WhiteWave Foods' CEO Discusses Q3 2012 Results - Earnings Call Transcript

| About: WhiteWave Foods (WWAV)

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WhiteWave Foods (NYSE:WWAV)

Q3 2012 Earnings Call

November 30, 2012 9:30 a.m. ET


David Oldani - IR

Gregg Engles - Chairman and CEO

Kelly Haecker - CFO

Blaine McPeak - President, WhiteWave


Chris Growe - Stifel Nicolaus

Michael Steib - Credit Suisse

Ryan Oksenhendler - Merrill Lynch

Amit Sharma - BMO Capital Markets

Judy Hong - Goldman Sachs

Farha Aslam - Stephens

Andrew Lazar - Barclays


[Operator instructions.] At this time, I would like to turn the call over to Mr. David Oldani, vice president and treasurer, investor relations. Please go ahead sir.

David Oldani

Thank you, operator, and good morning everyone. Thanks for joining us on the third quarter earnings conference call, which is the inaugural earnings conference call for the WhiteWave Foods Company. This morning we issued our earnings press release, which is available on our website at thewhitewavefoodscompany.com. The press release is also furnished as an exhibit to a Form 8-K, which is available on the SEC’s website at sec.gov.

Also available during this call, on the WhiteWave Foods website is a slide presentation which accompanies today’s prepared remarks. A replay of today’s call, along with the slide presentation, will be available on our website beginning this afternoon.

We would also like to advise you that all forward looking statements made on today’s call are intended to fall within the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements will include, among others, disclosure of earnings targets, as well as expectations regarding branding initiatives, innovation and research and development plans, growth plans, the potential spinoff or other disposition by Dean Foods of its remaining interest in us, and various other aspects of our business.

These statements involve risks and uncertainties that may cause actual results to differ materially from the statements made on today’s conference call. Information concerning those risks is contained in the company’s prospectus dated October 25, 2012, related to our initial public offering and in our Form 10-Q that will be filed with the SEC later today.

Further, we want to inform you that the information to be discussed on today’s call and in the accompanying slide presentation is presented on a pro forma adjusted basis as if the company had operated on an independent and standalone basis in all periods presented in order to enable you to make a meaningful evaluation of our operating performance between periods.

These adjustments include additional sales, costs, and net profits related to commercial arrangements we recently entered into; foods and subsidiaries including a sales and distribution agreement, manufacturing and supply agreements, and transitional sales agreements in connection with the separation of the company’s business from the rest of Dean Foods’ businesses; the exclusion of income associated with the intellectual property license agreement between us and a subsidiary of Dean Foods that has been terminated; projected increases in general and administrative costs related to operating as a standalone public company, which we expect to incur, including cost of corporate services historically provided to us by Dean Foods.

They exclude nonrecurring transaction costs related to our initial public offering; the expense related to one-time equity and cash awards granted to executive officers, employees, and directors in conjunction with the IPO; anticipated nonrecurring costs associated with the establishment of our own standalone functions related to our separation from Dean Foods; projected interest expense associated with the borrowings under our new credit facilities; and the accounting for interest rate swap agreements assumed by us from Dean Foods and exclude income from discontinued operations.

Our earnings release contains further details of these adjustments, along with reconciliations between our GAAP results and the results we present on a pro forma adjusted basis. Additionally, the release provides a reconciliation between the third quarter WhiteWave Alpro segment results reported by Dean Foods on November 8 and the WhiteWave Foods Company results prepared on a standalone basis.

Participating with me in the prepared section of today’s call are Gregg Engles, our chairman and CEO; and Kelly Haecker, our chief financial officer. Also available to participate in the Q&A portion of the call is Blaine McPeak, president of WhiteWave.

Gregg will start us off by providing a review of the results and overall business environment. Following Gregg, Kelly will offer some additional perspective on our operating results and comments on our forward outlook before turning the call back to Gregg for closing remarks. We will then open the call for your questions.

With that, I will turn the call over to Gregg. Gregg?

Gregg Engles

Thank you, Dave. Good morning everyone, and thank you for joining us. I’m delighted to be here today in my new role as the chairman and chief executive officer of the WhiteWave Foods Company and for what is our first earnings call as a public company.

As many of you know, just over a month ago we completed our initial public offering on the New York Stock Exchange, representing a significant first step in our separation from Dean Foods. With this move, our organization embarked on a new and exciting chapter in our history. As the former CEO of Dean, I was deeply involved in the growth of WhiteWave from its inception, and I’m honored to be leading the company and the talented WhiteWave and Alpro organizations in this important new stage.

The WhiteWave Foods Company is a unique company with pioneering brands that have helped launch some of the newest and most exciting trends in food and beverage. And importantly, our brands are squarely aligned with emerging consumer trends and preferences for products that are nutritious, flavorful, convenient, and responsibly produced.

With respect to today’s call, Dean Foods reported its third quarter earnings on November 8, with our WhiteWave and Alpro operations as one of its segments. However, we wanted to take this opportunity to review the WhiteWave Foods Company’s standalone results, and provide you with pro forma comparisons so that you can evaluate our business performance compared with prior periods, and have the proper framework to think about our results going forward.

Kelly will provide a walkthrough of the financials in a few minutes, but I’d like to begin, particularly for those of you who are new to us, with a brief overview of our company, our recent IPO, and the trends that drove significant and strong momentum for WhiteWave in the third quarter.

So let’s turn now to a brief review of who we are. The WhiteWave Foods Company is a leading $2 billion-plus food and beverage company that is well-positioned in large, on-trend, and high-growth categories through its leading positions across an exceptional portfolio of brands.

In the rapidly growing plant-based foods and beverages category, which includes products such as soy, almond, and coconut-based products, our primary brands are Silk in the United States, and Alpro in Europe. Both enjoy strong number-one brand positions.

In the premium dairy category, our Horizon Organic brand continues to resonate with consumer interest in health, nutrition, and the organic ethos of responsibly produced foods. Horizon Organic’s 45% share makes it the clear leader in its space.

Our coffee creamers and beverages business continues to benefit from increased hot and cold coffee consumption, and growing consumer interest in creamers and flavors that enhance their coffee. Our International Delight creamers have a strong number-two position at retail, and a strong number-one position in the away-from-home channel. This is a brand that consumers love and frequently purchase to create a flavorful, convenient, and affordable coffeehouse experience at home.

Notably, we operate in some of the fastest-growing subsegments within large, multi-billion categories, which means we believe we have a significant opportunity for innovation and continued growth. As a point of reference, while overall U.S. grocery grew at an average of just over 1% between 2009 and 2011, our categories grew between 8% and 9% annually, and this momentum has continued in 2012.

We were pleased to successfully complete the initial public offering of the WhiteWave Foods Company late last month, and I’m excited about our future prospects. To recap, we raised $368 million in net proceeds, in an offering that represented a 13.3% economic interest in the company.

In addition, as part of the IPO process, WhiteWave established a $1.35 billion credit facility. The IPO proceeds, and approximately $800 million of net borrowings, were used to repay $1.16 billion of intercompany notes owed to Dean Foods.

As we’ve discussed, we believe there are substantial benefits to WhiteWave as a standalone, independent company. First, the market will have the opportunity to invest in, and recognize the value of, our distinct product portfolio. Second, our management team will be solely focused on continuing to grow the WhiteWave business, building on a strong platform of innovation, and capitalizing on emerging trends.

Third, we will have independent access to the capital markets, and can directly determine the allocation of our capital toward innovation, product development, production capacity, and other initiatives to continue to improve our business. And finally, as a public company we’ll have an enhanced ability to pursue strategic acquisitions to augment the growth of our business.

With that, let’s turn to the quarter, where WhiteWave continued to build on its strong momentum. Our powerful mix of on-trend categories, leading brands, and highly effective innovation and marketing continued to deliver strong top and bottom line growth in the third quarter. In total, our third quarter pro forma adjusted net sales grew 13% over the prior year to $581 million.

This strong growth was led by our North America plant-based foods and beverages platform. In particular, the plant-based beverage category, which is aligned with long term emerging consumer trends for healthy and sustainable products, continued its positive trajectory.

Over the past year, household penetration of plant-based beverages in the United States has grown by 200 basis points to the highest reported level since the introduction of the category. The most recent 12-week data show category growth continues to be over 20%.

As the leading brand in the category, Silk is the main driver and beneficiary of these category dynamics. In the third quarter, Silk Pure Almond was once again the strongest performer in the platform, and Silk Soy has continued to stabilize on the strength of one of our latest product innovations called Silk Fruit and Protein.

Additionally, Silk Pure Coconut continues to perform well, broadening the appeal of the overall product set. Consistent with the first half of the year, the strong growth in Silk Pure Almond, Pure Coconut, and Fruit and Protein resulted in third quarter net sales growth of over 20% in our plant-based foods and beverages in North America.

Alpro, our European plant-based food and beverages platform, also continued to perform well. Despite a weak European economy, this business continues to generate steady sales growth from strength in fresh drinks, including the rollout of our new almond and hazelnut beverages and soy yogurt innovations.

Our core European geographies of the U.K., Belgium, the Netherlands, and Germany, continue to generally outperform the southern part of the continent. On a constant currency basis, Alpro net sales increased high single-digits in the quarter. With the impact of the weaker euro, Alpro net sales declined low single digits in the quarter after currency conversion.

Looking at our premium dairy platform, early in the year we increased our pay price to our farmer partners to help offset rising feed costs. We also instituted a corresponding consumer price increase at the time.

While these price increases have resulted in a slight decline in volume during 2012, net sales growth continues to be solid. We continue to see particularly strong performance in our innovative and differentiated single-serve and DHEA/Omega 3-enhanced products, which remain the Horizon brand’s most significant growth drivers. This drink helped deliver a mid single digit increase in Q3 net sales, and the most recent 12-week data show category growth continues to be strong, coming in at over 6%.

Turning now to our coffee creamers and beverages platform, the long term trend toward increased coffee consumption continues to create a favorable category dynamic for this business. And increasingly, consumers are choosing to whiten and flavor their coffee, adding variety and great taste to their coffee occasion.

Our coffee creamers and beverages platform is well-positioned to capitalize on these long term trends through continued brand building and innovation. Our launch of iced coffee in early 2012 has been an important part of the growth story this year. It has allowed our International Delight brand to move beyond the coffee mug, and we continue to spend to support its rapid development. Much like the first two quarters of this year, our coffee creamers and beverages platform posted net sales growth of over 20% in Q3.

And with that overview, I’ll now turn the call over to Kelly Haecker, who will provide you with an overview of the third quarter financials and our outlook for the fourth quarter. Kelly?

Kelly Haecker

Thanks, Gregg. Before getting to our third quarter results, I would first like to spend a few moments walking you through the pro forma adjusted reconciliation for 2011, in order to provide the foundation on which we are reporting our results.

The information you see on this slide is essentially the same financial presentation as in the tables that were provided as an exhibit to our earnings release this morning, where you can obtain additional detailed information.

I will begin with the pro forma column located in the middle of the table, which is identical to the pro forma figures that were presented in our final IPO prospectus filed with the SEC. As a reminder, the pro forma adjustments from our GAAP results include the incremental impact to sales and gross profits related to the recent establishment of sales and distribution and manufacturing and supply agreements, whereby subsidiaries of Dean Foods will continue to sell and distribute and manufacture certain WhiteWave products.

The new agreements modify our historical intercompany arrangements, and reflect new market pricing terms. The exclusion of income from an intellectual property license agreement between us and a subsidiary of Dean Foods that has been recently terminated will no longer be reported in our results. The inclusion of the expense associated with our one-time IPO grants to employees and directors, and the removal of allocated interest expense from Dean Foods and the inclusion of projected interest expense related to our new, independent credit facilities.

In order to provide you with our best estimate of what our results would have been, as if we operated on an independent and standalone basis during this period, as well as to provide the framework to compare our results going forward, we are also providing additional adjustments, which were not represented in the adjustments included in our prospectus.

These include the net impact to sales and gross profits from two recently implemented transitional sales agreements with subsidiaries of Dean Foods. One agreement transfers from another Dean Foods subsidiary back to us the direct responsibility for sales and costs related to certain WhiteWave products sold in the food service channel, and the second agreement transfers over from us the sales and costs related to aerosol whipped topping and other noncore products that are being transferred to Dean Foods entities.

The net effects of these agreements is a decrease to sales, an increase to gross profits, and a reduction in selling and distribution costs as reflected in the table. We’ve also layered in an additional corporate cost to reflect the $55 million in annual costs that we estimate will be required to operate as a standalone public company, and we have eliminated the cost of our one-time IPO grants, since this expense will be adjusted out of our earnings going forward. Lastly, we adjusted out the impacts of favorable noncash settlements of foreign tax examinations in 2011.

The accumulation of these adjustments results in the pro forma adjusted column, which we believe best represents what our operating performance would have been if the company had operated on an independent and standalone basis after taking into account the items that we estimate will affect our future results that I just detailed.

Now on to our third quarter results. Consistent with the first half of the year, we continued to experience strong volume, which drove pro forma adjusted net sales of $581 million in the third quarter, a 13% increase compared to the prior year period. And this top line growth, coupled with a favorable mix of products sold, and continued disciplined cost management, resulted in consolidated segment pro forma adjusted operating income growth of 17% to $59 million.

Importantly, during the quarter we continued to invest in production capacity, innovation, and brand building to drive future growth. Our North America segment led this strong performance, with net sales growth of 16%, driven by continued robust volume growth in plant-based foods and beverages, and in coffee creamers and beverages, as Gregg noted. This strong growth resulted in North American gross margin expansion of over 200 basis points in the quarter, helping to deliver over 20% operating income growth for this segment.

Overall consolidated results were somewhat tempered by our European based business. With the euro averaging over 11% below prior year levels in the quarter, the negative impact of currency conversion dilutes the reported results of our Europe segment. However, this segment continues to grow the top line, with volumes up mid single digits and net sales up high single digits on a constant currency basis, driven by a strong innovation pipeline. We remain very positive on the growth aspects of this business.

Now let’s take a look at the consolidated third quarter P&L on a pro forma adjusted basis. This is presented as if we had operated as a standalone enterprise, with our new commercial arrangements with Dean Foods reflecting market pricing being in effect, along with estimated independent corporate costs and interest expense related to our new capital structure. On that basis, our third quarter adjusted diluted earnings per share growth was 31%.

This strong earnings growth is a result of a compelling operating model and attractive financial growth characteristics. Our 13% sales growth translated into high teens growth in gross profit that carried down through the P&L, with over 20% growth in adjusted total operating income. This growth in operating income included an increase in marketing costs at a rate well ahead of our sales growth, as we continued to invest to drive future growth.

Building on our strong foundation, as we look to our fourth quarter, we expect our momentum across the business to continue with each of our brands and their respective categories performing well. We anticipate Q4 net sales percentage growth in the low double digits, driven by continued volume growth, resulting in a similar sales growth rate for the full year.

We expect this strong sales growth to lead to pro forma adjusted segment operating income growth in the mid-teens, with pro forma adjusted total operating income growth after estimated standalone corporate costs of around 20% for the quarter, resulting in full year growth in the low 20s. This would result in Q4 adjusted diluted earnings per share of between $0.16 and $0.18, or between $0.58 and $0.60 for the full year.

In short, we believe the business is well-positioned to continue to build on our track record of growth and to deliver a strong year. I will now turn it back over to Gregg for some closing remarks. Gregg?

Gregg Engles

Thank you, Kelly. Before we wrap up the call for your questions, I’d like to provide a brief overview and summary. As you can see from our performance, the WhiteWave Foods Company is delivering strong results, and has good momentum. And, at the core, there are several key elements that give me confidence in the future of our business.

First, our management team is outstanding. They bring broad experience from some of the world’s best consumer packaged goods companies, and over the last several years have honed their skills even further and become ingrained in the culture of entrepreneurialism at WhiteWave. I am honored to be working with this team.

Second, we have positioned the business to continue to win by building a robust infrastructure that can leverage strong top line growth into expanding profits and margins.

Third, our products have the wind at their back because they are aligned with long term consumer trends. This alignment is driving rapid category expansion that continues to increase our addressable market size.

Fourth, within these categories, we have large-scale brands that are market leaders. Our brands have earned consumers’ trust, and can be efficiently invested in and grown. In fact, so far in 2012 we have grown more than 10 times as fast as the overall packaged food industry.

Fifth, innovation is core to our strategy, and we have a strong track record of successfully innovating, both within our existing categories as well as into new areas of growth. Simply stated, we have a great platform and believe that we are uniquely well-positioned for continued strong and sustainable growth.

Thank you again for joining us today, and I’ll now ask the operator to open the call for your questions. Operator?

Question-and-Answer Session


[unintelligible] We’ll take our first question from Chris Growe with Stifel Nicolaus.

Chris Growe - Stifel Nicolaus

I had two questions for you, if I could. The first one would be, as I look at the IRI and Nielsen data, and I see plant-based beverages as a category doing very well, I see within that WhiteWave losing a little bit of market share. And again, this is with the backdrop that obviously revenue growth is very strong. So I just wanted to understand, within that, is it that soy is obviously a large component of your portfolio, and that’s sort of dragging your share down a bit?

And maybe you could also talk about how you’re doing in the realm of almond milk. Are you keeping up with the pace of growth in that category?

Gregg Engles

Let me hit the top line first, and then I’ll ask Blaine to comment about the subcategories. Yes, as the category has evolved away from being really purely a soy category, to being a category that is made up of other plant-based ingredients as well, our soy share, which is in the mid to high 70s, is becoming less of an important factor in the driver of the overall category. So our share in the other ingredient aspects, or subcategories, of the market, is in the 50s and 60s. So as the category mixes out to a different blend of product types, our share is going to drift down a little bit over time. I’d ask Blaine to comment specifically about almond.

Blaine McPeak

The only other adds there, I guess, really are with respect to Silk Pure Almond. We continue to hold the number-one position in the overall almond segment, and the vast majority of any type of share loss here within my base of beverages would be predominantly due to the changing mix between soy and almond, and our relatively market share in each of those.

Chris Growe - Stifel Nicolaus

I had one follow up, if I could, which is I know that last year you brought online the Dallas plants. And I just wanted to understand sort of how the capacity utilization is building there, and just to what degree… Certainly it’s been a bit of a drag on your profits, and how that can help your profitability going forward.

Gregg Engles

The plant opened in December of last year, of ’11, with its first lines. I think it opened with one line, making half gallons of plant-based beverages. The plant is still in the construction phase in the sense that we’re adding lines. I think that by the end of 2013 we’ll have that facility up to six lines. We’re currently operating, I believe, two lines, with lines three and four getting ready to come on.

So the plant is a work in process. The lines that we are operating in the plant are effectively running full, because of the volume growth in the business. So it’s capacity that we had to have. But it won’t be fully loaded, really, until the back half of 2013 as we continue to install additional lines in the facility. It’s helping, absolutely, service the volume growth in the business. It will ultimately provide a benefit in terms of distribution, because it gives us a mid-continent facility to ship mid-continent customers from. And you’ll continue to see it flow through in terms of lowering our overall costs in relationship to our sales here in the business going forward.


We’ll take our next question from Michael Steib with Credit Suisse.

Michael Steib - Credit Suisse

I’ve got a couple of questions. If I may start with the Silk and creamers businesses please. How much would you say, of the 20% growth in the U.S., came from new product launches and innovation versus growth in the base business? Can you give us an indication of how that would split up?

Blaine McPeak

I would say over on the Silk business, the vast majority of that growth has been driven by the core business, and continued strong growth in the almond franchise in particular. We had a slight advantage from the Silk Fruit and Protein launch. But the vast majority is just behind very, very strong commercial marketing programs and driving overall household penetration within that category subsegment.

On the coffee creamer side of the business here, and that’s coffee creamers and beverages, we indicated that we grew just over 20% in that particular business platform. And generally about half of that growth has been fueled by the launch of our iced coffee line that we launched in Europe January of last year. And we’re very very encouraged by the early results of that, and we’ll continue to advance that innovation going forward.

Michael Steib - Credit Suisse

And then just one more question, perhaps. I think you mentioned that the gross margin in the U.S. was up 200 basis points. I think at the group level it was 150. Can you just tell us what the main drivers for that were? Was it mix improvement or commodity cost related?

Blaine McPeak

The big driver of that is the mix, as you suggest, with the significant growth, particularly from the volume perspective, particularly in the plant-based beverages and coffee creamers and beverages businesses. That drove the favorable mix in North America. That was really the principal driver.

Michael Steib - Credit Suisse

So that should, at least to some degree, carry on into the next quarter?

Blaine McPeak



We’ll take our next question from Ryan Oksenhendler with Merrill Lynch.

Ryan Oksenhendler - Merrill Lynch

Can you talk a little bit about the innovation pipeline as you look out into the fourth quarter into next year? And I think you were launching Silk yogurt this quarter? Can you just talk about how that’s going as well?

Blaine McPeak

We have a pretty robust calendar here between now and the January timeframe with respect to innovation. If you take a look across our portfolio, you mentioned the Silk launch of Silk Fruity and Creamy Yogurt, that will begin shipping here toward the very end of December. And if you take a look at our overall Alpro business, they have a substantive part of their portfolio is in nonfluid areas such as yogurts and cooking creams and dessert area. And we believe we can create a similar type portfolio in the United States. So that will begin shipping within the next couple of weeks.

On our Horizon brand, we’ve consistently spoken about the growth of our single-serve business. And in partnership with the broader Dean Foods organization we will be launching True Moo in a single-serve, which provides a whole new entry price point for that overall category. That will be available in a aseptic single-serve for on-the-go, lunchbox nutrition for kids.

And then lastly, under the International Delight brand, both on the creamer side we’ll continue to expand the flavor assortment of that brand overall, with the launch of sugar-free caramel in the January timeframe. And we’re really excited about continuing to progress the overall category development of the iced coffee segment. We launched that, as I mentioned previously, in January of last year.

We’re going to expand that fairly aggressively here in the first quarter of 2013, with the launch of an International Delight iced coffee, with just 100 calories, with the launch of Silk Iced Soy Lattes, and as well, a launch of a single-serve offering as well, for those people who want to enjoy it on the go. We feel really encouraged about how we’re going to be pushing forward on the innovation front. It’s been a clear characteristic of our growth profile historically, and I think we feel good about it going into ’13.

Ryan Oksenhendler - Merrill Lynch

So then just in terms of modeling, is there a pipeline build we need to consider? And also, are there any incremental costs associated with the product launches?

Gregg Engles

At this point in time, I would not carve out any special expenses associated with the launch different than year over year. So we had meaningful launches in 2012 and meaningful launches in 2011, so launch costs are sort of baked into our algorithm, and likewise on the top line, you’ve seen, of course, the benefits of the innovations that we’ve brought to market, and we expect we’ll continue to see the benefits of that as we move into 2013 with our new launches.

Ryan Oksenhendler - Merrill Lynch

Can you give us a tax rate expectation for the full year? I think you’re tracking around 31.5% on an adjusted basis year to date. Is that good for the fourth quarter as well?

Kelly Haecker

Yeah, it’s pretty close. I would use probably something more around 32%, but it’s going to be pretty comparable with what we experienced on a pro forma adjusted year to date basis.


We’ll take our next question from Amit Sharma with BMO Capital Markets.

Amit Sharma - BMO Capital Markets

Gregg, first a clarification. The Dallas plant, my understanding was it was going to be fully operational early 2013. Now we are thinking it will be fully operational by the end of 2013. Is that a change?

Gregg Engles

Well, it’s fully operational today, we’re just installing additional lines in it. So it’s running at full capacity today for the lines that are in there, but we’re adding lines to it. So the last lines get installed, I think, and come up, in Q3 of 2013. So by the time you bring them up and get them running full force, it will probably be in Q4 of next year. So I guess fully operational means loaded to the gills without the ability to add any more lines. That’s where we’ll be at the end of 2013. But it’s fully operational today, and it has been throughout much of 2012, just not with all of the lines it can ultimately have installed in it.

Amit Sharma - BMO Capital Markets

So we have three to four lines operational today, and how many lines will it be by the end of second quarter of next year?

Gregg Engles

We have three lines operational today. I think we’ll ultimately end up with six lines in the facility. So not all lines are created equal. They’re not all making the same things. But in terms of lines in the facility, we’re halfway today.

Amit Sharma - BMO Capital Markets

So if you think broadly, have you talked about how much capacity it will add to your total manufacturing? Is it like 20% or 25%, or less?

Gregg Engles

It’s adding about 20%. And frankly, as I mentioned before, it’s running full at this point in time. So it’s not the only capacity project we have going on. We’re going back and adding capacity into our other existing facilities as well. So we’ve got robust volume growth here, and we’re spending capital to accommodate that across our network. We’ve talked about Dallas because it’s a new, from the ground up, facility, but we’re adding capacity across our plants.

Amit Sharma - BMO Capital Markets

And then Blaine mentioned that distribution was going to be the major advantage of this, and clearly so. But the fact that you’ll bring some of the co-packing in house, because of this extra capacity, will that be margin accretive as well?

Gregg Engles

Just to be really clear, we’re not bringing any co-packing in house. In fact, we’re expanding our use of co-packers just to accommodate the volume growth. So we produce about 70% of our volume today. We’ll continue to produce about 70% of our volume as the network expands, but obviously that 70% is getting bigger, but so’s the 30%.

Amit Sharma - BMO Capital Markets

A question around margin structure. Are you able to talk about where margins are for the plant-based and the dairy-based businesses as well as the premium dairy businesses?

Blaine McPeak

Certainly what I would say is the plant-based beverage and coffee creamer beverage businesses are the most profitable that we have, and they are certainly rivaling any kind of CPG best-in-class margins. Gross profit margins running north of 40%, and that allows us to support a pretty significant marketing spend against that business to ultimately contribute at a high teens level.

Amit Sharma - BMO Capital Markets

If we look at consolidated margins, those are like high single digit type margins, which is below where some of the companies in the natural or organic space currently have. So understanding that there are some initial costs associated with earnings as a standalone company, over the next year or the next 18 months, or whatever you want to see, what’s a better way of looking at the margin structure on the consolidated level?

Kelly Haecker

I think the way to probably look at it is to start with kind of where we are today and our intent, particularly with the leverage expectations in this business, as we layer on corporate costs and build out the infrastructure to support this business. Right now, on a pro forma adjusted basis, as you suggest, our total operating income margins are in the kind of high single-digits, and our expectation is over time, to gradually expand on those margins each year in the 50 basis points range.

But again, that will be significantly driven by the mix of our business. If we continue to see outsized growth in coffee creamers and beverages and plant-based beverages relative to the rest of the portfolio, then perhaps there will be opportunities to expand the margins even further. But the core margin improvement on a mix-neutral basis we anticipate on annual basis, just marginal improvement year over year, say around 50 basis points.


[Operator instructions.] We’ll take our next question from Judy Hong with Goldman Sachs.

Judy Hong - Goldman Sachs

My question is just if you look back sort of historically the relationship between the conventional milk pricing and either the Horizon or soy milk demand, with conventional milk pricing expected to go up, do you see that as a positive outlook for consumers trading up as the gap kind of narrows a bit? And then just broadly speaking, on the premiumization angle, can you talk about milk as a category, what do you think is sort of the right number that you can kind of point to as these premium dairy plus plant-based beverages being X percent of the total category. If you look at some of the other categories, is there reason that number could be lower or higher than some of the other CPG categories?

Gregg Engles

Let me try and get them in order. Clearly there’s some level of cross-elasticity between conventional milk and particularly organic. So as conventional prices rise, it always puts additional consumers in play to make the switch to organic, because the price gaps close. And I think we’re starting to see that. We’ll probably see a little more robust Horizon Organic performance in Q4, in a rising conventional environment. So that happens, and it’s going to come and go a bit with the category.

There’s, I think, less cross-elasticity with plant-based beverages. I think people choose those for primarily different reasons as opposed to cost. And those range across the spectrum from perceived health benefits, to perceived health conditions that people might have, like lactose intolerance or dairy allergy conditions, to a more social perspective on how they’re going to behave in the marketplace, because of sustainability or animal rights issues. There’s a lot of reasons that people are moving toward the plant-based beverages business.

To give you a longer term perspective, however, on where this is headed, I think it’s important to go back and start to look at the cost basis between plant-based beverages and milk beverages. And at the end of the day, the plant-based model is a lower cost model, because the cow is a relatively inefficient converter of grain into protein. So in what we believe will be a long term inflationary environment, the cost advantage of plant-based over dairy, we believe, will continue to grow.

And today, that model puts us in a position of having a premiumized product that we can innovate against and invest a robust amount against, in terms of marketing to consumers. So we love the long term competitive plot of plant-based in the world going forward. We think dairy just gets more expensive as it has to continually bear an increasing share of the externalities that have up until now been really not charged to dairy. And we think that the business model that we have of being able to innovate in our product and market our product because of the margin structure will allow us to continue to grow our share of the category, really as far out as we can see.

So we like the long term growth plot that we have, and in the short run, the swing up in dairy will, for those consumers who might be sitting on the fence because of price, give them a reason to move our way.

Judy Hong - Goldman Sachs

On the other issue, I know you’ve touched on the margin structure a little bit, but is there any structural reason why European margins are so much lower than the North America margins?

Gregg Engles

Yeah, it’s all below the gross profit line. The European market is just a more complicated market in which to operate. While it’s a large market in terms of consumers, larger than the United States in its totality, you still have very, very different product sets, because of traditional eating habits from country to country.

So you have more complexity in your portfolio. You have multiple redundancies in terms of sales force from country to country, because the retail trade is really country-specific as opposed to pan-European. You still have different languages and different labeling requirements from country to country.

So if you dig into the European segment, and look at the U.S. segment, you’ll find comparable margins at the gross margin line, but the European businesses, whether they’re large or small, are burdened by greater costs below the gross profit line. And I’d say the sort of average across the consumer space is on the order of 400 basis points less profitability given comparable margin structures at the gross profit line.

I think in our case, it’s somewhat magnified by the fact that we could stand to be bigger in Europe to leverage the infrastructure that we have. We have a $2 billion business in the United States and a $500 million business in the European market. And we’re also just losing G&A leverage because of the lack of relative scale there. So we love our business in Europe, we intend to make it bigger. As we make it bigger, we’ll make the margins better, because the inherent drag of complexity will become less burdensome as the organization gets bigger.


We’ll take our next question from Farha Aslam from Stephens.

Farha Aslam - Stephens

I was wondering if you could talk about what ACVs, your three key products, your Silk Almond, Silk Coconut, and your iced coffee are at now.

Blaine McPeak

Across most of the portfolio, on our developed products, almond being one of them, our ACVs are going to be in that 90% territory, similar to the overall Silk franchise. And with respect to the iced coffee arena, we’re fast approaching the 80% marker there on overall ACV. But what’s important is how we see that entire category developing and being the stewards of developing that category and expanding more beyond just ACV and more about the depth of distribution within that particular category, which is where we will be launching these pieces of innovation that I spoke about previously.

Farha Aslam - Stephens

And do you have any targets in terms of new product launches? Is there a number or a sales number or a percentage of sales that you’re targeting every year? And kind of how long do you anticipate new products to take to reach that 90 mature percent ACVs?

Blaine McPeak

We don’t necessarily have any specific measure that we look toward from a percentage of sales or absolute dollar threshold that we launch with respect to innovation. I think it’s a matter of ensuring that we have a good balance between innovation plus those programs that will grow our overall core business that is much more established and continue to grow penetration and depth of buying across the overall core of the franchise as well.

And with respect to how fast you quickly achieve full distribution, it really depends. It depends upon the scope of launch. As a case in point, around the iced coffee launch, which we supported quite extensively with overall advertising and marketing, we’re able to drive very, very accelerated rates of overall ACV distribution within the first four to five months of that particular product line.

In other cases, we might take a more measured approach to our overall outlook with regard to ACV. For example, the Silk Fruity and Creamy Yogurt launch that we have coming up here in the first quarter of next year, that’s going to be about making certain that we establish that business and nurture that business in a very, very attractive category. But we’re not going to explode out of the gates to try to drive ACV there, but make certain that we’re very successful in the ACV that we garner out of the gates.


At this time, we have time for one more question. Our last question comes from Andrew Lazar with Barclays.

Andrew Lazar - Barclays

Just two quick things. I know that you’ve talked about looking to try and take the Horizon brand name and extend it a bit, where it makes sense, outside potentially dairy. Maybe it’s more the center of the store. I’m trying to get a sense of how quickly you expect to be able to move on that. Is it something that’s more likely to come organically, or is that potentially also where some M&A could fit in as well?

Blaine McPeak

I think we’re very, very early in our area of assessment there. I think there’s a lot that we need to take a look at with respect to it. But nevertheless, this is a brand that has such great trust by moms. We think that it’s a brand that has stretched potential beyond where it competes today, be that either in refrigerated, different categories there, or potentially in the center store arena. I don’t think you’ll see anything any earlier. You won’t be seeing anything in 2013.

Andrew Lazar - Barclays

And then with respect to yogurt, obviously it’s a pretty dynamic category right now. There’s a lot going on in the key subcategories. I must say, though, I’m not as up to speed on what sort of offerings are currently in the category, in the plant-based yogurt space right now. Is that something that’s even been tried to be developed much at all by anybody? Or is your launch, while it may not be the first in that area, the one that’s really going to sort of get the most push around that new subsegment, if you will?

Blaine McPeak

We currently have plant-based yogurts under the Silk brand today. But in partnership with the Alpro organization, who have just a fantastic tasting yogurt, we have been able to fundamentally improve the overall product performance of the launch that we have coming up here in January. So the products exist today. They’re very very nascent, but we think we are doing it fundamentally better with both a soy and and an almond offering coming into January of next year. And this is about the nondairy component of yogurt, and can you begin to carve out a specific niche with a brand like Silk that has very, very strong equity with that particular consumer group.

Gregg Engles

And Andrew, just to give you a little frame of reference there, this market is much more well-developed in Alpro’s business, where yogurts constitute sort of high teens percentage of their business, and are growing at a 25% compound rate. So there’s outstanding potential in this arena, and this is a powerful area where we’re going to leverage the knowhow across our business in growing the plant-based alternative to dairy yogurt business in the United States. So we’re very excited about the products that we’re introducing. Again, I think Blaine has been clear, this is going to be a slow build, because I think there’s a bit more education that’s going to have to take place here among our consumers, but we’re very excited about the launch and prospects of this opportunity.

Andrew Lazar - Barclays

And as you said, the precedent essentially exists. You know that when you get those pieces correct, it can work, as it does in Europe. So a measured approach seems to make some sense. Thank you.

Gregg Engles

Very good. Well, thank you all for attending the inaugural earnings call for the WhiteWave Foods Company. We appreciate your interest in our business, and your excellent questions. And we look forward to reporting on our Q4 in the beginning of next year. Thank you for joining us, and we look forward to working with you going forward.

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