Friendly's ice cream, Dean Foods
Dean Foods recently acquired Friendly's Ice Cream business, adding to its ice cream portfolio.

DALLAS — Consider the Dean Foods Co.’s acquisition of the manufacturing and retail ice cream business of Friendly’s Ice Cream L.L.C., Wibraham, Mass., to be a gap play. The company lacked both a manufacturing footprint or much market penetration in the Northeast portion of the United States and for $155 million management was able to fill both holes.

Ice cream makes up 12% of Dean Foods’ total production, according to the company’s 2015 annual report, and the acquisition will allow the company to diversify away from white milk to more value-added products. In 2015, Dean Foods recorded $965 million in ice cream sales.

Gregg Tanner, Dean Foods
Gregg Tanner, c.e.o. of Dean Foods

“With $166 million in net sales in 2015 and low double-digit growth on both volume and net sales, Dean Foods will acquire a leading brand presence across several categories within ice cream,” said Gregg Tanner, chief executive officer, during a conference call with financial analysts on May 10. “We believe that coupled with the momentum of our current regional brands, the Friendly’s brand will be a catalyst for our strategy for growth in our ice cream business in our branded portfolio.”

With Friendly’s, Dean Foods also will be acquiring a company known for innovation.

“More than 22% of Friendly’s retail sales are from the sale of new flavors or formats introduced after 2012,” Mr. Tanner said. “Friendly’s pipeline of innovative products will continue to extend the brand into product offerings that address key consumer preferences. We are confident we can expand these innovations more broadly across the existing Dean Foods ice cream portfolio.”

Friendly's ice cream innovation, Dean Foods
Friendly's is a company known for its innovation with new flavors and formats for its ice cream.

For the quarter ended March 31, Dean Foods’ net income totaled $39,201,000, equal to 43c per share on the common stock, and an improvement compared with the same period of the previous year when the company recorded a loss of $73,740,000.

Sales for the quarter fell to $1,878,828,000 compared with $2,050,762,000 the previous year.

During the quarter Dean Foods also continued to focus on its manufacturing footprint and announced the closing of three plants.

“Our ice cream plants in Buena Park, Calif., and Orem, Utah, will cease production in Q3 of this year,” said Chris Bellairs, chief financial officer. “We will support customers in the Western U.S. by utilizing our recently-acquired facility in St. George, Utah, which begins production in late Q2.

Dean Foods Brown's Dairy in New Orleans
Dean Foods plans to close its Brown's Dairy plant in New Orleans.

“In addition, we announced the closure of our plant in New Orleans, which is scheduled to cease production in Q3. We entered into a lease agreement for a production facility in Hammond, La., which services our customers in New Orleans and the surrounding area. We will experience one-time transitory costs related to these network changes in Q2 and in Q3.”

One issue that continues to hang over the company is the announcement by Wal-Mart Stores, Inc., Bentonville, Ark.’s plan to build a milk processing plant in Indiana. During the conference call, Mr. Tanner said the dialogue between Dean and Wal-Mart is ongoing and that the company is still in the early stages of preparing a plan to adjust its network.

One analyst on the call took the issue further and asked Mr. Tanner what would happen if Wal-Mart decided to build more milk processing plants around the country?

Wal-Mart Great Value Milk
Wal-Mart plans to build a milk processing plant in Indiana.

“… I look at it as that’s why we have a national network and our national network, as we’ve proven in the past, we can adapt and change our network to whatever volumes and changes that we see,” Mr. Tanner said. “So I look at this and say it’s 95 million to 100 million gallons in the first wave. If there are more waves to come, and they have not given us any indication at this point that they intend to go further, but if they were, I am confident that our organization will step up and do what needs to be done to make sure it doesn’t have a financial impact.

“Now that’s on the financial side. It will have impacts on our people side, because it will impact the fact that we have to take additional costs out of our system from an overhead perspective because that volume does cover overhead. I don’t want to minimize the impact to the organization just because it doesn't impact us financially. It will definitely impact us within our organization.”