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2018 ANNUAL REPORT
Saputo produces, markets, and distributes a wide array of dairy products of the utmost quality, including cheese, fluid milk,
extended shelf-life milk and cream products, cultured products and dairy ingredients. Saputo is one of the top ten dairy processors
in the world, the largest cheese manufacturer and the leading fluid milk and cream processor in Canada, the top dairy processor
in Australia and the second largest in Argentina. In the USA, Saputo ranks among the top three cheese producers and is one
of the largest producers of extended shelf-life and cultured dairy products. Our products are sold in several countries under
well-known brand names such as Saputo, Alexis de Portneuf, Armstrong, COON, Cracker Barrel*, Dairyland, DairyStar, Devondale,
Friendship Dairies, Frigo Cheese Heads, La Paulina, Milk2Go/Lait’s Go, Montchevre, Murray Goulburn Ingredients, Neilson, Nutrilait,
Scotsburn*, Stella, Sungold, Treasure Cave and Woolwich Dairy. Saputo Inc. is a publicly traded company and its shares are listed
on the Toronto Stock Exchange under the symbol “SAP”.
* Trademark used under licence.
FINANCIAL HIGHLIGHTS
Fiscal years ended March 31 (in millions of CDN dollars)
REVENUES
ADJUSTED EBITDA*
NET EARNINGS
ADJUSTED NET EARNINGS*
2018
2017
2016
Fiscal 2018
Since 2016
CAGR(1)
$11,542.5
$ 11,162.6
$ 10,991.5
+3.4%
+2.5%
$1,264.7
$ 1,289.5
$ 1,174.1
-1.9%
+3.8%
$852.5
$ 731.1
$ 601.4
+16.6%
+19.1%
$704.2
$ 731.1
$ 626.9
-3.7%
+6.0%
For the fiscal year ended March 31, 2018
SECTOR
NUMBER OF PLANTS**
NUMBER OF EMPLOYEES**
% OF TOTAL REVENUES
Canada Sector
USA Sector
International Sector
21
26
12
5,400
6,100
3,500
35%
53%
12%
Products sold
in over
40
countries
59
plants
Approx.
15,000
employees
SEGMENT
% OF TOTAL REVENUES
CLIENTELE
RETAIL
FOODSERVICE
49%
39%
Sales are made to supermarket chains, mass-merchandisers,
convenience stores, independent retailers, warehouse clubs
and specialty cheese boutiques under company-owned or
customer brand names.
Sales are made to broadline distributors, as well as
to restaurants and hotels, under company-owned or
customer brand names.
INDUSTRIAL
12% Sales are made to food processors using Saputo’s products
as ingredients to manufacture their products.
* Non-IFRS measures described in the “Glossary” section on page 36 of the Management’s Discussion and Analysis.
** Taking into account the Murray Goulburn Acquisition completed on May 1, 2018, excluding the Koroit divestiture.
(1) CAGR, Compound Annual Growth Rate is defined as the year over year growth rate over a specified amount of time.
THE
SAPUTO
PROMISE
The Saputo Promise is our commitment to
live up to the values on which our business
was founded in 1954. It consists of 7 Pillars,
that form the backbone of our approach
to social, environmental and economic
performance.
As a global leader in dairy processing,
we have a responsibility to demonstrate good
corporate citizenship in everything we do.
We believe the future is created by what
we do today. And our promise is to never
stop building the future we believe in.
Here’s a summary of what we achieved
under our Promise in FY2018.
Saputo workshops reinforce best practices
in animal care and handling
Between September and November 2017, we held workshops at three locations in Argentina
to educate dairy farmers on ways to mitigate pain during disbudding, while also highlighting the
benefits of implementing proper animal care. Together with our local primary production teams
as well as APROCAL, a nationally recognized leader in supply management, we succeeded
in securing over 400 individuals to take part in various educational seminars including farm
owners, students, operators, and professionals in the field, and equipped them with the tools
and knowledge they need to create a healthier future for their animals as well as their dairy
farming business. Visit our case study section on www.saputo.com/our-promise to learn more.
In FY2018 energy consumption
increased by approx.
6%
per ton of product,
as compared to FY2017,
due to an increase in production
of more energy-intensive products,
such as powder and cheese.
(1) Total Recordable Incident Frequency
(2) Global Food Safety Initiative
We reduced TRIF(1)
by approx.
3%
in FY2018,
as compared to FY2017.
As at March 31, 2018,
94%
of our plants were certified
to GFSI(2) standards.
OUR 7 PILLARS
FOOD QUALITY
AND SAFETY
OUR PEOPLE
BUSINESS
ETHICS
RESPONSIBLE
SOURCING
ENVIRONMENT
NUTRITION
AND HEALTHY
LIVING
COMMUNITY
Our FY2018 Saputo Promise Fact Sheet – including further details on our non-financial performance- will be published in August 2018.
We reached
2.1 million
people
through our partnerships
and programs promoting
a healthy lifestyle.
By the end of FY2018,
the average tenure of
our employees was
10 years.
We continued to
promote the importance
of behaving ethically
by providing further
training on our Code of
Ethics, and ensuring it
is a formal part of the
onboarding process for
all new employees.
Milk2Go Now with Less Sugar
Between January 2016 and December 2017,
after several trials, adjustments, and consumer
testing, our product development team gradually
reformulated our original Milk2Go Flavours
(chocolate, strawberry, banana and vanilla),
which are now made with less sugar. On top
of reducing sugar by 4 grams, our chocolate-
flavoured Milk2Go is now the first Milk2Go
formulation to have successfully transitioned
to a ‘clean label’, with zero artificial colour or
flavouring. Visit our case study section on
www.saputo.com/our-promise to learn more.
This has been another year of continued growth
for Saputo as we strengthened our global business
and affirmed our position as one of the leading
dairy processors in the world.
MESSAGE FROM THE CHAIRMAN OF THE BOARD
AND CHIEF EXECUTIVE OFFICER
LINO A. SAPUTO, JR.
On August 1, 2017, I became Chairman of the Board, in
addition to my duties as Chief Executive Officer, following
the retirement of my father Emanuele (Lino) who devoted
62 years of his life to building Saputo into a global dairy
processor. I remain inspired by his vision and am committed
to continuing his legacy of growing the Company while
preserving the core values and traditions he made integral
to its success.
In addition, all members of the Board’s two committees –
the Audit Committee and the Corporate Governance and
Human Resources Committee – are independent directors.
The Board is committed to good corporate governance as
stated in the Company’s Management Proxy Circular dated
June 7, 2018. I invite you to refer to this document to learn
more about our governance practices and Board members.
I want to thank all directors for their leadership and
oversight this year. The Board of Directors is comprised
of eight independent directors and two non-independent
directors: myself and Louis-Philippe Carrière, who was
elected to the Board on August 1, 2017 upon his retirement
as the Company’s Chief Financial Officer and Secretary and
who continues to act as Senior Advisor to Saputo. After each
Board meeting, the independent directors, led by a Lead
Director, meet without the non-independent directors.
Profitability enhancement and shareholder value creation
are cornerstones of the Company’s objectives and remain
a focus of the Board of Directors. In fiscal 2018, the Board
reviewed Saputo’s dividend policy and increased the
quarterly dividend from $0.15 per share to $0.16 per share,
representing a 6.7% increase.
Since our IPO in 1997, we have grown significantly, both
organically and through a series of strategic acquisitions,
and now count approximately 15,000 employees worldwide.
Our revenues have increased to $11.5 billion in fiscal 2018,
our adjusted EBITDA* to $1.3 billion, and our adjusted
net earnings* to $704.2 million.
Canada. As we look to fiscal 2019, we expect to be in a
position to complete the previously announced acquisition
of the activities of Shepherd Gourmet Dairy (Ontario) Inc.
in June 2018, which will enable our Dairy Division (Canada)
to increase its presence in specialty cheese and expand its
yogurt offering in Canada.
A solid balance sheet offers us the flexibility to seek further
acquisition opportunities, such as the two we completed
in the United States in fiscal 2018 – the extended shelf-life
(“ESL”) dairy product activities of Southeast Milk, Inc. (“SMI”),
and Betin, Inc., doing business as Montchevre (“Montchevre”)
– as well as the now completed acquisition of the activities
of Murray Goulburn Co-Operative Co. Limited (“Murray
Goulburn”) in Australia.
Our growth has outpaced market trends as we regularly
adjust and adapt to changes in a highly competitive
landscape. We continue to invest in and modernize our
plants to further improve overall efficiencies and raw
material optimization across all divisions. The implementation
of our new enterprise resource planning (“ERP”) system
is progressing as planned, with successful implementations
in Argentina and Australia. The implementation within the
Dairy Foods Division (USA) will be completed in fiscal 2019
while the Cheese Division (USA) has started its preparation
activities with completion expected in fiscal 2020. Finally,
implementation in the Dairy Division (Canada) will begin in
fiscal 2020. While ERP has been impacting our short-term
results as planned, we are confident it will support our
future growth for decades to come.
In Canada, we worked to maintain our leadership position
by focusing on cost reductions, operating efficiencies and
promoting our retail brands, including the Saputo cheese
brand we relaunched in fiscal 2017. We successfully
completed the modernization of our Saint-Hyacinthe
(Québec) plant to expand our ESL and aseptic product
offering capabilities and capacity. We also initiated capital
projects to leverage best practices for our manufacturing
and warehouse, delivery and logistics platforms across
Our USA Sector delivered higher sales volumes in fiscal 2018
resulting in increased revenues. While some administrative
expenses increased in order to enable us to support future
growth, we also faced higher warehousing and logistical
costs related to additional storage expenses and higher
transportation costs. Furthermore, new regulations
impacted our shipping and delivery expenses.
With the completion of the Montchevre acquisition,
our Cheese Division (USA) broadened its presence in
specialty cheese in the United States. We completed the
modernization of our state-of-the-art blue cheese plant in
Almena (Wisconsin) where we began manufacturing and
packaging activities. We will also close our Fond du Lac
(Wisconsin) plant in the first quarter of fiscal 2019, the
production of which has already been amalgamated with
that of the Almena plant.
The Dairy Foods Division (USA) continued to build
strategic relationships with existing and new customers.
We introduced innovative new products and maintained
our focus on driving efficiencies and optimizing our
supply network for raw materials and delivered products.
The acquisition of the ESL dairy product activities of SMI,
based in Plant City (Florida), strengthened our national
network and added capacity for continued growth.
The International Sector saw further improvements in
market conditions, but the cycle of supply and demand
continued to create volatility in input and selling prices.
We increased our milk intake and continued to pursue
sales volume growth in existing markets, as well as to
develop additional international markets.
* Non-IFRS measures described in the “Glossary” section on page 36 of the Management’s Discussion and Analysis.
Our Dairy Division (Argentina) enjoyed a strong presence
in the domestic market and focused on cheese volume
development in supermarkets and among distributors.
Upgrades at the plant level were made this year to improve
line productivity and increase manufacturing capacity to
meet higher sales volumes in both the domestic and export
markets, which increased revenues for the division.
The most significant regulatory development in the
United States in fiscal 2018 was the enactment of
the “Tax Cuts and Jobs Act”, also known as tax reform,
in December 2017. This translated into a notable
one-time benefit for Saputo to adjust for future tax
balances and current fiscal year provisions and a reduction
in our U.S. federal income tax rate going forward.
In our Dairy Division (Australia), we completed cheese and
whey plant upgrades at our Allansford (Victoria) facility and
continued to build solid relationships with farmer suppliers
and customers as milk intake exceeded one billion litres
for the first time. Going forward, the recently completed
acquisition of Murray Goulburn will greatly expand our
capacity in Australia and our ability to pursue additional
export markets as we continue to invest in our Australian
platform and contribute to the ongoing development of its
domestic and international business.
On the regulatory front, the Comprehensive
Economic and Trade Agreement (CETA) between Canada
and the European Union (“EU”) came into effect on
September 21, 2017, giving EU cheeses increased access
to the Canadian market. We have been advised of our
Tariff Rate Quota allocation under this agreement and are
prepared and well positioned to face this regulatory change.
The Comprehensive and Progressive Agreement for
Trans-Pacific Partnership (CPTPP), which includes
Canada, Australia and nine other Pacific nations –
but not the United States – was signed on March 8, 2018.
This agreement will have an as-yet undetermined impact
on our quotas in Canada and on dairy pricing domestically
as new access is granted to the Canadian market, but
it also provides us with new export opportunities from
countries where we have a presence to other ratifying
countries through our international platform.
Meanwhile, it is still uncertain what, if any, changes there
will be to the North American Free Trade Agreement
(NAFTA) between Canada, the United States and Mexico.
As several significant gaps related to key areas of interest
for the various parties persist, it remains unclear whether
an agreement can be reached prior to the end of fiscal 2019.
Regardless of the outcome, we intend to adapt swiftly to
any revised regulatory environment in North America.
Looking ahead, I believe in our foundations, our
infrastructure and our executive team to continue delivering
strong results. I also want to thank our employees for
ensuring Saputo provides quality products and service to
our customers, consumers and business partners wherever
they are in the world. Our positive financial and operational
performance is the result of our employees executing on
our strategies and business plans while staying true to
the values that underpin all our initiatives.
That is why I look to the future with great optimism,
confident the Company will continue to face the challenges
and capitalize on the opportunities within the global
dairy industry.
LINO A. SAPUTO, JR.
Chairman of the Board and Chief Executive Officer
Saputo Inc.
MANAGEMENT’S
DISCUSSION AND ANALYSIS
—
CONSOLIDATED
FINANCIAL STATEMENTS
2018
June 7, 2018
TABLE OF CONTENTS
Canada Sector
USA Sector
International Sector
Liquidity, financial and capital resources
Contractual obligations
Balance sheet
Guarantees
Related party transactions
Accounting standards
MANAGEMENT’S DISCUSSION AND ANALYSIS
Non-IFRS measures
Caution regarding forward-looking statements
Selected financial information
Financial orientation
Financial information
Elements to consider when reading management’s discussion and analysis
Outlook
Consolidated results
Information by sector
3
3
3
4
5
5
7
8
9
11
13
15
18
20
22
22
23
23
23
23
Critical accounting policies and use of accounting estimates
25
Effect of new accounting standards, interpretations and amendments not yet implemented
Considerations for the implementation of IFRS 9 and IFRS 15
27
Effect of new accounting standards, interpretation and amendments adopted during the year 28
28
31
31
31
32
34
35
36
37
44
Risks and uncertainties
Disclosure controls and procedures
Internal controls over financial reporting
Sensitivity analysis of interest rate and us currency fluctuations
Quarterly financial information
Analysis of earnings for the year ended March 31, 2017 compared to March 31, 2016
Measurement of results not in accordance with international financial reporting standards
Glossary
CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MANAGEMENT’S DISCUSSION AND ANALYSIS
The goal of the management report is to analyze the results of, and the financial position for, the year ended
March 31, 2018. It should be read while referring to the audited consolidated financial statements and accompanying
notes. The accounting policies of Saputo Inc. (Company or Saputo) for financial years ended March 31, 2018, 2017 and
2016 are in accordance with International Financial Reporting Standards (IFRS). All dollar amounts are in Canadian
dollars, unless otherwise indicated. This report takes into account material elements between March 31, 2018 and
June 7, 2018, the date on which this report was approved by Saputo’s Board of Directors. The information in this MD&A
is being presented as of March 31, 2018, unless otherwise specified. Additional information about the Company, including
the annual information form for the year ended March 31, 2018, can be obtained on SEDAR at www.sedar.com.
NON-IFRS MEASURES
The Company reports its financial results in accordance with IFRS. However, in this MD&A, the following non-
IFRS measures are used by the Company: adjusted EBITDA; adjusted net earnings; and adjusted net earnings per share.
These measures are defined in the “Glossary” section on page 36 of this Management’s Discussion and Analysis. Refer
to ‘‘Measurement of Results not in Accordance with International Financial Reporting Standards’’ on page 35 of this
Management’s Discussion and Analysis for the reconciliations to IFRS measures.
Management of the Company believes that these non-IFRS measures provide useful information to investors regarding
the Company’s financial condition and results of operations as they provide key metrics of its performance. These non-
IFRS measures are not recognized under IFRS, do not have any standardized meaning prescribed under IFRS and may
differ from similar computations as reported by other issuers, and accordingly may not be comparable. These measures
should not be viewed as a substitute for the related financial information prepared in accordance with IFRS.
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of applicable securities laws. These statements are
based, among other things, on Saputo’s assumptions, expectations, estimates, objectives, plans and intentions as of the
date hereof regarding projected revenues and expenses, the economic, industry, competitive and regulatory environments
in which the Company operates or which could affect its activities, its ability to attract and retain customers and consumers,
as well as the availability and cost of milk and other raw materials and energy supplies, its operating costs and the pricing
of its finished products on the various markets in which it carries on business.
These forward-looking statements include, among others, statements with respect to the Company’s short and medium
term objectives, outlook, business projects and strategies to achieve those objectives, as well as statements with respect
to the Company’s beliefs, plans, objectives and expectations. The words “may”, “should”, “will”, “would”, “believe”, “plan”,
“expect”, “intend”, “anticipate”, “estimate”, “foresee”, “objective”, “continue”, “propose” or “target”, or the negative of these
terms or variations of them, the use of conditional or future tense or words and expressions of similar nature, are intended
to identify forward-looking statements.
By their nature, forward-looking statements are subject to a number of inherent risks and uncertainties. Actual results
could differ materially from the conclusion, forecast or projection stated in such forward-looking statements. As a result,
the Company cannot guarantee that any forward-looking statements will materialize. Assumptions, expectations and
estimates made in the preparation of forward-looking statements and risks that could cause actual results to differ
materially from current expectations are discussed in the Company’s materials filed with the Canadian securities regulatory
authorities from time to time, including the “Risks and Uncertainties” section of this Management’s Discussion and
Analysis.
Forward-looking statements are based on Management’s current estimates, expectations and assumptions, which
Management believes are reasonable as of the date hereof, and, accordingly, are subject to changes after such date. You
should not place undue importance on forward-looking statements and should not rely upon this information as of any
other date.
To the extent any forward-looking statement in this document constitutes financial outlook, within the meaning of applicable
securities laws, such information is intended to provide shareholders with information regarding the Company, including
its assessment of future financial plans, and may not be appropriate for other purposes. Financial outlook, as with forward-
looking information generally, is based on current estimates, expectations and assumptions and is subject to inherent risks
and uncertainties and other factors.
Except as required under applicable securities legislation, Saputo does not undertake to update or revise these forward-
looking statements, whether written or verbal, that may be made from time to time by itself or on its behalf, whether as a
result of new information, future events or otherwise.
ANNUAL REPORT 2018
- 3 -
SELECTED FINANCIAL INFORMATION
Years ended March 31
(in millions of CDN dollars, except per share amounts and ratios)
Revenues
Adjusted EBITDA*
Adjusted EBITDA margin*
Net earnings
Net earnings margin
Adjusted net earnings*
Adjusted net earnings margin*
PER SHARE DATA
Net earnings per share
Diluted net earnings per share
Dividends declared per share
Book value
BALANCE SHEET DATA
Working capital
Total assets
Net debt**
Total non-current financial liabilities
Equity
FINANCIAL RATIOS
Net debt / Equity
Net debt-to-adjusted EBITDA*
Adjusted return on average equity**
Earnings coverage ratio**
STATEMENT OF CASH FLOWS DATA
Net cash generated from operations
Amount of additions to property, plant and equipment,
intangible assets, net of proceeds on disposal
Business acquisitions
Dividends
2018
2017
2016
11,542.5
11,162.6
10,991.5
1,264.7
11.0 %
1,289.5
11.6 %
1,174.1
10.7 %
852.5
7.4 %
704.2
6.1 %
731.1
6.5 %
731.1
6.5 %
601.4
5.5 %
626.9
5.7 %
2.21
2.18
0.64
12.38
1,129.6
8,003.0
1,496.4
1,432.6
4,797.7
0.31
1.18
18.3 %
20.83
809.1
337.4
385.1
243.5
1.86
1.84
0.60
11.19
1,187.1
7,596.6
1,343.3
1,504.5
4,322.9
0.31
1.04
20.7 %
25.83
1,073.6
316.7
-
228.3
1.53
1.51
0.54
10.37
819.0
7,172.3
1,467.1
1,208.3
4,069.8
0.36
1.25
19.2 %
13.36
849.8
226.3
214.9
210.0
* Non-IFRS measures described in the ‘‘Glossary’’ section on page 36 of this Management’s Discussion and Analysis.
** Refer to the ‘‘Glossary’’ section on page 36 of this Management’s Discussion and Analysis.
ANNUAL REPORT 2018
- 4 -
FINANCIAL ORIENTATION
Saputo’s primary objective is the creation of shareholder value through profitability enhancement and long-term growth.
The Company maintains its focus on cost management and operational efficiency to remain a strong operator and a
disciplined financial manager while navigating a competitive and challenging dairy industry. Saputo is also focused on
organic growth and growth through acquisitions in order to develop new markets and expand existing ones in addition to
reinforcing its presence in emerging markets. The Company remains proactive in evaluating possible acquisitions and
potential growth markets. Saputo benefits from a solid balance sheet and capital structure, supplemented by a high level
of cash generated by operations. Saputo’s financial flexibility allows growth through targeted acquisitions and enables the
Company to overcome possible economic challenges. In fiscal 2018, the Company completed some strategic acquisitions,
continued to invest in capital projects, and increased its dividend.
FINANCIAL INFORMATION
(in millions of CDN dollars)
STATEMENT OF EARNINGS
Revenues
Canada
USA
International
Operating costs excluding depreciation, amortization,
acquisition and restructuring costs
Canada
USA
International
Adjusted EBITDA*
Canada
USA
International
For the three-month periods
ended March 31
2017
2018
For the years
ended March 31
2017
2018
980.9
1,435.1
328.4
2,744.4
872.2
1306.8
303.1
2,482.7
108.1
128.3
25.3
261.7
959.8
1,486.5
273.5
2,719.8
855.7
1336.0
244.0
2,435.7
104.1
150.5
29.5
284.1
4,069.9
6,132.8
1,339.8
11,542.5
3,594.0
5,483.4
1,200.4
10,277.8
475.9
649.4
139.4
1,264.7
4,060.2
6,003.3
1,099.1
11,162.6
3,607.1
5,269.1
996.9
9,873.1
453.1
734.2
102.2
1,289.5
Adjusted EBITDA margin
9.5%
10.4%
11.0%
11.6%
Depreciation and amortization
Canada
USA
International
Acquisition and restructuring costs
Interest on long-term debt
Other financial charges
Earnings before incomes taxes
Income taxes
Net earnings
Net earnings margin
14.5
42.3
7.9
64.7
1.2
8.3
4.6
182.9
52.9
130.0
4.7%
14.8
34.8
7.3
56.9
-
8.3
0.8
218.1
52.9
165.2
6.1%
55.9
138.4
32.0
226.3
40.6
33.8
14.1
949.9
97.4
852.5
7.4%
58.0
123.4
25.9
207.3
-
36.9
5.0
1,040.3
309.2
731.1
6.5%
* Non-IFRS measure described in the ‘‘Glossary’’ section on page 36 of this Management’s Discussion and Analysis.
ANNUAL REPORT 2018
- 5 -
(in millions of CDN dollars, except per share amounts and ratios)
Net earnings
Acquisition and restructuring costs (net of income taxes)
US Tax Reform**
Adjusted net earnings*
For the three-month periods
ended March 31
For the years
ended March 31
2018
130.0
5.3
-
135.3
2017
165.2
-
-
165.2
2018
852.5
30.6
(178.9)
704.2
2017
731.1
-
-
731.1
Adjusted net earnings margin*
4.9%
6.1%
6.1%
6.5%
PER SHARE DATA
Net earnings per share
Diluted net earnings per share
Adjusted net earnings per share*
Adjusted diluted net earnings per share*
0.34
0.33
0.35
0.35
0.42
0.42
0.42
0.42
2.21
2.18
1.82
1.80
1.86
1.84
1.86
1.84
* Non-IFRS measures described in the ‘‘Glossary’’ section on page 36 of this Management’s Discussion and Analysis.
** Refer to the ‘‘Glossary’’ section on page 36 of this Management’s Discussion and Analysis.
ANNUAL REPORT 2018
- 6 -
ELEMENTS TO CONSIDER WHEN READING MANAGEMENT’S DISCUSSION AND
ANALYSIS
Fourth Quarter 2018:
• Net earnings totalled $130.0 million, down 21.3%, as compared to the same quarter last fiscal year.
• Adjusted net earnings* totalled $135.3 million, down 18.1%, as compared to the same quarter last fiscal year.
• Earnings before interest, income taxes, depreciation, amortization, acquisition and restructuring costs (adjusted
EBITDA*) totalled $261.7 million, down $22.4 million or 7.9%, as compared to the same quarter last fiscal year.
• Revenues reached $2.745 billion, up 0.9%, as compared to the same quarter last fiscal year.
• Net cash generated from operations totalled $317.9 million, up 56.7%, as compared to the same quarter last fiscal year.
• Consolidated revenues increased due to higher sales volumes in all sectors. The fluctuation of the average block
market** per pound of cheese and the average butter market** price per pound and lower international selling prices of
dairy ingredients negatively impacted revenues.
• The combination of a higher cost of milk as raw material and lower selling prices in the export markets, including inventory
write-downs, negatively impacted consolidated adjusted EBITDA by approximately $33 million.
• Higher warehousing and logistical expenses related to higher transportation costs, as well as higher Enterprise
Resource Planning (ERP) expenses negatively impacted adjusted EBITDA by approximately $15 million and $10 million,
respectively.
• In the USA, market factors** also negatively impacted adjusted EBITDA by approximately $3 million, as compared to
the same quarter last fiscal year. However, higher sales volumes positively impacted adjusted EBITDA.
• The fluctuation of the Canadian dollar versus foreign currencies had a negative impact on revenues of approximately
$93 million, as compared to the same quarter last fiscal year. This fluctuation negatively impacted adjusted EBITDA by
approximately $5 million, as compared to the same quarter last fiscal year.
• On May 1, 2018, the Company completed the acquisition of the activities of Murray Goulburn Co-Operative Co. Limited
(Murray Goulburn or MG), based in Australia (Murray Goulburn Acquisition).
• On May 23, 2018, the Company announced that it had entered into an agreement to acquire the activities of Shepherd
Gourmet Dairy (Ontario) Inc. (Shepherd Gourmet Acquisition) located in St. Marys, Ontario (Canada) for a purchase price
of $100 million. The transaction is expected to close in June 2018.
• The Board of Directors approved a dividend of $0.16 per share payable on June 28, 2018 to common shareholders of record
on June 19, 2018.
Fiscal 2018:
• Net earnings totalled $852.5 million, up 16.6%, as compared to last fiscal year.
• Adjusted net earnings totalled $704.2 million, down 3.7%, as compared to last fiscal year.
• Adjusted EBITDA totalled $1.265 billion, down $24.8 million or 1.9%, as compared to last fiscal year.
• Revenues reached $11.543 billion, up 3.4%, as compared to last fiscal year.
• Net cash generated from operations totalled $809.1 million, down 24.6%, as compared to last fiscal year.
• Consolidated revenues increased due to higher sales volumes in all sectors. The fluctuation of the average block market
per pound of cheese and the average butter market price per pound resulted in an increase of revenues of approximately
$97 million, while higher international selling prices of cheese and dairy ingredients increased revenues by
approximately $90 million and impacted adjusted EBITDA favourably.
• Higher warehousing and logistical expenses related to higher transportation costs of approximately $30 million and ERP
expenses of approximately $32 million negatively impacted consolidated adjusted EBITDA.
• In the USA, market factors also negatively impacted adjusted EBITDA by approximately $25 million, as compared to
last fiscal year. These decreases were partially offset by higher selling prices in both domestic and export markets and
higher sales volumes.
• As a result of decreases in certain market selling prices, inventory was written down by approximately $17 million, as
compared to approximately $4 million last fiscal year.
• The fluctuation of the Canadian dollar versus foreign currencies had a negative impact on revenues of approximately
$211 million, as compared to last fiscal year. This fluctuation negatively impacted adjusted EBITDA by approximately
$18 million, as compared to last fiscal year.
• The acquisitions of the extended shelf-life dairy product activities of Southeast Milk, Inc. (SMI Acquisition) and Betin, Inc.,
doing business as Montchevre (Montchevre Acquisition), were completed on September 29, 2017 and December 12, 2017,
respectively.
________________________
∗ Non-IFRS measures described in the ‘‘Glossary’’ section on page 36 of this Management’s Discussion and Analysis.
** Refer to the ‘‘Glossary’’ section on page 36 of this Management’s Discussion and Analysis.
ANNUAL REPORT 2018
- 7 -
OUTLOOK
Throughout fiscal 2018, the Company continued to strategically invest in capital projects, materialize acquisitions, expand
its activities in existing markets and increase its dividend. In fiscal 2019, the strategic Murray Goulburn Acquisition,
combined with our existing Australian platform allowed the Company to become the leading dairy processor in Australia.
The Murray Goulburn Acquisition will provide opportunities in both domestic and export markets. In fiscal 2019, we will
focus on integrating MG’s operations and maximizing the asset base in addition to aligning it with our Company’s operating
model and business approach. Additionally, the SMI Acquisition and the Montchevre Acquisition integrations will continue
in the USA, maximizing network infrastructure and distribution as well as increasing our presence in the specialty cheese
category in the USA. The Company also benefits from a solid balance sheet and capital structure, supplemented by a high
level of cash generated by operations. This financial flexibility allows the Company to continue to grow through targeted
acquisitions and organically through strategic capital investments. Profitability enhancement and shareholder value
creation remain the cornerstones of the Company’s objectives. The Company has a long-standing commitment to
manufacture quality products and will remain focused on operational efficiencies.
We intend to continue expanding and modernizing our plants, with investments in equipment and processes designed to
increase efficiency. The Company tends to spend amounts of capital to a level which is equivalent to its depreciation and
amortization expense, without considering capital expenditure amounts for strategic projects, such as plant capacity
increases, capital expenditures necessary to build new infrastructure for rationalization programs, or the Company’s ERP
initiative. In fiscal 2019, the Company intends to spend $310.7 million in capital in addition to an amount of $54.8 million
allocated for the continued implementation of the ERP initiative. Refer to the section entitled ‘‘Capital Expenditures’’ in the
Annual Information Form of the Company dated June 7, 2018 for additional information on the Company’s capital
expenditure plan.
The Company will pursue planning, designing and implementation activities for the migration to a new ERP system. The
implementation is progressing as planned. The new ERP system has been successfully implemented in Argentina and
Australia. In fiscal 2019, the Company expects to complete the system implementation in the Dairy Foods Division (USA).
Afterwards, the Company will proceed with the implementation in the Cheese Division (USA), which is expected in fiscal
2020. Implementation in the Dairy Division (Canada) will begin in fiscal 2020.
ANNUAL REPORT 2018
- 8 -
CONSOLIDATED RESULTS
Consolidated selected factors positively (negatively) affecting adjusted EBITDA and earnings before income
taxes
(in millions of CDN dollars)
For the three-month periods ended
March 31
2017
2018
For the years ended
March 31
2017
2018
Market factors*,1
Inventory write-down
Foreign currency exchange1
* Refer to the ‘‘Glossary’’ section on page 36 of this Management’s Discussion and Analysis.
1 As compared to same quarter of previous fiscal year for the three-month periods; as compared to the previous fiscal year for the years ended
(25)
(17)
(18)
(10)
(2)
(4)
(3)
(11)
(5)
(4)
(4)
13
March 31.
Consolidated revenues for the fourth quarter of fiscal 2018 totalled $2.745 billion, an increase of approximately
$25 million or 0.9%, as compared to $2.720 billion for the same quarter last fiscal year. Higher sales volumes, as well
as the inclusion of revenues derived from the SMI Acquisition and the Montchevre Acquisition, increased revenues by
approximately $53 million, as compared to the same quarter last fiscal year. A lower average block market per pound
of cheese, partially offset by a higher average butter market price per pound, decreased revenues by approximately
$29 million as compared to the same quarter last fiscal year. Also, lower international selling prices of dairy ingredients
negatively impacted revenues. Moreover, the fluctuation of the Canadian dollar versus foreign currencies decreased
revenues by approximately $93 million.
Consolidated revenues totalled $11.543 billion in fiscal 2018, an increase of approximately $380 million or 3.4% in
comparison to $11.163 billion in fiscal 2017. Higher sales volumes and higher selling prices of cheese and dairy
ingredients in both domestic and export markets increased revenues, as compared to last fiscal year. The fluctuation
of the average butter market price per pound and the average block market per pound of cheese increased revenues
by approximately $97 million. Additionally, the inclusion of revenues from the SMI Acquisition and the Montchevre
Acquisition positively impacted revenues by approximately $78 million. Conversely, the fluctuation of the Canadian
dollar versus foreign currencies decreased revenues by approximately $211 million.
Consolidated adjusted EBITDA for the fourth quarter of fiscal 2018 totalled $261.7 million, a decrease of $22.4 million
or 7.9% in comparison to $284.1 million for the same quarter last fiscal year. The combination of a higher cost of milk
as raw material and lower selling prices in the export markets, including inventory write-downs, decreased adjusted EBITDA
by approximately $33 million. Furthermore, higher warehousing and logistical costs related to additional external storage
expenses and higher transportation costs of approximately $15 million, as well as higher administrative expenses to
support future growth, mainly due to the ERP initiative, of approximately $10 million decreased adjusted EBITDA. In
the USA, market factors negatively impacted adjusted EBITDA by approximately $3 million. These decreases were
partially offset by higher sales volumes, operational efficiencies through raw material optimization, as well as the
positive impact derived from the SMI Acquisition and the Montchevre Acquisition. Lastly, the fluctuation of the Canadian
dollar versus foreign currencies had an unfavourable impact on adjusted EBITDA of approximately $5 million, as
compared to the same quarter last fiscal year.
Consolidated adjusted EBITDA in fiscal 2018 totalled $1.265 billion, a decrease of approximately $25 million or 1.9%,
as compared to $1.290 billion in fiscal 2017. Higher warehousing and logistical costs related to additional external
storage expenses and higher transportation costs of approximately $30 million, as well as higher ERP expenses of
approximately $32 million decreased adjusted EBITDA, as compared to last fiscal year. Additionally, in the USA, market
factors decreased adjusted EBITDA by approximately $25 million. As a result of the decrease in certain market selling
prices, inventory was written down by approximately $17 million during fiscal 2018, as compared to approximately
$4 million for last fiscal year. These decreases were partially offset by operational efficiencies through raw material
optimization and higher international selling prices of cheese and dairy ingredients. Higher sales volumes and a
favourable product mix, as well as the inclusion of the SMI Acquisition and the Montchevre Acquisition positively
impacted adjusted EBITDA. Finally, the fluctuation of the Canadian dollar versus foreign currencies had an
unfavourable impact on adjusted EBITDA of approximately $18 million, as compared to last fiscal year.
The consolidated adjusted EBITDA margin decreased to 11.0% in fiscal 2018, as compared to 11.6% in fiscal 2017,
resulting mainly due to lower adjusted EBITDA in the USA Sector as compared to the prior fiscal year.
ANNUAL REPORT 2018
- 9 -
Depreciation and amortization for the fourth quarter of fiscal 2018 totalled $64.7 million, an increase of $7.8 million, in
comparison to $56.9 million for the same quarter last fiscal year.
In fiscal 2018, depreciation and amortization expenses amounted to $226.3 million, an increase of $19.0 million, as
compared to $207.3 million for fiscal 2017.
These increases are mainly attributed to additions to property, plant and equipment and intangibles related to the ERP
initiative, increasing the depreciable base, as well as the additional depreciation and amortization expenses related to the
SMI Acquisition and the Montchevre Acquisition.
Acquisition costs and restructuring costs amounted to $1.2 million and $40.6 million respectively for the three-
month period ended March 31, 2018 and fiscal 2018. Acquisition costs are related to the SMI Acquisition, the
Montchevre Acquisition and the Murray Goulburn Acquisition. In connection with the restructuring costs relating to a
plant closure in Fond du Lac, Wisconsin, the Company incurred $23.1 million in severance and closure costs and
$10.6 million in impairment charges to property, plant and equipment.
Net interest expense for the three-month period ended March 31, 2018 and fiscal 2018 increased by $3.8 million and
$6.0 million respectively, in comparison to the same periods last fiscal year. These increases are mainly attributed to
higher bank loans denominated in Argentine peso, which bear higher interest rates, and financing for the SMI
Acquisition and the Montchevre Acquisition.
Income taxes for the three-month period ended March 31, 2018 and 2017 totalled $52.9 million, reflecting an effective
tax rate of 28.9%, as compared to 24.3% for the same quarter last fiscal year. In fiscal 2018, income taxes totalled
$97.4 million, compared to $309.2 million in fiscal 2017, reflecting an effective tax rate of 10.3%, compared to 29.7%
last fiscal year. During the fiscal year, the Company recorded an income tax benefit of $178.9 million to adjust for future
tax balances of $169.2 million and current fiscal year provisions of $9.7 million, due to the reduction of the US federal
tax rate. Excluding the benefit of the US federal tax rate reduction, income tax expense in fiscal 2018 would have
totalled $276.3 million, reflecting an effective tax rate of 29.1% compared to 29.7% for the previous fiscal year. This
reduction is mainly due to an income tax recovery of $8.3 million following a positive settlement in a tax file. The income
tax rate varies and could increase or decrease based on the amount and source of taxable income, amendments to
tax legislations and income tax rates, changes in assumptions, as well as estimates used for tax assets and liabilities
by the Company and its affiliates.
Net earnings for the three-month period ended March 31, 2018 totalled $130.0 million, a decrease of $35.2 million or
21.3% in comparison to $165.2 million for the same quarter last fiscal year.
In fiscal 2018, net earnings totalled $852.5 million, an increase of $121.4 million or 16.6%, as compared to
$731.1 million last fiscal year.
The variations in net earnings are due to the above-mentioned factors.
Adjusted net earnings totalled $135.3 million for the three-month period ended March 31, 2018, as compared to
$165.2 million for the same quarter last fiscal year.
In fiscal 2018, adjusted net earnings, totalled $704.2 million, as compared to $731.1 million last fiscal year.
These decreases are due to the above-mentioned factors.
ANNUAL REPORT 2018
- 10 -
INFORMATION BY SECTOR
For fiscal 2018, the Canada Sector includes national and export revenues of ingredients manufactured in Canada.
The USA Sector includes national ingredient revenues, and export ingredient and cheese revenues of products
manufactured in the USA. For fiscal 2017, these figures were presented in the Dairy Ingredients Division as part of
the International Sector. Accordingly, certain prior year’s figures have been reclassified to conform to the current
presentation.
CANADA SECTOR
(in millions of CDN dollars)
Fiscal years
Revenues
Adjusted EBITDA*
2018
2017
Q4
980.9
108.1
Q3
Q2
1,057.2
1,032.6
127.9
122.9
Q1
999.2
117.0
Q4
959.8
104.1
Q3
Q2
1,059.0
1,044.3
116.9
119.8
Q1
997.1
112.3
* Non-IFRS measure described in the ‘‘Glossary’’ section on page 36 of this Management’s Discussion and Analysis.
The Canada Sector consists of the Dairy Division (Canada).
USA SECTOR
(in millions of CDN dollars)
Fiscal years
2018
2017
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
Revenues
1,435.1
1,591.3
1,528.1
1,578.3
1,486.5
1,593.8
1,532.0
1,391.0
Adjusted EBITDA*
128.3
153.9
170.7
196.5
150.5
200.1
196.1
187.5
* Non-IFRS measure described in the ‘‘Glossary’’ section on page 36 of this Management’s Discussion and Analysis.
Selected factors positively (negatively) affecting adjusted EBITDA and earnings before
income taxes
(in millions of CDN dollars)
Fiscal years
Market factors*,1
Inventory write-down
US currency exchange1
Q4
(3)
(7)
(6)
2018
Q3
(19)
-
(9)
Q2
Q1
(6)
-
(7)
3
-
8
Q4
(10)
-
(7)
2017
Q3
(3)
-
-
Q2
20
-
-
Q1
(11)
-
8
* Refer to the ‘‘Glossary’’ section on page 36 of this Management’s Discussion and Analysis.
1 As compared to same quarter of previous fiscal year.
Other pertinent information
(in US dollars, except for average exchange rate)
Fiscal years
Closing block price per pound of cheese*
Average block market per pound of cheese*
Closing butter market price per pound*
Average butter market price per pound*
Average whey powder market price per pound*
Spread*
US average exchange rate to Canadian dollar1
* Refer to the ‘‘Glossary’’ section on page 36 of this Management’s Discussion and Analysis.
1 Based on Bank of Canada published information.
Q4
1.530
1.524
2.215
2.160
0.241
0.148
1.268
2018
Q3
1.540
1.627
2.208
2.254
0.310
0.072
1.270
Q2
1.735
1.660
2.315
2.568
0.403
0.066
1.256
Q1
1.525
1.575
2.643
2.312
0.465
0.039
1.344
2017
Q4
1.520
1.580
2.108
2.177
0.482
0.011
1.324
The USA Sector consists of the Cheese Division (USA) and the Dairy Foods Division (USA).
ANNUAL REPORT 2018
- 11 -
INTERNATIONAL SECTOR
(in millions of CDN dollars)
Fiscal years
Revenues
Adjusted EBITDA*
Q4
328.4
25.3
2018
Q3
373.3
36.2
Q2
323.5
36.2
Q1
314.6
41.7
Q4
273.5
29.5
2017
Q3
313.3
29.6
Q2
269.0
24.7
Q1
243.3
18.4
* Non-IFRS measure described in the ‘‘Glossary’’ section on page 36 of this Management’s Discussion and Analysis.
Selected factors positively (negatively) affecting adjusted EBITDA and earnings before
income taxes
(in millions of CDN dollars)
Fiscal years
Inventory write-down
Foreign currency exchange1
Q4
(4)
2
2018
Q3
(2)
(4)
Q2
(3)
(1)
Q1
(1)
1
Q4
(2)
(1)
2017
Q3
-
4
Q2
(1)
1
Q1
(1)
3
1 As compared to same quarter of previous fiscal year.
The International Sector consists of the Dairy Division (Argentina) and the Dairy Division (Australia).
ANNUAL REPORT 2018
- 12 -
CANADA SECTOR
(in millions of CDN dollars)
Revenues
Adjusted EBITDA*
For the three-month periods ended
March 31
2017
2018
980.9
108.1
959.8
104.1
For the years ended
March 31
2017
4,060.2
453.1
2018
4,069.9
475.9
* Non-IFRS measure described in the ‘‘Glossary’’ section on page 36 of this Management’s Discussion and Analysis.
The Canada Sector consists of the Dairy Division (Canada).
Revenues
For the fourth quarter of fiscal 2018, revenues for the Canada Sector totalled $980.9 million, an increase of approximately
$21 million or 2.2%, as compared to $959.8 million for the same quarter last fiscal year. While sales volumes have
remained relatively stable, the increase in revenues is mainly due to a favourable product mix partially offset by lower
selling prices of ingredients sold in the export market.
Revenues from the Canada Sector in fiscal 2018 totalled $4.070 billion, an increase of approximately $10 million or 0.2%
in comparison to $4.060 billion in fiscal 2017. The increase is due to a favourable product mix, higher selling prices related
to the increase in the cost of milk as raw material partially offset by lower selling prices of ingredients sold in the export
market and lower sales volumes of juices, a product category the Company exited.
The Sector manufactures approximately 32% of all Canadian natural cheeses. Saputo’s market share of total fluid milk
and cream in Canada is approximately 37%. Saputo is the largest cheese manufacturer and the leading fluid milk and
cream processor in Canada.
In fiscal 2018, cheese, butter, value-added milk and cream per capita consumption increased, while fluid milk decreased,
as compared to the previous fiscal year. The retail segment of the Dairy Division (Canada) represented approximately
62% of revenues following continued demand for dairy products. The Division continued to support its leading national
brands, Dairyland, Saputo, Armstrong and Milk2Go, through various customer and consumer marketing activities, such
as themed trade promotions at various retailers and through social media vehicles like our brands’ websites and
Influencers. Additionally, the retail segment continued to focus on communicating the new image of Saputo and increasing
the exposure of specialty cheeses across Canada, namely, Alexis de Portneuf, Woolwich and DuVillage 1860, through
expanded distribution and inspirational consumer marketing support. We also continued to build consumer preference for
our products and notably launched our new brand image for Milk2Go along with reintroducing the products that are now
manufactured with our new state-of-the-art manufacturing equipment, in Saint-Hyacinthe, Quebec, using aseptic filling
technology.
Dairy utilization through menu inspiration in the foodservice segment represented approximately 35% of revenues in the
Dairy Division (Canada). The Company’s focus is to support customers such as distributors, restaurant chains and
pizzerias by providing quality products that perform to their expectations. Saputo strives to be the supplier partner of choice
by offering high quality service and support such as data driven foodservice insights to enhance operator knowledge. We
also continue to invest in foodservice product innovation to meet evolving consumer needs. The Company invests in the
foodservice industry through partnerships with various culinary colleges, thereby investing in future generations that will
contribute to a strong and healthy industry.
The industrial segment represented approximately 3% of revenues in the Dairy Division (Canada).
ANNUAL REPORT 2018
- 13 -
Adjusted EBITDA
For the fourth quarter of fiscal 2018, adjusted EBITDA for the Canada Sector totalled $108.1 million, an increase of
$4.0 million or 3.8%, as compared to $104.1 million for the same quarter last fiscal year. Operational efficiencies through
raw material optimization and a favourable product mix positively impacted adjusted EBITDA. This increase was partially
offset by lower international selling prices of dairy ingredients and higher warehousing and logistical costs related to
additional external storage expenses.
Adjusted EBITDA in fiscal 2018 totalled $475.9 million, an increase of $22.8 million or 5.0%, as compared to $453.1 million
in fiscal 2017. Operational efficiencies through raw material optimization, as well as lower administrative expenses,
including the impact of phasing the ERP deployment activities, positively impacted adjusted EBITDA, as compared to the
same quarter last fiscal year. This increase was partially offset by lower international selling prices of dairy ingredients,
higher warehousing and logistical costs related to additional external storage expenses, as well as lower sales volumes
of juices, a product category the Company exited. The fluctuation of the Canadian dollar versus foreign currencies had a
negative impact on adjusted EBITDA of approximately $1 million.
Outlook
We will continue to focus on reviewing overall activities to improve operational efficiency, in order to mitigate downward
margin pressures, low growth and competitive market conditions. The Dairy Division (Canada) will undertake capital
projects aimed at increasing efficiencies and maximizing its manufacturing footprint in order to maintain its leadership
position. The Division also intends to capture market opportunities from the redesign of the Saputo brand and reaffirm
its engagement to consumers from coast-to-coast as their preferred and trusted cheese brand through various
promotions, advertising and innovative packaging. As part of the Company’s capital expenditure plan, we intend to build
a new facility for approximately $240 million, over the next three years, in Port-Coquitlam, British Columbia to better
serve the market in Western Canada and benefit from a state-of-the-art facility to be commissioned in fiscal 2021.
Consequently, the Company has entered into an agreement to sell its existing facility in Burnaby, British Columbia,
which sale is expected to be completed in fiscal 2019, for an amount of $218 million, and will enter into a lease
agreement for that same facility until the construction of the new facility is completed.
We expect to be in a position to complete the Shepherd Gourmet Acquisition in June 2018 and then proceed with the
integration of the activities. The acquisition will enable the Dairy Division (Canada) to increase its presence in specialty
cheese and expand its yogurt offering in Canada. The transaction remains subject to customary conditions.
The Dairy Division (Canada) will begin its preparation activities in fiscal 2019 in anticipation of its upcoming ERP system
implementation in fiscal 2020.
ANNUAL REPORT 2018
- 14 -
USA SECTOR
(in millions of CDN dollars)
For the three-month periods ended
March 31
2017
2018
For the years ended
March 31
2017
2018
Revenues
Adjusted EBITDA*
* Non-IFRS measure described in the ‘‘Glossary’’ section on page 36 of this Management’s Discussion and Analysis.
1,435.1
128.3
1,486.5
150.5
6,132.8
649.4
6,003.3
734.2
Selected factors positively (negatively) affecting adjusted EBITDA and earnings before income taxes
(in millions of CDN dollars)
For the three-month periods ended
March 31
2017
2018
For the years ended
March 31
2017
2018
Market factors*,1
Inventory write-down
US currency exchange1
* Refer to the ‘‘Glossary’’ section on page 36 of this Management’s Discussion and Analysis.
1 As compared to same quarter of previous fiscal year for the three-month periods; as compared to the previous fiscal year for the year ended March
(10)
-
(7)
(25)
(7)
(14)
(3)
(7)
(6)
(4)
-
1
31.
Other pertinent information
(in US dollars, except for average exchange rate)
Block market price*
Opening
Closing
Average
Butter market price*
Opening
Closing
Average
Average whey powder market price*
Spread*
US average exchange rate to
Canadian dollar1
For the three-month periods ended
March 31
2017
2018
1.540
1.530
1.524
2.208
2.215
2.160
0.241
0.148
1.268
1.660
1.520
1.580
2.268
2.108
2.177
0.482
0.011
1.324
For the years ended
March 31
2017
1.460
1.520
1.605
1.955
2.108
2.112
0.350
0.092
1.312
2018
1.520
1.530
1.597
2.108
2.215
2.324
0.357
0.081
1.288
* Refer to the ‘‘Glossary’’ section on page 36 of this Management’s Discussion and Analysis.
1 Based on Bank of Canada published information.
The USA Sector consists of the Cheese Division (USA) and the Dairy Foods Division (USA).
Revenues
For the three-month period ended March 31, 2018, revenues for the USA Sector totalled $1.435 billion, a decrease of
approximately $52 million or 3.5%, as compared to $1.487 billion for the same quarter last fiscal year. The combined
effect of the fluctuation of the average block market per pound of cheese and the average butter market price per pound
decreased revenues by approximately $29 million, as compared to the same quarter last fiscal year. Lower selling prices
in the international cheese and dairy ingredient market also negatively impacted revenues during the quarter. Higher
sales volumes, as well as the inclusion of revenues of approximately $53 million derived from the SMI Acquisition and
the Montchevre Acquisition positively impacted revenues. The fluctuation of the Canadian dollar versus the US dollar
decreased revenues by approximately $63 million.
ANNUAL REPORT 2018
- 15 -
In fiscal 2018, revenues for the USA Sector totalled $6.133 billion, an increase of approximately $130 million or 2.2% in
comparison to $6.003 billion for last fiscal year. The combined effect of the fluctuation of the average butter market price
per pound and the average block market per pound of cheese, as compared to last fiscal year, increased revenues by
approximately $97 million. Additionally, higher sales volumes, as well as higher selling prices in the international cheese
and dairy ingredient market positively impacted revenues. The inclusion of revenues derived from the SMI Acquisition
and the Montchevre Acquisition positively impacted revenues by approximately $78 million, while the fluctuation of the
Canadian dollar versus the US dollar decreased revenues by approximately $133 million.
The retail segment contributed approximately 44% of total USA Sector revenues. Two of its retail brands maintained
their #1 market share positions. Frigo Cheese Heads continued to lead the string cheese brand category in the USA
market and Treasure Cave continued to lead the crumbled blue cheese category. The Cheese Division (USA) continued
to support these leading retail brands through promotional activities and trade incentives in fiscal 2018. Strengthening
its position in the snacking category, the Cheese Division (USA) relaunched its Frigo Cheese Heads brand, unifying all
its packaging under a new look and feel, while extending several flavors in its core line-up. A new line of products geared
towards the convenience channel was also launched under this brand. The Dairy Foods Division (USA) continues to
outpace market growth in core categories, including ESL creams/creamers and cultured products. The growth is driven
by strong relationships with key customers, positive trends in private label, and targeted customer solutions, such as
quality programs, formula updates and innovation.
The foodservice segment contributed approximately 49% of total revenues. In fiscal 2018, the Cheese Division (USA)
continued to focus on driving this segment through national pizza chains and through key national and independent
restaurant chains. In addition to focusing on growing its share of the cheese market, the Division also sought to increase
specialty cheese sales. The foodservice sales and marketing team executed various operator, distributor and broker
initiative programs targeted at driving incremental sales. The foodservice segment for the Dairy Foods Division (USA)
consists of two main customer segments: chain restaurants and broadline distributors. Distribution gains and menu
innovation are driving the chain restaurant segment with its core portfolio of ice cream mix and bulk-size ESL dairy
products. A focus on private label dairy products is driving growth for broadline distributors in core categories, such as
ESL cream/creamers and sour cream.
The industrial segment includes cheese sales and accounted for approximately 7% of revenues.
Adjusted EBITDA
For the three-month period ended March 31, 2018, adjusted EBITDA for the USA Sector totalled $128.3 million, a
decrease of $22.2 million or 14.8%, as compared to $150.5 million for the same quarter last fiscal year. Contributing to
the adjusted EBITDA decrease were higher warehousing and logistical expenses due to increased transportation costs,
which amounted to approximately $12 million, as well as higher administrative expenses, mainly due to the ERP initiative.
This decrease was partially offset by higher sales volumes and additional adjusted EBITDA derived from the inclusion
of the SMI Acquisition and the Montchevre Acquisition. The variation in the average block market per pound of cheese
during the quarter versus the same quarter last fiscal year had an unfavourable impact on both the realization of
inventories and on the absorption of fixed costs. A lower dairy ingredient market had a negative effect on adjusted
EBITDA. However, the relation between the average block market per pound of cheese and the cost of milk as raw material
was favourable. These combined market factors, including unfavourable margins associated with a fluctuation of butter
market prices, negatively impacted adjusted EBITDA by approximately $3 million, as compared to the same quarter last
fiscal year. As a result of decreases in certain market selling prices, inventory was written down by approximately $7 million.
The fluctuation of the Canadian dollar versus the US dollar had a negative impact on adjusted EBITDA of approximately
$6 million.
In fiscal 2018, adjusted EBITDA totalled $649.4 million, a decrease of $84.8 million or 11.5%, as compared to $734.2 million
for last fiscal year. The variation in the average block market per pound of cheese in fiscal 2018, as compared to last year,
resulted in an unfavourable realization of inventories. Also, the relation between the average block market per pound of
cheese and the cost of milk as raw material was unfavourable. However, a higher dairy ingredient market had a positive
effect on adjusted EBITDA. These combined market factors, including unfavourable margins associated with a fluctuation
of butter market prices, negatively impacted adjusted EBITDA by approximately $25 million, as compared to last fiscal year.
Contributing to the adjusted EBITDA decrease were higher administrative expenses, mainly due to the ERP initiative, as
well as higher warehouse and logistical costs due to higher transportation costs, which amounted to approximately
$20 million. Also, additional costs related to the start-up of a newly constructed blue cheese facility in Almena, Wisconsin
decreased adjusted EBITDA. As a result of decreases in certain market selling prices, inventory was written down by
approximately $7 million. These decreases were partially offset by higher sales volumes and a favourable product mix, as
well as the inclusion of adjusted EBITDA derived from the SMI Acquisition and the Montchevre Acquisition. The
weakening of the Canadian dollar versus the US dollar had a negative impact on adjusted EBITDA of approximately
$14 million.
ANNUAL REPORT 2018
- 16 -
Outlook
The Cheese Division (USA) is focused on increasing operational efficiencies and controlling costs in order to mitigate
the negative impact on adjusted EBITDA of the dairy commodity markets. During the upcoming quarters, the Division
will benefit from the additional blue cheese manufacturing capabilities in its newly constructed facility in Almena,
Wisconsin. This capital expenditure project allows the Division to strengthen its position within the blue cheese category.
Also, the Cheese Division (USA) will pursue growth of cheese export sales volumes to the extent USA milk pricing is
competitive with world prices.
The Division will close its cheese manufacturing facility in Fond du Lac, Wisconsin in the first quarter of fiscal 2019. In
an effort to pursue additional efficiencies and decrease costs while strengthening its market presence, the production
has been transferred into the Company’s facility in Almena, Wisconsin.
The Division will focus on the integration of the Montchevre Acquisition which enables the Cheese Division (USA) to
broaden its presence in specialty cheeses in the USA.
The Dairy Foods Division (USA) continues to focus on optimization and maximizing investments in its existing network
in order to benefit from new capabilities in production, enable future growth, meet customer demand and bring new
products to market. The Division has integrated the SMI Acquisition and will focus on maximizing its network
infrastructure and distribution. The Division will keep investing to support production capabilities and strengthen its
competitive cost position. More specifically, the Dairy Foods Division (USA) will focus on targeted capital expenditures
aimed at increasing production capacity.
The dairy ingredient markets were depressed through the fourth quarter of fiscal 2018 and these prices are anticipated
to remain low throughout the first half of fiscal 2019, which will continue to put downward pressure on the USA Sector’s
margins.
The implementation of the ERP system continues to progress. The implementation within the Dairy Foods Division
(USA) will be completed in fiscal 2019 while the Cheese Division (USA) has started its preparation activities and
implementation is expected to be completed in fiscal 2020.
ANNUAL REPORT 2018
- 17 -
INTERNATIONAL SECTOR
(in millions of CDN dollars)
For the three-month periods ended
March 31
2017
2018
For the years ended
March 31
2017
2018
Revenues
Adjusted EBITDA*
* Non-IFRS measure described in the ‘‘Glossary’’ section on page 36 of this Management’s Discussion and Analysis.
328.4
25.3
273.5
29.5
1,339.8
139.4
1,099.1
102.2
Selected factors positively (negatively) affecting adjusted EBITDA and earnings before income taxes
(in millions of CDN dollars)
For the three-month periods ended
March 31
2017
2018
For the years ended
ended March 31
2017
2018
Inventory write-down
US currency exchange1
1 As compared to same quarter of previous fiscal year for the three-month periods; as compared to the previous fiscal year for the years ended March 31.
(10)
(2)
(4)
7
(4)
2
(2)
(1)
The International Sector consists of the Dairy Division (Argentina) and the Dairy Division (Australia).
Revenues
For the three-month period ended March 31, 2018, revenues for the International Sector totalled $328.4 million, an
increase of $54.9 million or 20.1%, as compared to $273.5 million for the same quarter last fiscal year. Higher sales
volumes in both domestic and export markets increased revenues. Additionally, despite lower prices in the export
market, higher selling prices in the domestic market and the fluctuation of the Argentine peso versus the US dollar
increased revenues, as compared to the same quarter last fiscal year. The fluctuation of the Canadian dollar versus
the foreign currencies used in the International Sector had a negative impact on revenues of approximately $30 million,
as compared to the same quarter last fiscal year.
In fiscal 2018, revenues for the International Sector totalled $1.340 billion, an increase of approximately $241 million or
21.9% in comparison to $1.099 billion last fiscal year. Higher selling prices in both the domestic and export markets, as
well as the fluctuation of the Argentine peso versus the US dollar in the export market increased revenues, as compared
to last fiscal year. Despite an unfavourable product mix, higher export sales volumes, as well as increased sales volumes
in the domestic market of the Dairy Division (Argentina), increased revenues. The fluctuation of the Canadian dollar versus
the foreign currencies used in the International Sector had a negative impact on revenues of approximately $78 million,
as compared to last fiscal year.
Adjusted EBITDA
For the three-month period ended March 31, 2018, adjusted EBITDA for the International Sector totalled $25.3 million,
a decrease of $4.2 million or 14.2%, as compared to $29.5 million for the same quarter last fiscal year. Lower selling
prices in the export market and a higher cost of milk as raw material, including inventory write-downs, negatively
impacted adjusted EBITDA by approximately $26 million. This decrease was partially offset by higher sales volumes
and lower administrative expenses mainly due to higher ERP expenses during the same quarter last fiscal year. The
fluctuation of the Canadian dollar versus foreign currencies had a positive impact on adjusted EBITDA of approximately
$2 million.
In fiscal 2018, adjusted EBITDA for the International Sector totalled $139.4 million, an increase of $37.2 million or
36.4%, as compared to $102.2 million last fiscal year. Higher sales volumes and higher selling prices in both the
domestic and export markets positively impacted adjusted EBITDA. This increase was partially offset by higher
warehousing and logistical expenses, in comparison to last fiscal year. As a result of the decrease in certain market
selling prices, inventory was written down by approximately $10 million during the fiscal year, as compared to
approximately $4 million last fiscal year. The fluctuation of the Canadian dollar versus foreign currencies had a negative
impact on adjusted EBITDA of approximately $2 million.
ANNUAL REPORT 2018
- 18 -
Outlook
On May 1, 2018, the Company completed the Murray Goulburn Acquisition, which will add to and complement the
activities of its Dairy Division (Australia). By acquiring a well-established industry player, the Company reinforces its
commitment to strengthen its presence in the Australian market. The Company intends to grow milk intake, review
Murray Goulburn operations and focus on maximizing the network at its disposal. MG produces a full range of high-
quality dairy foods, including fluid milk, milk powder, cheese, butter and dairy beverages, as well as a range of dairy
ingredient and nutritional products, such as infant formula. MG supplies the retail and foodservice industries globally
with its flagship Devondale, Liddells and Murray Goulburn Ingredients brands. Saputo intends to continue to pursue
growth, invest in its Australian platform, and contribute to the ongoing development of its domestic and international
business. The Company has also initiated a sale process for the Koroit dairy plant, based in Victoria, Australia, acquired
from MG, such divestiture being required pursuant to the undertaking entered into with the Australian Competition and
Consumer Commission in connection with the Murray Goulburn Acquisition.
The International Sector will continue to pursue sales volumes growth in existing markets, as well as develop additional
international markets. The Sector will continue to evaluate overall activities to improve efficiencies and aim to maximize
its operational flexibility to mitigate volatility in market conditions. As volatility in dairy markets remains, we do not expect
a significant recovery in the international cheese and dairy ingredient prices in the first half of fiscal 2019. As such, we
will continue to focus on controlling costs and increasing operational efficiencies in order to mitigate their impact on
adjusted EBITDA.
ANNUAL REPORT 2018
- 19 -
LIQUIDITY, FINANCIAL AND CAPITAL RESOURCES
The intent of this section is to provide insight into the cash and capital management strategies and how they drive
operational objectives, as well as to provide details on how the Company manages its liquidity risk to meet its financial
obligations as they come due.
The majority of the Company’s liquidity needs are funded from cash generated by operations. Principally, these funds are
used for capital spending, dividends, debt repayments, business acquisitions and share repurchases. The Company also
has bank credit facilities available for general corporate purposes.
The Company’s cash flows are summarized in the following table:
(in millions of CDN dollars)
Cash generated from operating
activities
Net cash generated from operating
activities
Cash used for investing activities
Cash used for financing activities
(Decrease) increase in cash and cash
equivalents
For the three-month periods ended
March 31
2017
2018
358.1
317.9
(90.4)
(228.9)
(1.4)
263.5
202.9
(100.4)
(277.6)
(175.1)
For the years ended
March 31
2017
1,325.7
1,073.6
(317.8)
(679.8)
76.0
2018
1,155.8
809.1
(722.9)
(204.1)
(117.9)
For the three-month period ended March 31, 2018, cash generated from operating activities amounted to $358.1 million
in comparison to $263.5 million for the same quarter last fiscal year, an increase of $94.6 million. In fiscal 2018, cash
generated from operating activities amounted to $1.156 billion in comparison to $1.326 billion last fiscal year, a decrease
of $169.9 million.
Net cash generated from operating activities for the three-month period ended March 31, 2018, amounted to
$317.9 million in comparison to $202.9 million for the same quarter last fiscal year. The increase of $115.0 million is due
to changes in non-cash operating working capital items of $118.5 million driven by the fluctuation in accounts receivable,
inventories, as well as payables in line with the fluctuation of market prices and a decrease of income tax paid of
$23.2 million. This increase was offset by a decrease in adjusted EBITDA of $22.4 million and additional interest paid of
$2.8 million. In fiscal 2018, net cash generated from operating activities amounted to $809.1 million in comparison to
$1.074 billion last fiscal year. The decrease of $264.5 million is due to changes in non-cash operating working capital items
of $117.6 million driven by the fluctuation in accounts receivable, inventories, as well as payables in line with the fluctuation
of market prices, a decrease in adjusted EBITDA of $24.8 million, an increase of $90.0 million and $4.6 million in income
tax paid and interest paid, respectively.
Investing activities for the three-month period ended March 31, 2018 were mainly comprised of $14.7 million disbursed
for post-closing purchase price adjustments for the Montchevre Acquisition, additions to property, plant and equipment of
$65.3 million and intangibles related to the ERP initiative of $10.7 million. In fiscal 2018, investing activities consisted
mainly of the SMI Acquisition and the Montchevre Acquisition totalling $385.1 million, additions to property, plant and
equipment of $277.8 million and additions to intangibles of $66.2 million related to the ERP initiative. Of these additions,
37% went into the replacement of property, plant and equipment and 63% to implement new technologies and to expand
and increase certain manufacturing capacities.
Financing activities for the three-month period ended March 31, 2018 consisted mainly of a decrease in bank loans of
$173.6 million and issued shares as part of the stock option plan for $7.6 million. Finally, the Company paid $61.9 million
in dividends. Financing activities in fiscal 2018 consisted mainly of an increase in bank loans of $129.6 million due to the
Montchevre Acquisition and the net reimbursement of $100.0 million in long-term debt resulting from the issuance of
$300.0 million medium term notes, which was used in addition to cash on hand to repay $400.0 million from an unsecured
bank term loan. In addition, shares were issued as part of the stock option plan for $41.0 million. Finally, the Company
repurchased share capital for $29.0 million and paid $243.5 million in dividends.
ANNUAL REPORT 2018
- 20 -
Liquidity
Cash and cash equivalents, cash flows generated from operations, and the availability to draw against existing bank credit
facilities are expected to enable the Company to meet its liquidity requirements over at least the next twelve-months. The
Company does not foresee any difficulty in securing financing beyond what is currently available through existing
arrangements to fund possible acquisitions.
(in millions of CDN dollars, except ratio)
Fiscal years
Current assets
Current liabilities
Working capital
Working capital ratio
2018
2,422.4
1,292.8
1,129.6
1.87
2017
2,380.5
1,193.4
1,187.1
1.99
The working capital ratio is an indication of the Company’s ability to cover short-term liabilities with short-term assets,
without having excess dormant assets. The decrease in the working capital ratio is mainly attributed to higher bank loans
due to the financing for the SMI Acquisition and Betin Acquisition.
Capital management
The Company’s capital strategy requires a well-balanced financing structure in order to maintain the flexibility required to
implement growth initiatives, while allowing it to pursue disciplined capital investments and maximize shareholder value.
The Company targets a long-term leverage of approximately 2.0 times net debt to adjusted EBITDA. From time to time,
the Company may deviate from its long-term leverage target to pursue acquisitions and other strategic opportunities.
Should such a scenario arise, the Company expects to deleverage over a reasonable period of time in order to seek to
maintain its investment grade ratings.
(in millions of CDN dollars, except ratio and number of shares and options)
Fiscal years
Long-term debt
Bank loans
Cash and cash equivalents
Net debt**
Adjusted EBITDA*
Net debt-to-Adjusted EBITDA*
Number of common shares
Number of stock options
2018
1,425.3
193.3
122.2
1,496.4
1,264.7
1.18
387,407,403
19,510,123
2017
1,500.0
93.8
250.5
1,343.3
1,289.5
1.04
386,234,311
17,850,014
* Non-IFRS measures described in the ‘‘Glossary’’ section on page 36 of this Management’s Discussion and Analysis.
** Refer to the ‘‘Glossary’’ section on page 36 of this Management’s Discussion and Analysis.
As at March 31, 2018, the Company had $122.2 million of cash and cash equivalents and available bank credit facilities
of approximately $985 million, $193.3 million of which were drawn. See Note 9 to the consolidated financial statements
for details of the Company’s bank loans.
During fiscal 2018, the Company issued $300 million medium term notes under its medium term note program (the MTN
Program). The net proceeds in the amount of $298.9 million were used to repay indebtedness under the Company’s non-
revolving term facility. Under its MTN Program, the Company filed a short form base shelf prospectus qualifying an offering
of MTNs for distribution to the public over a 25-month period, expiring in January 2019.
In connection with the Murray Goulburn Acquisition, the Company entered into a new credit agreement on
December 21, 2017 providing for a non-revolving term facility in the aggregate amount of $1.280 billion (the Acquisition
Facility). On May 1, 2018, the facility had been drawn in full.
Share capital authorized by the Company is comprised of an unlimited number of common shares. The common shares
are voting and participating. As at May 29, 2018, 387,697,959 common shares and 23,669,527 stock options were
outstanding.
Normal course issuer bids
Under the normal course issuer bid (Bid) covering the period between November 17, 2016 and November 16, 2017, the
Company repurchased 6,580,880 common shares at prices ranging from $43.42 to $48.71 per share, for an aggregate
consideration of approximately $301.1 million.
ANNUAL REPORT 2018
- 21 -
In November 2017, the Company renewed its normal course issuer bid (New Bid) to purchase up to 8,000,000 common
shares, which represented approximately 2% of its issued and outstanding common shares, over a 12-month period
beginning on November 17, 2017 and ending on November 16, 2018. No shares were purchased under the New Bid.
During the fiscal year ended March 31, 2018, the Company purchased 654,900 common shares at prices ranging from
$43.42 to $44.99 per share, under the Bids for an aggregate consideration of approximately $29.0 million (9,185,080
common shares at prices ranging from $35.74 to $48.71 per share for the fiscal year ended March 31, 2017 for an
aggregate consideration of approximately $404.1 million).
CONTRACTUAL OBLIGATIONS
The Company manages and continually monitors its commitments and contractual obligations to ensure that these can
be met with funding provided by operations and capital structure optimization.
The Company’s contractual obligations consist of commitments to repay certain long-term debts in addition to leases of
premises, equipment and rolling stock as well as purchase obligations for capital expenditures to which the Company is
committed. Note 10 to the consolidated financial statements describes the Company’s commitment to repay long-term
debt, and Note 18 to the consolidated financial statements describes its lease commitments.
(in millions of CDN dollars)
Less than 1 year
1–2 years
2–3 years
3–4 years
4–5 years
More than 5 years
March 31, 2018
Long-term
debt
Leases
Purchase
obligations
4.4
520.9
-
300.0
300.0
300.0
29.1
24.6
20.0
15.8
14.2
27.1
1,425.3
130.8
91.8
-
-
-
-
-
91.8
March 31, 2017
Long-term
debt
Leases
Purchase
obligations
Total
125.3
545.5
20.0
315.8
314.2
327.1
-
-
900.0
-
300.0
300.0
30.6
25.3
21.0
16.9
13.3
37.2
1,647.9
1,500.0
144.3
Total
119.5
25.3
921.0
16.9
313.3
337.2
1,733.2
88.9
-
-
-
-
-
88.9
Long-term debt
As described in Note 10 to the consolidated financial statements, the Company’s long-term debt is comprised of unsecured
bank term loan facilities of $200.0 million (US$157.0 million), maturing in December 2019, which bear interest at lenders’
prime rates plus a maximum of 1.00%, or bankers’ acceptance rates plus 0.80%, up to a maximum of 2.00%, depending
on the Company credit ratings.
Long-term debt is also comprised of four series of $300.0 million of medium term notes for a total of $1.200 billion, with
annual interest rates varying from 1.94% to 2.83% and maturity ranging from November 2019 to November 2023.
In connection with the Murray Goulburn Acquisition, the Company entered into the Acquisition Facility which consists of
three tranches: a 1-year tranche of $400.0 million; a 3-year tranche of $300.0 million; and a 5-year tranche of $580.0 million
(AU$600.0 million). On May 1, 2018, the facility had been drawn in full.
Minimum payments on operating leases
The Company has long-term operating leases for premises, equipment and rolling stock.
BALANCE SHEET
The main balance sheet items as at March 31, 2018 varied mainly due to the strengthening of the Canadian dollar versus
the US dollar, Australian dollar and the Argentine peso, as well as the inclusion of the SMI Acquisition and the Montchevre
Acquisition in comparison to March 31, 2017.
The conversion rate of the USA operations’ balance sheet items in US currency was CDN$1.2900 per US dollar as at
March 31, 2018, compared to CDN$1.3318 per US dollar as at March 31, 2017. The conversion rate of the Argentinian
operations’ balance sheet items in Argentinian currency was CDN$0.0640 per Argentine peso as at March 31, 2018,
compared to CDN$0.0866 per Argentine peso as at March 31, 2017. The conversion rate of the Australian operations’
balance sheet items in Australian currency was CDN$0.9914 per Australian dollar as at March 31, 2018, compared to
CDN$1.0157 per Australian dollar as at March 31, 2017. The strengthening of the Canadian dollar versus the US dollar,
the Australian dollar and the Argentine peso resulted in lower values recorded for the balance sheet items of the foreign
operations.
ANNUAL REPORT 2018
- 22 -
The net cash (cash and cash equivalents less bank loans) position increased from positive $156.7 million as at
March 31, 2017, to negative $71.1 million as at March 31, 2018, mainly resulting from the decrease of net cash due to the
SMI Acquisition and the Montchevre Acquisition. The change in foreign currency translation adjustment recorded in other
comprehensive income varied mainly due to the weakening of the US dollar.
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 warranties and for future claims for certain liabilities. The terms of these indemnification provisions
vary in duration. See Note 18 to the consolidated financial statements that discuss the Company’s guarantees.
RELATED PARTY TRANSACTIONS
In the normal course of business, the Company receives services from and provides goods to companies subject to
control or significant influence through ownership by its principal shareholder. These goods and services are of an
immaterial amount and compensated by a consideration equal to their fair value, comparable to similar arms’ length
transactions. The services that are received consist mainly of travel, publicity, lodging, office space rental and
management services. The goods that are provided consist mainly of dairy products. Transactions with key
management personnel (Management defines key management personnel as all the executive officers who have
responsibility and authority for controlling, overseeing and planning the activities of the Company, as well as the
Company’s Directors) are also considered related party transactions and consist of short-term employee benefits, post-
employment benefits, stock-based compensation and payments under the deferred share unit plan. Refer to Note 19
to the consolidated financial statements for further information on related party transactions.
ACCOUNTING STANDARDS
CRITICAL ACCOUNTING POLICIES AND USE OF ACCOUNTING ESTIMATES
The preparation of the Company’s financial statements requires Management to make certain judgements and
estimates about transactions and carrying values that are fulfilled at a future date. Judgements and estimates are
subject to fluctuations due to changes in internal and/or external factors and are continuously monitored by
Management. A discussion of the judgements and estimates that could have a material effect on the financial
statements is provided below.
Income Taxes
The Company is subject to income taxes in numerous jurisdictions. Significant judgement is required in determining
the consolidated provision for income taxes. During the ordinary course of business, there are many transactions and
calculations for which the ultimate tax determination is uncertain. The Company recognizes liabilities for anticipated tax
audit issues based on estimates of whether additional taxes will be due. Where the final tax outcome of these matters
differs from the amounts that were initially recorded, such differences will impact the results for the reporting period and
the respective current income tax and deferred income tax provisions in the reporting period in which such
determination is made.
Deferred Income Taxes
The Company follows the liability method of accounting for deferred income taxes. Deferred income tax assets and
liabilities are measured using enacted or substantively 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. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is
no longer probable that the related tax benefit will be realized. Canadian, USA and international tax rules and
regulations are subject to interpretation and require judgement on the part of the Company that may be challenged by
taxation authorities. The Company believes that it has adequately provided for deferred 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.
ANNUAL REPORT 2018
- 23 -
Goodwill, Intangible Assets and Business Combinations
Goodwill, trademarks and customer relationships have principally arisen as a result of business combinations. The
acquisition method, which also requires significant estimates and judgements, is used to account for these business
combinations. As part of the allocation process in a business combination, estimated fair values are assigned to the
net assets acquired, including trademarks and customer relationships. These estimates are based on forecasts of
future cash flows, estimates of economic fluctuations and an estimated discount rate. The excess of the purchase price
over the estimated fair value of the net assets acquired is then assigned to goodwill. In the event that actual net assets
fair values are different from estimates, the amounts allocated to the net assets, and specifically to trademarks and
customer relationships, could differ from what is currently reported. This would then have a pervasive impact on the
carrying value of goodwill. Differences in estimated fair values would also have an impact on the amortization of definite
life intangibles.
Property, Plant and Equipment
Critical judgement is necessary in the selection and application of accounting policies and useful lives as well as the
determination of which components are significant and how they are allocated. Management has determined that the
use of the straight-line method of amortization is the most appropriate as its facilities are operating at a similar output
potential on a year to year basis, which indicates that production is constant (please refer to the estimated useful lives
table for further details on the useful lives of productive assets). It is Management’s best estimate that the useful lives
and policies adopted adequately reflect the flow of resources and the economic benefits required and derived in the
use and servicing of these long-lived productive assets.
Impairment of Assets
Significant estimates and judgements are required in testing goodwill, intangible assets and other long-lived assets for
impairment. Management uses estimates or exercises judgement in assessing indicators of impairment, defining a
CGU, forecasting future cash flows and in determining other key assumptions such as discount rates and earnings
multipliers used for assessing fair value (less costs of disposal) or value in use. Estimates made for goodwill and
intangible assets can be found in Note 7. Other long-lived assets are tested only when indicators of impairment are
present.
Employee Future Benefits
The Company is the sponsor to both defined benefit and defined contribution plans, which provide pension and other
post-employment benefits to its employees. Several estimates and assumptions are required with regards to the
determination of the defined benefit expense and its related obligation, such as the discount rate used in determining
the carrying value of the obligation and the interest income on plan assets, the expected health care cost trend rate,
the expected mortality rate, expected salary increase, etc. Actual results will normally differ from expectations. These
gains or losses are presented in the consolidated statements of comprehensive income.
ANNUAL REPORT 2018
- 24 -
EFFECT OF NEW ACCOUNTING STANDARDS, INTERPRETATIONS AND AMENDMENTS
NOT YET IMPLEMENTED
The International Accounting Standards Board (IASB) made revisions as part of its continuing improvements project.
Below is a summary of the relevant standards affected and a discussion of the amendments.
The following standards, amendments to standards and an interpretation have been issued and are applicable to the
Company for its annual periods beginning on and after April 1, 2018, with an earlier application permitted:
IFRS 2, Share-Based Payment
In June 2016, the IASB issued an amendment to clarify how to account for certain types of share-based payment
transactions. The amendments provide requirements on the accounting for: the effects of vesting and non-vesting
conditions on the measurement of cash-settled share-based payments, share-based payment transactions with a net
settlement feature for withholding tax obligations and a modification to the terms and conditions of a share-based
payment that changes the classification of the transaction from cash-settled to equity-settled.
IFRS 9, Financial Instruments
In July 2014, the IASB issued the final version of IFRS 9, Financial Instruments with the goal of replacing IAS 39,
Financial Instruments: Recognition and Measurement. The new standard addresses the classification and
measurement of financial assets and liabilities, provides a new impairment model for the recognition of expected credit
losses and provides a new hedge accounting model. Refer to the section “Considerations for the implementation of
IFRS 9 and IFRS 15” of this note for more information.
IFRS 15, Revenue from Contracts with Customers
The IASB issued IFRS 15, Revenue from Contracts with Customers with its goal to provide a single comprehensive
model for entities to use in accounting for revenue arising from contracts with customers. This new standard will
supersede current revenue recognition guidance in IAS 18, Revenue, IAS 11, Construction Contracts and IFRIC 13,
Customer Loyalty Programmes.
The objective of this standard is to provide a five-step approach to revenue recognition that includes identifying
contracts with customers, identifying performance obligations, determining transaction prices, allocating transaction
prices to performance obligations and recognizing revenue when performance obligations are satisfied. In certain
instances, transfer of assets that are not related to the entity’s ordinary activities will also be required to follow some of
the recognition and measurement requirements of the new model. The standard also expands current disclosure
requirements.
In April 2016, the IASB amended IFRS 15 to comprise clarifications of the guidance on identifying performance
obligations, accounting for licenses of intellectual property and the principal versus agent assessment (gross versus
net revenue presentation). The amendment includes additional practical expedients related to transition to the new
revenue standard.
With regards to identifying performance obligations, the amendments clarify how to determine when promises in a
contract are ‘distinct’ goods or services and, therefore, should be accounted for separately. The amendments to
licensing guidance clarify when revenue from a license of intellectual property should be recognized ‘over time’ and
when it should be recognized at a ‘point in time’. With regards to the principal versus agent assessment, the
amendments clarify that the principal in an arrangement controls a good or service before it is transferred to a customer.
Refer to the section “Considerations for the implementation of IFRS 9 and IFRS 15” of this note for more information.
IAS 40, Investment Property
In December 2016, the IASB issued an amendment to IAS 40 clarifying when assets are transferred to, or from,
investment properties. The amendment clarified that to transfer to, or from, investment properties there must be a
change in use. To conclude if a property has changed use there should be an assessment of whether the property
meets the definition. This change must be supported by evidence. This amendment may be applied prospectively or
retrospectively.
IFRIC 22, Foreign Currency Transactions and Advance Consideration
In December 2016, the IASB issued IFRIC 22 which provides an interpretation on how to determine the date of the
transaction when applying the standard on foreign currency transactions, IAS 21. The interpretation applies where an
entity pays or receives consideration in advance for foreign currency-denominated contracts. The date of the
transaction determines the exchange rate to be used on initial recognition of the related asset, expense or income. This
interpretation provides guidance for when a single payment or receipt is made, as well as for situations where multiple
payments or receipts are made and aims to reduce diversity in practice.
Except as disclosed in ‘‘Considerations for the implementations of IFRS 9 and IFRS 15’’, the adoption of these
standards, amendments and interpretation will not have a significant impact on the Company’s financial statements.
ANNUAL REPORT 2018
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EFFECT OF NEW ACCOUNTING STANDARDS, INTERPRETATIONS AND AMENDMENTS
NOT YET IMPLEMENTED (CONT’D)
The following standards have been issued and are applicable to the Company for its annual periods beginning on
April 1, 2019 and thereafter, with an earlier application permitted for entities that have also adopted IFRS 15:
IFRS 16, Leases
In January 2016, the IASB published a new standard, IFRS 16 ‘‘Leases’’, which will replace IAS 17 ‘‘Leases’’. The new
standard will eliminate the distinction between operating and finance leases and will bring most leases on the balance
sheet for lessees, except with respect to lease that meet limited exception criteria. For lessors, the accounting remains
mostly unchanged and the distinction between operating and finance leases is retained.
The following standards, amendments to standards and interpretations have been issued and are applicable to the
Company for its annual periods beginning on and after April 1, 2019, with an earlier application permitted:
IFRS 3, Business Combinations
In December 2017, the IASB issued an amendment to IFRS 3 to clarify that when an entity obtains control of a business
that is a joint operation, it remeasures previously held interests in that business.
IFRS 9, Financial Instruments
In October 2017, the IASB further amended IFRS 9 to allow financial assets with a prepayment option that could result
in the option’s holder receiving compensation for early termination to meet the solely payments of principal and interest
condition if specified criteria are met.
IFRS 11, Joint Arrangements
In December 2017, the IASB issued an amendment to IFRS 11 to clarify that when an entity obtains joint control of a
business that is a joint operation, the entity does not remeasure previously held interests in that business.
IAS 19, Employee Benefits
In February 2018, the IASB issued an amendment to IAS 19 to specify how an entity shall determine pension expenses
when changes to a pension plan occur. When an amendment, curtailment or settlement to a plan takes place, IAS 19
requires an entity to remeasure its net defined benefit liability or asset. The amendments require an entity to use the
updated assumptions from this remeasurement to determine the current service cost and net interest for the remainder
of the reporting period after the change to the plan. In addition, amendments have been included to clarify the effect of
a plan amendment, curtailment or settlement on the requirements regarding the asset ceiling.
IAS 23, Borrowing Costs
In December 2017, the IASB issued an amendment to IAS 23 clarifying that if any specific borrowing remains
outstanding after the related asset is ready for its intended use or sale, it becomes part of the funds that an entity
borrows generally when calculating the capitalization rate on general borrowings.
IAS 28, Investments in Associates
In October 2017, the IASB issued an amendment to IAS 28 to clarify that an entity should apply IFRS 9 to long-term
interests in an associate or joint venture that form part of the net investment in the associate or joint venture but to
which the equity method is not applied.
IFRIC 23, Uncertainty Over Income Tax Treatments
In June 2017, the IFRS Interpretations Committee issued IFRIC 23 which clarifies how the recognition and
measurement requirements of IAS 12, Income Taxes, are applied where there is uncertainty over income tax
treatments.
Management is currently assessing the impact of the adoption of these standards, amendments and interpretation on
the Company’s financial statements.
ANNUAL REPORT 2018
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CONSIDERATIONS FOR THE IMPLEMENTATION OF IFRS 9 AND IFRS 15
IFRS 9 and IFRS 15 are required to be applied for annual reporting periods beginning on April 1, 2018. The Company
will not be early adopting IFRS 9 or IFRS 15. The Company will adopt IFRS 9 and IFRS 15 in fiscal 2019.
IFRS 9 is applicable retrospectively in accordance with IAS 8, Accounting Policies, Changes in Accounting Estimates
and Errors, subject to certain exemptions and exceptions. In general, the main impacts of adopting IFRS 9 are expected
to be on classification and measurement of financial assets, the introduction of a new impairment model based on
expected losses (rather than incurred loss as per IAS 39, Financial Instruments: Recognition and Measurement), hedge
accounting and significant additional disclosure requirements.
The Company evaluated the impact of this standard. The Company’s analysis did not identify any differences that would
significantly change the classification and measurement of its financial instruments. The Company expects to apply the
simplified approach and record lifetime expected losses on all trade receivables.
IFRS 9 will require the Company to ensure that hedge accounting relationships are aligned with the Company’s risk
management objectives and strategy and to apply a more qualitative and forward-looking approach to assessing hedge
effectiveness. The Company completed these changes to its internal documentation to meet the requirements of
IFRS 9. The Company evaluated the impact of the new standard on the consolidated financial statements and it does
not have a significant impact.
IFRS 15 can be applied using one of the following two methods: retrospectively to each prior reporting period presented
in accordance with IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors, or retrospectively with the
cumulative effect of applying IFRS 15 recognized at the date of initial application. The Company decided to use the
second method as its transition method as prescribed under IFRS 15.
The Company has reviewed standard purchase orders, invoices, shipping terms and significant contracts with
customers including discount arrangements. The Company has quantified the impact of IFRS 15 and has determined
these changes do not have a material impact on its consolidated financial statements. The following items represent
the main areas where differences were identified on transition to IFRS 15:
•
Presentation of the shipping and handling activities will be considered principal and will be presented on a gross
basis. The Company’s current accounting treatment has not resulted in any material differences.
• Revenues will be recognized at a point in time when control of the asset is transferred to the customer, generally
upon shipment of products. The Company’s current accounting treatment has not resulted in any material
differences.
•
Some contracts with customers provide incentive programs, including discounts, promotions, advertising
allowances, and other volume-based incentives. Such incentives give rise to variable considerations, which are
also estimated at contract inception. IFRS 15 has not resulted in any material differences to the current estimation
methodologies or the timing of the recognition of estimates and the Company’s current accounting treatment.
The Company does not expect to record any adjustment in the opening retained earnings as of the transition date since
the impact is not material. In addition to ensuring that the accounting and disclosure requirements of IFRS 15 are met,
we continue to address any systems and process changes necessary to compile the information and meet the
recognition and disclosure requirements of the standards. The Company will not be required to materially change its
business process and controls to support this transition.
The Company will provide additional disclosure as required by the new standard starting from the first quarter of fiscal
year 2019 onwards. In addition to the new disclosure requirements under IFRS 15, the Company will also disclose the
amount by which each financial statement line item is affected in the reporting period by the application of IFRS 15 as
compared with the previous standards.
ANNUAL REPORT 2018
- 27 -
EFFECT OF NEW ACCOUNTING STANDARDS, INTERPRETATIONS AND AMENDMENTS
ADOPTED DURING THE PERIOD
The following amendments to existing standards were adopted by the Company on April 1, 2017:
IAS 7, Statement of Cash Flows
IAS 7 has been amended to provide additional presentation related to the changes in liabilities arising from financing
activities such as: (i) changes from financing cash flows; (ii) changes arising from obtaining or losing control of
subsidiaries or other businesses; (iii) the effect of changes in foreign exchange rates; (iv) changes in fair values; and
(v) other changes.
This amendment did not significantly impact the Company’s financial statements for the year ended March 31, 2018.
IAS 12, Income taxes
IAS 12 has been amended to provide clarification on the requirements relating to the recognition of deferred tax assets
for unrealized losses on debt instruments measured at fair value.
This amendment did not significantly impact the Company’s financial statements for the year ended March 31, 2018.
RISKS AND UNCERTAINTIES
The main risks and uncertainties the Company is exposed to are presented hereafter. The Board of Directors (the Board)
delegated to the Audit Committee the responsibility to study and evaluate the risk factors inherent to the Company and
ensure that appropriate measures are in place to enable Management to identify and manage these risk factors effectively.
The Audit Committee receives regular reports from Management on these matters. In this regard, the Audit Committee
and the Board have adopted and implemented certain policies and procedures which are reviewed at least annually. An
annual detailed presentation on all risk factors identified, as well as periodic presentations, are made by Management to
the Audit Committee and, as required, to the Board.
While risk management is part of the Company’s transactional, operational and strategic decisions, as well as the
Company’s overall management approach, risk management does not guarantee that events or circumstances will not
occur which could negatively affect the Company’s financial condition and performance.
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 be introduced into products or
packaging. The occurrence of such a problem could result in a costly product recall and serious damage to Saputo’s
reputation for product quality.
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 customers. Availability of raw materials as well as
variations in the price of foodstuffs can therefore influence the Company’s results upwards or downwards, and the effect
of any increase of foodstuff prices on results depends on the Company’s ability to transfer those increases to its customers
and this, in the context of a competitive market.
USA and international markets
The price of milk as raw material and the price of our products in the USA, Argentina and Australia, as well as in
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 results will depend on the Company’s ability to implement
mechanisms to reduce them.
Competition
The food processing industry is extremely competitive. The Canadian dairy industry is highly competitive and is comprised
of three major competitors, including Saputo. In the USA, Argentina and Australia, Saputo competes in the dairy industry
on a national basis with several regional, national and multinational competitors. Saputo also competes in the dairy industry
internationally. The Company’s performance in all the countries in which it does business will be dependent on its ability
to continue to offer quality products at competitive prices.
ANNUAL REPORT 2018
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Consolidation of clientele
During the last few years, there has been important consolidation in the food industry in all market segments. Given
that Saputo serves these segments, the consolidation within the industry has resulted in a decrease in the number of
customers and an increase in the relative importance of some customers. One customer represented more than 10%
of total consolidated revenues for fiscal 2018, with 10.44%. The Company’s ability to continue to service its customers
in all the markets that it serves will depend on the quality of its products and services as well as price.
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 considers that it has low
exposure to concentration of credit risk with respect to accounts receivable from customers due to its large and diverse
customer base operating in three segments, retail, foodservice and industrial, and its geographic diversity. There are no
accounts receivable from any individual customer that exceeded 10% of the total balance of accounts receivable as at
March 31, 2018. The allowance for bad debts and accounts receivable due is reviewed regularly by Management. The
Company updates its estimate of the allowance for doubtful accounts based on the evaluation of the recoverability of
accounts receivable balances of each customer taking into consideration historic collection trends of past due accounts.
Supplier concentration
The Company purchases goods and services from a limited number of suppliers as a result of consolidation within the
industries in which these suppliers operate in North America and other major markets. Furthermore, issues with suppliers
regarding pricing or performance of the goods and services they supply or the inability of suppliers to supply the required
volumes of such goods and services in a timely manner could impact the Company’s financial condition and performance.
Any such impact will depend on the effectiveness of the Company’s contingency plan.
Unanticipated business disruption
Major events, such as systems and equipment failure, health pandemics and natural disasters, could lead to unanticipated
business disruption of any or certain of the Company’s manufacturing facilities. The effect would be more significant if the
Company’s larger manufacturing facilities are affected, in which case, the failure to find alternative suppliers or to replace
lost production capacity in a timely manner could negatively affect the Company’s financial condition and performance.
Economic environment
The Company’s operations could be affected by the economic context should the unemployment level, interest rates or
inflation reach levels that influence consumer trends and consequently, impact the Company’s sales and profitability.
Environment
Saputo’s business and operations are subject to environmental laws and regulations, including those relating to permitting
requirements, wastewater discharges, air emissions (greenhouse gases and other), releases of hazardous substances
and remediation of contaminated sites. The Company believes that its operations are in compliance, in all material
respects, with such environmental laws and regulations, except as disclosed in the Annual Information Form dated
June 7, 2018 for the fiscal year ended March 31, 2018. Compliance with these laws and regulations requires that the
Company continue to incur operating and maintenance costs and capital expenditures, including to control potential
impacts of its operations on local communities. Future events such as changes in environmental laws and regulations or
more vigorous regulatory enforcement policies could have a material adverse effect on the financial position of Saputo
and could require additional expenditures to achieve or maintain compliance.
Information systems
The Company relies upon information technology applications and systems for its business and the reporting of its
results. These applications and systems are subject to an increasing number of constantly evolving cyber threats which
are becoming more sophisticated. The Company is mainly exposed to risks relating to confidentiality, data integrity and
business disruptions. Therefore, any unavailability or failure, due to security incidents or otherwise, may impede or slow
down production, delay or taint certain decisions and result in financial losses for the Company. In addition, any
unauthorised access to information systems, proprietary, sensitive or confidential information or malicious use could
compromise the Company’s data integrity or result in disclosure or loss of data which may have adverse effects on the
Company’s activities, results, and reputation, including loss of revenues due to a disruption of the business, diminished
competitive advantage, litigation or other legal procedures, or liability for failure to comply with privacy and information
security laws. Although the Company has measures to reduce the likelihood of disruptions to its information technology
applications and systems, and to identify and respond to and manage cybersecurity incidents, there is no assurance
that any of these measures will be successful. Also, the Company is currently undertaking technology initiatives
regarding an ERP system. There is no guarantee that the implementation of the ERP system will not disrupt or reduce
the efficiency of the Company’s operations.
ANNUAL REPORT 2018
- 29 -
Human resources
Saputo’s success depends on its ability to identify, attract and retain qualified individuals and to execute appropriate
succession planning for Management and key personnel. Although the Company believes that it has good relationships
with its employees and a significant number of the Company’s workforce is unionized, a lengthy strike or work stoppage
could impact the Company’s operations and performance. The Company’s operations are also subject to health and
safety risks as well as laws and regulations in this regard. Notwithstanding Saputo’s existing health and safety systems,
serious injury or death of any employee could have a serious impact on Saputo’s reputation and require the Company
to incur compliance costs.
Growth by acquisitions
The Company plans to grow both organically and through acquisitions. Historically, the Company has grown through
acquisitions and should reasonably and in large part rely on new acquisitions to pursue its growth. The ability to properly
evaluate the fair value of the businesses being acquired, to properly devote the time and human resources required to
successfully integrate their activities with those of the Company as well as the capability to realize synergies, improvements
and the expected profit and to achieve anticipated returns constitute inherent risks related to acquisitions. In connection
with acquisitions made by the Company, there may be liabilities and contingencies that the Company discovered after
closing, or was unable to quantify in the due diligence conducted prior to closing of an acquisition and which could have a
negative effect on the Company’s business, and financial condition and performance.
Consumer trends
Demand for the Company’s products is subject to changes in consumer trends. These changes may affect earnings. The
impact of these changes will depend on the Company’s ability to innovate and develop new products.
Intellectual property
As the Company is involved in the production, sale and distribution of food products, it relies on brand recognition and
loyalty from its clientele in addition to relying on the quality of its products. Also, as innovation forms part of the Company’s
growth strategy, its research and development teams develop new technologies, products and process optimization
methods. The Company therefore takes measures to protect, maintain and enforce its intellectual property. Any
infringement to its intellectual property could damage its value and limit the Company’s ability to compete. In addition,
Saputo may have to engage in litigation in order to protect its rights which could result in significant costs.
Financial risk exposures
Saputo has financial risk exposure to varying degrees relating to the currency of each of the countries where it operates.
In fiscal 2018, approximately 35% of sales were realized in Canada, 53% in the USA, and 12% internationally. Cash flows
from operations in each of the countries where Saputo operates act as a natural hedge against the exchange risks related
to debt denominated in such countries’ currency. The level of the financial risk exposure related to currency will depend
on its ability to maintain this natural hedge or any other protection mechanism.
Interest rate and access to capital market
Saputo’s interest bearing debt is subject to interest rate fluctuations. The impact on the Company’s results will depend
on its ability to maintain mechanisms to protect against such interest rate fluctuations. The Company’s growth is driven
mainly by acquisitions and is dependent on access to liquidity in the capital market.
Legislative, regulatory, normative and political considerations
The Company is subject to local, provincial, state, federal and international laws, regulations, rules and policies as well as
to social, economic and political contexts prevailing in places where Saputo conducts its activities. Consequently, the
modification or change of any of these elements may have an unfavourable impact on Saputo’s results and operations
and may require that important expenses be made in order to adapt or comply. More specifically, 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 the
Company’s ability to adapt, comply and mitigate. Saputo is currently in compliance in all material respects with all
applicable laws and regulations and maintains all material permits and licenses in connection with its operations.
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 result in the removal of tariff protection in the
dairy market, resulting in increased competition. The Company’s performance will be dependent on its ability to continue
to offer quality products at competitive prices.
ANNUAL REPORT 2018
- 30 -
DISCLOSURE CONTROLS AND PROCEDURES
The Chief Executive Officer (CEO) and the Chief Financial Officer (CFO) are responsible for establishing and maintaining
disclosure controls and procedures. The Company’s disclosure controls and procedures are designed to provide
reasonable assurance that material information relating to the Company is made known to Management in a timely manner
to allow the information required to be disclosed under securities legislation to be recorded, processed, summarized and
reported within the time periods specified in securities legislation.
The CEO and the CFO, along with Management, after evaluating the effectiveness of the Company’s disclosure controls
and procedures as at March 31, 2018, have concluded that the Company’s disclosure controls and procedures were
effective.
INTERNAL CONTROL OVER FINANCIAL REPORTING
The CEO and the CFO are responsible for establishing and maintaining internal control over financial reporting. The
Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with IFRS.
The CEO and the CFO, along with Management, evaluated the effectiveness of the Company’s internal control over
financial reporting as at March 31, 2018, in accordance with the criteria established in Internal Control – Integrated
Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based
on this evaluation, the CEO and the CFO, along with Management, have concluded that the Company’s internal control
over financial reporting was effective.
There were no changes in the Company’s internal control over financial reporting that occurred during the period
beginning on January 1, 2018 and ended on March 31, 2018, that have materially affected, or are reasonably likely to
materially affect, the Company’s internal control over financial reporting.
SENSITIVITY ANALYSIS OF INTEREST RATE AND US CURRENCY FLUCTUATIONS
The debt subject to interest rate fluctuations was $393.3 million as at March 31, 2018 and consisted of $193.3 million of
bank loans and $200.0 million bank term loan facilities. A 1% change in the interest rate would lead to a change in net
earnings of approximately $2.8 million. Canadian and US currency fluctuations may affect net earnings. Appreciation of
the Canadian dollar compared to the US dollar would have a negative impact on net earnings. Conversely, a decrease in
the Canadian dollar compared to the US dollar would have a positive impact on net earnings. During the fiscal year ended
March 31, 2018, the average US dollar conversion was based on CDN$1.00 for US$0.776. A fluctuation of CDN$0.10 of
the Canadian dollar would have resulted in a change of approximately $32.0 million in net earnings, $50.4 million in
adjusted EBITDA and $478.0 million in revenues.
ANNUAL REPORT 2018
- 31 -
QUARTERLY FINANCIAL INFORMATION
2018 quarterly financial information – consolidated statement of earnings
(in millions of CDN dollars, except per share amounts and ratios)
Q4
Q3
Q2
Q1 Fiscal 2018
Statement of earnings
Revenues
Operating costs excluding depreciation, amortization,
2,744.4
3,021.8
2,884.2
2,892.1
11,542.5
acquisition and restructuring costs
2,482.7
2,703.8
2,554.4
2,536.9
10,277.8
Earnings before interest, income taxes, depreciation,
amortization, acquisition and restructuring costs
Margin
Depreciation and amortization
Acquisition and restructuring costs
Interest on long-term debt
Other financial charges
Earnings before income taxes
Income taxes
Net earnings
Net margin
Acquisition and restructuring costs (net of income
taxes)
US Tax Reform**
Adjusted net earnings*
Adjusted net earnings margin*
261.7
9.5%
318.0
10.5%
329.8
11.4%
355.2
12.3%
1,264.7
11.0%
64.7
1.2
8.3
4.6
182.9
52.9
130.0
56.1
39.1
8.6
4.0
210.2
(126.8)
337.0
51.8
0.3
9.1
3.4
265.2
80.0
185.2
53.7
-
7.8
2.1
291.6
91.3
200.3
226.3
40.6
33.8
14.1
949.9
97.4
852.5
4.7%
11.2%
6.4%
6.9%
7.4%
5.3
-
135.3
25.1
(178.9)
183.2
0.2
-
185.4
-
-
200.3
30.6
(178.9)
704.2
4.9%
6.1%
6.4%
6.9%
6.1%
Per Share
Net earnings
Basic
Diluted
Adjusted net earnings*
Basic
Diluted
0.34
0.33
0.35
0.35
0.87
0.86
0.47
0.47
0.48
0.47
0.48
0.47
0.52
0.51
0.52
0.51
2.21
2.18
1.82
1.80
Earnings coverage ratio**
20.83
23.34
26.69
28.51
* Non-IFRS measures described in the ‘‘Glossary’’ section on page 36 of this Management’s Discussion and Analysis.
** Refer to the ‘‘Glossary’’ section on page 36 of this Management’s Discussion and Analysis.
Selected factors positively (negatively) affecting adjusted EBITDA and earnings before income taxes
(in millions of CDN dollars)
Fiscal year
Market factors*,1
Inventory write-down
Q4
(3)
(11)
2018
Q3
(19)
(2)
Q2
(6)
(3)
Q1
3
(1)
Foreign currency exchange1,2
* Refer to the ‘‘Glossary’’ section on page 36 of this Management’s Discussion and Analysis.
1 As compared to same quarter of previous fiscal year.
2 Foreign currency exchange includes effect on adjusted EBITDA of conversion of US dollars, Australian dollars and Argentine pesos to Canadian dollars.
(14)
(8)
(5)
9
ANNUAL REPORT 2018
- 32 -
2017 quarterly financial information – consolidated statement of earnings
(in millions of CDN dollars, except per share amounts and ratios)
Q4
Q3
Q2
Q1 Fiscal 2017
Statement of earnings
Revenues
Operating costs excluding depreciation, amortization,
2,719.8
2,966.1
2,845.3
2,631.4
11,162.6
acquisition and restructuring costs
2,435.7
2,619.5
2,504.7
2,313.2
9,873.1
Earnings before interest, income taxes, depreciation,
amortization, acquisition and restructuring costs
Margin
Depreciation and amortization
Acquisition and restructuring costs
Interest on long-term debt
Other financial charges
Earnings before income taxes
Income taxes
Net earnings
Net margin
Acquisition and restructuring costs
(net of income taxes)
Adjusted net earnings*
Adjusted net earnings margin*
Per Share
Net earnings
Basic
Diluted
Adjusted net earnings*
Basic
Diluted
284.1
10.4%
346.6
11.7%
340.6
12.0%
318.2
12.1%
1,289.5
11.6%
56.9
-
8.3
0.8
218.1
52.9
165.2
50.9
-
9.2
0.6
285.9
88.5
197.4
50.2
-
8.7
1.6
280.1
88.3
191.8
49.3
-
10.7
2.0
256.2
79.5
176.7
207.3
-
36.9
5.0
1,040.3
309.2
731.1
6.1%
6.7%
6.7%
6.7%
6.5%
-
165.2
-
197.4
-
191.8
-
176.7
-
731.1
6.1%
6.7%
6.7%
6.7%
6.5%
0.42
0.42
0.42
0.42
0.50
0.49
0.50
0.49
0.49
0.48
0.49
0.48
0.45
0.44
0.45
0.44
1.86
1.84
1.86
1.84
Earnings coverage ratio**
25.83
22.54
18.34
15.02
* Non-IFRS measures described in the ‘‘Glossary’’ section on page 36 of this Management’s Discussion and Analysis.
** Refer to the ‘‘Glossary’’ section on page 36 of this Management’s Discussion and Analysis.
ANNUAL REPORT 2018
- 33 -
ANALYSIS OF EARNINGS FOR THE YEAR ENDED MARCH 31, 2017 COMPARED TO
MARCH 31, 2016
Consolidated revenues totalled $11.163 billion in fiscal 2017, an increase of $171.1 million or 1.6%, compared to
$10.992 billion in fiscal 2016. The increase is mainly due to higher sales volumes and a favourable product mix, as well
as higher selling prices related to the increase of the cost of milk as raw material in the Canada Sector and the
International Sector. Revenues increased due to higher international selling prices of cheese and dairy ingredients, as
compared to fiscal 2016 and the inclusion of revenues from the companies forming Woolwich Dairy (Woolwich
Acquisition) for the full fiscal year. The fluctuation of the average block market per pound of cheese, combined with the
fluctuation of the average butter market price, decreased revenues by approximately $5 million. Finally, the fluctuation
of the Canadian dollar versus foreign currencies decreased revenues by approximately $145 million, mainly due to the
weakening of the Argentine peso.
Consolidated earnings before interest, income taxes, depreciation, amortization, acquisition and restructuring
costs (adjusted EBITDA) amounted to $1.290 billion in fiscal 2017, an increase of $115.4 million or 9.8% compared
to $1.174 billion for fiscal 2016. The increase is due to higher sales volumes, a favourable product mix, lower
warehousing and logistical costs, as well as lower ingredients costs. Additionally, higher international selling prices of
cheese and dairy ingredients positively impacted adjusted EBITDA. This increase was partially offset by higher
administrative expenses, mainly due to the ERP initiative, as well as sales and marketing expenses. In the USA, market
factors negatively impacted adjusted EBITDA by approximately $4 million. As a result of the decrease in certain market
selling prices, inventory was written down by approximately $4 million, as compared to approximately $18 million for
fiscal 2016. Finally, the fluctuation of the Canadian dollar versus foreign currencies had a positive impact on adjusted
EBITDA of approximately $13 million, as compared to fiscal 2016.
The consolidated adjusted EBITDA margin increased to 11.6% in fiscal 2017, as compared to 10.7% in fiscal 2016,
resulting mainly from a higher adjusted EBITDA in the USA Sector as compared to fiscal 2016.
Depreciation and amortization totalled $207.3 million in fiscal 2017, an increase of $8.7 million, compared to
$198.6 million in fiscal 2016. This increase is mainly attributed to the fluctuation of the Canadian dollar versus foreign
currencies, as well as additions to property, plant and equipment, increasing the depreciable base.
In fiscal 2016, the Company incurred acquisition costs relating to business acquisitions totalling $3.0 million
($2.4 million after tax), as well as restructuring costs in relation to plant closures announced in March 2016 in Canada
totalling $31.2 million ($23.1 million after tax). As part of the restructuring costs for fiscal 2016, the Company incurred
$5.5 million in severance costs and $25.7 million in impairment charges to property, plant and equipment. In fiscal 2017,
no acquisition or restructuring costs were incurred by the Company.
Net interest expense amounted to $41.9 million in fiscal 2017, compared to $70.4 million in fiscal 2016. This decrease
is mainly attributed to a lower level of long-term debt, lower interest rates and lower bank loans denominated in
Argentine peso which bear high interest rates.
Income taxes totalled $309.2 million in fiscal 2017, compared to $269.5 million in fiscal 2016, for an effective tax rate
of 29.7% in fiscal 2017, as compared to 30.9% for fiscal 2016. The decrease of the fiscal 2017 effective tax rate is
mainly due to the recognition of previously unrecognized deferred tax assets. The income tax rate varies and could
increase or decrease based on the amount of taxable income derived and from which source, any amendments to tax
laws and income tax rates and changes in assumptions and estimates used for tax assets and liabilities by the Company
and its affiliates.
Net earnings for fiscal 2017 amounted to $731.1 million, an increase of $129.7 million or 21.6%, as compared to
$601.4 million in fiscal 2016. This increase is due to the factors mentioned above.
Adjusted net earnings for fiscal 2017 amounted to $731.1 million, an increase of $104.2 million or 16.6%, as compared
to $626.9 million in fiscal 2016. This increase is due to the factors mentioned above, without considering acquisition
and restructuring costs.
ANNUAL REPORT 2018
- 34 -
MEASUREMENT OF RESULTS NOT IN ACCORDANCE WITH INTERNATIONAL
FINANCIAL REPORTING STANDARDS
In certain instances, the Company makes references to terms in evaluating financial performance measures, such as
adjusted EBITDA, adjusted net earnings and adjusted net earnings per share, that hold no standardized meaning under
IFRS. These non-IFRS measurements are therefore not likely to be comparable to similarly titled or described measures
in use by other publicly traded companies nor do they indicate that excluded items are non-recurring. The Company uses
earnings before interest, income taxes, depreciation, amortization, acquisition and restructuring costs (adjusted EBITDA)
as a performance measure as it is a common industry measure and reflects the ongoing profitability of the Company’s
consolidated business operations.
Adjusted net earnings is defined by the Company as net earnings prior to the inclusion of acquisition and restructuring
costs, net of applicable income taxes, if any. Adjusted net earnings per share is defined as adjusted net earnings per basic
and diluted common share. The most comparable IFRS financial measures to the ones used by the Company are earnings
before income taxes, as well as net earnings and net earnings per share (basic and diluted).
Adjusted EBITDA, adjusted net earnings and adjusted net earnings per share, as used by Management, provide precision
and comparability with regards to the Company’s ongoing operation. They also provide readers with a representation of
the activities considered of relevance to the Company’s financial performance through the inclusion of additional financial
information that can be used to identify trends or additional disclosures that provide information into the manner in which
the Company operates. Non-IFRS measures also provide comparability to the Company’s prior year results.
The definitions provided above are used in the context of the results and activities for the year ended March 31, 2018.
They are subject to change based on future transactions and as deemed necessary by Management in order to provide
a better understanding and comparability of future results and activities of the Company.
A reconciliation of earnings before income taxes, net earnings and net earnings per share to adjusted EBITDA, adjusted
net earnings and adjusted net earnings per share for the three-month periods and the fiscal years in which Management
has presented this measure is provided below.
(in millions of CDN dollars)
Earnings before income taxes
Other financial charges
Interest on long-term debt
Acquisition and restructuring costs
Depreciation and amortization
Adjusted EBITDA
For the three-month periods ended
March 31
2017
2018
182.9
4.6
8.3
1.2
64.7
261.7
218.1
0.8
8.3
-
56.9
284.1
For the years ended
March 31
2017
1040.3
5.0
36.9
-
207.3
1,289.5
2018
949.9
14.1
33.8
40.6
226.3
1,264.7
(in millions of CDN dollars, except per share amounts)
For the three-month periods ended March 31
2018
Per Share
Basic
Diluted
0.34
0.01
0.35
0.33
0.01
0.35
Total
130.0
5.3
135.3
Total
165.2
-
165.2
2017
Per Share
Basic
0.42
-
0.42
Diluted
0.42
-
0.42
Net earnings
Acquisition and restructuring costs1
Adjusted net earnings
1 Net of income taxes
(in millions of CDN dollars, except per share amounts)
For the years ended March 31
2018
Per Share
Basic
Diluted
2.21
0.08
(0.46)
1.82
2.18
0.08
(0.46)
1.80
Total
727.8
-
-
727.8
2017
Per Share
Basic
Diluted
1.86
-
-
1.86
1.84
-
-
1.84
Total
852.5
30.6
(178.9)
704.2
Net earnings
Acquisition and restructuring costs1
US Tax Reform
Adjusted net earnings
1 Net of income taxes
ANNUAL REPORT 2018
- 35 -
GLOSSARY
Adjusted EBITDA
"Adjusted EBITDA" means earnings before interest, income taxes, depreciation, amortization, acquisition and
restructuring costs.
Adjusted EBITDA margin
"Adjusted EBITDA margin" is defined as adjusted net earnings expressed as a percentage of net revenues.
Adjusted net earnings
"Adjusted net earnings" means net earnings prior to the inclusion of acquisition and restructuring costs, net of applicable
income taxes.
Adjusted net earnings margin
"Adjusted net earnings margin" is defined as adjusted net earnings expressed as a percentage of net revenues.
Adjusted net earnings per share
"Adjusted net earnings per share" (basic and diluted) means adjusted net earnings per basic and diluted common
share.
Adjusted return on average equity
"Adjusted return on average equity" means adjusted net earnings divided by average total equity not considering the effect
of annual fluctuations in foreign currency translation.
Average block market
"Average block market" means the average daily price of a 40 pound block of cheddar traded on the Chicago Mercantile
Exchange (CME), used as the base price for cheese.
Average butter market
"Average butter market" means the average daily price for Grade AA Butter traded on the CME, used as the base price
for butter.
Average whey powder market price
"Average whey powder market price" means the average daily price for extra grade dry whey published on the Dairy
Market News.
Earnings coverage ratio
"Earnings coverage ratio" means net earnings (before interest on long-term debt and other financial charges and income
taxes) for the applicable period divided by interest on long-term debt and other financial charges for the applicable period
for the trailing twelve-months.
Closing block price
"Closing block price" means the price of a 40 pound block of cheddar traded on the CME on the last business day of the
fiscal year.
Closing butter market price
"Closing butter market price" means the price of Grade AA Butter traded on the CME, on the last business day of each
fiscal year.
Market factors
Market factors include, for the USA Sector, the average block market per pound of cheese and its effect on the absorption
of fixed costs and on the realization of inventories, the effect of the relationship between the average block market per
pound of cheese and the cost of milk as raw material, the market pricing impact related to sales of dairy ingredients, as
well as the impact of the average butter market price related to dairy food products.
Net debt
Net debt means long-term debt and bank loans, including the current portion thereof, net of cash and cash equivalents.
Net debt-to-adjusted EBITDA
"Net debt-to-adjusted EBITDA" means net debt divided by our trailing twelve-months adjusted EBITDA financial liabilities,
consisting of long-term debt and bank loans, including current portions, net of cash and cash equivalents.
Spread
"Spread" means the average block market per pound of cheese less the result of the average cost per hundredweight of
Class III and/or Class 4b milk price divided by 10 in the USA market.
US Tax reform
"US Tax Reform" means the enactment of the ‘‘Tax Cuts and Jobs Act’’ on December 22, 2017.
ANNUAL REPORT 2018
- 36 -
CONSOLIDATED FINANCIAL STATEMENTS
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
International Financial Reporting Standards.
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 independent auditors to discuss internal controls, auditing matters
and financial reporting issues. It also reviews the annual report, the consolidated financial statements and the independent
auditors’ report. The Audit Committee recommends the independent auditors for appointment by the shareholders. The
independent auditors have unrestricted access to the Audit Committee. The consolidated financial statements have been
audited by the independent auditors Deloitte LLP, whose report follows.
(signed) Lino A. Saputo, Jr.
Lino A. Saputo, Jr.
Chairman of the Board
and Chief Executive Officer
(signed) Maxime Therrien
Maxime Therrien, CPA, CA
Chief Financial Officer
and Secretary
June 7, 2018
ANNUAL REPORT 2018
- 37 -
INDEPENDENT AUDITOR’S REPORT
To the shareholders of Saputo Inc.
We have audited the accompanying consolidated financial statements of Saputo Inc., which comprise the consolidated
balance sheets as at March 31, 2018 and March 31, 2017, and the consolidated statements of earnings, consolidated
statements of comprehensive income, consolidated statements of equity and consolidated statements of cash flows for
the years then ended, and a summary of significant accounting policies and other explanatory information.
Management’s Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in
accordance with International Financial Reporting Standards, and for such internal control as Management determines
is necessary to enable the preparation of consolidated financial statements that are free from material misstatement,
whether due to fraud or error.
Auditor’s Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We
conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require
that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether
the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the
consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the
assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or
error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and
fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An
audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting
estimates made by management, as well as evaluating the overall presentation of the consolidated financial
statements.
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for
our audit opinion.
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of
Saputo Inc. as at March 31, 2018 and March 31, 2017, and its financial performance and its cash flows for the years
then ended in accordance with International Financial Reporting Standards.
/s/ Deloitte LLP 1
June 7, 2018
Montréal, Québec
____________________
1 CPA auditor, CA, public accountancy permit No. A114871
ANNUAL REPORT 2018
- 38 -
CONSOLIDATED STATEMENTS OF EARNINGS
(in millions of CDN dollars, except per share amounts)
Years ended March 31
Revenues
Operating costs excluding depreciation, amortization, acquisition and
restructuring costs (Note 5)
Earnings before interest, income taxes, depreciation, amortization,
acquisition and restructuring costs
Depreciation and amortization (Notes 6 and 7)
Acquisition and restructuring costs (Note 22)
Interest on long-term debt
Other financial charges (Note 13)
Earnings before income taxes
Income taxes (Note 14)
Net earnings
Net earnings per share (Note 15)
Basic
Diluted
2018
2017
$
11,542.5
$
11,162.6
10,277.8
9,873.1
1,264.7
226.3
40.6
33.8
14.1
949.9
97.4
$
852.5
$
1,289.5
207.3
-
36.9
5.0
1,040.3
309.2
731.1
$
$
2.21
2.18
$
$
1.86
1.84
The accompanying notes are an integral part of these consolidated financial statements.
ANNUAL REPORT 2018
- 39 -
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in millions of CDN dollars)
Years ended March 31
Net earnings
Other comprehensive income:
Items that may be reclassified to net earnings:
Exchange differences arising from foreign currency translation
Net unrealized gains on cash flow hedges1 (Note 20)
Reclassification of gains on cash flow hedges to net earnings2
Items that will not be reclassified to net earnings:
Actuarial losses3 (Note 17)
Other comprehensive income
Total comprehensive income
1 Net of income taxes of $2.0 (2017 – $1.1).
2 Net of income taxes of $2.8 (2017 – $1.7).
3 Net of income taxes of $1.1 (2017 – $1.4).
2018
2017
$
852.5
$
731.1
(168.2)
6.0
(6.8)
(169.0)
(4.1)
(4.1)
(173.1)
$
679.4
$
104.2
0.6
(3.6)
101.2
(3.1)
(3.1)
98.1
829.2
The accompanying notes are an integral part of these consolidated financial statements.
ANNUAL REPORT 2018
- 40 -
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
CONSOLIDATED STATEMENTS OF EQUITY
(in millions of CDN dollars, except common shares)
For the year ended March 31, 2018
Share capital
Reserves
Common
Shares
Amount
Foreign
Currency
Translation
Cash
Flow
Hedges
Stock
Option
Plan
Total
Reserves
Retained
Earnings
Total
Non-
Controlling
Interest
Total
Equity
Balance, beginning of year
386,234,311 $
871.1 $
717.8 $
(3.0) $
97.9 $
812.7 $
2,639.1 $
4,322.9 $
- $
4,322.9
Net earnings
Other comprehensive income
Total comprehensive income
Dividends declared
Stock option plan (Note 12)
Shares issued under stock option plan
Amount transferred from reserves to
share capital upon exercise of options
Excess tax benefit that results from the
excess of the deductible amount over
the compensation cost recognized
Shares repurchased and cancelled
-
-
-
-
-
-
-
-
1,827,992
41.0
-
8.2
-
-
(654,900)
(1.4)
-
(168.2)
-
(0.8)
-
-
-
(169.0)
852.5
(4.1)
852.5
(173.1)
679.4
(243.5)
24.1
-
-
-
-
24.1
-
-
24.1
-
(243.5)
-
-
41.0
-
(8.2)
(8.2)
-
-
-
-
2.8
-
2.8
-
-
2.8
(27.6)
(29.0)
-
-
-
-
-
-
-
-
-
852.5
(173.1)
679.4
(243.5)
24.1
41.0
-
2.8
(29.0)
Balance, end of year
387,407,403 $
918.9 $
549.6 $
(3.8) $
116.6 $
662.4 $
3,216.4 $
4,797.7 $
- $
4,797.7
For the year ended March 31, 2017
Share capital
Reserves
Common
Shares
Amount
Foreign
Currency
Translation
Cash
Flow
Hedges
Stock
Option
Plan
Total
Reserves
Retained
Earnings
Total
Non-
Controlling
Interest
Total
Equity
Balance, beginning of year
392,520,687 $
821.0 $
613.6 $
82.1 $
695.7 $
Net earnings
Other comprehensive income
Total comprehensive income
Additional non-controlling interests arising
from issuance of additional shares
Acquisition of the remaining interest in a
subsidiary (net of taxes of $40.2)
Dividends declared
Stock option plan (Note 12)
Shares issued under stock option plan
Amount transferred from reserves to
share capital upon exercise of options
Excess tax benefit that results from the
excess of the deductible amount over
the compensation cost recognized
Shares repurchased and cancelled
-
-
-
-
-
-
-
-
-
-
-
-
2,898,704
57.6
-
12.7
-
-
(9,185,080)
(20.2)
- $
-
-
-
-
-
-
104.2
(3.0)
-
-
2,485.1 $
727.8
4,001.8 $
727.8
-
101.2
(3.1)
98.1
825.9
68.0 $
3.3
4,069.8
731.1
-
3.3
98.1
829.2
-
-
-
-
16.3
16.3
-
-
22.0
-
-
-
22.0
-
41.5
(228.3)
-
41.5
(228.3)
22.0
-
57.6
-
(12.7)
(12.7)
-
-
-
-
6.5
-
6.5
-
6.5
-
(383.9)
(404.1)
(87.6)
-
-
-
-
-
-
(46.1)
(228.3)
22.0
57.6
-
6.5
(404.1)
Balance, end of year
386,234,311 $
871.1 $
717.8 $
(3.0) $
97.9 $
812.7 $
2,639.1 $
4,322.9 $
- $
4,322.9
The accompanying notes are an integral part of these consolidated financial statements.
ANNUAL REPORT 2018
- 41 -
CONSOLIDATED BALANCE SHEETS
(in millions of CDN dollars)
As at
ASSETS
Current assets
Cash and cash equivalents
Receivables
Inventories (Note 4)
Income taxes receivable (Note 14)
Prepaid expenses and other assets
Property, plant and equipment (Note 6)
Goodwill (Note 7)
Intangible assets (Note 7)
Other assets (Note 8)
Deferred income taxes (Note 14)
Total assets
LIABILITIES
Current liabilities
Bank loans (Note 9)
Accounts payable and accrued liabilities
Income taxes payable (Note 14)
Current portion of long-term debt (Note 10)
Long-term debt (Note 10)
Other liabilities (Note 11)
Deferred income taxes (Note 14)
Total liabilities
EQUITY
Share capital (Note 12)
Reserves
Retained earnings
Total equity
Total liabilities and equity
March 31, 2018 March 31, 2017
$
$
$
$
$
$
122.2 $
944.9
1,234.5
52.0
68.8
2,422.4
2,220.0
2,417.3
823.1
85.7
34.5
8,003.0 $
193.3 $
1,068.6
26.5
4.4
1,292.8
1,420.9
66.7
424.9
3,205.3 $
918.9
662.4
3,216.4
4,797.7 $
8,003.0 $
250.5
863.2
1,172.5
15.0
79.3
2,380.5
2,165.5
2,240.5
662.3
99.7
48.1
7,596.6
93.8
1,008.3
91.3
-
1,193.4
1,500.0
68.9
511.4
3,273.7
871.1
812.7
2,639.1
4,322.9
7,596.6
The accompanying notes are an integral part of these consolidated financial statements.
On behalf of the Board,
(signed) Lino A. Saputo, Jr.
Lino A. Saputo, Jr.
Chairman of the Board
and Chief Executive Officer
(signed) Tony Meti
Tony Meti
Director
ANNUAL REPORT 2018
- 42 -
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions of CDN dollars)
Years ended March 31
Cash flows related to the following activities:
Operating
Net earnings
Adjustments for:
Stock-based compensation
Interest and other financial charges
Income tax expense
Depreciation and amortization
Gain on disposal of property, plant and equipment
Impairment charges related to plant closure
Share of joint venture earnings, net of dividends received
Underfunding of employee plans in excess of costs
Changes in non-cash operating working capital items
Cash generated from operating activities
Interest and other financial charges paid
Income taxes paid
Net cash generated from operating activities
Investing
Business acquisitions
Additions to property, plant and equipment
Additions to intangible assets
Proceeds on disposal of property, plant and equipment
Other
Financing
Bank loans
Proceeds from issuance of long-term debt
Repayment of long-term debt
Issuance of share capital
Repurchase of share capital
Dividends
Acquisition of the remaining interest in a subsidiary
Additional non-controlling interest arising from issuance of additional shares
2018
2017
$
852.5
$
731.1
34.3
47.9
97.4
226.3
(0.7)
10.6
0.9
1.8
1,271.0
(115.2)
1,155.8
(47.4)
(299.3)
809.1
(385.1)
(277.8)
(66.2)
6.6
(0.4)
(722.9)
129.6
300.0
(402.2)
41.0
(29.0)
(243.5)
-
-
(204.1)
34.0
41.9
309.2
207.3
(2.0)
-
(1.1)
2.9
1,323.3
2.4
1,325.7
(42.8)
(209.3)
1,073.6
-
(236.7)
(84.7)
4.7
(1.1)
(317.8)
(82.1)
600.0
(552.2)
57.6
(404.1)
(228.3)
(87.0)
16.3
(679.8)
76.0
164.3
10.2
250.5
(Decrease) increase in cash and cash equivalents
Cash and cash equivalents, beginning of year
Effect of exchange rate changes on cash and cash equivalents
Cash and cash equivalents, end of year
(117.9)
250.5
(10.4)
122.2
$
$
The accompanying notes are an integral part of these consolidated financial statements.
ANNUAL REPORT 2018
- 43 -
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Years ended March 31, 2018 and 2017
(Tabular amounts are in millions of CDN dollars except information on options, units and shares.)
NOTE 1 CORPORATE INFORMATION
Saputo Inc. (the Company) is a publicly traded company incorporated and domiciled in Canada. The Company’s shares
are listed on the Toronto Stock Exchange under the symbol “SAP.” The Company produces, markets and distributes a
wide array of dairy products from Canada, the United States, Argentina and Australia. The address of the Company’s
head office is 6869, Metropolitain Blvd. East, Montréal, Québec, Canada, H1P 1X8. The consolidated financial
statements (financial statements) of the Company for the year ended March 31, 2018 comprise the financial results of
the Company and its subsidiaries.
The financial statements for the year ended March 31, 2018 have been authorized for issuance by the Board of
Directors on June 7, 2018.
NOTE 2 BASIS OF PRESENTATION
STATEMENT OF COMPLIANCE
The consolidated annual financial statements of the Company have been prepared in accordance with International
Financial Reporting Standards (IFRS).
BASIS OF MEASUREMENT
The Company’s financial statements have been prepared on a going concern basis and applied based on the historical
cost principle except for certain assets and liabilities as described in the significant accounting policies section.
FUNCTIONAL AND PRESENTATION CURRENCY
The Company’s financial statements are presented in Canadian dollars, which is also the consolidated entity’s
functional currency. All financial information has been rounded to the nearest million unless stated otherwise.
NOTE 3 SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements include the accounts of the Company and entities under its control. Control exists
when an entity is exposed, or has rights, to variable returns from its involvement with investees and has the ability to affect
those returns through its power over them. All intercompany transactions and balances have been eliminated. Investments
over which the Company has effective control are consolidated. The operating results of acquired businesses, from their
respective acquisition dates, are included in the consolidated statements of earnings.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist primarily of cash and short-term investments having an initial maturity of three
months or less at the time of acquisition.
INVENTORIES
Finished goods, raw materials and work in process are valued at the lower of cost and net realizable value, cost being
determined under the first in, first out method.
ANNUAL REPORT 2018
- 44 -
NOTE 3
SIGNIFICANT ACCOUNTING POLICIES (CONT’D)
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost less accumulated depreciation and any impairment losses and are
depreciated using the straight-line method over their estimated useful lives as described below:
Buildings
Furniture, machinery and equipment
Rolling stock
Assets under finance lease
15 to 40 years
3 to 20 years
5 to 10 years based on estimated kilometers traveled
Shorter of term of lease or estimated useful life
Where components of an item of building or furniture, machinery and equipment are individually significant, they are
accounted for separately within the categories described above.
Assets held for sale are recorded at the lower of their carrying amount or fair value less costs to sell, and no depreciation
is recorded. Assets under construction are not depreciated. Borrowing costs are capitalized to qualifying property, plant
and equipment where the period of construction of those assets takes a substantial period of time to get ready for their
intended use. Borrowing costs, if incurred, are added to the cost of those assets until such time as the assets are
substantially ready for their intended use.
For the purposes of impairment testing, property, plant and equipment are tested at the cash-generating unit (CGU) level.
Write-downs are included in “depreciation and amortization” presented on the consolidated statements of earnings.
GOODWILL AND INTANGIBLE ASSETS
Goodwill represents the excess of the consideration transferred in a given acquisition over the fair value of the
identifiable net assets acquired and is initially recorded at that value. Goodwill is subsequently carried at cost less any
impairment.
Intangible assets include trademarks, customer relationships and software that is not an integral part of the related
hardware. Intangible assets are initially recorded at their transaction fair values. Indefinite life intangibles are
subsequently carried at cost less any impairment losses. Definite life intangible assets are subsequently carried at cost
less accumulated amortization and less impairment losses, if any. Goodwill and trademarks are not amortized as they
are considered to be indefinite life intangible assets. However they are tested for impairment annually or more frequently
if events or changes in circumstances indicate that the assets might be impaired.
When testing goodwill and indefinite life intangible assets for impairment, the carrying values of the CGU’s or group of
CGU’s including goodwill are compared with their respective recoverable amounts (higher of fair value less costs of
disposal and value in use) and an impairment loss, if any, is recognized for the excess.
Customer relationships and software are considered to be definite life intangible assets and are amortized using the
straight-line method over their useful lives which vary from 5 to 15 years and are reviewed for indicators of impairment
prior to each reporting period.
Refer to “Impairment Testing of Cash-Generating Units” in Note 7 for a discussion of the CGU levels at which goodwill
and intangible assets are tested.
IMPAIRMENT OF OTHER LONG-LIVED ASSETS
Other long-lived assets are subject to an “indicators of impairment” test at each reporting period. In the event of an
indication of impairment, the asset or group of assets (referred to as CGU’s), for which identifiable cash flows that are
largely independent of the cash inflows from other assets or group of assets exist, are tested for impairment. An
impairment loss is recorded in net earnings when the carrying value exceeds the recoverable amount. The recoverable
amount is defined as the greater of fair value less costs of disposal and value in use.
BUSINESS COMBINATIONS
The Company accounts for its business combinations using the acquisition method of accounting. Under this method,
the Company allocates the purchase price to tangible and intangible assets acquired and liabilities assumed based on
estimated fair values at the date of acquisition, with the excess of the purchase price amount allocated to goodwill.
Significant debt issuance costs directly related to the funding of business acquisitions are included in the carrying value
of the debt and are amortized over the related debt term using the effective interest rate method. Acquisition costs are
expensed as incurred.
ANNUAL REPORT 2018
- 45 -
NOTE 3
SIGNIFICANT ACCOUNTING POLICIES (CONT’D)
EMPLOYEE FUTURE BENEFITS
The cost of defined benefit pension and other post-retirement benefits is actuarially determined annually on March 31
using the projected benefit method prorated based on years of service and using Management’s best estimates of rates
of compensation increases, retirement ages of employees and expected health care costs. Current service costs and
interest on obligations offset by interest income on plan assets are expensed in the year. Actuarial gains or losses, the
effect of an adjustment, if any, on the maximum amount recognized as an asset and the impact of the minimum funding
requirements, are recorded in other comprehensive income (loss) and immediately recognized in retained earnings
without subsequent reclassification to the consolidated statements of earnings. The net pension expenditure under
defined contribution pension plans is generally equal to the contributions made by the employer.
REVENUE RECOGNITION
The Company recognizes revenue when the title and risk of loss are transferred to customers, price is determinable,
collection is reasonably assured and when persuasive evidence of an arrangement exists. Revenues are recorded net
of sales incentives including volume rebates.
FOREIGN CURRENCY TRANSLATION
The Company’s functional currency is the Canadian dollar. Accordingly, the balance sheet accounts of foreign
operations are translated into Canadian dollars using the exchange rates at the balance sheet dates and statements
of earnings accounts are translated into Canadian dollars using the average monthly exchange rates in effect during
the periods. The foreign currency translation adjustment (CTA) reserve presented in the consolidated statements of
comprehensive income and the consolidated statements of equity, represents accumulated foreign currency gains
(losses) on the Company’s net investments in companies operating outside Canada. The change in the unrealized
gains (losses) on translation of the financial statements of foreign operations for the periods presented resulted mainly
from the fluctuation 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 balance
sheet dates for monetary assets and liabilities, and at the prevailing exchange rates at the time of transactions for
income and expenses. Non-monetary items are translated at the historical exchange rates. Gains or losses resulting
from this translation are included in operating costs.
STOCK-BASED COMPENSATION
The Company offers an equity settled stock option plan to certain employees within the organization pursuant to which
options are granted over a five-year vesting period with a ten-year expiration term. The fair value of each instalment of
an award is determined separately and recognized over the vesting period. When stock options are exercised, any
consideration paid by employees and the related compensation expense recorded as a stock option plan reserve are
credited to share capital.
The Company allocates deferred share units (DSU) to eligible Directors of the Company which are based on the market
value of the Company’s common shares. DSUs are granted on a quarterly basis, vest upon award and entitle Directors
to receive a cash payment for the value of the DSUs they hold following cessation of functions as a Director of the
Company. The Company recognizes an expense in its consolidated statements of earnings and a liability in its
consolidated balance sheets for each grant. The liability and related expense is subsequently re-measured at each
reporting period.
The Company offers performance share units (PSU) to senior management which are based on the market value of
the Company’s common shares. The PSU plan is non-dilutive and is settled in cash. These awards are considered
cash-settled share-based payment awards. A liability is recognized for the employment service received and is
measured initially, on the grant date, at the fair value of the liability. The liability is then subsequently remeasured at
each reporting period with any change in value recorded in net earnings. The compensation expense is recognized
over the three-year performance cycle.
JOINT VENTURES
Joint ventures are accounted for using the equity method and represent those entities in which the Company exercises
joint control over and for which it is exposed to variable returns from its involvement in the arrangement. Joint control
is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant
activities require the unanimous consent of the parties sharing control.
ANNUAL REPORT 2018
- 46 -
NOTE 3
SIGNIFICANT ACCOUNTING POLICIES (CONT’D)
INCOME TAXES
Income tax expense represents the sum of current and deferred income tax and is recognized in the consolidated
statements of earnings with the exception of items that are recognized in the consolidated statements of comprehensive
income or directly in equity.
Current income taxes are determined in relation to taxable earnings for the year and incorporate any adjustments to
current taxes payable in respect of previous years.
The Company follows the liability method of accounting for income taxes. Under this method, deferred income tax
assets and liabilities are determined based on temporary differences between the carrying amount of an asset or liability
in the consolidated balance sheets and its tax basis. They are measured using the enacted or substantively enacted
tax rates that are expected to apply when the asset is realized or the liability is settled. A deferred income tax asset is
recognized to the extent that it is probable that taxable profit will be available against which the deductible temporary
difference can be used.
FINANCIAL INSTRUMENTS
Financial assets and liabilities are initially measured at fair value. Subsequently, financial instruments classified as
financial assets available for sale, held for trading and derivative financial instruments, part of a hedging relationship or
not, continue to be measured at fair value on the balance sheet at each reporting date, whereas other financial
instruments are measured at amortized cost using the effective interest method.
The Company has made the following classifications:
- Cash and cash equivalents are classified as loans and receivables and are subsequently measured at amortized
cost.
- Receivables are classified as loans and receivables and are subsequently measured at amortized cost.
- Other assets that meet the definition of a financial asset are classified as loans and receivables and are subsequently
measured at amortized cost.
- Bank loans, accounts payable and accrued liabilities, other liabilities and long-term debt are classified as other
liabilities and are measured at amortized cost, with the exception of the liability related to DSUs and PSUs which is
measured at the fair value of common shares on the balance sheet dates.
Certain derivative instruments are utilized by the Company to manage exposure to variations in interest rate payments
and to manage foreign exchange rate risks, including foreign exchange forward contracts, currency swaps and interest
rate swaps. Derivatives are initially recognized at fair value at the date the derivative contracts and currency swaps are
entered into and are subsequently remeasured to their fair value at the end of each reporting period. The resulting gain or
loss is immediately recognized in net earnings unless the derivative is designated as a hedging instrument.
HEDGING
The Company designates certain financial instruments as cash flow hedges. At the inception of the hedging relationship,
the Company formally documents its risk management objective, strategy, term, nature of risk being hedged and
identifies both the hedged item and hedging instrument.
For derivatives instruments designated as cash flow hedges, the change in fair value related to the effective portion of
the hedge is recognized in other comprehensive income (loss), and the accumulated amount is presented as a hedging
reserve in the consolidated statement of equity. Any ineffective portion is immediately recognized in net earnings. Gains
or losses from cash flow hedges included in other components of equity are reclassified to net income, when the hedging
instrument has come due or is settled, as an offset to the losses or gains recognized on the underlying hedged items.
The Company formally assesses at inception and quarterly thereafter, the effectiveness of the hedging instruments
ability to offset variations in the cash flow risks associated with the hedged item. Where a hedging relationship is no
longer effective, hedge accounting is discontinued and any subsequent change in the fair value of the hedging
instrument is recognized in net earnings.
NON-CONTROLLING INTEREST
Non-controlling interests represent equity interest in acquired subsidiaries by third parties. The non-controlling
shareholders claim on net assets of the subsidiary is presented as a component within equity. Any share purchases
from non-controlling interests after the Company obtains control of a division are treated as transactions with equity
owners of the Company. Net earnings and each component of other comprehensive income are attributed to both the
owners of the Company and to the non-controlling interest.
ANNUAL REPORT 2018
- 47 -
NOTE 3
SIGNIFICANT ACCOUNTING POLICIES (CONT’D)
FAIR VALUE HIERARCHY
All financial instruments measured at fair value are categorized into one of three hierarchy levels, described below, for
disclosure purposes. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability
in an orderly transaction between market participants at the measurement date.
Each level reflects the inputs used to measure the fair values of assets and liabilities:
Level 1 – Inputs are unadjusted quoted prices of identical instruments in active markets.
Level 2 – Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or
indirectly.
Level 3 – One or more significant inputs used in a valuation technique are not based on observable market data in
determining fair values of the instruments.
Determination of fair value and the resulting hierarchy requires the use of observable market data whenever available.
The classification of a financial instrument in the hierarchy is based upon the lowest level of input that is significant to the
measurement of fair value.
USE OF ESTIMATES AND JUDGEMENTS IN THE APPLICATION OF ACCOUNTING POLICIES
The preparation of the Company’s financial statements requires Management to make certain judgements and
estimates about transactions and carrying values that are fulfilled at a future date. Judgements and estimates are
subject to fluctuations due to changes in internal and/or external factors and are continuously monitored by
Management. A discussion of the judgements and estimates that could have a material effect on the financial
statements is provided below.
SIGNIFICANT ESTIMATES AND JUDGEMENTS
Income Taxes
The Company is subject to income taxes in numerous jurisdictions. Significant judgement is required in determining
the consolidated provision for income taxes. During the ordinary course of business, there are many transactions and
calculations for which the ultimate tax determination is uncertain. The Company recognizes liabilities for anticipated tax
audit issues based on estimates of whether additional taxes will be due. Where the final tax outcome of these matters
differs from the amounts that were initially recorded, such differences will impact the results for the reporting period and
the respective current income tax and deferred income tax provisions in the reporting period in which such
determination is made.
Deferred Income Taxes
The Company follows the liability method of accounting for deferred income taxes. Deferred income tax assets and
liabilities are measured using enacted or substantively 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. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is
no longer probable that the related tax benefit will be realized. Canadian, US and international tax rules and regulations
are subject to interpretation and require judgement on the part of the Company that may be challenged by taxation
authorities. The Company believes that it has adequately provided for deferred 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.
Goodwill, Intangible Assets and Business Combinations
Goodwill, trademarks and customer relationships have principally arisen as a result of business combinations. The
acquisition method, which also requires significant estimates and judgements, is used to account for these business
combinations. As part of the allocation process in a business combination, estimated fair values are assigned to the
net assets acquired, including trademarks and customer relationships. These estimates are based on forecasts of
future cash flows, estimates of economic fluctuations and an estimated discount rate. The excess of the purchase price
over the estimated fair value of the net assets acquired is then assigned to goodwill. In the event that actual net assets
fair values are different from estimates, the amounts allocated to the net assets, and specifically to trademarks and
customer relationships, could differ from what is currently reported. This would then have a pervasive impact on the
carrying value of goodwill. Differences in estimated fair values would also have an impact on the amortization of definite
life intangibles.
ANNUAL REPORT 2018
- 48 -
NOTE 3
SIGNIFICANT ACCOUNTING POLICIES (CONT’D)
Property, Plant and Equipment
Critical judgement is necessary in the selection and application of accounting policies and useful lives as well as the
determination of which components are significant and how they are allocated. Management has determined that the
use of the straight-line method of amortization is the most appropriate as its facilities are operating at a similar output
potential on a year to year basis, which indicates that production is constant (please refer to the estimated useful lives
table for further details on the useful lives of productive assets). It is Management’s best estimate that the useful lives
and policies adopted adequately reflect the flow of resources and the economic benefits required and derived in the
use and servicing of these long-lived productive assets.
Impairment of Assets
Significant estimates and judgements are required in testing goodwill, intangible assets and other long-lived assets for
impairment. Management uses estimates or exercises judgement in assessing indicators of impairment, defining a
CGU, forecasting future cash flows and in determining other key assumptions such as discount rates and earnings
multipliers used for assessing fair value (less costs of disposal) or value in use. Estimates made for goodwill and
intangible assets can be found in Note 7. Other long-lived assets are tested only when indicators of impairment are
present.
Employee Future Benefits
The Company is the sponsor to both defined benefit and defined contribution plans, which provide pension and other
post-employment benefits to its employees. Several estimates and assumptions are required with regards to the
determination of the defined benefit expense and its related obligation, such as the discount rate used in determining
the carrying value of the obligation and the interest income on plan assets, the expected health care cost trend rate,
the expected mortality rate, expected salary increase, etc. Actual results will normally differ from expectations. These
gains or losses are presented in the consolidated statements of comprehensive income.
EFFECT OF NEW ACCOUNTING STANDARDS, INTERPRETATIONS AND AMENDMENTS
NOT YET IMPLEMENTED
The International Accounting Standards Board (IASB) made revisions as part of its continuing improvements project.
Below is a summary of the relevant standards affected and a discussion of the amendments.
The following standards, amendments to standards and interpretations have been issued and are applicable to the
Company for its annual periods beginning on and after April 1, 2018, with an earlier application permitted:
IFRS 2, Share-Based Payment
In June 2016, the IASB issued an amendment to clarify how to account for certain types of share-based payment
transactions. The amendments provide requirements on the accounting for: the effects of vesting and non-vesting
conditions on the measurement of cash-settled share-based payments, share-based payment transactions with a net
settlement feature for withholding tax obligations and a modification to the terms and conditions of a share-based
payment that changes the classification of the transaction from cash-settled to equity-settled.
IFRS 9, Financial Instruments
In July 2014, the IASB issued the final version of IFRS 9, Financial Instruments with the goal of replacing IAS 39,
Financial Instruments: Recognition and Measurement. The new standard addresses the classification and
measurement of financial assets and liabilities, provides a new impairment model for the recognition of expected credit
losses and provides a new hedge accounting model. Refer to the section “Considerations for the implementation of
IFRS 9 and IFRS 15” of this note for more information.
IFRS 15, Revenue from Contracts with Customers
The IASB issued IFRS 15, Revenue from Contracts with Customers with its goal to provide a single comprehensive
model for entities to use in accounting for revenue arising from contracts with customers. This new standard will
supersede current revenue recognition guidance in IAS 18, Revenue, IAS 11, Construction Contracts and IFRIC 13,
Customer Loyalty Programmes.
The objective of this standard is to provide a five-step approach to revenue recognition that includes identifying
contracts with customers, identifying performance obligations, determining transaction prices, allocating transaction
prices to performance obligations and recognizing revenue when performance obligations are satisfied. In certain
instances, transfer of assets that are not related to the entity’s ordinary activities will also be required to follow some of
the recognition and measurement requirements of the new model. The standard also expands current disclosure
requirements.
ANNUAL REPORT 2018
- 49 -
NOTE 3
SIGNIFICANT ACCOUNTING POLICIES (CONT’D)
In April 2016, the IASB amended IFRS 15 to comprise clarifications of the guidance on identifying performance
obligations, accounting for licenses of intellectual property and the principal versus agent assessment (gross versus
net revenue presentation). The amendment includes additional practical expedients related to transition to the new
revenue standard.
With regards to identifying performance obligations, the amendments clarify how to determine when promises in a
contract are ‘distinct’ goods or services and, therefore, should be accounted for separately. The amendments to
licensing guidance clarify when revenue from a license of intellectual property should be recognized ‘over time’ and
when it should be recognized at a ‘point in time’. With regards to the principal versus agent assessment, the
amendments clarify that the principal in an arrangement controls a good or service before it is transferred to a customer.
Refer to the section “Considerations for the implementation of IFRS 9 and IFRS 15” of this note for more information.
IAS 40, Investment Property
In December 2016, the IASB issued an amendment to IAS 40 clarifying when assets are transferred to, or from,
investment properties. The amendment clarified that to transfer to, or from, investment properties there must be a
change in use. To conclude if a property has changed use there should be an assessment of whether the property
meets the definition. This change must be supported by evidence. This amendment may be applied prospectively or
retrospectively.
IFRIC 22, Foreign Currency Transactions and Advance Consideration
In December 2016, the IASB issued IFRIC 22 which provides an interpretation on how to determine the date of the
transaction when applying the standard on foreign currency transactions, IAS 21. The interpretation applies where an
entity pays or receives consideration in advance for foreign currency-denominated contracts. The date of the
transaction determines the exchange rate to be used on initial recognition of the related asset, expense or income. This
interpretation provides guidance for when a single payment or receipt is made, as well as for situations where multiple
payments or receipts are made and aims to reduce diversity in practice.
Except as disclosed in ‘‘Considerations for the implementations of IFRS 9 and IFRS 15’’, the adoption of these
standards, amendments and interpretation will not have a significant impact on the Company’s financial statements.
The following standard has been issued and is applicable to the Company for its annual periods beginning on
April 1, 2019 and thereafter, with an earlier application permitted for entities that have also adopted IFRS 15:
IFRS 16, Leases
In January 2016, the IASB published a new standard, IFRS 16 ‘‘Leases’’, which will replace IAS 17 ‘‘Leases’’. The new
standard will eliminate the distinction between operating and finance leases and will bring most leases on the balance
sheet for lessees, except with respect to lease that meet limited exception criteria. For lessors, the accounting remains
mostly unchanged and the distinction between operating and finance leases is retained.
The following standards, amendments to standards and interpretations have been issued and are applicable to the
Company for its annual periods beginning on and after April 1, 2019, with an earlier application permitted:
IFRS 3, Business Combinations
In December 2017, the IASB issued an amendment to IFRS 3 to clarify that when an entity obtains control of a business
that is a joint operation, it remeasures previously held interests in that business.
IFRS 9, Financial Instruments
In October 2017, the IASB further amended IFRS 9 to allow financial assets with a prepayment option that could result
in the option’s holder receiving compensation for early termination to meet the solely payments of principal and interest
condition if specified criteria are met.
IFRS 11, Joint Arrangements
In December 2017, the IASB issued an amendment to IFRS 11 to clarify that when an entity obtains joint control of a
business that is a joint operation, the entity does not remeasure previously held interests in that business.
ANNUAL REPORT 2018
- 50 -
NOTE 3
SIGNIFICANT ACCOUNTING POLICIES (CONT’D)
IAS 19, Employee Benefits
In February 2018, the IASB issued an amendment to IAS 19 to specify how an entity shall determine pension expenses
when changes to a pension plan occur. When an amendment, curtailment or settlement to a plan takes place, IAS 19
requires an entity to remeasure its net defined benefit liability or asset. The amendments require an entity to use the
updated assumptions from this remeasurement to determine the current service cost and net interest for the remainder
of the reporting period after the change to the plan. In addition, amendments have been included to clarify the effect of
a plan amendment, curtailment or settlement on the requirements regarding the asset ceiling.
IAS 23, Borrowing Costs
In December 2017, the IASB issued an amendment to IAS 23 clarifying that if any specific borrowing remains
outstanding after the related asset is ready for its intended use or sale, it becomes part of the funds that an entity
borrows generally when calculating the capitalization rate on general borrowings.
IAS 28, Investments in Associates
In October 2017, the IASB issued an amendment to IAS 28 to clarify that an entity should apply IFRS 9 to long-term
interests in an associate or joint venture that form part of the net investment in the associate or joint venture but to
which the equity method is not applied.
IFRIC 23, Uncertainty Over Income Tax Treatments
In June 2017, the IFRS Interpretations Committee issued IFRIC 23 which clarifies how the recognition and
measurement requirements of IAS 12, Income Taxes, are applied where there is uncertainty over income tax
treatments.
Management is currently assessing the impact of the adoption of these standards, amendments and interpretation on
the Company’s financial statements.
CONSIDERATIONS FOR THE IMPLEMENTATION OF IFRS 9 AND IFRS 15
IFRS 9 and IFRS 15 are required to be applied for annual reporting periods beginning on April 1, 2018. The Company
will not be early adopting IFRS 9 or IFRS 15. The Company will adopt IFRS 9 and IFRS 15 in fiscal 2019.
IFRS 9 is applicable retrospectively in accordance with IAS 8, Accounting Policies, Changes in Accounting Estimates
and Errors, subject to certain exemptions and exceptions. In general, the main impacts of adopting IFRS 9 are expected
to be on classification and measurement of financial assets, the introduction of a new impairment model based on
expected losses (rather than incurred loss as per IAS 39, Financial Instruments: Recognition and Measurement), hedge
accounting and significant additional disclosure requirements.
The Company evaluated the impact of this standard. The Company’s analysis did not identify any differences that would
significantly change the classification and measurement of its financial instruments. The Company expects to apply the
simplified approach and record lifetime expected losses on all trade receivables.
IFRS 9 will require the Company to ensure that hedge accounting relationships are aligned with the Company’s risk
management objectives and strategy and to apply a more qualitative and forward-looking approach to assessing hedge
effectiveness. The Company completed these changes to its internal documentation to meet the requirements of
IFRS 9. The Company evaluated the impact of the new standard on the consolidated financial statements and it does
not have a significant impact.
IFRS 15 can be applied using one of the following two methods: retrospectively to each prior reporting period presented
in accordance with IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors, or retrospectively with the
cumulative effect of applying IFRS 15 recognized at the date of initial application. The Company decided to use the
second method as its transition method as prescribed under IFRS 15.
ANNUAL REPORT 2018
- 51 -
NOTE 3
SIGNIFICANT ACCOUNTING POLICIES (CONT’D)
The Company has reviewed standard purchase orders, invoices, shipping terms and significant contracts with
customers including discount arrangements. The Company has quantified the impact of IFRS 15 and has determined
these changes do not have a material impact on its consolidated financial statements. The following items represent
the main areas where differences were identified on transition to IFRS 15:
•
Presentation of the shipping and handling activities will be considered principal and will be presented on a gross
basis. The Company’s current accounting treatment has not resulted in any material differences.
• Revenues will be recognized at a point in time when control of the asset is transferred to the customer, generally
upon shipment of products. The Company’s current accounting treatment has not resulted in any material
differences.
•
Some contracts with customers provide incentive programs, including discounts, promotions, advertising
allowances, and other volume-based incentives. Such incentives give rise to variable considerations, which are
also estimated at contract inception. IFRS 15 has not resulted in any material differences to the current estimation
methodologies or the timing of the recognition of estimates and the Company’s current accounting treatment.
The Company does not expect to record any adjustment in the opening retained earnings as of the transition date since
the impact is not material. In addition to ensuring that the accounting and disclosure requirements of IFRS 15 are met,
we continue to address any systems and process changes necessary to compile the information and meet the
recognition and disclosure requirements of the standards. The Company will not be required to materially change its
business process and controls to support this transition.
The Company will provide additional disclosure as required by the new standard starting from the first quarter of fiscal
year 2019 onwards. In addition to the new disclosure requirements under IFRS 15, the Company will also disclose the
amount by which each financial statement line item is affected in the reporting period by the application of IFRS 15 as
compared with the previous standards.
NEW ACCOUNTING STANDARDS ADOPTED DURING THE YEAR
The following amendments to existing standards were adopted by the Company on April 1, 2017:
IAS 7, Statement of Cash Flows
IAS 7 has been amended to provide additional presentation related to the changes in liabilities arising from financing
activities such as: (i) changes from financing cash flows; (ii) changes arising from obtaining or losing control of
subsidiaries or other businesses; (iii) the effect of changes in foreign exchange rates; (iv) changes in fair values; and
(v) other changes.
This amendment did not significantly impact the Company’s financial statements for the year ended March 31, 2018.
IAS 12, Income taxes
IAS 12 has been amended to provide clarification on the requirements relating to the recognition of deferred tax assets
for unrealized losses on debt instruments measured at fair value.
This amendment did not significantly impact the Company’s financial statements for the year ended March 31, 2018.
ANNUAL REPORT 2018
- 52 -
NOTE 4
INVENTORIES
Finished goods
Raw materials, work in progress and supplies
Total
March 31, 2018 March 31, 2017
$
$
$
835.2
399.3
783.0
389.5
1,234.5
$
1,172.5
The amount of inventories recognized as an expense in operating costs for the year ended March 31, 2018 is
$9,175.1 million ($8,876.1 million for the year ended March 31, 2017).
During fiscal 2018, a write-down of $16.9 million ($4.1 million at March 31, 2017) was included as an expense in “Operating
costs excluding depreciation, amortization, acquisition and restructuring costs” under the caption “Changes in inventories
of finished goods and work in process” presented in Note 5.
NOTE 5 OPERATING COSTS EXCLUDING DEPRECIATION, AMORTIZATION,
ACQUISITION AND RESTRUCTURING COSTS
Changes in inventories of finished goods and work in process
Raw materials and consumables used
Foreign exchange loss (gain)
Employee benefits expense
Selling costs
Other general and administrative costs
$
2018
(56.5) $
8,018.0
2.7
1,314.1
429.1
570.4
Total
$
10,277.8 $
Certain prior year’s figures have been reclassified to conform to the current presentation.
2017
(88.3)
7,768.1
(4.3)
1,268.9
404.2
524.5
9,873.1
ANNUAL REPORT 2018
- 53 -
NOTE 6 PROPERTY, PLANT AND EQUIPMENT
Furniture,
machinery
and
Land Buildings
equipment
Rolling
stock
Held for
Lease
sale
Total
For the year ended March 31, 2018
Cost
As at March 31, 2017 $
Business acquisitions
(Note 16)
Additions
Disposals
Transfers
Foreign currency
adjustments
69.2
$
854.9
$
2,638.3
$
16.9 $
-
$
-
$ 3,579.3
2.4
0.2
(0.8)
(5.2)
20.6
83.3
(11.5)
(17.8)
3.4
193.6
(85.2)
(0.1)
1.0
0.7
(0.4)
-
(0.8)
(23.0)
(71.5)
(0.5)
28.7
-
-
-
0.9
-
-
-
23.1
56.1
277.8
(97.9)
-
-
(94.9)
As at March 31, 2018 $
65.0
$
906.5
$
2,678.5
$
17.7 $
29.6
$
23.1
$ 3,720.4
Accumulated
depreciation
As at March 31, 2017
Depreciation
Disposals
Transfers
Impairment charges
related to plant
closure
Foreign currency
adjustments
As at March 31, 2018 $
-
-
-
-
-
-
-
290.5
33.0
(8.6)
(8.8)
6.1
(8.8)
1,115.9
166.1
(83.1)
-
4.5
(25.2)
$
303.4
$
1,178.2
$
7.4
1.9
(0.3)
-
-
(0.1)
8.9 $
-
1.1
-
-
-
-
-
-
-
8.8
1,413.8
202.1
(92.0)
-
-
-
10.6
(34.1)
1.1
$
8.8
$ 1,500.4
Net book value at
March 31, 2018
$
65.0
$
603.1
$
1,500.3
$
8.8 $
28.5
$
14.3
$ 2,220.0
Furniture,
machinery
and
Land
Buildings
equipment
$
68.2
0.4
(0.2)
$
818.4
29.5
(4.5)
$
2,438.0
205.0
(46.7)
0.8
69.2
$
11.5
854.9
$
42.0
2,638.3
$
-
-
-
-
-
256.3
34.3
(3.5)
991.7
153.4
(45.4)
3.4
16.2
$
290.5
$
1,115.9
$
For the year ended March 31, 2017
Rolling
stock
Lease
Held for
sale
Total
17.5 $
1.8
(2.7)
0.3
16.9 $
8.1
1.7
(2.5)
0.1
7.4 $
-
-
-
-
-
-
-
-
-
$
$
$
-
-
-
-
-
-
-
-
-
$ 3,342.1
236.7
(54.1)
54.6
$ 3,579.3
1,256.1
189.4
(51.4)
19.7
$ 1,413.8
Cost
As at March 31, 2016 $
Additions
Disposals
Foreign currency
adjustments
As at March 31, 2017 $
Accumulated
depreciation
As at March 31, 2016
Depreciation
Disposals
Foreign currency
adjustments
As at March 31, 2017 $
Net book value at
March 31, 2017
$
69.2
$
564.4
$
1,522.4
$
9.5 $
-
$
-
$ 2,165.5
The net book value of property, plant and equipment under construction amounts to $109.1 million as at March 31, 2018
($190.6 million as at March 31, 2017), and consists mainly of machinery and equipment.
The assets held for sale relate mainly to land and building in Canada as a result of the closure of certain facilities and
have been recorded at the lower of carrying value and fair value less costs to sell. There were no assets held for sale
as of March 31, 2017.
ANNUAL REPORT 2018
- 54 -
NOTE 7 GOODWILL AND INTANGIBLE ASSETS
Indefinite Life
Definite Life
For the year ended March 31, 2018
Goodwill
Trademarks
Customer
relationships1
Software2
Total Intangible
Assets
Cost
As at March 31, 2017
$
Business acquisitions (Note 16)
Additions
Foreign currency adjustments
$
2,240.5
233.8
-
(57.0)
As at March 31, 2018
$
2,417.3
$
Accumulated Amortization
As at March 31, 2017
Amortization
Foreign currency adjustments
As at March 31, 2018
$
-
-
-
-
354.7 $
81.7
-
(2.9)
433.5 $
-
-
-
Net book value at March 31, 2018 $
2,417.3
$
433.5 $
$
- $
$
260.1
49.9
-
(6.3)
$
135.9
-
66.2
(6.5)
303.7
$
195.6
$
87.2
17.7
(2.4)
102.5
$
201.2
$
1.2
6.5
(0.5)
7.2
$
188.4
$
750.7
131.6
66.2
(15.7)
932.8
88.4
24.2
(2.9)
109.7
823.1
Indefinite Life
Definite Life
For the year ended March 31, 2017
Goodwill
Trademarks
Customer
relationships1
Software2
Total Intangible
Assets
Cost
As at March 31, 2016
Additions
Foreign currency adjustments
$
$
2,194.1
-
46.4
As at March 31, 2017
$
2,240.5
$
Accumulated Amortization
As at March 31, 2016
Amortization
Foreign currency adjustments
As at March 31, 2017
$
-
-
-
-
351.9 $
-
2.8
354.7 $
-
-
-
$
255.8
-
4.3
$
48.6
84.7
2.6
260.1
$
135.9
$
69.3
16.7
1.2
-
1.2
-
656.3
84.7
9.7
750.7
69.3
17.9
1.2
88.4
$
- $
87.2
$
1.2
$
Net book value at March 31, 2017 $
2,240.5
$
354.7 $
172.9
$
134.7
$
662.3
1 Customer relationships are amortized straight-line over a period of 15 years.
2 None of the additions were internally generated.
IMPAIRMENT TESTING OF CASH-GENERATING UNITS
Goodwill
In determining whether goodwill is impaired, the Company is required to estimate the recoverable amount of CGUs or
groups of CGUs to which goodwill is allocated. Management considers the sectors below to be CGUs or groups of
CGUs as they represent the smallest identifiable group of assets that generates cash inflows that are largely
independent of the cash inflows form other assets or groups of assets.
The Company reports its operations under three geographic sectors. The Canada Sector consists of the Dairy Division
(Canada). The USA Sector includes the Cheese Division (USA) and the Dairy Foods Division (USA). Finally, the
International Sector combines the Dairy Division (Argentina) and the Dairy Division (Australia).
ANNUAL REPORT 2018
- 55 -
NOTE 7 GOODWILL AND INTANGIBLE ASSETS (CONT’D)
As of April 1, 2017, the Canada Sector includes national and export revenues of ingredients manufactured in Canada.
The USA Sector includes national ingredient revenues, and export ingredient and cheese revenues of products
manufactured in the USA. The goodwill related to Dairy Ingredients Division was reclassified to the Canada Division
and the Cheese Division (USA). Prior to April 1, 2017, these figures were presented in the Dairy Ingredients Division
as part of the International Sector. Accordingly, certain prior year’s figures have been reclassified to conform to the
current presentation.
Goodwill has been allocated to each CGU or group of CGUs as follows:
Allocation of goodwill
Canada
USA
Cheese Division (USA)
Dairy Foods Division (USA)
International
Dairy Division (Australia)
Dairy Division (Argentina)
March 31, 2018
$
323.2 $
March 31, 2017
323.2
1,247.3
617.3
219.6
9.9
2,417.3 $
1,068.6
613.6
224.9
10.2
2,240.5
$
Recoverable amounts for Dairy Division (Canada), Cheese Division (USA) and Dairy Foods Division (USA) have been
estimated using an earnings multiplier valuation model (fair value less costs of disposal). The key assumptions used in
these models consist mainly of earnings multipliers for market comparables that are applied to the results of each CGU
or group of CGUs tested.
Recoverable amounts for Dairy Division (Australia) and Dairy Division (Argentina) have been estimated using a
discounted cash flow (value in use) model based on the following key assumptions:
• Cash flows: Cash flow forecasts for a given CGU are based on earnings before interest, income taxes,
depreciation and amortization and are adjusted for a growth rate and income tax rates. The cash flow forecast
does not exceed a period of five years with a terminal value calculated as a perpetuity in the final year.
Terminal growth rate: Management uses a terminal growth rate to adjust its forecasted cash flows based on
expected increases in inflation and revenue for the CGU.
•
• Discount rate: Cash flows are discounted using pre-tax discount rates.
The Company performed its annual impairment test and in all cases the recoverable amounts exceeded their respective
carrying values including goodwill. As at January 31, 2018 and 2017, goodwill was not considered to be impaired.
Trademarks
Trademarks are included in the following CGU or group of CGUs:
Allocation of trademarks
Neilson – Dairy Division (Canada)
Other
March 31, 2018
$
March 31, 2017
223.2
131.5
354.7
223.2 $
210.3
433.5 $
$
For purposes of trademarks impairment testing, recoverable amounts of the CGU or group of CGUs to which they
belong have been estimated using discounted cash flows (value in use) based on the following key assumptions:
• Cash flows: Cash flow forecasts for a given trademark are based on earnings before interest, income taxes,
depreciation and amortization and are adjusted for a growth rate and income tax rates. The cash flow forecast
does not exceed a period of five years with a terminal value calculated as a perpetuity in the final year.
Terminal growth rate: Management uses a terminal growth rate to adjust its forecasted cash flows based on
expected increases in inflation and revenue for the products under trademark.
•
• Discount rate: Cash flows are discounted using pre-tax discount rates.
The Company tested its trademarks for impairment using value in use (discounted cash flows) to establish recoverable
amounts. The recoverable amounts for each trademark and other intangibles not subject to amortization were then
compared to their carrying values. In all circumstances, the recoverable amounts exceeded carrying values and
therefore no impairment losses were necessary. For definite life intangibles subject to amortization, no indicators of
impairment were present for fiscal 2018 and 2017.
ANNUAL REPORT 2018
- 56 -
NOTE 8 OTHER ASSETS
Joint ventures
Other
March 31, 2018
March 31, 2017
$
$
$
47.9
37.8
85.7
$
50.8
48.9
99.7
The Company has two joint ventures in Australia, for which it holds a 50% and 49% interest, respectively. In both joint
ventures, the terms of the contracts require unanimous consent of all parties in order to direct the significant operations
of the ventures. The joint ventures have a June 30th year end and are accounted for under the equity method. The
Company recognized $7.3 million in net earnings, representing its share of earnings in the joint ventures for the year
ended March 31, 2018 ($11.4 million for the year ended March 31, 2017). Dividends received from the joint ventures
amounted to $8.2 million for the year ended March 31, 2018 ($10.3 million for the year ended March 31, 2017).
NOTE 9 BANK LOANS
The Company has available bank credit facilities providing for unsecured bank loans as follows:
Credit Facilities
North America-USA
North America-Canada
Argentina
Argentina
Australia
Australia
Maturity
December 20221
December 20221
Yearly2
Yearly3
Yearly4
Yearly5
Available for use
Amount drawn
Canadian
Currency
Equivalent
387.0
258.0
117.4
100.5
24.8
96.8
984.5
Base Currency
March 31, 2018
March 31, 2017
$
300.0 USD
200.0 USD
91.0 USD
1,570 ARS
25.0 AUD
75.0 USD
$
71.0
-
41.3
42.2
7.9
30.9
$
193.3
$
-
-
46.2
23.9
-
23.7
93.8
1 Bears monthly interest at rates ranging from lender’s prime rates plus a maximum of 1.00% or LIBOR or banker’s acceptance rate plus 0.80% up to
a maximum of 2.00% depending on the Company credit ratings.
2 Bear monthly interest at local rate and can be drawn in USD.
3 Bear monthly interest at local rate and can be drawn in ARS.
4 Bear monthly interest at Australian Bank Bill Rate plus 0.85%.
5 Bear monthly interest at LIBOR or Australian Bank Bill Rate plus 0.75% and can be drawn in AUD or USD.
ANNUAL REPORT 2018
- 57 -
NOTE 10
LONG-TERM DEBT
Unsecured bank term loan facilities
Obtained December 2012 and due in December 2019 ($850 million)1
200.0
600.0
March 31, 2018
March 31, 2017
Unsecured senior notes2
2.65%, issued in November 2014 and due in November 2019 (Series 1)
2.20%, issued in June 2016 and due in June 2021 (Series 2)
2.83%, issued in November 2016 and due in November 2023 (Series 3)
1.94%, issued in June 2017 and due in June 2022 (Series 4)
Finance lease obligations
Current portion
Principal repayments are as follows:
Less than 1 year
1-2 years
2-3 years
3-4 years
4-5 years
More than 5 years
300.0
300.0
300.0
300.0
25.3
1,425.3
4.4
$
1,420.9
$
$
4.4
520.9
-
300.0
300.0
300.0
300.0
300.0
300.0
-
-
1,500.0
-
1,500.0
-
-
900.0
-
300.0
300.0
$
$
$
1 Bears monthly interest at rates ranging from lender’s prime plus a maximum of 1.00% or LIBOR or bankers’ acceptance rates plus 0.80% up to a
maximum of 2.00%, depending on the Company credit ratings, and can be drawn in CAD or USD. Effective February 4, 2013, the Company entered
into an interest rate swap to fix its rate, which matured on December 30, 2016. As at March 31, 2017 interest rate on $452.9 million of the facility was
fixed at 1.58% plus appropriate spread. As at March, 31 2018, US$157.0 million was drawn and its foreign currency risk was offset with a cross
currency swap.
Interest payments are semi-annual.
2
$
1,425.3
$
1,500.0
On June 12, 2017, the Company issued $300.0 million Series 4 medium term notes with an annual interest rate of 1.94%
payable in equal semi-annual instalments, maturing on June 13, 2022, pursuant to its medium term note program expiring
in January 2019.
On December 21, 2017, the Company entered into a new credit agreement providing for a non-revolving term facility
in the aggregate amount of $1.28 billion (the “Acquisition Facility”), consisting of three tranches: a 1-year tranche of
$400.0 million; a 3-year tranche of $300.0 million; and a 5-year tranche of $580.0 million (AU$600.0 million), which was
available to finance the acquisition of the business of Murray Goulburn Co-Operative Co. Limited (Note 25). On May 1,
2018, the facility had been drawn in full.
NOTE 11 OTHER LIABILITIES
Employee benefits (Note 17)
Derivative financial liabilities (Note 20)
Performance share unit liabilities and related fringe benefits
Other
March 31, 2018
March 31, 2017
$
$
33.1 $
11.7
18.5
3.4
66.7
$
38.8
4.5
21.3
4.3
68.9
ANNUAL REPORT 2018
- 58 -
NOTE 12 SHARE CAPITAL
AUTHORIZED
The authorized share capital of the Company consists of an unlimited number of common shares. The common shares
are voting and participating.
ISSUED
387,407,403 common shares (386,234,311 common shares in 2017)
$
918.9 $
871.1
March 31, 2018
March 31, 2017
During the year ended March 31, 2018, 1,827,992 common shares (2,898,704 in 2017) were issued for an amount of
$41.0 million ($57.6 million in 2017) pursuant to the share option plan. For the year ended March 31, 2018, the amount
transferred from stock option plan reserve was $8.2 million ($12.7 million in 2017).
Pursuant to the normal course issuer bid which began on November 17, 2016, and expired on November 16, 2017, as
amended, the Company was authorized to repurchase for cancellation up to 12,000,000 of its common shares. Under the
normal course issuer bid that became effective on November 17, 2017, and expiring on November 16, 2018, the Company
is authorized to repurchase, for cancellation purposes, up to 8,000,000 of its common shares. During the year ended
March 31, 2018, the Company repurchased 654,900 common shares, at prices ranging from $43.42 to $44.99 per share,
relating to the normal course issuer bids. The excess of the purchase price over the carrying value of the shares in the
amount of $27.6 million was charged to retained earnings.
SHARE OPTION PLAN
The Company has an equity settled share option plan to allow for the purchase of common shares by key employees and
officers of the Company. The total number of common shares which may be issued pursuant to this plan cannot exceed
45,698,394 common shares. As at March 31, 2018, 24,360,279 common shares are available for future grants under this
plan and 19,510,123 common shares are underlying options outstanding. During fiscal 2018, a total of 1,827,992 common
shares were issued following the exercise of options. Options may be exercised at a price not less than the weighted
average market price for the five trading days immediately preceding the date of grant. The options vest at 20% per year
and expire ten years from the grant date.
Options issued and outstanding as at year end are as follows:
Granting
period
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Exercise
price
$ 11.55
$ 13.91
$ 10.70
$ 14.66
$ 21.61
$ 21.48
$ 25.55
$ 27.74
$ 35.08
$ 41.40
$ 46.29
March 31, 2018
March 31, 2017
Number of
options
Number of exercisable
options
Number of
options
Number of exercisable
options
-
62,600
652,202
853,430
838,875
1,684,832
2,174,840
2,734,958
2,699,555
3,986,625
3,822,206
19,510,123
-
62,600
652,202
853,430
838,875
1,684,832
1,589,320
1,430,240
949,431
769,556
-
8,830,486
3,668
423,697
800,662
939,584
942,295
1,981,526
2,521,165
3,149,368
2,981,402
4,106,647
-
17,850,014
3,668
423,697
800,662
939,584
942,295
1,364,064
1,237,025
1,016,224
526,006
-
-
7,253,225
ANNUAL REPORT 2018
- 59 -
NOTE 12
SHARE CAPITAL (CONT’D)
Changes in the number of outstanding options are as follows:
Balance, beginning of year
Options granted
Options exercised
Options cancelled
Balance, end of year
2018
2017
Number of
options
17,850,014
3,908,023
(1,827,992)
(419,922)
19,510,123
Weighted
average
exercise
price
$
$
$
$
$
29.00
46.29
22.41
35.07
32.95
Number of
options
16,903,824
4,218,934
(2,898,704)
(374,040)
17,850,014
Weighted
average
exercise
price
$
$
$
$
$
24.41
41.40
19.87
32.30
29.00
The exercise price of the options granted in fiscal 2018 is $46.29, which corresponds to the weighted average market
price for the five trading days immediately preceding the date of grant ($41.40 in fiscal 2017).
The weighted average fair value of options granted in fiscal 2018 was estimated at $7.68 per option ($6.94 in fiscal 2017),
using the Black Scholes option pricing model with the following assumptions:
March 31, 2018
March 31, 2017
Weighted average:
Risk-free interest rate
Expected life of options
Volatility1
Dividend rate
1 The expected volatility is based on the historic share price volatility over a period similar to the life of the options.
18.89%
1.26%
1.10%
5.4 years
0.81 %
5.4 years
20.01 %
1.34 %
A compensation expense of $24.1 million ($20.8 million net of taxes) relating to stock options was recorded in the
statement of earnings for the year ended March 31, 2018 and $22.0 million ($18.7 million net of taxes) was recorded for
the year ended March 31, 2017.
Options to purchase 4,536,208 common shares at a price of $41.02 per share were granted on April 1, 2018.
DEFERRED SHARE UNIT PLAN FOR DIRECTORS
For fiscal 2018, a new fee structure for Directors was adopted. Under this structure, all eligible Directors of the Company
are allocated an annual retainer payable 50% in DSUs and 50% in cash or DSUs, at the election of the Director. Until the
ownership threshold is met by the Director, the Director must receive the entire compensation in DSUs. The number of
DSUs granted quarterly to each Director is determined based on the market value of the Company’s common shares at
the date of each grant. When they cease to be a Director of the Company, a cash payment equal to the market value of
the accumulated DSUs will be disbursed. The liability relating to these units is adjusted by taking the number of units
outstanding multiplied by the market value of common shares at the Company’s year-end. The Company includes the cost
of the DSU plan in “Operating costs excluding depreciation, amortization, acquisition and restructuring costs”.
Balance, beginning of year
Annual retainer
Dividends reinvested
Payment to directors
Variation due to change in stock price
Balance, end of year
2018
2017
Units
367,918
48,782
4,794
(126,864)
-
294,630
Liability
$
17.6
2.1
0.2
(5.6)
(2.1)
Units
374,956
49,026
4,688
(60,752)
-
$
12.2
367,918
Liability
$ 16.3
2.2
0.2
(2.6)
1.5
$ 17.6
The Company enters into equity forward contracts in order to mitigate the compensation costs associated with its DSU
plan. As at March 31, 2018, the Company had equity forward contracts on 320,000 common shares (320,000 as of March
31, 2017) with a notional value of $13.9 million ($14.6 million as of March 31, 2017). The net compensation expense
related to the DSU plan was $2.2 million for the year ended March 31, 2018 ($2.8 million for March 31, 2017), including
the effect of the equity forward contracts. Certain prior years’ figures have been reclassified to conform to the current
year’s presentation.
ANNUAL REPORT 2018
- 60 -
NOTE 12
SHARE CAPITAL (CONT’D)
PERFORMANCE SHARE UNIT PLAN
The Company offers senior management a performance share unit (PSU) plan to form part of long-term incentive
compensation, together with other plans discussed within this report. The PSU plan is non-dilutive and is settled in cash
only. Under the PSU plan, each performance cycle shall consist of three fiscal years of the Company. At the time of the
grant of a PSU, the Company determines the performance criteria which must be met. Following completion of a three-
year performance cycle, the PSUs for which the performance criteria have been achieved will vest and the value that will
be paid out is the price of the common shares at such time, multiplied by the number of PSUs for which the performance
criteria have been achieved. The amount potentially payable to eligible employees is recognized as a payable and is
revised at each reporting period. The expense is included in employee benefits under the “Operating costs excluding
depreciation, amortization, acquisition and restructuring costs” caption.
Balance, beginning of year
Annual grant
Cancelled
Payment
Balance, end of year
2018
Units
814,571
263,637
(6,592)
(299,909)
771,707
2017
Units
705,721
255,975
(15,738)
(131,387)
814,571
As at March 31, 2018, a long-term obligation related to PSUs of $15.5 million was recorded ($17.7 million as at
March 31, 2017) in addition to $10.9 million that was recorded in short-term liabilities ($13.6 million as at March 31, 2017).
On April 1, 2018, 298,819 PSUs were granted at a price of $41.02 per unit ($46.29 in 2017).
The Company enters into equity forward contracts in order to mitigate the compensation costs associated with its PSU
plan. As at March 31, 2018, the Company had equity forward contracts on 770,000 common shares (700,000 as of March
31, 2017) with a notional value of $32.9 million ($27.1 million as of March 31, 2017). The net compensation expense
related to PSUs was $11.3 million for the year ended March 31, 2018 ($10.0 million for the year ended March 31, 2017),
including the effect of the equity forward contracts.
NOTE 13 OTHER FINANCIAL CHARGES
Finance costs
Finance income
$
$
2018
17.4 $
(3.3)
14.1
$
2017
8.0
(3.0)
5.0
ANNUAL REPORT 2018
- 61 -
NOTE 14
INCOME TAXES
On December 22, 2017, the United States (US) enacted the “Tax Cuts and Jobs Act” which has been commonly referred
to as US tax reform. A significant change under this reform is the reduction of the US Federal tax rate from 35.0% to
21.0%, effective January 1, 2018.
This change resulted in the Company recording an income tax benefit of $178.9 million to adjust for future tax balances
of $169.2 million and current fiscal year provisions of $9.7 million. These benefits are estimated based on the
Company’s initial analysis of the “Tax Cuts and Jobs Act”. Given the complexity of this act, these estimates are subject
to adjustment when further guidance becomes available.
The reduction of the effective tax rate is also due to an income tax benefit of $8.3 million following a positive settlement
in a tax litigation file.
Income tax expense is comprised of the following:
Current tax expense
Deferred tax recovery
Income tax expense
$
$
2018
198.0 $
(100.6)
97.4
$
2017
264.9
44.3
309.2
RECONCILIATION OF THE EFFECTIVE TAX RATE
The effective income tax rate was 10.4% in 2018 (29.7% in 2017). The Company’s income tax expense differs from the
one calculated by applying Canadian statutory rates for the following reasons:
Earnings before tax
Income taxes, calculated using Canadian statutory
income tax rates of 26.4% (26.6% in 2017)
Adjustments resulting from the following:
Effect of tax rates for foreign subsidiaries and other deductions
Changes in tax laws and rates
Benefit arising from investment in subsidiaries
Manufacturing and processing deduction
Stock-based compensation
Recognition of previously unrecognized deferred tax assets
Adjustments in respect of prior years and other
$
2018
949.9 $
250.4
2017
1,040.3
276.2
29.5
(163.4)
(12.8)
(9.5)
3.9
-
(0.7)
66.4
-
(14.3)
(13.4)
3.6
(8.3)
(1.0)
Income tax expense
$
97.4
$
309.2
During the year, as a result of a reduction in the Canadian corporation tax rate, the statutory tax rate has decreased by
approximately 0.2%.
INCOME TAX RECOGNIZED IN OTHER COMPREHENSIVE INCOME
Income tax on items recognized in other comprehensive income in 2018 and 2017 were as follows:
Deferred tax benefit on actuarial losses
on employee benefit obligations
Deferred tax benefit on cash flow hedge
Total income tax recognized in other comprehensive income
2018
2017
$
$
1.1 $
0.8
1.9
$
1.4
0.6
2.0
ANNUAL REPORT 2018
- 62 -
NOTE 14
INCOME TAXES (CONT’D)
INCOME TAX RECOGNIZED IN EQUITY
Income tax on items recognized in equity in 2018 and 2017 were as follows:
Excess tax benefit that results from the excess of the deductible amount over the
stock-based compensation recognized in net earnings
Total income tax recognized in equity
CURRENT TAX ASSETS AND LIABILITIES
Income taxes receivable
Income taxes payable
Income taxes payable (net)
DEFERRED TAX BALANCES
Deferred tax assets
Deferred tax liabilities
Deferred tax liabilities (net)
2018
2017
2.8
$
2.8
$
6.5
6.5
2018
$
52.0
(26.5)
25.5
$
2018
$
34.5
(424.9)
(390.4) $
2017
15.0
(91.3)
(76.3)
2017
48.1
(511.4)
(463.3)
$
$
$
$
$
$
DEFERRED TAX ASSETS AND LIABILITIES
The movement of deferred tax assets and liabilities are shown below:
Deferred tax asset
Deferred tax liabilities
Accounts
payable and
accrued
liabilities
Income
tax
losses
Net
assets of
pension
plans
Total
Inventories
Property,
plant and
equipment
Other
Total
For the year ended March 31, 2018
$
56.8
$
15.4
$
9.9
$
82.1
$
8.5
$
323.7
$
213.2
$
545.4
(8.6)
(8.7)
(2.8)
(20.1)
(10.3)
(70.4)
(40.0)
(120.7)
-
-
(2.5)
-
-
(0.3)
1.1
-
(0.1)
1.1
-
(2.9)
-
-
-
-
(0.6)
(11.7)
(0.8)
51.0
(12.0)
(0.8)
51.0
(24.3)
Balance, beginning
of the year
Charged/credited to net
earnings
Charged/credited to other
comprehensive income
Acquisitions
Translation and other
Balance, end of the year
$
45.7
$
6.4
$
8.1
$
60.2
$
(2.4) $
241.6
$
211.4
$
450.6
Deferred tax asset
Deferred tax liabilities
Accounts
payable and
accrued
liabilities
Income
tax losses
Net
assets of
pension
plans
Total
Inventories
Property,
plant and
equipment
Other
Total
For the year ended March 31, 2017
$
50.4 $
7.2
$
7.4
$
65.0 $
11.8
$
327.0
$
178.9
$
517.7
5.7
8.8
1.0
15.5
3.7
12.0
44.1
59.8
-
-
0.7
-
-
(0.6)
1.4
-
0.1
1.4
-
0.2
-
(7.4)
0.4
-
(22.1)
6.8
(0.6)
(10.7)
1.5
(0.6)
(40.2)
8.7
Balance, beginning
of the year
Charged/credited to net
earnings
Charged/credited to other
comprehensive income
Acquisitions
Translation and other
Balance, end of the year
$
56.8
$
15.4
$
9.9
$
82.1
$
8.5
$
323.7
$
213.2
$
545.4
ANNUAL REPORT 2018
- 63 -
NOTE 15 NET EARNINGS PER SHARE
Net earnings
Non-controlling interest
Net earnings attributable to shareholders of Saputo Inc.
Weighted average number of common shares outstanding
Dilutive options
Weighted average diluted number of common shares outstanding
Basic net earnings per share
Diluted net earnings per share
$
$
2018
852.5 $
-
852.5 $
2017
731.1
3.3
727.8
386,561,315
4,610,594
390,972,159
5,053,793
391,171,909
396,025,952
$
$
2.21 $
2.18 $
1.86
1.84
When calculating diluted net earnings per share for the year ended March 31, 2018, 3,822,206 options (no options for
the year ended March 31, 2017) were excluded from the calculation because their exercise price is higher than the
average market value for the year.
Shares purchased under the normal course issuer bid were excluded from the calculation of net earnings per share as
of the date of purchase.
NOTE 16 BUSINESS ACQUISITIONS
BETIN, INC.
On December 12, 2017, the Company completed the acquisition of Betin, Inc., doing business as Montchevre (Betin
or Montchevre). The purchase price of $348.1 million, on a debt free basis, was paid in cash.
Montchevre manufactured, marketed and distributed goat cheese in the USA, mainly under the Montchevre brand. Its
activities are conducted at one manufacturing facility located in Belmont, Wisconsin (USA). For the year ended on
June 30, 2017, Montchevre generated annual revenues of approximately $150 million.
Recognized goodwill reflects the value assigned to expected future synergies and an assembled workforce within
the Cheese Division (USA) CGU.
EXTENDED SHELF-LIFE (ESL) DAIRY PRODUCT ACTIVITIES OF SOUTHEAST MILK, INC. (SMI)
On September 29, 2017, the Company acquired the ESL dairy product activities of SMI. The purchase price of
$63.6 million, on a debt free basis, included cash consideration of $37.0 million.
Its activities are conducted at one manufacturing facility located in Plant City, Florida (USA). For the year ended on
June 30, 2017, the ESL dairy product activities of SMI generated annual revenues of approximately $59 million.
Recognized goodwill reflects the value assigned to expected future synergies and an assembled workforce within
the Dairy Foods Division (USA) CGU.
The purchase price was allocated to the identifiable assets acquired and liabilities assumed based on the fair values
presented below.
Assets acquired
Liabilities assumed
Working capital
Property, plant and equipment
Goodwill
Intangibles
Finance lease obligations
Deferred income taxes
$
Betin
38.4 $
17.5
211.6
131.6
-
(51.0)
SMI
2.8 $
38.6
22.2
-
(26.6)
-
2018
Total
41.2
56.1
233.8
131.6
(26.6)
(51.0)
Net assets acquired and total consideration paid in cash
$
348.1 $
37.0 $
385.1
ANNUAL REPORT 2018
- 64 -
NOTE 17
EMPLOYEE POST-EMPLOYMENT BENEFITS PLANS
The Company sponsors various post-employment benefit plans. These include pension plans, both defined contribution
and defined benefit plans, and other post-employment benefits. Post-employment benefit plans are classified as either
defined contribution plans or defined benefit plans.
DEFINED CONTRIBUTION PLANS
The Company offers and participates in defined contribution pension plans of which 99% of its active employees are
members. The net pension expense under these types of plans is generally equal to the contributions made by the
employer and constitutes an expense for the year in which they are due. For fiscal 2018, the defined contribution
expenses for the Company amounted to $47.8 million compared to $45.7 million for fiscal 2017. The Company expects
to contribute approximately $49.2 million to its defined contribution plans for fiscal 2019.
DEFINED BENEFIT PLANS
The Company participates in defined benefit pension plans in which the remaining active employees are members. Under
the terms of the defined benefit pension plans, pensions are based on years of service and the retirement benefits are
equal to 2% of the average eligible earnings of the last employment years multiplied by years of credited service.
The registered pension plans must comply with statutory funding requirements in the province or state in which they
are registered. Funding valuations are required on an annual or triennial basis, depending on the jurisdiction, and
employer contributions must include amortization payments for any deficit, over a period of 5 to 15 years. Contribution
holidays are allowed and subject to certain thresholds. Other non-registered pension plans and benefits other than
pension are not subject to any minimum funding requirements.
The cost of these pension benefits earned by employees is actuarially determined using the projected benefits method
prorated on services and using a discount rate based on high quality corporate bonds and Management’s assumptions
bearing on, among other things, rates of compensation increase and retirement age of employees. All of these
estimates and assessments are formulated with the help of external consultants. The plan assets and benefit
obligations were valued as at March 31 with the assistance of the Company’s external actuaries. The Company also
offers complementary retirement benefits programs, such as health insurance, life insurance and dental plans to eligible
employees and retired employees. The Company expects to contribute approximately $4.9 million to its defined benefit
plans in 2019. The Company’s net liability for post-employment benefit plans comprises the following:
March 31, 2018
March 31, 2017
Present value of funded obligation
Fair value of assets
Present value of net obligations for funded plans
Present value of unfunded obligations
Present value of net obligations
Asset ceiling test
Accrued pension/benefit cost as at March 31
$
$
72.2
67.0
5.2
27.1
32.3
0.8
33.1
Employee benefit amounts on the balance sheet as net liability
$
33.1
$
The changes in the present value of the defined benefit obligations are as follows:
70.4
64.9
5.5
32.4
37.9
0.9
38.8
38.8
Defined benefit obligation, beginning of year
Current service costs
Interest cost
Actuarial losses (gains) from change in experience
Actuarial losses (gains) from change in economic assumptions
Actuarial losses (gains) from change in demographic assumptions
Effects of settlement1
Exchange differences
Benefits paid
March 31, 2018
March 31, 2017
$
$
102.8
5.0
3.6
2.2
2.8
0.4
(1.2)
(0.3)
(16.0)
87.6
5.8
3.6
0.6
5.1
2.1
-
0.3
(2.3)
Defined benefit obligation, end of year
$
99.3
$
102.8
ANNUAL REPORT 2018
- 65 -
NOTE 17 EMPLOYEE POST-EMPLOYMENT BENEFITS PLANS (CONT’D)
The changes in the fair value of plan assets are as follows:
March 31, 2018
March 31, 2017
Fair value of plan assets, beginning of year
Interest income on plan assets
Return on plan assets, excluding interest income
Administration costs
Contributions by employer
Effects of settlement1
Exchange differences
Benefits paid
$
$
64.9
2.5
-
(0.3)
17.6
(1.6)
(0.1)
(16.0)
Fair value of plan assets, end of year
1 Annuities were purchased to release the plan from its liability with regards to retirees.
$
67.0
$
57.1
2.4
3.6
(0.3)
4.4
-
-
(2.3)
64.9
Actual return on plans assets amounted to a gain of $2.2 million in fiscal 2018 compared to a loss of $5.6 million in
fiscal year 2017.
The fair value of plan assets, which do not include assets of the Company, consist of the following:
Bonds
Equity instruments
Cash and short–term investments
March 31, 201 8
March 31, 2017
48 %
45 %
7 %
100 %
50 %
43 %
7 %
100 %
The expenses recognized below are included in "Operating costs excluding depreciation, amortization, acquisition and
restructuring costs" within employee benefits expense (refer to Note 5) and are detailed as follows:
March 31, 2018
March 31, 2017
Employer current service cost
$
5.0
$
Effect of settlement
Administration costs
Interest costs
Interest income on plan assets
Defined benefits plans expense
0.5
0.3
3.6
(2.5)
$
6.9
$
5.8
-
0.3
3.6
(2.4)
7.3
The Company recognizes actuarial gains and losses in the period in which they occur, for all its defined benefit plans.
These actuarial gains and losses are recognized in other comprehensive income and are presented below:
Net gains (losses) during the year
Effect of the asset ceiling test
Amount recognized in other comprehensive income
March 31, 2018
March 31, 2017
$
$
$
(5.4)
0.2
(5.2)
$
(4.3)
(0.2)
(4.5)
Weighted average assumptions used in computing the benefit obligations at the balance sheet date are as follows:
March 31, 2017
March 31, 2018
Discount rate
Duration of the obligation
Future salary increases
Mortality table
3.59%
18.13
3.00%
3.77%
18.58
3.00%
2014 Private Sector Canadian
Pensioners’ Mortality Table, projected
generationally using Scale CPM-B
2014 Private Sector Canadian
Pensioners’ Mortality Table, projected
generationally using Scale CPM-B
The impact of an increase and a decrease of 1% on the discount rate would be $14.9 million and $17.8 million
respectively. Also, an increase or a decrease of 1% on the future salary assumptions would be approximately
$3.2 million on the obligation and a 10% increase in life expectancy would represent approximately $1.4 million.
ANNUAL REPORT 2018
- 66 -
NOTE 17
EMPLOYEE POST-EMPLOYMENT BENEFITS PLANS (CONT’D)
Weighted average assumptions used in computing the net periodic pension cost for the year are as follows:
Discount rate
Future salary increases
Mortality table
March 31, 2018
March 31, 2017
3.77%
3.00%
4.10%
3.00%
2014 Private Sector Canadian
Pensioners’ Mortality Table, projected
generationally using Scale CPM-B
2014 Private Sector Canadian
Pensioners’ Mortality Table, projected
generationally using Scale CPM-B
For measurement purposes, a 3.0% to 7.0% annual rate of increase was used for health, life insurance and dental plan
costs for the fiscal years 2018 and 2017.
Assumed medical cost trend rates have an effect on the amounts recognized in profit or loss. A one percentage point
change in the assumed medical cost trend rates would have marginal impact on cost and obligations.
NOTE 18 COMMITMENTS AND CONTINGENCIES
COMMITMENTS
The table and paragraphs below show the future minimum payments for our contractual commitments that are not
recognized as liabilities for the next fiscal years:
Less than 1 year
1-2 years
2-3 years
3-4 years
4-5 years
More than 5 years
Leases
Purchase obligations1
$
$
29.1 $
24.6
20.0
15.8
14.2
27.1
130.8 $
91.8 $
-
-
-
-
-
91.8 $
Total
120.9
24.6
20.0
15.8
14.2
27.1
222.6
1 Purchase obligations are the contractual obligations for capital expenditures to which the Company is committed.
The Company carries on some of its operations in leased premises and has also entered into lease agreements for
equipment and rolling stock. The Company guaranteed to certain lessors a portion of the residual value of certain
leased assets with respect to operations which mature until 2017. If the market value of leased assets, at the end of
the respective operating lease term, is inferior to the guaranteed residual value, the Company is obligated to indemnify
the lessors, specific to certain conditions, for the shortfall up to a maximum value. The Company believes that the
potential indemnification will not have a significant effect on the financial statements.
CLAIMS
The Company is a defendant to certain claims arising from the normal course of its business. The Company is also a
defendant in certain claims and/or assessments from tax authorities in various jurisdictions. The Company believes that
the final resolution of these claims and/or assessments will not have a material adverse effect on its earnings or financial
position.
INDEMNIFICATIONS
The Company from time to time offers indemnifications to third parties in the normal course of its business, in connection
with business or asset acquisitions or disposals. These indemnification provisions may be in connection with breach of
representations and warranties, and for future claims for certain liabilities. The terms of these indemnification provisions
vary in duration. At March 31, 2018, given that the nature and amount of such indemnifications depend on future events,
the Company is unable to reasonably estimate its maximum potential liability under these agreements. The Company
has not made any significant indemnification payments in the past, and as at March 31, 2018 and March 31, 2017, the
Company has not recorded any significant liabilities associated with these indemnifications.
ANNUAL REPORT 2018
- 67 -
NOTE 19 RELATED PARTY TRANSACTIONS
The Company receives services from and provides goods to companies subject to control or significant influence
through ownership by its principal shareholder. These transactions, which are not significant to the Company’s financial
position or financial results, are made in the normal course of business and have been recorded at the fair value,
consistent with market values for similar transactions. The services that are received consist mainly of travel, publicity,
lodging, office space rental and management services. The goods that are provided consist mainly of dairy products.
Transactions with key management personnel (short-term employee benefits, post-employment benefits, stock-based
compensation and payments under the DSU plan) are also considered related party transactions. Management defines
key management personnel as all the executive officers who have responsibility and authority for controlling, overseeing
and planning the activities of the Company, as well as the Company’s Directors.
Transactions with related parties are as follows:
Entities subject to control or significant influence through ownership by its principal shareholder $
Key management personnel
Directors
Executive officers
2018
6.3 $
2.6
28.1
$
37.0 $
2017
4.5
3.1
31.1
38.7
Dairy products provided by the Company were the following:
2018
2017
Entities subject to control or significant influence through ownership by its principal shareholder $
0.3 $
0.3
Outstanding receivables and accounts payable and accrued liabilities for the transactions above are the following:
Entities subject to control or significant influence
through ownership by its principal shareholder $
0.1 $
0.1 $
0.5 $
0.1
Receivables
Accounts payable and
accrued liabilities
March 31, 2018 March 31, 2017 March 31, 2018 March 31, 2017
Key management personnel
Directors
Executive officers
-
-
-
-
12.2
27.8
$
0.1 $
0.1 $
40.5 $
17.6
42.7
60.4
The amounts payable to the Directors consist entirely of balances payable under the Company’s DSU plan. Refer to
Note 12 for further details. The amounts payable to executive officers consist of short-term employee benefits, share-
based awards and post-retirement benefits.
ANNUAL REPORT 2018
- 68 -
NOTE 19 RELATED PARTY TRANSACTIONS (CONT’D)
KEY MANAGEMENT PERSONNEL COMPENSATION
The compensation expense for transactions with the Company’s key management personnel, including annual fees of the
executive Chairman, consists of the following:
Directors
Cash-settled payments
Stock-based compensation
Executive officers
Short-term employee benefits
Post-employment benefits
Stock-based compensation
Total compensation
2018
2017
0.3 $
2.3
2.6 $
13.5
3.5
11.1
28.1 $
0.7
2.4
3.1
17.6
3.4
10.1
31.1
30.7 $
34.2
$
$
$
$
SUBSIDIARIES
All the Company’s subsidiaries are wholly owned. The following information summarizes the Company’s significant
subsidiaries which produce a wide array of dairy products including cheese, fluid milk, extended shelf-life milk and cream
products, cultured products and dairy ingredients:
Saputo Cheese USA Inc.
Saputo Dairy Products Canada G.P.
Saputo Dairy Foods USA, LLC
Warrnambool Cheese and Butter Factory Company Holdings Limited
Molfino Hermanos S.A.
100.00%
100.00%
100.00%
100.00%
100.00%
Percentage Owned
Location
USA
Canada
USA
Australia
Argentina
NOTE 20
FINANCIAL INSTRUMENTS
In the normal course of business, the Company uses various financial instruments which by their nature involve risk,
including credit risk, liquidity risk, interest rate risk, foreign exchange risk and price risk (including commodity price risk).
These financial instruments are subject to normal credit conditions, financial controls and risk management and
monitoring strategies.
Occasionally, the Company may enter into derivative financial instrument transactions in order to mitigate or hedge
risks in accordance with risk management strategies. The Company does not enter into these arrangements for
speculative purposes.
CREDIT RISK
Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash equivalents
and receivables.
Cash equivalents consist mainly of short-term investments. The Company has deposited these cash equivalents in
reputable financial institutions.
The Company also offers credit to its customers in the normal course of business for trade receivables. Credit valuations
are performed on a regular basis and reported results take into account allowances for potential bad debts.
Due to its large and diverse customer base and its geographic diversity, the Company has low exposure to credit risk
concentration with respect to customer’s receivables. There are no receivables from any individual customer that exceeded
10% of the total balance of receivables as at March 31, 2018 and March 31, 2017. However, one customer represented more
than 10% of total consolidated revenues for the year ended March 31, 2018 with 10.4% (one customer with 10.6% in 2017).
ANNUAL REPORT 2018
- 69 -
NOTE 20
FINANCIAL INSTRUMENTS (CONT’D)
Allowance for doubtful accounts and past due receivables are reviewed by Management at each balance sheet date.
The Company updates its estimate of the allowance for doubtful accounts based on the evaluation of the recoverability
of receivable balances from each customer taking into account historic collection trends of past due accounts.
Receivables are written off once determined not to be collectible. The accounts receivable from our export sales benefit
from payment terms that are longer than our standard payment terms applicable to domestic sales.
The amount of the allowance for doubtful accounts is sufficient to cover the carrying amount of receivables considered
past due and at risk. The amount of the loss is recognized in the statement of earnings within operating costs.
Subsequent recoveries of amounts previously written off are credited against operating costs in the statement of
earnings. However, Management does not believe that these allowances are significant.
LIQUIDITY RISK
Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due. The Company
manages liquidity risk through the management of its capital structure and financial leverage, as outlined in Note 21
relating to capital disclosures. It also manages liquidity risk by continuously monitoring actual and projected cash flows.
The Board of Directors reviews and approves the Company’s operating and capital budgets, as well as any material
transactions out of the normal course of business.
Contractual maturities for the significant financial liabilities as at March 31, 2018 are as follow: accounts payable and
accrued liabilities, bank loans and long-term debt. All items included in accounts payable and accrued liabilities are less
than one year. For maturities on bank loans and the long-term debt, please refer to Note 9 and Note 10 respectively.
INTEREST RATE RISK
The Company is exposed to interest rate risks through its financial obligations that bear variable interest rates. Bank
loans and unsecured bank term loans facilities bear interest at fluctuating rates and thereby expose the Company to
interest rate risk on cash flows associated to interest payments. The senior notes bear interest at fixed rates and, as a
result, no interest rate risk exists on these cash flows.
During last fiscal year, the cash flow hedges of interest rate risk were assessed to be highly effective and a loss of
$2.1 million (net of tax of $0.7 million) was automatically transferred in the statement of earnings at the settlement date.
For the fiscal year ended March 31, 2018, the interest expense on long-term debt totalled $33.8 million ($36.9 million in
fiscal 2017). The interest accrued as at March 31, 2018 was $9.7 million ($8.3 million as at March 31, 2017).
As at March 31, 2018, the net amount exposed to short-term rates fluctuations was approximately $271.1 million. Based
on this exposure, an assumed 1% increase in the interest rate would have an unfavourable impact of approximately
$1.9 million on net earnings with an equal but opposite effect for an assumed 1% decrease.
ANNUAL REPORT 2018
- 70 -
NOTE 20
FINANCIAL INSTRUMENTS (CONT’D)
FOREIGN EXCHANGE RISK
The Company operates internationally and is exposed to foreign exchange risk resulting from various foreign currency
transactions. Foreign exchange transaction risk arises primarily from future commercial transactions that are
denominated in a currency that is not the functional currency of the Company’s business unit that is party to the
transaction, as well as the unsecured bank term loan facilities that can be drawn in US dollars.
The Company entered into forward exchange contracts to sell US dollars and buy Australian dollars in order to mitigate
market fluctuations in the USD/AUD exchange rates on receivables. During the fiscal year, the cash flow hedges were
highly effective and accordingly, the Company recognized an unrealized gain of $2.8 million (net of tax of $1.2 million)
in other comprehensive income (and an associated asset) as a result. A gain of $6.0 million (net of tax of $2.6 million)
was reclassified to net earnings during fiscal 2018 related to these forward exchange contracts. These cash flow hedges
were also deemed to be highly effective on March 31, 2017 and an unrealized gain of $3.5 million (net of tax of
$1.5 million), was recorded, during last fiscal year, in other comprehensive income. A gain of $5.6 million (net of tax of
$2.4) was reclassified to net earnings during fiscal 2017 related to these forward exchange contracts.
During last fiscal year, the Company entered into forward exchange contracts in order to offset market fluctuations in
the USD/CAD exchange rates for the US dollars intercompany financing. This intercompany financing from our US to
Canada divisions for the foreign exchange hedge will settle in November 2019 for US$250.0 million. This cash flow
hedges were highly effective and accordingly, the Company recognized an unrealized loss of $2.9 million (net of tax of
$0.4 million) in other comprehensive income. During fiscal 2018, a loss of $0.8 million (net of tax of $0.1 million) in other
comprehensive income was reclassified to net earnings related to this forward exchange contracts.
The Company is mainly exposed to US dollar fluctuations. The following table details the Company’s sensitivity to a
CDN$0.10 weakening of the Canadian dollar against the US dollar on net earnings and comprehensive income. For a
CDN$0.10 appreciation of the Canadian dollar against the US dollar, there would be an equal and opposite impact on
net earnings and comprehensive income.
Change in net earnings
Change in comprehensive income
$
$
2018
32.0 $
281.2 $
2017
24.3
249.1
COMMODITY PRICE RISK
In certain instances, the Company enters into futures contracts to hedge against fluctuations in the price of
commodities. Outstanding contracts as at the balance sheet date had a negative fair value of approximately $1.9 million
(negative fair value of approximately $1.5 million at March 31, 2017).
The Company applies hedge accounting for certain of these transactions. During the fiscal year, these hedges
(designated as cash flow hedges) were assessed to be highly effective and accordingly, an unrealized gain of
$0.6 million (net of tax of $0.4 million) was recorded in other comprehensive income. The gains recorded in the
statement of comprehensive income are transferred to the statement of net earnings when the related inventory is
ultimately sold. These hedges (designated as cash flow hedges) were assessed to be highly effective and accordingly,
an unrealized gain of $0.2 million (net of tax of $0.1 million) was recorded, during last fiscal year, in other comprehensive
income.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company has determined that the fair value of its financial assets and financial liabilities with short-term maturities
approximates their carrying value. These financial instruments include cash and cash equivalents, receivables, bank
loans, accounts payable and accrued liabilities. The table below shows the fair value and the carrying value of other
financial instruments as at March 31, 2018 and March 31, 2017. Since estimates are used to determine fair value, they
must not be interpreted as being realizable in the event of a settlement of the instruments.
ANNUAL REPORT 2018
- 71 -
NOTE 20
FINANCIAL INSTRUMENTS (CONT’D)
Cash flow hedges
Commodity derivatives (Level 2)
Foreign exchange derivatives (Level 2)
Derivatives not designated in a formal
hedging relationship
Equity forward contracts (Level 2)
Commodity derivatives (Level 2)
Long-term debt (Level 2)
$
March 31, 2018
March 31, 2017
Fair value
Carrying value
Fair value
Carrying value
$
(1.4) $
(8.7)
(1.4) $
(8.7)
(1.6) $
3.2
(1.6)
3.2
(1.4)
(0.5)
1,410.0 $
(1.4)
(0.5)
1,425.3 $
5.1
0.1
1,520.5 $
5.1
0.1
1,500.0
The following table summarizes the financial instruments measured at fair value in the consolidated balance sheet as
at March 31, 2018 and March 31, 2017, classified using the fair value hierarchy described in Note 3.
March 31, 2018
Commodity futures contracts
Foreign exchange contracts
Equity forward contracts
March 31, 2017
Commodity futures contracts
Foreign exchange contracts
Equity forward contracts
$
$
$
$
Level 1
Level 2
Level 3
- $
-
-
- $
(1.9) $
(8.7)
(1.4)
(12.0) $
- $
-
-
- $
Level 1
Level 2
Level 3
$
-
-
- $
(1.5)
3.2
5.1
6.8 $
- $
-
-
- $
Total
(1.9)
(8.7)
(1.4)
(12.0)
Total
(1.5)
3.2
5.1
6.8
For the years ended March 31, 2018 and 2017, there were no changes in valuation techniques and in inputs used in
the fair value measurements and there were no transfers between the levels of the fair value hierarchy.
Fair values of other assets, long-term debt and derivative financial instruments are determined using discounted cash
flow models based on market inputs prevailing at the balance sheet date and are also obtained from financial
institutions. Where applicable, these models use market-based observable inputs including interest-rate-yield curves,
volatility of certain prices or rates and credit spreads. If market based observable inputs are not available, judgement
is used to develop assumptions used to determine fair values. The fair value estimates are significantly affected by
assumptions including the amount and timing of estimated future cash flows and discount rates. The Company’s
derivatives transactions are accounted for on a fair value basis.
NOTE 21 CAPITAL DISCLOSURES
The Company’s objective in managing capital is to ensure sufficient liquidity to pursue its growth strategies and undertake
selective acquisitions, while at the same time taking a conservative approach towards financial leverage and management
of financial risk. An additional objective includes a target for long-term leverage of 2.0 times net debt to earnings before
interest, income taxes, depreciation, amortization, acquisition and restructuring costs. From time to time, the Company
may deviate from its long-term leverage target to pursue acquisitions and other strategic opportunities. Should such a
scenario arise, the Company expects to deleverage over a reasonable period of time in order to seek to maintain its
investment grade ratings. Also, the Company seeks to provide an adequate return to its shareholders. The Company
believes that the purchases of its own shares may, under appropriate circumstances, be a responsible use of its capital.
ANNUAL REPORT 2018
- 72 -
NOTE 21 CAPITAL DISCLOSURES (CONT’D)
The Company’s capital is composed of net debt and equity. Net debt consists of long-term debt and bank loans, net of
cash and cash equivalents. The Company’s primary use of capital is to finance acquisitions.
The primary measure used by the Company to monitor its financial leverage is its ratio of net debt to earnings before
interest, income taxes, depreciation, amortization, acquisition and restructuring costs. The net debt-to-earnings before
interest, income taxes, depreciation, amortization, acquisition and restructuring costs ratios as at March 31, 2018 and
March 31, 2017 are as follows:
Bank loans
Long-term debt, including current portion
Cash and cash equivalents
Net debt
Earnings before interest, income taxes, depreciation, amortization,
acquisition and restructuring costs
Net debt-to-earnings before interest, income taxes, depreciation, amortization,
acquisition and restructuring costs
$
$
2018
$
193.3 $
1,425.3
(122.2)
1,496.4 $
2017
93.8
1,500.0
(250.5)
1,343.3
1,264.7 $
1,289.5
1.18
1.04
The Company has existing credit facilities which require a quarterly review of financial ratios and the Company is not
in violation of any such ratio covenants as at March 31, 2018.
The Company is not subject to capital requirements imposed by a regulator.
NOTE 22 ACQUISITION AND RESTRUCTURING COSTS
Acquisition and restructuring costs are summarized as follows:
Restructuring costs
Acquisition costs
Total
$
$
2018
33.7 $
6.9
40.6 $
2017
-
-
-
RESTRUCTURING COSTS
In fiscal 2018, the Company announced the closure of one facility. The final closure will occur in June 2018.
Costs associated with the closure recorded regarding restructuring activities are summarized in the table below:
Write down of non-current assets
Severance
Total
$
$
2018
10.6 $
23.1
33.7 $
2017
-
-
-
The write down of non-current assets, recorded in fiscal 2018, consists of impairment charges to property, plant and
equipment to bring them to the lower of carrying value and recoverable amount. The total after tax costs for fiscal 2018
are $25.1 million.
The restructuring costs recorded in fiscal 2018 represent estimated expenses required to restructure these operations.
Liabilities related to severance expenditures have been grouped within current liabilities on the balance sheet.
ACQUISITION COSTS
In connection with the acquisitions of SMI and Betin (Note 16) as well as the acquisition of the business of Murray
Goulburn Co-Operative Co. Limited (Note 25), the Company incurred acquisition costs of $6.9 million ($5.6 million after
tax) in fiscal 2018.
ANNUAL REPORT 2018
- 73 -
NOTE 23 SEGMENTED INFORMATION
The Company reports under three geographic sectors. The Canada Sector consists of the Dairy Division (Canada).
The USA Sector consists of the Cheese Division (USA) and the Dairy Foods Division (USA). Finally, the International
Sector consists of the Dairy Division (Argentina) and the Dairy Division (Australia).
As of April 1, 2017, the Canada Sector includes national and export revenues of ingredients manufactured in Canada.
The USA Sector includes national ingredient revenues, and export ingredient and cheese revenues of products
manufactured in the USA. Prior to April 1, 2017, these figures were presented in the Dairy Ingredients Division as part
of the International Sector. Accordingly, certain prior year’s figures have been reclassified to conform to the current
presentation.
These reportable sectors are managed separately as each sector represents a strategic business unit that offers
different products and serves different markets. The Company measures geographic and sector performance based
on earnings before interest, income taxes, depreciation, amortization, acquisition and restructuring costs.
Management has aggregated the Cheese Division (USA) and the Dairy Foods Division (USA) due to similarities in long-
term average return and correlated market factors driving pricing strategies that affect the operations of both divisions.
The divisions within the International Sector have been combined due to similarities in global market factors and
production processes.
The accounting policies of the sectors are the same as those described in Note 3 relating to significant accounting
policies.
INFORMATION ON REPORTABLE SECTORS
Years ended March 31
Revenues
Canada
USA
International
Earnings before interest, income taxes, depreciation, amortization, acquisition and
restructuring costs
Canada
USA
International
Depreciation and amortization
Canada
USA
International
Acquisition and restructuring costs
Financial charges, net
Earnings before income taxes
Income taxes
Net earnings
2018
2017
$
4,069.9 $
6,132.8
1,339.8
4,060.2
6,003.3
1,099.1
$
11,542.5 $
11,162.6
$
475.9 $
649.4
139.4
453.1
734.2
102.2
$
1,264.7 $
1,289.5
$
55.9 $
138.4
32.0
$
226.3 $
40.6
47.9
949.9
97.4
$
852.5 $
58.0
123.4
25.9
207.3
-
41.9
1,040.3
309.2
731.1
Certain prior year’s figures have been reclassified to conform to the current year’s presentation.
ANNUAL REPORT 2018
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NOTE 23
SEGMENTED INFORMATION (CONT’D)
GEOGRAPHIC INFORMATION
Total assets
Canada
USA
International
Net book value of property, plant and equipment
Canada
USA
International
Total liabilities
Canada
USA
International
March 31, 2018 March 31, 2017
$
$
$
2,061.8 $
4,597.0
1,344.2
8,003.0 $
592.3 $
1,361.4
266.3
$
2,220.0 $
$
$
2,002.8 $
818.1
384.4
3,205.3 $
2,116.0
4,198.3
1,282.3
7,596.6
580.3
1,305.7
279.5
2,165.5
2,157.7
798.8
317.2
3,273.7
Certain prior year’s figures have been reclassified to conform to the current year’s presentation.
NOTE 24 DIVIDENDS
During the year ended March 31, 2018, the Company paid dividends totalling $243.5 million, or $0.64 per share
($228.3 million, or $0.60 per share for the year ended March 31, 2017).
NOTE 25 SUBSEQUENT EVENTS
ACQUISITION OF THE ACTIVITIES OF SHEPHERD GOURMET DAIRY (ONTARIO) INC.
On May 23, 2018, the Company announced that it has entered into an agreement to acquire the activities of Shepherd
Gourmet Dairy (Ontario) Inc. (“Shepherd Gourmet”). Its activities are conducted at one manufacturing facility located in St.
Marys, Ontario (Canada). Shepherd Gourmet manufactures, markets and distributes a variety of specialty cheeses, yogurt,
as well as Skyr Icelandic-style yogurt in Canada.
The purchase price of $100 million, on a debt-free-basis, will be paid in cash from cash on hand and available credit
facilities.
For the twelve-month ended on April 30, 2018, Shepherd Gourmet generated revenues of approximately $57 million.
The transaction is subject to customary conditions and is expected to close in June 2018.
ACQUISITION OF THE BUSINESS OF MURRAY GOULBURN CO-OPERATIVE CO. LIMITED
On May 1, 2018, the Company completed the acquisition of the business of Murray Goulburn Co-Operative Co. Limited
(Murray Goulburn or MG), based in Australia. The MG acquisition will add to and complement the activities of the Dairy
Division (Australia) and enable the Company to strengthen its presence in Australia.
MG produces a full range of high-quality dairy foods, including fluid milk, milk powder, cheese, butter and dairy beverages,
as well as a range of ingredient and nutritional products, such as infant formula. MG supplies the retail and foodservice
industries globally with its flagship Devondale, Liddells and Murray Goulburn Ingredients brands.
The purchase price for the transaction is $1.29 billion (AU$1.31 billion) on a debt-free basis and was financed through the
Acquisition Facility (Note 10).
For the trailing twelve-month period ended on December 31, 2017, MG had revenues of $2.42 billion (AU$2.43 billion).
ANNUAL REPORT 2018
- 75 -
CORPORATE HEADQUARTERS
STOCK EXCHANGE
DIVIDEND POLICY
Saputo Inc.
6869 Métropolitain Blvd. East
Montréal, QC Canada H1P 1X8
Telephone: 514-328-6662
www.saputo.com
ANNUAL MEETING
OF SHAREHOLDERS
Tuesday, August 7, 2018, at 10 a.m.
Laval Room, Hotel Sheraton Laval
2440 Autoroute des Laurentides
Laval, QC Canada H7T 1X5
INVESTOR RELATIONS
Sandy Vassiadis
Telephone: 1-514-328-3141
1-866-648-5902
Email: investors@saputo.com
Toronto Stock Exchange
Symbol: SAP
TRANSFER AGENT
Computershare Trust
Company of Canada
1500, boul. Robert-Bourassa,
Suite 700, Montréal, QC
Canada H3A 3S8
Telephone: 514-982-7888
EXTERNAL AUDITORS
Deloitte LLP
Montréal, QC Canada
Saputo Inc. declares quarterly
cash dividends on common shares
at $0.16 per share, representing a
yearly dividend of $0.64 per share.
The Board of Directors reviews the
Company’s dividend policy from time
to time, but at least once annually,
based on financial condition, financial
performance, capital requirements and
such other factors as are deemed relevant
by the Board in its sole discretion.
SAPUTO.COM
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