Morningstar DBRS Upgrades Credit Ratings on Saputo Inc. to BBB (high) From BBB, Changes Trends to Stable From Positive

DBRS Limited (Morningstar DBRS) upgraded the Issuer Rating of Saputo Inc. (Saputo or the Company) and the credit rating on the Company's Senior Unsecured Notes (the Notes) to BBB (high) from BBB, and changed the trends on both credit ratings to Stable from Positive.

KEY CREDIT RATING CONSIDERATIONS
The credit rating actions reflect Morningstar DBRS' expectations of an ongoing improvement in Saputo's credit risk profile through operating efficiency and profitability gains stemming from the Company's network optimization initiatives. The credit rating upgrades and Stable trends also reflect Morningstar DBRS' opinion that Saputo will maintain key credit metrics in aggregate at a level supportive of the new BBB (high) credit rating category on a normalized and sustained basis.

On July 18, 2024, Morningstar DBRS changed the trends on Saputo's Issuer Rating and the credit rating on the Notes to Positive from Stable, and confirmed the credit ratings at BBB. At that time, Morningstar DBRS commented that, should key credit metrics improve to and be maintained at a level commensurate with a BBB (high) credit rating (i.e., debt-to-EBITDA of around 2.5 times (x)), the credit ratings could be upgraded over the course of the year.

Since then, Saputo reported its full-year results for the fiscal year ended March 31, 2025 (F2025). Revenue grew to more than $19 billion in F2025 from approximately $17.3 billion in the fiscal year ended March 31, 2024 (F2024), attributable to volume growth and higher selling prices. EBITDA margins declined by approximately 50 basis points year over year (YOY) to 8.2% in F2025, primarily attributable to unfavourable milk-cheese spreads in the U.S. and higher milk and production costs in Argentina. These pressures more than offset the benefits of higher selling prices; a favourable product mix; and operating efficiency benefits, including improved capacity utilization and productivity, supply chain improvements, and cost-saving initiatives. Consequently, EBITDA grew toward $1.6 billion in F2025 from approximately $1.5 billion in F2024. Although EBITDA growth fell modestly below Morningstar DBRS' expectations of $1.7 billion, key credit metrics were in line with Morningstar DBRS' projections (i.e., debt-to-EBITDA improved to 2.5x in F2025 from 2.8x in F2024), attributable to EBITDA growth and debt repayment.

CREDIT RATING DRIVERS
If Morningstar DBRS became concerned that key credit metrics could deteriorate below the range considered appropriate for the BBB (high) credit rating category in aggregate (i.e., debt-to-EBITDA increased to more than 3.0x, along with a commensurate deterioration in other key credit metrics) on a sustained basis because of weaker-than-expected operating performance and/or more aggressive financial management, the credit ratings could be pressured.

Conversely Morningstar DBRS could take a positive credit rating action in the medium term should Saputo's business risk profile strengthen meaningfully, coupled with a commensurate improvement in key credit metrics on a normalized and sustained basis.

EARNINGS OUTLOOK
Morningstar DBRS forecasts revenue to grow to approximately $19.5 billion in F2026 and $20.0 billion in F2027, attributable to price and volume growth. Saputo's network optimization initiatives should continue to drive capacity and productivity improvements and operating efficiency gains, leading to EBITDA margin recovery in F2026 and growth in F2027. Morningstar DBRS anticipates that higher selling prices, a favourable product mix, cost-saving initiatives, and the U.S. Department of Agriculture's new milk pricing formula for all federal milk marketing orders that Saputo operates in in the U.S. should also positively affect EBITDA margins. These benefits should more than offset continued milk and dairy market price volatility, increasing labour costs, and higher advertising and promotional spend. Consequently, Morningstar DBRS projects EBITDA to grow to approximately $1.7 billion and $1.8 billion in F2026 and F2027, respectively. Although the direct impact of the considerable uncertainty about potential shifts in U.S. trade policy on Saputo's operating performance is limited, Morningstar DBRS acknowledges that the indirect impact thereof on consumer sentiment could affect the Company's volumes and product mix. While this uncertainty presents a potential downside risk to Morningstar DBRS' forecasts, Morningstar DBRS believes that Saputo will have sufficient headroom to cushion any potential effects thereof within its new BBB (high) credit rating category.

FINANCIAL OUTLOOK
Morningstar DBRS forecasts free cash flow (FCF) (after dividends but before changes in working capital and principal lease payments) to increase to more than $600 million and $700 million in F2026 and F2027, respectively, from $520 million in F2025. These projections are based on Morningstar DBRS' expectations that (1) operating cash flow will continue to trend in line with earnings growth; (2) capital expenditure (capex) tapers down to approximately $360 million in F2026 and stabilizes at around this level thereafter following the completion of the Company's four-year capex plan that began in F2022; and (3) the dividend policy remains consistent with previous years. In line with its investments in operating efficiency, Saputo sold its King Island Dairy business (the King Island Dairy sale) for approximately $27 million on May 9, 2025. Morningstar DBRS believes that the Company will use its FCF (after changes in working capital and principal lease payments), combined with proceeds from the King Island Dairy sale, for share repurchases such that key credit metrics, in aggregate, remain appropriate for the new BBB (high) credit rating category.

CREDIT RATING RATIONALE
-- Comprehensive Business Risk Assessment (CBRA): BBBH/BBB
Saputo's CBRA is supported by the Company's leading market position, diversification of operations by distribution channel and geography, and strong FCF generation. The CBRA also reflects Saputo's exposure to volatile commodity prices, the highly competitive dairy processing industry, and the risks associated with the mature geographies in which Saputo operates, the largest of which, Canada and the U.S., are heavily regulated.

-- Comprehensive Financial Risk Assessment (CFRA): A/AL
Saputo's A/AL CFRA reflects Morningstar DBRS' expectations that the Company will maintain key credit metrics at a level supportive of the BBB (high) credit rating category in aggregate.

-- Intrinsic Assessment (IA): BBBH
The IA is based on Saputo's CBRA and CFRA. Considering peer comparisons, among other factors, Morningstar DBRS places Saputo's IA within the IA range.

-- Additional Considerations: None
There were no additional considerations that had a positive or negative effect on Saputo's credit ratings.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
Morningstar DBRS considers Climate and Weather Risks a Relevant negative environmental factor for Saputo. Extreme weather events could result in (1) reduced availability of milk because of heat stress on livestock or reduced availability of quality feed crops and/or water, and (2) operational disruptions that could consequently affect the Company's operating performance and cash flow. The potential impact of such climate-related physical risks is mitigated by the global diversity of Saputo's milk supply, its capital investments to defend against natural disasters, and insurance. 

There were no Social or Governance factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (May 16, 2025) at https://dbrs.morningstar.com/research/454196.

Further details on the Issuer's Intrinsic Assessment can be found at https://dbrs.morningstar.com/research/456053.

Notes:
All figures are in Canadian dollars unless otherwise noted.

Morningstar DBRS applied the following principal methodology:
-- Global Methodology for Rating Companies in Manufacturing and Production Industries (February 3, 2025)
https://dbrs.morningstar.com/research/447185.

Morningstar DBRS credit ratings may use one or more sections of the Morningstar DBRS Global Corporate Criteria (February 3, 2025) https://dbrs.morningstar.com/research/447186 which covers, for example, topics such as holding companies and parent/subsidiary relationships, guarantees, recovery, and common adjustments to financial ratios.

The following methodologies have also been applied:
-- Morningstar DBRS Criteria: Approach to ESG Factors in Credit Ratings (May 16, 2025),
https://dbrs.morningstar.com/research/454196

-- Morningstar DBRS Global Corporate Criteria (February 3, 2025),
https://dbrs.morningstar.com/research/447186

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

A description of how Morningstar DBRS analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/431153.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at info-DBRS@morningstar.com.

The credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

Morningstar DBRS had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

For more information on Morningstar DBRS' policy regarding the solicitation status of credit ratings, please refer to the Credit Ratings Global Policy, which can be found in the Morningstar DBRS Understanding Ratings section of the website: https://dbrs.morningstar.com/understanding-ratings.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS trends and credit ratings are under regular surveillance.

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

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