Dean Foods, the US dairy giant, has faced questions on whether it will sell off parts of its business to improve the business after a challenging year.
In the wake of yesterday’s (9 November) third-quarter results, which revealed that Dean Foods’ profits had more than halved on the year and sent the company’s shares to a nine-year low, analysts speculated about the future of the group’s WhiteWave-Alpro division and its ice-cream business.
In a note to clients today, Alexia Howard, an analyst at Sanford Bernstein, said Dean Foods’ current EBITDA run-rate meant the company was “at risk” of “tripping” its debt covenants in the second quarter of 2011.
Howard said it was “plausible” that an activist investor could call for Dean Foods to sell part or all of the company’s WhiteWave-Alpro division to pay down debt.
“If this were to happen, it would need to occur in the 19 January to 18 February submission window. Given the recent improvement in the EBIT of WhiteWave, we now estimate that EBITDA could now be around $213m over the past twelve months. If the company were able to secure around 10x for this business, this could imply proceeds of $2.1bn that could be used to pay down more than half of their $3.98bn in debt,” Howard wrote.
However, responding to analysts’ questions on the future of WhiteWave-Alpro on yesterday’s conference call, Dean Foods CEO Engles said owning the business created value for the company’s investors.
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“For the long-term benefit of our current shareholders owning WhiteWave-Alpro is a value creating mechanism,” Engles said. “For the time being, WhiteWave-Alpro is an important value creating asset within the portfolio of Dean Foods.”
Engles refused to be drawn on a question from JPMorgan analyst Terry Bivens on whether Dean Foods could spin off WhiteWave-Alpro. “Somebody early on in my career told me not to answer too many theoretical questions,” Engles said.
However, Engles admitted that Dean Foods needed to review where its ice-cream business was heading.
“The ice-cream business is a business that we’re in primarily because we bought fluid milk businesses that were in it. So we never set out to build a strategic position in ice cream,” Engles said.
“On the other hand, it’s become a US$900m business for us, and so we have to think about it strategically. And it’s a business that has produced over time healthy profitability for us. We have some very good regionally branded positions in the business, but I think it’s a fair point to say that we have to sort out over time where we’re going with ice cream.”
However, Engles indicated that a sale of its ice-cream business could be tricky, with its links to Dean Foods’ core fluid-milk operations. “Ice cream is pretty embedded in our fluid dairy business today, so the level of complexity in changing direction there is quite high,” Engles explained.
Dean Foods’ profits were again hit by competition from own label affecting its fluid milk business in the third quarter.
Throughout the year, Dean Foods has warned repeatedly of tough trading conditions due to pressure from private label and Engles said that trend had continued.
Engles explained that, despite retailers pushing “deep discounts” on milk to attract shoppers and its competitors bidding “aggressively” for business, Dean Foods had managed to grow its share of the category.
“However, this competitive intensity has resulted in broad-based price concessions,” Engles said. “The result of this pressure on our P&L accounted for the lion’s share of the year-over-year decline in segment gross profits in the quarter. The heavy competition in the marketplace will likely continue to impact the processing industry profits for some time to come.”
Engles also said the company’s volumes were continuing to fall, indicating that shoppers were not just trading down to cheaper milk but also buying less.
“We …. continue to see intra-month trends of declining volumes throughout each month, indicative of cash-strapped customers. It is clear that a significant segment of consumers are not just looking for value pricing, they are cutting back on purchases of even basic items. These trends have had a pronounced impact on the fluid milk category, which has slowed considerably,” Engles said.
The Dean Foods chief executive said butterfat costs had “spiked unexpectedly” during the quarter, further hitting profits. The price of Class II butterfat had increased 70% on the year, Engles said.
“Class II butterfat is a key input in our creamer, cultured and ice cream products businesses, where the pass-through of changes in input costs is less efficient than fluid milk,” Engles said.
For more from the Dean Foods conference call, please visit Seeking Alpha.