Dean Foods (DF)

Dean Foods Company (DF) is a leading processor and distributor of milk and other dairy products in the U.S. as well as a leading manufacturer of various specialty food products. Effective January 1, 2008, management realigned the company's reporting segments. Morningstar Foods (which is primarily a private label, warehouse delivered, extended shelf life, and cultured dairy products business) was combined with WhiteWave Foods to create the WhiteWave-Morningstar reporting segment (20% of 2007 net sales). The products of White-Wave Morningstar include Silk soymilk, Sun Soy soymilk, and Silk cultured soy products, along with branded and private label organic dairy products, such as milk, cheese, butter, yogurt, sour cream, cottage cheese, pudding, whipping cream, cream cheese, fruit juice, Hershey s milk and milkshakes, International Delight coffee creamers, Land O Lakes Dairy Ease, Land O Lakes creamers, and Folgers Jakada milk and coffee beverages. The newly created DSD Dairy segment (80% of 2007 net sales) consists of the conventional fluid milk, ice cream, creamers, juice, and tea operations, which are shorter-shelf life products that are produced in local facilities and distributed through the company's national refrigerated direct store delivery (DSD) system. In June 2005, the company spun-off the Specialty Foods Group as TreeHouse Foods (THS), a leading pickle processor and the largest manufacturer and seller of powdered non-dairy coffee creamers in the U.S. In February 2008, Dean Foods offered 18,700,327 shares at $22.915 in a public offering underwritten by Lehman Brothers. The offering increased fully diluted shares outstanding by approximately 13%. The proceeds were used to reduce debt and general corporate purposes, including potential future investments or strategic acquisitions.

WhiteWave-Morningstar, Dean Foods' branded products division, focuses on branded products, which hold significant long-term promise. The segment had annual revenues of approximately $2.4 billion in 2007 and is expanding at a double-digit rate. Acquisitions, including Horizon Organic in January 2004, have added scale to the segment. The integration of three branded product operations (White Wave, Horizon Organic, and the National Brand Group) has improved the company's go-to-market capability and enhanced the efficiency of the supply chain. The sales, marketing, and research and development functions have also been integrated.

In 2006, management initiated a multi-year productivity and capability improvement program, aimed at enhancing operating efficiency and improving the company's competitive advantage. The first stage of the productivity improvement initiative was implemented in 2007, in which the company is realigning purchasing and finance processes. On the finance realignment project, the company is relining administrative functions by centralizing accounting and transaction centers that are currently at plant level. Although the project requires significant upfront costs, the project should start reaping benefits in 2008. In the purchasing and investment consulting department, management expects to reduce purchasing costs in the range of $5 million to $10 million in 2008. Management intends to invest the savings from these operating efficiencies into future initiatives including plant, productivity, and brand building initiatives.

Management continues to invest aggressively in brand building. The Silk soy product continues to perform well and is maintaining leadership in the category, based on market share growth. Some of the recent successful new product rollouts include Silk Kids Pack, Silk Light (a reduced-calorie version), and Silk Live (a drinkable cultured soy silk smoothie). In 2007, the company launched a line of new Silk Plus. The marketing mix has improved in terms of television advertising, packaging and graphics, especially for International Delight coffee creamers. The Branded Products Group should deliver improved profitability behind sustained investments in top-line growth and efforts to upgrade the supply chain.

In the mature yet consolidating dairy industry, management is expanding through strategic acquisitions, and streamlining costs by closing down facilities. The 2004 acquisitions of Ross Swiss Dairies in January and Milk Products of Alabama in November expanded the company's production and distribution capabilities and have allowed Dean Foods to more efficiently serve its customers. As part of the cost-reduction strategy, which started in 2003, five Dairy Group facilities were closed and the workforce was reduced accordingly. Management is rolling out a common IT platform across Dairy facilities, which will improve timeliness, utility costs, and the ability to meet performance goals. In addition, the implementation of the IT platform should enhance customer service levels and aid in improving return on invested capital (ROIC). In addition, management is optimizing the direct store delivery system and enhancing the efficiency of administrative support functions, including finance, human resources, and purchasing. During the first quarter of 2008, the company made three strategic and synergistic acquisitions in the DSD Dairy segment. The company acquired Well's Dairy fluid milk operations in Le Mars, Iowa, and Rich Foods Dairy in Richmond, Virginia, both at a cost of $50 million in cash. The company also acquired Atlanta Dairy in the Southeast U.S.

Management has divested non-core operations in order to better manage the domestic DSD Dairy and WhiteWave-Morningstar businesses. The company spun-off TreeHouse Foods in 2005. Also, the company completed the sale of Marie's dips and dressings and the Dean's dip businesses to Ventura Foods LLC for $194 million in the third quarter of 2005, yielding a gain of $37.8 million on the sale. In September 2006, the operations in Spain were sold for $96 million for a $6.8 million (net of tax) loss. The Portuguese operations were sold in January 2007 at an insignificant loss.

In an effort to improve efficiency, WhiteWave-Morningstar is continuously focusing on reducing SKUs and consolidating production. The company has eliminated about 700 SKUs out of 2600 SKUs. Management stated that the elimination will enable the company to focus on the high margin core products and, thereby, support margin expansion. In 2006 SAP was implemented across WhiteWave to enable more effective management of the supply chain and business processes. In addition, low margin, single-serve milk products and aseptic milk products were phased out. Full implementation of SAP across the remainder of the company's brands and production facilities occurred in 2007.

Management is focused on making the Horizon brand the No. 1 organic milk company. Currently, the company is sourcing raw milk from 350 organic farms, which represent 80% of Dean Foods' overall organic milk supply the company also converted another 230 farms to the organic format in 2007, which increased Horizon Organic milk volume by 20%. In addition, the company introduced several new seasonal items with new flavors and enhanced packaging under the brands Land O' Lakes and International Delight, in an effort to improve overall branded product portfolio. Other innovations in 2007 include a line of DHA Omega 3-enhanced products.

Dean Foods generates strong cash flow from operations. In 2007, the company generated $350 million in cash flow from operations, a 37.6% decline versus $562 million in 2006. Nevertheless, positive cash flow allows management the opportunity to invest in product innovations, acquisitions, and brand development. During the first six months of 2008, cash flow from operating activities increased 85.3% to $315 million. In March 2007, the Board of Directors declared a one-time special dividend of $15.00 per share. The special dividend was financed by a recapitalization of balance sheet through $4.8 billion in new senior secured credit facilities and the dividend was paid to shareholders on April 2, 2007. Management is committed to enhance shareholder value. Though the Board of Directors increased the share repurchase authorization by $300 million in November 2006, no shares were repurchased in 2007 due to the difficult operating environment and the higher debt level. In addition, in February 2008, the company sold 18.7 million shares and raised approximately $400 million in cash.

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