WhiteWave Foods' (WWAV) CEO Gregg Engles on Q1 2014 Results - Earnings Call Transcript

May. 8.14 | About: WhiteWave Foods (WWAV)

The WhiteWave Foods Company (NYSE:WWAV)

Q1 2014 Earnings Conference Call

May 08, 2014 10:00 AM ET

Executives

Dave Oldani – Vice President, Treasurer and Investor Relations

Gregg L. Engles – Chairman and Chief Executive Officer

Kelly J. Haecker – Chief Financial Officer

Blaine E. McPeak - President

Kevin C. Yost - President-Earthbound Farm Business

Analysts

Amit Sharma – BMO Capital Markets

Ken Goldman – JPMorgan

Farha Aslam – Stephens Inc.

Diane Geissler – CLSA

Michael Steib – Credit Suisse

William Chappell – SunTrust

Judy Hong – Goldman Sachs

Matthew Grainger – Morgan Stanley

Bryan Spillane – Bank of America

Phil Terpolilli – Longbow Research

Rohini Nair – Deutsche Bank

John Baumgartner – Wells Fargo

Operator

Good morning and welcome to The WhiteWave Foods Company’s First Quarter 2014 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 a 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 please, Mr. Oldani.

Dave Oldani

Good morning, everyone, and thanks for joining us on our first quarter 2014 earnings conference call. This morning we issued our earnings press release, which is available on our website at whitewave.com. This 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 our earnings targets, guidance for the second quarter and the balance of the year, expectations regarding our branding initiatives, innovation and research and development plans, growth plans, and various other aspects of our business.

These statements involve risk and uncertainties that may cause our actual results to differ materially from the statements made on today’s conference call. Information concerning those risks is contained in the company’s 2013 Form 10-K that was filed with the SEC on February 28, 2014.

We would also want to remind you that our presentation on today’s call and the accompanying slides is based on our adjusted financial results, which is the same basis that we’ve used in our past earnings presentations.

Our earnings release and the reconciliation posted on our website contain further details of these adjustments, along with the reconciliations between our GAAP results and the results we present on an 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. Available to participate in the Q&A portion of the call are Blaine McPeak, President of WhiteWave and Kevin Yost, President of Earthbound Farm, the organic produce company we acquired in January this year.

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 L. Engles

Thanks, Dave. Good morning, everyone, and thank you for joining us on the call this morning. We’re off to a very strong start in 2014, as you can see from our first quarter results today. Our top line increased 36% in Q1 with organic net sales growth of more than 12% augmented by the inclusion of Earthbound Farm’s results starting in the first quarter. This double-digit organic growth rate continues to be fuelled by strong volume growth across our market-leading brands.

Our robust top line growth led to significant growth on the bottom line. Earnings per share excluding our China joint venture costs increased 40%, it’s $0.22 per share in Q1, exceeding the high end of our guidance by $0.02. Including business development cost at our China joint venture, our earnings per share for the quarter was also $0.22, as these costs had less than $0.005 impact in Q1, given our China ventures early stage of development.

In addition to the strong results from historical WhiteWave, we’re also pleased with how Earthbound performed in the first quarter of owning this leading organic greens and produce brand. Our strong start in the first quarter has led us to increase our top and bottom line guidance for the balance of 2014, which we will discuss later on the call.

During Q1, we delivered healthy top line growth with sales reaching $830 million. Excluding Earthbound, sales increased over $75 million in Q1 2013 or over 12%. Volume continues to be the main top line driver as we experience strong growth across all our brands during the quarter. Each of our categories also experienced growth in Q1, driven by our innovative products in ongoing marketing investments.

In North America, sales increased 39% in Q1, as Earthbound’s results are included in this segment for the first time. Absent Earthbound, our North America segment continued a strong growth trend with sales up over 10% in the quarter. This double-digit organic growth was driven by all of our platforms with plant-based beverages, premium dairy and coffee creamers, all producing impressive growth rates.

Our European segment continues to generate exceptional results with reported sales up 24% in Q1 and 19% on a constant currency basis. This segment’s remarkable organic growth continues to be fulfilled by the strength of our plant-based almond beverages, non-dairy yogurts and growth in soy beverages.

Due to the better than anticipated volume growth, we will increase our capital spending in 2014, to support the growing production requirements being placed in our supply chain. Kelly will discuss our updated expectations for capital spending in a few minutes.

Let me now cover our individual platform results for the quarter. The strong growth trend in our North America plant-based foods and beverages platform continued with sales up over 13% in Q1. This marks the 12th consecutive quarter of double digit growth for Silk. Silk’s top line growth remains primarily volume-driven with some benefit from price increases we initiated late last year.

The plant-based category continues to grow rapidly behind the continued strong growth of almond. The category grew 20% overall with the almond subcategory growing more than 50% in Q1.

Almond has now grown to roughly two-thirds of the entire plant-based category. Silk almondmilk continues to be one of the main drivers of this growth as it grew by 52% in the first quarter. Impressive growth by any measure, but especially so considering the relative dollar size of our almondmilk business.

As the category has moved toward almond, we have been rebalancing our product mix and shifting shelf space away from soy to almondmilk SKUs. This intentional mix shift has contributed to a large part of the declines we have recently experienced in soy. As we have refocused our soy portfolio on our core SKUs, we have seen improved soy velocities in recent periods.

While still in its early stages, we are pleased with our distribution builds to date on the launch of almondmilk, protein and fiber and almond coconut blends. We’ve also seen a positive impact on Silk from our redesigned packaging and new national advertising campaigns aimed at increasing brand and category awareness.

Let’s now look at our European plant-based food and beverage segment. The strong growth momentum in our Alpro brand continued into Q1 with reported sales increasing 24%, up 19% on a constant currency basis. Volume continues to drive Alpro’s results with high teens percentage growth in Q1.

This growth was strong across all its main geographies. Alpro’s number one share in its nine largest markets increased by two points in the quarter and now stands at 41%. Alpro’s top line continues to be driven by significant growth in almond and other recently introduced beverages. It’s score on storage beverages also grew this past quarter. Outside of its beverage products, Alpro continued to experience more than 20% growth in its innovative soy-based yogurts and unique cream products in Q1.

At the end of Q1, we completed the previously announced plan to sell our non-strategic meat-free business in the Netherlands. This will result in a couple of points of top line headwinds in this segment until we last this divestiture in the second quarter of next year.

Over the balance of 2014, we intend to expand our European plant-based offerings even further with the introduction of an Alpro brand, a coconut beverage and under our organic Provamel brand, the launch of a rice and coconut chocolate blend and an exciting new Macadamian nut-based beverage. We are very pleased with the fantastic results that both of our plant-based beverage platforms delivered and anticipate this strong growth momentum to continue.

Turning now to Premium Diary, this platform produced sales growth of 8% in Q1, despite a 2 point negative impact from exiting some private level business and discontinuing service to a national coffee chain in the third quarter of last year.

The majority of the growth was volume-driven by our value-added offerings such as our DHA Omega-3 enhanced products with some benefits from price increases implemented early this year. The organic milk category continued to grow in Q1, expanding 7% in the period. While it’s still early, we are pleased by our initial steps to expand the Horizon brand beyond the dairy case. The rollout of our Mac & Cheese is off to a good start and the response by retailers and consumers has been very positive. Retailers have also embraced our recently launched line of great tasting Horizon snacks, crackers, and cookies.

We will continue to build that distribution of these new center store products over the balance of 2014. While these brand extensions have yet to become a material part of our results, we remain excited about the long-term growth in margin enhancing opportunities we expect they will provide over time.

While we are expanding the Horizon brand into other areas of the stores, we also remain focused on innovating in our core-dairy offerings. We recently launched lactose-free Horizon milks to attract new consumers into the brand and to provide access to organic dairy for those who are lactose intolerant.

Let’s now switch to the newest member of the WhiteWave brand family Earthbound Farm. This new platform performed well in Q1 with sales of $146 million. Earthbound’s organic packaged salads, which account for most of its business continued to see strong uptake this past quarter with high teens volume growth. Earthbound’s new frozen produce lines also saw its sales double in the quarter.

Organic share of the total packaged salad category increased over 3 percentage points in Q1 to 24%. Earthbound continues to have a leading 56% share of the branded organic packaged salads segment. Like WhiteWave’s other brands, Earthbound has an innovated mindset.

Earthbound recently launched power meal bowls, which are unique and tasty complete organic salad meal kits. This exciting addition to the packaged salad category is in its early stages of development, but has been tracking well against initial targets. We are very pleased with Earthbound’s first quarter results within WhiteWave and we’re on track to deliver at least the $0.07 EPS accretion that we expected for 2014. Moreover, we remain enthused about the growth opportunities that lie ahead for our fresh food platform.

Our coffee creamers and beverages platform, even with the shift into Q2, continued to generate strong growth with sales up 9% in Q1 behind increased volumes. Our International Delight flavored creamers continued to be a growth driver, increasing 7% ahead of the 6% flavored creamer category growth in Q1.

Our LAND O LAKES half & half dairy creamers also continued on a steady growth trajectory. We’re implementing price increases on LAND O LAKES products to help offset the input cost inflation we’re experiencing in this business, as a result of historically high dairy commodities. Our recent extension into the non-flavored creamer category with the national launch of Dunkin’ Donuts branded creamers has been going very well, reaching distribution levels where we will begin wide-scale marketing efforts in Q2.

Our innovation in the flavored creamer category continues with our latest new products that offer the two-in-one benefit of being both sugar-free and fat-free, making for a delicious and lighter combination in your coffee. We’re also launching a new line of ice coffee flavors, including cold stone sweet cream and Hershey’s cookies and cream, as we continue to innovate in the ready-to-drink iced coffee category.

Beginning in Q2, we’ll also unveil a new look for our International Delight brand that includes a more vibrant logo and impactful package graphics that make the brand stand out on shelf. We’re also rolling out our new national advertising campaign later this year to support this rebranding initiative. Our strong innovation pipeline and effective marketing puts us in a strong position to extend our recent record of outstanding growth. We’re excited and optimistic about our prospects across all of our businesses for the balance of the year.

Before turning the call over to Kelly, I want to spend a moment updating you on the status of our recently announced joint venture with Mengniu Dairy, the largest dairy company in China. We’ve been making good progress with all the key business establishment activities currently moving along as we expected.

The venture has been officially formed, fully registered, and has received the Chinese government approvals necessary to operate. Initial capital contributions have been made by both parties to the venture. The venture’s next step is to complete the previously announced plans to acquire a subsidiary of Yashili and its manufacturing facility. We expect this acquisition to be completed soon and work is scheduled to take place over the coming months to finalize construction of the facility in preparation for market entry and product launch late this year.

In summary, all of our commercialization plans are in track in China. We remain very excited about our entry into the China market through this venture and the future growth in value creation opportunities we expect it will provide.

With that, I’ll turn it over to Kelly to review our Q1 operating performance and update you on our increased outlook for the balance of 2014. Kelly?

Kelly J. Haecker

Thanks, Gregg. Good morning, everyone. As Gregg stated, we are off to a good start in the first quarter with over 36% sales growth to $830 million, driven by Earthbound’s inclusion in our results, as well as very strong double digit top line organic growth from our historical businesses. These factors resulted in consolidated segment operating income growth of over 34% in Q1 to another record high of $84 million. This performance was attributable to very strong operating income results from both of our segments.

Our North America segment’s operating income increased 32%, enhanced by Earthbound’s results that are now included within this segment. Excluding the Earthbound impact, our North America segment’s 10% organic top line growth rate resulted in mid teens operating income growth and margin expansion of over 60 basis points versus last year, due to a favorable product mix, coupled with some marginal pricing benefits and the advantage of operating cost leverage.

As Gregg mentioned, our Europe segment had an exceptional Q1 with sales growth of 24% on a reported basis and 19% on a constant currency basis. This robust top line growth resulted in significant cost leverage that expanded operating margins by more than 160 basis points and led to operating income growth of 55% in the quarter, aided slightly by favorable currency conversion.

Now, turning to our consolidated P&L for the quarter. We are very pleased with the structure of the consolidated results we posted in Q1. We generated strong sales growth not just strategically from our acquisition of Earthbound, but through strong double digit organic growth from our historical businesses.

And as previously noted, the conversion of those sales to profits in our historical North America and Europe business was strong. Excluding the impact of Earthbound, we expanded our consolidated operating margins by over 50 basis points in the quarter, despite expected higher corporate costs driven by challenging comparison to the prior year.

Below adjusted total operating income, both interest expense and our effective tax rate were generally in line with our expectations for the quarter. Our strong operating execution combined with the addition of Earthbound resulted in Q1 earnings per share of $0.22 representing growth of 40% over last year, which surpassed the high-end of our expected range for the quarter by $0.02. This excludes a roughly $0.005 investment in our China venture that we incurred in the quarter.

In summary, we are pleased with the quality of our results and our very strong start to the year. Now, I’ll spend a few moments going over our expectations for the balance of 2014. Based upon our strong results in Q1 and an expectation of continued growth across our platforms, we are now forecasting a higher top line than we originally predicted this year.

For Q2, we are now anticipating a reported net sales growth rate in the low 30% range and we expect a similar growth rate for the full year. This updated guidance includes an organic growth rate that we now expect to be in the 8% to 9% range for 2014, up from the 7% to 8% range we originally forecasted.

With this increased sales outlook, we expect our operating income growth rate in the second quarter to be in the low 40s on a percentage basis, up from the 35% growth rate we delivered in Q1. We also expect to deliver operating income growth in the low 40s on a full-year basis for 2014.

One thing to note is that while our interest expense in Q1 was higher due to financing of the Earthbound acquisition, it was partially offset by an expected annual interest rebate we received on certain loans outstanding. Therefore, quarterly interest expense for the remainder of 2014, is expected to be higher on a sequential basis leading to an estimated annual interest expense of approximately $32 million to $34 million based on our expected debt levels and our current forward outlook on rates.

We expect our full year effective tax rate for 2014 to be approximately 34% to 35%, a modestly higher rate than we experienced in Q1, with some debenture variability by quarter over the balance of the year.

Based on our revised top line growth expectations, we are increasing our adjusted earnings per share guidance for the full year 2014. We now expect to achieve between $0.95 and $0.98 in adjusted diluted earnings per share for 2014. This guidance excludes what we continue to expect to be about a $0.05 EPS investment for the year in our China joint venture. This revised guidance is up from our original EPS expectation of $0.90 to $0.94.

For the second quarter, we anticipate generating adjusted diluted earnings per share between $0.21 and $0.22, which excludes projected investments in the China venture that we expect to be about a $0.01 impact in Q2.

This EPS guidance compares to $0.16 in the second quarter of 2013, in which we had a notably lower tax rate than we expect this year. If adjusted for the different tax rates expected between the periods, our Q2 guidance range would represent approximately 35% to 40% year-over-year growth.

As we previously noted, we’re still in the process of commercializing the China joint venture. Accordingly, there are a numerous factors that could impact the timing and the amount of investment that we currently estimate on a quarterly basis as well as for the full year.

Lastly, as Gregg mentioned, to support the better than expected volume growth that we’ve been experiencing, we plan to coactively increase our 2014 capital spending to further expand production capacity in both North America and Europe.

We now estimate our investment levels to be around $275 million this year. The timing of when capital projects can be initiated and the pace of completion could vary and influence the amount of capital investments we actually made in 2014.

In summary, we’re very pleased with our strong Q1 results and remain confident in our ability to continue to grow our businesses, while delivering on our margin enhancing initiatives.

I will now turn the call back to Gregg for some closing comments. Gregg?

Gregg L. Engles

Thank you, Kelly. Before turning the call over for your questions, I want to take the moment to thank the entire team at WhiteWave for the outstanding performance they delivered in first quarter. We started the year off very strong and I believe our team continued to deliver the sales growth and innovation breakthroughs that are driving our business.

We’re pleased that our strong performance and the continued consumer preference tailwinds supporting the categories in which we participate, are enabling us to increase our outlook for the year.

The strong demand for our products is clear and we think it is prudent to step up our investment levels now to support the volume growth we’re seeing across our business. With the first quarter of Earthbound form as part of WhiteWave family now behind us, we’re already seeing the solid that this business has within our organization and its clear strategic and financial benefits.

Looking at the remainder of 2014 and beyond, with our portfolio of leading brands, we are very well positioned to grow our category leadership across all of our businesses and explore other strategic initiatives to feel WhiteWave’s growth.

And with that, thank you for participating on the call. I’ll ask the operator to open the call for your questions. Operator?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Your first question comes from the line of Amit Sharma at BMO Capital Markets. Please proceed.

Amit Sharma – BMO Capital Markets

Hi. Good morning, everyone.

Gregg L. Engles

Good morning, Amit.

Kelly J. Haecker

Good morning, Amit.

Amit Sharma – BMO Capital Markets

Kelly, you talked about increasing the investment spend, can you provide us little bit more color on where you’re spending that money and when should we start to realize some benefits from it in terms of margins?

Kelly J. Haecker

Yeah, Amit. Thanks. In the call, just in our past discussions with you, we chronicled our investment spending for 2014 and into 2015. And we talked about the seven filling lines that we had underway and in progress and then a number of warehouse initiatives as well. The additional investment now will include two more filling lines and related processing capability, one in North America and one in Europe.

So these are two filling lines designed to again continue to meet the growth and the capacity needs of our business. We are committed to staying ahead of this and not finding ourselves in the position where we were a couple years ago where we felt like we were behind.

So these are investments that we’ll begin to make this year. But you can expect these two lines in particular to not be commissioned well into 2015. So these are investments, long lead times that we just need to get started on now so that they’re available to continue to support our growth in 2015 and then in 2016 and beyond.

Amit Sharma – BMO Capital Markets

So your margin expansion target of 100 basis point plus that remains unchanged in 2015 from 2014?

Gregg L. Engles

Amit, our margin guidance that we give with respect to expansion in 2014 has been roughly 75 basis points, and we’re going to anticipate that we will continue to do that. We’re very confident that we will deliver that if you look at our entire year 2014 that we’ll be able to deliver on that commitment.

Amit Sharma – BMO Capital Markets

Got it. And then one for Blaine, if I may. I’m sorry if I missed that. Could you talk about contribution from your non-measured channels. Are they still continuing to be pretty solid?

Blaine E. McPeak

Yeah, Amit. We saw it was spread between 1 basis point and 2 basis points of contribution from unmeasured channels closer to the two range I think for this particular quarter.

Amit Sharma – BMO Capital Markets

Got it. Thank you very much.

Operator

Thank you. The next question comes from the line of Ken Goldman at JPMorgan. Please go ahead.

Ken Goldman – JPMorgan

Hey. Thanks for the question. I realize it’s early, but hoping for some additional color on mac and cheese, couple questions. Your ACV in measured channel is still below 20%. So bit of a slower rollout than most new products from packaged food companies. You cautioned us that the rollout would be slow, so I’m not concerned just, I guess, curious why the product won’t necessarily be getting that national distribution work quickly? And then the second point is just curious how velocities are for mac and cheese versus your expectation so far? Thank you.

Gregg L. Engles

Sure. Thanks, Ken. So as we conveyed very early on with respect to this set, this is a very important launch here that really takes a brand that has incredible strength of moms in particular mom’s with younger kids and expands it into other relevant categories as well as we see much longer-term benefit here with respect to improving the overall margin structure of the business. So broad stroke I would say that things have gone very much according to our plans.

We launched Macaroni & Cheese in January, we just launched the Horizon snack cookies and snack crackers. The distribution levels on an all outlet basis are in the high teens on macaroni and cheese. But when you take a look at the overall food sub category, we’re over 30%. Those are very much in line with what our expectations and what our plans were. I think we were very deliberate out of the gate that we’re not in any type of rates here to have any type of massive expansion like we typically do in our categories that are central to our core business.

We’re very deliberate about making sure that we’re building the strength of the brand and ensure that we get it right before we have any type of major rollout. So I’m very pleased with our results so far. I’m pleased with the velocities that we’ve seen in a small amount of the ACV, right where we are so far year-to-date, it’s still very early.

But I think the positive thing is that we’re seeing very, very strong consumer feedback on this launch across the board. And which just says that this is a brand that resonates with moms of younger kids and she wants to see this brand operate in a multitude of categories.

So it’s lower than what you might expect on some of our launches. But it’s very much in line with what our expectations were and what we’ve really been trying to communicate throughout our communication on this particular launch.

Kelly J. Haecker

Yeah. Ken, I would just add to that and say, there is a certain demographic where brands like Horizon skew much more heavily in penetration. And that’s where we have gone with our original ACV build to those markets and those outlets where the demographic is most supportive of the brand and expansion of the brand and our attention is to start there and be successful there, before we roll it more broadly.

So just as a long-term exercise for us. It’s not about having a big pop in the first year. It’s about building this brand over time and you start by building it with your core advocates and we’re having a lot of success there. So we’re very pleased with where we are and we’re right on our plan.

Ken Goldman – JPMorgan

That’s all. Well, thank you everyone.

Operator

Thanks. The next question comes from the line of Farha Aslam at Stephens. Please go ahead.

Farha Aslam – Stephens Inc.

Hi. Good morning.

Gregg L. Engles

Good morning, Farha.

Farha Aslam – Stephens Inc.

Gregg, could you give us a bit of a breakdown where WhiteWave products are sold at retail? How much is in you base grocery warehouse natural channel, rough estimate is fine?

Gregg L. Engles

Yeah. I’ll let Blaine to give you more of the details. But our products are very much mainstream, right. So they are – in terms of ATV, they’re very, very broadly distributed. There are service channels where we are probably underrepresented to a slight degree, and I’ll let Blaine give you more details around it.

Blaine E. McPeak

Farha, these are – our business historically grew up in more of the specialty channels, where the natural channel and things like that. But over the past several years, we’ve really, really migrated all of our brands here to participate broadly in all channels of distribution, and the largest certainly being in the food and mass – grocery and mass subsegment there, where north of 60% of our sales would reside. And then you have really about 20% that would fall into our channels business as we refer to, which would encompass away from home as well as our business.

And we believe that we’re very, very successful with that expansion from where our heritage has been and very, very pleased about what our growth prospects are to continue that expansion in terms of depth of distribution in many of the channels. And even if you think about the away from home marketplace, really that’s about expansion of rest of distribution there. So that’s a little bit of characterization I think in a number of our historical documents that we file along with the IPO we had much more specificity around each of the channel breakouts.

Farha Aslam – Stephens Inc.

And just as a follow-up in terms of shelf space, as you’re introducing these new products, are you garnering incremental shelf space and how tough is it to get through these new products?

Unidentified Company Representative

Yeah. I think what we see across the board is that within the overall refrigerated dairy categories it’s categorized, we are seeing that WhiteWave in the categories in which we participate are very, very strong growing categories and many retailers have continued to dedicate increased shelf space as you refer to it for those particular categories.

I think with the heavy innovation that we have, with the heavy innovation that comes in competitively, you’re seeing a balance between swap outs core velocity items across the board as well as some expansion in the overall shelf space.

So it’s a combination of both and I expect that to continue to happen as you just have helped your categories and you need to kind of weed out some of the poor performers.

But we take a very proactive stance with respect to partnership with our retailers on both expanding the space as well as addressing those needs within the existing space and I think as we mentioned in the prepared remarks, as we see the evolution of the plant-based category, we’re very proactive with our choice of making certain that they have the assortment appropriate for that future growth outlook.

So we’ve continued to migrate more of that set toward the almond category and we proactively pulled back some of that assortment on our soy business overall.

So it’s a combination of both. It’s a finite amount of room, so you have to be very, very focused on driving your core velocities on your business, which we are committed to doing through value based activity of a lot of advertising to drive the category in the household penetration as well as being smart about how you innovate into the category.

Farha Aslam – Stephens Inc.

Thanks for the added color.

Operator

Thanks. The next question comes from the line of Diane Geissler at CLSA. Please go ahead.

Diane Geissler – CLSA

Good morning.

Kelly J. Haecker

Good morning, Diane.

Gregg L. Engles

Good morning.

Diane Geissler – CLSA

I wanted to ask about the incremental capital spend and sort of where you are in terms of sort of third party co-packers. Can you talk about sort of what percentage of your products are internally produced and then after the initial set of projects sort of first seven filling lines and then I guess two incremental with the increase this morning kind of where you think you will be at that point? It just seems like your growth is sort of outstripping even your own expectations and even with the increased capital spend you may still – you may need to add more I guess is where I’m going...

Gregg L. Engles

Yeah. So I think the answer is we’re running really hard to keep up with the volumes here. I’m very pleased we took the decision over the last 18 months to significantly expand our footprint.

You will recall that, at the time that we initially started talking about that expanded investment of capital, we were about 70-30 in terms of in-sourced versus outsourced product. Frankly, today, we’re still right about 70-30. So we have put a lot of pressure on the external manufacturing system as well as our own.

Now, there are sort of low single-digit changes in those percentages as lines come up. It’s a little bit of a step function change, but the volume is just running really hard. So the step function changes have been sort of bringing us back to this 70-30 benchmark. I think our outlook today on volumes is that when this capacity comes on, we’ll probably end up in around the 75% in-sourced volume, but that is highly dependent upon what the growth rates are here.

So our Europe business it’s pleasantly surprising, but in some ways it probably ought not to be surprising because the growth of other ingredients is in almond in particular is tracking somewhat like what we saw in the domestic market. The volumes are just exploding.

And, so a meaningful part of this additional capital is going into Europe. Where we are today in terms of our almond products are 100% outsourced. So the volume growth in the non-soy products in Europe is an area of focus for us in terms of capital as is the yogurt area where again we’re seeing 20 plus percent volume growth off of what’s becoming quite a large base.

So we decided to export nearly vibrant categories. We have the need to continue to invest in order to satisfy the demand that’s coming in those categories and that’s why you’ve seen us take our capital up over time.

Diane Geissler – CLSA

Sure. Well, the other part of the question is obviously, you have a lot of innovation that you’ve launched not only in 2013 and 2014 but that you articulated in the presentation this morning so to the extent that capacity is an issue, it won’t slow your innovation more or less?

Gregg L. Engles

Well, we’re planning for it not to. The only thing that would cause that to happen is if our four categories accelerate even further. So I guess that’s a high class problem. We are making dedicated investments in capital to support our innovations. So I think really the short answer to your question is no. We planned for our innovation capital separately and in a dedicated manner.

Diane Geissler – CLSA

Okay. And then just on China quickly, I was under the impression that the new product launches would be something more of early 2015 event, but it sounds from your commentary this morning that you’re expecting a product in the market by the end of the year. Is that end of 2014, is that true?

Gregg L. Engles

Yes. I’ll tell you we’ve been cautious about our setting expectations around China simply because we’re new to that marketplace. There are regulatory requirements around permits that we’ve been somewhat cautious about the timeline surrounding those authorizations.

I will say that virtually all of the authorizations are in hand and we’re – we’ve made I think today, a very fulsome assessment of what we need to do to the (indiscernible) plant to get it in production.

We’ve ordered a quick month, we’re ready to start the modification of that plant. And if all continues to go as we foresee it today, we’ll be in market with product very late Q3, early Q4. There’s still some uncertainty around – around this though. So you should not expect to see anything in the way of meaningful revenue in 2014.

Diane Geissler – CLSA

Okay. Perfect. Thank you.

Operator

Thank you. The next question comes from the line of Michael Steib at Credit Suisse. Go ahead please.

Michael Steib – Credit Suisse

Good morning. My question relates to SG&A leverage in the quarter, and in particular I was hoping you could give us a bit more color on the sort of changes in both your selling marketing distribution expenses as well as general and administrative, which went up quite a bit in the quarter. Is that all due to the Earthbound consolidation in Q1?

Gregg L. Engles

Yeah. It is, Mike. And you know what, let me just take a step back and maybe perhaps talk a little bit about – again about the structure of our P&L here. So you do see a pretty dramatic change in our P&L on a year-over-year basis and it’s driven by Earthbound. So just to backup and talk a little bit about Earthbound.

This is a – as you talked about in our initial call on Earthbound, this is $500 million plus business at the top line with gross margins that are in the high teens and operating margins in the high single digits. And obviously, it’s very different, particularly gross margin from the structure of the rest of our P&L. So that has a significant impact there.

If you talk about the operating expenses within Earthbound, so that 10 points roughly, that’s between gross margin and operating margin, almost negligible distribution expense, because Earthbound employees a customer pickup model. Very modest marketing investments, although further we’d like to invest more there, but for the current period of time, it’s very modest level marketing spending.

And frankly relatively modest level of overall G&A. That 10 points of spending in sort of this broader distribution selling and marketing G&A space compares to our historical businesses where the percent of sales is closer to 25%.

So that’s really what you’re seeing in our P&L here play-out on a year-over-year basis. You’re obviously seeing a change in gross margin, a decrease of around 300 basis points. But ex-Earthbound, we would have seen an expansion of around 70 basis points driven by expansion both in our Europe business and our historical North America business.

And then, again, you’re seeing a decrease in SG&A, but that’s because of Earthbound. If you look at the SG&A on our historical businesses, we are seeing some improvement in distribution expense owing to some of the investments we made, although frankly, we’ll see more of that benefit as we did in the second half of this year.

From a marketing standpoint, we continue to invest in a very healthy level in these businesses. As a percent of sales, our marketing spending across our historical businesses is comparable to the spending levels of prior year as a percent of sales. So we continue to invest at very strong levels in our business.

And while we continue to I think manage our G&A very smartly across the business, there is nothing unusual – there is nothing unusually positive about G&A in the quarter. The impacts you’re seeing in our P&L on a year-over-year basis from a margin perspective are truly driven by Earthbound.

You slip Earthbound down away, again, we’re seeing nice expansion in gross profit as being solid operating margin expansion as we articulated in our prepared remarks over 60 basis points margin expansion in the North America – historical North America business over a 160 basis points operating margin expansion in Europe.

And, again, overall for the year, as I mentioned to Amit, we clearly remain confident that we can deliver on our expectation of expanding our operating margins around 75 basis points, I think you’ll see that.

And you’ll see that with or without Earthbound, because on a full year basis, Earthbound is relatively neutral from an operating margin standpoint to our overall enterprise. But, again, from gross margin down to operating margin has a very different structure and you see that play out in our P&L.

The other thing I would add is we also I think talked to you about on the initial call. Again, Earthbound gross margins high-teens, operating margins high single digits. And that weighs out very differently throughout the year. As we discussed with you, this is a business that sources product kind of in the late fourth quarter into the first quarter from the (indiscernible) Southwest, which requires us to transport and incur those costs up to our Northern California processing facility.

So the margin structure of that business is even bit more challenged in Q1 and also in Q4, but to somewhat of a slightly lesser extent in Q4. So in Q1 what you’re seeing out Earthbound is a gross margin closer to the mid-teens and operating margin closer to the mid single digits.

So that has particularly in Q1, you see a pretty diluted impact on our margins. But again ex Earthbound, we’re very pleased with the margin progression in our business. And I think the quality of our overall structure of our P&L is something that we’re very encouraged about and we look forward to seeing continued play-out through the course of 2014.

Michael Steib – Credit Suisse

Okay. That’s very helpful. Thank you so much.

Operator

Thanks. The next question comes from the line of Bill Chappell at SunTrust. Please go ahead.

William Chappell – SunTrust

Thanks, good morning.

Gregg L. Engles

Good morning, Bill.

Kelly J. Haecker

Good morning, Bill.

William Chappell – SunTrust

Good morning. I wanted to follow up actually on the Earthbound side of, looks like on the top line, it was a little bit faster than, I guess historical to see if there’s anything going on there. And then also with a new manager now owning the business for three months, what kind of changes, what kind of synergies could we now expect over the remainder of the year and into next year?

Kelly J. Haecker

I’ll kick that over to Kevin Yost to speak to.

Kevin C. Yost

Good morning, Bill. Yes, we had a very strong start to the year on the top line. And we owe that to good solid category growth. There is tailwinds in this category as you know and very solid sales execution. And then I think, we’re seeing the benefits of some hard work in our segmentation where we’re with retailers on best-in-class merchandising sets and assortments.

So these retailers that are moving to that model are replacing lower velocity items with higher velocity items. So you’re seeing the benefits of not only distribution, but velocity. To your second part of your question, Bill, it’s early days in terms of identifying synergies.

I guess, I’d answer it this way that in the back office we’re identifying some very straightforward simple things where we believe, we can bring WhiteWave leverage. And it has to deal with our spend on getting syndicated data back office in terms of AP, AR those types of things we’re attacking in a very prioritized fashion. I would not expect that you’ll see those benefits in 2014, because we’re laying the groundwork now and then setting up the execution for later years.

William Chappell – SunTrust

Got it. And then just on the plant-based beverages side. How much of the growth for the category is priced? I mean, and is there any elasticity that you really run into?

Unidentified Company Representative

Yeah. Good morning, Bill. In plant-based beverages, you’ll recall that given the inflation that we expected here strongly attributed to the almond marketplace and we increased our pricing in the first quarter. So far we’ve seen that pricing be relatively sticky in the marketplace. And we’ve had very strong volume growth continue on our Silk business, continued to drive strong household penetration across the board in the first quarter here.

And I think we’ll hopefully see the pricing stick in the marketplace. We have seen in the first quarter a little bit more promotional pressure than what we’d expect, given some of the input inflation. But as we look the marketplace if in fact we need to respond with additional promo or prices pressure, we certainly will.

But as a category leader in plant-based food and beverages and having operated in this category for many years, we know that the best bet for this category is to continue to invest in better innovation and continue to invest in advertising to drive that penetration and we will continue to operate in that fashion. But we’re seeing predominant volume growth so far has been the vast majority of the driver in the category and for our results.

William Chappell – SunTrust

Great. Thanks for the color.

Operator

Thanks. Your next question is from the line of Judy Hong at Goldman Sachs. Please proceed.

Judy Hong – Goldman Sachs

Thanks. Good morning everyone.

Unidentified Company Representative

Good morning.

Unidentified Company Representative

Good morning, Judy.

Judy Hong – Goldman Sachs

So just staying on the Plant Beverage category and maybe just a little bit color on how you think about the soy part of the business. The measured channel data I think has volumes still down, kind of double digits. You have talked about maybe nearing the end of perhaps the reduction in shelf space that now you think to the almond side of the business and as a result the velocity has picked up. So, just in terms of your strategy going forward with soy, is there a place with in terms of soy, they have a core kind of a consumer base that may be different than the almond consumers and as some of these innovations that you’re introducing come into the market, would those be taking even more shelf space away from soy? Is that how you’re thinking about the strategy there?

Unidentified Company Representative

Sure. Thanks for your question, Judy. So I think as we take a look at the category here that we continue to be very – very impressed with this category and the performance of Silk that continues to have strong double-digit growth fairly consistently here. And we believe that this is a category that is absolutely on trend for a whole host of different reasons for consumers. And as you point out within some of the segments there, there are different reasons that are attractive for different segments of consumers.

Certainly, the growth of the almond segment, we’ve seen this for now several years and there is shifting between almond and soy, but our outlook since the beginning really here is that we’re going to make certain that we follow the consumer with where the consumer is going and we ensure that our margin structure is commensurate with being able to do that between the different segment and I’d say that we’re in that phase now whereby we have a set of core soymilk SKUs that still remain very, very strong.

They are very large in the category, they are very liable, because as you mentioned, they have a strong consumer following for different benefits then what almondmilk may provide. But what we’re doing is we’re taking a look at the tertiary SKUs that have been more impacted with the growth of these other segments. And we’re proactively working with retailers and making certain that we optimize that assortment.

So in all, we are focused on the growth and the health of the overall category, and I believe that soy will remain a very sizeable segment. Today, it still represents around 30% of the category. And that’s fundamentally changed over the years, but it’s still you have some very, very strong SKUs there. So we’re going to continue to look to bring news to soy. But in the end, we are putting a vast majority of our efforts again where the consumer is going. And getting out ahead of them through both innovation as well as advertising. So it’s exciting. It’s one of the strongest categories, I think you’ll find in grocery and continue to drive household penetration. Last year, we saw over two points of household penetration growth to about 28% and there’s still lot of runway to go for this category.

Unidentified Company Representative

Yeah, and just on top of that commentary around North America, Judy, I’d add that you’re seeing now quite impressive growth in almond and the non-soy categories in Europe. But we are certainly, pleasantly surprised to-date that we see soy also continuing to grow, so everything that is happening in terms of additional ingredients beyond somewhere in Europe is incremental and that is really making for an extraordinarily robust and healthy segment in that marketplace.

Judy Hong – Goldman Sachs

Okay. And if I could ask a separate question on your guidance on sales growth guidance in particular. I mean obviously we’re early in the year, you’ve very strong first quarter and you laid the full year guidance.

But I guess that implies in the rest of the year that you get back to kind of 7%, 8% type of organic sales growth. So just wanted to get your view on how we should think about the rest of the year in terms of maintaining the momentum that you’ve seen in Q1. Are there any other factors that we should think about comparisons et cetera, that gives you a little bit of a temper view for the rest of the year in terms of sales growth, first is Q1.

Unidentified Company Representative

Well, we loved the growth in our categories. And as of now, there continues to be very, very strong and dynamic. I think we’re somewhat cautious about continuing to project 20% plus top line growth in Europe and that’s a meaningful contributor, 200 basis points of our outperformance over the North American business, so North America at 10%, Europe takes it up to 12% as a company.

So we’re I think appropriately cautious there. And then as we continue through the year, Horizon was 8% in Q1. I think it remains to be seen, whether milk supply is going to support Horizon continuing to run that strong. So there are just some things out there that I think cause us to try and be cautious about our view point.

Judy Hong – Goldman Sachs

Okay. Got it. Thank you.

Operator

Thanks. Next question is from the line of Matthew Grainger at Morgan Stanley. Please go ahead.

Matthew Grainger – Morgan Stanley

Hi, good morning. Just a question on input costs. Obviously, next year’s almond crop is still work-in-progress and a long ways off. But as you’re thinking about potential inflation looking out to next year, are you proactively changing anything from a sourcing standpoint to ensure you don’t run the risk of getting squeezed on supply next year?

Unidentified Company Representative

Yeah, Matt, I don’t think – your first point is that it’s still is early. I think we still have a few months to go before we have a firmer outlook on how 2015 looks. I can say this is a – I don’t think that – from an overall supply standpoint, I don’t think we are overly concerned with respect to that, given the overall amount of almonds that we procure. They are at an all-time high throughout this particular year.

So I think we just wait and see how the next several months progress, with respect to that particular input.

But more broadly, this is an organization that I think has proven fairly adept at managing our overall margin structure and continuing to make certain that we can drive against cost savings incentives that we have across our overall business, as well as if need be and we see input cost inflation where we need to take pricing. We have been fairly successful in the past and we’re able to execute against the inflation releases.

So, that’s just one of the inputs that we have here. I think we look across the entire input supply to make those decisions. But I’m very, very pleased with how we manage more broad stroke against our overall margin targets.

Matthew Grainger – Morgan Stanley

Okay. Thanks. And, Gregg, you mentioned the potential for Horizon growth to moderate a little bit through the balance of the year. And I know that’s not a prediction so much, is just a word of caution, but can you talk about how price gap dynamics between organic and conventional milk have evolved and whether you see that having a discrete contribution to the sales growth that you delivered in that segment this quarter?

Blaine E. McPeak

Yeah. I’ll take that one. This is Blaine. So just the context as you’ve seen in the category, so as you’ve seen, the fairly rapid inflation in the conventional milk market really beginning towards the third and fourth quarter of last year, you started to see those price gaps between organic and conventional from a consumer price point begin to close a bit and we see that has been reflected in the category accelerating a little bit here. Thereby last year, throughout the year, you’ll see a mid single-digit category growth rate for organic milk and in the first quarter here, we saw up in the 8% range.

So we did see an uptick. It put a little bit of pressure on the industry supply in the first quarter overall. But we also taken our outlook here on where at least the conventional milk market is forecasted to go. And I think, that’s why we’re a little bit more pragmatic and cautious in terms of how we portray what our growth expectations are around that, but I think the category is behaving well.

And I think, with respect to our situation here, you recall we increased the prices back latter part of last year. And we’ve seen that stick in the marketplace and so, or places where that’s happened so far, but we’re just accustomed to this category had been in flowing for a whole different number of dynamics. And I think we’ve proven that – we’ve become better and better every year in terms of how we manage against those ebbs and flows.

Matthew Grainger – Morgan Stanley

Okay. Thanks, Blaine.

Operator

Thanks. The next question comes from the line of Bryan Spillane at Bank of America. Please go ahead.

Bryan Spillane – Bank of America

Hey, good morning everyone.

Unidentified Company Representative

Good morning, Bryan.

Bryan Spillane – Bank of America

I wanted to follow-up on Judy’s question just relative to the dynamics driving sales growth, and I think more specifically just Europe. I think relative to the way that we’ve been forecasting, I think Europe has beat our estimates for the last couple of quarters. So I guess, one – two questions related to that.

One is, relative to your own internal plans as Europe really been the source of upside on revenue growth. And then second, maybe if you could talk a little bit about just what’s driving that inflection in growth? Has there been some change in advertising or is there just something that’s occurred, that’s caused these businesses start to inflect?

Unidentified Company Representative

Yeah. First of all, I’d say that revenue and volume has been better than our plan and our expectations across the business. So, every single one of our categories continues to outpace our ingoing expectations. Europe has been a particular standout in terms of volume growth.

And yeah, the reason why Europe is growing is just crystal clear. 18 months ago, they launched almond in that marketplace. And they expanded their capacity and focus on plant-based yogurts. And if you go back and you look the growth of almond in the United States, we are on that same curve in Europe and we are just on that curve of where we were in 2009 in Europe, right. Because they are four years or five years late in terms of or behind the U.S. in terms of the timing of the introduction and the rollout of those products.

So if you were to extrapolate the U.S. experience to Europe, we are in for four years or five years of just spectacular growth over there. We’re not extrapolating that right now, but so far the evidence says we’re probably wrong. But Europe has gone into the next leg up of the growth and penetration of these products into the market place, and if it continues to play out, we’re all going to really like the answer in those markets.

The rest of the business continues to benefit, I think, from the dynamics we’ve been talking about since we came public. Large macro shifts in consumer behavior that are supporting our fundamental categories.

The shift away from conventional dairy towards plant-based alternatives is becoming a more of a mainstream phenomenon. It’s not a niche phenomenon anymore. It’s becoming much more mainstream and so we continue to be the beneficiaries of that.

The coffee experience continues to become a more personal and customized experience and that’s benefiting our creamers business. And organic continues to resonate with moms, particularly in the dairy and the produce basis where we are the leading player in each of those spaces. And so the fundamental secular trends that have been driving our business remain in place and in fact over the last three quarters or so – four quarters, have in fact strengthened.

So I think that the disconnect between our Q1 volume performance and our forward outlook is simply comes down to the uncertainty around how far out into the future you can project these trends to continue with the sort of vigor that we’ve experienced over the last year.

And I guess come down on the point of being circumspect about that, but planning with our capital investments to take advantage of the circumstances if these categories continue to run as hard they run out into the future. So that’s where we are in terms of our overall outlook on the business.

Bryan Spillane – Bank of America

Thank you for that. Are capacity constraints at all a concern in terms of our restraint on growth going forward in the short-term in Europe?

Unidentified Company Representative

They are not a constraint in terms of our ability to continued deliver what we delivered in Q1. If they accelerate beyond that, it’s going to be – it’s a little bit hand-to-mouth now, but we’re managing it.

We’ve got some increases in capacity coming online throughout this year and into next year that will give us a little bit more headroom. But if this category does play out, the way the U.S. category played out over the last five years, you’ll see us come back with the sort of step-bunching change of capital of a new facility in that marketplace because we’re going to have to have one of them.

Bryan Spillane – Bank of America

And then just one last one just in terms of yogurt in Europe, I believe it’s a different formulation and is that part of the reason why it’s done better in that market than plant-based yogurts have done here?

Unidentified Company Representative

Our plant-based yogurt business is doing pretty nicely here, but everything is outsourced in co-pact, right? So yes, we have much more control over quality and formulation in Europe because we make it all ourselves. So the pace of innovation is faster. The level of quality consistency is just necessarily higher.

And as we mentioned before, we have a facility coming online late this year. We will internalize the manufacturer of our plant-based yogurts in the U.S. and start manufacturing our own product and I think, you’ll see a greater emphasis on us moving plant-based yogurts to the forefront of our efforts and innovation as we move into 2015 and beyond.

Bryan Spillane – Bank of America

Okay. Great. Thanks for the additional color, Rick.

Operator

Thanks. The next question comes from the line of Phil Terpolilli at Longbow Research. Go ahead, please.

Phil Terpolilli – Longbow Research

Yes. Good morning. Just a quick question about this, the plant-based beverage category. I just want to make sure I understand this right. So category grew about 20% in the quarter. You guys look like you underperformed that a little bit. I’m just trying to understand if that’s being under indexed to almond or maybe that promotional pressure I think, you alluded to with the caller earlier. Just trying to understand what’s going on there.

Unidentified Company Representative

Yeah, Phil. So the category is very very strong. The fundamental reason why silk would lag the category is predominantly driven by segment mix.

So the continued shifting between the different sub-segments of the plant-based category soy and almond, we gave up a little bit of share in almond due to some competitive expansion, a little bit of pricing pressure, but we see that as something that I don’t think is necessarily endemic to the long-term here. But the reality is this the vast majority of any share change nearly 70% is purely due to segment shifting overall.

So we expect that that pressure has been happening since we’ve launched almond. We’ve seen downward pressure on share with respect to that, where we’ve grown slightly less than the category overall. And I would expect that to continue with respect to our share basis until you actually see the soy business stabilize a bit.

But all I’ve to add, in every predominant segment within the plant-based category, Silk is a strong leader in everyone of those segments and we’re going to continue to make certain that we do what’s right for the category overall, which is continuing to invest in the strength of our brand differentiated and continuing to drive household penetration through new advertising and new innovation, and not to fall in the trap of short-term price promotional tactics.

So we’re encouraged by it, I like our outlook, I like our position from a share standpoint and we’re very, very pleased with that performance.

Phil Terpolilli – Longbow Research

Okay. That’s helpful. And just one follow-up if I could. The price increases that you’ve put through, have you seen – now that they’ve been on the marketplace a bit, have competitors followed suite, what have you seen on that front?

Unidentified Company Representative

Yeah. We’ve seen a little bit of elevation with respect to everyday base price. We have seen some higher promotional pressures in the first quarter. Whether or not that continues throughout the balance of this year, I don’t know. But we know how we intend to try to behave here. If in fact we need to respond with any incremental type of promotional pressure, we certainly will.

But again, we know this category well, we’ve operated in it for many years, and we know what it really takes to continue to drive the health of the category nuts. Really about making certain that you’re placing consumers from a brand building stand point and innovation stand point. So, that’s our plan to continue forward with that throughout the balance of this year and going forward frankly.

Phil Terpolilli – Longbow Research

Okay. Great. Thanks. Nice quarter.

Unidentified Company Representative

Thank you.

Operator

Thanks. Your next question comes from Rohini Nair at Deutsche Bank. Go ahead, please.

Rohini Nair – Deutsche Bank

Hi. Good morning. Thank you for the question.

Unidentified Company Representative

Good morning, Rohini. How are you?

Rohini Nair – Deutsche Bank

I am good. Thank you so much. Just wondering whether I could follow up some of the comments around innovation. Obviously some things that you’re emphasizing important for your model, given the nature of your categories.

So we’re just curious whether you might be able to give us some color around how you see these contributing to your growth. You may be seeing innovation becoming a larger percentage of our sales versus, and maybe the category sales versus where you might have been a year ago. And then along with that, do you feel you have enough of a pipeline in place to address that?

Unidentified Company Representative

Just from a overall company perspective, we feel very good about our pipeline of new innovation. It’s interesting that I know CPG companies talk about new innovations as a percent of sales. We don’t find that particularly useful here and frankly, it’s really difficult to sort of hit the metrics that other companies talk about because our base categories are growing so strongly. Almond is a four or five year old category and is growing 50%.

So yes, innovation is important to the future growth of the business. We’re investing heavily in it. But even with the success of new products given the growth in our core business, they would be incremental drivers, but they won’t be the – at least for the foreseeable future, they’re not going to be the core driver of growth. The core driver of growth is what’s happening in our base categories.

Rohini Nair – Deutsche Bank

Great. Thank you so much. I’ll pass it on.

Unidentified Company Representative

You’re welcome. Thank you for the question.

Operator

Thanks. And the last question comes from the line of John Baumgartner at Wells Fargo. Please go ahead.

John Baumgartner – Wells Fargo

Thanks for the question.

Unidentified Company Representative

Sure, John.

John Baumgartner – Wells Fargo

Gregg, I think you eluded to this a little bit, but we have seen some reports on organic milk shortage at retail. Is it fair to say this is more of an issue impacting private label right now versus brand? Has it helped Horizon sales over the past three months or six months?

Gregg L. Engles

I’ll let Blaine take that one.

Blaine E. McPeak

Good morning, John. There have been select about our stocks in the category as a whole. I think as we mentioned a little bit previously here, if category has seen a certain uptick with respect to growth in really the past four or five months, moving from a mid single-digit to a high single-digit category growth rate here in the first quarter, that had put a little bit of pressure on overall supply and a lot of that is demand driven here because of the closing gap between conventional as well as organic.

I don’t see any major change that’s happened considerably with respect to supply. So it is predominantly demand driven. So there have been select about our stocks, this isn’t the first time that categories experienced that kind of in that first quarter timeframe. If there is any time period, where you see more pressure on out of stocks, it is in the winter months. So, a spring flush comes in here, I expect that we’ll see the supply move more into check with respect to where demand is.

But it’s a healthier category when you start to see supply and demand in relative balance. And we are going to continue to try to manage and try to predict where that category goes to make sure that we grow our supply kind of in line with our expectations for the category. So it’s not the first time we’ve seen that and it’s fairly typical that you see spot outages in the first quarter. And I expect that to shift a little bit as we go throughout the year.

John Baumgartner – Wells Fargo

Thanks. Blaine. And, Kelly, just a follow-up. In terms of the EU margins really nice quarter there in terms of expansion, is there any expense timing to consider there or is this run rate basically sustainable for 2014?

Kelly J. Haecker

I wouldn’t want you to, want to protect that that’s sustainable sort of at these levels necessarily, but there was nothing particularly unusual. I think, what you saw in Europe, obviously we’ve been talking about the under-scaled nature of our European business. And this business continues to drive another 20%.

That’s the kind of margin expansion you’re going to see. They continue to invest in marketing and continue to run their business pretty typically. So from an expense profile standpoint, so no, there was nothing unusual there, just really in Europe nice solid leverage of our cost structure over there driven by north of 20% top line.

In our historical North America business. Again, I think, a pretty normal quarter. We saw – we’re continuing to see some benefits from the progress we’ve made on the investments we’ve made. But again, I think most of those we’ll probably see more towards the second half of this year.

We have seen some commodity inflation, but we’ve offset that largely with the pricing we’ve taken. So I would say for the most part in their historical North America business. So a relatively normalized quarter, nothing particularly unique. And I think, we’re demonstrating that we’re on track to deliver against our full year target. So, I think, I’d encourage you to continue to expect that for the year.

John Baumgartner – Wells Fargo

Okay. Thanks, Kelly.

Operator

Thank you. As there are no further questions, so I would now like to turn the call back over to Mr. Gregg Engles for closing remarks.

Gregg L. Engles

Well, thank you all again for joining us on the call this morning. We appreciate your interests in your diligence in covering WhiteWave Foods, and we look forward to talking with you about our second results in our second quarter results in our call in a few months. So, thank you all very much.

Operator

Thank you very much. That concludes your call for today ladies and gentlemen. So, you may now disconnect. Have a great day.

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