Lamb Weston Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
October 5, 2022

Key Takeaways

  • Strong Q1 performance: Sales grew 14%, gross margin expanded nearly 900 basis points, and adjusted EBITDA nearly doubled year-over-year.
  • Full-year guidance reaffirmed: Management expects to deliver at the high end of targets with $4.7–4.8 billion in sales, $840–910 million in EBITDA, and $2.45–2.85 in adjusted EPS.
  • Pricing actions effective: Price‐mix growth accelerated for the fourth consecutive quarter (up 19% in Q1) and global contract escalators will drive further benefits in H2.
  • Near-term volatility: Inflation, recession risk and supply-chain disruptions are pressuring casual-dining traffic and production efficiency.
  • Potato crop outlook: Yields are at the lower end of the historical average but quality remains good, and open-market purchases should keep operations on track without derailing targets.
AI Generated. May Contain Errors.
Earnings Conference Call
Lamb Weston Q1 2023
00:00 / 00:00

There are 11 speakers on the call.

Operator

Good day, and welcome to the Lamb Weston First Quarter Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Dexter Congolay. Please go ahead.

Speaker 1

Good morning, and thank you for joining us for Lamb Weston's Q1 2023 earnings call. This morning, we issued our Earnings Press Release, which is available on our website, lambweston.com. Please note that during our remarks, we'll make some forward looking statements about the company's expected These statements are based on how we see things today. Actual results may differ materially due to risks and uncertainties. Please refer to the cautionary statements and risk factors contained in our SEC filings for more details on our forward looking statements.

Speaker 1

Some of today's remarks include non GAAP financial measures. These non GAAP financial measures should not be considered a replacement for and should be read together with our GAAP results. You can find the GAAP to non GAAP reconciliations in our earnings release. With me today are Tom Werner, our President and Chief Executive Officer and Bernadette Madrieta, our Chief Financial Officer. Tom will provide an overview of the current environment.

Speaker 1

Bernadette will then provide details on our Q1 results and our fiscal 2023 outlook. With that, let me now turn the call over to Tom.

Speaker 2

Thank you, Dexter. Good morning and thank you for joining our call today. We're pleased with our performance in the quarter. We drove strong sales growth, expanded our gross margin and nearly doubled adjusted EBITDA, including unconsolidated joint ventures. Our results reflect our continued focus on implementing pricing actions to offset input and transportation cost inflation, driving productivity and cost saving initiatives, increasing service levels for our customers In each of our sales channels and supporting our people and talent.

Speaker 2

We built good operating momentum over the past few quarters by focusing on these near term objectives, We are confident in our ability to deliver the upper end of our sales and earning target ranges for the year. I'm especially proud of the Lamb Weston team has Continued to generate solid results in a very difficult macroeconomic environment. We expect this environment to remain challenging at least through fiscal 2023 As inflation, a growing threat of recession and industry wide supply chain disruptions continue to pressure demand for fries as well as our cost structure. It's no surprise that inflationary trends for food, energy and housing have affected restaurant traffic in the U. S.

Speaker 2

Over the past 6 months. We saw similar restaurant traffic trends during the Great Recession as consumer discretionary income came under pressure. While traffic at quick service restaurants has held up relatively well, it has come at the expense of casual dining and full service restaurants as Consumers increasingly choose less expensive options when dining away from home. In the past month or so, we've seen casual dining full service restaurant traffic tick up from summer lows, but traffic remains below levels achieved just prior to the war in Ukraine. Unlike traffic trends, fry demand continues to be solid when dining out.

Speaker 2

The fry attachment rate, which is a rate at which consumers order fries when visiting a restaurant Our other food service outlets remains above pre pandemic levels. Fry demand in retail channels has also benefited as restaurant traffic slows. Overall, we expect volatility in restaurant traffic and demand trends will continue through fiscal 2023, History has shown that this category is resilient during economic downturns. Although we may see some category weakness in the near term, We remain confident in the long term growth prospects of the category in the U. S.

Speaker 2

And in our key international markets. In addition, as category growth returns to historical rates, we should be well positioned to capture at least our share of growth with our investments And new processing capacity in Idaho and China as well as our newly announced expansion in Argentina. With respect to pricing, our overall price mix growth accelerated for the 4th consecutive quarter. In our Foodservice and Retail We continue to realize the carryover benefit of multiple product pricing actions that we have taken over the past 15 months and expect the benefit of these actions will continue to gradually build through the first half of fiscal twenty twenty three. In our Global segment, we made good progress in increasing price mix through price escalators included in multiyear contracts, while also securing some price adjustments outside of these agreements.

Speaker 2

In addition, we've nearly completed Negotiating contract renewals that represent about a third of our global segment volume. Overall, we feel good about how the This played out and we'll generally begin to see the results of these new pricing structures during the second half of fiscal twenty twenty three. Finally, with respect to this year's potato crop. Our preliminary view is the potato crop in our growing regions In the aggregate, we'll be around the lower end of historical average range. Specifically, the overall quality of the crop, including shape, color, level of defects and solid content is good and consistent with historical averages.

Speaker 2

Yields, however, are below average. The unusually hot weather during August affected the growth of the potatoes and resulted in a greater than average proportion the additional potatoes needed to meet our production forecast and expect to purchase most of this from growers in the Columbia Basin in Idaho. That's in contrast to last year when we purchased potatoes at significant premiums to contracted prices and transported them from as far away as the East Coast. As you may recall, our financial targets for the year were predicated in part on an average potato crop, And we believe this crop is broadly consistent with our expectations. While below average yields will result in additional open market Purchases at higher than contracted prices, we do not expect this to affect our ability to deliver our financial targets.

Speaker 2

To be clear, we view this crop as significantly better than last year's, which was poor both in terms of yield and quality due to the prolonged extreme summer heat in the Pacific Northwest. We'll provide our final assessment of the crop including how it performs out of storage when we report our 2nd quarter results in early January. So in summary, we generated strong sales and earnings growth in the Q1 Restaurant traffic and fry demand will be volatile in the near term as consumers continue to adjust to the inflationary environment. And on a preliminary basis, we believe the potato crops in our growing regions are at the lower end of historical average range and that any effect on our operations or financial Let me now turn the call over to Bernadette to review The details of our Q1 results and our progress towards our fiscal 2023 financial commitments.

Speaker 3

Thanks, Tom, and good morning, everyone. As Tom said, we're pleased with our performance in the quarter and we are confident in our ability to deliver at the high end of our financial target ranges for the year. In the quarter, our sales grew 14% to more than $1,100,000,000 Price mix was up 19% as we continue from product and freight pricing actions that we announced last fiscal year and as we began to execute new pricing actions during the fiscal for the Q1. Our sales volumes were down 5%, primarily reflecting the softer restaurant traffic trends in U. S.

Speaker 3

Casual dining and full service outlets that Tom described earlier, as well as the timing of shipments to large chain restaurant customers. In retail, while branded product volumes were up, overall retail segment volumes were down with the ongoing effect of losing certain low margin private label business. Sales volumes in foodservice and retail also continued to be affected by our inability to fully serve customer demand as a result of constrained production at our facilities. Gross profit increased $122,000,000 to $273,000,000 in the quarter. Gross margin expanded nearly 900 basis points versus the prior year quarter and 2 30 basis points sequentially to more than 24%.

Speaker 3

Pricing actions and productivity savings drove these improvements, more than offsetting the impact of higher costs on a per pound basis And lower sales volumes. Cost per pound increased high single digits with inflation again accounting for essentially all of the increase. Higher prices for inputs such as edible oils, ingredients for batter and other coatings, labor and transportation were the primary drivers. Potato costs were also up as a result of the poor crop that was harvested last fall. We'll continue to realize the financial impact of this crop through most of the Q2 of fiscal 2023 as we sell the final finished goods produced from the crop.

Speaker 3

And finally, we continue to incur higher costs and operational inefficiencies associated with labor, Spare parts and ingredient shortages and other industry wide supply chain challenges. Benefits from our portfolio simplification and other cost mitigation efforts, however, offset some of these higher costs. Moving on from cost of sales. Our SG and A increased $25,000,000 to $116,000,000 largely due to higher compensation and benefits expense and expenses related to improving our IT infrastructure, including designing a new ERP system Equity method earnings from unconsolidated joint ventures in Europe and the U. S.

Speaker 3

Increased nearly $170,000,000 More than $140,000,000 of the increase was related to the change in unrealized gains for mark to market adjustments related to changes in natural gas and electricity derivatives as commodity markets in Europe have experienced significant volatility. Another $15,000,000 of the increase relates to a gain recognized in connection with us acquiring an additional 40% interest in our joint venture in Argentina. Excluding these comparability items as well as other mark to market adjustments not associated with natural gas and Equity earnings increased $13,000,000 This largely reflects improved results in our joint venture in Europe. In addition, in September, our European joint venture withdrew from its joint venture in Russia after receiving all regulatory approvals. In the prior year quarter, earnings from the Russia joint venture were not material.

Speaker 3

So putting it all together, Adjusted EBITDA, including unconsolidated joint ventures, nearly doubled to $228,000,000 While adjusted diluted earnings per share more than tripled to $0.75 per share, Strong sales growth and gross margin expansion primarily drove the increases. Moving on to our segments. Sales in our Global segment were up 12% in the quarter. Price mix was up 14%, reflecting domestic and international pricing actions associated with customer contract renewals, inflation driven price escalators and higher prices charged for freight. Mix was also positive.

Speaker 3

Overall segment volumes declined 2% as North American volumes fell, primarily due to the timing of shipments to large QSR chain customers, including the effect of lapping a notable limited time product offering in the prior year quarter. Global's product contribution margin, which is gross profit less advertising and promotion expenses, Nearly doubled to $84,000,000 Favorable price mix more than offset the impact of higher manufacturing and distribution costs per pound. Sales in our Foodservice segment grew 14%. Price mix increased 26% as we continued to drive Product and freight pricing actions that we announced throughout fiscal 2022 and earlier in the quarter to counter inflation. Sales volumes decreased 12% as casual dining and full service restaurant traffic softened.

Speaker 3

While traffic trends progressively softened each month since the war in Ukraine began at the end of February, it began to tick upward in August. Sales volumes were also affected by the timing of incremental losses of certain low margin noncommercial business as well as our inability to fully serve demand as a result of constrained production. Distribution margin rose more than 40 percent to $138,000,000 as favorable price more than offset higher manufacturing and distribution cost per pound and the impact of lower volumes. In our Retail segment, sales increased 28%. Price mix was up 32%, reflecting pricing actions across our branded and private label portfolios as well as favorable mix with the sale of more branded products.

Speaker 3

Volume was down 4%, reflecting incremental losses of certain lower margin private label products. We'll be lapping the last of that lost private label business in the Q2. Sales volumes were also tempered by our inability to fully serve Customer demand due to the constrained production. Retail's product contribution margin more than tripled to $49,000,000 behind pricing actions and favorable mix. This was partially offset by higher manufacturing and distribution cost per pound.

Speaker 3

Moving to our liquidity position and cash flow. We ended the quarter with $485,000,000 of cash and a $1,000,000,000 Undrawn Revolver. While our net debt remained relatively flat at about $2,250,000,000 Our leverage ratio fell to 2.7x from 3.1x at the end of the fiscal 2022 as earnings grew. We generated more than $190,000,000 of cash from operations, which is up about $30,000,000 versus the prior year quarter, largely due to higher earnings. Capital expenditures were about $120,000,000 That's up about $40,000,000 as we continue to construct new French fry lines in Idaho and China.

Speaker 3

In addition, we paid about $42,000,000 to acquire the additional 40% interest in our joint venture in Argentina. We now own 90% of that joint venture. We returned $64,000,000 of cash to our shareholders in the form of dividends and share repurchases and have about $240,000,000 of authorization remaining under our share repurchase program. Turning to our fiscal 2023 outlook. Our financial targets for the year remain unchanged as we continue to build our operating momentum.

Speaker 3

While the macro environment Remain volatile. We're on track to deliver at the high end of our sales target of $4,700,000,000 to $4,800,000,000 with price driving the growth. We'll continue to realize the carryover benefit of product pricing actions in our Foodservice and Retail segments. And in our Global segment, we expect to see the benefit of pricing actions, including pricing structures for contract renewals build as the year progresses. Forecasting volume continues to remain more difficult due to the near term volatility in restaurant traffic and demand.

Speaker 3

As we saw in the Q1, we believe that consumer behavior during inflationary or recessionary times We'll continue to affect overall demand as well as our sales channel and product mix with QSRs and retail outlets benefiting at the expense of casual dining and full service restaurants. In addition, we expect our sales volume Additionally, while labor and access to shipping containers have improved, we continue to see the impact of shortages. We're on track to deliver at the high end of the range of our earnings targets, including adjusted net income of $360,000,000 to $410,000,000 adjusted diluted earnings per share of $2.45 to $2.85 and adjusted EBITDA including unconsolidated joint ventures of $840,000,000 to $910,000,000 These targets exclude the items impacting comparability that I described earlier. We expect our earnings increase This will be driven primarily by sales growth and gross margin expansion. We continue to expect gross margins during the second half of fiscal twenty twenty three that approach our normalized annual rate of 25% to 26%, and we feel good about the 4 key factors underlying this target.

Speaker 3

First, as Tom noted, we believe the potato crops in our primary growing regions will be at the lower end of the historical average range and that any effect on our operations and financial performance will be manageable. 2nd, we're pleased with the continued progress in implementing pricing to counter cost inflation. 3rd, we're making steady progress in adding production workers in order to ease labor pressures in our factories. And finally, the availability of domestic rail and trucking assets as well as access to shipping containers continues to improve. While a broad rail strike has likely been averted, we continue to closely monitor the status of discussions with the West Coast Stock Workers Union and the impact of potential work slowdown or stoppage may have on our exports.

Speaker 3

We continue to target SG and A expenses $475,000,000 to $500,000,000 which reflects higher compensation and benefits expenses to attract and retain talent, We look to return support back to historical levels and overall inflation for 3rd party services. We continue to expect equity earnings of $25,000,000 to $30,000,000 excluding items impacting comparability, but also expect increased volatility given the likelihood of a poor crop in Europe as well as possible limitations on natural gas In addition, we believe that the severe inflation outlook for Europe will likely translate into more pressure on restaurant traffic and demand. Our estimates for our other financial targets are unchanged, Including capital expenditures of $475,000,000 to $525,000,000 excluding acquisitions, Interest expense of approximately $115,000,000 depreciation and amortization expense of about $210,000,000 and an effective tax rate excluding items impacting comparability of about 24%. Now here's Tom for some closing comments.

Speaker 2

Thanks, Bernadette. Let me quickly sum up by saying we are managing well through this challenging environment and continue to build good operating momentum. We're well positioned to deliver at the upper end of our financial target ranges for the year and we're making the necessary investments in our production capacity and operating infrastructure to support long term growth and create value for our shareholders. Thank you for joining us today and now we're ready to take your questions.

Operator

Our first question will come from Chris Growe with Stifel.

Speaker 4

Thank you. Good morning.

Speaker 1

Good morning, Chris.

Speaker 2

Hi.

Speaker 3

Good

Speaker 4

morning. Thank you. Hi. I just had a quick question for you. And it was a very Strong first quarter performance.

Speaker 4

Congratulations on that. Obviously, you are looking more towards the higher end of your guidance now for the year. With this strong first quarter and this Recovery in the gross margin, it would seem like you could see an even stronger EBITDA performance. I realize it's early in the year, but I just want to get a sense of items maybe like in SG and A, if there's investments you can make there or perhaps even in as you start to kind of rebuild your production with better labor and availability of that. If there's some items like that we should keep in mind as we move through the year that could put a bit of a limit on the EBITDA performance?

Speaker 2

Yes, Chris, this is Tom. I'll just reiterate, we're off to a terrific start this fiscal year. And Our focus, you think about a year ago, our focus has been rebuilding our margin structure back to Pre pandemic levels, that's the focus of the team, and they've done a terrific job. And just in terms of SG and A and I'll let Bernadette add on to this. We have some elevated spend due to the ERP, A lot of it.

Speaker 2

There's some wages Also that has increased our SG and A based on the market conditions we have, but it's really about focusing on the mix, Margin management, that's what we've been focused on for the last year when I started talking about it. Team has done a great job executing that. It's the volume is a little bit choppy right now and I think that's going to continue for the balance of this fiscal year just Based on the economic environment we're all operating in and as well as some of the supply chain issues we continue to experience Within freight and containers, those kind of things. So, it's early. We got to understand how the crop processes through the factories the next 60 days.

Speaker 2

And on that note, in Q2, we'll reassess kind of how we're feeling about the year.

Speaker 4

Okay. Thank you. I had just a follow-up question on your gross margin. Obviously, it's a much stronger gross margin here in the Q1 than we expected and really more like your historical first Quarter gross margin performance. I realize there's a lot going in the gross margin today from pricing and cost inflation in the old crop and all that.

Speaker 4

I just want to get a sense of the factors that are aiding the gross margin performance this quarter. And maybe along with that, just

Speaker 2

to get a sense

Speaker 4

of how much these supply chain challenges are still weighing on the gross margin? Thank you.

Speaker 2

Yes. Chris, the main factor, If you think about a year ago, we were at 15% margin. And so it's really focused on Pricing through inflation, we have absorbed a tremendous amount of cost inflation In this business, just like everybody else has in the space. So it's really driving pricing to offset inflation. And we're making obviously great progress against that.

Speaker 2

We have a lot more to do. It's still From an input cost standpoint, we're going to see more inflation coming at us In the future, so we're adjusting our pricing architecture to offset that as much as we can and we believe we will. So That's kind of that's the driver, Chris.

Speaker 3

Yes. And we are making steady progress as we add production workers based on some of the actions that we've taken to attract and retain employees while there's still those labor shortages. We are seeing the impact of that and some of the changes we've made to shift schedules and other things. Just getting back to your run rates and throughput question.

Speaker 2

Yes. And just one of the big challenges we still have is Container issues for our international business, Chris. And it's while it's getting better, it's still Hindering our ability to shift to some of our international markets in a pretty significant way, which is impacting the overall volume in our global business unit. The team is working through it as best we can, but it's still challenging

Operator

Thank you. Our next question will come from Peter Galbo with Bank of America.

Speaker 5

Hey guys, good morning. Thanks for taking the question.

Speaker 3

Good morning. Good morning.

Speaker 5

Tom, I just wanted to ask actually like a more of a technical I guess around the 2022 potato crop, realizing that the yields are down and maybe the sizing is down a bit, But with the quality being good, can you just, I guess, educate us a little bit more on why the quality being above average or very good kind of helps Pull up maybe a down yield here, what that does for you from a manufacturing standpoint?

Speaker 2

Yes. So The way to think about it is the Quality of the potato, as we're manufacturing it or running it through the factories, it will provide Good solids and good color and the length is fine, Which last year we had all kinds of issues with the crop. So set that aside, so quality is good. You're going to be able to The finished product is going to be more normalized, I'll say. The yield impact is Literally, there's just less potatoes on the plant as it grows than what we historically have.

Speaker 2

So it's just you just have less potatoes per acre. And so, we're I feel great about our ability to procure Open potatoes as we have every year, we do it every year. So, it's while it's not at historical levels, Like we said on the call, we will manage through it. We have a great ag team that will help us manage through it and procure And we'll be able to deliver our customers the product they need.

Speaker 3

Yes. And Tom, if I could add on to that. In terms of the quality component Being better this year where it was last year. Last year that lower quality really resulted in Lower potato utilization, so it required more potatoes to produce the same amount of finished goods. And we're not going to have that issue this with a better crop in terms of quality.

Speaker 3

And then potato quality also affects line feed times in our plants. Again, We won't have that issue this year with a better quality crop.

Operator

Got it. That was going to be my follow-up. So thanks for that Bernadette.

Speaker 5

And then maybe just as a second question, more of a technical question for modeling purposes. Just can you quantify at all the shipment timing impact On QSRs in the Q1, does that shift to the 2nd quarter at all? And then just again, seasonally, I think historically gross margins tick up from 1Q to 2Q in a normal year. Should we expect some of that normal sequential acceleration into the 2nd quarter?

Speaker 3

Yes. As it relates to our gross margin, we'll continue to see the normal seasonality. And then as it relates to the first question and the impact of the QSR, we don't give certain Guidance as to relate to specifics, but essentially that will flow through in the Q2 in terms of timing, Just given the delay in shipments.

Speaker 5

Great. Thanks very much.

Operator

And our next Question comes from Tom Palmer with JPMorgan.

Speaker 6

Good morning and thanks for the question. I wanted to ask On COGS inflation expectations, it sounds like based on Bernadette's prepared remarks that maybe It decelerated just a little bit in the Q1. Is the assumption that as the year progresses, you see the rate of inflation ease a little bit? Just wondering what's kind of embedded in that?

Speaker 3

Yes. So we did end the quarter with high single digit Cost inflation, including transportation, but then we also had some of the increased costs related to inefficiencies for run rates. So those were the 2 pieces. As it relates to inflation though going forward, although they've come off their recent highs, They still do remain well elevated compared with pre pandemic levels. And then it also We'll be impacted going forward by the timing of when some of our hedges drop off, for some of our natural gas.

Speaker 7

Okay,

Speaker 6

understood. And then just maybe get a Quick recap of pricing actions at this point. You cited list price increases that flowed through during the Q1. So I guess presumably there'll be carryover in the Q2. From a list price standpoint, is there anything beyond that at this point or is kind of the next step up As we move into the New Year and global contracts are adjusted?

Speaker 2

Yes. So the big thing, Tom, is our global contract Negotiations are kind of wrapping up for this next fiscal year. Most of those will start flowing through in the back half. And as I said in the remarks, we feel good about where all those ended up. We'll start seeing realizing those in the back half.

Speaker 2

In terms of the other segments, we've been ahead of the curve in terms of the Pricing, the offset inflation and we as we always do, we'll continue to evaluate Based on what we're seeing on our cost structure, evaluating when we go to market and change prices going forward in the retail and foodservice segment.

Speaker 3

Yes, that's right. And then the last price increase that we announced in foodservice retail in July, you'll begin to see more benefit of that in Q2, Q3.

Speaker 1

You might start to see a little bit of slowdown in transport though, just say you have that. So remember, we've been talking about product pricing here, Transport will start to come off a little bit, just as the cost of transport goes down. As it and most people on the call know that we try to make that as a pass through as possible. It's over time, it tends to be gross profit neutral, but it will be a little bit more volatility on the top line because of that.

Speaker 7

Okay. Thanks for

Speaker 6

all the details.

Speaker 8

Thanks, Sam.

Operator

And our next question will come from Rob Dickerson with Jefferies.

Speaker 7

Hi, Rob. Thanks so much. Maybe just I've got a follow-up on the gross margin in the back half. Q1

Speaker 1

Hey, Rob, you're breaking up a little bit.

Speaker 7

I'm sorry. Yes, sorry. I was just saying gross margin in the Q1 was obviously impressive, not that far from expectations in the back half. And it sounds like contract negotiations this summer in Global going well. So I guess, as we think kind of just to that Q3 time period with some of the incremental pricing coming through, Tom, what would you consider Some of the drivers that might get you at the high end of that gross margin guide in the back half, maybe some of the drivers to get you To the lower half of it or to the lower end, it sounds like it's kind of more of the demand side relative to maybe volatility on cost or pricing Or anything around the crop?

Speaker 7

Thanks.

Speaker 2

Yes, Rob. As We've been very consistent. I feel good about where our gross margins are going to progress towards our historical averages In the back half pre pandemic, so that's what our focus is on. And we're off to Making good progress against that obviously. And so I feel confident about us returning back to normalized levels.

Speaker 2

And so I'm not going to talk about high end, low end, all those kind of things, Rob. I just It's about making progress and we're doing that as an organization and teams executing against that.

Speaker 7

All right. Fair enough. And then just quickly, Tom, I know you said early on in the call, it sounds like you've been able to secure Incremental supply, just given a little bit lower yield on the crop. At this point, kind of given Where you stand, is it fair to say that you have plenty of supply, right? You have plenty of potatoes as you kind of get The fiscal year, this shouldn't be like an issue.

Speaker 7

We're sitting here in March or April, such that the market's all out trying Fight for potatoes in the open market. That's it. Thanks.

Speaker 2

Yes, Rob, I feel great. We have great partner growers. We work in tandem with them on our needs and we had a great ag team that has Tremendous relationships with our growers. So, feel confident that we'll be able to execute against our Production plan and sales plan for the year and we have some things we can do to adjust new crop, old crop. So I feel good about where we're positioned going Forward.

Speaker 7

All right. Super. Thanks a lot.

Operator

And our next question will come from Adam Samuelson with Goldman Sachs.

Speaker 8

Good morning, everyone. Thank you for taking my questions.

Speaker 1

Good morning, Adam. Good morning, Adam.

Speaker 8

It's actually Guillermo stepping in for Adam. I was wondering if you could help us understand a little bit better your underlying assumptions as it relates to your guidance. You reaffirm it. Now that we have 3 more months, has anything changed in terms of your underlying price mix assumptions or volumes?

Speaker 3

Yes. Thanks, Adam. No, there's 4 key factors that we alluded to in our prepared Remarks as it relates to our guidance, that we've been watching and that's crop, pricing, our run rates and then logistics. And we feel good about where we're at on all of those. And therefore, I think we'll be at the higher end of the range of our earnings targets that we have outlined.

Speaker 3

So feel good about all four of those factors.

Speaker 8

That's helpful. Thank you. And as a follow-up, as it relates to your investment in Argentina, how does it benchmark in terms of Profitability versus the rest of the portfolio?

Speaker 2

Well, this is Tom. It's Right in line with our long term strategic growth plans. It gives us in country production capabilities Alongside of our we have a joint venture down there and it gives us a Footprint in the South American market, which is a huge market and we're under indexed in terms of share. So And it's super cost competitive. So I feel good about our investment.

Speaker 2

It's right along our strategic long term plan that we've been executing against for the past 6 years. And I'm excited about it and it's going to give us a tremendous competitive advantage in that market down there going forward.

Speaker 3

Yes. And we expect that the return on that expansion to be attractive and in line with our other expansions.

Speaker 8

That's super helpful.

Operator

And moving on to William Reuter with Bank of America.

Speaker 9

Hi, good morning. I just have 2. The first is with the 2nd year of Kind of below average crop yields, has there been any change in the amount of area or land that is being dedicated to the production of potatoes. I'm wondering whether there could be long term implications if some of the growers aren't making as much money as they historically did.

Speaker 2

No, I mean, this is Tom. The acres fluctuate a bit, nothing major. So The acres around our growing areas has been pretty consistent over time. There is some change, But it's really not it has not been material, as long as I've been around this business.

Speaker 9

Great to hear. And then kind of on a related topic, there is some trade press that suggests But some of your contract negotiations in the Columbia Basin are already complete for calendar year 'twenty three. Is there anything you can provide there in terms of color?

Speaker 2

Yes. No, we won't provide any color on that. The next couple of calls as some of those things finalize as we always We'll communicate that on one of these calls in the near future once everything is done.

Speaker 9

Understood. Sounds good. Thank you.

Operator

Yes. Thank you. And moving on to Carla Casella with JPMorgan.

Speaker 10

Hi. Thanks for taking the question. I'm wondering, you've been making a lot you've been spending a lot If you're investing on additional capacity, can you talk about your whether your view towards M further JV Investments may change as those facilities are done or Is that not inhibiting any of your M and A JV investment opportunities?

Speaker 2

Yes, this is Tom. The strategically, our investment in expanding capacity has been very consistent. As we see the category growth and we think about the next really 2, 3, 4, 5, 7 years As the category continues to grow even at low single digits, It's a big growth number in terms of overall volume. So over time, we're going to continue to invest in the business And invest in the growth of the category. In terms of M and A, I've been very consistent since I've been sitting in this chair that We are as active as we can be in pursuing M and A actions, But the timing of those are always hard to predict, but it is Absolutely.

Speaker 2

Going forward, part of our growth strategic plan, organic Capacity, investment and potential M and A as those opportunities present themselves.

Speaker 10

Okay, great. And then can you did you, I might have missed it, did you give a leverage target?

Speaker 3

Yes. So our leverage target remains the same at 3.5x to 4x. Certainly, we're considerably below that right now. But we maintain that strong balance sheet during these periods of economic volatility and it preserves optionality for M and A.

Speaker 10

Okay. That's great. And then just one last one on hedging. Can you just talk about what you can and are hedging and if your Viewer policies are changing there just in light of the current environment.

Speaker 3

Yes. Just high level, we do hedge our natural gas and oil, that's used in processing our potatoes. Our policies have not changed. We've always had a risk oversight committee that has monitored the markets and we've entered into those contracts as we've seen appropriate.

Speaker 10

Deb, you said how much you're hedged in for the year?

Speaker 3

We haven't disclosed that.

Speaker 10

Okay, great. Thank you.

Operator

Thank you. And that does conclude the question and answer session. I'll now turn the conference back over to Mr. Cong Bele for any additional or closing remarks.

Speaker 1

Thanks for joining us today. If you want to set up a follow-up call, Please e mail me and we can set up a time either today or in the following days. Thanks again for joining and I'll talk to you later. Bye.

Operator

Thank you. That does conclude today's conference. We do thank you for your participation. Have an excellent day.

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