US dairy processor Dean Foods has said its third-quarter earnings were hit by intense competition at the grocery retail level and higher costs.

The company reported net income of US$40.2m, or 25 cents per share, for the third quarter to 30 September, compared to $122.2m, or 76 cents per share, for the year-ago period.

Results were affected by the write-off of $21.2m (net of income tax) of deferred financing costs in the latest quarter and a non-recurring gain of $40.3m (net of income tax) in the third quarter of 2003 related to the sale of the company's frozen pre-whipped topping operations. Excluding those items and facility and restructuring costs, adjusted earnings per share totalled 46 cents, a decline of 12% compared to 52 cents in the third quarter of 2003.

Net sales rose to $2.77bn from $2.31bn a year earlier, due primarily to increased selling prices, which were implemented to offset increases in raw milk costs, and strong volume growth in the Branded Products Group.

"As we indicated in September, our third quarter earnings were impacted by significant cost inflation and volatility as well as intense competition at the retail grocery level," said Gregg Engles, chairman and chief executive officer.

"Our Specialty Foods Group continues to face significant cost pressures and competitive challenges. Returning this business to its historical profitability levels continues to be one of our top priorities. Dairy Group operating margins continue to be negatively impacted by inflationary and competitive pressures. Despite margin pressure in our dairy business, we continue to grow our milk market share, with volumes up 2.6%, our largest increase in five years. Our Branded Products Group delivered solid volume, sales and profit growth, as the segment generated operating margins of close to 11% during the third quarter," Engles added.

The company said that as it moves into 2005 is anticipates lower volatility in dairy commodity prices in the US and Spain, better results from its Specialty Foods Group segment as a result of exiting the nutritional drinks business, and continued strong sales and operating income growth from its Branded Products segment.