Q2 2021 Lamb Weston Holdings Inc Earnings Call
Based on body.
Good day and welcome to the Lamb Weston from trucking water Twentytwenty one earnings calls.
Today's conference is being recorded at this time, I guess trying to constant over to protect your comp.
VP Investor Relations of lumber Jeans go ahead.
Good morning, I'd like you put on yesterday watches second quarter 2021 from school.
This morning, we issued our earnings release, which is available on our website on Boston Dot com.
Please note that during our remarks, we'll make some forward looking statements about the tropics expected performance.
These statements are based on how we treat it as a day.
Actual results may differ materially due to risks and uncertainties.
Did you repurchase the cautionary statements and risk factors can change actually seek filings for more details on our forward looking statements.
Some todays remarks include non-GAAP financial measures. These non-GAAP financial measures should be should not be considered a replacement for what should be read together with our GAAP results.
You can find the GAAP to non-GAAP reconciliations on our earnings range.
It's me today, it's on water, our president and Chief Executive Officer, and Robert <unk>, Chief Financial Officer.
Thomas the body overview on the current operating departments.
Robert will provide some details on our second quarter results as well as some shipment trends from CIRCOR.
Let me now turn the call on Wichita.
That's true Dexter good morning, Thank you for joining our call today.
We delivered solid financial results in the second quarter is on fire Lamb Weston team continues to execute well through this channel.
That's only possible because of their ongoing commitment to serving our customers suppliers engineers jeez, okay. Thank them enough for their dedication that's for.
Our second quarter results also reflect operating conditions were generally similar to what we experienced in the first quarter.
Oh on restaurant traffic in the U.S. wasn't retail by holding steady at around 90% free pandemic levels from last quarter.
Oh on traffic on frozen potato demand range continue to vary widely by channel.
Dropping in large chain restaurants were essentially on par you're levels as quick service restaurants continue to live on strike through takeout and delivery forecast.
Traffic at full service restaurants was 70% to 80% of prior year levels from what's the score.
I will never traffic against softness in November as governments free of coal social and on Christmas day actually restrictions in an effort to contain a resurgence coke.
And as the onset of cold weather tempered outdoor dining opportunities across many markets.
Traffic on demand it on commercial customers, which includes lodging hospitality healthcare schools and universities.
Arts, and entertainment and workplace and while it was fairly steady at around 50% on prior levels from the entire quarter.
In retail consumer demand continued to be strong with weekly category volume growth between 15, and 20% versus the prior year.
Outside the U.S.
Restaurant traffic on Friday demand, we're on even across markets and very much on the core in.
In Europe on to serve our Lamb Weston Meyer joint venture sorry demand during much of the quarter was similar to last year.
But softened the 75% to 85% of prior year levels. During the latter parts corridor as governments reimpose, social restriction and as the weather turned colder.
As you may recall on like in the U.S. QSR sterile generally have only limited rights or capabilities.
Demand in our other key international markets was mixed.
In China, and Australia demand wasn't near prior year levels in our other key markets in any day Latin America overall demand improves sequentially from our first quarter, but remained well below prior year levels.
Moving forward, we expect many of the softer traffic and demand trends, we began to see in November to carry over into our fiscal third quarter.
Sorry, that's sure resurgence of cold weather on the U.S. and Europe has led government simple and even more weighted that social restrictions.
In addition, we expect outdoor restaurant dining traffic on our largest markets to fall further as we enter the coldest spots on the share in the northern hemisphere.
Not surprisingly, we expect traffic at full service restaurants will continue to be disproportionately affected.
Major QSR chains in the U.S. should be able to continue to hold up well due to their ability to serve customers should drive through on delivery retail.
Retail should also benefit as consumers seek more built at all.
I guess, where I will discuss layer, while still early our shipments on those channels on December support that channel.
So on one hand on the near term, we anticipate facing even more challenging and volatile operating conditions. There what we experienced in the first half of our fiscal year on the other hand, we believe this cold and flu shots on demand is temporary we're confident in the strength on the frozen potato category I do not see any structural impediments to recovery in the back.
Dan and girls over the long term.
That's true and vaccines become more widely available on the coming months and as the virus is more broadly contain we expect governments will gradually less social restrictions.
Listen lead to steady growth in restaurant traffic that's on your progress.
We believe this growth will lead to overall frozen potato on demand approaching pre pandemic levels on a run rate basis by the end of calendar 2021.
In the meantime, we're confident in our business fundamentals to pricing capacity utilization upscale supply and our ability to manage through the pandemics impacts on our manufacturing operations.
Our recently announced an increase in our quarterly dividend to the plan resumption of our share repurchase program reinforce our conviction in the strength of our business and the category as well as our commitment to support customers and create value for our stakeholders.
In summary, we delivered solid Q2 results and are executing well in a challenging environment.
We expect frozen retail demand has softened in the near term due to reduced traffic volume garrison reimpose, so sorry stretched items as well as John said colder weather and we're optimistic that the increasing availability of covert vaccines will enable restaurant traffic to gradually improve as the year progresses and that demand will approach free credit debit.
Levels by the end of calendar 2021, now let me turn the call over to Robert.
Thanks, Tom Good morning, everyone.
As Tom noted, we delivered solid financial results from the second quarter as our teams continued to manage through an ever changing demand environment as well as co head related disruptions to our manufacturing and distribution networks.
For the quarter net sales declined 12% to $896 million.
Sales volume was down 14% largely due to fry demand at restaurants, and food service being negatively impacted following government imposed restrictions took a day in the spread of coated.
As well as colder weather beginning to limit outdoor dining across many of our markets.
In addition volume was down as we lap the benefit from additional shipping days related to the timing of Thanksgiving last.
Last year.
Overall as Tom described earlier rest.
Restaurant traffic and our sales volumes in the U.S. stabilized at approximately 90% of pretty pandemic levels, although performance varied widely by sales channel.
International sales were mixed but improved sequentially versus our first quarter.
Price mix increased 2% driven by improved price in our foodservice and retail segments as well as favorable mix in retail.
Gross profit declined $62 million as lower sales and higher manufacturing costs more than offset the benefit of favorable price mix and productivity savings.
As we discussed in our previous earnings call, we expected our manufacturing costs to increase in the quarter. This was partly due to processing potatoes from the 2019 crop through early September which has a couple of months longer than usual.
We did this in order to manage finished goods inventories in light of the pad that mix impact on Friday man.
Processing older crop results on increased cost due to significant due to higher raw material storage fees.
As lower recovery rates.
Since we typically carry upwards of 60 days of finished goods inventory, we realize the impact of these costs in our second quarter income statement as we sold that inventories.
We also realized higher manufacturing costs due to input cost inflation, primarily related to edible oils, Robert potatoes, and other raw ingredients.
Overall, our input cost inflation was in the low single digits.
Finally, we continue to realize incremental costs and inefficiencies, resulting from the pandemics disruptive effect on our manufacturing and supply chain operations.
As a reminder, these costs largely related to labor and other costs to shutdown sanitize and restart manufacturing facilities impacted by coated.
Cost associated with modifying production schedules, reducing run times and manufacturing retail products on line, primarily designed for foodservice products.
On cost per enhancing employee safety and sanitation protocols as well as for a gravel warehousing transportation on supply chain costs.
Specifically in the quarter, we had notable disruptions in our facilities in Idaho, as well as lesser ones and some other facilities.
We expect to continue to incur Colgate related costs through at least the remainder of fiscal 2021.
As a result, we consider these costs and disruptions as part of our ongoing operations that are no longer disclosing these costs separately.
SGN day declined by nearly $8 million in the quarter, largely due to lower incentive compensation expense accruals and.
And a three and a half million dollar reduction in advertising and promotional expense.
The decline was partially offset by investments to improve our operations and infrastructure.
Which included about $5 million of nonrecurring consulting and training expenses associated with implementing phase one of our new ERP system.
Equity method earnings were $19 million, which is up $4 million versus last year ex.
Excluding the impact of unrealized mark to market adjustments equity earnings increased about 2 million due to better performance by our European joint venture.
However, like in the U.S., our shipments to soften during the latter part of the quarter, reflecting the effect on restaurant restaurant traffic of governments reimposing, social restrictions as well as colder weather on outdoor dry.
EBITDA, including joint ventures was $213 million.
Which is down 48 million.
The decline was driven by lower income from operations and it was partially offset by higher equity method earnings.
Diluted EPS in the quarter was 66 cents.
Down 29 cents largely due to lower income from operations.
EPS was also down due to higher interest expense, reflecting our higher average total debt and the write off of some debt issuance costs as we paid off the term loan a year earlier.
The decline was partially offset by higher equity earnings.
Moving to our segments.
Sales for our global segment, which generally includes sales for the top 100, North American based QSR and full service restaurant chains as well as all sales outside of North America were down 12% in the quarter.
Volume was down 11% due to softer demand for pricing outside the home, especially in our international markets.
Shipments to large chain restaurant customers in the U.S. of which approximately 85% or a QSR approach from prior year levels as QSR leverage drive through and delivery formats.
However, some of that strength also reflected pulling forward sales customize and limited time offering products from the third quarter.
International sales, which historically comp profit comprised about 40% of segment sales.
We're at about 80% of prior year levels in the aggregate that vary by market.
Shipments in China, and Australia approach from prior year levels.
Our shipments to other parts of Asia, and Latin America improved sequentially as customers and distributors in many of these markets were able to right size inventories. However.
However, they remain well below prior year levels.
Price mix declined 1% as a result of negative mix price alone was flat.
Levels product contribution margin, which as gross profit less A.M.P. expense declined 28% to $93 million lower.
Lower sales volume higher manufacturing costs and on favorable mix drove the decline.
Sales for our foodservice segment.
Which services North American food service distributors and restaurant chains generally outside the top 100, North American restaurant customers Dick.
<unk> declined 21% in the quarter.
Volume declined 25%.
Segments to smaller chain and independent full service and quick service restaurants tracked around 70% to 80% of prior year levels through much of October, but slowed to 60% to 70% in November following governments reimposing social restrictions as colder weather tempered restaurant traffic.
Some of our markets.
Shipments to non commercial customers improved modestly since summer.
But remain at around 50% of prior year levels with strength in health care more than offset by continued weakness in the other channels.
Price mix increased 4% behind the carryover benefit of pricing actions taken in the latter half of fiscal 2020.
Mix continued to be unfavorable with some hard hit independent restaurants, looking to reduce costs by purchasing more value added products rather than on the premium Lamb Weston branded ones.
Well, we've regained much of this business since the pandemic first struck last spring on a year over year basis. It remains a mix headwinds.
Foodservices comp product contribution margin declined 21% to $88 million.
Lower sales volumes higher manufacturing costs, an unfavorable mix drove the decline.
And was partially offset by favorable price.
Sales for our retail segment increased 7% in the quarter price mix increased 7%, primarily reflecting favorable mix benefit of selling more of our higher margin branded portfolio Alexa line.
Akcea grown in Idaho, and licensed restaurant trademarks ball.
Volume increased nominally.
Sales of our branded products were up about 30%, which is well above category growth.
Rates, which range between 15 and 20%.
The increase in our branded volume was offset by the loss of certain low margin private label volume.
Again late in the second quarter of fiscal 2020, as well as an additional amount that's again a couple of months ago.
As a result.
Expect private label losses to continue to be a headwind.
Retail product contribution margin increased 6% from $30 million.
The increase was driven by favorable mix and lower end P. expense and was partially offset by higher manufacturing costs.
Moving to our cash flow and liquidity position.
We're comfortable with our liquidity position and confident in our ability to continue to generate cash.
In the first half we generated nearly $320 million in cash from operations, which is down about $25 million versus last year due to lower sales and earnings.
We spent 54 million in capex, including expenditures for our new ERP system.
We paid $67 million in dividends in a few weeks ago announced a 2% increase in our quarterly dividend.
In addition, we plan to resume our share repurchase program this quarter.
As you May recall, we temporarily suspended our buyback program in late fiscal 2020 in order to help preserve our liquidity during the early days of the pandemic.
As we discussed in our previous earnings call in September we amended our credit agreement to put in place a new three year $750 million revolver.
At the same time using a portion of the more than $1 billion of cash on hand, we prepaid approximately $270 million outstanding balance on the term loan. It was due in November of 2021.
At the end of the second quarter, we had more than $760 million of cash on hand, and our new revolver was undrawn.
Our total debt was $2.75 billion and our net debt to EBITDA ratio was 3.1 times.
Now turning to our shipments so far in the third quarter.
Broadly speaking in the U.S. demand at QSR and at retail are holding up well while traffic at full service restaurant restaurants continues to soften.
Specifically U.S. shipments in the four weeks ending December 27th or approximately 85% prior year levels.
In our global segments shipments to our large QSR and full service chain customers in the U.S., we're more than 95% of prior year levels.
We expect that rate will largely continue for the remainder of the third quarter.
In our foodservice segment.
Shipments to our full service restaurants regional and small QSR and non commercial customers in aggregate were 60% to 65% of prior year levels.
That is largely in line with what we realized during the latter part of the second quarter.
We anticipate that shipments to full service restaurants, and small on regional QSR as well.
Continue to soften as social restrictions broad.
And as winter weather takes a bigger bite out of outdoor dining.
Shipments to non commercial customers, which have historically comprised about 25% of the segments volume.
Roughly half of our prior year levels and will likely remain soft for the remainder of the quarter.
In our retail segments ship.
Shipments were above prior year levels with strong volume of our branded products, partially offset by a decline in shipments of private label products.
We believe that this rate will largely continue for the remainder of the quarter.
Outside the U.S. overall demand has slowed but its varied by market.
In Europe shipments by our Lamb Weston Meyer joint venture.
Were approximately 85% of prior year levels, continuing the softer demand that we realized during the latter part of the second quarter.
We believe that shipments will continue to soften due to severe social restrictions and colder weather.
Shipments to our other international markets, which primarily include Asia Oceana Latin.
Latin America were mixed in aggregate international shipments so far on the quarter have been softer than what we realized during the latter half of the second quarter.
As a reminder, all of our international sales are in quoted included as part of our global segments results.
In short.
Other than at U.S., QSR, which can leverage drive through access.
Global demand for fries at restaurants, and food service will be soft in the third quarter. Following governments read as a reimposing restrictions to combat the resurgence of Covance.
As well as colder weather in our northern hemisphere markets limits outdoor dining opportunities.
With respect to contract pricing after completing discussions for contracts that were up for renewal, we expect pricing across our domestic large chain restaurant <unk> portfolio in aggregate to be flat versus prior year.
Outside of these large chain restaurant contracts on balance domestic pricing is holding up well.
However, we continue to see increased competitive activity in more value added oriented products in several international markets.
And to a lesser extent and some value tiered domestic market segments.
With respect to costs the.
The potato crop and our growing regions in the Columbia Basin, Idaho, Alberta, and the upper Midwest is consistent with historical average as in aggregate.
We don't see any notable impact on cost outside of inflation.
Robin on growing areas in Europe is also broadly consistent with historical averages, which should help ease cost pressures there versus last year.
However, we do expect to continue to incur additional costs as a result of covitz disruptive impact on our manufacturing and supply chain operations.
And we expect that we will continue to do so until the virus is broadly contained.
Now here's to offer some closing comments.
Thanks, Rob let me just quickly sum up by saying, while the near term environment will be volatile. We believe that's a restaurant traffic will gradually recover to pre pandemic levels.
On a calendar 2020 line.
Well continue to focus on the right strategic and operating priorities to serve our customers on build upon the long term health of the category in order to create value for our stakeholders.
Thank you for joining us today and were now ready to take your questions.
Thank you, ladies and gentlemen, if you wish to ask a question at this time T. signal by pressing star one on your telephone keypad piece ensure the mute function on your kind of touched on so now you're sitting on sweetjack equipment.
Again, Please press star one ask a question.
We can take ex next question from Andrew there.
Please go ahead.
Turning everybody and happy new year.
Well, Andrew happy New year.
Two questions from me, if I could first with visibility you're getting back to pre pandemic levels of demand by calendar yearend cash.
If there are any find b, we're seeing a range. The last thing you know shift from competitive dynamics among sort of the key north American players that could result in Lamb Weston coming out of it in a stronger relative position credit weighted.
Yeah, Andrew So I think you know.
Right now the the industry, we're all navigating through you know the pandemic and.
From Lamb Weston standpoint, the our strategy has not changed and you know while we have.
Paused a few things that we are thinking about free pandemic.
I will tell you that we're actively engaged in some projects.
And again, it's all about positioning this company as you know as we believe the demand is going to.
He turned by calendar year.
And if you think about 18 months from now.
We got to be ready to cash or share demand across all flow. So while we have paused a few things we have free reengage and some things projects that we're working on.
No were to move those forward and get ourselves in position.
12 to 18 months from now captures.
Capture that demand and we believe the on come back to pre pandemic levels.
That's a good segue to my second question, which is you know I know its an on time in some regards to ask about Inc.
Incremental industry capacity, but you know you see frozen potato demand approaching free pandemic levels again by calendar year end and then you know assuming demand globally grow that normalized levels from there and doing it takes a few years to get new capacity for the industry on line.
When would you think we might hear on on a new industry capacity additions being accounts, whether it be you know lamb Weston or others.
Yeah, you know on one of our competitors.
You know there and the process.
Okay any capacity that they were working on free dynamic.
You know from our standpoint again, we've got some things that we're moving forward and at the right time and and all the work around it.
You will make that decision on the other thing that.
<unk>.
One of the Sorel items with all this.
And as we've really focused internally on our efficiency then on operating efficiencies within our current footprint.
And then it's.
Given us visibility to opportunity, we believe within the current manufacturing footprint to unlock.
Capacity so yes.
That's something that the supply chain team in Lamb Weston is focused on.
We have a big initiative within supply chain to unlock capacity and drive efficiencies and you know if you think about and are the <unk> the timing of.
No new capacity versus what we have on our current footprint on 100% confident that with our supply chain initiative unlocks, adding capacity in our current footprint that we're absolutely on a great position.
As demand returns to support not only our current customers as or their business returns.
But also future demand that category girls, so I filled on a really good position.
But again at the right time, we got to make those decisions in terms of getting ourselves ready for the man resurgence 18 24 months out.
Okay. Thanks free time.
Yep.
We can now take on next question from Adam Samuelson with Goldman Sachs. Please go ahead.
Hi, Thanks, good morning, everyone.
[noise] oriented more to add.
Hi, So I guess my.
First question is really related to some of the pricing comment that you made he made earlier and just simple where you're seeing some of that incremental competitive activity internationally that we could see that presume. That's in your export markets on the U.S. not in the European JV, but is that Europe.
Kidney competitors Youre looking up to you.
Push into Asia I'm, just help me think about kind of from frame kind of where you're seeing that is that places. They haven't played before and then domestically on the value tier side is that just European imports into the EPS coaches on me thinking about the origin of that capacity, it's rather and how sales.
Yeah, you did how much of your volume is a really kind of trading and the exposure there.
Yeah on this is Rob me and in terms of the pricing on the internationally. It's it it is.
It is a mix of where that's coming from the competitive some of that in some markets, where there is some of that lower end.
Production is coming from local local producers.
Just brought on the cash flow and some of it is coming from excess capacity in Europe.
Similarly in the U.S. again, it's it's in that lower end value market and we have seen some increases.
From the Europeans are.
That that.
It is certainly having some impact in in that limited part of the market.
And just anyway.
Tommy can you.
Do you think about just how much that your business is really on those kind of categories. We are seeing in true contextualize kind of pockets, where there is a little bit day competitive intensity.
Yeah on them, we help we don't necessarily on this calls that but to Rob's point, it's it's the lower.
HM line flow on what we call that so it's really not.
Not material piece of our business the point is.
You know, it's more pronounced in Asia.
And the Europeans are being competitive in Asia.
And that you know, it's it's not one market specifically, it's random markets in Asia and you know our teams are doing a good job trying to hold serve but.
You know when you get in those situations.
Customers are going to think think about it on a different direction, but.
You know on watching that closely it is more pronounced than it has been.
But I will say no <unk> <unk> <unk>, it's nothing that we're not used to dealing with.
It's just more aggressive and you know the channel work through it and capture opportunities where we can.
Okay. That's will have on them just like my second one was going to be.
And then thinking about the fiscal third quarter and kind of volumes kind of slowing down.
From from where they were I mean team.
Seemingly a little bit more orderly than they might have been in the spring.
I'm, just trying to make sure I'm sensitive and thinking about the gross margin kind of vacations as a.
On softer volumes from here.
Sure. If we just kind of the levers you can pull or just the ability to plan better day to manage that kind of lower volume.
Your true yeah, it's all talk to the Patterson and Robert can hit the margin you know if you think back serves a day initial.
[noise] from start of the whole site, all panned out, but you know our business evaporated were down 60%.
In total 50, 60% so.
You know as we look over this next quarter while our.
You know were seeing softness in some of the channel specifically could service.
I believe it's going to be anywhere near where it was when all this thing started now that said.
We gave guidance on whats happening you know through December.
And you know I think that's going to be Werner where it plays out over the next 30 60 days on gets or whether things are open it back up.
The most important thing for.
Yes.
As we prepare for the opening back up and we learned a lot of lessons.
Spring as a management team and myself personally that you know we have to be ready.
And what does that mean it means if you think about April may.
We're taking some measures right now to share we've got the right inventories are right product. So when demand demand snaps back on which we believe it will in the spring and start increasing we can service our customers.
All the while recognize that.
You know, we're still dealing with.
This manufacturing operating issues because of Kelvin in terms of efficiencies so.
On on one hand, while.
You know things are slowing down on some areas.
On the other hand.
It's a great opportunity for us to get ourselves positioned to meet demand from the same snaps back. So on an air China is going to be volatile, but as we come out okay.
Spring and summer on vaccines and.
Saying all flow starts getting behind us on.
The other side I believe there's going to be some pent up demand for people to get out go out and source.
So wherever you are average for that.
Okay, Great Thats really helpful color I'll pass it on thank you.
We can now take our next question from Robert Dickerson from Jefferies.
Jefferies. Please go ahead.
Five day, thank you very much.
So just a.
Kind of circle back to a couple of comments you made on kind of where you are now in terms of you know because inventories and kind of how you have to be ready right. So that's the bad snap back and that's call. It April day, Jerry and whatever it is.
Like how do you feel I guess were around about Lamb westons could occur at inventories levels that maybe the industry inventory levels going to be to be right. Some of this kind of hopefully temporary softness in the Q3 part of the business writers there is like.
If you step back and say Okay. This is where we are now its already potatoes, Riyadh, Saudi to the industry has I feel like we kind of see that forecasted similar appropriately relative to the bad but to go back to write more careful.
Last year.
And now you said you are you thinking about Q3 and at the end of this spring and summer do you kind of say yeah. You know, we still feel pretty good news retail pretty guarded about their inventory levels as long as that demand does snap back. So we're not once a day kind of yeah, so to speak over inventory.
There.
Yeah, I think I might point of view as I, you know I believe the industry balance from from Lamb Weston standpoint were more balanced I feel good about US you know.
Where we're at on broadband mobility and archive on work well, what we have in storage to meet the needs. Even if theres on returns on demand I think we're in good shape. The you know the thing.
That we're working on right now to make sure we got the right inventory levels are products that.
What's really poll when the economy open back up in May June and.
And so we've got data and we can look and see what the customers.
On the products. They were they were we were shipped on job so on positioning those products to have.
On a different level of safety stock, if you will that I anticipate that and and so.
So I think we're in good shape on finished good inventory raw inventories the thing the thing to remember.
As you know the timing of.
Yes, you know what our take on May or June and timing of consumer demand out going on anymore or maybe it is further down the road.
We'll manage it and we can manage our production schedules, we can manage inventory levels. So you know there's things we can do.
And have done at all you do just to manage.
The supply and demand side of it and so I feel good about where we're at now.
Like I said, we're getting ourselves prepared for.
Demand returns as we get through Q3, and I think you know the company will be in good shape and won't react as needed just based on.
The ordering signals, we're getting from our customers.
Yeah, the other thing going on.
Rob the other point I'd make there is a distinction.
Initially so when when the pandemic first hit demand yet.
It felt like we don't have perfect insight into the downstream distribution you know through the channel, but it felt like they were working with old models and so the orders continue to come.
Even as and if it had user demand was coming off we're seeing a quicker adjustment in that now and so I think as we've learned they've also learned and and so that I'm not concerned about downstream channel being overloaded.
Okay great.
Like the specific about what the volume question, but I guess shot.
So you know you.
Global Division I forget it.
Sales declined 12%, but.
To your stack, they just get and you actually shipping days, maybe some LTL as well.
Flat right. So that's pretty good all things considered.
I'd argue if I'm thinking about Q3 right you don't have that big tough compare so to speak on the volume side, good speaking to to global so it's it there.
You know like should we be thinking on the global side that you net sales the trajectory of that year over year share daily brilliant food.
Right, assuming that shipments are still pretty good relative to prepare them for the kind of it feels like retail what model down still on on but obviously the or go does matter. So just any color on that would be helpful. Thanks.
Yeah, I would say that in the QSR side, the big QSR that that that demand seems to be just fine there they've figured out the model on their leveraging that the the drive throughs and so forth in.
In the in the there are other parts of that business that or sell to more sitting on restaurants, and and that's going to continue to look like our foodservice and then in our international sales. Okay again that varies by country. We cited.
China, and Australia being relatively strong, but there are some other international locations, which aren't as strong.
In Europe in particular now recognize Europe's not in our sales line, it's down in the equity earnings and so in Europe. The QSR don't have the drive through so we'll have some some headwinds there just because they don't have the same model.
Okay, and then just lots of very quickly so I think that that.
Past month, so a lot of investors come to me and sales we've heard that might have been some contract pressure on the larger QSR domestically.
I have no evidence of that.
People to it sounds like things are pretty good so to speak not from what I'm hearing so.
On the opportunity to address that and it's just that because it has so many people assets is already on track classroom and the larger kearsarge that's on that.
Yeah, we don't specifically talk.
Talk about.
Customers and negotiations.
What I will tell you is just like every other year we go through.
Contract season, with our customers so to speak.
And just like last year, just like the year before this year, we kind of came through as bad as we expected and you know so that's that's a.
Generally where we ended up.
Okay perfect. Thanks, guys appreciate it.
Yeah.
And we can now take on next question from Tom Palmer with JP Morgan. Please go ahead.
Good morning, and thanks for all the detail on on current trends Inc.
The press release and in the prepared remarks, you mentioned your view that you.
Overall sales in potato industry Nan could approach sleep pandemic levels by the end of this calendar year I just wanted to clarify how this would apply to Lamb Weston would you assume that the company's sales trends would be comparable to the overall industry or on their reasons why you might day boards from the industry.
Either because of a different channel mix than the industry or because of some some customer wins or losses that have been taking place.
Yeah, Doug This is Rob in terms of our overall performance again the foodservice.
Business, you know, that's where we expect to see the snap back as we've talked about that the QSR as have largely.
Hello held their own so really on the foodservice is where we'll see a lot of that strength and so and then some of those international markets are we talked about that have been.
A little more challenged and so those are the areas, where we think we'll see the strength.
And again as Tom talked about in terms of the capacity on lost its supply chain team is working on.
You know, while we haven't spent the capital for a new line per se.
The Guy just figured out some ways to get some capital out. So you can think about that the ability to service that capacity I think our international sales team is well set up and well positioned and we've talked about our foodservice sales team with that direct sales model to being in a favorite position relative to.
They maybe some of our competitors who are more broker oriented.
That that adjusted their their service model, a little bit there cost of that and so we do feel feel good that we'll have relative opportunities.
Okay. So just to clarify what you mean by that you think you could.
Neither will lead the industry, if not better when you say returned to free pandemic.
Exactly.
Okay. Thank you and.
Then just wanted to ask you wrapped up prepared remarks with the commentary on on contract renegotiations I just wanted to clarify exactly what this mean, so you're saying that the contracts that we negotiated this year were flat and then should we assume that the non contracted a roll over or have the typical.
All place increases that are normally baked into them and so kind of that the net net of your contract basket would be positive or did you mean that the net net would be flattish.
Well all.
The contracts as I stated earlier or.
That we talked about and work on their share guidance.
She is it or is that what we expected and we.
On that selling into.
The economics of that so.
So it's just.
We got through it just like we do every other year.
And you know there's there are some net contracts that we have that there is inflationary pricing mechanisms that are adjusted every year and you know those those contracts are in place and you know when automatically the changes based on inflation just gets passed through.
Oh yeah.
No it's more assets like every other year nothing's really changed.
Okay understood. Thank you.
We can now take our next question from Bryan Spillane of Bank of America. Please go ahead.
Thank you, operator, and not happy where everyone.
I mean now that they do so maybe just to pick up first on the odd on question on on around inflation and pricing and I guess.
More on just focused on inflation.
Can you give us sort of a a day eight update on what you're seeing now you know I think like cooking oil have inflated recently.
And you know we got a freight costs are higher on I don't really know or would like to get me to get them insight to it in terms of grower inflation adjusted their inflation and things like that.
I don't know from fertilizer seed potatoes, water, just trying to get a sense of whether or not.
You know the industry or or you'll feel maybe a little bit more input inflation as we move into into the out year versus what you've seen over the last over the last few years.
Yeah, Brian I'm, not that I want to address the the trial.
As we do every year, we don't get on the specifics.
That's how we get through the negotiating which you know is it that's happening.
As I said, that's we're talking here. So you know down the road you know July October.
Yeah, we'll talk about what the overall crop.
Looks like and the economics of all that just like we do every year. So.
Yeah it.
Ryan It's Rob if if if you think about it I mean, a lot of that is driven by energy fuel whether its diesel to run the tractor or whether it's gas going into fertilizer production things like that on <unk> and those tend to total to move.
Move together.
You you've mentioned edible oils, specifically and then yeah. There there's been a little bit of an upswing in the market recognize we do hedge and so are you know and enter into longer term contracts on that and so if you put all that together I think that low single digit inflation on.
Overall is what we're looking at a in the near term and as Tom said no as we go through raw negotiations you know, we'll see how that comes out okay.
Okay, and then get the second one related to innovation you know free you know pre pandemic. They get you look you look at last year and there was some nice.
Upside I got from some of the limited time offer than some of the more value added innovation.
Particularly on the QSR on.
Right. So you know as we start to normalize is there can you give us some color on on on kind of what the innovation pipeline, maybe looking like and whether that there's maybe a little bit of.
Maybe on a pipeline I guess, that's maybe backed up a little bit in terms of getting from new product because innovation into the market just because you.
You know that it's been disrupted over the last you know 10 or 11 months.
Yeah right I you know you can you can understand.
I understand this I'm not going to get into a lot of the specifics of some of the things we're working on.
We do have a full pipeline I will tell you one one saying.
No. We are acceleration is our crispy on delivering on.
Offering and.
On what came out was that about 15 months 18 months ago, and you know work line that technology.
To some deferred.
For I. formats, So you know with the.
It's there and it's right on a sweet spot of delivery and and drive through it all those kind of things and you know we're getting some traction on it it's a small base, but it's the girls on Christmas day on deliveries are accelerating.
Okay, great. Thank guys.
We can now take our next question from Chris Growe speech from please go ahead Sir.
<unk>.
Hi, Good morning, I wanted my happy new year as well to you.
Moving Chris if.
Hi, Good morning said a couple of questions on the first one to speed and then a follow on earlier questions. You did note the higher cost of processing potatoes out of storage they've been stores longer I'm, just trying to get a sense of your total supply and the adjusted to day to supply to such a level that was later on the you feel like you're in a good place.
On the supply and therefore, the future costs for Prosigna sales.
Yeah, Chris.
Like I said earlier we're.
Well balanced with a broad range base, our latest forecast for the remainder of the year. So I feel.
Yes, very comfortable where we're at.
And as you know just in terms of the.
The raw cost impacts you know with the demand.
Change.
Spring Summer, we made a decision to sort or on potatoes longer than we ever had and the implications of that is just don't get the yield.
That were used to based on its stores longer it just doesn't performance on the factories as well as the longest storage so worked through all that.
You know going forward with you know the current crop in storage, we will process that on a normal time line as we have in previous years. So it's just it was just on one off saying it was a decision based on the change on demand to utilize the old crop longer so it's.
But that's all behind us now.
Okay, Yes that makes sense just when you put on that I just the second question, we've got a number of questions around the.
Yeah, but the large ci contracts and some of the central.
Central pricing elements.
Just curious on.
Once on things you're doing or.
Let me weigh on pricing a bit, but I'd like to drive better demand I know, we've talked about no limits on offering quite the opposite of that there could be a items that.
Restaurant teams to try to regenerate demand, although things are moving to doing that and we'll tracing that promotion driven in the short term.
Wait on your pricing in those large contracts.
No that we're.
We're not seeing any saying any change that's.
That's driving.
Demand the interesting thing Chris <unk>, So you know Inc.
Obviously look at all kinds of different.
The encouraging thing.
Has the importance of fries on manual is at an all time high.
Now.
You know in scenario, if you say look if that holds as demand returns.
That's going to further add to bolt.
Overall, French fry demand going forward and that's it that's an interesting saying that we're monitoring right now.
I understand and whether that holds or not.
Remains to be seen but you know and you look for positives in the US and that's one thing that is really intriguing to us because that could be.
If it holds to the level at holdings on the importance menu importance.
Yeah, that's going to elevate demand even.
Further than what we believe is going to come back by the end of the calendar year, which is close to prevent damage levels.
Good thank you for that.
Yeah.
We can now take our next question from when you Roger Inc.
Bank of America. Please go ahead.
Good morning, I, just have two quick ones last quarter, you laid out what the one time costs were associated with coal that I was wondering if you could lay out that again for the second quarter and then what of those will remain post go bit.
Yeah. This is Ron in terms of in terms of the detail of that cost.
Yeah.
We've we've really concluded that those are just part of our operating costs now and frankly, you. If you go back to the first quarter. The pandemic. When we took a write off on raw on and we were shutting down line for or you know for a long period of time, they were real easy to carve out we.
I did give some detail on on like you know what the increased sanitation protocols, and so forth and SPP and so far in the plants and that continues on the rest of it you know as you bring in lines up and down it's become.
More difficult to really separate out what the operating versus Cove. It and so you know, it's just embedded into our cost structure on an ongoing basis now and so you know clearly our cost structure should improve as as the virus gets less and less.
And we have less impact on our growing and so forth. It's just gotten to the point, where the part of our normal operations of our business and embedded in our cost so we're not breaking that out.
That makes sense net.
In terms of the gross margin pressures in the quarter.
Passing on utilization as well as this age potato crop that had larger storage costs associated with it I guess, which one of those was larger and we'll continue to see the headwind of the elevated storage costs on the sales inventory or are we through that.
Yeah.
In terms of the storage cost that was just a carryover from old crop Oh, we got through the manufacturer that crop.
In the first and and and early part of the second quarter and then as I was sitting in inventory and then sold and we're out of that now and the second in the second quarter. So we shouldn't see that as a headwind going forward.
Okay, and I guess, just one more if I can sneak it in last time, you gave us on that they'd on leverage target. It was three to four times is that still the range.
Yeah, we haven't changed our leverage targets at all.
Great I'll pass to others. Thank you.
We can now take on next question from Karen.
<unk> team on please go ahead.
Hi, my questions have been answered, but I guess, yes.
On the weakness you're seeing on.
Is there an ability to take on new contracts and new business has that changed he talked about the competition on the lower end and contracts on the private I guess that sounds like it's more interesting you're talking about new businesses and the opportunities there.
[noise], Yeah, you know its.
This is Tom I am you know that the team, we're always talking to potential new customers.
Recently whats the demand change.
Yeah, those are more difficult a lot of the customers that we.
We haven't talked to you as initially it was about your supply. So you know kind of weigh on all that settled down as we got through the pandemic and you know our team our sales team are on the ground searching for new opportunities and that really hasn't changed.
From from a market standpoint.
Okay, great. Thanks, a lot.
And this concludes Q any session Mr. company on it looked like to hand call back to you for any additional comes from Max.
Well. Thank you all for joining our second quarter, Paul If you want to step up Paul obsession piece up past me, an email and I didn't get that schedule, but again, thanks for joining us and have a good day.
This concludes today's call on thank you for your participation you may now disconnect.
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