Dean Foods Earnings Report Q2 2017 – A Grassroots Perspective: Staying Calm, Placing in Context

Markets have Ups, and Markets have Downs. This challenging Dairy Industry climate led to an expected ‘down’ report for Dean Foods.  Stay Calm.

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On Tuesday, August 8, 2017, Dean Foods hosted their Earnings Call for the 2nd Quarter of their 2017 Fiscal Year.  This Call came in conjunction with the release of their Earnings Report for Q2 2017, and provided additional comments and insight into the numbers provided on the Financial Balance sheets, found in the Earnings Report.

Since then, a number of media reports have followed, some acknowledging that Dean is only one of several dairy focused businesses experiencing tough times in the overall dairy climate from farm to retail, while others are shouting ‘gloom and doom.’  The truth is somewhere in between all of that – each commentator brings their own perspective, and many of the widely available public reports are compiled from a financial sector view looking at numbers only, with few having a working knowledge of the complete dairy industry.  Because they deal with ‘big markets,’ a  lot of fortunes are made or lost on innuendo and incomplete information and rumors – emotions drive those markets up, and they drive those markets down.

Dean Foods Earnings Reports are of extreme importance to dairy farming communities across the United States –  Dean processing plants are the income source for farms in those areas because they buy milk from those farmers, and the plants provide a significant amount of jobs in those local economies.

My perspective is that of one who is involved in agribusiness and farming on this basic grass roots level.  Added to that, on one bleak February several years ago, I (and many other regional farm neighbors) was told my milk company had filed bankruptcy, and there would be no more checks from them.  My colleagues and I live, work and operate farms in the communities who benefit from the success of Dean Foods. We might stress a bit at times like this, but we don’t ‘freak out and panic.”   I know farms of all sizes who sell their milk to Dean Foods plants, I have friends whose jobs are at Dean Foods plants.  We have seen Dean Foods (and some of its predecessors) experience good times and bad, and we know there will be those market ups and downs.

Because of that grass-roots perspective and life experience, I often listen to those Earnings Calls.  Because I listened to the call the other day, as well reviewed the financial reports, and because I keep up with Dean news on a regular basis,  I would say “Stay Calm, let the flurry settle. Look at the entire matter in a complete context.”   Here’s why:

No doubt, the Dean Foods report was disappointing – the net profit dropped 45% from the same quarter as last year, resulting in lowered earnings per share that will be paid to stockholders.  Repeat – dividends will still be paid, there is not a loss, only the amount of dividend paid to shareholders will not be as much.

In today’s downright brutally competitive climate of the dairy industry from farmgate to retail shelf, those results were not entirely unexpected.  Stock prices went down 20% from the $15 level on the day before, and are currently trading in the $11.50 – $12.25 range (August 10).   These prices are nowhere near the 2010 lows, when Dean stock traded as low as $7 as another price war / oversupply situation taking place, albeit for different reasons.

In fact, just a couple of days before the call, and in anticipation of lowered earnings reports, one analyst suggested this was a cycle of “Contrarian Opportunity,” and could indeed be a time to consider buying Dean Stock.  This analyst continues:  “Milk will always be a staple of the U.S. consumer.  The fact that these concerns really only exist  [price wars, market variables] in the short term are reason enough to believe that demand for Dean Foods’ products is sustainable long term.”

Ralph Scozzafava, Dean Foods CEO,  was forthright with his assessment:  “We are not satisfied with our performance, and we are determined to improve our execution,” he said on the call.

Indeed, there is one positive spot already glimmering:  on the call, Chris Bellairs, Chief Financial Officer, revealed that a major private-label contract has been recently signed, but that results from those sales would not show up until a future Earnings Reports, said to be in 2018.  The new contract was not identified by name.

Dairy Reporter offered this balanced evaluation – not sensationalistic, but realistic and factual.

The real truth of the situation is somewhere in between the positives and negatives, and perspective and balance must be kept.  The ultimate focus should be on those who depend most closely on a sound Dean Foods: the farms and dairy farm families who supply Dean with raw milk, and the communities where Dean processing plants and jobs are located.

The extended multiplier effect of financial loss in those communities could be comparable to an area losing a large brick-and-mortar industrial plant, however, because the individuals and farms are so scattered, there is not quite the uproar as when a singular factory closes.  To prevent the potential (note – POTENTIAL) closing of some of those milk plants, it would be helpful if regional retailers decide that community neighbors are as important as ‘cheap’ milk, and make sure private label milks stay in the Dean plants.  Some might, some won’t.

Ultimately, behind every milk carton, there are the faces of farm families, generational farms, and local communities who produce that product.  The way  a consumer spends dollars affects those farms and processing plant jobs – some of them may be your neighbors.

From the Southeast to the Northeast to the West Coast, there are dairy farm communities and local ag economies who are far better served when Dean Foods is financially healthy.    Oh, and there are those stockholders, who do expect a return for their ownership shares – they will have a say as well.

Phil Lempert, also known as ‘The Supermarket Guru,’ penned an article for Forbes entitled “Walmart Moves into the Dairy Business Even as Milk Consumption Drops.”  When you get into the text of the piece, Lempert uses the Dean report to discuss not only the Walmart milk plant currently under construction, but the challenges facing the dairy industry as a whole.  This article has been shared widely on the internet and social media.

However, ‘there’s more to the story’ than the information in Lempert’s article:

Lempert asks the right questions about Walmart – but Dean Foods will be far from the only one affected. I generally like the Guru and his food news, but in my opinion, his observations in this piece are a bit shortsighted, and fail to provide a complete picture or broader perspective on Dean activity in the past several months. To wit:

When the Walmart plans for a plant were announced in 2016, Dean began making adjustments then to allow for that.  It was revealed on the call that when the Walmart plant begins operations, milk currently being processed at Dean-owned plants for Wal-Mart will decrease by 90-95 million pounds of milk over 2018 and 2019.  To make up for that loss,  they have been broadening their product portfolio, acquiring companies who are not as dependent on fluid milk.  As a large corporation, doing BIG business, it takes time to make for those adjustments, which has occurred and is occurring since that announcement.

As noted earlier, there was the announcement that Dean has  just signed that major private label contract (no name provided).  And just because it happens all the time with any milk company, no doubt Dean will be trying to gain business from other milk labels as well.

There is still a $45 million profit for the quarter (the way those numbers are computed by huge corporations, and in keeping with SEC accounting standards).  And while not as much as last year’s comparisons for the same quarter, profits still occurred in the form of  “adjusted diluted earnings per share.”  Additionally, there was still ‘net cash’ and not ‘LOSS of cash.’

Dean stated last winter, in another earnings report situation, when asked directly about how they would deal with a Walmart plant, that they had already withstood the challenge of losing some Walmart business, so they were a bit more prepared to deal with this occurrence, therefore they have been taking the actions mentioned above.

With all that said, these realities remain: Dean Foods is still one of the largest supporters of LOCAL dairy communities because they do generally source from farmers within a 200 mile radius of their plants. Dean Foods sources that milk through both independent producers and co-ops, bringing on this question: WHAT is each and every handler doing to stabilize and protect the financial integrity of the farms it represents?

No doubt, some of those handlers or co-ops may be evaluating and seeking contracts with the Walmart plant, but with Walmart’s known predatory practice of enticing vendors and then squeezing the crap out of them, how will that be good for any producer in the long term?

And on the flip side – how many of us continually shop in a Walmart with big-spending shopping trips, when by doing so, we are feeding that very greedy, corporate pig which has sucked the life out of our small downtowns and communities, and is now headed on a path to do that to family farms? [Keep in mind – those farms are our future food bank or food savings account – what happens to your children in 75 years when they are gone?}

‘Wally World’ is going to take on new meaning, and will exist far beyond the walls of any singular Walmart brick-and-mortar retail box.

What next?  As for me, I’m headed to get some Trumoo Whole Chocolate Milk (NOT at a Walmart), and plan on buying some Dean stock in the next couple of days.

 

Additional information can be found at:

USA Today article: 

“As milk production continues to grow across many areas of the country, we’re seeing surplus volume . . . and aggressive pricing that we believe just isn’t sustainable long term.”  a quote from Ralph Scozzafava, Dean Foods CEO.

“Dean Foods also will focus more on expanding in food categories that deliver higher profit margins than milk, such as ice cream.”

Benzinga article:  (published a week prior to earnings report):

[Dean Food’s Caught in Crossfire of Walmart, Kroger’s ‘Price War’]  Milk is being used as a loss leader in many locations, compounding price wars.

From “Food Dive”: Notes These factors: the use of milk as a loss leader in some retailers, the competition from plant-based beverages, but yet notes that Dean’s volume loss mirrored USDA figures.

Earnings Report and Recording of Call:  For readers who wish to read the earnings report in its entirety, as well as take an hour to listen to a recording of the Earnings call, you can find links at the “Investor Relations” page of the Dean Foods website.

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