Dean Foods’ posted an operating loss of $25.54 million for the first half of the year, compared with the first six months of 2017 — and saw an operating loss of $40.9 million compared with the quarter a year ago, according to the dairy giant’s latest earnings report. Net sales for the last six months inched up less than a tenth of a percentage point, to $3.93 billion from $3.92 billion a year ago. But profits tumbled, down for the first half of the year to $8.8 million — $49,000 less than last year at this time.
Losses were particularly steep in operational expenses. The dairy manufacturer implemented a cost savings plan that took $13 million out of administrative costs, CEO Ralph Scozzafava said in the report, but the producer is seeing higher-than-expected non-dairy inflation and significant private label competition. It’s reevaluated and lowered adjusted diluted earnings per share from 55 cents to 80 cents earlier this year to $0.32 to $0.52 per diluted share.
Despite the overall financial decrease, cash flows are high with the company posting cash flow generation at $61 million for the quarter.
Dean Foods is continuing to struggle in the face of changing consumer tastes. According to Mintel, sales in the dairy-based milk category have dropped about 15% since 2012, falling to an estimated $16.12 billion in 2017. Meanwhile, non-dairy milk sales in the U.S. have increased 61% during the past five years to more than $2 billion annually.
Recognizing the importance of having a hand in non-dairy based beverage, Dean bought a minority stake in Good Karma Foods, a maker of non-dairy milk and yogurt, in May 2017. Then even before seeing the results of their investment, this July, the dairy giant announced it purchased a majority stake the company. The dairy manufacturer also purchased Uncle Matt’s Organic in 2017, which manufactures probiotic-infused juices and fruit-infused waters.
Although there is no reflection in the financials that this investment has bolstered sales, this majority stake offers a glimmer of hope to the dairy producer, which is in the midst of shuttering two milk facilities this fall. Two other dairies were closed down this spring. Dean also notified more than 100 milk producers in eight states this spring that their contracts are canceled, likely due to Walmart’s new massive private label plant in Indiana.
Adding to Dean Foods’ problems is the fact that its dairy products are high quality and have commanded premium prices in an already price-sensitive and competitive market. So when grocers such as Kroger and Walmart cut retail milk prices in order to compete with each other, Dean is the biggest loser. The ongoing U.S. milk surplus has also dragged down the industry, particularly for smaller and independent dairies.
Contending with the milk surplus has become especially difficult in recent months as new Chinese and Mexican tariffs slam U.S. dairy producers as exports — and stockpiles — are at top levels. U.S. dairy exports hit a record high in April, but farmers have seen prices drop to levels below their cost of production due to corporate consolidation, shifting consumer tastes and oversupply.
To help, the U.S. Department of Agriculture announced Tuesday it would make $12 billion in short-term emergency funds available to help farmers hit by retaliatory tariffs. According to The Washington Post, the plan would begin in September, and is designed to assist agricultural businesses like dairy and soybean farmers, and pork producers. Even if this assistance can provide real help for Dean Foods, the funds will not arrive until the third quarter, so it will have to hunker down and ride out the storm.
This perfect storm of problems in the dairy industry has put Dean Foods in a tough spot that will be hard to maneuver out of. As of now, the company’s solution is to cut costs where it can, which means within its network of suppliers and employees. Scozzafava said in the report that the benefits of these cost-cutting measures will begin to make an appearance in Q4. “Upon completion of our enterprise-wide cost productivity plan in 2019, our company will be a much leaner and more agile organization that can better address the current marketplace,” he said. The true question is what a leaner and agile organization will look like, and what it means for the larger dairy segment.
By: Jessi Devenyns
Source: Food Dive