Dean Foods Earnings Call FY 2018: Background. Context. Future?

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In an entire food sector which is facing challenges at the moment from several different fronts, Dean Foods held their FY 2018 Year-end and 4th Quarter Earnings Call on Wednesday morning, February 27, 2019.  Dean Foods sources milk from independent contract farms and co-op members all across the nation, the Southeast included.
A summary of the context surrounding the event:
  • Most of food sector is off in recent financial reports
  • Sales of Dean Foods dairy products are still good  – Sales of $1.93 Billion for the Quarter actually beat a $1.91 Billion Estimate
  • Future: unknown; don’t give up hope – engage in a productive discussion
  • Initial Stock Prices and reaction after call: Dean Foods stock has traded in the $4 to $4.50 range for a couple of months (early 2019).  It was near $4.50 early Tuesday, Nov. 26 (the day before the earnings call), then dived under $3.90 for a bit of time on Wed. Nov. 27 (day of the call) and closed at $3.92.  On Thursday, Feb. 28, 2019, (day after earnings call), the stock closed at back over $4 at $4.01.   These highs and lows are par for the course after an earnings report.
 
The news from that call, and additional reports, is no real surprise to anyone who has been following Dean Foods for the past couple of years, but it has once again laid out the factors which will continue to affect the farm sector in the near future.  There is not a farm, nor a food company, anywhere, who is not affected by a changing food environment. Many big food companies, KraftHeinz included, are not having good earnings results of late, and there has been a ripple effect on Wall Street though all food business.  More closely related to dairy economics,  ‘‘Natural Cheese” was cited as one of the categories which led to Kraft’s difficult report. 
 
In many ways, we can feel a bit fortunate. Why?  Because Dean Foods is a publicly traded company, it is required by the SEC to issue reports and filings available to the general public and shareholders. Therefore, we do have a bit more knowledge about the true state of affairs.  We know (at least mostly) what we’re dealing with. 
 
Before providing the links to various reports (and not all of them are doom and gloom), I would offer this advice:  just take these reports as just that – reports. Dean Foods and its products still enjoy a lot of sales, a lot of income, and a lot of shelf space – it is the nation’s third largest dairy company.  That is a positive, and let’s be grateful for every hour we have that.
 
Remember the situation that led to this week’s report:
 
Also keep in mind that so much of this began over three years ago when Walmart announced they would be building their own milk plant.  Since then, the entire industry has been questioning how they would reckon with the Walmart monstrosity and their brutal tactics in the distribution and product acquisition sectors.  
Our area (Ky and TN, for the purposes of this post) felt that most intensely last spring when a living hell was catalyzed by the (at that time) expected June 2018 opening of the Walmart plant in Fort Wayne, Indiana, and over 100 farms in 8 states lost their Dean contracts.
Dean was not the only one affected or involved nationwide, but Dean, because they are publicly traded, took the great brunt of the fall and bad publicity. Dean was not the only party involved in farms losing contracts, and it could be even said, they were a victim as well of the Walmart entry into milk processing.
Since the Walmart plant opened in the summer of 2018, it is no secret they have experienced difficulty after difficulty, and still yet do not have all the bugs worked out of operations – neither at the plant, or distribution to stores from that plant.  
 
It is most sickening to think that some farms went forever-out-of-business because of fear of that new Walmart plant, which has had issue after issue, is not yet dependable, and  it is not known if it will ever be.
These million and billion dollar bad decisions by a big-box company have forever affected small communities in the east and southeast United States.  The fear and rumors related to Walmart and an assumed expansion after the first plant came on line have also been factors in the current industry state-of-affairs, although those rumors have quietened down as of late. 
 
Additional contributing factors affecting this Dean Foods earnings report: 
Sales of Milk: Generally, fluid sales of real milk (cow’s milk) are down, with the exceptions being whole milk and specialty dairy milks and dairy beverages. Let’s look at that as lessons and opportunities, and not despair, but get to work!   It is time we as farmers quit depending on hired employees as the only people who should ‘sell’ our products – we should also be full time milk salesmen ourselves!
 
Misinformation on the internet and in other places:  Don’t ever deny the impact that misinformation about milk and its health benefits, as well as our farming practices, has had on milk consumption, and milk consumption is the real reason for a dairy farm’s existence.  We, individually as farmer and industry agvocates, have got to step up our game, or the misinformation will win. Even popular sports figures are now being touted as ‘dairy free.’   (check the Dodgers!) 
 
Enormous expenses ran more than estimated related to Dean Foods plant closures – but that is largely past:  Only time will tell if it was a long-term wise move for Dean Foods main executives to decide to close 7 milk plants around the country.  However, in the short term, those costs were reflected in the two most recent quarters of financial reporting, and should be minimized going forward. 
 
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So, now back to the current Dean Foods situation, here are some links to current information, generally believed to be credible, and mostly in chronological order.  If you will pay attention to the events of Feb 27 and the timing, you can see how quickly information (of all kinds) is dispensed, so please keep in mind this is a fast-moving story, similar to that which other companies experience on the day of Earnings Reports. Any news should be considered “current” at that moment it is reported, events can change quickly, and perspectives are those of individual articles:
Mid-February, 2019:  The Milkweed reported about a “Notice of Covenant Waiver”   filed by Dean Foods, which could have had implications if not corrected by March 1st, however, it appears that situation got resolved in recent days, at least for the time being. (anecdotal, still trying to verify). 

Feb. 14, 2019: Dean Foods’ Great Brands Are on Track for a Profitable 2019

  source: by Faloh Investment – touts Dean’s recognizable brands as a positive
Feb. 26, 2019: Dean Foods Explores Strategic Alternatives to Accelerate Business Transformation;  source – Seeking Alpha, notes company is evaluating different strategies which may (but not certain) include sale of certain assets, joint ventures, more;  Stock jumped 10% with this news on the Tuesday evening before the full earnings call on Wednesday morning.  Other similar reports available with google searches, mostly different takes from the original news release.
Feb. 26, 2019: Local report about potential sale from Maria Halkas, Dallas News.com – largely uses information from the company news release above

Feb. 27, 2019 – 6:45 am:  News Release of Fourth Quarter and FY 18 Results

 

Feb. 27, 2019 – 6:57 am:  Dean Foods posts unexpected Q4 loss, suspends guidance(in layman’s terms, guidance is financial projections)
Feb. 27, 2019 – 8:10 am: Official Filing of 8-K with the SEC
This is a document required by law to be filed with the SEC.  There are some actions noted in the first few pages which may be of interest.
Feb. 27 – 9:00 am:  The Earnings Call / Webcast took place,  and a transcript was posted by 2:54 pm.  Listen for yourself to the audio of the call, or read the transcript, which are both available. The audio will take 50 minutes. .
Feb. 27 – 10:29 am: report on Benzinga titled:  Morgan Stanley: Pressures on Dean Foods Could Weigh on Company through 2019:   Report notes that $ales for QY 2019 actually beat the estimates:  Sales of $1.93 Billion beat a $1.91 Billion estimate
Feb. 27 – 12:47 pm: JPMorgan sees Dean Foods Sale as Unlikely    Ken Goldman, a seasoned financial analyst who is a frequent participant on the Dean Foods Earnin gs Calls, doesn’t think a sale is imminent for the reasons summarized at the link.
Feb. 27 – 2:02 pm:  Land-O-Lakes, a member-owned cooperative with a significant market presence in dairy products, animal nutrition, and an agronomy and crop-input division, released its 2018 Financial Statements.  Land-O-Lakes showed increased net sales, yet lowered net earnings, in 2018 when compared to 2017 numbers.  (See the first paragraphs).
  • Relationship between Dean and Land-O-Lakes:  Dean Foods (publicly traded) and Land-O-Lakes (a co-op) are separate companies, and neither owns the other, but there is a business relationship.  Land-O-Lakes sold its Fluid Milk division to Dean Foods in 2000. The Land-O-Lakes brand, presumingly through an ongoing license agreement, appears on milk cartons in the upper midwest.  And with Land-O-Lakes owning Purina and Winfield Crops, Land-O-Lakes still serves farms across the country shipping milk to Dean Foods plants.
Feb. 27 – 3:19 pm:  Slides posted from Dean Foods Earnings call:  These will provide a quick look-summary of the information discussed in the Earnings call, but should be viewed with caution without the context of the call.
Feb. 27th – 4:15 pm:  “Dean Foods: How Bad Is it?” – perspective from Value Analyst – notes company’s debt of $887 Million, compares significant financial numbers in relation to other food companies, more.
Feb. 27th – 6:22 pm:  “Here’s How Dairy Giant Dean Foods Curdled Its Own Milk” :  Karen Robinson Jacobs,  writing for Forbes, believes  that Dean’s current troubles began when Dean Foods sold the Whitewave Division, which included plant-based beverages and Horizon Organics. Consider this a review of past activity, and one writer’s opinion, but it adds to the mix of “how did Dean find itself here?”

Follow-Up Reports:

Feb. 28th – early morning: Market Watch notes some positives and challenges, yet questions, in addition to JP Morgan, if the company can find a buyer
Feb. 28th – early morning: Food Navigator, particularly, notes the quarterly and yearly losses were not due to a significant loss in sales, but due to enormously increased expenses.
March 1st – late morning:  James Brumley, Feature Writer for InvestorPlace, notes that the ability of food retailers such as Kroger, Walmart, and others to process their own private labels, enhanced by the ability to use milk as a loss-leader, has contributed to Dean Foods current stock price challenges.  His perspective is titled: “Dean Foods Stock has passed its Expiration Date.”
March 4th  – afternoon: from Seeking Alpha: summary of a perspective from Wells Fargo’s John Baumgartner  titled: Well-Fargo dissects M&A potential at Dean Foods. Perspective notes ‘DF sells $550MM+ of excess cream annually.’  (cream = dairy fat, rising in market demand) may be attractive to some potential buyers.  On this afternoon, 4 business days after earnings call, stock closed at $3.56.  On Thursday, Feb. 28 (1 day after call, stock was in the $4.00 range)
March 7th (Thursday):  Stock Price closed at $2.88/share, and came back to $2.91 after hours
March 9th – (morning):  Dean Foods Bonds Drop 2.2% During Trading:  reported by Lisa Matthews of Fairfield Current, a digital newspaper focusing on tech, health, science, and global events:  Article contains information on recent stock trades, and notes that on Friday, March 8th, stock traded down 17 cents / share, with a trade volume 2.5x that on a normal day: (4.34 million shares vs. avg. of 1.876 million shares per day.)  A lot of the trading volume in recent days and months has been due to institutional investors and hedge funds.
March 11th:   Two Stocks to Tuck Away: The Mosaic Company (MOS) and Dean Foods (DF): the lower half of this article notes recent volume trades of note of Dean Foods stock. Article contains lots of financial market lingo.  Article by Andrew Francis of Financial Mercury.
March 11th: Historical Performances Are Key to Consider:: Dean Foods Company (NYSE: DF) – an explanation of financial terms such as EPS, and looks back at some events coming up to the current weeks and days.  From Top Stock News.
March 12th: Analysts Anticipate Dean Foods (DF) Will Post Earnings of 15 cents/share (by Lisa Matthews for Fairfield Current):  Explanations of recent trades, even some purchased by some retirement funds.
March 12th:  Implied Volatility Surging for Dean Foods Stock Options (from Zacks) – an explanation of investors taking positions in anticipation of future stock price moves.
March 14th:  Bernstein drops Dean Foods (from Dairy Reporter) – suggests (suggests!) sale may come by division, but interesting that company itself is downsizing and in the process of restructuring.  Alexia Howard, a Bernstein representative who is a regular on the Dean Foods earnings calls, was noticeably absent from the Feb. 27th, 2019 call.
March 14th: Sentiment Still Supports the Bullish Case: Dean Foods (DF) Company:  Article by Kevin Freeman for the MonReport explains some financial terms and how they work, such as Relative Strength Index (RSI).  In this case, at the time of this post on the morning of Mar. 14th, with an RSI of 22.13, Dean Foods stock is considered to be oversold.
March 29th: Bear of the Day: Dean Foods:  Article by Benjamin Rains for Zack’s.  Notes that Dean, along with DFA and other ‘real dairy’-focused entities, are facing challenges and possible crossroads “due to the rise of alternative ‘milk’ offerings such as oat, nut, and soy, along with other non-dairy options for ice cream and more.”   Perspective goes on to note that that the “global dairy alternatives market is projected to soar  from $11.9 billion in 2017 to $34 Billion in 2024.” 
April 11th: Dean Foods Company (DF)’s Mixed Signals Lead to Crossed Wires: Article by Abby Carey for The Mon Report
April 12th: Dean Foods Attracts Takeover Interest from SaputoGlobe and Mail: reported by Seeking Alpha, with a link to a Globe and Mail story
April 15th: Saputo eyes US Dairy M&A – summary from Seeking Alpha; notes Dean shares were up 5.61% early in the morning on Monday, Apr. 15th after possibilities first announced late on Friday afternoon, April 12th.
April 15th: Saputo interested in Acquiring Dean Foods, report says:  a summary published at Food Dive.  Notes Saputo, a Canadian-owned company, owns 62 plants in 40 countries around the world, and reported an 18.4% increase in revenues at it’s last earnings report.
April 15th: Saputo to be disciplined with M&A:reported at Seeking Alpha.  Quotes Lino Saputo, “The level of discipline will be even more enhanced.” Notes Dean Foods closed up 7.48% (price $2.30/share) for the day.
April 18th: Can it sustain the pressure built by the Analysts: Dean Foods Company (DF) – article by Christopher Black for West News Now.
April 18th: Implied Volatility Surging for Dean Foods (DF) Stock Options – credited to Zack’s Equity Research, published on Zacks.com:  Article explains that “implied volatility shows how much movement the market is expecting in the future. Options with high levels of implied volatility suggest that investors in the underlying stocks are expecting a big move in one direction or another.”  Notes that a “Jun 21 $3.00 Call had some of the highest implied volatility of all equity options today,” [April 18th].
April 29, 2019: (posted mid-morning): Dean Foods Company Stock is 2.39% Higher Today, What Just Happened? – by Melanie Gerald, for FindANews.com;  article details the volumes of current and historical trades, and what they could potentially mean
April 29, 2019: (posted morning)  If You Had Bought Dean Foods (NYSE: DF) Stock Three Years Ago, You Would be Sitting on An 89% Loss, Today – From Simply Wall Street.
Timelines and charts have ‘minute captures’ of events: Access those here.
Stock closed at $1.81/share.
This Ed Bosworth article for Find A News notes to look beyond share price and consider fundamentals and future growth potential.
April 30, 2019: Analysts Estimate Dean Foods (DF) to Report a Decline in Earnings: Here’s What to Look For – (post at Zack’s Equity Research).  States there’s a Year-End Earnings report expected on May 7th, and expectations are it may be worse than expected.
At the end of the day, April 30, the stock price had dropped to $1.70/share.
May 1, 2019: How Far Dean Foods Company Will Fall Today:  (post at Find A News, authored by Peggy Goldman)
May 1, 2019:  One Stock with Low Beta Value: Dean Foods;  by Aston Bradley for Investor Place
Stock Closed at $1.61/share on this day.
May 2, 2019:  Rounding UP the figures: Dean Foods Company (DF), McDonald’s Corporation – written by Sarah Watson for FIN Bulletin.     From the article: “One metric that indicates how volatile a stock’s price is compared to the wider market is the Beta. The Beta value for Dean Foods Company (NYSE: DF) is 0.24 indicating less volatile than the rest of the market.”   Yet no predictions on what the company is going to do going forward.

 

May 2, 2019:  “Dean Foods Company (DF) Stock May Not Offer Adequate Shelter”, written by Rob Hiassen, and posted at FinBulletin. com

Directly from the article:  Institutional investors currently hold around $140 million or 92.2% in DF stock. Look at its top three institutional owners: Blackrock Inc. owns $24.27 million in Dean Foods Company, which represents roughly 18.24% of the company’s market cap and approximately 17.34% of the institutional ownership. Similar statistics are true for the second largest owner, Vanguard Group Inc, which owns 9,845,854 shares of the stock are valued at $16.74 million. The third largest holder is Dimensional Fund Advisors Lp, which currently holds $12.95 million north of this stock and that ownership represents nearly 9.74% of its market capitalization.
On May 2, 2019, Dean Foods Stock closed at  $1.54 / share.
COMPARE all of the above to this:  ABOUT A YEAR AGO:  On April 19, 2018 – the stock was $8.95, and this article was written, April 17th:  Is Dean Foods Company (NYSE: DF) Cheap for a Reason?  from Simply Wall Street
May 3, 2019: “Norges Bank Invests $6.97 Million in Dean Foods Company” – this Finance Daily post, authored by Andrew Sebastian, examines several of the volume trades which have occurred in recent weeks.  Various companies still have several differing ratings on the Dean Foods stock.
Stock closed at $1.52 on May 3rd.
May 5, 2019:  “Dean Foods Falters in More Concentrated Milk Market” – Heather Haddon, who covers food and retail policy for the Wall Street Journal, analyzes several recent trends which have affected the dairy business in general, and Dean Foods in particular across the country.

Where Do We Go from Here?

That, literally, is a Billion $$$ question, with the implications that our farms, processing jobs, related agribusiness, and extended rural communities are all at stake.
We in the Southeast, as well as other regions of the country, have seen many other episodes of dilemmas that occurred when decisions that affected our communities were made far, far away in corporate boardrooms by people that didn’t know ‘us.’
We are grateful we still enjoy cordial community relationships with our processing plants, and the folks who are employed there. Those folks have a great deal to lose as well as our farming communities – there are jobs which could be affected, and a resulting effect on the municipal economies in those regions.
At this point, I have no answers, but only questions to provoke thought:
  • How can we help the Dean Foods situation and the Dean Foods brand in our own communities?
  • What, generally, do you see as an answer to Dean Foods future?
  • If a sale occurs, do you have any idea who are the buyers you would be OK with, and buyers you would definitely not want to control our futures?
  • What are you yourself willing to do to promote the sale of milk (and specific milk brands which we can trace to our farms) to keep sales alive, and perhaps even recapture from plant-based beverages?  (Note: I am not suggesting criticizing checkoff efforts with this question.)
  • What are you willing to do yourself –  or invest in time wise or monetarily wise – to protect your future?
The truth is, there are many answers to the question about Dean Foods future, and it will take several efforts to chart a course for a brighter future.
One thing is for sure – we can’t take anything for granted!  We ourselves – as individuals and as farms – are going to have to become more active in convincing consumers that real milk is a great product! 
There will be more to come as this story evolves and as we pursue our farming futures.
(Note: some updates have been added after initial posting on March 1, 2019)

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