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August 9, 2013

On the money: Dean Foods eyes competitive advantages with efficiency drive

Dean Foods has said its efforts to reduce costs and drive efficiencies, along with new business wins, will enable the US dairy firm to further extend its "competitive advantage".

Dean Foods has said its efforts to reduce costs and drive efficiencies, along with new business wins, will enable the US dairy firm to further extend its “competitive advantage”.

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.

CEO Gregg Tanner told analysts on the firm’s earnings call yesterday (8 August) that the company is making progress in its efforts to reduce costs and drive efficiencies.

“Our accelerated cost reduction efforts include the planned closure of 10% to 15% of our plant network through mid-2014. We only began realising a small amount of the savings from these closures in the first half of the year. We have strong momentum behind these initiatives and expect increased savings over the balance of the year and into 2014.

“Our focus remains clear: we continue to work to extend our competitive advantage, beginning with costs and efficiency.”

Tanner said he expects these efforts to offset the volume deleverage it is experiencing and to “further differentiate” the company from its competitive set from an efficiency and productivity perspective.

Dean Foods’ share of US fluid milk sales volume declined to 36.4% during the second quarter of the year from 37.8% in the first. More than two-thirds of this, the company said, was attributable to the transition of volume to other providers related to previously disclosed business losses. The firm lost a large Wal-Mart Stores contract earlier this year.

Tanner, however, said the company is continuing to focus on strengthening its volumes at “margin-appropriate pricing levels” and recent wins are expected to begin positively impacting its volumes in the fourth quarter.

Janney analyst Jonathan Feeney said that while the volume softness was “slightly more than we anticipated”, the volatility was unlikely to affect its projected “$1.00 in FY15 FCF/share”.

“Dean remains in a comfortable financial position, continues to lead the way in rationalizing capacity, and is on track to meet its cost reduction plans ($120M in FY13).”

The chief executive told analysts Dean Foods would be “bringing on some new business” in the fourth quarter of the year, which he said “obviously will help” volumes. Exactly how much this new business will impact volumes, however, he remained coy about.

“I’m not going to get into specifics around how much volume it is, but it is – it will be substantial when it’s all said and done.”

Yesterday, shares in Dean Foods slumped as the dairy firm swung to a second-quarter loss. The company said it expected the third quarter to be “the most challenging” of the year, and as a result, narrowed its full-year earnings guidanceto 47 cents to 53 cents per share, from a previous estimate of 45 cents to 55 cents per share.

Nonetheless, Tanner was upbeat about the firm’s outlook and said the momentum behind its cost reduction activities will enable the company to deliver “solid” full year results.

“Our advantaged cost position is important as we work to return to our long history of share gains,” he told analysts. “I expect these category share gains, combined with our portfolio of strong brands, a significantly strengthened balance sheet, industry-leading pricing tools and our uncompromising commitment to quality, safety and service to provide the platform for our success going forward.”

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