Price increases fuel quarterly earnings for Dean Foods

by Keith Nunes
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DALLAS — Price increases passed to customers and consumers during the second quarter of fiscal 2008 added strength to Dean Foods’ earnings. For the quarter ended June 30, net income was $48,885,000, equal to 32c per share on the common stock, compared with $28,416,000, or 22c per share, during the same period of fiscal 2007. Sales for the quarter increased to $3,102,559,000 during the second quarter, which compared with $2,843,645,000 during fiscal 2007.

Net sales for the company’s DSD Dairy business unit during the second quarter were $2.5 billion, a 9% increase from $2.3 billion for the second quarter of 2007. The sales increase in the quarter was due to the pass-through of higher overall dairy commodity costs to customers and higher sales volumes. The second-quarter average Class I mover, which is an indicator of the company’s raw milk costs, averaged $17.80 per cwt, 10% above the same period in 2007 and 7% lower than the first quarter of 2008. Class II butterfat prices averaged $1.55 per lb in the second quarter, down slightly from the same period a year ago and 16% higher than the first quarter of 2008.

DSD Dairy operating income in the second quarter was $154.3 million, 9% above the $141.2 million reported in the second quarter of 2007. DSD Dairy results benefitted from tight cost controls across the business, including the continued benefits from the reduction in workforce completed in the fourth quarter of 2007, increased proceeds from excess cream sales, and disciplined pricing execution to offset commodity volatility, according to the company.

Dean Foods’ WhiteWave-Morningstar business had second-quarter net sales of $652.3 million, 10% higher than second-quarter 2007 net sales of $590.9 million. Sales of Morningstar’s private label and food service cultured and creamer products increased 7% over the second quarter of 2007 to $284.2 million behind growth in ice cream mix and yogurt sales.

The WhiteWave branded portfolio of products increased sales 13% over the prior year period to $368.2 million. Net sales of Horizon Organic milk increased nearly 30% due to continued volume growth and increased pricing. Silk soymilk net sales increased in the low double digits, driven by distribution gains and the strength of the Silk Plus Omega-3 DHA product.

Segment operating income in the second quarter for WhiteWave-Morningstar business was $49.3 million, compared with $55.8 million in the second quarter of 2007. Segment operating margins were 7.6%, compared with 9.5% in the second quarter of 2007. Segment operating income in the quarter continued to be adversely affected by challenges in the Horizon Organic brand where price increases were offset by higher milk and other commodity costs. Other items impacting WhiteWave-Morningstar operating income included higher administrative costs and increased marketing spending in the quarter as well as lower profitability at Morningstar related to commodity cost inflation and sales mix.

"Overall, we are cautiously optimistic about the back half of the year," said Gregg Engles, chairman and chief executive officer. "Despite the continued challenging commodity cost inflation we’ve faced, our business teams are executing well. Back half overlaps in the areas of shrink and excess cream sales should be favorable. Tempering our confidence for the balance of the year, however, is a heightened level of competitive pressure we are seeing in certain areas of our business, as well as continued volatility and inflationary pressure across the cost spectrum. Nonetheless, on balance, we are confident our DSD Dairy segment will continue to perform well in the third and fourth quarters.

"At WhiteWave-Morningstar, the majority of the businesses continue to perform well. However, the anticipated recovery in Horizon Organic profitability is taking longer than we had hoped due to higher raw organic milk and other commodity costs, and a highly competitive market.

"In light of these factors, we are comfortable reiterating our guidance for 2008 adjusted diluted earnings of at least $1.20 per share. For the third quarter, we expect adjusted diluted e.p.s. to be between 26c and 31c per share."

For the first six months of fiscal 2008, net income for Dean Foods was $79,657,000, or 55c per share, compared with net income of $92,236,000, or 70c per share, for the same period during fiscal 2007. Sales for the first six months of fiscal 2008 were $6,179,519,000 compared with $5,473,394,000 for the same period the previous year.

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