Dean Foods lifts guidance despite milk price rally

Dean Foods shares posted strong gains after the top US dairy group raised its earnings target for the third time this year, despite foreseeing the dairy market revival prompting a sharp rise in its milk costs.

The group forecast milk prices, as measured by benchmark class 1 mover values, averaging $20.70 a hundredweight this month, up 36% from a June low, with a further increase expected in December,

"Management currently expects the class I mover, a measure of raw milk costs, to increase approximately 20% in the fourth quarter from third quarter levels," the group said, in comments which follow a sustained revival in values on world markets, such as GlobalDairyTrade.

US values in particular are being supported by a drop in domestic milk production which, in the face of drought damage to pastures and high feed costs, has this year shown a particularly steep pullback from spring highs.

'A bit of breathing room'

However, the group said that the success of a strategy at its Fresh Dairy Direct division of improving its market share, passing through commodity costs and enhancing operational efficiency was allowing it to increase to "high teens to 20%" its estimate for the division's full-year growth in operating profit.

A jump of 32% to $100m in the division's operating profit in the July-to-September quarter "has provided a bit of breathing room against this target as we navigate a more challenging commodity environment in the fourth quarter",  Gregg Engles, the Dean Foods chairman, said.

At the smaller Morningstar business, a manufacturer in the main of private label dairy products, the target for full year profit growth was hiked to "mid-20s%" from "mid-teens%", after a jump of 54% to $31m in income in the latest quarter.

"At Morningstar, strong growth across the business has continued," Mr Engles said, flagging "expectations for continued momentum to finish out the year".

Board changes

Dean Foods lifted its target for full-year earnings per share to $1.27-1.32, above a Wall Street forecast of $1.19 a share.

The group, which also raised guidance in May and August, had initially forecast full-year earnings of $0.87-0.95 a share.

The upgrade more than offset any worries among investors at the latest changes to the Dean Foods boardroom to send the group's shares up nearly 8% in early deals in New York before a fall back in late morning deals to $16.71, a gain of 3.9% on the day.

Dean said that its finance director, Shaun Mara, was to leave to "pursue other opportunities", and would be replaced by Chris Bellairs, finance director at the Fresh Dairy Direct business.

Steve Kemps has also quit as general counsel, to be replaced by his deputy, Rachel Gonzalez.

Mr Engles himself quit as chief executive of Dean Foods to take the helm at WhiteWave Foods, the soy milk-to-organic food division which was spun-off last month through an initial public offering.

Dean Foods is also investigating a disposal of the Morningstar business, and said it would make an announcement when and if a deal is reached.

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