Dean Foods steps up cost cutting, plans more price hikes

BANGALORE (Reuters) - Dean Foods Co (DF.N) is stepping up its efforts to cut expenses and plans to continue to raise prices, as the top U.S. dairy company battles higher commodity costs and weak demand at its core fresh dairy products business.

Dean shares rose 15 percent to their highest in a year, after the company reported a first-quarter profit above estimates and raised its full-year earnings forecast.

Struggling with rising costs of butterfat, fuel and other items, Dean has been cutting costs since 2009, and expects to save $60 million in selling, general and administrative expenses in 2011 -- more than double its prior target.

In the first quarter, price of butterfat, a fat present in milk, averaged $2.21 per pound, up 49 from the year-ago period, Dean said.

The dairy company cut 600 jobs in its first quarter and 140 in the current quarter. It had about 27,000 employees, according to its website.

In the first quarter, sales at its WhiteWave-Alpro segment, which sells Horizon Organic milk and Land O'Lakes creamers, rose 7 percent to $507 million and operating income was up 8 percent.

The company was also able to pass on higher commodity costs at its Fresh Dairy Direct-Morningstar business -- which drove a 2 percent rise in sales to $2.54 billion, even as demand fell.

Dean is better able to pass through price increases as the pressure from retailers to discount prices is moderating, Wells Fargo analyst Eric Serotta said.

Serotta believes Dean will be able to pass on moderate price increases through this year -- barring an unforeseen spike in milk costs.

Dean said it is pursuing new business to offset a soft fresh dairy business, and expects additional sales to reflect in the current quarter.

RESULTS SUSTAINABLE?

Strong first-quarter results prompted Dean to raise its 2011 adjusted earnings outlook to 67-75 cents a share, from its previous outlook of 55-65 cents a share.

However, Morningstar analyst Erin Lash was skeptical. "They still face head-winds such as input cost inflation, their limited ability to differentiate their product lines, and competitive pressures from retailers and competitors have not yet fully abated," Lash said.

Stifel Nicolaus analyst Christopher Growe said he believes milk costs pose the biggest danger to the company's outlook, which he believes is based on the assumption that the costs will fall in the second half of year.

"Variance from expectations around milk price assumptions could clearly pressure earnings," Growe said in a note.

Shares of the company were up 12 percent at $12.26 on Tuesday afternoon -- making them one of the top gainers on the New York Stock Exchange.

(Reporting by Mihir Dalal in Bangalore;Editing by Vyas Mohan)