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Dean Foods withdraws 2014 earnings guidance after 'rocky' Q2

By Mark Astley+

12-Aug-2014

Dean Foods withdraws 2014 earnings guidance after 'rocky' Q2

US dairy giant Dean Foods has withdrawn its full-year earnings guidance after fluid milk price volatility in the second quarter left its results looking "rocky." 

Dallas-based Dean Foods, America's second largest dairy manufacturer, reported a operating income loss of US$4m (€3m) for the three months ended June 30 2014 - down from US$44m (€33m) in Q2 2013.

Rising raw milk costs and a subsequent slow in US fluid milk sales meant Q2 was "even more challenging" than originally anticipated, said the company.

Given the current climate, described as "the most difficult operating environment in the history of the company" by CEO Gregg Tanner, Dean Foods has forecast losses in Q3 and withdrew its full-year earning guidance.

"The balance of the years appears rocky, with a continued unpredictable and volatile dairy commodity environment. That makes it difficult to provide guidance beyond the immediate quarter," said Tanner.

"While be hope to see a more positive environment later in the year, the uncertainty surrounding whether or when that will occur leads us to withdraw our full year guidance for the present time."

Dean Foods shares fell 3.9% to US$15.20 (€11.38) on the New York Stock Exchange (NYSE) on the back of the company's Q2 report, recovering from an initial drop of around 10%.

Despite its Q2 performance, Credit Suisse upgraded Dean Foods from Neutral to Outperform.

Breakfast cereal "impact"

Speaking on a conference call with analysts yesterday, Tanner pinpointed the rising cost of raw milk in Q2 as the route cause of its results.

Raw milk costs averaged at US$23.66 (€17.73) per hundred weight (cwt) in the three months ended June 30 2014, up 31% on Q2 2013 and 6% on Q1 2014.

A subsequent increase in the retail price of fluid milk contributed to a 4% decrease in its Q2 sales, said the company. 

“As our volumes soften further than we expected, we experienced increased volume to leverage across our network," Tanner told analysts.

Tanner also raised concerns about the "health of the ready-to-eat cereal category and its impact on fluid milk."

Plant closures

This "difficult operating environment" reinforces "the importance of the initiatives" Dean Foods already has underway, said Tanner.

Dean Foods set itself the target in 2013 of closing between 10% and 15% of its plants by mid-2014.

"We have strong momentum behind these initiatives and expect increased savings from plant closures in 2014 to defer some of the volume deleverage associated with the loss of business in 2013 as well as the current above trend fluid milk category weakness we are experiencing from the record high dairy commodity environment," Tanner told analysts.