Q2 2020 Earnings Call
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Today's conference is being recorded.
At this time I would like to turn the conference over to Dexter Congbalay VP Investor Relations of Lamb Weston. Please go ahead.
Good morning, Thank you for joining us for Lamb Weston second quarter 2020 earnings call.
This morning, we issued our earnings press release, which is available on our website Lamb Weston Dot com.
Please note that during our remarks, we'll make some forward looking statements about the company's performance.
These statements are based on how we see things today.
Actual results may differ materially as conservative.
[noise]. Please you purchased cautionary statements under risk factors contained in our filings with the FCC for more details on our forward looking statements.
Some of today's remarks include non-GAAP financial measures. These non-GAAP financial measure should not be considered every placement for that should be read together with our GAAP results you can find the GAAP to non-GAAP reconciliations in our earnings release [laughter] with me today, It's Hot Warner, Our President and Chief Executive Officer, and Robert Dodd Archie Tonight.
Hello, [laughter], Tom will provide an overview of our performance some recent capital allocation actions.
Update on the current operating in Florida.
Well that provides details on our second quarter results and our updated fiscal 2020 outlooks.
With that let me now I'll turn the color Tom.
Thank you Dexter happy new year, everyone and thank you for joining our call today.
We delivered another strong quarter as we continue to execute well specifically sales increased 12% behind strong volume growth and favorable price mix in each of our core business segments.
EBITDA, including unconsolidated joint ventures increased 17%, while adjusted diluted earnings per share increased 19%.
And in the first half a year, we generated $345 million of cash flow from operations.
Because of our strong year to date result, and good operating room momentum we've raised our physical 2020 outlook for both sales and EBITDA.
It's Dexter mentioned I'd like to update you awesome capital allocation actions, we've recently taken as well as our thoughts on the potato crop in the current operating environment.
On capital allocation in October we acquired a 50% ownership interest and the new joint venture in Argentina.
This JV will provide us better access to a strategic and growing market, where we have been under represented.
Before this investment or market share in South America was less than 2%.
Well the JV is a modest sized operation today. It provides a good base for expansion to serve the broader south American markets with a low cost high quality products. This year to enable us to drive faster share growth over the long term.
We also remain committed to reinvesting capital back in this business to support customer growth.
We've added three new French bright line since 2014.
And despite these additions our current capacity utilization is above our targeted operating rates due to recent demand growth being faster than historical averages.
What we're not prepared to now any capacity expansion projects today, we're aggressively evaluating opportunities to expand production capacity inside and outside North America to support our customers grow.
We look forward to sharing our expansion plans with you soon.
In the meantime, we're actively working distress existing capacity by de bottlenecking lines in driving productivity.
And finally in addition to reinvesting back into the business, we remain committed to returning capital to shareholders.
Last month, we announced a 15% increase in our quarterly dividend of 23 cents, a share or 92 cents on annual basis.
Puts our dividend payout ratio at about 27% on a latest 12 month basis, which is within our target payout range of 25% to 35%.
We will continue to supplement our dividends with share repurchases.
And the second quarter, we bought back about eight and a half million dollars and stock, which is largely consistent with our goal to at least offset equity compensation dilution.
To do so we estimate that we need to buying back around $40 million of stock annually.
[laughter] now switching to the potato crop.
Recent press reports that led to market fears of raw potato and French fries shortages.
As we discuss our last earnings call the crop and our growing areas and the Columbia Basin, and Idaho, well Resourced. The vast majority of our raw potatoes, and where we have most of our production facility is consistent with historical averages in terms of both yield and quality.
As a result, we expect the operator plants there at normal utilization rates.
In Alberta, Canada, where we have one plant crop yields in quality are below average as a result of adverse weather conditions during the growing season and harvest periods.
However, we've been able to secure enough potatoes to operate that plant at normal race. Nonetheless, overall potato availability in Alberta is limited.
In Minnesota, where we have a single plan through our joint venture Lamb Weston already go crop yields and quality or below average also due to poor weather conditions during the growing season and harvest periods.
As a result potato availability in the upper Midwest will also be limited. However, our partner in that plant is a primary supplier of raw potatoes, and they expect to provide adequate supply for the plant to operate as planned.
Also we understand that the crops and other key growing regions, such as Manitoba and Prince Edward Island are below average due to adverse weather.
This limits the availability of potatoes in North America, it's important to know that we do not currently sourced raw potatoes from these regions.
So let me be clear.
Given our concentration of processing facilities, and the Columbia basin in Idaho, as well as our strong rover relationships in Alberta in the Midwest.
And most importantly, our decision to source open potatoes, several months ago, we're confident that we have raw potatoes to deliver our volume growth targets for the remainder of our physical year.
However, the tail supply in North America is tight.
And this may pressured our ability to pursue incremental volume growth opportunities, both domestically and internationally for this crop year.
Accordingly, we will continue to evaluate opportunities improved price and mix in each of our business segments.
Now turning to Europe .
The detailed supply there is also expected to be challenging due to quality and late harvest weather conditions.
Compared to last year's historically poor harvest the potato crop in the Netherlands in Belgium. This year are better but still below average.
Often Germany, Poland and the UK are more challenged.
As a result raw material prices in Europe remain elevated versus historical averages, but our low prices that we experienced last year.
So we expect Atlanta Watson Myers performance will continue to improve compared to last year adds cost pressures ease in the second half of our physical year as a result of the new crop.
With respect to be operating environment.
We believe that industry capacity utilization rate North America remain elevated during the second quarter and they will likely remain so for the remainder of our physical years subject to raw potato availability.
We believe global demand growth for frozen potato products generally favorable and will will remain so through physical 2020.
Similar to what we saw earlier in the year U.S. demand. It was the second quarter continued to be underpinned by positive restaurant traffic trends.
And quick service traffic growth was strong again led by growth in chicken based outlets.
Demand in our key international markets as well as in Europe continued to grow in line with recent trends.
Together these factors helped drive our strong volume growth in the quarter, especially in our global segment.
So in summary, we delivered a strong second quarter in first half results. We expect the overall operating environment to remain generally favorable for the balance of the year underpinned by solid demand growth.
We're well positioned with wall raw potatoes to deliver our volume targets.
And finally, our successful execution of our strategy is generating strong cash flows which allows us to continue to reinvest in the business to support growth and step up cash returned to shareholders.
Now, let me turn to go over to Rob to provide details on our second quarter results and our updated outlook.
Thanks, Tom Good morning, everyone.
As Tom noted we delivered another strong performance in the quarter and for the first half of the year.
Specifically in the quarter net sales increased 12% to $1.019 billion with volume growth and favorable price mix in each of our core business segments.
Volume increased 10% led by growth in our global and foodservice segments.
Our two acquisitions in Australia, Marvel Packers and ready meals added about a point in the half a volume growth.
In addition, we had a couple of extra shipping days than we had in the second quarter fiscal 2019 due to the timing of Thanksgiving.
These extra couple of days contribute about another plenty of volume growth.
As a result, this will pose a headwind to our Q3 results on a year over year basis.
Price mix was up 2% due to pricing actions and favorable mix.
Our strong sales growth drove a 36 million dollar or 14% increasing gross profit.
Favorable price mix volume growth, along with lower transportation costs drove the increase more than offsetting the impact of higher manufacturing costs due to inefficiencies and higher depreciation expense associated with our new production line in terms of stuff.
In addition, the increase in gross profit included a 4 million dollar benefit from unrealized mark to market adjustments related to commodity hedging contracts, that's compared to a 2 million dollar loss in the prior year period.
Our gross margin percentage increased about 65 basis points to 28%.
Excluding the mark to market adjustments it was up about five points.
While we made a lot of progress improving our plan to operating performance from the first quarter.
The second quarter, we continue to incur higher than normal periods of unscheduled operating downtimes, which affected our production levels.
This impact is fixed cost absorption raised overall maintenance costs and lowered recovery rates.
In addition, some of the cost that we realized in the second quarter was a carryover effect as we work through finished goods inventories from the first quarter.
Since our plants are now operating a more normal levels, we expect only a modest carryover effect from these manufacturing efficiencies in our fiscal third quarter results.
[noise] SGN a expense was $92 million, an increase of about 17 million.
About 6 million of this increase was related to higher incentive compensation accruals based primarily on our performance.
About $4 million of the change reflects an insurance settlement, we had last year, but this was partially offset by a 2 million dollar reduction in foreign exchange losses.
About $7 million or the increase related to investments in our sales marketing and operating capabilities.
Finally, more than $2 million of the increase was related to designing and implementing our new enterprise resource planning system. As we previously discussed we expect to spend about $10 million to $20 million of onetime costs. This year on implementing a new ERP system.
To date, we spent about $4 million. So we expect spending to ramp up in the second half of the year.
Income from operations increased about $20 million or 11% to 194 million.
This reflected solid sales and gross profit growth.
Equity method investment earnings from our unconsolidated joint ventures, which includes Lamb Weston Meyer in Europe , Lamb Weston audio in Minnesota, and our new joint venture in Argentina.
Were $15 million in the quarter.
Excluding mark to market adjustments equity earnings increased $6 million, largely reflecting lower raw potato prices in Europe .
[noise], so putting it all together EBITDA, including joint ventures increased $38 million or 17% to 261 million.
Operating gains by our base business, along with contributions from the B S. W consolidation and the Australia acquisitions drove 30 about $32 million of EBITDA growth.
Unconsolidated joint ventures added about 6 million.
Moving down the income statement interest expense was about $25 million, which is about a million below last year.
Our effective tax rate was more than 23% or about two points higher than last year due to discrete items.
Turning to earnings per share adjusted diluted EPS was up 15 cents or 19% to 95 cents.
Operating gains in our base business and higher equity earnings drove the increase.
We also had an approximately four cents benefit from the DSW consolidation.
Now, let's review the results reach for business segments.
Sales for a global segment, which includes the top 100, U.S. based change as well as all all sales outside of North America were up 15%.
Volume grew 14%.
The increase was driven by higher sales, including increased sales of limited time offerings to strategic customers in the U.S. and key international markets. It also includes the three point benefit from the acquisitions in Australia.
And a one point benefit from the additional shipping days related or the timing of Thanksgiving.
Price mix rose, 1%, primarily reflecting pricing adjustments associated with multiyear contracts.
Global product contribution margin, which is gross profit less advertising and promotion expense increased $17 million or 15%.
Volume growth favorable price mix and lower transportation costs drove the increase which was partially offset by higher manufacturing costs and higher depreciation expense associated with the harvest in line.
Sales for Foodservice segment, which services North American foodservice distributors and restaurant chains outside the top 100, North American restaurant customers increased 9%.
Volume increased 5% led by growth of distributor private label and Lamb Weston brands and products.
About half of the volume increase was due to the additional shipping days in the quarter.
Even after adjusting for the Thanksgiving shift we delivered our fourth consecutive quarter of volume growth as our direct salesforce continued to strengthen customer relationships.
Price mix increased 4%, primarily reflecting pricing actions taken in October .
Foodservices product contribution margin increased $14 million or 14%.
Favorable price mix volume growth and lower transportation costs more than offset higher manufacturing cost in depreciation expense.
Sales in our retail segment increased 7% driven by four points of volume growth behind increased sales with branded and private label products.
About two points of the volume growth was due to the additional shipping days in the quarter.
Price mix increased 2.3% excuse me.
Largely due to favorable mix and pricing actions.
Retails product contribution margin.
Increased $3 million or 10% favorable price mix and volume growth drove the increase was partially offset by higher manufacturing costs depreciation expense and S&P spending.
Moving to our balance sheet and cash flow.
Our total debt at the end of the quarter was about $2.2 billion. This puts our net debt to EBITDA ratio at 2.6 times.
With respect to cash flow, we generated nearly $345 million of cash from operations in the first half of the year.
That's up about 9% versus last year driven by earnings growth.
We used about $135 million towards acquisitions, including a $17 million initial payment for our half of the new joint venture in Argentina.
We also invested nearly 110 million combined and capital expenditures and I T related projects.
In addition, we bought back more than $13 million of stock and page $59 million in dividends to our shareholders.
Turning to our updated fiscal 2020 outlook.
As Tom noted because of our first strong first half performance, we've raised our sales and earnings outlook for the full year.
As a reminder, our targets include the contribution of the 50 Threerd week that will benefit the fourth quarter.
Overall, we continue to be prudent when updating our annual outlook.
For the full year, we're now targeting sales to grow at the high end of our original mid to high single digit rate range.
We continue to expect that sales will be primarily driven by volume.
And it will deliver price mix increases to offset input cost inflation.
As you know, we delivered 10% sales growth in the first half, including a 2% higher price mix and robust 8% volume growth.
We expect our volume growth will moderate in the second half for a number reasons.
And our global segment.
Volume growth in the first half of the year was faster than we had anticipated due to domestic QSR traffic growth above historical trends and international demand was also above our initial expectations.
While we expect global demand will remain generally favorable in the back half of the year.
We expect these trends may begin to normalize towards historical growth rates.
Also in our global segment in the third quarter will be lapping strong sales of limited time offering products.
Also in the third quarter, we'll realize a headwind approximately one percentage point due to a lower number of shipping days versus the prior year quarter as a result of the timing of Thanksgiving.
This will affect each of our core business segments with the most pronounced impact in our foodservice segment.
Finally in our retail segment will realize the effect of losing some low margin contracts and our private label retail business.
In short, we expect to drive solid sales growth in the second half led primarily by volume growth with modestly higher price mix.
[noise] for earnings we've increased our full year target for adjusted EBITDA, including unconsolidated joint ventures to a range of $965 million to $985 million, that's up from a range of 950 to 970 million.
For the second half we expected gross profit will rise largely in line with sales growth with volume growth and favorable price mix offsetting input cost inflation and higher depreciation expense.
As a result, we expect that.
Gross margin percentage will be essentially flat in the second half.
However, gross margin in third quarter, maybe pressured as a result, a difficult prior year comparison.
Gross margin a third quarter fiscal 2019 included a $4 million benefit from unrealized gains on hedging contracts a mixed benefit due to strong sales of higher margin limited time offering products and our global segment and a cost benefit from supply chain efficiencies, especially around edible oils and transportation.
Regarding SGN a for the year, we continue to expect our base SGN, a which excludes advertising promotional expenses as well as one time in European investments will be within our target range of 8% to 8.5% of sales.
Aim p. expense in the second half should.
Should be a bit above the $11 million, we spent so far so far.
As I previously noted we anticipate total ERP system implementation spending to ramp up versus a 4 million of onetime expense that will occur incurred in the first half.
We continue to target total onetime expenses.
Related to the project between 10 and $20 million for the full year.
With respect to equity earnings we continue to expect that it will continue to gradually improve in the second half despite that pay potato crop in Europe , Europe again being somewhat channel.
To summarize in the second half the year will deliver solid growth in EBITDA, including joint ventures, driven by sales and gross profit growth as well as improved equity earnings.
This growth will be tempered by higher SGN, a expense as we step up spending behind our ERP implementation.
In addition, it's important to note we had an approximately $10 million year over year earnings benefit from the BMW consolidation in the first half of fiscal 2019 or 2020 excuse me.
Since we note when since we completed that transaction around mid fiscal 2019 will no longer have that benefit in the back half of this fiscal year.
Finally, most of our other financial targets remain the same.
We continue to target total interest expense of around $110 million.
Depreciation and amortization expense of approximately $175 million.
In total capital expenditures, which includes some capex for our new ERP system of around $300 million.
We've updated our effective tax rate target to be about 24%. That's on the high end of our previous estimate of 23% to 24%.
Now back to Tom for some closing comments.
Thanks, Rob let me sum up by saying, we're pleased with our strong first half performance as we continue to execute well and a generally favorable environment. We've raised our sales and EBITDA our targets for the full year and remain prudent with our updated outlook, we're well positioned with a raw potatoes applied to deliver our volume targets and support custom.
Average growth and we remain focused on reinvesting in our business to drive long term growth returned capital to shareholders and create value for all our stakeholders.
I want to thank you for your interest in Lamb Weston and we're now happy to take your questions.
Thank you if you'd like to ask an audio question. Please signal by pressing star one on your telephone keypad.
You're using to speakerphone. Please make sure your mute function is turned off to allow yourself.
<unk>.
In press Star one to asking audio question.
Well pause for a brief moment, hello, everyone and opportunity to signal for questions.
[noise] [noise], we'll take our first question and that is from Andrew lives are with Barclays. Please go ahead.
Good morning, everybody and happy new year.
Happy New year Andrew.
Two questions if I could Tom I guess first as you mentioned through fiscal one H Lamb Weston sales running close to 10% or so even excluding the benefit of the holiday timing.
I'm getting to the high end of mid single digit for the full year suggests I'm sales growth in the back half of something like low single digits, maybe 2% or so and and I realize that you and Rob went through some of the factors that drove sales rose to be above your expectations through the first half, but I guess what are you.
Yes would drive this sort of pretty significant deceleration, particularly with favorable restaurant trends expected to continue I know just kind of follow.
Andrew It's Rob again is consistent we think we're prudent with our outlook as you say.
Good mid sent the high end of the mid single digits, we maybe stretch it out will further than you do and you said six I think you go to somewhere in the in the 7% range is more where we think that ends up but.
Again going through those the those individual elements there again were.
We're anticipating that we were going to return to more normal growth rates in the back half of the year, where we had accelerated growth rates, especially in our international business.
In the global segment and Anders It's Tom I think the other thing you know as as we've been very consistent with our outlook to be prudent.
A couple things that I alluded to on prior calls the restaurant traffic.
Trends have been favorable the you know Q1 goes up 2% traffic is up 1% this last quarter, which is significant.
And and that's an area, where it's really hard to predict so we're being conservative absolutely.
But we got work that's a trend we're monitoring going forward and.
These leave if the trends continue as is then we can see some upside to this.
That's helpful perspective, Thanks, and then you mentioned the 1% price mix that you saw in the global segment was primarily driven by a multi year contracts and I'm curious you know from given some of the the price to meeting somebody incremental pricing that went into place more recently.
We would englobal I guess would your expectation be that price mix, there accelerates a bit sequentially as we go into the back half of the fiscal year or don't have that wrong.
Yes, so the.
Just just to reset Andrew our global contracting.
You know ended up where we projected it to end up and you know, there's there's pluses and minuses net net.
As we plan this physical year based on what we thought the environment.
Would allow us to price it kind of ended up where we thought so you know what you're seeing and global you know relative to the pricing that we got through during the contract negotiations as can be pretty stable for the balance of year and I would say remember.
You know when we have international volume growth.
Like we have it then it's been no again ahead of where we projected the pricing in those international markets are no different than our pricing in our North American markets. So you get you get a dilutive.
Pricing factor in that yeah.
Okay very helpful. Thanks, so much.
Yep.
Thank you.
Our next question and that is from Adam Samuelson with Goldman Sachs. Please go ahead.
Yes, Thanks, Morry and happy new year everyone.
Having new year and.
I guess I was hoping me.
<unk>.
The discussion on the global business, a little bit and if you contrast, a little bit some of the growth rates in your your export business out of North America relative to domestic given the volume growth segment put up I mean can well in excess of the 1% traffic gross the QSR. So you just sizes and I'm just trying to get a sense of.
Kind of baby geographies as those that are contributing if you're thinking the U.S. is gaining share from other export regions just any additional color there would be helpful.
Yeah, I'm not going to get into specific market growth rates. We don't have an typically talked about that but what I will tell you just reiterate is.
The.
International markets.
At least this last quarter have grown above historical averages and that's true for North America as well So you know.
As we think about.
Go forward.
Again, we're being prudent in our outlook.
And you know we got a strong first half a growth across the international and North American markets of the global business unit and we'll see how it all plays out in the you know the next several quarters, but it's just been strong demand quite frankly.
Yeah. Adam this is Rob the other thing I'd say related to that Tom mentioned in his in his comments that that you know that well the traffic maybe 1% are waiting of customers in North America, maybe a little stronger in the were weighted to the chicken side.
Maybe heavily more heavily than the market and that's where they had outsized growth.
Okay that that color is very helpful. And then just as we thinking about the impact of a of some of the Rob potato shortages in different parts of North America.
How.
Just told me not just the fiscal 2020 per se, but all calendar 2020 out we think through kind of how that how you think the market will absorb that are or handle that and if there were pricing and mix opportunities that was.
Would emerge is that something that would happen in the may quarter or is it more do you think there's more pressure in August before you get to the next harvest to see lay out the calendar a little bit just how some of those robitaille.
Issues could because it could affect the marketplace and how some opportunities that present themselves [noise].
Yeah, I think I think is my experience with situations like this.
It is you got to you have to be patient.
And you know, we'll see how this all plays out in the spring quite frankly and.
You know, there's there's there's several things that the industry can do to augment potatoes supply whether its harvest early.
You know urea plant more acres, there's there's a number different thing so it's really add them a little bit early to speculate on what's going to happen.
We have an idea.
But we have to.
The most important thing for US is we are well positioned with the raw potatoes that we've secured we got ahead of it. So we're going to take care of all of our customers' needs.
We will opportunistically.
Evaluate opportunities that may come our way, but our focus is to execute against our customers and the plans that they have and drive their growth. That's it and you know if there's things that come our way we'll evaluate it.
As they happen.
Okay I appreciate all that kind of non thanks.
Thank you well take our next question and that is from Tom Palmer with JP Morgan. Please go ahead.
Thanks, Good morning, and happy new year.
Maybe a lot of.
You get a lot of helpful color on the potato crop in North America I Hope you can maybe provide a bit quantification on your annual outlook for potato and non potato costs and also how you see cogs inflation in the second half a year relative to what seemed to be low single digit inflation in the first half.
Yeah, Tom This is Rob and in terms of our inflation again. It is as we've talked about before we contract.
Oh, the vast majority I mean in the in the high Ninetys of our needs for the year and as Tom mentioned in his remarks.
Before things started to run up we are as did a great job of getting ahead of it in and contracting.
For the remainder of potatoes, and we needed to small amount additional that we needed and so we're still targeting our our cogs inflation to be really in line with what it's been the first half of the as a year and so those those kind of low single digit inflation.
Oh, great. Thanks for the color there.
And then I just wanted to clarify something you've mentioned a few times opportunities that may come your way on the price mix side.
I just wanted to clarify this is more related to potentially.
Seeing that migration of customers, who might not be able to get the volumes that they might typically procure from others or are you also considering maybe a regular lead times list price increase.
It's more the first I would say.
You know, but but again like I said earlier, we'll see how that all plays out I've seen instances when we've had situations like this with the wrong in other areas the world, where a everybody just managed through it. So we just again have to be patient execute against what.
Our plans are take care of our customer needs.
And you know if there's.
You know theres customers that come to us that you know our.
I want us to provide product then we'll evaluate that.
Okay. Thank you.
Thank you.
Take our next question from Chris Growe with Stifel. Please go ahead.
Hi, good morning, and happy new year as well.
I want to Chris Hi, I just had a question for you first on a comment you made about capacity utilization and we're seeing is really strong volume growth and I.
I, just don't understand how limit seamless could lead to your volume growth going forward, perhaps around LT goes and then given the time it takes to build capacity I know, you're always thinking about that but I'm just trying to understand where we are in that and that the that thought process and because we see more capacity or that's the need for more capacity coming more quickly.
Yeah, Chris as Tom you know a couple of things.
No as I said in my prepared remarks.
We are aggressively.
Valuating capacity addition, in our current footprint inside and outside North America. That's number one and the second thing is our supply chain team has a full court press on operating efficiency and projects on unlocking capacity in our.
Our footprint today. So you know in terms of where we're at you know I feel good about.
You know the near future if you will on our ability to unlock capacity and drive efficiencies to support.
Volume growth on a normalized level, but again to your point, what you're pushing that is you know.
We're evaluating additional capacity in our network and that's just a function of the overall category growth that we continue to see.
It's probably a good good place to be and I got that thank you and then just one quick follow on and impresses relates to the strong volume growth quarter, but you had a much stronger gross margin performance. This quarter in pricing was just a touch below what I thought it but it sounds like that would you know more than compensated for the for the cost inflation. So was it just the volume growth and and the efficiencies.
In the quarter that allowed for star gross margin performance.
Yeah, Chris This is Rob we did have good gross margin performance and and spot on I mean, we had good pricing, especially in the food services, you see but but really good cost control I would say and and recall in Q1, we had some headwinds that.
We talked about in terms of operating inefficiencies in the plants, not running, particularly well and so a lot of that's cleaned up and we operated better we're still not all the way to bright.
Through Q2, but a lot closer and so we cleaned up a lot of that and so input cost inflation was was managed well and then and then the operating a level of the plants was a lot better.
Okay. Thank you.
[noise]. Thank you well take our next question from Rebecca Schuman with Morningstar. Please go ahead.
Good morning, and happening here.
So I just you know I'm really impressed with this volume goes in your global segment and Yeah. You did mention that part of that was driven by some benefits to the chicken segment I'm wondering also its given your relative favorable.
Sourcing.
Potatoes in your regions how.
<unk> your experience is better than some of your competitors out East is there's also some share gains possibly that is driving some of the strength.
Yes, Tom you know it in terms of.
Quality a your for kind of your first question.
The industry's counted on and even Plainfield, there's areas that are better there's areas that are worse in terms of raw potatoes. So I would attribute you know the volume growth in any Raul quality advantages, it's all about getting ourselves position over the the crop year to ensure.
Sure that we have the raw potatoes available for our customers grow and you know.
Talk about this on this call at Nauseum, but we're in a great position.
So it's not about the raw potatoes, it's about traffic and it's about you know the markets and in our global markets across the globe.
The demand was just better than we expected and you know so it's it's really about what I've talked about.
Previously we've had few one we had good traffic you too we've seen an increase in traffic year over year.
You know so that continues then we're in a great position at the sport that.
Okay, great. Thank you for clarifying there and the second question I have is just is it safe to assume that the negative.
In Q3 from the timing of Thanksgiving is also going to be about 1%.
Yeah I went through those details earlier, you can follow up with Dexter again to reiterate that.
Okay. Thank you so much.
Thank you well take our next question from Bryan Hunt with Wells Fargo Securities. Please go ahead.
Thank you.
My first question and no I'm I'm, sorry, I'm, beating on the subject, but if you look at your global.
Sales, they accelerated sequentially and even backing out or you know the adjustment for the calendar as well the acquisitions, you saw acceleration and and that's what the declining trend in restaurant traffic. So based on previous comments you know you saw QSR traffic.
Two and then up one but yet your sequential growth accelerated so I wonder if you could dive into that was there any contract wins.
Do you see some incremental initial benefits oh shortages and parts of the World where do you. All you know took share I I again, it's it's a it's a very important topic I was just wonder if you could dig into it a little bit more for us.
Yeah, Brian This is Rob again as I as I talked about and prepared remarks that we did have good growth and the international side of our global business and then and then good QSR growth here domestically.
And then as we talked about or waiting in QSR as maybe some customers that had a little stronger growth rates and so I think that that contributes a lot of it and then as we look forward again went through a the comps and where where we had some good LTL.
Performance last year in the third quarter that Oh, we may not see this this year in the third quarter.
So so I guess based because there's no reason first to believe that there's a level of permanent that you all will grow above the industry overall.
But nothing that we've reflected two you know.
Okay. My next question is in fact for that incremental color next question as you all mentioned historically or you know looking at capital allocation.
Your target leverage is three and a half to four times you're running at 2.6 based on your comments you know and you will generate significant free cash flow based on our projections over and above your incremental dividend and you're maybe $40 million on share repurchase.
[noise] you. So basically you all have to do something meaningful to get back and within that three to have to four times bandwidth.
So do you all feel like your new you know if you adjust your financial targets down to something lower in terms of leverage.
And if that's the case.
Do you feel like that makes you an investment grade company instead of a high yield company.
Yes, it's Tom.
No.
Consistent with.
What we've talked about in the past you know since we've been public we have three priorities first one is we're going to continue to invest in this business.
And that means adding capacity and that cost $350 million to $400 million. When we decide to pull that trigger second we are going to actively pursue M&A.
And third and return capital shareholders and.
You know so I'm comfortable with where our leverage is I think I think our investment.
Rating right now gives us the opportunity.
Do.
Pursue a potential M&A as we have in the past now granted they've been you know small bolt on acquisitions, but I want to make sure I've got plenty balance sheet.
Capacity to do a potential big deals that comes around so I feel good about where leverage is.
And it gives US you know was our cash flow returning shareholder returning capital to shareholders with no dividend increase that we just recently announced and our share buyback program and I want to have some balance sheet available.
Two opportunities in the marketplace.
Yeah, I I guess, the only thing you know based on our math what gets you back in a three NAFTA for.
Turns of leverage would be a sizable acquisition is is there you know is there anything on the horizon or is there anything out there available for sale that you know that is sizable in your opinion at this moment.
Well I'm not going to get into specifics what I will tell you is worth active as we can be.
In the market.
Very good I'll hand, it off to others and happy new year and I appreciate your time.
Thank you.
Thank you well take our next question from Carla Casella with JP Morgan. Please go ahead.
Hi, I'm the Capex side I had a question on 309 Capex keep in mind is how much of your Capex is maintenance and do you have a sense or any other major projects beyond 2020 that we should be considering in our kind of foreign capex.
[noise] Yeah. This is rob the the maintenance level of Capex, we talked about the past has been on the 115 125 range somewhere in that one 120 ish range.
And and really the only thing that that May thing to think about his Tom's comment.
Oh, and the not too distant future, we're gonna have to add some capacity and so think about it in those terms and we've talked about that in that.
Okay, Great and then on the Thanksgiving timing shift you mentioned took about it added about a point across this quarter did you I don't think I heard you quantify how much you expect it could take some guys in the next quarter.
Yeah, Hi, it's Dexter Icarly, it's about saying just it's a pull forward that's all this.
Okay, great. Thanks.
Right that's gonna be our last question, so ducs drug when if anybody wants to have a follow up conversation just.
Email me and well set at the time.
Happy new year to everyone and a have a good because [noise].
Thank you ladies and gentlemen, this concludes todays conference.
All participants may now disconnect.
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