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Edited Transcript of DF earnings conference call or presentation 27-Feb-19 2:00pm GMT

Q4 2018 Dean Foods Co Earnings Call

DALLAS Mar 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Dean Foods Co earnings conference call or presentation Wednesday, February 27, 2019 at 2:00:00pm 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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* Akshay S. Jagdale

Jefferies LLC, Research Division - Equity Analyst

* Amit Sharma

BMO Capital Markets Equity Research - Analyst

* John Joseph Baumgartner

Wells Fargo Securities, LLC, Research Division - VP and Senior Analyst

* Judy Eunjoo Hong

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

* Kenneth B. Goldman

JP Morgan Chase & Co, Research Division - Senior Analyst

* Matthew Jacob Fishbein

Deutsche Bank AG, Research Division - Research Associate

* Rose V. Lauricella

Morgan Stanley, Research Division - Research Associate

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Presentation

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Operator [1]

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Good morning, and welcome to the Dean Foods Company Fourth Quarter and Full Year 2018 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 expressed written consent of the company is strictly prohibited. At this time, I would like to turn the call over for opening remarks to the Vice President, 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, Gigi, and welcome, everyone. Thanks for joining us on our fourth quarter and full year 2018 conference call. This morning, we issued a 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 direct comparable GAAP measures can be found in today's press release on our website.

Participating with me on today's call are Ralph Scozzafava, our Chief Executive Officer; and Jody Macedonio, our Chief Financial Officer. Ralph will start us off with an overview of our strategic plan that we are executing in 2019 and a review of our fourth quarter and full year performance. Jody will then offer some additional perspective 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 now 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. As everyone knows, there has been a significant amount of change happening in the marketplace, and we must adapt accordingly. Here at Dean Foods, we remain laser focused on our strategic plan and its key initiatives to drive improved business performance in 2019 and beyond.

As a reminder, our strategic plan and its 5 pillars are the roadmap that we use to drive our business and our company forward. These pillars include: winning in private label; building and buying strong brands; driving operational excellence; enhancing our future capabilities; and transforming the way that we go to market. Today, Jody and I will frame our discussion around these pillars, with the imperatives that are most critical for 2019.

Yesterday, after the market closed, we announced that as we seek to accelerate our business transformation and enhance shareholder value, the board has initiated a review of a range of potential strategic alternatives to best position the company for the future. To provide additional financial flexibility as we work to achieve our transformation goals, we also announced that we have successfully refinanced our credit facilities and also suspended payment of our dividend. I'll speak more about all of these items at the end of the call.

Now turning to our imperatives for 2019. First, we're executing on the commercial agenda of our plan, which includes winning in private label and building and buying strong brands. To win in the private label piece of the business, we must be the low-cost provider and also transform the way we go to market. We have an expansive footprint of plant locations that enable us to process our products very close to our customers, and ultimately, to our end consumers, across most of the U.S., and we utilize our powerful direct-store delivery capability to deliver our fresh, high-quality products from farm-to-table very effectively. Our private label customers, they know that Dean gives them the very best the industry has to offer, and we know that we have to bring a strong quality value and service package to the marketplace to earn that business every day. This enables us to continue building and buying strong brands like DairyPure and like TruMoo, and introducing more innovative new products to enhance and diversify our portfolio.

Secondly, we continue to take an aggressive approach to delivering operational excellence, where we're executing the second phase of our enterprise-wide cost productivity plan. This plan will continue to generate meaningful incremental savings as we integrate our operating model and rightsize our cost structure.

And finally, we're building our capabilities by making tangible improvements and investments in our people, technology and infrastructure that will allow us to be more efficient and effective in our execution.

In short, we're taking bold steps and meaningful actions in 2019 to drive our strategic plan forward and transform our company to more effectively compete and win in today's landscape. So with that, let's recap last year.

For the fourth quarter, we reported an adjusted operating loss of $46 million and an adjusted loss of $0.50 per share, both significantly down versus year ago. On a full year basis, we reported $1 million of adjusted operating income and an adjusted loss of $0.47 per share. Our financial results reflect the number of challenges that we, and our industry, experienced in 2018, including a rapidly changing landscape and a very dynamic retail environment.

In terms of volume, the overall fluid milk category continued to post declines of roughly 2% year-over-year according to the USDA. One key driver of the change in our 2018 results versus prior year was the anticipated customer volume exiting our system beginning in the second quarter. Another cause was the higher-than-anticipated transitory costs associated with the very large plant consolidation exercise we implemented at the end of the third quarter, where we closed 7 plants in a 6-week period and consolidated that volume into numerous receiving plant locations. The bulk of the higher transitory costs came from only a handful of these plants, which were far more complex, and we have since added resources to these locations to help accelerate improvement.

In addition, a portion of the transitory costs related to the seasonality of the business as we made sure to prioritize service to our customers above all else and deliver the highest quality level of service and delivery standards during the very important peak holiday season.

In addition, similar to what other CPG companies have been experiencing lately, margins continue to be impacted by inflationary pressures from higher fuel and freight cost as well as a very tight labor market, particularly as it relates to our drivers.

Despite the significant progress we made in executing our enterprise-wide cost productivity plan, the cost savings that we drove were mitigated by the incremental transitory costs, putting significant pressure on our operating results in 2018. To help offset this escalating cost environment, we are continuing to address our cost base and have also executed certain pricing initiatives effective in the first quarter of 2019.

Despite these challenges, we continue to generate positive free cash flow from operations in 2018.

Importantly, as we execute our plan, we continue to transition from a decentralized holding company model into an integrated, low-cost operating company structure, rightsized to the business that we have today. While all the results of this work are not yet reading through the P&L, we're very confident we're taking the right actions to position the business for the long term.

So now let's turn to the commercial agenda of our plan. As I mentioned, we're successfully executing on our commercial plans. We operate in a large and essential category, where milk is ranked as the fifth largest edible category in the food and beverage industry. We have a very balanced portfolio of products that enables us to participate in the growing private label business as well as drive a branded portfolio. We have solid opportunities to leverage both businesses. To that end, winning in private label is a primary objective for our company. We have many advantages to leverage in our plant network, and DSD capability enable us to bring a strong combination of quality, value and service to enable us to win in this important business.

Building and buying strong brands is a crucial profit driver for our company. Even as retailers continue to invest in private label, our big national brands, DairyPure and TruMoo, are #1 in the markets that we serve and are at the core of building a strong portfolio of products in the dairy case.

On the frozen side of the business, we see attractive category dynamics in ice cream and frozen novelties. We have a national ice cream platform with excellent growth potential and strong positions in both branded and private label. Importantly, we're leveraging the breadth of our plant network, while hitting in high-growth segments like novelties and premium pint-sized products.

Our portfolio of brands include Friendly's, Mayfield, Dean's and Steve's Ice Cream. With Steve's, we're reintroducing the brand to retailers with an appealing portfolio of super premium traditional dairy and nondairy pint products.

With our Friendly's brand, we've launched the line of delicious sundae cups and cakes that have been very well received by retailers. We have solid commercial plans in place, and we are executing them right now in the marketplace.

So with that, I'll now turn the call over to Jody to update you on our enterprise-wide cost productivity plan and review our financial performance in more detail. 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, our enterprise-wide cost productivity plan is aimed at optimizing and transforming our company. Key elements of the plan include rescaling our supply chain, optimizing spend management and integrating our operating model.

Let's start with rescaling our supply chain. We experienced considerably higher-than-expected transitory costs related to our plant consolidation as we ramp up receiving locations and returned to steady state. We have identified a handful of more complex locations where we have dedicated additional internal resources and have also deployed a third party to accelerate process and performance improvement. Overall, we are seeing some easing in transitory cost, and we expect the plant consolidation savings to accelerate as we progress throughout the year.

As we continue our transition from a holding company to an operating company, we're deploying broad-based efficiencies as it relates to our external spend. We've centralized management of our procurement team, enabling us to standardize our processes, leverage our buying power and optimize spending across all categories. We've augmented these efforts by deploying a best-in-class, procure-to-pay system to fully leverage the benefits of our supplier arrangement.

In addition, we are employing a new trade promotion management system to enhance returns on trade promotions for both our retail customers and Dean Foods. In terms of the integration of our operating model, we are mid-flight in streamlining and centralizing our back office processes into a shared service model, which will provide us with a simpler, more cost-effective structure in 2019 and beyond.

Lastly, enhancing our capabilities enables our company to be a leaner and more nimble organization that can readily meet the challenges in the current marketplace with a clear eye to the future.

Turning now to the P&L. In the fourth quarter, total Dean Foods volume was down significantly year-over-year, reflecting the loss of certain customers exiting our system and an overall category decline. Through December, we saw a quarter-to-date fluid milk category decline to 2.1% in USDA results.

In measured channel, IRI data shows a conventional white milk category decline of 4.1% in the fourth quarter, with higher levels of decline in large format, drug and convenience stores being slightly offset by growth in the dollar channel.

Full year 2018 adjusted gross profit was $1.7 billion. For Q4, we reported $384 million in adjusted gross profit, a decline of 14% versus prior year, driven primarily by lower volume and higher-than-expected transitory costs related to our plant closures. As a reminder, transitory costs include incremental product shrink, labor and freight, which resulted from our accelerated plant consolidation that began at the end of the third quarter.

As Ralph mentioned, we're aggressively addressing these costs and have deployed additional resources to augment our efforts in a more complex facility.

Below the gross profit line, total company operating expenses increased by $33 million in Q4 and $14 million for the full year as compared to the year ago period.

Within selling and distribution, the cost versus prior year increased $34 million in the fourth quarter and $51 million for the full year, primarily due to transitory costs associated with plant closures and higher fuel and freight inflation as well as investments in advertising.

Full year 2018 G&A costs improved $28 million versus 2017, driven by our focused efforts to reduce headcount and employee-related expenses as part of our enterprise-wide cost productivity program.

As a result of all of these factors, the adjusted operating loss for Q4 was $46 million. Full year 2018 adjusted operating income was $1 million.

Below the operating income line, adjusted EBITDA for the quarter was a loss of $14 million. Adjusted EBITDA for the full year was $136 million. Adjusted interest expense for the full -- fourth quarter was roughly flat versus year ago and down $7 million or 12% for the full year versus year ago.

Q4 adjusted loss per share was $0.50, and full year adjusted loss per share was $0.47.

Before we move on, I'd like to point out that in the fourth quarter, we recorded a noncash goodwill impairment charge of $191 million, which is reflected in our financial results on a GAAP basis, but has been eliminated for our adjusted results for comparison purposes. The impairment charge resulted from our annual assessment of the carrying value of our business compared to its fair value based on our current projected clash flows, the overall category evolution, and other comparable companies in our category. This noncash charge had no impact to our operations or our cash flows.

In Q4, raw milk costs were up 6% sequentially versus Q3 and down 6% versus year ago. As we look to the remainder of 2019, the USDA continues to forecast the supply increase by approximately 1% versus 2018. We've checked Class I raw milk cost inflation in Q1 of nearly 8% versus prior year and expect full year dairy commodity inflation.

With retailers continuing to invest in private label pricing, we've seen a decrease in retailer margin over milk, with fourth quarter's rate at $1.34 comparable to $1.36 in the third quarter. Keep in mind, any change in raw milk costs will predominantly impact our branded business.

Turning now to free cash flow. While we're not pleased with our operating performance in 2018, we did generate full year free cash flow of $38 million, which is flat versus last year. Net working capital for Q4 2018 was $120 million lower compared to Q4 2017. This improvement was driven by better working capital management, lower volume and dairy commodity prices.

Full year capital expenditures of $115 million were in line with our expectations and reflect a significant investment in our enterprise-wide cost productivity program.

In February, we successfully completed a refinancing of our debt capital structure, reflecting flexible, low-cost and multiyear revolving facilities. This was achieved by amending and extending our $450 million AR securitization facility for another 3 years, with maturity date of February 2022. We also entered into a new 5-year $265 million revolving credit facility secured by real estate and other assets. The revolving facilities are anchored by the $700 million and 6.5% fixed rate senior unsecured notes issued in 2015 and due in 2023. This combined $715 million in revolving facilities is rightsize from what we had in place prior to closing and gives us cost-conducive borrowing capability.

We're very pleased that we have significantly increased accessible liquidity, gained greater covenant flexibility and extended the company's debt maturity profile.

From a balance sheet perspective, we ended 2018 with $887 million of net debt, which was $15 million lower than prior year. This was driven by our positive free cash flow generation in 2018.

With that, I'll now turn the call back to Ralph for a brief commentary on our forward outlook and the recently announced strategic alternatives review. We'll 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 you've heard from our remarks today, we're in an important period of transition and transformation for Dean Foods. We're working diligently across our company to execute our major priorities of driving our commercial agenda, implementing our enterprise-wide cost productivity plan and building on our core capabilities.

Before I turn the call over to Q&A, I'd like to briefly discuss the strategic alternatives review, financial guidance and our dividend.

Yesterday, we announced that the company has initiated a review to explore and evaluate a range of potential strategic alternatives to enhance shareholder value. As we focus on ways to accelerate our business transformation, we recognize that there may be opportunities to unlock significant, unrealized value in the company.

I know I speak on behalf of the entire management team when I say that we are and remain fully committed to executing on our strategic plan while this review is underway. We have not established the definitive timeline to complete our review and no decision on any particular alternative has been reached. There can be no assurance that this review will result in any agreement or transaction, and we do not intend to discuss or disclose developments with respect to the board's process unless and until we determine a specific course of action or it's otherwise necessary.

Now in our earnings release today, we also announced the company had suspended financial guidance. We concluded that this was a prudent action to take as we continue to focus on ways to accelerate the execution of our transformation plan and simultaneously, evaluate a range of other strategic alternatives. This decision in no way diminishes our commitment to moving quickly to enhance our performance or our confidence in our long-term prospects.

Now regarding our dividend, as I mentioned earlier, we suspended payment of a quarterly cash dividend. This will enable us to allocate additional financial resources toward the execution of our transformation plan, which we think is prudent and in the best interest of all stakeholders.

Importantly, as Jody mentioned, we've enhanced the composition of our capital structure with the execution of our credit facility refinancing. We now have a capital structure that's more appropriate for a company of our size and industry position and gives us the flexibility to fund both operational and strategic objectives.

As one of America's largest dairy providers, with our domestic manufacturing plant footprint and large DSD network, along with our national brands and strong private label capability, we have a solid foundation to drive improved financial and operational results. Complemented by our transformation strategy, we're reshaping ourselves into a company that will be more competitive, lean and agile. Our primary focus is and will continue to be providing our customers and consumers with the brands and products that they love and the same great quality and excellent service that they have come to expect from us.

So with that, let's open up the call to your questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from Judy Hong from 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 Ralph, I guess, I understand you may not be in position to give us a bit more details about the strategic alternatives, but I think the range of options that you played out is pretty wide. So -- and I guess from a timing standpoint, just given the challenges that you faced with the EBITDA decline, I think from an outsider's view, it's also hard to find options that they actually create a lot of value. So just help us understand sort of the timing? And then when you think about some of the range of options, are we looking at more like an asset sale? Or is this much more of a broader just in terms of how you think about the business structure or even thinking about maybe separating the private label versus the brand with no businesses?

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

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Yes. Thanks, Judy. I think -- just let me handle the timeline piece first. We are in no hurry to do anything. I think the most important thing that we can think about is where is the unlocked potential on this company and what are the options that would help maximize and optimize that. To include, continuing to execute the plan that we have today. So we're not going to put any kind of time frame on it. What we wanted to do with this announcement is make sure that we looked at all potential ideas, ideas that we have and others might have. And I think within those, we'll see something that will or won't be more impactful than what we're doing today. I think the message for anyone and everyone listening is we will take the appropriate amount of time, our board will be very thoughtful and considerate, and we'll make a prudent decision, one way or another, at the appropriate time. So we're still very early in this endeavor.

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Operator [4]

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Our next question is from Ken Goldman from JP Morgan.

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Kenneth B. Goldman, JP Morgan Chase & Co, Research Division - Senior Analyst [5]

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I joined a little bit late, so forgive me if this was addressed, but I'm just curious if you could describe a little bit of the process that led you to launch or endeavor into the strategic review. In other words, why now? Dean's obviously had some good stuff and some challenges over the last few years, and I'm just trying to get a sense of what -- at what point was there sort of a straw that broke the camel's back that made you say, right now, we need to sort of go in different direction?

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

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Yes, I think the first thing to think about is it's not new. One of our primary objectives here, the primary objective is to drive shareholder value. And Ken, as you know, every so often, we sit down with the board and we think about corporate strategy and what makes the most sense for us from business perspective as an organization and more broadly. And we think that this is a good time for us to think about what else is out there. We're in the middle of a very important period of transition and transformation. We've got a lot of things that we're doing that are going to make us more competitive, leaner, more agile. We've got a strong commercial agenda and a lot of capabilities. So at this point, we thought, let's have some discussions, and we'll see what might be out there to help us maybe accelerate our transformation. And in doing so, we're going to be very transparent about it as we have. We made an announcement, and now we'll go ahead on a path. So we'll see where it takes us.

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Operator [7]

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Our next question is from Akshay Jagdale from Jefferies.

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Akshay S. Jagdale, Jefferies LLC, Research Division - Equity Analyst [8]

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So Ralph, I mean suspending the dividend in conjunction with what we know is a really good cash flow generation capability at Dean Foods, combined with suspending guidance. I mean, it just sounds like, to me, that you feel like you could do a better job or -- with this transformation if you were private, right? I mean are you basically -- by suspending the dividend, et cetera, I mean, are you basically just increasing the flexibility and the options? Or how do we think about that right if you can give some context on that? And then on the operational side, I mean, can you talk about the cost structure having an impact on some of the private label bids? I mean have you made any progress on share gains on private label because that was part of the story. And now that you've addressed the cost structure, I mean where are we on that?

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Ralph P. Scozzafava, Dean Foods Company - CEO & Director [9]

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Yes. Sure, Akshay. Let me maybe start it at the beginning. I think I'll just start with the dividend. I know it's a question others may have. Look, I think one of the most important priorities that we have, as a management team, our board has, is allocating resources. And whether that's people, money, we think that the best allocation of our resources, both our capital and our intellectual capital, is against our transformational plan. And we think that's what's in the best interest of all shareholders. We think that is the best use and message, frankly, to our organization around the use of our resources. So we're going to continue to drive everything, all energy, against the transformation plan. So that's really the first thing. In terms of guidance, honestly, we're going to be evaluating a lot of alternatives, and we really think that there are some changes depending on some things that we and the board will decide over the next few months that may change the pace and magnitude of some of the things that we do. We just went through a period where we consolidated 7 plants in a 6-week period that was a -- I think a very necessary and bold move and I think that we'll ultimately benefit greatly from it. That is an important decision, so we may decide to do some things faster or slower. And we thought to give guidance at this point in time isn't prudent given everything that we're trying to do. Last part of your question around the cost structure, and we've been really clear about it. If you really want to win in private label, which is important to us, you need to be a low-cost provider. And everything that Jody talked about, that our team is doing, is to make us more efficient, more effective at winning those bids, doing it in the right way and then, also being able to unleash our brands at the same time. So yes, I think that we're making progress in getting our cost structure down. The transitory costs in Q4 really offset and mitigated a lot of the good work that we're doing. Those bubble costs will come out. And when they do, I think we're going to find ourselves in a pretty darn competitive position.

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Operator [10]

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Our next question is from John Baumgartner from Wells Fargo.

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John Joseph Baumgartner, Wells Fargo Securities, LLC, Research Division - VP and Senior Analyst [11]

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Ralph, when you look at the company's evaluation, I guess, I wanted to argue that that's fair value for our commodity business and structural decline. But if you flip that, I guess, one could also maybe argue that the market right here is kind of undervaluing the optionality and the value of milk fat. And when you think about the strategic review and the comments about potential JVs or a sale, how did you think about the magnitude of investment or complexity that would exist for a strategic JV partner to kind of come in and unlock that value or even the amount of capital that a financial buyer would need to maybe inject because it feels as though ever since the Morningstar divestiture, Dean's ability to kind of monetize this milk fat stream and the value add is kind of limited.

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Ralph P. Scozzafava, Dean Foods Company - CEO & Director [12]

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Yes, let me talk to that because I think you're getting into some real important dairy math, which I think is pertinent, right? I think our ice cream business helps us unlock some of that. We think it's a great platform for us, and we think that there is growth potential in that business. So to the degree that we can utilize a lot of that byproduct ourselves and sell it at retail versus wholesale is important. So there's a lot of optionality from that standpoint. But I go back to this, John, and I know you've been good about asking about this in the past, we've got this big footprint. And we got a footprint of plants that put us very, very close to the customer as it relates to fluid milk. The big DSD network, lots of folks have talked to us through the years, and we have tremendous optionality around what else we could put on those trucks. And now with our enterprise-wide cost productivity plan, we think we can get ourselves down to a cost structure that can make us very, very competitive. So I like our balance sheet right now. I like the refinancing that was done. And I think with those ingredients, we're going to choose the best path forward for the company, and that path may be to continue on our transformation plan and we're just fine with that too.

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Operator [13]

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Our next question is from Rob Dickerson from Deutsche Bank.

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Matthew Jacob Fishbein, Deutsche Bank AG, Research Division - Research Associate [14]

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It's Matt Fishbein on for Rob. For a long time, Dean Foods has considered its HTST method of processing milk as a competitive advantage, given HTST's freshness, better taste, et cetera, relative, of course, to UHT processing, which is the type of processing plant that Walmart just finished building and the type of processing it looks like Amazon is going to use for its new private label milk. Do you still consider your method of processing a competitive advantage? And what is HTST's share of the overall fluid milk market? And what is the go-forward share trend look like from your perspective? Is it more expensive to process your milk around that distribution network as in primarily HTST processor? Is it fair to say that this and perhaps the market shift to UHT processing is part of structural problem you're facing? And regarding the branded business and your other products, is there any way you can help us quantify the percentage of your customers that don't purchase private label milk from you but do purchase branded products and your other non-fluid milk products? Just trying to understand how dependent the success of your branded and non-fluid milk strategy is on winning a private label.

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

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Yes. Sure, Matt. Let me go back to HTST versus extended shelf life. Most of the plants in the country, the vast majority are HTST, which for those on the line, if they're not familiar with, it's fresh milk. All right? So fresh milk, you pasteurize, you homogenize and it's fresh. And the other is a much more cooked process. You can taste it in the milk, and it's a very small part of the category on a relative basis. In fact, the Walmart plant, just to be clear, is an HTST. So it's a fresh milk plant, so are the vast majority of ours. Fresh milk is darn close to 90% of all the milk consumed in the category. It's extremely large. So that is where the business is. And if you think about it from a consumer standpoint, what are we hearing from consumers? We're hearing farm-to-table, we're hearing fresh. The more processed, the worse it is. And what we've got basically is a very fresh offering and it's the highest quality milk out there and it's the lion share by a long stretch of the category. So no, we don't think by any means that we're chasing some old technology and some old product line. As far as the brands, we know the consumer insight work that we do has told us that there is a core set of consumers that want the highest quality milk for their families, for their kids. And the whole notion of a product like DairyPure, with the 5-Point Purity Promise, absolutely guarantees that highest quality product to bring home and share with the family. So we think the branded part of the business is absolutely important as well as winning a private label, which helps you unlock a lot of distribution. I would tell you that the products, we like to have them travel together because of the DSD network makes transporting both from a logistic standpoint much more effective and efficient. We do have some customers that are branded only for us. They understand they can get a premium on our brands, but we really like to do it all in a package. And I think that's best for the retailer too.

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Operator [16]

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(Operator Instructions) Our next question is from Amit Sharma from BMO Capital Markets.

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Amit Sharma, BMO Capital Markets Equity Research - Analyst [17]

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Ralph, 2-part question. One on the potential strategic options. Can you talk about the strategic direction that the company has taken in the last several years, collecting brands and then potentially moving outside of the fluid milk category as well with ice cream and the JV with organic as well. Has that been as productive as you would have expected going into those? And is that on the table as well that let's streamline ourselves. This diversification hasn't really delivered, so maybe look to monetize some of those assets? And then one for Jody. You talked about putting some more pricing in 1Q '19. I mean many other companies who are facing inflation in the nondairy commodities set have generally priced already. Are you delayed? Or is it just a structural issue that you will not be able to get pricing in line with inflation in a timely fashion?

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Jody L. Macedonio, Dean Foods Company - CFO & Executive VP [18]

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I'll answer the pricing first. Thank you for the question. We are seeing the same types of inflationary pressures that other food and beverage companies have been talking about. And yes, we did initiate pricing action in January of this year, and we're going to start seeing that flow through our results in 2019. So I think it's important that like other CPG companies that we price as we should when we're seeing inflation in this escalating cost environment.

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Ralph P. Scozzafava, Dean Foods Company - CEO & Director [19]

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And Amit, as far as it relates to diversification, I think the thing that we all have to remind ourselves with -- of and we do it here is, we have to have patience as well. We have such a huge core business in fluid milk that it really takes time and magnitude to build enough diversification around that business. Our ice cream business is an example. It's large-scale, more in the top 3 or 4 producers in the United States and it's high volume. But when you compare it to the fifth-largest category, where we're by far #1, it pales in comparison. I can tell you, from an earnings point of view, it does -- it punches -- our ice cream business punches above its weight. We like the growth potential, so we just need some time to develop these other categories and then perhaps as we go through a strategic alternatives process, there may be some ways to accelerate that diversification. And that's just one of the things that we're thinking about as we go down on this parallel path.

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Operator [20]

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Our last question is coming from the Pamela Kaufman from Morgan Stanley.

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Rose V. Lauricella, Morgan Stanley, Research Division - Research Associate [21]

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This is Rose on for Pam. In the last 8-K that we saw last week, you listed about 10 plants that had been under closure -- that have been closed. So were there some additional plants closed relative to the 7 you highlighted? And then can you confirm us how many plants you have remaining in the business? And what your plans are for further plant closures?

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Ralph P. Scozzafava, Dean Foods Company - CEO & Director [22]

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Okay, let me just start with some of the plants that you might have seen listed. There are some carve-outs that we did as it relates to collateral when we securitized the loans in the facilities that you saw us announce on Friday. So that's simply a listing of what's not in that collateral package.

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Operator [23]

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At this time, I am showing no further questions. I would like to turn the call back over to Ralph Scozzafava for closing remarks.

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Ralph P. Scozzafava, Dean Foods Company - CEO & Director [24]

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All right, great. Well listen, thank you, everyone. We appreciate you being on the call today. It's an important time for Dean Foods. Transformation, transition, we are maniacally focused on executing our plan to deliver better, improved financial performance and operating results. And our strategic alternatives process will begin, and we will spend a lot of our time driving our business. So thank you for your interest, and we'll see you all in the next call. Thank you.

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Operator [25]

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Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect.