WhiteWave Foods Company CEO Discuses Q1 2013 Results - Earnings Call Transcript

| About: WhiteWave Foods (WWAV)
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WhiteWave Foods Company (NYSE:WWAV) Q1 2013 Earnings Call May 9, 2013 9:00 AM ET


Dave Oldani - VP, IR

Gregg Engles - CEO

Kelly Haecker - CFO

Blaine McPeak - President


Marcella - Credit Suisse

Amit Sharma - BMO Capital Markets

Farah Aslam - Stephens Inc.

Diane Ghastlier - CLSA

Judy Hong - Goldman Sachs

Erik Katzman - Deutsche Bank

Dennis - Wells Fargo

Ryan Oksenhendler - Bank of America Merrill Lynch

Bill Chappell - SunTrust


Good morning. And welcome to The WhiteWave Foods Company First Quarter 2013 Earnings Conference Call. Please note that today’s call is being recorded and is being broadcast live over the Internet on The WhiteWave Foods’ corporate website.

This broadcast is the property of The WhiteWave Foods Company. Any redistribution, retransmission or rebroadcast of this call in any shape or form without the express written consent of the company is strictly prohibited.

I would now like to turn the conference over to your host for today, Mr. Dave Oldani, Vice President, Treasurer and Investor Relations for The WhiteWave Foods Company. Go ahead Mr. Oldani.

Dave Oldani

Thank you Tehisha (ph), and good morning, everyone. Thanks for joining us on our first quarter 2013 earnings conference call. This morning we issued our earnings Press Release, which is available on our website at whitewave.com. The release is also furnished as an exhibit to our Form 8-K, which is available on the SEC website at sec.gov.

Also available during this call, on The WhiteWave website is a slide presentation that accompanies today’s prepared remarks. A replay of today’s call, along with the slide presentation, will be available on our website beginning this afternoon.

We would also like to advise you that our forward looking statements made on today’s call are intended to fall within the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

These statements will include, among others, disclosure of our earnings targets, expectations regarding branding initiatives, innovation and research and development plans, growth plans, the penny spin-off and other potential dispositions by Dean Foods’ Company of its remaining interest in us 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 most recent annual report on Form 10-Q filed with the SEC on February 19, 2013.

We also want to remind you that the financial results and related references to periods prior to 2013 discussed on today’s call and in the accompanying slide presentation are presented on a pro forma adjusted basis as if the company had operated independently as a standalone entity which is the same basis that we have presented in our past earning presentations and financial results and related references to 2013 period on a risk adjusted basis.

The adjustments related to commercial arrangements we entered into in connation with the separation of our business from Dean Foods’ business, the termination of an intellectual property license with the former Dean Foods' subsidiary, estimated cost associated with operating as a standalone public company and other one time or non-recurring costs associated with our initial public offering and separation from Dean Foods.

Our earnings release and the reconciliation posted on our website contains further details of these adjustments. Along with reconciliations between our GAAP results and the results we present on a pro forma adjusted and adjusted basis.

Additionally, the release provides the reconciliation between the first quarter WhiteWave segments result as reported by Dean Foods' today and The WhiteWave Foods Company results prepared on a standalone basis.

Participating with me in the prepared section of today’s call are Gregg Engles, our Chairman and CEO; and Kelly Haecker, our Chief Financial Officer. Also available to participate in the Q&A portion of the call is Blaine McPeak, President of WhiteWave’s North America Segment.

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

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

Gregg Engles

Thanks, Dave, and good morning, everyone. Thank you for joining us on the call today. WhiteWave was off to a good start in 2013, delivering earnings per share of $0.16 in Q1, a 20% increase over the prior year. EPS came in at the top end of our guidance for the quarter despite a higher than anticipated tax rate. Consolidated sales were up more than 9% in Q1 driven by volume growth across all of our brands.

Consolidated operating income exceeded our expectations, increasing 20% from a year ago, despite the higher distribution in supply chain costs we discussed last quarter. We are pleased with our Q1 results and the fundamental health of our categories and brands, but we acknowledge the ongoing need to reduce our supply chain costs from their current elevated levels.

We have begun to make progress this quarter as evidenced by the Q1 startup of Almond milk production at two additional WhiteWave plants. We are now producing a 100% of this rapidly growing product line internally under remote favorable cost structure. We remain focused on further reducing cost through other projects and initiatives already underway which Kelly will discuss later on the call.

A marker of our success in building our business is recognition from our customers and from industry experts. Nothing validates our approach more than complements from our customers, which is why I am especially pleased to hear that Wal-Mart has recognized WhiteWave as its supplier of the year in the dairy category for 2012, one of its highest forms of recognition.

Wal-Mart cited at our best in class product launches including iced coffee and our co-branded creamers along with the strong growth of Silk Pure Almond as standout achievements. The Market Research Company Information Resources Inc. also recently named International Delight Iced Coffee as one of the top CPG launches of 2012 in terms of first year sales. Called new product pace setters, IRI applauds the best in class new products for driving the growth of the companies that bring them to market.

Ranking number twelve, International Delight Iced Coffee share the honor this year with some of the world’s most recognized brands. Additionally a new joint study issued by the Boston consulting group an IRI analyze the 2012 performance of over 400 CPG manufacturers comparing dollar and volume sales growth along with market share gains. WhiteWave ranked sixth among mid-sized companies with $1 billion to $5 billion in retail sales.

We are pleased to be ranked among other top performing companies in the mid-sized category which includes the likes of Green Mountain Coffee, Chobani and Starbucks. We are extremely proud of this external recognition and have plans to build on this track record of success.

As I noted earlier, our top line growth continued to be strong in Q1 with sales level over 9% from the prior year to $608 million. Volume growth continues to fuel our top line with growth across all of our product categories during the quarter. This growth was driven by our leading brands which continue to resonate with consumers’ interest in natural nutritious and great tasting products that are responsibly produced. These trends together with outstanding marketing continues to support a robust volume driven top line.

Our North American segment sales increased 10% in Q1 led by strong double digit growth in our plant based beverages and coffee creamers platforms. Our European segment also performed well with 7% sales growth in the quarter despite the ongoing difficult economic climate in Europe.

Now turning to our platform results for the quarter, sales of North America plant based foods and beverages grew 13% in Q1, driven primarily by volume. Increased consumer preferences for healthy and sustainable products drove 14% category growth, led by our Silk brand. Within the category Almond continues its torrid growth at over 55% which led to modest cannibalization and volume declines in soy. Our almond business is quickly approaching the size of soy mill and enjoys a similar margin structure.

As with our Soy franchise, we are the market leader in Almond with a 54% share at the end of Q1. We also hold a 67% share of the rapidly growing coconut milk sub-category. We are building the Silk brand to be synonymous with plant based beverages and we believe that we can continue to drive its robust growth.

To maintain our category leadership we are focused on long term brand building initiatives, including bringing more innovation to the category to drive heightened consumer awareness. One example is our upcoming introduction of light offerings to the almond milk sub-category. This line will have the same great taste as original silk pure almond with a third pure calories. We are pleased to bring this healthy and delicious option to consumers interested in the wellness benefits of plant based foods and beverages.

Also on the innovation front, in Q1 we launched Silk Iced Latte, a great tasting non-dairy ice coffee as well as Silk Fruity and Creamy nondairy yoghurts. Both products have received good retailer acceptance and current distribution levels are in line with expectations.

Alpro, our European plant based food and beverage segment also continued to perform well, with sales up 7% in the quarter on both a reported and constant currency basis. Alpro's core geographies of the UK, Belgium, the Netherlands and Germany, continue to report solid growth. Alpro's growth has been volume driven, particularly due to strong growth in the almond, hazelnut and rice beverages we introduced a year ago, as well as continued strong growth of our expanded Soy Yoghurt lineup. We look forward to building on the momentum at Alpro with a continued focus on growing our plant based beverage and yoghurt offerings.

Turning now to premium dairy, this platform produced sales growth of 5% in Q1, in line with the expectations we communicated last quarter. The majority of this increase was volume driven with marginal benefit coming from overlapping price increases we took toward the end of Q1 2012.

Our growth continues to be driven by our single serve and DHA omega 3 products and increases on our core half gallon offerings. The organic milk category maintained its growth trajectory in Q1, expanded 4% in the period fueled by Horizon Organic, which outpaced the category by 1 percentage point.

In Q1 we began the rollout of new TruMoo aseptic single serve flavored milks, a brand that we licensed from Dean Foods that is lower in sugar than traditional flavored milks and contains no high fructose corn syrup. Retailer acceptance has been favorable and we continue to increase distribution of this unique and economically priced offering.

We will continue to bring innovation to the category with the launch of Horizon DHA omega 3 in a single serve package beginning in Q2. We are excited to provide this value added product to Horizon moms as a healthy alternative for their families, whether at home, at school, or on the go.

Our coffee creamers and beverages business continued its robust growth in the quarter with sales up 14% from the year ago period. Growth was volume driven across our portfolio including strong growth in iced coffee as we lap our introduction from a year ago, our creamers business also enjoyed a strong business in the food service and the away from home channels which contributed to our strong performance.

The refrigerated flavored creamer category grew 9% in Q1, driven by increased coffee consumption and the trend toward flavored customized beverages. Our International Delight offering dovetailed nicely with this trend as we continue to provide new and exciting flavors that appeal to coffee consumer preferences.

We recently introduced a line of Coldstone Creamery inspired flavors, which brings the taste of the ice-cream change top desserts home to your cup of coffee. We remain pleased with the performance of our ice coffee line and the recent roll-out of our lights line as well as our single serve four pack offering has been well received by retailers. We are pleased with the status of our distribution heading into the ice coffee season in Q2 and Q3.

Building into our successful introduction, we continue to focus on improving and differentiating our ice coffee line. One new enhancement is that our formulations are now made with cold brewed coffee. We remain enthused by the underlying trends that continue to drive this category and we believe we have a rich pipeline of innovation to support the long term growth of our coffee creamers and beverages business. Overall our platform started the year-off on a solid foundation of continued growth.

I will now turn it over to Kelly who will review our first quarter operating performance and our outlook for the balance of 2013. Kelly?

Kelly Haecker

Thanks Greg. Good morning everyone. As Gregg stated, we are off to a good start in the first quarter. We are 9% sales growth to $608 million led by volume growth in the high single digits. This top line growth drove our consolidated segment operating income growth of over 12% in Q1 to a record high level of $63 million. This was despite continued higher distribution and external warehousing costs, resulting from the impact of our current capacity constraint.

Consolidated segment operating margin for the quarter was relatively unchanged from the prior year period due to a favorable sales mix in North America which offset these higher supply chain costs. Our North America segment continued its strong top line performance in Q1 generating sales growth with 10%.

Operating income in North America grew 8% in the quarter to $56 million, somewhat dampened by the higher supply chain costs. Our North America marketing investments in the quarter were consistent with last year's elevated levels.

Operating income in our Europe segment grew to $7 million in Q1, up significantly from $4 million in the same period last year. This increase was driven by a combination of continued solid sales growth of 7% coupled with lower marketing expenses in the quarter compared to the elevated levels in the prior year in support of our 2012 introduction of almond and hazelnut beverages in Europe. Looking forward, we remain very positive about the profit growth opportunities across all of our businesses.

Now looking down further to consolidated P&L; we reported adjusted diluted earnings per share of $0.16 in Q1 representing EPS growth of 20%, despite a higher than expected tax rate due to discreet non-recurring items related to state tax audit proceedings and other tax adjustments.

We leveraged our 9% sales growth to a 12% segment operating income increase and net earnings growth of 20%, a rate more than two times our top line growth despite some headwinds in our P&L. We had a solid start to the year but as Gregg noted we remained focused on reducing cost across our supply chain.

Let me spend few moments outlining some of our current initiatives. We have stepped up capital investments consistent with our growth plans and have already completed key capacity expansion projects with several more growth and margin enhancing initiatives underway.

As previously mentioned during late Q1, we added almond milk production capabilities to two more of our plants. Importantly, these locations place the expanded capability geographically advanced west and east coast locations and allow for reduced distribution cost.

We have taken our almond milk production from no internal capacity when we launched almond at the beginning of 2010 to now being 100% internally produced, even while the subcategory grew faster than we originally projected. Staggered over the balance of 2013 and 2014, we plan to add six new filling lines to plants throughout our network which should increase our production capacity by over 20% once all lines are fully operational.

This additional capacity is essentially the equivalent of adding one new manufacturing facility which will allow us to produce more volume internally at lower cost but will also increase the efficiency of our distribution and warehousing network.

We’re also working to optimize our warehousing on both coasts as we’ve outgrown internal cold storage capacity and preferred outside storage locations. As a result, we’re now utilizing more distant warehousing locations that carry higher storage and distribution cost.

We expect to complete our warehouse investments in the second half of 2014 and the resulting lower cost from those new facilities should be fully reflected in our P&L by mid-2015. We’re pleased with our progress on these projects and remain focused on crisp execution of our plans. Importantly once completed, these projects are forecasted to generate high returns with short payback periods.

In addition to our capital growth plans we’ve undertaken several internal cost reduction initiatives including rebidding delivery routes to leverage our growing scale through lower shipping rates, upgrading planning software to eliminate cross shipments between our facilities to further reduce distribution and warehousing cost and simplifying our order policies to drive greater truckload utilization rates and lower shipment cost.

We have a solid track record of efficient operations and are confident in our ability to optimize our manufacturing network and continually streamline our supply chain to increase our margins and profitability overtime.

With that review of our operating improvement plans, now let’s turn our forecast. We expect the core growth of our leading brands and recent innovation launches to drive a sales growth rate in high single digits for Q2 and for the full year consistent with previous guidance. Combining the sales growth with continued progress on cost reduction initiatives, we expect total operating income growth in the low-to-mid teens for Q2. On a full year basis, we anticipate operating income growth in the mid-teens, again as previously forecasted.

We continue to estimate approximately $55 million in corporate expense for 2013 and are maintaining our full year capital expenditure forecast between $150 million and $160 million. Our tax rate should range between 34% to 35% for the full year.

With our coming spin-off from Dean Foods', our employee's equity length long term incentive awards will convert into WhiteWave awards, which is projected to result a modest increase to diluted shares outstanding over of the balance of the year based upon current market prices.

Based upon the above considerations, we expect adjusted diluted earnings per share between $0.14 and $0.16 for Q2 and for the full year we are maintaining our guidance between $0.68 and $0.72 adjusted diluted earnings per share.

In summary, we are pleased with our Q1 results and remain confident and our ability to drive growth in our business while we execute against our cost reduction initiatives. I will now turn back to Gregg for some additional comments before we open up the call for your questions. Gregg?

Gregg Engles

Thank you, Kelly. Before we ramp up I want to go over some of the details on our upcoming spin-off. On May 1st, Dean Foods announced that his Board of Directors had authorized the distribution of a portion of its remaining interest in WhiteWave in the form of prorated dividend of WhiteWave class A and Class B common stock on shares of Dean Foods common stock outstanding that the closure business on May 17.

The distribution will be completely at a closure business on May 23rd. Dean will distribute 47.7 million shares of our Class A common stock and 67.9 million shares of our Class B common stock to Dean food stockholders. The distribution has been structured to be tax free for U.S. federal income tax purposes.

On a per share basis, based on the number of Dean Food shares outstanding as of March 31st, it is estimated that Dean stockholders will receive 0.256 shares of our Class A common stock and 0.364 shares of our Class B common stock for each share of Dean they owned.

The actual distribution ratios will be determined based on the number of Dean Shares outstanding as of the May 17th, record date. It is projected that after this distribution 51% of the flow in our shares of common shocks will be Class A shares with the remaining 49% being Class B shares.

On May 1st, the WhiteWave Board also approved a reduction in the voting rights of our Class B shares. So that effective upon the distribution, each class B share will be entitled to one vote on matters except for the election and removal of directors. As to which each B share will remain entitled to 10 votes.

Once this distribution is complete, Dean will hold 99.9% of our class A common stock and will no longer own any class B shares. Being that stated that it expects to dispose of this remaining interest within 18 months of the distribution in one or more debt for equity exchanges or other tax-free dispositions.

You can refer the press releases that were issued by Dean and by us on May 1 for additional information. Also, as part of the separation effective May 1, I resign my seat as Chairman of the Dean board to enable me to devote 100% of my time and attention to WhiteWave and creating value for our shareholders.

With our spinoff from Dean Foods just a couple of weeks away, let me reiterate my excitement about our prospects and potential as an independent company. We have an outstanding management team. They bring broad experience from some of the world’s best consumer package goods companies.

Our brands and brands are aligned with enduring consumer trends for healthy great tasting and responsibly produced alternatives to traditional food offerings for great testing affordable coffee beverage, personalize just the way you like it. Within these on trend categories, we have large scale brands that are market leaders.

Each of our Silk horizon and Alpro brands holds number one brand positions with meaningfully higher shares than those of their nearest competitors. Our brands have earned consumer’s trust and can be efficiently invested in and grown.

Innovation is core to our strategy and we have a strong track record of successfully innovating both within our existing categories as well as into new areas of growth. And we are positioned to benefit from the growing global adoption of products in our major categories. We have a history of successfully acquiring and integrating businesses and brands and believe that we can leverage these experiences to take advantage of future global growth opportunities.

In closing, let me say that all of us at WhiteWave are excited as we embark on our journey as a completely independent company. We will continue to focus on uniting the spirit and the principals of small food with the scale and resources necessary to change the way the world eats for the better.

Thank you again for joining us today. I will now ask the operator to open the call to your questions. Operator?

Question-and-Answer Session


(Operator Instructions). Your first question comes from the line of Michael Steib from Credit Suisse. Please proceed.

Marcella - Credit Suisse

This is Marcella for Michael. Our understanding was that this proportionate growth of the Almond category tended to have a diluted mix effect on WhiteWave’s growth versus the category overall but today you just said that Almond is almost the biggest Soy in WhiteWave’s portfolio. So could we say at this point that WhiteWave is not order indexing in Soy anymore, so this dilutive mix effect versus the category, we will not see it anymore?

Gregg Engles

There still is a modest effect, Marcella. The category is about 50% Almond, about equal in terms of Almond and Soy. Silk is still somewhat higher in Soy share. So you saw that in the aggregate numbers that we reported today. The category grew 14, the WhiteWave portfolio grew 13, so just slightly less than the category entirely due to the mix effect of Almond versus Soy. But you will see that continue to diminish over time, as Almond continues to grow.

Marcella - Credit Suisse

Okay, understood. And then in terms of gross margin we see at least a sequential improvement here. How much of that would you attribute to not having the capacity constraints anymore that you mentioned at the beginning of the call?

Gregg Engles

Well the capacity constraint still remains. I think what you saw on the first quarter of this year, and you are right there, the gross margin generally flat year-over-year and I think that’s a combination of two things. A combination of a mix improvement in North America as plant based beverages, coffee creamer and beverage grew at a faster rate in our premium diary business. But that marginal benefit was offset by, as we spoke in the higher levels of distribution warehousing and overall manufacturing cost, driven by capacity constraints. So those two factors generally offset each other in the first quarter.


Your next question comes from the line of Amit Sharma from BMO Capital Markets. Please proceed.

Amit Sharma - BMO Capital Markets

Gregg, just wanted to focus on the creamer part of the business, clearly it’s still pretty solid growth, but sequentially growth has come down and if we look at IRI data, as you noted, you’re lapping pretty strong launch of ready-to-drink coffee last year. What’s the outlook for that business? Are we going to lap, as we lap the coffee launch from last year, our trend is going year-over-year, look a little bit less attractive or do you have a pretty strong innovation to offset some of those comparisons.

Blaine McPeak

Amit, good morning this is Blaine. Just in taking a look at our performance in the fourth quarter of last year, our coffee creamers and beverages business grew in that same mid-teens just about 15% growth rate year on year and this year we are in the 14% range in the first quarter so relatively comparable levels of growth rates iced coffee in the quarter here represented about three points worth of that growth in the first quarter.

So sequentially quarter to quarter we are seeing very similar results to what we have seen in the fourth quarter. I think as we take a look forward with respect to iced coffee we still remain bullish on that category development overall and our overall position within that category as we continue to expand innovation that we have spoken about previously about bringing new international lights iced coffee which are 100 calories, bringing a single serve variant to the product line up as well as silk iced latte and we expect that our distribution year-on-year as we go into the heavier iced coffee selling season here will be roughly 2x what we saw last year.

So we expect to see continued strong growth there as well as, as we ramp up our marketing efforts in particularly the second and third quarter when you hit the higher seasonal time period. But we remain very optimistic and encouraged by the continued both coffee trends in America that are fueling our coffee creamer business as well as creating a new category here of iced coffee.

Amit Sharma - BMO Capital Markets

And just a quick follow up on the Dallas plant; can you please remind us where are we in terms of getting full ramp up of the capacity in their plant?

Blaine McPeak

Yes I think as Kelly mentioned we continue to expand our overall manufacturing lines across our entire network so for the lines which came up upon us in middle part of 2012 we continue to make great progress there with respect to ramping those up to our capacity expectations and in addition to that we are adding new lines throughout the course of this year and into next year that we will continue to ramp up an overall volume that gets produced out of that plant.

So far I think its meeting our expectations. We need to continue to deliver upon that performance as we bring these new lines on as well. And that will impact not only our manufacturing cost but that continues to improve our overall network with respect to the distribution that you see as well.

Gregg Engles

Yes just specifically on Dallas I think that for the current period we have all the lines that we are putting into Dallas right now that have been sort of set forth or installed. We have six lines operating in that facility which is well ahead of what our plan for this period of time would have been at two lines. So we really ramped that facility up. We are still in the learning curve on that plant in terms of operating the facility and bringing it up to full performance, on par with our other facilities.

So we have got a little room to go there which should continue to give us some improvement in our manufacturing footprint cost as we go through the back half of the year and out into the early part of 2014, but we are well invested in Dallas today and now we're just trying to load the facility and make it as efficient as possible.


Your next question comes from the line of Farah Aslam from Stephens Inc. Please proceed.

Farah Aslam - Stephens Inc.

Question on your innovation, it seems like a lot of your innovation is focused on your lights category. Generally in your experience how significant do lights become as part of the product category and how quickly do you anticipate those to develop.

Gregg Engles

Generally speaking if you take a look across categories that are not driven by a light or a lower calorie propositional value, you might see 20% of the category begin to develop into that type of range. We see it as one more offering to broaden the overall portfolio. So for example with iced coffee here, we have the core International Delight Iced Coffee lineup which is largely flavor driven and that very much mimics a lot of the out of home iced coffee that people can get.

We also recognize that there's that segment out there who is more calorie conscious and it's a new segment and we have a 100 calorie offering on the International Delight lights iced coffee and we think that it's going to help us continue to grow household penetration and bring new people into the category, perhaps even have people who are lighter users take a look at moving up that spectrum. So generally about 20% across most categories and I think this one should be relatively similar to that.

Farah Aslam - Stephens Inc.

And how long does that usually 20% take to deliver, kind of develop to full, we're just trying to figure out growth.

Gregg Engles

Yes, I think you know you're going to see that it's going to be over a couple of year type time period. These things take time to build overall awareness of the proposition and going to be supporting our entire iced coffee portfolio heavier here as we enter the second and third quarter which tends to be a higher seasonal period for us in general.

Farah Aslam - Stephens Inc.

So we should think of may be 20% category growth fuelled by lights, over the next three years of your business.

Gregg Engles

I would say that the iced coffee category is still a nascent category with respect to retail and I don't think I’d get caught at this point in time trying to predict a category growth versus where we think we can grow the overall category too, because it's still early, we have new competitors coming in that will help grow that category overall and we're encouraged by what we're seeing so far but it hasn't settled out into a stable base at this point yet. So it's still very much in development.


Your next question comes from the line of Diane Ghastlier from CLSA. Please proceed.

Diane Ghastlier - CLSA

I wanted to ask some questions on the growth and efficiency initiative slide that you had in your deck. You talked a little bit of some debottlenecking within the selling and distribution that we thought pretty good move year-on-year in terms of the reductions in terms of capital sales of percentage and I guess I'm just looking at what you have outlined here. Can you give us some a little bit more detail on what you think of the capital spend behind this projects will be and then how should we think about that in terms of kind of the benefits to your selling and distribution costs over the; I guess in near term and the longer term. I think you cited you would be done by the end of the fiscal '14 and you would see the benefits in '15 but I have to believe that there is going to be some benefit over the next two years as these projects come up online and start contributing in terms of lowering our costs. Just any details on that would be appreciated.

Gregg Engles

Yes, you are right Diane you will see some benefit along the way. Let me maybe provide a little bit overall perspective on how to think about our margins as relate to this. First I had; just to re-confirm our CapEx for the years is $150 million and $160 million and a lot of it is on the spending against this projects, some of which started last year and a significant amount of the spent will be continuing in 2013 and in some cases as you can see well into 2014. But just an overall perspective on our margins would allow you to perhaps broadly frame how we are thinking about this.

So, we reported and adjusted total operating margin, so this is total operating margin of 7.5% in 2012 for the full year and we kind of consistently said that we believe that this business could drive annual operating margin improvement of roughly 50 basis points, driven in large part by the fix costs leverage across our P&L including our SG&A.

So, its kind our based expectation now. I might note that despite this supply chain headwinds that we are faced with now; we believe that this year we still remain on track to deliver that 50 basis points improvement on a full year basis for 2013.

With that as a back drop, clearly as you know with this stepped up investment spending that we have this year and continuing into next year, we do expect those to drive some additional margin expansion over and above what our base algorithm would suggests and how much that will be will depend upon a number of factors but I think all things being equal, we believe that as we execute these initiatives fully over the course of the next two years, and we see the benefits fully reflected in our P&L, I think you could expect up to another 50 basis points of margin expansion in total over that period time.

And as you just suggest that will come in gradually over the next couple year of period. So if you’d like to model it, think of maybe incremental 25 basis points a year over the course of the next couple years as we built out these capabilities and we see the benefits.

Diane Ghastlier - CLSA

Okay and then I could ask on your, how is the channel of distribution shaping up. I know traditional retailers you always had a pretty good share position there but can you talk about some of the alternative channels such as C store and maybe foodservice, particularly as you bring out these items that are sort of focused on convenience; single serve type products. Could you talk a little bit about that development of the channel?

Blaine McPeak

This is Blaine. Just some context on the channels overall. We are pleased with the development of what we would consider our away from home channels plus club as we continue to expand distribution in particular in the food service venue, when you think about our club channels that fairly models our retail distribution that you might see in food, grocery, and math.

This is a business that overall has grown slightly faster than the overall right way of North American growth rate, so we continue to drive from distribution there but importantly we’re also driving velocity with some of the innovation that we’ve brought to the marketplace. So as you are aware when we get into the away from home market place in particular in food service, it’s difficult to fully assess exactly all the distribution levels that you have.

We think it’s relatively balanced between both distribution that we have picked up and velocity improvements that we’ve seen and as part of this separation from Dean Foods that was part of taking on the solid responsibility as well for that away from home segment and we’re very pleased with how that progress has occurred here toward the end of the first quarter.


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

Judy Hong - Goldman Sachs

Couple of question, first just in terms of your full year guidance, I think your tax rate is now higher at 34, 35 but doesn’t seem like full year earnings guidance isn’t changing. So just help us understand what’s coming in little better from an operating income perspective and then secondly just in terms of the margins in the quarter, I guess our understanding was that you have a much more upfront loaded headwinds on the margins and that the margins will improve as you get into the back half the year and it actually came out with 70 basis points of margin expansion in the quarter, so was there any timing factor in the quarter and how should we think about sort of the phasing of the margins as you go into the rest of the year?

Kelly Haecker

First of all with respect to the guidance, yes, we have called up our tax rate just slightly. As we mentioned there were some discreet items I the quarter which added to our effective tax rate. T think you should think about our tax rate on a normalized basis to be closer to 34%. So the full year, that’s why we’re suggesting it probably will be a little bit note of 34% including the much higher rate in Q1.

So, you are right, we have called that up for the full year and our expectation is that we are expecting some slight upside to our original guidance and operating income, which is why those two factors kind of to lead us to the same conclusion respect to our EPS guidance. And its number of factors I think making us feel more comfortable by the operating income forecasted at this point.

With respect to the phasing of the margin, yes I think that extension you noted in Q1, 70 basis points year-over-year, operating margin, as I suggest in earlier my comments, I think it’s similar to what we’re anticipating for the full year. Certainly there were a number of timing issues affecting Q1. It certainly was the most challenging quarter for us from a distribution and warehousing perspective on year-over-year comp basis and that was probably the most difficult part that we faced in Q1, but as we go up through the balance of the year, we anticipate frankly to deliver a pretty similar margin improvement, each quarter as we go through the year.

Gregg Engles

Yes. Judy, just to put a little more color on that I think that you’ll see us step up our level of investment in marketing as we get into the last three quarters of the year on a comparable basis compared to the prior year period. So, as we see improvement in the distribution and warehousing side of things I think you’ll see us have up higher level of spending increase basis prior year in the back half on marketing.

Judy Hong - Goldman Sachs

Any specific areas in terms of what you expect the more meaningful step up investments, is that innovation or just other things any brand specifics.

Blaine McPeak

Yes. Most of the step up will be in support of our coffee creamers or Iced Coffee in our plan based beverages and consistent with what we’ve seen in the first quarter here, all the categories remain very, very robust in particular coffee creamers and beverages as well as plant base beverages and in every one of our categories we continue to drive our full penetration, as of matter of fact in the first quarter, building off the success we thought last year and plant based and silk hustle penetration based. So we improved the overall year by 300 basis points. We saw a rapid hustle penetration on plant based beverages, category in the first quarter here. Now a lot of that is due to, we have very highly effective marketing in a place today and we will continue to invest, focus predominantly across those three platforms.


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

Chris Growe - Stifel

Just have two questions for you if I could first one just be, is there any more color and I really just think there will be better sense of how to model for the year Europe profit performance in the quarter was very strong. Anything that you can note there, that would give us any color on how to that model that for the year.

Gregg Engles

Yes I think the really Europe in Q1 was driven by the overlap of the launch last year of almond hazelnut and rice as well as an expanded soy line in our principal marketplaces in Europe. So marketing spending this year didn’t have those launch cost in it. So this at least as we see it today will probably be the quarter of greatest outperformance versus last year and the year over year cost in Europe on the operating income line will come back down into more normalized sort of comps, relative to the top line growth for the business in the back half of the year.

So we are up to an incredibly strong start there largely due to overlaps. We continue to see a very, very extraordinarily healthy top line in Europe given the circumstances in that particular market place and we will leverage that down in the more normalized rate till operating income grows in that business over the back part of the year.

Chris Growe - Stifel

In relation to you mentioned before about, may be get some color on the phasing of the marketing for the year, was marketing down overall for the company in this quarter, is that mostly related to Europe and I guess I understand from the North American marketing trends, were those still steady or up or how did they perform in the quarter.

Blaine McPeak

Yes marketing was down company wide, year over year and as Gregg suggested, it was largely due to the overlap in Europe relative to their significant set up investment in prior year for the launch of Almond milk and hazelnut milk. In north America our marketing spend overall was relatively flat and again that was against elevated level of marketing spend last year in Q1 behind our product launches last year. But overall it was down year over year.

Chris Growe - Stifel

And I just wanted another question for you. Just in relation to the yogurt business, the soy yogurt business you have launched, I know it's something that you thought it would take some time and some consumer education or what not, it's something that's in line with where you expected distribution to be and just curious if you have any more color around how is that going and how your efforts are undertaking to educate the consumer.

Blaine McPeak

Yes we launched Silk Fruity & Creamy yogurt in January of this year which leveraged the lot of the learning that we have coming out of our Alpro business there and a successful yogurt business that they have there and it is still very earlier. You will recall that we wanted it keep it relatively limited launch here with respect to a lot of the dynamics that are happening in the yogurt category, and we wanted to approach as almost a test and learn and then as we see successful role.

So everything so far is on the distribution side is within our expectation. So we have achieved about 20% ACB distribution overall and so far we are encouraged by the early signs of what we are seeing the velocity on those items. We are going to treat it very much as keeping it into this type of a realm of continue to develop where we have stronger marketplaces for the Silk business overall and we start to see some signs of success then we will consider a role out, that would go more broadly than that. But generally speaking we are pretty pleased of what we have seen so far.


Your next question comes from the line of Erik Katzman from Deutsche Bank, please proceed.

Erik Katzman - Deutsche Bank

A couple of questions. Gregg, I guess, having had the chairman role at Dean and then resigning from that, you must have had influence on the decision for Dean to retain the 20% stake, potentially. Why allow a situation with the overhang associated with that to exist and potentially obscure what sound like pretty good fundamentals for WhiteWave.

Gregg Engles

Well, I think, you know in any of these sorts of events, like we have been there in terms of the disaggregation of Dean, there is more than one objective and more than one constituency. So at the end of the day Dean’s retention of shares and yes, I was on the board, I have some influence but I had one of the 11 vote. So you can sort of measure my influence by that.

At the end of the day Dean has to feel comfortable with where its balance sheet is going to be. And I think the decision was made to give Dean as robust a balance sheet as possible and really the vehicles for doing that after the IPO and sale of Morningstar were the sizing of the retains share of the WhiteWave business.

So that will be monetized, or will be turned into cash over some period of time, the outer bound which is 18 months. They have made their intensions with respect that clear, and it’s all about their balance sheet. So, yes, it may be some overhang.

Although, I think I would slightly dispute the notion that that overhang when there are $140 million WhiteWave shares trading here following May 23rd, that overhang is a gigantic burden on the marketplace, but it is or isn't, it will be resolved over a relatively short period of time so I guess the answer is we did it the way that we did it, the collective action of these two Boards in order to solve Rubix cube and leave everybody with the right balance sheet and right positioning going forward for the long term.

Erik Katzman - Deutsche Bank

And then the second question really has to do with more of a strategy or fundamental issue. This soy milk business, I understand the move to line extend and grow almond and coconut and all the other businesses that you have but what I do not hear any more is driving let’s say half gallon core soy business and I would guess that that is one of your highest margin businesses and yet it sounds like you feel that in the U.S. that soy in terms of household penetration or usage per capita has basically kind of stagnated. How do you react to that?

Gregg Engles

Well I am going to let Blaine react to it but I will give you my sort of top line thoughts on it which are first of all we have positioned our plant based beverage platform so that we are agnostic with respect to line items in terms of margin. So soy does not have any higher margins than almond or than coconut. So the luxury of that is the consumer can now take you where they want to take you in terms of their purchase preferences without penalizing your P&L.

The second thing that I would say broadly about how we think about this business is we no longer think about it as the soy milk business. We think about it as the plant based alternative to dairy category or plant based beverage category and I think what you are seeing is the natural expansion and evolution of a category from being an ingredient specific business, a soy business in your vernacular to being, there is many ways to describe it, a dairy alternative business a plant based beverage business and what happens when you give consumers a lot of choices is that they migrate away from the single choice they had in the past right so in the past their single choice was soy today we have given them lots of different choices and they are making alternative choices based upon what they like.

The result has been the category has gone from being a sort of in the kind of 2009 timeframe, a mid-single digits grower to being a 20% grower. Right it's on pace to be 14-15% grower this year. So fantastic positive development for the category driven by great expansion in household penetration again as we offer consumers more choices.

So we're delighted with the evolution of the business. Do we wish almond was all on top of soy and no cannibalization? Yes but I don't think in our heart of hearts we think that's a logical outcome. So I'll let Blaine talk more about it.

Blaine McPeak

I'll just build a little bit on that, I think that captures it very, very well. In looking at a lot of different categories in the food industry over many, many years I think one of the characteristics is that every category sees shifts within segments of each of the categories and I can pick five off the top of the head where you're seeing some of that.

The important part I think is that those companies that are successful in managing through that transition are those that they see it, they capitalize upon it and ultimately they embrace that change within the categories and go where the consumer's going overall. And we've seen that similar aspect here within overall plant based beverages, with the shifts between soy and almond and coconut milk, the others that come over time.

But the key here is that we saw it and we embraced it and today we hold a share of leadership position in every one of those segments and still hold a nearly 65% market share of the overall plant based category and we're committed to being the leader in those categories, those segments to continue to drive that growth. You've seen it in the market household penetration growth that we saw last year and it continues in the first quarter of this year and as Greg mentioned we have a very robust category here growing in the teens and we're going to follow the consumer, we're going to better understand each of these segments within and why consumers are buying those segments and make certain that we're appealing to each of those, but in the end our margin structure is very, very comparable across these segments today and we're fairly agnostic as Greg mentioned about where we drive that growth.

Gregg Engles

Just one more, sort of, I guess anecdotal reference. If you looked at the flavored coffee business 10 years ago, there was two flavors in it, there was a Hazelnut business and a French vanilla business and we could have the same conversation when the categories started to offer consumers lots of choices and today there's 50 different flavors in the category.

There is tremendous amount of innovation and Hazelnut and French vanilla are a much smaller percentage of the category, but guess what, the category's three times as big, and that's where we all want to be.


Your next question comes from the line of John Baumgartner from Wells Fargo. Please proceed.

Dennis - Wells Fargo

This is Dennis filling in for John. I guess just following up on Eric's question thus far sales in soymilk being offset by gains and almond milk but if the declines in soy milk continue to be large enough, could they be too large offset gains by almond milk and if so, do you view this is a risk to the overall silk platform or is this not a big concern giving your comments that you just made and your comments on the size of almond milk now?

Gregg Engles

I think you have to understand where the soy milk drinker is going, right? So, for your hypothesis, for your supposition about the category to be true, people would have to be leaving the soy milk category and not going to almond right? And that's not what's happening. They are leaving the category and they are going to almond or to coconut or to one of these other choices, right? They are not just leaving soy; they are moving to another diary alternative beverage, which we happen to provide.

So as soon as you link those data points, then you are correct. The worry about soy some of being a negative and almond not being a positive kind of goes away, right? They’re not leaving soy because they don’t like soy. They're leaving soy because they like almond better.

Dennis - Wells Fargo

And then just a quick follow up if I might. Is there a risk that we could get into a situation where your base was supply constrained for almonds, similar to organic milk or you have a lag for supply response? So conceivably could there be a situation where the lag in production could put pressure on input costs more so on other products such as soy milk?

Gregg Engles

I think overall we would not have any macro concern about our ability to supply our almond milk product. As we mentioned previously, we have seen some inflation in the second half year here of 2013 which we feel confident that we have covered through changes within the different commodities that we procure but I wouldn’t think there is any concern at this point about any supply constraints.


Your next question comes from the line of Ryan Oksenhendler from Bank of America Merrill Lynch. Please proceed.

Ryan Oksenhendler - Bank of America Merrill Lynch

Just a follow up on the supply of almond milk; now I think about actually talking from the other side, is there a chance that you see increased competition given the growth of the category, the solid margin structure obviously but you guys went from co-packing most two product to actually bringing in house. So is there excess capacity out there that someone else could actually see more or increased competition in that space?

Gregg Engles

We see competition today in all of our categories, be it either branded or private label. I think you will continue to see new player coming to these categories because there’re growth categories but here we sit with nearly 55% share in the Almond category and I think we’ve proven overtime that we’re pretty good at being able to hold our share positions within the category because we’re committed to the category growth in building brand overall and that's through great marketing great partnerships with our customers and as well as bringing innovation to the marketplace.

So yes, there might be other players who coming into marketplace and in some regards that can be benefit as well continue to grow the overall categories well. So we’re fully aware that other will play in our categories here and we’re accustomed to cross our entire business.

Ryan Oksenhendler - Bank of America Merrill Lynch

And then just quickly on housekeeping, the outlook for interest expense I think you’ve guided $20 million to $22 million, it came little bit below that run rate in the first quarter and you get the benefit of few million dollars from the Morningstar sale coming. Is it coming below that possibly for the full year?

Gregg Engles

Yes, it could, I think assume around $20 million right now. That’s kind of the way we’re thinking about it, take Q1 and multiply it times four and you’re in roughly that neighborhood. So, $20 million approximately I think a pretty good estimate for a full year at this point.


Your last question will come from the line of Bill Chappell from SunTrust. Please proceed.

Bill Chappell - SunTrust

One of the things you’ve talked about I guess over the past four, five, or six months as the Dean transaction was completed, you might look more strategically, be it M&A or expanding from horizon to other categories or what have you, is that still the case and now that we are nearing the end of the parenthood, is that something you’re looking increasingly for the second half?

Gregg Engles

Well clearly its part of our long-term plot for value creation. We think we have a really robust U.S. platform that's built around a great management team and great systems. We have a robust European platform that frankly would benefit from supporting a larger business in terms of the margins structure there and the G&A burden and we think that we have a great positioning as one of the leading players in these on trend categories to build our business into related categories with similar dynamics.

So yes, we will be looking in those spaces for lots of reasons including some of the limitations of private letter ruling. We’ve been cautious about going on too much stuff prior to the spin for some technical tax reasons and so we’ll be mindful of that out through the 2013 but beyond that I think you should hope that you’ll see activity from us over time because I think we have an opportunity to build the value of our business in the M&A arena. So, we’ll be out there looking to expand our business with businesses are of similar character to what you see in our portfolio today.

Bill Chappell - SunTrust

Okay. And then can you just give a little more on the kind of manufacture are the warehousing distribution initiatives in kind of what you’re expecting kind of out of that?

Gregg Engles

Again, to reiterate just specifically with respect to warehousing distribution and maybe just a backup for a second and as Blaine eluted to this earlier. All of these things kind of work in synergy together. As we are stressed for manufacturing capacity standpoint that requires us to produce product in less optimal locations and co-packing which ultimately drives distribution and warehousing higher and then in addition to that to that, we're short on internal cold storage warehousing, so we have to use more outside.

So all of our investments around CapEx that we’ve talked about here today, whether they’re capacity related from a plant manufacturing standpoint or whether it’s directly associated with warehouse capacity have a pretty significant effect on our warehouse and distribution overall.

So, as you see outlined there, we have a number of capacity projects brought online, the fillers that we mentioned, those filling lines, as they come online, that will ultimately improve warehousing and distribution and then specifically as we get into the latter part of next year, both on the east coast and west coast, first at the east coast we will be bringing up some warehousing capacity that we’re investing in associated with our east coast plant and then on the west coast, it's a little different project we’re working on just consolidating a lot of our warehousing on the west coast that is currently, again, further off site and inefficient today. So, we think there is an opportunity frankly without investing but just changing the way we consolidate and operate warehouses out there can be beneficial.

So, all those things working in tandem, we think continue to drive margin improvement but as we suggested this will be gradual, it will be over a couple of year period time and probably won’t come to fruition fully until we get into the first half of 2015.


Ladies and gentlemen, I would now like to turn the call back over to Mr. Gregg Engles for closing remarks.

Gregg Engles

Well, thank you all for joining us on the call this morning. We appreciate your continued interest in the company and we look forward to talking to about our second quarter results on our next call when we are a fully independent company. Thank you all very much.


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

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