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Executives

Barry Sievert - Vice President of Investor Relations

Gregg L. Engles - Chairman, Chief Executive officer and Chairman of Executive Committee

Shaun P. Mara - Chief Financial Officer and Executive Vice President

Analysts

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

Amit Sharma - BMO Capital Markets U.S.

Farha Aslam - Stephens Inc., Research Division

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

Reza Vahabzadeh - Barclays Capital Inc.

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

Ryan Oksenhendler - BofA Merrill Lynch, Research Division

Jonathan P. Feeney - Janney Montgomery Scott LLC, Research Division

Robert Moskow - Crédit Suisse AG, Research Division

Carla Casella - JP Morgan Chase & Co, Research Division

Dean Foods (DF) Q4 2011 Earnings Call February 15, 2012 9:30 AM ET

Operator

Good morning, and welcome to the Dean Foods Company Fourth Quarter 2011 Earnings Conference Call. Please note today's call is being recorded and is also being broadcast live over the Internet on the Dean Foods corporate website. This broadcast is the property of Dean Foods. Any redistribution, retransmission or rebroadcast of this call in any form without the express written consent of the company is strictly prohibited. At this time, I'd like to turn the call over for opening remarks to Vice President of Investor Relations, Mr. Barry Sievert. Please go ahead.

Barry Sievert

Thank you, Katie, and good morning, everyone. Thanks for joining us for our fourth quarter 2011 earnings conference call. We issued an earnings press release this morning, which is available on our website at deanfoods.com. The release is also filed as an exhibit to Form 8-K available on the SEC's website at sec.gov. Also available during this call at the Dean Foods website is a slide presentation, which accompanies today's prepared remarks. A replay of today's call, along with the slide presentation, will be available on our website beginning this afternoon.

The earnings per share, operating income and interest expense information that will be provided today are from continuing operations and have been adjusted to exclude the expenses related to facility closings and reorganizations, expenses related to litigation matters, expenses related to goodwill impairment and other asset write-downs, gains or losses from the divestiture of assets and other nonrecurring items in order to enable you to make a meaningful evaluation of our operating performance between periods. The earnings release contains a more detailed discussion of the reasons why these items are excluded from the consolidated results, along with reconciliations between GAAP and adjusted earnings and between net cash flow from continuing operations and free cash flow from continuing operations.

We would also like to advise you that all forward-looking statements made on today's call are intended to fall within the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements will include, among others, disclosure of earnings targets, as well as expectations regarding our branding initiatives, expected cost savings, leverage ratios and various other aspects of our business. These statements involve risks and uncertainties that may cause actual results to differ materially from the statements made on today's conference call. Information concerning these risks is contained in the company's periodic reports on forms 10-K and 10-Q and in today's press release.

Participating with me in the prepared section of today's call are Gregg Engles, our Chairman and CEO; and Shaun Mara, our Chief Financial Officer. Gregg will start us off by providing an overview of our reporting segments and a review of their recent results. Following Gregg, Shaun will offer some additional perspective on our financial results before turning the call back to Gregg for some commentary on the forward outlook and other closing comments. We will then open the call for your questions.

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

Gregg L. Engles

Thank you, Barry, and good morning, everyone. Today, we reported Q4 adjusted diluted earnings of $0.27 per share, $0.02 above the high end of our guidance of $0.20 to $0.25 for the quarter. I'm pleased with the results of the quarter but even more pleased that we've continued to meet our financial and operational commitments to our stockholders.

While 2011 was not without its challenges, we met or exceeded our guidance in all 4 quarters and finished the year with $464 million of full year operating income and adjusted diluted earnings of $0.77 per share. We will continue to strive to build on this track record in 2012 and beyond.

In addition to the EPS results, other Q4 highlights include consolidated adjusted operating income growth of 21%; year-over-year profit growth in our Fresh Dairy Direct business, which posted an 11% increase in Q4 operating income; and continued strong performance of WhiteWave-Alpro, which closed out a highly successful year with 6% top line and 17% adjusted operating income growth for the quarter.

I'll discuss these results in more detail in a moment, but before I do, I wanted to address the change in segment reporting we've made beginning with this earnings report. As discussed in the earnings release we issued this morning, we have broken Morningstar Foods out as a separate reportable segment from our FDD fresh milk business. Significant changes in the fresh milk business and diverging market conditions, go-to-market models and customer bases have increasingly led us to view the FDD and Morningstar businesses differently. Going forward, we'll manage, invest in and develop strategy for these businesses separately. Therefore, we will now report the business in 3 segments: Fresh Dairy Direct, WhiteWave-Alpro and Morningstar. Our upcoming 10-K filings will include 2010 and 2009 results, recast to reflect the new segment alignment. Additionally, we will post unaudited supplemental information on our website this morning to assist you in further understanding the financial performance of these segments.

As part of these adjustments, we recently made a change in the leadership structure of Fresh Dairy Direct. We've combined the supply chain and commercial functions of FDD under a single leadership team to ensure the organization is aligned and to facilitate more rapid decision-making. Gregg Tanner, our Chief Supply Chain Officer since 2007, has taken on the additional role of Fresh Dairy Direct President to ensure alignment between the manufacturing and selling organizations at FDD.

Let me now provide an overview of the 3 segments and their Q4 performance, starting with the Morningstar business. Morningstar is a leading provider of extended shelf life value-added creamer, beverage and cultured dairy products with an emphasis on foodservice customers and private label retail. Segment net sales for 2011 were $1.3 billion. Approximately 64% of Morningstar's 2011 sales were in the foodservice channel and 36% were to retail or other customers.

Segment sales are primarily composed of products in 2 broad categories. Extended shelf life cream and beverage products, including milk, ice cream mix and aerosol whipped toppings, comprise 79% of 2011 Morningstar sales. Cultured products, including cottage cheese and sour cream, comprise 21% of sales. One of Morningstar's core strengths is this investment to support customers through the development of innovative products, menu items and in-store solutions that drive customer volume and profit. For example, our Morningstar team worked with McDonald's in the development of the successful McCafé Frappe beverage lines, and this work was instrumental in Dean Foods being named McDonald's Supplier of the Year for 2011.

Although Morningstar's core financial performance has been solid over the last several years, reported operating income has been impacted by divestitures and other intercompany adjustments. Excluding these items, we estimate that operating income increased approximately 15% at Morningstar in 2010 and 9% in 2011. We plan to invest to support the future growth of this business and expect continued solid returns from that investment. Future success for the business will be driven by continued innovation and successful customer partnerships.

Turning to Q4 results, Morningstar reported net sales of $349 million or 7% above Q4 of 2010. The increase in net sales was driven primarily by a mix shift within the portfolio. Volumes for the segment were essentially flat with the year-ago quarter. However, excluding the impact of our Q2 2011 private label yogurt divestiture, Morningstar volumes were 12% higher than the year ago period. Adjusting for divestitures, Q4 volumes grew across the Morningstar product line, with ESL beverages and cream products up low-double digits and cultured volume up mid-teens.

Morningstar's 2011 operating results are clouded by our Q2 divestiture of the yogurt business. However, we saw solid growth and income from an ongoing business in both 2010 and, again, in 2011. Excluding the estimated impact of the divestiture, full year 2011 operating income increased by approximately 9% from the prior period.

We are pleased to begin to highlight the Morningstar segment more clearly under our new reporting structure in 2011 and beyond. It is a business with strong and unique capabilities and growing segments. Morningstar enters 2012 with solid momentum, and we expect it to continue to post solid growth this year.

Our branded segment, WhiteWave-Alpro, is a world-class branded platform with a history of strong top and bottom line growth, driven by innovation and market-leading brands in growth categories. For 2011, WhiteWave-Alpro net sales were $2.1 billion. Silk and Alpro plant-based beverages and foods comprise 40% of sales; creamers, 32%; and Horizon Organic products, 24% of sales. The business has performed exceptionally well in recent years, and operating income margins have generally been around 10%. WhiteWave-Alpro closed out a strong year with another solid quarter of top and bottom line growth. In total, fourth quarter WhiteWave-Alpro net sales grew 6% over the prior year to $559 million, driven by solid growth in creamers and plant-based beverages.

WhiteWave's creamer business, consisting of International Delight and Land O'Lakes creamers, maintained strong momentum in Q4, with net sales increasing high-single digits. Our seasonal flavors and our co-branded American favorites varieties, including Almond Joy and Cinnabon, were particularly strong in Q4. We're currently in the process of launching a new lineup of International Delight Iced Coffee beverages. Initial acceptance and consumer reaction has been encouraging, and we expect this to be an area of solid growth for the International Delight brand as we invest to develop a new refrigerated category. Once we've gained appropriate distribution, we'll spend to support the launch, particularly in late Q1 and in Q2 of this year.

As expected, Horizon Organic sales slowed during the quarter due to industry-wide shortages of organic milk. Tight organic farming margins, difficult summer weather in 2011 and high conventional milk prices combined to limit organic milk production in the back half of 2011. As a result, Q4 sales were flat compared to the same period last year.

To support our network of farmers, we increased pay prices for organic milk during Q1 of 2012 and reflected these increased costs in our selling prices. Despite these efforts, we continue to expect sales growth to remain constrained by supply throughout 2012.

Our Silk product line of plant-based beverages also finished the year in solid fashion. The brand posted mid-single digit growth, with particular strength in Silk PureAlmond. We will continue to drive growth in the category with a pipeline of plant-based beverage innovations, including the current launch of Silk Fruit&Protein. Silk Fruit&Protein combines the natural protein of soy with the taste and added nutrition of fruit to offer consumers an all-around healthy and delicious beverage choice. Early sell-in in response to this new offering is in line with our expectations.

Alpro net sales increased mid-single digits before and after currency conversion, even as the European economy continues to constrain consumers, particularly in the southern part of the continent. Drawing on our experience with Silk PureAlmond in the United States, Alpro will expand its plant-based beverage lineup into almond and hazelnut drinks in the first half of 2012, which should expand the category and offer European consumers more choices in plant-based beverages and foods. Spending to support this launch will reduce profit at Alpro in the first half of 2012.

WhiteWave and Alpro finished a strong year in Q4, with operating income growth of 17%, but we continue to invest for the future. For the fourth quarter, WhiteWave-Alpro operating income was $59 million, the highest in our history.

Our largest segment, Fresh Dairy Direct, is focused on winning in the fluid milk category with the lowest cost position, offering superior customer service through one of the country's largest refrigerated DSD networks. Total 2011 segment sales were $9.6 billion. The segment is primarily a fluid milk business. On a net sales basis, fluid milk accounted for 74% of 2011 FDD sales. Another 10% of sales consisted of cultured dairy and creamer products. 9% of FDD volume is ice cream and novelties, and there is a modest amount of juice, tea, water and other distributed products.

Our Fresh Dairy Direct business platform has struggled since late 2009, with weak industry volumes, competitive pricing pressures and highly inflationary commodities. In the last year, we've taken a number of significant steps to improve the performance of FDD. These steps streamlined our list of initiatives and focused on 3 core areas: reducing cost, pricing to cover inflation and driving volume through new business wins. Execution in these areas has been essential to help offset the headwinds facing FDD, although we still have work to do.

As expected, the Class I raw milk price declined in Q4 after marching inexorably to historic highs during the first 9 months of the year. The Q4 Class I average was $18.83 per hundredweight, a 12% sequential decline. Raw milk price declines are generally favorable for the performance of the business, and gross margin per gallon improved slightly from Q3 as a result.

The gap between our brands and private label narrowed during Q4 as retailers did not fully reflect the raw milk price declines in their prices on shelf. As a result, the margin over milk rebounded to its highest level since mid-2009. This restored some of the margin that retailers had invested in the private label milk category in an effort to drive traffic over the last couple of years.

Increasing retailer margins are both good and bad for the category and our business. On the plus side, the higher private label retails helped to restore the historical price relationship between our brands and private label, making our brands more competitive. On the negative side, because milk prices remain at historical highs, the restoring of retailer margins mean consumers aren't seeing the full benefit of lower raw milk cost on shelf, which has a negative impact on category volumes.

Category volumes remained weak in Q4. The fluid milk categories posted declining volumes for 8 consecutive quarters going back to 2009, when both raw milk prices and retail margins were at historic lows. In the fourth quarter, category volumes were down approximately 2.4%, a deterioration of recent trends.

With the benefit of new volume obtained over the past year, we again outperformed the industry. Dean fluid milk volumes declined 1.5% in the quarter. However, when adjusted for the divestiture of the Waukesha, Wisconsin facility in Q3, our Q4 fluid milk volume was essentially flat on a year-over-year basis. We estimate the balance of the industry experienced approximately a 3% volume decline in the quarter.

Category volume declines and industry overcapacity continue to drive competitive intensity at the wholesale level. However, despite soft volumes, favorable commodity price movements and our efforts to reduce cost helped Fresh Dairy Direct limit gross profit decline to just 1% in the quarter. Below the gross profit line, our efforts to reduce cost across the business, in particular in SG&A, drove significant year-over-year benefit. While higher fuel cost led to a $9 million increase in FDD distribution expense, our cost-control efforts in SG&A more than offset this increase to deliver a net $17 million decline in total operating expenses. As a result, Fresh Dairy Direct operating profit was $99 million in the fourth quarter, 11% above a year ago results, marking the first profit growth at FDD since Q3 of 2009.

Looking ahead, we remain concerned about the health of the fresh milk category, with volume weakness the primary issue. With that said, we feel good about the actions we've taken to reduce our cost structure and better position the business to succeed despite a challenging marketplace.

I'll now turn the call over to Shaun Mara for some additional commentary on the financials. Shaun?

Shaun P. Mara

Thanks, Gregg. Good morning, everyone. I'll take a few minutes now to walk through the consolidated financial performance in the quarter from a P&L, cash flow and debt perspective.

Starting with the P&L, consolidated gross profit of $766 million was $9 million above the year ago quarter, driven by WhiteWave-Alpro gross profit growth of $19 million, partially offset by gross margin declines due to volume softness at Fresh Dairy Direct and divestiture impacts at Morningstar.

Distribution expense was a notable headwind, once again, in the quarter, up 5% over the same quarter a year ago, as higher fuel costs continue to pose a challenge. However, our initiatives to reduce SG&A cost resulted in a significant decline with Q4 costs down $32 million or 11% below year ago levels.

The improvement in gross profit and our sharp focus on reducing SG&A expense more than offset higher distribution cost to yield a 21% growth in consolidated operating income to $135 million.

Below operating income, interest expense declined $4 million from the year ago period to $60 million as a result of continued debt reduction. Also, as expected, our quarterly income tax rate came in at 33%, bringing our full year rate to 34%. The full year rate was lower than our historical average rate largely due to the mix of domestic and foreign income and the favorable noncash settlement of a tax examination. For 2012, we expect our mix of domestic and foreign income should result in a tax rate of 36% to 38%.

Net income of $51 million resulted in fourth quarter adjusted diluted earnings per share of $0.27, an 80% increase from a year ago.

Turning now to the cash flow and balance sheet, total net debt decreased by $92 million during the quarter to $3.65 billion. Q4 debt paydown was supported by stronger operating results and the positive impact of declining commodities on working capital, offset by capital spending of $110 million and cash interest payments of $78 million. For the full year, total capital expenditures were $326 million, representing a $24 million increase versus the prior year. The year-over-year increase was primarily driven by the $84 million of spend on the new WhiteWave manufacturing facility here in Dallas, Texas.

Full year free cash flow totaled $123 million. With the added cash provided by divestitures, we successfully reduced our net debt outstanding by $324 million in 2011. Our leverage ratio of funded debt-to-EBITDA, as defined by our credit agreements, continues to decline. As we stated earlier in the year, our goal was to reduce our leverage to below 4.75x by year end. We achieved this, ending the year at 4.64x. This is more than a full turn below our current maximum covenant of 5.75x and also well below the step-down to 5.5x at the end of Q1 2012. We anticipate our leverage ratio will be approximately 4.5x at the end of the first quarter. We remain comfortable with a cushion available under our covenants, and we will continue to focus on leverage reduction in 2012. All in, the fourth quarter was very successful from an operating income, EPS, cash flow and debt reduction perspective.

Before I turn it back over to Gregg for our thoughts on the forward outlook, I'd like to take a look at 2011 on a full year basis and some of the challenges we faced coming into the year, as well as our performance against them. I think it provides important context as we look ahead to 2012.

Although all of our businesses faced challenges entering 2011, the headwinds our Fresh Dairy Direct business faced were particularly daunting. As a reminder, 2010 was a difficult year for FDD, with a 36% decline in operating income. In addition, FDD entered 2011 with 4 major challenges: first, volumes across the fluid milk category remained weak; second, we faced continuing inflation across key commodities; third, price concessions given over the course of 2010 meant difficult overlaps through the first half of the year; fourth, because incentive compensation was paid well below target in 2010, 2011 compensation expense was meaningfully higher.

Added to this, at the Dean Foods level, our comparisons were further challenged by the sale of 2 yogurt businesses in early 2011, which were dilutive to 2011 results by approximately $0.06. We also made necessary adjustments to our debt structure, including a December 2010 bond issuance and an amendment to our credit facility that effectively increased our 2011 interest expense by approximately $0.10. Together, these 2 items alone reduced our earnings base by about $0.16 from 2010's $0.80 base.

Facing these pressures, we identified 3 key areas of focus for 2011: accelerating cost reduction to rightsize for the realities of the market; price realization to pass through inflationary input costs; and the acquisition of additional fluid milk volumes to offset category weakness.

To attack our cost structure, we first reduced costs across the supply chain. We completed the final leg of our $300 million cost reduction program by achieving over $125 million in 2011 savings across procurement, distribution and manufacturing. In addition, we increased the focus and urgency behind SG&A cost reduction and successfully lowered SG&A costs, excluding advertising and incentive comp, by over $70 million on a year-over-year basis and by an even greater amount on a run rate basis coming out of Q4.

Our second key area of focus was on pricing to effectively pass through commodity inflation. We worked to improve our pricing protocols and processes to ensure inflationary commodities were effectively passed through, resulting in a 2% increase in full year Fresh Dairy Direct gross margin per gallon. And finally, we focused on offsetting industry volume weakness through obtaining incremental sales volume. We added more than 55 million annual gallons to our fluid milk operations to help offset the industry weaknesses.

These efforts helped offset the headwinds facing our fluid milk business and, supported by the continuing growth in Morningstar and WhiteWave-Alpro, led to a full year consolidated operating income that declined less than 2% from the prior year.

Full year 2011 adjusted diluted earnings per share of $0.77 is $0.03 below 2010's reported results, but $0.13 or 20% above the 2010 result when normalized for yogurt divestiture and Q4 bond issuance. While challenges still remain, as we look ahead to 2012, several of the headwinds we faced a year ago are less daunting. Our plans are built on current dairy commodity forecasts that are neutral to slightly favorable, the additional volume we obtained last year will help offset ongoing category weakness, and finally, our aggressive cost reduction across the business throughout 2011 and early 2012 have better positioned the business for success.

With that, I will turn the call back to Gregg for some commentary on the forward outlook before opening the call for your questions.

Gregg L. Engles

Thank you, Shaun. Looking ahead, we're cautiously optimistic as we enter 2012. Our biggest concerns are continued fluid milk category volume weakness and industry pricing pressures. Our 2012 plans assume flat FDD volume, excluding the impact of divestitures. Additional category weakness would introduce incremental risks to our plan. However, we believe our actions to significantly reduce supply chain and overhead costs and to simplify the FDD organization have positioned the business to stabilize and compete effectively in a challenging marketplace.

Our current 2012 forecast for raw milk costs suggests a more stable commodity environment than in recent periods. Following a decline in Q1, we expect relatively flat raw milk cost for the balance of the year. Any significant raw milk cost inflation from current forecasts would present a challenge for our outlook. Based on our current assumptions and visibility, we expect 2012 operating income growth for Fresh Dairy Direct to be in the low- to mid-single digits.

For WhiteWave-Alpro, we expect continued strong top line performance from coffee creamers and beverages and plant-based foods as we build on our current momentum with additional investment in brand-building and innovation. We expect Horizon milk sales to be soft through much of the year as the industry works through short supplies of organic raw milk. All in, including a negative currency impact, we expect solid mid-single digit top line growth at WhiteWave-Alpro in 2012.

At the WhiteWave-Alpro operating income line, we expect another solid full year performance. On a quarterly basis, operating income growth is expected to be heavily weighted to the back half of the year. Startup costs for the new Dallas manufacturing facility and the launch costs of International Delight Iced Coffee, Silk Fruit&Protein and Alpro's new plant-based beverages will pressure first half profits. The incremental investment behind these product launches will likely result in flat operating income performance through the first half of the year. We expect very strong operating income performance for WhiteWave-Alpro in the back half and full year operating income growth in the high-single to low-double digits again.

Morningstar enters 2012 with good momentum, and we expect solid underlying volume and operating income growth for the business this year. However, growth will be somewhat offset in the first half by the overlap of last year's Q2 yogurt divestiture. All in, on a reported basis, we expect mid-single digit 2012 operating income growth at Morningstar.

Corporate costs will provide a tailwind as SG&A cost reductions taken in the latter part of 2011 and in early 2012 drive year-over-year expense favorability. Adding it all up, we expect full year consolidated operating income growth to be in the high-single to low-double digits. With continued debt reduction a priority, we expect further declines in leverage and interest expense in 2012. For the full year, we estimate total interest expense will be between $233 million and $238 million, and we are targeting year end 2012 leverage below 4.25x.

Weighing all of these factors, we expect adjusted diluted earnings per share growth of between 13% and 24% or adjusted diluted earnings of between $0.87 and $0.95 per share. We expect full year capital spending of between $250 million and $275 million.

For the first quarter, we expect relatively flat Fresh Dairy Direct and WhiteWave-Alpro operating income, to be offset by stronger Morningstar results and lower corporate costs, to yield adjusted diluted earnings of between $0.18 and $0.23 per share.

In summary, the fourth quarter was an important milestone for Dean Foods. WhiteWave-Alpro and Morningstar closed out very successful years, and Fresh Dairy Direct delivered year-over-year profit growth. Consolidated adjusted operating income and adjusted diluted earnings per share growth were strong for the business. Debt and leverage continued to decline, and we once again met our guidance commitments to our shareholders.

As we enter 2012 with momentum behind both WhiteWave-Alpro and Morningstar, and Fresh Dairy Direct continues to stabilize, we expect a solid year. We expect solid adjusted operating income and EPS growth and continued debt and leverage declines during this year while we continue to drive further improvements in the business.

With that, I'll conclude our prepared remarks and ask the operator to open the line for your questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] We'll go first to Judy with Goldman Sachs.

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

So just a few questions, Gregg. First, on the volume side, obviously, that seems to be an issue if you look at the measured channel data or, obviously, some of the risks that you've called out. So can you just give us some perspective on your flat volume guidance, how much do you think that you need to see the industry get better, how much of that could come from the retailers, basically passing through the lower milk cost to consumers? And to the extent that there is downside risk to volume, how much flex do you have in your P&L to achieve your guidance for 2012?

Gregg L. Engles

So those are all good questions. First of all, we're calling our volume flat. We're not calling the category flat. We think the category in all likelihood will continue to decline, although we expect the declines to moderate from Q4 levels. So what's driving our flat volume call for Dean is really a number of things. First of all, it's just simply the overlap in 2012 of volume that we picked up and share that we picked up through the year in 2011. So not all of that volume is in 2011. It came on throughout the year. So we'll get the benefit in the first part of the year of lapping the acquisition of that volume. Secondly, milk prices are coming down. We expect them to continue to come down at least through the first quarter. And even if retailers now hold the margin that they've built back in the category, prices will come down at retail. And we expect there to be, as there historically has been, some elasticity effect of consumers coming back and finding more value in milk, particularly as we see other food commodities staying relatively high. So we expect the milk industry to benefit by picking up a little bit of volume. And then we've got some underlying signs of economic strength and employment growth, and clearly, the consumer, particularly at the lower end, has taken the brunt of this last recession. And as they begin to go back to work and have income growth, we expect to see their purchases and expenditures in our category improve. So those are really the factors that go into our expectation of a better volume environment for Dean Foods in 2012 than in 2011 at FDD. In terms of how much flex there is, you can look at the P&L in FDD and see that there's not just a lot of flex in it because there's not just a lot of margin in it. So our call on Dean are pretty dependent upon price and volume. At FDD, at least, you don't have the kind of levers to pull that you have in a traditional CPG business, where you have marketing and trade and lots of other things that you can pull when the basics of volume and price start to work against you. So we made that call out specifically in the script that price and volume would be important to delivering 2012's guidance in FDD for specifically that reason.

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

Okay. And then just on the commodity side, so clearly, the Class I Mover has trended down in the last few months. What about some of the non-raw milk cost components? Obviously, in 2011, those were also a big hurdle for you guys. So in terms of packaging, fuel, can you talk about how those are looking for 2012?

Gregg L. Engles

They're still pretty inflationary. So we expect the diesel price to be up from the average price that we paid in 2011, and plastic resin has continued to be a highly inflationary commodity in the U.S. as U.S. manufacturers export their product out and around the world, given our low feedstock prices here in the U.S. So not a lot of relief in those areas. And frankly, we have to continue to get better at pricing for those inputs in order to sustain the FDD algorithm over time. That's an area where we lost ground in 2011, and we need to get better at pricing to cover non-milk inputs as we go forward.

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

And do you think that, that gap will get better in 2012?

Gregg L. Engles

I think they'll be less inflationary in 2012 than they were in 2011, but frankly, in our algorithm, those are still called to be a headwind as opposed to a tailwind but less so.

Operator

We'll take our next question from Amit Sharma with BMO Capital Markets.

Amit Sharma - BMO Capital Markets U.S.

Gregg, the tone of the call seems that much more positive this quarter relative to what we have seen in the last 2 quarters. Do you think the worst is behind us? Milk prices are moderating. Your plans are running at a good play. Cost savings are accelerating. How do you -- I see the guidance. How do you really -- the underlying business, do you think the worst is behind us at this point?

Gregg L. Engles

We're giving guidance now for 2012, and over the time horizon, as we can see it for 2012, we feel better about the overall conditions in the industry. So the economy's improving. Disposable income is going up for people. Commodity prices are coming down. All of those things should benefit volume and be a more benign competitive environment for the business. But I just want to make a point explicitly that this is a 2012 call. I think when you look out over the longer term, and you don't have to listen to my call, you can just turn on CNBC in the morning and listen to them, I think there are still significant structural issues globally that have to be worked through that could lead to significant commodity cost inflation over time. And as we've seen over the last 2.5 years, that is a very challenging environment for our FDD business. So feel pretty good about the outlook for 2012. Beyond that, I'm not prepared to make a long-term declaration of victory that the issues that have challenged the business are gone.

Amit Sharma - BMO Capital Markets U.S.

Okay. And on sort of modeling side of the business, Shaun, what was the run rate of SG&A savings as we exited the fourth quarter?

Shaun P. Mara

I think if we look at 2012, we're targeting about $100 million in total cost savings, which includes both supply chain as well as SG&A. I think the SG&A makeup of that will probably be a higher percentage than we've seen in the past, but we're still targeting to get cost reductions in 2012 above what we have in 2011.

Amit Sharma - BMO Capital Markets U.S.

And that's including inflation and diesel and resin that Gregg talked about?

Shaun P. Mara

Those are cost savings specifically on reductions we're having within the factory, within procurement and then within SG&A.

Gregg L. Engles

But they will be offset to some degree by inflation to the extent we don't recover it in price.

Operator

[Operator Instructions] We'll go next to Farha Aslam with Stephens Inc.

Farha Aslam - Stephens Inc., Research Division

In terms of your cost savings targets, Gregg, you've now achieved that $300 million that you've been targeting as well for SG&A, that $100 million incremental, is that incremental? And kind of going forward, how should we think about your cost savings actions at the company?

Gregg L. Engles

Well, first of all, the $300 million program is finished out. We're not announcing a new program. What Shaun did say in response to Amit's question is we expect another $100 million of savings in our plan for 2012, so there are ongoing cost-saving opportunities. But as you can see from our guidance with respect to capital spending, they're going to be more driven by tight expense SG&A management, very targeted, sort of rapid-payback types of capital expenditures and less sweeping efforts to remake our network over time. We just don't believe that the business fundamentally, with the soft volume environment, frankly merits the level of capital investment that we've made over the last few years to drive things like network optimization. So we'll have to see how that plays out over time and how the volume trends for the category evolve. We expect ongoing opportunities to take costs out of the business beyond 2012, but we'll have to see what the portfolio of those opportunities looks like as we go through 2012 and assess the environment on an ongoing basis.

Farha Aslam - Stephens Inc., Research Division

Okay. And just as a follow-up on that, given your sort of more moderate CapEx investments on these sweeping changes, in 2012 what would you expect your debt reduction target to be, and what would be the interest expense on that? In 2012?

Gregg L. Engles

I'll kick that over to Shaun. The interest expense guidance contemplates our debt paydown throughout the year that we gave you of $233 million to $238 million. Now we expect pretty significant debt paydown as we go through this year. And Shaun, you may want to...

Shaun P. Mara

It's about $230 million we're assuming for debt paydown this year.

Operator

We'll take our next question from Alexia Howard with Sanford Bernstein.

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

Can I move to Horizon on the WhiteWave side? I think it was in 2008, there was a supply constraint issue back then as well, and it caused a pretty big downturn in Horizon's profitability, if I remember. What did you learn from that experience, and how confident can you be that you're not going to end up in the same kind of situation this time around?

Gregg L. Engles

Well, actually, the situation in 2007 and 2008 was an enormous supply surplus rather than a supply shortfall. And I can tell you we absolutely learned the lesson then that excess organic milk is a lot worse than a shortage of organic milk for us because, as you'll recall, the result of the surplus is that we bought that milk at organic prices because we had commitments with our farmers to take their supply, and then we sold it at much lower conventional prices. And that was, in the short run, a very negative situation for our P&L. Here, we're short supply. We're short supply for a number of reasons. First of all, we had terrible hot weather last summer. That will reverse itself out this year. But more enduring reasons are very high prices for organic feed, which, given the price environment for organic raw milk, caused farmers to cut back on feed to their animals, which resulted in lower production. We've moved to address that issue with higher pay prices this year that we mentioned on the call. And then frankly, the exceptionally high conventional milk prices of last year induced a number of what I would call marginally profitable organic milk producers to convert back to conventional and take advantage of the margins in the conventional milk marketplace. That milk's not coming back anytime soon. So we think that through 2012, we'll rebuild supply and get back towards a more balanced situation. But frankly, in response to higher pay prices and the shortage of supply, the industry pretty much has taken price at retail. So you'll see higher retails in Horizon Organic. So it's not a perfect situation. There's a robust amount of demand that remains out there for organic milk in the consumer marketplace. We'd love as a brand and as an industry to be able to satisfy all of that demand. That's going to be a challenge this year. But we're moving the industry back towards a better supply-demand balance throughout 2012, and we feel okay about Horizon, at least at this point in time in the year.

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

Great. And just as a real quick follow-up, what do you envisage as the new run rate on corporate cost? I mean, you've talked about it coming down a little bit more at the beginning of 2012. Is there a number you can give us that we could be using?

Gregg L. Engles

Yes, Alexia, there's a lot of geography that changes from time to time in corporate cost. So I really would point you to the SG&A line as the place where you can see aggregate SG&A in the business and see what the true reductions have been in the cost base of the company. I don't know if Shaun can give you a number here or if we need to follow up offline.

Shaun P. Mara

I think if you look at SG&A for the fourth quarter of last year or this year, it was $264 million. We'll probably track slightly below that in each of the quarters through 2012. So closer to $257 million, $258 million.

Operator

We'll take our next question from Reza Vahabzadeh with Barclays Capital.

Reza Vahabzadeh - Barclays Capital Inc.

Gregg, do you see any encouraging signs that milk margins in the FDD business is near stabilization rate? I know you've seen some improvement lately, but as far as capacity and demand, is there any sign to -- makes you more comfortable around stability of milk margins going forward than the last 2 years?

Gregg L. Engles

Reza, the fundamental challenges that the industry has faced really haven't been resolved, right? So you have soft and declining volumes, and you have not seen a lot of capacity leave the industry. I think what's different this year than, say, the 2010, 2011 period is that with the raw commodity coming down, there's just less pressure on the whole system in terms of margin. So retail prices can come down. Retailer margins can expand, and that takes a little bit of pressure off of the processor side of the business. So it's, overall, a healthier marketplace given the price action of the raw commodity, but the fundamental challenges of soft volumes and excess capacity remain. That's probably the best characterization I can give you of the state of the industry.

Reza Vahabzadeh - Barclays Capital Inc.

Got it. And then would you anticipate retailers eventually, at some point in time, passing through the lower wholesale prices on to the customers?

Gregg L. Engles

I would think so. If you look at the chart that was in our slides today of the private label margin over milk, you see that that margin really is -- it's rebuild -- it's rebuilding back to that $1.60, $1.70 level. That's sort of the historically natural level for that margin. I don't guess in this environment, you'll see retailers try and push above that. That's just a guess. But that's -- historically, they have not done that. The reason it was so much above that in 2009 is frankly because the price of milk fell so precipitously in the early part of the year. It fell over $5 a hundredweight in one month. So you're not going to see that kind of declines here. So I think you're seeing the retail margins rebuild, and my guess is you won't see them push much beyond this.

Operator

We'll take our next question from Chris Growe with Stifel, Nicolaus.

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

I had a question for you on -- so a bit of a follow-up to the earlier question on the pricing at retail. So you mentioned that we're seeing that sort of recovery in the private label over the raw milk kind of spread. Do you anticipate, therefore, if we can hold at that level, that prices at retail would now, going forward, in theory, reflect any change in the raw milk price? So we've rebuilt that spread, but now we should probably see those 2 correlate then going forward as raw milk, say, goes down with -- likely go down at retail?

Gregg L. Engles

Yes, that's exactly what I would expect. That's what the historical pattern's been. Maybe it’s lagged a little bit just as prices worked their way through the system, but that's what you typically see, and I would be surprised if it were different this time.

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

Okay. And then I just was curious about the measured channel versus non-measured channel performance in the quarter or as you see it going forward. Clearly, the data has been very weak for volume if you look at IRI or Nielsen, but not as bad, of course, given your reported results or the USDA results. Is that channel shift -- can you tell us kind of where it's going and how Dean fares in that shift?

Gregg L. Engles

Well, obviously, we fare well because we're doing better in the non-measured channel -- in the aggregate data than we are at retail, though the whole industry is. So look, the milk goes really across the food and beverage industry in the U.S. So about 8% of milk goes into schools. That's a pretty stable base of demand. So while you see retails going down, you haven't seen school net volumes decline anywhere near as much as happening at retail because of the nature of that program. So that is a natural buoyancy device for the category. And then, of course, this is no surprise to anybody. You've seen the entry of a lot of nontraditional retailers into grocery, whether that be club stores entering the grocery channel or sort of the dollar limited-assortment store universe entering grocery. And those are places that are sourcing volume from the traditional grocery environment. So it's no surprise with the development of alternative channel shopping that you're seeing the grocery channel itself struggle with volume, right? That shouldn't be a surprise to anybody. I will point out that while we're pleased to be doing well in those alternative channels, the fact of the matter is we're still, as an industry and as a company, selling less milk than we were before, and with the emergence of all these alternative outlets, I'm driving to more points of distribution than I was before against less volume. So when you go through and you start parsing through the distribution line in our P&L, you'll see that over the last 2 or 3 years, it's been a persistent challenge for us. Part of that's input cost. Part of it is miles driven by our need to go to more stops to deliver the same or a smaller amount of milk. And that's something that, over time, this industry's going to have to price for better.

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

That makes sense. And then the last question I have for you is just like kind of the brand versus private label performance. Can you give us how that fared in the fourth quarter? And then given the narrowing of price gaps, I assume you expect a little better branded performance in 2012?

Gregg L. Engles

Yes, the branded environment generally outperformed, at least compared to recent quarters, in Q4 as the spread widened. We still have some brands that are out of value, and that's an issue that we've got to fight through in 2012. We have brands that are deeply in value, and they perform even relatively better than the brands that are out of value. But where we have big price spreads and high relative price points, we're still suffering branded volume declines, and our mix is moving more towards private label. That's a headwind. Again, I think I would characterize our point of view on that as it will be less of a headwind in 2012 than it was in 2011.

Operator

We'll take our next question from Ryan Oksenhendler with Bank of America.

Ryan Oksenhendler - BofA Merrill Lynch, Research Division

Actually, I had a question on FDD. It sounds like you're looking for some margin improvement this year. I was just wondering how much of that was driven by a decline in milk prices versus mix improvement versus structural initiatives that are happening at Dean in 2012.

Gregg L. Engles

The biggest driver is cost takeout. The second biggest driver is just the natural margin expansion you get as the price of the commodity comes down. And then mix, I would say, is, again, less of a headwind but not a help in 2012.

Ryan Oksenhendler - BofA Merrill Lynch, Research Division

Okay. And then in terms of -- I know some of your customers are closing some stores. I think [indiscernible] has closed some stores. I think that was some of your -- I think one of your big contracts this year. Is there an impact from that on your volumes going forward?

Gregg L. Engles

Yes, of course, it is on a market-by-market basis and a customer-by-customer basis. But I think the best way to think about it is that milk's going to get bought somewhere. And given our share, we're going to, by and large, sell the milk. It may go through a different customer, a different outlet with a different cost or margin structure, but by and large, those store closings will result in higher volume in other outlets we serve. And so it's not a good thing. On the other hand, it's not as linear as it might seem on first blush.

Operator

We'll take our next question from Jonathan Feeney with Janney Capital Markets.

Jonathan P. Feeney - Janney Montgomery Scott LLC, Research Division

I just wanted to, I guess, follow up on what -- you continue to take share, and what gives you the confidence that -- your competitors have reached a point where they're going to get a little bit more rational, and then they're not going to chase this sort of lower commodity cost environment downward. It seems, I mean -- you can look at historical numbers and feel real comfortable with that versus where your margins are, versus your average, right? But I've been doing that exercise for a while, and we've kind of blown through the bottom of what looks like was possible. So what gives you the confidence now to say, okay, we're feeling pretty good about our competitors are being a little bit more rational, so we can tell you that we're going to keep this margin going through 2012 [indiscernible]?

Gregg L. Engles

Again, I’d go back to the answer I gave to a question earlier, which is what really gives me confidence today is that we have a market of declining milk prices that just puts less pressure on the whole system, right? So everybody can feel better about the whirlwind. Retail milk prices are going down, the retailer’s restoring some of the margin that they gave up in the recession. Everybody is getting something here. When the price is going down, there's less pressure on the system. But fundamentally, volume’s got to stop going down in the category to lessen the natural empathies of people to chase volume, right? And so I'm not declaring victory here. I just want to be perfectly clear. 2012 is going to be better unless the commodity outlook that we've outlined is significantly wrong. But fundamentally, there's still way too much capacity in this industry, and when the pressure gets turned back up on the industry, as it inevitably will, that's going to manifest itself in declining margins unless that capacity gets rationalized out of the system.

Jonathan P. Feeney - Janney Montgomery Scott LLC, Research Division

That makes perfect sense. And if I just could follow up in that vein, the move from traditional to nontraditional retailers you cited, I mean, to me, that's been a huge part of Dean's success over the past 10 or 15 years, given 2 of the 3 largest traditional retail chains are captives -- own captive dairy suppliers. Do you feel like Dean’s getting a little boost from that -- maybe that accelerant? [ph] It’s clearly, that acceleration we're seeing to nontraditional retailers, where I think you guys compete a little bit more favorably.

Gregg L. Engles

You know on balance, it may be a slight positive. But we've got a portfolio of retailers, including a bunch of traditional grocers. And we’ve got some that are winning and some that are losing, like you would in any portfolio of customers. So it's hard for me to really make a broad statement. What I do agree with, your basic proposition is -- I think we over indexed in customers in nontraditional channels. What I'm not so confident of without doing a bunch of research on it is how the business in the corpus of grocery, how share has shaken out there on a relative basis. That might offset the benefit I've gotten in non-measured channels.

Operator

And we'll take our next question from Robert Moskow with Crédit Suisse.

Robert Moskow - Crédit Suisse AG, Research Division

I had a question about how you're showing Morningstar as a separate entity now. Are you considering the strategic role of Morningstar any differently in the portfolio? Would you consider an asset sale? And then secondly, just in terms of your capital structure, with the company doing better, the stock doing better, would you consider the possibility of an equity offering to kind of supercharge your capital structure, de-leveraging it further?

Gregg L. Engles

As to the role of Morningstar, this is a business that has been hidden within a broader segment, really, the entire time that we've owned it. But it's a significant business. It's $1.3 billion in sales. And it is in categories and product lines that we think, long term, have a bright future. So just to illuminate Morningstar a little bit more, all of the products that Morningstar makes and sells are extended shelf life products, and therefore, virtually all of them go through the warehouse channel. They're warehouse-distributed. So it's quite different from FDD, and we see, over time, a continuing migration of products away from the more expensive DSD distribution system and into the warehouse, where the economics support them. And Morningstar is benefiting from that trend, right, the migration of products from shorter shelf life, DSD-distributed to longer shelf life warehouse-distributed. And they're also in a number of categories where, frankly, you can invest to innovate, and we're seeing -- and we'll be talking about in the future, I'm sure, more extensively significant innovation in the Morningstar business. So when you strip away all the puts and takes of Morningstar, a business that had operating income growth of 15% in 2010, 9% in 2011, we're saying mid- towards single digit operating income growth this year, it's a business that has great prospects and we're very excited about. So we didn't separate out the segments to signal that we were going to sell the business. We have no intention of it. We like the business. It's a great fit in our portfolio. We separated out the segments because that was the right answer from an accounting and reporting perspective, given the way that we view the business internally. But it's a business that we're really excited about and that we think, over time, that the investment community will come to appreciate the value of the business. It's private label and foodservice. It's, my guess, would be probably the largest refrigerated private label and foodservice company in this space. So it's benefiting from the trends of the migration towards private labels in the retail space and towards the QSR space, in particular. So it's a very well-positioned business. As to the issue of whether or not we're going to do an equity offering to reduce the capital structure, look, this business is de-levering pretty nicely right now. I think that would be precisely the wrong thing to do from the perspective of shareholder value, to go out today and raise equity. So we like the plot for the coming quarters in terms of what's going to happen with our balance sheet. And we're going to continue down the path towards de-leveraging in a natural way rather than going out and tapping the equity markets to de-lever our balance sheet in one fell swoop.

Operator

We'll take our final question from Carla Casella with JPMorgan.

Carla Casella - JP Morgan Chase & Co, Research Division

You talked about the fluid milk a lot, and I'm just wondering, you've been able to gain some volumes and offset the overall category decline. Are there further opportunities there, or would you start to run up against, I guess, antitrust if you really started to add more volumes there?

Gregg L. Engles

No, I think we can take as much volume in the marketplace as we want to take, right? We're just competing with the other players in the marketplace. What we can't do, I don't think, is make any significant acquisitions in this space, but I don't think that's a new answer for anybody. So we're taking share because of the value proposition that we offer to our customers, and we're going to keep driving against that. And we think we're the natural winner in this space, right? We're the only company with real national network. We've got the lowest cost structure in the industry in terms of conversion and distribution. Our size and scale give us natural advantages, and I think you've seen that, over the years, play out in steady share gains within the category, and we hope to continue that track record of success. The other thing that we hope happens, and we've called this out a couple of times, is we hope and believe that the category is going to get better on a relative basis in 2012 versus 2011. So at a minimum, we expect the rate of decline of the category to decline as the price of milk goes down. So we feel, again, as we said in the prepared remarks, cautiously optimistic about the outlook for FDD. But with all of the caveats that we've given in the prepared remarks and in response to people's questions, there's still the underlying challenges of declining volume in the category.

Carla Casella - JP Morgan Chase & Co, Research Division

So the 55 million gallons that you added this year, is that a good target to say how much you might be able to add annually, or is that a high bar?

Gregg L. Engles

I think that -- I don't think we'll make a specific volume call in terms of business that we're going to add. What we have said is we're calling flat volumes in FDD against the category that we expect to decline, albeit decline at a slower rate than it did in 2011. So that implies we expect to continue to take share.

Carla Casella - JP Morgan Chase & Co, Research Division

Okay, great. And then just one clarification question. The new Iced Coffee International Delight beverage, where does that go in the store? And if it's a new category, where does it fit in?

Gregg L. Engles

It's a refrigerated product. It will go in different places in different stores but, by and large, either in the creamer category or in the specialty milks category. And it's a fantastic product. I would encourage you to go try it. It is a product to offer you in your home the same iced coffee experience that you would get at a coffee house if you were to go out and drive through. It's a absolutely fantastic product, and it's off to a pretty good start. So we're excited about it.

Carla Casella - JP Morgan Chase & Co, Research Division

And is it fully rolled out now, or what was the time frame of the rollout? When did it begin and when did it get fully in place -- or when will it be fully in place?

Gregg L. Engles

We started shipping in late Q4, so we're really just building ACV. We won't turn on any advertising or marketing until late Q1 or early Q2.

Operator

That concludes today's question-and-answer session. I'd like to turn the conference back over to Mr. Engles for any additional or closing remarks.

Gregg L. Engles

Well, thank you all for joining us on the call this morning. We appreciate your continued interest in Dean Foods, and we look forward to speaking to you again on our Q1 earnings call in early May. Thank you all very much.

Operator

This concludes today's conference. We appreciate your participation.

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