Lamb Weston Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 25, 2023

There are 8 speakers on the call.

Operator

Hey, and welcome to the Lamb Weston Fourth Quarter Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Dexter Congbele. Please go ahead, sir.

Speaker 1

Good morning and thank you for joining us for Lamb Weston's 4th quarter and fiscal 2023 earnings call. This morning, we issued our earnings press release, which is available on our website lamblestan.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 that 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 some highlights from the past year as well as an overview of the current operating environment.

Speaker 1

Bernadette will then provide details on our Q4 results as well as our outlook for fiscal 2024. 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 financial results in the Q4 and fiscal 2023. I want to start by thanking the entire Lemwesen team for driving these results and their incredible commitment to supporting our customers. I'm proud of the work we did and continue to do to grow our business and build momentum as we enter a new year.

Speaker 2

Specifically in fiscal 2023, we delivered record sales of nearly 5 point $4,000,000,000 and drove strong profit growth in each of our core business segments through a combination of pricing actions, Mix Improvement and Supply Chain Productivity. We acquired the remaining interest in our European joint venture, which added 1500 new colleagues, Six processing facilities and nearly £2,000,000,000 of capacity. The business integration is well underway and we believe this strategic transaction Strengthens our capabilities to serve customers as a unified global Lamb Weston. We acquired controlling interest in our joint venture in Argentina and we broke ground on a £250,000,000 capacity expansion, which will improve our ability to serve the growing South American market. We also made progress on major capital expansion projects in China, Idaho and the Netherlands, all of which are on track to be completed within the next 18 months.

Speaker 2

We opened an innovation Belay. In Bergen Apsum, the Netherlands, we're in close partnership with our innovation center in Richland, Washington. We'll develop and test new product and processing ideas for customers in Europe and around the world. We launched new groundbreaking products with proprietary technologies that address customer and consumer needs in non traditional frozen potato channels such as pizza outlets, expanding our total addressable market. We further stabilized our supply chain by targeting Staffing levels and managing through a second consecutive challenging crop cycle, all while executing productivity initiatives and upgrading capabilities at our processing Belay.

Speaker 2

We continue to strengthen our operational infrastructure by completing the design work for the next phase of our new Enterprise Resource Planning System. We'll begin implementing this new system across a portion of our supply chain in North America later this year. And finally, we returned more than $190,000,000 to shareholders including increasing our dividend for the 6th straight year And continuing to execute against our share repurchase plan. I'm especially proud that we delivered this performance in a highly Belay. Operating environment and I'm excited to see what our Lamb Weston team can deliver in fiscal 2024 and beyond.

Speaker 2

Let me now turn to the current operating environment. The overall global frozen potato category remains healthy. The fry attachment rate in the U. S, Which is the rate at which consumers order fries when visiting a restaurant or other food service outlets was largely steady throughout fiscal 2023 And remain well above pre pandemic levels. Servings in Europe and our other key international markets also held up well.

Speaker 2

However, the cumulative effect of inflation and other macro pressures on the consumer over the past few years have continued to temper traffic in certain restaurant channels. In the quarter, total restaurant traffic in the U. S. Grew versus the prior year quarter As QSR traffic growth more than offset declines in casual dining and full service restaurants. However, total traffic growth decelerated Sequentially each month during the Q4 as QSR traffic growth slowed and as traffic declines at casual dining and full service restaurants to soften further.

Speaker 2

Overall restaurant traffic picked up in June behind strength in QSRs. However, traffic at casual dining and full service remains soft. We expect that near term demand may be somewhat choppy because of the variability Restaurant traffic trends and continued macro pressures on the consumer, which makes forecasting global demand for frozen potatoes very difficult. As a result, we incorporated a cautious view of demand and volume when developing our fiscal 2024 financial targets. Despite this added volatility, we remain confident in the long term growth prospects of the global category and we'll continue to invest behind the capabilities to support that With respect to costs and pricing, While we expect input cost inflation to moderate relative to the double digit rates that we experienced in each of the last two fiscal years, We believe it will continue to have a meaningful impact on our cost structure.

Speaker 2

We expect most of our input cost inflation will be driven by higher contract prices for potatoes. In North America, we have agreed to a 20% increase for this crop this year's crop, while in Europe, we have agreed to an increase of 35% to 40 Belay. We believe the overall environment for inflation driven pricing actions remains generally favorable. However, it's important to note that any price actions that we may take this year will likely be more modest than what we implemented in fiscal 2023 given that First, our pricing actions last year were intended to catch up to the effect of multiple years of high inflation. And second, we expect total input cost inflation to grow at a lower rate.

Speaker 2

Although we expect pricing actions will continue to Belay. To offset inflation over the long term, we'll continue to drive improvements in product and customer mix resulting from our revenue growth management initiatives as well as supply chain productivity to benefit sales growth and profitability. With respect to the upcoming potato crop, we're harvesting and processing the early potato varieties Initial indications are that this portion of the crop, which represents about 10% of our potato needs in North America this year, It's broadly consistent with historical averages. At this time, the crops in the Columbia Basin, Idaho, Alberta and the Midwest that will be harvested in the fall appear to be largely in line with historical averages as growing conditions in these regions have been generally favorable. In Europe, a wet and cold spring impacted when we report our Q1 results in early October in line with our past practice.

Speaker 2

Before Bernadette shares details on our Q4 financial performance and fiscal 2024 outlook, I'd like to Thank you, on a change we're making to our reportable segments. Effective at the start of fiscal 2024 in connection with our recent acquisition And to align with our expanded global footprint, we began managing our business in 2 reportable segments, North America and International. The North America segment includes products sold in restaurant, foodservice and retail channels in the U. S, Canada and Mexico, including our large multinational chain customers. The International segment includes products sold in restaurant, foodservice and retail channels outside of North America.

Speaker 2

These two segments as well as our global supply chain who will report to Mike Smith, our Chief Operating Officer. Mike's role is focused on execution and is designed to help us drive growth and unlock efficiencies by providing a truly end to end view of our global business. I'll continue to maintain responsibility Driving our long term strategies and priorities including allocating capital and resources to support sustainable profitable growth and create value for our shareholders. We'll begin to provide our financial results under the new reportable segments with our Q1 results. So in summary, we delivered a record year of sales and earnings growth and continue to build operating momentum across each of our core segments.

Speaker 2

While near term demand may be difficult to predict, the category remains healthy and we remain confident about its long term growth prospects. And finally, at this time, the potato crop in North America is largely in line with historical averages, while late planting may delay the harvest in Europe. Let me now turn the call over to Bernadette.

Speaker 3

Thanks, Tom, and good morning, everyone. I want to also thank the Lamb Weston team for finishing the year strong and setting us up well for fiscal 2024. Let's begin with our Q4 results. Sales were up more than $540,000,000 versus the prior year quarter or 47% to a quarterly record of just under $1,700,000,000 That's at the high end of our targeted range for the quarter. About $380,000,000 of the increase was attributable to the consolidation of our EMEA and Argentina operations.

Speaker 3

The EMEA amount is above the high end of the targeted $300,000,000 to $325,000,000 range for the quarter, reflecting a strong benefit from pricing actions. Excluding incremental sales from these acquisitions, Net sales grew 14%. Price mix was up 24% as we continue to benefit from pricing actions taken in fiscal 2023 across each of our business segments to counter input and manufacturing cost inflation. As expected, pricemix in the quarter decelerated sequentially from the 30% or more increase that we delivered in our 2nd and third quarters as we largely lapped all the pricing actions taken in fiscal 2022. In addition, we No year over year benefits from freight rates charged to customers as we reduce these rates further to match the decline in our transportation costs.

Speaker 3

While we expect lower customer freight rates will soon become a year over year headwind for price mix, our goal is to match to our transportation costs so that their effect on our profits is neutral over time. Our overall sales volumes in the quarter declined 10% due to 4 factors. The first And primary driver was our continued effort to strategically improve our product and customer mix by exiting certain lower priced and lower margin business across our domestic and international portfolio. 2nd, demand was tempered by softer casual dining and full service restaurant traffic in the U. S.

Speaker 3

This had a more pronounced effect on our Foodservice segment and drove much of the decline in that segment's volume in the quarter. 3rd, certain customers in international markets began to right size inventories after carrying unusually high levels of inventory to de risk their supply chains during this pandemic. And 4th, certain large retail customers temporarily lowered prices to right size inventories of private label products, delaying shipments of products that we produced on their behalf. In addition, we realized some acceptable levels of branded product volume Belay in response to the inflation driven pricing actions that we implemented over the past year. Moving on from sales, our gross profit in the quarter, excluding comparability items increased more than $170,000,000 to nearly 4 dollars 25,000,000 About 40% of the increase was attributable to the incremental earnings from consolidating EMEA.

Speaker 3

The remainder was driven by the cumulative benefit of pricing actions, mix improvement and supply chain productivity in our legacy Lamb Weston business, which more than offset higher input and manufacturing cost per pound and the impact of lower volumes. Gross margin was up more than 300 basis points to 25.1 percent despite absorbing the dilutive impact on margin of the EMEA acquisition. Input costs increased high single digits on a per pound basis, easing somewhat from the double digit inflation rate earlier in the year. The increase in cost per pound were again largely driven by a 20% increase in the contracted price for potatoes in North America, significantly higher prices for open market potatoes due to poor yields from the 2022 crop and continued increases in the cost of labor, energy, edible oils and ingredients for batter coatings. Our higher per pound cost also reflected reduced fixed cost coverage due to lower throughput as we did take some extended downtime for planned maintenance in some of our production facilities and increased write downs of inventories, primarily consisting of bulk and obsolete finished goods.

Speaker 3

Our SG and A expenses excluding comparability items increased $65,000,000 to 183,000,000 About half of the increase was from incremental SG and A with the consolidation of EMEA, while the other half was primarily driven by 3 factors. 1st, higher compensation and benefit expenses due to improved operating performance 2nd, an $8,000,000 increase in advertising and promotion expenses as we restore support behind our branded products and our retail segment to historical levels. And third, higher expenses related to improving our IT and ERP infrastructure. Adjusted EBITDA including joint ventures increased $117,000,000 or 59 percent to $318,000,000 with higher sales and gross profit driving the growth. Moving to our segments.

Speaker 3

Sales in our Global segment were up 85% in the quarter and included the $380,000,000 of incremental sales from the EMEA and Argentina acquisitions. Net sales excluding the acquisitions grew 17%. Price mix was up 28%, which is largely comparable to the increases in the previous two quarters. The increase in price mix reflects the carryover benefit of the domestic and international pricing actions that took effect in our fiscal 2nd and third quarters. Volume declined 11%, primarily reflecting Exiting certain lower priced and lower margin business in international and domestic markets and the inventory destocking by certain customers and International Markets that I mentioned earlier.

Speaker 3

Global's product contribution margin, excluding comparability items, Increased about $145,000,000 More than half of the increase was from the cumulative benefit of pricing actions, Mix improvement and supply chain productivity, more than offsetting higher cost per pound and lower volumes. Incremental earnings from EMEA, which was above our target for the quarter, drove the remainder of the increase. Sales in our Foodservice segment grew 4%, a notable deceleration versus the 17 Belay. That we delivered through the 1st three quarters of the year. Price mix was up a healthy 13%, but lower than the 26% that we posted through the 1st 3 quarters, as we fully lapped our pricing actions taken in fiscal 2022 and realize no tailwind from transportation rates.

Speaker 3

As expected, the price increase that we began to implement in May only had a modest impact in the quarter, so we'll see more benefit come through in early fiscal 2024. Sales volumes were down 9%, which is consistent with the prior three quarters. We attribute most of the decline to the impact for softer casual dining and full service restaurant traffic, although we also continue to realize the impact of exiting some lower price and lower margin business. Food services product contribution margins fell about $3,000,000 Lower volumes drove the decline as higher price mix more than offset the impact of higher cost per pound. Sales in our Retail segment increased 25%.

Speaker 3

Price mix increased 35%, driven by pricing actions across our branded and Private Label Portfolios that we began to implement in February to counter input cost inflation. Trade support during the quarter remained below historical levels given category demand. Volume fell 10%, largely reflecting the challenges that I described earlier for private label products. Retail's product contribution margin increased more than $40,000,000 and its margin percentage expanded 140 basis points to nearly 38% As a cumulative benefit from pricing and mix improvement actions over the past couple of fiscal years more than offset higher cost per pound. Moving to our liquidity position and cash flow.

Speaker 3

We continue to maintain a solid balance sheet with ample liquidity and a low leverage ratio. We ended the quarter with about $305,000,000 of cash and no borrowings under our $1,000,000,000 U. S. Revolver. Our net debt was nearly $3,200,000,000 at the end of the 4th quarter.

Speaker 3

Using EBITDA on a trailing 12 month basis, which only includes a single quarter of EMEA's earnings. Our leverage ratio is 2.6 times. We remain focused on creating value for our shareholders. Our capital allocation priorities remain the same and we continue to prioritize investing in our business to drive long term growth as well as returning capital to our shareholders through dividends and share repurchases to offset management dilution. In fiscal 2023, we generated more than $760,000,000 of cash from operations or $340,000,000 above last year, largely due to higher earnings.

Speaker 3

Capital expenditures were about $735,000,000 which is up $430,000,000 from the prior year. This increase is largely related to construction costs as we continue to expand processing capacity. For the year, we returned more than $190,000,000 of cash to shareholders, including $146,000,000 in dividends and $45,000,000 in share repurchases. Now, let's turn to our fiscal 2024 outlook. We're taking a prudent approach to our financial targets for the year.

Speaker 3

Overall, we anticipate that the operating environment will continue to be challenging with inflation and other macro factors affecting our cost structure, restaurant traffic and consumer demand. In addition, we expect our capacity to produce coated fries, specialty cuts and chopped and formed varieties such as puffs and hash browns We'll remain constrained until our new production facilities in China and Idaho become available late in fiscal 2024. For the year, we are targeting sales of $6,700,000,000 to $6,900,000,000 This includes $1,000,000,000 to $1,100,000,000 of incremental sales attributable to the EMEA transaction during the 1st 3 quarters of the year And net sales growth excluding acquisitions of 6.5% to 8.5%, which is above our long term sales growth algorithm of low to mid single digits. Note that since we began to consolidate EMEA sales beginning in the Q4 of fiscal 2023, Those results are included in our last year's sales baseline when calculating our sales growth. We expect sales growth excluding acquisitions to be largely driven by pricing actions, including both the carryover impact of actions taken in fiscal Belay as well as any actions that we may take this year to counter input cost inflation.

Speaker 3

We also expect to deliver favorable customer and product mix as we continue to benefit from our revenue growth management initiatives. As Tom noted, while we expect a solid contribution from price, we do not expect pricing actions to be at the same level as fiscal 2023. Outside of those customer contracts in our global segment that have yet to be fully priced, we expect any future pricing Belay. Will be largely in line with the more modest rate of input cost inflation than what we've experienced in the past 2 fiscal years. In addition, transportation rates that we charge to customers will likely serve as a price headwind as we continue to adjust rates to reflect lower freight costs.

Speaker 3

In fiscal 2024, we expect volume excluding acquisitions will continue to be pressured by our ongoing efforts to strategically manage product mix by exiting certain lower price and lower margin business. This strategy has proven to be beneficial to earnings and we continue to see opportunities across our domestic and international channels. In addition, we're taking a cautious approach to consumer demand for 2 primary reasons. First, while QSR traffic has held up relatively well, casual dining and full service restaurant traffic trends have softened in the U. S.

Speaker 3

Over the past few months. 2nd, forecasting demand has become increasingly difficult due to conflicting data about the health of the consumer in the U. S, Europe and our key markets. As a consequence of inflation, especially for food away from home, the expiration of temporary government Belay. And other consumer support programs put in place during the pandemic, employment trends and other macroeconomic headwinds.

Speaker 3

Despite these near term factors, we remain confident in the health and long term growth prospects of the global category And we remain committed to investing in our people, production capacity and operations to support that growth. For earnings in fiscal 2024, we expect adjusted EBITDA including unconsolidated joint ventures of $1,450,000,000 to $1,525,000,000 assuming potato crops in our primary growing regions are in line with Using the midpoint of this EBITDA range implies growth of more than 20% or about $260,000,000 versus the prior year. Looking at it another way, it's up $200,000,000 more than our annualized second half of fiscal 2023 run rate of $1,325,000,000 In addition to incremental earnings from the Lamb Weston EMEA acquisition, we expect our earnings growth will be largely driven by higher sales and gross profit as we benefit from pricing actions, mix improvement and supply chain productivity. We're projecting that the increase in sales and gross profit will be partially offset by higher SG and A expenses. We're targeting total SG and A of 765 to $775,000,000 which is up about $200,000,000 In addition to inflation, the increase largely reflects Incremental expenses attributable to the consolidation of our EMEA operations, increased investments to upgrade our information Belek.

Speaker 3

Non cash amortization of intangible assets associated with the EMEA acquisition as well as ERP investments we expect to place in service during the year and higher compensation and benefit Due to increased headcount to support our growing business. In addition to our operating targets, we expect equity earnings, which includes our Lamb Weston RDO joint venture in Minnesota to be $30,000,000 to $35,000,000 We expect capital expenditures of $800,000,000 to $900,000,000 as we continue construction of our previously announced capacity expansion efforts, as well as capital associated with our new ERP system and other IT upgrades. So to summarize our fiscal 2024 outlook, we're targeting sales of $6,700,000,000 to $6,900,000,000 including $1,000,000,000 to $1,100,000,000 of incremental sales attributable to the consolidation of our EMEA operations. We expect our sales growth excluding acquisitions will be largely driven by price mix with volume pressure due to our ongoing efforts to strategically manage customer and product mix and a cautious view of demand. And finally, we're targeting adjusted EBITDA, including unconsolidated joint ventures of nearly $1,500,000,000 using the midpoint of our guidance, which is an increase of 20% and largely driven by sales and gross profit growth.

Speaker 3

Lastly, as Tom mentioned, effective at the beginning of fiscal 2024, we began managing our operations as 2 business segments, North America and International. In the coming weeks, we'll provide recast financial information for fiscal years 2021, 20222023 that is consistent with our new reporting segment structure, including quarterly results for the last 2 years. And with that, let me now turn it back over to Tom for some closing comments.

Speaker 2

Thanks, Bernadette. Let me sum it up by saying, We are super proud of the team's strong performance in fiscal 2023 and believe that we're well positioned to execute our strategies to deliver our financial targets for fiscal 2024. We also remain committed to investing in our business to support customers around the world and drive people, new production capacity and operations to support sustainable profitable growth over the long term. Thank you for joining us today. Now we're ready to take your questions.

Operator

And our first question is going to come from Andrew Lazar from Barclays. Please go ahead.

Speaker 4

Thanks very much. Good morning, everybody.

Speaker 2

Good morning, Andrew.

Speaker 4

I guess as a starting point, You talked about volume declines accelerated pretty significantly in fiscal 4Q versus 3Q and are expected to be pressured again in 2024. I know a lot of that or even the majority is some of the actions that you're taking sort of purposely around product mix. But how much of this sequential change in volumes was due to the inventory You mentioned. And what I'm trying to get a sense of is like how does that square with the fact that my sense was most customers are still clamoring for really more supply Rather than less. And I guess, do you see this destocking behind you at this point?

Speaker 4

And then I've just got a follow-up.

Speaker 2

Yes. Andrew, this is Tom. As we look at the Q4 Trends, we did have softness as we remarked in our comments in the foodservice channel And QSR held up well. We did have some destocking in the retail channel that we experienced. And so the we're watching it closely.

Speaker 2

And we also walked away from some volume over The last contract season that we're now starting to see in our results. So it's but I will say in Early on in June, we saw restaurant traffic pick up a little bit. So that's a positive, but we're watching it closely. And It's kind of a mixed bag as we commented on our prepared remarks on what's happening with restaurant traffic and it just depends on the channel right now. So we're watching closely.

Speaker 2

And we do that said, we have line of sight to some Belay. And we'll evaluate those going forward, but that does take some time to transfer into our business if we choose to Pursue some of those accounts.

Speaker 3

Yes. And Andrew, If I could just add, the destocking was more in our global segment in the international markets as they got more comfortable with ocean freight carriers and service rates and more timely on time distribution there. So that was more in the global segment there.

Speaker 4

Got you. And then, and Tom, I think you mentioned potentially some additional opportunities. For those, would those be sort of new accounts for you or Potentially more business with current accounts.

Speaker 2

It's a mixed bag Andrew. I'm not going to get into specifics. I don't talk about particular accounts and customers, but it's a mixed bag.

Speaker 3

Yes. And Andrew, I think it's important. As we talk about as restaurant Trends have softened some. The overall demand continues to really be aided by that French fry attachment rate, which continues to be above pre pandemic levels.

Speaker 4

Got it. And then separately, if we're doing our math correctly, your 24% guidance at the midpoint suggests gross margins maybe around the 25% level. I guess first, did we have that sort of right? And I meant it was back in the envelope. And if it is, it certainly obviously would be a level well above historical levels, right, even though that would include the likely dilutive impact from the JV.

Speaker 4

I'm just trying to get a sense of how much maybe gross margin dilution do you see from the JV? And then Is this level of gross margin one that obviously I think it is, but you view as sustainable moving forward?

Speaker 2

So Andrew, we I'm not going to get into specifics on your mathematics, but we are focused on Margin improvement as we have been historically over time. We also evaluate Overall profit pool, when we evaluate additional accounts and opportunities to drive volume and service our customers. I'm extremely pleased with where and what the team has done Over the last year in terms of returning our margin structure to a normalized level And we're going to continue to improve it, but we're going to evaluate opportunities going forward to improve the overall profit pool.

Speaker 4

Thank you.

Speaker 1

Hey, Andrew. Did you say 25%?

Speaker 4

And then 28%.

Speaker 1

Okay. We're not yes, we can't give specifics on the gross margin. We can kind of look down the model, but I just want to make sure I didn't hear 25.

Speaker 4

Yes. Sorry, you may have. I mean 28, if I did say 25, sorry. Okay. Thanks.

Operator

And our next question is going to come from Tom Palmer from JPMorgan. Please go ahead, sir.

Speaker 1

Good morning and thanks for the question. Just wanted to ask on the cadence of 2024. I think normal seasonality might have sequential increases in the 1st 3 quarters then a dip in 4Q. Just given the expected timing of pricing actions relative to cost inflation, is there anything to consider this year on that cadence that might cause it to deviate?

Speaker 3

Yes. The only thing Tom that I'd mentioned there is generally overall margins and profitability declined sequentially first in the Q1 and that's largely driven by seasonality. Q1 is generally our lowest margin quarter.

Speaker 1

Okay. Understood. And just wanted to ask on Europe. I mean, we can see spot potato prices Up quite a bit. How does this affect you guys from a timing standpoint?

Speaker 1

Is this are you already addressing it with pricing? Is this So more work to be done. It does seem to be maybe a bit more substantial there than what we're seeing in the U. S.

Speaker 2

Yes. So Tom, we have the team in Europe, Mark Schroeder who runs our international business. They're addressing it. They're doing a terrific job. They're getting ahead of it as much as they can.

Speaker 2

And we have contracted traditionally higher than what we have in terms of locking in potato prices, But we still have a little bit of open potatoes, but we're going to price through it, manage it as we had as we did last year and the year before. So The team is doing a great job. They got a plan in place and I'm confident on how they're managing the challenges we're having with that crop right now.

Speaker 1

Thank you.

Operator

And our next question is going to come from Peter Balboe from Bank of America. Please go ahead, sir.

Speaker 4

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

Speaker 2

Good

Speaker 5

morning. If I could just come back to Andrew's question around the gross margins. I guess the first just clarification point. Bernie, on the quarter itself, I think if you put some of the adjustments back, it's like a 25.1%. I think there was an additional hedging loss or mark to market loss that wasn't adjusted out that would have actually Resulted in an exit rate of a year that was much higher and maybe would have squared against that 28% number that Andrew had mentioned that we were kind of also coming up with.

Speaker 5

So I just wanted to clarify that distinctly to start off.

Speaker 3

Yes. No, thanks for the question, Peter. First, I'd just Say that we really are pleased with our gross margin performance this quarter, plus 300 basis points to about 25.1 percent and that's despite absorbing the lower margin EMEA business. And we talked about a couple of things. In addition to inflation, the other impact was that reduced fixed cost coverage that we Due to some of that extended maintenance downtime that was planned.

Speaker 3

And then the other piece was the inventory write off. So It's those components that are affecting our 4th quarter margins in addition to the regular inflation that we've been seeing.

Speaker 5

Okay. That's helpful. And then maybe Tom, just a broader question. I started to feel some inbound just Hey, if the crop comes in normal this year, doesn't that mean that that's the potatoes and I mean that's never historically been an issue in the past for pricing dynamics in the industry. So one, I just was hoping you could address that kind of upfront.

Speaker 5

And 2, You spoke about I think some of the capacity constraints you're still expecting through the course of the year for things like coated fries. I would think that would keep industry The supply demand dynamic is pretty tight, but just wanted to give you the chance to talk on those topics. Thanks very much.

Speaker 2

Yes. The thing that we manage every year is and we do it really well is What happens with the yields on the potato crop? And right now, knock on wood, things look pretty good in terms of Like I said in my prepared remarks, how the crops progressing. And we keep a close eye on our contracted Amount versus forecast versus what the market is doing and we do this globally. So we're tuned into it and we can make adjustments over the course The next 90 to 120 days to 6 months and adjust even our new crop to balance The overall supply of potatoes out, we do it every year.

Speaker 2

The team the ag team does a great job doing that. So I'm comfortable with where we're at in terms of contracted potatoes. And as we do every year over the next several months, we'll make some adjustments to acres. And I'll report out more in October on the balance of the crop and the quality of the main crop. That's really the key in terms of Ag Management that we're really good at And the team does a great job.

Speaker 2

And then in terms of capacity, we got some we're bringing on some capacity over the next 18 months. And it's a testament to our belief in the category going forward. While In the near term, we're seeing some softness in some areas. Over the long term, I think the category is going to continue to be resilient as it has over historical timeframe. And I feel great about how we're positioned, our capacity coming online, competition has some capacity coming online, but I think overall the category is going to absorb what's coming at it.

Speaker 2

So I feel good about where The near term and long term supply demand is going to be continue to be balanced.

Operator

And our next question will come from Rob Dickerson from Jefferies. Please go ahead.

Speaker 4

Great. Thanks so much. Just a quick question on the business access, right, the lower And businesses, is there any kind of visibility as to when you Think that actually might start to decelerate or actually stop like are you in the 7th inning or 3rd inning this current?

Speaker 3

Yes. No. As it relates to our lower margin exits Of the businesses, we've been doing that now and we're very close to being through the brunt of that work. We do continue to take a look at that though as our contracts come due and we make decisions to improve our customer and product mix as we look at the availability in our manufacturing footprint and the flexibility that we need to continue to serve our customers optimally.

Speaker 4

Okay, great. And then I guess secondly, in terms of Expectations for the facility in China, it sounds like one that is still on track for Hopefully, maybe sometime Q4 this fiscal year. And then secondly, just in terms of The amount of capital to pull on the CapEx side for all the facilities, I mean, 8.50 Going in this year, the midpoint, still clearly elevated relative to the history. But again, just to clarify, If we're thinking about next fiscal year, right, in 2025, I mean most of that incremental should Well, or should kind of come off the cash flow statement. Is that right?

Speaker 2

Yes, Rob. So All of our capital projects are on track. Obviously, we have an elevated number this year and that's all been preannounced. So as we think about the go forward, as we have line of sight to some other strategic capitals, What I will say is we'll give additional guidance in the coming quarters on what the out years look like going forward. So I'm not going to get into all that on this call.

Speaker 2

But we are taking a look at a couple of different Strategic Capital Projects that I won't go into detail, but we'll reevaluate guidance going forward here in the next Quarter.

Speaker 4

Got it. Okay, cool. And then I guess just lastly to kind of round up the commentary on volume and pricing for the year. There are usually Numerous data sets that we can all look at in terms of industry restaurant traffic, like all things considered, Right. Even though there's risk, even though we're speaking to pressure, it doesn't look as if overall the pressure right now Is that bad, right?

Speaker 4

I mean, there's some pressure, but the pricing is not that bad. So as you kind of think through the year, given you had baked this Into the guide, assuming these trends kind of stay where they are, right, they don't get worse. I mean, it seems like it's still a safe assumption, especially given what you've done historically, that we're not thinking about Increased LTOs or pricing give back, right? This is prices are where they are, trends are where they are in the industry. As long as things kind of don't get materially worse, the pricing is sticky.

Speaker 4

That's it. Thanks.

Speaker 2

Yes. Rob, look, here we've done a terrific job rebasing our business this past year. And Now we're at a point where we have selectively walked away from business. And based on our capacity constraints and now we're going to evaluate as I said earlier, we're going to evaluate Accounts and businesses globally going forward. And the impact of that As I look at it and how I've always managed this business is we're going to look where we can expand the overall profit pool of this company And drive adjusted EBITDA going forward.

Speaker 2

And we may make some decisions where it may be Additive to our earnings and it may be decretive to our margin percentage, But we're going to make selective strategic choices going forward to do that just like we have in the past As we had now we're at historic margin levels and we worked hard over the last 15 months to get us to this level. And now we're in a good spot in terms of growing our company going forward and driving volume and that's what we're going to do. And so it's going to be a bit of an adjustment over the coming year to drive account volume.

Speaker 4

Makes sense. Thanks, Tom. Thanks, team.

Speaker 2

Yes.

Operator

And Adam Samuelson from Goldman Sachs is next. Please go ahead.

Speaker 1

Yes. Thank you. Good morning, everyone.

Operator

Good morning, Adam.

Speaker 1

Good morning. Maybe first a clarification question and then I think it kind of dovetail into The perspective is kind of Bill that's in the 2024 guidance, the 1 to 1 by 1 business of incremental sales from currently acquired businesses, What's the assumed EBITDA contribution from acquisitions on a year on year basis in 2024 for the 9 months even though Our team consolidating the EMEA business?

Speaker 3

Yes. Adam, we haven't given any specific earnings contribution related to those businesses. We've just given top line.

Speaker 4

Okay. I had it was worth a shot.

Speaker 6

So I guess though maybe holistically, If we think about where EMEA is relative to

Speaker 1

the legacy North America business on margins, kind of Our understanding was that it was coming in as a lot lower kind of at a lot more profitability levels meaningfully below the U. S. Can you help us think about kind of the line of sight you have to narrowing that gap? How much of that can you do through your own mix management productivity Actions and how much is probably going to be dependent on changes in industry contracting for potatoes, changes in market structure from consolidation That will take probably longer.

Speaker 3

Yes. Adam, the way I'd explain that is we're not giving specific earnings contribution, but The adjusted EBITDA from the acquired businesses were well above the $20,000,000 to $30,000,000 target that we provided. As it relates to going forward. As Tom said, Mark Schroeder is running that business and we're doing a lot of things there as we do look at mix management in pricing and we're confident in the actions that we've taken thus far and that we'll continue to deliver it going forward.

Speaker 1

Okay. And if I can just ask a follow-up on the parent business. And again, As you look at your own cash capitalization, especially with the new potato crop coming in the fall And you think look at the industry, I mean, the industry has been constrained from a raw material supply perspective. And Tom, earlier you alluded to the needs to drive volume growth in the business. How would you where

Speaker 2

How would you look at your own capacity utilization and

Speaker 1

the industry capacity utilization as you kind of go into the calendar 2023 Kenneth Cropier.

Speaker 2

Yes. I mean, as I've said previously, our target is to Well, on the assets around 95% of capacity and we're continuing to trend towards that. We've much improved over the prior year and That's really the sweet spot I think for us and the I can't comment on the industry and what the other guys We're doing, but that's kind of where we're targeted and we're trending towards that.

Speaker 1

Okay. That's all very helpful.

Speaker 4

I'll pass on. Thanks.

Operator

And our next question is going to come from Matt Smith with Stifel. Please go ahead.

Speaker 7

Hi, good morning. Thank you for taking my question.

Speaker 3

Good morning.

Speaker 7

Good morning. Thank you. I had a follow-up on The outlook, specifically around SG and A, which is increasing, obviously, including the EMEA consolidation. But I was wondering if you Provide some color on perhaps some unique factors impacting fiscal 2024. For instance, is the ERP Spending peaking here in fiscal 2024 and any insight into the level of the amortization expense related to that EMEA would be helpful.

Speaker 3

Yes. As I said in my prepared remarks, SG and A is expected to increase about $200,000,000 this year. We are replacing again decades of underspending in IT with the ERP, but also in other areas of the business as it relates to IT. That's going to be about a third of it. But then we've also got another Impact of the incremental EMEA SG and A for the 3 quarters that they weren't included in our previous year results.

Speaker 3

And then I did mention that we are going to have a step up in that non cash amortization related to the intangibles we took on as well as once we place Some of the ERP project and service, we're going to see incremental amortization there. So it's those factors as well as incremental costs related to some headcount that we'll be adding to support the growing business that's making up that increase.

Speaker 7

Okay. Thank you for that. And in terms of the IT spending and the ERP investments, It's obviously a multi year project. Is this a normal level of expense we should think about for the coming years? Or is this A peak level expense depending on where you are in the process of replacing your system?

Speaker 3

Yes. So the level of expense is going to increase as it relates to the non cash component, because as that continues to build and we go Live with the different areas of the system, we're going to see more amortization expense. The system is going to be amortized over 5 to 7 years. And so that's more what you're going to see is that non cash component.

Speaker 7

Okay. Thanks for that detail. I'll pass it

Operator

William Reuter from Bank of America is next. Please go ahead.

Speaker 7

Hi. My first question is you talked about the French fry attachment Belay. I couldn't tell from the tone whether you're seeing a sequential decline in the French fry attachment rate Maybe based upon some weakness in casual and other full service dining. Has there been a sequential change?

Speaker 3

No, no sequential change continues to remain well above pre pandemic levels.

Speaker 7

Okay. And then in the question around CapEx and it being elevated this year and the majority of the current projects being completed, It sounds like there are some additional projects for future years. Could some of those include acquisitions? Or Are most of these going to be just organic investments?

Speaker 3

Yes. Most of those are going to be organic investments. Again, as we take a look at our manufacturing footprint and the possibility for needs to add incremental flexibility for other products. Great.

Speaker 7

That's all for me. Thank you.

Speaker 3

Thank you.

Operator

And Carla Casella from JPMorgan is next. Please go ahead.

Speaker 3

Hi. Two just quick two quick clarifications. I think

Operator

you said you ended the

Speaker 3

year with no revolver borrowings and but I saw debt is up by about $243,000,000 What was the draw? Was that From China or elsewhere? Yes. So the net debt in terms of the cash position And then the other piece that we had was related to the incremental debt we brought on for the EMEA acquisition. Okay, great.

Speaker 3

And then just On the overall cost, you mentioned the 20% to 30% increase in the potato costs across the different regions. What's the timeframe that that Stan, but when do we start to lap that full cost increase? And when did it go in place? Yes. So the Incremental costs relates to the crop that we are harvesting now, and we'll continue to harvest the main crop through September,

Speaker 4

October and use those potatoes until we get

Speaker 3

into next year's crop. And use those potatoes until we get into next year's crop, which the early crop will start at a similar timeframe around July of next Calendar

Speaker 1

year. Okay. So we'll probably

Speaker 4

see it

Speaker 3

in the cost next quarter. Yes, Colin.

Speaker 1

It starts at our P and L And from a P and L standpoint, starts hit us a little bit in the Q2. And then towards the end of the second quarter, just because we have With FIFO inventory, and we carry about 45, 60 days of inventory.

Speaker 3

Awesome. Thank you so much. Thank you.

Operator

And I have no further questions in the queue. I'd like to turn the call back over to Dexter Congballet. Please go ahead.

Speaker 1

Thanks for joining the call today. A couple of things. One, we're going to plan to have or scheduled an Investor Day for Wednesday, October 11 at the New York Stock Exchange in the morning. So please hold out on your calendars. Official invites and RSVP, logistics will go out sometime over probably in the next month or so.

Speaker 1

2nd, if you want to schedule any follow-up calls with me, please to send me an email and we can set a time for a call during the next few days. Thank you for joining today.

Operator

And this concludes today's call. Thank you for your participation. You may now disconnect.

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Earnings Conference Call
Lamb Weston Q4 2023
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