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No Milk No Honey

07 August 2019 by jbchevrel

Dean Foods Co (DF) was active this week. Indeed, the largest dairy company in the US reported its results yesterday. Causing cash to plummet around 10 pts. CDS widened consequently. DF reported a net loss in Q2 for the 4th consecutive quarter. Top line also came down, -5.5% to $1.84B and, below the consensus of $1.88B. The $5.4m in Ebitda reported fell short of the $37.8m consensus. From a strategy standpoint, the dairy-focused company blamed retailers for discounting milk too much. DF’s core margin goes from thin to thinner, literally squeezed between lower retail prices and inflationary pressures in the dairy commodity market. At the second order, dairy beverages are less in vogue among consumers, with increased competition from alternative ones. Water being one of those, according to the company statement. But not only. Consumers also consume more and more vegetal-based milk (ex: almond, oat, soy, coconut), that are surely more and more present in coffee places among others. The trend is here, and it is steep. Indeed, the consumption of cow’s milk in the US has fallen -40% since 1970 while US sales of dairy-free milk alternatives have soared +30% since 2011. From a cash standpoint, DF is now also projecting to be a net user of cash in 2019, dampening previous expectations of positive FCF. Negative FCF of -$74m for H1-19 was a chunky $158m less than H1-18. This has been driven by 2 quarters of operating losses and unfavorable working capital changes (inventory builds), capex at $45m. Net debt was reported at $968m with $21m cash on hand. Huge leverage also justifies that a credit event is almost surely going to happen, as per CDS market expectation, in the next five years (>90%) although the implied probability priced in at one-year horizon is less than half, the 1s5s paying c25% for c50% on 5s.