DF
#Thank you, <UNK>, and good morning, everyone.
I'll start today's call with a quick reminder of some of the key pillars of our strategic plan and how they drive and guide our actions.
Building and buying strong brands and winning in private label are critical to building a solid and reliable commercial business, while driving operational excellence and enhancing our capabilities will make us both more efficient and more effective over the longer term.
These pillars are at the center of what we do, and the corresponding imperatives driving our actions in 2018 come directly from them.
First, we're driving some exciting commercial initiatives with investments in innovation and brand building as well as a smart approach to winning in the private label business.
On our brands, we'll continue to build our industry-leading DairyPure and TruMoo brands.
We are seeing the benefits of our brand-building efforts as we continue to retain category leadership positions on both of these brands.
From an innovation standpoint, our recent launch of DairyPure mix-ins cottage cheese is another key extension of our strong DairyPure equity in an adjacent and attractive category.
We have a large private label business, and it's very important to us.
It enables us to do many things, and we'll use our improved cost structure to help drive smart volume to win in this business too.
We bring many capabilities to the marketplace, and our scale advantage brings meaningful benefits to our customers.
We'll also continue to diversify our portfolio as we drive our ice cream products through geographic expansion on our Mayfield brand in the South; and the introduction of new and innovative products, like Friendly's cakes and sundae cups.
We're also targeting the continued development of dynamic channels like food service, where we continue to experience growth.
And we're also expanding our presence in the fast-growing organic space with Organic Valley Fresh and Uncle Matt's Organic.
Now the second major imperative for us is to dramatically reset our cost structure to match our volume of today while creating the right network and cost base, with an eye toward the future.
Our aggressive enterprise-wide productivity plan will enable us to do just that by delivering an incremental $150 million in run rate savings by 2020.
You can see the early results of our work beginning to read through our income statement.
We have plenty more good work to do ahead of us to achieve our goals.
The third key takeaway for you is that we'll build our core capabilities and skills as we ramp up our investment in our people, our infrastructure, technology and systems to enable us to be more capable and drive better execution.
You'll hear much more about this from <UNK> in just a bit.
We consider 2018 an important year of transition and transformation as we take aggressive yet appropriate action to drive our strategy and reset our cost structure at the same time.
This will enable us to deliver solid and consistent earnings and cash flow over the long term.
We've made very good progress to date in executing against these initiatives, so let's start with a review of our Q1 performance.
For the quarter, we delivered $32 million of adjusted operating income, down 11% versus year ago; and 14% (sic) [$0.14] of adjusted earnings per share, up 8% versus prior year and on track with our full year plan.
We had strong execution of our key actions to reduce our selling and administrative costs, and you're seeing that read through in our Q1 financial results.
Our supply chain teams delivered solid performance against our OPEX 2020 productivity plan to drive waste out of our system.
And they reduced total landed cost by over $4 million versus year ago despite higher-than-expected freight inflation.
<UNK> will speak in more detail about our cost performance in just a few minutes.
Our volume and brand mix came in, in line with our expectations, and we're encouraged by recent trend improvements in category volume.
So now I'd like to briefly discuss our brand performance and commercial initiatives, so let's get started.
We continue to drive our commercial agenda on several fronts.
First, building strong and resilient brands in the categories we compete is a primary focus for our selling and marketing team.
Despite continued retail investment in private label white milk and a growing price gap, DairyPure continues to be the brand leader and deliver flat year-over-year dollar share in the white milk category at retail.
In 2018, we're investing in DairyPure at higher levels than last year.
And as we support our product innovation and new marketing campaign, we're also expanding our reach through increased digital presence in addition to airing new TV creative.
We're also diversifying into adjacent categories with our new DairyPure mix-ins cottage cheese, which began shipping in early Q2 and thus far is tracking to our expectations.
The Organic Valley Fresh joint venture continues to progress with some additional customer wins and ACV growth.
And of course, we're actively pursuing smart volume to support our win in private label strategy, where we prudently balance volume and price with a lens towards better profitability across our network.
This is a large and important business for us, and we're committed to winning here as well.
So as we drive our strategy, it's critical that we continually assess our total business.
And as we execute our enterprise-wide productivity plan, we have to ensure that the savings we generate ultimately make us more profitable and generate stronger cash flow.
On that important note, I'd like to now turn the call over to <UNK> to walk you through our cost productivity plan execution and financial performance in more detail.
<UNK>.
Thank you, <UNK>.
Let me start by saying that I'm happy to be joining my first earnings call as the CFO of Dean Foods, and I look forward to getting to know you all better.
On our last call, <UNK> took you through the 3 primary areas of our enterprise-wide productivity plan: rescaling our supply chain, optimizing spend management and integrating our operating model.
We've taken big steps towards creating a leaner and flatter organization.
We began these efforts in Q4 of last year, and as you'll see reflected in our P&L, we further reduced our SG&A costs in Q1.
We simplified our field organizational structure, enabling our functional experts to get closer to our customers and streamline the way we do our business.
Our new organizational structure supports integrated and centralized spend management for our indirect spend categories.
We're mobilizing new processes, principles and systems to leverage our size and scale for efficiencies in areas that were previously decentralized across the enterprise.
We are deploying new technology in this area to simplify how we buy to ensure we're controlling our spend in a disciplined and sustainable manner.
We're in the early stages of executing our initiatives in this area, but we're encouraged by the quick wins we're already seeing.
We recently completed the analysis and developed execution plans to rescale our supply chain.
Recall that our overarching goal here is to rightsize our network to better match our current and projected volume, including the anticipated impact from customer changes.
In Q2, we will begin to see volume reductions at 2 large customers.
We have plans in place to reduce our fixed costs once this volume leaves our system, but we will incur some transitory costs until these plans are complete.
We'll talk more about these actions once they are announced in the coming weeks.
Turning now to the P&<UNK>
In the first quarter, total Dean volume was in line with our expectation.
We reported $448 million in adjusted gross profit in Q1, a decline of 4% versus prior year driven primarily by our lower volume and higher mix of private label products.
Please note that in connection with our implementation of the new revenue recognition standard under FASB ASC 606, effective January 1, 2018, we are presenting the sale of excess raw materials as part of the net sales line of our income statement.
We previously reported these sales as a reduction of cost of sales.
The impact of this reclassification resulted in an increase in net sales of $152 million in Q1 and a corresponding increase in cost of sales.
Below the gross profit line, total company operating expenses decreased by $14 million from the year-ago period in Q1.
Within selling and logistics, expenses increased by $2 million in Q1, driven primarily by higher freight expense versus year ago.
Our G&A costs also improved in Q1 by $13 million, driven by a reduction in headcount and employee-related expenses.
In total, we delivered $32 million of adjusted operating income, a decrease of $4 million versus prior year.
Below the operating income line, adjusted EBITDA for the quarter was $67 million, a $7 million decrease versus the prior year period.
Interest expense decreased roughly $2 million from the year-ago period.
In combination with our new normalized adjusted tax rate of 26.5%, adjusted diluted earnings per share was $0.14 in Q1, nearly an 18 ---+ 8% increase versus prior year.
In Q1, raw milk costs were down 13% sequentially versus Q4 and down 16% versus year ago.
In tandem with these lower costs, we've seen an increase in retail and margin over milk, with the March exit rate rising to $1.44, nearing historical norms.
We expect Class I raw milk costs to increase as we progress throughout the year, with rates in the back half of 2018 at similar levels to what we saw in 2017.
Additionally, similar to other manufacturers, we are seeing higher inflation in external freight, resin and fuel.
These categories drove higher input costs in Q1 than year ago, and we expect this to continue through the balance of the year.
We are working to mitigate this inflation through additional productivity.
Turning now to free cash flow performance.
Our Q1 free cash flow was $22 million, up $3 million versus prior year, primarily due to improved operating results combined with lower restructuring costs.
Net working capital was relatively flat compared to the end of 2017, and receivables improved over $9 million versus prior year.
This was driven by lower dairy commodity prices and better working capital management.
From a balance sheet perspective, we ended Q1 with net debt of $884 million, down from $902 million in the prior quarter.
This decrease was primarily facilitated by positive quarterly free cash flow.
On an all-cash netted basis, we maintained total leverage of 2.68x despite the last 12 months bank EBITDA being lower than full year 2017.
We continue to possess a high-functioning debt capital structure with $900 million in flexible, low-cost and multiyear revolving facilities.
These revolving facilities are anchored by $700 million in 6.5% fixed-rate senior unsecured notes due in 2023.
With that, I'll turn the call back to <UNK> for a brief commentary on our forward outlook.
We'll then open the call to questions.
<UNK>.
Thanks, <UNK>.
As we move forward in 2018, we're focused on executing our commercial plans and our cost productivity initiatives that'll drive our strategic plan.
We've been successful in delivering early results in the administrative cost area against our enterprise-wide productivity plan.
You're seeing the early benefits read through our P&L, and we have more work to do in this area to achieve our goals.
We'll also now begin the next phase of our plan by rightsizing our network to better match volume.
We'll incur some transitory costs, as the execution of our plans will add the exit of specific customer volume in the second quarter.
And we have firm plans in place to remove the fixed costs from our system within this year.
We're also implementing plans to mitigate any headwinds in nondairy input costs while executing our strategic initiatives.
And we'll continue to drive our brands and private label business as we actively pursue smart volume to ensure we have the right volume in our plants to drive profitability and cash flow.
I'm confident in our ability to execute these actions and reaffirming our full year adjusted diluted earnings per share range of $0.55 to $0.80.
Our full year free cash flow and capital expenditure guidance remains unchanged.
So what we want you to take away is the understanding that we're taking meaningful and aggressive steps to deliver higher earnings and cash flow over the longer term enabled through our continued execution of our commercial agenda, coupled with our enterprise-wide productivity plan targeting an incremental $150 million of annual run rate savings by 2020.
We're hard at work doing both, and I look forward to updating you with our progress on our next call.
So with that, I'd like to open up the call to your questions.
Operator.
Yes, sure.
Just at a high level, I could ---+ we could tell you that our volume was in line with our expectations, which was good.
I think some of the gaps that you see are driven by 2 things.
Private label.
Keep in mind we are a ---+ the largest supplier of private label.
We supply a lot of the major folks that we all know, so you're not going to see that when you're just tracking only our brands.
So that's the first thing.
The second is we have a food service business that's on track; very large business probably more so ---+ more developed in our particular company than maybe other CPGs that you follow.
So I'd say that'd be the ---+ really the 2 sources.
Yes, I think that's a good assumption.
And it's baked into our guidance.
It's in our plan, way forward, so where we're headed.
And we're also taking costs out correspondingly, so our guidance remains unchanged.
Yes, Q1 saw no impact.
That's correct.
We don't talk about wins or volume that we exit with customers, so we typically don't get into any detail on that.
You'll see some in Q2 that we've got our plans in place to mitigate.
That's really the best way to think about it.
We have a number of volume gains that we don't announce, so you really have to balance the two.
And that's how we manage it internally.
Sure.
I'll start, and then <UNK> can give you a lot more detail on this topic.
What I'll start with is the amount of hard work and change management that's going on.
We're taking on some big pieces of changing the way that we do business, <UNK> mentioned in her remarks, that are far different than things we've done here before.
And I think that's why really the results are reading through.
There is no change in bonus accrual.
In fact, <UNK>, why don't you take the rest.
Yes.
So the SG&A performance reflects the targeted cost reductions that we shared that we would be deploying as part of our enterprise-wide productivity plan.
That began in Q4 of last year and continued on in Q1.
So it is all employee-related expenses.
We have not ---+ we have, as you know, fully reloaded actually our bonus plan for 2018, so that is not a savings in our Q1 performance.
No.
Actually, we haven't been providing volume numbers.
And I think it's obvious with what we're trying to do.
We're taking a business and really making some changes, some consolidations.
And I think within that we think that a volume number can be misleading given the amount of costs that we're taking out.
That's why we talk about smart volume a lot.
And we don't want a volume number to be either unusually optimistic or pessimistic.
We're managing to the numbers that we have internally, and so far, so good.
I think, when we get through the change that we're in, we'll have another discussion about that.
Yes, potentially, but I would tell you now we are managing a business that is going to be slightly smaller, not a lot smaller.
We just have a huge scale advantage we want to keep.
However, there's a little shrink-to-grow that we're working through.
And when we get to another place, we're going to go through ---+ up to 2020, we're going to get through all of our savings, the $150 million.
So I wouldn't entertain on every call we would revisit this discussion.
We'll not give volume guidance for quite a long time.
Sure.
I'll start, and I think <UNK> might have some comments on this.
It's ---+ I mean it's really ---+ it's physics.
When you consolidate plants, you've got to get to a last model date.
And then you've got to transition the volume to the receiving plant.
Within that, there are some costs.
And it's just the physics of stopping production in one location and starting up in another.
And that's the best way to ---+ that I can describe it.
Yes.
I think, just to follow on that, as we have shared, we do expect our volume to decrease with respect to 2 large customers, but we have to make some investments in the receiving plants as well as before we can take the fixed costs completely out of the plants that are being consolidated.
So it's really a timing issue in order to ensure a smooth execution in the marketplace so there's no disruption in the ---+ with our customers.
No.
I think we've got some very capable people here.
We've been able to build, I think, one of the best, strongest brands in the store, one of the largest, with DairyPure, remembering, I think you know, that brand is 3 years old.
And it's the #1 brand in milk and larger than some major brands.
So we've got the talent here, the talent that built TruMoo, the talent that brought DairyPure mix-ins to market and so on.
So we like the team that we have.
We like them a lot.
We're deep, and I like where we sit.
Yes, sure.
<UNK>, first, I would tell you on the brand side we have solid velocities on our brands, DairyPure, TruMoo.
And one of the measures of a brand and how you're building equity is how resilient that brand can be in the face of what I would call very aggressive private label activity at a heightened level than we've seen in many years.
Now to the degree that's sustainable, I would argue it's not.
And at some point, that'll subside.
But even in the face of all of that, we've got basically flat dollar volume, dollar share.
And our velocities are performing very well and in fact strong and outperforming the category in the food channel, where we do the bulk of our business.
So I tell our folks our brands are going through the crucible right now in the marketplace and are quite resilient.
And I mentioned that in the prepared remarks.
So more to come, but we'll continue to drive our brand building with increased support this year, more diversification beyond fluid milk but, of course, supporting the core fluid milk business.
I think, as far as the Walmart piece and their new plant, we have pretty good visibility into what's happening and the transitions; and we're comfortable with our outlook.
Let me ---+ maybe I'll start with the private label piece.
And then I can kind of hand off to <UNK> to talk a little bit about the supply chain question you asked.
Both very good questions.
All right, so we've got a branded mix in this category.
Let's just talk about fluid milk for a minute.
It's about 1/3 of the category, so it is a meaningful element and contributor to the category and brands.
So that's even a volume number.
When I go to a dollar number, the number is even higher.
So as much as we talk about this category, fluid milk, being predominantly private label, there is a large branded component to it.
That's really the first thing.
Really the conversation with retailers, and the good ones always get it, and they knew it before we told them, believe me, is they make very little to no money on private label.
And they make a lot of money on our brands.
And that can vary a little bit, but typically the brands are where you can margin up the category, so it becomes a category profit management story.
On the plant side of the business, let me just turn that over to <UNK> to talk about plants and logistics.
Yes.
Thank you for your question.
This is a reminder that because our business is predominantly DSDs, we don't have the same input pressures on freight as some of other companies that we're competing with or in the marketplace that you're hearing about.
We have our own drivers, and so we are not under that same pressure.
While we do have higher freight and fuel costs, it's not the same as some of the other companies, but I will tell you that when we're looking at a consolidation of our plant network, we certainly do look at the variables of freight and fuel in those decisions.
And it is well analyzed when we make these decisions.
Well, we've given annual guidance.
We really haven't broken down into quarterly and for a lot of reasons.
One is we're able to see across 12 months.
And given the changes that we're making and really the aggressive nature of some of the changes, to try and bucket them perfectly within a quarter would potentially give us ---+ put us in a situation where we'd give you some misleading potential information.
So the years to year, $0.55 to $0.80.
I would anticipate, as we get through the second quarter and get on our next call, we would adjust that range.
I would like to narrow that, but that's a conversation for another day.
A lot of work going on, good work, are starting to read through, which is good, in terms of financial statements, but we've got a lot of work to do here.
And our team knows it.
Yes, I'll talk Organic Valley.
And then <UNK> may have some comments.
She's their newest board member and got a full indoctrination up there a couple weeks ago.
That's a great brand.
We went up to the annual meeting that they have up at ---+ in Wisconsin for the Organic Valley team and their farmers.
And I would tell you, every time I experience that brand, it's ---+ it truly is a movement.
And they've created one of the most authentic brands in the grocery store.
I think we published some results.
You can see in our release for the first quarter our ---+ part of our 50% piece of the joint venture.
So that flowed through the income statement for the first time, so you get a read there.
There's a lot of growth in front of us.
And they can make virtually any product certainly in the dairy category and beyond.
And I think, as we get further along with them, the opportunity to do more is certainly there.
And they're a terrific partner thus far.
Yes ---+ no, to reiterate what <UNK> said: I mean it is a very special group of people supporting the Organic Valley business.
I was very impressed by the people that I met and the work that they're doing to grow their brand.
We are ramping up this business and continuing to drive incremental distribution in the conventional channels and feel very encouraged about the opportunities to grow, but as <UNK> stated, you can see the performance that we had in this on ---+ during the quarter on the equity line in the P&L in our release.
Okay.
It's a great question, and you can interpret it a number of ways.
What we'll look at here is the price gap between brands and private label, and then we'll look at velocities to make sure that our brands can stay competitive.
And to the earlier question about private label that someone asked, I think it was a share-related question.
We have a very large and powerful private label business.
And it's important to us, and we're not going to apologize for it.
It's important.
We're a low-cost producer.
We want to leverage that business.
So we're not afraid to admit that and to support that part of our business with our customers too.
I'm not sure what they'll do going forward, babying the retailers from a margin standpoint.
I have some ---+ I have a suspicion, but we'll see it play out together.
But we'll be ready for it, whatever they choose to do.
I\
Just to add to that, I want to remind you all that the impact of commodity changes on our business is primarily seen in our branded portfolio.
So it's not the entire portfolio.
And as to <UNK>'s point on the network consolidation work that we're going to be announcing soon, we're not only looking at the plants, but it's we're ---+ we also take into account all of the logistics components of that as well.
So we'll be thoughtful on how we execute that to mitigate additional freight and fuel inflation that could be seen.
Yes, it's a great question because we've integrated a lot of those businesses in the ---+ what I'd call the back office in the plants.
And we're in a marketplace where there is what I would call some dynamic innovation that we need to participate in.
And we've got some products that we'll be bringing out this summer that'll help us do that.
Clearly you see in the category some really, really strong growth in this kind of better-for-you dietary area; the Halo Tops of the world; kind of low-calorie, single-serve pint business.
I think you know about, a year ago, we bought all of the intellectual property for the Steve's Ice Cream brand.
We think that's a way that we can play in pints.
On the Friendly's business, also on the what I'd call packaged non-2-piece part of the category, our cakes and our sundae cups continue to be excellent, excellent sellers with very strong dollar velocities.
We've got to now build more capacity, frankly, because we just can't make enough of that product.
So I think ---+ between the innovation that we'll bring from that standpoint and really participate in some of the growing parts of the category, I think we'll get ourselves in the game the way that we really need to be.
We've got a great brand in the Northeast in Friendly's.
It's the #1 brand.
We're strong in the Southeast in Mayfield.
We're expanding, but I think we can execute this summer against the holidays.
If we can do that the way we expect to, I think we'll find ourselves in a pretty good place.
Yes, it's a great question because that's how we typically manage it.
It's one of the gains and the losses; and what businesses do we exit, what businesses do we pick up.
And the net effect of all that is what informs our guidance.
This happens to be a year when there is a plant that's being introduced in an industry that hasn't seen a big plant like that in a ---+ maybe ever, certainly a very long time.
So we're just managing through that, but there are many customer wins that we're getting.
There are some customers that we're walking away from, but I like the way that our commercial team and our revenue management folks have been managing both the branded piece of the business and the bid process on private label.
I think their work has been excellent in my view.
Yes, it\
You could.
We have 9 ice cream plants.
We're geographically dispersed.
It's an excellent footprint across the country, so yes.
And in fact, you're already seeing some Friendly's being made outside of the Wilbraham plant.
You're seeing Mayfield made in multiple locations, so yes.
We just closed about 1.5 years ago on the plant in St.
George, Utah.
That allows us to ship to both high elevation and low elevations from that single location, which is really important in the Western U.S. So we've got the footprint and we've got brands.
We just need to make sure that we're smart about where we make and how we ship and all of that, but yes, you could see announcements like that.
Well, we want to thank everybody for being on our call and your interest in Dean Foods.
We're making progress.
We've got more to do.
We've got, I think, a plan that'll really work for us and that we've got a team in place that's working very hard and very capable to get it done.
So thanks for your interest, and we look forward to updating everyone on our next earnings call.
Take care, everybody.
