No. of Recommendations: 2
Hi everyone,

Slide deck:

Late to the game, I know, but I've got to do this when I can.

Dean Foods handily beat both analyst expectations ($0.06 EPS) and management's own expectations (around $0.05 EPS) by reporting $0.14 in EPS for the quarter. The difference was due to stronger WhiteWave-Alpro performance, more cost reduction than expected, and passing through commodity prices better than expected, offset a bit by lower volumes of milk sold.

So there are a couple of takeaways from that, which management spent a good amount of time discussing.

First, the cost cutting measures are working and that's going to continue. Second, the organic milk, the soy Silk brand, and the creamer business is doing quite well. Organic milk saw a 20% increase YoY. That level of growth is probably unsustainable, but is a reflection of high end consumers buying more as they feel more comfortable in their economic circumstances. This ties in to the good performance of luxury brand retail.

Third, volume is down and remains a serious challenge. The company is hoping to remain flat on volume through picking up more business (market share) while the industry as a whole sees declining volume. This is an indication of the lower level consumer still feeling pinched and cutting back on costs and is consistent with poor results at lower-end retailers.

Debt is slowly going down and management expects this quarter to be the highest in terms of leverage multiple as defined by the debt covenants.

Price differential between branded and non-branded milk is shrinking as grocers are having to raise the price of their store-brand milk. Gregg Engles commented that the level it had reached was too low given rising raw milk prices. Interesting point: for every $1 change in the Class I mover (raw milk) price per century weight (cwt), there's a $0.10 change to the price of milk per gallon. This price convergence is good news for Dean Foods.

One thought: If the elimination of the corn ethanol subsidy survives and is actually implemented, then we can hopefully expect to see the price of corn come down, which should help on the price of feed which should lower prices for things like raw milk, beef, and chicken.

Kellogg commented that cereal sales volume is recovering, which will help on milk volume sold, as the two are related (duh). Roughly 30% of milk sold is tied to cereal sales.

Operating profit per gallon of milk sold has historically been about $0.16 to $0.20 per gallon. A few years ago, it got into the low-20s, but that was unsustainable. In the recent past, it went down into the low teens, which was too low for everybody. It's coming back up, according to CEO Engles, which is good.

Humorous note: Apparently Engles had said something about shaving his beard off if the share price reached $15 or so. One analyst asked if it was off (shares were around $14 at the time). Engles' response was that "maybe we push the price target higher." Ha ha.

Still in turnaround mode, seems to be working out. My best performing pick to date with a 51.6% return since buying just before Christmas. Will have to think hard on whether or not to increase this company to a 4% position or not.

Free cash flow was down a bit for the quarter, primarily due to higher inventory expenses thanks to rising raw milk and butterfat expenses. Expectations at 15% discount rate as of yesterday's closing price: 10.3% / 5.1% / 0%. Wow. That kind of answers the question about getting a second position started in the negative (the 5-year CAGR is 13.5%). At least right now.


Previous coverage:
Q4 2010:
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