Dean Foods struggled with historically high raw milk prices as it reported a net loss of $8,956,000 in the first quarter ended March 31. Prices might go even higher in the second quarter before leveling off in the second half of the year, executives of the Dallas-based company said in a May 8 earnings conference call.
In the first quarter, Class 1 Mover, a measure of raw milk costs, was $22.38 per cwt, an all-time quarterly high, 22% higher than the first quarter of 2013 and 12% higher than the fourth quarter of 2013.
“Based on current Class I raw milk forecasts, we anticipate the second quarter of 2014 will be the highest quarterly average on record, exceeding the first quarter’s average by approximately 6%,” said Gregg Tanner, chief executive officer of Dean Foods. “The result of this continued upward movement in raw milk prices has increasingly moved us into unchartered territory with respect to price elasticity within the fluid milk category.”
He said Dean Foods expects another loss in the second quarter. The company lowered its full-year guidance on earnings per share to at least 60c. The company previously had expected adjusted diluted earnings per share of 73c to 86c. The new full-year guidance is predicated on a moderation of Class 1 pricing beginning in June, assuming prices of $20 to $21 per cwt by the end of the year.
The current high prices have Dean Foods facing two unpleasant choices, said Chris Bellairs, executive vice-president and chief financial officer.
“One is (to) pass through that high milk cost of $24 and run the risk of destroying demand,” he said. “The other is to not pass it through, and sort of try to maintain historic price levels that we have, and destroy margin.”
Mr. Tanner said retailers are absorbing some of the cost increases.
“Everybody is really price-sensitive in the market because we know that there are certain price thresholds that we can’t cross or it starts to impact the demand more so than others,” he said.
The loss of nearly $9 million in this year’s first quarter for Dean Foods compared to net income of $495,797,000 in the first quarter of the previous year. Net sales were $2,341,040,000, slightly above $2,292,430,000 in the first quarter of 2013.
Besides the higher raw milk prices, the previously disclosed loss of business from a retailer also affected first-quarter results negatively. School milk volume decreased because of winter weather disruptions. Dean’s unadjusted fluid milk volumes in the first quarter declined 6.7% on a year-over-year basis. Dean Foods’ share of U.S. fluid milk volume declined to 35.9% in the first quarter of 2014 from 37.8% in the first quarter of 2013.
Mr. Tanner said Dean Foods’ share in the first quarter of 2014 increased about one-tenth of 1% when compared to the fourth quarter of 2013.
“Since bottoming out in the third quarter of 2013, we have increased our share of fluid milk category by 1%,” he said.
Cost-reduction efforts continue. The company closed eight plants in 2013 and since then has announced three additional closings.
“We are currently operating in a very difficult environment,” Mr. Tanner said. “However, we remain confident the right steps are being taken to build a strong foundation for future success.”
