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Dean Foods (NYSE:DF)

Q2 2012 Earnings Call

August 08, 2012 9:30 am ET

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

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

Eric R. Katzman - Deutsche Bank AG, Research Division

Amit Sharma - BMO Capital Markets U.S.

Ryan Oksenhendler - BofA Merrill Lynch, Research Division

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

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

Christine McCracken - Cleveland Research Company

Akshay S. Jagdale - KeyBanc Capital Markets Inc., Research Division

Robert Moskow - Crédit Suisse AG, Research Division

David Palmer - UBS Investment Bank, Research Division

Operator

Good morning, and welcome to the Dean Foods Company Second Quarter 2012 Earnings Conference Call. Please note that today's call is being recorded and is also being broadcast live over the Internet on Dean's Food's corporate website. This broadcast is the property of Dean Foods, and any redistribution, retransmission or rebroadcast of this call in any from without the express written consent of the company is strictly prohibited.

At this time, I would like to turn the call over for opening remarks to Vice President of Investor Relations, Mr. Barry Sievert. Please go ahead, sir.

Barry Sievert

Thank you, Jennifer, and good morning, everyone. Thanks for joining us for our second quarter earnings conference call. Yesterday, we issued an earnings press release as well as a press release announcing the proposed initial public offering of common stock of the WhiteWave Foods Company, whose business will be comprised of the WhiteWave-Alpro segment. These press releases are available on our website at deanfoods.com. The press releases, which are filed as exhibits to Form 8-Ks, are -- as well as the S-1 filing, are also 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 asset write-downs, expenses related to litigation matters, 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 press 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 also would 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, the proposed IPO and various other aspects of our business. These statements involve risks and uncertainties that may cause actual results to differ materially from the statements made on today's conference call. Information concerning those risks is contained in the company's periodic reports on forms 10-K and 10-Q and in our earnings 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 some comments related to the filing of the S-1 for WhiteWave Foods Company, followed by a review of this quarter's results and the current business environment. Then Shaun will offer some additional perspective on our financial results before turning the call back to Gregg for comments on the forward outlook and other closing remarks. 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. We're glad you could join us on this important day for Dean Foods.

Yesterday afternoon, we announced strong Q2 results driven by continued growth across each of our 3 operating segments. This continued solid performance has provided us the enhanced financial flexibility necessary to initiate the first step towards separating WhiteWave-Alpro from Dean Foods.

We also filed a registration statement to conduct an initial public offering of up to 20% of the WhiteWave Foods Company, which is comprised of our WhiteWave-Alpro segment. For all of the reasons we've discussed in the past, we continue to believe that this is the right move for our shareholders.

WhiteWave-Alpro and the rest of Dean Foods have distinct product portfolios and business dynamics that require different management styles, operating philosophies, capital structures and levels of investment. As such, we believe the separation of WhiteWave-Alpro from Dean Foods is the next logical step in our journey to create value for our shareholders.

As you'll see in the filing, effective with the IPO, I'll become Chairman and CEO of The WhiteWave Foods Company while remaining Chairman of Dean Foods. Blaine McPeak at WhiteWave Foods and Bernard Deryckere at Alpro will continue to report to me. Kelly Haecker, WhiteWave's CFO, will assume the CFO role at the WhiteWave Foods Company, and Roger Theodoredis will be promoted from General Counsel of WhiteWave to the General Counsel role of the new company.

At the time of the IPO, Gregg Tanner, who is currently the President of Fresh Dairy Direct and our Chief Supply Chain Officer, will be promoted to CEO of Dean Foods. Gregg Tanner has over 30 years of food industry experience and his leadership of Fresh Dairy Direct and our supply chain organization over the past 5 years has been instrumental in the strong return to growth that we have experienced in our largest business. Given his extensive industry experience and proven record at Fresh Dairy Direct, the board and I are fully confident that Gregg is well qualified to assume the CEO role and continue to build on the long-term success of Dean Foods.

We built a strong leadership team across Dean Foods, and we're pleased that this transaction will provide new avenues for career growth for many of our employees. As we move forward with this process, I'm confident it will be a smooth process and transition.

Our strong operating performance and the resulting improvement in our balance sheet has provided the enhancement and the flexibility necessary to pursue a separation of the business, with each of the separate company balance sheets well positioned to support future growth. As of the end of the second quarter, total Dean Foods leverage, as -- defined as net debt-to-EBITDA, is just under 4x.

This slide provides a high level view of the transaction's expected impact on Dean Foods. At the time of the offering, the IPO proceeds plus $800 million to $925 million that we expect to raise in debt at WhiteWave will funnel back up to Dean Foods to reduce debt. The net result is that following this IPO transaction, we expect Dean's leverage ratio to decline to approximately 3.5x, as defined by our credit agreements at year end. At that time, we expect the WhiteWave Foods company's leverage to be between 3 and 3.5x. In the event that the IPO is not completed by year end, we expect Dean Foods' leverage ratio to be approximately 3.75x.

Beyond that brief overview, SEC regulations limit what I can say with respect to this important transaction. In general, I would refer you to the S-1 filing for details regarding the proposed offering.

Now I'd like to turn to a discussion of our second quarter results. We continue to build on our broad-based momentum in the second quarter. We delivered strong growth across the business and a doubling of the year-ago quarter's adjusted earnings per share.

Highlights include 11% net sales and 31% operating income growth at WhiteWave-Alpro, continuing our strong momentum across that business; a 41% increase in operating income at Fresh Dairy Direct driven by continued fluid milk volume outperformance against the soft category and a focus on pricing discipline and cost reduction; 10% core volume growth and 19% operating income growth at Morningstar driven by strong customer performance, new products and production-driven cost reductions. With this strong performance across the business units and our continued focus on cost containment, we delivered consolidated adjusted operating income growth of 37% and 100% adjusted earnings per share growth.

Cash flow was particularly robust during the quarter. Net debt declined $196 million from Q1. And as I mentioned earlier, our debt-to-EBITDA ratio ended the quarter below 4 at 3.96x, representing our lowest leverage position since the second quarter of 2009. With that overview, let's look at each of the segments in a bit more detail starting with WhiteWave-Alpro.

WhiteWave-Alpro's on-trend categories, leading brands and highly effective innovation and marketing continued to deliver strong net sales growth in the quarter. In total, second quarter WhiteWave-Alpro net sales grew 11% over the prior year to $573 million, primarily driven by volume growth.

Strong momentum continued in Plant-based Beverages in Q2 with Silk PureAlmond continuing to be the strongest performer in the platform. PureAlmond is bringing new users into the plant-based beverage category and was recently honored with a Nielsen Breakthrough Innovation Award, which recognized the product as one of the most successful and enduring food and beverage product innovations of 2010. In just 2 years since its launch, PureAlmond has reached more than half the size of our Silk soy business, and its growth in the second quarter was highly incremental. Strong growth in Silk PureAlmond and PureCoconut products drove plant-based food and beverage sales growth of over 20% in Q2.

With a strong core coffee creamer set augmented by the introduction of International Delight Iced Coffee this year, our Coffee Creamers and Beverages platform also continued to deliver strong growth. Iced coffee continues to perform well, and net sales for the total platform increased nearly 20% in the second quarter. We expect a solid momentum in our Coffee Creamers and Beverages platform to continue through the back half of the year.

Turning to our premium dairy platform, you'll recall that we increased prices on Horizon Organic this -- earlier this year. This increase passed through a portion of the increase in the price that we pay the farmers for organic milk, which was initiated to offset increasing farmer cost and encourage additional supply growth. As expected, this price increase and tighter raw milk supplies have resulted in moderated net sales growth for premium dairy this year, increasing mid-single digits in Q2 on slightly lower volumes.

On a euro basis, our Alpro business net sales increased high single digits in the quarter, a significant achievement given the state of the economies in many of its European markets. Fresh drinks and yogurts continue to post strong growth, and Northern Europe continues to generally outperform the South. With the impact of the stronger dollar, Alpro net sales declined mid-single digits in the quarter after currency conversion.

Net Q2 results for the WhiteWave-Alpro segment are as follows: volumes were up strongly, net sales increased 11% to $573 million and operating income grew 31% to $58 million. This performance includes significantly increased marketing investment to support our new product launches and incremental start-up cost related to our new Dallas facility. The new plant is ramping up as well due to the strong volume growth across the WhiteWave business. We are very pleased with the positive momentum at WhiteWave-Alpro, and we will continue to invest in innovation, marketing and manufacturing infrastructure to support its robust growth.

Fresh Dairy Direct also delivered another quarter of strong growth in Q2. Our performance was driven by continued focus on 3 fundamental areas: volume performance, price realization and cost efficiency. On the volume side, our focus on new business resulted in fluid milk volumes that again outperformed the industry. Fresh Dairy Direct fluid milk volumes were flat when adjusted for the divestiture of our Waukesha facility last year, or down 1.2% on an unadjusted basis. This compares to the balance of the fluid milk industry that experienced an estimated 2.5% decline in volumes.

In Q2, the Class I raw milk price continued a decline that began in the fourth quarter of 2011, averaging $15.58 per hundredweight. This represents a 10% sequential decline and a 21% decline from year-ago levels.

The summer heat and drought conditions across the Midwest this year have resulted in rising prices in the futures market for feed and dairy commodities, with the December Class III futures price climbing above $19 per hundredweight recently. While a rise of this nature is not out of the question in our view and that of several other dairy -- our view and that of several other dairy economists is not quite so pessimistic.

While we are keeping an eye on rising corn and feed prices, we think the upward impact on dairy prices could be less extreme than some analysts predict for several reasons. First, domestic milk production has been very strong through the first half of 2012 with the current USDA full year forecast calling for 2.8% year-over-year growth. Milk supply growth has been supported by cheap and plentiful alfalfa and hay through the first half of this year, and the strong milk supply growth is matched against tepid domestic demand, resulting in relatively high inventory levels for storable dairy commodities: cheese, nonfat dry milk and butter. Additionally, a strengthening dollar reduces U.S. price competitiveness on the global market, particularly versus the euro, likely impacting export activity in the back half of the year.

The graph on this page shows the approximate high and low Class I forecasts based on data from 6 prominent dairy economists. As you can see, views regarding the slope of the forward trend over the balance of the year are significantly varied. Balancing the puts and takes that exist in the market today in relation to the overall range of expectations, our view is relatively center cut between the high and low forecasts.

As expected, the August Class I price increased just over $1 from July to $16.55 per hundredweight. We expect another step higher in September, resulting in a Q3 average price in the mid-$16s, up less than $1 from Q2, and still significantly below last year's Q3 average of $21.41 per hundredweight. Following this increase, we expect the Class I Mover to rise modestly in Q4, resulting in a full year average price in the high $16s. If, however, prices trend closer to the higher end of the range of forecasts, which is certainly possible, we would expect the additional headwind to impact FDD operating income by between $5 million and $10 million in Q4. This is roughly equivalent to $0.02 to $0.04 per share.

Turning back to Q2. The retail environment continues to be much more favorable compared to the previous 2 years when retailers were deeply discounting private-label milk. The margin over milk, which measures the spread between average retail price for private label and a Class I raw milk price, remained at levels consistent with historical averages, creating a healthier environment for the entire dairy value chain and helping bring our regional brands back into better value versus private label. Regional brand market shares stabilized over the last few quarters, and our brand volumes outperformed private label in the second quarter.

Also helping support our overall volume performance at Fresh Dairy Direct has been the strong performance of our reformulated and re-branded chocolate milk business sold under the TruMoo brand. First launched in schools and then expanded across our retail business, TruMoo offers superior-tasting low-fat chocolate milk with no high-fructose corn syrup, lower total sugar and all the great nutrition of milk. TruMoo's success in schools and at retail make it Fresh Dairy Direct's largest single national brand with over $630 million in annual sales. Volume sales of TruMoo at retail increased 12% in the second quarter and were up 6% year-to-date against a category decline of approximately 4%.

With a relatively favorable commodity environment and a focus on price realization and cost efficiency, Q2 Fresh Dairy Direct gross profit reached $532 million. This represents a 4% improvement in gross profit per gallon from year-ago levels. Additionally, our continued focus on costs helped drive improved operating expense performance. This is the reason expenses declined $8 million from a year ago, while SG&A costs declined $20 million. It is important to note that over the last 2 years, we've taken over $150 million in structural fixed costs out of the FDD business on a run rate basis. This is clearly evident in our recent performance.

Fluid milk volume outperformance, a focus on price realization and disciplined cost management resulted in $125 million of Q2 Fresh Dairy Direct operating income. This represents a 41% increase over last year and a 24% sequential improvement from the first quarter. Gregg Tanner and his team continue to drive significant improvements in the FDD business, and we expect this momentum to carry over into the back half of the year.

Our Morningstar team, led by Kevin Yost, also posted strong results with 10% volume growth driven by strength in both food service and retail. Morningstar is an innovation and customer relationship-driven business with new products helping to propel its strong growth. Morningstar's ice cream mix and iced coffee products posted strong growth in the quarter, bolstered by increased distribution at existing customers, new customer wins and warmer temperatures that helped spur consumption.

In addition to the strong performance of our ice cream mix and iced coffee products, another great example of the success that the Morningstar team has driven is the turnaround in their away from home sour cream business. With product and packaging innovation and a new pricing architecture, our Morningstar team has delivered strong and accelerating double-digit growth in sour cream in the food service channel during the first half.

In recognition of Morningstar's customer first philosophy, we were recently chosen out of over 2,000 suppliers as Sysco's top Gold Supplier across all categories. Our Wholesome Farms whipping cream was also recognized with the Best of Sysco Brand Award.

Robust growth across the Morningstar business resulted in mid-teens increase in volume in the food service channel and an increase of high single digits at retail. Solid volume growth, offset by the pass-through of more favorable dairy commodities, resulted in Morningstar net sales of $345 million, on par with the year-ago quarter. Segment gross profits increased 13% to $62 million.

The powerful combination of strong volume growth and our increased or continued focus on efficiency delivered Morningstar operating income of $32 million, a 19% increase over Q2 last year. Like our FDD and WhiteWave-Alpro businesses, Morningstar carries significant momentum into the second half of the year, and we expect continued strong growth.

Before I turn the call over to Shaun, I'd like to reiterate how pleased we are to report another quarter of strong performance. We have an excellent foundation in place. With expectations for continued execution across all platforms, I'm confident on our ability to deliver for the balance of the year. With that, here's Shaun to provide some additional commentary on the financials. Shaun?

Shaun P. Mara

Thanks, Gregg. Good morning, everyone. During the second quarter, we continued to focus on 3 main priorities: volume performance, price realization and cost reduction. We believe this focused approach helped drive the strong overall performance. The results of this approach are clearly manifested in our gross profit performance for the quarter, solid volume growth at WhiteWave-Alpro and Morningstar, coupled with a continued focus on cost and price realization across the business, resulted in a consolidated gross profit of $805 million. This was 6%, or $46 million, above the year-ago quarter.

Below the gross profit line, distribution efficiencies were offset by increased expense related to higher sales volumes to result in a 1% increase in distribution expense for the quarter. Selling and marketing costs also increased 1% as increased selling expense related to higher sales volumes and higher spending related to new product launches were partially offset by efficiencies at FDD. Within this, total advertising expense increased 17%, or $8 million, over the year-ago quarter. Adjusted G&A cost declined 3% driven by our ongoing cost reduction efforts. In fact, SG&A, excluding advertising and incentive compensation, declined $30 million.

In total, increased gross profit across all segments and our sharp focus on controlling expenses resulted in a 37% growth in Q2 consolidated operating income. This marks the fourth consecutive quarter of year-over-year adjusted operating profit growth for Dean Foods and our highest quarterly results since Q4 of 2009. With effectively flat consolidated operating expenses, our growth was entirely the result of increased gross profits.

Below the operating line, a particularly strong quarter of debt reduction and lower effective interest rates led to an $11 million decline in interest expense from the year-ago period. As a result, we now expect full year interest expense to be in the range of $220 million to $223 million.

Adjusted net income of $66 million resulted in second quarter adjusted diluted earnings per share of $0.36, a 100% increase from a year ago.

Turning now to cash flow and the balance sheet. We had a particularly strong quarter of cash flow and debt reduction. Total net debt decreased by $196 million from Q1 to $3.5 billion. Cash flow from operations totaled $235 million in Q2. Capital spending totaled $51 million, resulting in free cash flow of $184 million.

Through the first 6 months of the year, cash flow from operations totaled $239 million; capital spending, $96 million; and free cash flow was $143 million. Nearly $200 million of net debt reduction, coupled with strong EBITDA growth, drove our leverage ratio of net funded debt-to-EBITDA, as defined by our credit agreements, down to 3.96x at quarter end. This is more than a 1.5 turn below our 5.5x covenant and a full turn below where the ratio stood a year ago.

Having already met our previously stated goal to reduce leverage to 4x by year end, we are updating our expectations. Including the expected de-leveraging from the IPO, we now expect total leverage to be nearly 3.5x by year end. In the event that the IPO is not completed by year end, we expect Dean Foods' Q4 leverage ratio to be approximately 3.75x. With that, I will turn the call back to Gregg for some commentary on our forward outlook before opening the call for your questions.

Gregg L. Engles

Thank you, Shaun. Looking ahead at Q3 and the balance of the year, we expect continued strong performance across the business. We expect first half momentum to continue at WhiteWave-Alpro with strong, volume-driven net sales growth and operating leverage. Unfortunately, due to the quiet period imposed around the IPO, we cannot provide specific WhiteWave-Alpro guidance at this time.

At Fresh Dairy Direct, we will continue to focus on the fundamentals of the business: volume performance, price realization and cost efficiency. We expect to continue to post solid year-over-year growth despite expectations for a rising dairy commodity environment. We expect mid to high teens full year operating income growth at FDD.

At Morningstar, solid customer growth, new product innovations and a focused approach are expected to drive continued success for the segment over the balance of the year, resulting in mid-teens full year operating income growth.

In total, strong operating segment performance and a continued focus on efficiency and leverage reduction should drive continued strong operating income and EPS growth. For the third quarter, we expect EPS to be between $0.25 and $0.30.

Typically, about this time of year, we will begin to shrink our annual guidance range. However, with the incremental uncertainty in the commodity market, we're maintaining a $0.10 range for the time being. Given our strong performance in the first half and expectations for continued momentum over the balance of the year, we're increasing our full year guidance to a range of $1.18 to $1.28 per share under our current corporate structure.

In summary, we reported strong second quarter performance driven by growth across all of our operating segments. We're pleased with the first half of 2012 and look forward to building on these results over the balance of the year. As I noted in my introduction, our strong performance has driven solid leverage reduction and provided the enhanced financial flexibility necessary to pursue the proposed IPO for WhiteWave Foods Company. We have a deep management bench on both sides of the business, and we believe this transaction will create new opportunities for growth. We look forward to moving ahead with this plan, and, of course, we'll keep you informed as the process advances.

With that said, given the legal limitations regarding our ability to comment on yesterday's S-1 filing for the WhiteWave Foods Company, we will limit our responses during the Q&A portion of today's call to second quarter results. Thank you again for joining us on this important day for Dean Foods. I'll now conclude our prepared remarks and ask Jennifer to open the line for your questions. Jennifer?

Question-and-Answer Session

Operator

[Operator Instructions] And we'll take our first question from Alexia Howard with Sanford & Bernstein.

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

I guess if we're focusing on the results on the quarter, could I ask about the Horizon business? It looks as though supplies of organic milk really did start to come down quite significantly in the last month or 2. Can you say anything about what's enabling you to see reasonable growth there and when those supplies might start to get better going forward?

Gregg L. Engles

Yes, Alexia, really the supply constraints in the organic milk business started building in the back half of last year as prices for organic production feed and other inputs began to rise at the farm level, and we and the industry, over the course of the last 2 years, have given several increases in pay prices to our farmer partners and providers. I think that the benefit of those pay price increases for organic milk production will start to manifest themselves somewhat in the back half of the year. So you really have 2 effects taking place in the organic milk market: you have some limitation on supply; and then, frankly, you have the tamping down of demand that comes with the multiple price increases that the industry has taken in order to offset the effect of rising raw milk cost. So we expect as we begin to lap those price increases for volume to start to build back into the organic milk category, but I think it'll be the back half of the year before that really takes hold.

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

Okay, great. And then as a follow-up, can I ask about your volume outlook for FDD? Your volumes have been significantly better than the industry over the last few quarters. Are you feeling -- are you managing to win contracts versus the other players? Or is there something else going on that's allowing you to see better volume growth than the industry overall?

Gregg L. Engles

Well, I think that our inherently somewhat advantaged platform of having really the only national platform continues to play to our advantage with large national customers, who I think ultimately find the advantage in our ability to supply them wherever they are. And as you know from what's happening in the overall retail segment, the larger national retailers are slowly and inexorably taking share from the smaller regional players in the marketplace. So I think we, as the only national platform, continue to benefit from that trend, which is just share shift within our customer base. We also continue to outperform, I think, in channels that are growing more rapidly, including the small-format channel segment. And then we are competitive in bid situations on the margin. So I think all of those things are driving our continued excellent performance with respect to comparative industry volumes.

Operator

We'll take our next question from Eric Katzman with Deutsche Bank.

Eric R. Katzman - Deutsche Bank AG, Research Division

Okay, maybe first, a detailed question. Now hopefully, you can answer this, but I'm not exactly -- it's not exactly clear to me, with regard to the WhiteWave partial spin, how the debt paydown over the next 6 or let's call it 5, 6 months is occurring. Can you walk through the -- so you're going to raise a couple of hundred million, but then it looked like you were also going to put a fair amount of debt on to WhiteWave, yet there's also some -- there's free cash flow that's going to be used to pay down debt. So is it possible to kind of walk through a little bit in more detail how you get to the 3.5 to 3.75x EBITDA?

Gregg L. Engles

Yes, so let me try and break it down into pieces for you. So we're at 4 today, and we expect -- let's say we expect the timing of this IPO to be at year end, just to make the math easy. All of the free cash flow from the combined businesses, WhiteWave, Morningstar and FDD, will go to repay our existing credit balances at Dean Foods up until the moment of the IPO. That will de-lever us from 4x to 3.75x. All right? We intend to put between 3 and 3.5x EBITDA of leverage on WhiteWave and then raise IPO proceeds on top of that. All of that cash will be upstream to Dean Foods to repay its outstanding credit balances, which then deleverages you from the 3.75 to about 3.5x.

Eric R. Katzman - Deutsche Bank AG, Research Division

Okay. All right. Okay, we can work that out. And then I guess a follow-up question then again. I don't know if you'll be able to answer this, but one of the things about WhiteWave -- and this is more of a longer-term question, but there's a high correlation between your market share and your margin and profitability ratios, whether it's Quaker Oats oatmeal or Wrigley gum or what have you. And so why is it that with such high market shares across the bulk of the brands within WhiteWave, why is the margin there at, let's say, an average of 10% versus, again, similar brands with growth and shares where margins have historically been closer to 20%? Can you answer that one?

Gregg L. Engles

Well, my lawyer's sitting across the table from me, and she is going to frown at me if I get out of bounds here. So let me just make this a historical commentary. And we've said this many, many, many times. When you take the WhiteWave business and you look at its brands separately as opposed to in the aggregate, what you will find is that the International Delight business and the Silk business have best-in-class operating profit margins, and the Horizon Organic business has a significantly lower margin structure. And so when you average those 3 together, you get the margin structure that you see. And as you've seen our margin structure progress, you'll see that to some extent, it's driven by the mix and the relative growth rates of our business. So over the last 2 or 3 quarters, you've seen our Plant-based Beverages business and our coffee creamer business grow substantially faster than Horizon Organic, and you've seen our operating income margin structure move up by over 100 basis points. So that's what drives it.

Operator

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

Amit Sharma - BMO Capital Markets U.S.

Gregg, we just wanted to focus on the outperformance in the FDD business during the quarter. Shaun, you mentioned that -- about $28 million of SG&A and distribution saving during the quarter. Do you have a similar number for the first quarter?

Shaun P. Mara

We're about $60 million in SG&A decline, first half versus first half, if you back out incentive compensation and advertising.

Gregg L. Engles

Is that just the FDD, Shaun, or is that the whole...

Shaun P. Mara

It's about $24 million for FDD in Q2. So it's probably $50 million for FDD in the first half of the year.

Amit Sharma - BMO Capital Markets U.S.

So similar sort of improvement in first and second quarter from the cost-cutting perspective? Is that what I'm getting?

Shaun P. Mara

Yes, that's correct.

Gregg L. Engles

Year-over-year. I'd say slightly higher in Q2 than in Q1.

Amit Sharma - BMO Capital Markets U.S.

Right. Okay, that's good. So then, the significant outperformance, is that just a function of declining milk prices then? You did 125 versus 100 in the first quarter.

Gregg L. Engles

Well, certainly, declining milk prices helped. There's no question about that. I wouldn't attribute it all to declining milk prices because we have an ongoing effort to deliver in excess of $100 million of savings this year, and some of that's flown to the bottom line.

Shaun P. Mara

Yes. I would say, Amit, if you talk about the numbers I just referred to, those were more SG&A savings. On top of that, we try to get efficiencies for distribution as well as in our plant. So there's more savings there that we are targeting than we actually delivered in the first half of the year. So I think it's a combination of the commodities, the cost-cutting efforts as well as continued price realization.

Amit Sharma - BMO Capital Markets U.S.

What I'm really trying to kind of get to, Shaun, is if the milk environment [indiscernible] as you said it's certainly a possibility, what -- how much of that will be cushioned by these cost savings and SG&A savings going forward? Will we get to the second half perhaps here? Or will it be lower than that in FDD?

Shaun P. Mara

I think we've put in ourselves in a position, as Gregg said, where we've actually made structural changes to our costs that allow us to absorb the prices a little better than we have in the past. I think we'll have some impacts, obviously, with milk prices going up to ability to pass on all those things from our pricing protocols. But I think in general, we're in a better position today than we were a year ago or 2 years ago.

Amit Sharma - BMO Capital Markets U.S.

Got it. And then on the spin, Gregg, are you able to comment on the timing of the transaction? I mean, certainly, this makes a lot of sense and something that you have talked about in the past. Why do it now versus 6 month ago or 6 months later?

Gregg L. Engles

Well, first of all, what we have long said was the impediment to affecting this transaction was the balance sheet. And so fundamentally, our decision to proceed now, I think, reflects our judgment that the balance sheet is in a position where we can affect this deal and do so in a way that leaves each of the separate companies with balance sheets that are appropriately suited for the conditions they'll experience and their need to be able to finance their growth going forward. So we've, as Shaun mentioned, dramatically reduced our leverage over the last year. We're a full turn below where we were a year ago and, frankly, well ahead of the pace that we had set for ourselves in 2012. So when we began to see this earlier in the year, obviously what you read about yesterday didn't happen over the last 3 weeks. There has been substantial work for a substantial period of time in order to prepare for this. And so as we begin to see the trajectory of the business for 2012, we began to move forward with our effort to culminate it in the filing of the S-1 yesterday. So really, the key drivers are the de-leveraging of the business, but then the very, very strong performance through the first half of WhiteWave-Alpro, I think highlighting the opportunities that, that business has, which, I think, are elucidated in the S-1, to grow going forward, and the need for a separate capital structure and a separate currency in order to fully to take advantage of those opportunities.

Operator

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

Ryan Oksenhendler - BofA Merrill Lynch, Research Division

Gregg, can you talk about -- were you surprised in the quarter? I guess the -- your volumes are actually pretty good compared to the industry. But just given the decline in milk prices, what the industry volumes did, do you think that it would be better than down 2.5%?

Gregg L. Engles

It's bouncing around between down 2.5% to down 0.5%. It's just not correlated to price. I think it's correlated to weather and the season and to the general economic outlook and consumer confidence. And so you have cross currents in the marketplace this year. So it has been really hot. That is not, on balance, good for milk consumption at the margin in terms of just how people eat. So I think that had a mildly depressive impact on volumes. I think you've got weak consumer confidence right now, which is negative for volumes. And I think you've got slightly better retail prices, which is somewhat helping volumes. So I'm not really surprised. I think we see the trend right now down kind of...

Shaun P. Mara

1.5

Gregg L. Engles

1 to 2 on average.

Shaun P. Mara

[indiscernible] was down 2% for the quarter. That's on top of a 1.7% decrease in Q1. So it's pretty consistent with what we saw in the first quarter as well.

Gregg L. Engles

Really what we've seen for the last 5 quarters.

Shaun P. Mara

Yes, exactly, right.

Ryan Oksenhendler - BofA Merrill Lynch, Research Division

Okay. And what -- and if you expect milk prices to rise in the back half of the year, do you expect volumes to continue to decline? And then do you think you may start to see some competitive pressure from some of your smaller peers?

Gregg L. Engles

It's always hard to predict the level of competitive intensity in a rising commodity environment. I would say this about the processing industry, generally. I think the industry has been through 2 or 2.5 years of quite difficult economic conditions, and I think it has pretty much, historically low margins at this point of time. So I think that will impact how -- the industry reacts in this rising environment. And while you can also never predict what your customers are going to do in terms of the promotional environment, I think that on balance, their experience in this last highly competitive promotional period was not particularly good. So -- and that's pretty recent. So we'll just see. Again, I think it's fair hard to predict. Rising prices do impact volume negatively. So if prices spike significantly, we'll see volumes slip a little bit.

Ryan Oksenhendler - BofA Merrill Lynch, Research Division

Got it. And then can you just talk about -- I mean, you've had some really strong growth in the top line for WhiteWave the last couple of years. Can you talk about how much of that is pricing versus volumes?

Gregg L. Engles

In 2012, so far, it's almost all volume. There is, with the exception of Horizon, very, very little pricing in the algorithm. There was somewhat more pricing in 2011 because we were in a period of pretty significant commodity cost inflation. In 2011, I think I'll refer you really to the MD&A section of the S-1, which I think covers this in some detail, but my recollection is about half price, half volume.

Shaun P. Mara

About right.

Ryan Oksenhendler - BofA Merrill Lynch, Research Division

Got it. So overall, it's been relatively pretty balanced. And then can you just talk about in term -- in Silk? It seems like soy is starting to stabilize a little bit, and you're still seeing some pretty robust in almond. Can you -- what can you attribute that stabilization to in soy? And do you think that can continue?

Gregg L. Engles

Yes, the soy business is a big business. And with the introduction of almond, what we ultimately did was give the consumers a flavored choice. And so I think the lighter, less committed soy users who liked the taste of almond moved to that direction and have stayed in the almond category. I think also, almond is also drawing people into the category who wouldn't come into the category when it was just soy, which is driving the overall growth of that category. And the soy category has kind of resolved itself to the committed heavy soy user. So we do feel like over the last few quarters, the soy part of the category has really put its base in. And now the almond, coconut, other plant-based alternative offerings in the category are really truly incremental to the total category.

Operator

[Operator Instructions] And we'll take our next question from Chris Growe with Stifel, Nicolaus.

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

I had one kind quick kind of overview question for you, a big-picture question, Gregg, which is in relation to the WhiteWave IPO, I'm curious why that was chosen versus just a complete spin-off. And if you could give any color around what the intentions will be for Dean Foods given that it'd still own a good chunk of WhiteWave. When would that -- theoretically, your -- what's the reasonable time horizon [indiscernible] to shareholders?

Gregg L. Engles

Yes, again, we've cover this pretty thoroughly in the S-1 around the timing and intentions. But first, as to why pursue an IPO. First of all, I think having a WhiteWave security trade on a post-IPO basis is, I think, an excellent way for the market to assess the WhiteWave story on a stand-alone basis and I think will lead to an orderly market as we ultimately distribute all of the shares in WhiteWave to our shareholders through the ultimate spin. So it's a pretty typical way of companies going about this. But frankly, if you go back to the earlier question around the balance sheet, the IPO proceeds are incremental proceeds to the total Dean Foods capitalization that allow us to de-lever the business and again create 2 balance sheets that we think are appropriately levered for the business realities of the 2 separate companies. So the capital we will raise in the IPO is incremental aggregate debt paydown for the business.

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

Sure, that makes sense. I also want -- go ahead, sorry.

Gregg L. Engles

Just back to the timing question. As is typical in these transactions, there will be a lockup with respect to Dean Foods' ownership of its shares in WhiteWave following the IPO, and that lockup's 180 days, which is why we've said in the S-1 that unless that is waived by the underwriters, the spin would not happen until at least the 180-day mark post the IPO. And frankly, our plan today would be, assuming conditions permit, to move expeditiously to distribute the shares.

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

Okay. And I had one follow-up, if I could, which is in relation to the continued and very significant cost declines in the dairy business, the costs you're pulling out of the business. You cited some -- obviously some fixed-cost declines. You got some very aggressive SG&A declines over the last 2 years. It's been a huge benefit to the margin structure of that business. And I guess going forward -- I want to be clear. It's something that I talked to you about before in the past. But is the next round of cost reductions, any kind of meaningful cost reductions, will that require capital? And I guess the question being the dairy business on its own, I guess, would have the capacity and -- to spend some capital to reduce costs even further from this point?

Gregg L. Engles

Look, we have a portfolio of cost reduction opportunities. We have continued opportunities, I think, to streamline our G&A infrastructure and take costs out there, do things more efficiently. That is not highly capital intensive. And we still have a portfolio of over 80 fluid milk plans in the FDD business where I think we continue to see opportunities to reduce our fixed-cost burden and make our network more efficient. And those, by and large, will require capital.

Shaun P. Mara

I think the plan right now, Chris, is capital spend for this year will be likely increased for 2013 as we think through some cost reduction opportunities.

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

Is there an -- have you given new guidance for this year for CapEx?

Shaun P. Mara

For CapEx this year, it's consistent with the last time. For next year, we haven't given guidance yet, but it'll increase.

Operator

We'll take our next question from Judy Hong with Goldman Sachs.

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

Gregg, on the WhiteWave business, so I think you've had a lot of success with some of the newer products like the Silk Fruit&Protein and the iced coffee line. So where are you just in terms of distribution on those brands? And what sort of run rate do you see as you continue to build distribution of some of the newer products? And then just on the margin side, I understand you can't really give forward outlook but just in terms of maybe the first half, if you can talk about how much advertising was up in the quarter. And then the start-up costs, how much was that a drag, just to get a sense of kind of what's the positive mix impact and the volume leverage would have been in the quarter?

Gregg L. Engles

Yes, I can -- advertising is $8 million increase year-on-year for Q2 for WhiteWave-Alpro.

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

Okay. And the start-up costs?

Gregg L. Engles

The start-up cost, I'd call it $3 million to $4 million after the quarter on here. And then -- and that plant is ramping up kind of quickly. We have one line running in that plant today. By Q1 of next year, we'll have 5 lines running in that plant. So it's ramping up quickly as we try and service the volume that's coming at us in our categories and that we are now manufacturing out of our network in some circumstances. So that plant is improving quickly and is going to be a great asset for us. After the distribution of the new products, we're 70-plus percent ACV in iced coffee. We're 50%-plus ACV in Fruit&Protein. So we still have some distribution room to go there, but we also think that these categories just have lots of room for innovation and product development. So we're really excited about those platforms.

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

Okay. And then, Gregg, just on the Class I Mover pricing, so helpful to kind of get perspective on the balance of the year, but do you have any thoughts on how you're thinking about 2013? And I guess to the extent that there is risk to the herd sizes being reduced because of the higher grain cost, how are you sort of incorporating that into potentially and even more onerous inflation perhaps in 2013?

Gregg L. Engles

We had -- 3 months ago when the world's outlook on agriculture was different than it is today, we had expected 2013 to be a relatively stable year in terms of milk pricing. We're going to have a higher first half of 2013 than we had previously expected. And again, the Class I expectation is going to be -- or Class I reality, at the end of the day,is going to be driven by a complex set of forces. So the higher the milk prices go, the quicker -- the more quickly we're going to destroy demand and the more quickly they're going to come back down and the less the herd is going to reduce and all of those things. So this is a thin market. I think everybody understands that, a thinly traded market. And it's a market that sometimes moves on the basis of emotion. But when you cut through the emotion and you look at supply and demand balance here, which I think is going to drive sort of the intermediate and long-term realities of milk prices, we are relatively long dairy commodities globally. The U.S. position, in terms of its global competitiveness, is declining because its currency is strengthening. We have weak domestic takeaway of fluid and other dairy products in the United States. And frankly, we have a situation where increases or expectations for declining farm profitability are driven by the current corn crop. And what I'm often reminded of or think of is that you know what, we are going to have another corn crop next year. And most farmers know that, that we're going to have another corn crop next year. And for them to take advantage of relatively high milk prices, they have to avoid killing their cows because it takes time to rebuild their herds. And so again, there's an enormous amount of emotion driving this marketplace. But -- and we may well have spikes in price in this marketplace as that emotion and the uncertainty around the corn crop and herd side plays out. But when you dig down and you look at the fundamentals, our view, at least today, what we know about the crops and grain prices and what we expect to happen with inputs over the back half of the year and the beginning of next year, when you take and you filter all that through, that we believe the supply and demand balance, on average, suggests that milk prices should move up but not explode to the upside. That's our view.

Operator

And we'll take our next question from Christine McCracken with Cleveland Research.

Christine McCracken - Cleveland Research Company

Just to follow along that same line of thinking and not to belabor the point, but on the organic side, I would suspect that a lot of the areas impacted by drought also produce organic feed. And I'm wondering if there's any exposure on the soy side. I know that, that is typically contracted, but inasmuch as this dry weather could affect supplies of other inputs, could you comment on what your exposure might be?

Gregg L. Engles

Well, with respect to soy, the reality of the Silk businesses is just have a -- the fundamentally different margin structure than our FDD milk business. So the cost of raw materials as a percentage of selling price is just dramatically lower there. It's much more of a branded consumer packaged goods business model. So yes, we have exposure to rising soy prices, but the ultimate impact on profitability will be much more akin to what you would see across the balance of the food group and what you would see from rising milk prices in the FDD business. Yes, there are areas affected by the drought that are producers of organic products, but the reality of organic dairy production is these cows are on pasture, they tend not to be in the areas that have been most affected by the drought this year, it's well distributed across the United States from a geographic perspective. And so yes, there will be, out of this drought, some upward pressure with respect to the organic complex as well, but it is not as much of a grain-fed, confined feeding-driven business as the FDD business is. And so we don't expect the impacts to be as high.

Christine McCracken - Cleveland Research Company

And the pasture conditions, as I've read it, are the worst in something like 50 years. I'd be surprised that organic would be completely unaffected. But in any case, just one...

Gregg L. Engles

I didn't say it would be completely unaffected. We just said it would be not as affected as FDD.

Christine McCracken - Cleveland Research Company

Got it. Just a follow-up on -- you suggested that the hot weather affected and negatively impacted maybe fluid milk volumes, but I'm curious on ice cream and that side, if you saw any benefit as you might have in the past.

Gregg L. Engles

Absolutely. Our ice cream mix and frozen dessert business at Morningstar, as we said in our prepared remarks, definitely benefited from warm weather, and the same is true of our ice cream business inside of FDD, okay? And yes, and our iced coffee business. No question about it.

Operator

We'll take our next question from Akshay Jagdale with KeyBanc Capital Markets.

Akshay S. Jagdale - KeyBanc Capital Markets Inc., Research Division

So my first question is I guess since you're going to focus on historical numbers on WhiteWave, can you help us with where Horizon is in its profitability curve? I know in the past you've said if you can get it to like a normalized FDD margin, high single digits, you think that's a fair number to use longer term. But is that still in play? And where are we relative to that target currently?

Gregg L. Engles

Akshay, my lawyer across the table is waiving me off on forward-looking guidance with regard to any of the WhiteWave businesses.

Akshay S. Jagdale - KeyBanc Capital Markets Inc., Research Division

Okay, I tried. So then, just a follow-up on -- just on your FDD business, a lot's been made, obviously, of the Midwest drought impact on milk prices. You clearly have laid out your view on milk prices. But can you just help us, from a sensitivity standpoint, as to what percentage changes in milk cost are due to your P&L? And perhaps if -- and I -- and maybe you don't want to be quantitative, but perhaps you can help us, at least qualitatively, think about in the past, when milk prices went up 35% in some of the years, 2001 specifically, '08 that I remember, milk prices went up 35% and your FDD EBIT went down by a similar amount. So mathematically, there's a pretty high correlation between the price of milk and your FDD margins. So I understand that all the initiatives that you've taken probably changed that relationship such that it's not as sensitive. But can you just help us there because that's really a hard question to answer -- but since -- for us from the outside? But it seems like you're making a pretty strong statement that despite what's going on in the Midwest, you still feel pretty good about FDD going forward.

Gregg L. Engles

Well, we did try and give you some numbers in the prepared remarks, and I will just refer you back to them. So we gave you a graph with a range of 6 economists. The highest economist in that graph had a Class I milk price in Q4 in the sort of $19.50 to $20 average price range, and we quantified the expected effect on FDD in Q4 of about $10 million or $0.04 a share. So that's our best estimate today of the negative effect of rising milk prices. So look, we are not intending to make a strong statement that our FDD business is not -- it's profitability is not inversely correlated to milk prices. It is. When milk prices go up, the profitability on our FDD business is going to go down. It is mathematically accurate because there is causation there, and that's why it's correlated. What we are saying is that the level of profitability that we would expect to make today given -- at a given milk price versus what we made 2 years ago at a given milk price is higher because we've taken out $150 million of fixed costs between now and then, right? So we are starting from a higher base today, and we expect to end up at a higher floor. But we still expect to see a negative correlation between high milk prices and FDD profitability.

Akshay S. Jagdale - KeyBanc Capital Markets Inc., Research Division

And just one...

Shaun P. Mara

There's -- as you think through the rest of the year, if you go back to last year, Q3, our average Class I Mover was $21.41. In Q4, it was $18.83. So sequentially, the cost of milk is going up, but versus the last year, it'll still be declining. So just keep that in mind as you think through the numbers.

Akshay S. Jagdale - KeyBanc Capital Markets Inc., Research Division

And one -- just last one on -- again on FDD. I mean, one of the most positive things about that business is its free cash flow generation capability. I know that had been somewhat limited because of the CapEx, you were spending on restructuring. Can you help us, just directionally at least, as to what one should expect sort of post the spin or just going forward? Do we -- should we expect any meaningful change there such that CapEx as a percentage of sales for that business should be lower now that sort of the restructuring projects are behind you?

Gregg L. Engles

Yes, I don't think we can give you a perspective on what it looks like post-spin. I will say for this year, the plan for Dean Foods in total is about $250 million in free cash flow for the year is our current forecast that we have out there. So I think that should give you some perspective on it. That has quite a few onetime -- yes, there's quite a few onetimes in there, so. Cash expenditure is in that number. We expect FDD to remain a robust cash generator.

Operator

I'll go ahead and take our next question from Robert Moskow with Credit Suisse.

Robert Moskow - Crédit Suisse AG, Research Division

I don't know if you can answer this question, but I guess it's kind of backward looking. So if you could just, Gregg, just talk about WhiteWave's core competencies for a second. I always thought that the strength of it was that it added a very disciplined marketing approach to an organic and natural category -- surrounded -- which is a very fragmented space that probably doesn't have the same kind of blue-chip marketing return on marketing analyses. And I guess I -- what I'd like to know is do you look at it the same way? And do you look at it therefore as something that could extend beyond just beverages and into other types of food products?

Gregg L. Engles

Well, I'm going to make an effort to answer that question and try and keep it historically focused. So we built WhiteWave as a value-added dairy alternative business within what was a more commoditized, lower-margin business of Dean Foods. And we built it to have best-in-class consumer products, goods, capabilities. So we intentionally moved it 800 miles from our corporate and dairy group headquarters in Dallas so that it would have a separate identity, and we recruited top talent out of the CPG worlds in order to build our management ranks and then we invested relatively heavily in capabilities that you would expect: consumer insights, research and development, world-class brand marketing. And I think the results are what you've seen historically with respect to the performance of that business. And what we have as of today is a business that is built around large, national-scale brands, brands with several hundred million dollars each in terms of aggregate revenue and supported by a very well-invested and largely new national manufacturing footprint. So yes, we built it to be a best-in-class consumer packaged goods company, and I think that's what we have.

Robert Moskow - Crédit Suisse AG, Research Division

Right. And so I don't know if you can answer this, but is it a -- therefore just a beverage company? Or can it be something else? Can it -- and maybe that'll be tabled for a different day.

Gregg L. Engles

I think we need to table that for a different day.

Operator

And we'll take our next question from David Palmer with UBS.

David Palmer - UBS Investment Bank, Research Division

How much of the profit growth this quarter, and I'm really thinking about the FDD division, was productivity? And how much did that productivity in the year-over-year contribution basis differ for -- if at all, from the first quarter?

Shaun P. Mara

I think productivity was relatively consistent quarter-on-quarter. I don't think there was much differential there. I think we're pretty consistent in terms of Q1 and Q2. So I don't -- I think the contributions are relatively consistent.

David Palmer - UBS Investment Bank, Research Division

And would that -- I mean, put in whatever terms you wanted, gross profit dollars or gross margin, whatever you want to -- however you want to put it, would -- how much of that gain in the quarter was productivity versus the other factors?

Gregg L. Engles

David, I think you're trying to get at the same question as one of the earlier analysts hoped at, which is how much of FDD profit improvement was driven by falling milk price and how much was driven by other factors that aren't correlated to lower milk prices. And therefore, what does that apply for the forward outlook? And it's hard to completely give you a surgical answer around how much was productivity and how much was price. What I will say is this. The second quarter's typically better than the first quarter. The second quarter is a better quarter because you have schools in, you have ice cream building, you have relatively good volumes. Clearly, this is a quarter in which milk prices came down, but we had much of that benefit in Q1 as well. So the business is executing well. It's executing well in terms of its efficiencies of operation, it's executing well in terms of price realization in the marketplace and it's executing well in terms of volume performance relative to the category. And we have been benefited by an improving commodity environment. So I expect the first 3 of those factors to continue going forward, that we'll continue to execute well on productivity, on price performance in the marketplace as it relates to the movements of the commodity. And that we will continue to perform well relative to the category with respect to volume, but the commodity environment is going to reverse and that's going to provide some headwind to us rather than a tailwind. I can't give you any quantification of that beyond the quantification that we addressed in our prepared remarks and in answer to one of the questions.

Shaun P. Mara

And just a reference point for you, David. If you look at the gross profit growth in Q1 versus -- Q1 versus last year, Q2 versus last year, we grew Q1 FDD profit 1%, we grew Q2 2% on basically a similar volume. So there's -- some of it is in gross profit, and the rest of it is cost reduction. The other thing to keep in mind is fuel costs. So fuel costs in Q1 versus Q1 of last year were higher, a step-up than they were in Q2.

Gregg L. Engles

Now that is actually an important point that Shaun just hit on, which is there are other commodities that impact FDD performance here aside from milk. And many times in the recent past, when the milk commodity has been going up, so have our other significant commodity inputs, including diesel fuel and resin. That is not the case today. So we see a rising milk commodity environment, but we don't see the same sorts of inflationary pressures, at least to the extent we have in the past, with respect to other important inputs in the FDD cost matrix.

David Palmer - UBS Investment Bank, Research Division

And if I can squeeze one follow-up. That would be on the profit per gallon in the dairy category. It looks like that profit per gallon that's available to the retailer and to Dean is going up. In the past, we've often wondered and sometimes been disappointed that Dean didn't seem to be getting its fair share of changes on that. It was more of a pass-through for Dean than it was for the retailer. But in this case, it looks like Dean is getting more or certainly its fair share of any profit increases per gallon, and maybe that's some of the things you talk about with the diesel. But also, it doesn't look like it's a pure pass-through, that you're recapturing some actual pennies per gallon. Is that fair? And if that's happening, why is that happening?

Gregg L. Engles

I don't think it's really a fair characterization of what's happening. We have pretty good, with our private label customers, pretty good pass-through mechanism up and down. What is happening is we're -- we have some mix shift towards our branded products, as we mentioned in our prepared remarks, where we have a higher-margin structure. So as the mix shifts back towards brands, we benefit. And the other thing that frankly is driving the profit per gallon is the amount of costs we've taken out of the business. So that, we are benefiting from.

Operator

At this time, I would like to turn it back over for any additional and closing remarks to Gregg Engles.

Gregg L. Engles

Well, thank you very much. I just want to wrap up by saying we're pleased to have reported an excellent second quarter, we're pleased to have filed the S-1 for the IPO of the WhiteWave Foods Company and we're excited about the future prospects of our collective business here. So thank you for your attendance on the call, and we look forward to continuing to communicate with you as this process evolves and, at the latest, as of Q3 results. Thank you very much.

Operator

Once again, that does conclude today's presentation. Thank you for your participation.

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