Dean Foods is projecting double digit operating income growth in 2012 for its fresh dairy segment as raw milk commodity pricing becomes more “stable.”
The firm’s Fresh Dairy Direct (FDD) segment, which holds an approximate 38% share of the US fluid milk market, looks set to achieve operating income growth in the low-teens for 2012 after a “difficult few years” of unsteady raw milk prices.
Dean Foods chairman and CEO Gregg Engles outlined the firm’s expectations for the year at its Strategic Decisions Conference in New York.
The FDD segment, which produces and distributes private label and branded dairy products, recorded an 18% operating income increase in the first quarter of 2012, hitting $101m – the highest quarterly result since Q2 2010.
Engles told the conference: “Looking ahead, we feel good about the path that the business is on.”
Engles added, however, that the firm’s value-added dairy offering, Horizon Organic, is still on the mend after suffering at the hands of the ‘milk crisis’.
Dairy income growth
“The fluid milk business is now beginning to emerge from what has been a difficult few years,” Engles told the conference.
“Ever increasing raw milk prices, weak consumer spending, retailer pricing actions and the pressures that squeeze profitability for milk processors have contributed to a difficult period for this business.”
Beginning in 1999, retailers began reducing their fluid milk margins on private label milk in an effort to drive store traffic, which effectively squeezed the profitability of milk processing and distribution.
A “more favourable environment than we have seen in at least the last two and a half years” has emerged as retail pricing has recovered, Engles added.
“Our FDD leadership team is clearly focused on winning business and outperforming the industry in terms of volume. We have outperformed the industry for the last four quarters consecutively in terms of volume share.”
“Our focus is clearly on driving profit and cash flow at FDD again by focusing on the fundamentals – cost management, price realisation and profitable volume growth.”
“Given our momentum in the business and our expectations for a relatively stable commodity environment, we expect the FDD segment to generate low-teen operating income growth in 2012.”
Dean Foods’ value-added dairy range, Horizon Organic – which is part of the firm’s Whitewave-Alpro business segment – recorded mid-single digit growth for the first quarter of 2012, after experiencing 10% in 2011.
Engles added, however, that raw milk supply is likely to constrain the growth of the Horizon Organic brand in 2012.
But the firm is confident it can work through these issues and increase growth of the range, which it sees as the “logical next step for parents after formula and organic baby foods as they move in their toddler years.”
“Looking ahead we plan to continue to innovate in the value added dairy area and to test the limits on how far Horizon Organic can go as a purveyor of organic and ‘better for you’ products,” he added.