Dean Foods Company announced that the Company reported a loss of $0.28 per diluted share, as compared to second quarter 2010 earnings of $0.25 per diluted share. The loss per share in the quarter includes a $131 million charge related to the previously disclosed Tennessee dairy farmer class action litigation. On an adjusted basis, second quarter 2011 diluted earnings per share were $0.18, compared to $0.29 per adjusted diluted share in the prior year’s second quarter. A full reconciliation between GAAP earnings per share and adjusted earnings per share is provided in the tables below.
For the second quarter of 2011, the net loss attributable to Dean Foods totaled $51 million, compared to net income of $45 million in the prior year’s second quarter. Adjusted net income for the second quarter was $32 million, compared to adjusted net income of $53 million in the second quarter of 2010.
“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 CEO.
“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.”
Consolidated Net Sales
Net sales for the second quarter totaled $3.3 billion, compared to $3.0 billion of net sales in the second quarter of 2010. Net sales for the second quarter increased due to the pass-through of higher dairy and overall commodity costs that were partially offset by lower volumes at Fresh Dairy Direct-Morningstar, as well as continued solid sales growth at WhiteWave-Alpro.
Consolidated Operating Income / Loss
Consolidated operating loss in the second quarter totaled $16 million, compared to consolidated operating income of $125 million in the second quarter of 2010. Second quarter consolidated adjusted operating income totaled $114 million, compared to $133 million in the second quarter of 2010. The decline in second quarter consolidated adjusted operating income was due to a $31 million decline in operating income at Fresh Dairy Direct-Morningstar, offset by $6 million of operating income growth at WhiteWave-Alpro, and a $6 milliondecline in corporate expense driven by the Company’s ongoing cost savings initiatives.
Fresh Dairy Direct-Morningstar
Fresh Dairy Direct-Morningstar fluid milk volumes decreased by 1.1% in the second quarter, compared to the overall industry that experienced a volume decline of approximately 1.9% on a year-over-year basis, based on USDA data and Company estimates. The Company’s outperformance of the industry was driven primarily by the addition of new customers. Other product categories served by Fresh Dairy Direct-Morningstar remained soft, including ice cream, cottage cheese and sour cream. Total volumes from the Fresh Dairy Direct-Morningstar segment declined 4.3% from the second quarter of 2010, including the impact from the divestiture of its yogurt businesses. The soft volume in the quarter was offset by the pass-through of higher average commodity costs, resulting in Fresh Dairy Direct-Morningstar net sales of $2.8 billion, a 12% increase from$2.5 billion in net sales for the second quarter of 2010. The second quarter average Class I mover, a measure of the Company’s cost of milk, was $19.83 per hundred-weight, 21% above the previous quarter and 41% above the second quarter of 2010.
Fresh Dairy Direct-Morningstar operating income in the second quarter was $116 million, a decrease of 21% from the $147 million reported in the second quarter of 2010. Volume weakness across the portfolio offset progress toward the Company’s cost reduction initiatives, resulting in the decline in operating income in the quarter.
WhiteWave – Alpro
For the second quarter of 2011, the WhiteWave-Alpro segment reported net sales of $514 million, 12% above second quarter 2010 net sales of $459 million due to continued strong growth across the product portfolio. Among the key brands at WhiteWave-Alpro, net sales of Horizon Organic® branded milk increased mid-teens in the second quarter. Branded creamer sales, which include both International Delight® and LAND O LAKES® creamers, also increased mid-teens on continued strength behind International Delight innovation. Silk® sales increased mid-single digits on continued strength of Silk PureAlmond® and Silk PureCoconut®. Alpro sales increased low-single digits in the quarter on a constant currency basis, and mid-teens after currency translation.
Segment operating income in the second quarter for WhiteWave-Alpro was $44.1 million, 13% above the $39.1 million reported in second quarter of 2010. 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 $46.6 million, an increase of 14% from $41.0 million in the second quarter of 2010.
Second quarter 2011 corporate expense totaled $48.6 million, compared to $54.4 million in the second quarter of 2010. The reduction in corporate expense was driven by management’s concerted efforts to reduce costs.
Reducing selling, general and administrative (SG&A) expense, excluding incentive compensation and advertising expense, is an area of focus for the Company in 2011. Management expects to reduce these costs by $60 million on an annualized run-rate basis by year-end. In the second quarter these costs were approximately $30 million below second quarter 2010 levels on an annualized basis. The Company also continues to make strong progress toward its initiative to reduce supply chain costs by $125 million in 2011, completing its $300 million cost reduction program that began in 2009.
Net cash provided by continuing operations for the six months ended June 30, 2011 totaled $180 million, compared to $243 million through the second quarter of 2010. Free cash flow provided by continuing operations, which is defined as net cash provided by continuing operations less capital expenditures, totaled$61 million for the first six months of 2011, compared to $131 million over the same period in 2010.
A reconciliation between net cash provided by continuing operations and free cash flow provided by continuing operations is provided in the tables below.
Year-to-date capital expenditures totaled $119 million, compared to $113 million through the first six months of 2010. Total debt outstanding, net of cash on hand, decreased by $262 million from December 31, 2010 levels. Debt repayment has been augmented by the receipt of proceeds from the sale of two yogurt businesses and a$62 million tax refund, offset by the funding of the previously announced Vermont litigation settlement in the second quarter. Total debt at June 30, 2011, net of $116 million cash on hand, was $3.7 billion. The Company’s funded debt to EBITDA ratio, as defined by its credit agreements, was 4.95x as of the end of the second quarter versus a maximum leverage ratio covenant of 5.75x. The current maximum leverage ratio remains in effect until the end of March 2012, when it steps down to 5.50x. The Company continues to focus on reducing its overall leverage and expects to exit 2011 with a leverage ratio of 4.75x or below.
On July 12th, the Company announced that it had reached an agreement with the class plaintiffs to settle litigation brought on behalf of a class of dairy farmers in various Southeastern states. The case had been scheduled for trial beginning in August 2011.
The United States District Court for the Eastern District of Tennessee preliminarily approved the class-wide settlement agreement on July 14, 2011 and stayed the dairy farmer action against Dean. The proposed settlement agreement requires a total payment of up to $140 million over a period of four to five years, for distribution to dairy farmer class members in a number of Southeastern states. Following preliminary approval, Dean Foods made an initial payment of $60 million into an escrow account, to be distributed following the Court's final approval, and issued a standby letter of credit for the remaining $80 million. The agreement calls for the Company to make a payment of up to $20 million on each of the following four anniversaries of the final approval date.
On July 28, 2011, the Court issued an order partially decertifying the dairy farmer plaintiff class with which the Company had previously settled. The plaintiffs have filed a motion that the Court re-consider its decertification order. In order to pursue certainty regarding the settlement agreement, the Company plans to file a motion with the Court concerning the impact of this order, including whether the settlement agreement remains appropriately and adequately enforceable against the entire original plaintiff class. Until the Company has further clarification, there can be no assurance that the settlement agreement will receive final approval in its current form, or at all.
The Company took a pretax charge of $131 million in the second quarter related to the settlement agreement.
WhiteWave-Alpro continues to perform well, and management expects full-year operating income growth in the low to mid-teens.
Fresh Dairy Direct-Morningstar’s business continues to stabilize in many ways. The Company continues to cut costs across the supply chain, as well as in core SG&A.
“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,” continued Mr. Engles. “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.
“Given current category performance, we expect the new business we added in the second quarter, a more stable pricing environment, and our cost reduction initiatives to drive continued stabilization of Fresh Dairy Direct-Morningstar results into the third and fourth quarter, with normal seasonality driving stronger performance in the fourth quarter.
This, combined with expectations for continued solid growth from WhiteWave-Alpro and the accumulating benefits of our SG&A cost reduction initiatives, should result in earnings consistent with, to slightly above 2010 levels in the third quarter. We expect to return to year-over-year adjusted earnings per share growth in the fourth quarter.
“More specifically, for the third quarter we are expecting adjusted diluted earnings of between $0.12 and $0.17per share. With this in mind, we are reaffirming our previous full year guidance of between $0.67 and $0.75 per adjusted diluted share.”
About Dean Foods
Dean Foods is one of the leading food and beverage companies in the United States and a European leader in branded soy foods and beverages. The Company's Fresh Dairy Direct-Morningstar segment is the largest U.S. processor and distributor of milk, creamer, and cultured dairy products. These offerings are marketed under more than 50 local and regional dairy brands, as well as through private labels. The WhiteWave-Alpro segment produces and sells an array of branded dairy, soy and plant-based beverages and foods. WhiteWave brands, including Silk® soy and almond milk, Horizon Organic® milk and dairy products, International Delight® coffee creamers, and LAND O LAKES® creamers, are category leaders and consumer favorites. Alpro is the pan-European leader in branded soy food products.