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Dean Foods Company (NYSE:DF)

Q4 2009 Earnings Call Transcript

February 10, 2010 9:30 am ET

Executives

Barry Sievert -- VP, IR

Gregg Engles -- Chairman and CEO

Jack Callahan -- EVP and CFO

Analysts

Eric Serotta -- Consumer Edge Research

Terry Bivens -- J. P. Morgan

Farha Aslam -- Stephens Inc.

Chris Growe -- Stifel Nicolaus

Eric Katzman -- Deutsche Bank

Ryan Osmond [ph] -- Banc of America/Merrill Lynch

Lindsey Zuckerman [ph] -- Goldman Sachs

Operator

Good morning and welcome to the Dean Foods Company fourth quarter 2009 earnings 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 expressed 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, Karen; and good morning, everyone. Thanks for joining us for our fourth quarter and year end 2009 conference call. We issued an earnings press 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 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 and expected-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 our consolidated results, along with a 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 under 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 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 me today are Gregg Engles, our Chairman and CEO; and Jack Callahan, our Chief Financial Officer. Gregg will lead off the prepared remarks for today's call, before turning it over to Jack, who will offer some additional prepared remarks, before opening the call to your questions.

Gregg?

Gregg Engles

Thank you, Barry; and thank all of you for joining us on today's call. This morning, we reported fourth-quarter results that were well below our expectations for the business. For the quarter, we reported $0.31 in adjusted diluted earnings per share. While there were several reasons for our shortfall in the quarter, the single biggest challenge to the business was increased margin pressure across the Fresh Dairy Direct and Morningstar businesses, exacerbated by an inflationary dairy complex. I will give you more detail on the fourth quarter results in a moment, but first, I would like to put them in context with the full-year 2009.

2009 as a whole was a highly successful year for Dean Foods. Operating profits in total and for each of our business segments were the highest in our history. Full-year operating income grew 10% in 2009 on top of the 7% growth reported in 2008. Moreover, we built the necessary capability to transform our business and our initiatives to reduce costs took hold as we delivered over $75 million in cost savings in the first year of our $300 million cost reduction program. Finally, we strategically built our portfolio, adding Alpro to become the clear global soy leader, and Heartland and Foremost Farms to strengthen our core fluid milk franchise.

Full-year adjusted diluted earnings per share were $1.59, up 22% from 2008, and well ahead of the algorithm for low double-digit earnings per share growth that we discussed at our analyst meeting a year ago. Again, all in all, it was a strong year. As the year came to a close, however, several of our businesses fell short of expectations. Act Fresh Dairy Direct, retailer and competitive pressures that had been apparent for much of the year became more pronounced in the back half of Q4, and were exacerbated by sharply-rising dairy commodities. Morningstar profits were challenged by volume softness, steep commodity inflation, and a charge incurred to renegotiate a distributor contract. At WhiteWave, we significantly stepped up advertising and marketing to support our brands and invest behind very strong performance from new innovation in our creamer business.

The dairy processing industry is not immune from the economic downturn that continues to reverberate through the packaged foods sector. You may have seen a recent Wall Street Journal article that highlighted the impact of deflation on food processors and retailers. Conventional milk is an important category for retailers. It enjoys nearly 90% household penetration. This ubiquity, combined with the category’s frequency of purchase, make it a key traffic driver for grocery retailers.

In 2009, raw dairy commodity prices fell to historic lows. As these lower costs were passed through into the marketplace, retailers lowered their margins on milk to hit key price points and to demonstrate strong value to consumers in an effort to keep or win share in a challenging economy. As one large retailer commented to me recently, the fluid milk category in 2009 was “hotly contested”. The magnitude of this margin compression is best demonstrated by looking at the average per gallon retail price of milk versus the per gallon Class I mover or raw cost of milk. The difference between those two prices is the money available to cover retailer and processor costs and to generate profits. This margin over milk has been steadily declining since the beginning of 2009. Initially, this margin compression was largely absorbed by the retailers. As the year progressed, however, and particularly in the fourth quarter, an increasingly consolidated and more powerful retail base began to seek and obtain price concessions from processors. We believe this has affected the entire industry, and along with the continued shift from branded products to private labels, clearly impacted our results in the fourth quarter. This pressure underscores the importance of our strategy to differentially reduce costs versus our competitors. As a result, we remain singularly focused on our cost reduction efforts and committed to maintaining our leading position in volume during the speed of margin compression.

While raw milk costs were at historically low levels for much of the year, in the fourth quarter, prices moved significantly higher, rising from $10.93 in September to $13.99 in December. For the quarter, the Class I milk price averaged $13.07 per hundredweight, a 26% sequential increase from Q3. The mover stepped up again in January to $15.03, but eased a bit in February. This move up in price to more normalized levels should help the farm community recover some of the lost profitability they experienced during early 2009 and it is healthier for the whole value chain in the long run.

Going forward, we currently expect Class I prices to trade in a modest range up or down from the current level. Given our belief that the transition to higher milk prices was largely complete by January, we do not currently expect milk price volatility to be a significant driver of our performance in 2010. However, given the current commodity’s forecast and the new higher price level, we do expect shrink costs and lower returns from excess cream sales to create some modest additional headwinds for the Fresh Dairy Direct business in 2010 compared to 2009.

The heightened competitive environment makes it clear that our strategy to drive differentiated customer value at Fresh Dairy Direct through cost reductions and capability building are critical to our success. The breadth and scope of our manufacturing and distribution systems gives us opportunities to reduce costs that are unique among the players in the industry. By driving to a differentiated cost and capability position, we are able to offer a strong value proposition, unmatched service, and category leadership to our customers, making us a valued partner.

In 2009, we lowered our costs by over $75 million, including $60 million within the Fresh Dairy Direct business. We enter 2010 with considerable momentum behind our cost reduction initiatives. Current market challenges and our commitment to our shareholders demand our continued focus on these efforts and we have a line of sight to over $90 million in incremental cost savings in 2010.

Turning to the balance of our business, WhiteWave-Morningstar had a very strong year, with segment operating profit of 25% versus 2008. The businesses in the segment remain well positioned, but Morningstar in particular faced challenges as we closed out the year.

Let me address WhiteWave first. While category growth in soy and organic milk, like other premium categories, slowed in 2009, our Silk and Horizon brands both gained share and posted improved operating performance in the fourth quarter.

Our creamers business, which has benefited from increased coffee consumption at home and a robust innovation pipeline, posted a strong fourth quarter with solid share in sales growth. We chose to invest behind that momentum in Q4, with significantly stepped up advertising and marketing for International Delight and LAND O LAKES, and the launch of Silk PureAlmond. Our creamer lines have been a bright spot for us in 2009, and continued to carry strong momentum into the new year. The net result of significantly-stepped up marketing spend in Q4 at WhiteWave was a flat operating performance compared to Q4 of 2008. In the context of the full year, it is clear our investments over the last several years in WhiteWave bore fruit in 2009, with strong double-digit operating profit growth and over 200 basis points expansion in operating margin for the year.

At Alpro, our European soy platform that we acquired mid-year, was a solid contributor in the quarter, with mid single-digit net sales growth and a solid operating profit performance in the quarter. The business has performed consistent with our expectations to date and we remain excited about Alpro as a key part of our global soy business.

Morningstar also posted very strong full-year results, with solid double-digit operating profit growth. In the fourth quarter, however, volume softness, steep commodity inflation, and a chart incurred to renegotiate a distributor contract led to a year-over-year decline in operating profits. Morningstar’s fourth-quarter results were down meaningfully on a year-over-year basis, against a very difficult comparison, driven by rising butterfat costs, compared to butterfat costs that plummeted in the prior year period.

Let me give you a bit more perspective on Morningstar. As you may know, Class II butterfat is an important input for our Morningstar business. Through the first three quarters of 2009, the Class II butterfat environment was fairly stable, which aided Morningstar's strong full-year profit growth. In the fourth quarter, however, butterfat prices rose considerably from $1.23 in September to $1.55 per pound in December, significantly challenging Morningstar's profitability, as their pricing lagged this move into commodity. The first quarter of 2010 is also likely to be challenging for Morningstar, as butterfat costs have continued to rise in Q4.

So, let me summarize my remarks. On the whole, 2009 was a very successful year. Operating income grew 10% on top of 7% growth the year before. Adjusted diluted earnings per share grew 22% on top of 8% growth in 2008. While delivering these results, we have made significant progress against our important strategic initiatives. However, as we closed out the year, significant challenges emerged from retailer and competitive pressure and industry-wide margin compression. We are responding to this challenge by focusing on maintaining or growing our volumes and continuing to drive down costs, which we are uniquely positioned to do, giving us a competitive advantage to win in this dynamic environment.

From an earnings and share perspective, we are focused this year on holding the gains we have made, while driving the transformation of our business. We face a challenging market as we begin 2010 and in Q1, we comp against the highest operating profit quarter in the company’s history. Nonetheless, with our aggressive drive to lower cost, and our strong industry position, we expect to resume earnings growth in the back half of the year, with increasing momentum as the year progresses.

For the full year, we are expecting an adjusted diluted earnings per share to be between $1.54 and $1.64, inclusive of the effects of the higher number of shares outstanding related to the equity offering we completed in the second quarter of 2009.

With that, let me turn the call over to Jack for a more detailed review of our financial results and forward guidance. Jack?

Jack Callahan

Thanks, Gregg. Good morning; and thank you for joining us on this morning's call. I will take a few minutes to walk through the financial performance in the quarter and for the full year, as well offer some detail on our forward outlook. And we plan to offer additional detail next Friday at CAGNY.

To close out 2009, I am both proud of the strong step forward in our full-year results, as well as disappointed in our fourth quarter performance. Our full year performance in 2009 was very strong across the board. We delivered the best operating profit year in the company's history at $693 million, a full-year growth rate of 10%. Adjusted diluted earnings per share increased 22% to reach $1.59. Fresh Dairy Direct posted excellent volume growth and 9% profit growth. In a challenging year for the premium branded products in the food service business, WhiteWave-Morningstar delivered 25% growth in operating profit. We drove strong cash flow performance and added to our business portfolio through key acquisitions. In addition, we built capability to accelerate the increasing momentum behind the transformation of the business, especially our cost savings initiative.

However, these strong full-year results stand in contrast to a challenging fourth quarter. Given the very strong fourth quarter of 2008, and the growing pressures on the business that we saw in Q2 and Q3, we had entered the fourth quarter expecting results to be below year ago. However, the magnitude of the year-over-year decline in our results was greater than anticipated. As we talked about in our previous earnings calls, we have been dealing with a noticeable uptick in pressures on the business throughout 2009, as the recession increased consumer and retailer emphasis on value, and lower overall commodity costs were reflected in the marketplace. And these pressures on the business increased significantly later in the fourth quarter, as commodity costs rose, impacting both reporting segments and driving our performance in the quarter below our expectations.

Consolidated operating income in the quarter was $151 million, down 21% from a year ago. Earnings per share were $0.31; that was $0.05 behind our ingoing guidance. We are not content with this performance, but as Gregg pointed out, it underscores the importance of the cost-reduction strategies we have been pursuing over the past year.

Now, let us take a closer look at the performance of each of the reporting segments in more detail, starting with First Dairy Direct. We are focused in Fresh Dairy Direct on maintaining or growing our volume base as we weather this challenging environment. And indeed, with the benefit of our recent acquisition, Fresh Dairy Direct had a very strong quarter of volume growth; with a 4.6% increase in fluid milk volume worsened the balance of the industry that we estimate was down nearly 2 points. On a full-year basis, our fluid milk volumes increased 2.7%. We ended the year with about 38% of the US fluid milk category. Looking ahead, we expect to maintain or expand our share position in this period of significant margin pressure on the industry.

Fresh Dairy Direct operating income increased 9% for the year, but was down 12% in the fourth quarter, due to a tough year ago comparison and increased margin pressures, particularly in the back half of the quarter, as our private label business continued to grow at the expense of the branded business. Also impacting results in the quarter were increasing shrink related to rising dairy commodities and lower profits from excess cream sales.

In the WhiteWave-Morningstar segment, fourth-quarter net sales increased 8% to $752 million, including sales from our Alpro acquisition that was completed in July. Our branded portfolios at WhiteWave in Alpro increased sales 19% to $501 million, due to the benefits of the Alpro acquisition and strong sales growth in our creamers business at WhiteWave, offset by continued category softness in the US soy and organic milk categories. Consistent with recent performance, we held or increased our share position across all of our key branded product lines in soy, organic milk, and creamers.

Looking more specifically at the sales performance of our key national brands, Horizon organic milk increased its share in the quarter on flat sales, as the organic milk category remained sluggish in response to a difficult economy. In our creamers business, International Delight again had a strong quarter sales growth, with our CoffeeHouse Inspirations line and seasonal flavors driving strong net sales growth, as well as solid share expansion in the quarter. Our branded creamers portfolio, which includes both International Delight and LAND O LAKES creamers increased sales in the mid single digits on an adjusted basis.

Silk soy milk also increased share in the category during the quarter through solid marketing support. Silk net sales were roughly flat when adjusted for the unprofitable food service contract we exited late last year. You may have recently seen a new Silk product in your local grocery store. Leveraging the strong brand equity of Silk, we have just launched Silk PureAlmond to respond to the growing demand for almond milk products. While it is still early in the product launch, we are optimistic about the future of this (inaudible) product line.

Alpro, the second part of our global soy platform increased sales mid single digits over the previous year on a constant currency basis, as they continued to lead European soy sales, expand our geographic reach, and increase per capita consumption.

Morningstar net sales declined 10% in the quarter to $259 million. The year-over-year decline at Morningstar is due primarily to the pass-through of lower commodity costs, but was also impacted by a low single-digit volume decline. The WhiteWave-Morningstar segment operating income in the water was down 12% from a year ago to $61 million, due to the impact of the Hero JV and a profit decline at Morningstar. At Morningstar, volume softness, steep Class II butterfat commodity inflation, and a charge incurred to renegotiate a distributor contract led to a year-over-year decline in operating profits versus the tough Q4 of 2008 overlap. Additionally, we made a change in the recording of our Hero JV from corporate to the WhiteWave-Morningstar segment. This change retroactive to January 2009 better aligns the business reporting and operating structure of the joint venture. As a result of this change, WhiteWave-Morningstar operating income was $4 million lower in the quarter.

At WhiteWave, we increased marketing spending to support innovation the CoffeeHouse creamers business, as well as for the launch of Silk PureAlmond. This strategy is consistent with our expectation for renewed top line growth, as we head into 2010. Within the quarter, however, the increase in marketing support contributed to essentially flat year-over-year operating profit for WhiteWave. Alpro continued to perform in line with our expectations from a profit point of view and turned in another solid quarter.

Now, let me turn to several corporate items. Adjusted corporate costs continue to be above year ago levels and in line with the previous two quarters. In the fourth quarter, these costs totaled $57 million. The year-over-year increase is due in part to the capability build-out of our supply chain, R&D, and IT functions that will drive cost compression going forward. Additionally, legal expense, incentive compensation, and pension expense also increased meaningfully. In 2010, corporate expense is expected to remain roughly at this level of quarterly spend, with limited year-over-year growth other than Q1.

On a consolidated basis, we are reporting $151 million of operating income for the fourth quarter, down 21% from last year's fourth-quarter. With the benefit of lower average debt balances, interest expense in the quarter was $14 million below year ago levels, resulting in adjusted diluted earnings of $0.31 per share on a fully diluted base of 183 million shares, that is about 27 million shares due primarily to the equity offering in spring 2009.

For the full year, consolidated operating income rose 10% to reach $693 million, the highest in our history, and adjusted diluted earnings per share increased 22% to reach $1.59. Our full-year tax rate for 2009 was 38.2% compared to 38.3% in 2008.

Consistent with the previous year, net cash from operations in 2009 was a very strong $659 million, despite the fourth-quarter step up in dairy commodities that directly impacted working capital. Capital expenditures for 2009 came in at $268 million. Looking ahead to next year, we anticipate capital spending up to $300 million, but we will carefully manage the pace of that expense to support ongoing debt pay-down. In addition, please note the Q4 cash investment includes a payment of $88 million to close our Heartland acquisition. Overall, free cash flow from continuing operations for the full year 2009 was a very strong $391 million, bringing our total free cash flow over the past two years to just above $850 million.

Now, I want to update you on the balance sheet. As of December 31, total outstanding debt stood at just under $4.2 billion. Our leverage ratio of funded debt to EBITDA, as defined by our credit agreement, stepped up a bit this quarter due to the impact of losing the very strong fourth-quarter of 2008 and our trailing 12 month EBITDA calculation, and the funding of the Heartland acquisition in the quarter. As of year-end, our leverage ratio stood at 4.16 times. Our leverage ratio is likely to take a step up again next quarter, as we last the strong first quarter of 2009, but we remain committed to deleveraging the balance sheet and continue to be focused on our goal of reaching 3.5 times funded debt to EBITDA. For 2010, we expect to be below 4 times by year-end and now anticipate in approaching our goal of 3.5 times by midyear 2011.

We also continue to enjoy very strong levels of liquidity. As of December 31, total unfunded and available revolver and accounts receivable securitization capacity stood at approximately $1.3 billion.

As Gregg said, for the full year, we are expecting adjusted diluted earnings per share to be between $1.54 and $1.64. Looking at how 2010 will likely play out from an EPS growth perspective, the first quarter presents a challenging overlap. The first quarter of 2009 was the strongest overall performance in the company's history, and benefited from a lower share count before the equity offering in the second quarter of 2009. With this in mind, and reflecting the current challenges we face, we are expecting first-quarter adjusted diluted earnings per share to be between $0.25 and $0.30. As we look at the balance of the year, however, the overlaps and the commodity outlook become less daunting, and we expect to be back posting strong quarterly year-over-year growth by the back half of the year.

So to summarize, plainly said, 2009 was a strong year for Dean, with a difficult finish. The currently challenging marketing environment, however, just adds to our resolve and urgency to move forward on the strategies we have outlined. Our clear focus as an organization is on reducing costs to extend our advantage in the marketplace for the long term. In 2010, we will leverage the strong momentum we have behind our cost reduction initiatives, while limiting incremental investment. We are confident in our strategic direction, and expect to emerge from the current market with a strengthened competitive position.

With that, I will conclude my comments by again congratulating our teams on a successful year, while acknowledging that the fourth quarter is an indication of how far we have yet to go on our journey as a company, and accepting it as a challenge to accelerate the pace of change in our transformation initiative.

I would like to thank you for joining us today. I hope to see many of you at CAGNY next week. I would now ask the operator to open up the call for your questions. Operator?

Question-and-Answer Session

Operator

Certainly, sir. (Operator instructions) We will take our first question from Eric Serotta with Consumer Edge Research.

Eric Serotta -- Consumer Edge Research

Good morning.

Gregg Engles

Good morning, Eric.

Eric Serotta -- Consumer Edge Research

Quite a few areas to ask some questions on. First would be any insight you could share with us behind the rapid deterioration you saw toward the year end and I know that retailers sometimes are increasingly -- retailers are obviously focused on how their year-end results and balance sheets look. It seems like there was a marked shift during the quarter. And then I have a follow-up question for you.

Gregg Engles

Yes, I will give you a little bit of perspective on it, Eric. You know, even within the quarter, we had a very poor December. We started the quarter relatively strong, but December was an extremely difficult month. Part of that I think has to do with the sharp move up in butterfat costs at Morningstar, a meaningful part of it. Morningstar prices its product by and large or a large part of this product prior to the announcement of the class price for the following month. So, we had prices at Morningstar that did not anticipate the sharp rise in December butterfat costs in the market as December opened up and there is just no way to recover that during the month of December. So we had a difficult month in December in the Morningstar business.

We also had a difficult month in dairy. And there, I would say that we both had a deterioration of the mix between private-label and brands in December, which hurt our margins. We had more competitive push back with respect to taking price in the rising price environment, so we had some price concessions in the month of December. And frankly, in the month of December, on the Fresh Dairy Direct, I am just not sure we executed as well as we normally do in a rising price environment. So, really within the quarter, it is also a tale of different months, a strong start to the quarter, and a very poor finish to Q4.

Eric Serotta -- Consumer Edge Research

Okay, and then if the prices are determined, if you are effectively setting prices in Morningstar before the class prices are announced, shouldn't there be some catch up, I know that butterfat prices have continued to rise, you mentioned a continued difficult first quarter. So when should we start to see some catch up and some ability to pass through those higher butterfat costs and what is preventing it? And the second question is, in terms of the continued impact of higher butterfat prices on the FDD business, the Fresh Dairy Direct business; we are not back to a situation like 2007, where you saw an inversion of the prices skim and fat. So going forward, how is the higher butterfat price impacting your profitability in the traditional fluid milk business?

Gregg Engles

Yes, let me hit both of those. Morningstar will recover the margin compression from not getting their forecast of the butterfat price right from the November to December transition, and the butterfat price is stabilizing at a higher level it looks like coming out of January and into the back half of Q1. So, we expect Morningstar's catch up in margins to happen during Q1. Now, that is different from recapturing the margin shrink that we experienced from November to December. You know, that is a phenomenon that occurs when the butterfat price drops meaningfully and of course, you saw that in last year’s fourth quarter or in 2008’s fourth quarter and in the first quarter of 2009, when Morningstar’s profitability and margins blew out because they underestimated the drop in butterfat costs in terms of the forecast. So, I think we will be back to a more normalized pricing and margin environment as butterfat price stabilizes here in the back half of Q1. When that moves down and we in fact recapture the lost profitability is something that I -- I don't have a good crystal ball on it at this point in time.

With respect to the impact of higher butterfat prices on Fresh Dairy Direct and higher milk prices in general, clearly, there is no evidence that we are moving back to this inverted situation in 2007. However, in 2009, we had about as favorable spread between the cost of skim and the cost of fat, as we have experienced in industry history, at least in the recent history. So, as milk prices have moved up, skim price has moved up and the spread between fat and skim has narrowed somewhat, which, as I said in my prepared remarks, leads to a slight narrowing of the profitability from excess cream sales. Nothing inverted, but a slight narrowing. And of course, as we lose physical product in the manufacturing process, we experience what we call shrink, we were now losing at a higher values than we did last year, because the Class I mover is $15 instead of $10. So again, that is a modest slight headwind in 2010, not a significant headwind like we saw in 2007 and 2008.

Jack Callahan

Yes, I mean just based on the current dairy forecast, looking at cream sales still fairly profitable compared to 2009, the year over year comparison on cream and the increase in shrink is probably an aggregate of $50 million to $20 million headwind based on the current dairy outlook that we have, largely over the first three quarters of the year. So that is currently considered in our outlook.

Operator

(Operator instructions) We will move on to Terry Bivens with J. P. Morgan.

Terry Bivens -- J. P. Morgan

Good morning. Can you guys hear me?

Gregg Engles

Yes, we can.

Terry Bivens -- J. P. Morgan

Okay. Good morning. Gregg, if you look at the Fresh Dairy Direct business, I mean the margin was pretty far below our expectation as well. And you have mentioned the factors in that. But I kind of like and the implicit in that is you did not get the traditional pass through with some accounts, so there was some sacrificed pricing. Clearly, the shrink figured into the shift from branded to private label. Can you kind of parse those elements in terms of how they impacted the margin?

Gregg Engles

Let me make a general comment and then I will let Jack do the parsing. The general comment around the price pass through is something that I want to just spend a brief moment on.

We continue to pass the price of rising commodity costs through to our customers. The margin compression comes from discrete one of price negotiations that are uncorrelated to the rising environment. So customers are aggressively shopping for more attractive prices on their private labels in liquid milk, there is excess capacity in this industry. They are bidding processors against one another and that is leading to discrete incidences of margin compression. So, it is not a circumstance of any customer saying the milk price went up $0.10 a gallon this quarter, I am not taking it. It is more of a matter of a long-term renegotiation around the existing operating margin in the business. And that is being driven, I think by the dynamic represented on one of the slides that we put up of the amount by which retailers themselves have compressed their margins on milk, and now they are coming back to the processing industry, trying to extract some participation in that margin compression, as they seek to represent value to their customers. So that is the overall dynamic, not one of some sort of breakdown of the basic industry course of dealing around passing through monthly parsed statistics.

So, I will turn it over to Jack.

Jack Callahan

Yes, on a year on year basis, FDD is down in absolute dollars about $19 million, close to $20 million. The single greatest impact continues to be the mix shift. We have nice growth in our private label business, but that is just coming in at a lower contribution margin versus ongoing softness in our branded portfolio. The second biggest impact is the occasional margin concession that Greg was just referring to, and the last factor was the year over year comparison on the aggregate of profits from cream sales and the year-over-year comparison on shrink, which that last factor on aggregate was about $4 million or $5 million.

Terry Bivens -- J. P. Morgan

Okay, and if I could just slip in a quick follow-up, I mean, the obvious concern here is we are certainly looking for falling dairy prices going through the summer and recovering in the back half. You don't think any permanent damage has been done to the pass through mechanism that would prevent you passing through those higher costs in the back half?

Jack Callahan

Absolutely not. It is just completely foundational, the way the industry operates that these prices get passed through on a month-to-month basis. The inability to pass those prices through would be a significant negative change to the overall dynamics of the industry and everybody understands that buy ability frankly of much of the processing sector relies on passing through these price changes on a monthly basis. So, we see absolutely no evidence that that is changing, but what we do see is renegotiation of the underlying margin in this difficult environment.

Terry Bivens -- J. P. Morgan

Okay, I understand. I will pass it along. Thank you very much.

Operator

Our next question will come from Farha Aslam with Stephens Inc.

Farha Aslam -- Stephens Inc.

Good morning.

Gregg Engles

Good morning, Farha.

Farha Aslam -- Stephens Inc.

I have a question regarding your position in the industry as a leader. Do you think your costs advantage, and as part of that, your competitors are private. Are they willing to accept lower returns and how is that impacting what returns you can get on that dairy asset going forward?

Gregg Engles

It is a good and broad industry structure question. So while many of our competitors are private, some of them publish financial results and of course, there are M&A activities. We have the opportunity to see the financial results of many of our other competitors and based on what we see from published financial results of some of our largest private competitors, and from the companies that we have acquired over time, is that first, we have a consistent and significant cost advantage vis-à-vis the companies that we have acquired and the companies whose operations that we can see. So that is manifested in a profitability differential between ourselves and what I would call our largest and most capable competitors that we can see of several hundred basis points. So we are confident in the quality of our cost position in this industry.

As we have gone through 2009, and as the greatly expanded margins driven by dropping commodities and Q408 and Q109 have played out in the marketplace and this competitive intensity has risen, we have also demonstrated I think time and again in our bidding activity with respect to competitively good business that we are very well positioned. And you see that in the steady growth of our market share and volumes over the course of 2009. So while there is an erosion of margin in the marketplace, the people that we compete against, whether they are private or not, have to maintain some ongoing level of profitability. And our cost differentiation has led us to be successful in growing our market share during this period of time. So it is a period of time of pressure from the customer environment with respect to our margins, but we are growing our share during this period of time and we are steadily driving down our costs and frankly, we think this leads to an improvement in our competitive position and share position as we come out of it.

Farha Aslam -- Stephens Inc.

Okay, and maybe one follow-up. The distributor contracts that you referenced during your prepared remarks, could you share some details about what that restructuring was?

Jack Callahan

Yes, I can. It was a contract we inherited when we bought a dairy company several years ago related to value added products. And the underlying margin structure of that contract led us to be selling to this distributor, who was small at the time that we acquired the business that owned this contract, at margins that were frankly causing us to be selling at little or no profitability to this distributor and that ultimately was eroding our share in the end-user marketplace, because of the cost advantage transfer of products. So we negotiated a price to exit that arrangement and move terms back to market-based terms with that distributor, and that was consummated in the fourth quarter and the total cost of that was several million dollars.

Farha Aslam -- Stephens Inc.

Okay. Thank you very much.

Operator

We will move on now to Chris Growe with Stifel Nicolaus.

Chris Growe -- Stifel Nicolaus

Good morning.

Gregg Engles

Good morning, Chris.

Chris Growe -- Stifel Nicolaus

Can I just ask a couple of questions here? I guess to follow up on the previous question, Gregg, are your competitors operating at profitable levels. It would seem like given the degree of resetting of the margins in the category, it would seem like the -- given they were already very low, are the more of these smaller dairies close to the amount of business, I guess, or is this like the last push, if you will, for them?

Gregg Engles

Well, clearly the -- since 2007, this industry, as a whole, has been profit challenged, as milk prices spiked. There is not one simple answer to your question. What I would say is the larger competitors that we have that publish financial results; you see a significant downshift in their operating profit margins over the 2007 and 2009 time period. They have not gone into negative operating profit territory, except perhaps during certain short periods during that time horizon. However, on -- when you get into the universe of smaller or less well-positioned operators, including some of the ones that we have acquired, or some of the ones that have gone out of business that we picked up their share, they clearly have moved into negative operating profit territory, at least for more extended periods of time.

And yes, you see them actively seeking to exit the business. Now, they don't tend to fold up and just go out of business, although that has happened on occasion. They seek to sell and realize whatever they can for their operations. So Foremost Farms in Wisconsin will be a good example of that. It was owned by a large co-op, relatively large business in terms of dollar volume, very little profitability or negative during much of the last several years, and seeking to exit a category in which they are strategically disadvantaged. So there is quite a bit of that out there in the industry, and these periods exacerbate those issues in the competitive side. So the same margin pressures we feel they feel and the margin pressure they feel is compounded by declining volumes.

Chris Growe -- Stifel Nicolaus

If I could just follow with one more question, the continued mix shift in your dairy business to private label, where do you stand today between like branded and private label? How much did that degrade, if you will, throughout 2009?

Jack Callahan

Throughout 2009, actually the sort of the branded volumes were just sort of flat to down like 1%, but all of our growth then came through private label. So for the year, we grew our private-label business sort of high single digits. So, all our growth is coming through private label. What has also impacted profit performance though is that we have what we have seen some contraction in our margins on the branded business, you know, as we try to manage our branded portfolio up against these incredibly hot price points that are being put out there on the private label side out there in the marketplace. So on the branded side, it has been both a story of volume, you know, weakness, but maybe a bigger issue in terms of margin compression.

Gregg Engles

Just to give you a little more color on that. So again, the chart on Slide 8 I think is instructive. When you see this margin over milk move from $2.00 to $1.56, within that $1.56 is a $0.06 IRI average, you have large retailers from time to time selling milk at zero or negative retail margins. So during 2009, when you saw milk in the marketplace at $1.99, that retailer is making no money or losing money on the milk that they are retailing. Well, on our branded products, we are clearly when the gap blows out to a retailer or using his private-label to drive food traffic in the store and selling it at zero or negative margins, the gap between that retail private-label and our brands blows out. And so in order to maintain share, we have got to start dealing on private.

Jack Callahan

Right. We have got to start promoting and moving aggressively to narrow the price gap or our brands become irrelevant pretty quickly. So the price where we are seeing the most margin compression is where we have frankly the highest price and strongest brands, and we have to defend those brand positions as we work through this hot milk environment.

Chris Growe -- Stifel Nicolaus

I don’t see what changes that in the store given the way you are talking to that, and maybe not even in the store, but how does that change even in 2010, given this hot competitive environment?

Gregg Engles

Well, first of all, milk has moved up from $10 to $15, right? So the price gap has gotten narrow. And so now you are losing money on milk at $2.49, as a retailer. That is a $0.50 increase in the per gallon cost of milk. So the price gap is going to narrow vis-à-vis our brands, just by passing through the nominal cost of the increase in the product. So that takes some of the pressure off the brands. The second thing that I think is starting to play out in the marketplace is that retailers of wary of the effect of food price deflation on their own P&Ls. So, we are moving back to a marketplace in which, yes, retailers are competing on price and competing with respect to value, but the level of price competition got to levels that were damaging people's P&L significantly, across the business. So you are starting to see an abatement of that margin and price pressure in the end use retail environment.

Jack Callahan

One thing that I have to add is, you know, we have done some analysis looking at some of the strategies of some retailers and a couple of examples, a couple of retailers have basically doubled their future advertising, the lead add, if you would, on milk in 2009 versus 2008. Because of the abnormally low dairy commodity environment, they are able to actually hit some really hot price points like $1.99. You know, going back to Gregg's point, this rise in dairy commodity is going to force those prices back up and then there is the question of harder to no play at the traffic drops of the retailers going forward. It was clearly a big hot item for the back half of 2009.

Gregg Engles

And by the way, Chris, I think your underlying point is legitimate in a slow economy, high unemployment, consumers focused on value. Our brands continue to remain under pressure, just not under nearly as much pressure as they were in 2009.

Operator

We will move on to our next question from Eric Katzman with Deutsche Bank.

Eric Katzman -- Deutsche Bank

Hello, everybody.

Gregg Engles

Hey, Eric.

Eric Katzman -- Deutsche Bank

I guess, you know, with the stock down about 13% today, obviously anybody who had some hope is extremely frustrated. But I guess my first big picture question, Gregg, is a year ago, you came in front of investors and painted a pretty compelling picture in terms of kind of positioning yourself as a almost more of a predictable CPG type of firm, with mid to high single-digit EBIT growth and low double-digit EPS growth. And I'm just kind of wondering, is there, I mean, with the market, you know, not discounting you and pretty much since a year ago discounting you at multiple well below the rest of the group, this difference between, you know, you are being you, there is just at the end of the day a commodity play versus your I guess approach a year ago to try to position it as more of a consistent longer term business. Can you help kind of bridge that gap and do you think given the competitive pressures and kind of what Chris was talking about in the last question, I mean, is that kind of being thrown out the window now?

Gregg Engles

Well, clearly, the events of the last 12 months would not support the argument that the commodity doesn't heavily influence our results from period to period. So I am not going to swim against the tide and try and make the argument that commodity movements are important here. Here is what I would say is that in February of 2009 at our Investor Day, we were coming off a year in which we had delivered $1.30 a share of earnings on a significantly lower share count than we have today, and then we ultimately experienced in 2009. In 2009, we drove profit growth in excess of 20% against that higher share count, and we are basically guiding flat in 2010. Had milk not fallen from $20 to under $10 and stayed there for most of 2010, I think the earnings progression you would have seen would have looked more like $1.30, $1.43 and maybe, you know, $1.58 or $1.60, which is the algorithm that you have described. So that begs the question of what one ought to expect in terms of the ongoing quality of the underlying commodity?

This last commodity cycle I think has to be viewed in the context of 2006 through 2009. So in 2006, we had a dairy commodity that was sort of an $11, $12 Class I mover average. In 2007, we all experienced that across every business and every aspect of our lives, stunning commodity volatility. So milk effectively doubled off of that price in 2007, gasoline, diesel fuel tripled, copper, you know, every -- we went into the bubble of 2008 or 2007 and early 2008. That bubble exploded in late 2008, we had a commodity crash and we lived with that low price through much of 2009. Everybody knew it was unsustainable, because farmers were losing money at a marginal cost level, but we had to work excess supply off of the marketplace.

And so coming into 2010, we actually have a milk price forecast that has more normal historic levels of volatility, like we see movement around this $15 level of $1.50 to $2.00 up and down either direction, right it is modest typical seasonal volatility in the milk commodity. Now, I think the world is a unpredictable enough place and I am not going to guarantee that is the way it actually plays out, but if that is the way that it plays out, you will see us revert to the kind of profit growth algorithm that we have described in early 2009. Because our underlying business on the brands side is being driven by steady, modest volume and price dynamics and a very effective and stable cost structure, and our milk business is being driven by a multi-year relatively foreseeable reduction in our underlying cost structure that we continue to believe is advantage versus what our competitive set can accomplish.

So, while we are living through some margin compression here, over time, we are going to separate ourselves from the rest of the processing industry. The excess capacity that has dragged margins around in the back half of 2009 will begin to diminish over time as the weaker of those players can’t keep pace with what is happening in the industry in terms of costing capability, and I think we can ultimately find our way to an algorithm that is as predictable as we and you would like us to have.

So, just to summarize that long response to your question, I hope that the bull whip that started in 2007 has sort of played out finally at the end of 2009, and that we move back to a more stable algorithm. Underlying everything that is happening in the gross margin environment of our business, we are steadily driving down costs and we are largely finished with the capability-building that we have needed to do in order to make that come to life.

Eric Katzman -- Deutsche Bank

Okay, thank you for that. But as a follow, and then this kind of relates to the fourth quarter, and almost to exactly that point, you know, the gross profits for the business were pretty much up at least as I expected by about 4% and so the hit to margins really came from the SG&A side. And so, you know, what had been let us say a $550 million to $600 million quarterly SG&A spend, in the last two quarters has ramped up dramatically. And so, I guess what I don't understand is a lot of what we have been talking about in terms of the competitive pressure is more of a gross -- I would assume is more of a gross margin hit, and yet it seems as if the SG&A side is what is really getting hit. And so I am not -- I don't understand what is going on there, and perhaps you could kind of shed some light.

Jack Callahan

You know, Eric, we had a lot of questions about G&A growth and we have had -- you may notice in our financial statements be provide a little bit more detail to help you strip out some of the impacts, because we have had a lot of them that hit us this year between deal costs and other things. But I think if you go back to the same, I think it is really important you should strip out the impact of the Hero JV that is now consolidated. Remember, it is a mid-year pickup of Alpro that is probably the primary driver of the increase on the operating expense line, selling and distribution and G&A. So I think you really need to kind of parse that all through. The one place where we have had some G&A growth has been in the corporate expense area, which we talked about today. That was largely to support IT, supply-chain, and R&D and we also had some impacts with legal expense, et cetera. And we kind of see that really behind us other than maybe one more quarter in Q1 and that growth should taper off. If you look at G&A across the business units, you will see actually pretty good performance in terms of an operating expense point of view across FDD, WhiteWave and Morningstar. So I think it is important we parse through all the moving changes there to kind of really get at what the true growth has been and I think you will see slower growth going forward.

Operator

We will move on to our next question from Bryan Spillane with Banc of America/Merrill Lynch.

Ryan Osmond -- Banc of America/Merrill Lynch

Hey, guys. This is actually Ryan Osmond [ph] here in place of Bryan Spillane.

Gregg Engles

Good morning.

Ryan Osmond -- Banc of America/Merrill Lynch

I was just wondering, in terms of next year, the $90 million, is that a gross number or a net number?

Jack Callahan

That is a gross number.

Ryan Osmond -- Banc of America/Merrill Lynch

That is a gross number?

Jack Callahan

Yes.

Ryan Osmond -- Banc of America/Merrill Lynch

Okay, can you give us some idea of what the net number is going to be or what the (inaudible) look like, because in the corporate line, you know, you said that you will last the first quarter in terms of straining, that would be higher year over year. But you know, is that going to eventually subside or can you give us just some more insight on that one?

Jack Callahan

In terms of G&A investment going back, we are limiting incremental investment going forward. So the growth in the corporate line will largely be just Q1. It is a difficult overlap versus Q1 of 2009 and we would really guide you to kind of stay toward of this, you know, 55, 57, 58 level of spend through the balance of 2010.

Ryan Osmond -- Banc of America/Merrill Lynch

Did that drop off in 2011 at all?

Jack Callahan

I would not anticipate it dropping off.

Ryan Osmond -- Banc of America/Merrill Lynch

Okay. And can you just give us, you know, so is there any other spending that is embedded in the segments for the cost savings initiatives for 2010?

Jack Callahan

In all of our businesses, they have initiatives like this every year to drive relativity, but I think in many cases, the base case capability is in place and there is always some investment to go chase the initiative, but it is not as significant versus what we saw this year in 2009.

Ryan Osmond -- Banc of America/Merrill Lynch

All right. Thanks, guys.

Operator

And you have time for one more question. That question will come from Lindsey Zuckerman [ph] from Goldman Sachs.

Lindsey Zuckerman -- Goldman Sachs

Hey, good morning, guys.

Gregg Engles

Good morning, Lindsey.

Lindsey Zuckerman -- Goldman Sachs

I guess, Gregg, if you could just follow up on your comment with respect to your expectation that milk volatility won't be a big issue for 2010, I was just wondering, given some of the regulatory issues that create mismatches between supply and demand in the US milk market and an increasingly global demand side of the equation from milk products plus the structural challenge as to growing supply, why do you think after multiple years of big volatility we would revert back to a less volatile environment?

Gregg Engles

Well, first of all, I think many of the factors that grow the price higher in 2007 and 2008 are not there. So at least we don’t foresee them as being there in 2010. So what was driving prices higher over that period, you will recall, were first supply shortfalls in Oceania, which is the largest export market, we don't expect those to recur, certainly not at the levels that existed in 2007 and 2008; a rapidly declining US dollar, which made US stocks significantly more attractive from a global perspective; a creeping but unrecognized decline in global stocks through 2006 and early 2007 that sort of took the market by surprise when global stocks were largely exhausted in mid 2007. We have an environment today where we have significant US and global stocks of dairy commodities. You have an industry in China that is significantly larger in terms of production than it was in the 2006 to 2007 time horizon. So they have moved onshore significantly more of their own production. And while you still have Asia-Pacific that is relatively strong, the rest of the world is relatively weak in terms of its ability to consume dairy products. So we actually see a moderate demand environment and a supply environment that is frankly still adjusting to oversupply. So there are a few other technical factors around the US marketplace that I think will put a damper on supply.

The biggest one that I would mention is that technology does work, even in these kinds of industries. So there is a phenomenon that is now just really taking hold in the US dairy industry that revolves around how dairy cows are inseminated. You have to cause a dairy cow to have a calf in order to continue to lactate. So, they are inseminating dairy cows artificially to do that and it used to be you get one calf, you get one heifer. So it is sort of 50-50 sex distribution. Well, now the producers of artificial insemination products have figured out how to only produce heifers, so they have sex semen. Now, every cow that is born or virtually every cow that is born is a potential replacement heifer as opposed to half of them being beef and half of them going into the milking line. So you just have this function change in the level of pressure on new supply in the US industry, which frankly was one of the reasons it was so difficult to work off the excess supply in 2009 and one of the reasons why we think you are going to continue to see pressure on the supply side in 2010, to change the economics for a dairy farmer of maintaining and growing their supply.

So, at least through 2010, we don’t see the forces in place that are going to lead the kind of price volatility that we saw in 2007 and 2008. Again, I am not going to bet on my crystal ball and in the world of commodity volatility, but certainly the factors that drove things last time are not in place today.

Lindsey Zuckerman -- Goldman Sachs

Okay, thanks. That is very helpful. If I could just really quickly follow up on WhiteWave-Morningstar, the stepped up brand investment that hit you in the fourth quarter, is that a one-off related to specific initiatives or should we anticipate higher brand investment across 2010?

Gregg Engles

No, it is really more of a 2009 step up at -- you know, (inaudible) were at the sustainable level or the level what we feel is optimal in terms of brand marketing against our brands. But it was meaningful. It was in excess of $10 million of additional brand spending quarter over quarter like what it was in Q4 2009. Yes, we did have that. The fourth quarter was always a bit light from a marketing point of view and with the innovation coming along, we thought it prudent to kind of support the CoffeeHouse business which has had real success in the marketplace and we now are pretty excited about this new Silk almond milk product. But we would not anticipate a significant step up next year. We have a pretty strong base of marketing spend as we enter next year.

Lindsey Zuckerman -- Goldman Sachs

Okay. Thanks very much.

Operator

Ladies and gentlemen, this does conclude the question and answer session. At this time, I would like to turn the conference back to Mr. Gregg Engles for any closing remarks.

Gregg Engles

Well, thank you again for joining us on the call this morning. We look forward to meeting with many of you at the CAGNY conference in just over a week. And for those of you unable to join us in person, you are welcome to view our presentation on February 19 through a link that will be available on our website. Thanks again for participating this morning, and we will see you in Florida.

Operator

Ladies and gentlemen, that does conclude today’s conference. We thank you for your participation.

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Source: Dean Foods Company Q4 2009 Earnings Call Transcript
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