Saputo Company was founded in 1954 and is based in Montreal, Canada. The company deals with the production and sale of an extensive variety of dairy products. The company is ranked the twelfth largest company among companies that process dairy products. It is the largest dairy processor in Canada. The rapid growth of the company is attributed to mergers and acquisition. The company has engaged about 10,100 employees and it currently owns a total of 47 plants. Out of the 47 plants, 30 plants are spread across the dairy product sectors of Canada, Europe and Argentina. Sixteen plants are located in the dairy products sector of the USA. Due to its expansive strategies, the company has been featured as one of the most successful food processing companies in Canada, America and Europe.
Besides, the company is facing an interesting opportunity for growth due to the expansion of its customer base. Due to the existence of a gap in the provision of a wide range of pasteurized dairy products, the founder was inspired to create a flexible dairy company, hence the formation of Seputo Incoperation. The company has also diversified into another secondary line business namely, for imports of dry food products for resale in Canada. The products of the company are sold, both in the domestic and international markets.
Foreign Operating Activities
The operating activities of the company the past two years
From the table, the company net financial results from foreign markets declined during the two year period. Further, the company had other incomes which originated from the sale of scrap, foreign exchange gains and proceeds on the sale of property, plant and equipment. The company did not have any extraordinary gains or losses, income from discontinued operations or cumulative effect of accounting changes during the years.
Foreign Operations Characteristics
Due to an increase in the market cheese price in USA by $0.20, the revenues of the company in the American market increased in the last fiscal year. The revenues from the company’s Argentina branch decreased in the year 2012 as a result of a sudden increase in the milk market price. As of 2012, the stronger Canadian dollar against the weaker US dollar negatively impacted the revenues of the company in the USA as compared to the previous years (ABC News Network 1). In fact, the business agreement between the company and Morningstar Foods in the US in 2012 helped the company to consolidate its daily products market share in a competitive market (ABC News Network 1).
Analyzing of Foreign Operating Activities
The table below shows values of various ratios for the two year period:
From the table, it is evident that the company had a decline in profitability as shown by a decline in gross profit, operating profit and net profit margin. Return on total stockholders’ equity also declined due to the decline in profitability. However, the level of activity of the company increased as shown an increase in activity ratios, such as receivable turnover, inventory turnover and asset turnover.
Risks and Uncertainties and Risks in Saputo’s Foreign Divisions
The Argentina division has been unable to addresses “challenges mitigating the increasing cost of milk as raw material, while remaining competitive with selling prices in the export market” (Saputo Inc 1). On the other hand, the weak US dollar has affected the revenues since they have to repatriate to Canada in terms of the Canadian dollar. Besides, the US division is facing the challenge of balancing the costs of operation and the market price of its dairy products. Despite the current growth in revenues from this division, the challenge of getting a constant supply of milk at competitive prices has remained a hindrance towards its expansionary policies (ABC News Network 1).
Despite the availability of opportunities, the company faces a number of market risks that cast doubt on its ability to tap the opportunities in the divisions. First, is the economic conditions. Down swings slow down the rates of growth of the company, especially in the US and Europe. Secondly, competition from local established firms reduces the market share and revenues for the company such as McCormick, Smuckers, and Bunge of America. Thirdly, since the industry is capital intensive, obtaining financing for rapid and vigorous expansion is a challenge. For instance, debt financing is limited to a fixed number of years. One source of financing cannot be adequate for the nature of the business (Saputo Inc 2).
Fourthly, rapid changes in technology are a major threat to the continuity of the business because the business relies on technological developments in order to remain competitive amidst multinational players in the dairy and beverage industry. Investing in the latest technology is a risk to the company’s foreign divisions since the returns against investments have remained relatively unstable. Also, attracting and retaining highly qualified personnel is a key risk for the company (Gibson 6). Finally compliance with health, safety, environmental and other regulations is a major hindrance to the future success of the company considering the recent decision by the California agricultural department to increase milk prices and stricter health standard (Eugine and John 12). These regulations are projected to worsen the business environment since commodity prices to suppliers are often sticky downwards (ABC News Network 1).
Considering the fact that the company operates in more than two markets, it is exposed to currency and interest risks. If left unmanaged, the risks can impact greatly the earnings of the company. The company does not trade in financial instruments. From a review of the capital structure of the company, it is observable that the company has fixed variable rate of debt. Upon review of the financial statements of the company, it is evident that the pretax profit of the company will change by about C$5. 4 million for a percentage change in the interest rate applicable to the variable rate of debt after tax effects, equity changes by C$3. 2 million (ABC News Network 1).
Currency exchange risk is restricted to risks arising from the translation. There are risks arising transaction since the company does not engage in any foreign transaction (Siddiqui 23). The company reports in Canadian pounds, while most of the assets and liabilities are in US dollars. The company’s exposure to currency risk is quite glaring because the most transactions are carried out in the US currency (Gibson 17). Besides, the company hedges on the translation of profits arising from the US market.
Summary of Foreign Risk Management Strategies
Since currency exchange risk is significant, trading transaction should not be treated in isolation. From the review, the company is significantly exposed to interest rate changes. The interest rates are managed by the company through interest rate swaps. The company has a comprehensive insurance cover for its operational risks. Through this the risks are mitigated through transfer of effects to the insurance company. In addition, the company has a structured decision making organ that ensures that every decision made is supported by rationale and in the best interest of the company (ABC News Network 1).
Recommendations for Improving Risk Strategies for Foreign Operations
Negotiation of Forward Contracts
Through this, the company will be in a position to sign future contracts at current market prices so as to minimize the costs of increases in market prices since the company operates in a volatile market.
Preparing the Company’s Financial Statements in Currency of the Foreign Branch
Thruogh this approach, losses from imbalances during financial statement preparation will be minimized in the face of currency fluctuations.
Hedging
Through hedging, the company will be in a position to take opposite but equal positions in the future and cash markets in the foreign divisions. This strategy will protect the company’s capital from market dynamics such as inflation on the foreign markets through proactive investment in notes, bonds, and shares.
Works Cited
ABC News Network 2013, Company Profile. Web.
Eugene, Brigham and John Michael.Financial management theory and practice, USA: South Western Cengage Learning, 2009. Print.
Gibson, Charles. Financial reporting and analysis: using financial accounting information, United States of America: South-Western Cengage Learning, 2010. Print.
Saputo Inc. Saputo Inc.: Financial Results Fiscal 2013 Third Quarter Ended December 2012 Web.
Siddiqui, Siddiqui. Managerial economics and financial analysis. New Delhi: New Age International (P) Limited, 2005. Print.