Dean Foods’ Profits Buoyed by Lower Raw Milk Prices

Volume across all products fell 3.2% to 632 million gallons in Q2 FY16, hurting sales

D1Dean Foods Company (NYSE: DF), the largest processor and direct-to-store distributor of fluid milk and other daily products in the U.S., announced its Q2 FY16 financial results on August 8th, 2016.

Headquartered in Dallas, Texas, Dean Foods manufactures, markets, and distributes various branded and private label dairy case products, such as fluid milk, ice cream, cultured dairy products, creamers, ice cream mix, and other dairy products. It offers its products under approximately 50 national, regional, licensed brands, and private labels, including DairyPure, TruMoo, Alta Dena, Berkeley Farms, Country Fresh, Dean’s, Garelick Farms, and others. The company sells its products to retailers, distributors, foodservice outlets, educational institutions, and governmental entities. Read more about Dean Foods’ financial results below.

Q2 FY16 financial highlights

During Q2 FY16, Dean Foods’ sales fell 8.6% to $1.84 billion, versus $2.01 billion in the year-ago quarter, but meeting forecasts of $1.85 billion. Sales fell in part to a 3.2% decline in total volume; volume across all products was 632 million gallons for Q2 FY16, compared to 653 million gallons in Q2 2015. For Q3 FY16, the Company expects total volumes to decline in the low single-digits as compared to the year-ago volumes but to improve versus recent trends.

The Q2 FY16 average Class I Mover, a measure of raw milk costs, was $13.53 per hundred-weight, approximately 7% lower as compared to Q1 FY16 and a decrease of nearly 15% from the year-ago quarter. The Q3 FY16 average Class I Mover forecast of $15.00 per hundred-weight represents an approximately 11% increase over Q2 FY16, but an 8% decline over Q3 FY15.

Based on fluid milk sales data published by the U.S. Department of Agriculture (USDA) through May 2016, fluid milk volumes improved sequentially from a 0.6% decline in Q1 FY16 to a 0.1% increase in Q2 FY16 on an unadjusted basis. On this same basis, Dean Foods’ share of U.S. fluid milk volumes decreased by 10 basis points sequentially to 34.5% for the quarter-to-date through May 2016.

The Company’s Q2 FY16 operating income jumped to $73 million from $57 million in the year-ago period due to cost control and pricing discipline. During the reporting quarter, costs fell 7% versus the year-ago quarter.

Buoyed by lower raw milk prices, net income jumped to $33.37 million, or $0.36 per share, from $26.52 million, or $0.28 per share, in the same quarter last year. Adjusted EPS jumped 15.2% to $0.38, but failed to meet forecasts of $0.40 for the reporting quarter.

Source: Dean Foods
Source: Dean Foods

Other highlights

Source: Dean Foods
Source: Dean Foods

Dean Foods completed its acquisition of the Friendly’s ice cream brand’s manufacturing and retail ice cream business on June 20th, 2016, for $155 million in cash. Friendly’s Ice Cream, which clocked sales of $166 million in FY15, is a popular brand that produces ice cream and other frozen desserts, including single-serve sundae cups, novelty items, cakes, and rolls. Friendly’s has a retail footprint of over 8,000 outlets. The acquisition complements well with Dean Foods, which is the third largest branded ice cream company in the U.S. with popular brands such as Mayfield and Dean’s Country Fresh.

Dean Foods also began production at its new ice cream facility in St. George, Utah. The Company’s Blue Bell ice cream brand, which was recalled from stores after being linked to a listeria outbreak in early 2016, was re-launched in the market during the reporting quarter.

Net cash from continuing operations for the six months ended June 30th, 2016, totaled $125 million. Free cash flow was at $80 million for the six months ended June 30th, 2016, a $144 million decline as compared to the prior year period, on account of higher incentive compensation payouts. The Company’s capital expenditures totaled $29 million for the reporting quarter.

Share repurchases

D4During Q2 FY16, the Company spent $25 million to repurchase 1.4 million shares, or 1.5% of its total shares outstanding.

Guidance for full year FY16

In Q3 FY16, Dean Foods expects adjusted diluted EPS of $0.32 to $0.40; Q3 FY16 diluted EPS is expected to be $0.28 to $0.36 with improving volume performance, continued pricing and cost discipline, and favorable year-over-year commodity costs.

Stock Performance

D5Dean Foods’ stock ended the day at $17.56, slipping 3.04%, at the close on Wednesday, August 10th, 2016, having vacillated between an intraday high of $18.12 and a low of $17.55 during the session. The stock’s trading volume was at 2,434,856 for the day. The Company’s market cap was at $1.63 billion as of Wednesday’s close.

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