditionally a slower
period for us. Finally, on February 7, 2005, we increased the base
selling price for our economy- and family-size products, which
affected some of our volumes.

Throughout the fiscal year, we were active in supporting our brand
names. The category in which we operate requires innovation and
new features on a regular and a seasonal basis. New products were
introduced for the Christmas and Easter holiday periods, namely
Brownies Dominoël, Ah Caramel! Black Forest, Mini 1/2 Moon
Strawberry-Vanilla and the Ah Caramel! Easter Eggs. Other items
targeting younger consumers, like Dynamite brand cakes, were
introduced as permanent products.

With the aim of offering our customers the products they seek, we
introduced at the end of fiscal 2005 the new trans-fat-free Hop&Go!
line, backed by an advertising campaign on television and
magazines which started at the beginning of fiscal 2006. Our leader
brands Jos. Louis, Ah Caramel!, 1/2 Moon and Brownies are now
offered either in a trans-fat-reduced or trans-fat-free formula.

In Canada, despite an increasingly competitive market, the
division was able to retain its market share.

With regards to the US market, there was no material fluctuation
in sales during the fiscal year. The introduction of our products to
this market remains a small-scale undertaking, proceeding a step
at a time and in well defined areas.

EBITDA (Grocery Products Sector)

EBITDA for the fiscal year ended March 31, 2005, amounted to
$26.6 million, a drop of $5.9 million from that of the previous fiscal
year. The EBITDA profit margin dipped from 19.4% in fiscal 2004 to
16.7% in fiscal 2005. Several elements account for these declines.
Firstly, the drop in revenues in fiscal 2005 compared to fiscal 2004,
as mentioned in the revenues section above, created a reduction in
EBITDA. Secondly, compared to the same period last fiscal year, we
were subject to certain manufacturing cost increases during fiscal
2005, including increases in raw material and packaging costs, as
well as labour costs. Moreover, as mentioned in our fiscal 2004
annual report, the division incurred additional expenses during
fiscal 2005 related to the pension plan of approximately
$2.3 million as compared to fiscal 2004. Throughout fiscal 2004
and fiscal 2005, fixed-asset investments have enabled us to
improve our production efficiency by switching to the use of
robotization in certain operations. These increased efficiencies,
however, were not sufficient to preserve our EBITDA margin.

Outlook (Grocery Products Sector)

Fiscal 2005 has turned out to be a highly constructive year,
enabling the Bakery Division to identify the various market growth
potentials in Canada.

In order to offset the impact of various cost increases, we
announced an increase in the base price of our family- and
economy-size products. Even if in the short term, this price
increase had an effect on our sales volumes, we are confident that
the sales volumes will resume to normal levels. We already practice

Revenues (in millions of dollars)
Grocery Products Sector

158.8

9
.
7
6
1

4
.
7
6
1

EBITDA (in millions of dollars)
Grocery Products Sector

26.6

2
.
3
3

5
.
2
3

2003 2004 2005

2 0 0 5 A N N U A L R E P O R T / S A P U T O 2 9

daily raw-material supply management, and we are subject to, like
any manufacturer, increases in raw-material costs such as
packaging and labour costs. Contrary to past practices, the
revision of our selling prices will take place annually to ensure that
the division can continue to grow.

We took over our Maritime distribution network to have greater
control of market penetration, which incidentally will be receiving
in fiscal 2006 additional marketing investments to support the re-
launching of our Hop&Go! brand.

The snack cake, cereal bar and tart categories experienced
somewhat difficult times in fiscal 2005 with the emergence of the
trans-fat concern. In our position as leader, we were quick to
introduce different products that responded to this new reality. We
will be increasing our efforts in the upcoming fiscal year to expand
our product offering at this level. The efforts from our research
and development activities will support the division in order to
market products that will meet consumer demands.

As a way of expanding our business, we developed over fiscal 2005
certain products for the in-store bakery and foodservice segments,
and we will over fiscal 2006 present our products to the market. We
believe growth possibilities in those segments are realistic.

In the United States, we are exploring other avenues to sell our
products through co-packing arrangements for whom we would
manufacture products for US customers.

The result of these initiatives will enable us to make better use of
the excess capacity of our plant, which totals about 31%. Fixed-
asset investments anticipated for fiscal 2006 will be in support of
our development efforts.

Even though we operate in an industry referred to as one of
indulgence, we remain convinced that consumers will continue to
treat themselves. Our responsibility as leader in the snack-cake
category in Canada will be to contribute to the growth of the entire
category while never losing sight of consumer concerns regarding
healthy eating.

As mentioned in our fiscal 2004 annual report, we took the
decision to retain the Bakery Division and to invest approximately
$20 million over the next three years for the development and the
redeployment of its brands. In fiscal 2005, we took further steps to
consolidate our position and strengthen the division through
different initiatives. Fiscal 2006 will be the first of the three-year
plan for which the investments will be covered by additional
profitability generated within the same three years.

LIQUIDITY

Cash generated by operating activities before changes in non-cash
working capital items totalled $305.3 million for fiscal 2005,
slightly higher compared to the $301.3 million for fiscal 2004.
During fiscal 2005, non-cash operating working capital items used
$28.8 million, compared to a usage of $13.7 million in fiscal 2004.
The increased usage is the result of increased inventory values at our
Dairy Products Division (Canada) and our Cheese Division (USA). The
increase in our Canadian operations is attributed to an increase of
approximately 8% in the cost of milk as raw material. Our Cheese
Division (USA) inventory increase is attributed to a combination of
higher inventory volumes and the increased inventory cost in line
with the higher average block market per pound of cheese in
fiscal 2005.

In investing activities, the Company added $81.8 million in fixed
assets, of which nearly 35% went into the replacement of fixed
assets. The remaining funds were used to implement new
technologies, as well as to expand and
increase certain
manufacturing capacities. The total of fixed asset spending compares
favourably to our original budget of $80 million. The Company also
disposed of unused assets in fiscal 2005 for total proceeds of
$5.4 million, mostly in our Dairy Products Division (Canada).

As for financing activities, the Company repaid approximately
$44 million of long-term debt. With this long-term debt
repayment, the Company fully repaid the Canadian long-term debt
under its initial contractual obligations of February 2001
governing loans issued as part of the acquisition of Dairyworld.
The Company also repaid $68.8 million of bank loans.

For fiscal 2005, the Company issued shares for a cash consideration
of $13.5 million as part of the Stock Option Plan, and paid out
$59.5 million in dividends.

FINANCIAL RESOURCES

At March 31, 2005, the Company’s working capital stood at
$452.6 million, an increase of $155.4 million over the
$297.2 million at the end of the previous fiscal year. The increase
is attributed mostly to the complete repayment of the current
portion of long-term debt and the significant reduction of
outstanding bank loans as well as the increased cash positions as
at March 31, 2005, resulting from the strong cash flows generated
by the Company in fiscal 2005. Our interest bearing debt-to-equity
ratio has also improved significantly, from 0.39 as at March 31, 2004
to 0.21 as at March 31, 2005.

The Company’s financial condition continues to improve. As
operations continue to generate positive cash flows, we do not
foresee any additional working capital requirements.

3 0 2 0 0 5 A N N U A L R E P O R T / S A P U T O

SHARE CAPITAL INFORMATION

Share capital authorized by the Company is comprised of an
unlimited number of common and preferred shares. The common
shares are voting and participating. The preferred shares can be
issued in one or more series, and the terms and privileges of each
class must be determined at the time of their creation.

Issued as at
Authorized March 31, 2005

Issued as at
June 1, 2005

Common shares
Preferred shares
Stock options

Unlimited
Unlimited

104,527,282 104,625,499
None
5,551,832

None
4,797,915

OFF-BALANCE SHEET ARRANGEMENTS

For all of its operations, the Company has certain off-balance sheet
arrangements, consisting primarily of leasing certain premises as
well as certain lease agreements for equipment and rolling stock.
These agreements are recorded as operating leases. Future minimum
lease payments as at March 31, 2005 totalled $38.9 million.

The Company does not use derivative financial instruments for
speculation. Saputo uses certain derivative financial instruments
in specific situations. In the normal course of business, our
Canadian operation
imports certain products and our
management of foreign exchange risk occasionally leads us to
make certain foreign currency purchases in euros, of which the
total amount as at March 31, 2005 was 1,200,000 euros.

The Company periodically enters into forward contracts to protect
itself against price fluctuations on certain commodities when
it has secured a commitment to sell a finished product. As at
March 31, 2005, the fair value of these contracts is $0.9 million.

The Company’s exposure to the derivative financial instruments
used is not affected by changing economic conditions, since these
instruments are generally held until maturity.

Notes 16 and 17 to the consolidated financial statements describe
the Company’s off-balance sheet arrangements.

For fiscal 2006, we foresee making about $100 million in additions
to fixed assets, with approximately $60 million earmarked for new
technology and added manufacturing capacity. The remainder will
be devoted to replacing certain fixed assets. The increase in fixed
asset additions is due to the continuing investment in our
Argentina operations along with strategic investments planned for
our Dairy Products Division (Canada). The Company expects fixed-
asset depreciation expense in the amount of approximately
$70 million. All funds required for the additions to fixed assets will
be generated from Company operations. As at March 31, 2005,
the Company had no significant commitments related to fixed-
asset acquisitions.

The Company currently has at its disposal bank credit facilities of
$234 million, $15.1 million of which are drawn. The Company also
has $41.5 million of cash on hand. Should the need arise, the
Company can make additional financing arrangements to pursue
growth through acquisitions.

BALANCE SHEET

In comparison to March 31, 2004, the main balance sheet items at
March 31, 2005 varied due to the appreciation of the Canadian
dollar versus both the US dollar and the Argentina peso. The
conversion rate of our US operation’s balance sheet items in US
currency was CND$1.2096 per US dollar as at March 31, 2005,
compared to CND$1.3113 per US dollar as at March 31, 2004. The
conversion rate of our Argentina operation’s balance sheet items
in Argentina pesos was CND$0.4135 per Argentina peso as at
March 31, 2005, compared to CND$0.4570 per Argentina peso as at
March 31, 2004. The increased Canadian dollar results in lower
values recorded for the balance sheet items of our foreign
operations. From an operations perspective, as at March 31, 2005,
our inventory levels were approximately $32 million higher than
levels from the previous fiscal year. The inventory increase is
attributed to our Dairy Products Division (Canada), resulting
principally from an increase of approximately 8% in the cost of
milk as raw material, and our Cheese Division (USA), due to a
combination of higher inventory volumes and the increased
inventory cost in line with the higher average block market per
pound of cheese in fiscal 2005. In fiscal 2006, our objective is to
reduce our inventory by approximately $35 million. As at March 31,
2005, the amount of current portion of long-term debt has been
eliminated following repayments made throughout the fiscal year.
Income taxes payable increased from $26.0 million at March 31, 2004
to $67.4 million at March 31, 2005. The increase is the result of tax
planning initiatives undertaken by the Company that deferred
various tax payments. The change in foreign currency translation
adjustment listed under shareholders’ equity is determined on the
basis of the change in foreign exchange rates. The Company’s total
assets stood at $2.133 billion as at March 31, 2005, compared to
$2.070 billion as at March 31, 2004.

2 0 0 5 A N N U A L R E P O R T / S A P U T O 3 1

GUARANTEES

From time to time, the Company enters into agreements in the
normal course of its business, such as service arrangements and
leases, and in connection with business or asset acquisitions or
disposals, agreements, which by nature may provide for
indemnification to third parties. These indemnification provisions
may be in connection with breach of representations and
guarantees and for future claims for certain liabilities, including
liabilities related to tax and environmental issues. The terms of
these indemnification provisions vary in duration.

Note 16 to the consolidated financial statements discusses the
Company’s guarantees.

CONTRACTUAL OBLIGATIONS

ACCOUNTING STANDARDS

Applied Standards

Disposal of Long-Lived Assets and Discontinued Operations

Section 3475 of the Canadian Institute of Chartered Accountants
(CICA) Handbook, Disposal of Long-Lived Assets and Discontinued
Operations, established standards for the recognition, measurement,
presentation and disclosure of long-lived assets. It also establishes
standards for the presentation and disclosure of discontinued
operations, whether or not they include long-lived assets.

The requirements apply to disposal activities initiated, following
the Company’s commitment to pursue a plan, effective May 1, 2003.
The Company prospectively adopted these new recommendations
effective in fiscal 2004, which had no significant impact on the
Company’s consolidated financial statements.

The Company’s contractual obligations consist of commitments to
repay its long-term debt as well as certain leases of premises,
equipment and rolling stock.

Asset Retirement Obligations

Note 7 describes the Company’s commitment to repay long-term
debt, and Note 16 describes its lease commitments.

(in thousands of dollars)
2006
2007
2008
2009
2010
Subsequent years
Total

Long-term
debt
-
36,388
21
-
205,632
60,480
302,521

Minimum
lease
9,886
8,322
6,113
5,066
4,064
5,424
38,875

TOTAL
9,886
44,710
6,134
5,066
209,696
65,904
341,396

Section 3110 of the CICA Handbook, Asset Retirement Obligations,
requires the recognition of liabilities for legal obligations, whether
they are of a legal, prescribed, contractual or other nature, and
normally when these obligations arise. The liability’s fair value is
initially measured and the related costs are capitalized in the
carrying amount of the fixed asset in question. The asset retirement
cost is amortized in the income statement using a systematic and
rational method. The Company prospectively adopted these new
recommendations effective April 1, 2004, which had no significant
impact on the Company’s consolidated financial statements.

Hedging Relationships

RELATED PARTY TRANSACTIONS

In the normal course of business, the Company receives and
provides goods and services from and to companies subject to
significant influence by its principal shareholder. These goods and
services of an immaterial amount are compensated by a counterpart
equal to the fair market value.

The CICA Accounting Guideline AcG-13, Hedging Relationships,
specifies the circumstances in which hedge accounting is
appropriate, and it examines in particular the identification,
documentation, designation and effectiveness of hedge
accounting, as well as the discontinuance of hedge accounting.
The Company prospectively adopted these new recommendations
effective April 1, 2004, which had no significant impact on the
Company’s consolidated financial statements.

Employee Future Benefits

Section 3461 of the CICA Handbook, Employee Future Benefits,
expanded the disclosure requirements for these plans on both
annual and
financial statements. The Company
prospectively adopted these new recommendations effective
April 1, 2004.

interim

3 2 2 0 0 5 A N N U A L R E P O R T / S A P U T O

Accounting by a Customer for Certain Consideration Received
from a Vendor

Portfolio Investment

The CICA Emerging Issues Committee EIC-144, Accounting by a
Customer for Certain Consideration Received from a Vendor, provides
guidance on how a customer of a vendor's products should account
for cash consideration received from a vendor. The Company
retroactively adopted this new recommendation effective
July 1, 2004, which had no significant impact on the Company's
consolidated financial statements.

The portfolio investment is recorded at cost. The Company carries
out an annual valuation to ensure that the fair value of the
investment is not lower than the carrying amount. To calculate an
estimated fair value, the Company uses the company’s EBITDA by
applying to it a multiple based on comparable industry standards.
If the portfolio investment undergoes a decline in value that is
permanent, its carrying amount would be written down to account
for this decline in value.

Consolidation of Variable Interest Entities

Goodwill

The accounting standards require that goodwill no longer be
amortized, and that an impairment test be performed annually or
more frequently when events occur or circumstances arise that could
indicate a reduction in its fair value. To determine any decline in
value, each of the respective accounting units are required to
undergo an assessment. The Company’s assessments are based on
multiples for Saputo and for the industry. These multiples are applied
to EBITDA and net assets. Should the calculated value be lower than
the book value, a write-down would be taken. The Company has
performed the impairment test, no write-down was necessary.

Stock Based Compensation

The Company uses the fair value based method to expense stock
based compensation. With this method, the Company records a
compensation cost over the vesting period of the options granted.
The expected useful life of options used for calculating the fair value
of options is based on management’s experience and judgment.

Trademarks

Impairment testing has to be performed on all trademarks
annually. Estimated future cash flows to be derived from the
trademarks are discounted to the present using current market
rates. The discounted cash flow is compared to the carrying value
of the trademarks. Should the discounted cash flow be lower than
the book value, a write-down would be taken. The Company has
performed the impairment test, no write-down was necessary.

The CICA Accounting Guideline AcG-15, Consolidation of Variable
Interest Entities, requires enterprises to identify Variable Interest
Entities in which they have an interest, to determine if they are the
primary beneficiary of such entities, and, if so, to consolidate them.
The Company prospectively adopted this new recommendation
effective January 1, 2005, which had no impact on the Company's
consolidated financial statements.

Future Standards

The CICA issued in April 2005 new accounting standards for
recognition, measurement and disclosure of
financial
instruments, hedges and comprehensive income. The new
requirements are all to be applied at the same time and are
effective for interim and annual financial statements relating to
fiscal years beginning on or after October 1, 2006. The Company is
presently assessing the impact of the new recommendations on
the consolidated financial statements.

CRITICAL ACCOUNTING POLICIES AND
USE OF ACCOUNTING ESTIMATES

in
The preparation of consolidated financial statements
accordance with generally accepted accounting principles requires
management to make estimates. These estimates are established
on the basis of previous fiscal years and management’s best
judgment. Management continually reviews these estimates.
Actual results may differ from those estimates. The following
section establishes the main estimates used in preparing the
consolidated financial statements of Saputo Inc.

Fixed Assets

In order to allocate the cost of fixed assets over their useful lives,
estimates of the duration of their useful lives must be carried out.
The cost of each fixed asset will then be attributed over the duration
of its useful life and amortized year after year on this basis.

2 0 0 5 A N N U A L R E P O R T / S A P U T O 3 3

Sensitivity Analysis
Pension Plans and Other Employee Future Benefits

(in thousands of dollars)
Anticipated rate of return on assets
Effect of an increase of 1%
Effect of a decrease of 1%
Discount rate
Effect of an increase of 1%
Effect of a decrease of 1%
Assumed growth rate of overall healthcare costs
Effect of an increase of 1%
Effect of a decrease of 1%

Pension Plans

The Company offers and participates in defined contribution
pension plans of which close to 82% of its active employees are
members. The net pension expenditure under these types of plans
is generally equal to the contributions made by the employer.

The Company also participates in defined benefit pension plans of
which the remaining active employees are members. The cost of
these pension benefits earned by employees is actuarially
determined using the projected benefit method prorated on
services and using management’s assumptions bearing on, among
other things, the discount rate, expected return on plan assets,
rates of compensation increase and the retirement age of
employees. All of these estimates and assessments are formulated
with the help of external consultants.

The discount rate is determined on the basis of the effective rates
of return on high-quality long-term corporate bonds, as required
by the adjusted standard, to account for the duration of plan
liability. The rate was downwardly adjusted last fiscal year from
6.25% to 6%, effective December 31, 2004. We expect that this
adjustment will increase our expense during fiscal 2006 by
approximately $0.5 million.

We established the expected average return on invested assets at
7.9% given the type and combination of these assets. This rate has
been revised to 7.3% for fiscal 2006. This assumption is deemed
reasonable and is supported by our external consultants. We
expect that this adjustment will increase our expense during fiscal
2006 by approximately $1 million.

The compensation growth rate was set at 3.5% over the long term,
taking into consideration estimated future inflation rates.

Pension plans

Other employee future benefits

Accrued
benefit
obligations

N/A
N/A

(18,434)
20,699

N/A
N/A

Net
expense

(1,697)
1,697

(1,669)
1,893

N/A
N/A

Accrued
benefit
obligations

Net
expense

N/A
N/A

(2,274)
2,783

2,439
(2,075)

N/A
N/A

(563)
395

224
(186)

The Company also offers a post-retirement medical benefit program.
For the purposes of assessing costs related to this program, the
hypothetical annual growth rate of medical costs was set at
between 5.5% and 7.0% for fiscal 2006 and, based on the
assumptions used, these rates should gradually decline to reach
5.0% in fiscal 2010 and subsequent fiscal years.

Any change in these assumptions or any plan experience that
differs from the expected entails actuarial gains or losses with
respect to expected results. If these gains or losses exceed 10 % of
the maximum of the asset or liability of the plans, they are
amortized over the expected average remaining service life of the
group of employees participating in the plans, in compliance with
CICA recommendations.

The above table presents a sensitivity analysis of the key economic
assumptions used to measure the impact on defined-benefit
pension obligations, on other employee future benefit obligations
and on net expenditure. This sensitivity analysis must be used with
caution, as its results are hypothetical, and variations in each of
the key assumptions could turn out not to be linear. The sensitivity
analysis should be read in conjunction with Note 15 of the
Consolidated Financial Statements. The sensitivity of each key
variable has been calculated independently of the others.

The measurement date of pension plan assets and liabilities is
December 31 of each fiscal year.

Pension plan assets are held by several independent trusts,
and the average composition of the overall portfolio as at
December 31, 2004 was 4% in cash and short-term investments,
47% in bonds and 49% in shares of Canadian, US and foreign
companies. In the long term, we do not expect any major change
to this asset allocation. In comparison to December 31, 2003, the
average composition was 2% in cash and short-term investments,
44% in bonds and 54% in shares.

3 4 2 0 0 5 A N N U A L R E P O R T / S A P U T O

For defined-benefit plans, actuarial valuations were performed as at
December 2002 and 2003, covering all obligations with respect to
this type of plan. In light of these valuations, a solvency deficiency
of 20 million was posted on December 31, 2003. This deficiency is
primarily due to an increase in plan liabilities resulting from a sharp
decline in the discount rate prescribed by provincial legislation on
pension plans, and from insufficient asset returns at the time of the
evaluation. In accordance with this provincial legislation, an
additional contribution is required for the next five years to pay off
this deficiency. An additional payment of $6.1 million was made in
fiscal 2005 ($4.6 million for fiscal 2004). The additional payment
required for fiscal 2006 will be $6 million. The next evaluation for
certain pension plans is scheduled for December 2005.

Future Income Taxes

The Company follows the liability method of accounting for income
taxes. Deferred income tax assets and liabilities are measured using
enacted or substantially enacted income tax rates expected to
apply to taxable income in the years in which temporary differences
are expected to be recovered or settled. As a result, a projection of
taxable income is required for those years, as well as an assumption
of the ultimate recovery or settlement period for temporary
differences. The projection of future taxable income is based on
management’s best estimates and may vary from actual taxable
income. On an annual basis, the Company assesses its need to
establish a valuation allowance for its deferred income tax assets.
Canadian, US and international tax rules and regulations are
subject to interpretation and require judgment on the part of the
Company that may be challenged by the taxation authorities. The
Company believes that it has adequately provided for future tax
obligations that may result from current facts and circumstances.
Temporary differences and income tax rates could change due to
fiscal budget changes and/or changes in income tax laws.

RISKS AND UNCERTAINTIES

Product Liability

Saputo’s operations are subject to certain dangers and risks of
liability faced by all food processors, such as the potential
contamination of ingredients or products by bacteria or other
external agents that may accidentally be introduced into products
or packaging. Saputo has quality control procedures in place
within its operations to reduce such risks and has never
experienced any material contamination problems with its
products. However, the occurrence of such a problem could result
in a costly product recall and serious damage to Saputo’s
reputation for product quality. We maintain product liability and
other insurance coverage that we believe to be generally in
accordance with the market practice in the industry.

Supply of Raw Materials

Saputo purchases raw materials that may represent up to 85% of
the cost of products. It processes raw materials into the form of
finished edible products intended for resale to a broad range of
consumers. Thus, variations in the price of foodstuffs can
influence Company results upwards or downwards, and the effect
of any increase of foodstuff prices on results depends on the
ability of the company to transfer those increases to its customers,
and this in the context of a competitive market.

US and International Markets

The price of milk as raw material and the price of our cheese
products in the United States and Argentina and by-products on
international markets are based on market supply and demand
forces. The prices are tied to numerous factors, such as the health
of the economy and supply and demand levels for dairy products in
the industry. Price fluctuations may affect the Company’s results.
The effect of such fluctuations on our results will depend on our
ability to implement mechanisms to reduce them.

2 0 0 5 A N N U A L R E P O R T / S A P U T O 3 5

Competition

Financial Risk Exposures

The food processing industry in North America is extremely
competitive. Saputo participates in this industry primarily
through its dairy operations. The Canadian dairy industry is highly
competitive and is comprised of three major competitors,
including Saputo. In the United States and Argentina, Saputo
competes in the dairy industry on a national basis with several
regional and national competitors. Our performance will be
dependent on our ability to continue to offer quality products at
competitive prices, and this applies to all the countries in which
we operate.

Saputo has financial risk exposure to varying degrees relating to
the foreign currency of our United States and Argentina
operations. Approximately 34% and 4% of our sales are realized in
the United States and Argentina, respectively. However, the cash
flows from these operations act as a natural hedge against
exchange risk. Cash flows from the United States also constitute a
natural hedge against the exchange risk related to debt expressed
in US dollars. At March 31, 2005, Saputo’s long-term debt was
made up of the US senior notes only, which are at a fixed rate
throughout their term.

Consolidation of Clientele

Regulatory Considerations

During the last few years, we have seen important consolidation in
the food industry in all market segments. Given that we serve
these segments, the consolidation within the industry resulted in
a decrease in the number of clients and an increase in the relative
importance of some clients. Our ability to continue to service our
clients in all the markets that we serve will depend on the quality
of our products, services and the prices of our products.

Environment

The production and distribution of food products are subject to
federal, state, provincial and local laws, rules, regulations and
policies and to international trade agreements, all of which
provide a framework for Saputo’s operations. The impact of new
laws and regulations, stricter enforcement or interpretations or
changes to enacted laws and regulations will depend on our ability
to adapt and comply. We are currently in compliance with all
important government laws and regulations and maintain all
important permits and licenses in connection with our operations.

Saputo’s business and operations are subject to environmental laws
and regulations. We believe that our operations are in compliance,
in all material aspects, with such environmental laws and
regulations, except as disclosed in our Annual Information Form
dated June 1, 2005 for the fiscal year ended March 31, 2005. Any
new environmental laws or regulations or more vigorous regulatory
enforcement policies could have a material adverse effect on the
financial position of Saputo and could require significant
additional expenditures to achieve or maintain compliance.

Growth by Acquisitions

The Company intends to grow both organically and through
acquisitions. Based on past experience, a significant portion of
this growth will likely occur through acquisitions. The ability to
properly evaluate the fair value of the businesses being acquired,
to successfully integrate them into the Company’s operations and
realize the expected profit and returns are inherent risks related
to acquisitions.

Consumer Trends

Demand for our products is subject to changes in consumer trends.
These changes may affect the Company’s earnings. In order to
constantly adapt to these changes, the Company innovates and
develops new products.

3 6 2 0 0 5 A N N U A L R E P O R T / S A P U T O

Tariff Protection

Dairy-producing industries are still partially protected from
imports by tariff-rate quotas which permit a specific volume of
imports at a reduced or zero tariff and impose significant tariffs
for greater quantities of imports. There is no guarantee that
political decisions or amendments to international trade
agreements will not, at some time in the future, result in the
removal of tariff protection in the dairy market, resulting in
increased competition. Our performance will be dependent on our
ability to continue to offer quality products at competitive prices.

CONTROLS AND PROCEDURES

The Chief Executive Officer and the Chief Financial Officer
together with management, after evaluating the effectiveness of
the Company’s disclosure controls and procedures as of March 31,
2005, have concluded that the Company’s disclosure controls and
procedures were adequate and effective to ensure that material
information relating to the Company and its consolidated
subsidiaries would have been known to them.

SENSITIVITY ANALYSIS OF INTEREST RATE
AND THE US CURRENCY FLUCTUATIONS

The portion of the long-term debt covered by fixed interest
rate equals 100%. The used portion of the bank credit facility is
subject to interest rate fluctuations, and was not being
protected as of March 31, 2005. A 1% change in the interest
rate would lead to a change in net earnings of approximately
$0.110 million, based on the $15.1 million in bank loans as of
March 31, 2005.

fluctuations may affect earnings.
Canadian-US currency
Appreciation of the Canadian dollar compared to the US dollar
would have a negative impact on earnings. Conversely, a decrease
in the Canadian dollar would have a positive impact on earnings.
During the fiscal year ended March 31, 2005, the average US dollar
conversion was based on CND$1.00 for US$0.78. A fluctuation of
CND$0.01 would have resulted in a change of approximately
$0.7 million in net earnings, $1.9 million in EBITDA and
$17.9 million in revenues.

MEASUREMENT OF RESULTS NOT IN ACCORDANCE WITH
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES

Earnings before interest, income taxes, depreciation and amortization (EBITDA) is not a measurement of performance as defined by Canadian
generally accepted accounting principles, and consequently may not be comparable to similar measurements presented by other companies.

The Company assesses its financial performance based on its EBITDA.

(in thousands of dollars)
Operating income
Depreciation of fixed assets
EBITDA

Canada & Other
214,418
29,743
244,161

Dairy Products
United States
$ 105,868
31,175
137,043

Canada & Other
$ 180,001
29,854
$ 209,855

Dairy Products
United States
$ 129,337
31,550
$ 160,887

2005

TOTAL
$ 320,286
60,918
$ 381,204

2004

TOTAL
$ 309,338
61,404
$ 370,742

Grocery
Products
21,408
5,147
26,555

Grocery
Products
27,881
4,634
32,515

TOTAL
$ 341,694
66,065
407,759

TOTAL
337,219
66,038
$ 403,257

2 0 0 5 A N N U A L R E P O R T / S A P U T O 3 7

The 2004 and 2005 quarterly financial information has not been reviewed by an external auditor.

2005 Quarterly Financial Information
Consolidated Statement of Earnings

(in thousands of dollars, except per share amounts)

Statement of earnings data
Revenues
Cost of sales, selling and administration expenses
Earnings before interest, income taxes,
depreciation and amortization
Margin %
Depreciation of fixed assets
Operating income
Interest on long-term debt
Other interest
Earnings before income taxes
Income taxes
Net earnings
Net margin %
Per share
Net earnings
Basic
Diluted

2004 Quarterly Financial Information
Consolidated Statement of Earnings

(in thousands of dollars, except per share amounts)

3 8 2 0 0 5 A N N U A L R E P O R T / S A P U T O

1st

2nd

3rd

4th

Quarter
(unaudited)

Fiscal

2005
(audited)

$ 1,018,900
911,882

$ 1,005,109
904,209

$ 942,235
845,711

$ 916,825
813,508

$3,883,069
3,475,310

107,018

100,900

96,524

103,317

407,759

10.5%

10.0%

10.2%

11.3%

10.5%

17,043
89,975
7,870
467
81,638
23,348
58,290

5.7%

0.56
0.55

$
$

16,689
84,211
7,404
426
76,381
20,513
55,868

5.6%

0.54
0.53

$
$

16,138
80,386
6,439
170
73,777
15,507
58,270

6.2%

0.56
0.55

$
$

16,195
87,122
6,313
1
80,808
21,091
59,717

66,065
341,694
28,026
1,064
312,604
80,459
$ 232,145

6.5%

6.0%

0.57
0.57

$
$

2.23
2.20

1st
Quarter
(unaudited)

2nd
Quarter
(unaudited)

3rd
Quarter
(unaudited)

4th
Quarter
(unaudited)

Fiscal
2004
(audited)

$ 816,783
726,118

$ 915,540
804,658

$ 892,010
796,949

$ 945,857
839,208

$ 3,570,190
3,166,933

90,665

110,882

95,061

106,649

403,257

11.1%

12.1%

10.7%

11.3%

16,542
74,123
9,598
15
64,510
18,450
46,060

5.6%

0.45
0.44

$
$

16,436
94,446
8,971
416
85,059
26,858
58,201

6.4%

0.56
0.56

$
$

16,252
78,809
8,223
272
70,314
20,276
50,038

5.6%

0.48
0.47

$
$

16,808
89,841
8,000
515
81,326
23,260
58,066

66,038
337,219
34,792
1,218
301,209
88,844
$ 212,365

6.1%

5.9%

0.56
0.56

$
$

2.05
2.03

SUMMARY OF THE FOURTH QUARTER
RESULTS ENDED MARCH 31, 2005

Revenues for the quarter ended March 31, 2005 totalled
$916.8 million, a decrease of 3.1% compared to $945.9 million for
the same quarter last fiscal year. The decrease is attributed to our
US Dairy Products Sector and our Grocery Products Sector. The
main contributor to the decrease in revenues in the US Dairy
Products Sector this quarter compared to the same quarter last
fiscal year, was the appreciation of the Canadian dollar, which
eroded approximately $24 million in revenues. This was partially
offset by a higher average block market per pound of cheese,
which increased revenues by $15 million. The Grocery Products
Sector experienced reduced revenues of approximately $7 million
due, among other things, to the Easter Holidays, which
traditionally is a slow period for the division. The fourth quarter of
fiscal 2005 included the Easter Holiday, which was not the case in
fiscal 2004. In addition, on February 7, 2005, we increased the
base selling price for our economy- and family-sized products,
which affected some of our volumes. Revenues from our Canadian
and Other Dairy Products Sector were slightly lower in comparison
to the same period last fiscal year, mainly due to lower volumes in
our Canadian cheese activities.

Earnings before interest, income taxes, depreciation and
amortization (EBITDA) for the fourth quarter of fiscal 2005
totalled $103.3 million, a $3.3 million decrease from the same
period last fiscal year. EBITDA from our US Dairy Products Sector
decreased by approximately $13 million compared to the
corresponding period last fiscal year. The appreciation of the
Canadian dollar along with an unfavourable relationship between
the average block market per pound of cheese and the cost of milk
as raw material were the driving factors behind the decrease. The
Grocery Products Sector EBITDA decreased by approximately
$2 million as a result of reduced revenues, and additional pension,
raw material, packaging and labour costs. The EBITDA of our
Canadian and Other Dairy Products Sector increased by
approximately $12 million in comparison to the corresponding
period last fiscal year. The increase is attributed to the benefits
derived from rationalization activities undertaken in the prior
fiscal year, for which fiscal 2004 fourth quarter included
$2.7 million in rationalization expenses, increased sales volumes
specifically in our specialty cheese category, more interesting
margins achieved in our Argentina operations, and a gain on sales
of assets held for sale in the amount of $2.6 million.

Compared to the same quarter last fiscal year, depreciation
expense decreased by $0.6 million to $16.2 million. Interest
expense decreased to $6.3 million compared to $8.5 million for
the corresponding period last fiscal year, as a result of long-term
debt repayments made throughout the year. The effective tax rate
for the current quarter was 26.1% compared to 28.6% for the
same quarter last fiscal year. The lower rate is the result of higher
income being generated in jurisdictions with lower tax rates
compared to the same quarter last fiscal year. During the quarter,
the Company added $22.0 million in fixed assets and received
proceeds of $4.6 million from the sale of certain fixed assets. The
Company also repaid $19.5 million in bank loans, issued shares for

a cash consideration of $2.7 million as part of the Stock Option
Plan, and paid out $15.7 million in dividends to its shareholders.
For the same period, the Company generated cash flows of
$79.5 million from operations, similar to the cash generated from
operations for the corresponding period last fiscal year. Net
earnings reached $59.7 million, an increase of $1.6 million from
the same quarter in fiscal 2004.

QUARTERLY FINANCIAL INFORMATION

During fiscal 2005, certain specific circumstances affected the
quarterly changes in revenues and earnings before interest, income
taxes, depreciation and amortization compared to fiscal 2004.

First, the average block market per pound of cheese on the US
market was higher during all quarters, increasing both revenues
and EBITDA. However, the relationship between the average block
market per pound of cheese and the cost of milk as raw material
was unfavourable for the last three quarters of fiscal 2005 in
comparison to fiscal 2004, having a negative affect on EBITDA.
The Canadian dollar was also stronger during all quarters of fiscal
2005 compared to the same periods in fiscal 2004, thus reducing
both revenues and EBITDA throughout the fiscal year. Our
Canadian operations continued to grow gradually from quarter to
quarter in fiscal 2005. Fiscal 2005 also includes a full year of
results from our Argentina operations compared to 18 weeks for
fiscal 2004. Finally, our Grocery Products Sector incurred
additional pension costs of approximately $0.5 million in each of
the first three quarters of fiscal 2005 and $0.8 million in the
fourth quarter of fiscal 2005. Quarterly earnings directly reflect
the effects of the previously mentioned items.

ANALYSIS OF EARNINGS FOR THE YEAR
ENDED MARCH 31, 2004 COMPARED
TO MARCH 31, 2003

Saputo’s consolidated revenues amounted to $3.570 billion in fiscal
2004, up 5.1% compared to $3.398 billion posted in fiscal 2003.

Although the Company’s sales volume grew in Canada – and even
more so in the United States where sales volumes rose nearly
5.9%, the rise of the Canadian dollar in fiscal 2004 as compared to
fiscal 2003 created a shortfall in revenues of nearly $182 million.
The average block market per pound of cheese on the US market,
21% higher than in 2003, increased revenues by about
$138 million. In addition, the acquisition in Argentina contributed
approximately $44 million to revenues between November 28, 2003
and March 31, 2004.

2 0 0 5 A N N U A L R E P O R T / S A P U T O 3 9

Earnings before interest, income taxes, depreciation and
amortization (EBITDA) stood at $403.3 million, a 14.3% increase
compared to $352.8 million in fiscal 2003. EBITDA margins
increased from 10.4% in fiscal 2003 to 11.3% in fiscal 2004. The
strong cheese block market condition in the United States in fiscal
2004 drove up EBITDA by approximately $36.9 million. Major
increases in sales volumes in the Unites States, combined with our
improved operational efficiency, helped grow EBITDA in our
US Dairy Products Sector by about $27.7 million. However, the rise
of the Canadian dollar unfavourably affected EBITDA by about
$23.8 million. In Canada, sales growth as well as our improved
operations strengthened EBITDA by about $10 million in fiscal
2004, despite the fact that the dairy by-product market, combined
with the appreciation of the Canadian dollar, had an unfavourable
impact of about $2 million on dairy by-product exports. The
Company incurred, throughout fiscal 2004, some $7.8 million in
rationalization costs when it closed certain manufacturing
facilities. The Bakery Division’s EBITDA remained relatively stable.

Depreciation expense totalled $66.0 million in fiscal 2004, down
$4.9 million from fiscal 2003. The expense in fiscal 2004 included
a write-down of fixed assets of approximately $1 million following
the shutdown of plants during the same fiscal year. The decline in
this expense is mainly attributable to the rise in the Canadian
dollar in fiscal 2004 compared to fiscal 2003.

Net interest expense amounted to $36.0 million in fiscal 2004,
down $6.3 million compared to fiscal 2003. Nearly half of this
decline is attributed to the reduction of interest resulting from
ongoing payments of long-tern debt. The other portion of this
decline owes to the effect the rise of the Canadian dollar has had
on interest charges for debt in US dollars.

Income taxes were $88.8 million in fiscal 2004, for an effective tax
rate of 29.5% compared to 27.5% in 2003. The higher rate is mainly
attributable to the fact that, in fiscal 2004, a greater portion of our
taxable earnings were generated in the United States, which were
subject to higher tax rates than those in Canada.

For the fiscal year ended March 31, 2004, net earnings totalled
$212.4 million, a 22.3% increase over 2003’s net earnings of
$173.7 million. A higher Canadian dollar, compared to fiscal 2003,
eroded net earnings by $9.2 million for fiscal 2004, and
rationalization expenses consumed another $5.6 million.
Excluding these two factors, net earnings would have risen by
30.8% compared to fiscal 2003.

OUTLOOK

Although no business acquisitions were made during the fiscal year,
we nonetheless realized growth, and we did so on several levels. It
was essentially organic growth that enabled us to generate a return
on equity of 18.8%. Our vision for our development embodies a
number of components: organic growth, consolidation of our
position in current markets, growth by acquisitions, and preparing
our future by tailoring our plans accordingly.

Each of our divisions has set itself precise objectives for fiscal 2006,
all of which should result in increased revenues, EBITDA, cash flow
generated and consolidated net earnings. We are mainly relying on
organic growth and improvement in our procedures and our
efficiency to achieve continuous growth in our overall profitability.

During fiscal 2005, we started working on the acquisition of two
businesses, which were announced during the early months of
fiscal 2006. Certainly the Company’s larger-scale growth will be by
way of acquisitions, and we will continue to toil steadily in that
direction. At all levels, our growth will not take place at the
expense of our profitability.

Our financial position is excellent, and provides us with considerable
flexibility in our future development for the 2006 fiscal year as
well as for the coming years. Our destiny is ours alone to shape.

4 0 2 0 0 5 A N N U A L R E P O R T / S A P U T O

MANAGEMENT’S STATEMENT OF RESPONSIBILITY
FOR FINANCIAL REPORTING

Management is responsible for the preparation and presentation of the consolidated financial statements and the financial information
presented in this annual report. This responsibility includes the selection of accounting policies and practices and making judgments and
estimates necessary to prepare the consolidated financial statements in accordance with generally accepted accounting principles.

Management has also prepared the financial information presented elsewhere in this annual report and has ensured that it is consistent
with the consolidated financial statements.

Management maintains systems of internal control designed to provide reasonable assurance that assets are safeguarded and that
relevant and reliable financial information is being produced.

The Board of Directors is responsible for ensuring that management fulfills its responsibilities for financial reporting and is responsible
for reviewing and approving the consolidated financial statements. The Board of Directors carries out this responsibility principally
through its Audit Committee, which is comprised solely of independent directors. The Audit Committee meets periodically with
management and the external auditors to discuss internal controls, auditing matters and financial reporting issues. It also reviews the
annual report, the consolidated financial statements and the external auditors’ report. The Audit Committee recommends the external
auditors for appointment by the shareholders. The external auditors have unrestricted access to the Audit Committee. The consolidated
financial statements have been audited by the external auditors Deloitte & Touche LLP, whose report follows.

(signed)

Lino Saputo, Jr.
President and
Chief Executive Officer

(signed)

Louis-Philippe Carrière, CA
Executive Vice President,
Finance and Administration,
and Secretary

AUDITORS' REPORT TO THE SHAREHOLDERS OF SAPUTO INC.

We have audited the consolidated balance sheets of Saputo Inc. as at March 31, 2005 and 2004 and the consolidated statements of
earnings, retained earnings and cash flows for the years then ended. These financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and
perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.

In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as
at March 31, 2005 and 2004 and the results of its operations and its cash flows for the years then ended in accordance with Canadian
generally accepted accounting principles.

(signed)

Deloitte & Touche LLP
Chartered Accountants
Laval, Québec
May 27, 2005

2 0 0 5 A N N U A L R E P O R T / S A P U T O 4 1

CONSOLIDATED STATEMENTS OF EARNINGS

Years ended March 31

(in thousands of dollars, except per share amounts)

Revenues
Cost of sales, selling and administrative expenses
Earnings before interest, depreciation and income taxes
Depreciation of fixed assets (Note 3)
Operating income
Interest on long-term debt
Other interest (Note 11)
Earnings before income taxes
Income taxes (Note 12)
Net earnings

Earnings per share (Note 13)

Net earnings
Basic
Diluted

2005

2004

$ 3,883,069
3,475,310
407,759
66,065
341,694
28,026
1,064
312,604
80,459
232,145

$ 3,570,190
3,166,933
403,257
66,038
337,219
34,792
1,218
301,209
88,844
212,365

$
$

2.23
2.20

$
$

2.05
2.03

CONSOLIDATED STATEMENTS OF RETAINED EARNINGS

Years ended March 31

(in thousands of dollars)

Retained earnings, beginning of year
Net earnings
Dividends
Retained earnings, end of year

2005

2004

711,371
232,145
(59,462)
884,054

546,667
212,365
(47,661)
711,371

4 2 2 0 0 5 A N N U A L R E P O R T / S A P U T O

CONSOLIDATED BALANCE SHEETS

As at March 31

(in thousands of dollars)

ASSETS
Current assets

Cash
Receivables
Inventories
Income taxes
Future income taxes
Prepaid expenses and other assets

Portfolio investment (Note 2)
Fixed assets (Note 3)
Goodwill (Note 4)
Trademarks (Note 4)
Other assets (Note 5)
Future income taxes

LIABILITIES
Current liabilities

Bank loans (Note 6)
Accounts payable and accrued liabilities
Income taxes
Future income taxes
Current portion of long-term debt (Note 7)

Long-term debt (Note 7)
Other liabilities (Note 8)
Future income taxes

SHAREHOLDERS’ EQUITY
Share capital (Note 9)
Contributed surplus (Note 10)
Retained earnings
Foreign currency translation adjustment

On behalf of the Board

(signed)

Lino Saputo, Director

Louis A. Tanguay, Director

2005

2004

41,477
299,828
452,814
14,381
10,711
16,795
836,006
53,991
648,584
507,200
24,054
53,437
9,800
$ 2,133,072

15,083
291,197
67,438
9,653
-
383,371
302,521
19,139
112,191
817,222

483,896
8,095
884,054
(60,195)
1,315,850
$ 2,133,072

7,874
287,012
420,660
9,348
14,877
13,838
753,609
53,991
661,183
524,856
26,076
46,422
3,411
$ 2,069,548

82,367
295,124
26,020
8,927
43,969
456,407
327,942
13,941
114,429
912,719

469,262
4,411
711,371
(28,215)
1,156,829
$ 2,069,548

2 0 0 5 A N N U A L R E P O R T / S A P U T O 4 3

CONSOLIDATED STATEMENTS OF CASH FLOWS

2005

2004

232,145

212,365

4,774
66,065
(2,576)
4,860
305,268
(28,783)
276,485

-
-
(81,786)
5,441
(7,278)
(83,623)

(68,844)
(43,965)
13,544
442
(59,462)
(158,285)

34,577
(974)
7,874
41,477

27,565

37,896

2,936
66,038
(680)
20,630
301,289
(13,717)
287,572

(99,994)
2,000
(90,446)
5,926
(4,677)
(187,191)

63,945
(110,099)
4,931
4
(47,661)
(88,880)

11,501
(2,391)
(1,236)
7,874

33,889

70,095

Years ended March 31

(in thousands of dollars)

Cash flows related to the following activities:

Operating

Net earnings
Items not affecting cash

Stock based compensation
Depreciation of fixed assets
Gain on disposal of fixed assets
Future income taxes

Changes in non-cash operating working capital items

Investing

Business acquisitions (Note 14)
Portfolio investment
Additions to fixed assets
Proceeds on disposal of fixed assets
Other assets

Financing

Bank loans
Repayment of long-term debt
Issuance of share capital for a cash consideration
Employee future benefits
Dividends

Increase in cash
Effect of exchange rate changes on cash
Cash (bank overdraft), beginning of year
Cash, end of year

Supplemental information
Interest paid

Income taxes paid

4 4 2 0 0 5 A N N U A L R E P O R T / S A P U T O

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Years ended March 31
(tabular amounts are in thousands of dollars except information on options)

1 . S I G N I F I C A N T A C C O U N T I N G P O L I C I E S

The financial statements have been prepared in accordance with generally accepted accounting principles used in Canada and include the
following significant accounting policies:

Use of estimates

In the course of the preparation of financial statements in conformity with generally accepted accounting principles, management must
make estimates such as the useful life and depreciation of fixed assets, the valuation of goodwill, portfolio investments, trademarks and
future income taxes and certain actuarial and economic assumptions used in determining defined benefit pension costs, accrued pension
benefits obligation and pension plan assets, and assumptions that affect the reported amounts of assets and liabilities and the disclosure
of contingent assets and liabilities at the date of the financial statements and the revenues and expenses for the period. Actual results
could differ from these estimates.

Consolidated financial statements

Investments over which the Company has effective control are consolidated. The interest in a joint venture (Note 14), that is jointly
controlled is accounted for by the proportionate consolidation method. The operating results of acquired businesses, from their
respective acquisition dates, are included in the consolidated statements of earnings.

Inventories

Finished goods and goods in process are valued at the lower of average cost and net realizable value. Raw materials are valued at the lower
of cost and replacement value, cost being determined under the first-in, first-out method.

Income taxes

The Company follows the liability method of income tax allocation. Under this method, future income tax assets and liabilities are
determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted
or substantially enacted tax rates that will be in effect when the differences are expected to reverse. Future income tax assets are
recognized only to the extent that, in the opinion of management, it is more likely than not that the future income tax asset will be realized.

Fixed assets

Fixed assets are stated at cost and are depreciated using the straight-line method over their estimated useful lives or by using the
following methods:

Buildings
Furniture, machinery and equipment
Rolling stock

20 years to 40 years
3 years to 15 years
5 years to 10 years or based on kilometers traveled

Goodwill and trademarks

Goodwill and trademarks are not amortized; however they are tested for impairment annually, or more frequently if events or changes in
circumstances indicate that the assets might be impaired. The carrying values of goodwill and trademarks are compared with their
respective fair values, and an impairment loss is recognized for the excess, if any.

Employee future benefits

The cost of pension and other post-retirement benefits earned by employees is actuarially determined using the projected benefit method
prorated on services and using estimates of expected return on plan assets, rates of compensation increase, retirement ages of employees
and expected health care costs and other post-retirement benefits. Current service costs are expensed in the year. In accordance with
generally accepted accounting principles, past service costs and the excess of the net actuarial gains or losses related to defined benefit

2 0 0 5 A N N U A L R E P O R T / S A P U T O 4 5

1 . S I G N I F I C A N T A C C O U N T I N G P O L I C I E S ( c o n t ’ d )

pension plans over 10% of the greater of the benefit obligation or fair value of plan assets are amortized over the expected average
remaining service period of active employees entitled to receive benefits under the plans. The Company uses five-year asset smoothing to
determine the defined benefit pension costs. On January 1, 2000, the Company prospectively adopted the new employees future benefit
accounting standards. It amortizes on a straight-line basis the transitional obligation over the expected average remaining service life of
the employee groups for each of the plans at January 1, 2000. In the case where a plan restructuring entails both a plan curtailment and
settlement of obligations from the plan, the curtailment is recorded before the settlement.

Revenue recognition

The Company recognizes revenue, net of sales incentives, upon shipment of goods when the title and risk of loss are transferred
to customers.

Foreign currency translation

The balance sheet accounts of the self-sustaining companies operating in the United States and Argentina are translated into Canadian
dollars using the exchange rates at the balance sheet dates. Statement of earnings accounts are translated into Canadian dollars using
the average monthly exchange rates in effect during the fiscal years. The foreign currency translation adjustment account presented in
shareholders’ equity represents accumulated foreign currency gains or losses on the Company’s net investments in self-sustaining
companies operating in the United States and Argentina. The change in the foreign currency translation account during the year ended
March 31, 2005 principally resulted from the increase in value of the Canadian dollar as compared to the US dollar.

Foreign currency accounts of the Company and its subsidiaries are translated using the exchange rates at the end of the year for monetary
assets and liabilities and the prevailing exchange rates at the time of transactions for income and expenses. Gains or losses resulting from
this translation are included in the statement of earnings.

Foreign currency gain

Stock based compensation

2005
562

2004
315

The fair value based method of accounting is used to expense stock based compensation awards. This method consists of recording
compensation cost to earnings over the vesting period of options granted. When stock options are exercised, any consideration paid by
employees and the related compensation expense recorded as contributed surplus are credited to share capital.

New accounting standards

On May 1, 2003, the Company adopted the new recommendations of the Canadian Institute of Chartered Accountants (CICA) regarding
"Disposal of long-lived assets and discontinued operations", which establish standards for the recognition, measurement, presentation
and disclosure of the disposal of long-lived assets and discontinued operations. This new standard was applied prospectively. (See Note 3
for the required disclosure)

Effective April 1, 2004, the Company adopted the following new recommendations of the CICA regarding “Asset retirement obligations”,
which requires the recognition of liabilities for legal obligations, whether they are of a legal, prescribed, contractual or other nature, and
normally when these obligations arise; “Hedging relationships”, which specifies the circumstances in which hedge accounting is appropriate,
and examines in particular the identification, documentation, designation and effectiveness of hedging relationships for the purpose of
hedge accounting, as well as the discontinuance of hedge accounting; and “Employee future benefits”, which expands the disclosure
requirements in both annual and interim financial statements. These new recommendations had no significant impact on the Company’s
consolidated financial statements.

Effective July 1, 2004, the Company adopted the following new recommendation of the CICA regarding “Accounting by a Customer for Certain
Consideration Received from a Vendor”, which provides guidance on how a customer of a vendor's products should account for a cash
consideration received from a vendor. This new recommendation had no significant impact on the Company's consolidated financial statements.

Effective January 1, 2005, the Company adopted the following new recommendation of the CICA regarding “Consolidation of Variable
Interest Entities”, which requires enterprises to identify variable interest entities in which they have an interest, to determine if they are
the primary beneficiary of such entities, and, if so, to consolidate them. This new recommendation had no impact on the Company's
consolidated financial statements.

4 6 2 0 0 5 A N N U A L R E P O R T / S A P U T O

2 . P O R T F O L I O I N V E S T M E N T

21% share capital interest in Dare Holdings Ltd.

2005
53,991

2004
53,991

The portfolio investment is recorded at cost less the excess of dividends received over the Company's share in accumulated earnings. No
dividends were received during fiscal 2005. The dividend of $2,000,000 received during fiscal 2004 was accounted for as a reduction of
the cost of the investment.

3 . F I X E D A S S E T S

Land
Buildings
Furniture, machinery and equipment
Rolling stock
Held for sale

2005
Accumulated
depreciation
-
$
53,657
290,014
5,378
-
$ 349,049

Cost
27,872
246,887
707,965
11,817
3,092
997,633

Net book
value
27,872
193,230
417,951
6,439
3,092
$ 648,584

Cost
33,932
253,394
677,945
10,714
3,622
$ 979,607

2004
Accumulated
depreciation
-
$
56,013
258,036
4,375
-
$ 318,424

Net book
value
33,932
197,381
419,909
6,339
3,622
661,183

During the year, a gain on disposal of fixed assets held for sale totalling $2,576,000 was recorded in cost of sales, selling and
administrative expenses. These assets relate to the activities of the Canadian dairy products sector.

During the year, a $6,000,000 write-down to fair value of certain machinery and equipment was recorded. This charge is included in
depreciation of fixed assets.

Fixed assets held for sale represent mainly machinery, equipment and buildings of the Canadian dairy products sector that will be disposed
of as a result of certain plant closures. A $1,000,000 write-down to fair value of these assets was recorded in 2004. This charge is included
in depreciation of fixed assets.

The net book value of fixed assets under construction, that are not being amortized, amounts to $47,921,000 as at March 31, 2005
($71,030,000 as at March 31, 2004).

4 . G O O D W I L L A N D T R A D E M A R K S

Dairy
products
sector

2005
Grocery
products
sector

Dairy
products
sector

Total

2004
Grocery
products
sector

Total

Goodwill

Balance, beginning of year
Foreign currency translation adjustment
Business acquisitions (Note 14)
Balance, end of year

$ 360,343
(17,656)
-
$ 342,687

$ 164,513
-
-
$ 164,513

$ 524,856
(17,656)
-
507,200

386,117
(27,123)
1,349
$ 360,343

$ 164,513
-
-
$ 164,513

$ 550,630
(27,123)
1,349
$ 524,856

Trademarks

Balance, beginning of year
Business acquisitions (Note 14)
Foreign currency translation adjustment
Balance, end of year

26,076
-
(2,022)
24,054

-
-
-
-

26,076
-
(2,022)
24,054

-
27,330
(1,254)
26,076

-
-
-
-

-
27,330
(1,254)
26,076

2 0 0 5 A N N U A L R E P O R T / S A P U T O 4 7

5 . O T H E R A S S E T S

Net accrued pension plan asset (Note 15)
Other

6 . B A N K L O A N S

2005
45,505
7,932
53,437

2004
37,517
8,905
46,422

The Company has available short-term bank credit facilities providing for bank loans up to a maximum of approximately $234,000,000.
These bank loans are available in Canadian dollars or the equivalent in other currencies and bear interest at rates based on lenders' prime
rates plus a maximum of 0.6% or LIBOR or bankers' acceptances rate plus 0.55% up to a maximum of 1.6%, depending on the interest-
bearing debt to the earnings before interest, depreciation and amortization and income taxes ratio of the Company.

2005
-

2004
43,870

36,288
205,632
60,480

121
302,521
-
$ 302,521

39,339
222,921
65,565

216
371,911
43,969
327,942

-
36,388
21
-
205,632
60,480
$ 302,521

2005
14,383
4,756
19,139

2004
13,941
-
13,941

7. L O N G - T E R M D E B T

Term bank loan, repaid during year

Senior notes

7.97%, due in November 2006 (US$30,000,000)
8.12%, due in November 2009 (US$170,000,000)
8.41%, due in November 2014 (US$50,000,000)

Other loans, repayable up to 2008

Current portion

Estimated principal payments required in future years are as follows:

2006
2007
2008
2009
2010
2011 and subsequent years

8 . O T H E R L I A B I L I T I E S

Employee future benefits (Note 15)
Other

4 8 2 0 0 5 A N N U A L R E P O R T / S A P U T O

9 . S H A R E C A P I TA L

Authorized

The authorized share capital of the Company consists of an unlimited number of common and preferred shares. The common shares are
voting and participating. The preferred shares may be issued in one or more series, the terms and privileges of each series to be
determined at the time of their creation.

Issued

104,527,282 common shares (103,777,730 in 2004)

2005

2004

$ 483,896

$ 469,262

749,552 common shares (317,725 in 2004) for an amount of $13,544,000 ($4,931,000 in 2004) were issued during the year ended
March 31, 2005 pursuant to the share option plan. For share options granted since April 1, 2002, the amount previously accounted for as
an increase to contributed surplus was also transferred to share capital upon the exercise of options. For the year ended March 31, 2005,
the amount transferred from contributed surplus was $1,090,000.

Share option plan

The Company established a share option plan to allow for the purchase of common shares by key employees, officers and directors of the
Company. The total number of common shares which may be issued pursuant to this plan cannot exceed 14,000,000 common shares.
Options may be exercised at a price equal to the closing quoted value of the shares on the day preceding the grant date. The options vest
at 20% per year and expire ten years from the grant date.

Options issued and outstanding as at the year-ends are as follows:

Granting
period
1998
1999
2000
2001
2002
2003
2004
2005

Exercise
price
8.50
$
from $16.13 to $18.75
19.70
$
$
13.50
from $19.00 to $23.00
30.35
$
22.50
$
33.05
$

2005

2004

Number of
options
77,420
160,602
272,403
582,608
814,073
815,518
1,174,625
900,666
4,797,915

Weighted
average
exercise price
8.50
$
18.34
$
19.70
$
13.50
$
19.09
$
30.35
$
22.50
$
33.05
$
23.62
$

Number of
options
125,249
226,180
400,164
793,069
994,783
891,072
1,315,063
-
4,745,580

Weighted
average
exercise price
8.50
$
18.28
$
19.70
$
13.50
$
19.13
$
30.35
$
22.50
$
-
20.96

Options exercisable at end of year

1,778,646

19.71

1,566,785

18.12

Changes in the number of options are as follows:

Balance at beginning of year
Options granted
Options exercised
Options cancelled
Balance at end of year

2005

Weighted
average
Number of
exercise price
options
20.96
$
4,745,580
33.05
984,055
$
18.07
(749,552) $
28.01
(182,168) $
23.62
$
4,797,915

2004

Number of
options
3,784,944
1,338,396

Weighted
average
exercise price
19.99
$
22.50
$
15.52
(317,725) $
23.31
(60,035) $
20.96
$

4,745,580

2 0 0 5 A N N U A L R E P O R T / S A P U T O 4 9

9 . S H A R E C A P I TA L ( c o n t ’ d )

The fair value of share purchase options granted was estimated at $9.86 per option ($6.31 in 2004), using the Black-Scholes option
pricing model with the following assumptions:

Risk-free interest rate:
Expected life of options:
Volatility:
Dividend rate:

2005
3.5%
61/2 years
28%
1.8%

2004
4.9%
71/2 years
27%
1.7%

The exercise price of these options is $33.05 ($22.50 in 2004), which corresponds to the closing quoted value of the shares on the day
preceding the grant date.

A compensation expense of $4,774,000 ($4,173,000 after income taxes) relating to stock options was recorded in the statement of earnings
for the year ended March 31, 2005 and $2,936,000 ($2,571,000 after income taxes) was recorded for the year ended March 31, 2004.

The effect of this expense on basic and diluted earnings per share was $0.04 for the year ended March 31, 2005, and $0.025 for the year
ended March 31, 2004.

Options to purchase 914,952 common shares at a price of $36.15 were also granted on April 1, 2005.

Deferred share units plan for directors

Effective April 1, 2004, all eligible directors of the Company were allocated a fixed amount of deferred share units which were granted on
a quarterly basis in accordance with the deferred share units plan. The directors have a choice to receive either cash or deferred units for
their compensation. The number of units issued to each director is based on the market value of the Company’s common shares at each
grant date. As directors cease their functions with the Company, a cash payment equal to the market value of the accumulated deferred
share units will be disbursed. The number of units issued each year, multiplied by the market value of common shares at the Company’s
year-end, is recorded as an expense by the Company. During the year ended March 31, 2005, the expense recorded for the deferred share
units was $488,000.

2005
4,411
4,774
(1,090)
8,095

2005
1,568
(504)
1,064

2004
1,475
2,936
-
4,411

2004
1,586
(368)
1,218

10 . C O N T R I B U T E D S U R P L U S

Contributed surplus, beginning of year
Stock based compensation
Amount transferred to share capital
Contributed surplus, end of year

11 . O T H E R I N T E R E S T

Expense
Income

5 0 2 0 0 5 A N N U A L R E P O R T / S A P U T O

1 2 . I N C O M E TA X E S

The provision for income taxes is comprised of the following:

Current income taxes
Future income taxes

2005
75,599
4,860
80,459

2004
68,214
20,630
88,844

Reconciliation of income taxes, calculated using statutory Canadian income tax rates, to the income tax provision presented in the
statement of earnings:

Income taxes, calculated using Canadian statutory income tax rates
Adjustments resulting from the following:
Manufacturing and processing credit
Effect of tax rates of American subsidiaries
Changes in tax laws and rates
Utilization of tax benefit not previously recognized
Benefit arising from investment in subsidiaries
Other

Provision for income taxes

2005
97,212

2004
$ 101,454

(1,453)
4,593
(3,816)
(2,381)
(9,118)
(4,578)
80,459

(4,483)
4,442
(1)
(3,501)
(9,819)
752
88,844

The tax effects of temporary differences that give rise to significant portions of the future tax asset and liability are as follows:

Future income tax asset

Accounts payable and accrued liabilities
Income tax losses
Other

Future income tax liability

Inventories
Fixed assets
Net assets of pension plans
Other assets
Portfolio investment

Classified in the financial statements as:

Current future income tax asset
Long-term future income tax asset
Current future income tax liability
Long-term future income tax liability
Net future income tax liability

Potential tax benefits

2005

2004

5,088
5,639
3,634
14,361

5,773
2,915
2,306
10,994

7,350
95,677
4,979
1,463
6,225
$ 115,694

6,680
94,624
7,259
993
6,506
$ 116,062

10,711
9,800
(9,653)
(112,191)

14,877
3,411
(8,927)
(114,429)
$ (101,333) $ (105,068)

As of March 31, 2005, the Company has income tax losses of approximately $60,857,000 which may be used to reduce future years' taxable
income of its subsidiaries in Argentina. The benefits resulting from these tax losses have not been recognized in the accounts. These
losses expire as follows:

2006
2007
2008
2009

$
$
$
$

898,000
3,037,000
48,615,000
8,307,000

2 0 0 5 A N N U A L R E P O R T / S A P U T O 5 1

1 3 . E A R N I N G S P E R S H A R E

Basic earnings per share have been calculated using the weighted average number of common shares outstanding during each fiscal year:
104,257,660 shares in 2005 (103,589,621 in 2004).

Diluted earnings per share for the year ended March 31, 2005 have been calculated using 105,698,700 (104,817,272 in 2004) common
shares by applying the treasury stock method.

14 . B U S I N E S S A C Q U I S I T I O N S

The Company acquired on May 1, 2003 a 51% voting share interest in Gallo Protein 2003, LLC (a joint venture) for a cash consideration of
$3,546,000, and acquired on May 23, 2003 the commercial activities of the Treasure Cave and Nauvoo brands for a cash consideration of
$36,510,000. Relating to the Gallo Protein acquisition, the fair values attributed to the assets acquired were $812,000 to working capital,
$1,385,000 to fixed assets, and $1,349,000 to goodwill. The fair values attributed to the assets acquired for the commercial activities of
the Treasure Cave and Nauvoo brands were $5,361,000 to working capital, $3,819,000 to fixed assets and $27,330,000 to trademarks.
Gallo Protein 2003, LLC operates in the United States and manufactures and markets whey protein isolates and related products from whey
protein concentrate. The commercial activities of the Treasure Cave and Nauvoo brands are related to the manufacturing and
commercialization of blue cheese in the United States.

On November 28, 2003, the Company acquired 100% of the voting shares of Molfino Hermanos S.A. (Molfino). Molfino is a cheese and
dairy products manufacturer operating in Argentina. Total acquisition costs for Molfino amounted to $66,162,000 including cash of
$4,395,000 and related acquisition costs of $1,829,000 for a net consideration paid of $59,938,000. The fair values attributed to the
assets acquired were $40,092,000 to fixed assets, $2,166,000 to other assets, and the remainder of $19,509,000 to working capital. The
operating results of Molfino are included in the Canada and other dairy products sector.

1 5 . E M P L O Y E E P E N S I O N A N D O T H E R B E N E F I T P L A N S

The Company provides defined benefit and defined contribution pension plans as well as other benefit plans such as health insurance,
life insurance and dental plans to eligible employees and retired employees.

Under the terms of the defined benefit pension plans, pensions are based on years of service and the average salary of the last
employment years or the career salary. Contributions are paid by employees and contributions by the Company are based on
recommendations from independent actuaries. Actuarial valuations were performed as at December 2002 and 2003. The measurement
date of pension plan assets and liabilities is December 31.

The defined contribution pension plans entitle participating employees to an annual contribution giving right to a pension.

Plan assets are principally comprised of shares of Canadian and foreign companies, mutual funds and fixed income investments.

5 2 2 0 0 5 A N N U A L R E P O R T / S A P U T O

1 5 . E M P L O Y E E P E N S I O N A N D O T H E R B E N E F I T P L A N S ( c o n t ’ d )

Financial position of the plans

Changes in accrued benefits obligation

Benefits obligation at beginning of year
Current service cost
Interest cost
Benefits paid
Actuarial losses (gains)
Amendments and divestitures
Foreign currency gain
Benefits obligation at end of year

Changes in fair value of plan assets

Fair value of plan assets at beginning of year
Actual return on plan assets
Employer contributions
Employee contributions
Benefits paid
Foreign currency loss
Fair value of plan assets at end of year

Deficit

Unamortized actuarial losses
Unamortized past service cost
Adjustment to recognize obligation
Unamortized transitional obligation
Asset (liability) as at the measurement date
Employer contributions made from the measurement

date to the end of the year

Net asset (liability) recognized in the balance sheet

2005

2004

Defined
benefit
pension
plans

$ 165,460
5,214
10,099
(12,962)
8,085
-
(261)
175,635

152,730
13,584
9,175
1,170
(12,962)
(210)
163,487

(12,148)
66,461
680
14
(11,059)
43,948

Other
benefit
plans

17,614
680
1,173
(1,175)
3,013
205
(924)
20,586

-
-
1,046
129
(1,175)
-
-

(20,586)
4,561
35
-
1,561
(14,429)

Defined
benefit
pension
plans

$ 154,890
4,188
10,187
(11,767)
8,295
-
(333)
165,460

142,145
15,914
5,548
1,129
(11,767)
(239)
152,730

(12,730)
60,797
761
-
(12,215)
36,613

Other
benefit
plans

20,683
914
1,216
(1,172)
(826)
(2,049)
(1,152)
17,614

-
-
1,061
111
(1,172)
-
-

(17,614)
2,260
(344)
-
1,757
(13,941)

1,557
45,505

46
(14,383) $

904
37,517

-
(13,941)

All defined benefit pension plans present an accumulated benefits obligation in excess of plan assets.

2 0 0 5 A N N U A L R E P O R T / S A P U T O 5 3

1 5 . E M P L O Y E E P E N S I O N A N D O T H E R B E N E F I T P L A N S ( c o n t ’ d )

Employee benefit plans expense

Defined benefit plans

Employer current service cost
Interest cost on benefits obligation
Actual return on plan assets
Actuarial losses (gain)
Plan amendments
Curtailment and settlement of plans
Unadjusted benefits expense taking into account

the long-term nature of the cost

Difference between expected return and actual

return on plan assets

Difference between amortized past service
costs and plan amendments for the year

Difference between net actuarial loss recognized
and actual actuarial loss on benefits obligation

Transitional obligation amortization

Defined benefit plans expense

Defined contribution plans expense
Total benefit plans expense

2005

2004

Pension
plans

4,044
10,099
(13,584)
8,085
-
70

Other
benefit
plans

550
1,173
-
3,013
205
-

Pension
plans

3,058
10,187
(15,914)
8,295
-
(1,146)

Other
benefit
plans

584
1,216
-
(826)
-
(2,049)

8,714

4,941

4,480

(1,075)

175

2,392

(109)

1,999

(5,995)
(1,155)
1,817

(2,779)
196
2,249

(7,614)
(1,156)
(1,807)

521
377
1,822

10,278
12,095

-
2,249

8,712
6,905

-
1,822

For the year ended March 31, 2005, the Company’s total expense for all its employee benefits plans was $14,344, 000 ($8,727,000 in 2004)
and the total Company contributions to the employee benefits plans was $20,499,000 ($15,321,000 in 2004).

Weighted average assumptions
To determine benefits obligation at end of year:

Discount rate of obligation
Rate of increase of future compensation expense

To determine benefit plans expense:

Discount rate of obligation
Expected long-term rate of return on plan assets
Rate of increase of future compensation expense

6.00%
3.50%

6.25%
7.90%
3.50%

6.00%
3.50%

6.25%
N/A
3.50%

6.25%
3.50%

6.75%
7.90%
3.50%

6.25%
3.50%

6.75%
N/A
3.50%

For measurement purposes, a 5.5% to 7% annual rate of increase was used for health, life insurance and dental plan costs for the year
2006 and this rate is assumed to decrease gradually to 5% in 2010 and remain at that level thereafter. In comparison, during the previous
year, a 5.5% to 7% annual rate was used for the year 2005 and that rate was assumed to decrease gradually to 5.3% in 2007.

5 4 2 0 0 5 A N N U A L R E P O R T / S A P U T O

16 . C O M M I T M E N T S A N D C O N T I N G E N C I E S

The Company carries some of its operations in leased premises and has also entered into lease agreements for equipment and rolling
stock. The minimum annual lease payments required are as follows:

2006
2007
2008
2009
2010
Subsequent years

9,886
8,322
6,113
5,066
4,064
5,424
38,875

The Company is defendant to certain claims arising from the normal course of its business. The Company believes that the final resolution
of these claims will not have a material adverse effect on its earnings or financial position.

The Company from time to time enters into agreements in the normal course of its business, such as service arrangements and leases, and
in connection with business or asset acquisitions or dispositions, which agreements by their nature may provide for indemnifications of
counterparties. These indemnification provisions may be in connection with breach of representations and warranties and for future
claims for certain liabilities, including liabilities related to tax and environmental matters. The terms of these indemnification provisions
vary in duration. Given the nature of such indemnifications, the Company is unable to reasonably estimate its maximum potential liability
under these agreements.

17. F I N A N C I A L I N S T R U M E N T S A N D R I S K M A N A G E M E N T

a) Fair value of financial instruments

The fair value of cash, receivables, bank loans and accounts payable and accrued liabilities corresponds to their carrying value due to their
short-term maturity.

The fair value of long-term debt, estimated by discounting expected cash flows at rates currently offered to the Company for debts of the
same remaining maturities and conditions, is $345,285,000 ($445,133,000 in 2004).

b) Credit risk

The Company grants credit to its customers in the normal course of business. Credit valuations are performed on a regular basis and the
financial statements take into account an allowance for bad debts. The Company does not have any credit risk concentration.

c) Interest rate risk

The short-term bank credit facilities bear interest at fluctuating rates.

The Company occasionally enters into interest swap contracts to hedge against exposures to increases in interest rates. As at March 31, 2005,
the Company had no outstanding interest swap contracts.

d) Currency risk

In the normal course of Canadian operations, the Company enters into certain foreign currency transactions. The Company manages its
currency risks by occasionally entering into foreign currency contracts. The Company had outstanding foreign currency contracts as at the
balance sheet date for the purchase of 1,200,000 euros.

The Company realizes approximately 34% and 4% of its sales in the United States and Argentina, respectively, and is therefore exposed to
currency exchange fluctuations.

The cash flows from US operations constitute a natural economic hedge against the exchange risk related to debt expressed in US dollars.

e) Price commodities risk

The Company occasionally enters into hedging contracts to hedge against fluctuations on the price of certain commodities. Outstanding
contracts as at the balance sheet date had a fair value of $900,000.

2 0 0 5 A N N U A L R E P O R T / S A P U T O 5 5

1 8 . S E G M E N T E D I N F O R M AT I O N

The dairy products sector principally includes the production and distribution of cheeses and fluid milk. The activities of this sector are
carried out in Canada, Argentina and the United States.

The grocery products sector consists of the production and marketing of snack cakes. Total assets of this sector include the
portfolio investment.

These operating sectors are managed separately because each sector represents a strategic business unit that offers different products
and serves different markets. The Company measures performance based on geographic operating income and sector operating income
on a stand-alone basis.

The accounting policies of the sectors are the same as those described in Note 1 relating to significant accounting policies. The Company
does not have any intersector sales.

Information on operating sectors

Revenues

Dairy products
Grocery products

Earnings before interest,
depreciation and income taxes

Dairy products
Grocery products

Depreciation of fixed assets

Dairy products
Grocery products

Operating income
Dairy products
Grocery products

Interest
Earnings before income taxes

Income taxes
Net earnings

2005

2004

Canada
and other

United States

Total

Canada
and other

United States

Total

$ 2,415,541
158,793
$ 2,574,334

$ 1,308,735
-
$ 1,308,735

$ 3,724,276
158,793
$3,883,069

$ 2,161,852
167,384
$2,329,236

$ 1,240,954
-
$ 1,240,954

$3,402,806
167,384
$ 3,570,190

244,161
26,555
$ 270,716

29,743
5,147
34,890

137,043
-
137,043

$ 381,204
26,555
407,759

$ 209,855
32,515
$ 242,370

$ 160,887
-
$ 160,887

$ 370,742
32,515
$ 403,257

31,175
-
31,175

60,918
5,147
66,065

29,854
4,634
34,488

31,550
-
31,550

61,404
4,634
66,038

214,418
21,408
$ 235,826

$ 105,868
-
$ 105,868

$ 320,286
21,408
341,694

$ 180,001
27,881
207,882

$ 129,337
-
$ 129,337

$ 309,338
27,881
337,219

29,090
312,604

80,459
$ 232,145

36,010
301,209

88,844
$ 212,365

5 6 2 0 0 5 A N N U A L R E P O R T / S A P U T O

1 8 . S E G M E N T E D I N F O R M AT I O N ( c o n t ’ d )

Geographic information

Revenues
Dairy products
Grocery products

Total assets
Dairy products
Grocery products

Net book value
of fixed assets
Dairy products
Grocery products

Additions to
fixed assets
Dairy products
Grocery products

Goodwill
Dairy products
Grocery products

2005

2004

Canada

Argentina United States

Total

Canada

Argentina

United States

Total

$2,265,277
158,793
$2,424,070

$ 150,264
-

$ 1,308,735
-
$ 150,264 $ 1,308,735

$ 3,724,276
158,793
$3,883,069

$2,117,390
167,384
$2,284,774

$ 44,462
-
$ 44,462

$ 1,240,954
-
$ 1,240,954

$3,402,806
167,384
$ 3,570,190

$ 1,017,031
298,950
$1,315,981

$ 100,696
-

$ 716,395
-
$ 100,696 $ 716,395

$ 1,834,122
298,950
$ 2,133,072

$ 932,552
291,622
$1,224,174

$ 89,138
-
$ 89,138

$ 756,236
-
$ 756,236

$ 1,777,926
291,622
$2,069,548

$ 315,260
40,739
$ 355,999

38,856
6,010
44,866

$ 132,698
164,513
$ 297,211

51,601 $ 240,984
-
$ 240,984

-
51,601

$ 607,845
40,739
$ 648,584

$ 305,134
39,876
$ 345,010

$ 41,805
-
$ 41,805

$ 274,368
-
$ 274,368

$ 621,307
39,876
661,183

18,134 $
-
18,134

18,786
-
18,786

75,776
6,010
81,786

63,713
5,123
68,836

- $ 209,989
-
-
- $ 209,989

$ 342,687
164,513
507,200

$ 132,698
164,513
$ 297,211

315
-
315

21,295
-
21,295

85,323
5,123
90,446

-
-
-

$ 227,645
-
$ 227,645

$ 360,343
164,513
$ 524,856

1 9 . S U B S E Q U E N T E V E N T S

On April 18, 2005 the Company acquired the activities of Fromage Coté S.A. and Distributions Kingsey Inc. (a cheese manufacturer
operating in Canada) for a cash consideration of $52,900,000, subject to adjustments. The preliminary purchase price allocation is as
follows; working capital: $10,900,000, fixed assets: $11,375,000 and intangible assets: $30,625,000. The final allocation of the purchase
price will be completed in the next fiscal year.

On May 27, 2005 the Company acquired the activities of Schneider Cheese, Inc. (a cheese manufacturer operating in the United States) for
a cash consideration of US$24,400,000, subject to adjustments. The preliminary purchase price allocation is as follows; working capital:
US$2,400,000, fixed assets: US$4,350,000 and intangible assets: US$17,650,000. The final allocation of the purchase price will be
completed in the next fiscal year.

2 0 0 5 A N N U A L R E P O R T / S A P U T O 5 7

Social
Responsibility

Human capital, in society at large or within the confines of our
own Company, is our most precious resource. This is the premise
that underlies many of Saputo’s initiatives. One of those consists
in providing our employees with a stimulating work and living
environment in which they can achieve their potential and make a
personal contribution to the success of the Company. Much more
than a job, at Saputo, where an entrepreneurial approach and
family spirit prevail and where promotion from within is the order
of the day, employees are offered a career.

That commitment towards our employees continues outside the
Company, where employees are encouraged to involve themselves
in helping out their communities that are close to their hearts. We
are very much aware of the important contribution these activities
make to society, and we back up our encouragement with financial
investments or with product donations.

Of the 8,500 employees in the Company today, many are actively
involved in a variety of volunteer activities that range from
marathons to raising funds to help victims of the December 2004
Tsunami, and volunteering their time on behalf of a favourite
charitable institution. Sports and youth development are also
essential activities for Saputo employees, with a great many of
them devoting their time and energies to helping organizations
geared to supporting the young.

As a corporate citizen, Saputo contributes to many organizations
and institutions. Causes and needs seem to grow steadily, and all
of them with equally praiseworthy aims and goals. The Company
builds on its leadership position in the food industry to benefit
those organizations that foster good nutrition and promote
health through proper eating habits. It is the Company’s desire to
contribute to the essential daily nutrition of children at
elementary schools. A healthy diet leads not just to better report
cards but to a better quality of life, and thus Saputo continues
with its involvement in the Club des petits déjeuners du Québec.

Moreover, Saputo has expanded such participation to a national
level by supporting the organization Breakfast for Learning.
In close to 2,600 schools across Canada, approximately 260,000
students benefit from a school feeding program that allows them to
start their day with the energy and the mental focus that will help
them to succeed. Youth is also supported through contribution to
the Make-A-Wish Foundation® of America in the United States, whose
mission is to realize the wishes of children with life-threatening
medical conditions. Saputo also donates a variety of foods to
various food banks across Canada and the United States.

Furthermore, Saputo supports a number of educational institutions
and takes part in various research projects primarily having to do
with the agro-food industry. Saputo contributes to the academic
development of students through various university scholarship
programs and by recognizing outstanding initiatives.

Saputo’s support is also directed towards family and sports
activities. Saputo helped feed the athletes and volunteers at the
41st Québec Games Finals, which took place in Saint-Hyacinthe in
March 2005. The Company continues to back the Montréal Impact,
a not-for-profit professionnal soccer team, as a major sponsor.
Saputo’s involvement in soccer goes well beyond this particular
professional team; for many years it has sponsored the Québec
Soccer Federation as well as several soccer teams and technical
clinics in a number of regions to promote physical activity. In this
same perspective, Saputo continues to back the Fondation de
l’athlète d’excellence du Québec, which by way of academic
scholarships supports athletes from Québec and elsewhere in
Canada who distinguish themselves on the national and
international athletic scenes.

These are just a few examples illustrating the deep-seated
commitment of Saputo and its employees to the community and to
the individuals, it’s most precious resource.

2 0 0 5 A N N U A L R E P O R T / S A P U T O 5 9

BOARD OF DIRECTORS

From lef t to right, in the back:

Pierre Bourgie, President and Chief Executive Of f icer, Société Financière Bourgie Inc.
Louis A. Tanguay, Corporate Director
Jean Gaulin, Corporate Director
Frank A. Dottori, President and Chief Executive Of f icer, Tembec Inc.
André Bérard, Corporate Director
Lino Saputo, Chairman of the Board, Saputo Inc.

From lef t to right, in the front:

Caterina Monticciolo, CA, President, Julvest Capital Inc.
Lucien Bouchard, Senior Partner, Davies Ward Phillips & Vineberg LLP
Patricia Saputo, CA, FP, President, Pasa Holdings Inc.
Lino Saputo, Jr., President and Chief Executive Of f icer, Saputo Inc.

6 0 2 0 0 5 A N N U A L R E P O R T / S A P U T O
6 0 2 0 0 5 A N N U A L R E P O R T / S A P U T O

SHAREHOLDER INFORMATION

Head Office

Transfer Agent

Saputo Inc.
6869 Métropolitain Blvd. East
Saint-Léonard, Québec, Canada H1P 1X8
Telephone: 514.328.6662 • Fax: 514.328.3364
www.saputo.com

National Bank Trust
1100 University Street, Suite 900
Montréal, Québec, Canada H3B 2G7
Telephone: 514.871.7171 or 1 800 341.1419
Fax: 514.871.7442

General Annual Meeting of Shareholders

External Auditors

Tuesday, August 2, 2005, at 11 a.m.
Laval Room, Hotel Sheraton Laval
2440 Autoroute des Laurentides
Laval, Québec, Canada H7T 1X5

Investor Relations

Corporate Communications
Telephone: 514.328.3377 • Fax: 514.328.3364
Email: investors@saputo.com

Stock Exchange

Toronto
Symbol: SAP

Deloitte & Touche LLP, Laval, Québec

Dividend Policy

Saputo Inc. declares quarterly cash dividends on common shares
in an amount of $0.15 per share, representing a yearly dividend of
$0.60 per share. The balance of corporate earnings is reinvested
to finance the growth of the Company’s business.

The Board of Directors may review the Company’s dividend policy
from time to time based on financial position, operating results,
capital requirements and such other factors as are deemed relevant
by the Board in its sole discretion.

Un exemplaire français vous sera expédié sur demande adressée à :
Saputo inc.
Communications corporatives
6869, boul. Métropolitain Est
Saint-Léonard (Québec) Canada H1P 1X8
Téléphone : 514.328.3377 • Télécopieur : 514.328.3364
Courriel : investisseurs@saputo.com

A special thank-you to our young artists from Breakfast for Learning for their superb
drawings and to Gabrielle, member of the Club des petits déjeuners du Québec.

Photography: Ronald Maisonneuve, Fernando E. Alvarez,
Impact de Montréal/pépé, Jacques Sztuke

Graphic design: www.dyade.com

Printed in Canada

This annual report is printed on elemental chlorine-free and acid-free Canadian paper.

w w w. s a p u t o . c o m