Dean Foods suffers loss after litigation charge

by Jeff Gelski
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DALLAS — Dean Foods Co. lost $51 million in the second quarter ended June 30 after it took a $131 million charge related to settling litigation brought on behalf of a class of dairy farmers in various Southeastern states, the Dallas-based company said Aug. 4. The loss compared with net income of $45 million, equal to 25c per share, in the previous year’s second quarter. On an adjusted basis, second-quarter net income was $32 million, or 18c per share, which compared with $53 million, or 29c per share, on an adjusted basis in the previous year’s second quarter.

Dean had second-quarter net sales of $3.3 billion, which compared with $3 billion in the previous year’s second quarter. Dean attributed the sales gain to the pass-through of higher dairy and overall commodity costs that were offset partially by lower volumes at Fresh Dairy Direct-Morningstar.

“In many ways, the second quarter of 2011 is a continuation of the trends we have seen over the last several quarters,” said Gregg Engles, chairman and chief executive officer. “WhiteWave-Alpro again posted strong results, and Fresh Dairy Direct-Morningstar continued to make progress toward profit stability against a backdrop of weak industry volumes. We continued to execute our plan to drive costs out of the business, and progress in this area has been solid.”

Shares of Dean Foods were trading at $9.49 per share on the New York Stock Exchange on the morning of Aug. 4 after closing at $10.34 per share on Aug. 3.

Second-quarter operating income for Fresh Dairy Direct-Morningstar decreased 21% to $116 million from $147 million in the second quarter of the previous year. Volume weakness across the portfolio offset progress toward the company’s cost-reduction initiatives.

Second-quarter net sales for Fresh Dairy Direct-Morningstar rose 12% to $2.8 billion from $2.5 billion thanks to the pass-through of higher average commodity costs. Fresh Dairy Direct-Morningstar fluid milk volumes decreased 1.1% in the second quarter, which compared with an overall industry decline of about 1.9% on a year-over-year basis, based on U.S. Department of Agriculture data and company estimates. Other product categories served by Fresh Dairy Direct-Morningstar remained soft. The categories included ice cream, cottage cheese and sour cream.

Second-quarter operating income for WhiteWave-Alpro increased 13% to $44.1 million from $39.1 million. On an adjusted basis, which excludes the impact of the 50% interest in the Hero/WhiteWave joint venture that WhiteWave does not own, the segment reported operating income of $44.6 million, a 14% increase from $41 million. The company expects full-year operating income growth in the low to mid-teens for WhiteWave-Alpro.

Second-quarter net sales for WhiteWave-Alpro rose 12% to $514 million from $459 million because of strong growth across the product portfolio. Sales of Horizon Organic branded milk gained mid-teens in the quarter as did sales of branded creamer, which includes International Delight and Land O’Lakes creamers. Silk sales increased mid-single digits on continued strength of Silk PureAlmond and Silk PureCoconut.

Companywide for the six months ended June 30, Dean Foods had net income of $57.1 billion, or 31c per share, which was down from $96.5 million, or 53c per share, in the same time period of the previous year. Six-month net sales were $6.3 billion, up from $5.9 billion in the same time period of the previous year,

In the third quarter Dean Foods expects adjusted diluted earnings per share between 12c and 17c per share, Mr. Engles said. He added the company reaffirmed its previous full-year earnings guidance of between 67c and 75c per adjusted diluted share.

“Consistent with our previous comments, our biggest concern over the balance of the year continues to be the volume weakness across conventional dairy categories, which has worsened in recent periods,” Mr. Engles said. “Due to the heavy fixed-cost nature of our business, relatively small changes in volumes drive meaningful changes in bottom-line performance.

“We believe a recovery in volumes will not happen until the employment picture improves, particularly among the less-affluent, who continue to struggle. In the interim, our best course of action is to continue driving structural costs out of the business to offset the deleveraging effects of soft volumes.”

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