Shares in Dean Foods fell after Q4 earnings missed expectations

Shares in Dean Foods fell after Q4 earnings missed expectations

A push among US retailers to deliver more value for consumers hit margins at dairy giant Dean Foods, the company has claimed.

Dean Foods said yesterday (10 February) that its fourth-quarter margins were dented by the renegotiation of contracts with retailers, which are squeezing dairy producers during a period of food deflation in the US.

Dean Foods CEO Greg Engles said that retailers were “aggressively shopping” for lower prices from dairy processors in fiscal 2009.

“As the year progressed, particularly in the fourth quarter, an increasingly consolidated and more powerful retail base began to seek and obtain price concessions from processors,” he said.

“Customers are aggressively shopping for more attractive prices on their private labels in liquid milk and there is excess capacity in this industry. They are bidding processors against one another and that is leading to discrete incidences of margin compression.”

This trend, coupled with a continued shift to private label, placed the company’s bottom line under pressure during the fourth quarter, Engles indicated during a conference call with analysts yesterday.

The maker of Horizon Organic milk revealed that fourth-quarter earnings fell 24% to US$50.3m, down from $66.4m last year.

In spite of increased pressure from retailers, CFO Jack Callahan insisted that the company was still able to pass the increasing cost of raw materials through to customers.

“It is completely fundamental to the way the industry operates that these prices get passed through on a month-to-month basis. The inability to pass those prices through would be a significant negative change to the overall dynamics of the industry… We see absolutely no evidence that that is changing, but what we do see is renegotiation of the underlying margin in this difficult environment,” he said.

Management revealed that, while raw milk costs were at “historically low levels” for much of the year, fourth-quarter prices moved “significantly higher“, rising from $10.93 in September to $13.99 in December.

According to Engles, the company believes that the transition to higher raw milk prices was largely complete by January.

“We do not currently expect milk price volatility to be a significant driver of our performance in 2010,” he insisted.

Management added that its performance in the coming year will hinge on the company’s ability to continue to strip costs out of the business.

“The heightened competitive environment makes it clear that our strategy to drive differentiated customer value at Fresh Dairy Direct through cost reductions and capability building are critical to our success,” Engles said.

Over the past 12 months, Engles said that the company had reduced costs by $75m, including $60m within its Fresh Dairy Direct business.

“We enter 2010 with considerable momentum behind our cost reduction initiatives. Current market challenges and our commitment to our shareholders demand our continued focus on these efforts and we have a line of sight to over $90m in incremental cost savings in 2010,” he revealed.

Nevertheless, the Dallas-based food group remained cautious in its outlook for 2010, disappointing the market with an EPS range of $1.54-1.64.

Shares in the US dairy group fell from an open of $16.39 yesterday to close at $15.19.