Q1 2021 Lamb Weston Holdings Inc Earnings Call
Good day and welcome to <unk> first quarter 2021 earnings call. Today's conference is being recorded at this time I would like to turn the conference over to Dr. Conboy VP Investor Relations at Flame watch. It. Please go ahead.
Good morning, and thank you for joining us.
First quarter earnings call.
This morning, we issued our earnings press release, which is available on our website.
Oh.
Please note that during our remarks, we'll make some forward looking statements.
Expected performance.
Statements are based on how we see things today.
Actual results may differ materially due to risks.
I'm certain teams.
Please refer to the cautionary statements risk factors contained in our.
For more details on that.
Staples.
Some of today's remarks include non-GAAP financial measures.
Non-GAAP financial measures should not be considered a replacement for that should be read together with GAAP results.
Can find the GAAP to non-GAAP reconciliations in our earnings release.
With me today are Tom Warner.
<unk> Chief Executive Officer.
Our Chief Financial Officer.
Tom will provide an overview of the current operating environment as well as other business updates Rob will then provide some details on our first quarter results as well some trends that we're seeing so far in the second quarter.
Let me now turn the call over to Tom.
Thank you Dexter good morning, everyone and thank you for joining our call today I hope that you and your families continue to be well.
Let me just start off by saying that I feel good about our performance in the quarter and how we are executing as a company.
It was a testament to the land wants the team and I want to thank them for their commitment to each other and our company as well as their continued service to our customers suppliers and communities.
As we navigate this challenging environment, our first priority remains ensuring to health and safety of our employees since the onset of the pandemic, we've instituted rigorous operating protocols across the company.
Especially for production in front line teams that work to keep feeding the worldwide, while keeping our manufacturing facilities.
Product sales.
In some cases this has created additional burden for our team members and their families and I want to thank them for their commitment and understanding I continue to be inspired by the spirit of teamwork and our employee show every day and that makes me proud to be a part of this great company.
In addition to the hard work by our team our improved financial performance versus our fourth quarter 2020 reflects two broad factors.
First the operating environment has steadily recovered over the past few months with restaurant traffic and Friday demand improving in North America, and most of our key markets.
Second we have gotten better at managing through the disruption that the pandemic has created in our manufacturing operations as well as controlling cost across the business.
With respect to the operating environment.
We are optimistic about the sequential improvement breadth and pace of recovery in restaurant traffic and Fry demand.
However, we also remain cautious about the uncertainty of the recovery stability with told it continuing to be a challenge in the U.S. and some key international markets.
In the U.S. overall restaurant traffic and Fry demand steadily improved early in the quarter, then largely stabilized at levels that were below what we saw just before the pandemic.
Traffic at large quick service chain restaurants approached prior year levels.
Especially during the latter half of the quarter by leveraging drive-thru takeout and delivery formats.
Full service restaurant traffic also improved as the quarter progressed, then stabilized at about 75% to 80% of the prior year levels as governments relaxed restrictions for on premise dining and restaurants lean more on carry out delivery and outdoor dining to generate sales.
Traffic and demand at non commercial customers, which includes lodging and hospitality healthcare schools and universities sports and entertainment and workplace environments remain at less than 50% of their prior year levels for the entire quarter, although it did improve modestly as the quarter progressed.
In retail demand growth in the quarter was strong.
After peaking at more than 50% weekly category volume growth in April and May weekly volume growth steadily moderated to between 15 and 20% growth by August as restrictions on restaurants east.
In Europe, which is served by our land once admired joint venture Friday man approach prior year levels by the end of the quarter. Although it's important to know that demand at this time last year was somewhat soft for us due to a poor potato crop.
The main improvement in our other key in all international markets was mixed in China, and Australia demand steadily improved.
In approach prior levels by the end of the quarter.
Our other key markets in Asia, and Latin America, the improvement in demand was uneven as governments employed differing approaches to contain the spread of the virus.
It sure demand steadily improved in the U.S. and across most of our international markets. This summer progress that stabilize the low pre pandemic levels.
Along with that steady recovery in demand our teams levers lessons learned when told first hit and have adapted our operations to better manage through the current environment.
As I noted earlier since the onset of the pandemic, we've stepped up our employee safety and sanitation protocols at each of our manufacturing commercial and support locations, which has resulted in earlier detection of cold weather on our workforce.
We've also steadily become more efficient and minimizing disruptions to our manufacturing facilities and service levels, including.
Isolating.
The areas of our facilities that would be needed to shut down sanitizer restart after members of our production team are affected by the virus as well as increasing flexibility to adjust production schedules and run times across the network.
Our supply chain team has been able to significantly reduce our incremental production costs in its inefficiency as compared to what we incurred in the fourth quarter of fiscal 2020.
We've also taken a range of steps to aggressively manage our selling general and administrative expenses, including shutting down all travel and large meetings and deferring other discretionary expenditures of projects.
Oh, one project that we did not differ was implementing phase one of our new enterprise resource planning system as we believe it will be a key enabler to driving efficiencies over the long term.
We are currently evaluating options for winter began implementing phase two.
Before handing the call off to Rob Let me update you on the potato crop in the pricing environment.
With respect to the crop on a preliminary basis, we delivered crop in our growing areas in the Columbia Basin, Idaho, Alberta, and the upper Midwest will be consistent with historical averages in the aggregate.
Our early read on the European potato crop is that it will also be consistent with us with historical averages and that's a welcome sign given the poor crops in recent years.
As usual, we'll provide our updated view of the crops yield and quality and how we expect the crop to hold up and storage. When we report our second quarter results in early January.
With respect to contract discussions and pricing, we're largely through the negotiations for the domestic large chain restaurant contracts that are up for renewal this year and in the aggregate we have maintained stable pricing in the portfolio.
For those contracts yet to be finalized, we'll remain disciplined and take an approach designed to maintain and reinforce our strategic customer relationships.
Outside of these large chain restaurant contracts on balance domestic pricing continues to hold up well.
However, we have begun to see increased competitive activity in some domestic market segments as well as more a value oriented product segments in some international markets as.
As demand continues to strengthen we expect pricing pressure in these segments will lessen.
In summary, we feel.
We feel good about our performance in the quarter and how we're executing as a company we're out.
We're optimistic about the positive demand trends in the U.S. and in our key in the international markets.
We remain cautious due to the continued uncertainty with the current operating environment.
We're navigating through the crisis by prioritizing the health and safety of our employees.
Leveraging our manufacturing footprint and operational agility to make sure we service customers and again.
And aggressively controlling costs across the entire company.
Finally, we're encouraged about the health of this year's crop as well as the overall pricing stability across our portfolio.
In a challenging times, which we expect will be around for a while but we also believe that by focusing on our strategies and our commitment to our employees and servicing our customers will emerge as a stronger company now let me turn the call over to Rob.
Thanks, Tom Good morning, everyone.
As Tom noted, we believe that we weathered the worst of the pandemic specked on our operations during the fourth quarter of fiscal 2020.
Demand across most restaurant sectors has improved from the lows of Q4, providing a backdrop for us to deliver a 3% sequential sales growth in our first quarter.
The sequential increase in earnings was more dramatic we nearly doubled gross profit from 111 million to 214 million.
And increased EBITDA, including joint ventures by more than two and a half times from 78 million to 202 million.
As we increased operating leverage and we greatly improved our ability to control costs and manage through the disruption that's bad debt has on our manufacturing network and distribution chain.
While our results remain below pre pandemic levels and down versus prior year, the sequential improvement in the demand environment and our financial performance is encouraging.
Now turning to our year over year results.
Net sales declined 12% versus prior year quarter to 872 million.
Sales volume was down 14% as frozen potato demand outside the home continued to be affected by government imposed restrictions on restaurant traffic at other foodservice operations.
However, after realizing some benefit from customers reloading inventories and early in the first quarter, our weekly shipment trends in each of our domestic channels and most of our international markets steadily improved as the quarter progressed.
I'll discuss this in more detail when reviewing our business segment performance.
Price mix increased 2% due to improvements in both the foodservice and retail segments.
Gross profit declined $35 million with about 16 million.
Due to pandemic related costs on our manufacturing and supply chain operations.
That 16 million is down from 47 million of pandemic related production costs that we incurred in the fourth quarter of fiscal 2020.
Of the 16 million about six where utilization related costs and inefficiencies arising from disruptions to our manufacturing network back.
That compares to about $25 million of costs.
For utilization related costs that we incurred in the fourth quarter.
As a reminder, these costs largely relate to labor and other costs to shutdown sanitize and restart manufacturing facilities impacted by Covance.
Costs associated with modifying production schedules and reducing run times across our network to compensate for facilities impacted by Covance.
Incremental costs and inefficiencies related to manufacturing retail products online primarily designed for foodservice products.
The other 10 of the $16 million consist of non utilization related costs and.
And included about $3 million of expense to the remaining crop year 2019, Rob potato purchase obligations.
At about $7 million for enhanced employee safety sanitation protocols.
As well as for incremental warehousing transportation and supply chain costs.
As we previously discussed we expect to incur utilization and non utilization related cost inefficiencies as long as our manufacturing and supply chain operations are impacted by the pandemic.
The remaining 19 million dollar decline in gross profit largely reflects lower sales volumes, partially offset by favorable price mix, a $5 million year over year change in mark to market adjustments.
And cost efficiency savings.
SGT they in the quarter was essentially flat cost management efforts, including a three and half million dollar reduction in advertising and promotional expense off.
Offset $1 million of nonrecurring expenses associated with implementing our new ERP system and $4 million of pandemic related expenses largely related to net cost of EUR retaining certain sales employees.
Equity method earnings were $12 million up 1 million from last year.
However, excluding the impact of unrealized mark to market adjustments equity earnings declined 2 billion with.
With half due to pandemic related costs similar to what we incurred in our base business.
While down versus last year equity earnings increased sequentially as a result of significant decline in pandemic related costs in the first quarter.
As well as steady improvements in our weekly shipments by our European joint venture.
EBITDA, including joint ventures was $202 million down 31 million.
About $21 million the decline was due to pandemic related costs I've discussed.
The remainder of the EBITDA decline was driven by lower sales gross profit.
Diluted EPS in the quarter was 61 cents down 18 cents or 23% from last year.
Now moving to our segments sales for our global segment, which includes the top 100 US based QSR and full service restaurant chains as well as all sales outside of North America were down 14% in the quarter.
Price mix declined 1% as a result of negative mix.
[noise] volume sell 13%.
Due to the decline in demand for price outside of the home.
However weekly shipments to large QSR chains, which historically comprised about one half of global segment sales.
Improved from around 85% of prior year levels at the end of May two near.
To near prior year levels by the end of the first quarter.
Weekly shipments to large full service change, which historically comprised about 10% of global sales.
Improved from 45% to 50% in bay to 70% to 80% by the end of the first quarter as governments relaxed restrictions on on premise dining and its restaurants improved carryout and delivery capabilities.
International sales, which historically comprised about 40% of segment sales were mixed.
As Tom noted monthly shipments in China, and Australia approaching prior year levels by the end of the quarter as demand steadily improved.
Monthly shipment trends in other markets in Asia Pacific and Latin America were uneven.
This mayor pattern ever in demand recovery, but also generally lag as the rate of customer.
The lack the rate of customer improvement as customers and distributors in these markets continue to rightsize their inventories.
Global product contribution margin, which as gross profit less a and p. expense declined $25 million to 78 million.
And then Mike related cost really accounted for about $9 million of the decline with it.
With the remainder driven by lower sales.
Sales for our foodservice segment, which services in North American foodservice distributors and restaurant chains outside the top 100, North American restaurant customers.
Slide 22% in the quarter.
Price mix increased 6% behind the carryover benefit of pricing actions taken in the latter half of the fiscal 20.
Mix was unfavorable for two reasons.
First independent restaurants, which purchase a high amount of Lamb Weston branded products have been disproportionately impacted by the pandemic.
And second some customers have traded down to more value oriented products in order to reduce costs.
It's important to note that this impact was more pronounced in the fiscal fourth quarter and.
And Weve steadily regained much of this business as restaurant traffic improved in recent months.
Volume declined 28%, reflecting the continued impact that government imposed restrictions have had on consumer traffic.
Our weekly shipments to full service and small and regional quick service restaurants.
Together, we have historically comp compromise three quarters of the segment sales improve.
Improved to 80% to 85% of prior year sales by the end of the first quarter.
Our weekly shipments to non commercial outlets, which have externally compromise the other 25% of the segment sales modestly improved as the quarter progressed.
But were soft at about 50% of prior year levels.
Foodservice is product contribution margin declined $17 million to 86 million.
The pandemic related costs accounting for 4 million of the decline.
The remainder was private primarily driven by lower sales offset by a favorable price mix.
Sales in our retail segment increased 19% in the quarter.
Volume increased 11%, although this masks the performance of our branded portfolio, which.
Which historically has compromised about 40% of the segments volume.
Our brands are winning volume growth.
Volume growth of our grown in Idaho, Alexia and license brand products.
It was up together more than 30% in the quarter.
That's well above weekly category volume growth rates, which range between range between 15 and 25%.
However, retail segments volume growth was part growth was partially offset by a decline in private label shipments, which.
Which reflects the loss of certain low margin private label business.
That largely began during the third quarter of fiscal 2020.
Price mix increased 8% roughly.
Reflecting that favorable mix of more branded products.
Retail product contribution margin increased $7 million to 36 million.
And it was driven by higher sales volumes favorable mix and lower NP expense.
This increase was partially offset by $3 million a pandemic related costs.
Moving to our cash flow and liquidity position in the first quarter, we generated more than $250 million of cash from operations.
That's up $12 million versus last year.
Our top priorities and deploying cash continue to be investing to grow the business and returning cash to shareholders.
In the quarter, we spent $33 million in capex, including for our new ERP system.
Given the outlook for the business.
Cash flow and improved liquidity position, we're increasing our capital expenditures target for the year to $180 million from 140 million.
As we invest in productivity and optimization projects as.
As well as some targeted growth capacity.
With respect to capital returns, we declared a regular quarterly dividend two weeks ago.
Since the pandemic began.
We've taken steps to enhance our liquidity and further strengthen our financial position.
By entering into a new $325 million term loan.
And completing a 500 million dollar note offering.
In September we amended our credit agreement to put in place a new three year $750 million revolver to replace the $500 million facility that was set to expire in November with 2021.
The new revolver remains undrawn and fully available.
In conjunction with the revolver with.
With more than $1 billion of cash on hand, we chose to prepay the approximately $270 million outstanding balance on the term loan that was due in November 2021.
All in the financing actions, we've taken since the pandemic began having increased our liquidity by nearly $1 billion.
Lower our weighted average interest rate and stretched our debt amortization.
While only increasing our expected annual after tax interest.
Payments by about $11 million.
So along with our current so along with our ability to continue to generate cash we feel good about our current liquidity position.
Now turning to some demand trends that we're seeing in the second quarter.
As Tom mentioned in the aggregate the demand environment and our weekly shipments have largely stabilized during the latter half of the first quarter and into.
And into the first four weeks of September.
Specifically in the U.S. shipments to date in the second quarter.
Approximately 90% of prior year levels.
In our global segment weekly shipments to our large QSR and full service chain restaurant customers in the us.
Trending at around 95% of prior year levels.
While QSR as our lives are likely to be largely unaffected, we anticipate the shipments to full service restaurants.
Take a step back as outdoor dining options become more limited with the onset of colder weather.
In our foodservice segment weekly shipments to our full service restaurants regional and small QSR and non commercial customers in aggregate.
Are trending at approximately 80% of prior year levels.
Shipments to full service restaurants, and small and regional QSR had been trending above that rate, but could soften due to colder weather.
Shipments to non commercial customers have been trending well below that rate and are likely to remain so until the spread of co business broadly contained.
In our retail segment weekly shipments are trending even with prior year levels with strong volume growth of our branded products offset by a decline in shipments of private label products.
In Europe weekly shipments to date in the second quarter by our European joint venture or approaching prior year levels, Although consumer demand at this time last year was somewhat soft due to high prices and quality concerns as.
As a result of the poor crop.
As in the U.S., we believe the shipments to full service restaurants in Europe may also begin to soften as cold weather reduces outdoor dining options.
Shipment trends in our other international markets are mixed.
In China, and Australia shipments are approaching prior year levels.
In other markets in Asia Pacific and Latin America demand has improved since the end of the first quarter, although our shipments continue to generally lagged demand.
Improvements as customers and distributors continue to right size their inventories.
As a reminder, all of our international sales are included as part of our global segments results.
In short overall demand across our markets is largely consistent with what we observed during the latter half of the first quarter.
Although we remain cautious about the effect of the onset of colder weather on outdoor dining as well as the continuing spread of the virus in the U.S. Senate resurgence in some key international markets.
In addition, when estimating sales for the quarter recall that our second quarter results last year.
Benefitted from strong sales of customized products, including limited time offerings as well as from additional shipping days related to the timing of the Thanksgiving holiday.
With respect to costs as we've previously discussed we.
We plan to process potatoes from the 2019 crop through early September which has a couple of months longer than usual, we stretched out the old crop in order to manage inventories in light of the Pandemics impact on Friday demand.
Processing older crop results in higher cost as a result of higher raw potatoes storage fees and lower recovery rates.
Since we typically carry upwards of 60 days of finished goods inventory will realize the impact of these higher costs in our second quarter income statement.
As we sell that inventory over the coming months.
Now here is Tom for some closing comments.
Thanks, Rob let me just quickly sum up by saying it was a solid quarter in the context of the current operating environment and I'm proud of how our manufacturing commercial and support teams have continued to focus on the right strategic and operating priorities to serve our customers. We are optimistic about the steady improvement in restaurant traffic and drive demand in most.
Most of our markets as well as our ability to control costs and manage through the pandemics impact on our operations.
However, we do expect some choppiness in demand as the world continues to manage through the crisis, we remain confident that the Lamb Lamb Weston as well positioned to emerge as a strong company once we get to the other side of the pandemic and create value for our stakeholders over the long term.
Thank you for joining us today and were now ready to take your questions.
[noise], if you would like to ask a question. Please said mobile printing star one on your telephone keypad.
If you are using a speakerphone please.
She has turned out to why you said much of its really quick.
Again star one that's the question.
Take our first question.
From Chris Growe with Stifel.
Hi, good morning.
Morning, Chris.
Thank you for the time I just wanted to start off I had.
Start off I had a question for you on the gross margin.
Absolutely Mark improvement sequentially, you talked about the leverage you talked about you had lower cobi cost as an example, one other element of this that we've seen is stronger price and mix and stronger than expected sales.
Thats in the Foodservice Division I just want to get.
I just want to get a sense of it sounds like mix was positive.
Some pricing coming through as well I guess I'm trying to think about the first quarter versus the fourth quarter, how important that component was to the gross margin performance or was it more the leverage that that price mix improvement.
Yes. This is Tom.
You know the important saying comparing to Q4, it's really about the volume returning.
And 'cause Q4, we just fell off a cliff in foodservice and as you guys know this one of our stronger margin segments. So it's a combination of both.
I seen flow through and really the the restaurants, reopenings and volume starting to recover in Q1 that really drove the sequential improvement.
And in relation to some of the pricing you've had the pricing in the fourth quarter. I guess was massed by mix is that the way to say that foodservice division.
Well yeah, absolutely in it. So you know we had significantly lower volume in Q4.
So it was a mix component of it and you know as you.
You look at it we talked about Q1.
It's really volume and price flown through and volume returning like I said, Yeah got it and then foodservice Chris that it's not a that's at that price increase comes through overtime I mean, it's not it's not one customer they are all different contracts. So they roll at a different time. So some of that has a little bit.
More impact in Q1 than we saw in Q4.
I just one more follow on to that I'll, let it go but my question was on the gross margin would be as I think about normally from Q1 Q2, you have a nice sequential improvement in gross margin. It sounds like you have some residual costs coming through from utilizing old crop as an example, and you as a inventory you have a tough comp as well do we think about the gross margin.
Just continuing on volume or there's nothing on the cost side. There that we should think about the gross margin eat a little softer in Q2 versus Q1, even though sequentially that normally it's better yeah.
Yeah, I think you're spot on Chris that one we've got some cost carryover that we don't know.
That we don't normally have in Q2 Q2 normally were prep work, we're selling crop that was processed directly out of field. So no storage cost to it and their press potato say process better so.
So that's going to have some impact on on our Q2 margin and in addition, as I mentioned I think in my comments that that recall that Q2 last year, we had strong performance in LTL shows and other specialty products like that that help on the pricing side.
Okay. Thank you for the time.
Thank you.
Well take our next question from Andrew Levi with Barclays.
Morning, everybody.
Putting Andrew.
First thing I think Tom you mentioned.
It sounds like there's some maybe increased competitive pressure in some segments of the U.S. maybe outside of some of the large chains and some of them are value oriented I think international segment. You May have said I was hoping you could just maybe go into that a little bit more and give us a sense of sort of what's happening there and is it is it true sort of contracts or.
Not necessarily contract pricing, just kind of more like spot pricing types of competitive dynamics I'm trying to get a better here in London.
Andrew it's predominantly.
Spot pricing in certain regions.
In the in the North America, and it's it's a little I'd characterize it this way, it's a bit more pronounced than normal and.
And like I said everything overall from a pricing standpoint, it's pretty stable it's not.
Nothing that we haven't seen before.
You know so we're watching it carefully.
But obviously you know with.
Capacity available.
We just need to manage through it and we will do that the international side of it the way to think about the pricing pressures on the lower not the lower line flow type items.
That's that we characterize as non value added so we play in that a little bit and a lot of these markets.
But our most of our focus is on the value added.
Like Chris Cat early Friday type items in the international markets, but.
You know it is getting competitive on a lower value than on value added side.
Got it and then you talked about some sort of sequential demand trends in traffic trends, certainly improving pretty dramatically over the course of the quarter of course from the from the lows. If you will in the fourth quarter.
But that you know maybe the last couple of weeks it seems to have kind of like stabilized or plateaued, a little bit that some of the levels that Rob went through trying to get a sense of what you think is driving that.
Sort of.
Moderating pace right of sequential improvement in sort of restaurant traffic away from old meeting, because obviously, we haven't necessarily yet come into like Super Cold weather and things. It's two point of kind of moderated or that's the piece right a sequential improvement as moderator, so trying to get a sense of what you're seeing out there. What you think is driving that thank you.
Yes, some of the some of the Q1.
[music].
You know think about it this way Andrew in Q1, as we reopened up a lot of our customers served rebuilt and stocking inventory cuddly dramatically decrease or orders in sorry in March April may So there was a restock.
Happening kind of mid May through June and everybody trying to get caught up and so I think.
You know as I think about.
Where we're at today in terms of demand, it's been pretty stable at the levels that we talked to in the script and you know the thing.
You know, we got our eye on is as as the weather changes and.
Yeah flare ups in global Housewives, we certainly have data, where we look at the markets that are.
Potentially put more restrictions on ROA.
We're watching those ordering patterns very closely so.
No. Those are couple of things that why we continue to remain cautious about how we just got to work through it and it'll actualized itself over the next 90 days.
But we're watching it carefully.
Got it thanks very much.
Well take our next question from Brian Lane with Bank of America.
Hey, Thank you and good morning, everyone.
Right.
It's a couple of questions first.
On the on on on margins and they get before thinking about costs going forward you know understanding that some of that the cobi cost probably stay in the base for a while can you just give us.
Or how much.
<unk> expenses, maybe you're deferring into the out years, so just how much cost avoidance.
Is happening this year and that we might have to think about adding back into the out years and then also just as we're talking about cross if you can comment at all on what you're seeing in terms of freight cost and if that's something we should be thinking about.
Yeah, Thanks, Brian in terms of deferring cost I mean.
You know that those inefficiency costs in the cobi costs, and so and so forth those are flowing straight through the inventory now if you're asking about are we deferring any maintenance costs or things like that that might bite us in future years, none of that we continue to maintain our facilities.
As we normally do and so nothing there so really nothing that I would say gets deferred into out years now we did mention last last call that we had deferred some expansion capital.
That we were looking at but again, that's that's you know, we'll we'll reassess that as the market recovers.
In terms of freight costs.
You know.
Yes, I I've heard others have had challenged with some some near term freight we tend to contract a lot of our trucking as opposed to play a lot in the spot market, where we'd had some freight volatility maybe more in Q4 is is and it early in Q1 was as we were trying to catch up those into.
Stories and hot shopping.
Some things are our rail truck freight had some negative impact to it but that we have pretty well stabilized and again, so because we contract the trucking largely we're not as exposed as maybe some others that you may have heard.
Okay, and then and then just tying back to Andrew's question around pricing it is the competitive.
Dynamics in the market you have a sense now of kind of where capacity utilization rates are or how much slack there into the system in North America.
Yeah, and I think we spoke about this last quarter you know it seemed like there were some quite older plants, maybe that had been taken out.
Commissioned and took a little bit difficult I think from the seat worth putting and really to get an understanding of where we are the industry sits right now in terms of utilization rates or any color you can help us.
That would be would be would be helpful.
Yes, Brian I know you know I'm not going to get into this to.
To a specific number on utilization rate because it's it's really a moving target right now.
And you know, we if you think about Lamb Weston.
You know, obviously our utilization rates below.
Worries historically operated but on top of that.
You know, we as we have shutdowns of startups.
Over the past.
Since the pandemic started it really muddied the waters on what your overall capacity is now we know the absolute number historically.
But you know.
It's about running production as much as you can in light of the disruptions were experiencing and they've gotten a lot better and we're getting a lot of like I noted in my remarks.
Remarks, we're a lot better at.
Adjusting and moving production around when we have a disruption to service our customers, which also there's a cost element to that so you know I think I think as this becomes more stabilized.
Brian.
We'll have a better understanding of.
The overall capacity you will utilization across the industry and you know the competitive set it's his experience in some of the same things that we are so.
It's it's a bit of a moving target right now.
Alright, I appreciate that thank you.
Thanks, Brett.
Well take our next question from component polymer with JP Morgan.
Good morning, and thanks for the question I wanted to ask on the retail shipment side I was a bit surprised the quarter to date figure was only flat given how.
How robust your branded take away as I appreciate branded much stronger than private label, but do you think that the quarter to date shipment, but there is an accurate reflection of overall takeaway trends for you at retail or our shipments maybe lagging that that take away a bit.
Yeah, I think that that.
Again as I said in prepared remarks that on our branded business. We continue to perform very well and private label. We've we've ceded some of that that that volume.
It started really in Q3 of last year.
And so I think that that are branded performance. You know I think is continues to be very strong, but that private label offsets are offsets that so our overall sales out of the retail I think that that accurately reflects it now category trends out of the retail stores I mean, you get the nails Nielsen data as well.
We do and so you you see those are are continue to be pretty strong overall.
But for US it's that it's that mix trade.
Okay. Thanks.
You mentioned the tough comp for LTL is next quarter, we see QSR volumes at least you know beginning to trend more favorably are you.
Are you seeing those customers turning back towards or starting to plan limited time offers and so you know to what extent, Mike those start to flow through in the next quarter or two.
Yes, Tom.
I won't get into specifics on customers and LTL goes.
What I will say is you know there's.
There is renewed interest across many of our customers, but those obviously take some time to get.
Through the.
The innovation and then get it on menu so more to come on that but I'll say as.
There's some renewed interest in it.
All right. Thank you.
Right.
We'll take our next question from Rob Dickerson with Jefferies.
Oh, great. Thank you so much.
Yep.
In terms of the crop this year sounds like a regular sales of the prepared remarks.
Maybe you're sourcing areas.
Sales and you know about average this year, which is good given the reduction in love with potatoes that lays the ground. This year for this years crop or kind of where we are you know in terms of Uh huh.
In terms of the harvest time.
Do you kind of curled fine the demand supply equation, you know fairly healthy you know at this point when you look at the overall broader crop and then secondly could others be somewhat disadvantaged given the reemergence of the bad, but maybe some very regional supply for sales.
Yeah, Rob I think overall, how characterize it is right now based on.
You know our overall demand forecast, we're balanced from a Ronnie like industries kind of in the same spot. So you know as we do every year as you know the our forecast change.
We quickly align that with our raw needs and our AG team does a great job canvassing, our growing areas and ensure that a workout.
We're covered to service our customers. So I think everything is pretty balanced right now.
Okay, Great and then also maybe.
We see no large heard the words, we started construction.
We started construction on one of their plants like that but.
But.
Yeah, it's not construction probably to go back.
I know, Bob the ceiling or let's say somebody just curious.
Curious.
We've already commented on just maybe.
Maybe.
Got the signal of confidence.
The overall industry like structural a basis of the industry as we think about even going into calendar 21.
Because a lot of question to be asked around utilization now, but we'll take it out 12 to 18 months at a large competitors that plant.
Flat you know it seems to me that the industry is saying, yes were trying to get to that but we also have to be prepared for when demand comes back because you know the industry overall is structurally.
Impaired at this point that.
Thanks.
Yeah, absolutely, it's a it's a a lot of cash.
Vote of confidence for the category, we feel the same way and you know so.
One of the big one of the main reasons for increasing capitals Reds chopped up on capacity and you know that kind of that product category has been growing over the years. So you know we're we're evaluating.
You know, we're thinking about two years out and as the saying return back to normal.
You know I think everybody's going to it's going to start dusted off there her plans and.
Let's move to kind of move move the category forward and I think it's absolutely a vote of confidence.
Okay, great. Thank you.
Got you that's about.
Excellent okay.
Well take our next question from Adam Samuelson with Goldman Sachs.
Hi, yes, thanks, good morning, everyone.
Turning out to me out.
Yes.
Right and maybe I'm kinda keying off of Rob.
Question just on on on the lot supply I believe the contract rate is in the Pacific Northwest. This year. It was up about 3% and I'm just trying to make sure when you get pricing stable in terms of your contract negotiations with with your customers is that pricing stable a net number.
Or is that a gross number and so we got to think about flat topline parts in there. So there should be a kind of low to mid single digit inflation on the on the potato concert.
Yeah, Adam in terms of the pricing negotiations with customers I think with what we were speaking to it.
Is that that that generally the pricing negotiations you know, we're we're consistent with expectations and so I think there was some concern that some had expressed on our last call that there might be some pricing pressure and we just haven't seen that now recognize that.
In our global business unit, those big chain customers we.
We tend on average to have about a third of those contracts come up every year and those contract structures are different some have cost pass through elements. Some some have just cost inflation elements and so forth.
So you know that it's it's you know fairly variable in terms of how those contracts work.
But I think overall I think the read is that that that pricing in a marketplace for sales continues to be in good shape stable from our expectations are on the raw side. You know the crops are in good shape and and and we've got what we need to service our customers for this year.
Okay. That's helpful and then the follow up just thinking about.
The U.S.G. lining.
Any way to help frame how.
What that could look like this year I know, you're probably keeping very tight lid on discretionary spending and something like 18 year fairly easy control in the current environment, but.
What that could look like in corollaries any update on the ERP project in terms of timing the completion.
Got it Adam It's Tom you know in terms of S. DNA, we you know early on like.
Like we mentioned you know put a lid on stopped all non discretionary spending and.
Projects and you know travel those kind of things and we'll continue to do that as yeah. So in terms of levels of S. DNA I think we target around.
Eight 9% of sales and.
You know the with.
With that said as as things continue to improve.
You know, there's there's some things we may choose to invest in.
Within SDMA, but we'll manage that tightly like we have in the team's done a good job put the lid on costs of Nondiscretionary.
In terms of the ERP.
Yeah, I'll take that in terms of the RP you know.
We have implemented released one of that ERP, which covered.
Our financial reporting covered our maintenance in the plants and covered our indirect or procure to pay cycle and that was that's been implemented and is now operating in and standard ERP exercise not perfect, but but not horrible. It's all it's it's fine.
Operating well the team's done a great job with it into.
In terms of release too that impacts more customer facing an inventory elements and and given the current environment.
So we're we're really step back from that one to let the key people in the business run the business in this challenging time and two.
And to just managing through the risk. So we're going through the assessment now to determine what the timing is to do that but we haven't relaunched at this point.
Okay that color is very helpful. Thank so much.
Well take our next question from Bryan Hunt with Wells Fargo Securities.
[laughter] their time this morning.
My question has to do with your Kid of supply.
You had said coming into the year your contracts are down 20% to 25%.
And you made some further comments to your balance from our law perspective relative to your forecast how much latitude do you have to catch up with demand.
With spot potatoes, you know if you were to see demand come in stronger than your forecast.
You know, we we have a like we do every time this year, we have a pretty good idea of where.
Working with our growers strategic growers.
Thats open potatoes.
Available and we make decisions we made decisions this year already.
You know to make sure that we have raw available based on the changing forecast and it will continue to make those decisions throughout the course of Illinois, 60, 90, 120 days as things change. So there is some flexibility in the system.
You know and the whole industry to kind of the same playbook, so like I say.
Like I said, we feel we've made some decisions.
To do some things to do some things to keep a balance right now based on our latest thinking on how the demand is going to play out for the balance of the year and we will continue to evaluate it and we have a great AG team that has a very good understanding of what's available in the market. So thats all I have.
I have no concern that will be if things improve dramatically.
We have a plan in place to make sure we stay balanced.
Great. My next question is that you know you touched on LTL shows the potential you know in the in the margin opportunity that Youve seen historically no. T. goes you know in your discussions with and contracting for the upcoming year or what their QSR customers. What what is their mindset around L. T O.
Is there a potential for more of them or lesser than year over year. You know like can you just touch on the potential quantity of LTL was one of your basis.
Yeah, I think the way to think about it is you know there was a period where.
Yeah, a lot of customers of all different sizes were focused on many simplification.
Based on.
You know the environment that unfolded the last six months and I think you know now that now that there is a.
Return of demand.
You know the the mindset was so our customers is chair of occasion.
So that's that's leading towards.
Renewed discussions on.
You know LTL activity and what that could look like for some of our customers and every customer is different. So some are more aggressive on menu items than others and you know the the thing to do.
Thing to remember is you know once those discussion starts it does take some time.
Some of them are placed on menu.
And then my last question you and you touched on this briefly.
If you look at capital allocation your talk about growth returning cash to shareholders.
You know given the lower capacity utilization in the industry. You know, we could see there might be from the outside looking in opportunities to maybe make some capacity acquisitions at more favorable multiples when you have yeah.
And in a not too distant past can you touch on maybe what the M&A pipeline looks like today versus you know a year ago and do you feel more confident in putting money to work on acquisitions versus returning it to shareholders. That's it for me. Thank you.
Her up.
Yes, so you know consistent.
What I've talked about in the past one of our strategic pillars invest for growth an important part of that has is M&A and.
You know we continue to canvas.
The industry.
Even in the last six months are saying as in touch with opportunities as possible and and you know.
You know, it's a it's an environment that may lead to some opportunistic M&A and you know the the great news is.
[music].
You know Rob and his team have done a good job getting our [noise].
You know getting the revolver down in this environment and you know building some.
Additional debt. So we got cash on the balance sheet go out of firepower and you know if the opportunity presents itself.
You know ready to play so we continue to do everything we can to move some forward and we're ready.
We're ready to go.
Thanks for your comments.
Well take our next question from Carla Casella with JP Morgan.
Hi, This is Clark on for Carla Casella.
Kobe related cost base, you're breaking that out anymore can you tell what percent of those do you expect to recur each quarter going forward throughout the year.
Yeah that that this is rob all the it that's so hard to determine because what you're what you're trying to forecast. There is how many infections, you're gonna have where they're going to come on what line and so how you shut that down so I think thats it.
The challenge to forecast so.
You know the the best that we can do is disclosed what has happened and disclose the enough where the detail and then I'll, let you do your own forecast on cobot and knees and new spots.
Got it thank you and Oh.
Oh are you evaluating your shelf space at retail or do you feel like you have the right candidate that retail and then how are you looking at this in the survey Hey.
Adam.
Yeah, I think from a retail standpoint, we feel.
We feel good about our shelf space and facing as Rob mentioned, you know the the branded offerings on shelf are doing pretty well.
And.
And you know we were continually evaluating a shelf set.
So we feel good about all that that in terms of the foodservice I I'm not quite following your question.
HM.
Yes.
Dockside every club in spine and then last question in terms of margin will probably until byproduct have you ever broken out the difference between branded and private label on margin no.
No we don't.
Okay. Thank you.
Thank you.
That concludes today's question and answer session. Mr. Clean way at this time I'll turn the conference back to you for any additional remarks.
Thanks, everyone for joining the call. This morning, if you would like just a separate follow up call. Please Uh huh.
Email me and we can get something set up you could today over the next couple of days and thanks for joining and Sensical. Thanks.
This concludes today's call. Thank you for your participation you may now disconnect.
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[noise] mm.
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Hmm.
HM.