Saputo pulls plug on European operations

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Saputo Inc. has decided to pull the plug on its modest operations in Europe after concluding that the market is too challenging.

But that doesn't mean the cheese producer is irrevocably giving up on the region, says president and chief executive officer Lino Saputo Jr.

"The European market is quite challenging. There is very limited access to milk, with a small pool of milk for a large number of processors," he said in an interview Monday.

"I'm not saying we will never be in Europe. But we would have to have a large and diverse product portfolio, with branded products," he said.

Canada's largest dairy processor said Monday it is closing its cheese manufacturing facility in Heiden, Germany and has entered into a 30-day consultancy period for the proposed closure of its plant in Newcastle Emly, Wales.

The German operation makes Italian specialty cheeses for retail, while the U.K. facility produces mostly mozzarella for the food-service market segment.

Montreal-based Saputo gingerly dipped its toe in the European market in 2006 by acquiring the German plant, then expanded in 2007 with the U.K. purchase.

The strategy was to observe and learn about the regulatory environment there before deciding if it was worth investing more to build a bigger platform, said Mr. Saputo.

Saputo has to be sure it can control its "own destiny," he said.

Meanwhile, the company remains focused on a growth strategy, especially in the United States and Latin America but also with an eye on Australia, he said.

"[Saputo]'s European investments were very typical of the Saputo way: the company viewed the European cheese market as attractive, and wanted to understand what operating dynamics were like prior to making any substantial investments in the region," RBC Dominion Securities analyst Irene Nattel said in a research note Monday.

Both European acquisitions "proved to be tough sledding, and the company made the decision that as attractive as the size of the consumer market might be, for processors this was not a region that would deliver the kind of shareholder value [Saputo] demands," she said.

"With subsequent acquisitions and investments in the U.S. and Argentina, and potential for continuing acquisitions notably in the U.S., in our view the decision to exit Europe makes a lot of sense."

Saputo said it will cost about $15-million after taxes to close the two plants.

The shutting of both facilities – resulting in the loss of about 140 jobs – would result in the avoidance of a loss of roughly $1.5-million in annual earnings before interest, income taxes, depreciation and amortization (EBITDA), the company said.