Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Barry Sievert – VP, IR

Jack Callahan – EVP and CFO

Gregg Engles – Chairman and CEO

Analysts

Bryan Spillane – Bank of America/Merrill Lynch

Chris Growe – Stifel Nicolaus

Eric Katzman – Deutsche Bank

Farha Aslam – Stephens Inc.

Terry Bivens – JP Morgan

Alexia Howard – Sanford Bernstein

David Palmer – UBS

Robert Moskow – Credit Suisse

Jonathan Feeney – Janney Montgomery Scott

Christine McCracken – Cleveland Research

Dean Foods Company (DF) Q2 2009 Earnings Call Transcript August 5, 2009 9:30 AM ET

Operator

Good morning. Thanks for holding everyone and welcome to the Dean Foods Company second quarter 2009 earnings release conference call. Please note that today’s call is being recorded and is also being broadcast live over the Internet on the Dean Foods corporate website. This broadcast is the property of Dean Foods. Any 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, Kevin and good morning everyone. Thanks for joining us for our second quarter 2009 conference call. We issued an earnings press release this morning, which is available on our website at deanfoods.com. This release is also filed as an exhibit to an 8-K available on the SEC's website at sec.gov. Also available during this call at Dean Foods website is a slide presentation that 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 consolidated earnings per share, operating income and operating margin information that will be provided today are from continuing operations and have been adjusted to exclude the expenses related to facility closings and reorganizations, expenses related to closed or anticipated to close acquisitions, and non-recurring 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 the reconciliation between GAAP and adjusted earnings, and between net cash flow from continuing operations and free cash flow from continuing operations.

We also would like to advise you that all forward-looking statements made on today's call are intended to fall within the Safe Harbor provisions 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, leverage 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.

With those formalities out of the way, I will now turn the call over to Jack Callahan, our Chief Financial Officer, who will offer a detailed review with the financial results for the first quarter. Following Jack, Gregg Engles, our Chairman and CEO, will discuss our strategic initiatives, commodity outlook and forward expectations before opening the call up to your questions. Jack?

Jack Callahan

Thank you, Barry and good morning everyone. The second quarter marks another successful quarter in what we continue to expect to be a very strong year for Dean.

We once again delivered solid bottom line growth across both operating segments highlighting the strength of our portfolio of businesses. Some of the notable highlights of the quarter include a strong consolidated performance with operating income growth of 11% and diluted earnings per share growth of 30%, driven by excellent profit growth across the portfolio.

Fresh Dairy Direct fluid milk volumes continue to outperform the industry, while delivering 9% growth in operating income. We had exceptional earnings flow through at WhiteWave-Morningstar leading to operating income growth of 46%. We made continued progress and made several accelerated investments against our strategic transformation initiatives, and we were very pleased to acquire the leading soy player in Europe, which when combined with our Silk brand makes us a clear global leader in soy based beverages and related products.

Clearly, the business is performing very well. Favorable commodity trends continue to provide a tailwind to the business. Solid efforts by our business teams to drive out cost and built capability have allowed us to capitalize on this favorability in the form of strong earnings growth in the first half of this year. Overall, I am very pleased with the financial results across the entire portfolio of businesses, included our fluid milk and ice cream operations and Fresh Dairy Direct, our private label long shelf life dairy business at Morningstar, and our nationally branded businesses at WhiteWave.

The strength of our operating performance has given us the flexibility to accelerate some investments in strategic projects IT and supply chain management, while still delivering 30% diluted earnings per share growth in the quarter to 43% per share. For the first half of this year, earnings per diluted share are $0.95, nearly 70% ahead of last year’s result. Our strong performance also continues to drive the strong free cash flow that has led to consistent deleveraging of the balance sheet towards our goal of 3.5 times funded debt to EBITDA or below.

Through the first six months of the year, the business has generated almost $250 million of free cash flow. Let’s take a closer look at the performance of each of the business segments in more detail starting with Fresh Dairy Direct. Our Fresh Dairy Direct business continues to increase volumes in its fluid milk business. The strategic acquisitions we have made in the business over the last year combined with solid execution from our field teams led to fluid milk volumes that again outpaced the competition in the market.

Acquisition aided fluid milk volumes increased 2.4%. This is nearly 300 basis points ahead of the rest of the market that was down nearly 0.5% in the quarter based on our estimates using USDA and federal milk marketing order data. Excluding the impact of acquisitions, Fresh Dairy Direct fluid milk volumes increased approximately 1%. In addition to the strong fluid milk volume performance, our ice cream business also continues to perform well growing both market share and profitability in the quarter.

In addition to the strong volume performance at Fresh Dairy Direct in the quarter, commodities continue to be significantly favorable on a year-over-year basis helping to support our strong results. The Class I milk price averaged $10.47 per hundred weight for the quarter, 41% below the $17.80 average in the same period a year ago and 13% below the first quarter of this year.

The average CME butter price increased a bit sequentially in the second quarter, up 8% from the first quarter of 2009 to average $1.23 per pound, but still 16% below year ago levels, and we continue to anniversary the steep commodity inflation of 2008 as energy, packaging and most other commodities were lower on a year-over-year basis in the second quarter of this year.

This commodity favorability has played an important role in the strong Fresh Dairy Direct results so far this year. This combined with the cost reduction benefits of our network rationalization, centralized procurement, new distribution technologies and our continuous improvement efforts drove Fresh Dairy Direct operating income growth of 9% in the quarter to $169 million, despite continued competitive pressures across the industry.

As the favorable commodity trends are passed into the marketplace, the benefit of this favorability will likely begin to moderate towards the end of 2009 and into 2010 as the overlaps become more challenging. Therefore, we continue to focus intently on driving our cost reduction initiatives to sustain bottom line performance across the inevitable commodity cycles.

On the WhiteWave-Morningstar of the business, net sales declined 5% for this segment to $622 million. Within this, WhiteWave sales declined 3% to $359 million due primarily to slowing category growth across premium branded categories at WhiteWave and the exit of an unprofitable food service relationship in Silk as well as the previous disclosed exit of a private label organic milk business in the UK.

Adjusting for the businesses we exited, our core WhiteWave sales were essentially flat in the quarter. Also impacting WhiteWave-Morningstar segment sales in the quarter was a 7% decline in Morningstar sales to $263 million. The sales decline at Morningstar primarily reflects the pass through of lower dairy commodity costs and a modest volume decline due to softer food service businesses.

Looking a bit closer at the sales performance in the quarter at WhiteWave-Morningstar, our branded creamers business was relatively strong in the quarter growing low single digits as consumers continued to consume more coffee at home and in food service channels, where our brands are strong. Net sales growth was driven by solid growth of both Land O'Lakes creamer sales as well as reinvigorated International Delight sales. The launch of a redesigned package, strong seasonal flavor performance and increased marketing support behind International Delight helped to drive solid net sales growth in the quarter and an increase in market share for the period.

Our creamers business carries significant momentum heading into the second half of the year. In addition to the ongoing strength of our base month, this month we began to launch of our coffee house inspired flavors into the market. These flavors will allow consumers to bring the coffee house flavor in experience they love to their at home coffee occasions. Retailers are very excited about the new products and acceptance of the line extension has been strong. We expect to launch to result an incremental brand growth over the balance of the year.

Turning to other key brands in the portfolio, consistent with most other premium branded categories, organic milk category sales have slowed materially to nearly flat growth and the industry once again finds itself in a state of oversupply. In an effort to reduce our excess supply and protect our network of approximately 500 organic family farmers as much as possible during this period, we have proactively reduced the size of the herd on our company-owned organic farms. Consistent with these category dynamics, Horizon milk sales were up slightly in the quarter on the strength of our single served and DHA enhanced offerings, offset by softer gallon and half gallon sales.

We continue to work to drive cost out of our Horizon supply chain to improve the brands economics, while providing our network of farmers a fair return and consumers a strong value proposition. Our team has made solid progress against those efforts and given expectations for a slower growing, but perhaps more rational category, we are optimistic that the brands economics will continue to improve. Silk soymilk net sales were down mid single digits in the quarter or up slightly when adjusted for the unprofitable food service contract we exited late last year. Like other premium categories in the grocery store, soymilk sales have slowed [ph] along with the economy.

To reinvigorate Silk growth, we are currently taking selective promotional pricing actions and increasing targeted marketing behind the recent launch of our Heart Health product. Recently, we have seen sales growth trends begin to improve as these actions start to take hold in the market. At Morningstar, our private label cottage cheese and yogurt sales remain relatively strong at retail in the quarter, while ice cream mix was challenged a bit by continued softness in the food service channel.

For the WhiteWave-Morningstar segment as a whole, favorable dairy and energy commodities, tight overall SG&A expense control and production distribution efficiencies drove very strong segment operating profit income to $72 million in the second quarter, 46% above year ago results. Now let me turn to corporate and other costs, which were up meaningfully over last year to $61 million in the quarter, including a Hero/WhiteWave joint venture investment of $3 million.

As we said previously, due to our very strong start to this year that is well above the trajectory we discussed with you earlier, we are consciously choosing to selectively accelerate some investments we laid to our strategic initiatives to drive future growth. These investments include addition of strategic consulting projects, information technology investments to help drive data consistency and support decision-making capabilities, supply chain capability to support our cost reduction efforts and additional research and development funding to reduce cost and fuel future top line growth.

In addition to this accelerated strategic investments, corporate expenses were also impacted by increased days employees costs due to increased incentive compensation and the higher pension expense, and we also had a significant increase in legal fees and accruals as there is unusually higher level of activity in this area right now. Over the balance of the year, we expect corporate expense to continue to trend higher on a year-over-year basis as we continue to pull forward investments and strategic initiatives. We expect this growth to moderate as we get beyond the first quarter of 2010.

Before I move on, I would also like to note that due to a change in accounting rules, beginning this year, closed and anticipated to close transaction costs are required to be expensed through the P&L versus the historical practice of capitalizing the cost wit the deal. With the Alpro acquisition, we incurred approximately $9 million of transaction cost in the second quarter that would have been capitalized in the past. These costs have been excluded from our adjusted results to allow better core business comparisons from period-to-period.

So to sum up the financial results for the quarter, on a consolidated Dean Foods basis, the strong growth from the operating segments in the quarter drove solid consolidated results of $180 million in operating income, an increase of 11% over last year’s second quarter. With the benefit of lower average debt balances, interest expense in the quarter was $17 million below year ago levels. This helps to increase net income by 41% and diluted EPS by 30% in the quarter to $0.43 per share, very strong results all the way down the P&L.

Now, I would like to discuss our cash flow performance and our continued focus on deleveraging the balance sheet. The business continues to generate exceptional cash flow driving consistent deleveraging of the balance sheet. Free cash flow from operations for the first half of this year was a very strong $249 million. Over the last six quarters, free cash flow from operations has averaged well over $100 million [ph] per quarter driving a rapid deleveraging of our balance sheet. We bolstered our deleveraging efforts with our successful May equity offering that raised approximately $445 million.

Capital expenditures through the first six months were $100 million. The pace of capital spending is expected to pick up over the balance of the year and we continue to expect to end the year with approximately $300 million in CapEx spending. Although, it is possible some spending on larger projects or plans could shift into early 2010. So given this strong cash flow results, let me review where we stand against our balance sheet objectives. Our total debt outstanding has been reduced by nearly $900 million over the past 12 months and is now down over $1.5 billion from its peak in the third quarter of 2007.

As of June 30, total outstanding debt stood at $3.8 billion. Our leverage ratio or funded debt to EBITDA, as defined by our credit agreement, has declined from 4.48 times a year ago to 3.85 times at this year’s second quarter end. Pro forma June 30 for the Alpro acquisition, which was completed in early July, our ratio would have been approximately 4.1 times funded debt to EBITDA. We continue to focus on deleveraging the balance sheet and are on a solid trajectory towards our goal of reducing our leverage to 3.5 times funded debt to EBITDA or below. And we continue to enjoy very strong levels of liquidity.

As of July 31, post the Alpro acquisition, which was funded with revolver borrowings in cash total unfunded and available revolver and AR securitization capacity stood at approximately $1.4 billion. This gives us very favorable source of funding for the business, while we begin to realize synergies and integrate outgrowing to Dean.

With that, I will conclude my comments by congratulating all our teams on a very successful quarter. We look forward to reporting what we expect to be a strong year of growth for the business both in terms of financial results as well as continued progress against our strategic initiatives. I would like to thank you for joining us today and now turn the call over to Gregg Engles.

Gregg?

Gregg Engles

Thank you, Jack. I thank all of you for joining us on this morning’s call. Let me reiterate Jack’s comments and both thank and congratulate our team on another excellent quarter. Across the entirety of our business, our teams continued to drive strong financial performance due in part to the benefits of favorable commodities but also due to continued progress against our initiatives, a clear strategic focus and increased management capability across the business.

Before moving to the question-and-answer portion of the call, I want to address three areas in my comments. First, I will give an update on the progress we are making against our strategic initiatives; second, I will discuss the M&A environment including the very exciting acquisition of Alpro that was completed in early July; and third, I will briefly comment on the commodity environment and update you on our forward outlook.

As I said, while commodities have clearly been favorable thus far this year, also helping drive our success is the steady progress we are making against our transformation initiatives. As we get farther into the work, we are learning and refining our strategies and putting increased emphasis on areas where we see the greatest opportunities. Some of the early progress that we’ve made includes in our distribution network, we almost completed the initial installation of our new GPS distribution technology.

We are already realizing early benefits from these tools through fewer more efficient routes, improved tracking and benchmarking of performance, and increasingly consistent methodologies across our distribution network. Through the first half of this year, while our roll out was still ongoing, our efforts have resulted in a 4% reduction in our overall gallons of diesel fuel and flat employee related cost in our DSD system despite increased overall product volumes.

We will continue to drive value in our DSD system through these technologies were sometime to come as our fuel teams become increasingly familiar with and comfortable with our tools. In addition, through our network rationalization efforts, we’ve announced the closure of four processing facilities. This, combined with the four facilities we closed last year incrementally increases our overall capacity utilization, lowers our employee related expense and plant energy usage, and drives further efficiency across our network. Consistent with our efforts in distribution, we see much more opportunity ahead in network rationalization.

We are also continuing to push forward in the early phases of our standardization efforts, which we expect to lead to greater purchasing economies, longer product runs and greater efficiency in our plants. This is a major project that will take time to complete, but the importance and benefits of simplifying and standardizing across our operations can not be overstated. We are increasing our focus in this area as it is a gating factor to a lot of the other work that needs to be done to drive our transformation.

The strong ice cream performance we are benefiting from now is in large part the result of product and formula standardization and simplification work that has been ongoing for the last two years. Through this work and the focused efforts of our ice cream team to drive improvements in the way we go-to-market, this business has turned around from one that was in decline and losing market share to one that is growing its share of the market and increasing profitability. This serves as a solid example of where we like to take the rest of the Fresh Dairy Direct business.

We are also putting systems and methodologies in place that will allow us to drive consistency and measurement across our processing network. Our solid start to this year has allowed us to accelerate some of the investment behind this critical supply chain project. This project is in part laying the ground work for many of the initiatives that we expect to enable our overall strategy to drive $300 million in savings over the next three to five years. Based on the significant progress we’ve made just through the first half of this year, we believe we are very much on track to meet this goal which we expect to help drive solid earnings progression over time.

In addition to our transformation efforts, we look to build on the strength of our business through select, strategic acquisitions while also continuing to make progress against the deleveraging objectives that Jack discussed a moment ago. Our strong cash flow and the May equity offering further deleveraged our balance sheet and provided the flexibility we need to pursue additional strategic acquisitions like the three that we’ve announced so far in our Fresh Dairy Direct business this year. We expect these transactions to add over $300 million of incremental annual revenue to the business.

We were also successful in the quarter in an auction for the highly sort after Alpro business. Alpro is the leading Pan-European soy-based beverage and food products company. The company’s strength and the attractive and growing soy category and leadership position in Europe provide obvious strategic synergies with our Silk soymilk business in North America. A number of key elements including a very strong management team, a solid track record of growth, leading brands, a diverse product portfolio and strong competitive position and outstanding manufacturing and distribution assets all added to the attractiveness of the business to us.

I have long believed that Alpro will be one of the most strategic businesses that Dean could acquire and I am very pleased we were able to complete this transaction. I am absolutely delighted that we were successful in this auction, enable to bring this unique and strategic platform into the Dean Foods portfolio of businesses. Alpro brings to us a wealth of new and exciting opportunities. Its product line is very broad including ambient and chilled soymilk, and it has an excellent line of soy based yogurts, desserts, creams and meat alternatives.

We will be working closely with the Alpro management team to drive soy assumption in their established Western European markets as well as to expand the brands reach into new markets across Europe. We also see synergies with our Silk brand to share best practices in product formulation and innovation, processing technologies and consumer insights to drive the business of both companies forward. We look forward to telling you more about the Alpro business as we move throughout this year and next.

Looking at the pipeline of potential acquisitions, I would describe it as having less total activities in the recent past but with some significant opportunities to continue to strengthen our business. Turning to our forward outlook, the first half of 2009 is a very strong start to the year with over $380 million in first half operating income. Looking forward, I expect our first half momentum to carry over into the back half of the year even as the year-over-year comparisons get tougher and we contemplate a less favorable commodity environment, particularly in the fourth quarter and into 2010.

Looking at the current commodity environment, dairy prices remain well below the historically high year ago levels and close to all-time lows. The lower prices provide a near term benefit to our results primarily by decreasing the dollar value of our shrink or milk that has lost in the process of production. Lower prices also support industry wide sales volumes during difficult economic times. As our industry continues its historic practice of passing changes and dairy commodity costs through to our customers, the current lower dairy prices provide a strong value proposition to families across the country and help to support industry volumes in tough economic times.

However, the cyclical nature of the industry and poor dairy producer economics dictate that prices will eventually rise. The extraordinarily higher prices over the last few years supported an unprecedented expansion of the US dairy herd as farmers realize strong economic returns on incremental herd additions. The growth in the herd was supported by record high dairy commodity prices that were driven primarily by growing domestic and global demand for dairy protein weakened production across other areas of the globe and a weak US currency.

With the global recession and the strengthening of the dollar against other currencies, export and domestic demand growth have weakened considerably and the US dairy market is now over supplied. Dairy prices have collapsed to at or near government support levels and many US dairy farmers are currently under considerable economic stress. We do not view this as healthy for the long term stability of the industry or that we expect it to last long. Consistent with other cycles in the industries long history, we anticipate lower prices to lead to reduce supply and higher prices in the future.

We expect that the formal herd reduction program is underway as well as the collective results of individual farmers making macro-economic decisions to feed their cows a less rich mix of feed to reduce the size of their herds or to exit the dairy farming altogether in favor of more attractive alternatives will drive supply lower and eventually result in increasing prices as it has in the past. There is already much evidence that this process is underway. While it remains to be seen how much and how soon these actions will drive an increase in dairy commodity prices, we are currently basing our plans on expectation or rising prices towards the later part of this year and into 2010.

The recent actions by the USDA to temporarily raise price supports across several dairy commodities have not meaningfully altered this outlook although we may see slightly higher average monthly prices, a month or two sooner than we otherwise would have. This has always been a very cyclical industry and we recently have seen both extraordinarily high and extraordinarily low prices. We would prefer in an environment that is more economically sustainable for the roughly 10,000 farmers that our business supports and with more price stability for everyone in the value chain.

Looking at other commodities that have a material impact on our business, energy related commodities including diesel, resin and natural gas continue to be favorable as we begin the third quarter and last the inflationary environment of 2008. As we get closer to the end of the year, this year-over-year favorability is almost certain to begin to reverse. Therefore, while our Fresh Dairy Direct business carries significant momentum into the back half of the year and the commodity environment continues to be reasonably favorable, the reversal in the commodity cycle will eventually cause our comparable period outperformance to recede.

Despite our strong performance and outlook, I would also like to sound one additional note of caution. The current economic environment and changing consumer behavior has led to material channel and category shifts over the past several quarters. These shifts have clear ramifications for the fluid milk business. Remember that while our volumes have been increasing, the balance of the industry has been flat to down. We have a balanced book of business in channels, categories and customers that is helping to insulate us from the migration of volume across the industry.

Not all of our competitors are similarly situated however and the industry’s changing dynamics are driving continued competitive pressure as deleveraged competitors search for incremental volume to fill their plans. We continue to work very hard to differentiate ourselves from a total cost, service and quality basis to combat this dynamic and protect our business against competitive encroachment. But this pressure will likely influence margins over time until a resurgent commodity environment forces the industry to once again focus on price realization instead of chasing volume.

On the WhiteWave-Morningstar side of the business, we expect continued strong results as our brand support initiatives and innovation drive net sales and our continued efforts to leverage our SG&A infrastructure and controlled manufacturing and distribution costs continued to bear fruit, although operating income growth rates will likely diminish as commodity trends turn slightly less favorable. Our branded platform will also have the benefit going forward of the Alpro business, which we acquired in the early part of Q3.

With these factors in mind, we are expecting adjusted diluted earnings per share to be at least $0.30 per share in the third quarter, reflecting a balance of our strong momentum, cautiousness related to competitive behavior, the typical seasonality of the business and the full quarter impact of our May equity offering on our diluted share count. Considering these same factors, we are increasing our forecast for full year adjusted diluted earnings per share to at least $1.66 per share or 23% above year ago levels.

With that, I would like to thank you for joining us on this morning’s call and for your continued interest in Dean Foods. I will now turn the call back over to the operator to open the line for your questions. Operator?

Question-and-Answer Session

Operator

Thank you very much. (Operator instructions) And first up in the roster is Brian Stalange [ph] at Bank of America/Merrill Lynch.

Bryan Spillane – Bank of America/Merrill Lynch

Hi, good morning.

Gregg Engles

Good morning.

Bryan Spillane – Bank of America/Merrill Lynch

I appreciate the commentary on the outlook for milk prices and also the competitive dynamic. I just want to make sure I understand one thing, will higher milk prices and ultimately higher retail prices, will that going to pressure margins in terms of the cost of milk going up. If it reduces the competitive environment, will that offset to some degree the cost pressure from higher milk prices?

Jack Callahan

Yes. I think that there are many dynamics that happened in this marketplace, but one of the things that we’ve clearly learned over the last couple of cycles is that, while increasing milk prices pressure our margins as they rise, they pressure the margins of everybody else and price realization becomes the most important dynamic in that kind of a marketplace as oppose to volume. We’ve been in a marketplace for the last couple of quarters with expanding margins and falling commodity costs, where the game changes more to volume particularly for those competitors in the space who are being deleveraged by dynamics that are causing milk to move across channels from higher priced retail channels into a lower pricing discount channel. So yes, a raising commodity environment really crystallizes your mind on price realization in an industry with a margin structure like ours. So yes, it does to some degree mitigate some of the competitive pressure in that kind of marketplace.

Bryan Spillane – Bank of America/Merrill Lynch

All right. And then Gregg, is some the caution that you are expressing kind of reflect that given how the -- or how much pressure the industry is under right now, it may take longer for the industry to start engaging in price increases again, they may be stuck on the volume thing longer than they normally would be?

Gregg Engles

It really is going to be a function Brian of how quickly prices rise when they move up. We are in an industry with a margin structure such that if you get strong moves up and price, you simply have to take price.

Bryan Spillane – Bank of America/Merrill Lynch

Okay.

Gregg Engles

If you don’t, you will quickly lose and move into a significant loss making position, particularly if you are part of the industry that doesn’t have the lower cost structure. So we have seen that over the last couple of cycles and again it will depend on the level of intensity of the price moves up and whether or not it includes commodities other than just the milk complex. But yes, in a rapidly raising commodity environment, people have to quickly focus on price realization.

Bryan Spillane – Bank of America/Merrill Lynch

Okay, great. And then Jack, just I want to make sure I did this math correctly that the debt now including the Alpro acquisition stands at about $4.1 billion?

Jack Callahan

No, it’s about $4.3 billion.

Bryan Spillane – Bank of America/Merrill Lynch

$4.3 billion, okay.

Jack Callahan

It's about number $4.25.

Bryan Spillane – Bank of America/Merrill Lynch

Okay. All right. Thank you.

Operator

Next up is Chris Growe at Stifel Nicolaus.

Chris Growe – Stifel Nicolaus

Hi, good morning.

Jack Callahan

Hi, Chris.

Chris Growe – Stifel Nicolaus

Hi, just to follow-on Brian’s question regarding the competitive pressure in dairy, is that -- are you still seeing a shift to private label from branded? Is that or is it more about just intense price competition at retailer? Is there one of the other you could characterize there?

Jack Callahan

We still see a shift to private label, although clearly the rates of that shift are abating as the milk price has come down and that gap between private label and brands have narrowed somewhat in this lower commodity price environment. The competition is really stepped up around volume as we gain share and the breath of the industry has de-levered somewhat.

Chris Growe – Stifel Nicolaus

Okay. And then, if I could ask you, you made some investments this quarter and you intend to, it sounds like across the second half to achieve these cost savings, you made a comment Gregg, I believe, this is kind of setting the stage for you to achieve cost savings. So these investments you are making today, they have a certain cost saving benefit that is coming through right now or is it more about what you will see in the future like 2010 and beyond.

Gregg Engles

Most of these investments will yield benefits, they are not immediate, but they are relatively quick. So we are pulling forward projects that were part of our three year strategic plan because we had the opportunity to do so in this year to accelerate some of the cost saves as we pull forward some of the work and as we pull forward some of the capability building. For example, in our supply chain and our R&D efforts, as we add people we add capability, we begin to tackle projects at a quicker phase that had been laid out in our three year plan. So yes, we are definitely pulling forward activity from 2010 to 2011 into 2009 and the first half of 2010. To be clear, we have and are already realizing benefits we've built into this years plan and you can see that part of the $300 million productivity was $50 million at WhiteWave, we are fairly seeing some of the benefit to that with their performance so far this year. And in FDD, we are certainly seeing the benefits to some of the network optimization as it relates to the number of facilities and some of the distribution efficiencies. So we are using this opportunity to build some incremental capability to get in some of the other areas like continuous improvement.

Chris Growe – Stifel Nicolaus

Okay. And just -- one final one I think for you Jack regarding the EPS accretion that you expect for the year from the acquisition, can you give us an idea of what you expect for--

Jack Callahan

It’s modestly accretive. We have to finish off some of our purchase accounting etc. But for the balance of the year, I wouldn’t assume much more than a penny per quarter.

Chris Growe – Stifel Nicolaus

But that’s on Alpro.

Jack Callahan

Just on Alpro -- excuse me. Thank you for that clarification. That's right.

Chris Growe – Stifel Nicolaus

(inaudible) benefit from the dairy acquisitions you've made--

Jack Callahan

Yes. The most significant diary acquisition that we have under contract is not closed yet and will not close until most likely sometime in the fourth quarter. So that will have, its not yet sort of contemplated until that closes. And then, we did have a acquisition we closed earlier this year which quite frankly on a first year basis will not be accretive at all. It was a breakeven proposition when we picked it up and we are working hard to get that to drive our synergies to get this -- to get it to what we’ve forecast for 2010.

Chris Growe – Stifel Nicolaus

Okay. So the California acquisition is not closed yet.

Jack Callahan

That is not closed yet.

Gregg Engles

It is not closed yet.

Chris Growe – Stifel Nicolaus

Okay. Got you. Thanks a lot.

Operator

Next up from Deutsche Bank we have Eric Katzman.

Eric Katzman – Deutsche Bank

Hi, good morning everybody.

Jack Callahan

Good morning, Eric.

Eric Katzman – Deutsche Bank

You are probably in a closed room, so I don’t know if you have seen that the stocks down over 10% which I am a bit surprised at, but I guess with the comments about competition Gregg, maybe now is the time to talk a little bit more concretely about the $300 million of savings versus reinvestment and just kind of given the what sounds like more visibility on it and willingness to pull projects forward. Perhaps it would be helpful that kind of lay out how you think those savings kind of move over the next couple of years, in particular with your comments about the input cost environment being less favorable.

Gregg Engles

Look, the basic financial algorithm that we laid out at our investor day in February is one that we have an increasing level of confidence in. So our visibility on how we are going to deliver the $300 million of cost savings over the next three to five years and we are getting close to being one year into it is increasingly materially. So we are highly confident that we will deliver the cost savings out of the activities that we’ve undertaken in our network. I think we were clear in February that we are going to have a model in this industry that while it gives us a consistently upward trajectory in operating and earnings per share performance is going to oscillate with changes in the commodity environment. And this commodity is one that has a cycle to it and has some level of volatility to it. So you see extraordinary outperformance over Q4, Q1 and I believe Q2 and I think we made clear and if its not clear, let me just make it clear again, that level of outperformance is going to have some cyclicality with it that tracks the commodity.

So in periods of declining prices, you are going to have a significantly expanding margins. At some point of time, those margins become two tempting to the competition and they seek volume and the margin gets competed them. And then as the cycle reverse, you will see the dynamic that I spoke about earlier in response to Bryan’s question as people focus on price realization and less on volume. So it has always happened in this industry and is always going to happen in this industry. And I think frankly it happens in every industry. Right when margin expand to a point where they are unsustainably high which they tend to do in response to changing dynamics of the underlying industry, then competition arises and those margins contract again. That’s what happening in our industry and its not to be unexpected. So I really can’t comment on the stock price. What I can tell you is, we’ve really like the performance of our business. We really like how our business is positioned.

We think we have a very rich pipeline of opportunities to continue to drive our cost structure down, and improve our operating performance but its not going to be straight line. And what we are saying in this quarter’s commentary and call is, we’ve had three really fantastic quarters in a row, three really fantastic quarters measured against very, very easy comps because of the difficult environment in the year ago period and the cycle is inevitably going to get a little bit more difficult. Milk prices are going to rise, we are seeing increased competitive intensity as margins have expanded very meaningfully in this category and that’s not sustainable over time, but there is no disaster coming from our perspective. We think the increase in milk prices will be manageable certainly not as volatile as the last increase in milk prices that we saw and we like the fact that we believe we are separating ourselves from our competition consistently with the transformation activities that we are undertaking in our business. So our comments are intended to frighten or discourage the market, but they are intended to make sure that the market has a realistic perspective of what is a company with a very strong position in this industry, but an industry that has competitive dynamics like all industries do.

Eric Katzman – Deutsche Bank

I guess the -- my reaction to that is that, if I look back over your history even before the centralization process that’s underway, I mean I can only think really of one quarter where the competitive dynamics have thrown you kind of off track and that was when milk kind of collapsed and some competition moved quicker than you thought, I think it was like the third quarter of 2004 [ph] if my memory correct or may be ’05, but I don’t know it just seems that you have always enabled to deal with the competition in the past and kind of managed through it pretty effectively.

Gregg Engles

We think we are very effective competitors and we think we have a very effective cost position. The comments are really intended to illustrate that margins aren’t going to go up here in the straight line. We looked at from a competitive point of view and we have had five straight quarters of gaining share, and that in a relatively flat category is just putting pressure on competition. And as they gotten relief in their P&Ls with commodities, some of that is just making its way into the marketplace. So that’s an inevitable back-and-forth that we are going to see and we are going to remain competitive as we need to in the marketplace.

Eric Katzman – Deutsche Bank

And then in fact, this is last and I'll pass it on. Is it possible to quantify the year-over-year jump in investments, however you want to characterize that? I think you mentioned IT and some supply chain stuff maybe R&D.

Jack Callahan

Well, I can say about -- in terms of -- at least -- ran through the corporate expense which is probably obviously the most notable. However, there are investments sitting within FDD and WhiteWave-Morningstar. I would say about half of the increase that was seen year-on-year is related to strategic investments either consulting projects or selective additions to headcount largely in the area of supply chain R&D and we have a new head of -- we have a new CIO. The other half of the increase relates to just increase in base employee cost that relate to incentive compensation, and the higher pension that we’ve talked about before, and the stepped up legal activity that I referred to earlier.

Eric Katzman – Deutsche Bank

Okay. I will pass it on. Thank you.

Operator

There is a question now from Farha Aslam at Stephens.

Farha Aslam – Stephens Inc.

Hey, good morning.

Jack Callahan

Hi, Farha.

Farha Aslam – Stephens Inc.

You talked about the government program bringing forward the milk price increased by couple of months, will they change the slope of the line at all? Will that slope be steeper because of the program?

Jack Callahan

You really don’t know till you experience that, but our best analysis of government support program is, frankly it lowers the slope of the line because it will give dairy farmers some relief and that relief will we believe postpone or slowdown the rate of herd reduction in the marketplace as farmers wait to see if price recovery will reflate their business model. So we believe it in fact slows down the slope of the curve, there is ultimately coming. We are supportive of the government’s action.

Farha Aslam – Stephens Inc.

Okay. And then the increase in corporate expenditures, the $61 million we saw this quarter, is that a run rate we can use or do you anticipate further increases beyond that $61 million?

Jack Callahan

I would use that sort of a run rate as I mentioned in my remarks through the first quarter of 2010 and then if we would look to that growth rate to moderate.

Farha Aslam – Stephens Inc.

Okay. And then just on Horizon Organic, how is that business in terms of profitability? You guys have contracted that Idaho facility. Do you think that now the supply demand is imbalance in longer term, where can see margins and profitability in that business?

Jack Callahan

Well, the business is not in supply and demand balance because the growth rate of the category is slowdown and the industry was geared to expand supply to sustain a growth rate that was in the teens. So the slowing of the category has left excess milk in the category. What I will say is the industry is reacting very differently to it than they did the last time. The last time that we had excess supply back in mid-2000, there was a great land rush for share in this category because it was drove on 30%. Today, with the slow growth of the category, the way that industries reacting is, the manufacturers are shutting supply. So they are asking their farmers to voluntarily reduce supply. Certain participants in the industry are effectively applying quotas at lower levels than farmers have historically supplied them.

And some of the players are just affirmatively not renewing contracts with organic farmers. So there is a different dynamic at the processor and brand owner level here than existed the last time. So the economics of the business are frankly improving. Now they would be improving faster if we didn’t have a flat category, but they are improving. They are certainly not back to the level of being good or even profitable, but they are certainly less loss making than they were in the past. And we frankly think there is a possibility that this category returns to positive contribution over the next few quarters. So we are encouraged by the change in category. I think this will be a better category when it is slower growth and more stable than very high growth and incredibly volatile. So we are cautiously optimistic about where our Horizon business is going.

Farha Aslam – Stephens Inc.

Okay. And my final question is on your WhiteWave-Morningstar, that was a significant improvement and profitability if Horizon still losing money. Could you just kind of break down the change into how much you think is really the dairy? What percentage of the improvement was diary that we possibly could not count on going forward? And how much was really truly organic that you guys are running the business better?

Jack Callahan

There is a lot going on because you have two very different business situations with Morningstar that’s in the private label business and WhiteWave which is in the branded business. I would say, we are benefiting from dairy commodity trends particularly in the Morningstar business which tends to have more of the pass through fundamentals that you see in FDD. And recall last year that Morningstar which is really dependent on more Class II pricing really had a little bit of a challenging year running against that for the full year. So that is clearly benefiting them this year. However, they are also running the business better with more rational coming back on the number SKUs [ph] that they offer and some difference in terms of some pricing disciplines and driving some productivity across the P&L. So I think Morningstar has probably benefited more from some of the commodity trend. On the WhiteWave side, they are benefiting a bit from some realized pricing that was taking at the peak of the commodity challenge that we had back in August, September of 2008 and as commodities dramatically declined, there is a little bit of benefit there that is helping them. But they are also meaningfully driving productivity across their P&L both in the plants and there was excellent, excellent SG&A leverage across both businesses this year compared to last. So it’s a balance of both.

Gregg Engles

Yes, I think the commentary that I would give you Farha on WhiteWave is that, we’ve been undergoing this transformation of WhiteWave as we move from three separate companies to one for the last three or four years, it’s been complicated. We’ve completely rebuild the management team. We’ve installed successfully SAP and begun to leverage that tool and we’ve been talking about the underlying earnings power of the businesses within WhiteWave excluding Horizon and I have been telling you that the productivity and the improvement in those businesses was being masked by negative results in Horizon, which was a big business and a volatile business in that portfolio, and by the build up of SG&A in the business necessitated by the transformation. Well, those things have pretty much come to an end and what we’ve been telling you about the fall through and the profitability of those underlying businesses I think has become evident in the last two quarters in WhiteWave’s performance.

Jack Callahan

So, clearly there are some commodity benefits that are flowing through the WhiteWave P&L as well as the Morningstar P&L and you seeing that with other food companies as commodity has come down. But the WhiteWave business, Ex-Horizon is an absolutely fantastic business with great brands in good categories and great brand positions and that you are going to see a much stronger level of performance from WhiteWave going forward because we are now leveraging the infrastructure that we built against these businesses and we have got just an outstanding team at WhiteWave that now is making evident the progress that they have been making over the last few years.

Farha Aslam – Stephens Inc.

Okay, thanks. And that is helpful. Thank you.

Operator

Next, we have a question from Terry Bivens at JP Morgan.

Terry Bivens – JP Morgan

Right. Good morning everyone.

Jack Callahan

Hi, Terry.

Gregg Engles

Good morning, Terry.

Terry Bivens – JP Morgan

Question on the margins. Gregg I am having trouble kind of getting to where we need to go here. If you look at the first quarter your volumes were kind of flat in this quarter, the second quarter it looks like the no comparison is even better for you guys and the volume performance was better and I am kind of wondering why the operating margin was down in the milk unit. I know you have some extra costs there clearly in the corporate line and the same question kind of extends to the third quarter as well as we look at what you are talking about now for Q3, understanding you guys you know tend to be you know appropriately conservative. I am just –it seems as though margins should have marched up fairly steadily, Q1, Q2, Q3, what am I missing there?

Jack Callahan

I’d refer back to some of Gregg’s comments about the competitive intensity. You know the sort of the pricing realization was a bit of a challenge as we went through the second quarter relative to the first. I mean, think about what has happened over the last six to nine months. We had an incredible peak of commodities towards the middle referred quarter of 2008 and a stunning decline and as we continue to take share and grow our volumes there is some increase in competitive activity in the marketplace and so we are very comfortable in terms of the progress we are making and are attacking our cost structure. But a lot of the difference between the second and the first quarter can really come back to price utilization.

Gregg Engles

Yes, I would add a little bit to Jack’s comments. You will recall our first quarter conference call we described the first quarter as the perfect sunny day as opposed to the perfect storm. During Q1 you had between January and March, you had a $5 decline in one month in the Class I mover, that is a massive but one time profit opportunity that you know just inevitably shows up in your P&L and as you will recall from years of following the company it is more about the trajectory of commodities in the milk complex than it is the absolute level of commodities in terms of our period over period price performance.

So, in Q1 you had still strong moves down across the commodity complex and that just really almost cannot be competed away as happening so quickly. So, as you get to a stable but lower level of price, Jack’s comment really becomes the applicable comment, right. Prices are just sometimes automatically with your customers, that lower the margin somewhat. What I would tell you is that the second quarter of 2009 is the second best operating income performance we have ever had in the Dairy Group. So, it was an exceptionally good quarter in the Fresh Dairy Direct business, we made a $170 million of operating profit almost down from $182 million in Q1 and the end of Q2 as school goes out it is always a pretty difficult period, right.

So, you have always got year-over-year volume progression versus Q2 of last year. Q3 [ph] is always a little soft on the milk side of the business at the end of the quarter. So, if the trajectory of commodities that is now is not down but flat in Q2 and the recognition in the marketplace over the period of the quarter that commodities have materially come down.

Terry Bivens – JP Morgan

Okay, and just one follow up then on that competitive issue. I mean it has always been my understanding that with a lot of your customers it is clearly direct pass through. But did you lose significant business or you know enough to talk about as perhaps other suppliers came in at a lower price, has that been a phenomenon we have seen in the second quarter?

Jack Callahan

Well, now you can see from our volumes, we in fact gained business, right. So, we gained share vis-à-vis the rest of the industry during the quarter both organically and certainly by virtue of the acquisitive activity that we have had. So, we are performing very well in the marketplace but you have to remember that there is a lot that goes into our cost structure other than the price of milk. So, we have diesel, fuel down $2 a gallon, vis-à-vis last year we had resin down, you have natural gas down, you have the entire energy complex down, electricity and that is fattening the margins of the entire industry also included and that really I think is the area where you are seeing increased competitive figure because milk has passed along.

Gregg Engles

You know, pretty effectively there is some lag on the way down, I discussed that phenomenon a minute ago, but clearly the entire cost complex of the industry is down and some of that is been fed back into the marketplace.

Terry Bivens – JP Morgan

Okay. Alright, thanks for the detail.

Jack Callahan

Thank you, Bev.

Operator

Next on, we have a question from Alexia Howard at Sanford Bernstein.

Alexia Howard – Sanford Bernstein

Hello, there.

Gregg Engles

Hello, Alexia.

Alexia Howard – Sanford Bernstein

Hi, just to, I guess a follow up on a little bit on Terry’s question about the drivers of the operating margin line. It looks as though when you strip out the facility of closings and everything, you had gross margins were way up, 470 basis points but the operating costs were up about a 360 basis points also this quarter. When I look at the corporate expenses going up about $20 million also year-on-year, I mean that really only explains about 70 basis points of that, so, what was the other big step up in the operating costs line?

Gregg Engles

The problem is you are comparing it to a milk cost that is about half of what it was last year. So, percentage margins just do not get you anywhere and in that analysis you have to look at the absolute dollars. So, I think when you look at the absolute dollars, you would not see the same phenomenon.

Alexia Howard – Sanford Bernstein

Okay, and so I guess the next question on from that would be the –how sensitive do you believe that either dollars are to changes in the Class I milk price going forward. I mean obviously we have got very, very low levels of Class I milk right now, but if it went up to $13, $14, $15, $16, how much do you worry, obviously the margins will change as you rightly pointed out, but in terms of the dollar profit is that very sensitive, at what points will you become worried I guess?

Jack Callahan

Again, I would go back to the comments I made to Terry. It is much more about the trajectory than it is about the absolute level of price. Now the absolute level of price impacts us in shrink and all sorts of things in our plants and that is always a challenge that we have in a high, low price environment but price realization in the street as it relates to the not commodity, is very effective, again, you have a lag on the way up and a drag on the way down of which you know in periods of significant price change is important. But once you get to a level of price stability, the absolute level of price probably is not the most important driver of the business.

So, I think you just have to go back and look at 2007 and 2008. If you want to see an absolute worst case scenario you can go look at that with exploding up prices and exploring energy prices on the way up and see the margin compression that happened. But you will also see is you get into 2008 and a period of relatively higher stability and milk prices although at a very high level, you see margins in the business were covered because the industry has to price for milk prices.

The other part of your question should be that what happens to volumes and again you see that this category is extremely inelastic on the volume line. So, changes in volumes of the sort of you know sort of 1% are big changes in volumes in this category. So, we have a very resilient business model as we talked with you about throughout 2008 and what I would say in general response to your question is we do not expect prices to go back to the levels that they achieved in 2007 and 2008 although we do expect them to rise and we hope that we are not going to have the same sort of velocity on the way up that we had in 2007. We do not see all of the factors in place for that level of velocity explosion on the way out.

Jack Callahan

In our forward outlook for 2009 release contemplates, Class I low prices going back up approaching 13, $13 plus so you know by the end of the year so that, that is certainly considered in and how in our forward outlook and in general going back to some of Gregg’s comments earlier is about the health of the dairy industry and back to that $13, $14 where the dairy farmer has a more economic return as is that a equilibrium point overall for the industry and we anticipate moving towards that direction in the coming months.

Alexia Howard – Sanford Bernstein

That is great. Thank you very much. I will pass it on.

Operator

Moving on now to David Palmer, UBS.

David Palmer – UBS

Good morning, this is actually Jeff crammed down for Dave. How are you?

Jack Callahan

Hi, Jeff.

Gregg Engles

Hi, Jeff.

Jeff – UBS

So, I do not want to believe with the points on pricing but yesterday Class spoke a lot about their adaptive pricing which may have minimized some of the margining gains in the quarter but could potentially minimize earnings paying in 2010 should rebounce and I guess my question would be has Dean increased its efforts to minimize volatility from Dairy in a way that potentially crimps second quarter earnings a bit.

Jack Callahan

No, I do not think so. We have not fundamentally changed the way that we reflect milk prices into the marketplace and again going back to the point that this is a pretty well grooved process across the industry. So, once you reach a level of price stability within a couple of months, the milk price at any given level is pretty well reflected in the marketplace.

Gregg Engles

Now, the periods of transition from one price level to another create either problems or opportunities and we have seen both in our business over the last five or six quarters but the mechanism for reflecting the dairy commodity and liquid milk is much more highly evolved than it is in cheese.

Jeff – UBS

Alright, thanks.

Operator

And from Credit Suisse we have Robert Moskow.

Robert Moskow – Credit Suisse

Hey, Gregg. I am hoping that you can help us kind of frame the upside, downside case of this a little bit.

Gregg Engles

Sure.

Robert Moskow – Credit Suisse

In ’07, ’08 you had horrible conditions and you earned about $1.25. This year you might be earning about $1.65 but you are kind of talking about it as a year of really strong margins in the fluid milk business and may be those margins are not sustainable. So, can we think about whether a normal year is and then maybe then we can start thinking about ’10 and ’11 and maybe we can start a fine that double digit EPS growth to that normal base.

Jack Callahan

Yes, I think that, you know, we have not planned 2010 yet, we are in that process right now. So, no one should interpret anything that I say here as 2010 guidance but..

Gregg Engles

Also keep in mind, 2009 is going to end well head of the trajectory laid out earlier this year, so.

Jack Callahan

Yes, I guess that is probably good of frame that question in the context of our investor day. We had $1.30 in earnings in 2008. We laid out a three year rough plan that said we could grow earnings at a compound doubledigit rate but that every year was not going to be the same. You will remember our oscillating sign wave around an upward trajectory. Clearly we are outperforming that in 2009 and if you are not going to replicate 2009 because of that commodity dynamics coming out of 2007, and 2008 on a regular basis going forward.

However, what we did lay out at our investor day is that we believe we have an opportunity and I will tell you it is coming to life in our numbers and our cost structure today where we can continue to drive cost out of our business we believe differentially with respect to the rest of the industry and therefore through the commodity cycles we believe we will be able to maintain an earnings growth rate that gives you that sort of three year best time period we described, compound doubledigit earnings per share growth.

And frankly that is on the back of significantly higher share count given the equity offering that we did in May. Well, 2009 is a good year and we are very pleased with the year that we are having, we are not at all signaling that that sets us up for a bad year in 2010. We are absolutely not revealing that. We believe that we can continue to drive earnings progression in the business consistent with the three year algorithm that we laid out in February and we hope that we can perform at the high end of the algorithm that we laid out. So, we are driving cost efficiency into this business.

We are making investments that you can see in our corporate line in order to make that come to life and we are getting excellent results from the work that we have undertaken. So we really like our position, we believe we can sustain earnings growth here for a long time horizon and we believe that even in difficult commodity environments we can continue to drive profit growth in this company. Now, if you get the worse, the perfect storm like you got in 2007, it is going to be hard to do that, right. But in a normally volatile commodity environment of ups and downs that are consistent with the sort of historical level of volatility in this category, we believe we can drive year in and year out or over any sort of intermediate time period doubledigit earnings per share growth. We are very confident of that.

Gregg Engles

Going back to what we spoke about earlier this year is that we do not expect our earnings progression to be tightly linear. We absolutely know that it is going to be a move and sometime decided in the crooked past and we have a tough overlap in the beginning of 2010 just given the extreme favorability we had in Q1 but that long term progression of earnings is going to be sustained by the productivity programs that we have in place to help us write out these inevitable commodity cycles that will impact our P&L from quarter to quarter.

Robert Moskow – Credit Suisse

Regarding the volatility, again you are saying nothing here about the volatility is going to be a lot higher than normal and nil, I mean the volatility could be just normal, if you just, the prices could just go up?

Jack Callahan

We are at an extreme point right now being so low, so it has to revert back up where the dairy farmer makes money. So, it is a volatile period right now, it is just the inverse of what we lived through in 2007 and through the early days of 2008. So, we do not anticipate it to swing back violently, the other way building on Gregg’s earlier comments. But we do expect overtime that it is going to return to a point where the entire industry is making an adequate return.

Gregg Engles

And our investor day algorithm contemplated that normal level of volatility.

Robert Moskow – Credit Suisse

Very good. Thank you.

Jack Callahan

You bet.

Operator

There is a question from Jonathan Feeney now at Janney Montgomery Scott.

Jonathan Feeney – Janney Montgomery Scott

Good morning. Thank you.

Jack Callahan

Good morning.

Jonathan Feeney – Janney Montgomery Scott

Gregg, I guess or Jack even. I wanted to comet the competitive advantage a question a little bit differently. I realize your business is highly regional and local and I guess in two parts could you tell me maybe what percent of your operating footprint you feel like you have a lower fully delivered cost than your number one competitor in that market, does that question makes sense? And secondly, could you give me an order in magnitude as how much, as how big that difference tends to be, well at least what you are targeting?

Gregg Engles

You know we are starting to have an extensive detail of everyone of your competitors but I will tell you we are looking at all the dairy based acquisitions that we have made, where obviously that we had a chance to really understand their P&L relative to ours and every one of the situations we believed that we could deliver significant synergies to that particular operation. For example, just in the area of the cost to direct material we believe there was a relatively straightforward opportunity to reduce that in the range of 8 to 12% but that is only a part of the cost structure, so I do not think that is the entire P&L but from every analysis that we do on these and these available opportunities we clearly have an advanced cost structure.

Jack Callahan

As we look back at our performance in historical periods compared to both companies that we have acquired and other companies that publish financial statements in this industry, we have a couple of hundred basis point, profit pool advantage to most of the other competitor so we can see their P&L. So, yes, we believe we are operating at a lower cost structure than the industry.

Jonathan Feeney – Janney Montgomery Scott

Are there a pockets to that is not true Gregg, or would say that national is more or less true, all the different markets you could be?

Gregg Engles

Of course there are pockets, there are plants here and plants there that are effectively run and cost competitive plants. So, it is more of a general statement. To dissect it market by market would take hours to go through it with you, right, because there is a local dynamic to this to some degree. And keep in mind one third of the space is still one to plant diaries. So, even if there was a plant to have a theoretical lower cost structure, how much of the business could actually serve and it is not replicable.

Jonathan Feeney – Janney Montgomery Scott

Right and thank you. That is very helpful. And just one other question. Gregg you mentioned, standardization as being key to moving forward, I think it is fair to say that something that a lot of store brand companies have talked about. It’s sort of the Holy Grail, convincing food retailers that having a 31.5 outsize maybe is not the best idea considering it adds to manufacture costs. How receptive have your retailers been to those sorts of conversations and are your, so the way you can sort of share some of the upside with them as far as you get them excited about the standardization opportunity, how has that been going?

Gregg Engles

Well, I – to give you a couple of comments with respect to that. First a lot of the lack of standardization in our system is self imposed as opposed to being imposed by retailers. So, we got a big standardization opportunity that we can get at that really is a historical artifact of the fact that this company was built by acquisition of a bunch of smaller players. So, much of that opportunity is internal. You do make a very good point or asked a very good question around those aspects of lack of standardization in a portfolio that are driven by our private label customers and they are you know it is progress that you have to make by virtue of laying out a compelling case and that compelling case often involves sharing the upside from standardization, right. Sometimes it is a matter of simply helping your private label customers understand that the product offering they might have is not that competitive product offering in terms of size or selection or level of complexity. Sometimes it is moving them from a unique formula to a more national brand equivalent formula. There are savings across the system and they share on those savings.

Jonathan Feeney – Janney Montgomery Scott

Great. Thank you very much.

Gregg Engles

You bet. Thank you.

Operator

And next up from Cleveland Research, this is Christine McCracken.

Christine McCracken – Cleveland Research

Good morning. Given the honor, just a couple of quick follow ups. Just first on the competitive environment in milk it seems based on your comments and the volume gains in the quarter because that is a fairly recent event is there any particular chain or have you lost a large contract or is there something that is kind of across the board you know competitive atmosphere that is generally just configured later?

Gregg Engles

Just to reiterate we grew volume in the quarter, so there is a strong volume growth quarter for us. Going back to some of the dynamics, better going out for pricing is milk kind of given its draw a traffic, has been a place where some retailers have used it as place to drive the traffic, particularly with the increased focus on value, so there has been a little bit of retailer induced margin pressure too as we are trying to drive their cost lower understandably kind of given the nature of the economy and their selective use of this category as a draw. So, it is not just the competition which is frankly always there and the reality of the business in which we compete. This category I think also a little bit more – has had a little bit more focus on the retailer using it as a way to build their traffic basin, particularly since there appear to be greater winners and losers across the retail space these days.

Christine McCracken – Cleveland Research

And then just in terms of your second half guidance, you know it seems like the dairy herd maybe as rather be as you had suggested it might I think in earlier calls and certainly what most analysts were looking for. CWT came in today a lot lighter than I think the industry was looking for in terms of her liquidation. In this case, why is it so bearish and at least the second half outlook today crosses more of a 2010 event, it did sound like you are I would say late in the first quarter and if so, why such, I guess low guidance to the second half in terms of earnings?

Jack Callahan

Yes, I will be honest Christine on terms of how we look at our forecast for the balance of the year if diary costs were to go to $13, $14, it really does not have a meaningful impact on our outlook. Given just how efficiently the core price of milk tends to get reflected into the market place. So, the only way it would really fundamentally reshape our forecast would be if we thought Class I was going to go back to some of the levels that we saw in 2007 where it exceeded $20 and you have incredibly difficult yearoveryear comparisons and things like shrinking our plants which do not appear to be the case right now.

Christine McCracken – Cleveland Research

Alright, will follow up later. Thanks.

Operator

With that ladies and gentleman, we will conclude the question and answer session and I will turn things back over to Gregg Engles for additional or closing remarks.

Gregg Engles

Well, thank you all very much for joining us on the call this morning. I hope you found it informative. We look forward to seeing many of you at the Back-to-School Conference in Boston at early September and we will talk with you the next time or beyond that on our Q3 conference call. Thank you very much.

Operator

Thank you once more. Ladies and gentlemen, that will conclude today’s call. Have a good day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Dean Foods Company Q2 2009 Earnings Call Transcript
This Transcript
All Transcripts