DEAN FOODS COMPANY (NYSE:DF)

December 3, 2013
Dan Ballantine
Jason Chan
Michael DeRenzo
Dan Kleeman

1
AGENDA
Introduction
Macroeconomic Outlook
Industry Overview
Company Overview
Financial Analysis
Valuation
Recommendation

2
 DEAN FOODS COMPANY (NYSE: DF)
Company History

Dean Foods was founded in 1925 and

is headquartered in Dallas, Texas Dean Foods Regional Brands
Global food and beverages company
that specializes in dairy products
Largest processor and direct-to-store
distributor of fluid milk and dairy
products in the United States
Branded & private label product base
includes: fluid milk, ice cream, cultured
dairy products, creamers, ice cream mix,
etc.
Portfolio includes more than 50 brands
and private labels

Source: Dean Foods Company Q3 2013 10-Q Pg. 41

3
 MACROECONOMIC OUTLOOK
Projected Disposable Income

Positive job growth, improved

housing market, positive equity US Disposable Income YOY Growth
performance and lower overall
savings (more positive consumer
sentiment) will aid future disposable
income gains
An increase in disposable income
results in an increase in overall
demand for dairy products from
restaurants and households
Consumer preferences: shift towards
healthier dietary habits

Source: IBISWorld Business Environment Profiles Per Capita

Disposable Income, September 2013
4
 MACROECONOMIC OUTLOOK
Raw Milk Prices

$21.92 per hundredweight in 2013

vs. a forecasted value of $24.50 per Forecasted Price of Raw Milk
hundredweight in 2018
2008 2013 CAGR of 1.7% vs. 2013
2018 CAGR of 2.2%
Projected prices increases largely
driven by increased foreign demand
WTO continues to push US to
withdraw its price support for Milk
Removal of price supports will result
in price volatility and potentially
lower milk prices

Source: IBISWorld Business Environment Profiles

Price of Milk, April 2013 5
 INDUSTRY OVERVIEW
Dairy Products Manufacturing

Companies that manufacture

dairy-based products from raw &
manufactured milk and milk
substitutes Dairy Products Manufacturing
Product Breakdown by Revenue
US dairy products manufacturing
market has about 1,100
companies with combined
revenue of $107 billion annually
High degree of economies of
distribution
50 largest fluid milk producers claim
85% of annual fluid milk revenue
Industry heavily relies on direct-
to-store delivery (DSD)

Source: Hoovers Dairy Products Manufacturing, Industry

Description
6
 INDUSTRY OVERVIEW
Industry Trends & Challenges

Overall industry consolidation

Acquisitions of local dairy farms and local manufacturers
Creating more efficient production and distribution networks
Continued declining milk consumption in US
Increased competition from large grocery chains

Source: Hoovers Dairy Products Manufacturing,

7
INDUSTRY FORCES ANALYSIS

Buyers:
High

New Rivalry: Substitutes:

Entrants:
High Medium
Low

Suppliers:
Medium

8
 INDUSTRY FORCES ANALYSIS

Bargaining Power of Suppliers: MEDIUM

Inputs are commodities and input pricing is subject to fluctuation
Recent consolidation within dairy farming industry
Bargaining Power of Buyers: HIGH
Low-end customer perception of difference between private label and
branded products makes it hard to exercise pricing power
Primarily commodity products
Threat of New Entrants: LOW
Distribution networks hard to create
Limited profitability in the long run

Source: Hoovers Dairy Products Manufacturing, Industry

Description
9
 INDUSTRY FORCES ANALYSIS

Threat of Substitutes: MEDIUM

Declining demand for milk as a product
Increased usage of traditional dairy milk substitutes

Rivalry among Competitors: HIGH

Private labels price significantly below branded products to drive
customer traffic at times

Source: Hoovers Dairy Products Manufacturing, Industry

Description
10
 COMPANY OVERVIEW
Fresh Dairy Direct Segment Breakdown (Fiscal Year 2012)

Dean Foods has a very concentrated product mix (74% fluid milk)
Majority of Dean Foods sales comes from private labels

Source: Dean Foods Company 2012 10-K, Pg. 5

11
 COMPANY OVERVIEW
Dean Foods Recent Company Developments

During the fiscal year of 2013 Dean Foods spun off two major
business segments in order to focus on its core business
January 3, 2013: Dean Foods sold Morningstar division to Saputo Inc.
July 25, 2013: Dean Foods sold its final stake in WhiteWave
On November 12, 2013 announced adoption of company cash
dividend policy
First dividend distribution will take place during in Q1 2014
Quarterly dividend rate of $0.07/share ($0.28/share annually)

Source: Dean Foods Company Q3 2013 10-Q

12
 RECENT FINANCIAL INFORMATION

Source: Dean Foods Company 2012 10-K, Dean Food Company

2010 10-K
13
 COMPANY STRATEGY
Change in Company Strategy

Dean Foods recently sold its two high-growth potential

divisions and decided to solely focus on Fresh Dairy Direct
Much less dynamic business model
Focused on new successful brands like TruMoo flavored milk
Continue to cut costs across the board and expand market
share
Significantly reduce the debt on the balance sheet and
continue to strengthen it moving forward
Primarily focused on offsetting the weak margins within the
fresh dairy business
Maximize sales, increase volume and efficient operations (cutting costs)
Source: Sosland, Josh. "A New Day at Dean Foods." Food Business Week. N.p., 6 June 2013. Web. 2 Dec. 2013.
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 MANAGEMENTS OUTLOOK

Increasing and continually volatile raw milk prices continue to impact

managements outlook moving forward
Dean Foods lost a large contract for private-label milk in early 2013
Management expects an overall volume decline of 7% for fluid milk in 2013
Primary focus is on its Fresh Dairy Direct division and cutting costs in
order to improve its bottom line
Improve asset utilization through utilizing its national network more
efficiently
Closed 7 production facilities during first three quarters of 2013
Management expects to have closed 10 15% (8 12 facilities) of its
production facilities by the middle of 2014
Includes elimination of distribution routes and associated SG&A expenses

Source: Dean Foods Company 2012 10-K, Pg. 9; Dean Foods

Company Q3 2013 10-Q, Pg. 43, 44
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 SWOT ANALYSIS

Strengths Weaknesses
- Extensive DSD network - Heavy US concentration could limit
- Managements focus on core DFs ability to enter global markets
business segment - Highly concentrated customer base
- Only operates Fresh Dairy Direct
- Managements cost-reduction
segment (74% of sales from FFD
and debt-reduction initiatives
from fluid milk)

Opportunities Threats
- Increasing trend of health and - Steadily increasing (and
wellness volatile) price of raw milk
- Continued increase in global - Non-dairy substitutes
demand for dairy products - Increased competition from
large grocery chains

Source: Hoovers Dairy Products Manufacturing, Trends &

Opportunities; MarketLine Advantage
16
 CURRENT STOCK INFORMATION

Metric Value
Current Stock
Price $18.17

Trailing P/E
10.7

Forward P/E
17.6

Dividend Yield
N/A*

Market Cap
($ millions) $1,677.9

* DF will begin paying a $0.07/share quarterly dividend in 2014, implying a current

dividend yield of 1.6%
Source: Capital IQ, Yahoo Finance, Dean Foods Q3 2013 Earnings Release
17
FINANCIAL ANALYSIS
Liquidity Ratios
2008 2009 2010 2011 2012
Current Ratio 1.04 1.11 1.26 1.47 1.64
Quick Ratio 0.62 0.62 0.68 0.65 0.72
Cash Ratio 0.03 0.03 0.06 0.08 0.06

Profitability Ratios
2008 2009 2010 2011 2012
Gross Profit Margin 23.65% 27.93% 25.47% 23.88% 25.30%
Operating Profit Margin 4.89% 5.58% 2.49% -16.76% 3.73%
Net Margin 1.48% 2.04% 0.76% -13.68% 1.40%
ROA 2.61% 3.06% 1.05% -23.22% 2.81%
ROE (Book Value) 60.30% 24.96% 6.35% -222.64% 87.88%
EBIT/Tangible Assets 27.78% 24.73% 10.10% -68.38% 15.50%
EBIT/EV 8.65% 9.03% 4.71% -33.92% 7.32%

Solvency Ratios
2008 2009 2010 2011 2012
Debt/Assets 0.64 0.54 0.51 0.65 0.55
Debt/Equity 8.04 3.09 2.69 NM 6.75
Interest Coverage 1.98 2.52 1.41 NM 2.60
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FINANCIAL ANALYSIS
Activity Ratios
2008 2009 2010 2011 2012
A/R Turnover 14.09 12.92 12.28 13.20 13.07
Days Sales Outstanding 25.91 28.24 29.73 27.65 27.93
Inventory Turnover 24.61 19.40 18.72 21.87 21.60
Days Inventory on Hand 14.83 18.82 19.50 16.69 16.90
A/P Turnover 9.55 6.97 6.48 7.41 7.38
Days Payables Outstanding 38.22 52.40 56.31 49.23 49.46
Fixed Asset Turnover 6.88 5.69 5.13 5.75 6.02
Total Asset Turnover 1.77 1.50 1.37 1.70 2.00

DuPont Analysis
2008 2009 2010 2011 2012
Tax Burden 61.32% 63.27% 117.83% NM 60.10%
Interest Burden 49.23% 61.05% 28.86% NM 61.69%
Operating Profit Margin 4.89% 5.58% 2.49% NM 3.73%
Asset Turnover 1.77 1.42 1.36 NM 2.02
Leverage 12.61 5.74 5.26 NM 12.37
ROE 32.92% 17.58% 6.04% NM 34.51% 19
 COMPARABLE COMPANIES

Company Ticker Market Cap ($ millions)

The J. M. Smucker Company (NYSE:SJM) $11,023.9

General Mills, Inc. (NYSE:GIS) $32,615.6

Campbell Soup Company (NYSE:CPB) $12,161.2

Saputo, Inc. (TSX: SAP) $9,401.5

The WhiteWave Foods Company (NYSE:WWAV) $4,047.5

Dean Foods Company (NYSE:DF) $1,677.9

Source: Capital IQ
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 STOCK PERFORMANCE

Source: Yahoo Finance

21
 COMPARABLE COMPANY ANALYSIS

Source: Capital IQ
22
 COMPARABLE COMPANY ANALYSIS

Source: Capital IQ
23
 DISCOUNT RATE

Annual Realized Returns

Year Actual
CAPM 1 0.38%
2 -50.50%
3 26.74%
Risk-Free Rate 2.74% 4 47.40%
Market Risk Premium 8.00% 5 21.98%
5-Year Beta 0.22
Total Realized Return 13.22%

CAPM Cost of Equity 4.50%

Arithmetic Annual Return 9.20%
Geometric Annual Return 2.52%

Source: Yahoo Finance

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DISCOUNT RATE
Weighted Average Cost of Capital

Share Price $ 17.98

Shares Outstanding (thousands) 94,404.21
Market Value of Equity $ 1,697,387.77

Debt 1,031,643

Percent Equity Weight 62.20%

Percent Debt Weight 37.80%

Cost of Debt 5.00%

Cost of Equity
CAPM Cost of Equity 4.50% 0.00% Cost of Equity
DF Realized Return 9.20% 100.00% Weightings
Cost of Equity 9.20%

Tax Rate 40.0%

WACC 6.86%

Business Risk Premium 3.00%

Discount Rate 9.86% 25

 DCF ANALYSIS
Dean Foods Company Discounted Cash Flow Analysis ($ thousands)

2013E 2014E 2015E 2016E 2017E Terminal Value

Net Income 61,382 65,532 87,577 159,224 174,126
Depreciation 158,443 160,678 161,261 160,416 159,010
Capital Expenditures (175,000) (165,000) (155,000) (150,000) (150,000)
Changes in Net Working Capital
Less Increases in A/R 169,113 (1,692) 21,111 1,930 (19,355)
Less Increases in Inventories 140,801 11,486 1,278 6,315 (3,720)
Plus Increases in A/P (391,606) (8,013) (3,967) 7,894 11,959
Free Cash Flow (36,867) 62,991 112,261 185,778 172,019 2,584,221
Present Value (33,560) 52,195 84,675 127,554 107,511 1,615,127

Discount Rate 9.86%

Calculation of Implied Share Price Terminal Value

Implied Enterprise Value $ 1,953,503 Terminal Growth Rate 3.00%
Less Debt $ (1,031,643)
Implied Market Cap $ 921,860

Implied Share Price $ 9.77

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DECISION DRIVERS

Strengths
GICS Diversification
Cost and debt reduction initiatives
Extensive and improving production and distribution networks
Renewed focus on returning cash to shareholders
Concerns
Concentrated geographic, product, and customer bases
Limited growth in core geographic market
Exited higher margin business lines in 2013
Increasingly negative industry outlook

27
RECOMMENDATION

Valuation Summary
Current Stock Price: $18.17
Comparable Companies Valuation: $30.41
DCF Valuation: $9.77

Recommendation: WATCH LIST

Place DF on the RCMP Watch List

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QUESTIONS?

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