Dean Foods Reports 55% Drop In Profits

On an adjusted basis (as defined below), diluted earnings per share were $0.27, compared to $0.61 in the prior year's fourth quarter. Adjusted net income from continuing operations for the fourth quarter was $37.1 million, compared to adjusted net income of $83.9 million in the fourth quarter of 2006. The decrease in adjusted net income and earnings per share is related to the increase in interest expense as a result of the recapitalization and the special cash dividend of $15 per share that was paid in April 2007 and a decline in operating results in the quarter. Interest expense in the quarter totaled $88.8 million, compared to $50.2 million in the fourth quarter of 2006.

Summary of Dean Foods Segment and Operating Results

Q4 2007 FY 2007
(in millions, except EPS) Value % Change Value % Change
Dairy Group:
Fluid Milk Volume flat flat
Operating Income $150.9 -13% $624.5 -9%
WhiteWave Foods:
Net Sales $388.4 13% $1,372.5 9%
Operating Income $36.6 -20% $118.4 -11%
Consolidated Adjusted Operating
Income: $149.2 -19% $589.7 -13%
Interest Expense: $88.8 77% $319.7 64%
Adjusted Diluted Earnings per
Share: $0.27 -56% $1.20 -43%

Diluted earnings per share from continuing operations for the full year ended December 31, 2007 totaled $0.95, compared to $2.01 for the full year 2006. Net income from continuing operations for the full year 2007 totaled $130.5 million, compared with $280.3 million in 2006.

Adjusted diluted earnings per share from continuing operations for the full year 2007 totaled $1.20, compared to $2.12 in 2006. On an adjusted basis (as defined below), net income from continuing operations for the full year 2007 totaled $164.5 million, compared to $295.7 million in 2006. The decline in full year adjusted net income and diluted earnings per share for the year is attributable to the 64.3% increase in interest expense related to the recapitalization in connection with the special cash dividend of $15 per share that was paid in April 2007 and the 12.7% decline in consolidated operating income.

Net sales for the fourth quarter totaled $3.2 billion, an increase of 24.6% from net sales in the fourth quarter of 2006. For the full year ended December 31, 2007, net sales totaled $11.8 billion, an increase of 17.1% from net sales in the previous year. Net sales increases in both the quarter and full year were due to the pass-through of higher dairy commodity costs and strong sales growth at WhiteWave Foods.

Consolidated operating income in the fourth quarter totaled $142.5 million, a decrease of 17.4% from $172.6 million in the fourth quarter of 2006. Adjusted fourth quarter consolidated operating income totaled $149.2 million, a decrease of 19.3% from $184.9 million in the fourth quarter of 2006.

For the full year, consolidated operating income declined 14.9% to $553.6 million from $650.7 million in 2006. On an adjusted basis, consolidated operating income declined 12.7% for the year, to $589.7 million from $675.8 million in 2006.

"2007 was the most challenging year in the history of Dean. We were faced with steeply rising and record high dairy commodity costs in our Dairy Group operations. At the same time, WhiteWave Foods was challenged by a severe oversupply of organic milk that drove down realized prices and increased competitive intensity in the industry," commented Gregg Engles, Chairman and Chief Executive Officer. "However, while 2007 was a difficult year operationally, these near-term challenges did not slow our progress toward transforming the Company into a stronger long-term competitor. In 2007, we laid much of the groundwork that we will build on as we transform the business to drive productivity and increase efficiency in the years to come."

DAIRY GROUP

Dairy Group net sales for the fourth quarter were $2.8 billion, a 26.4% increase from $2.2 billion in net sales for the fourth quarter of 2006. The sales increase was due primarily to the pass-through of higher overall dairy commodity costs to customers. The fourth quarter average Class I mover, which is an indicator of the Company's raw milk costs, averaged $21.03 per hundred-weight, a 69% increase from the same period in 2006 and just 2% lower than all time high levels reached in the third quarter of 2007. Class II butterfat prices averaged $1.42 per pound in the fourth quarter, 2% higher than the fourth quarter of 2006.

Dairy Group segment operating income in the fourth quarter was $150.9 million, compared to $173.1 million in the fourth quarter of 2006, as the impact of the pass-through of high dairy commodity costs and other items such as shrink, lower proceeds from excess cream sales, higher fuel costs and consumer mix shift toward private label products continued to pressure results.

For the full year 2007, Dairy Group net sales were $10.4 billion, an increase of 18.2% from 2006 levels due to the pass-through of higher dairy commodity costs to customers. Full year segment operating income for the Dairy Group totaled $624.5 million, 8.8% below 2006 results as steeply rising and record high dairy commodity costs and cost friction items such as shrink, lower proceeds from excess cream sales, and consumer mix shift toward private label products pressured results in the second through fourth quarters of the year.

WHITEWAVE FOODS

WhiteWave Foods segment reported fourth quarter net sales of $388.4 million, 12.5% higher than fourth quarter 2006 net sales of $345.1 million. Sales growth was strong across the entire branded portfolio with net sales of Horizon Organic(R) milk increasing over 20% due to volume growth of nearly 40% that was driven by increased promotional activity and lower average prices. International Delight(R) and Silk(R) sales both increased in the low double digits and Land O'Lakes(R) sales grew in the mid-teens over the same period last year, driven by high-single digit volume growth and commodity based price increases.

Segment operating income in the fourth quarter for WhiteWave Foods was $36.6 million, compared to $45.8 million in the fourth quarter of 2006. Segment operating margins were 9.4%, compared to 13.3% in the fourth quarter of 2006, due to the lower contribution from Horizon Organic related to increased brand spending and lower overall gross profit margins.

"Overall, we are pleased with the results we've seen from our strategy to invest aggressively behind the Horizon Organic brand through this period of industry oversupply," added Mr. Engles. "We've successfully defended our marketshare during this period of rapid industry growth. Our increased investment has resulted in volume growth that has outpaced the industry, helping to extend the brand's leading position in the market and positioning us to maximize its long-term value."

For the full year, WhiteWave net sales increased 9.2% to $1.4 billion. For the year, Horizon Organic milk sales increased 18%, due to the accelerated growth in the back half of the year fueled by the strong growth in raw milk supply and increased promotional spending. Silk sales increased 8%. Land O'Lakes sales increased 13% due to solid volume growth and commodity based price increases. International Delight sales increased 11% for the year.

Segment operating income for the year declined 10.8% to $118.4 million, from $132.7 million in 2006. The decline in operating income is primarily due to the increase in promotional spending in support of Horizon Organic and higher infrastructure and distribution costs.

CORPORATE EXPENSE

Corporate and other expenses totaled $38.3 million, compared to $34.1 million in the fourth quarter of 2006. For the full year, corporate expense was $153.2 million, compared to $141.6 million for the full year 2006. The increase in both the quarter and full year was largely driven by investments in support of the Company's strategic initiatives.

CASH FLOW

Net cash provided by continuing operations for the full year 2007 totaled $350.3 million, compared to $561.6 million for the full year 2006. The decline in net cash provided by continuing operations is due primarily to higher year over year interest expense, lower operating results, and an increase in working capital requirements.

Capital expenditures for the full year 2007 totaled $241.4 million, compared to $237.2 million for the full year 2006.

In the fourth quarter, debt outstanding decreased by $93.7 million. Total debt at December 31, 2007, net of $32.6 million in cash on hand, was approximately $5.2 billion. The Company's funded debt to EBITDA ratio, as defined by the senior credit agreement dated April 2, 2007 related to its bank debt, was 5.95x.

Source: Dean Foods Company