Dean Foods: leverage ratio of 5.14 times likely to represent peak

By Jennifer Lanning Drey

Savannah, Ga., May 10 - Dean Foods Co. ended the first quarter with a leverage ratio of 5.14 times funded debt to EBITDA and believes the March 31 figure will represent its peak leverage going forward, Shaun Mara, Dean's chief financial officer, said during the company's first-quarter earnings conference call.

Dean expects to end 2011 with a funded debt-to-EBITDA ratio of 4.75 times, Mara said. The maximum total leverage ratio allowed under the company's bank covenant is currently 5.75 times.

In the first quarter, Dean reduced its net debt by $95 million, aided by the sale of Mountain High yogurt business.

Additionally, following the close of the first quarter, the company further reduced debt by $155 million through the sale of its private label yogurt business and the receipt of a tax refund.

Dean has now fully repaid its 2012 tranche A term loan, cutting in half the amount of debt paydown required over the next 12 months, Mara said. Dean now has $53 million of required debt paydown in the next year, he said.

Total outstanding net debt at March 31 was $3.88 billion.

Cash flow falls, should improve

For the first quarter, Dean reported net cash provided by continuing operations of $37 million. After $40 million of capital expenditures, first-quarter free cash flow was negative $3 million. The free cash flow figure compared with free cash flow of $24 million for the same period in 2010.

Mara said operating cash flows were lower than average in the first quarter due to reduced net income and higher inventory and receivable valuations.

Despite such factors, Dean expects its operating and free cash flow generation to pick up significantly over the balance of 2011. Dean expects full-year free cash flow of more than $200 million, he said.

Stronger start than expected

Dean reported first-quarter net sales of $3.05 billion, compared with $2.96 billion of net sales in the first quarter of 2010. The company said net sales for the first quarter increased due to strong sales growth at WhiteWave-Alpro and the pass-through of higher overall dairy commodity costs that were partially offset by soft volumes at Fresh Dairy Direct-Morningstar.

For the first quarter, net income attributable to Dean Foods totaled $25 million, compared with net income of $43 million in the prior-year's first quarter.

"Overall, the business is off to a stronger start than we had anticipated, and we're somewhat encouraged as we look to the balance of the year," Gregg Engles, Dean's chief executive officer, said during the call.

The company is focused on stepping up its agenda to reduce costs and improve profitability, using pricing to offset inflation and pursuing new business to offset volume softness at Fresh Dairy Direct-Morningstar, he said.

"Looking ahead at the balance of the year, many challenges remain, but our ability to overcome them continues to improve," Engles said.

Dean Foods is a Dallas-based food and beverage company.

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