Saputo Inc.
TSX : SAP

Saputo Inc.

August 02, 2005 11:00 ET

Saputo Inc.: Financial Results for the First Quarter of Fiscal 2006-Net Earnings Down By 7%

MONTREAL, QUEBEC--(CCNMatthews - Aug. 2, 2005) - Saputo Inc. (TSX:SAP) - All amounts are in Canadian dollars unless otherwise indicated

Saputo Inc. released today its financial results for the first quarter of fiscal 2006, which ended June 30, 2005.



- Net earnings closed at $54.2 million, down 7.0% compared to the
same period last year.

- Consolidated revenues totalled $1.007 billion, a decrease of 1.2%
over the $1.019 billion posted one year earlier. Revenues from our
US Dairy Products Sector were negatively affected by a lower
average block market(i) per pound of cheese and the appreciation of
the Canadian dollar compared to the same period last year. The
decrease offset a revenue increase in our Canadian and Other Dairy
Products Sector resulting from increased selling prices, higher
sales volumes, as well as the inclusion of the activities of
Fromage Cote S.A. and Distributions Kingsey Inc., acquired on April
18, 2005. Revenues from our Grocery Products Sector were $2.6
million lower compared to the same period last year.

- Consolidated EBITDA(ii) for the first quarter of fiscal 2006
totalled $96.7 million, a decrease of $10.3 million from the $107.0
million posted one year earlier. Even though our Canadian and Other
Dairy Products Sector increased its EBITDA by $10.3 million, our US
Dairy Products Sector offset this increase and decreased the
consolidated EBITBA, mainly due to unfavourable market conditions.

- EBITDA for the Canadian and Other Dairy Products Sector rose to
$65.8 million, up 18.6% or $10.3 million over the same period last
year. The EBITDA margin increased to 10.1% this year compared to
9.1% last year due mainly to savings derived from rationalization
activities undertaken in fiscal 2005 and increased sales volumes.

- EBITDA for the US Dairy Products Sector totalled $25.3 million,
resulting in a $19.2 million or 43.1% decrease compared to $44.5
million for the same period last year. A lower average block market
per pound of cheese, a less favourable relationship between the
average block market per pound of cheese and the cost of milk as
raw material, the appreciation of the Canadian dollar along with
increased promotional, fuel and ingredient costs compared to the
same quarter last year were the major factors contributing to the
decrease. During the first quarter of fiscal 2006, the average
block market per pound of cheese was US$0.49 lower compared to the
same period last year.

- EBITDA for the Grocery Products Sector stood at $5.6 million, a
decrease of $1.4 million compared to the same quarter last year.
The EBITDA margin went from 17% to 14.5% for the same period. The
division incurred costs of $1.2 million related to additional
marketing expenses and $0.5 million related to the pension fund in
the first quarter of fiscal 2006 as compared to the first quarter
of last fiscal year.

- Cash generated before changes in non-cash operating working capital
items totalled $73.4 million, a decrease of $3.4 million from the
corresponding period last year. The decrease is a direct result of
lower earnings generated in the first quarter compared to the same
quarter last year.

- During the first quarter of fiscal 2006, the Company acquired, for
a cash consideration of $83.5 million, the activities of Fromage
Cote S.A. and Distributions Kingsey Inc., a cheese manufacturer
operating in Canada, along with the activities of Schneider Cheese,
Inc., a cheese manufacturer operating in the United States.

(i) "Average block market" is the average daily price of a 40 pound
block of Cheddar traded on the Chicago Mercantile Exchange (CME),
used as the base price for the cheese.

(ii)Measurement of results not in accordance with generally accepted
accounting principles The Company assesses its financial
performance based on its EBITDA, this being earnings before
interest, income taxes, depreciation and amortization. EBITDA is
not a measurement of performance as defined by generally accepted
accounting principles in Canada, and consequently may not be
comparable to similar measurements presented by other companies.


For more information on the results of the first quarter of fiscal 2006, we invite you to read the attached interim report for the quarter ended June 30, 2005, which forms an integral part of this press release.

Dividends

The Board of Directors revised its policy and raised Company dividends. The quarterly dividend will therefore rise to $0.18 per share from $0.15 per share, for a total of $0.72 per share annually, representing a 20% increase. This dividend will become effective for the dividend payment of September 2, 2005 to shareholders of record on August 19, 2005.

Conference Call

A conference call to discuss the first quarter of fiscal 2006 results will be held on August 2, 2005 at 2:00 PM, Eastern time. To participate in the conference dial 1 800 525 6384. To ensure your participation, please dial in approximately five minutes before the call.

To listen to this call on the web, please enter http://events.onlinebroadcasting.com/saputo/080205/index.php in your web browser.

For those unable to participate, an instant replay will be available until midnight, August 9, 2005. To access the replay dial 1 800 695 2814, passcode 7708496. The conference call will also be archived on the Saputo web site at www.saputo.com.

About Saputo

Solid foundations, a commitment to excellence and dedication to growth are the keystones that have enabled Saputo to evolve as the largest dairy processor in Canada, one of the most important cheese producers in North America, the third dairy processor in Argentina and the largest snack cake manufacturer in Canada. Our products, manufactured in 45 plants that stretch from one end of the Americas to the other, are marketed under such well-known brand names as Saputo, Armstrong, Caron, Cayer, Kingsey, Dairyland, Baxter, Nutrilait, Stella, Frigo, Dragone, Treasure Cave, La Paulina, Ricrem and Vachon. Saputo Inc. is a public company whose shares are listed on the Toronto Stock Exchange under the symbol SAP. Propelled by the same sense of dedication that motivates our 8,500 employees to surpass themselves day after day, we will continue to successfully craft our future. Visit our Web site at www.saputo.com.


Message to Shareholders


We are presenting the results for the first quarter of fiscal 2006, which ended on June 30, 2005.

Net earnings closed at $54.2 million, down 7.0% compared to the same period last year.

Earnings before interest, income taxes, depreciation and amortization (EBITDA(i)), totalled $96.7 million, a decrease of $10.3 million from the $107.0 million posted one year earlier. The decrease is attributed to our US Dairy Products Sector. A lower average block market(ii) per pound of cheese, a less favourable relationship between the average block market per pound of cheese and the cost of milk as raw material, the appreciation of the Canadian dollar, along with increased promotional, fuel and ingredients costs compared to the same quarter last year were the major factors contributing to the decreased EBITDA in our US Dairy Products Sector. All divisions within our Canadian and Other Dairy Products Sector showed positive EBITDA growth in the first quarter of fiscal 2006 compared to the first quarter of fiscal 2005. Savings derived from rationalization activities undertaken in fiscal 2005, increased sales volumes, and the inclusion of Fromage Cote, acquired on April 18, 2005 were the main elements positively affecting EBITDA. In our Grocery Products Sector, EBITDA decreased by $1.4 million over the same period last year, due mainly to additional marketing expenses.

Revenues totalled $1.007 billion, a decrease of 1.2% over the $1.019 billion posted one year earlier. Revenues from our US Dairy Products Sector were negatively affected by a lower average block market per pound of cheese and the appreciation of the Canadian dollar compared to the same period last year. The decrease offset a revenue increase in our Canadian and Other Dairy Products Sector resulting from increased selling prices, higher sales volumes, as well as the inclusion of Fromage Cote. Revenues from our Grocery Products Sector were $2.6 million lower compared to the same period last year.

During the first quarter of fiscal 2006, the Company acquired the activities of Fromage Cote S.A. and Distributions Kingsey Inc., a cheese manufacturer operating in Canada, along with the activities of Schneider Cheese, Inc., a cheese manufacturer operating in the United States.

Outlook

In our Dairy Products Division (Canada), we remain determined to capitalize on the increasing consumer interest for specialty cheeses and in so doing maximize the benefit of the acquisition of Fromage Cote. We have thus put in place, at the end of June 2005, an operating structure whose focus is to further develop our specialty cheese products offering. This structure allows us to have dedicated employees in the manufacturing, sales and marketing activities of our specialty business. We intend to use our manufacturing expertise in order to bring to market new products. We strongly believe in this category of cheese products and we intend to benefit from its development. As for our fluid milk activities, we will direct our efforts in solidifying our customer base with value-added products like yogourts and flavoured milk. We are going to continue to develop the vending machine segment as we have been doing for the last two years. We will also increase our efforts to further develop our presence in Ontario and Quebec.

In Argentina, we continue to develop both the national and international markets. Our capital expenditure program is progressing as planned and will allow us to better manage our by-products.

In the United States, we faced adverse market conditions in the first quarter, resulting in a decrease in our profitability, even though we increased our sales volumes. We have been addressing this issue on an ongoing basis and intend to put in place certain mechanisms that should help minimize these adverse market conditions. In the first quarter, important promotional expenses were incurred in the retail segment, in which we intend to benefit from increased sales volumes in the current fiscal year. The integration of Schneider Cheese is progressing and will allow us to extend our product offering in the string cheese category.

In our Grocery Products Sector, we will continue to pursue our objective to increase the value of our products through our research and development activities. During the first quarter of fiscal 2006, we initiated the investments forecasted in our three year-plan, totalling $20 million, for the development and redeployment of our brands as discussed in the 2005 annual report. We are satisfied with the results so far and we will continue to move forward with this program. We will also pursue the introduction of our products in the United States through alternate avenues as our efforts in the first quarter of fiscal 2006 led to promising results.

Finally, we are evaluating potential acquisitions of dairy operations to pursue our growth.

Dividends

The Board of Directors revised its policy and raised Company dividends. The quarterly dividend will therefore rise to
$0.18 per share from $0.15 per share, for a total of $0.72 per share annually, representing a 20% increase. This dividend will become effective for the dividend payment of September 2, 2005 to shareholders of record on August 19, 2005.

Management's Analysis

The goal of this management report is to analyze the quarter ended June 30, 2005. It should be read in conjunction with the audited consolidated financial statements and accompanying notes for the fiscal year ended March 31, 2005, as well as the Company's management report for the same period. This report takes into account every material element to be considered between June 30, 2005 and August 2, 2005, the date of this report, on which it was approved by the Board of Directors of Saputo Inc. (the "Company" or "Saputo"). This disclosure document contains management's analysis on forward-looking statements. Caution should be used in the interpretation of management's analysis and statements, since management often makes reference to objectives and strategies that contain a certain element of risk and uncertainty. Due to the nature of our business, the risks and uncertainties associated with it could cause the results to differ materially from those stated in such forward-looking statements.

Operating Results

Consolidated revenues for the quarter ended June 30, 2005 totalled $1.007 billion, a decrease of $12 million or 1.2% over the $1.019 billion for the same quarter last year. Revenues from our US Dairy Products Sector declined by approximately $55 million. The appreciation of the Canadian dollar and an average block market per pound of cheese of US$1.52 compared to US$2.01 for the same quarter last year, were the major factors negatively affecting the revenues of the US Dairy Products Sector. These factors offset additional revenues generated by an increase in sales volumes in our US Dairy Products Sector compared to the same period last year. Revenues from our Canadian and Other Dairy Products Sector increased by approximately $46 million in comparison to the corresponding period last fiscal year. This increase is attributed to higher selling prices in all divisions within the sector, sales volume increases in our Canadian fluid milk activities, and revenues generated by Fromage Cote, acquired on April 18, 2005. Revenues from our Grocery Products Sector decreased by approximately $3 million compared to the same period last year. The increase in the base selling price for our economy- and family-size products announced on February 7, 2005, affected our sales volumes compared to the same period last year.

Consolidated earnings before interest, income taxes, depreciation and amortization (EBITDA) for the first quarter of fiscal 2006 stood at $96.7 million, a decrease of $10.3 million or 9.6% from the $107.0 million posted in the corresponding period last year. The decrease is attributed mostly to our US Dairy Products Sector, which decreased by approximately $19 million compared to the same period last year. A lower average block market per pound of cheese, a less favourable relationship between the average block market per pound of cheese and the cost of milk as raw material, the appreciation of the Canadian dollar, along with increased promotional, fuel and ingredient costs compared to the same quarter last year were the major factors contributing to the decreased EBITDA in our US Dairy Products Sector. The EBITDA of our Canadian and Other Dairy Products Sector increased by approximately $10 million compared to the same period last year. Rationalization activities undertaken in fiscal 2005 in our Canadian fluid milk activities, increased sales volumes also in our Canadian fluid milk activities, EBITDA generated from Fromage Cote, acquired on April 18, 2005, and more favourable EBITDA generated by our Argentina operations were the main factors contributing to the EBITDA increase in our Canadian and Other Dairy Products Sector. The EBITDA of our Grocery Products Sector decreased by about $1.4 million due to additional pension charges, increased marketing expenses, and lower sales volumes.

The EBITDA margin decreased from 10.5% in the first quarter of fiscal 2005 to 9.6% in the first quarter of fiscal 2006. Lower EBITDA margins generated in our US Dairy Products Sector and our Grocery Products Sector negatively affected the consolidated EBITDA margin in comparison to the corresponding period last year.

Other Consolidated Results Items

Depreciation expense stood at $17.9 million for the first quarter of fiscal 2006, up by $0.9 million compared to the same period last year. The increase is attributed to Fromage Cote, acquired on April 18, 2005, and the additional depreciation related to additions made to fixed assets in the prior fiscal year, specifically in our Canadian and Other Dairy Products Sector.

Net interest expense decreased by $2.0 million over the quarter ended June 30, 2005 as compared to the same period last year. The reduction is essentially explained by the decrease in interest on long-term debt as a result of lower long-term debt levels in comparison to the same period last year.

Income taxes totalled $18.3 million, reflecting an effective rate of 25.2%, compared to 28.6% for the corresponding period last year. The reduced rate is the result of a greater portion of our taxable earnings being generated in Canada in comparison to the same period last year, which is subject to lower tax rates than the United States.

Net earnings reached $54.2 million, down $4.1 million as compared to the same period last year. This reflects the various factors analyzed above.

Cash and Financial Resources

Over the first quarter of fiscal 2006, cash generated by operating activities before changes in non-cash working capital items totalled $73.4 million, a decrease of $3.4 million from the corresponding period last year. The decrease is a direct result of lower net earnings generated in the first quarter compared to the same quarter last year. Non-cash working capital items used $12.9 million for the first quarter of fiscal 2006, compared to a usage of $57.9 million for the first quarter of fiscal 2005. This discrepancy is explained by an increase in the inventory of our US Dairy Products Sector, which occurred in the first quarter of fiscal 2005, to replenish several aged cheese categories and string cheese products.

Investment activities used $83.5 million to acquire the activities of Fromage Cote S.A. and Distributions Kingsey Inc., a cheese manufacturer operating in Canada, along with the activities of Schneider Cheese, Inc., a cheese manufacturer operating in the United States. The Company added $14.6 million in fixed assets during the quarter.

Financing activities comprised of an increase in bank loans for $1.5 million and the issuance of shares for a cash consideration of $8.3 million, as part of the Stock Option Plan.

As at June 30, 2005, working capital stood at $439.8 million, compared to $452.6 million as at March 31, 2005. The decrease is attributed essentially to the acquisition of the activities of Fromage Cote S.A. and Distributions Kingsey Inc. and Schneider Cheese, Inc., which were paid entirely by cash available and cashflows generated by the Company.

As at June 30, 2005, our interest bearing debt-to-equity ratio stood at 0.22, relatively unchanged from the 0.21 as at March 31, 2005.

The Company currently has at its disposal bank credit facilities of $234 million, $16.0 million of which are drawn. The Company also has $15.5 million of cash on hand. Should the need arise, the Company can make additional financing arrangements to pursue growth through acquisitions.

Balance Sheet

With regards to the balance sheet items as at June 30, 2005 that varied compared to those as at March 31, 2005, we should note that the variation in most items is principally due to the acquisition of the activities of Fromage Cote S.A. and Distributions Kingsey Inc. and of Schneider Cheese, Inc. From an operations perspective, inventories increased in both our US Dairy Products Sector and our Canadian operations, due to the temporary build-up of inventory. We maintain our objective indicated in our 2005 annual report to reduce inventories by $35 million throughout fiscal 2006. The Company's total assets stood at $2.236 billion as at June 30, 2005, compared to $2.133 billion as at March 31, 2005.

Share Capital Information

Share capital authorized by the Company is comprised of an unlimited number of common and preferred shares. The common shares are voting and participating. The preferred shares can be issued in one or more series, and the terms and privileges of each series must be determined at the time of their creation.



Authorized Issued as at Issued as at
June 30, 2005 July 22, 2005
---------------------------------------------------------------------
Common shares Unlimited 104,940,926 104,992,599

Preferred shares Unlimited None None

Stock options 5,233,777 5,173,802


Follow-up on Certain Specific Items of the Analysis

For an analysis of off-balance sheet arrangements, guarantees, contractual obligations, related party transactions, accounting standards, critical accounting policies and use of accounting estimates as well as risks and uncertainties, we encourage you to consult the comments provided in the 2005 annual report on pages 31 to 37 of the management's analysis, since there were no notable changes during the first quarter of fiscal 2006.

Information by Sector

Canadian and Other Dairy Products Sector

This sector consists of our Dairy Products Division (Canada) as well as our Dairy Products Division (Argentina).

For the quarter ended June 30, 2005, revenues for the Canadian and Other Dairy Products Sector totalled $652.8 million, an increase of 7.5%, or $45.7 million, compared to $607.1 million for the same period last year. Approximately $23 million of the increase comes from the recent acquisition of Fromage Cote, completed on April 18, 2005, and contributed to revenues for 11 weeks in the quarter. Fromage Cote revenues are in line with the annual revenues generated at the time of the acquisition. About $19 million in additional revenues were generated in our Dairy Products Division (Canada) by the increase in our selling price, in accordance with the increase in the cost of milk as raw material.

In Canada, our cheese activities volumes were lower compared to last year, essentially due to non-recurring sales that occurred in the first quarter of fiscal 2005. In our fluid milk activities, revenues were higher this quarter compared to the same period last year, due to higher sales volumes in the fluid milk, cream and yogourt categories. In addition, we showed a slight increase over last year in the drinks category sold under the Sunny Delight(iii) license. In Argentina, revenues this quarter increased slightly compared to the same period last year, due to a combination of an increase in the selling price, in accordance with the increase in the cost of milk as raw material, and slightly lower volumes.

With the exclusion of revenues from the acquisition of Fromage Cote, revenues in the first quarter of fiscal 2006 were higher by approximately $53 million, or 9.2%, compared to the fourth quarter of fiscal 2005. Sales volumes in the Canadian fluid milk activities continued to increase. The Canadian cheese activities saw their sales volumes increase through the return of certain volumes. In the fourth quarter of fiscal 2005, our cheese sales volumes were negatively affected as a result of the increase in the price of cheese products due to the increase in the cost of milk as raw material, which occurred in February 2005. In the first quarter of fiscal 2006, these volumes were recuperated.

For the quarter ended June 30, 2005, EBITDA rose to $65.8 million, up 18.6% or $10.3 million over the same period last year. The EBITDA margin increased to 10.1% this year compared to 9.1% last year.

Our Canadian and Other Dairy Products Sector performed well compared to the same period last year. Our manufacturing efficiencies remain a priority and we continue to be a low-cost processor. The recent acquisition of Fromage Cote has contributed to the overall EBITDA, but not at the same EBITDA margin as in our other Canadian dairy activities. The rationalization activities completed in the prior year have started to show increased savings in the quarter of approximately $2 million compared to the same period last year. In addition, approximately $1 million in expenses was incurred last year as a result of processing excess milk in Western Canada in acting as last-resort processor, in which this expense was not incurred this year. Furthermore during this first quarter of fiscal 2006, rationalization costs of approximately $1 million were expensed. Revenues pertaining to our Argentina activities continue to show improved EBITDA margins, benefiting from the integration process and capital investments made in the prior fiscal year.

US Dairy Products Sector

Revenues for the US Dairy Products Sector totalled $315.2 million for the quarter ended June 30, 2005, representing a $55.3 million or 14.9% decrease from the $370.5 million posted for the same period one year earlier. One of the main reasons for this decrease in revenues is that the average block market per pound of cheese in the first quarter was US$0.49 lower compared to the same period last year, trimming revenues by approximately $71 million. The appreciation of the Canadian dollar eroded approximately $30 million in revenues. On the other hand, our sales volumes for the quarter increased by 11.5% mainly in the foodservice and industrial segment. In the retail segment, volumes for the quarter were slightly higher compared to the same period last year. Heavy promotional efforts were made in this quarter in supporting our retail brands as well as continued introductions of new products, such as Juniors and Nacho Frigo Cheese Heads and extending our Frigo Cheese Heads product line. The recent acquisition of Schneider Cheese, Inc. acquired on May 27, 2005, accounted for approximately 1% of the 11.5% volume increase in the quarter.

For the quarter ended June 30, 2005, EBITDA totalled $25.3 million, resulting in a $19.2 million or 43.1% decrease compared to $44.5 million for the same period last year. During the first quarter of fiscal 2006, the average block market per pound of cheese was US$0.49 lower compared to the same period last year, creating a negative effect on the absorption of fixed costs. The average block market per pound of cheese declined in 7 of the 13 weeks of the quarter, creating a less favourable relationship between the average block market per pound of cheese and the cost of milk as raw material compared to the same period last year. With regards to the inventories, overall variations in the average block market per pound of cheese had an impact on their realization. These factors combined had a negative impact of approximately $11.5 million on EBITDA. The appreciation of the Canadian dollar eroded approximately $2.3 million in EBITDA. The increased contribution from the additional volumes in the quarter was minimal since the sales were mainly related to commodity priced items. In the quarter, heavy promotional efforts were made relating to brand support and the launching of new products in the Frigo Cheese Heads product line. These promotions resulted in an additional cost of approximately $4 million compared to the first quarter of fiscal 2005. The continued increase in fuel costs related to transportation resulted in approximately $2 million of additional expenses. The remainder of the unfavourable effects on EBITDA is related to the increased ingredients cost used in the manufacturing processes.

Grocery Products Sector

Revenues for the Grocery Products Sector totalled $38.7 million for the first quarter of fiscal 2006, a $2.6 million decrease as compared to the corresponding quarter of last year. The price increase implemented last February as well as a change in our pricing strategy regarding the reduction and the frequency of rebates had an impact on sales volume, which showed a decrease as compared to the same period last year.

During the quarter, the division was able to maintain its market share despite an increasingly competitive market in Canada. We introduced Jos. Louis, Ah! Caramel, Half Moon, Brownies, Hop&Go! and our tarts products in either a trans-fat-reduced or trans-fat-free formulas. As mentioned in the 2005 annual report, our strategy to approach the US market is to look for co-packing arrangements. We have started to manufacture products for the US market, and expect that these initiatives will generate approximately $3 million in revenues over the course of the current fiscal year.

EBITDA for the Grocery Products Sector stood at $5.6 million, a decrease of $1.4 million compared to the same quarter last year. The EBITDA margin went from 17% to 14.5% for the same period. The division incurred additional costs of $0.5 million related to the pension fund in the first quarter of fiscal 2006 as compared to the first quarter of last fiscal year. For fiscal 2006, we anticipate to expense approximately $2 million over fiscal 2005, related to the pension plan. The division has also engaged in additional marketing expenses such as a TV campaign, advertisement in magazines as well as sampling of products for approximately $1.2 million during the first quarter of fiscal 2006, in order to develop its Hop&Go! brand in Ontario and the Atlantic provinces. Excluding these marketing expenses, the EBITDA margin would have been at 17.6%.



(signed) (signed)
Lino Saputo Lino Saputo, Jr.
Chairman of the Board President and
Chief Executive Officer
August 2, 2005

(i) Measurement of results not in accordance with generally accepted
accounting principles
The Company assesses its financial performance based on its
EBITDA, this being earnings before interest, income taxes,
depreciation and amortization. EBITDA is not a measurement of
performance as defined by generally accepted accounting
principles in Canada, and consequently may not be comparable to
similar measurements presented by other companies.

(ii) Average block market" is the average daily price of a 40 pound
block of Cheddar traded on the Chicago Mercantile Exchange
(CME), used as the base price for the cheese.

(iii)Trademark used under license.



NOTICE

The consolidated financial statements of Saputo Inc. for the three-
month periods ended June 30, 2005 and 2004 have not been reviewed by
an external auditor.


CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands of dollars, except per share amounts)
(unaudited)

For the three-month
periods ended June 30
2005 2004
---------------------------------------------------------------------
Revenues $1,006,708 $1,018,900
Cost of sales, selling and administrative
expenses 910,034 911,882
---------------------------------------------------------------------
Earnings before interest, depreciation
and income taxes 96,674 107,018
Depreciation of fixed assets 17,904 17,043
---------------------------------------------------------------------
Operating income 78,770 89,975
Interest on long-term debt 6,344 7,870
Other interest (1) 467
---------------------------------------------------------------------
Earnings before income taxes 72,427 81,638
Income taxes 18,273 23,348
---------------------------------------------------------------------
Net earnings $54,154 $58,290
---------------------------------------------------------------------
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Per share (Note 6)
Net earnings
Basic $0.52 $0.56
Diluted $0.51 $0.55


CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
(in thousands of dollars)
(unaudited)

2005 2004
---------------------------------------------------------------------

Retained earnings, beginning of period $884,054 $711,371
Net earnings 54,154 58,290
Dividends (15,727) (12,502)
---------------------------------------------------------------------
Retained earnings, end of period $922,481 $757,159
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---------------------------------------------------------------------



SEGMENTED INFORMATION
(in thousands of dollars)
(unaudited)

For the three-month
periods ended June 30
2005 2004
---------------------------------------------------------------------

Revenues
Dairy Products
Canada and Other $652,801 $607,060
United States 315,176 370,514
---------------------------------------------------------------------
967,977 977,574
Grocery Products 38,731 41,326
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$1,006,708 $1,018,900
---------------------------------------------------------------------
---------------------------------------------------------------------

Earnings before interest, depreciation
and income taxes
Dairy Products
Canada and Other $65,768 $55,513
United States 25,347 44,482
---------------------------------------------------------------------
91,115 99,995
Grocery Products 5,559 7,023
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$96,674 $107,018
---------------------------------------------------------------------
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Depreciation of fixed assets
Dairy Products
Canada and Other $8,686 $7,478
United States 7,780 8,274
---------------------------------------------------------------------
16,466 15,752
Grocery Products 1,438 1,291
---------------------------------------------------------------------
$17,904 $17,043
---------------------------------------------------------------------
---------------------------------------------------------------------

Operating income
Dairy Products
Canada and Other $57,082 $48,035
United States 17,567 36,208
---------------------------------------------------------------------
74,649 84,243
Grocery Products 4,121 5,732
---------------------------------------------------------------------
$78,770 $89,975
---------------------------------------------------------------------
---------------------------------------------------------------------

Interest 6,343 8,337
---------------------------------------------------------------------

Earnings before income taxes 72,427 81,638

Income taxes 18,273 23,348
---------------------------------------------------------------------

Net earnings $54,154 $58,290
---------------------------------------------------------------------
---------------------------------------------------------------------



CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of dollars)
(unaudited)
For the three-month
periods ended June 30
2005 2004
---------------------------------------------------------------------

Cash flows related to the
following activities:
Operating
Net earnings $54,154 $58,290
Items not affecting cash
Stock based compensation 1,982 1,170
Depreciation of fixed assets 17,904 17,043
Loss (gain) on disposal of fixed assets 5 (14)
Funding of employee plans in excess of costs (1,433) (1,539)
Future income taxes 778 1,885
---------------------------------------------------------------------
73,390 76,835
Changes in non-cash operating working capital
items (12,866) (57,913)
---------------------------------------------------------------------
60,524 18,922
---------------------------------------------------------------------

Investing
Business acquisitions (Note 9) (83,527) -
Additions to fixed assets (14,621) (15,592)
Proceeds on disposals of fixed assets 89 595
Other assets 328 660
---------------------------------------------------------------------
(97,731) (14,337)
---------------------------------------------------------------------

Financing
Bank loans 1,506 5,978
Repayment of long-term debt - (27,512)
Issuance of share capital for a cash
consideration 8,327 7,258
---------------------------------------------------------------------
9,833 (14,276)
---------------------------------------------------------------------

(Decrease) in cash (27,374) (9,691)
Effect of exchange rate changes on cash 1,362 847
Cash, beginning of period 41,477 7,874
---------------------------------------------------------------------
Cash (bank overdraft), end of period $15,465 $(970)
---------------------------------------------------------------------
---------------------------------------------------------------------


Supplemental information

Interest paid $12,695 $14,415
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---------------------------------------------------------------------

Income taxes paid $6,223 $9,342
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---------------------------------------------------------------------



CONSOLIDATED BALANCE SHEETS
(in thousands of dollars)

June 30, March 31,
2005 2005
(unaudited) (audited)
---------------------------------------------------------------------
---------------------------------------------------------------------

ASSETS
Current assets
Cash $15,465 $41,477
Receivables 312,825 299,828
Inventories 501,428 452,814
Income taxes 14,384 14,381
Future income taxes 9,343 10,711
Prepaid expenses and other assets 16,725 16,795
---------------------------------------------------------------------
870,170 836,006
Portfolio investment 53,991 53,991
Fixed assets (Note 3) 666,701 648,584
Goodwill 562,124 507,200
Trademarks 24,372 24,054
Other assets (Note 4) 54,901 53,437
Future income taxes 3,982 9,800
---------------------------------------------------------------------
$2,236,241 $2,133,072
---------------------------------------------------------------------
---------------------------------------------------------------------

LIABILITIES
Current liabilities
Bank loans $16,006 $15,083
Accounts payable and accrued liabilities 312,469 291,197
Dividends payable 15,727 -
Income taxes 78,897 67,438
Future income taxes 7,246 9,653
---------------------------------------------------------------------
430,345 383,371
Long-term debt 306,508 302,521
Other liabilities 19,289 19,139
Future income taxes 108,828 112,191
---------------------------------------------------------------------
864,970 817,222
---------------------------------------------------------------------

SHAREHOLDERS' EQUITY
Share capital (Note 7) 493,400 483,896
Contributed surplus (Note 8) 8,900 8,095
Retained earnings 922,481 884,054
Foreign currency translation
adjustment (53,510) (60,195)
---------------------------------------------------------------------
1,371,271 1,315,850
---------------------------------------------------------------------
$2,236,241 $2,133,072
---------------------------------------------------------------------
---------------------------------------------------------------------



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts are in thousands of dollars except information on options)
(unaudited)

1 - Accounting Policies

The unaudited consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles and applied in the same manner as the most recently audited financial statements. The unaudited consolidated financial statements do not include all the information and notes required according to generally accepted accounting principles for annual financial statements, and should therefore be read with the audited consolidated financial statements and the notes included in the Company's annual report for the year ended March 31, 2005.

2 - Foreign Currency Translation

The balance sheet accounts of the self-sustaining companies operating in the United States and Argentina are translated into Canadian dollars using the exchange rates at the balance sheet dates. Statement of earnings accounts are translated into Canadian dollars using the average monthly exchange rates in effect during the periods. The foreign currency translation adjustment account presented in shareholders' equity represents accumulated foreign currency gains or losses on the Company's net investments in self-sustaining companies operating in the United States and Argentina. The change in the foreign currency translation account for the period principally resulted from the decrease 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 date for monetary assets and liabilities and the prevailing exchange rates at the time of transactions for income and expenses. Gains or losses resulting from this translation are included in the statement of earnings.



For the three-month periods
ended June 30
2005 2004
---------------------------------------------------------------------

Foreign exchange gain $420 $163
---------------------------------------------------------------------
---------------------------------------------------------------------

3 - Fixed Assets



June 30, 2005
---------------------------------------------------------------------
Accumulated Net book
Cost depreciation value
---------------------------------------------------------------------

Land $29,001 $- $29,001
Buildings 254,028 55,210 198,818
Furniture, machinery and equipment 732,319 305,115 427,204
Rolling stock 12,744 5,731 7,013
Held for sale 4,665 - 4,665
---------------------------------------------------------------------
$1,032,757 $366,056 $666,701
---------------------------------------------------------------------
---------------------------------------------------------------------


March 31, 2005
---------------------------------------------------------------------
Accumulated Net book
Cost depreciation value
---------------------------------------------------------------------
Land $27,872 $- $27,872
Buildings 246,887 53,657 193,230
Furniture, machinery and equipment 707,965 290,014 417,951
Rolling stock 11,817 5,378 6,439
Held for sale 3,092 - 3,092
---------------------------------------------------------------------
$997,633 $349,049 $648,584
---------------------------------------------------------------------
---------------------------------------------------------------------

Fixed assets held for sale represent mainly machinery, equipment and
buildings of the Canadian dairy products sector that will be disposed
of as a result of certain plant closures.

The net book value of fixed assets under construction, that are not
being amortized, amounts to $59,828,000 as at June 30, 2005
($47,921,000 as at March 31, 2005).

4 - Other assets

June 30, 2005 March 31, 2005
---------------------------------------------------------------------

Net accrued pension plan asset $47,297 $45,505
Other 7,604 7,932
---------------------------------------------------------------------
$54,901 $53,437
---------------------------------------------------------------------
---------------------------------------------------------------------

5 - Employee Pension and Other Benefit Plans

The Company provides defined benefit and defined contribution pension
plans as well as other benefit plans such as health insurance, life
insurance and dental plans to eligible employees and retired
employees. Pension and other benefit plan obligations are affected by
factors such as interest rates, adjustments arising from plan
amendments, changes in assumptions and experience gains or losses.
The costs are based on a measurement of the pension and other benefit
plan obligations and the pension fund assets.

Total benefit costs for the three-month periods ended June 30 are as
follows:


2005 2004
---------------------------------------------------------------------

Pension plans $3,524 $2,668
Other benefit plans 612 418
---------------------------------------------------------------------
$4,136 $3,086
---------------------------------------------------------------------

6 - Earnings per Share

Basic earnings per share have been calculated using the weighted
average number of common shares outstanding during each period:
104,645,179 shares for the three-month period ended June 30, 2005
(103,969,656 for the three-month period ended June 30, 2004).

Diluted earnings per share for the three-month period ended June 30,
2005 have been calculated using 106,138,698 (105,436,306 for the
three-month period ended June 30, 2004) common shares by applying the
treasury stock method.


7- Share Capital

Authorized

The authorized share capital of the Company consists of an unlimited
number of common and preferred shares. The common shares are voting
and participating. The preferred shares may be issued in one or more
series, the terms and privileges of each series to be determined at
the time of their creation.

June 30, 2005 March 31, 2005
---------------------------------------------------------------------

Issued

104,940,926 common shares
(104,527,282 at March 31,2005) $493,400 $483,896
---------------------------------------------------------------------
---------------------------------------------------------------------

413,644 common shares (423,032 in 2004) for an amount of $8,327,539
($7,258,610 in 2004) were issued during the three-month period ended
June 30, 2005 pursuant to the share option plan. For share options
granted since April 1, 2002, the amount previously accounted for as
an increase to contributed surplus was also transferred to share
capital upon the exercise of options. For the period ended June 30,
2005, the amount transferred from contributed surplus was $1,177,000.

Share option plan

The Company established a share option plan to allow for the purchase
of common shares by key employees, officers and directors of the
Company. The total number of common shares which may be issued
pursuant to this plan cannot exceed 14,000,000 common shares. Options
may be exercised at a price equal to the closing quoted value of the
shares on the day preceding the grant date. The options vest at 20%
per year and expire ten years from the grant date.

Options issued and outstanding as at the period end are as follows:

June 30, 2005
---------------------------------------------------------------------
Weighted
Granting Exercise Number of average
period price options exercise price
---------------------------------------------------------------------
1998 $8.50 72,320 $8.50
1999 from $16.13 to $18.75 121,896 $18.36
2000 $19.70 214,841 $19.70
2001 $13.50 473,479 $13.50
2002 from $19.00 to $23.00 748,561 $19.10
2003 $30.35 751,429 $30.35
2004 $22.50 1,081,946 $22.50
2005 $33.05 856,494 $33.05
Current $36.15 912,811 $36.15
--------------------------------------------------
5,233,777 $26.03
--------------------------------------------------
--------------------------------------------------

Options exercisable at
the end of the period 2,359,794 $21.13


March 31, 2005
---------------------------------------------------------------------
Weighted
Granting Number of average
period options exercise price
---------------------------------------------------------------------
1998 77,420 $8.50
1999 160,602 $18.34
2000 272,403 $19.70
2001 582,608 $13.50
2002 814,073 $19.09
2003 815,518 $30.35
2004 1,174,625 $22.50
2005 900,666 $33.05
Current - -
--------------------------------------------------
4,797,915 $23.62
--------------------------------------------------
--------------------------------------------------

Options exercisable at
the end of the period 1,778,646 $19.71



Changes in the number of options are as follows:

June 30, 2005
---------------------------------------------------------------------
Weighted
Number of average
options exercise price
---------------------------------------------------------------------

Balance at beginning of period 4,797,915 $23.62
Options granted 914,952 $36.15
Options exercised (413,644) $20.13
Options cancelled (65,446) $28.16
---------------------------------------------------------------------
Balance at end of period 5,233,777 $26.03
---------------------------------------------------------------------
---------------------------------------------------------------------


The fair value of share purchase options granted was estimated at
$10.79 per option ($9.86 as at March 31, 2005), using the Black-
Scholes option pricing model with the following assumptions:



June 30, 2005 March 31, 2005
---------------------------------------------------------------------

Risk-free interest rate: 4.0% 3.5%
Expected life of options: 6 years 6 1/2 years
Volatility: 28% 28%
Dividend rate: 2.0% 1.8%

The exercise price of these options is $36.15 ($33.05 for the
corresponding period), which corresponds to the closing quoted value
of the shares on the day preceding the grant date.

A compensation expense of $1,982,000 ($1,792,000 after income taxes)
relating to stock options was recorded in the statement of earnings
for the three-month period ended June 30, 2005 and $1,170,000
($1,034,000 after income taxes) was recorded for the three-month
period ended June 30, 2004.

The effect of this expense on basic and diluted earnings per share
was $0.02 for the three-month period ended June 30, 2005, and $0.01
for the three-month period ended June 30, 2004.

8 - Contributed Surplus

Year ended
June 30, 2005 March 31, 2005
---------------------------------------------------------------------

Contributed surplus, beginning of
period $8,095 $4,411
Stock based compensation 1,982 4,774
Amount transferred to share capital (1,177) (1,090)
---------------------------------------------------------------------
Contributed surplus, end of period $8,900 $8,095
---------------------------------------------------------------------

9 - Business Acquisitions

On April 18, 2005, the Company acquired the activities of Fromage
Cote S.A. and Distributions Kingsey Inc. (a cheese manufacturer
operating in Canada) for a cash consideration of $52,900,000, subject
to adjustments. The preliminary purchase price allocation is as
follows; working capital: $10,900,000, fixed assets: $11,375,000 and
intangible assets: $30,625,000. The final allocation of the purchase
price will be completed during the current fiscal year.

On May 27, 2005, the Company acquired the activities of Schneider
Cheese, Inc. (a cheese manufacturer operating in the United States)
for a cash consideration of US$24,400,000, subject to adjustments.
The preliminary purchase price allocation is as follows; working
capital: US$2,400,000, fixed assets: US$4,350,000 and intangible
assets: US$17,650,000. The final allocation of the purchase price
will be completed during the current fiscal year.

10 - Comparative Figures

Certain of the prior period's comparative figures have been
reclassified to conform to the current period's presentation.


Contact Information

  • Saputo Inc.
    Claude Pinard
    Vice President, Communications
    (514) 328-3377