WhiteWave Foods Co Q3 Earnings: A Deeper Dive

WhiteWave Foods (WWAV) reported its third quarter 2015 earnings on November 9. The leading producer of plant-based foods and beverages, which is also a player in the organics and premium dairy spaces, posted solid year-over-year revenue and earnings growth that beat its own guidance and analysts' expectations. It also upped its full-year 2015 earnings guidance.

Key numbers

Data source: WhiteWave

These are solid results whether one focuses on the reported or adjusted numbers. Notably, operating margin expanded, while the organic revenue growth rate shows the company's core business is growing nicely. Organic growth excludes contributions from acquisitions made in the last year.

The China joint venture is currently eating into profit, but once it's up and running, investors should see a long-term payoff. The middle -- or "consuming" -- class in the world's most populous country is growing like gangbusters. 

Constant-currency numbers best reflect a company's performance. While the U.S. dollar has been particularly strong against foreign currencies, this dynamic is not likely to continue indefinitely.

Source: WhiteWave Foods

High-level overview

• Company closed on the Vega and Wallaby acquisitions. Vega makes plant-based nutritional products, such as powders and bars, while Wallaby is a popular California-based maker of organic yogurts and kefirs.
• All three segments experienced growth.

The Americas food and beverages segment (72% of total revenue)

• Segment has three platforms: plant-based foods and beverages, coffee creamers and beverages, and premium dairy.
• Revenue increased 23% from the year-ago period to $723 million.
• Organic revenue grew 11% on a constant-currency basis. 
• Operating income rose 31% to $89 million and jumped 37% on a constant-currency basis.
• Revenue in plant-based foods and beverages soared 41%. This platform includes the flagship Silk brand of beverages and yogurts; So Delicious beverages, frozen desserts, and yogurts; and Vega nutritional products.
• Growth in plant-based foods and beverages was driven by the inclusion of So Delicious (acquired in the fourth quarter of 2014), two months of Vega's results, and strong organic growth across the platform. Organic revenue increased in the low double-digits on a constant-currency basis.
• Within this platform, refrigerated nut-based beverages increased 11%, frozen desserts and novelties grew 23%, and yogurts increased 34%. WhiteWave has the market-leading position in each of these categories.
• Revenue in coffee creamers and beverages rose 13%. Organic revenue grew in the high single-digits. 
• Revenue in premium dairy increased 18%, driven by mid-teens organic growth and the inclusion of one month of Wallaby's results. Organic growth was driven primarily by price increases in organic milk, as well as growth in other dairy products. Revenue in the organic milk category increased 6%; Horizon Organic continues to be the market leader in this category. 

Americas fresh foods segment (15% of total revenue)

• Segment consists solely of the Earthbound Farm brand, which includes organic salads, fruits, and vegetables. This brand is fairly new, as it was acquired in Jan. 2014. 
• Earthbound Farm continues to hold the market-leading position in organic packaged salad.
• Revenue increased 5% to $147 million.
• Adjusted operating income decreased 12% due to higher farming costs related to short-term increases in crop inventories. 
• Segment has struggled this year, as weather affected supply availability early in the year. This appears to be a temporary situation, and perhaps in part due to a learning curve, as Earthbound is a relatively new acquisition. 

Europe foods and beverages segment (13% of total revenue)

• Segment sells plant-based foods and beverages primarily under the Alpro brand. It also produces private-label products. 
• Revenue increased 4% to $135 million, and grew 20% on a constant-currency basis.
• Operating income increased 39% on a reported and constant-currency basis.

Main risk factors 

• Commoditization: A major risk factor involves increased competition, mainly from private-label brands in the core plant-based business, resulting in commoditization. Blaine McPeak, president of the Americas foods and beverages segment, said on the conference call that private-label market share in the plant-based business in the Americas is running about 13%, and the company expects "modest increases over time." Investors should keep their eyes on this number and operating margins.   
• Debt and cash flow: WhiteWave's debt-to-equity ratio is 1.8, which is somewhat on the high side for a company in its industry that doesn't have strong free cash flow. It's taking on debt to expand its operations and make acquisitions. This is a positive, as long it reaps a net benefit, and the company can repay the debt without eating too much into its cash stash. So, far this seems to be the case. However, investors need to watch the interconnected debt load/cash flow/cash position situation. 

Looking ahead
WhiteWave raised its full-year 2015 adjusted earnings guidance to $1.17 to $1.18 per share from its previous guidance of $1.14 to $1.17. This outlook excludes the expected $0.07 per share constant-currency operating investment in the China JV. The company also reiterated its expectation of approximately 10% constant-currency organic revenue growth for 2015.

We're in the early innings of a global shift away from dairy products to plant-based ones. WhiteWave should continue to benefit from this transitioning since it's the dominant player in this fast-growing category and has proven adept at strategic acquisitions to extend its product portfolio. It's also a major player in other rapidly expanding spaces, most notably organic foods and beverages.

WhiteWave's stock has solid long-term potential, as long as the main risk factors outlined above remain controlled. The China JV in particular could be a significant catalyst for growth. A good amount of growth is already priced in, with the stock sporting a forward price-to-earnings ratio of 29 and a five-year PEG of 1.8.