Dean Foods Q1 profit up, liquidity weighs on stock

BANGALORE (Reuters) - Lower milk costs and tighter expense control helped top U.S. dairy processor Dean Foods Co (DF.N) beat estimates handsomely in the first quarter, but its shares fell on lingering liquidity concerns.

The giant dairy company, which backed its 2009 profit forecast of at least $1.55 a share, also gave a disappointing second-quarter outlook.

The Dallas-based maker of Horizon Organic milk and International Delight coffee creamers made an offering of 22.5 million common shares on Friday to repay debt.

"The fact that they are issuing shares to help pay down a maturity that's (due in) two weeks sends a signal that their liquidity is pretty tight," Morningstar analyst Ann Gilpin told Reuters.

Dean said it intends to use the net proceeds of the offering to repay the $122.8 million aggregate principal amount of its unit's senior notes due May 15 and repay debt under its receivables-backed facility.

Despite Dean's chances of benefiting from lower milk prices in the second quarter, the weak economy and consumer tendencies of focusing on price while shopping could be headwinds for the company as it tries to promote its higher-priced organic milk products, said Gilpin.

"They are not really out of the woods yet," she said.

For the second quarter, the company expects earnings to be at least 38 cents a share, before items, assuming the issuance of about $465 million of common shares.

LOWER MILK PRICES, COST CUTS BUOY Q1

Dean's first-quarter profit more than doubled to $76.2 million, or 48 cents a share, from $30.8 million, or 21 cents a share, a year earlier.

Excluding one-time items, Dean earned 52 cents a share. This compares with analysts' forecast of 42 cents a share, according to Reuters Estimates.

Net sales fell 12 percent to $2.7 billion as the company passed on lower raw milk costs to consumers.

Oversupply and inadequate demand have led to milk prices dropping drastically from last year. Retail dairy prices typically move in sync with commodity costs.

The Class I Mover milk price fell 37 percent in the latest first quarter from the year-earlier period. Mover Milk is a kind of a base price which Dean Foods and other dairy companies pay dairy farmers for milk.

Dean CEO Gregg Engles, however, said on a conference call that he expects the dairy commodity environment to become "incrementally more challenging" in the second half of 2009.

The company, which saw volume growth at its Fresh Dairy Direct and Morningstar businesses in the quarter, was also helped by lower interest expense and cost-cutting efforts.

Dean has announced plans to close two processing facilities in its Fresh Dairy Direct segment, lower conversion costs across its manufacturing network, and standardize its product portfolio as part of efforts to cut costs in a deepening recession.

Dean's stock was down 8.6 percent, or $1.78, at $18.92 on the New York Stock Exchange in afternoon trading, lagging its peers on the Dow Jones U.S. Food and Beverage Makers Index .DJUSFB, which was down only 0.1 percent. Earlier, Dean shares were down as much as 11 percent to $18.42.

(Editing by Lisa Von Ahn and Gerald E. McCormick)