WhiteWave Foods' (WWAV) CEO Gregg Engles on Q2 2014 Results - Earnings Call Transcript

Aug. 7.14 | About: WhiteWave Foods (WWAV)

WhiteWave Foods Company (NYSE:WWAV)

Q2 2014 Earnings Conference Call

August 7, 2014 10:00 AM ET


Dave Oldani – VP, Treasurer and IR

Gregg Engles – Chairman and CEO

Kelly Haecker – CFO

Blaine McPeak – President

Kevin Yost – President, Earthbound Farm


Michael Steib – Credit Suisse

Matthew Grainger – Morgan Stanley

Farha Aslam – Stephens Inc

Judy Hong – Goldman Sachs

Amit Sharma – BMO Capital Markets

Bill Chappell – SunTrust

Ken Goldman – JPMorgan

(Chris Roe) – Stifel

Bryan Spillane – Bank of America

John Baumgartner – Wells Fargo

Rohini Nair – Deutsche Bank


Good morning and welcome to the WhiteWave Food Company’s second quarter 2014 earnings conference call. Please note that today’s call is being recorded and a presentation webcast is also being broadcast live over the internet on the investor relations section of WhiteWave Foods’ corporate website.

This broadcast is the property of the WhiteWave Foods Company. Any redistribution, retransmission or rebroadcast of this call in any form or without the express written consent of the company is strictly prohibited. I would now like to turn the call over to Dave Oldani, Vice President, Treasurer and Investor Relations for the WhiteWave Foods company. Go ahead, Mr. Oldani.

Dave Oldani

Good morning, everyone and thanks for joining us on our second quarter 2014 earnings conference call. This morning we issued our earnings press release which is available on our website at whitewave.com. The release is also furnished as an exhibit to our Form 8-K which is available on the Securities and Exchange Commission website at sec.gov.

Accompanying today’s call and prepared remarks is a slide presentation that may be found on the investor relations section of the WhiteWave website. A replay of today’s call will be available on our website approximately two hours after the conclusion of this call.

We would like to advise you that all forward-looking statements 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, guidance for the third quarter and the balance of the year, expectations regarding our branding initiatives, innovation in research and development plans, growth plans and various other aspects of our business.

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

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

Our earnings release and the reconciliation posted on our website contains 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 is Blaine McPeak, President of WhiteWave North America, and Kevin Yost, President of Earthbound Farm.

Gregg will first provide a review of our results and overall performance. Kelly will then offer additional perspectives on our operating results and comment on our forward outlook before turning the call back to Gregg for closing remarks. We will then open the call for your questions.

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

Gregg Engles

Thank you, Dave, and good morning, everyone and thank you for joining us on the call this morning. We’re pleased to report another quarter of strong financial performance. Our top line increased 36% in Q2 as a result of another quarter of double digit organic net sales growth, which was over 11% in the quarter and also from the contribution of Earthbound Farm, which we acquired earlier this year.

Our strong Q2 performance was broad-based with top line growth across all our brands and with several of our business platforms generating record revenues in the quarter. Operating income increased by 53% in Q2 aided in part by the acquisition of Earthbound Farm. Excluding Earthbound and joint venture related investments, our organic operating income grew more than 2.5 times our organic top line growth rate in the quarter with our organic operating income margin expanding by over 100 basis points.

This core operating performance was driven by both cost leverage from our increasing scale as well as the benefits we’re starting to realize from our supply chain investments. Our strong top line performance coupled with operating margin expansion resulted in earnings per share growth excluding China joint venture costs of 42% to $0.23 in Q2, exceeding the high end of our guidance by a penny.

This level of EPS was achieved despite a slightly higher than anticipated tax rate for the quarter. Including business development costs at our China joint venture, our earnings per share for the quarter was $0.22 as we continue to invest behind building this business.

Due to our strong Q2 results and outlook for the balance of the year, we’re again increasing our EPS guidance for 2014 which Kelly will discuss later.

Our top line growth trajectory continued in Q2 with sales reaching $838 million. Excluding Earthbound, sales increased by more than 11% from last year. Our growth continues to be primarily volume driven. As I mentioned, several of our platforms reported record revenue quarters and all of our categories continue to grow behind our on-trend brands and products.

Sales were up 38% in our North America segment and up over 8% on a purely organic basis. These top line results were driven by growth across our platforms with plant-based beverages, coffee creamers and premium dairy all producing strong growth rates in Q2.

We also continue to be pleased with the top line growth of our organic greens and produce platform as Earthbound Farm grew by double digits again in Q2. Our European segment continues to generate exceptional growth with reported sales up 26% in Q2 and up 18% on a constant currency basis. This segment’s significant top line growth was driven by the ongoing rapid growth in almond beverages as well as double digit growth in our innovative dairy-free yogurts and creams and core soy beverages.

Let me now walk you through our individual platform results. Our North America plant-based foods and beverages platform had another record quarter with sales up over 13%. This marks the platform’s 13th consecutive quarter of double digit growth.

Silk’s top line performance was primarily volume-driven with some pricing benefits from increases implemented late last year in response to higher input costs. The rapid growth in the plant-based category continued in Q2 increasing 17% in total behind the ongoing strong growth in the almond sub category which increased by another 44% in the quarter.

Almond now represents almost 70% of the total plant-based beverage category. Silk almond milk continues to be a key driver of this growth as our sales grew by 45% in Q2 off an already sizeable base.

We continue to be the plant-based market leader with silk holding a 56% share of the total category and holding the number one position in almond, soy and coconut subcategories. Despite strong growth in the category, we have seen higher levels of promotional activity recently and we will be focusing our marketing initiatives towards maintaining silk’s market-leading positions.

We continue to experience exceptional growth in our Europe plant-based segment with reported sales increased 26% and up 18% on a constant currency basis in Q2 consistent with the strong growth the segment experienced in Q1. This was also a record top line quarter for our (Alpro) business behind continued volume growth in the high teens.

This strong growth was broad-based across our European product portfolio, which continues to be led by significant growth in almond beverages, which more than doubled in Q2 as well as mid-20s percentage growth in our innovative yogurts and creams. We also experienced double digit growth rates in our based soy beverages in Europe.

(Alpro) also experienced sales gains across all of its core geographies and grew its number one European market share position in plant-based beverages by a couple of percentage points to 42% in the quarter.

Our increasing scale in Europe lead to significant operating margin expansion in Q2 with operating margins up over 320 basis points to 11%. We continue to make good progress on our capacity growth plans in Europe which should allow for additional margin expansion opportunities over time.

Overall, we’re very pleased with the excellent results that both our plant-based beverage platforms delivered in the quarter. We continue to remain very positive regarding our growth opportunities in this category, particularly in Europe where we believe almond and other plant-based ingredients, as well as plant-based yogurts are still in the early stages of their growth.

Switching now to coffee creamers and beverages, this platform grew 5% in the quarter as we’re still experiencing a negative overlap within ice coffee resulting from new players entering this category in the back half of last year and capturing some share. Excluding ice coffee, our coffee creamers business grew by over 7% in Q2. We maintain a leading share position in ice coffee that is two times our closest competitor and we have been growing our share over the recent months. We expect the negative ice coffee overlap to end in Q3.

Volumes in the refrigerated creamer category continue to grow at double digit rates in Q2 but heavier price promotions and a move to larger sizes in the category lowered dollar growth to 6% in the quarter. Despite the increased level of promotional activities, we were able to grow our dollar share of the total refrigerated creamers category which includes our International Delight, Dunkin’ Donuts and Silk creamer brands during the quarter.

We continue to be pleased with our new Dunkin’ Donuts creamers in terms of both distribution and share levels that we have achieved to date. Even with recent price increases due to historically high conventional dairy commodity prices, we continue to see steady volume growth in our Landolakes half and half creamers in Q2. And although currently relatively small in scale, our Horizon Organic creamers delivered very strong volume growth in the quarter, validating our belief that more consumers continue to be interested in organic options.

We’re excited about International Delights’ new brand design, eye-catching packaging, additional size offerings and the rollout of a new national advertising campaign. We believe this, along with the robust pipeline of planned innovations should continue to provide additional growth opportunities in our coffee creamers and beverages business.

Our premium dairy platform delivered another strong quarter of top line growth with sales up 8% in Q2, despite a roughly one point drag from past business excess we’ve previously mentioned. Q2 marked the final quarter of this negative overlap.

Horizon’s growth was volume-driven behind our innovative volume-added products, including DHA Omega 3 and lactose-free offerings as well as growth in our other organic dairy products such as butter and cheese.

The organic milk category continues to experience strong growth increasing 8% in Q2 driven by Horizon, which continues to maintain its number one share position. We will be implementing price increase at retail in mid-August to offset the impact of recent pay price increases we instituted with our family farmers.

The rollout of our new center store, Horizon products, continues to grow in line with our expectations. It will be some time before these brand extensions become material to our results but we remain encouraged by the strong repeat usage we’re seeing and increased levels of distribution we’re achieving.

Our recently launched snacking line platform is performing very well and, as we expected, we experienced heavy competitive activity when we entered the Mac N Cheese category but continue to be pleased with our results to date.

With our new category positions and portfolio of products that can satisfy many different meal and snacking occasions, we believe we are well positioned heading into the back to school season.

And turning now to organic greens and produce, Earthbound Farm continues to exceed our expectations generating Q2 net sales of $153 million representing 10% growth from last year and a record quarter for this business.

The top line continues to be driven by strong growth in Earthbound’s largest business, organic packaged salad, which was up low double digits for the quarter. In addition, we continued to experience good volume growth in Earthbound’s new frozen product line behind increased distribution.

The organic packaged salads category continues to grow rapidly, up 18% in Q2. Organic’s share in the total packaged salad category increased by two points to 24% in the quarter. Earthbound Farm continues to maintain a leading 55% share in the branded organic packaged salads segment.

We’re very pleased with the solid results Earthbound has delivered over the first half of 2014 and, as a result, are increasing our original EPS accretion estimate for this year from $0.07 to now be at least $0.09 in 2014.

We continue to add new management capabilities to this organization and remain excited about the opportunities that exist for this great brand and category. With that review of our businesses, I’ll turn the call over to Kelly to review our Q2 operating performance and update you on our outlook for the balance of 2014. Kelly?

Kelly Haecker

Thanks, Gregg. Good morning, everyone. As Gregg mentioned, our strong growth continued in the second quarter with sales up 36% to $838 million due to the contribution from Earthbound Farm and solid double digit organic top line growth. This top line performance drove consolidated segment operating income growth of 53% in Q2 to another record high of $88 million.

Our consolidated results continue to reflect strong profit conversion dynamics with notable margin expansion in both of our operating segments.

Our North American segment’s operating income increased 49% elevated in part by Earthbound’s results. Excluding Earthbound, our North America segment’s 8% organic top line growth rate resulted in just over 20% operating income growth and 110 basis points of margin expansion. This segment’s margin expansion is being driven by continued cost leverage that results from our growth coupled with benefits from our recent capital investment programs which are beginning to yield results.

Our margins were also enhanced somewhat by pricing actions taken to offset past cost inflation.

As expected, Earthbound’s profit contribution increased sequentially from the first quarter, driven by the season shift of farming operations out of the desert southwest to the (Selinas), California area which lowers transportation costs, resulting in a high single digit operating margin for Earthbound in the quarter. This is in line with the margin progression we expected from this business.

Our Europe segment once against posted exception Q2 results with sales growth of 26% on a reported basis and 18% on a constant currency basis. At the same time, we expanded operating margins in this segment by over 320 basis points leading to operating income growth in excess of 75% for the quarter.

This robust margin expansion is principally driven by the increased scale, our continued strong growth in this segment is creating enabling us to realize significant cost leverage across our European infrastructure.

Margin was also aided somewhat by currency translation in the quarter and the absence of our low margin meat alternatives business that we sold in Q1 of this year. We expect to continue to deliver solid year-over-year margin expansion in our Europe segment in the second half of this year, although at a more moderate level than we experienced in Q2.

Overall, we are pleased with our continued ability to leverage our increasing scale and that we are also beginning to realize the benefits from our capital investments.

Now, turning to our consolidated P&L for the quarter, as previously mentioned, we converted our 36% top line growth in the total adjusted operating income growth of 53% in the quarter driven by solid performance across both of our segments.

Excluding the impact of our China joint venture investments, consolidated operating margins expanded by over 110 basis points in the quarter. Below adjusted total operating income, interest expense came in at the low end of our expectations for the quarter driven by better than expected cash flow while our 36% effective tax rate were slightly higher than we expected.

Our strong operating performance resulted in Q2 adjusted earnings per share of $0.23 exceeding the high end of our expected range for the quarter by a penny and representing growth of 42% over last year despite a significantly higher effective tax rate.

This excludes a roughly $0.01 impact in our P&L for the quarter related to the startup investment in our China joint venture.

In summary, another quality quarter of results across all of our businesses and throughout our P&L drove our strong earnings growth.

Now, let me spend a few minutes walking you through our expectations for the remainder of the year. Based on our strong Q2 results and expectations for our continued top line growth and margin expansion across our platforms, we are increasing our full-year 2014 earnings forecast.

We now expect to deliver operating income growth in the low to mid 40s on a percentage basis for 2014. After interest expense that is project to now range from $30 million to $32 million and a full-year estimated tax rate of around 35%, we expect to achieve between $0.98 and $1 in adjusted diluted earnings per share for 2014.

This revised guidance is up from our previous EPS expectation of $0.95 to $0.98 and represents growth of 33% to 36% over full-year 2013. This guidance excludes what we continue to expect to be about a $0.05 EPS investment for the year in our China joint venture as we expect our operating investments in China to increase somewhat in the second half of the year.

For the third quarter, we expect operating income growth to also range in the low to mid 40s on a percentage basis resulting in adjusted diluted earnings per share of $0.25 to $0.26, again, excluding projected investments in the China joint venture, which we expect to be about a $0.02 impact in Q3.

This EPS guidance compares to $0.19 in the third quarter of 2013 which included a notably lower tax rate than we expected this year. If adjusted for the different tax rates expected between the periods, our Q3 guidance range would represent approximately 35% to 40% year-over-year growth.

Our guidance includes top line growth in Q3 of around 30% lower than our first half growth rate reflecting the normal seasonally lower sales expected from Earthbound related solely to its fruits and vegetables business which it provides to customers primarily on a brokerage basis.

This top line guidance also includes an organic growth rate over the balance of 2014 that we expect to be in the 8% to 9% range with Europe continuing to be accretive to our overall growth.

For the full year, we continue to expect sales growth in the low 30s consistent with our previous guidance.

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

We continue to estimate our capital investment levels at around $275 million for 2014 but the timing of capital projects may vary and can impact the amount of capital investments we actually make this year.

In summary, we are pleased with the strong results we generated in Q2. We continue to forecast robust top line growth and believe that we can drive further margin expansion across our business. I will now turn the call back to Gregg for some closing comments. Gregg?

Gregg Engles

Thank you, Kelly. Before opening the call for your questions, I’d like to provide an update on our China joint venture where we continue to make steady progress. We now have a leadership team in place that is singularly focused on venture activities. Construction of our China manufacturing facility is progressing as planned and we expect to have products on shelf by year-end.

We remain very optimistic on the long-term growth opportunities this venture can provide to WhiteWave and are looking forward to providing you with more details around our plans at the appropriate time.

Now to wrap up, our strong performance and continued top line growth are projected to drive ongoing earnings growth and additional cost leverage. This leverage, along with the further benefits from our capital investments, is expected to deliver margin expansion over the balance of the year enabling us to raise our EPS forecast for 2014.

At the same time, Earthbound Farms’ strong performance continues to exceed our expectations, resulting in our increased ESP accretion benefit in 2014, which further energizes us about the additional growth and margin opportunities that can be achieved over time with this business.

We remain focused on driving growth in our businesses as well as the growth of our categories. This will include continuing to invest behind our brands to ensure our market leading positions.

We continually strive to drive growth in our core products as well as develop new and innovative offerings that draw more consumers to our categories and increase household penetration.

We also remain interested in exploring strategic options as another way to augment and accelerate WhiteWave’s growth. Thank you, again, for joining us today and I’ll now ask the operator to open the call for your questions. Operator:

Question-and-Answer Session


Thank you, sir. (Operator Instruction) Please note management asks that questioners keep their questions to one question and one follow-up question. (Operator Instructions) Our first question comes from Michael Steib of Credit Suisse. Your line is open.

Michael Steib – Credit Suisse

Thanks for taking my question. My question really relates to several references you made to the supply chain investment and the cost leverage, the benefits of which you’re starting to see now. Kelly, I think you made a comment that we shouldn’t expect the same type of margin and progression in Europe in the second half. But my question is what about the US? Is this sort of margin progression at that rate around 100 basis points? Is that sustainable as we look in the back half of the year?

Kelly Haecker

Hi, Michael. Good morning. With respect to our margin performance, as we indicated, we’re very pleased with the margin progression we’re seeing in the business and you mentioned North America. I think it’s really in the quarter driven by three things. One, we continue to deliver against our cost reduction initiatives. That’s clearly a part of it.

We also had some pricing benefit in Q1 from some pricing actions we’ve taken to catch up a little bit with recent cost inflations, so that’s an element as well. And then overall we’re just seeing generally good leverage as we’ve continued to see in the past as we grow our business.

So just the overall scale of our business continues to provide leverage. So I’d say of the three items, the actual margin improvement that we’re seeing from our capital programs is probably the least significant of the three in the quarter. Frankly, as we look over the balance of the year, we anticipate that we’ll continue to deliver against the margin improvement expectations that we’ve set out. We’ve always had a goal in aggregate to deliver at least 75 basis points of margin expansion across our entire business for the year and we remain on track to do that.

Q2 just gave us I guess increasing level of confidence that we’ll continue to deliver against that expectation.

Michael Steib – Credit Suisse

Okay, thank you.


Thank you. Our next question comes from Matthew Grainger of Morgan Stanley. Your question, please.

Matthew Grainger – Morgan Stanley

Hi. Good morning, everyone, and congratulations on the quarter.

Gregg Engles

Thanks, Matt.

Matthew Grainger – Morgan Stanley

So I just wanted to follow up on the creamers category. You called out higher promotional activity during the quarter and it’s clear that your major competitor is placing some additional focus on the category. Can you just talk a bit more on how promotional intensity trended during the quarter, whether you’ve seen any shift in recent months and, given all the negative commentary across the industry on promotional efficacy, how would you characterize the impact that it’s having on the creamer category?

Gregg Engles

Good morning, Matt. Let me just take a step back and think and I’ll probably give some context beyond just coffee creamers and touch on the majority of our categories here.

I think as we listen across the entire food industry and certainly seeing a number of growth challenges and you hear the commentary that there’s an increase in promotional activity without substantive incremental impact, and with some of those characteristics would be true within our categories, yet I think what stands out here about WhiteWave is that we’re operating in very attractive categories and we have very solid brand positions as well.

I think for in the second quarter for WhiteWave, we saw a continued strong category performance across the board, which really speaks to the fact that our categories are very much on favorable consumer tailwinds behind them. And but you’re right. We did see heavier competitive pressure and that pressure can be branded promotional pressure or some private label expansion quite frankly, while we tried to pull back on some of our promotional efforts within the quarter.

So in the case of your question there on coffee creamers as well as in plant-based beverages, we attempted to pull back promotional efforts but we saw the category shift a bit in the other direction and even with that we had very attractive growth across all of our segments and saw our growth being driven in the quarter by both distribution as well as velocity. So let me just speak to each of the businesses a little bit.

In organic milk, we just continue to see impressive growth here in this category. It was up 8% in the quarter. That was ahead of our expectations and certainly accelerated with respect to what we saw for the latter half of last year which was really in that mid-single digit territory of around 5% or 6%.

So this is a category that’s clearly on trend with moms. It’s having some benefit with respect to seeing the higher conventional milk prices and Horizon’s continued to have a very solid share performance as we said in our prepared comments here really lead by the value-added offerings that we brought to the marketplace with respect to our DHA enhanced milk as well as lactose-free.

And looking forward, I believe that we’re coming into the back to school timing and I believe we have very good programs across the board on Horizon fluid as well as being able to leverage some of our center store expansion as we initiated early part of this year.

In the coffee creamer category, the category had strong growth of plus 6% but at the same time we also saw dynamics in the category whereby the volume growth actually outpaced the dollar growth and that’s really being driven predominantly by an increase in competitive price promotion as well as a bit of a shift of mix into larger sizes, which have just a lower value per ounce.

And I’d say with respect to the promotional side, where we attempted to zig about, the category really zagged on us and put a little bit of share pressure on International Delight. But that all said, we continue to grow our overall coffee creamer market share and that was really aided by the launch of Dunkin’ Donuts that we launched in the beginning of this year.

So we feel very positive about the category still. We think these are some dynamics that you’re going to face every once in a while and we feel really positive about the International Delight brand restage with the new advertising, new packaging and new innovation that we continue to press throughout the year here.

So turning to the plant-based beverages side, the category, just continued to remain very, very robust with growth of 17% and that, as we mentioned, is led by almond milk growth of over 40%.

Now, within the category, we still saw share pressure as we’ve been talking for the past several quarters and the majority of that share pressure continues to be driven by the shift between soy and almond whereby in soy we have over a 70% market share and in almond we have right around a 50% share, so that mix out there will have a negative impact on our share.

But beyond that, in the quarter really all major national branded almond milk players saw share pressures as we saw a step up in both private label almond milk distribution expansion at a major retailer plus we saw continued promotional pressure in the segment.

So somewhat similar to creamers, we look to pull back on promotion within that quarter and even with that, though, with self-leading market position, we continue to grow in the almond segment over 40% and, as we mentioned as well, Silk continues to remain the leader in every segment that we compete within plant-based beverages.

So I think broad stroke, these are very attractive categories, have strong future potential and we know they’re going to evolve over time and competitive dynamics will shift over time. We’ve got incredibly great brands here and we just remain committed to continuing to invest in the categories to try to grow their overall penetration and we know that it’s through marketing and strong innovation that’s going to continue to drive that type of growth.

So hopefully that helps. I wanted to give that as a broader backdrop just because I know there’s a lot of noise in the industry here and it’s different by category, though there are some similarities.

Matthew Grainger – Morgan Stanley

Sure. No, that definitely helps. I appreciate all the context and I feel like I just asked five questions, so I’ll probably stop there.

Gregg Engles

No, I just answered like five.


Thank you. Our next question comes from Farha Aslam of Stephens Incorporated. Your line is open.

Farha Aslam – Stephens Inc

Hi, good morning.

Gregg Engles

Good morning, Farha.

Farha Aslam – Stephens Inc

Question around Europe, you’ve had some really great growth there. Could you highlight is it your new products that’s resonating? Is it distribution gains, a recovery of the consumer? What’s driving that growth?

Gregg Engles

Farha, as we mentioned last quarter, which I think was the quarter when our European growth really came into view, what’s really happening in Europe is that the category is beginning its transformation from a primarily soy-based category into a much broader frame of reference that includes other ingredients but, today, what’s primarily driving the transformation of the category is the introduction of these nut-based milks centered around almond.

So we’ve seen this for four or five years now in the US marketplace with a large step function change in growth rate driven by the expansion of the frame of plant-based beverages beyond soy and that dynamic is not starting to take hold in Europe.

So when it does, it brings lots of new users into the category. It greatly expands household penetration and, if done right, is highly incremental to the category and that’s what we’re seeing in Europe. We’re seeing continued solid growth of soy but we’re also seeing now a rapid expansion and adoption of almond.

So we’re operating in the same marketplace as we have historically operated but you are seeing significantly larger sets in incremental distribution around our soy-based offerings with these other ingredients, again, primarily almond.

The other thing that is I think becoming a more important driver of our business in Europe and that we believe gives us opportunities around the world, frankly, is now the much more rapid expansion and adoption of plant-based dairy alternative yogurts. This is a business that’s been a nice business for us in Europe. It’s been a double digit grower. But now for the last several periods, it has been a 20% or 20% plus grower for us in Europe and it’s now growing off quite a bit larger base.

So we’re making lots of progress around improved palatability of these products. They perform incredibly well for consumers. They’re becoming consumer preferred choices that they’re making and we’re very encouraged by what this portends for the future in terms of the global growth of the business around plant-based dairy alternatives.

Farha Aslam – Stephens Inc

That’s helpful. And my follow-up, again relating to Europe, your comps in the second half of the year become much more difficult versus what they were in the first half of the year. Do you anticipate double digit growth continuing off of that half your comp base in the second half and into 2015?

Gregg Engles

Yeah, we do.

Farha Aslam – Stephens Inc

Okay. That’s it for me.


Thank you. Our next question comes from Judy Hong of Goldman Sachs. Your line is open.

Judy Hong – Goldman Sachs

Thank you. Good morning, everyone. First just a quick question on your guidance. Kelly, maybe just if I think about the $0.02 to $0.03 of increase at the midpoint of your guidance, is it all to be accretion? From Earthbound it’s now coming in $0.02 higher?

Kelly Haecker

No, it’s a little bit of that but I’d say we’re looking at the entire business right now and, as you saw in Q2, not just Earthbound but we were pleased with the organic growth rate both obviously in Europe and in North America. And so considering that, considering our confidence level with respect to our overall margin expansion performance and then couple that with Earthbound, I think it’s all those factors, so not just Earthbound but we remain certainly confident in that guidance that we’ve given and think it appropriately reflects all of our expectations for the balance of the year.

Judy Hong – Goldman Sachs

Okay. And then maybe speaking of Earthbound, so you’ve talked about the revenue exceeding your expectations, maybe a little bit more color around what you think you may have underestimated when you first acquired the business, what’s been going right for it to drive that revenue acceleration and just maybe a little bit more color also on the profitability of the business, how is that trending versus a year ago?

Kelly Haecker

I would say that nothing’s really surprised us. I mean, we think it’s an exciting business. It’s a business that we (thought) that we acquired. As we communicated to you in Q1, we believe that this was a business that had an opportunity to be a double digit grower. So far it’s demonstrated that.

We also articulated to you that this was a business that had a very different margin structure that our existing business and a very different margin structure throughout the year. In Q1, we delivered a solid top line but with kind of a mid-single digits operating margin.

Then as we transferred our production toward the (Salinas) area in Q2, we’ve seen the margin progression advance in line with our expectations. In Q2, gross margins on the business in the high teens approaching 20 and operating margins in the business approaching high single digits, which again is very much in line with our expectations for the business.

Certainly the top line continues to be robust. We continue to believe that it will be robust over the course of the balance of the year and, hence, our confidence in taking up our guidance with respect to the accretion that this business will provide this year.

Judy Hong – Goldman Sachs

Okay. Thank you.


thank you. Our next question comes from Amit Sharma of BMO Capital Markets. Your line is open.

Amit Sharma – BMO Capital Markets

Hi, good morning, everyone.

Gregg Engles

Good morning, Amit.

Amit Sharma – BMO Capital Markets

Gregg, I really like your answer on the European portion. Just a quick follow-up on that, anything on the competitive horizon that is starting to show up? I mean, this type of growth should invite competitors in that segment. If you can talk about if you’re seeing something, what kind of a relative share advantage you have in your key markets over there.

Gregg Engles

Well, you’re exactly right. This kind of growth always attracts competition. And we’re seeing some of it. I think we are advantaged as you typically see by being the first mover here.

So we have a much more highly developed commercial infrastructure that ranges from our supply chain to our selling organization to our marketing and consumer insights around this category. So I think we’re ahead of the curve and our challenge is to stay ahead of the curve.

You’ll see us continue to step up our capital investment to support this growth. We’re doing it off a base that is a well invested base around our existing soy business, so I think that will continue to give us competitive advantages here.

And we at the present time really are the only company with a pan European brand in and around these categories, which is a significant advantage. So today in these categories we have a very high share.

I think you should expect, as you mentioned, so see new entrance over time in this category but we’re investing very heavily behind the trend and that, today, is a strategy that’s playing out very well for us. So we have a very innovative company in Europe, great product development and we are putting a lot of pressure on the category from an investment perspective to make sure that it fully develops. So we feel pretty good about our European business today.

Amit Sharma – BMO Capital Markets

And it reflects in the results, so that’s really understandable. And then another question on the… you talked about strategic alternatives and strategic opportunity as one other avenue of growth going forward. When you think about you acquisition strategy, can you talk about what kind of target, what kind of acquisition filter you have in terms of size, accretion, valuation? How do you think about the portfolio going forward?

Gregg Engles

We’ve talked about this over and over and we are in exactly the same place that we’ve always been. We’re a company I think that is characterized by strong top line growth, driven by significant brands that we can market against that are leaders in categories that are supported by strong consumer trends and those are the sorts of businesses we’re looking for.

We’re looking for businesses that have strong top line growth that we believe will be enduring with brands that are leading brands within their segments. And those are the sorts of things you should see us focus on. I think Earthbound is a good example of that. Great category, clearly leading brand, lots of opportunities and those are the types of businesses we’re looking for, businesses that can be leaders and be big businesses.

Amit Sharma – BMO Capital Markets

All right. So you’re open to expanding the portfolio a little bit wider in order to get those brands and those opportunities.

Gregg Engles

Yes, but I think you’ll see as we move forward if we have the opportunity to make acquisitions here that they fit with in the fabric of the kind of company that we are.

Amit Sharma – BMO Capital Markets

Got it. Thank you very much.


Thank you. (Operator Instructions) With that, our next question comes from Bill Chappell of SunTrust. Your line is open.

Bill Chappell – SunTrust

Good morning. Thank you.

Gregg Engles

Good morning, Bill.

Bill Chappell – SunTrust

Good morning. Going back to Europe, is there any way to break out kind of how much of it is kind of core beverage growth versus the yogurt growth? And then maybe any update on yogurt moving to the US.

Kelly Haecker

Yeah. In terms of the breakout, Bill, just in broad terms, beverages compose about two-thirds of our business over there with yogurt representing just over 20% of the business now and the balance is represented by creams and desserts and some of the other products that we have. So it’s predominantly a drinks and yogurts business.

And frankly, both businesses grew at around that 18%, 20% constant currency growth rate. So frankly the contribution was pretty equal from both, obviously relative to their size.

And I guess maybe I’ll let Blaine talk about how he’s thinking about plant-based yogurts in North America.

Blaine McPeak

Good morning, Bill. We really launched our yogurt initiative towards the end of last year and as we’ve mentioned throughout the different calls and conversations here, I think, we’ve intentionally tried to keep our distribution to a manageable level, have a stage rollout here. We’re right around that 20% territory with respect to an ACV standpoint.

I think we’ve learned and continue to learn a lot from the successes and product profiles of our (Alpro) yogurt business which really is a standout with respect to plant-based yogurts and we continue to apply those to our overall portfolio with respect to marketing, with respect to innovation in the product profile.

So we’re kind of still in that test mode, test and selectively expand mode. Where we have it in distribution and where we’ve begun to market that brand, we’ve actually seen our velocities perform pretty well. They hang in the middle of the category and they’re very incremental for the category because they’re bringing in a new and different type of user. So I think we have a positive category growth story.

And as we continue throughout this year, I think our expectations are going to be one whereby we’re going to be faced with the decision about when do we put a little bit more pressure on the accelerator and expand our distribution further and I think as we get toward the end of the year, as see some of the results of our test and have opportunities to continue to improve our product, I think you’ll begin to see that.

Bill Chappell – SunTrust

Thanks. And then just a random question. As you look at the organic milk market, it seems that whole milk is gathering all the growth where skim is actually in decline. Is there any reason for that or does that say anything about kind of where the market skew is younger or anything we should be looking at?

Gregg Engles

Well, that’s a question that I’ll probably want to… I’ll have some more experts talk about from our end. But I think your hypothesis, in particular in organic dairy, whereby you’re seeing it more relevant toward families with younger children and as you get into that territory, you typically see more of a strength around the whole milk portfolio just given kids’ nutritional needs.

But beyond that, I think that’s where it continues to resonate is that household of younger kids for us and that’s why we see such strength with our Horizon organic, with DHA and that portion of our business continues to demonstrate strong growth and we’re very, very pleased with it.

And even within that, we’re seeing a little bit more strength around the higher fat levels that the skim side of it. So I think there may be some correlation there, Bill, but there’s a lot of different dynamics across the entire milk industry that probably has some impact beyond what I’m even aware of today.

Bill Chappell – SunTrust

Americans love their milk fat.

Gregg Engles

I could go with a bowl or more every day.

Bill Chappell – SunTrust

Thanks so much.


Thank you. Our next question comes from Ken Goldman of JPMorgan. Your question, please.

Ken Goldman – JPMorgan

Hey, thanks for the question. Gregg, the California drought only getting worse, you talked last time or maybe two quarters ago about well water and irrigation keeping supply okay for now but at what point do you think it’s fair to start worrying about 2015? Can you maybe update us how you see the situation today and what’s most at risk for you right now going into next year?

Gregg Engles

Yeah, I’ll let Kevin Yost address that issue for you, Ken.

Kevin Yost

Yeah, thanks for the question, Ken. Good morning. Certainly the situation in California is always on our radar screen as we talked about in past calls. Our specific operations, of course, operate in those areas but we are disproportionately well water driven and we’re constantly monitoring those wells, the rate at which they pump, the depth at which we need to go to have ample water. So it’s a constant monitoring process.

At the same time, as we look to continue to expand our land to keep up with our category growth rate, we’re constantly monitoring diversification and making sure that we’re in the right places for the long term. So we feel comfortable with certainly the back half of the year. We feel comfortable with 2015.

But to be clear, the drought monitoring that we do, we are looking long term at constantly diversification more broadly so that we can manage to this situation and then, of course, always pray for snow in this year in Nevada.

Ken Goldman – JPMorgan

That’s helpful. I guess my follow-up will be this. You mentioned well water. There is some information that we’re getting that well water is starting to drop a bit. Is that similar to what you’re seeing as well, no pun intended?

Kevin Yost

Yes. But Ken, in specific areas, all of this is pumping from adjacent aquifers, et cetera, that ultimately need to be replenished over the long term. So at a micro level, we’re monitoring those wells specifically on specific ranches. Much of that we’re seeing really in more of the central valley of California, which isn’t where our leafy greens are primarily grown versus in the northern (Salinas) Valley, (San Banido) valleys. But, again, I don’t want to run by the fact that we think it’s a long-term issue that we’re going to monitor and manage through broader land diversification.

So we can expand the number of wells and the depth of wells in our current land and then long-term it’s land diversification.

Ken Goldman – JPMorgan

All right. I’m going to go Google aquifer. Thank you very much.


Thank you. Our next question comes from (Chris Roe) of Stifel. Your question, please.

(Chris Roe) – Stifel

Good morning.

Gregg Engles

Good morning, Chris.

(Chris Roe) – Stifel

Hi. Just had a couple of questions for you if I could. I just wanted to ask first, if I could on… we’ve had a lot of questions on Europe but just to understand the margin and is it sustainable? We’ve been kind of pushing toward the low double digit operating margin that we looked to hit this quarter. Is that sustainable? Is that just scale driving that margin improvement in Europe?

Gregg Engles

Yeah, I think that you’ll see it bounce around a little bit from quarter to quarter but, yeah, the trajectory is up here because one of the things we’ve always had (Alpro) was a very professional well-invested SG&A infrastructure. That’s really required because of the complexity of operating in a multi-country environment of greater Europe. And what you’re seeing with the very strong volume growth that we have today is we’re getting tremendous leverage out of that infrastructure and you’re seeing it reflected in the bottom line.

So we feel like we have a very, very good plot in terms of margins in Europe. We’re also really at the very front end now of investing to internalize and build out our capability for manufacturing our product beyond the soy portfolio, so the nut-based and other ingredients we’re manufacturing and selling today and as those investments come online, we internalize that production more and more into our own network, I think you’ll also see continued margin step up.

So we feel like the margin trajectory here in Europe is up and to the right. It’s going to bounce around from quarter to quarter a little bit as we get more or less leverage in any given period but, yes, we feel good about the margin trajectory in Europe.

(Chris Roe) – Stifel

Okay. And just maybe a question for Kelly around the gross margin and you’ve had some obviously capacity constraints, both warehouse and production and I’m just curious how those are turning. You’ve had some like midway through the year the expectation for some new distribution facilities coming on stream, obviously new production capacity as well. Just understand kind of how the underlying gross margin’s performing and how those projects are progressing.

Kelly Haecker

Yeah, just again, our underlying gross margin is strong. You’ll see in our overall P&L a decrease in margin year over year of 240 basis points. That’s entirely driven by the structure of the Earthbound P&L that’s in our portfolio today.

Ex-Earthbound, you saw a gross margin expansion in the quarter of 100 basis points, both solid margin expansion in North America as well as Europe as we’ve discussed.

With respect to capacity, we continue to bring on (filling) lines. We’re in pretty decent shape right now with respect to our manufacturing capacity. We have a number of long lead time projects that are underway right now that will be coming onboard late this year and really frankly throughout next year, both in North America and Europe. So we’re progressing on the plant capacity programs as we laid out.

With respect to warehousing, yeah, we’re just in the process right in Q3 of bringing online our large east coast warehouse that has been in the works for about 18 months. And we’ll probably begin to see a little bit of a benefit of that warehouse come online late this quarter but really it would be well into the fourth quarter when we begin to see a more meaningful impact.

You’ll see that impact not in gross margin, though. You’ll see that in operating margin because that ultimately reduces our warehousing and distribution costs to go into our operating expense. But we’re very pleased with our ability to now bring that online in Q3 and very excited about the opportunity to dramatically increase the amount of cold storage that we move internal from external now. So that’ll be a nice margin contributor for us as we get in toward the latter part of this year and certainly for the entirety of 2015.

(Chris Roe) – Stifel

Okay. Thank you for the color. That was very helpful.


Thank you. Our next question comes from Bryan Spillane of Bank of America. Your question, please.

Bryan Spillane – Bank of America

I just have one question and, Gregg, I just wanted to follow up on Amit’s question earlier. I just wanted to make sure I understood. In the prepared remarks you referenced non-M&A but you really just referenced exploring strategic options as a way to augment and accelerate growth. So is there a wider spectrum of options you’d be thinking about? And I’m not sure what that would be, whether it’s joint ventures or mergers or could you just clarify whether strategic options was meant to be just acquisitions or is there a wider spectrum of things we should be thinking about?

Gregg Engles

Well, we’ve done two things in the public history of this company. We’ve made an acquisition and we’ve entered into a joint venture. So when we look at growing our business internationally, I think joint ventures are a very good option for benefitting from scale a potential joint venture partner might have in a marketplace. But in our developed marketplaces you should think about it as M&A.

Bryan Spillane – Bank of America

Okay. Thank you.


Thank you. Our next question comes from John Baumgartner of Wells Fargo. Your question, please.

John Baumgartner – Wells Fargo

Gregg, or maybe Kevin, in terms of Earthbound, you called out the frozen foods drink in your comments but what about the other adjacencies such as maybe dried fruit or some of the shelf stable snacks? What are the opportunities for growth there?

Kevin Yost

Good morning, John. This is Kevin. I might just back up and give a little broader context because we want to make sure that we stay focused on what is tremendous growth in the packaged green category. So that category growth there and keeping our business focused on not only keeping up with the growth there but also continuing to innovate in our base, so bringing more line extensions there, packaging innovations and certainly a big part of our growth in the first half of the year is bringing segmentation to the category and, frankly, garnering more shelf space because it’s now consumer driven shelf sets.

Beyond that, there are some immediate adjacencies that you’ve seen us already start to exploit in terms of power meal bowls, the ready to eat salad, chips will be there as well, premium (cure in) the category and then our frozen fruits and vegetables, which Kelly talked about in terms of the tremendous growth that’s there and we’re really at an ace in stage there in terms of distribution. We’re pleased with the velocity and the progress there.

And then to your mention, I think there’s another ring out in some areas that we already participate in like dried fruit that we need to understand better how we can win in that space.

But the way we’re thinking about innovation is if you back up, the reason WhiteWave wants to be in this produce aisle is because that’s where the consumer is. Using our strong base of packaged salads and now frozen, what are the other things that consumers believe our brand can apply to and that may mean more broadly, what are other brands that can apply in the category that can use our sales and distribution strength?

So we are going through a process right now of prioritizing those opportunities what we believe we can win.

John Baumgartner – Wells Fargo

Okay, great. And just maybe one for Blaine if I could. In terms of the organic milk, so growth there is elevated for you in the category, but conventional milk prices haven’t really rolled over yet. So when that does happen, how are you thinking about trade down the category and the impact on Horizon growth? I mean, will you see a slowdown there or are you more confident in these initiatives, lactose-free milk can kind of keep that high (inaudible) rate continuing?

Blaine McPeak

Yeah, John, I think as we saw within this particular quarter, the organic milk category was a little bit ahead of our expectations. We had kind of pegged it to be in that mid-single digits territory.

I think we remain in relatively decent position from an overall supply standpoint. I think the category as a whole tightened up a little bit and I think for just prudence sake, that mid-single digit is probably the area that we think is real longer term. You’re going to see some ebbs and flows here quarter to quarter.

Historically, there’s been some linkage to the pricing of conventional. It’s hard to fully manage it or predict that elasticity there. But it’s typically organic milk is now over 2X the price point of conventional milk and we just announced a price increase, as we mentioned, as well.

So we’re going to… you might see a little bit of pressure on the elasticity side and it may not be that 8% but I think it’ll stay in that mid-single digits is kind of our expectation.

John Baumgartner – Wells Fargo

Great. Thanks, Blaine.


Thank you. Our final question for the hour come from Rohini Nair of Deutsche Bank. Your line is open.

Rohini Nair – Deutsche Bank

Thank you so much for the question. Very quickly, I wanted to ask about your non-dairy yogurt. You pointed it out as kind of a meaningful driver for your growth in Europe, essentially the same growth rate as your plant-based business there.

The US launch seems to still be kind of a work in progress, so can you just help us understand what the main issues have been there? Is it mostly about the taste? I guess I’m just wondering whether this might ultimately be the same type of growth driver for the US as in Europe or whether we should be thinking about it differently.

Gregg Engles

Yeah, I think we believe that the potential for plant-based share (growth) is every bit as high in the United States as in Europe. I think the principle difference so far has been that the Europe business very early on achieved a level of scale that allowed them to have a self-manufactured supply chain, which allowed them to produce very consistent quality and to innovate around the product on a very regular basis to improve its palatability. And we’re in the process of getting there in the US.

The US is a little bit of a different market. It’s not a country-by-country market. It’s a unified market of 300 million people, so the requirements of scale are a little bit higher here to get over that hurtle. We are externally manufactured on that product today.

And so I think once we become internally manufactured on that product, which is in the not too distant future, then you’ll see us accelerate our efforts behind driving the dairy alternative category on the yogurt side.

Rohini Nair – Deutsche Bank

Great, thank you so much.


Thank you. At this time, I would like to turn the call back over to CEO Gregg Engles for any closing remarks. Sir?

Gregg Engles

Thank you all, again, for joining us on the call this morning. We appreciate your interest in the WhiteWave Foods Company and we look forward to updating you on our third quarter results on our next call and hopefully seeing many of you at the back to school conference in early September. Thank you all very much.


Thank you, sir, and thank you, ladies and gentlemen, for your participation. That does conclude the program for today. You may disconnect your line at this time. Have a great day.

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