Dean Foods' share price was down 9% today (13 February) after the US dairy giant issued a cautious outlook for the year.
Shares in the group were down to US$16.73 in early morning US trading today, despite the firm booking earnings of $167.5m in the 12 months to the end of December. This compared to a net loss of $1.6m last year.
Dean Foods said it achieved the increase despite a "challenging" rise in costs in the back half of the year.
While management said it expects consolidated operating income to grow in the low- to mid-single digits, it said the fluid milk industry remains competitive. The firm said it recently lost a portion of a major customer's business, which will begin to be reflected in 2013's second quarter.
Dean Foods, which has been restructuring its business in recent months, selling its Morningstar business and spinning off its WhiteWave Foods unit, booked an operating profit of $427.8m versus an operating loss of $1.9m last year.
Net sales, however, were down slightly to $11.46bn from $11.64bn last year.
The company said it was pleased with the results and enters 2013 with "considerable momentum across many fronts".
Dean Foods Reports Strong Fourth Quarter And Full Year 2012 Results --Q4 Diluted Earnings per Share of $0.20, Full Year 2012 Diluted Earnings per Share of $0.90 --Pro Forma Adjusted Diluted EPS increases 48 Percent in Q4 to $0.40, Full Year 2012 up 81 Percent to $1.39 --Affirms Plan to Spin-off Shares of The WhiteWave Foods Company in May 2013 --Announces Intention to Retain up to 19.9 Percent of the Outstanding WhiteWave Shares
DALLAS, Feb. 13, 2013 /PRNewswire/ -- Dean Foods Company (NYSE: DF) today announced strong fourth quarter and full year 2012 results. The Company reported fourth quarter 2012 diluted earnings per share of $0.20, compared to a fourth quarter 2011 loss per share of $0.05. These financial results reflect both the initial public offering of The WhiteWave Foods Company in October 2012, which minority interest is now reflected as a non-controlling interest, and the sale in January 2013 of the Company's Morningstar business, which is now reflected in discontinued operations. On a pro forma adjusted basis, including the Morningstar business in continuing operations and eliminating the non-controlling interest of The WhiteWave Foods Company that the Company does not own, as well as certain separation costs and certain other adjustments, fourth quarter 2012 adjusted diluted earnings per share were $0.40, a 48 percent increase from the $0.27 adjusted diluted earnings per share in the prior year's fourth quarter, and well above the Company's November 2012 guidance for the fourth quarter.
Fourth quarter consolidated operating income totaled $83 million, compared to a consolidated operating loss of $50 million in the fourth quarter of 2011. Pro forma adjusted fourth quarter consolidated operating income in 2012 totaled $157 million, a 16 percent increase from the $135 million reported in the fourth quarter of 2011.
"The fourth quarter marked the successful conclusion of a very strong year," said Gregg Tanner, Chief Executive Officer of Dean Foods. "At Fresh Dairy Direct, our employees are to be commended for the results they delivered through continued focus on the fundamentals of the business, including volume performance, cost control and effective pricing. In particular, the strong pricing discipline demonstrated by our FDD field organization in the face of a highly inflationary commodity environment resulted in significant outperformance compared to our expectations."
Net income attributable to Dean Foods totaled $37 million for the fourth quarter of 2012, compared to a net loss of $10 million in the prior year fourth quarter. Pro forma adjusted net income for the fourth quarter was $74 million, a 47 percent increase from $51 million in the fourth quarter of 2011.
Net sales for the fourth quarter of 2012 totaled $3.0 billion, compared to $2.9 billion of net sales in the fourth quarter of 2011, reflecting strong sales growth at WhiteWave and the pass-through of higher commodity costs at Fresh Dairy Direct.
FRESH DAIRY DIRECT
Fourth quarter Fresh Dairy Direct operating income was $106 million, as compared to $107 million in the fourth quarter of 2011. Fourth quarter Fresh Dairy Direct pro forma adjusted operating income was $102 million, a 2 percent increase from $99 million in the fourth quarter of 2011.
"Despite the challenging rise in costs in the back half of the year and fourth quarter in particular, fourth quarter gross profit per gallon was above third quarter and year ago levels," said Mr. Tanner. "These results demonstrate the benefits of our focused agenda, and begin to break the old paradigm that we are reliant on favorable commodity prices to perform."
While still down on a year-over-year basis, industry volume performance improved in the fourth quarter from earlier in 2012. On an adjusted basis, as defined by the USDA, which adjusts for the quality and number of days in the period, Fresh Dairy Direct fluid milk volumes declined 0.8 percent on a year-over-year basis. This compares to the balance of the industry that experienced a volume decline of approximately 0.9 percent on a year-over-year basis, based on USDA data and Company estimates.
The pass-through of higher year-over-year commodity costs resulted in Fresh Dairy Direct net sales of $2.42 billion, a 1.5 percent increase from $2.39 billion in net sales for the fourth quarter of 2011. The fourth quarter 2012 average Class I Mover, a measure of raw milk costs, was $20.32 per hundred-weight, an increase of 8 percent from the fourth quarter of 2011, and 23 percent above the third quarter 2012 level.
CORPORATE EXPENSE
Fourth quarter 2012 corporate expense totaled $56 million, compared to $48 million in the fourth quarter of 2011. On a pro forma adjusted basis, fourth quarter 2012 corporate costs were $40 million compared to $46 million in the year ago period.
CASH FLOW
Net cash provided by continuing operations, which excludes Morningstar, for the year ended December 31, 2012, totaled $384 million, compared to $412 million for the year ended December 31, 2011. Free cash flow provided by continuing operations, which is defined as net cash provided by continuing operations less capital expenditures, totaled $156 million for full year 2012, compared to $106 million in 2011. A reconciliation between net cash provided by continuing operations and free cash flow provided by continuing operations is provided in the tables below.
Capital expenditures in 2012, including Morningstar, totaled $254 million, compared to $326 million in 2011. Total debt outstanding, net of cash on hand, decreased by$634 million from year-ago levels. Consolidated total debt at December 31, 2012, net of $79 million cash on hand, was $3.0 billion. For purposes of credit facility compliance, at the Dean Foods level, which includes Morningstar but excludes WhiteWave, total debt at December 31, 2012, net of $25 million cash on hand, was$2.3 billion. The Company's funded debt to EBITDA ratio, as defined by its credit agreements, was 3.54 times as of the end of 2012 versus a maximum leverage ratio covenant of 5.50 times.
FORWARD OUTLOOK ON REBASED RESULTS
With strong 2012 results, a strengthened balance sheet and a narrowed strategic focus, Dean Foods enters 2013 with considerable momentum across many fronts, but also some challenges. Management expects consolidated operating income growth in the low-to-mid single digits, as compared to a rebased 2012 operating income of $257 million that reflects the anticipated future structure of the Company assuming a full separation of WhiteWave had occurred on January 1, 2012 and reflects the sale of Morningstar (see Rebase paragraph below).
The Company's focus on volume, cost and pricing effectiveness has yielded significantly improved results and renewed momentum in the business. However, the fluid milk industry remains competitive. A recent RFP for private label milk with a significant Dean Foods customer resulted in a loss of a portion of that customer's business which will begin to be reflected in the second quarter of 2013. Dean Foods' management expects 2013 total fluid milk volume to decline in the low-single digits.
"Building on our successful cost reduction actions in 2012, we expect to dramatically accelerate our efforts to offset the financial impact of the recently lost volumes," continued Mr. Tanner. "Our primary focus for the balance of 2013 is on the elimination of costs, particularly fixed costs. With our significantly improved balance sheet, we anticipate expediting our ongoing cost reduction efforts, including the closing of 10-15% of our plants to remove fixed costs and eliminating a significant number of distribution routes, as well as associated SG&A. As these initiatives gain traction, we expect the impact of the lost volumes on our operating income to be relatively modest."
Operating income at FDD is forecasted to decline in the mid-single digits from the rebased results. This decline is expected to be more than offset by substantially reduced corporate costs, resulting in a low-to-mid single digit increase in consolidated operating income compared to 2012's rebased results. The Company also noted that, with the completed sale of Morningstar and pending separation of WhiteWave from Dean Foods, the Company expects to consolidate the reporting of FDD and corporate in 2013.
Forward Outlook Excluding WhiteWave's Operating Results
Excluding WhiteWave's operating results, Dean Foods expects to deliver adjusted diluted earnings per share of between $0.45 and $0.55 for the full year 2013. For the first quarter, Dean Foods expects to earn between $0.10 and $0.15 per share, excluding WhiteWave's operating results.
Forward Outlook Including WhiteWave's Operating Results
(Assuming WhiteWave Achievement of Midpoint of Guidance)
Including its current WhiteWave ownership interest, and assuming that The WhiteWave Foods Company achieves $0.70 and $0.15 of adjusted diluted earnings per share for the full year 2013 and first quarter, respectively, each the midpoint of the adjusted diluted earnings per share guidance ranges that it announced today, Dean Foods' expects approximately $1.00 to $1.10 adjusted diluted earnings per share for the full year 2013 and $0.22 to $0.27 adjusted diluted earnings per share per share for the first quarter of 2013.
REBASED 2012
In conjunction with today's earnings announcement, the Company provided a rebased view of 2012 results to provide investors a base for modeling the Company's business on a go-forward basis. The rebased results give effect to new cross-entity pricing arrangements among Dean Foods, WhiteWave and Morningstar. Additionally, the rebased view excludes Morningstar, which has been reclassified as discontinued operations as a result of the recent sale of the business. The rebased results also exclude WhiteWave, which is expected to be reclassified to discontinued operations concurrent with the planned spin-off of the majority of the equity interest in WhiteWave that Dean currently holds. The spin-off is expected to take place in May 2013. Allowing for these adjustments, 2012 Fresh Dairy Direct operating income is $440 million, corporate expense is $184 million, and adjusted consolidated operating income is $257 million. A more complete reconciliation of the rebased full year and quarterly results is provided in the schedules below.
THE WHITEWAVE FOODS COMPANY INITIAL PUBLIC OFFERING AND PLANNED SPIN-OFF BY DEAN FOODS
On October 31, 2012, The WhiteWave Foods Company, formerly a wholly-owned subsidiary of Dean Foods that owns the business comprising Dean Foods' WhiteWave segment, completed its initial public offering of 23 million shares of its Class A common stock at a price to the public of $17.00 per share (the "WhiteWave IPO"). WhiteWave's Class A common stock began trading on the New York Stock Exchange on October 26, 2012, under the symbol "WWAV". In addition, in connection with the WhiteWave IPO, WhiteWave entered into a $1.35 billion senior secured credit facility under which it borrowed approximately $885 million upon completion of the WhiteWave IPO. Substantially all of the net proceeds of the initial borrowing under the WhiteWave senior secured credit facility plus$282 million of the net proceeds of the WhiteWave IPO were used to repay approximately $1.16 billion of indebtedness outstanding under the Dean Foods senior secured credit facility. WhiteWave used the remaining net proceeds from the WhiteWave IPO of approximately $86 million to repay debt under its senior secured credit facility.
Following the WhiteWave IPO, Dean Foods continues to own approximately 86.7 percent of the economic interest in, and approximately 98.5 percent of the voting power of, WhiteWave's common stock.
Today, Dean Foods affirmed its intention to effect a tax-free spin-off of shares of The WhiteWave Foods Company in May, following the April 23, 2013 expiration of its IPO lock-up period. The Company has received a private letter ruling from the Internal Revenue Service providing that, subject to certain conditions, the anticipated spin-off will be tax-free for U.S. federal income tax purposes. Dean Foods also announced plans to retain up to 19.9% of the outstanding WhiteWave shares, or up to 34.4 million shares, with the intention to monetize or distribute the position in a tax free manner at a later date.
The spin-off or other disposition is subject to various conditions including Board approval, the receipt of any necessary regulatory or other approvals, the maintenance of the private letter ruling from the Internal Revenue Service, and the existence of satisfactory market conditions. There can be no assurance as to when or whether the proposed spin-off or any other disposition will occur.
Following any spin-off or other disposition, Dean Foods anticipates that there will be ongoing commercial relationships between Dean Foods and WhiteWave. In addition, Dean Foods and WhiteWave will provide certain transitional services to each other.
