Shares of Dean Foods Company DF lost 13% yesterday following an earnings and revenue miss in fourth-quarter 2017. Both the metrics also deteriorated year over year. With this, the company reverted to its negative earnings surprise after reporting in-line earnings in the previous quarter, with third straight sales miss.
Additionally, this Dallas-based food and beverage company’s shares have plunged 14.7% in the past three months, wider than the Consumer Staples sector's decline of 2.1%.
Q4 in Detail
Plagued by lower volumes and increased raw milk expenses, the company’s quarterly adjusted earnings from continuing operations of 25 cents per share missed the Zacks Consensus Estimate by a penny and also plunged 34.2% year over year. However, the bottom line was in line with the company’s guidance and excluded tax reform gains of $44 million.
On GAAP basis, the company posted earnings per share of 54 cents compared with 37 cents in the year-ago quarter.
Net sales declined 4.1% year over year to $1,935 million and missed the Zacks Consensus Estimate of $1,950 million. Total volumes across all products dropped 6% from the prior-year quarter. Adjusting for two less selling days in the reported quarter, total volume dropped 3.5%. While raw milk costs escalated 3% year over year, the metric dipped nearly 1% on a sequential basis.
Dean Foods Company Price, Consensus and EPS Surprise
Dean Foods Company Price, Consensus and EPS Surprise | Dean Foods Company Quote
Moreover, adjusted gross profit declined 9.9% to $448.1 million while the adjusted operating income was down by 39.2% to $178.1 million in the fourth quarter.
Financial Position
Dean Foods ended the year with cash and cash equivalents of $16.5 million, long-term debt —including current maturities — of about $913.2 million and shareholders’ equity of $655.9 million. Total debt outstanding, excluding cash on hand, was nearly $902.4 million as of Dec 31, 2017.
In 2017, the company generated nearly $144.8 million of net cash from operating activities and $38.1 million of free cash flow.
The company deployed roughly $107 million as capital expenditures in 2017. As of Dec 31, 2017, Dean Foods’ net debt to bank EBITDA total leverage ratio on an all cash netted basis came in at 2.68 times, reflecting modest growth from third-quarter 2017.
Other Developments
Dean Foods announced plans to boost operational excellence via execution of the enterprise-wide cost productivity program in order to generate additional savings in 2018 and beyond. Notably, it concluded the assessment phase and is currently in the advanced stages of designing along with the implementation of its savings plans. Markedly, this productivity program mainly revolves around three major areas, including enhancement of its supply-chain network, optimizing spending across all key categories to ensure greater efficiency, and integration of operating model along with minimizing general and administrative expenses.
The enhancement of supply chain focuses on consolidating plant network as well as maintaining quality, value and service. In the process, changes will be implemented in phases effective 2018, which is likely to be completed in 2019. Further, the company has completed the initial phase of cutting down the general and administrative expenses in the reported quarter and first-quarter 2018. Additionally, there are more actions planned for the future.
These initiatives along with the ongoing cost productivity efforts are expected to generate savings in 2018, which are likely to offset some negative impacts from volume declines and higher non-dairy input costs. While some savings expected to reflect in 2018, the company anticipates larger savings in 2019 and beyond.
Dean Foods aims to achieve an additional $150 million in annual run-rate savings by 2020 as well. In 2018, dairy commodity input expenses are anticipated to be deflationary compared with the previous year.
Furthermore, this plan is projected to generate free cash flow in the range of $30-$50 million for 2018. Additionally, capital expenditures for the year are projected in the $135-$160 million band.
2017 Results
Dean Foods recorded adjusted earnings from continuing operations of 80 cents per share in 2017, down significantly from earnings of $1.57 in the prior year. However, net sales came in at $7,795 million, up nearly 1.1% from 2016.
Outlook
Management has been taking strategic initiatives to drive results in 2018, amid a competitive landscape. Also, the company expects to gain from its smart volume initiative through the rest of 2017 aimed at improving top line, building margins and creating operating efficiencies. This initiative relates to managing private label products, while also analyzing new volume opportunities and evaluating existing volume profitability. These strategies are likely to aid the company in delivering robust earnings and cash flow in the long term.
Dean Foods now envisions adjusted earnings per share in the range of 55-80 cents versus 80 cents in 2017. The Zacks Consensus Estimate is currently pegged higher at 81 cents for the year. Though first-quarter 2018 earnings are expected to come disproportionately lower than fourth-quarter 2017, the metric is likely to improve through 2018 and into 2019.
Dean Foods carries a Zacks Rank #3 (Hold).
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Post Holdings, Inc. POST with a long-term earnings growth rate of 14% has delivered a positive earnings surprise of 7.3% last quarter. Also, the company flaunts a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Sysco Corporation SYY has a long-term earnings growth rate of 10.1% and a Zacks Rank #2 (Buy). It has delivered an average positive earnings surprise of 1.1% in the last four quarters.
Church & Dwight Co., Inc. CHD, also a Zacks Rank #2 stock, has a long-term earnings growth rate of 10.4%. Further, the company has pulled off an average positive earnings surprise of 6.6% in the trailing four quarters.
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