The largest US milk processor Dean Foods Co. (DF, Financial) posted better-than-expected quarterly results as it did not change the prices of milk or give any advantage to the end customer of the lowered milk prices after the decline in the market due to the ban of imported milk in China and Russia. With all profits in the pocket and announcement of continuing the strategy, shares of the company rose 10% at a three-month high to close at $17.94.
Effect of reduction in raw milk costs
The Dallas-based American food and beverages company specializing in dairy products was founded in 1925 and currently has 100 facilities located in 35 American states and a total of 5 manufacturing plants in Belgium, France, UK and the Netherlands. During its current quarter results, the company announced a no reduction in retail milk prices in the near future taking investors' delight up by a notch, as the decision will bring in higher profits for the company thereby benefiting the customers.
Prices of raw milk in the U.S. fell drastically, almost 25% within the first three months, due to the decline in demand from U.S. markets and ban on import of milk in China and Russia. The pricing of raw milk was higher through 2013-2014, which had cost Dean a huge portion of their profits with customers reducing their milk purchases. The company had even planned a cost-cutting drive while estimating a resultant decline in milk volumes by about 1% to 5% each year. The increase in the prices of raw milk was also attributed to strong competition from dairy alternatives and juices, which affected the sales. Also, the customers were now going out more for breakfasts, which led to a greater-than-expected decrease in milk volumes. In this quarter itself, the company saw a decline of 3% or 662 million gallons of milk as compared to last year across a range of products like sour cream and other dairy products.
The revival came just last year and Dean expects 2015 to be a turnaround year for the milk prices. The company also launched a national brand called DairyPure recently, which has been created combining all regional milk brands in an effort to gain a large chunk of market share under one umbrella. Keeping the pace in view, the company expects a better than estimated profits for the second quarter with adjusted earnings per share of 20 cents to 30 cents as compared to adjusted loss in the same quarter last year of 14 cents per share.
Though the company will continue with the cost cutting of 1% to 1.5% per year probably to make up for the lost revenues, and catch up with the declined milk volumes and adjustment at manufacturing plants and distribution networks. The company is also working on a comeback plan through the fast-growing maker of almond milk and other dairy products, WhiteWave Foods Co. (WWAV, Financial), which got associated with Dean in 2013.
Losses this quarter
Speaking of the current quarter, Dean Foods could not perform well, and revenues declined 12% to $2.05 billion with a reported loss of $74 million or 78 cents per share as compared to last year’s $9 million or 9 cents per share. The company also fell in the adjusted profits wherein the company could project only 12 cents to 22 cents as against forecast of 22 cents by the analysts on $2.1 billion sales. Establishment of DairyPure brand and previous debts of the company also added to the losses of as much as $109.9 million.
The positive takeaways
An adjusted profit of 24 cents per share was recorded this quarter, which was above the average analyst estimate of 18 cents. A raise in the coming quarter has also been forecast for adjusted earnings equalling 20-30 cents per share, way above the analysts’ estimate of 20 cents.
The continued strategy of the company of not sharing profits coming from reduced milk prices with the customers is looking good as of now, but how it will play in the long run is to watch out for.
