Dean Foods 2Q14 Earnings Call Notes

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings. Full transcripts can be found at Seeking Alpha

most difficult operating environment in history of company

“This is by far the most difficult operating environment in the history of the company, reinforcing the importance of the initiatives that we have underway.”

Milk volumes soft

” the fluid milk category volumes remained soft and infact volume declines have accelerated beyond what we would consider the normal trajectory of the category. As Class I raw milk continue to rise through May, the category continued to weaken. ROI data suggest that year-over-year refrigerated fluid milk in the multi outlet or MULO in convenient store channels were down 4.1%, 4.8% and 4.7% respectively for April, May and June.”

Ready to eat cereal is declining too

“We are also concerned about the health of the ready-to-eat cereal category and its impact on fluid milk. Within MULO, total cereal volumes in Q2 were down 5% versus year ago levels which compares to last quarters year-over-year decline of 3%.”

High milk cost hit volumes

“Second, very high milk cost and resulting increases in retail prices created incremental volume softness in addition to increased pressure on our margins as pricing and retail was pressured by both price gap and price threshold considerations. In addition, higher raw milk cost raised the cost of Dean Foods of route returns, dumps, production losses and other forms of shrink.”

4% volume decline

“Total volumes in the second quarter were 674 million gallons, which represents a 4% decline from 703 million gallons in the second quarter of 2013.”

35.9% market share

“Our share as a fluid milk category for the quarter to date ending in May was 35.9%, which represents a 0.2% increase from the prior quarter”

Milk prices may improve late this year into 2015

” Although prices continued to remain in their record levels it is our and industry experts belief that we are seeing meaningful signs that raw milk pricing may improve as we move into late 2014 and early 2015.”

Bumping up against leverage covenants

“On an all-cash netted basis, our Q2 leverage ratio was 3.61 times net debt to EBITDA against our covenant maximum of four times. Today, we announced our intention to further amend our senior secured credit facility and receivables-backed facility to among other things, modify the consolidated net leverage ratio covenant to increase our maximum permitted consolidated net leverage ratio.”

higher cost firms will likely fail

“We would expect that this extremely challenged operating environment may cause some higher-cost firms to fail resulting in long-term opportunity for Dean to service additional customers at competitive prices.”

Consumers trading down to private label

“within Dean’s Foods, Chris, there was a — there is a negative mix shift taking place. So, our business transitioned about 1% of volume from brand to private label. So that’s a headwind for us as we experience that mix shift. But to Gregg’s point, brand versus brand, our brands continue to win in the marketplace versus competitive brand.”

All the fundamentals say that prices should come down, but they aren’t

“trying to prognosticate Class I at this point, all the data shows you that it should start to come down. All the fundamentals of the market say it should start to come down. But those fundamentals have been in place now for probably five to six months and we have not seen it come down.”

Margins on branded are 60c

“we have said in the past is that our branded margins, I think run at about $0.60 — $0.60 to $0.65 depending on the part of the country, higher than the private label margins.”