Dean Foods Executive Insights: Easter Shift, Excess Capacity
On Wednesday, Dean Foods Company (NYSE:DF) reported its first quarter earnings and discussed the following topics in its earnings conference call. Here’s what executives shared with investors and analysts.
Robert Dickerson – Consumer Edge Research: So, I guess I am used to be said great job, it’s so nice to actually sort of turn the corner a little bit after a couple of years. The first question I have is just regarding the Easter shift. I mean, we saw some companies namely HERSHEY’S (NYSE:HSY) and then Kraft (NYSE:KFT) to benefit in Q1 Easter shifts from your products. You could argue, got sort of Easterie, so to speak. So with guidance for Q2 still somewhat and obviously exceeding current consensus, it doesn’t seem like there was much of a bump that you’re calling out but just wanted to get some color on that?
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Gregg L. Engles – Chairman and CEO: I think Easter plays out a modest role in our business from a seasonality perspective, particularly perhaps around the Morningstar business with the Heavy Whipping Cream and Half & Half products. But it’s not a huge factor in our business and in fact when you look at how performance calendar rises across the first quarter in terms of by month, it wasn’t driven by a late March surge to serve Easter, it was really steadily above plan beginning sort of around late January to February timeframe. So really very strong throughout the quarter and it has continued very strong into Q2. So, while I won’t say Easter wasn’t an effect, it certainly wasn’t a big enough effect to call it out as a unique driver of the business and for FDD, frankly, our business has such high velocity that with Easter falling on the 8th, 9th or 10th, whatever, fell in April, really those sales were primarily driven in the first week of April as opposed to the end of March. So not a big impact on our business.
Robert Dickerson – Consumer Edge Research: The second quick follow-up was just, it looks like you have essentially outperformed in each of your segments and much of the business you have deleveraged as well, so there are number of drivers boosting EPS growth, but from Q1, from your perspective, I guess what were the one or two or three results that came in that really surprised you? Was it just there is a lot more volume growth than you actually really expected or is a sizable amount of this actually just coming because milk is back down in the 15.
Gregg L. Engles – Chairman and CEO: Now look, I think the most important take away from the call from my perspective is that really these results were certainly influenced by the performance at FDD and it was influenced by the drop in milk prices. It’s always a better environment when it goes down, but all three of these businesses were huge contributors to the outperformance and frankly this WhiteWave business is just firing on all cylinders. So again a 11% volume growth in the WhiteWave business, I think is just stunning branded volume growth performance and the algorithm is again about as good as it gets, so a 11% volume growth, only 13% sales growth, so very little in the way of price. This is a business that’s being driven by the consumer and really we’ve just been incredibly pleasantly surprised by the strengths of our brands and the strength of these categories and again that’s continuing as we move into Q2. So we’re extraordinarily pleased by the performance of the business that I think will ultimately drive the most value for this company.
Eric Katzman – Deutsche Bank Securities: I guess my first question Gregg, the problem last time around was with the excess capacity in the industry in the captive players and some of the local guys using the excess capacity to get more aggressive with most traditional retailers struggling for volume, why shouldn’t we be concerned that Kroger and Safeway and some of the little guys get more aggressive on pricing to drive store traffic again?
Gregg L. Engles – Chairman and CEO: If there is one risk that you still have to call out around this business, it is soft volumes in the category, and it’s excess capacity in the processing industry. The specific question that you are asking around retailer behavior, it’s always possible that they revert to a highly promotional pattern of behavior. But I think what the retailers have realized, from the past two years of experience, is that very deep discounting of milk really served only to destroy their collective profit pool, in this category, and did not drive incremental volume, nor at the end of the day, when everybody gets to the bottom, does it drive share. So I think frankly, the most encouraging thing that we have seen out of the most recent drop in milk, is that retailers to all appearances have abandoned that strategy, and frankly, almost fully restored the margin over milk, close to its historic highs that we hit back in the early parts of 2009. So that says to me that they had the experience of pursuing a deeply promotional strategy with milk. They have learned that it doesn’t produce incremental profitability anywhere in their store, and they are walking back to a more traditional approach to this category, which emphasizes profitability, as opposed to elasticity. I think that’s good news. But you are right, the underlying industry still has soft volumes and still has excess capacity, and when pressure points occur, that can manifest itself as declining margins, and that clearly is a risk. The other thing I’d say about the change in the commodity though is there are – our two years or two and half years in wilderness here, coincided with 30 months of pretty much steadily increasing milk prices, over which period of time 80% or 90% of the months were up months, and in which the price of that commodity doubled. I think we’ve all experienced how painful that is, in terms of margin and now we are experiencing the other side of the normal dynamics in this category of the benefit that accrues in the category, when the price of milk goes down for a pretty extended period of time. So I think what’s unusual over the last three years, is how long the uptrend was, not what happens during the uptrend; because what happened during the uptrend is pretty much in line with what has happened historically in the uptrends, but this was a 30 month period of steadily rising milk prices, that we hope for the time being has ended.
Eric Katzman – Deutsche Bank Securities: Then I don’t know if this will be a quick follow-up, but if the leverage has limited – by your own comments, your financial stability or strategic flexibility with WhiteWave to recognize an asset that – by the comments today is hitting on all cylinders. Can you talk a little bit about at what leverage point WhiteWave is a potential asset to be spun off or sold or do you feel now that it’s just – it’s worth keeping because it’s doing so well and there’s no need to even think about trying to force the market to recognize its value?
Gregg L. Engles – Chairman and CEO: Well, look I think we hit this issue head-on at CAGNY in early 2011 and our point of view with respect to the role that WhiteWave plays in our portfolio hasn’t really changed. So let me start by saying we are keenly aware of the fact that or our belief that WhiteWave is a highly valuable property. It got dominant brands in rapidly growing categories. It stokes by great innovation and marketing and it is performing I would argue as well as almost any consumer packaged goods business in the developed world, just a fantastic business that is highly aligned with consumer trends towards health and wellbeing and organic, it’s just a fabulous business. We’re also keenly aware of our duty as a management team and the Board is keenly aware of its duty to maximize value for shareholders over time, so if we don’t feel that the value of WhiteWave is being reflected and the aggregate value of Dean Foods we understand there’s an opportunity to recognize value for our shareholders by separating it and we again I think stated that very clearly year and half ago constraints on our ability to do so which we highlighted in 2011, and those constraints were around the amount of leverage that the businesses when separated could sustain and what the appropriate leverage profile was for the businesses if you were to separate them, and litigation that frankly had to be resolved before you could separate the business. We’ve largely resolved the litigation. That’s a very large net positive for this company and our leverage level is working down. So what I would tell you is we don’t have a specific leverage target at which we’re going to pull the trigger, but we’re mindful of the opportunity we think to perhaps accrete value for shareholders and it’s something that our management and our Board consider on a regular basis.