Dean Foods Q3 Profit Jumps, Cuts 2013 Outlook

13 Nov 2013 --- Dean Foods Company has reported third quarter 2013 earnings from continuing operations attributable to Dean Foods of $4.35 per share, compared to a third quarter 2012 loss of $0.02 per share. On an adjusted basis, third quarter 2013 diluted earnings from continuing operations were $0.12 per share, compared to third quarter 2012 adjusted earnings of $0.14 per share.

Third quarter 2013 operating income totaled $23 million, compared to third quarter 2012 operating income of $108 million. Third quarter 2013 adjusted operating income totaled $42 million, compared to $57 million in the year-ago period on a pro forma and comparative basis.

"We continue to feel confident in our long-term trajectory," said Gregg Tanner, Chief Executive Officer of Dean Foods. "We are actively working to extend our competitive advantages through aggressively reducing costs and enhancing our strengths and capabilities. At the same time, we have put the pieces in place to enhance shareholder value by utilizing our strong balance sheet and growing adjusted free cash flows, specifically through the adoption of a dividend policy, the initiation of a cash tender offer for up to $400 million of our bonds, and an increase in our available share repurchase authorization up to $300 million."

Net income attributable to Dean Foods totaled $415 million for the third quarter of 2013. On an adjusted basis, third quarter net income attributable to Dean Foods totaled $11 million.

Net sales for the third quarter of 2013 totaled $2.2 billion, compared to $2.2 billion of net sales in the third quarter of 2012, on a pro forma and comparative basis.

Dean Foods' share of U.S. fluid milk sales volume declined to 34.9 percent during the third quarter from 36.4 percent in the second quarter of 2013. Industry fluid milk volumes declined approximately 1.7 percent year-over-year in the third quarter on an unadjusted basis, based on USDA data and company estimates. Due to the previously disclosed loss of business at a large retailer, Dean Foods' unadjusted fluid milk volumes declined 10 percent on a year-over-year basis. Excluding the previously announced loss of business at a major customer and another customer's decision to vertically integrate its dairy operations last year, Dean Foods' milk volumes declined 1.7 percent in the quarter, consistent with the overall category. Total volumes across all products declined 8 percent to 685 million gallons.

The Company continues to make solid progress against its target of $120 million of cost savings in 2013, including the planned closure of eight to twelve (10-15%) of its manufacturing facilities by mid-2014. The Company has closed or announced the closure of eight plants since its accelerated cost reduction initiative began in the fourth quarter of 2012. As of the end of the third quarter, seven of the announced closures have ceased operations.

The third quarter 2013 average Class I Mover, a measure of raw milk costs, was $18.98 per hundred-weight, an increase of 15 percent from the third quarter of 2012, and 5 percent above the second quarter 2013 level.

Consolidated net cash used in continuing operations for the nine months ended September 30, 2013 totaled $259 million. Free cash flow from continuing operations, which is defined as net cash provided by or used in continuing operations less capital expenditures, was an outflow of $349 million for the nine months ended September 30, 2013. Negative cash flow was driven primarily by one-time items, most of which were associated with strategic separation activities, including the payment of $315 million of taxes related to the Morningstar divestiture, $35 million related to the impact of moving WhiteWave and Morningstar accounts receivable from intercompany to third party, and $31 million of deal costs, as well as a $19 million litigation settlement payment in the second quarter. On an adjusted basis, which excludes these and certain other items, Dean Foods generated $97 million in free cash flow through the first nine months of 2013.  A reconciliation between net cash used in continuing operations and adjusted free cash flow provided by continuing operations is provided in the tables below.

Total debt at September 30, 2013, net of $361 million cash on hand, was approximately $671 million. The Company's funded net debt to EBITDA ratio was 1.64 times as of the end of the third quarter of 2013.

Demonstrating its strong commitment to driving total shareholder returns, the Company announced that its Board of Directors has adopted a dividend policy with the intention of paying a $0.07 quarterly dividend beginning in the first quarter of 2014 ($0.28 per share on an annual basis).

"Turning to the forward outlook for the fourth quarter, although challenges remain, we still expect to deliver solid full-year results," continued Tanner. "The dairy commodity environment looks more challenging than previously thought as prices remain stubbornly high despite strong domestic production growth. Industry volumes remain soft. We expect to continue to have temporarily higher costs in the fourth quarter related to the plant closure activities. We expect this to be partially offset by our recent new business wins that will begin to improve our volume performance in the fourth quarter.

"All told, we expect fourth quarter adjusted earnings per share of $0.17- $0.23 per share, resulting in full year 2013 adjusted earnings per share of between $0.85 and $0.91.

"We now expect full year 2013 adjusted EBITDA to be between $391 and $400 million and adjusted free cash flow of approximately $100 million."