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Edited Transcript of DF earnings conference call or presentation 7-May-19 1:00pm GMT

Q1 2019 Dean Foods Co Earnings Call

DALLAS May 13, 2019 (Thomson StreetEvents) -- Edited Transcript of Dean Foods Co earnings conference call or presentation Tuesday, May 7, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jody L. Macedonio

Dean Foods Company - CFO & Executive VP

* Ralph P. Scozzafava

Dean Foods Company - CEO & Director

* Suzanne Rosenberg

Dean Foods Company - VP of IR & External Communications

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Conference Call Participants

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* Amit Sharma

BMO Capital Markets Equity Research - Analyst

* Bryan Cecil Hunt

Wells Fargo Securities, LLC, Research Division - MD & Senior Analyst

* Christopher Robert Growe

Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Analyst

* David James Allen

JPMorgan Asset Management (UK) Limited - Fund Manager

* Jacob Samuel Nivasch

Crédit Suisse AG, Research Division - Research Analyst

* Judy Eunjoo Hong

Goldman Sachs Group Inc., Research Division - MD, Senior Analyst & Co-Head of the GIR Asian Professionals Network

* Robert Frederick Dickerson

Deutsche Bank AG, Research Division - Research Analyst

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Presentation

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Operator [1]

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Good morning, and welcome to the Dean Foods Company First Quarter 2019 Earnings Conference Call. Please note that today's call is being recorded and is also being broadcast live over the Internet on the Dean Foods' corporate website. This broadcast is the property of Dean Foods. Any redistribution, retransmission or rebroadcast of this call in any form without the expressed written consent of the company is strictly prohibited.

At this time, I'd like to turn the call over for opening remarks to the Vice President of Investor Relations and External Communications, Ms. Suzanne Rosenberg. Please go ahead.

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Suzanne Rosenberg, Dean Foods Company - VP of IR & External Communications [2]

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Thank you, Joelle, and good morning, everyone. Thanks for joining us on our first quarter 2019 earnings conference call. This morning, we issued an earnings press release, which is available along with a slide presentation in the Investor Relations section on our website at deanfoods.com. A replay of today's call will be available on our website beginning this afternoon.

Before we begin, we 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 are based on current expectations and projections and involve risks and uncertainties that may cause actual results to differ materially from our forward-looking statements. Information concerning those risks is contained in the company's filings with the SEC. In addition, we will be discussing operating and financial results on an adjusted basis. A reconciliation of these non-GAAP measures referenced during today's discussion to the most directly comparable GAAP measures can be found in today's earnings press release on our website. Participating with me in the prepared section of today's call are Ralph Scozzafava, our Chief Executive Officer; and Jody Macedonio, our Chief Financial Officer. Ralph will start us off with a review of our first quarter performance as well as an overview of our strategic plan. Jody will then offer some additional perspectives on our financial results before turning the call back over to Ralph for comments on the forward outlook and other closing remarks. We will then open the call to your questions.

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

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Ralph P. Scozzafava, Dean Foods Company - CEO & Director [3]

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Thank you, Suzanne, and good morning, everyone. Our first quarter was a busy and productive period, laying the foundation for the ongoing improvement we expect throughout 2019. The adjusted operating loss was in line with our internal plan expectations, and the underlying trends that we're seeing in operations are encouraging. We saw sequential improvement in each month of the quarter, and our results marked an improvement compared to the fourth quarter of 2018. Despite unfavorable comparisons arising from certain customer volume that exited our system last year, we believe we have passed the inflection point in our transformation, as many of the initiatives we implemented over the past 12 months are now beginning to take hold.

Execution of our strategic plan is driving the improved results, and we're on the right trajectory to deliver year-over-year improvement and positive free cash flow for full year 2019 starting now. Importantly, we remain laser-focused on executing our enterprise-wide cost productivity plan. We've made significant progress integrating our operating model and rightsizing our cost structure as well as introducing innovative new products and driving promotional improvements for both our customers and our company. This has been a significant undertaking and a true reset for Dean Foods, which operates in an industry that's experiencing large customer and consumer shifts. In short, we're actively resetting our cost structure and our supply chain to more adequately align with the dairy industry of today and tomorrow. We're moving from a legacy holding company structure into an integrated operating company with streamlined and centralized operations. As a result of the actions we've taken, we're starting to see real progress in the first quarter, and we expect to be free cash flow positive for the full year 2019, starting with positive quarterly free cash flow being delivered in the second quarter. While there is still a lot of work to be done, our progress underscores our confidence that we are on the right path.

So with that, let's look at our results for the first quarter. For the quarter, we reported an adjusted operating loss of $36 million and an adjusted loss of $0.41 per share, both significantly down versus a year ago but right on track with our internal plan and an improvement from the fourth quarter of 2018. In addition, to support our efforts, we refinanced our debt capital structure in February, which provides us with the resources necessary to drive our commercial agenda and execute our enterprise-wide cost productivity plan. In terms of volume, the conventional white milk category continues to decline, and our first quarter results also reflect the anticipated overlap of certain volume exiting our system from last year.

Now moving forward, our strategic plan and its 5 pillars remain our road map to drive and guide our actions throughout 2019. As a company, we must win in private label. We're building and buying strong brands and driving operational excellence across our system. We're enhancing our future capabilities and transforming the way that we go to market. So today, we'll focus on these pillars and the imperatives that are most critical for 2019.

First, in terms of winning in private label, this is a large and important business for us. And our efforts to streamline our cost structure are making us more and more competitive every single day. Similar to other CPG companies, we implemented some pricing actions in the beginning of the year to help offset inflation. The key, though, to winning in the private label business and doing it sustainably is to deliver the best combination of quality, value and service in the dairy marketplace. For years, our quality has been at the top of the industry. And in 2018, we took our quality to the next level with the very best quality delivered against our key metrics in many, many years.

We all know that we drove major changes in our plant network last year. Now with much of that work behind us as we exited Q1, our service levels are returned to best-in-class, near 99% KPI achievement for in-full deliveries as well as on-time performance. Now of course, we're also focused on the cost side of the business to provide our customers with competitive prices as we drive our enterprise-wide cost productivity plan, take waste out of our system so we can go and secure new business.

On our brands. We continue to build our industry-leading DairyPure and TruMoo brands. Despite retailers' ongoing investment in private label, DairyPure and TruMoo are the #1 brands in the conventional white milk category and the flavored milk category, respectively, both by volume and by dollar sales. In fact, if you look at the branded conventional white milk category as measured by IRI, Dean Foods brands have a 38% market share of that business. Our brands are important. They're important to the end consumer and can provide strong benefits to our retailers and the category overall. I'll touch more on the commercial side of our business shortly.

The second major imperative for us is to continue to take an aggressive approach to our enterprise-wide cost productivity plan. As I mentioned earlier, this plan is dramatically resetting our cost structure to align with our volume today while creating an optimal network and cost base for the long term. With the plant consolidation now substantially behind us, we're actively focused on delivering operational excellence.

On the logistics and distribution side of the business, we're transforming our supply chain processes. Our resource allocation, we're leveraging new technology and resetting our infrastructure to optimize our route network to ultimately reduce cost and improve our service levels all at the same time. We've recently implemented an industry-leading transportation management system, which allows us for greater visibility across our fleet in terms of shipments, payments, procurement and overall business intelligence. Specifically, we're taking a really hard look at our total distribution network from end-to-end as we manage both inbound and internal product movements with our new transportation management system. We have greater visibility now, and we can better manage third-party freight rates, contracts, terms through a national network-wide approach as we centralize our third-party freight management. Moving forward, we expect to generate meaningful incremental savings as we take significant steps to integrate our operating model, rightsizing our cost structure at the same time.

And finally, we're building our capabilities by making tangible improvements and investments in our people, our technology and infrastructure that will allow us to be more efficient and effective in our execution. In essence, we're investing in the right tools and people that will affect positive systemic change at Dean Foods. We're implementing world-class technology, like the transportation management system that I've just mentioned, to enable us to make step-function improvements in our cost base. And we have similar tools that we're implementing in the areas of procurement, sales management and in our accounting functions, just to name a few, and it's all happening right now in 2019.

Further, the heavy lifting of our plant consolidation is now behind us. Transitory costs resulting from the complexities of this plant consolidation are being reduced. And we have several initiatives underway that we believe will drive our plan forward and position our company to more effectively compete and win in the marketplace.

So let's turn to the commercial side of our business, where we're successfully competing for business in fluid milk and ice cream, both private label and branded. During the first quarter, we introduced some exciting innovative new products to the market, which enhance and diversify our portfolio. Our #1 TruMoo brand debuted TruMoo After Dark to select national retailers. TruMoo After Dark is an indulgent flavored milk made especially for adults. We use elevated ingredients like cardamom, nutmeg, cinnamon and ginger to create unique flavors.

In DairyPure, we're building on the success of DairyPure Mix-ins, a single-serve high-protein cottage cheese-based product, which is on-trend with what consumers are looking for today, which is more protein in their diets. We extended the line with great new flavors, including blackberries with granola; as well as 2 new savory flavors, creamy jalapeno with tortilla strips and sun-dried tomato with croutons.

Now on to our ice cream business. We launched Friendly's Cake Singles inspired by Friendly's iconic ice cream cakes as well as new dessert cup, which we almost can't make fast enough to keep up with the demand. We also relaunched our Steve's Ice Cream brand in the fast-growing premium pint category and introduced new flavors and new packaging to the marketplace as well. In addition to our brands, we are actively pursuing some important volume opportunities to support our winning private-label strategy, where we prudently balance volume and price with a lens towards better volume leverage across our network.

We also continue to develop dynamic channels, like food service where we're experiencing good growth. We partnered with many quick-serve chains in the U.S., providing fresh dairy products such as soft-serve ice cream, milkshake mix, single-serve white and chocolate milk, buttermilk, just to name a few. Additionally, we have large customers in the full-service restaurant segment and most recently established some major wins with a couple of large national casual dining and fast food chains where our fresh dairy products will be used across their entire systems.

Our go-to-market model across our food service business extends well beyond the reach of Dean Foods' DSD system as we successfully partner with food service broad liners and specialty distributors to expand availability of our fresh dairy products for food service operators across the country.

As we execute our strategy, we're focused on assessing areas where we can improve and drive most growth and profitability, ensuring that the same as we generate from our productivity efforts are ultimately deployed across the most value-enhancing opportunities for the overall business. That's how we'll improve our financial performance.

So before turning the call over to Jody to discuss the quarter in further detail, I'd like to comment briefly on the strategic alternative process that we have underway. First and foremost, we have the right strategic plan and we're actively executing right now, which on its own will improve our financial results. This plan will continue to drive and guide our actions throughout 2019 and beyond. As we discussed in February, we're also exploring potential strategic alternatives to advance our strategy and enhance value. We're conducting a thorough and comprehensive review, and we're being open-minded as we consider opportunities that create the most value for Dean Foods, our shareholders, our company and all of our other stakeholders. As we said at the time, we've now set a timetable for concluding the review, and we look forward to updating you as decisions are made.

So with that, I'd like to turn the call over to Jody to walk you through our enterprise-wide cost productivity plan, the execution of it and our financial performance. Jody?

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Jody L. Macedonio, Dean Foods Company - CFO & Executive VP [4]

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Thank you, Ralph. As many of you know, there are 3 primary components of our enterprise-wide cost productivity plan: integrating our operating model, optimizing spend management and rescaling our supply chain.

First, rescaling our supply chain. While we continue to be impacted by transitory costs related to our plant consolidation, in Q1 we delivered a step-change improvement in these costs, specifically in a handful of more complex locations that we discussed on our last call. We also saw each component of transitory costs, incremental product shrink, labor and freight improve each month within the quarter. We expect these positive trends to continue and the plant consolidation savings to accelerate throughout the year. Second, integrating our operating model. We are in mid-flight on streamlining and centralizing our back-office processes into a shared service model that will provide us with a simpler, more cost-effective structure in 2019 and beyond.

Third, optimizing spend management. We're actively centralizing and streamlining our procurement efforts to leverage our scale and optimize spending across all categories. In Q1, we expanded our sourcing activities into new expense categories. Our objective is to mine value across supply chain to drive cost productivity and reduce complexity while enhancing our brands. Specifically, we are strengthening our supplier network and executing on our ongoing value engineering program, which is focused on product and packaging improvement.

Turning now to our results. In the first quarter, as expected, total Dean Foods volume was down significantly year-over-year with certain customers exiting our system last year and an overall category decline. Through February, we saw a quarter-to-date fluid milk category decline of 1.2% in USDA results. We reported $374 million in adjusted gross profit in Q1, a decline of 17% versus prior year driven primarily by lower volumes and Class I raw milk inflation.

In Q1, raw milk costs were up 8% versus year ago and down 1% versus Q4. As we look to the remainder of 2019, the USDA forecasts a supply increase of approximately 1% versus 2018. We project Class I raw milk cost inflation in Q2 of 12% versus prior year and expect full year dairy commodity inflation. Retailer margin over milk remains well below historic norms, with the March rate at $1.32. Please keep in mind, any change in our raw milk costs will predominantly impact our branded business.

Below the gross profit line, total company operating expenses decreased by $7 million from year ago. Within selling and distribution, expenses decreased by $5 million in Q1, primarily driven by lower marketing spend. Our G&A costs improved in the first quarter by $2 million, driven by a reduction in head count and employee-related expenses. In total, we reported an adjusted operating loss of $36 million in the first quarter, which was in line with our internal plan. While these results were down significantly year-over-year, we saw operating performance improve each month during the quarter. Our operating results improved versus the fourth quarter of 2018, and we expect quarterly sequential improvement throughout 2019. First quarter adjusted diluted loss per share of $0.41 was in line with our internal plan and significantly below last year's results.

Turning now to our free cash flow results. The negative free cash flow in the first quarter primarily reflects our operating results. Working capital management improved throughout the quarter. Investments in ice cream to support new business drove inventory build ahead of the summer season. It's important to note that almost all of the negative free cash flow in the quarter were based on January and February results as cash flow in March improved dramatically. We expect full year capital expenditures between $95 million and $115 million.

From a balance sheet perspective, we ended Q1 with a net debt of $991 million. We successfully refinanced our revolving facilities in February of this year. As a result, we possess a high-functioning debt capital structure with flexible, low-cost and multiyear revolving facilities. These facilities are comprised of a $450 million AR securitization and a revolver secured by real property and other assets.

On closing on February 22, the revolver was sized at $175 million, which will expand to $265 million following the completion of real estate appraisals. We are pleased to report that while we have up to 6 months from closing to perform this appraisal work, we expect to have this completed before the end of Q2.

As reported in our 10-K filing on February 22, we had revolver borrowings of $295 million. Our current revolver borrowings are $290 million, and we have the resources necessary to drive our commercial agenda and continue to execute our enterprise-wide cost productivity plan.

With that, I'll now turn the call back to Ralph for a brief commentary on our forward outlook. We will then open the call to questions. Ralph?

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Ralph P. Scozzafava, Dean Foods Company - CEO & Director [5]

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Thanks, Jody. As we move forward in 2019, we're focused on executing our commercial plans and our cost productivity initiatives that will enable us to create a more efficient operating model and drive our financial performance. While we've been successful in delivering early results against our enterprise-wide productivity plan, we know that we have much more work ahead of us.

So what we'd like you to take away from today's call is that while our transformation is still underway, we have passed the inflection point and are beginning to see sequential improvement in our operating results. We expect this to continue throughout 2019 to generate positive full cash -- free cash flow for the full year starting now in Q2. We have the right plan and we'll continue to execute our 5 strategic pillars as we take meaningful and aggressive steps to deliver high earnings and cash flow over the longer term. This will be enabled by the execution of our commercial agenda, coupled with our enterprise-wide productivity plan. We have much to do, and we're up for the task.

So with that, we'll now turn the call over to you for Q&A. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Judy Hong with Goldman Sachs.

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Judy Eunjoo Hong, Goldman Sachs Group Inc., Research Division - MD, Senior Analyst & Co-Head of the GIR Asian Professionals Network [2]

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So clearly, you felt some of the sequential improvement in terms of your operating expenses. I guess I'm curious to just hear a little bit more about the sales decline in the quarter. Was that about 9% or so? How much of that was the customer loss? And then just kind of thinking about the price versus volume of the underlying business, and as you think about the Class I mover being higher, can you just talk about sort of how much risk does that kind of pose on your ability to get the pricing on the branded side?

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Ralph P. Scozzafava, Dean Foods Company - CEO & Director [3]

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Yes. Sure, Judy. Let me start on the volume piece. First of all, the lion's share of the volume that came out of our system is volume that we planned for. A vast majority of it is really 2 customers that I think a lot of you know, one that has a new plant. So that's where we reset our cost structure, both to accommodate that and then also to take advantage of resetting the cost structure across the system. So that will be work that will continue in 2019 into 2020. So we expect volume at other customers to be pretty well intact, particularly as it relates to private label and our brands. As you think about the movement in Class I, we don't get into lots of conversations around pricing on these calls for obvious reasons, but Jody mentioned it in her prepared remarks. As it relates to private label, that's a pass-through model. We work on a tolling arrangement, so that's fairly pure.

And then like any other CPG company, as we think about any kind of inflation, obviously, if we can offset it with cost and take waste out of our system, cost reductions will do it. Otherwise, then at that point in time, there's a pricing action to take. I like our brands. Just while I have the opportunity to talk about them, we do have the leading brands in the category. Sometimes we tend to lose sight of that. We have the #1 fresh milk brand with DairyPure. We've been able to extend off of it into sour cream and cottage cheese, #1 flavored milk brand with TruMoo. And I think we're doing a pretty darn good job of marketing those brands, leveraging digital media, other means to communicate with the consumers of today, the millennials who are now becoming moms and dads. And we think we have the right formula to continue to build those brands, so we'll do that as well.

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Operator [4]

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And our next question comes from Bryan Hunt with Wells Fargo.

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Bryan Cecil Hunt, Wells Fargo Securities, LLC, Research Division - MD & Senior Analyst [5]

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I'd like to touch on your comments earlier, Ralph. You said that you would expect earnings to grow throughout the rest of the year and cash flow. When you talk about growth, are you comparing to the actual EBITDA that you all generated a year ago? Roughly $140 million, and the free cash flow level of roughly $80 million? I was wondering if you could put some context around that.

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Ralph P. Scozzafava, Dean Foods Company - CEO & Director [6]

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Yes. That's a great question. We are now working on how do we get every quarter sequentially to be better than the last one. So where we will land with free cash flow, we're very comfortable to tell you that Q2 on its own will be cash flow positive, so will Q3, so will Q4, and the entire year will then be brought to positive cash flow. We will do a better job of improving our operating income results quarter-on-quarter. We just -- because of all that we're doing, we don't really want to quantify that other than to tell you that expect improvement every single quarter.

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Bryan Cecil Hunt, Wells Fargo Securities, LLC, Research Division - MD & Senior Analyst [7]

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If I were to back into it and look at your CapEx plus your interest, is the majority of the free cash flow you all are guiding, is it from cash earnings? Or are you looking for a substantial working capital drawdown? And that's it for me.

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Ralph P. Scozzafava, Dean Foods Company - CEO & Director [8]

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No. It's a good question. It's a combination. It will be a combination of the two. One of the things that we want to make sure that we do here as stewards of the business, we've said for a long time, this business for us, as it should be and I think our shareholders would agree, it's about earnings and cash flow. So we're going to manage both diligently, and we're not going to focus on one versus the other. We're focused on both.

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Operator [9]

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And our next question comes from Ken Goldman with JPMorgan.

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David James Allen, JPMorgan Asset Management (UK) Limited - Fund Manager [10]

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This is James Allen on for Ken. Just one for me. We see that CapEx as a percentage of sales is just below 2%, which seems quite low, and we saw that you trimmed the CapEx outlook again. So we just wondered if this level of CapEx was sustainable or if -- when you stabilize the business, you think you might need to raise it a bit.

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Ralph P. Scozzafava, Dean Foods Company - CEO & Director [11]

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Sure. I'll talk to that. Jody, I think you will have a point of view on this one as well. And I want to talk about our plants, and I want to talk about the amount of maintenance that we do and the conditions of our plants because I've read a couple of things that make me very uncomfortable.

We have 60 plants. I've been in the food business for heck of a long time, and we have some of the best plants that I've ever been around. We're SQF Level 3 qualified in every single one of them, and they are in excellent condition. We maintain them very, very well. So our CapEx budget now when we have a lower number of plants, as you can imagine, we took out over 10% of our plants over the last year. I think we're going to take our CapEx down appropriately because those plants are no longer in our system. What we're doing, and we said this maybe a year or so ago on a call, and I don't know if folks picked it up, we are very focused with our supply chain team on preventative maintenance, and it's probably the best program that I've seen, where we are making sure that we repair before we replace, that we maintain before we repair, and we head off a lot of expensive costs because we're taking better care of our equipment.

Think about your own car, as an example, when you are preventative and you maintain, your car is going to last a lot longer, it's going to run a lot better. So I like our plant network. I think our capital allocations are appropriate for where we are. And I think what's different is we're not spending a lot of "strategic capital" on initiatives that don't pay back. We've got a lot of capital, frankly, that we spent in our system through the years ago that is on initiatives that are no longer a part of our business. So we're being very disciplined around what I'll call growth and strategic capital.

So Jody?

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Jody L. Macedonio, Dean Foods Company - CFO & Executive VP [12]

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No. I think you said it well. We feel that the CapEx plan that we put in front of you is sufficient for this year, and the team is executing against all of the initiatives that we have for the enterprise-wide cost productivity plan, including some of the IT investments, like Ralph talk, which -- the transformation management system, the trade promotion system that you've heard us talk about. These are all IT investments that we've been putting into, and that is part of the CapEx plan that we present to you.

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Operator [13]

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And our next question comes from Robert Moskow with Crédit Suisse.

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Jacob Samuel Nivasch, Crédit Suisse AG, Research Division - Research Analyst [14]

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This is Jake Nivasch on for Rob this morning. Just a quick question for you. Are you guys still in talks with any buyers for any of your assets? Or I guess have any buyers walked away from the business? Or if you just walk us through there, I'm not sure if you mentioned it this morning.

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Ralph P. Scozzafava, Dean Foods Company - CEO & Director [15]

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No. Sure. Good question. The strategic alternatives process, as we stated, is an ongoing one. I think it's fair to say that we are open-minded to look for things that enhance and advance our strategy, and that's a key criteria. It's very possible that we won't do anything. And we'll continue to execute the plan that we have, which we're very happy with, and we'll continue to make progress on it. So look, we've been in conversations with some folks, and we'll leave it at that. And when we do have something to talk about, we certainly will if there is something to talk about. But we are very, very open-minded, and we're exploring some things. And we'll come back to you with news as appropriate.

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Operator [16]

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Our next question comes from Rob Dickerson with Deutsche Bank.

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Robert Frederick Dickerson, Deutsche Bank AG, Research Division - Research Analyst [17]

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So Ralph, I just want to come back to free cash flow guidance again. I heard your comments earlier, response to a question. I guess I'm just -- I don't say I'm confused, but I'm a little let's call it mystified to a certain extent that you didn't want to give us free cash flow guidance I guess at the end of the last year, right? At the end of Q4. Now we get it, it's supposed to be positive, but we don't want to give us any type of quantification on the savings, right? That it's "meaningful." We don't have a 3-year plan going forward, right? So I'm -- and then to get the free cash flow guide though, it means that you also -- I'm assuming your model needs to have some projection for potential revenue growth, maybe margin expansion, right? EBITDA needs to be growing. You said that was a combination of everything. But then you also don't want to give public equity holders, right? Because you're still a public company, not a private company. Any type of color as to the bridge between, let's say, sales and free cash flow.

So I'm just wondering if you could help us understand a little bit on the EBITDA side, not the working capital side or the CapEx side, but the EBITDA side, like why should we have confidence that EBITDA would be up for the remainder part of the year given we've now seen it be somewhat materially down the past 3 quarters, and we have no quantification of anything, right? So I mean I hate to be rude, but I think that's where we are. That's the juncture where we are in the public equity markets for Dean Foods, is that we have no visibility, we've no color, but we should think free cash flow should be up 5x or whatever it is over the past 2 years, but you don't want to give us any type of details. So really think it's helpful and it's really necessary at this point to try to build confidence in the public market's perception of your ability to actually turn the corner, as you say, in EBITDA terms. And I'll leave it at that.

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Ralph P. Scozzafava, Dean Foods Company - CEO & Director [18]

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Yes. Sure. I think -- let me start with -- I don't think any public company is giving anyone 3-year numbers, so I think that's a question that no one will answer. Let me just say this. We have -- we're going to show you with results. We've turned the corner with a Q1 that is better than Q4. We were very clear that every month through the quarter -- and I don't know how many companies are giving you month-to-month through-the-quarter information, but every month was -- operating income increased and better than the month before, with March being the best month of the quarter. So we've passed the inflection point. We're giving forward guidance now on cash flow because we think it's important for the market to understand that.

We'll do that as soon as Q2, and we'll do it for the rest of the year. We've been very clear around the initiatives, the $150 million cost takeout in our enterprise-wide plan. We've demonstrated the building blocks around streamlining our operations, what we're doing in our supply chain. And you have to remember, we're recovering from significant volume coming out of our system from 2 large customers, so we're rebounding from that. So I think the guidance is fair. I think it's fair and useful for our shareholders when we tell them that our operating income will improve every quarter and that we'll get to cash flow positive for the year. We're very comfortable with those numbers, and we'll stand by them.

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Operator [19]

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And our next question comes from Amit Sharma with BMO Capital Markets.

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Amit Sharma, BMO Capital Markets Equity Research - Analyst [20]

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Ralph, can you talk about specifically which trends you saw getting better? Or I think your press release say you're encouraged by the buying trends. Can you just be a little bit more specific in which trends improved or the trends that you're encouraged by as you went through the quarter? I mean, it's really good to hear you say monthly improvement, but I think what Rob was trying to get to and I think people want to know is what are these trends like? How can we see them through the P&L? And then I have one for Jody as well.

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Ralph P. Scozzafava, Dean Foods Company - CEO & Director [21]

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Sure. Great question. We really saw it in the operations side of the business. And you're very close to our company, as I know, and you follow us very well. We closed 7 plants in a 6-week period. And we forget many times, 4 of those plants closed on September 28. So we really had October, November, December to transfer 7 plants worth of volume to 23 receiving locations. What made that even more complicated is that is a high-velocity period for our customers. So we had to make sure that our service levels were at the highest levels so we could maintain those customers and give them the quality, the value, the service that they expect from us. So a lot of our work had to really happen in January and February.

And we took a lot of those costs out of the system. And to be really, really specific about it, we're talking about product loss with a product that has a short shelf life. With that much movement in the supply chain, we really took our product shrink levels down. We were able to get our freight in line with a lot of shipments being all across our network, trying to make up for some manufacturing gaps that we had as we made transitions. We got that out of our system. And then we continually brought labor down through the quarter. So you really saw it in our plant network and in our distribution system. January was a difficult month, February was much better and March was much better than that. So those are the underlying trends. That's the trajectory that we're talking about, and we're going to continue that improvement as we move on through the year.

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Jody L. Macedonio, Dean Foods Company - CFO & Executive VP [22]

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And I would add to that. We're also seeing the benefits of our procurement efforts read through the P&L as well as our operating model I've talked about, that we are continuing to simplify the way we do our business and those savings are reading through.

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Operator [23]

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And our next question comes from Chris Growe with Stifel.

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Christopher Robert Growe, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Analyst [24]

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[First of all], I have a question for you just -- a bit to follow-on to Rob and his questions. If you're just doing the math of turning free cash flow positive in the second quarter, it requires a significant improvement in profitability. EBIT and operating profit would have to basically get back to flat or up actually in the quarter. And that would, therefore, imply that there's a significant amount of cost savings coming through because it would seem like you still have that same degree of volume deleveraging occurring as well. Is that the right way to look at it? How much of those cost savings? And is the missing link, you've got a lot of working capital improvement coming in Q2?

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Ralph P. Scozzafava, Dean Foods Company - CEO & Director [25]

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Let me start, and I'll give it to Jody. So let me be really clear about quarterly free cash flow. What we're talking about is free cash flow within Q2 on its own in isolation will be cash flow positive. We'll say the same for Q3. We'll say the same for Q4. And the aggregate of that now combining with the Q1 cash delivery, we will then be free cash flow positive for the year. So I want to be really clear about that. Some of the cash used in the first quarter, we won some business in the ice cream segment, and we won a very large piece of business. And we had inventory build. We also had large investments in innovative products in the ice cream business. So you saw some inventory swell there, and a lot of that inventory is now being sold into the trade and being delivered, as you can expect, before ice cream season. So yes, there is going to be a certain amount of working capital improvement.

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Jody L. Macedonio, Dean Foods Company - CFO & Executive VP [26]

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Absolutely. And if you look back, because the predominant piece of our inventory is ice cream, Q1 spikes for us on a seasonal basis. So there's a normal seasonal build for inventory. And then coupled with the new business, it was significantly higher than Q4.

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Operator [27]

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(Operator Instructions) Our next question will be from Amit Sharma with BMO Capital Markets.

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Amit Sharma, BMO Capital Markets Equity Research - Analyst [28]

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Jody, I was going to ask you can you just run through the liquidity position again for us. Like as the end of the quarter or currently, how much liquidity availability do we have? And if free cash flow doesn't come as planned positive, like how much room do we have under the current agreement to continue to meet requirements?

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Jody L. Macedonio, Dean Foods Company - CFO & Executive VP [29]

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I want to step back and remind people that we refinanced in February, right? So I want to make sure that everyone knows that in February, we refinanced our revolving credit facilities, which allowed us to amend and extend our $450 million AR securitization for another 3 years. So that will expire and mature in February '22 -- 2022. And then the new revolving credit facility is of $265 million, of which we have $175 million accessible today and that will expand to $265 million when we complete these appraisals. We are not disclosing our liquidity levels at this time. But as we've said, we have ample liquidity to execute on our plans that we're embarking on right now.

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Operator [30]

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And our next question comes from Chris Growe with Stifel.

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Christopher Robert Growe, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Analyst [31]

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I just want to ask as a bit of a follow-on to my question before was, how much in the way of cost savings do you have coming through this year? And do those accelerate in the second quarter? And are there costs related to achieving those cost savings that you will have to bear as part of your free cash flow guidance?

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Ralph P. Scozzafava, Dean Foods Company - CEO & Director [32]

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Yes. There are some costs that are in our system that we have to take to get more costs out. I'll give you an example. We talked about the TMS system. It's state-of-the-art. It's the old lean logistics system, where we are absolutely able to look at every piece of our supply chain in terms of where freight is coming in and freight is going out, both within our system from suppliers to vendor -- to customers. That system is an investment in IT, as Jody mentioned. You need to make sure you have the right staffing and people who can run that system. So there is an investment. But given the size of our logistics organization, our -- over $1 billion in costs, we are making that investment so that we can go attack waste in the system. So that's one example.

We've got others that we can talk you through. So yes, there is a little bit of investment. But we [aren't working against], as you all know, a very, very large business with lots of costs in the business. And now as we centralize, now as we standardize, as we get visibility around all the waste that's in the system, we are going to continue and continue to take waste out of our system this year, next year and the year after that. And it's just going to be a part of life here. And I think when we get to where we're going and we're starting to make progress, we pass that inflection point, we're going to be very lean, very agile and extremely competitive.

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Operator [33]

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(Operator Instructions) Our next question comes from Judy Hong with Goldman Sachs.

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Judy Eunjoo Hong, Goldman Sachs Group Inc., Research Division - MD, Senior Analyst & Co-Head of the GIR Asian Professionals Network [34]

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So last year, I know some of the cost pressures that you also mentioned were things like resin and freight and fuel. And I know you have given some quantification last year. So can you talk a little bit about what you saw this quarter and then what you're expecting in terms of those costs for the balance of the year? And then I guess separately, Ralph, when you talked about putting together more integrated operating structure and a more centralized company, I'm just wondering how that kind of impacts your strategic options in looking at selling off assets?

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Ralph P. Scozzafava, Dean Foods Company - CEO & Director [35]

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Yes, I'll answer the last part, Judy, and then I'll hand the other piece off to Jody. We have to run this company as efficiently, as effectively as possible. And you all know that we're a roll-up of dairies. In many instances, we were not fully integrated, I'd say partially in some areas. But in the true operating functions, not integrated. And I think everybody knows when an acquisition is made, the first thing you want to do is gain all the revenue and cost synergies you possibly can. Well, during the days of the roll-up, it was more important and rightfully so to get a big national footprint and save the integration for later.

That's the work we're doing now. There's a tremendous amount of savings that we're going to continue to drive and we're not going to stop until we get all of them. So that's what I would say. As it relates to anything with strategic alternatives, the best company that we can be is the company that has the most flexibility and the most functionality and has the greatest future. So we're going to ensure that, as a stand-alone company, we are going to have and guarantee the best future we possibly can for the company and all of our stakeholders. That's really our mission. Jody?

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Jody L. Macedonio, Dean Foods Company - CFO & Executive VP [36]

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Yes, Judy. So to answer your questions regarding kind of what kind of inflation levels we're seeing from a rate basis. As we said, we had inflation in Class I in Q1, and that was expected. So from a versus plan standpoint, we did expect inflation there. And I would say right now, what we're seeing is what we're quoting as Class I, probably is the highest risk that we're seeing within the inflation numbers as of today. Fuel changes every day, but it's certainly moderated from what we saw from the rates of inflation in Q4. Resin was slightly up in Q1. But as it has a dependency on fuel, they're somewhat related, it's moderated as well. So not near -- we are seeing inflation, is what I can tell you, but it's not at the same rates that we saw in Q4.

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Operator [37]

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I'm not showing any further questions at this time. I would now like to turn the call back over to Ralph Scozzafava for any closing remarks.

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Ralph P. Scozzafava, Dean Foods Company - CEO & Director [38]

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Listen, we want to thank everyone who is on the call today and everyone who has interest in our company. We've got a lot of work to do. We know what that work is. We've got a team that's up to the task. So while we're going to get back to it, we look forward to talking to everyone on our next quarterly call.

Thank you.

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Operator [39]

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Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program, and you may all disconnect.

Everyone, have a wonderful day.