Turnaround of Dean Foods

Turnaround of Dean Foods:

A Strategy to Milk a Shrinking Industry

Turnaround Management Final Project | Professor Kathryn Harrigan December 12, 2018

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Table of Contents Executive Summary ...... 3 Company Overview...... 4 Industry Overview ...... 6 Peer and Historical Comparison ...... 7 Causes of Decline ...... 10 M&A Consolidation and Debt ...... 10 Declining Demand for Milk ...... 11 Slim Margins due to Cost Challenges ...... 12 Recent Insider Trading Scandal ...... 13 Liquidation Analysis ...... 15 Waterfall Analysis ...... 18 Chapter 11 ...... 20 Strategic Turnaround Strategies ...... 22 Valuation ...... 23 Recommendation ...... 25 Conclusion ...... 25 Exhibits ...... 26 Exhibit 1 : SWOT ...... 26 Exhibit 2 : Trading and Transactions Comparables ...... 27 Exhibit 3 : Liquidation Process Under Chapter 7 ...... 28 Exhibit 4 : Financials and assumptions of investing in the plant-based products business ...... 29 Exhibit 5 : Financials and assumptions of streamlining the number of plants ...... 29 Exhibit 6 : Financials and assumptions of eliminating unprofitable areas ...... 30 Exhibit 7 : Financials and assumptions of increasing share of ice-cream and fresh cream products ...... 30 Exhibit 8 : Consolidated balance sheet with restructuring measures ...... 31 Exhibit 9 : Consolidated income statement with restructuring measures ...... 32 Exhibit 10 : Consolidated cash flow statement with restructuring measures ...... 33 Exhibit 11 : Key ratios ...... 33 Exhibit 12 : Discounted free cash flow valuation – base case ...... 34 Exhibit 13 : Discounted free cash flow valuation – restructuring measures ...... 34 Exhibit 14 : Dean Foods brand portfolio (Dec 2018) ...... 34 Bibliography ...... 35

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Executive Summary Dean Foods Company, found in 1925, has grown Stock price development over the better part of a century from a small Dean Foods (DF) Stock Performance: 2011-2018 regional player to a large diversified food company 25 70 focused primarily on fresh fluid milk, associated 60 20

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20 V industry is characterized by razor thin, low single- 5 10 digit operating margins and has suffered a slow 0 0 1 2 2 3 3 4 4 5 5 6 6 7 7 8 1 1 1 1 1 1 1 1 1 1 1 1 1 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 decline over the past half-decade with forward- -2 -2 -2 -2 -2 -2 -2 -2 -2 -2 -2 -2 -2 -2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 -1 -1 -1 -1 -1 -1 -1 -1 -1 -1 -1 -1 -1 -1 c n c n c n c n c n c n c n e u e u e u e u e u e u e u looking growth expected to be anemic at best. D J D J D J D J D J D J D J Moreover, it suffers from heavy governmental Dean Foods demonstrated strong performance intervention – through Federally mandated milk throughout the half decade after the Great prices – and constant competition from large Recession, but over extension through acquisition, cooperative firms. To compound the industry wide malaise, exportation of excess milk products is legal challenges, declining addressable market, and challenging – if not impossible – due to the an unsustainable debt load has pressured the stock perishable nature of such dairy related products. in the past year. In recent periods, the decline in the industry has Selection of brands under Dean Foods been pronounced. This coincided with successive years of M&A at Dean Foods, funded primarily through heavy debt issuance. However, the trouble arising from these acquisitions was just beginning and in 2010 lawsuit were filed by US governmental agencies alleging that Dean Foods created a monopolizing provider. In 2012 a rising debt load and increasing pressure from litigation forced Dean Foods to spin off WhiteWave and Morning Star, refocusing on its core dairy business. Post- divestitures, Dean Foods focused on operating improvements and debt reduction. This led to a stable credit rating for several years until an insider trading scandal and missed earnings targets precipitated a Moody’s downgrade in May 2018. The company manages a broad portfolio of brands Presently, Dean Foods faces considerable (more than 50), driven by regional preferences and headwinds both internally – from difficult labor legacy acquisitions. unions, high integration costs, and a significant Turnaround strategy debt load – as well as externally – from a declining demand environment and governmental regulation. Our chief concern is to provide implementable recommendations to provide Dean Foods with a sustainable path to future profitability and growth.

TURNAROUND ASSESSMENT Company Overview Dean Foods Company (NYSE: DF) was founded by Samuel E. Dean, Sr. in Franklin Park, Illinois, in the 1920’s. After purchasing other Illinois dairy plants Dean developed the enterprise "from a small regional dairy into a diversified food company.” Today, DF operates in the food and beverage industry and is the largest processor and direct-to-store distributor of fresh fluid milk and other dairy and dairy case products in the United States.

As of 2017, consolidated net sales totaled $7.8 Billion. DF operates 65 manufacturing facilities in 31 states with distribution capabilities across all 50 states. The company manufactures, markets and distributes a wide variety of branded and private label dairy and dairy case products, including fluid milk, ice cream, cultured dairy products, creamers, ice cream mix, and other dairy products to retailers, distributors, foodservice outlets, educational institutions, and governmental entities across the United States. DF products encompass over 50 national, regional and local dairy brands, as well as private labels including:

• White milk national brand DairyPure® • Flavored milk brand TruMoo® • Regional dairy brands such as Alta Dena®, Berkeley Farms®, Country Fresh®, Dean’s®, Friendly's®, and Garelick Farms® • Milk and cultured products such as LAND O LAKES®, Lehigh Valley Dairy Farms®, Mayfield®, McArthur®, Meadow Gold®, Oak Farms®, PET®, T.G. Lee®, and Tuscan® • Organic milk through the Organic Valley® Fresh joint venture

Beyond dairy products, DF distributes organic juice, probiotic-infused juices, and fruit-infused waters under the Uncle Matt's Organic® brand. Figure 1 provides a pictographic representation of the full product and brand mix analysis, as of 2017 by revenue.

Figure 1: Product and brand mix split by revenue (2017)

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Although Dean Foods was founded in 1925, the past 20 years have seen periods of rapid acquisition, consolidation, integration and the separation of operations including (i) the spin-off of The WhiteWave Foods Company and sale of (ii) Morningstar Foods in 2013. Currently, the firm’s business strategy is anchored by the following five pillars:

1. Build and Buy Strong Brands 2. Win in Private Label 3. Deliver Operational Excellence 4. Transform Go To Market 5. Enhance Future Capabilities

It is important to highlight that Dean Foods business is affected by seasonal changes in demand. Sales are typically the highest in Q4 due to increased dairy consumption during seasonal holidays. Conversely, fluid milk volumes tend to decrease in Q2/Q3 due to the reduction in dairy consumption associated with school customers. However, this negative revenue impact is partially offset by the increase in ice cream and ice cream mix consumption during the summer months.

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Industry Overview The dairy product industry consists of operators that manufacture a wide variety of dairy goods, typically from raw (unprocessed) milk, and then sell them to “downstream” markets such as wholesalers, retailers, and food service establishments. Recently, the industry has been categorized by strong instability and a wide variety of challenges. It is a mature industry that has traditionally been characterized as highly competitive, subject to commodity volatility, and low profit margins.

As of 2018, revenue for the industry was projected to be $106.8 Billion generating just $4.1 Billion in profits. The past five years (2013-2018) have seen a modest annual decline of 1.2%. However, milk products – generally a staple of many diets throughout the world – are expected to have a growing demand in the future and this, coupled with rebounding milk and feed prices, should lift the industry. Further, operators are anticipated to introduce innovative new food and beverage products that cater to the ever-increasing health conscious consumer market. With this in mind, many analysts predict the industry will eventually grow at annual rate of 0.6% in the next five years (2018-2023) (Savaskan, 2018).

Structurally, industry revenue typically benefits from higher input prices as operators pass such costs to their clients in the form of increased prices. However, in America producers have little ability to influence market prices as the federal government establishes minimum prices that companies must pay to producers in federally regulated areas for raw milk. The federal government’s minimum prices for Class I milk vary depending on the processor’s geographic location or sales area and the type of product manufactured. Federal minimum prices change monthly. Class I butterfat and raw skim milk prices (which are the required minimum prices for raw milk that is eventually processed into fluid milk) and Class II raw skim milk prices (which are the required minimum prices for raw milk that is eventually processed into products such as cottage cheese, creams, creamers, ice cream and sour cream) for each month are announced by the federal government the immediately preceding month. Class II butterfat prices are announced either at the end of the month or the first week of the following month in which the price is effective. Some states layer their own rules for determining minimum prices for raw milk on top of the federal legislation. In addition to the federal or state minimum prices, milk manufacturers and related companies may pay producer premiums, procurement costs and other related charges that vary by location and supplier (United States Department of Agriculture, 2018).

Competition between dairy processors for shelf-space with retailers is based primarily on price, service, quality, and the expected or historical sales performance of the product compared to its competitors’ products. In some cases, fees are paid to customers for shelf-space. Competition for consumer demand is based on a variety of factors such as price, taste preference, quality, and brand recognition. Dairy products also compete with many other beverages and nutritional products for consumer sales. Additionally, competitive pressures exist from vertically integrated retailers, discount supermarket chains, dairy cooperatives and other processors, and online and delivery grocery retailers.

The opportunity to expand by cultivating exports poses significant issues for the industry, primarily because milk products are perishable and “organic challenges” are presented when considering shipping goods long distances. This is further compounded by logistics and regulation, particularly cross-borders. This typically limits exports to dried or preserved goods and, geographically, within neighboring countries; for example, America typically exports to only Mexico and Canada. As a result of these issues, exports account for barely 5% of industry revenues in any given year (Kumar, 2018).

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Peer and Historical Comparison The closest comparables to Dean Foods are dairy production cooperatives, however, as private organizations most financial data is inaccessible. Through manual aggregation of press releases, we were able to compare the revenue, operating income, and margins for the largest American co-op, Dairy Farmers of America (DFA), relative to Dean Foods over the last five years.

Dairy Farmers of America 2013 2014 2015 2016 2017 2018 Revenue $12,043 $16,652 $12,866 $12,528 $13,655 $14,322 Operating Income $58 $40 $88 $122 $118 $121 % Operating margin 0.48% 0.24% 0.68% 0.98% 0.87% 0.84% Dean Foods Revenue $8,205 $8,648 $7,147 $6,631 $6,704 $6,535 Operating Income $119 $8 $82 $227 $72 $88 % Operating margin 1.45% 0.09% 1.15% 3.42% 1.07% 1.35% Figure 2: Comparables financial analysis

Dean Foods has better operating margins than Dairy Farmers of America, presented in Figure 2. Nonetheless, the incentives and the ownership structure of a cooperative company are different than Dean Foods’. Cooperative structures do not have the market pressure to perform and deliver (increasing) returns to shareholders, which shelters them from engaging in “empire-building” M&A activity and activist shareholders, for example. Moreover, Dean Foods has a high debt load, due in part to past acquisitions, which affects their overall profitability (net income margins).

Comparing the industry ratios for the dairy production industry with the ratios for Dean Foods (Savaskan, 2018), Figure 3, it is possible to see that even though Dean Foods has similar or better operating metrics (such as the cash conversion cycle) with respect to the industry, it falls short in the Interest Coverage ratio as the EBIT its generating does not sufficiently cover interest payments.

Liquidity ratio Industry Dean Foods Current ratio 1.5x 1.5x Quick ratio 0.9x 1.0x Avg. Days Sales Out. 27 31 Avg. Days Inventory Out. 29 17 Avg. Days Payable Out. 23 26 Cash conversion cycle 32 23 Coverage Ratio EBIT/Interest 6.9x 2.4x Debt/Net Worth 1.6x 1.4x Figure 3: Industry ratios

Even though Dean Foods has similar or better operating metrics (such as the cash conversion cycle) with respect to the industry, where it falls short in the Interest Coverage ratio as the EBIT generated fails to cover interest payments sufficiently.

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Dean Foods does not have direct comparable pure play listed dairy companies in the US to retrieve the trading multiples for the company. Dean Foods operates in the Dairy Food industry, which is characterized by heavy dependence on raw material prices such as milk, butterfat, bulk cream, sweeteners, diesel fuel and resins, among others. Therefore, we have taken a peer group of similar companies in the food industry which also see raw material fluctuations. The companies we picked are Hormel Foods (Meat and Foods products), Fresh Del Monte Produce (Fruits and Vegetables), Ingredion Incorporated (Starches and Sweeteners), Bunge Limited (Agribusiness), Pilgrim’s Pride (Chicken), Sanderson Farms (Poultry), Tyson Foods (Poultry), and Archer-Daniels-Midland (Agribusiness).

Figure 4 provides the valuation comparison of Dean Foods with comparable companies. We can see that Dean Foods trades at lower valuation multiples compared to peers.

Company Comp Set EV/Forw EV/Forwa P/Forwar Company Name EV/Rev EV/EBITDA EV/EBIT P/E P/B ard Rev rd EBITDA d E Fresh Del Monte Produce Inc. (NYSE:FDP) 0.5x 11.8x 23.2x NM 1.3x 0.47x - 14.31x Ingredion Incorporated (NYSE:INGR) 1.4x 8.3x 10.5x 16.6x 4.6x 1.44x 8.14x 13.98x Bunge Limited (NYSE:BG) 0.4x 10.2x 16.7x 36.4x 2.0x 0.36x 8.62x 10.70x Pilgrim's Pride Corporation (NasdaqGS:PPC) 0.6x 7.2x 10.4x 11.6x 9.0x 0.60x 6.71x 11.98x Sanderson Farms, Inc. (NasdaqGS:SAFM) 0.6x 6.9x 10.8x 13.6x 1.6x 0.66x 16.68x NM Tyson Foods, Inc. (NYSE:TSN) 0.8x 7.4x 9.5x 7.1x NM 0.75x 7.39x 9.78x Archer-Daniels-Midland Company (NYSE:ADM) 0.5x 9.4x 12.9x 11.3x 1.7x 0.49x 9.04x 12.57x Hormel Foods Corporation (NYSE:HRL) 2.5x 17.5x 19.8x 24.1x 14.2x 2.45x 16.73x 24.50x Average 0.9x 9.8x 14.2x 17.2x 4.9x 0.9x 10.5x 14.0x Dean Foods Company (NYSE:DF) 0.2x 6.0x 21.9x NM 1.9x 0.2x 8.4x NM Figure 4: Comparables trading multiples

We can clearly see that Dean Foods trades at a far lower Revenue and EBITDA multiples of 0.2x and 6x respectively compared to average peer multiples of 0.9x and 9.8x. The Earnings multiple is not meaningful due to the low profitability of Dean Foods over the last year.

The market is pricing in the concern that Dean Foods might not be a going concern and would need to restructure its debt load. Deans Foods is currently trading at depressed valuations and that means that the company cannot tap the equity markets for fundraising without massively diluting current shareholders.

Operating costs (SG&A) for Dean Foods are higher compared to peer companies. This is evident if we compare the operating margins of all the companies. Even though Dean Foods has a higher gross margin, its operating margin is lower than peer companies. Dean Foods has the potential to cut costs and operate far leaner in order to affect an operating turnaround. The raw material costs (milk) is not in the company’s control, so the only way to cut costs would be the operating costs.

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Company Comp Set LTM LTM Net LTM Total LTM NTM LT LTM Gross LTM EBIT Company Name EBITDA Income Debt/Cap Total EPS Margin % Margin % Margin % Margin % ital % Debt/EB Growth Fresh Del Monte Produce Inc. (NYSE:FDP) 6.6% 4.3% 2.2% 0.13% 25.80% 3.4x - Ingredion Incorporated (NYSE:INGR) 24.1% 17.4% 13.7% 7.66% 37.08% 1.7x - Bunge Limited (NYSE:BG) 5.1% 3.5% 2.1% 0.59% 51.32% 4.5x - Pilgrim's Pride Corporation (NasdaqGS:PPC) 8.9% 8.1% 5.6% 3.53% 52.94% 2.6x - Sanderson Farms, Inc. (NasdaqGS:SAFM) 12.6% 9.1% 5.8% 5.29% - - - Tyson Foods, Inc. (NYSE:TSN) 13.1% 10.4% 8.0% 7.55% 43.52% 2.4x - Archer-Daniels-Midland Company (NYSE:ADM) 6.3% 4.6% 3.1% 3.54% 29.19% 2.7x 6.00% Hormel Foods Corporation (NYSE:HRL) 20.9% 13.8% 12.1% 10.60% 10.03% 0.5x 7.50% Average 12.2% 8.9% 6.6% 4.9% 2.5x Dean Foods Company (NYSE:DF) 22.1% 2.7% 0.7% (0.19%) 60.29% 4.2x (13.78%) Figure 5: Comparables key ratios

Dean Food’s Debt to EBITDA is at the higher end at 4.2x compared to 2.5x of peer companies and it needs to generate ample free cash flow to service its debt. The de-growth in EPS over the past year has not helped the company.

Therefore, Dean Foods needs to restructure its debt to give it more room to improve operations.

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Causes of Decline M&A Consolidation and Debt Dean Foods is a result of a series of mergers and acquisitions over the past 20 years. The industry as a whole has significantly consolidated dairy processing since 1970 – as the largest dairy producer in the United States, Dean Foods played a prominent role in this consolidation.

Figure 6: Milk processors have consolidated significantly and are now concentrated in Great Lakes/CA/FL Regions.

In 2001, Dean Foods was acquired by Suiza Foods. The Dean Foods brand name was kept for the combined company. Between 2002 and 2005 Dean Foods acquired White Wave, Inc., Horizon Organic Holding Corporation, and launched TreeHouse Foods. In 2006 Dean Foods acquired Jilbert’s Dairy in Michigan. The next year, they bought the Wells Dairy milk plant in Iowa. In 2009 Dean Foods purchased soy beverage maker Alpro for approximately $455 Million along with Foremost Farms USA (Dean Foods).

This wave of M&A activity had consequences. In 2005 and 2008 lawsuits were filed against Dean Foods for violating organic cow standards in their Horizon brand. In 2010 the US Department of Justice and the state attorneys general's office of Wisconsin and Michigan, filed a lawsuit alleging that purchases by Dean Foods were creating a monopolizing provider. Under pressure from litigation and a mounting debt load, Dean Foods spun off WhiteWave and Morning Star in 2012 to refocus on its core dairy business (Moody's, n.d.).

Figure 7: Dean Foods stock plummets during litigation, with recovery post-divestiture when refocused on dairy

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After stabilizing in 2016, Dean Foods acquired Friendly’s, formed a joint venture with Organic Valley, and invested in Good Karma, Steve’s Ice Cream, and Uncle Matt’s Organic.

Post 2012 divestitures, Dean Foods has focused on improving its operating costs and paying down its debts. Dean Foods credit rating had been stable for a number of recent years until a combination of an insider trading scandal in 2017 and missing earning targets in 2018 led to a Moody’s downgrade in May 2018 (Jagdale & Kutua, 2015).

Figure 8: Moodys credit rating for Dean Foods

Dean foods renegotiated its debt covenants to allow for meaningfully higher leverage, which can increase to 5.5x in 2019 compared to 2.8x today, and implies soft 1H19 results. In order to meet these new levels, earnings will need to be flat year over year according to Jeffries covenant analysis below (Goldman & James, 2018).

Figure 9: Covenant analysis based on reduced Dean Foods earnings

The earnings miss and low confidence by investors is due largely to industry shifts and cost reduction challenges that are putting a strain on a historically strongly performing company.

Declining Demand for Milk The U.S. milk industry is cyclical facing periods of oversupply and overdemand. Right now, there is an oversupply of raw milk which was brought about by three years of 1-2% yoy increases in milk production. Demand from consumers has declined an average of 2% yoy since 2009. Lower raw milk costs in 2015 and 2016 intensified competition between dairy processors, enabling them to offer lower prices in order to win contracts for key customers.

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Structurally, US milk volumes are facing headwinds due to lower cereal consumption and higher plant- based beverage consumption that is growing at a tremendous velocity. Although Dean Foods has made investments in soy, flax, and almond milk production they often divest non-dairy production or their investments are too small to make a substantial impact in their changing business.

Soy, almond, oat, flax, and other milk substitutes are becoming more preferred by consumers across the United States. This can be observed in any casual trip to the supermarket through the dairy section. Premium placement is now being given to non-dairy items as milk demand erosion continues. Figure 10 below from J.P. Morgan shows the dairy aisle at a Ralph’s grocery store where a majority of space is now being taken up by dairy substitutes (Dickerson & Fishbein).

Figure 10: Milk substitutes are taking up prime real estate in the dairy aisle

Additionally, Dean Foods has historically had sales exposure concentrated with large customers. The company’s top five customers accounted for 29% of FY15 sales. Loss of major customers has had material impact on company performance. In 2018, Dean Foods lost 90 Million gallons of Walmart business. Walmart, one of their biggest customers, decided to invest in their own milk production and have built a factory with an estimated capacity of 100-110 Million gallons.

Slim Margins due to Cost Challenges Cost competition on milk has continued to get increasingly more competitive. Milk production consistently peaks each year at record highs as farmers become more efficient at producing more milk from less cattle. In May of 2016, more than 18,500 pounds of milk was produced (Andress & Charrow, 2016).

Figure 11: Herd sizes shrink as yield per cow more than doubles

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Dean Foods 3Q2018 earnings were lower than expected due to what management is indicating are “transitory costs”. Although there have been significant dairy processing plant consolidations that have happened in the past few years, there is a lot of room for further consolidation. Aggressive factory consolidation in Q3 closed 7 plants in 6 weeks, stretching resources and leading to unintended cost increases above modeled synergies from rationalized operations.

Relying heavily on a company owned fleet of diesel-powered delivery trucks to move milk across the country, Dean Foods has significant energy exposure. This has hurt margins in years and seasons where energy prices have spiked and continues to be a major operational risk for the company.

Further, Dean Food’s has limited ability to influence their gross margins since fluid milk prices are set by the USDA, which maintains tight control over supply and demand. In reality, gross margins are negatively correlated with the price of milk. As milk prices and margins rise the government consistently correct by reducing prices. In short, the $106 Billion milk industry sees only $4 Billion in profits each year (Goldman & James, 2018).

Figure 12: Correlation of Dean Food’s Gross Margin with Class I Mover

Recent Insider Trading Scandal In April 2017, famed sports gambler William T. Walters was convicted of fraud and conspiracy in one of the biggest insider trading scandals in recent years. Walters was convinced of 10 charges of securities fraud, wire fraud and conspiracy (potential sentence of up to 20 years in prison).

Walters had been getting information from Thomas C. Davis, a board member of Dean Foods. Through realized profits and avoided losses, Walters made more than $40 Million on the scheme.

It was established that Davis and Walters would speak in code, using “Dallas Cowboys” to refer to Dean foods and asking “How’s the milkman doing?”. They used a prepaid burner phone, codenamed the “Bat Phone,” to communicate.

The government’s main witness, Thomas C. Davis, came out while trying to avoid punishments on several offenses related to the trading scheme that he had pled guilty to. Under cross examination,

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Davis acknowledged being squeezed for money after taking $100,000 of a charity he was running and mislabeling expenses on his taxes. He had lied to many including SEC investigators.

The investigation brought to the spotlight prominent figures including hedge fund billionaire Carl Icahn and professional golfer Phil Mickelson. Icahn and Walters were friends that frequently spoke. Many historical trades that Walters had made were stocks that Icahn had made public announcements he was interested in. Because of this relationship it was difficult to charge Icahn with any wrongdoing. Mickelson on the other hand owed nearly $2 Million in gambling debts to Mr. Walker. Michelson made nearly $1 Million in trading Dean Foods shares which were seized by the SEC in a civil suit. Michelson was not criminally charged (Moynihan & Moyer, 2017).

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Liquidation Analysis Overview Dean Food’s causes of decline and current position make it critical for the company to change the operating strategy over the next 6-8 months, to avoid the breach of debt covenants. In the event, the above does not pan out, the company would be forced to liquidate under chapter 7, assuming the qualification under 11 U.S.C. §§ 101(41) and 109(b).

Below is a liquidation analysis for Dean Food’s based on the latest available balance sheet dated September 2018. Data is not projected, given a fire sale provides limited opportunity for a full valuation of assets. Debt holdings are based on data obtained from Dean food’s latest available 10K, December 2017. There will most likely be discrepancies between present day and December liability figures, but these differences are not assumed to alter the conclusions of the below liquidation analysis materially.

The liquidation analysis indicates a recovery value of $1.058B or 44.9% of the full value of Dean Food’s assets. Figure 13 below details the recovery analysis of the firm’s assets.

ASSETS Sep-30-2018 % of total % realisable Amount Cash And Equivalents $ 21.8 0.93% 100% $ 21.79 Accounts Receivable $ 612.3 26.00% 70% $ 428.58 Other Receivables $ 4.1 0.18% 70% $ 2.90 Inventory $ 262.2 11.14% 30% $ 78.65 Prepaid Exp. $ 32.0 1.36% 0% $ - Other Current Assets $ 6.2 0.27% 0% $ - Total Current Assets $ 938.6 $ 531.9

Net Property, Plant & Equipment $ 999.4 42.45% 50% $ 499.7

Goodwill $ 190.7 8.10% 0% $ - Other Intangibles $ 158.8 6.74% 15% $ 23.81 Deferred Tax Assets, LT $ 15.5 0.66% 0% $ - Other Long-Term Assets $ 51.4 2.18% 5% $ 2.57 Total Assets $ 2,354.5 100.00% $ 1,058.0

Liquidation value of assets $ 1,058.0 % of total 44.9% Figure 13: Assets as of September 2018 with realizable value under Liquidation (Note: all numbers are $m) Asset Assumptions The assumptions and observations based on Dean Food’s 2018 balance sheet and 10-K informed the recovery values deemed realizable in a Chapter 7 liquidation:

ASSET ASSUMPTIONS & OBSERVATIONS Cash and cash • Dean Food’s 3Y cash balance has been ~$20m equivalents • Cash in bank / cash on hand and is recoverable

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Accounts • Dean Food’s 5Y average days of sales outstanding (DSO) is ~30 days receivable and • Dean Food’s credit terms to customers generally range up to 30 days, as an other receivable internal process they perform ongoing credit evaluations of the customers and maintain allowances for potential credit losses based on historical experience. The reserve for product returns has not historically been material. • One largest customer accounts for ~20% of net sales Inventory • Given >90% of these items are perishable in nature and thus have a small shelf life, recoverable amount is assumed to be half of historical recovery averages i.e. 50-60% • Dean Food’s inventory comprises of dairy, diary case products such as fluid milk, ice creams, cultured dairy products, creamers, ice cream mixes and other products such as juices, teas, bottled water. • 5Y average inventory days is ~11 days Prepaid expense • The nature of the description from the 10-K does not indicate it is recoverable and other current • Derivative assets that have settlement dates equal to or less than 12 months assets from the respective balance sheet date were included under this category Net Property, • 25% of the assets are land and building used for commercial purposes and Plant & finding active buyers for these offices seems reasonable. ~65% of the fixed Equipment asset class is machinery with estimated average useful life ranging from 3 to 20 years, given the overall decline in the industry seems a more difficult proposition to sell. Furthermore, this includes the distribution fleet which are leased assets with terms ranging from have 1-20 years. • Largest component of the total assets on the book, ~40% of total assets • On an average Dean Food’s makes addition through capital expenditure of ~2% of sales per anum • It comprises Land and building, leasehold improvements, machinery and equipment • Annual Asset impairment: In 2017 the impairment analysis indicated an impairment of $27.8 million (~2.5%-3% of fixed asset base). 5Y average is <2%. Goodwill and • Given goodwill has resulted from acquisitions recovery is assumed to be 0%. other intangible On the other hand the private labels and brand value is likely to result in a assets retrieval rate of ~15% on liquidation, with potential interest from competitors. • According to company’s accounting policies, goodwill and other intangible assets with indefinite lives are not amortized • Other intangible assets are assumed to be the trademark of Dean Foods and the private labels used for the products Other long-term • No clear information is available for the characteristics of these assets - on assets conservative-basis only 5% realizable due to lack of further information

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Net Property, Plant & Equipment $ 999.4 42.45% 50% $ 499.7

Liquidation value of assets $ 1,058.0 % of total 44.9% Figure 14: : Assets as of September 2018 with realizable value under Liquidation ($ million USD)

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Waterfall Analysis At time of liquidation, according to section 292 there is an order of payment and thus the purpose of a waterfall analysis is to sort creditors according to their seniority.

Order of Payment 1. The cost & expenses of the winding up - S292 (1) (a) 2. Creditors secured by specific charge 3. Preferential creditor S292 (1) (a ) wages and salary accrued (b ) renumeration payable (c ) contributions payable 4. Creditors secured by a floating charge 5. Preferential creditors S292 (1) (a ) worker's compensation (b ) federal tax 6. Unsecured creditors / general unsecured claims

Note: If the funds that remain for the general unsecured creditors are not sufficient to settle all the claims, the available money must be divided proportionately Figure 15: Order of payment chart according to S 292

Further, it provides an overview of what each creditor could expect to receive in the event of a liquidation, assuming the pecking order of the absolute priority (AP) rule holds. Creditors in the same group must be treated equally, according to the pari passu principle, and no one lender can be unfairly discriminated against relative to its peers.

The analysis commences at the top of the seniority ladder. Dean Food’s has first lien creditors with claim of $11.2 Million, which would be satisfied completely in a liquidation. The claim of second lien debt holders is $907.7 Million, including Senior notes that are unsecured but have a rank above all other unsecured creditors. All second lien creditors will also recover 100% of their face value. All other unsecured creditors (Accounts payable, accrued expenses, def tax liability and other non-current liabilities) would be paid proportionally i.e. 15% of their face value.

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Creditors Amount Interest % Recovery % Recovery Amount Assets Left First Lien Debt Senior Secured Revolving Credit Facility $ 11.2 4.180% 100% $ 11.2 Total $ 11.2 $ 11.2 $ 1,046.8

Second lien debt Receivables Securitization Facility $ 205.0 0.900% - 1.050% 100% $ 205.0 6.50% Senior Notes Due 2023 $ 700.0 6.500% 100% $ 700.0 Capital Lease and Other $ 2.7 NA 100% $ 2.7 Total $ 907.7 $ 907.7 $ 139.1

Balance available for : (Unsecured) $ 139.1 Accounts Payable $ 424.1 14.9% $ 63.1 Accrued Exp. $ 246.9 14.9% $ 36.8 Def. Tax Liability, Non-Curr. $ 60.0 14.9% $ 8.9 Other Non-Current Liabilities $ 203.6 14.9% $ 30.3 Total $ 934.7 $ - Figure 16: Creditor repayment schedule under Liquidation ($ million USD)

Details on the Liabilities of Dean Food’s

Senior Secured Revolving Credit Facility: As per the credit agreement, the facility is for up to $450 Million with the right to request an increase of the aggregate commitments under the Credit Facility by up to $200 Million, which can be either term loans or revolving loans, without the consent of any lenders not participating in such increase. Security: The Credit Facility is guaranteed by existing and future domestic material restricted subsidiaries substantially all of our wholly- owned U.S. subsidiaries. It is secured by a priority perfected security interest in substantially all of the assets and the assets of the Guarantors.

Receivables Securitization Facility —Up to $450 Million receivables securitization facility pursuant to which certain of the subsidiaries sell their accounts receivable to two wholly- owned entities intended to be bankruptcy- remote. The entities then transfer the receivables to third- party asset- backed commercial paper conduits sponsored by major financial institutions.

Dean Foods Company Senior Notes due 2023 — Dean Food’s issued $700 Million at 6.50% senior notes due 2023. The 2023 Notes are our senior unsecured obligations. They rank equally in right of payment with all of our existing and future senior obligations and are effectively subordinated in right of payment to all of our existing and future secured obligations, including obligations under our Credit Facility and receivables securitization facility.

Capital Lease Obligations and Other — primarily comprised of leases for information technology equipment

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Chapter 11 In the event Dean Foods fundamentals continue to decline and the board assesses more value will be recoverable as a going concern than entering Chapter 7 liquidation, the company could execute a Chapter 11 restructuring. While under U.S. Code § 303 three or more creditors with aggregate claims at least $10,000 more than the value of the secured assets could force an involuntary filing, Dean Foods would be better served preempting the creditors with a pre-packaged Chapter 11 plan. Research demonstrates that firms entering a voluntary reorganization deliver materially higher long-term value than forced liquidations (Arturo Bris, 2006). In terms of where to file, since Dean Foods is incorporated in Delaware it would be advantaged execute its plan in Delaware Bankruptcy District Court, as judges are generally more business friendly and cases are resolved between 140 and 190 days faster than equivalent cases in other courts (Ayotte & Skeel, 2003).

Entering a Chapter 11 bankruptcy would afford Dean Foods a variety of general benefits. First, the automatic stay keeps creditors at bay, while the company is permitted to continue operating and execute its turnaround plan. Second, the company can reject executory contracts to realign its fundamentals and clear out unprofitable obligations. Third, bankruptcy is a potent motivator to bring creditors to the negotiating table, and Dean Foods could refinance secured debts and provide partial recovery to unsecured creditors, reducing the overall debt load.

However, the negatives of bankruptcy are significant and can have a lasting impact on the business. Approximately 7.5% of firm value is extracted for direct costs associated with the process – accountants, lawyers, consultants, filing fees - immediately setting the company behind after it exits bankruptcy (Altman, 1984). Throughout the bankruptcy proceedings employees will be uncertain of their future with the firm and the highest performers will often execute their option to leave. Customers will be motivated to explore alternative options, and the largest, more sophisticated customers could leverage the situation for additional negotiating power. Pending supplier contract terms, vendors would be more likely to accelerate repayment of trade credit, setting purchase minimums, or canceling the agreement outright. Exploitation of trade credit in recent bankruptcies (Toys-R-Us, Sears) has left many business-to- business firms hypersensitive to any downturn in prospects. Finally, a complete turnaround process is limited in bankruptcy, as decisions outside of the “ordinary course of business” requires court approval, putting a material constraint on management’s ability to restructure.

For Dean Foods specifically, executing a Chapter 11 restructuring would be unlikely to recover more for the stakeholders than continuing operations. Based on an Altman Z-Score assessment, the firm flirted with the zone of insolvency in 2012, but asset divestments generated sufficient funds to repair the situation (Heine, 2000). In present day, Dean Foods Z-Score is 4.0 through Q3 2018, well above a level that would foster concern (Figure 16).

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5.0

4.0

3.0

2.0

1.0

- Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 LTM Sep- 18

Figure 17: Altman Z-Score. Asset sales in 2012 pulled the company above concern for financial distress

However, if the current situation continues to deteriorate, Dean Foods might elect to file for access to the unique processes associated with bankruptcy. For Dean Foods, the firm could reject contracts with milk and raw materials producers, amounting to $815 Million at the end of 2017 (Dean Foods). As the filer, Dean Foods would have the ability to selectively assume or reject specific contracts based on the criticality to the business. Additionally, Dean Foods would be able to discharge debts and provide a limited recovery to unsecured creditors, provided the negotiated plan is accepted. Further, although 90% of the defined benefit pension plans are frozen, 37% of Dean Foods employees (6,300) are covered under union collective bargaining agreements. Entering bankruptcy could allow the firm to increase the position of power with collectively bargained employees, although given the primary CBA, covering 32% of employees, comes due March 2019 Dean Foods would be better served focusing on extracting concessions out of court. In bankruptcy the company would be reputationally impacted with customers. As the dairy industry is highly commoditized, competitive, and fragmented, customers can easily substitute suppliers and would be motivated to press Dean Foods for commitments in the event of bankruptcy.

In summary, a Chapter 11 restructuring is not the ideal path for Dean Foods at the present time. Although earnings are constrained, prospects for revenue growth or cost reductions are limited, and competitive pressures are increasing, the company has admirably conserved resources and generated sufficient cash to meet obligations. However, if the company continues to decline and fails to execute a successful turnaround, a voluntary Chapter 11 filing would be advisable.

TURNAROUND ASSESSMENT

Strategic Turnaround Strategies Dean Foods has seen its profit deteriorate year-over-year driven mainly by a shift in the industry paradigm. Competition for volume has been fierce, with players like Walmart building large dairy facilities , demand for private label dairy, which has lower margins for Dean Foods, has been increasing vis-à-vis branded products, and demand for cow’s milk has been decreasing with the growth of pant- based milks (Nielsen, 2018). This scenario ought to be tackle through a refocusing of Dean Foods business and its streamlining.

To turnaround Dean Foods and ensure a profitable sustainable operation the team has craft four restructuring measures that will address the decreasing market for milk-based products and increase the current operational efficiency:

1. Invest in plant-based products business: in 2018 Dean Foods increased its stake in Good Karma Foods, a plant-based beverages and yogurts company. We believe the company should continue betting on this substitute to its traditional business. Using WhiteWave, a plant-based beverages and yogurts now owned by Danone but once owned by Dean Foods, as a proxy for net income and gross profit margins, we estimated this operation to yield an increase in $2 Million gross profit (Exhibit 4). Given the small scale of Good Karma Foods and the lack of synergies with the milk business (only on sales and distribution), we opted to keep a conservative estimate on the impact of a focus shifting. 2. Streamline number of plants: Dean Foods currently has 65 plants whist the Dairy Farmers of America owns 42 and has a revenue level approximately 1.7 times that of Dean Foods. We have assumed a reduction of ~10% of the company’s plants and considered that sales would not be affected, given excess capacity, but distribution costs would increase by ~10%. The outcome is an estimated increase of $188 Million of gross profit vis-à-vis the 2018 baseline (Exhibit 5). Dean Foods will obviously face resistance from local workers and the unions but the fact that the labor agreement is coming due in 2019 and that the company has already announced some closures gives us confidence that the measure is feasible. 3. Eliminate unprofitable areas: Dean Foods currently serves areas in the US that are not profitable. We have assumed that these areas represent up to 15% of sales, which will in effect reduce the overall sales level, it will contribute to Dean Foods’ margin. We estimated this contribution to be of $17 Million of gross profit (Exhibit 6). Similar to the reduction in plants, the company will likely face resistance but given its current context and in the wave of change to be implemented we believe Dean Foods would be able to follow through with the elimination of the unprofitable areas. Further, we recommend Dean Foods consolidates the number of regional brands commensurate with the plant and distribution contraction, and focus advertising into a select few national brands instead of the 50 currently supported. 4. Increase the share of ice-cream and fresh cream products: milk related products provide Dean Foods better margins by allowing for greater differentiation vis-à-vis competitors, i.e., less commodifiable then milk, thus more likely to for the company to be able to sustain its branded products. Assuming a slight year-on-year increase up to 0.7% of ice-cream and fresh cream sales (vs. the baseline scenario which assumes a continuing of the decrease in milk sales, i.e., -7% year-on-year), we estimated this measure to yield a $2 Million increase in gross profit (Exhibit 7).

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All in all, the four proposed restructuring measures would allow Dean Foods to increase gross profit by $208 Million (Figure 17). The measures will lead to a smaller scale operation, as expected in a demand decreasing market such as the milk one, but nonetheless a profitable operation.

Figure 18: Restructuring waterfall for sales and net income Valuation To estimate the enterprise value of Dean Foods, a discounted free cash flow valuation covers both the base case and proposed turnaround impact. First, the WACC is calculated based on the company’s 2018 financial statements and assumptions for market rates. The cost of debt was based on Dean Foods’ Senior Notes due 2023, as the $700 Million in notes represent the clear majority of Dean Foods’ debt load. Accordingly, the cost of debt was 푟푑 = 6.5%. Interestingly, Dean Foods stock price has a limited correlation to the baseline market, potentially reflecting the recession proof and regulated business model. On a leveraged basis, the company’s equity Beta is 훽푒 = 0.59. Due to the overhaul of corporate rates in Tax Cuts and Jobs Act 2017, we assumed an all-in tax rate of 23%.

푟푒 = 훽푒 ∗ (푟푚 − 푟푓) + 푟푓 푁퐷 퐸 푊퐴퐶퐶 = 푟 ∗ (1 − 푡푎푥 푟푎푡푒) ∗ + 푟 ∗ 푑 푇퐸푉 푒 푇퐸푉

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On this basis, we found the weighted average cost of capital to be 5.3%. While on the surface this might appear to be uniquely low, the counter economic cycle nature of Deans Foods operations will naturally reduce the Beta. In fact, over a five-year period CapIQ finds the equity Beta to be essentially zero (-0.02). In that context, 5.3% appeared appropriate to discount Dean Foods future cash flows.

Levered beta (2Y) 0.59 Rf 2.885% Market premium 5% Cost of equity 5.84%

Cost of debt 6.50%

Market value of equity 402.2 Debt 887.2 Cash 21.8 Total enterprise value 1267.6 Tax rate 23%

WACC 5.3% Figure 19: Weighted average cost of capital

Given the low projected industry growth in the U.S. dairy sector, we conservatively estimated terminal free cash flow growth ranging from 0.5% - 1.5%. Accordingly, we found a midpoint valuation of Deans Foods in the base case of $(812) Million, implying the firm’s current path would destroy value.

Discount Discounted PV of terminal value Implied TEV Rate Cash Flows 0.5% 1.0% 1.5% 0.5% 1.0% 1.5% 4.3% 15,016 (980,033) (1,135,582) (1,347,320) (965,017) (1,120,567) (1,332,304) 5.3% 16,227 + (738,410) (829,012) (943,657) = (722,183) (812,785) (927,430) 6.3% 17,345 (582,215) (640,642) (711,323) (564,869) (623,297) (693,977) Figure 20: Range of DCF valuations in the base case ($ thousand USD)

However, with the recommended restructuring approach and the same supporting assumptions for the DCF, the turnaround Dean Foods would generate cash flows valuing the firm at $1,614 Million.

Discount Discounted PV of terminal value Implied TEV Rate Cash Flows 0.5% 1.0% 1.5% 0.5% 1.0% 1.5% 4.3% 374,091 1,479,303 1,714,096 2,033,701 1,853,394 2,088,186 2,407,792 5.3% 363,116 + 1,114,586 1,251,345 1,424,395 = 1,477,703 1,614,461 1,787,511 6.3% 352,606 878,819 967,012 1,073,700 1,231,425 1,319,618 1,426,306 Figure 21: Range of DCF valuations with restructuring measures ($ thousand USD)

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Recommendation We have evaluated four different options for Dean Foods’ future and our recommendation will be to choose the alternative that provides the most shareholder value and leads Dean Foods towards a more profitable and sustainable path. The result of the four valuations can be found in Figure 19 below.

Figure 22: Dean Foods valuation scenarios ($ million USD)

Given the scenarios above, it is clear that maintaining Dean Foods as a going concern, whilst implementing the discussed restructuring measures, is the solution that generates the highest value for the shareholders.

Conclusion This analysis sought to understand the reasons behind the decline of Dean Foods and the potential actions they could take to improve company performance. The dairy business has undergone massive consolidation over the past half-century. Suffering from low margins, increasing efficient yields, and shrinking consumer demand, the entire industry is suffering. Close to the zone of insolvency in 2012, Dean Foods divested many profitable assets to focus on its core dairy business and bought itself critical financial flexibility to engage in a sorely needed turnaround effort.

Many of Dean Foods struggles are attributable to government regulations, a powerful union labor force, and co-operative competitors. However, the company has not only suffered from external factors, it put an undue burden on management after executing several unwise mergers, failing to capitalize on a growing trend in plant-based substitutes, and doubling down on fluid milk production, the lowest margin channel in dairy. Recent financial results have been artificially buoyed through asset sales and takeover rumors that bolstered the stock price but never materialized, but as demonstrated in this analysis the current path is tenuous.

Dean Foods is due for a realization the current company has overextended beyond its core capabilities and rejuvenation plan to modernize an outdated and commoditized product offering, otherwise the company will progressively decline, reliant on government price reductions to drive earnings.

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Exhibits Exhibit 1 : SWOT Dean Foods is currently in a time of operational and financial flux and the below matrix highlights the strengths, weaknesses, opportunities, and threats the business is currently facing or will deal with in the near future:

STRENGTHS (+) WEAKNESSES (–) • 2018 should be the margin trough. Analysts expect margin • Higher transitory costs related to plant consolidation. improvement following a positive trajectory through 2020. • Operating margins have failed to show sustainable • Effective cost saving initiatives are in place and should improvement despite hundreds of millions in cost savings reach $150MM in incremental savings by year-end 2019. since 2010. • Main products are generally Giffen goods with inelastic • Increasing leverage; after renegotiation of debt covenants demand. leverage can increase to 5.5x in '19 from 2.8x in '18. • Competitive scale: DF is largest fluid milk processor in the • Large debt load of ~$837MM. U.S. and is able to generate cost savings through size and • ~37% of labor force are covered under collective scale. bargaining agreements and labor disputes could adversely

INTERNAL FACTORS INTERNAL • Strong free cash flow generation. affect the business. • Despite facilities decrease (18%) and headcount decrease (15%) since 2012, sales volume/plant and volume/employee metrics have stayed relatively flat. OPPORTUNITIES (+) THREATS (–) • Recent acquisition of Good Karma is a solid platform to • Plant based beverages (i.e., soy milk, almond milk etc.) are expand into more niche flax offerings (e.g., yoghurt). growing rapidly and, due to consumer preferences, could • Accretive strategic announcements (i.e., JVs/M&A). displace demand for traditional milk products. • Monthly USDA milk prices rises. Profitability has been • Milk demand erosion continues; the industry en masse negatively correlated over the years with the cost of Class I continues to sell less product each year. milk, its primary input. • Accelerated contract losses: Walmart (~17.5% of total • New contract wins. revenues) will likely generate less sales for DF in '19 due to • Product and geographic diversification are opportunities to WMT vertical integration. The Food Lion contract loss.

EXTERNAL FACTORS EXTERNAL generate top and bottom line growth. • Aggressive private label competition/branded share losses. • Due to current stock price, analysts believe DF is strong • Input cost headwinds. buyout candidate.

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Exhibit 2 : Trading and Transactions Comparables S&P Packaged Foods and Meat, S&P 500 – Long term chart and 2-year chart

Dean Foods 5 Year chart

100.00%

80.00%

60.00%

40.00%

20.00%

0.00%

-20.00%

-40.00%

-60.00%

-80.00%

-100.00%

Dean Foods Company (NYSE:DF) - Share Pricing S&P 500 Packaged Foods & Meats (Sub Ind) (^SP500-30202030) - Index Value S&P 500 (^SPX) - Index Value Dean Foods 2 Year Chart

40.00%

20.00%

0.00%

-20.00%

-40.00%

-60.00%

-80.00%

-100.00%

Dean Foods Company (NYSE:DF) - Share Pricing S&P 500 Packaged Foods & Meats (Sub Ind) (^SP500-30202030) - Index Value S&P 500 (^SPX) - Index Value Transaction Comparables

Select Dairy M&A Transactions Date Target Acquirer Transaction Deal Type Transaction Enterprise Target EV/EBITDA Target Status value value Revenue Country (US$m) (US$m) (US$m) 7/7/2016 Whitewave Foods Danone Complete Acquisition/Merger $12,079 $12,079 $4,121 22.2x United States 1/15/2016 Synutra International Beams Power Complete Acquisition/Merger $125 $648 $389 8.2x United States 12/3/2012 Morningstar Foods Saputo Complete Acquisition/Merger $1,450 $1,450 $1,611 9.4x United States 4/26/2011 Parmalat Groupe Lactalis Complete Majority Stake $3,575 $4,606 $5,794 10.9x United States 3/22/2011 Parmalat Groupe Lactalis Complete Minority Stake $1,056 $6,505 $6,185 8.6x United States 9/11/2008 Meiji Dairies Meiji Seika Kaisha Complete Acquisition/Merger $1,971 $1,971 $6,452 5.9x Japan Average 10.9x

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Exhibit 3 : Liquidation Process Under Chapter 7

TURNAROUND ASSESSMENT Exhibit 4 : Financials and assumptions of investing in the plant-based products business Actual Forecast 2013 2014 2015 2016 2017 Sep 2018 2018 2019 2020 2021 2022 Invest in plant-based products business: Good Karma Acquisition (thousand USD) 15 000 0 0 0 0 Good Karma Operating Income (thousand USD) 316 YoY increase in sales of plant-based milk (Source: Nielsen) 3% 9% 5% 5% 5% 5% WhiteWave (plant-based beverages and yogurts company, now owned by Danone) Financials: Total net sales (million USD) 3 436,6 3 866,3 4 198,1 Cost of Sales (million USD) 2 283,4 2 543,0 2 745,2 Gross profit (million USD) 0,0 1 153,2 1 323,3 1 452,9 0,0 Operating expenses: Selling, distribution and marketing (million USD) 621,9 705,9 729,5 General and administrative (million USD) 265,7 285,2 321,6 Asset disposal and exit costs -1,1 0,0 0,0 Operating income (million USD) 0,0 266,7 332,2 401,8 0,0 Gross profit margin N.a. 33,6% 34,2% 34,6% N.a. 34,0% 34,0% 34,0% 34,0% 34,0% Selling, distribution and marketing (% of net sales) N.a. 18,1% 18,3% 17,4% N.a. 18,0% 18,0% 18,0% 18,0% 18,0% General and administrative (% of net sales) N.a. 7,7% 7,4% 7,7% N.a. 8,0% 8,0% 8,0% 8,0% 8,0%

Estimated Good Karma: using WhiteWave as proxy Net sales (thousand USD) 5 267 5 530 5 807 6 097 6 402 Cost of sales (thousand USD) 3 476 3 650 3 832 4 024 4 225 Gross profit (thousand USD) 1 791 1 880 1 974 2 073 2 177 Selling, distribution and marketing (thousand USD) 948 995 1 045 1 097 1 152 General and administrative (thousand USD) 421 442 465 488 512 Operating income (thousand USD) 316 421 442 465 488 512

Exhibit 5 : Financials and assumptions of streamlining the number of plants Actual Forecast 2013 2014 2015 2016 2017 Sep 2018 2018 2019 2020 2021 2022 Streamline number of plants: Number of plants closed 7 0 0 0 0 Total number of plants 66 59 59 59 59 59 % reduction in number of plants 11% 0% 0% 0% 0% % reduction cost of sales vs % reduction of number of plants 25% Estimated % increase in selling and distribution due to reduction of plants 10% 0% 0% 0% 0% Baseline: Cost of sales (thousand USD) 5 659 108 5 320 857 5 005 624 4 710 677 4 435 744 Selling and distribution (thousand USD) 1 339 263 1 245 515 1 158 329 1 077 246 1 001 839 Phasing of cost savings / increase 25% 75% 100% 100% 100% Cost savings (increase): Cost of sales (thousand USD) 37 513 112 539 150 052 150 052 150 052 Selling and distribution (thousand USD) -33 482 -100 445 -133 926 -133 926 -133 926

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Exhibit 6 : Financials and assumptions of eliminating unprofitable areas Actual Forecast 2013 2014 2015 2016 2017 Sep 2018 2018 2019 2020 2021 2022 Eliminate unprofitable areas: Estimated decrease in sales due to elimination of unprofitable areas 0% 10% 15% 15% 15% Estimated gross margin of unprofitable areas -2% Estimated decrease in selling and distribution due to elimination of unprofitable areas 0% 10% 15% 15% 15% Baseline: Net sales (thousand USD) 7 440 351 6 919 527 6 435 160 5 984 699 5 565 770 Cost of sales (thousand USD) 5 659 108 5 320 857 5 005 624 4 710 677 4 435 744 Selling and distribution (thousand USD) 1 339 263 1 245 515 1 158 329 1 077 246 1 001 839 Cost savings / decrease in sales: Net sales (thousand USD) 0 -691 953 -965 274 -897 705 -834 865 Cost of sales (thousand USD) 0 705 792 984 579 915 659 851 563 Selling and distribution (thousand USD) 0 124 551 173 749 161 587 150 276

Exhibit 7 : Financials and assumptions of increasing share of ice-cream and fresh cream products Actual Forecast 2013 2014 2015 2016 2017 Sep 2018 2018 2019 2020 2021 2022 Increase share of ice cream and fresh cream products: Estimated increase in sales vs baseline 0,0% 0,2% 0,5% 0,7% 0,7% Estimated gross margin pp delta vs baseline 2% Baseline: Ice cream: Net sales (thousand USD) 1 116 053 1 037 929 965 274 897 705 834 865 Cost of sales (thousand USD) 826 545 777 370 731 538 688 647 648 664 Fresh cream: Net sales (thousand USD) 372 018 345 976 321 758 299 235 278 288 Cost of sales (thousand USD) 275 515 259 123 243 846 229 549 216 221 Increase in sales (expenses) Ice cream: Net sales (thousand USD) 0 2 076 4 826 6 284 5 844 Cost of sales (thousand USD) 0 -1 555 -3 658 -4 821 -4 541 Fresh cream: Net sales (thousand USD) 0 692 1 609 2 095 1 948 Cost of sales (thousand USD) 0 -518 -1 219 -1 607 -1 514

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Exhibit 8 : Consolidated balance sheet with restructuring measures Actual Forecast 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Assets Current assets: Cash and cash equivalents 16 762 16 362 60 734 17 980 16 512 31 807 165 957 289 443 338 570 331 676 Receivables, net of allowances 752 234 747 630 653 156 669 200 675 826 647 311 542 521 476 945 443 828 412 824 Income tax receivable 15 915 64 443 7 985 5 578 2 140 2 140 2 140 2 140 2 140 2 140 Inventories 262 858 251 831 253 326 284 484 278 063 267 853 224 491 197 357 183 653 170 824 Deferred income taxes 60 143 50 362 54 735 37 504 0 0 0 0 0 0 Prepaid expenses and other current assets 42 786 49 432 47 627 43 884 47 338 44 642 37 415 32 893 30 609 28 471 Total current assets 1 150 698 1 180 060 1 077 563 1 058 630 1 019 879 993 752 972 524 998 777 998 800 945 934 Property, plant and equipment, net 1 216 047 1 172 596 1 174 137 1 163 851 1 094 064 1 029 881 984 781 939 681 894 581 849 481 Goodwill 86 841 86 841 86 841 154 112 167 535 167 535 167 535 167 535 167 535 167 535 Identifiable intangible and other assets, net 312 836 294 724 158 088 207 897 211 620 211 620 211 620 211 620 211 620 211 620 Deferred income taxes 35 623 35 415 31 386 21 737 10 731 0 -56 828 -116 422 -152 093 -165 734 Total 2 802 045 2 769 636 2 528 015 2 606 227 2 503 829 2 402 788 2 279 632 2 201 191 2 120 442 2 008 835

Liabilities and Stockholders' Equity Current liabilities: Accounts payable and accrued expenses 761 288 774 900 741 988 706 981 671 070 669 632 561 228 493 391 459 132 427 059 Current portion of debt 698 698 1 493 140 806 1 125 0 0 0 0 0 Current portion of litigation settlements 19 101 18 853 18 414 0 0 0 0 0 0 0 Total current liabilites 781 087 794 451 761 895 847 787 672 195 669 632 561 228 493 391 459 132 427 059 Long-term debt, net 896 564 916 481 840 932 745 245 912 074 813 199 713 199 613 199 513 199 413 199 Deferred income taxes 100 691 137 944 106 820 126 009 60 018 60 018 60 018 60 018 60 018 60 018 Other long-term liabilities 273 314 276 318 272 864 276 630 203 595 203 595 203 595 203 595 203 595 203 595 Long-term litigation settlements 36 074 17 124 0 0 0 0 0 0 0 0

Stockholders' equity: Preferred stock 0 0 0 0 0 0 0 0 0 0 Common stock 948 941 914 906 911 915 919 923 927 931 Additional paid-in capital 791 276 752 375 679 916 653 629 659 227 659 228 659 228 659 229 659 229 659 230 Retained earnings -20 719 -41 015 -49 523 45 654 74 219 74 988 160 231 249 622 303 128 323 590 Accumulated other comprehensive loss -57 190 -84 983 -85 803 -89 633 -78 410 -90 668 -90 668 -90 668 -90 668 -90 668 Non-controlling interests 0 0 0 0 0 11 882 11 882 11 882 11 882 11 882 Total stockholders' equity 714 315 627 318 545 504 610 556 655 947 656 345 741 592 830 987 884 498 904 964 Total 2 802 045 2 769 636 2 528 015 2 606 227 2 503 829 2 402 788 2 279 632 2 201 191 2 120 442 2 008 835

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Exhibit 9 : Consolidated income statement with restructuring measures Actual Forecast 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Net sales 9 016 321 9 503 196 8 121 661 7 710 226 7 795 025 7 440 351 6 235 872 5 482 128 5 101 469 4 745 098 Cost of sales 7 161 734 7 829 733 6 147 252 5 722 710 5 977 348 5 621 595 4 508 249 3 879 701 3 655 418 3 444 408 Gross profit 1 854 587 1 673 463 1 974 409 1 987 516 1 817 677 1 818 757 1 727 623 1 602 426 1 446 052 1 300 690 Operating costs and expenses: Selling and distribution 1 337 745 1 355 053 1 379 317 1 348 349 1 346 948 1 372 745 1 222 403 1 119 551 1 050 683 986 641 General and administrative 310 453 288 744 350 324 346 028 311 176 297 614 277 223 257 871 239 876 223 143 Amortization of intangibles 3 669 2 889 21 653 20 752 20 710 22 321 20 759 19 305 17 954 16 697 Facility closing and reorganization costs, net 27 008 4 460 19 844 8 719 24 913 73 444 20 759 19 305 17 954 16 697 Litigation settlements -1 019 -2 521 0 0 0 0 0 0 0 0 Impairment of intangible and long-lived assets 43 441 20 820 109 910 0 30 668 2 232 0 0 0 0 Other operating (income) loss 2 494 -4 535 0 0 0 -2 289 0 0 0 0 Equity in (earnings) loss of unconsolidated affiliate 0 0 0 0 0 -5 516 -5 516 -5 516 -5 516 -5 516 Total operting costs and expenses 1 723 791 1 664 910 1 881 048 1 723 848 1 734 415 1 760 551 1 535 628 1 410 517 1 320 951 1 237 663 Operating income 130 796 8 553 93 361 263 668 83 262 58 206 191 995 191 909 125 101 63 027 Other (income) expense: Interest expense 200 558 61 019 66 813 66 795 64 961 56 924 49 924 42 924 35 924 28 924 Loss on early retirement of long-term debt 63 387 1 437 43 609 0 0 0 0 0 0 0 Gain on disposition of WhiteWave common stock -415 783 0 0 0 0 0 0 0 0 0 Other income, net -400 -1 620 -3 751 -5 778 -2 942 0 0 0 0 0 Total other expense -152 238 60 836 106 671 61 017 62 019 56 924 49 924 42 924 35 924 28 924 Income (loss) from continuing operations before income taxes 283 034 -52 283 -13 310 202 651 21 243 1 282 142 071 148 986 89 177 34 103 Income tax expense (benefit) -42 325 -32 096 -5 229 82 034 -26 179 513 56 828 59 594 35 671 13 641 Income (loss) from continuing operations 325 359 -20 187 -8 081 120 617 47 422 769 85 242 89 391 53 506 20 462 Income (loss) from discontinued operations, net of tax 2 803 -652 -1 095 -312 11 291 0 0 0 0 0 Gain (loss) on sale of discontinued operations, net of tax 491 195 543 668 -376 2 875 0 0 0 0 0 Net income (loss) 819 357 -20 296 -8 508 119 929 61 588 769 85 242 89 391 53 506 20 462 Net loss attributable to non-controlling interest in discontinued operations -6 179 0 0 0 0 0 0 0 0 0 Net income (loss) attributable to Dean Foods Company 813 178 -20 296 -8 508 119 929 61 588 769 85 242 89 391 53 506 20 462

TURNAROUND ASSESSMENT Exhibit 10 : Consolidated cash flow statement with restructuring measures Actual Forecast 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Cash flows from operating activities: Net income (loss) 819 357 -20 296 -8 508 119 929 61 588 769 85 242 89 391 53 506 20 462 (Income) loss from discontinued operations, net of tax -2 803 652 1 095 312 -11 291 0 0 0 0 0 (Gain) loss on sale of discountinued operations, net of tax -491 195 -543 -668 376 -2 875 0 0 0 0 0 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 173 829 164 297 176 884 178 385 170 640 167 421 165 859 164 405 163 054 161 797 Share-based compensation expense 19 289 12 276 16 377 29 830 11 021 9 660 9 660 9 660 9 660 9 660 Loss on divestitures and other, net -705 -7 549 2 736 1 265 4 031 38 862 0 0 0 0 Impairment of intangible and long-lived assets 43 441 20 820 109 910 0 30 668 2 232 0 0 0 0 Write-off of financing costs 6 791 0 0 0 1 080 0 0 0 0 0 Other operating income 0 0 0 0 0 7 719 -12 208 -13 521 11 754 35 040 Equity in (earnings) loss of unconsolidated affiliate 0 0 0 0 0 -7 355 -7 355 -7 355 -7 355 -7 355 Loss on early retirement of debt 63 387 1 437 43 609 0 0 0 0 0 0 0 Gain on disposal of WhiteWave common stock -415 783 0 0 0 0 0 0 0 0 0 Recognition of accumulated losses from de-designated cash flow hedges 63 454 0 0 0 0 0 0 0 0 0 Deferred income taxes 10 765 62 927 -34 359 26 376 -25 431 10 731 56 828 59 594 35 671 13 641 Obligations under litigation settlement 0 -2 521 0 0 0 0 0 0 0 0 Other, net 1 557 7 954 9 225 -4 861 8 467 -2 216 0 0 0 0 Changes in operating assets and liabiliites, net of acquisitions: 0 0 0 0 0 Receivables, net 22 192 3 369 94 279 -462 -5 606 28 515 104 790 65 576 33 117 31 004 Inventories -657 11 237 -1 495 -19 434 12 714 10 210 43 361 27 135 13 704 12 829 Prepaid expenses and other assets -5 653 7 849 8 148 7 474 -11 625 2 696 7 227 4 522 2 284 2 138 Accounts payable and accrued expenses -131 766 -41 253 -46 524 -65 165 -63 520 -1 438 -108 403 -67 837 -34 259 -32 073 Termination of interest rate swap liability -28 147 0 0 0 0 0 0 0 0 0 Income taxes receivable/payable -459 708 -49 105 56 297 2 241 3 438 10 731 56 828 59 594 35 671 13 641 Litigation settlement -18 372 -18 605 -18 853 -18 853 0 0 0 0 0 0 Contribition to company sponsored pension plans 0 0 0 0 -38 500 0 0 0 0 0 Net cash provided (used in) operating activities - continuing operations -330 727 152 946 408 153 257 413 144 799 278 537 401 829 391 166 316 807 260 785 Net cash provided by operating activities - discontinued operations 14 086 0 0 0 0 0 0 0 0 0 Net cash provided (used in) operating activities -316 641 152 946 408 153 257 413 144 799 278 537 401 829 391 166 316 807 260 785

Cash flows from investing activities: Payments for property, plant and equipment -175 163 -149 421 -162 542 -144 642 -106 726 -100 000 -100 000 -100 000 -100 000 -100 000 Payments for acquisitions, net of cash acquired 0 0 0 -158 203 -21 596 -15 000 0 0 0 0 Proceeds from sale of fixed assets 9 940 27 629 18 495 14 705 4 336 19 083 0 0 0 0 Other investments 0 0 -2 200 0 -11 000 0 0 0 0 0 Net cash used in investing activities - continuing operations -165 223 -121 792 -146 247 -288 140 -134 986 -95 917 -100 000 -100 000 -100 000 -100 000 Net cash provided by investing activities - discountinued operations 1 403 494 0 0 0 0 0 0 0 0 0 Net cash provided by (used in) investing activities 1 238 271 -121 792 -146 247 -288 140 -134 986 -95 917 -100 000 -100 000 -100 000 -100 000

Cash flow from financing activities: Repayments of debt -1 027 416 -668 -1 416 -1 232 -143 323 -100 000 -100 000 -100 000 -100 000 -100 000 Early retirement of debt -400 000 -23 812 -476 188 0 0 0 0 0 0 0 Premiums paid on early retirement of debt -57 243 -1 161 -37 309 0 0 0 0 0 0 0 Payments of financing costs -6 197 -3 287 -16 816 0 -1 786 0 0 0 0 0 Proceeds from senior secured revolver 1 043 700 2 277 297 360 670 254 300 326 900 314 933 314 933 314 933 314 933 314 933 Payments for senior secured revolver -1 258 450 -2 257 246 -430 971 -245 200 -324 800 -329 733 -329 733 -329 733 -329 733 -329 733 Proceeds from receivables securitization facility 908 000 2 656 000 685 000 945 000 2 525 000 2 413 333 2 413 333 2 413 333 2 413 333 2 413 333 Payments for receivables securitization facility -695 000 -2 634 000 -920 000 -905 000 -2 360 000 -2 433 333 -2 433 333 -2 433 333 -2 433 333 -2 433 333 Proceeds from short-term credit facility 626 750 0 0 0 0 0 0 0 0 0 Payments for short-term credit facility -37 521 0 0 0 0 0 0 0 0 0 Proceeds from issuance of 2023 notes 0 0 700 000 0 0 0 0 0 0 0 Proceeds from issuance of subsidiariy's common stock 0 0 0 0 0 354 0 0 0 0 Common stock repurchases 0 -25 000 -53 010 -25 000 0 0 0 0 0 0 Cash dividend paid 0 -26 232 -26 182 -32 828 -32 737 -32 884 -32 884 -32 884 -32 884 -32 884 Issuance of common stock, net of share repurchases for withholding taxes 23 481 7 861 -16 -720 -535 5 5 5 5 5 Tax savings on share-based compensation 1 954 360 342 746 0 0 0 0 0 0 Net cash used in financing activities - continuing operations -877 942 -29 888 -215 896 -9 934 -11 281 -167 326 -167 680 -167 680 -167 680 -167 680 Net cash used in financing activities - discontinued operations -51 584 0 0 0 0 0 0 0 0 0 Net cash used in financing activities -929 526 -29 888 -215 896 -9 934 -11 281 -167 326 -167 680 -167 680 -167 680 -167 680

Effect of exchange rate changes on cash and cash equivalents 1 -1 666 -1 638 -2 093 0 0 0 0 0 0

Change in cash and cash equivalents -7 895 -400 44 372 -42 754 -1 468 15 295 134 150 123 486 49 127 -6 894 Cash and cash equivalents, beggining of period 24 657 16 762 16 362 60 734 17 980 24 657 31 807 165 957 289 443 338 570 Cash and cash equivalents, end of period 16 762 16 362 60 734 17 980 16 512 31 807 165 957 289 443 338 570 331 676

Exhibit 11 : Key ratios Actual Forecast 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Gross profit (% of net sales) 20,6% 17,6% 24,3% 25,8% 23,3% 24,4% 27,7% 29,2% 28,3% 27,4%

Leverage ratios: Debt-to-assets 32,0% 33,1% 33,3% 34,0% 36,5% 33,8% 31,3% 27,9% 24,2% 20,6% Debt-to-equity 1,26 1,46 1,54 1,45 1,39 1,24 0,96 0,74 0,58 0,46 Interest coverage ratio 0,65 0,14 1,40 3,95 1,28 1,02 3,85 4,47 3,48 2,18

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Exhibit 12 : Discounted free cash flow valuation – base case Actual Forecast 2017 2018 2019 2020 2021 2022 Net operating profit after tax -1,650 -5,731 -37,331 -65,357 -90,748 + Depreciation & amortization 167,421 165,859 164,405 163,054 161,797 - Change in net working capital -39,983 -20,312 -18,890 -17,568 -16,338 - Capital expenditures -100,000 -100,000 -100,000 -100,000 -100,000 Free cash flow 25,788 39,816 8,184 -19,871 -45,289

Balance sheet Net working capital 332,297 292,314 272,002 253,111 235,543 219,205 Change -39,983 -20,312 -18,890 -17,568 -16,338 Exhibit 13 : Discounted free cash flow valuation – restructuring measures Actual Forecast 2017 2018 2019 2020 2021 2022 Net operating profit after tax 769 85,242 89,391 53,506 20,462 + Depreciation & amortization 167,421 165,859 164,405 163,054 161,797 - Change in net working capital -39,983 -46,975 -29,396 -14,846 -13,898 - Capital expenditures -100,000 -100,000 -100,000 -100,000 -100,000 Free cash flow 28,207 104,126 124,401 101,715 68,360

Balance sheet Net working capital 332,297 292,314 245,339 215,943 201,097 187,199 Change -39,983 -46,975 -29,396 -14,846 -13,898 Exhibit 14 : Dean Foods brand portfolio (Dec 2018)

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