Lamb Weston Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
April 6, 2023

Key Takeaways

  • Lamb Weston delivered 31% sales growth in Q3 with gross margins expanding across all core segments, driving strong EBITDA and EPS improvements.
  • Completed the acquisition of the remaining interest in Lamb Weston EMEA, adding six factories and £2 000 000 000 of production capacity, with integration efforts now underway.
  • Revenue growth management actions enabled the company to offset input cost inflation through strategic pricing and mix improvements, resulting in margin recovery above pre-pandemic levels.
  • Contracted potato prices in North America and Europe rose approximately 20%, reflecting continued input cost inflation that will pressure margins absent further pricing actions.
  • The company raised its full-year 2023 guidance to net sales of $5.25–5.35 billion, adjusted EBITDA of $1.18–1.21 billion and EPS of $4.35–4.50, up notably from previous targets.
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Earnings Conference Call
Lamb Weston Q3 2023
00:00 / 00:00

There are 10 speakers on the call.

Operator

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

Speaker 1

Good morning, and thank you for joining us for Lamb Weston's Q3 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 performance that 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 Warner, our President and Chief Executive Officer and Bernadette Madriada, our Chief Financial Officer. Tom will provide an overview of the current operating environment, while Bernadette will provide details on our Q3 results and our updated fiscal 2023 outlook.

Speaker 1

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 delivered strong results in our fiscal Q3 as we continue to build good operating momentum. Specifically, sales grew 31%, while gross margin expanded in each of our core business segments. This in turn drove strong EBITDA and earnings per share growth.

Speaker 2

I want to thank the entire Lamb Weston team for their dedication and focus on serving our customers so that together we delivered another great quarter and positioned us for a strong finish to the year. This thank you is also to our more than 1500 colleagues in Europe, who are now officially members of the global Lamb Weston team after we recently completed the purchase of the remaining interest in Lamb Weston Meyer. Lamb Weston Europe, Middle East and Africa or Lamb Weston EMEA Add 6 factories and about £2,000,000,000 of production capacity to our global manufacturing footprint. It strengthens our ability to Serve customers in key markets around the world and it enhances a world class management operating and commercial team with deep knowledge of the frozen potato industry. We've kicked off the process to integrate Lamb Weston and EMEA's operations and are excited to see what we can deliver together both now and over the long term.

Speaker 2

Before turning the call over to Bernadette, let me first provide some quick updates on the current operating environment. While the macro environment remains highly challenging, overall French fry demand remains healthy. Total restaurant traffic improved versus the prior year quarter When traffic was negatively affected by the Omicron variant. QSR has essentially accounted for the entire growth in traffic, including strong growth across burger and chicken restaurant chains, which are significant contributors to driving fry demand. In contrast, traffic at casual dining and full service restaurants fell versus the prior year.

Speaker 2

This has a more pronounced effect on our Foodservice segment And contributed in part to a decline in that segment's volume. The fry attachment rate, which is a rate at which As we previously noted, we're encouraged by how the category is currently performing in away from home channels, but continue to expect restaurant traffic and demand trends Will be volatile through fiscal 2023 and into fiscal 2024 as consumers continue to deal with a challenging macro environment. Demand for fries in Food and Home channels remained solid. Shipments by our retail segment grew in the 3rd quarter, led by strong performance in products sold under licensed restaurant brands. We expect demand in this channel will remain solid into fiscal 2024.

Speaker 2

With overall category demand holding up relatively well and as industry supply expected to be constrained for at least the next couple of years, We believe the environment for pricing actions to counter input cost inflation may remain generally favorable. In addition, we've been building our revenue growth management and execution capabilities. We've made good progress as shown by our ability to offset input cost inflation to drive the recovery in our gross margins over the past year in each of our core business segments. Nonetheless, we're continuing to work on maximizing revenue and margin By further evaluating markets and sales channels by using a broader set of variables and leveraging data backed insights on our customers and consumers. Pricing in the quarter in our Global segment was in line with our expectation as we continued to incorporate new pricing structures for customer Inflation driven price escalators and benefits from pulling forward pricing actions for contracts up for renewal in the coming years.

Speaker 2

Despite lapping some of the pricing actions we took in fiscal 2022, price mix in both the Foodservice and Retail segments in the quarter Was better than we anticipated as we continued efforts to rationalize pricing structures and strategically improve customer and product mix across the respective portfolios. During the remainder of fiscal 2023 in our Global segment, we don't expect Any additional notable pricing actions to take effect. In Foodservice, we expect the year over year growth rate and price mix will decelerate as we continue to lap more of the fiscal 2022 pricing and mix improvement actions. And in retail, we expect the year over year growth rate And price mix will also decelerate as we continue to lap last year's pricing actions, although this will be tempered by a recent price increase that took effect towards the end of the Q3. With respect to the potato crop in North America, We believe we have secured enough open market potatoes to meet our production forecast until the early potato varieties are harvested in July.

Speaker 2

We purchased open potatoes from growers in the Columbia Basin and Idaho, but also secured supply from as far away as the East Coast. This adds up to our potato costs through the first half of fiscal twenty twenty four. With respect to the upcoming potato crop, As previously discussed, we've agreed to a nearly 20% increase in the contract prices for potatoes grown in the Columbia Basin and have locked in the targeted contracted acres to be planted in that region. We're in the process of securing most of the acres in Our other growing regions in North America and expect to have this process completed shortly with contract prices largely in line with the 20% increase in the basin. In Europe, we have secured the acres in our key growing regions and expect to complete the contracting process shortly.

Speaker 2

Like North America, contract prices are up significantly to reflect input cost inflation for growers. So in summary, we delivered another strong quarter of sales and earnings growth which has enabled us to raise our financial targets for the year And continue to build good operating momentum across each of our core segments. We're excited about more than 1500 new Lamb Weston EMEA colleagues that have joined the global team and believe that leveraging EMEA's capabilities will help us better serve customers around the world. And finally, category demand remains healthy and we believe that industry supply should remain constrained for at least the next couple of years. Let me now turn the call over to Bernadette to review the details of our Q3 results and our updated financial fiscal 2023 outlook.

Speaker 3

Thanks, Tom, and good morning, everyone. I want to also thank the Lamb Weston team for delivering another quarter of strong results and continuing to build good operating momentum across the company. This momentum has enabled us to raise our financial targets for the remainder of the year. I also want to add a warm welcome to the Lamb Weston EMEA team. Let's begin with our Q3 results.

Speaker 3

Sales in the Q3 were up 31 percent to $1,250,000,000 Price mix was up 31% as we continue to benefit from pricing actions across each of our core business segments to counter input and manufacturing cost inflation. The increase reflects the carryover impact of product pricing actions that we initiated in fiscal 2022 as well as pricing actions that we began implementing during this fiscal year. Our overall sales volumes were flat. While we increased shipments to our large QSR chain And to retail customers in North America, which generally reflects demand and restaurant traffic trends that Tom described earlier, Our growth in volume was offset by a couple of factors. First, we continued To strategically improve our product and customer mix by exiting certain lower price, lower margin business.

Speaker 3

2nd and to a lesser extent, softer casual dining and full service restaurant traffic also affected volumes in the quarter, which is largely reflected in our foodservice shipments. It's worth noting that in the quarter, we also continued to make progress in stabilizing our supply chain with better availability of production team members and key ingredients as well as improved production forecasting. As a result, the impact on production in the quarter was relatively modest, which helped drive improvements in our customer fill rates versus our 1st and second quarters. This improvement is more apparent in our Retail and Foodservice segments as we have largely maintained high fill rates in our Global segment since the start of the pandemic. That said, we expect changes in product mix and consumer demand will continue to pressure our near term production and therefore shipments of high demand products, including retail fries, premium fries and batter coated products.

Speaker 3

We expect this volume pressure and our ability to meet growing consumer demand will continue until our capacity investments in China, Idaho, Argentina and the Netherlands become available over the next couple of years. Gross profit in the quarter versus the prior year quarter to 31.7%. Our strong gross margin performance reflects the cumulative benefit of executing pricing actions in each of our business segments to counter input and manufacturing cost inflation as well as leveraging efforts to improve customer and product mix and Supply Chain Productivity. On the cost side in the quarter, we again realized a double digit increase And input and manufacturing cost per pound. This was largely driven by about a 20% increase in contracted prices For potatoes in North America, significantly higher prices for open market potato prices due to poor yields from the calendar year 2022 crop and continued increases in the cost of edible oils, ingredients for batter coatings, labor and energy.

Speaker 3

In contrast, our transportation costs fell in the quarter as industry rates for rail, trucking and ocean freight services Continued their steady decline over the past couple of quarters. We're continuing to reduce our freight charges to customers to match the decline in costs, which will steadily reduce the tailwind from transport prices in our sales line. However, the impact on our gross profit over time will be largely neutral. Moving on from gross profit. Our SG and A, excluding items impacting comparability, Increased $49,000,000 to $136,000,000 primarily reflecting higher compensation and benefit expenses due to improved operating performance as well as actions to maintain competitive pay levels across our organization.

Speaker 3

We also had higher expenses related to improving our IT infrastructure, including designing and building a new ERP system and a $6,000,000 increase in advertising and promotion expenses, largely behind support of our branded products in our Retail segment. Equity method earnings from our unconsolidated Joint ventures increased $12,000,000 excluding items impacting comparability and mark to market adjustments associated with Currency and commodity hedging contracts. Favorable price mix, largely reflecting pricing actions in Europe, drove the increase. Moving to our segments. Sales in our Global segment were up 33% in the quarter.

Speaker 3

Price mix was up 33%, reflecting the revenue growth management initiatives and pricing actions to counter inflation that Tom described earlier. Global's volume was flat. Solid growth of shipments to large QSR chain customers in North America was offset by the impact of exiting certain lower priced and lower margin business in international and domestic markets as we actively manage our customer mix. Global's product contribution margin increased to $168,000,000 from a relatively weak prior year quarter, which at the time reflected significant input in manufacturing cost increases and only a modest benefit from product pricing actions. Global segment's product contribution margin percentage In the quarter was 25.8%, which is back to its seasonal pre pandemic level And was also a bit better than expected as we realized more benefits from pulling forward pricing actions for some customers than we originally anticipated.

Speaker 3

Sales in our Foodservice segment grew 22%, driven by a 25% As we continue to realize the carryover benefit of product pricing actions that we announced throughout fiscal 2022 as well as the actions taken in fiscal 2023 to counter inflation. Sales volumes were down about 3%, primarily reflecting exiting of some lower price, lower margin business to manage our customer and product mix as well as softer traffic in casual dining and full service restaurants. Food Services product contribution margin increased to $143,000,000 or up 34% as the cumulative benefit from pricing actions more than offset higher manufacturing cost per pound and the impact of lower volumes. Our Retail segment delivered another strong quarter with sales up 50%. Price mix increased 44%, reflecting pricing actions across our Branded and Private Label Portfolios to Counter Inflation.

Speaker 3

This was aided in part by limited trade support given the strong category demand and Constrained Supply Environment. Volume in the segment was up 6% behind better customer fill rates for our branded products. Private label volume was also up as we lapped the incremental losses of certain lower priced and lower margin products over the past couple of years. Retail's product contribution margin increased to $83,000,000 and its margin percentage topped 38% as the cumulative benefit from pricing actions more than offset higher manufacturing costs per pound. We're very pleased with how our retail team has strengthened our market share, profitability and portfolio mix over the past couple of years, and we remain confident and our ability to remain the overall category leader.

Speaker 3

Moving to our liquidity position and our cash flow. Our balance sheet remains solid with strong liquidity and a low leverage ratio. We ended the quarter with about 6 $75,000,000 of cash and a $1,000,000,000 undrawn revolver. Our cash balance was inflated as we did take on a new $450,000,000 term loan at the end of January to fund most of the cash consideration for the EMEA transaction, which closed a couple of days into our fiscal Q4. Our net debt was more than 2 point $5,000,000,000 at the end of the 3rd quarter, resulting in a 2.3x leverage ratio on a trailing 12 month basis.

Speaker 3

After accounting for the EMEA transaction, the estimated net debt at the beginning of our fiscal 4th Quarter would be about $3,300,000,000 resulting in a 2.6 times leverage ratio using our updated fiscal 2023 earnings target and an annualized contribution from our EMEA operations. Our capital allocation priorities remain the same. We continue to prioritize investing in the business to drive long term growth as well as delivering dividend growth for our shareholders and share repurchases to offset management dilution. In the 1st 3 quarters of the year, We generated about $335,000,000 of cash from operations. That's about $160,000,000 more than the first 3 quarters of last year.

Speaker 3

This is largely due to the higher earnings, partially offset by increased working capital. Capital expenditures were nearly $500,000,000 which is up about $270,000,000 from the 1st 3 quarters of last year. This increase is largely related to construction costs as we continue to expand processing capacity in Idaho, China and Argentina. In the 1st three quarters, we returned nearly $146,000,000 of cash to shareholders, including 106 $1,000,000 in dividends and about $41,000,000 in share repurchases. Now let's turn to our 2023 outlook.

Speaker 3

Our updated targets include the financial consolidation of Lamb Weston EMEA beginning in our fiscal Q4. For the year, we've increased our sales target to $5,250,000,000 to $5,350,000,000 up from our previous target of $4,800,000,000 to $4,900,000,000 About $300,000,000 to $325,000,000 of the increase reflects the consolidation of Lamb Weston EMEA. The additional $100,000,000 to $150,000,000 increase reflects Our strong results in our fiscal Q3 and our expected continued momentum in the 4th quarter. Excluding the contribution from EMEA, we expect our net sales growth in the 4th quarter to be driven by price mix As volumes will continue to be affected by certain exiting certain lower price and lower margin volume business to strategically manage customer and product mix and the potential for a slowdown in restaurant traffic and consumer demand. For earnings, we're targeting adjusted diluted earnings per share of $4.35 to $4.50 That's up from our previous target of $3.75 to $4 and Adjusted EBITDA, including unconsolidated joint ventures of $1,180,000,000 to $1,210,000,000 up from our previous estimate of $1,050,000,000 to $1,100,000,000 Of the $110,000,000 to $130,000,000 increase in our adjusted EBITDA target, We estimate that EMEA will contribute an incremental $10,000,000 to $15,000,000 of that amount.

Speaker 3

That implies then that EMEA's total EBITDA contribution of $20,000,000 to $30,000,000 in the 4th quarter, which is in line with the normalized full year pre pandemic EBITDA of about €100,000,000 The additional $100,000,000 to $115,000,000 increase in our full year EBITDA target reflects our strong results in our fiscal Q3 and our expected strong sales and earnings growth in the 4th quarter. Including the consolidation of EMEA, we're targeting a full year gross margin of 27% to 27.5%, implying a 4th quarter gross margin of 23% to 24.5%. Excluding EMEA, We've raised our full year gross margin target to 28% to 28.5%, up from our previous target of 27% to 28%. This implies a 4th quarter gross margin target, excluding EMEA, of 25% to 27%. While this would be a healthy gross margin expansion versus the prior year quarter, it also implies a notable step down from Our fiscal Q3 gross margin of 31.7%.

Speaker 3

We believe this estimate is prudent, reflecting typical seasonal patterns in our cost Significantly higher cost open market potatoes, continued inflation for key inputs and the impact of volume declines as a result of inflationary pressures on consumers. With respect to SG and A, We expect expenses, excluding items impacting comparability, of $550,000,000 to $570,000,000 That's up from our previous target of $525,000,000 to $550,000,000 The increase largely reflects The consolidation of Lamb Weston EMEA. In addition, we increased our estimate for capital expenditures to between $700,000,000 to $725,000,000 up from our previous estimate of $475,000,000 to $525,000,000 This increase reflects accelerated spending behind capital expansion investments as well as capital spending associated with the consolidation of EMEA. We also made adjustments to other financial targets, which you can find in our earnings release. And with that, let me turn the call back over to Tom for some closing comments.

Speaker 2

Thanks Bernadette. Let me sum it up by saying we are executing in this challenging operating environment and are confident in our increased financial targets for the year. We also continue to feel good about growth trends in the category and believe that the investments we're making in our people, new production capacity and infrastructure will have us well positioned to support sustainable profitable growth over the long term. Thank you for joining us today and we're now ready to take your questions.

Operator

We'll take your first question from Andrew Lazar from Barclays. Please go ahead, sir.

Speaker 4

Great. Thanks so much. Good morning everybody.

Speaker 2

Good morning, Andrew. Hey, Andrew.

Speaker 4

To start off, I know that Lamb Weston did not necessarily see Pre pandemic gross margins is a ceiling, but with margins now above pre pandemic levels excluding the recent transaction of course, I I guess what are the key factors that provide visibility to further margin expansion moving forward to the extent that that's how you see it? And then I've just got a follow-up. Thanks.

Speaker 3

Yes. Good morning, Andrew. This is Bernadette. As we look at our margins, I think the key piece that We're focused on now is our revenue growth management and our execution capabilities that Tom mentioned. We're focused Continuing to work on maximizing revenue as well as margin and we'll continue to do that as we look Across our markets and our sales channel to make sure that we're managing those.

Speaker 4

I think you said in the 4th quarter, We shouldn't expect any incremental pricing actions. With grower costs expected to be up as you mentioned another 20% for the current Coming crop. Should we expect some incremental pricing going forward, I guess as we roll into fiscal 2024 or Have you implemented all that you need for the coming year? And with capacity constraints starting to ease, I guess what I'm getting at is, could we have a scenario in the coming fiscal year where you have both some incremental pricing and some positive volume growth as well Given constraints have been one of the main reasons for volume being flattish to down the last couple of quarters. Thank you.

Speaker 2

Yes, Andrew, this is Tom. So a couple of things. As we noted, we have taken some pricing actions here at the end of the 3rd quarter. We're going to continue to evaluate as we roll up our plan for fiscal 2024, Which starts in June kind of what the overall inflation number is going to be and we are not at all in a deflationary period. Our crop cost is going to be up 20%.

Speaker 2

And so as we start evaluating the overall input cost Complex, as we do every year, we're going to determine the pricing actions we may Have to take and the team and the marching orders, we've done a very good job to offset inflation. We're going to continue to do that. And so as we noted in the prepared remarks, we've had to over the last 12, 15 months, do a lot of catch up pricing just based on the nature of what our contract constraints were. And So I feel good about where we're at in terms of really getting back to more normalized margin levels before the pandemic. And we're going to continue to execute and evaluate what's going on in the inflationary input environment going forward.

Speaker 2

So that's first part. 2nd part in terms of the overall volume, I feel good about where the category is. As we noted QSRs are performing tremendously well in terms of traffic. Our foodservice, so the casual dining segment, we're seeing some softness as we do when you have some economic Things happening like is going on today, so people are trading down. We have rationalized our Customer and product mix over the last 12 to 15 months, which is part of our revenue growth management initiative.

Speaker 2

And as we continue to evaluate opportunities in the marketplace, Andrew, I think And get our operations running back to a higher throughput level, that's going to give us Opportunities to take on business or going forward. So the other thing to remember is We've got a lot of capacity coming on. Our first capacity turn on is going to be this fall in China. So we're evaluating how that's going to look in terms of production shifts from North America to China. And then shortly after that, we'll have American Falls, Argentina and Kreineken over the next directionally 18 to 24 months.

Speaker 2

So we're getting prepared As we turn that capacity on to evaluate opportunities around the globe.

Speaker 4

Great. Thank you so much. Yes.

Operator

We'll hear next from Tom Palmer from JPMorgan.

Speaker 5

Good morning and thanks for the question. Good

Speaker 2

morning Tom.

Speaker 3

Good morning.

Speaker 5

Maybe I could just start off clarifying Expectations for the Europe business. You noted normal EBITDA of about $100,000,000 and then the 4th quarter guidance is pretty consistent with that. But I think The business has been doing a bit better than this over the past couple of quarters at least. Are there reasons such as Certain costs that are not excluded from adjusted earnings or other cost headwinds or seasonality that might make this figure a bit lower in the 4th And then when we look at results this year, would the general assumption be that next year EBITDA grows year over year on top of that?

Speaker 3

Yes. Good morning, Tom. As we take a look at our 4th quarter guidance that we provided, Excluding EMEA, you will typically see a step down in our gross margins as you move from Q3 to Q4 just based on seasonality. And then we're also going to be lapping prior year price increases. And so we're going to see a Deceleration of the fact of that as we continue to move forward.

Speaker 3

Again, we also mentioned that we did See some pricing pull forward as well. And so there's some effect of that that you're Noting in Q3 that we wouldn't see in Q4. And as we always do, we take a step back and take prudent approach as we guide to where we think we're going to end at the end of the Q4, but those are the main triggers that are going to affect what you're seeing in guidance for the Q4.

Speaker 5

Understood. Thank you. And then just maybe on the gross margin, I know you noted Kind of a more normal seasonal decline in the 4th quarter. I think a quarter ago you were talking about maybe less than a normal quarterly decline in the 4th quarter. I know Bernadette you made mention of being prudent in your prepared remarks.

Speaker 5

Is there anything to consider That has shifted that expected cadence beyond that? I mean, for instance, was 3Q much better than you And therefore, you're expecting more than normalization or anything with the timing of pricing? Because it would seem like you're getting a bit of help, At least on the retail side, given the late quarter pricing action.

Speaker 3

Yes. I think there was a couple of things. There was A little bit more pull forward and benefit in the prior quarter. And then also we are seeing more open market purchases that we Bringing in at much higher prices, just given the way that the crop ended up this year from a yield perspective. So those are the two items that I would say are impacting that the greatest.

Speaker 5

Great. Thank you.

Operator

Adam Samuelson from Goldman Sachs, your line is open.

Speaker 6

Yes. Thank you. Good morning, everyone.

Speaker 2

Good morning, Adam. Good morning.

Speaker 6

Good morning. So the first question is on Europe. And as You can kind of roll that now into the consolidated business. Bernadette, you alluded to the 4th quarter guidance So the business kind of reflecting kind of earnings consistent with that pre pandemic €100,000,000 EBITDA run rate. Do you have the actual trailing 12 months or what the fiscal 2023 EBITDA would be for the JV on a 100% basis, just as a point of reference.

Speaker 6

And As we think about moving into fiscal 'twenty four, it would seem like fiscal 'twenty three is above that pre pandemic run rate. Kind of reasons why kind of profitability would could be lower year on year or higher, just help us think about kind of some of the key

Speaker 3

Yes. Thanks for the question, Adam. A couple of responses To that, I would say first, as we look at the 4th quarter guidance, that's what I would take to look at The normalized amount for this year in terms of being that $100,000,000 on a run rate basis. And Certainly, there's going to be a number of things as we bring EMEA into our operations that we're looking forward to Having that one face to the customer, introducing our revenue growth management capabilities and bringing in our supply chain, Common methodologies and ways of working that we're looking to work on over time as we integrate this business with ours to bring in more upside as we continue to progress. But it's not going to happen overnight.

Speaker 3

It's going to happen over time. But those are some of the opportunities that we to be able to continue to grow this business.

Speaker 2

Yes. And I'll just add, Adam, we have a Tremendous management team running that business and they've managed it through Tremendous amount of volatility over the last 15 months with all the things that are going on. And We I'm more confident now with the trajectory of EMEA in that business And the foundation that the management team has put in place and the overall global reach we now have to serve our customers in all the international markets. So we have a lot to do to get that business integrated Into one global team, and over time, I'm super confident where The capabilities just allow us to really serve our customers in a different manner than we ever have. So it's a Tremendous accomplishment what the team has done with that business.

Speaker 2

I can't emphasize that enough. We got a great leadership team over there, and I'm excited and looking forward to what we're going to do as we integrate that business going forward.

Speaker 6

All right. That's helpful color. And then just on the CapEx, which with 1 quarter left in the year was a pretty Sizable kind of increase in the outlook even inclusive of McGonig and CapEx at the JV that you're now kind of consolidating. Does this change any of the timing around the Argentine, Idaho or Chinese capacity? Are there things you're doing in the rest of the network or capabilities around coatings or battering that Kind of you're pulling forward.

Speaker 6

Just help us think about kind of snagging to that CapEx step up, how it impacts timing of new capacity and What should we think about as a range for the consolidated CapEx for next year even if at a rough high level?

Speaker 3

Yes. No. So as we take a look at our capital spending, there were a number of items where we had long lead times, Just given the supply chain dynamics that are out there. And we've been able to accelerate some of those things in terms of equipment and other pieces to come in, which is being reflected in our overall capital spending for this year. Really happy with that, but that's not Going to bring on the capacity any sooner as we continue to build those factories.

Speaker 3

We just wanted to make sure that we have the items when needed to make sure that we would bring these up on time. So no change when we're going to bring that capacity online. As we look to next Gerry, certainly as we do every year end when we give our Q4 guidance, we'll update with our capital spending at that time, but We'll have another year of significant capital expenditures given we're bringing on over £1,000,000,000 in the next 18 to 24 months with All of the capacity expansions that we referred to.

Speaker 6

All right. That's all. That's all really helpful. I'll pass it on to Dex.

Speaker 1

Hey, Adam, it's Dex. So let me just kind of for everybody just kind of here's the timing of The capacity coming online, China is going to be sometime fall of 2023. American Falls, Idaho is going to be spring of 2024. Argentina is fall of 2024, right? And then in Kreindigern in the Netherlands, Initial thoughts right now are going to be early calendar 25.

Speaker 1

December 25. Yes, it's early to mid. That one's a little bit more in But that's kind of where the timing is right now.

Speaker 5

Thank you.

Operator

As a reminder ladies and gentlemen, it is the Serkhi followed by the digit 1. We'll hear next from Peter Galvo from Bank of America.

Speaker 7

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

Speaker 2

Good morning, Peter. Good morning,

Speaker 3

Peter.

Speaker 7

Tom, I think in your comments you mentioned the incremental pricing in retail that you took kind of towards the end of 3Q. In Global, it seems like there was no more incremental that was at least expected to come this year. But maybe you can opine a little bit just on Foodservice. That was maybe the one area We didn't hear about, if there's any incremental pricing actions. And then in addition to that, just would love any kind of first thoughts as plantings have gone into the ground here in early April.

Speaker 2

Yes. So in terms of the Foodservice segment, we've done a really good job over the past Year or 2 kind of catch up to our inflation and so I feel comfortable where we're at on that. We're as I said earlier, we're evaluating as we look to our fiscal 2024, our input cost Inflation and how that's going to materialize and then as we do every year then we'll Get together and think about what we need to do to offset inflation. And I can't say this Enough. We're still in an inflationary environment in our business.

Speaker 2

And so as we have in the past And we'll continue to do, we're going to evaluate our pricing actions in all segments to offset inflation. And That's kind of what we're going to do. So,

Speaker 3

Yes. So with the foodservice increase, there'll just be a small impact in the 4th Quarter given the timing of that announcement. And then the only other thing is as it relates to the crop, we are currently in the process of planting There are the Columbia Basin in Idaho, so we'll provide more of an update on our next call.

Speaker 7

Okay. No, that's helpful. And then maybe just to follow-up on Adam's question on CapEx. Obviously, kind of from a position of strength, you guys are accelerating some of the spend. Bernadette, it didn't sound like you were kind of pulling forward any spend from next year, but maybe just wanted to clarify that.

Speaker 7

And then just in a broader context on kind of capital allocation with the CapEx spend being as high as it is and maybe you're going to move past You know through a lot of that, the debts termed out pretty far

Speaker 8

at this

Speaker 7

point. You started to buy back a little bit of stock in the quarter. The dividend yield is Pretty low relative to peers. Just maybe you can kind of comment on how you're seeing the setup for some of the other pillars within capital allocation? Thanks very much.

Speaker 3

Yes. So if I take the latter question first, as Tom mentioned, we're still really confident in the strength of this category And we're going to continue to invest for the long term. As it relates to our cash position and our overall Low debt to equity ratio, we want to maintain flexibility, for the long term should certain things happen or open up for us from an M and A or other perspective. And so we feel good about where we're at. So our capital allocation hasn't changed, and we're going to continue to take into consideration share buybacks as we have in the past To offset management dilution, but as we've also shown, we will opportunistically buy back when it makes sense.

Speaker 3

And then just to confirm your First question on the capital spending, we haven't necessarily pulled much forward in terms of total capital spending. We've got a lot of large projects Happening over the next 18 months to 24 months, and some of that was just on some long lead time equipment.

Speaker 7

Got it. Thanks very much guys.

Operator

Rob Dickerson from Jefferies, your line is open.

Speaker 9

Great. Thanks so much. Maybe just my first question, Good morning, Mechanical. It's Bernard. It looks like the interest expense expectation for the year hasn't changed.

Speaker 9

So clearly you're taking on the term loan and then maybe some assumed pre existing debt I would think from Meyer. Maybe just kind of quickly explain,

Speaker 4

maybe I

Speaker 9

just missed it in the prepared remarks, kind of how that interest expense doesn't change with the assumption of debt?

Speaker 3

Yes. No, that's a great question. What we're finding is that we're having more capitalized interest related to some of these heavy capital projects, Which is putting more of that, which is offsetting some of that interest expense overall. So that's all that you're seeing there.

Speaker 9

Got it. So that but that would probably be more like a Q4 event like we would still assume that, even though you're not guiding that There would be incremental debt and interest given the deal, just thinking about the mechanics of the actual acquisition?

Speaker 3

Yes, you're exactly right. You're thinking about it right.

Speaker 9

Okay, super. And then maybe just Tom and Bernadette, just kind of we're talking about a lot of commentary around that 100,000,000 On the Meyer JV, and kind of what the potential run rate could be, Maybe just another kind of way to ask it is just that's the number we've all been talking about Visavis kind of pre pandemic, but then also there are all these synergies or some synergies that should come through. So I'm just curious like Over the past few months, you've actually closed the transaction. Do you feel like you have better line of sight on kind of synergy potential without having to quantify them Over the next 2 to 3 years.

Speaker 2

Yes. So again, The business is on a much better trajectory than it has been over the last 12 months and that's a testament to Terrific management team we have that have implemented a number of different strategies to get that business back on track. I Fully expect over the next 12 months that we will improve Our run rate that we've indicated prior, and I'm not going to give a specific number, but I'm More confident now than ever that this where that business is going and the trajectory that the team has got that business on And the synergies and the integration that we're going to do over the next 12 months is going to well position EMEA Better than it ever has. And we're not going to give specific numbers, but I will tell you I'm confident that we will Move that business in a direction You know that is that I believe is much better than what we've indicated.

Speaker 9

Sorry, super. And then just quickly, maybe a little bit more fun to talk about. I saw Your ability to enter Domino's With product, I guess, that is not fried. It seems like it's more baked. Maybe if you could just spend a minute kind of speaking Is that the technology that maybe you have on a proprietary basis that allows you to do that?

Speaker 9

And then is that something that I would assume you would clearly try to Attack with other customers that let's say don't have fryers? And that's it. Thanks.

Speaker 2

Yes. So I'm not going to get into all The product technology, but we're super excited about that product And how it's performing, it's performing better than expected. I've been talking about that for a long time in In terms of getting into non fry channels and that was a big first step. We've done that with other well known chains Also and we're going to continue to monitor it. We're going to work with non fry channel customers As we do today, we'll continue to do that and we have a great innovation team working on non fry potato products, But those are long lead time items, but I will tell you what is happening with that particular product is exciting and it's Performing amazingly.

Speaker 2

So we'll continue to monitor it, but it's been a long time coming and hats off to the team that Put a lot of years of work into getting that to market and it's great to see it pay off and really do well in the marketplace.

Speaker 9

All right. Super. Thanks so much.

Operator

We'll hear next from William Reuter from Bank of America.

Speaker 8

Good morning. I just I have two questions. The first is, you mentioned M and A, you also are active in building handful of new facilities. You're going to be consolidating the JV and you talked about a lot of the operational changes you're going to make there. I guess do you feel like you're at the point now where you still could be active?

Speaker 8

And I guess what types of businesses or where within the supply chain do you expect that you would be more active?

Speaker 2

Yes. So the intent and part of our strategic playbook We're always going to be evaluating potential acquisitions within the potato category. That's the number one focus. Category is strong. It's good returns, great investment.

Speaker 2

It's growing and we have not only invested In expanding our current manufacturing footprint around the globe as we're doing with the 4 projects we have going on, but To the point Bernadette made earlier, it's important for me and the company to make sure we have a strong balance sheet. So If an opportunity comes up, we'll be able to execute it. And so that's always going to be on the table And I've been consistent in that over the past 6 years. So, I feel good about where our capital, our balance sheet is. We're investing to expand our footprint.

Speaker 2

It's right on strategy. We're positioning ourselves in the industry To support our customers in all the markets around the world, I feel good about where we're at.

Speaker 8

Okay. And then my second question, is there any way for you to provide some additional color around what the impact of open market purchases were this year? Just trying to think about in the event that you're able to fill that with contracted purchases next year, what that tailwind could be?

Speaker 3

Yes. We haven't quantified the impact of those open market purchases. A little bit different this year in that we were Short on yield versus last year, there was an impact for yield and quality. While we are needing to bring in A fewer open market purchases, the cost this year is significantly higher. So we have not quantified that, but there is a meaningful impact this year similar to last year.

Speaker 8

Great. Okay. That's all for me. Thank you.

Speaker 1

Hey, Bill. I mean the reason that we had to go in the open market is because crop yields weren't good this year. Typically, we have an average crop and you really don't have to go into the open market that much at all.

Speaker 8

Great. Thank you.

Operator

We do have a follow-up from Andrew Lazar from Barclays. Please go ahead.

Speaker 4

Thanks so much. Just a super quick one. Tom, when you announced the joint venture acquisition with Meyer, I think one of the things you'd mentioned was that you also hope that Or intended that this action would kind of send a message right to the broader sort of European sort of competitive environment there that You were certainly looking for there to be over time the potential for further consolidation in what is a much more fragmented operating theater right in Europe. And I'm just curious if this transaction now that you've closed it in a couple of months or since announcing it, whether the I don't know the dialogue Our pace of conversations maybe with others has picked up more generally. We saw another one outside of you, right, the transaction that happened whatever it was a couple of months ago in Belgium.

Speaker 4

I'm just curious if your expectation would be that we're likely to see more somewhat sooner or not and if you're hearing more chatter and dialogue? Thanks.

Speaker 2

Yes, Andrew, great question. Obviously, I can't get into what Conversations are or are not happening, but consistent, Andrew, With how I positioned this over the last several years is, we're continuing to be as active as we can. I think the intention of what I would love to do from an industry standpoint is known and certainly the Transaction with Lamb Weston Meyer. People took notice, but Mike, I'll leave it at that and hopefully the fragmentation of the market, It's a private sector and you got to people got to come to the table and but I'm pretty sure they're clear they know what I want to do.

Speaker 6

Thank you.

Operator

That does conclude the Q and A portion of today's conference. I would like to turn the conference back over to Dexter for any additional or closing comments.

Speaker 1

Thanks for joining the call this morning. If you want to schedule a follow-up session, you can just send me an email and we can organize the time. Thanks for everybody joining the call. Thank you.

Operator

That does conclude today's teleconference. We thank you all for your participation. You may now disconnect.

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