CEO Gregg Tanner admitted the group had faced a “challenging” third-quarter

CEO Gregg Tanner admitted the group had faced a “challenging” third-quarter

Dean Foods said an expected increased savings in the fourth quarter and into 2014 will help offset volume deleveraging from its lost business.

The US dairy giant yesterday (12 November) saw its share price slide around 7% after it revealed a third-quarter profit decline and flat sales.

Higher reorganisaton costs hit operating profit and the firm also saw its share of US fluid milk sales volume declined to 34.9% from 36.4% in the previous quarter. Industry fluid milk volumes declined around 1.7% year-over-year.

Speaking on the firm's earnings call yesterday, CEO Gregg Tanner admitted the group had faced a "challenging" third-quarter.

"Industry volumes remain soft, raw milk cost increased and our transitory costs in production and distribution associated with the loss of volumes and plant closures were higher than we anticipated, resulting in an operating performance that was below our plan," he told analysts.

Dean Foods has been slimming down its business, including the sale of its Morningstar business to Saputo, to focus on milk. It also previously announced plans to close eight to its 12 facilities by the middle of next year.

The company also lost a significant amount of business from Wal-Mart this year to a cheaper rival. That partial loss of business, together with category weakness, resulted in total volumes of 685m gallons in the quarter, representing an 8% decline on comparative basis.

Tanner told analysts he expects its volumes to "underperform the broader industry" in the fourth quarter and through the first half of 2014, due to the ongoing impact of the lost business. However, he suggested that new business coming online in the next quarter, in addition to continued cost savings, will help in the long term.

The chief executive said the company has made "strong progress" against its accelerated cost reduction initiatives. These are helping offset the impact of the loss of some private label businesses and "continued category softness".

A "bolstered competitive position" resulting from the efficiency improvements has enabled the company to add "significant" business wins, Tanner said.

"These wins are beginning to positively impact volumes in the fourth quarter and have started to offset the volume decline. Since we began ramping up activities late last year, we have strong momentum behind these initiatives and expect increased savings in the fourth quarter and into 2014 to help to offset the volume deleverage associated with the lost business."

Tanner told analysts there "continues to be opportunities", insisting that there is "volume out there to be had".

"We're going to have to continue to go after multiple customers to try and offset some of that volume. And our expectation is, we'll do that over some period of time. I don't know if that's a couple years or three years, or what period of time that is, but we will continue to work towards that."

For Dean Foods to build its momentum, however, it will be about maintaining flat volumes, Tanner said.

"We'll have to continue to outperform the category, of which we're very confident we can do. We think our third quarter was our low point. We have gained share 14 out of the last 16 quarters, and we expect to get back on that trend here in the fourth quarter of this year and as we go into 2014. But to be able to deliver the algorithm, we have to be able to maintain about flat volume.

"We're in an extremely competitive industry, so I expect that competitiveness to continue. We'll continue to fight for volume the same as we have all along. I like the hand we have and I think we're in a competitive position to be able to win the majority of those fights."

Morningstar analyst Erin Lash views Dean Foods' focus on driving cost savings "positively". The efforts will "reduce the impact volatile commodity costs and competitive pressures ultimately have on the firm's underlying results", she suggests. 

"Management struck a cautious tone regarding dairy costs, citing elevated milk prices as a detriment to the firm's profitability as well as to industry volumes. Over the longer term, we forecast average annual sales growth of 2%-3% and operating margins to approximate 3% in fiscal 2013, down from 3.3% on average over the past three years, and 5.1% by 2022," Lash predicted.