Dean Defies Predictions

Some insiders felt Dean would fall very short on first quarter earning. Instead, they pulled a rabbit out of the hat:

http://www.prnewswire.com/news-releases/dean-foods-reports-first-quarter-2011-results-121555323.html

In the first half hour of trading today Dean shares were up over 14%. At the closing bell Dean shares were up 11.48%.

Oddly enough, Dean saw sales volume for fluid drop and the Class I mover rise dramatically when compared with the first quarter of 2010. Greg Engles said on the conference call he expected farm milk price to remain steady for the rest of the year. But, what does he know?

As Yogi Berra once said, "It's tough to make predictions, especially about the future."

Dean News

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In the northeast case Judge Reiss is considering a partial settlement:

http://www.burlingtonfreepress.com/article/20110415/NEWS01/110415033/0/BUSINESS03/Federal-judge-considers-severing-settlement-Dean-Foods-case-?odyssey=nav|headhttp://www.blogger.com/img/blank.gif

While she hasn't decided whether DFA or DMS have a standing to oppose the settlement, Reiss said farmers would have a chance to oppose it at a fairness hearing before she decides whether or not to give it final approval. If she gives the settlement preliminary approval, notices would go out to the farmers represented in the lawsuit in 10 states.

(more at link)

Forbes has a couple items on Dean Foods, the first is on Greg Engles compensation: http://www.forbes.com/lists/2011/12/ceo-compensation-11_Gregg-L-Engles_XU3T.html

Next is on bad management: http://blogs.forbes.com/frederickallen/2011/04/14/americas-best-and-worst-bosses-for-the-buck/

The least effective: Gregg L. Engles of Dean Foods. His paycheck has averaged $20 million a year over the past six years, while his company’s average return has been -11%.

Somewhat Less Than Exciting News

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Today Dean Foods settled with the U.S. Department of Justice and State AG's regarding Dean Foods' purchase of Foremost Farms fluid milk plants.

Just who might be willing to purchase the plant is a riddle. Between the likes of Dean and Wal*Mart, there is not a lot of profit in fluid milk.

Dean Foods 2010 Earnings

AT: http://www.deanfoods.com/our-company/news/press-release.aspx?StoryID=1529517

The story begins:

Dean Foods Company (NYSE: DF) today announced that the Company earned $0.50 per diluted share for the full year 2010, as compared to $1.38 per diluted share for the full year 2009. On an adjusted basis (as defined below), the Company earned $0.80 per diluted share for the full year 2010, compared to $1.59 for the full year 2009.

For the fourth quarter 2010, the Company recorded a loss of $0.11 per diluted share, as compared to fourth quarter 2009 earnings of $0.27 per diluted share. The loss for the fourth quarter of 2010 includes a $20 million charge (net of tax) associated with an agreement in a previously disclosed legal matter, a $10.8 million write down of deferred tax assets, as well as $17 million (net of tax) of restructuring charges, and other one time or non-recurring items, as more fully described in the attached tables. On an adjusted basis, fourth quarter 2010 diluted earnings per share were $0.15, compared to $0.32 per diluted share earned in the prior year's fourth quarter.

"2010 was an exceptionally difficult year for Dean Foods, and our fourth quarter results reflect many of the same trends that have impacted the business all year," said Gregg Engles, Chairman and CEO. "At Fresh Dairy Direct-Morningstar, wholesale pricing for private label milk remained pressured during the quarter, and volume softened. As a consequence, Fresh Dairy Direct-Morningstar operating profit was little changed from the third quarter.

"We have, however, begun to see signs that the fluid milk category is stabilizing, albeit at historically low levels of profitability. Some retailers have taken early steps to reduce heavy private label promotions and our regional brand volume mix has begun to stabilize. Regional branded milk volumes outperformed private label on a year-over-year basis in the fourth quarter. Moreover, private label wholesale prices appear to have stopped declining, although we have not yet seen them rise. Volume, however, remains weak, which we believe will limit upward price mobility. The net result is an industry that appears to be stabilizing at a price and profit level meaningfully below historical norms. To move forward in such an environment means that we must continue to optimize our network to offset volume weakness and drive efficiency to rebuild profits, which is the path that we are on.

More at link.

Transfer of Funds

There is a recent National Bureau of Economic Research (NBER) paper:MODELING PROCESSOR MARKET POWER AND THE INCIDENCE OF AGRICULTURAL POLICY:A NON-PARAMETRIC APPROACH by Rachael E. Goodhue and Carlo Russo. The document is: Working Paper 16706

The paper is concerned with wheat, however, there are some interesting parallels to dairy. The authors state, "the wheat milling industry is relatively concentrated, while there are a very large number of wheat-producing farms. Consequently, individual farmers have relatively little ability to negotiate effectively.
These factors are reflected in the organization of farmgate grain markets;
generally prices are set by buyers and farmers choose whether or not to accept the take-it-orleave-it offer." Sounds like dairy.

The authors conclude:

"This analysis demonstrates that market power might redistribute the benefits of government intervention. It provides empirical evidence that U.S. wheat millers were able to increase their marketing margins on average by approximately 10 percent when farmers received payments through a marketing loan program. This expected increase in margins was computed controlling for the realizations of a broad set of supply, demand and processor marginal costs shifters in those years. In turn, these findings suggest that millers are extracting a rent from the deficiency payment/marketing loan gain policy. Thus, the analysis suggests that the general assumption that competitive models may be a good approximation for imperfectly competitive agricultural markets does not necessarily hold, particularly if distribution, as well as efficiency, is a concern."

If you substitute milk for wheat and throw in the MILC payment, there should have been no surprise 2009 was Dean Foods most profitable year.

More on DFA's Opposition

DFA in documents file in Vermont Federal District Court on January 18, 2011 objected to the settlement with Dean Foods.

In a court document, Greg Wickham, general manager of DMS states:

“DMS is an LLC is also a common marketing agency that today markets milk for almost 8000 dairy farmers in the northeastern United States. DMS is owned by three cooperatives: Dairylea, DFA and St. Alban’s. Although DMS to is not directly have any farmer members, it is indirectly owned by the farmers who belonged to and own Dairylea, DFA and St. Albans and DMS's operations are overseen by a Board of Directors made up of dairy farmers from each of its owner coops. These three coops have all designated DMS as their exclusive marketing agent for raw milk in the northeastern United States. As of August 2010 they were about 1,441 Dairylea producers marketing milk through DMS in the Northeast, about 1,463 DFA producers and about 446 dairy farmers were members of St. Albans.”

DMS is not an "common marketing agency," in any usual sense of the term. It operates actually as a market allocating agency. There is quite a difference.

Wickham also states,"In addition, DMS and 2010 markets milk of hundreds of independent dairy farmers were not members of any cooperative," and fails to mention that many quite possibly most, are not voluntarily participating in the DMS system.

"In September 2010, for example, DMS marketed total of 1.272 billion pounds of raw milk, 1.166 billion pounds of which was marketed to plants in Order I” according to the court document. That volume represents 60% of Order I milk.

With all of that market share, Wickham complains:

"For example, there is one Dean planted which we primarily provide milk for class I purposes, and also ship about 10,000,000 pounds a month of milk that is used for class II purposes. With respect to that Class II milk, we have told Dean's repeatedly that we felt the milk was underpriced by over $1.00/cwt, but for years they were unwilling to give ground in the negotiations. Even with the recent price increase to that plant, it is in my view still underpriced by $40 - .50/cwt."

What he is saying, is that Dean Foods has more market power than an organization,DMS, which by their own reckoning has 60% of the milk in Order I.

Dean Foods

Dean is looking for money:

"David Tepper’s hedge fund firm Appaloosa Management has started a brand new position in Dean Foods (NYSE:DF). Per a 13G filed with the SEC, the hedge fund disclosed a 7.35% ownership stake in DF with 13,396,536 shares due to trading on December 28th, 2010. The majority of shares are held in Appaloosa’s Palomino fund. You can view Appaloosa’s other investments in our newsletter, Hedge Fund Wisdom."

(more at link)

http://wallstcheatsheet.com/trading/david-tepper-buys-dean-foods.html

Dean Foods is also selling its yogurt business, which consist of three plants, to Schreiber Foods.

What next?

New Rating

http://www.tradingmarkets.com/news/stock-alert/df_fitch-rates-dean-s-proposed-400mm-issuance-ccc/rr6--1368466.html

Fitch Rates Dean's Proposed $400MM Issuance 'CCC/RR6'
Posted on: Wed, 15 Dec 2010 01:08:50 EST

Symbols: DF
Dec 15, 2010 (Close-Up Media via COMTEX) --

Fitch Ratings has assigned a 'CCC/RR6' rating to Dean Foods Company's (Dean; NYSE
: DF | PowerRating) approximately $400 million proposed senior unsecured notes. The ratings remain on Rating Watch Negative.

Today Dean announced preliminary plans to offer, subject to market and other conditions, up to approximately $400 million of senior notes. The company also entered into an amendment to its bank credit and receivables purchase agreements, dated April 2, 2007 and subsequently amended and restated on June 30. The amendments are conditioned upon the completion of the notes offering and subsequent debt paydown as described below.

Dean intends to use net proceeds from the debt offering to pay down a portion of its outstanding bank term loan A and to pay fees and expenses related to the credit facility amendment mentioned above. At Sept. 30, Dean had $4.1 billion of total debt, of which approximately $1.3 billion was related to its term A loan. Roughly $1.1 billion of this term loan matures on April 2, 2014.

Fitch's 'CCC/RR6' rating is based on expectations that the newly issued notes will rank pari passu with Dean's existing senior unsecured notes. The company's existing $500 million of 7 percent guaranteed notes due June 1, 2016 contain a change of control provision that requires Dean, or any third party involved in a change of control, to repurchase all or any part of the notes at a purchase price of 101 percent plus accrued and unpaid interest.

Furthermore, due to Fitch's recovery analysis, which incorporates a notching methodology relative to the Issuer Default Rating (IDR), the 'CCC/RR6' rating implies limited recovery in a distressed situation. Fitch does not expect Dean to default on these obligations; however, the unsecured note rating reflects the heavy mix of secured debt in the company's capital structure and Fitch's view that limited value would be available for distribution to unsecured bondholders if there were a recovery event.

On Dec. 3, Fitch downgraded Dean's IDR to 'B' from 'B+' due to materially higher than expected declines in operating earnings and cash flow along with Fitch's expectation that financial leverage will remain elevated through 2011. Additionally, Fitch placed all of Dean's ratings on Rating Watch Negative because of heightened covenant risk under the company's secured bank facility's maximum leverage requirement. The amendment to Dean's credit facility provides increased flexibility under its maximum leverage ratio and minimum interest coverage requirements while introducing a new senior secured leverage ratio condition.

From the effective date of the amendment through Dec. 31, 2011, Dean's maximum leverage ratio will be 5.75 times (x), stepping down by 0.25x increments annually at Dec. 31 until Sept. 30, 2013 when the ratio falls to 4.5x. The company's minimum interest coverage ratio is set at 2.5x through Dec. 31, 2011, stepping up to 2.75x at March 31, 2012 and then increasing to 3.0x at March 31, 2013. Dean's new maximum senior secured leverage ratio is 4.25x through Dec. 31, 2011, declining to 3.75x on March 31, 2012 and then to 3.5x on March 31, 2013.

Fitch currently projects that total debt-to-operating EBITDA for Dean will approximate 5.6x at year end 2010 and 5.4x at the end of 2011. Given that the company's bank covenants excludes up to $100 million of unrestricted cash and adjusts for non-cash expenses and non-recurring charges, Fitch expects cushion under Dean's covenants to gradually improve as operating performance stabilizes and the company uses free cash flow along with proceeds from potential asset sales to repay debt.

Negative Rating Watch and Rating Triggers:

Fitch views the amendment to Dean's credit and receivables-backed facilities positively and currently believes the company's liquidity is adequate. At Sept. 30, Dean had $1.5 billion of liquidity which included $102.1 million of cash, $863.1 million of revolver availability and $481.3 million of borrowing capacity under its receivables-backed facility. Of the secured revolver, $225 million expires on April 2, 2012 while $1.3 billion is due April 2, 2014. Once the amendment becomes effective, the maturity date on the company's $600 million receivables-backed facility will be Sept. 30, 2011 versus June 30, 2011 currently.

Dean's ratings will be removed from Negative Watch once the amendment of the company's credit facility becomes effective. As previously mentioned, effectiveness is conditioned upon Dean issuing up to $400 million of the aforementioned rated notes (which must be at least seven years in tenure) on or before Feb. 28, 2011 and using net proceeds to prepay its term A loan as outlined by the agreement.

Fitch currently rates Dean and its wholly-owned subsidiary Dean Holding Company as follows:

Dean Foods Company (Parent)

--Issuer Default Rating (IDR) 'B';

--Bank credit facility 'BB-/RR2';

--Senior unsecured debt 'CCC/RR6'.

Dean Holding Company (Operating Subsidiary)

--IDR 'B';

--Senior unsecured debt 'CCC/RR6'.

This is what it means to be "King of the Mountain."

Dean Foods Bonds

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Dean stocks rose significantly today, mostly on news regarding bonds. The bond interest rate is more than twice the 30 year mortgage rate.

A Bloomberg report: http://www.bloomberg.com/news/2010-12-09/dean-foods-chief-engels-loses-59-as-s-p-s-worst-after-milk-takeovers-sour.html

"Credit Suisse Group AG analyst Robert Moskow says Dean’s strategy of driving down costs to undercut smaller, less efficient milk processors and force them to scale back capacity hasn’t yielded results. At the same time, Dean is facing pressure from retailers who are discounting milk to attract penny-pinching consumers while demanding price breaks from suppliers. Also, more shoppers are buying cheaper private label milk products instead of Dean’s brands."

So, here we are with dairy farmers near the bottom and the largest fluid in terrible financial shape.

Dean Settles

In an 8K SEC document filed today Dean stated:

The Company has reached an agreement with the plaintiffs in its previously disclosed purported class action antitrust lawsuit filed in the United States District Court for the District of Vermont to settle all claims against the Company in such action. The settlement agreement is subject to court approval. There can be no assurance that the court will approve the agreement as proposed by the parties. Pursuant to the agreement, the Company would be obligated to pay $30 million, and would agree to other terms and conditions with respect to its raw milk procurement activities at certain of its processing plants located in the Northeast. The Company expects to take a charge in the fourth quarter of 2010 of approximately $18.4 million, net of tax, with respect to the proposed settlement.

Well, we'll see. At this point DFA and DMS (one and the same) have not settled and the case moves ahead with "discovery" extended to April 15, 2011.

Dean

http://www.cnbc.com/id/40086665

"These results are clearly disappointing for us and reflect continued significant challenges in our largest business, Fresh Dairy Direct-Morningstar," said Gregg Engles, Chairman and Chief Executive Officer."

Kraft is having cash flow problems and now Dean. Any mystery regarding where they expect the money to come from?

SE Case Class Certified

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This ruling has been long anticipated. In a class action suit those who are part of the class have to be verified by the judge - this has now been done.

Mostly, the Judge granted certification of all classes with the main exception of DFA members in the Southeast claim for “breach of contract.” The Judge seems to think those DFA member somehow benefitted from DFA’s action. The Judge stated, “To the extent that DFA has engaged in the wrongdoing alleged in plaintiffs’ complaint, it would appear on the surface that most, if not all, of DFA member dairy farmers have in fact benefitted from DFA wrongdoing.” “On the surface” indeed.

In footnote 9 on page 19, the Judge states, “Plaintiffs’ breach of contract claims appear to focus on claims that DFA has participated in “sweetheart” deals, made “secret” payments to insiders, wasted money on unnecessary expenses, and the like.”

If the Judge owned cows and shipped milk in the Southeast he might have a better grasp of the facts in the DFA member’s claim.

Court Case

On August 4, 2010 Judge Greer hand down a Summary Judgment in
Food Lion, LLC, et al. ) v. Dean Foods Company, et al., )
No. 2:07-CV-188

This case is a parallel case to the Southeast dairy farmer case. Supermarkets are alleging Dean and DFA "fixed" prices:

This multi-district class action antitrust case involves allegations by plaintiffs Food Lion, LLC (“Food Lion”) and Fidel Breto, d/b/a Family Foods (“Breto”), on behalf of themselves and a class of all others similarly situated, 1 purchasers of processed milk, involving allegations against Dean Foods Company (“Dean”), Dairy Farmers of America, Inc. (“DFA”), National Dairy Holdings, L.P.(“NDH”), Dairy Marketing Services, LLC (“DMS”), and Southern Marketing Agency, Inc. (“SMA”) (collectively, “defendants”) for violations of §§ 1 and 2 of the Sherman Act, 15 U.S.C. §§ 1 and 2.

The supermarkets are represented by one of the most reputable firms in antitrust, Akin Gump.

His Honor is not fully happy with the Plaintiffs. Most particularly he takes some shots at the plaintiff's "expert.":

In deposition, Professor Froeb admitted that he did not consider the relevant market in that context but rather that he used a “different approach” in arriving at his conclusions. Professor Froeb also admits that he did not assess the “commercial realities,” Id., but rather relied solely on his theoretical model. Such an approach may be academically acceptable; it does not, however, comply with the Supreme Court’s dictates with respect
to construction of the relevant geographic market. Furthermore, Professor Froeb’s construction of his model with reference to a single customer, Food Lion, also does not comply with the relevant legal requirements. Professor Froeb admitted that he constructed his model with reference solely to “the regions where Dean and Food Lion engage in the sale and purchase of milk.”

I would go a step further and say "such an approach" is practically required in academia. The difficulty of obtaining an "expert" cannot be overstated.

In any event the Judge dropped SMA as a defendant. He also dropped most of the claims (in large part because of the "expert"). He did leave one claim stand:

In Count I of the amended complaint, plaintiffs allege a violation of § 1 of the Sherman Act by Dean, DFA and NDH. More specifically, the plaintiffs allege a horizontal agreement among Dean, DFA and NDH to lessen competition for sales of processed milk to retailers in the southeast and, in fact, not to compete for such sales.

The case will move forward on the one count.

Visions of paint drying are appropriate.