Dean Foods to close 10% to 15% of its plants

by Keith Nunes
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DALLAS — Following the spin-off of WhiteWave Foods and the sale of Morningstar Foods, Dean Foods is emerging as a much different company, one that is focused on leveraging its scale and driving greater efficiencies to gain more share of the branded and private label fluid milk market.

For 2013, Gregg Tanner, chief executive officer, said Dean Foods will build upon its strengths through a continued focus on fundamentals such as efficiencies, and drive volume performance at attractive economic returns. In an effort to run a leaner operation, he said Dean Foods will cease production at 10% to 15% of its plants in an effort to eliminate fixed costs and reduce a number of distribution routes.

“We’re currently working through the sequencing and timing of each of those closures,” he said in a conference call with financial analysts on Feb. 13. “We’ve already announced two of those and we’ll announce more in the coming weeks ahead.”

Dean’s decision to reduce capacity is partially a reflection of the structure of the fluid milk processing segment, which is populated by a lot of small single-facility operations.

“Recall how fragmented the industry is,” said Gregg Engles, chairman of Dean Foods, in response to an analyst’s question. “So if you’re a one-plant operation, reducing capacity means exiting the industry. Or if you’re a two-plant operation, that lumpiness makes it hard for some of our competitors to do the kinds of things that we can do.”

In the last couple of years Dean Foods has closed 10 to 12 processing plants, Mr. Tanner said.

The break-up of the company leaves an entity where 75% of its business is focused on the fluid milk category.

“The fluid milk category enjoys a number of attractive attributes,” Mr. Tanner said. “First, fluid milk is ubiquitous. It is a nutritious and healthy product that is found in over 90% of U.S. homes. As a result, fluid milk is a very large category, with roughly $20 billion of annual sales. This size and pervasiveness, plus the perishability of the product, make it an important category for retailers and consumers as well as a large long-term opportunity for the best positioned processor.”

However, he added, the category is not without its challenges, including a slow decline in consumption per capita, lower birth rates and demographic shifts.

“Those factors combined with increased industry efficiencies have led to significant excess processing capacity over time,” Mr. Tanner said. “Additionally, the industry remains highly fragmented, with over 150 processors in the U.S., while the customer base of retailers has consolidated significantly over the past decades. With these business dynamics, we believe there are several reasons why we are uniquely positioned to win over the long term.”

Scale is one advantage on Dean Foods’ side. The company is roughly five times larger than its nearest competitor, and it is the only fluid milk processor with a coast-to-coast processing and distribution network.

“Our relative size means that in procurement, for example, we can drive greater savings across our major purchases like resin, paperboard and fuel,” he said. “Also, while the majority of our competitive set is comprised of relatively small operations with limited options for improving capacity utilization, our coast-to-coast network allows us opportunity to significantly improve asset utilization, drive efficiency, and lower our cost per unit through network optimization activities.”

For the year ended Dec. 31, 2012, the company had income of $167,498,000, equal to 91c per share on the common stock, which compared with a loss of $1,575,621,000 during the previous year. Sales for the year were $11,462,277,000, down 2% from $11,641,191,000 during the previous year.

The Fresh Dairy Direct segment posted operating income of $446,451,000 during the year, up 18% from $378,493,000 during the previous year.

During the fourth quarter the company as a whole had income of $37,009,000, or 20c per share, which compared with a loss of $9,874,000 during the same quarter of the previous year. Sales for the quarter were $3,041,354,000, up 4% from $2,928,967,000.
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