DALLAS — Dean Foods’ earnings ticked up during the second quarter of fiscal 2016 as the company continues to shift its focus away from less profitable market segments and attempts to develop a strong national, branded presence through the development of its DairyPure and TruMoo brands.
For the quarter ended June 30, Dean Foods earned $33,371,000, equal to 37c per share on the common stock, and an increase compared with the previous year when the company earned $26,519,000, or 28c per share.
Sales for the quarter fell to $1,848,788,000 from $2,014,706,000 during the same period of the previous year.
|Gregg Tanner, c.e.o. of Dean Foods|
“In the second quarter, total Dean Foods volume across all products of 632 million gallons was in line with our expectations,” said Gregg Tanner, chief executive officer, during an Aug. 8 conference call with securities analysts. “The declines in our fluid milk products were primarily due to large-format, private label volume we have chosen to exit, as this volume was not consistent with our more disciplined pricing architecture. Our branded white milk volume in all channels was flat year-over-year, and we experienced an increase in our flavored milk volume”
During the second quarter, Dean’s branded white milk share at retail increased 10 basis points versus the first quarter and 40 basis points when compared against the prior year, according to the company.
“Across the majority of our channels, fluid milk volume performance is exceeding or meeting our expectations,” Mr. Tanner said. “As we previously stated on the first-quarter call, we expect our share to remain stable or grow modestly over the balance of this year.”
A challenge facing the company is the cost of raw milk. During the second quarter, raw milk prices were down approximately 7% versus the first quarter of 2016. The quarterly average cost for the second quarter was $13.53 per cwt, which represents a decline of $2.30, or nearly 15%, on a year-over-year basis, Mr. Tanner said.
“With regards to the dairy commodity outlook, we forecast raw milk costs for the third quarter to average $15 per cwt, which represents an approximately 11% increase sequentially but an approximately 8% decrease year-over-year,” he said.
With the cost of raw materials rising, financial analysts on the call were asking about the company’s ability to manage pricing of its branded products versus private label.
“… there’s a couple things,” Mr. Tanner said. “One is we put in a pricing team that has gotten some new tools … that I think has made us much more effective and efficient in our pricing. And secondly, I think the investments that we’ve made behind the brands … have allowed us to expand our margins and really focus on that gap between private label and branded.”
An interesting subject that came up during the conference call involved how Dean Foods’ product portfolio may change in the future. In December 2012, the company sold its Morningstar Foods business unit to Saputo, Inc., Montreal, for $1.45 billion. Included in the agreement was a non-compete clause that prevented Dean Foods from manufacturing products produced by Morningstar Foods. Later this year the non-compete clause expires and Dean Foods will be free to manufacture and market its own creams, creamers, ice cream mixes, whipping cream, aerosol whipped toppings, iced coffee, half-and-half, value-added milks, sour cream and cottage cheese.
“Are those categories attractive?” Mr. Tanner said in response to an analyst’s question. “Yes, there are some of those categories that are very attractive. I think for us it’s a matter of prioritization of our innovation pipeline and which of those choices in sequencing did we want to take on, and how much do we want to throw at the organization at any point in time.”
He added that the company also is looking at plant-based products as an alternative for its innovation pipeline.
For the first six months of fiscal 2016, Dean Foods earned $72,572,000, or 79c per share, which compares favorably to the same period of the previous year when the company recorded a loss of $47,221,000.