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Catching the Wave



March 12, 2014 – Comments (0) | RELATED TICKERS: WWAV

Board: Value Hounds

Author: LeKitKat

Coffee creamers

There are both organic and not-so organic creamers. The not-organic include dairy creamer Land O’ Lakes and non-dairy International Delight. Land O’ Lakes is a half and half milk/cream coffee creamer. International Delight is water, sugar, corn syrup some mono/diglycerides artificial and natural flavors and a few more ingredients. So not exactly health food. WWAV also makes a plant-based soy coffee creamer in three flavors and are the Silk Brand.


Things you can drink include organic plant-based soy, almond and coconut milk from Silk. Horizon is organic milk in cartons and boxes for kids (and adults if you roll that way). Organic milk for the masses as WWAV says.

Alpro (that looks disturbingly like Alpo if you aren’t reading carefully) is the European version of Silk—plant-based soy and non-soy beverages and other foods.

Silk, International Delight, and Horizon Organic have the #1 or #2 brand positions based on retail sales in the United States, and Alpro has a #1 brand position based on retail sales in Europe.

European sales are still a small percentage of total sales. That may be a good thing since margins are so much lower than North American sales. Alpro revenue increases outperformed the US business in Q4.

[See Post for Tables]

WWAV has had revenue growth in the mid-to-low teens over the past 5 years with 2010 growth higher at 18.4%. CAGR is 14% from 2007 to 2013.

Operating and net margins declined in 2013 after the IPO as cost of sales increased and SG&A continued to grow. Net income was especially hard hit by a doubling of the interest expense. Operating income to interest expense decreased from coverage of 18x down to 8.6x from 2012 to 2013. Interest expense will nearly double from current levels when the Earthbound Farms merger is finished in Q1 2014. Of course, part of the increase will be offset by the $500 million in revenue EBF is expected to generate. At estimated 6% margins, EBF would add operating income would increase by $30 million and debt expense could reach $36 million depending on LIBOR. I expect margins to contract a little after the merger.

WWAV sells to grocery stores, mass merchandisers, club stores, convenience stores, and health food stores. They also sell to restaurants and other businesses that use food distribution services (hospitals). They do get pretty sweet shelf space in dairy at eye level and that creates better sales.

White Wave and organic grocers (Whole Foods, Sprouts, Natural Grocers) growth in the natural and organic sector is outpacing the growth of the overall food and beverage industry.

WWAV is in a growth industry

• Plant-based foods and beverages represented a $2.1 billion market in the United States and Europe in 2012with a CAGR of 10% from 2009 to 2012. Plant-based foods and beverages are a $1.1 billion category in the US alone in 2012 and increased 18% from 2011. The European market was $1.0 billion in 2012, increasing 5% from 2011. Almond-based beverages are growing faster with a CAGR of 126% from 2009 to 2012 and are a $458 million subcategory in 2012 use.

•Coffee creamers and beverages were a $3.9 billion business in the United States in 2012 with a CAGR of 9% from 2009 to 2012.

•Premium dairy was a $2.4 billion business in the US in 2012 and had a

CAGR of 7% from 2009 to 2012. Organic milk was $1.3 billion in sales and grew 10% yearly from 2009 to 2012.

Sales of organic food and beverages are expected to reach about $188 billion by 2019, growing at a compounded annual growth rate of 15.5% from 2013, according to a report by Transparency Market Research.

In 2013 WWAV’s revenue growth was 15% and exceeded the CAGR of 14% and also exceeded the growth premium dairy, coffee creamers and plant-based categories over the past 3 years (7%-10%). If the demand continues, long-term growth looks good for mid-to-low teen revenue growth. Margins have been less predictable and the merger with EBF may not help. WWAV will need to develop expertise in marketing and distributing perishable fragile produce and put its marketing mojo into pushing salad. Marketing for soy and almond milk has been successful-- almond milk sales have outstripped all other product. Distribution for Earthbound Farms looks good (anecdotally speaking). I find it at most traditional grocers and club retailers like Sam’s. It is prominently labeled organic where other spring salad mix brands and off brands are not always organic.

Details of the IPO and how it was financed

In connection with the IPO WWAV borrowed $885.0 million under the senior secured credit facilities and repaid approximately $86.0 to the revolver with IPO proceeds.

The senior secured credit facilities provide $1.35 billion borrowing capacity under revolving credit ($850 million) and two term loan facilities ($500 million). Borrowings interest is high at LIBOR plus 1.75% per annum / LIBOR plus 2.00% per annum (one facility).

Bottom line -- debt is not exactly cheap and interest floats.

Making WWAV and the IPO

WhiteWave was incorporated July 2012 as a wholly owned subsidiary of Dean Foods to acquire the capital stock of WWF Operating Company, a wholly owned subsidiary of Dean Foods. Dean Foods contributed all of the capital stock of WWF Opco to WhiteWave in exchange for 150,000,000 shares of Class B common stock. WWF held all of the historical assets and liabilities related to the current WWAV business.

October 2012, WWF issued $1.2 billion in short-term (1-2 years) notes to Dean as a dividend.

Also in October WWAV increased the total number capital stock to 2,045,000,000 shares, and created two economically equal classes of common stock with A votes worth one and B stock worth 10 votes. Dean had B stock.

At the end of October 2012, WWAV did the IPO and sold 23,000,000 shares of Class A for $17.00 per share. At the same time WWAV borrowed $850 million against the $1.3 billion credit facility. That plus the $282 million from the IPO was used to pay off the notes to Dean. Part of the credit facility was paid off with the rest of the IPO mad money.

In May 2013, Dean Foods distributed 47,686,000 shares of WWAV Class A common stock to its shareholders and 67,914,000 shares of WWAV Class B stock as a dividend on shares of Dean stock outstanding.

Dean Foods owned 34,400,000 shares of WWAV Class A no shares of Class B stock (class B was downgraded to one vote). They required to dispose of any remaining ownership interest within three years by May 23, 2016 and did so in July 2013.

---- short version, WWAV came to market in a debt(notes to Dean) for equity transaction.

December 31 2013 debt $662.7 million and debt/capital was 41%. The merger in Q1 2014 will raise this a bit. We will have to wait to see what equity EBF brings before it can be calculated.

BTW Engles did well for himself with the spinoff. He made $22.5 million in 2012 compared to $8.6 million in 2011 with nearly $10 million in IPO stock and options and a $4.7 million cash bonus.

Q4 and annual 2013

Q4 EPS were $0.22, up 22% and annual EPS were $0.74-- a 23%. Q4 revenue increased 11%. Full year revenue increased 10% reaching $2.5 billion.

WWAV adjusted the operating income and for the year it was $209 million vs the GAAP $155 million and on that basis, there was an increase of 21% rather than a decline Adjustments consisted of decreased SG&A costs incurred by the IPO and asset disposal expense.

US sales 2013

•Plant-based Silk soymilk, almond milk, and coconut milk, revenue increased 13% in 2013. Silk almond milk sales grew over 60% during the fourth quarter and 58% for the year. W Almond milk has been a hit.

Anecdotally I see heavy marketing for almond milk and that includes the competitor Blue Diamond. Almond milk is trending #. WhiteWave’s Silk brand continues to hold the #1 market positions in each of its product subcategories.

•Premium dairy (Horizon Organic) increased 5% for the year.

•Coffee creamers rose 13% in Q4 and 12% for the year.

Europe 2013

European Alpro revenue increased 16% in Q4 on a reported basis and increased 12% on a constant currency basis. For 2013 revenue was up 14% (reported) and 12% on a constant currency basis.

Loss of licensing revenue

Since the IPO WhiteWave lost related party license income collected from Morningstar for the rights to produce and sell White Wave products. It was not an insignificant loss and made up a meaningful percentage of operating income. The licensing revenue was added in after gross income and the next table is the percentage of operating income licensing revenue contributed.

Licensing revenue as a percentage of operating income

2013 2012 2011 2010 2009 2008
0.0% 20.0% 24.3% 31.4% 45.8% 47.8%

It has decreased over the last 5 years winding down to zero in 2013. Its loss is partially responsible for slowing operating income growth and lower operating margins in 2013. There was also a $26 million charge for asset disposal and exit costs contributing to negative growth and contracted margins.

After normalizing operating income, operating income growth is negligible and margins contracted year-over-year.

Net margin and net growth are affected by the one-time charge, but more importantly, interest expense doubled and will increase again when the Earthbound Farm deal is finalized. Earthbound farms appears to have lower net margins than WWAV and growth in net income and earnings per share may slow initially after the merger. WWAV estimates EBF will add 7¢ to 2014 revenue and that works out to net margins around 2.4% on $500 million in revenue—about 100 basis points lower than WWAV 2013 net margin (unadjusted) and 5.3% in 2012. WWAV says that EBF EBITDA margins are mid-to-low teens and that indicates after assimilation, EBF net margins may expand.

New Deals

China Joint Venture

On January 5, 2014 WWAV announced it’s in the process of forming a joint venture with China Mengniu Dairy to manufacture and distribute products in China. It will begin producing products in late 2014 and with China’s poor safety track record on its own dairy and other foods, foreign-based organics should find a market.

Earthbound Farms merger

WhiteWave closed on Earthbound Farms (EBF) January 2014 from investors including private equity firm Kainos Capital for about $600 million. EBF does mainly packaged salads and organic fresh and frozen fruits and vegetables with revenue estimated at $500 million in 2013. They will need to increase and borrow from credit facilities at a floating rate of LIBOR plus 1.75%-2%. Their margin on borrowing is a shade on the high side and interest rate risks may dampen market enthusiasm for the merger if 2014 margins and growth stall or decline. Interest rate fears hit REITS and MLPs that have seriously underperformed the past year mostly due to the uncertainty surrounding rate hikes. A floating rate will be subject to rate moves and increase interest expense. Current LIBOR is 0.23% and if they borrow now, the margin and LIBOR would create 2.23% rate. If they borrow $600 million, interest can be estimated around $13.4 million per year.

WWAV is paying 1.2x revenue and 8x EBITDA —- reasonable prices in a world where FB just paid $19 Billion for Whatsapp with its 450 million subscribers and half of those paying 99¢ per year.

Earthbound Farms sells packaged organic produce --over 100 products. Organic packaged salads as a sector are growing sales at a compounded annual rate of 15% implying EBF should be capable of grow at this rate. It has brand name and packaged salads have a 21% penetration –the highest of any organic category. With WhiteWave as producer/distributor it’s probable EBF products will get good shelf space. Eye level, great shelf placement is key to high sales. You never want to be on the bottom and top shelves. WhiteWave (at least anecdotally per me) gets good exposure in the dairy aisle. With WhiteWave's retail presence, Earthbound should also see more shelf space in big retailers including club stores.

EBF gets 65% of sales in packaged salad, 45% total market share of organic package salad and 57% of branded the market –3x the nearest branded competitor. FWIW, Sam’s Club sells its own unbranded mixed greens. There is no doubt many others.

Salad continues to be one of the dominating categories for organic foods. In the United States, 21% of salad sales for 2013 will be organic. This has grown strong from 12% share back in 2008. The market share of organic salad is the highest penetrated category of all foods. WhiteWave will be happy to integrate the growing share of organic foods into its market leading positions

More good news is the acquisition will be accretive in year one and add 7¢/share to adjusted net earnings. It’s a good acquisition adding 19% to guided organic revenue and 8% to projected organic EPS in 2014 based on $500 million in sales for EBF.


Revenue growth in the high twenties for the full year and in the first quarter of 2014, based upon an organic growth rate of approximately 7% to 8 % in 2014 for the existing businesses and the inclusion of Earthbound Farm’s operating results beginning in 2014.

Adjusted operating income growth rate is estimated in the mid-thirties driven by continued strong organic volume growth, coupled with progress on capacity and cost reduction initiatives, and the inclusion of Earthbound Farm results.

Management forecasts annual interest expense to increase to approximately $33 to $37 million (about where I put it with current LIBOR plus margin), based upon the current forward outlook on rates.

Adjusted diluted earnings are projected at $0.90 and $0.94 for full year 2014 and at the high end would be 20% growth all on an adjusted basis.


WhiteWave is in a moderate growth industry (it’s not Tesla or Netflix) and if it continues to increase revenue in tandem with the predicted growth of the organic markets for salad and plant-based beverages, the next few years will see steadily rising revenue around 15% annually. Margins may not fare as well in the near-term as interest expense and the merger with lower margin merger are assimilated. It’s an OK acquisition and a nice fit with the WWAV organic business and expands their reach into foods other than dairy.


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