Plant closures, raw milk prices hinder Dean Foods

by Jeff Gelski
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DALLAS – High raw milk prices continued to damage Dean Foods’ financial results in the third quarter, and those prices may remain elevated into 2015. Likewise, inefficiencies related to plant closures impacted quarterly results negatively. Dean Foods expects the effects of those inefficiencies to decrease.

Dean Foods recorded a loss of $15,972,000 in the quarter ended Sept. 30, which compared to net income of $415,120,000 in the previous year’s third quarter. Net sales in the quarter increased to $2,373,280,000 from $2,200,899,000.

Dallas-based Dean Foods, as part of its efficiency efforts, has closed 12 plants since 2012, said Gregg Tanner, chief executive officer of Dean Foods, in a Nov. 10 earnings call.

“Over the short term, there is an amount of inefficiency that occurs with plant closures,” he said. “Cost reductions lag the extra cost incurred as we move volume within our network and concurrently ramp up and wind down production and distribution.

“In the third quarter, we continued to experience these transitory costs in production and distribution activities associated with our four recent plant closures. This offset some of the savings from our previous optimization activities and some of our in-year cost productivity improvement.”

 As the company moves past the extended period of heavy plant closure activity and realizes further cost reductions, Dean Foods said the rate of per-unit production and distribution costs will continue to decline and flatten from year-over-year basis.

Turning to price issues, the third-quarter average Class 1 mover, a measure of raw milk costs, was $23.51 per cwt, which marked a 24% increase from the previous year’s third quarter. Fluid milk volume for Dean Foods in the third quarter declined 1% on a year-over-year basis.

At retail, Dean Foods’ brands had an average cost of $4.08 per gallon in the third quarter, which was up 31c from the previous year’s third quarter, Mr. Tanner said. The price gap between Dean Foods’ brands and private label expanded 6% year-over-year to 66c this year from 62c last year.

“These higher price points and price gaps versus private label continue to put our branded portfolio under pressure,” he said.

The TruMoo brand was one highlight.

“As we continue to extend our national TruMoo brand into new categories such as ice cream and protein, we see a path and trajectory towards building TruMoo into a $1 billion brand,” Mr. Tanner said. “In the convenience store channel, TruMoo experienced an 11% increase versus prior year in a marginally improving flavored milk channel, and share increased 2%.”

TruMoo Protein Plus will target young adult males, he added.

For the nine months ended Sept. 30, Dean Foods recorded a loss of $25,573,000, which compared with net income of $857,034,000 over the same time period of the previous year, and net sales of $7,108,189,000 which was up from $6,720,871,000.

Mr. Tanner said the company expects fourth-quarter earnings per share of 5c to 15c, but the company expects to report a loss for the full year.

“The dairy commodity environment remains extremely challenging, and for the fourth quarter, we expect raw milk costs will remain stubbornly high despite continued strong global production growth and waning demand,” he said “While we don't expect much relief on raw milk costs for the growing imbalance between U.S. dairy commodity pricing, vis-a-vis the world markets, until early 2015, we do expect significant butterfat cost declines at the end of Q4.

“Industry volumes remain soft, and we expect our Q4 volumes to be down low single digits as compared to prior year, but with a continued improvement to net price realization. Further, we expect the higher landed costs we've experienced behind transitory costs for plant closure activities to begin to flatten.”
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