Dean Foods looks to cost savings after Q2 profit falls

By Jim Cornall contact

- Last updated on GMT

Dean Foods is looking to cost savings for the remainder of 2017 after posting financial results the company said are "well below expectations."
Dean Foods is looking to cost savings for the remainder of 2017 after posting financial results the company said are "well below expectations."

Related tags: Dean foods, Generally accepted accounting principles, Milk

Dean Foods Company has issued its second quarter 2017 results.

For the three months ending June 30, 2017, gross profit fell from £$493m in Q2 2016 to $467m in 2017.

Adjusted net income fell from $35m in Q2 2016 to $20m in 2017.  Taking into account the first six months of the year, adjusted net income dropped from $76m in 1H 2016 to $32m in 1H 2017.

Adjusted diluted earnings per share also fell from $0.38 in Q2 2016 to $0.21 in Q2 2017.

Cash flow and debt

Net cash provided by continuing operations for the six months ended June 30, 2017 totaled $79m.

Free cash flow provided by continuing operations (net cash provided by continuing operations less capital expenditures), was $45m for the six months ended June 30, 2017, a $35m decrease compared to the prior year period.

Total outstanding debt at June 30, 2017, net of $32m cash on hand, was approximately $880m. The company's net debt to bank EBITDA total leverage ratio, on an all-cash netted basis, increased slightly on a sequential basis to 2.25 times at the end of the second quarter 2017.

Experiencing challenges

Chief executive officer Ralph Scozzafava said in the second quarter, Dean Foods faced a challenging and rapidly evolving retail environment.

“We experienced volume pressure from both a macro and competitive perspective that impacted our total volume performance within the quarter, and we anticipate this will carry forward for the remainder of 2017.

“Our financial results came in well below our expectations. We are not satisfied with our performance and are determined to improve our execution,”​ he added.

He said in response to these challenges the company is accelerating and expanding an aggressive set of commercial and cost productivity initiatives to address volume and mix.

“We expect these actions will better position our company for the future."

During the company’s earnings conference call, Scozzafava said, “Our branded white milk volume in all channels was down nearly 6% year-over-year with declines in measured channels outpacing the nearly flat volume in non-measured channels.

“Despite these headwinds, we continue to see growth in our flavored milk volume, which is up 1%.”

He noted that in the private label white milk space, the company experienced some customer losses at a higher rate than expected.      

However, he added the company recently won a significant private label bid with a major customer, but the benefit of that volume would be seen in 2018.

Forward outlook

Scozzafava said for the balance of 2017, the company’s volume and mix challenges are occurring at a higher rate than planned.

“While we are on track to deliver our cost productivity estimate of $80m to $100m for the full year, our volume shortfall will drive lower financial results than our previous expectations.”

He added full-year adjusted earnings per share guidance was being reduced to $0.80 to $0.95 and full-year free cash flow would now be in the range of $50m-$75m.

Cost structure would also be addressed, with Scozzafava saying Dean Foods was aggressively addressing cost structure and targeting an incremental annual cost reduction of $40m-$50m by the end of 2017.

After the announcement of the results, Dean Foods shares dropped more than 20% to close on $11.86.

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