Chief financial officer Chris Bellairs said that Dean Foods delivered a solid start to 2016 with $122m of adjusted EBITDA for the quarter.
First quarter results
The first quarter 2016 average Class I Mover, a measure of raw milk costs, was $14.49 per hundred-weight, an approximately 11% sequential decrease from the fourth quarter of 2015 and a decrease of nearly 14% from the first quarter of 2015. The second quarter 2016 average Class I Mover forecast of $13.49 per hundred-weight represents an approximately 7% decline sequentially and an approximately 15% decline year-over-year.
Total volume across all products was 641m gallons for the first quarter of 2016, a 3.2% decline compared to total volume of 662m gallons in the first quarter of 2015. For the second quarter 2016, as compared to the prior year period, the company said it expects total volumes to decline in the low single digits.
Based on fluid milk sales data published by the USDA through February, fluid milk volumes improved sequentially from a 1.1% decline in the fourth quarter 2015 to a 0.6% decline in the first quarter 2016 on an unadjusted basis.
Bellairs said that total company operating expenses decreased approximately $4m from the corresponding period in 2015, partly due to lower fuel-related costs.
He noted that the company experienced a year-over-year operating income increase of $32m to $83m, while the adjusted EBITDA for the quarter of $122m was a $32m increase.
Effect of closures
Bellairs noted that in Q1, the company announced the closure of three manufacturing facilities; ice cream plants in Buena Park, California and Orem, Utah, and the plant in New Orleans, Louisiana cease production in Q3 2016.
He said Dean Foods will support customers in the western US by utilizing the recently-acquired facility in St. George, Utah, which begins production in late Q2.
To compensate for the closure in New Orleans, the company entered into a lease agreement for a production facility in Hammond, Louisiana, which will service customers in New Orleans and the surrounding area.
“We will experience one-time transitory cost related to these network changes in Q2 and in Q3,” he stated.
Purchase of Friendly’s
In Dean Foods’ earnings call Tuesday, CEO Gregg Tanner said the purchase of Friendly's ice cream business provides several benefits.
“First, this will enable us to expand our brand footprint and manufacturing capabilities to markets and geographies where we do not currently compete. The Friendly's facility brings Dean Foods new production capability, additional storage, incremental manufacturing capacity for growth of our brand.
“Second, Friendly's has strong brand presence in the Northeast, an area where Dean currently has a void. The Friendly's brand generates 59% unaided brand awareness and in a recent study showed the strongest purchase intent in the Northeast among major brands.
“Friendly's is one of the only companies with solid distribution across all three major segments of the ice cream dessert category. In the Northeast, Friendly's is the number one or number two brand in cups, cartons, cakes and rolls.
“Third, with Friendly's, we get a wide portfolio of flavored and package size across the family of products. More than 22% of Friendly's retail sales are from the sale of new flavored or formats introduced after 2012. Friendly's pipeline of innovative products will continue to extend the brand into product offerings that address key consumer preferences.
“We are confident we can expand these innovations more broadly across the existing Dean Foods ice cream portfolio.”
Private label business
Tanner announced that, in Q1, the company competed for and won a “significant” long-term agreement for a predominantly private label business in the West region totaling 40m gallons on an annualized basis.
“We will begin servicing this customer in June. We estimate this new business, combined with the impact of the Friendly's acquisition, will increase our second-half volume growth rate by approximately 300 basis points,” he said.
He added that in spite of Walmart's recent announcement regarding their intentions of building a milk processing plant in Indiana, “given the margins profile for Walmart private-label white milk, we still believe the in-state impact will not be material to our financial results.”
Responding to a question on the effect of Walmart’s processing plant should they expand their program, Tanner said, “We can adapt and change our network to whatever volumes and changes that we see. So if I look back at 2014 where we had extremely high milk cost, we had 180m gallons of Walmart business coming out of our system and we still were able to stay cash flow positive through that and that was kind of the perfect storm.
“So I look at this and say, it's 95m to 100m gallons the first wave, if there is more waves to come and they have not given us any indication at this point that they intend to go further, but if they were, I am confident that our organization will step up and do what needs to be done to make sure it doesn't have a financial impact.”
He did say, however, that it would impact in other ways.
“It will have impacts on our people side, because it will impact the fact that we have to take additional costs out of our system from an overhead perspective because that volume does cover overhead. So I don't want to minimize the impact to the organization just because it doesn't impact us financially, it will definitely impact us in our organization.”
Tanner said that with US butter and cheese prices remaining uncompetitive versus the international market, there will continue to be a decline in overall US dairy exports.
“Despite the temporary increase we saw in exports in January and February, the USDA published March data showing a decline of over 21% with the major drop in non-fed dry milk driving the decline,” he said.
“These supply and demand factors should continue to contribute to a relatively benign dairy commodity environment over the short term.”