Dean Foods Says Conventional Dairy Business Remains Challenged, Value-Added Brands Continue Strong Growth

Net income attributable to Dean Foods for the second quarter of 2010 totaled $44.8 million, compared with $64.1 million in the prior year’s second quarter. Lower operating income at Fresh Dairy Direct-Morningstar offset improved WhiteWave-Alpro results and lower interest expense in the second quarter.

Aug 4 2010 --- Dean Foods Company has announced second quarter diluted earnings per share of $0.25 for the quarter ended June 30, 2010, compared to diluted earnings of $0.38 per share in the second quarter of 2009. Adjusted (as defined below) diluted earnings per share in the second quarter were $0.29, compared to $0.44 per share in the year ago period.

“Our results in the quarter remain well below year ago levels, but represent a step forward from the difficult start to 2010,” said Gregg Engles, Chairman and Chief Executive Officer. “While the challenges in the fluid milk category continue to negatively impact results, we remain focused on significantly lowering our cost structure to position us to win over the longer term.” 

Net income attributable to Dean Foods for the second quarter of 2010 totaled $44.8 million, compared with $64.1 million in the prior year’s second quarter. Lower operating income at Fresh Dairy Direct-Morningstar offset improved WhiteWave-Alpro results and lower interest expense in the second quarter. Adjusted net income for the quarter was $53.5 million, a decrease of 28% from $74.5 million in the second quarter of 2009.

Net sales for the second quarter totaled $3.0 billion, an increase of 11% from net sales of $2.7 billion in the second quarter of 2009. The net sales increase in the quarter was primarily due to the pass-through of higher dairy commodity costs at Fresh Dairy Direct-Morningstar, the benefits of the acquisition of Alpro and continued strong sales growth at WhiteWave–Alpro.

Consolidated operating income in the second quarter totaled $125.0 million, compared to $157.0 million in the second quarter of 2009. Continued pressures in the market for conventional fluid milk and related products drove a 28% decline in Fresh Dairy Direct-Morningstar operating income. This decline was partially offset by an 18% increase in WhiteWave-Alpro operating income and lower Corporate expense, resulting in second quarter consolidated adjusted operating income of $133.4 million, a decrease of 26% from $180.2 million in the second quarter of 2009.

Fresh Dairy Direct-Morningstar fluid milk volume increased 0.2% in the second quarter, including acquisitions, versus the balance of the industry that experienced volume decline of roughly half a percent, based on Company estimates. Fresh Dairy Direct-Morningstar net sales increased due to the pass-through of higher average dairy commodity costs to its customers. As a result, segment net sales increased 8% to $2.5 billion, from $2.3 billion in the second quarter of 2009. The second quarter average Class I Mover was $14.10 per hundred-weight, 4% below the previous quarter, but 35% higher than the second quarter of 2009.

Across the balance of the Fresh Dairy Direct-Morningstar portfolio, the ice cream, cultured and creamer businesses experienced modest volume declines in the quarter, while strong demand from quick service restaurants drove a solid increase in ice cream mix and aerosol product sales volumes. Class II butterfat, a primary input for cultured and ice cream products at Fresh Dairy Direct-Morningstar, averaged $1.68 per pound in the second quarter,13% above the previous quarter and 34% above the year earlier period.

Fresh Dairy Direct-Morningstar operating income in the second quarter was $146.8 million, a $20.0 million increase over the difficult first quarter of 2010, but a 28% decline from $203.5 million in the second quarter of 2009. Retail pricing for private label milk remains well below historical levels, widening price gaps between branded and private label offerings and driving continued consumer trade-down to lower-margin private label products. Tight cost control and sequential improvements in net pricing across much of the portfolio drove a sequential improvement over the first quarter in segment operating income results.

For the second quarter of 2010, the WhiteWave-Alpro segment reported net sales of $459.0 million, 31% higher than second quarter 2009 net sales of $349.1 million. This increase was a result of the benefits of the Alpro acquisition and continued strong volume driven net sales growth across the WhiteWave portfolio.

Among the key brands at WhiteWave-Alpro, the non-dairy milk alternatives business, which includes both Silk and Alpro, continued to post strong results. Silk sales increased low-double digits in the quarter as a result of the strong performance of Silk PureAlmond. Alpro sales increased in the high-single digits in the quarter on a constant currency basis. International Delight Coffee Creamer net sales grew in the mid-teens on continued strength behind product and packaging innovation. Land O’Lakes brand creamers increased sales in the mid-single digits. Horizon Organic milk sales again outpaced the organic milk category to report high-single digit net sales growth.

The acquisition of Alpro and reduced investment in the Hero/WhiteWave joint venture contributed to an 18% increase in segment operating income in the second quarter to $41.0 million, from $34.7 million in the second quarter of 2009. WhiteWave operating profits were essentially flat due to increased distribution costs and the timing of marketing spending against new products. The WhiteWave-Alpro segment operating income includes a $1.9 million loss related to the Company’s interest in the Hero/WhiteWave joint venture, but excludes a $1.9 million loss from the joint venture attributable to the non-controlling interest.

The Company announced that it has entered into an agreement to sell its Rachel’s U.K. business, which consists of yogurt and other dairy products, and has reclassified results for the business under discontinued operations. The transaction is expected to close in the third quarter. The sale of Rachel’s is not expected to have a material impact on earnings. 

Corporate and Other expense totaled $54.4 million for the second quarter of 2010, as compared to $58.0 million in the second quarter of 2009. For the balance of the year, the Company expects Corporate expense to be roughly flat compared to year ago levels.

Net cash provided by continuing operations for the six months ended June 30, 2010 totaled $243.5 million, compared to $348.3 million in the first half of 2009. Free cash flow provided by operations, which is defined as net cash provided by continuing operations less net capital expenditures, totaled $130.6 million for the six months ended June 30, 2010, compared to $247.4 million in the first half of 2009.  A reconciliation between net cash provided by continuing operations and free cash flow provided by continuing operations is provided below.

Net capital expenditures for the first half of 2010 totaled $112.9 million, compared to $100.8 million in the same period of 2009. The Company expects full year capital expenditures to be between $250 and $300 million for 2010.

Total debt at June 30, 2010, net of $61.2 million in cash on hand, was approximately $4.1 billion. The Company’s funded debt to EBITDA ratio, as defined by its credit agreements, was 4.68x as of the end of the second quarter, compared to a current covenant of 5.5x.

 “At a high level, our current outlook for the business is fundamentally unchanged from the first quarter,” said Engles. “Consumers, particularly working class consumers, remain underemployed and over leveraged. Their economic anxiety is reflected in a highly promotional retail environment for private label milk that is driving negative private label versus branded mix for our Fresh Dairy Direct-Morningstar business. Despite aggressive retail pricing, category volumes are soft. As a result, our expectations for Fresh Dairy Direct-Morningstar performance have not changed from last quarter’s call.

“On the other hand, our more value-added business at WhiteWave-Alpro, bolstered by increasingly confident upper income consumers, continue to post strong volume, revenue, and operating profit growth – a trend we expect to continue, which should result in very solid annual profit growth for that segment.

“Finally, we have put one of the major risks to our business behind us, with the successful amendment and extension of our credit facilities. The increased flexibility of loosened covenants and extended maturities came at a cost of additional interest expense of approximately $0.06 from the second to the third quarter.

In keeping with our recent practice, we will offer guidance only for the upcoming quarter. Given our view that business conditions have not materially changed from the second quarter, and given typical seasonal weakness in the third quarter versus the second, we expect earnings of $0.17 to $0.22 per share in the third quarter. Adjusting for the six cents of additional third quarter interest expense, our range of guidance for the third quarter is essentially unchanged from the second quarter.”

Net sales for the six months ended June 30, 2010 totaled $5.9 billion, an increase of 10% from net sales for the same period of last year, due to the pass-through of higher dairy commodity costs, the impact of acquisitions, and strong growth in net sales at WhiteWave-Alpro. Net income for the first half of the year totaled $87.9 million, compared with $140.4 million in the first six months of 2009.  Diluted earnings per share from continuing operations for the six months ended June 30, 2010 totaled $0.48, compared to $0.86 for the first six months of 2009.

On an adjusted basis, net income for the six months ending June 30, 2010 totaled $96.5 million, compared to $156.7 million in the same period of 2009.  Adjusted diluted earnings per share for the first six months of 2010 totaled $0.53 compared to $0.95 in the first six months of 2009.