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WhiteWave Foods Company (NYSE:WWAV)

Q2 2013 Earnings Call

August 9, 2013 10:00 AM ET

Executives

Dave Oldani – VP, Treasurer and IR

Gregg Engles – Chairman and CEO

Kelly Haecker – CFO

Blaine McPeak – President

Analysts

Ken Goldman – JPMorgan

Ryan Oksenhendler – Bank of America

Farah Aslam – Stephens Inc

Diane Ghastlier – CLSA

Amit Sharma – BMO

Matthew Grainger – Morgan Stanley

John Baumgartner – Wells Fargo

Michael Steep – Credit Suisse

Bill Chappell – SunTrust

Operator

Good morning ladies and gentlemen. And welcome to The WhiteWave Foods Company Second 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 WhiteWave corporate website.

This broadcast is the property of The WhiteWave Foods Company. Any redistribution, retransmission or rebroadcast of this call in any form without the express written consent of the company is strictly prohibited.

I would now like to turn the call over to Dave Oldani, Vice President, Treasurer and Investor Relations for The WhiteWave Foods Company. Go ahead Mr. Oldani.

Dave Oldani

Good morning, everyone. And thanks for joining us on our second quarter 2013 earnings conference call. This morning we issued our earnings Press Release, which is available on our website at whitewave.com. The release is also furnished as an exhibit to our Form 8-K, which is available on the Securities and Exchange Commission website at sec.gov.

Also available during this call, on The WhiteWave website is a slide presentation that 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 our 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 our earnings targets, expectations regarding our branding initiatives, innovation and research and development plans, growth plans, 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 2012 Annual Reported as updated b current report on Form 8-K filed with the SEC on June 14, 2013.

We also want to remind you that the financial results and related references to periods prior to 2013 discussed on today’s call and in the accompanying slide presentation are presented on a pro forma adjusted basis as if the company had operated independently as a standalone entity which is the same basis that we have presented in our past earning presentations and financial results and early references to 2013 period are presented on an adjusted basis.

These adjustments due periods prior to 2013, related to commercial arrangements we entered into in connation with the separation of our business from Dean Foods’ businesses, the termination of intellectual property license with the former Dean Foods’ subsidiary, estimated cost associated with operating as a standalone public company and other one-time or non-recurring costs associated with stock offering and separation from Dean Foods.

Our earnings release and the reconciliation posted on our website contains further details of these adjustments. Along with the reconciliation between our GAAP results and the results we present on a pro forma adjusted and adjusted 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’s North America Segment.

Gregg will first provide a review of our results and overall business performance. Kelly will then offer additional perspective on our operating results and comment 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

Thanks, Dave, good morning, everyone. And thank you for joining us today. I’m pleased to confirm today the results that we preliminarily released in mid-July.

Q2 was another strong quarter of operating results for WhiteWave. We’ve delivered earnings growth of 28% and earnings per share at the top end of our guidance of $0.016 per share.

Consolidated sales were up over 10% in Q2, driven by continued volume growth across all our brands. Consolidated operating income increased 16% from the year ago, after increased marketing investments and despite continued higher distribution and supply chain cost due to our ongoing strong volume growth.

Q2 was another strong quarter of operating results and we continue to be encouraged by the underlying fundamentals driving the growth of our categories and brands, to improving the ongoing trend of increased consumer interest in natural, nutritious and flavor for foods and beverages.

Our supply chain costs remain higher than desired, but we are making steady progress on the capacity expansion plans we previously communicated to lower these costs over time.

As I mentioned, we continue to have strong top-line growth in Q2, with sales up over 10% from the prior year to $616 million.

Volume growth continues to be the main driver behind our top line performance, as all our product categories grew during the quarter. Our leading brands and innovative products along with great marketing continue to feel healthy volume driven top line growth.

Our North American segment sales increased 10% in Q2, which continues to be led by strong double-digit growth both in our plant based beverages and coffee creamers platforms. In spite of lingering economic challenges on the continent, our European segment also produced very strong top line growth of 13% on the quarter, driven by strong growth in almond and other non-Soy beverages as well as yogurts.

This growth came from across all the channels we serve with the meaningful part coming outside of the grocery drug and mass merchandiser channels. We had strong growth in channels such as convenient stores, food service and other away from home outlets.

Our North America segment also had strong growth in products, they distribute outside the United States, including a growing presence in Canada and Mexico.

Now, we’ll review the individual platform results for the quarter. Sales of North America, plant based foods and beverages, grew 12% in Q2, driven primarily by volume. This category continued to enjoy healthy, 14% growth in the quarter, and Silk continued to be the category’s leading brand.

The almond sub-category continued its very robust growth in Q2, growing by 50%. Almond now represents the majority of the total plant based category with a 55% share with Soy representing 35%. Due to ongoing growth of almond, we continued to experience volume shifts out of Soy. This is being more than offset by our ongoing strong growth in Silk almond, which was up over 50% in the quarter.

Our Silk brand continues to be the market leader across the plant based category. We enjoy number one share positions in all of the sub-categories in which we participate with a 75% share in Soy, a 65% share of coconut and 52% share of almond. Silk has roughly 60% share of the overall plant based food and beverage category.

We’re excited about the many opportunities we have to build upon our strong silk brand, as consumers continue to migrate to the great taste and health and wellness attributes of plant based foods and beverages. Those opportunities include expanding our offerings into new and differentiated areas that continue to increase consumer awareness, usage occasions and household penetration.

Alpro, our European plant based food and beverage segment had a very strong quarter with sales up 13% on both the reported and constant currency basis. Alpro’s core markets of the UK, Belgium, the Netherlands and Germany continue to be the strongest performing geographies. Alpro’s growth was volume driven behind the strong growth of Almond, Hazelnut and rice beverages that we launched in early 2012, as well as continued significant growth of our Soy Yoghurt.

We’re pleased with the very strong growth that our Europe segment produced considering the ongoing challenging economic climate in the region. We look forward to building on our momentum by growing our entire plant based beverage platform on the continent and continuing to expand our great tasting Soy Yogurt offerings.

Now, looking at Premium Dairy, this platform produced solid sales growth of 6% in Q2, with increased volumes representing the majority of our growth. This top line growth continues to come from our value added single serve and DHA omega 3 products, as well as growth in our core half gallons. Our Horizon brand continues to drive the growth of the organic category, as we are performing the 4% category growth in Q2, by 2 percentage points.

We’re looking forward to the upcoming back-to-school season, as our newer offerings of three new flavors and DHA omega 3 supplemented milks come in convenient shelf-stable single-serve cartons that align well with parent’s increasing desire to provide healthy options in their kid’s school lunch boxes.

Our coffee creamers and beverages business continued its strong growth in Q2, with sales up 12% from the prior year period. The majority of this growth was volume driven due to solid core retail performance coupled with the continued strong increases we’ve been experiencing in club stores, food service, convenient stores and other away from home channels.

The refrigerated flavored creamer category grew 8% during Q2, as the category continues to enjoy increased consumption in coffee flavoring trends. We experienced strong growth in our International Delight flavored creamers as our recent introduction of Cold Stone inspired flavors are up to a strong start.

Similar to the seasonal effects that other CPG companies have experienced, the abnormally cool spring weather resulted in slower than anticipated sales of our ice-coffee in Q2. We continue to feel good about our position in this category, despite new entrance, as additional participants should help increase consumer interest and aid in driving overall category growth in this nascent category.

We continue to focus on innovating and differentiating our ice-coffee offerings, as evidenced by our Q3 launch of the Green Mountain branded ice-latté line. It is packaged in a unique crash shaped bottle for the coffee consumer who is interested in a stronger, great tasting premium ice coffee option and we’re excited about its potential.

We continue to be inspired by the opportunities we see within the coffee creamers and beverages category, and feel we have a robust pipeline of innovation to drive the long-term growth of our platform. Each of our platforms generated very strong top line results, behind continued volume growth in Q2.

I’ll now turn it over to Kelly, who will review our second quarter operating performance and our outlook for the balance of 2013. Kelly?

Kelly Haecker

Thanks, Gregg. Good morning everyone. As Gregg mentioned, we had another solid quarter of operating performance. We increased the top line 10% to $616 million driven by high single digit volume growth. This top-line growth drove consolidated segment operating income growth of 9% to $58 million.

Our consolidated segment operating margin for the quarter, is relatively unchanged from the prior year period. This was despite continued higher distribution and external warehousing cost, resulting principally from the impact of our current capacity constraints as we are still in the early stages of our capacity expansion plans to lower cost.

Operating income in our North America segment grew 9% in the quarter to $50 million, behind continued strong sales growth of 10%. A favorable sales mix helped to offset the higher supply chain cost in North America and maintain a constant operating margin in this segment on year-over-year basis.

As Gregg stated, our Europe segment delivered a very strong Q2, with sales growth of 13%. This adjusted top line performance drove operating income growth of 12% in the quarter to roughly $8 million for this segment, while we continued to invest in marketing to support the ongoing roll-out of almond, hazelnut and rice beverages as well as our innovative Soy Yogurts.

We are very pleased with the results and momentum of our European business and remain encouraged by the continued growth opportunities present in all of our businesses.

Now, turning to our consolidated P&L, we leveraged our 10% sales growth into 16% total operating income growth delivering year-over-year margin expansion of 40 basis points despite our current supply chain cost headwinds. We combined that operating performance with the benefits of lower interest expense and the lower tax rate could drive net earnings growth of 28%, well over two times our top line growth rate. And deliver adjusted diluted earnings per share of $0.16 in Q2.

Let me now spend a few moments walking you through our expectations for the remainder of the year. We expect the core growth of our leading brands along with ongoing contributions from recent innovations to drive a sales percentage growth rate in the high single-digits for Q3, and for the full year, in line with our previous full-year guidance.

From this anticipated sales growth, we expect to generate total operating income growth in Q3 in the low-to-mid teens on a percentage basis. This total operating income growth plate reflects the continuation of a difficult year-over-year overlap of our higher supply chain cost. As these higher cost levels were not experienced until the fourth quarter of 2012. On a full year basis, we anticipate an operating income growth rate in the mid-teens.

We continue to estimate roughly $55 million in corporate expense for 2013, and we maintain our $150 million to $160 million full year capital expenditure forecast. We expect our tax rate to be around 34% for the balance of the year which is in line with our tax rate for the first half of the year.

Because of the spin-off and decrease in late May, we foresee a higher diluted share count in the back half of 2013. This will be caused by additional shares which result from the conversion of our employee’s equity length, long-term incentive awards in Dean Shares to WhiteWave shares as of the spin-off. Over the balance of 2013, our share-count should range between approximately 175 million to 176 million shares on a fully diluted basis.

With this set of expectations, we anticipate adjusted diluted earnings per share between $0.17 and $0.18 for Q3. This was compared to $0.16 in the third quarter of last year, in which we had a notably lower tax rate than we expect in 2013.

With adjusted for the different tax rates between period, our Q3 guidance range will represent approximately 13% to 20% growth year-over-year on a comparative basis.

For the full year, we are taking up the bottom end of our guidance range to reflect our strong results to date and current forward outlook. So, for 2013, we now expect to achieve between $0.69 and $0.72 adjusted diluted earnings per share.

In summary, Q2 was another solid quarter of operating results and we remain focused on executing against our capacity expansion plans in order to drive continued operating performance improvements over time.

I will now turn the call back to Gregg, for some closing comments before we open the call for your questions. Gregg?

Gregg Engles

Thank you, Kelly. In July, our separation from Dean Foods became complete after Dean sold its remaining interest in us through a successful secondary offering. This was the final milestone in the multi-step process that began last October with our initial public offering. We’re glad to have the separation from Dean Foods complete.

100% of (inaudible) shares are now in the public market and available to freely trade. We’re grateful for the number of years that we spent under Dean Foods. It was Dean that originally acquired the legacy businesses that we brought together to create what the WhiteWave Foods Company is today. Dean is a great company with great people and we wish them all the best.

All of us at WhiteWave are excited as we now move forward a completely independent company. We have significant momentum and believe that the long-term favorable consumer trends towards healthy flavorful and sustain-ably produce foods and beverages are moving more consumers in our direction.

We’re pleased with our initial financial results since becoming a public company and remained intently focused on continuing to drive top-line growth across our businesses, further optimizing our cost structure while continuing to develop innovative products that could change the way the world eats for the better.

We’re very excited about the opportunities that we feel lie ahead for us to continue to create value for our shareholders.

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

Operator

(Operator Instructions). And our first questions is coming from the line of Ken Goldman, JPMorgan.

Ken Goldman – JPMorgan

Hi, good morning everyone.

Gregg Engles

Good morning, Ken.

Kelly Haecker

Good morning, Ken.

Ken Goldman – JPMorgan

Gregg, you’ve talked in the past about your desire to do acquisitions and plenty of food and beverage companies obviously are still doing deals. But others seems to be maybe shifting a little more toward that build rather than the buy end of the spectrum, decisions on how to grow. So, I’m just curious, how you may be thinking about that today? Whether multiples of – may become prohibitive to you guys in general.

You haven’t done a deal yet, for example. And I guess, if that’s the case, do you see an opportunity to maybe migrate that Silk or Horizon to other parts of the store where the consumer may give you I guess permission to do that?

Gregg Engles

Well, I think, first of all, we’ve tried to be clear from the beginning regarding how we would view M&A. We think it’s an opportunity, we think it’s an and as opposed to an or, it’s not a mutually exclusive choice between building our brands organically. But, if we’re going to make significant investments in additional categories and brands, there need to be businesses and brands that fit with the overall profile of our company.

So, we’re $2.5 billion plus in sales, we have five brands and we’re managing large mainstream consumer brands that are supported by trends that are causing our categories and our brands to grow on a significant basis without acquisition. And if we’re going to add businesses to our portfolio, we would like them to look like our existing businesses.

So, businesses that either are or we can believe become large businesses, that can be effectively managed within our structure and that are supported by favorable consumer dynamics and trends over time.

That sort of by definition plays into your description of what the world looks like today relatively high multiple environment or businesses like that. And so, you’ve got to make the financial math work, right, we’re not going to do something that’s dilutive to the value of our stock for our shareholders.

I think the really great news is that we have big brands that can be grown in categories that continue to be supported by favorable trends. And so, we’ve got a top-line that’s at least through Q2 of this year continue to grow in north of high single-digits, sort of in the low double-digit territory. And that’s a great place to be.

So, we believe we have lots of opportunities to create value by continuing to build upon the very strong businesses that we have, we’re investing against those businesses. And we are absolutely looking at where our brands can go. So, in Europe, our Alpro brand is moving beyond being a Soy brand be being a plant based food and beverage brand and we’re having, as you saw in today’s results, terrific success there, where we’re growing the business end to the low double digits and that’s volume driven growth.

The same is happening in the North American marketplace where the plant based beverage and food category continues to grow well up into the mid-teens. And that’s supporting terrific growth in our platform, and we’re taking the Silk brand beyond just beverages into the food category with our launch of Soy base and there are other places we believe that we can take that Silk brand over time that are very exciting.

We have moved in the coffee creamers and beverages business beyond just flavored creamers moving into ready-to-drink coffee beverages, and we think there is just a tremendous amount of opportunity in the coffee category generally and then in areas around flavors and indulgence in coffee. So we are very excited about the long term growth prospects of that business.

And I think, we’re moving a little bit up market with our introduction in this quarter of the Green Mountain packaged coffee which is in a really terrific plastic cap that I think is going to be an exciting intern into that category.

So, we think we have lots of room Horizon Organic again is a brand that has just fantastic resonance with M&A. And we think we can take it into territory other than just liquid milk.

So, I think you’ll continue to see a pretty strong innovation plot and new product offering plot from us across all of our geographies. And then if can find the right thing that sort of fits the company and category and brand profile that we have as a business and that you can acquire from a multiple that makes sense, you’ll see as good M&A. So, we’re in a great position, we have a fantastic balance sheet. We’re less than two and half times leveraged and with growing EBITDA and cash flow, we’re deleveraging that aspect of our balance sheet very quickly. So we feel like we’re just really well positioned to continue to grow the business.

Ken Goldman – JPMorgan

Thanks, Gregg.

Gregg Engles

Thank you.

Operator

Your next question is from the line of Ryan Oksenhendler, Bank of America.

Ryan Oksenhendler – Bank of America

Hi, good morning guys.

Gregg Engles

Good morning, Ryan.

Ryan Oksenhendler – Bank of America

I just had a few questions for you, in regards to I guess, how much of your sales are captured in the measured channels. And within that is there a certain category that maybe indexes higher or lower and that’s because the Nielsen data showed maybe more moderate sales growth and you guys reported in the quarter. So, within that I think a lot of people do look at it. Can you provide sales growth for the measured and non-measured channels this quarter and I guess how you see that playing out over the longer term?

Gregg Engles

Good morning, Ryan. From our non-measure standpoint, typically just north of 20% would be reflective of our sales there in North America anyway. And I think with what you see, any differential as we’ve spoken briefly about previously with regard to differential between the measured and the reported here that we have. There is about three points of incremental growth that would be associated with our channels business which is growing faster than the overall.

Historically, this business has been over-developed largely in our coffee creamers business. So, if you think about the sea-store business and our portion control props or any type of bulk format coffee-creamers. We’re really excited about being able to expand well beyond coffee creamers and move our soap brand into better few beverages and away from whole marketplace.

And we’re also excited about just the growth prospects that continue to emerge as we press a little bit beyond the United States force here in both Mexico and Canada. So, I think any type of external outlook is generally reflected in the guidance that we’ve provided of high-single digit growth rate going forward.

Ryan Oksenhendler – Bank of America

Great. And I guess, and when you look out to the second half of the year, your guidance for the full year is high-single digits. I think you’re probably right around that 10% mark for the first half. And we’re seeing several companies talk a lot for this consumer, it doesn’t seem like you guys have been seeing that. And is there anything that would mark a slowdown from the first half to the second half that we should be aware of?

Gregg Engles

I would think our categories remain relatively robust I think as we take a look at their progression from the first quarter to the second quarter, it’s been relatively consistent across each of the quarters. We remain very, very positive on the outlook both in the second half here as well as longer term prospects of each of these categories.

I think, in our, in the organic milk category, I think you’ll start to see a little bit of pressure in the fourth quarter where we had a very strong year ago performance in the fourth quarter of 2012, so you may see a little bit of pressure in there. But that’s a category that’s growing into that kind of mid-single digit territory, anyhow. But I think we’re still very optimistic about the growth prospects of the business.

When you take a look at the ice coffee segment here, clearly it’s a much more seasonal business, so you have the strength in the summer months here. So, you’ll see a little bit of shifts in dynamics in that as we move into the winter months. But generally speaking, we feel good about the outlook here for the balance of the year.

Ryan Oksenhendler – Bank of America

Okay, great. Thanks guys.

Gregg Engles

Thank you.

Operator

Your next question is from the line of Farah Aslam, Stephens Inc.

Farah Aslam – Stephens Inc

Hi, good morning.

Gregg Engles

Good morning, Farah.

Farah Aslam – Stephens Inc

You’ve kept your CapEx guidance flat, you were seeing great growth. Do you – are you pleased with how you’re balancing internal production versus co-products or co-producers do you have opportunities to bring more in-house and raise margins?

Kelly Haecker

Well, we absolutely have opportunities to bring more in-house. And that’s really the driver along with the associated efficiencies of doing that and the capital that we’re spending over this year and over the next couple of years. So, we have about two thirds of our business in-house or in-house capacities are pretty fully utilized and we a third of our business externally.

Volume growth, here in the North American business for Q2 was high single digits, which is significant pressure on the system, as we continue to see volumes significantly increase across the business. So, right now the capital we’re putting on the ground is pretty much turning out to just handle that volume growth as opposed to really in-source the existing volumes that are out of the system. And so, I think we’re going to have a little bit farther down the road before you start to see a shift in terms of the mix of what’s internal and what’s external.

When we do bring both external volumes in-house, you’ll see the associated margins increase associated with that because of course we won’t be paying the external Co-pack charges and the logistics of moving that product to our customer from our own facilities is significantly advantage versus having it outside the system.

So, this is a, this volume growth stays in the business, this is going to be a relatively longer term project as investing to lower the cost base of our external and our incremental sales from volume growth. And that should translate into sort of margin progression that I talked about in past quarters, 50% plus percent basis points improvement in operating margin on an annual basis going forward.

Farah Aslam – Stephens Inc

Okay. So that’s a long term opportunity. And the near term, I mean, you do have a pretty robust new product introduction pipeline. Could you share with us, where ACVs are on your new products, kind of generally what it costs to build out that ACV and kind of how the margins progress in new products as we think about new product introductions and what it can add to your bottom line?

Kelly Haecker

Yeah. I think from an innovation standpoint, we look at it from a couple of fronts really. So, first and foremost you need to continue to innovate on your core business to keep it differentiated versus other branded competitors, other private label competitors. But we also really fundamentally believe that we can begin the structures Gregg mentioned previously, where each of these brands compete.

So, we’ve proven this historically with where we’ve moved the Silk brand into a variety of different brands of plant based beverages, migrated to international Delight brand from traditional coffee creamers into ice-coffee. And we have – we have a horizon portfolio that continues to add value to what has historically been a fairly undifferentiated arena.

Everyone is fundamentally different from the other. Our ice coffee ACV today is right up near 90% ACV. I think we’ve seen great retail acceptance and we’re very optimistic about the long-term potential to build that overall category.

We have previously spoken about extending the Silk brand into the overt category in how we’re taking a much, much more measured approach to how we look at building and nurturing that business. We have roughly a 20% ACV on Yogurt overall. And we continue to just bring a lot of flavor excitement to both the ice-coffee side of things as well as the flavored creamer side of things as we have just introduced the Cold Stone flavors under the international Delight brand. And as Gregg mentioned previously, we’ve rolled out the Green Mountain coffee, premium ice coffee.

For the most part if it’s a standard flavor extension, we expect our ACV builders going to get up into consistent with the overall line anywhere between 70% and 90%. And some of these new launches, lot of it depends on timing in our own expectations. So, as low as 20% on Yogurt which, is blindfold at this point.

So, there is no one answer I don’t think that fits for innovation, each one of them might be a little bit different. But, we’re pleased with the performance we’ve had over the past several years in creating fundamental new categories and segments that are very, very sizable. And that we’re pleased with the early progress that we’ve seen so far as well.

Farah Aslam – Stephens Inc

Great, thank you.

Operator

Your next question is from the line of Diane Ghastlier, CLSA.

Diane Ghastlier – CLSA

Good morning.

Gregg Engles

Hi Diane.

Kelly Haecker

Good morning.

Diane Ghastlier – CLSA

I wanted to ask about just to clarify on your discussion on the co-packing and the 50 basis point opportunity there. Can you give us an update on where you are in terms of the distribution system changes that you talked about on your first quarter call? And then, would that also be included in, I guess, I’m just trying to get an idea about what you’re looking for on an EBIT basis in terms of margin improvement over the next two to three years from both co-packing side and then what you’re doing within your selling and distribution networks?

Kelly Haecker

Yeah Diane, so, first the question is respect to just the status of those projects. And we laid out our first quarter call, next 12 to 18 months projects that we intend to bring online. You might recall that we had four filling lines three in North America and one in Europe that we expected to bring online. We’re beginning here in the latter part of the third quarter up through the first quarter of 2014. Those all remain on track so we still anticipate that we’ll bring those four filling lines online between now and the first quarter.

And then, with respect to our warehousing, the big projects in ‘14 and then in ‘15, we’re to expand our capacity on our own internal warehousing at a couple of warehouses. Those five which remain on track as well. You’ll see those come online towards the second half of 2014 and then probably ramp up in the first half of ‘15, so, probably mid-’15 before we see the full benefits.

So, both the internal manufacturing capacity projects as well as the internal warehousing projects remain on track in line with what we laid out within previously earlier this year. With respect to margins, to clarify that point, as we said in the past, we anticipate our kind of core algorithm to allow us to expand our margins to about 50 basis points annually.

And with the additional stepped-up investments that we’ve laid out and I just articulated we’d anticipate over the next couple of years for that to add an incremental 50 basis points. So, anticipate over the next couple of years, around 150 basis points, hopefully slightly ahead of that we would anticipate to deliver to our total operating margin line.

Gregg Engles

Yeah. And Diane, just to sort of expand on Kelly’s comments a little bit. The distribution and the manufacturing cross lines here are really related. So, before billing lines that we’re putting in, those will handle incremental volumes and maybe in-source a little bit of volume external to our system today, which will a cogs conversion benefit. But also then, those volumes are now being produced in our own facilities and can ship from our own facilities as opposed to ship from a third party facility. And that has a distribution benefit.

So, while those projects don’t necessarily involve expanding our warehouse capabilities, they do have a distribution benefit because they eliminate re-supply and moving product around the system. We are, as Kelly mentioned, we have some large warehouse products that are scheduled to come online in ‘14. To be clear, we’re just breaking ground on those projects. So there is going to be several quarters of construction here before that capacity is pure distribution capacity is online, which is why, we’re saying, you’re really not going to see the benefit of that until the 2015 time horizon.

Diane Ghastlier – CLSA

Okay, well, I appreciate all the color on that. I just wanted to ask on the plant based beverage sales line versus the category growth. It looks like it was a little bit slower than the overall categories. There, should we read anything into that or is there any explanation?

Kelly Haecker

It’s just purely the mix out of the category from almond to Soy, right to where we have 75-share, from Soy to almond, right. We’re 75-share in Soy, we’re at 52 to 55-share in almond. So as the category mixes out to almond, we disproportionately suffer from that mix-out in category growth rate.

So, even though we are growing at the category rate or above the category rate in almond, because our shares there are lower than Soy, we’re just naturally leaking a little total category share.

Diane Ghastlier – CLSA

Okay. Is there a period over the next couple of quarters, where you think that will stabilize?

Gregg Engles

I think what you’re going to see, this is a category, the overall plant based beverage category that has fundamentally transitional in the course of call it for past three years really. So, what was historically predominantly a Soy category has transitioned today, where now almond is about 55% of the category and Soy is about 35% of the category. So it’s fundamentally bend-shifting for several years here.

And I think as we’ve talked previously, it’s going to be one where we’re going to follow a consumer, we’re going to follow where they want to go. I think the important is we’ve seen these transitions within the category, we’ve capitalized upon these transitions in the category. And our approach is going to be to manage this as a total plant based beverage look and continue to grow household penetration of that category as a whole, regardless of the transitions or then any of the varying segments.

And from a margin structure standpoint, we feel confident about how these different segments stack up internally for ourselves with respect to an overall gross margin standpoint. So, you might see, continue to see some share pressure here over the next 12 months as you continue to see this, this evolution. But keep in mind, in each of the segments that we compete in, which would be Soy today with 75-share with north of a 50-share and coconut was about 65 share. We are the leader in every one of those segments as well as the overall plant based beverage category.

So, we’re going to be stewards of the category and continue to grow the whole pie. And where it transitions out internally between segments, we’ll just let that play out.

If you look at our share evolution in the category over the last two or three years, we’ve gone from 70 plus share, as a category to a 60-share of the category, that’s the same time that we’ve grown top line in this segment in the mid-to-high teens. So, it feels the dynamics of the category, how you aggregated up into the total category shares that you’re seeing.

Diane Ghastlier – CLSA

Okay. Thank you.

Kelly Haecker

You’re welcome.

Operator

Your next question is from the line of Amit Sharma, BMO.

Kelly Haecker

Hello Amit.

Operator

Amit, your line maybe on mute.

Amit Sharma – BMO

Hi, good morning everyone.

Gregg Engles

Good morning.

Amit Sharma – BMO

Gregg, just I wanted to follow-up on Diane’s last question about the competitor dynamics especially in the almond category. Here in the north east we’re certainly seeing Blue Diamond being a little bit more show space, it’s on the private label it is also signed up here. Is that a concern going forward?

Gregg Engles

I think that we’ve got competitors, good competitors in all of our categories. So the almond sub-segment is now 55% of the category is growing 50% in the most recent period. So, you’re going to attract interest from branded and private label competitors in the category like that, it’s not anything different than what we’ve seen in any of the businesses that we participate in.

So, the good news is that category is growing up 50%. I guess the bad news if you want to find bad news in that, we’ve got competitors against that category. But we love our brand, we love our positioning. We’re growing at or above the rate of growth in the sub category. So we’re stable to taking share in the category. And we think we have great innovations and a great brand position.

So, all-in-all, would I take a 50% growing category and a little competition as opposed to a flat category and no competition, I think we like where we are.

Amit Sharma – BMO

I absolutely agree with that. Other question Gregg, when you – the Green Mountain partnered ice latte, can you walk us through the decision point to go with the co-branded versus going into the International Delight brand?

Gregg Engles

Yeah. As we started assessment of the overall refrigerated multi-serve opportunity which we believe is tremendous. When we take a look at the away from home mark, applies which is the $1.5 million segment. We had a vision that it was going to be a multiple brand, multiple price tier, multiple offering category. The aspect of launching into the premium territory was part of our plan from day one. And the Green mountain brand is a fantastic brand from an awareness standpoint, from an equity standpoint and from a quality standpoint overall.

And it just brings in a whole different type of user into the category overall. And it’s a brand that is different than our international Delight brand, which stands much-much more for just the flavor-full, more creamy texture product line overall. And we’ve built this category out now to have everything from more indulgent International Delight line to a lower calorie lights under the International Delight brand, we’ve launched into a plant based beverage under Silk, as well as, now bringing into the premium side under the Green Mountain brand.

And we’re pleased with how our total portfolio looks both in terms of our overall position within the segment but also how we’re going to grow the overall category here.

Kelly Haecker

Yeah, so just to be clear, we launched with an International Delight line that’s been our ice-coffee business today. This is, an additional evolution of the category not in tightened but in addition to where we launched with a more up-market premium product and there we felt like a Green Mountain brand equity brought a lot to the table in terms of consumer positioning, so it’s a category.

Amit Sharma – BMO

Okay. I appreciate that answer. Thank you.

Operator

Your next question is from the line of Matthew Grainger, Morgan Stanley.

Matthew Grainger – Morgan Stanley

Hi guys, good morning.

Gregg Engles

Good morning, Matthew.

Matthew Grainger – Morgan Stanley

Just two questions on creamers and the sustainability of the very strong growth that you’ve seen there year-to-date. I guess, first I just wanted to get your thoughts on competitive dynamics in the area of coffee creamer specifically excluding the ice-coffee products. Measured channel data suggests some increased promotional support and I guess, from what we’re seeing shared momentum from your key competitor there. Is that consistent with what you’re seeing, and are you making any tactical adjustments to how you’re managing that category?

Kelly Haecker

Well, first off on the category as a whole, we remain very bullish on the category as a whole. When you take a look at just coffee consumption in general growing as well as perhaps most importantly as how consumers are consuming that coffee which is not just a straight coffee and more toward a much-much more flavor-full sweetened experience, you’re seeing it in a way from home you’re seeing it at home. And we’ve been seeing these tailwinds for several years within the overall category.

When we look at the flavored segment of the coffee creamer category, we’re pleased, I mean, we’re number two in the category overall. But we’ve been holding our share, and we are going to continue to be innovators in this category and treat this category with growing the overall penetration by brand building and innovating within it.

So, we continue to bring flavor news to it, but I’m pleased with the category growth and I’m pleased with how we’ve been able to hold our share up within the category. And it’s our intent to build this category through brand building and value added. If we need to respond with respect to any type of price promotions we certainly will. But we believe the long-term health is about innovating in brands.

Matthew Grainger – Morgan Stanley

Okay, thanks for that. And then just to come back to ice-coffee, you mentioned a bit slower category growth trends during the quarter and some of the factors that contributed to that. You’ve given in prior quarters a sense of how ice-coffee contributed to overall creamers growth during the quarter. Can you give us a sense of what that number was?

Kelly Haecker

Sure, up until about the second quarter. So, when you think about last year, the launch of ice coffee added anywhere between three and four incremental points of growth because it was completely new at the time. Certainly, this year as we lack that launch in particular in the second quarter here, our business is relatively flattish in the second quarter which as Gregg mentioned in the prepared remarks, largely due to a slow start due to an unseasonably cooler weather pattern as we began, somewhere we saw that across a number of different seasonally driven categories.

So, a little bit short of our expectations. But the category still grew in that 10% territory overall. And as we’ve talked, this is not just about a one-year play here, this is about something as with all of our innovation that we’ve had that we see great potential, we remain committed to and committed to not just growing our position but growing that overall category. And we remain optimistic about the future potential of ice-coffee overall.

Matthew Grainger – Morgan Stanley

Okay. And once you strip out those weather related or seasonal factors, you’re comfortable that the new line extensions are each individually bringing new people into the category?

Gregg Engles

Yeah, we’ve seen. I mean, it’s – as you launch new items into a challenging season, which from a lot of standpoint it makes things a little bit more difficult. But we’ve seen that they are bringing incremental usage occasions into it. As will some of these competitors who enter the category and they advertise and generate awareness of the overall proposition.

I think we like that quite, we think that this is the category in the first year achieved roughly about $140 million in retail sales its first year, which is a very strong launch out of the gate and it’s only in year one. I know there is going to be continued development from WhiteWave and from other competitors see that continue to grow that pie.

Matthew Grainger – Morgan Stanley

Okay, great. Thanks again.

Operator

Your next question is from the line of John Baumgartner, Wells Fargo.

John Baumgartner – Wells Fargo

Thanks, good morning.

Gregg Engles

Good morning, John.

John Baumgartner – Wells Fargo

Gregg, or maybe Blaine, in terms of the Horizon business there, I think in the past your position has been that you look at maybe different pack sizes as a way to maybe margin up within the business. I guess, given at the cost structure kind of it is what it is. But how would you characterize any broader innovation opportunities maybe in terms of adjacency such as gross federal gain, agreeing to large scale organic Greek builder, as with the kind of maybe move up the margin there, will it be more that need for a year or so ago?

Blaine McPeak

Sure. We’ve seen tremendous growth out of the Horizon brand over the past several years. I think, as we take a look at the overall organic milk category which is where the brand competes today predominantly. We’re in that mid-single digit territory and as you mentioned it’s across our business, it’s the most challenge from an overall margin standpoint.

All that said, this is one of the strongest brands at retail period. And it is one of the strongest brands that moms having their arsenal, when they think about better for you foods for their kids. And we believe that this is a brand that has tremendous stretch potential to move into other kid relevant categories, refrigerated categories or potentially center-storage dry categories. And we’re really excited about the potential, not only just from an absolute growth standpoint. But as we look at these categories, it will also begin to transform the financial structure of that business from a gross margin standpoint.

And we’re still early on, we’re still laying the pipeline here in terms of our plans. But it’s exciting where that brand can go, and we’ve proven it with other brands with respect to stretch potential and this one will be no different.

John Baumgartner – Wells Fargo

Thanks, Blaine. And just a follow-up for Kelly if I could, in terms of expectations for pay price increases to the organic dairy farmers, have you raised recently and I guess, what’s the farmer’s plans for position right now?

Kelly Haecker

Well, we’ve looked at over the past several years. And we have had, we’ve seen fairly strong increases that we’ve provided to our network of over 600 family farmers. And as I look at it, I think we feel like while we’ve had some of the rising input cost be it seed or fuel, we’ve been pretty good at commence rate increase in our pay prices over that period of time.

And going forward, we don’t really provide any future perspective in terms of where that may go but I can say, anytime when we’ve seen it in the past we’ve been fairly disciplined in terms of ensuring that we’re able to maintain any margin structure on Horizon business.

John Baumgartner – Wells Fargo

Thanks everyone.

Gregg Engles

Thank you.

Operator

Your next question is from the line of Michael Steep, Credit Suisse.

Michael Steep – Credit Suisse

Good morning I have a couple of questions. First of all related to a comment you made in your prepared remarks. I think you’ve said that in North America you’ve continued to benefit from a favorable sales mix in the business. Could you just elaborate a little bit and tell us what are the main drivers behind that are?

And then secondly, just a near term question, with regards to the outlook for Q3. I wanted to just confirm that the slightly lower operating profit growth that you’re guiding to relative to the full year that that’s entirely due to the step-up in supply chain cost year-on-year, I wanted to ask whether there are any other factors behind that? Thank you.

Gregg Engles

Well, Michael as to your first question, really, I think the basic point is, we’ve got a substantially higher margin structure in plant based business and coffee related business. And those are growing at rates that are much higher than the growth rate of our Horizon organic business. So, we’re getting a positive operating income and gross margin mix benefit out of the basic growth dynamics of our categories. And I’ll let Kelly speak to your second question.

Kelly Haecker

Well Michael, in respect to your second question is that you’re dead on. I think the biggest headwind in Q3 is, as we look at the quarter will be the year-over-year increase in distribution related cost that will be the key driver. We do expect over the – year-to-date basis, our total operating margin is about 50 basis points ahead of a year ago, so 7.6% this year versus 7.1% year ago.

We can still expect over the back half of this year to have that same kind of year-over-year margin expansion, so full year last year, we delivered a total operating margin of around 7.5%. So, we’re still kind of targeting 8% for the full year. So you can expect overall to be from headwinds and tailwinds, in the back half throughout the P&L but overall we still anticipate delivering about 50 basis points expansion on year-over-year basis.

Michael Steep – Credit Suisse

Okay, thank you.

Operator

Your next question is from the line of Bill Chappell, SunTrust.

Bill Chappell – SunTrust

Thanks. I wanted to dig a little bit into the plant based beverage business and I think you’ve said that the category is growing 14% in the U.S. and you’re growing 12%. Are we seeing, are we getting to a time where the Soy business stabilizes and you can kind of participate in the full kind of category growth or is it just the cannibalization is going continue for at least two, three, four more quarters before that stabilizes?

Gregg Engles

Good morning, Bill. Yeah, I think we’re – as I mentioned, we’re first and foremost focused on the overall category here. And that share is going to transition during that period of time. We still hold that 60% share in the overall category. And it’s a very healthy category, right. There is changing dynamics within it but overall the plant based category is incredibly healthy. We’re seeing household penetration gains, consistently quarter to quarter, year-over-year. We hit the highest household penetration we’ve ever had in the fourth quarter of last year and that continued to progress in the first quarter as well.

So, this is a very strong on-trend category from any way you want to take a look at it. We look at it, it’s going to continue to transition. And we’re fully prepared to modify how we go-to-market, how we invest our marketing dollars, how we innovate. And as well as how we think about our overall manufacturing network as we see those transitions within the segment.

But we’re also, this Soy, it’s a sizable category and it’s a sizable subcategory and we continue to bring news to that as well. And we’re not walking away from Soy, we just – we’ve launched flavor improvements earlier part of this year, we continue to bring news with it by qualifying the overall product profile for nick qualification.

And we’re going to remain committed to trying to keep all segments growing but we’re not going to worry about the transitions within it, we’re going to follow where the consumer preference goes. And that maybe in these segments, other segments we haven’t considered yet. But it’s about a total category play here.

Bill Chappell – SunTrust

Sure. And I understand that but I mean, you’re not seeing in terms of consumer migration that slowed down or stabilize on the Soy category right now?

Gregg Engles

We’ll call it, based on how it’s transitioned, it has continued into the second quarter here. I don’t think we have any crystal ball in terms of seeing exactly how that’s going to land over the course of the next three months, 12 months. But what I can say is that we’re comfortable with how we’re driving growth in the overall category and we’re comfortable with the margin structure that resolves across any of these different segments.

Kelly Haecker

Yeah, Bill, I mean, a little bit of it is self-fulfilling prophecy. As almond grows as quickly as it’s grown, instead of putting pressure on all the points of distribution in the category, some of them are Soy, some of those are other value added dairy. So, what’s happening in this category as evolves and as almond really has grown is that everybody else to some degree is either losing share of facings or losing facings.

And so, some of it is just kind of inevitable until the category stabilizes and the growth rate stabilize. And you’re to see in that play-out. But the blind point, as long as Almond is growing faster than Soy and we have a higher share of all, higher share of Soy than almond, you’re going to see our total category shares drift down but the big moves have happened. So, at this point in time I think it’s just incremental moves within the overall category share.

Bill Chappell – SunTrust

Sure, I was more thinking onto the positive side, at some point your growth rates could actually accelerate. But switching to…

Kelly Haecker

Highly possible.

Bill Chappell – SunTrust

Yeah, on the pricing standpoint, I don’t know if you referred, I think you said for both plant based in the U.S. and on coffee creamer, it was all volume driven. Have there been – I mean, efficiently on plant base, has there been any step-up in terms of promotional area that seems like either you are Blue Diamond is on sale each week, or are there coupons out there. Is that just to drive more consumers out there or is it an increased kind of pricing pressure from the competition?

Kelly Haecker

Well, I think as we look at it there is pressure in all of our different segments from competitors be it branded or private label. We saw private label in the second quarter get a little bit more aggressive with respect to plant based beverages here.

And if need be, we’re going to respond in kind mix certain that we hold a very strong position in each of these segments. But it’s our belief that that is not how you’re going to grow the categories, our belief is that you’re going to continue to grow the categories through advertising and driving awareness of the benefits of plant based beverages in this case. And we feel great about the innovation we’re bringing to the category to drive that expansion as well as our advertising and marketing.

So, that’s our fundamental belief that how we’ve developed these categories, I don’t care if it’s plant based or organic, we’re brand builders, we’re innovators, we have a focus on growing the category. But if need be, if we need to get into any type of short-term pricing discussions, we certain will.

Gregg Engles

Yeah, Bill, we’ve seen this over and over again in these rapidly growing categories. And it’s what you frankly should expect. We have a category that’s growing at the rate that organic was growing in sort of the middle part of the last decade or what. Soy did for a period of time in the 2000s where Almond is doing today.

As the math of it from the brand owner and manufacturer is, the sort of discounted cash flow value – discounted present value of your ultimate stabilized share position, is really sensitive to your shares, right. So the math – it’s a math exercise. So people in these rapidly growing categories, inevitably at some point in time play for share because that’s going to determine kind of the long-term capitalized value of these businesses. And so, you see that come and go in these especially these rapidly growing categories.

If people play for that that point in time when they capitalize the value of your share out to the future, so you should expect to see some of this is completely in line with what’s happened in other high growth categories, and what logic would tell you people should do.

Bill Chappell – SunTrust

Got it. Thank you.

Operator

At this time, there are no further questions in queue. I would like to turn the call back over to Mr. Gregg Engles, for any closing remarks.

Gregg Engles

Well, thank you all for joining us on the call this morning. We appreciate your interest in the WhiteWave Foods Company and your great questions. And we look forward to talking with you about our third quarter results on the next call in few months. Thank you all very much. Have a good day.

Operator

Ladies and gentlemen that concludes today’s conference. We thank you for your participation. You may now disconnect. Have a great day.

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