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The WhiteWave Foods Company (NYSE:WWAV)

Q4 2013 Earnings Conference Call

February 13, 2014 10:00 ET

Executives

Dave Oldani - Vice President, Treasurer and Investor Relations

Gregg Engles - Chairman and Chief Executive Officer

Kelly Haecker - Chief Financial Officer

Blaine McPeak - President, North America

Analysts

Bill Chappell - SunTrust

Andrew Lazar - Barclays

Chris Growe - Stifel

Mathew Grainger - Morgan Stanley

Amit Sharma - BMO Capital Market

Ken Goldman - JPMorgan

Farha Aslam - Stephens

Judy Hong - Goldman Sachs

Phil Terpolilli - Longbow Research

Ryan Oksenhendler - Bank of America/Merrill Lynch

John Baumgartner – Wells Fargo

Operator

Good morning and welcome to The WhiteWave Foods Company’s Fourth Quarter and Full Year 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 expressed 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 - Vice President, Treasurer and Investor Relations

Good morning, everyone and thanks for joining us on our fourth quarter and full year 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’s 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 will be available on our website beginning this afternoon.

We would also like to advise you that all forward-looking statements made on today’s call are intended to fall within the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements will include, among others, disclosure of earnings targets, 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 Report as updated by our current report on Form 8-K filed with the SEC on June 14, 2013.

We also want to remind you that our presentation on today’s call and the accompanying slides is based on our adjusted financial results. The financial results and related references to periods before 2013 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 used in our past earnings presentations and the financial results and related references to 2013 periods are presented on an adjusted basis. The pro forma and other adjustments are outlined on Slide 3 of today’s presentation. Our earnings release and the reconciliation posted on our website contain further details of these adjustments along with reconciliations between our GAAP results and the results we present on a pro forma adjusted and adjusted basis.

As the company completed the acquisition of Earthbound Farm on January 2, 2014, the results of operations related to Earthbound Farm will be reported in the accompanying results beginning in the first quarter of 2014. The company expects to file a Form 8-K with this 2013 financial results in line with Earthbound Farm on a pro forma late March 2014.

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 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 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 - Chairman and Chief Executive Officer

Thanks Dave. Good morning everyone and thank you for joining us on the call this morning. As you have seen from our announced results, we ended 2013 with another solid quarter of operating performance at WhiteWave. We continued to generate strong top line growth of 11.5% in Q4 which resulted in 10% growth on a full year basis. This double-digit growth rate was all organic as we enjoyed a good balance of volume growth across our brands and core product offerings complemented by our continued innovation in new product development.

We converted the strong top line growth into even higher growth rates on the bottom line as we benefited from strong operating cost leverage. We continue to make good progress against our capacity expansion plans to support our volume growth and lower our operating costs. In Q4, we increased earnings per share by 22% to $0.22 for the quarter exceeding the high end of our guidance range by $0.02. For the full year we generated $0.74 of EPS representing growth of 23% on an annual basis. Overall, Q4 was another strong quarter that capped off a great year financial performance at WhiteWave. Our outlook for 2014 is even brighter as we enter the year with significant momentum and broaden our strategic frame with the recent acquisition of Earthbound Farm.

As I noted, Q4 was another quarter of strong organic top line growth with sales reaching $679 million and full year sales increasing to over $2.5 billion. Volume growth continues to be our primary top line driver with growth across all our platforms during the quarter and throughout the year. Our categories continued to grow behind the enduring customer preference for great tasting products that are better for people and better for the planet. We believe our market leading brands, innovative products and ongoing investments in marketing and brand building will continue to drive our growth going forward.

Sales in North America increased 11% in Q4 and finished the year up 10%. This double digit growth continues to be led by strong top line results from our plant based beverages and coffee creamers platforms. We are also pleased with the mid-single digit growth in Q4 from our premium dairy platform as we originally anticipated a flat top line due to exiting certain private label business and the impact of no longer servicing a national coffee chain with Horizon products starting in the third quarter. Our European segment also continues to produce excellent top line results with sales growth of 16% year-over-year (ph) basis for 2013. This growth continues to be fueled by ongoing steady growth in almond, hazelnut and other non-soy beverages as well as continued increases in on non-dairy yogurt products.

Looking now at our individual platform results for the fourth quarter and the full year, looking ahead to 2014, oh I am sorry excuse me, North American plant based foods and beverages had another great quarter of double-digit growth with sales up 13% in Q4. This topped off a full year in which this platform delivered 13% growth in 2013. The plant based category had a similar growth profile with mid-teens growth in the fourth quarter and for the full year. Our silk brand continues to be a plant based market leader with an approximately 60% share of the plant based food and beverage category. We continue to maintain number one share positions across all our subcategories with shares over the past year of 74% in soy, 64% in coconut and 53% in almond. Almond milk continues to propel the growth in the plant based category with this subcategory growing over 50% during the fourth. Our silk almond milk continues to drive this growth as it posted its second consecutive quarter of 60% growth. For the first time our almond milk sales exceeded our soy milk sales in the quarter. Almond milk’s share of the plant based category continues to grow and currently stands at 60% of the entire category.

Looking ahead to 2014, we will selectively increase the distribution of our silk non-dairy yogurt offerings as we have been pleased with how these new products had performed in North America. We are also excited about the potential of our recent innovations, which include flavorful almond and coconut milk blends and a new variety of almond milk enhanced with protein and fiber as we continued to expand the product set in the plant based category to appeal for more consumers.

Alpro our European plant based food and beverage segment had another quarter of very healthy growth with sales increasing 16% as we reported and 12% on a constant currency basis. For the full year Alpro’s top line grew 14% on a reported basis and 12% on a constant currency basis, so very robust growth in spite of the soft economic conditions in Europe. Alpro’s four core markets of the UK, Germany, Belgium and the Netherlands continue to be its largest and strongest markets. The Southern parts of the continent continued to improve however, as reflected by the results we see out of these regions. We generated double digit volume growth in Q4 behind the ongoing strong growth of our soy based yogurts as well as rice, almond and hazelnut beverages.

Given the success we have experienced over the past two years since we began offering almond and hazelnut beverages in Europe and the continued growth, we expect for these products. We will be making investment this year in order to produce these beverages ourselves instead of outsourcing. In 2014, we intend to further expand our plant-based offerings, including introducing rice-based creams to rollout innovative new yogurt products and to focus on increasing our distribution footprint into new areas of Europe. We are pleased with Alpro’s growth over the past year and look forward to continuing that trend in 2014 as we focus on increasing our scale in Europe behind Alpro’s distinctive and great tasting products.

Turning to our premium dairy platform, this business delivered top line growth of 5% in Q4, which drove growth in the organic milk category of 5% in the quarter. Continued volume growth in our core half gallon and value-added offerings help drive this better than expected top line performance in the quarter as we retained our leading market share position of 43%. This was despite the volume loss headwinds I mentioned earlier, which cost us over 2 points of growth on Horizon in Q4. We completed the previously announced sale of our Idaho farm in December and utilized the proceeds to reduce debt. As part of the transaction, we entered into a long-term exclusive supply agreement with the buyer ensuring us an ongoing source of organic milk supply from this farm.

Now on to some exciting news for us, we are thrilled to announce that we are extending the Horizon brand beyond the dairy case for the first time with the recent introduction of a line of macaroni and cheese offerings. These great tasting new products in eye popping packaging began hitting store shelves in late December. While still early in the evolution of this product, we are pleased with how these products have performed on shelf. We will continue to slowly increase our distribution throughout the year and anticipate reaching target levels by late 2014. We will be making marketing investments in this first year launch and the product has been manufactured externally. I would caution that we do not anticipate this line extension to be a material contributor to operating results in the near-term. We are, however, very positive about Horizon’s long-term growth in margin building opportunities as we take this iconic brand beyond the dairy case and build us value in the years to come.

The fourth quarter wrapped up another great year of growth in our coffee creamers and beverages platform with sales of double-digits to 13% in Q4 and 12% for the full year. Our Q4 performance was driven by continued volume growth behind the strong performance in our seasonal flavors offerings that resulted in mid-teens growth in our International Delight flavored creamers business. Our traditional half-and-half Land O Lakes dairy creamers also saw good growth in the quarter. The refrigerated flavored creamer category continues to grow, up another 8% in measured channels in Q4 reflecting consumers increasing preferences for customized flavorful coffee. Our International Delight flavored creamers grew at almost twice the category rate as we continued to generate strong away from home growth where we maintain our leading share. After creating the multi-served iced coffee category in 2012, we attracted several new market entrants that captured some share over the past year as expected.

We are pleased to have grown iced coffee in the low-teens during our second year in the market and to maintain a share that is over two times that of the closest branded competitor. We see iced coffee continuing to be a nice business for us with additional growth opportunities. We are also excited about our recent announcement that we are bringing new innovation to the liquid non-flavored creamer category with the launch of Dunkin' Donuts branded creamers. Now, for the first time, consumers will be able to experience at home the unique and delicious taste of cream with their coffee that they come to love when visiting Dunkin' Donuts restaurants. These creamers are made with real milk and cream for a smooth and delicious companion to your coffee. We are very excited about the potential of these new offerings in the non-flavored creamer category. Overall, Q4 was a strong finish to another great year across all of our brands and we are very pleased by the organic growth and operating results we generated in 2013. We look forward to continued growth opportunities in 2014 and beyond.

Before I turn it over to Kelly, I wanted to highlight a couple of our recent strategic growth initiatives. Our acquisition of Earthbound Farm closed on January 2. Earthbound is the largest organic produce brand in the North America and the largest non-dairy organic brand in the United States with 2013 sales of over $500 million. The company’s primary product segment is fresh package organic salads which account for approximately 65% of sales. Earthbound holds a leading 55% share within the branded organic packaged salad subcategory, which is nearly three times the size of its next closest branded competitor. It is also expanded into a number of other premium organic products over the years including fresh fruits and vegetables, frozen fruits and vegetables and dried fruits and snacks.

Collectively, the brand offers more than 100 organic products. The company maintained significant competitive advantages and produce procurement, processing and innovation. Earthbound is the most vertically integrated organic packaged salad supplier. It grows the majority of its leafy green requirements through its own growing operations. It also operates a large state-of-the-art organic certified processing facility in San Juan Bautista, California which is strategically located near premier organic farm land. And with the unique scale vertically integrated production platform, Earthbound has a track record of sustainable cost advantages.

Fresh fruits are one of the most attractive emerging trends in the food industry today. Consumers are increasingly willing to pay for fresh premium and wholesome fruits. This makes Earthbound compelling fit with WhiteWave both strategically and financially. Strategically represents a logical extension of our core capabilities and extends our business into a new branded platform in an on trend high growth category. With Horizon Organic and Earthbound what we will have a strong leadership position in the two most popular gateways to which people enter the organic category produce and diary. This acquisition is also financially attractive as we expected to be roughly $0.07 per share accretive to our 2014 adjusted earnings. We financed approximately $600 million transaction under our increased credit facilities and with year-end pro forma leverage of 3.2 times, we continue to maintain ample flexibility for additional strategic growth opportunities. We have also brought Kevin Yost in to be President of Earthbound Farms. Kevin ran in the Morningstar business for me at Dean Foods and brings more than 22 years of CPG in food industry experience in a strong operating track record to WhiteWave.

We are thrilled to have Kevin on board and have the highest confidence in his ability to lead and optimize Earthbound to its fullest potential. We believe Earthbound Farm is a great addition to the WhiteWave portfolio and a strong strategic fit that will provide significant opportunities for continued growth. We are also in the process of forming a joint venture with Mengniu Dairy to begin manufacturing and distributing products in China. Expanding our brands and products internationally is one of our stated growth objectives and we’re pleased to begin executing on this strategy with such a strong partner.

Mengniu is the largest diary company in China with significant sales in marketing capabilities, a broad distribution network and experience inventorying with western food companies. They share our common goals of producing high quality great taste in foods and beverages that are aligned with consumer taste. We look forward to a long and successful partnership with Mengniu. China is an excellent market for us to bring our product capabilities as it has a large in growing consumer base with increasing desires for healthy nutritious and sustainable foods and beverages. The joint venture needs to receive regulatory approvals and then acquire and complete construction of a production facility before I can begin selling products. The venture currently does not expect to generate revenue in China until late 2014. The venture will also require additional funding for start-up operations and commercialization costs. So, we expect to incur operating losses on our China venture in the near-term.

We do believe the market potential for the types of products that venture will produce is vast and should provide significant growth in profit opportunities for WhiteWave for years to come. We’re very enthusiastic about what the joint venture means in terms of creating additional shareholder value and firmly believe that our venture with Mengniu is an ideal way to bring our innovative products to this very important market. We look forward to telling you more about the venture progress on future calls.

With that, I’ll turn it over to Kelly to review our operating performance and our outlook for 2014. Kelly?

Kelly Haecker - Chief Financial Officer

Thanks, Gregg. Good morning everyone. As Gregg mentioned we closed out the year with continued strong volume growth that drove our net sales up by over 11% to $679 million in Q4.

For the full year, net sales increased over $2.5 billion, which was up over 10% from last year. This strong double-digit growth led to a consolidated segment operating income growth rate of 21% in Q4 to $73 million another record high. This segment operating income performance was attributable to very strong growth from both of our operating segments. Our North America segment’s continued strong sales growth, coupled with a favorable product mix and the benefit of operating cost leverage helps to deliver operating income growth of 20% in Q4 to $65 million, with operating income margin in this segment expanding by 90 basis points versus last year.

As Gregg stated, our Europe segment had another very strong quarter with sales growth of 16% on a reported basis and 12% on a constant currency basis. This top line growth was leveraged in the substantial operating income growth of 25% in the quarter, demonstrating the overhead cost leverage that exists in our currently under-scaled Europe business. Both of our segments produced very strong top and bottom line results in Q4 and for the full year and we continue to see additional growth opportunities for all of our brands.

Now, turning to our consolidated P&L, we are very pleased with the leverage we were able to generate from our P&L throughout 2013 as we converted our 10% full year organic growth into total operating income growth rate of 21%. As you can see, we posted even better operating performance in Q4 as we generated 27% growth in total operating income off of our 11% top line growth. This more than two times conversion ratio drove our operating margin higher by more than 110 basis points in the quarter as we were able to maintain a consistent gross margin while lowering our operating cost as a percentage of sales.

On a full year basis, we improved our operating margin by 70 basis points demonstrating the operating leverage inherence in our P&L. This margin expansion is aided somewhat by lower than anticipated corporate cost as we have yet to experience the full normalized cost of our post-separation standalone functions and certain strategic corporate development activities. This strong operating performance resulted in Q4 earnings per share of $0.22 representing growth of 22% over last year, which surpassed the high end of our expectation range for the quarter by $0.02.

For the year, EPS grew 23% to $0.74 in total earnings per share. This strong operating performance combined with asset sales allowed us to reduce our total net debt by $150 million in 2013 and end the year with a leverage ratio below two times. After the acquisition of Earthbound Farm, our pro forma year end leverage ratio was approximately 3.2 times. So we still maintain ample financial flexibility when it comes to pursuing various growth initiatives. In summary, Q4 was a very strong finish to another solid year of financial performance for WhiteWave.

Before turning to our outlook for 2014, I do want to add that we intend to divest our soy-based meat alternatives business in Europe, which generates nominal operating losses. Our intention is to pursue a sale is based on the strategic decision to focus even more on our branded based drinks and yogurts going forward. The ongoing trend towards private label and soy-based meat alternatives is not in line with the brand focused growth strategy as Alpro. As a result, we recorded a $12 million non-cash loss in the fourth quarter related to these operations.

Also in Q4, we recorded an additional $7 million a non-cash write-down and other cost related to finalizing the sale of our Idaho dairy farm. We have excluded these charges from our adjusted results. Now, I will spend a few moments going over our expectations for the first quarter and for the full year 2014. We entered 2014 with solid momentum with all of our brands and categories performing well behind continued strong consumer trends for healthy, nutritious and flavorful foods and beverages. We anticipate another year of strong operating performance.

Let me outline the main factors that we expect to shape our results this year. On the top line, we forecast that continued volume growth will be the main driver in our existing businesses behind continued growth in our core offerings along with the strong pipeline of new product innovation. We also expect a modest pricing benefit from actions taking to offset certain inflationary pressures we anticipate over the next year. The inclusion of Earthbound beginning in Q1 will of course be a major contributor to our reported results. When it comes to operating costs, we plan to continue to invest in marketing at a strong level to build our brands, increase consumer awareness and support the rollout of our new innovations with advertising campaigns and other media. We remained focused on executing our capacity expansion initiatives so that we can meet the growing volume demand of our business and continue to lower our supply chain costs over time.

As a result, we look for operating margins to expand further particularly in the second half of the year as new capacity is brought our line and we begin to capture the related cost savings. On the corporate expense line, we estimate annual cost to be around $65 million. This is a notable step-up from 2013 due to several factors that include annualizing the cost related to our standalone capabilities that will build out during 2013 following our spinoff in Dean Foods. Transition cost from Earthbound Farm into our reported corporate cost adding corporate functions to support our China joint venture and planning for corporate development activities as we continue to look to expand our strategic trend.

Consistent with last year, these costs will not be incurred evenly by quarter. The first quarter should again be the highest due to the timing of our long-term incentive compensation brands with the annual balance being relatively even over the remaining quarters. We expect strong volume driven sales growth to continue in 2014. Therefore, we will be developing our sixth manufacturing facility in North America, at a Brownfield location that we expect to have up and running late this year. Additionally, as Gregg noted in his earlier remarks we will be investing to expand our production capacity in Europe to produce our rapidly growing almond and hazelnut beverages internally. This will allow us to expand margins further beginning in 2015 after this new capacity is online since that production is completely outsourced today.

Our guidance on capital investments now also includes Earthbound’s requirements. Based upon these factors, we project operating capital expenditures in the $230 million to $260 million range in 2014. Excluding the investments in our China joint venture to acquire and complete construction of the production facility. With incremental debt related to Earthbound acquisition, we are forecasting annual interest expense to increase to approximately $33 million to $37 million based upon the current forward outlook on rates. Our tax rate for 2014 is anticipated to be around 35% with potential quarterly variability at the inclusion of Earthbound Farm’s U.S. based operations is expected to increase our rates somewhat.

Finally, there will be startup cost to commercialize the China joint venture that we will begin incurring this year and reporting as a minority interest in our P&L. Now taking all this into consideration, we anticipate a reported net sales growth in the high 20s percentage range for the full year and for the first quarter of 2014. This guidance includes the 7% to 8% organic growth rate for our existing businesses and the addition to Earthbound Farm in our results. I would note that this guidance considers top-line headwinds from the lapping of the Horizon business exists we mentioned through the third quarter as well as approximately two to three points of growth coming out of our Europe segment from exiting the soy-based meat alternatives business.

We expect our operating income growth rate in the first quarter to be in the high teens to low 20s on a percentage basis. As I mentioned, Q1 is the highest period of corporate cost and we will have a smaller profit contribution from Earthbound due to normal seasonally higher transportation costs that Earthbound incurs in the first quarter. Also, the Easter selling season will take place in the second quarter in 2014 as compared to occurring in the first quarter of 2013.

We project our operating income growth rate to increase during the year as production capacity comes online, other cost reductions are implemented and Earthbound seasonally sources it’s raw material near its Northern California plant, rather from the desert Southwest. We expect full year operating income to grow in the mid 30s percentages. Based upon the strong growth expectations, we expect to achieve between $0.90 and $0.94 in adjusted diluted earnings per share for 2014 before we expect to be about $0.05 EPS investment for the year in our China joint venture. This would equate EPS growth of 22% of the 28% for the full year excluding China.

For the first quarter, we anticipate generating adjusted diluted earnings per share of between $0.18 and $0.20, which excludes our investments in the China venture that we project to be roughly a one step impact to EPS in Q1. The EPS estimates are off of a share base that is forecasted to be roughly 3 million to 4 million shares higher than the prior year or around 178 million shares. I would also like to note that as we mentioned earlier, the China joint venture is still in the process of obtaining the necessary regulatory approvals before it can move forward with its plans. Accordingly, the timing of when these approvals are received could impact the amount of investment that we currently estimate on a quarterly basis as well as for the full year.

In summary, 2013 was a strong year of operating performance and we are very encouraged about our outlook and growth prospects. We entered 2014 with strong momentum and continued to make solid progress on our capacity and cost savings initiatives, which should allow us to expand our operating margins over time. We look forward to delivering another year of strong top and bottom line growth in 2014.

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

Gregg Engles - Chairman and Chief Executive Officer

Thank you, Kelly. Before turning the call over to your questions, I would like to take a few minutes to talk about our focus for the coming year. We entered 2014 with momentum from our solid performance last year and we intend to build on that momentum. We are highly focused on achieving and exceeding the goals that we have set out for 2014 and are confident that we have the brands, products and people to deliver. 2014 will also be a year of strategic evolution for WhiteWave. The significant steps we have already taken to execute on our strategic growth plans and initiatives, namely Earthbound Farm and our JV in China are milestones toward that vision. WhiteWave is the company it is today as a result of strategic acquisitions and cutting edge innovation, which are at the core of this company’s culture.

In 2014, we will be focused on integrating Earthbound into the WhiteWave family and leveraging our number one brands in organic produce and organic dairy. As I mentioned earlier, we see tremendous potential for growth and innovation here and we have only just begun to scratch the surface of these opportunities. We will also be focused on getting our JV in China off the ground to tap the potential of that promising market and expand our footprint into Asia. We will explore opportunities for growth both organically and through M&A.

Our innovation pipeline is full of exciting brand extensions and new products and we continue to believe that we have a portfolio across a very interesting set of platforms. As we have said before, we will look at opportunities to have the right characteristics for us, that is things that would support our growing top line and are in spaces where the opportunity exist to innovate and grow. We are honored to be presenting next week at CAGNY and look forward to expanding more on our business and growth opportunities then. We hope that if you are not there in person, you will have the opportunity to listen to the webcast that will be available on our website.

Finally, I want to once again thank the entire WhiteWave team. Our terrific results last year and bright future would not be possible without the talent, effort and passion of our employees and their belief in our company’s mission to change the way the world leads for the better. And with that, I will now ask the operator to open the call for your questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from the line of Bill Chappell, SunTrust. Please proceed.

Bill Chappell - SunTrust

Thanks for the question. Just first one, just want to understand kind of the – your commodity outlook and then pricing and when I look at kind of the top line expectations, how much of that is pricing or how much you expect to raise prices over the six to nine months?

Kelly Haecker

Hi, Bill, this is Kelly. Good morning.

Bill Chappell - SunTrust

Good morning.

Kelly Haecker

Bill, just from a commodity perspective and from an overall perspective, we are anticipating some inflation in the year ahead but relatively honest. The key drivers on the upside will be of course almonds as we’ve been talking about. Of course, we utilize conventional-based milk products in our Land O Lakes creamers business, along with iced coffee and now our Dunkin' Donuts creamer business we see inflationary pressure there as you are well aware of. And then we expect some inflationary pressure on packing. But those are substantially offset by the rest of our commodities that tend to be deflationary in the year ahead. So, we will see some inflation but overall relatively benign compared to what we’ve been accustomed to over the past few years. As you know, we announced some pricing on our silk business in Q4 to offset some of the inflation that we’re seeing particularly with respect to almonds so, we’re anticipating on balance that sort of the price commodity implication will have the relatively mutual impact on our margin structure in 2014.

Bill Chappell - SunTrust

Okay. Maybe just as a follow-up to that, any exposure or how should we look at California the drought and how that works with – especially with Earthbound because it have an impact or is just raised cost, I mean, still get water, but just trying to understand how that plays out?

Gregg Engles

Yes, we can still do water, does it have an impact – in a relatively modest impact, as you know, we’re producing and forming right now and does in southwest, we have access to well water, river water so for the most part, we see no short-term implications as we move up in the Northern California and beginning in the spring, summer and early fall with our farming operations, there are two we also have access to well water so we’ll be able to water as necessary. We will move some crop acres around from drier areas to wetter areas to accommodate, this is the most part we don’t anticipate any material implication from the drought this year.

Bill Chappell - SunTrust

Got it, thanks for the color.

Operator

The next question comes from the line of Andrew Lazar, Barclays. Please proceed.

Andrew Lazar - Barclays

Just trying to get the sense of – in the overall full year revenue guidance in the high 20s, was that implies for the type of the growth I guess that you’re looking for Earthbound that would be helpful.

Gregg Engles

For Earthbound, we see Earthbound’s growth in 2014 of course as you now that will be included entirely in our results for the first time in 2014, but we anticipated growing in high single digits essentially in line with our overall base organic growth algorithm.

Andrew Lazar - Barclays

That’s helpful, thanks. And then just in terms of the earnings that will be invested into the China joint venture. Just trying to get a bit a sense little bit of where that’s actually going so what exactly that we can spend on and sort of when you see sort of the payback from that. Thanks very much.

Gregg Engles

Yes, Andrew, this venture of course is a new venture so, initially the investments in the venture will be building up the staffing and the infrastructure, the people and other related cost of building an organization that can actually operate in the commercial environment. So, we will experience those costs through the first part of the year before we generate any revenue. As we begin to generate revenue, then as you would expect I think for a startup venture we’ll begin to generate operating losses in the business as we spend to market secured distribution and incur all of the cost that you would typically expect to incur in a startup venture. Now we will be leveraging the Mengniu system in country from a commercial perspective in China so mitigate some of those costs, but we expect that for the first year or so of actual operations will be incurring operating losses in that venture as well.

As we get to the point of actually launching the venture which as Kelly mentioned is depended upon the securing of the necessary regulatory approvals in that actual constitution and investment in the venture. We’ll start to give you a more clarity as we have at around the schedule and start to dimensionalize more fully the expected operating loss from the China venture in the early periods when we expected to crossover in the profitability and start to give you more detail around that venture as we have it.

Kelly Haecker

And Andrew, just to clarify, let me confirm it for you, where you will see that. So as Gregg mentioned, you will see some overhead investments that will show up as I mentioned in the prepared remarks in the corporate cost line and probably that’s what I see it predominantly in the first half of the year. And as we begin operations will report a potential share of operating losses in the minority interest line at the low operating income.

Andrew Lazar - Barclays

Great, thanks so much and then see you all next week.

Gregg Engles

Thank you.

Operator

The next question comes from the line of Chris Growe, Stifel. Please proceed.

Chris Growe - Stifel

Hi, good morning.

Gregg Engles

Good morning.

Chris Growe - Stifel

Good morning. I want to ask first I could about the – in 2014, you have at least an operating facility, production facility last year that came on stream in ‘13 that will benefit margins this year, you have some capacity in warehousing and you talked about like a 50 basis point benefits roughly from that kind of activity in ‘14. I just want to confirm if that was still a good estimate and I just add to that, you have a new facility starting further incremental cost with that in the short run of a drag against that 50 basis points that we are forecasting?

Gregg Engles

Chris, with all those factors included, we continue to forecast organic margin expansion in 2014 versus 2013 of around 75 basis points. So, that’s 75 basis points we have been communicating for several quarters now and we will anticipate again on an organic basis, Earthbound and China excluded to deliver that on that commitment 75 basis points of margin expansion in 2014.

Chris Growe - Stifel

Okay, thank you. And then just a quick follow-on maybe for Gregg, in relation to likely there is a significant investment into marketing and advertising more than a lot of its peers. And I am just curious with a point now where you can sort of start to harvest a lot of that investment or do you see that still is a period of time where you are investing to try and not only increase your own sales, but that of the categories as well?

Gregg Engles

We are investing to grow our business and grow the categories. So, I think you will see us continue to invest at least at these rates to support what are incredibly dynamic categories that are really at the nexus of where the food industry is changing in important way. So, we think this is the classic situation where you need to invest to build the opportunity to be as large as it can be and we have a good fortune to be able to do that and still generate the kind of profit algorithm that we are able to generate. So we are clearly investing in capital. We are investing in marketing, building our brands and building out these categories.

Chris Growe - Stifel

Okay, thank you very much and see you at CAGNY.

Gregg Engles

Thanks.

Operator

The next question comes from the line of Mathew Grainger, Morgan Stanley. Please proceed.

Mathew Grainger - Morgan Stanley

Hi. Good morning everyone and congratulations on the nice end to the year.

Gregg Engles

Thank you.

Mathew Grainger - Morgan Stanley

So, I just wanted to follow up on the sales growth outlook, we are coming off three years where organic sales have been up anywhere from 10% to 14% and you are guiding to 7% to 8% organic growth despite some strong momentum in the business and I think pretty robust product pipeline here. Are there any specific category level concerns or competitive issues that we should be taking into account or watching out for or is this more a case that’s starting out with a baseline outlook to simply close your long-term target and seeing how the year progresses?

Gregg Engles

Yes, I think it’s really more the latter. We clearly are running at a rate ahead of our annual guidance for the year. That’s supported by some pretty incredible growth rates in certain segments of our business with our almond business, up 60% in Q4, for example. So, we have guided to a long-term algorithm of sort of 6% to 7% top line. I think given the growth rates in these categories, it’s just prudent to be thoughtful about the kind of guidance that we give. There are some specific areas that I think are likely to slow a little bit. And I will let Blaine speak about that, but Horizon organic dairy for example is going to be supply constrained at some level.

Blaine McPeak

Yes. I think as you mentioned to Matt, you see the typical headwinds of just strong concepts you have coming up off a very strong growth period this year. In addition, I think we realized that we compete in relatively very competitive segments and we are pragmatic in terms of our outlook here. But that said, we still will be a company that heavily invest behind the development of our brands to try to grow these categories, will be heavy on the innovation front as well and the good things is that all these categories remain relatively robust here. And you see transitions within each of the categories a little bit here, but we are fairly confident in the guidance that we have provided so far of the high single-digit.

Mathew Grainger - Morgan Stanley

Okay, thanks. And one quick follow-up and there is a momentum that we have seen in non-measured channels, it seems bit on Q4 growth in North America that you are thinking would see that sort of 2% to 3% benefit that we saw in the past year quarter. Is that something that should continue through – fairway through 2014 or we now near in the end of an initial ramp-up phase in some of that distribution to in other channels?

Gregg Engles

Yes, you’re right. In the fourth quarter was just a little bit north of that 2%, I should say two point contribution of the growth there which is generally in line with what we’ve seen throughout the majority of 2013. I think you will continue to see that in early periods here in 2014 as we continue to expand distribution in those channels. We have had a bit of a step-up in ‘13 with respect to those distribution process there, we certainly remain hopeful that we can continue that, but I do think that’s some is that is behind so you might see that mitigate a little bit as we enter ’14 here, but that arena of growth outside of our – outside of the traditional retail channel so, in channels like food service, club store, any away from home marketplaces as well as international. We see that as a pillar for us to continue to drive growth both across better fee solutions as well as coffee bar solutions and we’re really pleased with the results we’ve had so far and we’d like our prospects going forward in those channels as well.

Mathew Grainger - Morgan Stanley

Okay, thanks, see you guys next week.

Gregg Engles

Thank you.

Operator

Next question comes from the line of Amit Sharma, BMO Capital Market. Please proceed.

Amit Sharma - BMO Capital Market

Hi, good morning everyone.

Gregg Engles

Good morning.

Amit Sharma - BMO Capital Market

Can you talk about competitive environment in Europe and that’s really being a pleasant surprise from the growth perspective at least versus our expectations and just wanted to understand given the significant growth and there are some companies here in the U.S. we are talking about increasing their investment in that non-dairy segment in Europe. What is the competitive environment over there?

Gregg Engles

I think I said the overall competitive environment in Europe is I would say slightly more favorable for WhiteWave and it is in the United States and in its more favorable because Europe is more difficult in the United States is and Alpro is very well of all in its commercial system across Europe. So what we have in the United States or large completely continental competitors who can advertise in an efficient media market and take advantage of our incredibly efficient distribution systems here throughout the country.

In Europe, it really is a country-by-country market. So, commercial systems are unique to our countries, the media markets are specific to countries and commercial organizations are therefore more expensive to build and maintain and Alpro has that in these categories whereas no else helped us. So, we find that our competitors in Europe are tend to be country or market specific rather than pan-European and I think it’s going to be very difficult for anyone to acquire the kind of scale brand reach and commercial capabilities that we have in Europe which is I think why you’ve seen us be able to capitalize on these new ingredients and plant-based beverages and capitalize on our innovation in culture soy products and soy yogurt alternatives so effectively and efficiently. So, we like our product in Europe. We’re going to have competitors everywhere because these are incredibly dynamic and attractive categories, but we think we have the business systems and the capabilities in the brands in place to be the winner in that marketplace as well.

Amit Sharma - BMO Capital Market

That’s certainly helpful. And then you also talk about bringing on the production in-house and expected market improvement from that. Are you able to share any views on what is the magnitude of that improvement either in 2015?

Gregg Engles

Well, I think we’ll talk about that when we get to 2015 and what we really we’re trying to communicate on the call today is you will see the capital step-up in our effort to internalize production of our new ingredients or nut based ingredients. It require significant amount of capital to bring both the volume and because we’re relatively fall in Europe and to handle the multiple allergens that get created when you bring that’s another plan based ingredients into your facility. So, there is a big opportunity there going forward to capture that margin and lower our operating costs by leveraging that volume in our system and we are going to make the investments necessary to do that in 2014.

Amit Sharma - BMO Capital Market

Got it. And just one quick follow-up on that, what percent of your almond requirements are locked in, in terms of supply at this time?

Gregg Engles

Yes, I mean, we are a bit more than half right now locked on almonds this year. So a good part of the back half of the year remains open and obviously we had considered all that in our guidance we have given today.

Amit Sharma - BMO Capital Market

And you don’t anticipate any supply issue because of the drought, right?

Gregg Engles

We do not. There certainly could be some reflection in price that we believe we will be able to obtain the almonds definitely.

Amit Sharma - BMO Capital Market

Great, thank you very much.

Operator

Next question comes from the line of Ken Goldman, JPMorgan. Please proceed.

Ken Goldman - JPMorgan

Hi, thanks for the question. Kelly, I am trying to get a sense for the worst case scenario for you in terms of the California drought, you mentioned you have access to well and river water right now, but it is at least a small risk that the wells run dry at some point right. So what happens to your supply of lettuce, almonds, milk, if that takes place, again not a big risk, but just trying to get a sense of the downside uncertainty here for you.

Kelly Haecker

Ken, I guess the way I would respond to that is just to say that I think for the – and we see the other drought conditions certainly they were to persist over a longer period of time, I view it more than a longer term concern that we would have with our Earthbound business, I would say that from a standpoint of our access to water with wells and rivers and the like over the – what I would consider the 2014 growing season. I would put that as relatively modest. Clearly, I would say we have to pump more water there is a few implication to that. So I would suggest you it’s completely devoid of any implication for us, but we just don’t see it as being material issue. And again we don’t anticipate these drought conditions causing any kind of material disruption. It would be certainly be monitored over a longer period of time, but I think that gets well beyond 2014.

Gregg Engles

And just to be – just to maybe make it a little bit more clear our farming operations in Northern California are all centered quite closely around Salinas. So we are not in the Central Valley, where water is being rationed. We are not pulling water from the Sacramento River Delta. We are in an area that has access to and today relatively abundant supplies of groundwater that we have the right to pump from. So, we are not reliant on some river continuing to run. You know the river reference was to the Desert Southwest, where currently our farmers are drawing water from the irrigation system supplied by the Colorado River as opposed to a river in California. So our ability to irrigate our crops is pretty localized in California. There are no apparent restrictions on availability of water. And as Kelly mentioned if there is going to be an implication in 2014, it’s in all likelihood going to be cost, because it costs money to irrigate as opposed to have precipitation provide the water for your crops. And right now, we are – it looks like we now have to irrigate.

Ken Goldman - JPMorgan

That’s helpful. And then Gregg, can you talk a bit more detail about your early reed of the Mac & Cheese launch, how are repeat purchases doing? And I am curious about distribution you mentioned by the end of the year, I think you expect full distribution. Is that a bit longer than you expected early, some new products in food take a little bit less time to be national or is that not the right way to look at it perhaps?

Blaine McPeak

Yes, Ken, let me just, this is Blaine, I will address a couple of those. So first off, we began shipping this in the very last week of December so any reed with respect to repeat performance would have you is 30 days in here. So it’s impractical for us to give any commentary at that time. I can say that the level of retailer interest so far has been positive, but at the same time we are also going to be smart about how we conduct this launch. This is not going to be a launch likely might follow on any of our typical lines that we would have in refrigerated case. So we are being more measured with respect to our distribution expectations, our ACV and not that much difference in how we approach the yogurt category here with the (indiscernible) is ensuring that we quite smart, we go to the highest potential customers, the highest potential markets and we ensure that we begin to really drawing success in those before we begin to expand further. So I think we are going to be very smart about how we launch this, but that all said, the first foray of this brand into the center store we are really, really excited about it. I think the product is fantastic. The packaging on shelf really, really stands out, I think will be very competitive. And this is just step one. So this is a brand that moms love for their young kinds and as early as the second quarter here and likely next week at CAGNY, we will be revealing a little bit more details about kind of Phase 2 about how we continue to expand here, but this isn’t about one, this will be about just expanding where there brand competes generally.

Ken Goldman - JPMorgan

Very helpful. Thanks everyone.

Gregg Engles

Thanks Ken.

Operator

The next question comes from the line of Farha Aslam, Stephens. Please proceed.

Farha Aslam - Stephens

Hi, good morning.

Gregg Engles

Good morning, Farha.

Farha Aslam - Stephens

Question regarding Earthbound Farms, with that acquisition you got a whole new distribution system into the produce aisle. I was wondering how you plan to leverage that distribution system kind of and maybe timing of innovation and integration would be helpful?

Gregg Engles

Yes, I think you should think about 2014 as a year where we really get our arms around Earthbound and the capabilities that we have. And it is a different business model given the perishability of the product and as you mentioned the unique supply chain into the produce channel. So, we think there are just lots of opportunities to optimize what we have. We are building starting with Kevin outstanding management team around the already outstanding team that exists in Earthbound. So, I think 2014 will be a year of getting this platform ready for significant growth into the future. Now, there is a – I think a very interesting pipeline of innovation that already existed at Earthbound. So, we are pushing into the organic goals of salad kit, single-serve ready-to-eat salad kit market pretty aggressively as we speak in our channels of distribution. We are very excited about that. We launched over the last couple of years a foray really with the first truly organic line of frozen fruits and vegetables and we think it has ots of potential to grow in the frozen set as we bring organics to that set.

And then I think this unique platform of sales and distribution in the produce channel will give us lots of opportunity to build a portfolio of products that are fresh, that are nutritious, that are more – where there is more preparation content on our side rather than expecting somebody to do it at home. And I think we’ll build some of those products ourselves and I think we may have the opportunity to acquire some of those products overtime because now we have a robust platform going into that part of the store. So, we’re incredibly excited about the long-term potential of Earthbound.

Farha Aslam - Stephens

That’s helpful. And then just on innovation back into your refrigerated case, you are launching a number of new products and as we go to the store notice about innovation in that overall. Are you finding it hard to find shelf space and how are you winning – how incremental is that shelf space that you are attaining?

Blaine McPeak

Yes, good morning, this is Blaine again. In any category, shelf space certainly has had a premium and you see a lot of innovation across all categories in the industry today. I think we are incredibly pleased with our innovation performance over the past several years. And it’s absolutely clear that it’s critical to continue to expand the strength of our brands as well as drive the overall category growth. The thing that we are working on our side here is that we operate in very, very strong categories and retailers realize that. I think there is all this conversations about how we look at the overall space allocated to the categories as a whole and that usually starts the conversation with respect to that really being stewards of the category as how we view WhiteWave. And at the same time, we have to be very, very conscious about how we collaborate with our retailers about optimizing that assortment and that mix on the set that adds incrementality both in sales as well as in profit for the retailer. And sometimes as you might cannibalize some of your existing SKUs, but we have very fast turning SKUs in our portfolio and we usually target those that in the lower tiers there so, it does a challenge, but I think in collaboration there we – we’d like the prospects still it gets harder and harder every year, but a lot of it comes down to the quality of ideas you are bringing them. We’re really, really pleased with things like adding Dunkin’ Donuts to the coffee creamer category here, continue to expand the overall silk lineup and plant-based beverage with protein and fiber almond milk as well as almond coconut blends and a lot of it is about the testament of the ideas we bring in their relationships that we continue to build with our retail partners.

Farha Aslam - Stephens

Great, thanks for the added color.

Operator

The next question comes from the line of Judy Hong, Goldman Sachs. Please proceed.

Judy Hong - Goldman Sachs

Thank you so, just had a couple of questions, first going back to the Earthbound and just looking at the strategic opportunity there Gregg, you talked about the benefits of being really a strong leader in a very important categories in dairy and produce now with the acquisition. I wanted to just get an understanding of how that benefit will really translate into each of the businesses just beyond what Earthbound is doing itself and the right way to doing itself, but does that really give you the benefit of the scale in terms of getting more distribution into the outlet that you’re not currently present then, how much of that can you quickly get, core merchandizing opportunity just kind of thinking about more of the synergistic effect of buying Earthbound.

Gregg Engles

Yes, I think that there is a number of elements to it, Judy and the first thing I want to say is we got a business is very dynamic and growing very rapidly. So, the notion of doing things quick here is not all that pertinent for us. We’re trying to do things well and capitalize on these long-term secular trends that are providing such a nice tailwind to our business. So, we’re trying to move efficiently, we’re not trying to go slow, but we’re trying to build out really in during brands and propositions and platforms and leverage our capability. So, it’s fantastic to have Earthbound, these two great gateways into the organic business together with Horizon in the company that’s going to provide us opportunities overtime and I don’t have that products to announce or a specific roadmap to layout for you, but it’s going to provide us opportunities to leverage both of those brands now across areas of the store where they couldn’t necessarily get to on their own.

So, we think there are opportunities for Horizon in the fresher arena. We think there are opportunities for Earthbound in sets of the store that are outside of produce. And we think that just a deeper penetration into this movement of consumers towards organic and healthy eating with these two very, very strong brands will just provide us leading edge inside into where the market is going and where the consumer is headed that will allow us to build our business at a greater rate than if we didn’t have that scale in the category. So, I don’t want to suggest that there is anything we are going to announce at CAGNY next week that is specifically around leveraging Earthbound and Horizon together, but we clearly now have much scale and breath across the store in these categories and I believe you will see us leverage it over time in a thoughtful way.

Judy Hong - Goldman Sachs

Okay, that’s helpful and then just at the follow-up on the Horizon Mac & Cheese launch. So, I hear you in terms of taking bit more measured approach here, the improved and smart about it. As you think about the opportunity though on a longer term basis, could you just frame us how you see that opportunity over the long-term, you got over $2 million in retail sales for the category dominated by Kraft and then you got Annie’s with relatively small share within the broader Mac & Cheese, but strong in the organic lines so, how are you thinking about Horizon in that kind of competitive set and within the category.

Gregg Engles

Sure, well, we look at this new – first is just attachment of the strength of the brand Horizon is about a $750 million brand our retail and it’s incredibly strong. So you have a very strong basis from which to begin with this is a whole series of initiatives with respect to expanding the potential of the brand into a number of different categories that are highly relevant for moms with young kids. At the same time we also see this not only growing top-line but beginning to transform the margin structure of this business over time. We don’t worked is anyone particular here in terms of that focal area we look at those high indexing categories that over index of moms of the younger children. But we fully realize that you should be these categories that we enter into are going to be large categories, are going to be highly competitive where we’re going to need to fight above rate and it should these categories. But reality is that lot of these categories are flat as well and may not be going. So, we believe that we can continue to stimulate category growth as well as bring new consumers and for the retailers there is potential for additional margin for the retailers as well as by having a brand as strong as Horizon here. And we look at it as a category additive we don’t have any particular competitive sights in our frame here, but we realized that it will never be easy. We are entering new highly dynamic categories that we have to believe in our brand to differentiate in those particular categories and I think we have that with Horizon Organic here.

Judy Hong - Goldman Sachs

That’s great. Thank you, both.

Operator

The next question comes from the line of Phil Terpolilli, Longbow Research. Please proceed.

Phil Terpolilli - Longbow Research

Hi, yes, thank you. Good morning.

Gregg Engles

Good morning.

Phil Terpolilli – Longbow Research

Just a quick clarification question and one just maintenance question, so you are seeing inflation in several categories you mentioned earlier, I assume, we are talking about almonds and milk, we are seeing deflation elsewhere. So in total, you are seeing less inflation than in prior years, but you plan to take further pricing action of this year beyond what you took at 4Q, is that fair, is that the way I should be reading that? Just wanted to make sure I understood what you were saying earlier?

Gregg Engles

Yes. Just to clarify again on balance we are seeing a little bit of inflation in 2014 versus 2013 like perhaps a little less than we have seen historically, but it was probably a little bit of catching up on price we needed to do in a couple areas as well, particularly with respect to sales we had almond pressure for some time. And so I think there was a little bit of a catch up that we felt was appropriate. So I think that hopefully makes it a little bit more congruent either.

Phil Terpolilli - Longbow Research

Okay, that’s helpful. And then just a maintenance question on CapEx and even just ballpark anything would be helpful, I am just trying to understand the step up this year, what’s from the additional plans you are talking about versus the step up from Earthbound? Thanks.

Gregg Engles

Yes. The biggest part will be the step up from the additional plant. As you mentioned I think on our call we announced Earthbound, we could expect Earthbound capital expenditure probably somewhere between $25 million to $35 million of capital expenditures. So, for the most part, the biggest increase will be the new plant.

Phil Terpolilli - Longbow Research

Okay, thank you.

Operator

The next question comes from the line of Bryan Spillane, Bank of America/Merrill Lynch. Please proceed.

Ryan Oksenhendler - Bank of America/Merrill Lynch

Hi, guys. It’s actually Ryan.

Gregg Engles

Hi, Ryan.

Ryan Oksenhendler - Bank of America/Merrill Lynch

I had a question for you and I apologize if you answered this already, I was on another call, but your sales guidance you gave for 7 to 8. Is that include I guess 2% to 3% headwind from the selling of the soy-based meat alternatives business. So its really little bit higher?

Gregg Engles

Yes, let me clarify that the 200 to 300 basis points with respect soy-based meat alternatives exit was just as a relates you with impact on that Europe segment. So, I think the way to think about these exited businesses if you can aggregate the impact of that exit along with the Horizon exit we talked about. You need to think about is more of 50 to 60 basis points year-over-year impacts not significant on year-over-year basis. More pronounced in the first half until we begin to lapse into the Horizon exit will begin to see in third and fourth quarter, but on a full year basis for a consolidated net sales about a half of point.

Ryan Oksenhendler - Bank of America/Merrill Lynch

Great, thanks.

Gregg Engles

That is inclusive of that guidance. We have taken that into consideration.

Ryan Oksenhendler - Bank of America/Merrill Lynch

Got it, okay. And then just quickly in terms of the outlook for M&A I guess balance sheet is still in pretty good shape, is the Earthbound acquisition preclude you from further M&A over the next 12 months or so?

Gregg Engles

No, absolutely, no. I think our balance sheet is in pretty good shape. We expect in 2014 again below three times levered. So, we do – we deliver this business pretty quickly through earnings growth if you will the periods that we’ve been a public company and we don’t see that changing obviously given the guidance that we expect EBITDA to continue to grow pretty significantly in our leverage our comedown. So, we feel like we’ve got a lot of capability here and we think we have some nice opportunities out there that are interesting.

Ryan Oksenhendler - Bank of America/Merrill Lynch

And I guess it could be a little more specific in terms of what areas you’ll be targeting in geographies as well. That would be extremely helpful.

Gregg Engles

No, we actually can’t give you any information about that.

Ryan Oksenhendler - Bank of America/Merrill Lynch

Alright, thanks guys.

Operator

Ladies and gentlemen, we have time for one more question and that question comes from the line of John Baumgartner, Wells Fargo. Please proceed.

John Baumgartner – Wells Fargo

Thanks for the question, good morning.

Gregg Engles

Good morning.

John Baumgartner – Wells Fargo

Gregg, I think – just a little bit earlier on the margin opportunity in Europe over the next year so as you go out further, as you build capacity I guess taking more of the incremental volume in house versus co-packing, is there a reason structurally why we couldn’t see the European margin and Alpro across the North American (indiscernible) low to mid teens?

Gregg Engles

I think that will be difficult unless there are sort of a step function change in the scale of that business and even with the large change in the scale of that business, European business just tend to suffer because of the fragmented nature of that market with different languages, different retail systems, the need for unique commercial go to market organizations on a country-by-country basis. They just tend to run 300 to 400 basis points higher in cost then U.S. businesses do. So, in a less pretty much true for any pan European business that cost burden is just higher given the level of complexity in Europe as suppose to the United States. So, our margins are definitely growing there, they are going to get to be very respectful margins on a gross margin basis that business is almost identical in terms of this margin structure to our self business in the United States, but the cost burden in G&A to lower gross margins just going to be higher.

John Baumgartner – Wells Fargo

Understood and then just follow-up for Blaine in some of the Dunkin’ business, how you are thinking about that business in terms of the risk of cannibalization to your lazy business that’s out there now.

Blaine McPeak

Yeah, as we look at the Dunkin’ launch that’s really launching in the unflavored creamer segment which is really comprised of unflavored non-dairy creamers as well as half and half category. We are very underdeveloped with respect to those particular segments in the creamer category so, while there is always going to be a little bit of cannibalization. We feel pretty good about the incrementality of this business and we’re really, really pleased with the partnership that we have with Dunkin’ Donuts is a very, very strong brand, is very strong in the Northwest and it’s continuing to expand the stores throughout the United States, I think they have north of 7,000 stores today in a very, very high aided awareness on their brand overall and it’s just a fantastic partners here and we think the product is fantastic and the shelf impact is extraordinary. So, we’re really pleased to how that’s come to (indiscernible) we just started shipments here in January. You recall we had it in test market in the late third quarter and fourth quarter of last year and we decided to roll that nationally this year. I think we’ll see some pockets where we may not get distribution expansion because it’s a little bit under developed in certain market, but we like the opportunity ahead of us there and the product is second to none.

John Baumgartner – Wells Fargo

Great, thanks, Blaine.

Operator

We will now turn the call back over to Mr. Gregg Engles for closing comments.

Gregg Engles – Chairman and Chief Executive Officer

Well, thank you all for joining us on the call this morning. We appreciate your interest in our company and we look forward to talking to you more about our business and growth opportunities next week at CAGNY. So, we also appreciate your coming to our conference and having a great experience with us that CAGNY. So, thank you very much.

Operator

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

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