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Dean Foods (NYSE:DF)

Q1 2013 Earnings Call

May 09, 2013 10:30 am ET

Executives

Barry Sievert - Vice President of Investor Relations

Gregg A. Tanner - Chief Executive Officer, Director and Chairman of Executive Committee

Chris Bellairs - Chief Financial Officer and Executive Vice President

Analysts

John J. Baumgartner - Wells Fargo Securities, LLC, Research Division

Christopher R. Growe - Stifel, Nicolaus & Co., Inc., Research Division

Judy E. Hong - Goldman Sachs Group Inc., Research Division

Alexia Howard - Sanford C. Bernstein & Co., LLC., Research Division

Matthew C. Grainger - Morgan Stanley, Research Division

Amit Sharma - BMO Capital Markets U.S.

Ryan Oksenhendler - BofA Merrill Lynch, Research Division

Eric R. Katzman - Deutsche Bank AG, Research Division

Farha Aslam - Stephens Inc., Research Division

Akshay S. Jagdale - KeyBanc Capital Markets Inc., Research Division

Carla Casella - JP Morgan Chase & Co, Research Division

John Malcolm - Citigroup Inc, Research Division

Operator

Good morning, and welcome to the Dean Foods Company First Quarter 2013 Earnings Conference Call. Please note that today's call is being recorded and is also being broadcast live over the Internet on the Dean Foods corporate website. This broadcast is a property of Dean Foods. Any redistribution, retransmission or rebroadcast of this call, in any form, without the expressed written consent of the company is strictly prohibited.

At this time, I would like to turn the call over for opening remarks to the Vice President of Investor Relations, Mr. Barry Sievert. Please go ahead.

Barry Sievert

Thank you, and good morning, everyone. Thanks for joining us on our first quarter earnings conference call. This morning, we issued an earnings release, which is available on our website at deanfoods.com. The press release is also filed as an exhibit to a Form 8-K, which is available on the SEC's website at sec.gov. A slide presentation, which accompanies today's prepared remarks, is also available during the call at the Dean Foods website. A replay of today's call, along with the slide presentation, will be available on our website beginning this afternoon.

Throughout today's call, the earnings per share, operating income and interest expense information that will be provided are from continuing operations and have been adjusted to exclude expenses related to facility closings, reorganizations and realignments, asset write-downs, litigation matters, transaction-related costs and other non-recurring items.

In addition, pro forma adjustments were made to our 2012 results to reflect transactions between our segments under our current commercial agreements that went into effect upon the completion of the WhiteWave IPO rather than under the intercompany agreements that were in effect throughout the majority of 2012. The WhiteWave Foods Company released first quarter results and held an investor call earlier today. We will not be discussing their results, but we'd refer you to their press release, Form 8-K filing and the replay of their conference call, which is available on their website at www.whitewave.com for more information on their performance.

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 anticipated cost savings, leverage ratios and various other aspects of our business, including the announced spin-off of a portion of our ownership interest in The WhiteWave Foods Company and any future disposition of our remaining ownership interest in -- following the WhiteWave spin-off.

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 periodic reports on Forms 10-K and 10-Q, as well as in today's earnings release.

Participating with me in the prepared section of today's call are Gregg Tanner, our Chief Executive Officer; and Chris Bellairs, our Chief Financial Officer. Gregg will start us off with an update on the WhiteWave spin-off plans and a review of Dean Foods first quarter performance. Chris will then offer some additional perspective on our financial results before turning the call back to Gregg for comments on the forward outlook and other closing remarks. We will then open the call to your questions.

With that, I will turn the call over to Gregg for his opening remarks. Gregg?

Gregg A. Tanner

Thank you, Barry, and good morning, everyone. Thanks for joining us on the call today. As I'm sure you've seen from the press release, the first quarter marked a solid start to the new year. Although before getting into the results, I'd like to provide an update on our effort to unlock shareholder value through the spin-off of WhiteWave from Dean Foods.

We are moving forward with our plans to effect the full separation of the business. The post-IPO lock-up period expired April 23, 2013. On May 1, the Board declared a dividend of The WhiteWave Foods Company stock. We will spin an aggregate of approximately 47.7 million shares of Class A common stock and approximately 67.9 million shares of Class B common stock of The WhiteWave Foods Company to Dean Foods shareholders as of the close of business on the record date of May 17.

Accordingly, on May 23, we plan to distribute WhiteWave shares to Dean Foods stockholders of record. Based upon the number of shares of Dean Foods common stock outstanding on March 31, 2013, we expect that each share of Dean Foods owned will entitle the holder to approximately 0.256 Class A shares of WhiteWave and 0.364 Class B shares of WhiteWave, with fractional shares to be settled in cash. The final distribution ratios will be determined on the record date.

We will retain 34.4 million Class A shares or approximately 19.9% of WhiteWave, which we plan to monetize in a tax-free manner within the next 18 months. We are pleased to reach the final stages of the strategic realignment of Dean Foods. Gratified by the stockholder value we have been able to unlock through this process, I'm optimistic about the future of both companies as we look ahead.

Because the spin-off will deliver a significant amount of value to our shareholders in the form of WhiteWave shares, we anticipate Dean Foods' share price will adjust lower, concurrent with the spin-off. As a result, at our Annual Meeting next week, we are seeking stockholder approval for a potential reverse stock split following the spin-off of WhiteWave. We anticipate some volatility immediately following the spin-off, as investors reposition their holdings. Assuming stockholder approval of the reverse stock split proposal, the Board plans to wait sometime before determining whether to enact the reverse split and, if so, the appropriate split ratio.

So turning to the results of the first quarter. You see a continued focus on the fundamentals of costs, volume and price. The narrowed focus on the key drivers of the business and our company-wide "say what you'll do and do what you say" attitude have helped delivered 9 consecutive quarters of results at or above our guidance.

Beginning in the first quarter, we have combined the results of our core dairy operations, previously referred to as Fresh Dairy Direct and our corporate expenses into a single segment called Ongoing Dean Foods.

Our Ongoing Dean Foods segment, which excludes all impacts from WhiteWave, earned adjusted EPS of $0.16 per share as compared to our guidance for adjusted earnings of $0.10 to $0.15 per share. Including the 86.7% economic interest of WhiteWave that we owned on March 31, 2013, our consolidated Q1 adjusted diluted earnings per share was $0.29. This is a 16% increase from the year-ago period and above our Q1 guidance of $0.22 to $0.27 per diluted share.

For the Ongoing Dean Foods segment, first quarter adjusted operating income of $74 million compared to $66 million reported in Q1 of 2012 on a pro forma and comparable basis, a 12% year-over-year increase.

We also significantly deleveraged the company through the $1.45 billion sale of Morningstar. Leverage, at the end of Q1, stood at just 2.13x debt to EBITDA, as defined by our credit agreements. Over the past 12 months, we have reduced Dean Foods' net debt by over $2.6 billion.

Total volumes across Ongoing Dean Foods business, including fluid milk, ice cream, cultured and other products, came in at 727 million gallons for the quarter, a decline of 4.5% from 762 million gallons in Q1 of 2012. Roughly half of this decline is directly related to the loss of 2 sales days in the quarter due to the overlap of leap year and the fact that March included 5 Sundays this year.

Within fluid milk, our share of U.S. sales volume held steady from fourth quarter levels at 38%. Category volumes softened a bit in the quarter from recent trends. The category declined approximately 3.6% on an unadjusted basis, which does not normalize the impact of leap year and selling day quality between periods. On this same basis, we slightly underperformed the broader market and our competition in the quarter due to the recent loss of some customer volumes. Our fluid milk volumes declined 4.1% on an unadjusted basis, similar to our volume performance. We believe roughly 1/2 of our fluid milk volume decline was due to the number of quality days in the quarter.

On an adjusted per sales day basis, we believe the category was only down modestly from fourth quarter levels. In recent quarters, we have been publishing adjusted volume performance based on USDA data. The USDA has not published adjusted data for the first quarter, and it's not clear if or when they will again.

The overall volume performance was a result of solid growth in small format, offset by continued weakness in the large format groceries, certain mass merchandisers and food service. Our nation-wide DSD system is giving us a competitive advantage, as consumer purchasing patterns continue to shift milk sales from large to small format retailers.

We continue to focus on strengthening our volumes at margin-appropriate pricing levels. However, we expect our lower-margin private label volumes to continue to underperform the broader industry through the balance of the year due to the loss of a portion of a significant customer's business that we discussed last quarter.

Considering category trends in the first quarter and the coming volume losses over the rest of the year, we now expect our full year fluid milk volumes to decline in the low- to mid-single digits.

A notable bright spot in our volume performance in the quarter was our flavored milk business, under the TruMoo brand, which continued to outperform the flavored milk category. TruMoo was recently ranked as the fourth most successful consumer packaged goods brand of 2012 by Information Resources Inc., or IRI, out of 1,900 new CPG brands that were introduced in the U.S. between 2011 and 2012. The TruMoo brand was first introduced in August of 2011 when we reformulated and converted all of our flavored milk business to the new brand, giving us the ability to innovate and market the product on a national scale.

Since its introduction in 2011, we have invested over $30 million in support of the brand. TruMoo, with 35% fewer grams of sugar than its largest rival, lower fat and no high-fructose corn syrup, represents a healthier and delicious flavored milk alternative. This brand conversion and innovation has been very successful, with TruMoo now 3x larger than the next largest flavored milk brand. We are very pleased with the success of the TruMoo portfolio and expect the brand to continue to grow in the years ahead.

Turning back to the white milk category. Retailers continue to price private label milk at levels consistent with historical norms, with the margin over milk or the spread between the Class I Mover and the retail price of private label gallons, at approximately $1.54 per gallon compared to $1.47 per gallon in the previous quarter and $1.65 per gallon in Q1 of 2012.

Price gaps between brands and private label in Q1 remain consistent with prior periods and were $0.05 per gallon above last year's levels. We don't believe recent retail price trends suggest any evidence of a return to the aggressive price discounting that the industry experienced in 2010 and 2011.

Our priority brands continued to take share, with our share of the U.S. branded milk up over 1.5 in the last 12 months and 2.5 points over the last 2 years to 48.4%.

In contrast to the back half of 2012, Class I raw milk prices declined sequentially in Q1. On average, the Q1 Class I price was 10% lower than the previous quarter. This sequential decline in raw milk costs helped drive a sequential improvement in gross profits. Despite the decline, raw milk prices remained 6% above year-ago levels, contributing to a slight decline in gross profit per gallon on a year-over-year basis, which was also influenced by volume de-leverage in our plants.

The year-over-year softness at the gross profit line was more than offset by strong cost performance in distribution and SG&A. Class I milk prices have been relatively flat through the first 2 months of the second quarter, declining $0.14 in April and then rising just $0.10 in May. Recent movements in the markets for storable dairy commodities lead us to expect about a 6% sequential increase in the June price. However, we continue to view the fundamentals in the U.S. market as relatively balanced, with solid supply growth, ample inventories and continued tepid demand. Barring any unusual weather patterns like we experienced last year, we expect Class I prices to drift higher over the back half of the year, but to remain within manageable levels.

Consistent with our core business strategy, we continue to focus on efficiency and cost reduction in Q1. We significantly reduced distribution and SG&A costs, helping us to deliver solid bottom line results. As a result of our strong focus on rightsizing our SG&A cost infrastructure over recent periods, SG&A costs for our Ongoing Dean Foods operations declined $23 million in the first quarter from the year-ago period.

Excluding advertising and incentive compensation, SG&A was $16 million below year-ago levels. Our renewed focus on distribution costs resulted in a $17 million decline in distribution expenses from Q1 of last year for our Ongoing Dean Foods operations. We are making solid progress in our distribution efficiency efforts. And over the next 18 months, we expect to eliminate a significant number of routes from our network, driving higher distribution asset utilization and route economics and resulting in a more variabilized cost structure within our distribution system.

Our accelerated cost-reduction efforts also included the planned closure of 10% to 15% of our plant network. In addition to the 3 plants announced late last year that are still in the closure process, we have recently announced the closure of 2 additional plants. We have closed our Shreveport, Louisiana facility and have recently notified employees of the upcoming closure of our Buena Park, California fluid milk plant. We have strong momentum and expect to announce additional plant closures over the balance of the year and into 2014.

Paramount to our planning as we approach these initiatives is maintaining continued excellence in quality, safety and service. These are values that we refuse to compromise on and values that ensure our ability to provide a completely seamless transition from 1 plant to another for our customers.

Within our ongoing plant network, our commitment to quality is relentless. This focus has led to a healthy competition among our manufacturing plants, which compete across several metrics to be the highest quality facility in the Dean Foods network.

I'd like to take a moment to recognize and congratulate our Purity Dairy in Nashville, and that is our fluid milk plant; and our Toledo ice cream plant for winning the 2012 Dean Foods CEO Quality Award as the 2 plants that best exemplified our quality culture in 2012. Your hard work is noticed and very much appreciated.

As a result of our strong cost performance, adjusted operating income per gallon for Ongoing Dean Foods segment, including the former FDD and corporate segments, increased 18% from year-ago levels to reach $0.102 per gallon, the highest per gallon result in more than a year. This drove a total adjusted operating income increase of 12% in the quarter over the prior-year quarter.

This year is off to a solid start, and we expect to continue to deliver against our objectives as the year progresses.

With that, I will turn the call over to Chris for a more detailed review of the financial results. Chris?

Chris Bellairs

Thank you, Gregg, and good morning, everyone. I'll walk through the Q1 results for the Ongoing Dean Foods segment, as well as review the balance sheet and cash flow performance in the quarter. As a reminder, the numbers I'll discuss are only for our Ongoing Dean Foods segment and, thus, exclude the impact of WhiteWave ownership interest and Morningstar.

Starting at the top of the P&L. As Gregg noted, volumes declined in the quarter to 727 million gallons, in part due to modest softening in our categories and also impacted by the absence of leap year and the quality of days in the quarter this year versus the last. This drove a bit of volume de-leverage in our plants, resulting in a year-over-year decline in adjusted gross profit of about 6%. However, a $17 million reduction in distribution costs and a $23 million reduction in SG&A costs drove solid adjusted operating income growth of 12% to $74 million. Adjusted EBITDA for the quarter for Ongoing Dean Foods was $116 million.

On an adjusted basis, interest expense came in at $26 million for the quarter. This, in combination with our tax rate of 37.5%, yielded adjusted diluted EPS of $0.16 for the quarter, just above the higher end of our ingoing expectations.

As of the end of the first quarter, total net debt outstanding, excluding WhiteWave's stand-alone debt, stood at approximately $1 billion. Dean Foods' leverage ratio on March 31, as defined by our credit agreement, was 2.13x, a significant decline from 3.54x at the end of the fourth quarter of 2012. The sharp decline is predominantly the result of the debt reduction driven by the proceeds received from the Morningstar sale. Our leverage is likely to move a bit higher over the balance of the year due to the upcoming tax payments associated with the Morningstar transaction. As a reminder, we will pay 50% or approximately $215 million of the Morningstar tax bill in Q2, 25% in Q3 and the remaining 25% in Q4 of this year.

Our goal remains to achieve and maintain a leverage ratio below 2.5x net funded debt to EBITDA. Once we have reached our target, we will evaluate best uses for free cash flow going forward.

Net cash flow used in continuing operations for Ongoing Dean Foods was $89 million. Capital expenditures totaled $16 million, resulting in a negative free cash flow from continuing operations for Ongoing Dean Foods of $105 million.

Our negative free cash flow was driven by a couple of significant one-time items. A large net use of working capital in the quarter was due to the move of Morningstar from intercompany to external accounts receivable and swap termination fees associated with interest rate swaps extinguished in connection with the debt retired from the Morningstar sale. Also impacting cash flow in the quarter were higher incentive compensation payouts related to our strong 2012 performance, as well as inventory builds related to ice cream and butter production.

Net of our large income tax payables and litigation payment, we expect to generate positive normalized cash flow throughout the remainder of 2013. Total cash flow was supplemented by the receipt of approximately $1.45 billion of proceeds from the MorningStar sale, offset by the payoff of $1.3 billion of Dean Foods debt.

Finally, as Gregg mentioned earlier, in connection with the spin-off of WhiteWave, we will retain an approximate 19.9% interest or a 34.4 million shares stake in WhiteWave, which, based on yesterday's closing price, is worth more than $550 million.

This will provide Dean significant financial flexibility going forward, as we expect to monetize this ownership interest on a tax-free basis within the next 18 months.

With that, I'll now turn the call back to Gregg Tanner for comments on our corporate strategy going forward, as well as a review of our forward outlook. Gregg?

Gregg A. Tanner

Thanks, Chris. Our focus remains very clear. We are working to extend our competitive advantages in the core areas that drive our business: Volume, cost and pricing.

In the near term, we are especially focused on cost reduction. We are accelerating our cost-reduction efforts, including the closure of 10% to 15% of the plants in our network. We are also eliminating a significant amount of distribution routes and continuing to rightsize our SG&A.

Progress, so far, is consistent with our expectations, and we anticipate meeting our objectives. As a result of the loss of some business with a significant customer that we previously disclosed, our private label white milk volumes are expected to underperform the industry this year. However, we believe that, as we move past this volume loss, we will return to our long-term trend of gaining share due to the strength of our network, our advantaged cost structure, our strong brands, a significantly strengthened balance sheet and a focus on service, quality and customer relationships.

Additionally, we will continue to improve our pricing protocols to ensure that we pass through commodity inflation and reduce commodity-driven volatility in our results.

Turning to the forward outlook, as we complete the spin-off of WhiteWave, we will continue to focus on driving value in our core business and expect to deliver a solid 2013 growth. With softer-than-anticipated industry volumes to start the year, we now expect our volumes to decline low- to mid-single digits this year.

The dairy commodity environment looks to be a neutral factor in our forecast. Diesel, resin and sugar are expected to be modest tailwinds. We are confident the momentum behind our cost-reduction activities will deliver solid bottom line results.

Overall, for the year, we continue to expect to substantially offset the financial impact of the lower volumes through accelerated cost reduction and productivity initiatives, resulting in a low- to mid-single digit increase in Ongoing Dean Foods operating income from the pro forma 2012 results.

With the dramatic debt reduction of the last year, we expect the interest expense to be approximately $108 million to $112 million in 2013. We expect our full year tax rate to be around 38%. As a result, for the full year, we continue to expect diluted EPS of between $0.45 and $0.55, excluding WhiteWave. On the same basis, for Q2, we expect adjusted diluted earnings of $0.11 to $0.15 per share.

In summary, Q1 was a good start to the year. We're delivering on our initiatives. With our solid momentum heading into Q2, we expect to deliver strong Q2 and full year results.

I want to again thank our employees for their hard work in delivering the first quarter and the groundwork they are putting in place to produce solid full year results. To our investors, I want to thank you for your continued interest and support of Dean Foods.

And with that, I will ask the operator to open the call up to your questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] We'll go first to the side of John Baumgartner with Wells Fargo.

John J. Baumgartner - Wells Fargo Securities, LLC, Research Division

Chris, just wondering if you could speak a little bit to the 9 3/4% 2018 senior note in terms of bringing those in early with some of the lower cost bank debt here given the environment?

Chris Bellairs

You bet, John. Obviously, a very active conversation for us here. As I think you're probably aware, the takeout premium for those right now is a fairly substantial number. So we're sort of doing the assessment right now of -- the balancing act of when that takeout premium comes down relative to the -- our first opportunity to call those at the end of next year.

John J. Baumgartner - Wells Fargo Securities, LLC, Research Division

Okay. Great. And then, in terms of the other larger inventories of butter and ice cream, was that just typical seasonality, or was there anything opportunistic in terms of build getting ahead of the cost inflation later this year?

Chris Bellairs

It's a little bit of both. Some of it was driven by commodity input costs. Some of it was driven by some of the best scheduling for both the ice cream plants and our butter churn.

Operator

And we'll go next to the side of Chris Growe with Stifel.

Christopher R. Growe - Stifel, Nicolaus & Co., Inc., Research Division

I just want to ask you a question -- actually, 2, if I could. The first one would just be, as you think about the earnings -- the gap you have in your earnings range for, say, the second quarter, or even just a little [ph] wider gap for the year, I just want to understand -- obviously, there's a lot of variability in those numbers and what can go into that. But would you attribute the variability mostly to volumes and, maybe, just to try to be conservative with your volume outlook for the year? Is that -- would be that the biggest factor in that EPS range?

Gregg A. Tanner

Chris, I would tell you that I'm not sure. I mean, volume, obviously, is one of the concerns coming out of the first quarter. But I think it's just that there are so many moving parts right now, as we start to exit some of the business with a customer, who we lost the RFP to. But I just -- I think, this second quarter, we're just trying to be as prudent as we can with our forecast because of the second quarter and third quarter volume that will be moving out.

Christopher R. Growe - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And I had a second question, just in relation to pricing and pricing protocols and the success that you've had in being a little bit more diligent around the milk price change every month and getting that through and really managing your mix. There's a lot of factors that go into that, I realize. So just curious if you could speak to that and if you're -- the kind of progress you're seeing there and how that's aiding profitability? We saw it in Q4. I guess, we saw it, to a degree, this quarter as well.

Chris Bellairs

Yes. So I think we continue to make good progress on that. We actually reviewed some of the new tools the team is working with last week, some of the new things they put together to work with our field sales teams, as they set price every month. The first quarter was maybe a little bit of an interesting quarter to test those because, with milk moving down sequentially -- as you saw in the numbers, our gross profit per gallon did increase sequentially. So those tools will probably come to be tested more fully in quarters and months, where we're seeing sequential movement up in the milk price. But right now, we feel pretty good about the tools being developed, how they're being rolled out and how they're being adopted.

Operator

We'll go next to Judy Hong with Goldman Sachs.

Judy E. Hong - Goldman Sachs Group Inc., Research Division

First, just -- now that you've finalized the spin-off of WhiteWave, I was just curious when you think you would get more clarity on your capital allocation plans? Just given that, if I look at your leverage, even if you adjust for the gain that you have to pay on Morningstar, it seems like you're pretty much close to your target level?

Gregg A. Tanner

Yes. Judy, I would tell you that -- I mean, our continued focus is to continue to drive down our debt, and we need to get it below the 2.5 target that we've set for ourselves and we need to keep it below that for an extended period. So my take would be that -- as we get to that point and maintain that, that we will come back with what we believe are the alternatives or the best use of that cash -- that excess cash that we'll have.

Judy E. Hong - Goldman Sachs Group Inc., Research Division

Okay. And, Chris, just clarifying, the premium that you would be required to pay on retiring the 9 3/4% debt, can you use your gain on Morningstar sales against that premium that you have to pay, so your cash payments on the gain is actually less?

Chris Bellairs

That's correct. It would be -- there is the offset there. But even with that right now, the decision that we're looking at, it still isn't completely obvious that would be the best use of cash right now.

Operator

And we'll go next to Alexia Howard with Sanford C. Bernstein.

Alexia Howard - Sanford C. Bernstein & Co., LLC., Research Division

So we've had several examples of other people in the industry rationalizing capacity. I'm -- and you've obviously closed plants as well. Could you give us any rough estimates of what proportion of the total industry capacity has come out over the last year to 18 months? And in particular, are you able to give any commentary on what happened specifically with the Waukegan plant and where the volume went? And as other plants close in the industry, do you expect the competition of volume, as that plays out?

Gregg A. Tanner

Thank you. As far as other industry capacity, I can't really speak to what has come in or out, as I don't -- I can speak to what we've done. And as I talked to earlier, we're going to take 10% to 15% of our facilities out. That should translate in very similar types of capacity. It may be a little bit less, but it should be relatively close to the percentage of facilities that we take. So I think that -- from my perspective, as far as your question on Waukesha, Waukegan, I don't -- I know that we picked up some of that business coming out of that facility. And where the rest of it went, I can't really speak to because I'm not sure.

Operator

We'll go next to Matthew Grainger with Morgan Stanley.

Matthew C. Grainger - Morgan Stanley, Research Division

Gregg, just want to revisit the comments you made around the second half outlook for raw milk costs. When you say you expect price to drift higher during the second half, are you benchmarking that against the second quarter average or off a higher June Class I price? And then, just the range of forecast that you'd consider, can you give us an update on what you'd consider a realistic range for Class I prices for the full year, and can you give us a sense of at what point, if things do drift higher, you'd start to see a little bit of risks to the operating profit growth outlook?

Gregg A. Tanner

Okay. But there's a lot of there, so let me start with, sequentially, our prices would go up in June -- starting with June. So as we said there, we think there's about a 6% or somewhere around $1 a hundredweight increase in June. And then, as that moves forward, on average, second half of the year between $18 and $19 a hundredweight would be kind of what we would think of as a range.

Chris Bellairs

Right now, Matthew, USDA is forecasting a 0.70% increase in total production this year versus last. So as we -- and obviously, that's also somewhat dependent upon the corn crop. But as it looks right now, the factors impacting the back-end of the year, there's nothing -- nothing looks particularly ominous after we get through that modest pickup in June.

Gregg A. Tanner

And I think you'll see a little bit of the reaction early on in the -- over the last quarter to what was going on in New Zealand with the drought in New Zealand. They've now received rain, so that's kind of gone away. And now, their focus has kind of moved to the lower production rates in the EU. So I just -- you don't see it, I don't see it in the U.S. market. I think we're going to be relatively stable through the back half of the year, slightly increasing.

Chris Bellairs

Per cow output within the U.S. has remained very strong, so some of the fundamentals look pretty good.

Operator

We'll go next to Amit Sharma with BMO Capital Markets.

Amit Sharma - BMO Capital Markets U.S.

Now, Gregg, you've laid out a pretty persuasive case of reducing capacity and really bringing down your operating structure. Now in addition to that, as we look at some of the external players that have a bearing on margins, your retailers, your competitors, what can you -- could you give us some comfort in terms of where do you see that? Is it moving towards the rational environment, or it's as usual?

Gregg A. Tanner

It feels as usual. We're not seeing anything out there, retailer-wise or even consumer-wise, that is dramatically changing the landscape. So I don't -- I can't speak to anything specifically that I'm seeing that would tell us there's -- that their capacity rationalization and us being more cost-effective is not going to work and work effectively.

Amit Sharma - BMO Capital Markets U.S.

Got it. And then, as a follow-up, TruMoo, as you laid out, is very successful, right? And clearly, there are differences between the chocolate milk and the white milk market. But are there any lessons in terms of what can you do to your brand development in the white milk sort of business, or is that completely different?

Gregg A. Tanner

Well, I think there's multiple things. I think it is a little bit different, but I think there are some of the learnings when you can scale up a national brand and you get the economies of scale. Whether it be from an advertising or just distribution perspective, there's definitely some synergies there to be gained. And I think that's probably the biggest thing coming out of TruMoo that we've been able to accomplish is being able to take advantage of that from a national perspective. And I would think the same would play true whether -- on white milk as well.

Chris Bellairs

You also see the strength of our DSD network coming into play there as well. DSD, for us, I think, is a nice opportunity [ph] to grow the TruMoo business, and we still have opportunities yet to go.

Operator

We'll go next to Robert Moskow with Crédit Suisse.

Unknown Analyst

This is Clay [indiscernible] standing in for Rob. A couple of questions. So I know that you mentioned in your prepared remarks regarding the Ongoing Dean free cash flow of a negative $105 million. Wondering if you could provide a little bit more color on the moving parts there, specifically kind of the amounts related to the accounts receivable shift and the hiring incentive compensation and the swap repayment?

Gregg A. Tanner

Hey, Chris, do you want to take that?

Chris Bellairs

So the swap repayment was $28 million. The accounts receivable is kind of in that $25 million to $30 million range. Similar for the inventory build, probably a little less and then -- and incentive compensation was also kind of in that range, perhaps even a little higher than that range. So 4 items, and all 4 of them contributed to about -- roughly in line with the same amount to the $105 million negative cash flow for the quarter.

Unknown Analyst

Okay. And is that $28 million on swap, is that included in the $1.3 billion of debt repayment, or is it separate?

Chris Bellairs

Separate.

Unknown Analyst

Separate, okay. And then, you had kind of mentioned that free cash flow going forward, you expect it to be positive. Are you prepared to kind of give anything more specific there, or you just want to leave it at that?

Chris Bellairs

No, I think, at this point, we'll leave it where we did, and then we'll provide more color as we go throughout the year.

Operator

And we'll go next to Ryan Oksenhendler with Bank of America.

Ryan Oksenhendler - BofA Merrill Lynch, Research Division

I just had a question actually on the outlook for 2014. Given that the -- I guess, the TSA agreement you have with WhiteWave is going end or roll off at the end of this year, and you'll get the full year benefit of the run rate of the cost savings from this year, possibly assuming that you'll have some additional cost savings. You can easily get to a double-digit profit growth as opposed to your long-term target of a mid-single digit profit growth. I guess, is there any headwinds that you've seen actually that may offset some of those tailwinds?

Gregg A. Tanner

I think that -- I wish I could predict that. But what I would tell you is, as we move into -- as we look at 2014, we will have some significant tailwinds, but we'll also be overlapping the loss of some significant volume. So as we've lost the volume, we're not able to take the capacity out at the same rate. So we get a little bit behind that curve. But as that starts to pick up, I think you will see the -- you'll see it play out very similar to as you are defining it.

Operator

We'll go next to Eric Katzman with Deutsche Bank.

Eric R. Katzman - Deutsche Bank AG, Research Division

A couple of questions, I guess. First is, the savings that you're talking about are obviously, this year, very meaningful relative to your gross profit and your just total cost. When I look at our model versus what you generated, there was much more SG&A savings versus, let's say, cost of goods. And so, I'm just trying to kind of get a gauge how that $120 million -- with some of it I guess stranded overhead, which would be G&A, how that kind of flows through for the year, like, how we should kind of think about that? And then, on the financing side of things, am I kind of reading it correctly that you're basically deferring decision on returning cash to shareholders to really towards maybe the end of this year, when you figured out the capital, what to do with the long -- the bonds and the tax payments?

Gregg A. Tanner

All right. Well, I'll let Chris try to break down the cost structure for you. I can tell you, on the use of capital, we're going to continue to look at all our alternatives, but we're not going to do that and talk to it until we're below our 2.5x debt to EBITDA and maintaining that. So that's why we continue to defer that point because we're not there, and I don't want to distract the organization away from that until we're there and staying there. So that will answer the capital question. Do you want to take the cost?

Chris Bellairs

Yes, on the cost structure, Eric, I think, as you saw and as we discussed in the first quarter, it was clearly more heavily dependent upon both distribution and SG&A for the productivity that we drove in Q1. I think, as you go throughout the balance of 2013, you'll see that begin to take more traction in our -- in the plant costs and in raw materials. So the plant cost effect, obviously, is -- as some of the plants that we have closed here in the first quarter, the 2 that we discussed today on the call, as those get traction, then you'll see conversion cost savings -- plant cost savings begin to increase. So I think, in the back half of the year, it does become more balanced and then, similarly, into 2014, as you get the positive effect of a full year of closure of facility the next year and the routes that Gregg mentioned that we'll be taking off the street throughout this year. You see the savings fall into the plant costs and distribution costs, probably more heavily than you'll see them continue with SG&A.

Operator

We'll go next to Farha Aslam with Stephens, Inc.

Farha Aslam - Stephens Inc., Research Division

On your 10% to 15% plant rationalization, any time horizon as to when you're targeting that?

Gregg A. Tanner

Yes, it's over the 18 months.

Farha Aslam - Stephens Inc., Research Division

Over the next 18 months?

Gregg A. Tanner

Yes. So it will be 2013, 2014.

Farha Aslam - Stephens Inc., Research Division

And for each plant, I understand that different plants have different sizes. Historically, you would save about $3 million to $4 million of overhead. Is that number still relevant for you?

Gregg A. Tanner

Yes, it's close. I mean, it -- you're right, it varies depending on size. But in general, that's probably pretty close.

Farha Aslam - Stephens Inc., Research Division

Okay. And then, if you're taking out 10% to 15% of your plants, how close will you be to -- at the end of 18 months, to your target of being up from 50% to 75% of capacity?

Gregg A. Tanner

There's a lot of variables that go into that, obviously, because we're continuing to push -- from a continuous improvement standpoint, we continue to push efficiencies and OEEs in our facilities to much higher levels, which continues to create capacity as well. So it's just a continued focus on the productivity side of this. I would assume that we will continue -- as we continue to become more and more productive and remove more and more waste that we will continue to have to take assets out to maintain that 75%.

Operator

We'll go next to Akshay Jagdale with KeyBanc.

Akshay S. Jagdale - KeyBanc Capital Markets Inc., Research Division

So my questions are on free cash flow. Previously, you had said normalized free cash was $75 million to $100 million in '13. Are you now sort of backing off of that? That's the first question. And when will free cash flow normalize? And then, lastly, on CapEx, within that free cash flow number, what is your estimate for restructuring charges?

Gregg A. Tanner

Okay. Let me tell you -- yes, we intend to -- we're not backing away from the $75 million to $100 million in free cash flow for this year. So we -- it's fully intend to deliver on that. As far as the Ongoing, our capital -- we would anticipate that our capital will stay high in 2014 closer to that $175 million range versus where we've been running. But then, I think, as you look to 2015, our capital will get back in line with close to the $125 million that we've historically looked at. Now as far -- the last part of your question again?

Chris Bellairs

Akshay?

Gregg A. Tanner

What was the last part of your question?

[Technical Difficulty]

Chris Bellairs

I'm sorry, Akshay. We missed the -- you kind of have 3-parter there, I think.

Akshay S. Jagdale - KeyBanc Capital Markets Inc., Research Division

So, yes, I was just saying, when will free cash flow normalize? Because the reported number this year in 2013, it would be great if you tell us what the reported number would be that's associated with the $75 million to $100 million. And then, when should we just expect reported to equal normalize?

Chris Bellairs

So we think, in 2014, as the CapEx starts to adjust down, if 2013 is elevated 2014 will be as well. So you started looking at 2015 as being where we would describe it as more of a run rate.

And I think that your -- the third part of your question was kind of the overall cash cost of restructuring. And on a per plant basis, the cash cost of restructuring, absent the CapEx, that we spent to close a plant down is relatively modest. It's -- we don't have significant cash costs that get consumed in each individual plant closure.

Operator

And we'll go next to Carla Casella with JPMorgan.

Carla Casella - JP Morgan Chase & Co, Research Division

I just -- I wanted to do a gut check. It looks like EBITDA for the Ongoing business, on an LTM basis, is in, like, the $430 million range. Is that correct?

Gregg A. Tanner

Yes, $430 million to $450 million, I think, is what we've talked about.

Carla Casella - JP Morgan Chase & Co, Research Division

Okay. So it looks like, if you exclude the WhiteWave debt, that you're already pretty close to your target of the leveraged total debt to EBITDA of 2.5x. Is that correct? I mean, actually, it looks like pro forma is, like, 2.4x?

Gregg A. Tanner

That is correct. But the real question is that we still have the taxes on the Morningstar sale to pay. So if you look at that and you translate that through 2013, at the end of '13, we'd be a little over 3x.

Operator

[Operator Instructions] We'll go to Amit Sharma with a follow-up from BMO Capital Markets.

Amit Sharma - BMO Capital Markets U.S.

Chris, I really appreciate giving out the volume number for the quarter. Can you give us the quarterly volume breakdown for 2012?

Chris Bellairs

We can. We'll need to follow up with you and everyone else, Amit, we don't have it here with us today. But we were thinking about just kind of rolling that out quarter by quarter from this point forward, but we can certainly give the 4 quarters of history for 2012. I hope that helps with you guys...

Amit Sharma - BMO Capital Markets U.S.

Absolutely.

Operator

And we will go back to the side of Akshay Jagdale with KeyBanc for a follow-up.

Akshay S. Jagdale - KeyBanc Capital Markets Inc., Research Division

Again, I want to focus on free cash flow. So just to be clear, in 2013, the difference in reported and normalized is more than just the CapEx coming down, right? There's a bunch of other stuff going on. So if you could just help us bridge the gap, like, what's the reported number expected to be in '13 compared to the normalized? And really, the question for '14 is, other than the CapEx coming down, is there any other one-time issues that we need to be worried about or focused on that might impact reported free cash?

Chris Bellairs

So in '14, we still have 3 more years, '14, '15 and '16 of the litigation payment. So that will be in the number next year and for 2 more years after that. But sort of back to this year, the -- so similarly, the litigation payment is of -- one of the other big things that as we sort of adjust or normalize to give you guidance in the $75 million to $100 million range, you have to take that into account, plus the ones that we have described here in the first quarter.

Akshay S. Jagdale - KeyBanc Capital Markets Inc., Research Division

Okay. And on the CapEx, just to be clear again, you're saying the restructuring cash costs related to plant closures, et cetera, are generally included in your longer-term guidance, right?

Chris Bellairs

Yes. So 2 different things. So CapEx -- separately, we've guided to $150 million to $175 million this year for CapEx. And we're -- we only have been giving guidance for next year, as we've described kind of an 18-month -- Gregg just talked about an 18-month glide path for our accelerated plant closures. Think of next year's CapEx as probably being elevated versus our long-term run rate as well. So that's CapEx. And then, separately, cash costs of restructuring, it is embedded in our numbers. And I would tell you, on a per plant basis, it doesn't end up being an overly large number.

Operator

And our last question comes from the side of John Malcolm with Citigroup.

John Malcolm - Citigroup Inc, Research Division

I just had -- as it relates to your remaining shares of WhiteWave, when you state debt for equity exchange, is that simply just selling your remaining shares into the open market, bringing proceeds back into either tender or call, any bonds, or are you looking at some other transaction?

Chris Bellairs

It's probably a little more complicated than just selling. So we -- the mechanics of it are a little complicated. But essentially, we have a relationship with the bank where we will take debt out from them. And then, we'll -- they'll sell the shares and take the proceeds from that to pay off that -- the debt that we've taken. Does that help?

John Malcolm - Citigroup Inc, Research Division

It does.

Operator

And there are no additional questions. Are there any closing remarks?

Gregg A. Tanner

There are, thank you. And I want to thank you again for joining all of us on the call this morning. We appreciate your continued interest in Dean Foods, and we'll talk to you all in August. Thanks.

Operator

This does conclude today's conference. You may disconnect at any time.

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