Dean Foods (DF) Q3 Earnings In Line, Stock Down On View Cut

Shares of Dean Foods Company (NYSE:DF) declined 1.1% on Nov 7 as the company slashed its adjusted earnings view for 2017 after reporting in-line third-quarter 2017 earnings. This marked an improvement from the company’s negative earnings surprises delivered in the preceding three quarters. However, the company’s sales lagged estimates.

Further, this Dallas-based food and beverage company’s shares have plunged 20.1% in three months, wider than the Consumer Staples sector’s downside of 3.1%.

Despite a tough retail backdrop, the company’s results gained from overall solid sales execution, which helped in wining some new business for 2018. Though the company displayed stringent focus on cost productivity and commercial initiatives, results were hurt by lost sales volumes and incremental costs related to the recent hurricanes in both Texas and Florida. The company estimates that the hurricanes impacted business in the third quarter by nearly $6 million or 4 cents of earnings per share. The impacts primarily related to revenue lost, soft resin supplies and increased freight.

Further, soft volumes, higher raw milk costs, and loss of share in U.S. fluid milk volumes were hindrances.

Q3 in Detail

Plagued by lower volumes and increased raw milk expenses, the company’s quarterly adjusted earnings of 20 cents per share came in line with Zacks Consensus Estimate while it plunged 45.9% year over year.

On GAAP basis, the company posted loss per share of 11 cents, against earnings of 16 cents reported in the year-ago quarter.

Net sales declined 1.4% year over year to $1,937.6 million, and lagged the Zacks Consensus Estimate of $1,973 million. Total volumes of 608 million gallons dropped 6.6% from 651 million gallons in the prior-year quarter. The lag was mainly due to volume and private label mix challenges that continued in the quarter.

Raw milk costs escalated about 10% year over year and nearly 7% on a sequential basis, which also impacted top line.

Further, the milk category remained soft as the USDA data through August 2017 revealed that fluid milk volumes dipped 2.2% year over year, on a quarter-to-date basis. Additionally, Dean Foods' share of U.S. fluid milk volumes contracted 50 basis points.

Adjusted gross profit declined 9.1% to $448 million, while the adjusted operating income collapsed by 34.8% to $45 million in the third quarter.

Financial Position

Dean Foods ended the quarter with cash and cash equivalents of $24.3 million, long-term debt including current maturities of about $946.5 million, and shareholders’ equity of $604.4 million. Total debt outstanding, excluding cash on hand, was nearly $928 million as of Sep 30, 2017.

In the first three quarters of 2017, the company generated nearly $67 million of net cash from operating activities and $5 million of free cash flow.

The company deployed roughly $61 million as capital expenditure in the nine months of 2017. As of the end of the third quarter, Dean Foods’ all cash netted leverage (net debt to bank EBITDA total leverage ratio) came in at 2.56 times, reflecting slight increase from second-quarter 2017.

In the fourth-quarter, the company expects free cash flow to benefit from sequential rise in operating results, partly offset by seasonal ice cream build and higher capital expenditures. Further, management significantly lowered its free cash flow guidance for 2017 to $10-$20 million, from the prior forecast of $60-$75 million. Additionally, the company trimmed its capital expenditure forecast for the year to $105-$115 million.

The Road Ahead

While the third-quarter performance remained soft, the company expects to gain from its smart volume initiative through the rest of 2017, aimed at improving top line, building margins and creating operating efficiencies. This initiative relates to managing private label products, while also analyzing new volume opportunities and evaluating existing volume profitability. This means ensuring that volumes are produced and sold at appropriate margins.

Additionally, the company’s initiatives to strengthen brands and diversify portfolio will enable it to build brand equity on DairyPure by launching innovative products and improving marketing. Further, the company remains on track with its comprehensive productivity program, including OpEx 2020, and company-wide initiatives to drive efficiencies. Evidently, the Zacks Rank #4 (Sell) company is progressing well on its OpEx 2020 cost productivity plan, which is aimed at generating annual savings in a range of $80-$100 million.

Following the third-quarter results, the company slashed adjusted earnings guidance for 2017. The company now envisions adjusted earnings per share in the range of 80-90 cents, compared with the previous forecast of 80-95 cents.

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