Value trend drives down Dean Foods earnings

by Keith Nunes
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DALLAS — Net income at Dean Foods Co. in the first quarter ended March 31 was $40,917,000, equal to 24c per share on the common stock, down 46% from $75,200,000, or 48c per share, in the first quarter of fiscal 2009.

“We entered 2010 facing substantial margin pressure in our milk business as retailers compressed private label margins to attract value conscious consumers,” said Gregg Engles, chairman and chief executive officer. “Despite a very strong performance at WhiteWave-Alpro, these very low private label retails drained the profit pool of our regional brands, and led to consolidated results that were below our expectations.”

Sales for the first quarter were $2,972,313,000, which compared with sales of $2,702,938,000 for the same period during the previous year.

As part of its first-quarter earnings report, Dean Foods also announced the realignment of its business segments. The structure will align its traditional dairy business under Fresh Dairy Direct-Morningstar and its value-added, branded businesses under the WhiteWave-Alpro name.

Operating income in the Fresh Dairy Direct-Morningstar division during the first quarter was $127 million, a decrease of 41% from $215 million reported in the first quarter of 2009. The fluid milk category continues to be highly challenging as retail pricing for private label milk remains well below historical levels, widening price gaps between branded and private label offerings beyond sustainable levels, according to the company.

Segment operating income in the first quarter for the WhiteWave-Alpro business was $44 million, an increase of 54% from $29 million in the first quarter of 2009. The company said its net sales growth across the portfolio and expense control led to strong profit flow through WhiteWave.

“Looking ahead at WhiteWave-Alpro we are on a solid path of volume, sales and profit growth that we expect to continue throughout 2010,” Mr. Engles said. “Our branded business is very strong with significant momentum. We expect to continue to drive volume-led top-line growth through effective innovation and marketing, and to leverage this growth into another year of strong operating income growth.

“At Fresh Dairy Direct-Morningstar, the road ahead appears rocky, with a retail price environment that appears unsustainable, but has not yet abated. That makes it difficult to provide accurate guidance beyond the immediate quarter.

“The current pressures on F.D.D.-Morningstar had a significant impact on Q1 results and could impact balance-of-year operating profits by up to $100 million if retailers continue to pursue a strategy of aggressive price promotion in private label milk. Additionally, dairy commodity prices are now expected to trend higher through the balance of the year, which could further pressure results.”

Mr. Engles said he expects diluted earnings per share for the second quarter of fiscal 2010 to be in the range of 23c to 28c per share.

“While we hope to see a more positive environment in the back half of the year, the uncertainty surrounding whether or when that will occur leads us to suspend our full year guidance for the present time,” he said.
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