Thursday, February 26, 2009

Supply-Side Memo: Dean Foods, Producer of White Wave, Horizon Organic and Silk Organic Is In the Tall Grass and Grazing For More

Dean Foods, which is the largest processor and distributor of fresh fluid milk and dairy products in the U.S., along with being one of the major players in the organic milk (fluid and soy) and natural-organic dairy products categories through its WhiteWave-Morningstar division, held an investor day today which was Webcast via the company's Web site. Some of the company's well-known natural-organic dairy brands are: Horizon Organic, Silk organic soy milk, WhiteWave dairy products and Rachel's Organics. [Click here for a list of all of the company's dairy brands.]

The purpose of Dean Foods' investor day and Webcast was to detail the company's new strategic plan for going forward. The company's natural-organic dairy divisions will play a major part in it's new strategic plan and direction.

Below are the three key planks of its new strategic plan that Dean Foods' executive team described at the meeting/webcast today:

~Dean Foods' said today it plans to extend its current low cost position in the dairy industry. "The first key component of the strategic plan, and the clear focus for the near term, is to reduce costs across the business and extend Dean Foods' low cost position in the marketplace," the company said today.

~Additionally, the company said it will focus on driving revenue and profit growth in its core businesses. "In the DSD dairy platform, the company says it plans to build on its core manufacturing and distribution strengths to continue to increase its market share and drive strong operating returns. This includes branded dairy products and private label.

At its natural-organic WhiteWave-Morningstar division, Dean Foods said it will focus on "leveraging and building upon the strong net sales growth of the branded portfolio to drive continued revenue growth and reignite segment operating profit growth."

~Finally, the dairy giant said it's going to "invest for growth in new capabilities and platforms to drive sustainable long-term growth." In other words its investing despite the current economic recession, at least in a prudent if not massive way.

Dean Foods' CEO Gregg Engles outlined this morning in the webcast a $300 million across the board cost-savings program the dairy processor, marketer and distributor will embark on over the next five years.

He said the majority of the $300 million in cost savings targets what the company calls its DSD Dairy Segment, which involves the production, marketing, distribution and sales of its branded fluid milk, soy beverage and related dairy products. These include the numerous brands under the WhiteWave-Morningstar natural-organic division.

[You can read a detailed summary of the company's specific cost-cutting plans designed to eliminate $300 million in expenses over five years here.]

Dean Foods' organic dairy brands -- Horizon, White Wave, Silk ect. -- have been a leading source of the company's growth since it acquired most of those brands. In the U.S., for example, Organic fluid cow milk and refrigerated, fresh soy milk have gone from mere micro-niche items sold primarily in natural foods stores just five years ago to near-mainstream items today.

Nearly every U.S. supermarket chain and independent grocer today offers organic fluid milk and refrigerated soy milk (as opposed to just the varieties in shelf-stable tetra packaging) for sale, devoting an increasing amount of dairy case display space to the products. Even many convenience stores, drug chain stores, discount stores and dollar stores are selling organic fluid and soy milk today.

Additionally, there's been an explosion in the amount of supermarket shelf space devoted to organic yogurt varieties, beverages and related natural and organic dairy products of all kinds in just the last five years alone. Additionally, many more mainstream supermarkets that in the past never sold natural-organic dairy products at all have added them to their dairy cases.

Dean Foods' biggest advantage in the organic segment is the strong brand identity it has with Horizon, Silk, WhiteWave and the like, in our analysis.

And even though organic category sales are down in the recession, it's surprising that organic dairy items, particular value-added items like yogurt, cottage cheese, ect., are still doing well overall.

Our analysis is this is the case in-part because consumers tend to cut back first on organic shelf-stable packaged food and grocery items in bad economic times, perceiving buying those to be less important to their health and well-being than fresh products like organic produce and dairy products are. In other words, fresh is the last organic segment cash-strapped shoppers will cutback on in many cases.

Milk prices down, good for dairy processors

Big dairy companies like Dean Foods actually are doing well in this economy in a relative sense because the price for milk they purchase from dairy farmers is at the lowest price it has been at in recent, and even not so recent, history. Dramatically lower the primary ingredient in a company's products and lots of good things will follow.

At the other end of that equation though are the dairy farmers, who are suffering.

For example, in California's Central Valley, one of the top milk producing regions in the U.S., a local dairy farmer association just announced a program in which the dairy farmers- members will kill off thousands of cows and sell them to the meat processing industry as a way to reduce their herds and thus lower the supply of milk, resulting, they hope, in higher prices being paid them by processors like Dean Foods (and others), which has a large processing plant under its Morningstar division in the Central Valley County of Merced. Similar scenarios are happening in all of the dairy-producing states.

With the cost of cow milk so low, Dean Foods today actually revised upward its estimate for its first quarter of the new fiscal year earnings. Here is what CFO Jack Callahan said today in the webcast: "As we discussed a few weeks ago in our fourth quarter earnings release, we expected the first quarter to be strong as the commodity environment continues to improve. "Most notably, the Class I Mover milk price will decline in March to $9.43 per hundredweight, which is the lowest price in recent memory. The energy complex also remains favorable. Based on our analysis of the January results and what looks to be, based on preliminary reports, a solid February, the quarter will likely be even stronger than we initially though," he said.

"The Company increased its first quarter 2009 guidance for adjusted diluted earnings per share to at least $0.41 per share, from its prior guidance for at least $0.38 per adjusted diluted share. Additionally, the Company's full year expectations have also increased, with management now expecting adjusted earnings to reach at least $1.55 per diluted share in 2009, representing full year growth of at least 19% from the $1.30 posted in 2008," company CFO Callahan added.

Dean Foods posted its highest-ever quarterly operating income in its recently-ended fourth quarter, which it announced on February 11. [You can Read More on the company's Q4 peformance.]

The solid performance in its fourth quarter and the increase in earnings estimate for the first quarter should allow Dean Foods to continue from a financial perspective the aggressive promotion its been doing of late on many of its organic dairy product brands like yogurts.

One thing we don't see changing at retail is the price of organic milk, Horizon brand or any other. A gallon of organic milk (from a cow) is priced about 50% -to- 60% higher at retail today than a gallon of non-organic milk. That's a stiff premium, which is why many consumers just can't afford to buy organic fluid milk in this economy (and often in a good economy) even though they want to. The core organic milk consumer still seems to be sticking (again our fresh organic cutback last theory) but their is significant overall sales erosion in the category as evidenced by recent data.

A slightly lower organic milk retail price a good goal

We suggest one long-term goal of the milk processing industry is to get the price of organic fluid milk down by at least 20%-25% over the two -to- three years.

Of course retailers can help with this by continuing to take the higher margins they do on organic fluid milk as compared to non-organic (after all they should as the volume is considerably less in organic), but perhaps taking a bit less high margin. A 5% reduction would be a big deal, for example, assuming the dairy processors would toss in 5% in cooperation. Doing so would help to build greater retail demand for organic fluid milk, in our analysis.

Until the price to consumers of organic milk comes down a bit closer to that of non-organic, say 20-25% higher, it will remain a niche product.

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