Dean Foods' Profit Jump in 2Q - Analyst Blog
August 08 2012 - 5:00AM
Zacks
Dean Foods Company (DF) reported adjusted
earnings of 36 cents per share for the second quarter of fiscal
2012, beating the Zacks Consensus Estimate of 31 cents a share. The
company’s quarterly earnings doubled compared with the year-ago
earnings of 18 cents per share. On a reported basis, including
one-time items, the company registered earnings of 30 cents per
share versus a loss of 28 cents in the prior-year quarter.
Robust second quarter results reflect continued growth momentum
across the company’s business segments as well as a stringent focus
on cost control.
Quarter in Detail
Dean Foods’ net sales dipped 5.3% year over year to $3,125.5
million compared with net sales of $3,298.8 million in the
prior-year quarter. The decline was primarily a pass-through of
lower dairy commodity costs, offset partly by strong top-line
performance at WhiteWave-Alpro. The company’s quarterly net sales
also missed the Zacks Consensus Estimate of $3,241 million.
Segment-wise, during the reported quarter, Dean Foods’ Fresh
Dairy Direct sales declined 10% to $2.2 billion while
WhiteWave-Alpro’s sales climbed 11% to $573 million. Top line
results at the company’s Morningstar segment were almost flat
compared to last year’s net sales of $345 million.
Adjusted operating income for the second quarter increased 36.9%
to $156.5 million from the prior-year quarter’s $114.3 million. The
improved results were primarily due to an increase in operating
income of 31%, 41% and 19% at WhiteWave-Alpro, Fresh Dairy Direct
and Morningstar, respectively. Operating income growth was also
attributed to disciplined expense control in all fronts throughout
the organization.
Consequently, Dean Foods’ adjusted operating margin for the
quarter expanded 150 basis points to 5.0% compared with 3.5% in the
prior-year quarter.
Dean Foods ended the quarter with cash and cash equivalents of
$60.4 million, long-term debt of $3,552.0 million and shareholders’
equity deficit of $3.1 million. During the six-month period, the
company generated $238.7 million of cash from operation, while free
cash flow totaled $143 million. Capital expenditures for the six
month period decreased to $96 million compared with $119 million in
the year-ago period.
Further, the company remains focused on curtailing its overall
leverage. As of the end of the second quarter, the company's funded
debt to EBITDA ratio as defined by its credit agreements declined
to 3.96x, below its maximum leverage covenant ratio of 5.50x.
WhiteWave Foods’ IPO
Concurrent to the earnings release, the company announced that
its wholly-owned subsidiary, The WhiteWave Foods Company, has
proposed an initial public offering (IPO) of up to 20% of its
common shares and has also filed to register with the U.S.
Securities and Exchange Commission regarding the same. Subsequent
to the IPO, The WhiteWave Foods Company will own Dean Foods'
WhiteWave-Alpro business, while Dean Foods will hold a minimum of
80% of The WhiteWave Foods Company's shares.
Additionally, Dean Foods stated that it expects to use the
proceeds from the offering as well as about $800-$925 million,
planned to be borrowed under The WhiteWave Foods Company’s new
credit facility, to reduce its debt levels. Consequently, if the
transaction is completed, the company expects to lower its year-end
leverage ratio to nearly 3.5x debt to EBITDA, as defined by its
credit agreements. The company expects to complete the transaction
in the fourth quarter of 2012.
However, if the transaction fails to culminate, the company’s
year-end leverage ratio is expected to be roughly 3.75x.
Outlook
Looking forward to the rest of the year, Dean Foods expects the
momentum of the first half of 2012 to continue across all its
business segments. The company expects the WhiteWave segment to
deliver strong volume-driven sales growth and operating
leverage.
Further, the company expects the Fresh Dairy Direct business to
deliver operating income growth in the mid to high-teens range for
the full year, driven by strong volume growth, price realization,
and cost efficiency. The company also expects full-year operating
income growth at Morningstar in mid-teens range, on account of
solid customer growth, new product innovations, and a focused
approach.
In a nutshell, the company expects such performance at the
segments along with continued focus on efficiency and leverage
reduction to drive both operating income and earnings per share
growth. Adjusted earnings in the third quarter are expected in the
range of 25 cents to 30 cents per share. Consequently, the company
guided full-year earnings per share in the $1.18–1.28 range.
Dean Foods, which competes with Kraft Foods
Inc. (KFT), currently has a Zacks #3 Rank, implying a
short-term Hold rating on the stock. However, we have a long-term
Outperform recommendation on the stock.
DEAN FOODS CO (DF): Free Stock Analysis Report
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