DALLAS, Aug. 11, 2014 - Dean Foods, the nation's largest bottled milk company, lost $6 million in its most recent quarter, in a time CEO Gregg Tanner describes as “even more challenging than we had originally anticipated.” The loss on sales of $2.4 billion contrasts with a $65 million profit on sales of $2.2 billion in the 2013 second quarter.

Following the disclosure, the price of Dean Foods shares on the New York Stock Exchange declined by more than 9 percent in pre-market trading.

“This is by far the most difficult operating environment in the history of the company, reinforcing the importance of the initiatives we have underway,” Tanner said, a reference to what he called “increasing and record high dairy commodity costs.” The Class I milk price (for fluid use) was 31 percent higher than a year ago, he said, “price levels unprecedented in our history.”

“As a result of the extreme dairy commodity environment, we face unprecedented challenges, including softening category volumes, mix shift out of our brands and significant cost friction,” said Dean Food CFO Chris Bellairs.

The company said that it improved its share of U.S. fluid milk sales volume to 35.9 percent, compared with 35.7 percent in the first quarter of 2014. However, nationwide fluid milk sales volume in April and May declined approximately 4 percent from the same time last year, according to USDA data cited by Dean.

In a conference call with analysts, Tanner said the company also is “concerned about the health of the ready-to-eat cereal category, which affects milk.”

He also expressed concern about the “rapid and unexpected increase in butterfat prices,” which affect the company's ice cream segment. CME butter prices averaged 32 percent higher than a year ago, peaking at $2.62 per pound - “something we've not seen since 1981,” he said.

Dean also sustained the loss of “private label business from a significant customer” during the quarter and acknowledged that the “slight trend toward private label white milk represents a headwind to our profit and loss.” Bellairs said that about 1 percent of the company's fluid milk volume shifted from higher-profit brands to lower-margin private label, a trend he described as a financial “headwind.”

To reduce costs, Dean closed 12 bottling plants this year, “four of those in June and July,” in an accelerated “optimization” program.

Although he sees “meaningful signs that raw milk pricing may moderate late this year or in early 2015,” the outlook remains so uncertain that the company withdrew its forecast for the remainder of the year.

“The balance of the year appears rocky, with a continued unpredictable and volatile dairy commodity environment,” he said. “That makes it difficult to provide guidance beyond the immediate quarter. Therefore, for the time being, we are going to provide specific guidance only for the next quarter, where our visibility is better.”

He expects “an adjusted diluted net loss” of between 5 cents and 15 cents per share in the third quarter - about on a par, on the higher end of the estimate, with the second quarter.

“While we hope to see a more positive environment later in the year, the uncertainty surrounding whether or when that will occur leads us to withdraw our full year guidance for the present time.

Tanner saw a bright spot in rapid growth of “Tru Moo” chocolate milk, which the company formulated with lower sugar content and plans to roll out nationally later this year. In areas where it has been sold, Tru Moo sales were an all-time high in the quarter, he said.

With all U.S. milk processors “under pressure in ways that we have not seen before,” he said, “cost-disadvantaged competitors” may find it more difficult to survive. “That may present an opportunity for Dean Foods,” he added. “We believe we are the cost leader. Our size and scale give us opportunity to extend our lead.”


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