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While Canadians are barred from bringing meat into the country, visitors to the United States are allowed to import up to 20 kilograms per person of cheese and milk with a value of $20 or less.Christinne Muschi for The Globe and Mail

Saputo Inc. says cross-border shopping and higher dairy prices at home have caused a continued reduction in its milk and cheese sales volumes in Canada.

For the second consecutive quarter, Canadian per capita milk volumes declined in the second quarter, Saputo chief executive officer Lino Saputo Jr. said Wednesday during a conference call by the Montreal-based cheese and dairy giant.

"That is a reality of the Canadian market today."

The declines, which he declined to enumerate, have been in cheese and fluid milk categories beyond specialty products such as flavoured single-serve offerings.

The reduction was first noticed in April, following the latest price increase put in place a month earlier.

"We have seen that the overall market is shrinking. Either consumers are consuming less products or consumers are sourcing products from other areas which would be possibly as well cross-border shopping," he told analysts.

Saputo reported Wednesday that its profit increased 1 per cent to $127.1-million in the second quarter of its fiscal year even though revenue surged 15.5 per cent.

It earned 61 cents per diluted share for the period ended Sept. 30, 1 cent higher than in the prior year.

Despite the lower sales volumes, Saputo said the company has increased its market share in Canada.

While Canadians are barred from bringing meat and some foods back into the country, visitors to the United States are allowed to import up to 20 kilograms per person of cheese and milk with a value of $20 or less.

Those returning from countries other than the United States can bring back cheese but not milk products, including whey, cream and butter oil, according to a Canadian government website.

The high Canadian dollar has prompted many Canadians to cross the border in search of discounts for clothes and electronics. Rarely has there been any suggestion of higher purchases of food.

It's not the first time that Saputo has warned about the negative impact of higher prices. It said a 2008 federal regulation altering the composition of cheese would increase consumer prices and affect demand.

The change required cheese makers to use more full-fat milk and less of the ingredients typically labelled as milk solids.

Saputo said the company will continue to seek additional operating efficiencies to offset the impact of lower sales volumes on its results.

The company was expected to report 60 cents per diluted share in profit on $1.78-billion of revenue during the second quarter, according to analysts polled by Thomson Reuters.

Mark Petrie of CIBC World Markets said the results were "short of expectations" owing to lower profitability in the United States.

"The main factors for the shortfall in the U.S. were a tighter margin between cheese and milk prices, and a declining cheese price through the quarter," he wrote in a report.

Canadian operations were in line with forecasts.

Revenue increased by $240.7-million to $1.8-billion mainly owing to its DCI acquisition in the United States, higher average block market per pound of cheese, increased sales volumes and a more favourable dairy ingredients in the United States.

The Canadian/Argentina dairy segment earned $135.7-million on $1-billion of sales, compared with $132.8-million on $994-million of revenue in the prior year.

The strengthening of the Canadian dollar compared to the U.S. and Argentine currencies cut $5-million of revenue.

The U.S. segment's operating profit increased slightly to $74.4-million as revenue grew 39 per cent to $723.7-million. The grocery segment's profit tumbled 38 per cent to $2.9-million as revenue decreased to $35.2-million from $37.8-million a year earlier.

"Despite continued challenging market conditions, we maintained our strong financial position, strengthened our balance sheet and increased cash flows and for this I'm pleased with our results," the president and CEO said.

California's change in its milk pricing formula that took effect Sept. 1, has begun to affect operating profit. Prices will be set according to variations in the whey market instead of a fixed formula.

The impact would have been $6-million (U.S.) had they been in place since the beginning of the fiscal year.

"In the upcoming quarters, we will work on implementing various measures in an effort to diminish the impact of this decision," he said.

Saputo is the world's 12th-largest dairy processor and Canada's largest with more than 10,200 employees. It produces, markets and distributes cheese, milk, yogurt and dairy products at 47 plants in Canada, the United States, Europe and Argentina. It is also Canada's largest snack cake producer.

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