Dean Foods CEO Discusses Q3 2010 Results - Earnings Call Transcript
Dean Foods Co. (
)
Q3 2010 Earnings Call
November 09, 2010 09:30 pm ET
Executives
Barry Sievert, IR
Gregg Engles, Chairman and CEO
Jack Callahan, Jr., EVP and CFO
Analysts
Judy Hong - Goldman Sachs
Eric Serotta - Wells Fargo Securities
Terry Bivens - JPMorgan
Farha Aslam - Stephens Inc.
Alexia Howard - Sanford Bernstein
Christine McCracken - Cleveland Research
David Palmer - UBS
Jon Feeney - Janney
John Baumgartner - Telsey Advisory Group
Presentation
Operator
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Dean Foods Q3 2009 Earnings Call Transcript
Good morning and welcome to the Dean Foods Company third quarter 2010 earnings conference call. Please note that today’s call is being recorded and it is also being broadcast live over the Internet on the Dean Foods corporate website. This broadcast is the property of Dean Foods. Redistribution, retransmission or rebroadcast of this call in any form without the express written consent of the company is strictly prohibited.
At this time, I would like to turn the call over for opening remarks to the Vice President of Investor Relations, Mr. Barry Sievert. Please go ahead, sir.
Barry Sievert
Thank you, Jamie, and good morning, everyone. Thanks for joining us for our third quarter 2010 conference call. We issued an earnings release this morning, which is available on our website at deanfoods.com. The release is also filed as an exhibit to a Form 8-K available on the SEC’s website at sec.gov. Also available during this call at the Dean Foods website is a slide presentation, which accompanies today’s prepared remarks.
A replay of today’s call, along with the slide presentation, will be available on our website beginning this afternoon. The earnings per share, operating income and interest expense information that will be provided today are from continuing operations and have been adjusted to exclude the expenses related to facility closings and reorganization, expenses related to closed and expected to close acquisitions, and other nonrecurring items in order to enable you to make a meaningful evaluation of our operating performance between periods.
The earnings release contains a more detailed discussion of the reasons why these items are excluded from the consolidated results, along with reconciliations between GAAP and adjusted earnings and between net cash flow from continuing operations and free cash flow from continuing operations.
We would also like to advise you that all forward-looking statements made on today’s call are intended to fall within the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. These statements will include, among others, disclosure of earnings targets, as well as expectations regarding our branding initiatives, expected cost savings, coverage ratios and various other aspects of our business. These statements involve risks and uncertainties that may cause actual results to differ materially from the statements made on today’s conference call. Information concerning those risks is contained in the company’s periodic reports on Forms 10-K and 10-Q and in today’s press release.
Participating with me in the prepared section of today’s call are Gregg Engles, our Chairman and CEO; and Jack Callahan, our Chief Financial Officer. Also joining the call today for the question-and-answer portion is Joe Scalzo, our President and Chief Operating Officer.
Gregg will start us off by providing a general review of the quarter, walking through the performance of the operating units and offering some commentary on the forward outlook. Following Gregg, Jack will offer additional comments on our financial performance before turning the call back to Gregg for some additional commentary on the balance sheet and other closing commentary. We will then open the call to your questions.
With that, I will now turn the call over to Gregg for his opening remarks. Gregg?
Gregg Engles
Thank you, Barry, and thank you all for joining us on today’s call. As you have seen this morning, we reported third quarter net income of $23 million, or $0.13 per share. These results are clearly disappointing and reflect continued significant challenges in our largest business, Fresh Dairy Direct-Morningstar.
Despite our poor consolidated performance, WhiteWave-Alpro continued to perform exceptionally well and delivered significant top and bottom-line growth. However, given the relative size of the business, it was not enough to offset weakness in the much larger Fresh Dairy Direct-Morningstar segment. As we’ve noted on previous calls, our core dairy business’ performance has suffered material margin pressure from the fundamental adverse shifts in the market pricing of private label milk and its related fallout.
More recently, two other factors have impacted our business. We have experienced weakness in milk category volumes and other beverage and cultured product categories within Fresh Dairy Direct-Morningstar. Butterfat costs also spiked to unexpectedly high levels in Q3, which further compressed segment operating performance.
In light of these results, we continue to take aggressive steps to improve our results at FDD-Morningstar, including accelerated cost reductions and, as we recently announced a realignment of the management and organization of the business. With that overview, let me drill down a bit into each of the businesses starting with Fresh Dairy Direct-Morningstar.
Fresh Dairy Direct-Morningstar gross profits declined $44 million from the year-ago period. While the issues impacting results are much the same as we’ve been dealing with for the past year or so, the relative magnitude has changed a bit. The pricing pressures on the core dairy business that began last year continued through the third quarter.
To attract customers in a tough climate, retailers have priced gallons of private label milk at deep discounts. The margin over milk metric on the right of this chart that tracks the spread between retail pricing of private label gallons of milk and the government-mandated Class I mover price remains essentially unchanged from prior periods, $0.40 to $0.50 a gallon below historical levels.
This continues to impact the processing industry in two ways. First, it drives ongoing pricing pressure from processors, such as Dean, as retailers look to reduce their costs across the category. Volume-hungry competitors have bid aggressively for available business, and contact renegotiations have been widespread. So far we have successfully maintained and even grown our share. However, this competitive intensity has resulted in broad-based price concessions.
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