Q3 2021 Lamb Weston Holdings Inc Earnings Call
Please standby were about to begin.
Good day, and welcome to the Lamb, Weston and third quarter, 2020 one earnings call.
Today's call is being recorded at this time I'd like to turn the call over to Dexter <unk> VP Investor Relations of Lamb Weston. Please go ahead.
Good morning, and thank you for joining us for of Lamb Weston as third quarter of 2021 earnings call. This morning, we issued our earnings press release, which is available on our website Lamb Weston dotcom.
Please note that during our remarks, we'll make some forward looking statements about the company's expected performance. These statements are based on how we see things today actual results may differ materially due to risks and uncertainties.
And just referred to the cautionary statements and risk factors contained in our SEC filings for more details on our forward looking statements.
Some of today's remarks include non-GAAP financial measures. These non-GAAP financial metrics should not be of considered the replacement for and she'd be read together with our GAAP results you can find the GAAP to non-GAAP reconciliations and our earnings release.
With me today are Tom Werner, our President and Chief Executive Officer, and Robert <unk>, Our Chief Financial Officer.
Tom will provide an overview of the current operating environment and our recently announced the best when they try to well Rob will provide some details on our third quarter results as well as some shipment trends for the fourth quarter.
With that let me now turn the call over to Tom.
Thank you Sir good morning, and thank you for joining our call today, we delivered solid sales volumes and the third quarter as the restaurant traffic and consumer demand improved as governments gratulate, the social and off premise dining restriction and some markets.
And I'll still down year over year of the rate of volume decline improved sequentially and both the U S and and our key international markets from what we realized during the first half of our physical here.
Again this was largely in response to government and easing of restrictions as the quarter progressed and demonstrating the consumers are ready to go out as the restaurants expand dining capacity.
Specifically overall restaurant traffic and the U S was between 85 and 90% of pre pandemic levels.
Traffic at large quick service chain restaurants continued at roughly prior year levels as the.
The leverage drive through takeout and delivery formats.
After a slow start for the quarter traffic and full service restaurants recover to 70% to 80% of prior year levels.
Traffic began to pick up later in the quarter as some governments gradually lifted social and dining restrictions that were put in place due to the resurgence of COVID-19.
And as a relatively mild winter weather provided more outdoor dining opportunities.
While we expect this momentum will continue we're mindful that some of this performance maybe do the two customers and distributors restocking inventory prior to the unexpected boom and the restaurant traffic in the coming months.
And contrast demand and noncommercial customers, which includes the lodging and hospitality health care schools, and University sports and entertainment and workplace and environment remain around 50% of prior year levels for the entire quarter.
We're confident that demand from these customers will return, but realize that recovering to pre pandemic levels maintained some time of government slowly lift restrictions for larger gatherings.
And the retail demand and the quarter was strong with weekly category volume at 115% to 125% of prior year levels as consumers continue to eat more meals at home.
Outside the U S restaurant traffic and Fry demand has been mixed.
And Europe, which are served by our Lamb Weston Meyers joint venture for our demand and the quarter was 80 to 85 per cent of prior year levels. However, we believe that demand rate is likely and softens as governments reimposed severe social restrictions in response of the resurgence of Covid infections.
Demand and most of our international markets and Asia, Oceana, and Latin America and improved in the quarter our shipments in China were strong.
And and our other key markets in the aggregate remained below prior year levels, but continued to improve sequentially versus the first half of the year as well as and each month of the quarter.
And so while the man and Europe remained soft we feel good about the demand trends and the U S and most of our key international markets and we expect governments will continue to gradually roll back social restrictions and the months ahead as more of their citizens get access to the vaccines.
And this should serve to a lot of pent up consumer demand of his restaurants and the other foodservice outlets and ultimately the demand for price.
As a result, and we remain optimistic the overall frozen potato demand will steadily approach pre pandemic levels on the run rate basis by the end of calendar 2021.
The progress we made all of sales volume and the quarter was offset by the pandemic continue the effect on our supply chain operations as.
And as Rob will discuss later COVID-19 related disruptions significantly affected our production transportation and warehousing networks, leading to significantly higher costs as we focused on customer service well dealing with the pandemic impact and some of our communities of workforce.
And the decision and in addition of decisions that we made and the first half of the year to defer certain capital repair and maintenance projects further reduces our flexibility to manage disruptions and drove incremental manufacturing and distribution costs.
Yeah.
So in summary, and the third quarter and we delivered solid top line results.
Operating and opinion them the environment has been and will continue to be challenged and we expect it will continue to occur our cross hardcore.
Hard costs across our supply chain and the near term.
Before I turn the call over to Rob Let me review of couple of items first we will provide our normal update for this year's potato crop when we report earnings in July and October.
Second as you may have seen a couple of weeks ago, We announced that were building of new French Fry processing facility in China and.
A total of the investment of around $250 million. This greenfield facility will complement our plant and Shanghai and is expected to add about 250 million pounds of frozen potato product capacity, we anticipate starting up the plant sometime during the back half of calendar 2020 three.
We chose to build the plant in China, because it's a fast growing 1 billion pounds plus market and a key driver to our international growth.
This new plant enables us to support customers and China, using and country supply, which is something that our larger customers are increasingly want as they continue to expand.
In addition, our new facility will allow us to further diversify our manufacturing base and mitigate risks of potential trade disruptions as we look to drive the international growth.
So in summary, and the third quarter, we delivered solid top line results of demand continued to gradually recover for the incremental costs related the pandemic related disruptions pressured earnings.
We expect that the increasing the availability of Covid vaccines and the easing of government imposed social restrictions will allow the restaurant traffic to gradually improve as the year progresses and.
And we remain optimistic that overall frozen potato demand will approach pre pandemic levels on a run rate basis by the end of calendar 2021 and.
Now, let me turn the call over to Robert.
Thanks, Tom and good morning, everyone.
As Tom noted in the third quarter, we delivered solid sales results as overall demand continued to improve but the pandemic disruptive impact our of manufacturing and distribution operations significantly increased our costs.
Specifically in the quarter net sales declined 4% to $896 million sales volume was down 6% largely due to the pandemic impact of Fry demand, but improved through the quarter after a slow start.
Importantly, the rate of volume decline and improved sequentially from the 14 per cent decline that we realized during the first half of fiscal 2020 one.
Most of the sequential improvement was within our global segment and largely reflects a steady recovery and shipments in our key international markets.
<unk> sales of limited time offering products and the U S. Also contributed to the global segment's recovery.
In addition, we saw sequential improvement and our foodservice segment led by casual dining as well as continued strength by our branded offerings and our retail segment.
Price mix increased 2% and improved price and our retail and foodservice segments as well as favorable mix and retail drove the increase price was up and our global segment. Although this was offset by negative mix.
Gross profit declined $54 million as lower sales and higher manufacturing and distribution costs more than offset the benefit of favorable price mix and productivity savings.
Let's focus on cost of goods sold.
As Tom noted the higher costs were largely the result of the pandemic disruptive impact across our supply chain.
The resurgence of Covid and many of the community communities, where our plants are located.
Eighthly affected our manufacturing workforce at.
At times of the combination of infected and quarantined employees significantly affected our ability to staff production lines and the other key roles at a number of our facilities.
The consequences, where first we lost days of production, which resulted in a number of our plants operating well below normal utilization rates.
And reduced our ability to cover fixed overhead costs.
In addition, recall that a year ago, we decided to continue paying employees despite production lines being down due to COVID-19.
While we believe that was the right thing to do to support our production teams. It has had an impact on our cost structure.
Second focusing on maintaining customer service levels required us to quickly adjust production schedules to accommodate work force and manufacturing line availability.
This drove incremental costs and inefficiencies.
And many cases, we shifted production from one facility to another even though the alternate facility may not be the most effective in terms of cost or throughput for that specific product.
That negatively impacted line speeds throughput and raw potato recovery rates.
And third the number of effect of of employees.
And facilities met that we incurred even more costs related to temporary shutdown of the restart of manufacturing facilities.
Compounding these disruptions and the quarters, where our decisions to defer certain capital repair and maintenance projects on our production lines that were originally scheduled for the first half of fiscal 2021.
We plan on undertaking these capital and maintenance projects once the demand environment and our operations were more stable during the second half of the year.
While deferring these projects was prudent in light of the uncertainty surrounding COVID-19.
Executing them that the same time as another COVID-19 way and impacted our plants led to additional disruption and our manufacturing capabilities and further limited our flexibility to adjust production schedules across our network.
This drove additional costs and inefficiencies on top of the start of the staffing related issues I described.
The pandemic induced volatility of our production facilities also had a downstream impact on our transportation and warehousing operations.
We generally prefer to rely on rail more than trucking to move product from our production facilities and warehouses to our distribution centers and customers across the country.
However, late changes to production schedules required us to switch significant volume from rail to trucking, which is more flexible, but also higher cost and an effort to maintain customer service levels.
In addition, we typically employed trucks using contracted carrier rates as opposed to securing spot trucking, which tends to be higher cost.
Spot trucking has also had significant rate increases over the past six months, but because of the disruption to our production schedules and again, the Brian talk prioritized customer service, we lean more on expensive spot trucking.
So our transportation cost significantly increased because of the unfavorable mix of rail and trucking as well as and unfavorable mix of contracted and spot trucking.
As you would expect our warehousing costs also increased with the additional handling required across our distribution network.
Finally, while the pandemic related effects on our supply chain were the primary drivers of our cost increases we also realized higher cost due to the input cost inflation and the low single digits.
We expect that rate will begin to tick up in the coming quarters, and edible oil and transportation costs continue to increase.
While our costs were higher in the quarter, we are starting to see the benefits of of our supply chain teams work around the series of initiatives, we call win as one.
These initiatives build upon the Lamb Weston operating culture of productivity programs that we have in place.
Broadly speaking when as one and seeks ways to reduce our variable and fixed cost increased production throughput on existing assets and improved working capital, especially inventories.
And the couple of the plants, where the team has implemented these new ways of working asset utilization is at or above pre pandemic utilization rates and we're seeing the benefit and the cost structures and those facilities.
As the team continues to roll out these programs to the rest of the network and its infection and quarantine rates declined through vaccination program for supporting for our production employees, we expect our cost structure and utilization rates will begin to normalize.
Longer term, we expect these initiatives to enhance margins and drive cash flow and strengthen our culture of continuous improvement.
Since we only began what the rollout windows wanted a couple of our plants of few months ago.
We're not providing any specifics on activities or targets today, we anticipate giving investors more insight into this program as we gain more traction.
Moving to the segments moving on from cost of sales excuse me, our SG&A increased $8 million and the quarter.
The increase was largely due to investments, we're making behind the witness what initiatives I just described.
Equity method earnings were $11 million, excluding the impact of unrealized mark to market adjustments net of comparability item and the prior year quarter equity earnings declined about $11 million.
Two factors drove the decline first fry demand and Europe fell as much of the region remained and locked down and as colder weather affected outdoor dining.
Second our joint ventures also realized higher production costs related to COVID-19 disrupting their manufacturing and distribution operations.
Adjusted EBITDA, including joint ventures was $167 million, which is down $61 million.
Lower income from operations drove the decline.
Adjusted diluted EPS in the quarter was 45 cents, which is down 32 sets of most.
Mostly due to lower income from operations.
EPS was also down due to higher interest expense, reflecting our higher average total debt, resulting from actions, we took to and late in fiscal 2020 and early fiscal 2021 to enhance our liquidity position.
Now moving to our segments sales for our global segment, which generally includes sales for the top 100, and North American based U S. R and full service restaurant chains as well as all sales outside of North America were down 2% and the quarter.
Volume was down only 2%, which is much better than the minus 12% we realized during the first half of fiscal 2021.
Shipments of large chain restaurant customers in the U S of which approximately 85% art and <unk> increased nominally versus prior year.
<unk> continued to perform well as they continue to leverage drive thru and delivery formats.
As I mentioned earlier U S. <unk> were also aided by <unk> for the return of some noteworthy limited time off product offerings.
International shipments, which historically comprise about 40 per cent of the segments volume were about 95% of prior year levels and the aggregate.
That's up from around 75% of prior year levels that we realized during the first half of fiscal 2020 one.
And the third quarter shipments in China were strong versus the prior year when demand was negatively impacted by Covid.
Shipments to our other key markets strengthened as the quarter progressed and were generally stronger and developed markets and emerging ones.
Price mix was flat with positive price offset by unfavorable mix.
Global's product contribution margin, which is gross profit less A&P expense declined 27% to $79 million.
Higher manufacturing and distribution costs as well as unfavorable mix drove the decline.
Sales for our foodservice segment, which services North American foodservice distributors and restaurant chains generally outside the top 100, and North American restaurant customers declined 22%.
Volume declined 24% after a slow start shipments to smaller chain and independent full service and quick service restaurants recovered to about 90% of prior year levels for the entire quarter as governments gradually ease social and indoor dining restrictions.
We believe that some of the sales volume strengthening during the last few weeks of the quarter may reflect distributors restocking of inventory in anticipation of more governments lifting social restrictions and the spring.
However, it's difficult to gauge the extent of that benefit.
In contrast, the shipment and contrast shipments to noncommercial customers remained at around 50% of prior year levels with continued strength and health care more than offset by weakness and the other channels such as travel hospitality and education.
Price mix increased 2% behind the carryover pricing benefit benefit of pricing actions, we took and the second half of fiscal 2020.
This was partially offset by unfavorable mix versus the prior year due to lower due to lower sales of premium products.
As we've discussed in previous earnings calls we've regained much of this business since the pandemic first struck last spring, but all the year over year basis. It remains of mix headwind for the quarter.
Food services product contribution margin declined 30% to $70 billion.
Lower sales volumes higher manufacturing and distribution costs and unfavorable mix drove the decline and it was partially offset by favorable price.
Yeah.
Sales for our retail segment increased 23% with volume up 13%.
Sales of our branded portfolio, which include Alexia grown in Idaho and license restaurant trademarks.
We're up about 45% continuing the strong growth threat and we've seen since the start of the pandemic and well above category growth volume growth rates that have been between 15, and 25% and the quarter.
The increase of our branded volume was partially offset by the loss of certain low margin private label volume, which will continue to be a headwind on volume through the remainder of the fiscal year.
Price mix increased 10%, primarily reflecting the favorable mix benefit of selling more of our higher margin branded products.
Retail's product contribution margin increased 15% to $33 million. The increase was driven by favorable mix and was partially offset by higher manufacturing and distribution costs as well as the 1 million dollar increase and advertising and promotional expense.
Moving to our cash flow and liquidity position, we continue to be comfortable with our liquidity position and confident and our ability to continue to generate cash.
At the end of the third quarter, we had nearly $715 million of cash on hand, and our revolver was undrawn.
Our total debt was more than $2 $7 billion and our net debt to EBITDA ratio was about three five times.
In the first three quarters of fiscal 2021.
We generated nearly $375 million of cash from operations, which is down about $60 million versus last year to the due to lower sales and earnings.
We spent $107 million and capex and paid $101 million and dividends.
In addition, and the third quarter, we resumed our share buyback program and bought back nearly $13 million worth of stock at an average price of just over $77 per share.
Now turning to our current shipment trends.
Please note that instead of providing a comparison to last fiscal year's fourth quarter, we're providing comparisons to the fourth quarter of fiscal 2019.
We're doing this since fourth quarter of fiscal 2020, which includes March April and May of 2020 includes the severe impact of government imposed social restrictions at the beginning of the Covid pandemic.
It was also the height of personal and economic uncertainty for many businesses and individuals.
As such we believe the fourth quarter of fiscal 2019 provides a more meaningful comparison for investors to understand the current condition of our business.
Yeah.
Broadly speaking, we're optimistic about the recent restaurant traffic and significant shipment trends and the industry and the U S and many of our key international markets other than Europe.
U S shipments and the four weeks ending March 28 were approximately 90% of levels during a similar period for the fourth quarter of fiscal 2019.
And our global segment shipments to our large <unk> and full service chain restaurant customers and the U S where more than 85% of fiscal 2019 levels and we expect that rate will largely continue for the remainder of the fourth quarter.
And our foodservice segment shipments to our full service restaurants regional and small <unk> and noncommercial customers in aggregate.
We're approximately 90% of fiscal 2019 levels.
We anticipate the shipments for these customers will largely continue at similar rate for the remainder of the fourth quarter.
Shipments to non commercial customers, which have historically comprised about 25% of the segments volume.
Remained at around half of fiscal 2019 levels.
We expect the shipment rates will likely remain soft for the rest of the quarter and will likely take time to fully recover from free to pre pandemic levels.
And our retail segment and shipments were approximately 110% of fiscal 2019 levels with strong volume growth of our branded products, partially offset by a decline and shipments of private label products.
We believe this rate may gradually decline during the remainder of the fourth quarter as consumers begin to shift purchases of fries to dining of restaurants as governments lift of social restrictions.
Outside the U S overall demand varies by market.
In Europe shipments by our Lamb Weston Meyers joint venture, we're about 85% of fiscal 2019 levels.
Demand has softened over the past few months as governments and some of our larger markets, such as Italy, and France, reimposed strictly stricter social restrictions to combat of resurgence in Covid infections.
In addition, other than in the U K vaccination of air efforts across Europe have lagged well behind rates and the U S. As a result, we anticipate shipments may slow during the remainder of the fourth quarter.
Shipments to our other international markets, which primarily include Asia, Oceania, and Latin America, where approximately 75 per cent for fiscal 2019 levels and aggregate.
As I discussed earlier international shipment rates have steadily improved over the past few months and.
And we expect that will continue during the remainder of the fourth quarter, the government's slowly ease social restrictions and as the current congestion and shipping ports begins to clear up.
For those markets that are currently already operating under more lenient and social restrictions, we anticipate the current shipment rates for those countries will largely remain at current levels.
In short, although Europe is challenging we believe overall shipment and restaurant trends and the U S and most of our international markets will remain favorable as governments continue to rollback, social restrictions and vaccine becomes more widely available.
These trends will keep us on a path of steady progress and restaurant traffic, which we believe will lead to overall frozen potato demand approaching pre pandemic levels on a run rate basis by the end of calendar 2021.
With respect to costs in the fourth quarter, we expect to incur a similar level of incremental pandemic related manufacturing and distribution costs as we did and the third quarter.
We experienced significant disruption and our production facilities transportation and warehousing networks and January and February and this continued into March.
We will realize some of the costs related to these disruptions and the fourth quarter as we ship finished goods and.
Inventory produced during these months.
Now here's Tom for closing comments thanks.
Thanks, Rob let me just quickly sum up by saying, we continue to prioritize and ensuring the health and safety of our employees. During these challenging times by adhering to strict COVID-19 protocols and all of our manufacturing locations and encouraging all of our workers and their families to get vaccinated as soon as possible.
We're confident that the near term pandemic related pressures on our manufacturing and distribution networks are temporary and that our cost structure will normalize and once we get past Covid and in addition, we believe that the investments, we're making and our supply chain will improve our cost structure over the long term.
We feel good about the trends and restaurant traffic and frozen potato demand and the U S and most of our key international markets and remain optimistic that overall frozen potato demand will approach pre pandemic levels on a run rate basis by the end of calendar 2021.
And finally as shown with our investments for our new facility of China and to expand chopped and formed capacity and Idaho, we're focusing on the right strategic and operating priorities to serve our customers and build upon the long term health of the category in order to create value for all our stakeholders. Thank.
Thank you for joining us today and now we're ready to take your questions.
Thank you if you would like to ask the question you may signal by pressing star one on your telephone keypad, if you're using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment. Once again star one for questions and we'll take our first question from Andrew Lazar with Barclays.
Good morning, everybody.
For the Andrew Andrew.
Hi, there.
I know this could be a little difficult, but I was hoping maybe you could.
The us maybe quantify a little bit if you could some of these these incremental COVID-19 costs that had been I know you believe are largely transitory.
And if demand ultimately.
Returns on a run rate basis by the end of calendar year to pre pandemic levels.
I guess would you expect these higher costs under that kind of a scenario to bleed in Q2.
And the beginning of fiscal 'twenty, two is that sort of and expectation. We should have at this point or do we think that if the steady pace of improvement and restaurant traffic continues and it's largely pay for more of a <unk> issue and I was just kind of follow up.
Okay, Andrew its Rob.
In terms of of quantifying. It again, we we did stop breaking that out as of.
Vic and <unk>.
As we viewed it as a more normal I think we started that in Q2 I believe.
But the way I would think about it is that you know what pricing has done.
You know, we've got modest input cost inflation.
And so if you go back historically and look at margins you know that would give you a sense of of what margins should be in a normalized and it.
And it ex the Covid costs and I would argue that that the bulk of any margin difference. There is gonna be related to the COVID-19 costs and so I think you can back into it that way and come pretty close.
And in terms of of of bleeding into.
Q1, again, it's it's going to depend on how quickly we can get people and plants vaccinated and back to normal normal production and operating schedules again, we see demand recovering as we've said by the end of calendar 2021 to <unk>.
Pre COVID-19 levels, and and so and as you'd think about that that tells you of the operating you know the the pull of the demand side ought to be there and so it's back to as long as we can get people and the plants to operate the plants, we should over time get cost back to where they are but.
Again that will take some time to get people vaccinated and get them back into plants and stabilize all of that so I anticipate that certainly into Q4, and we will probably have some bleed over into Q1 as well.
And then.
And just using back of the envelope math and then the comments Robert you gave.
Around sort of the first month trends of of physical for Q2.
Based on that it would seem to suggest maybe sales down around 10% versus the <unk> of 2019 and.
And that sequentially a bit better than what we saw for the two year trend in <unk> and <unk>, but maybe not quite as much as I would have expected given reopening and vaccine rollout and everything else and so I didn't know if.
The math would generally right and as we've got it and and.
And if I'm.
I was maybe expecting the.
Quintal of improvements could be a little bit greater and <unk> then it would suggest.
Yeah, It's a great question, Andrew and I think if you look at it.
Q4 of 19.
Particularly I think and our global business that we it was pretty strong quarters of the comp is tough and and and that one the other one and and and you know of as I mentioned that debt in our foodservice business. We believe there is a bit of restocking going on.
We'll see how that plays out through Q4 of them.
And in actuality, but Ah that that's one where maybe where we're taking maybe conservative perspective on that that makes sense.
Great. Thanks very much.
Yeah.
We will take our next question from Bryan Spillane with Bank of America.
Hey, good morning, everyone. Good.
I'm wondering what are the right.
So just two questions for me was related to the Andrew's question about the sales trends I think in the press release you talked about.
And at <unk>.
U S bars for U S.
Right.
And that 85 per cent of prior year, and I think that's down right and if it was running at 95%.
The reported the second quarter.
And is that true would be is there something and the comps are just what's happening there and that that would be.
Maybe.
And the slowdown or is the slowdown to get you that.
Yeah, I think the that again that goes back to the the comp back to 19.
If you look at the global and and so the the comp.
Comp to 19.
And again at Q4, and 19 being a particularly strong quarter in and the global business unit.
Okay.
Okay.
Okay.
Hey, Brian Hey, Brian It's Dexter.
In short we don't.
And see a slowdown versus if we think about it.
Q3, Q4 sequential I mean, the he was in the North American business is all of them as well.
Net.
And the second question could you give us a debt.
And now and for it and I know what the.
Great measure is the Covid impact.
The production rate, whether it happens absenteeism and you didn't utilize it.
These rates are.
It seems like it.
And did make for a little bit more than you expected at some point, there and that the third quarter and just trying to get a sense of like clearly stated.
I did.
All or are you still pretty much the same.
The level of the theater.
The.
And that you were or anything of the third quarter.
Hey, Brian This is Tom I would say and it is improving we have taken a number of actions several weeks ago.
And to encourage our employees to get vaccinated.
And you know, though we are seeing improvement and you know the thing Rob talks about it and in his prepared remarks, the thing that debt.
You know I made the decision that we're going to service our customers. So the.
That is causing as we take the plants down like Rob said were moving things around and it's very natural for US right. Now. This is this is not a systemic problem. This is the short term issue that will continue to manage through you know, but we've got the right team focused on and of course corrective actions.
And you know, but there is adjustments every week all production and that that's a decision it's right for the company, it's right for the service our customers for the long term.
But it is improving and you know I think as as the employees and and people will get vaccinated and you know, we're still fall and our protocols of the plants to keep the employees safe.
But you know we are seeing improvement and it will congratulate improve and and I suspect you know we get into summer and we should be and pretty good shape close to the normalized run rates.
Alright, Thanks, Tom Thanks, Rob.
Uh huh.
Thank you and we'll take our next question from Chris Growe with Stifel.
Hi, good morning good.
Good morning, Chris and just high.
Hi, just had a question for you if I could ask first about the international performance and really more focus more of the outlook you'd indicated that you know the Europe I guess I understand given there's been some incremental.
The restrictions there, but and some of those would you call. The other key markets and you think about Asia, and Oceania particular, and the Latin America being a little weaker right now given the restrictions and those markets, but the run at 75 per cent of for Q2 levels and I was surprised of that degree of decline or lower level of shipments and you just want to understand kind of how is the you mentioned China.
And very strong and there are other markets that are that are weighing on that especially in the Asia region that maybe the resulting in the weaker performance overall.
Yeah, the system's rock the.
And in particular, the Philippines is a little bit light, but we've also had some some business shifts we've moved some of the business that has come through our top line historically, we've lived for Lamb Weston Meyer.
And so some of Thats just shipped within our overall platform.
As part of it but but the the <unk>.
Other piece that just in the near term that's playing a little bit of a role is as the port issues and some of the logistics challenges you've seen more globally, where where you know getting containers available and so on and so forth is having an impact we think that will clean up but the but that's also having an impact on on those volumes.
Okay.
The port of she was an issue of the quarter of more of an issue going forward and Q4 going for it.
Well, it's certainly an issue and the quarter to some degree with exports.
But going forward, it's not cleaned up yet.
And you know where and the same boat as everybody else, who is export and out of the Florida Seattle and.
And in the West coast ports that are container availability and and and shipper liabilities. So we'll see a bit of what we think into the end of this quarter as well.
Okay, and then there was some of some the.
The reports recently about the potato costs being down from this current crop and I know that can vary by region and the state and whatnot I just wonder I wouldn't get the just the overall since and we're gonna get a better update on the the crop conditions going forward, but can you talk at all about whats been reported at least the.
Potato costs could be down a little bit and from the from this coming crop.
The address this I.
And as I always do in July and October Chris I'll update you on the overall crop condition acres yield all of those kind of things and I differ on the overall contract pricing as we are all the way it closed yet I understand the various reports out there, but I I will address.
And that.
In July as I always do.
Okay. Thank you for the Yep.
Yep.
Thank you and we'll take our next question from Adam Samuelson with Goldman Sachs.
Hi, yes, thanks, good morning, everyone.
And I'm running out of them.
Hi, So I guess.
I was hoping on the the cost issue and.
In the quarter.
And I, Tom Robert I appreciate that it was kind of a whole cascade of things that kind of snowball on themselves.
And any way to disaggregate.
Some of the and then Dimensionalize some of those individual pieces in terms of the incremental freight expense kind of unplanned downtime and fixed cost under absorption and I'm just trying to make sure we're sensitive to the kind of how it really impacted the margin performance and.
And where some of that may continue into the upcoming quarter, we can be sensitive from.
Larry and get that impact and then taking that impact of that if we get into the fiscal 'twenty 10 of 23.
Yeah, I think it's it's tough to I mean, obviously, we've got the data internally, but I don't I don't want to start down the path the path of disaggregated that and don't have an update on the I guess, what I would say is that that it it.
It all stems from.
You know not being of our staff and operate those lines because of Covid and so it's that cascading effect and so there's there's nothing systemic and and the and the operating costs there that I would call out. It's it's it's it's really that one time or the the the temp.
The impact of the Covid on the transportation side again, you know the the the shifting around from rail to truck and works for trucking and so forth that's temporary as well driven off of that same issue, but I would point that that there is general and transportation.
Cost inflation going on and so and so as we go we contract freight you know for for the coming coming periods I think we like everybody else from and as you bring cost increase.
Hey, Hey, Adam It's you know yeah, we have tried to step back from giving up on.
The specific numbers are of course, we've got the data internally, but it's just one of the things that.
How much is really specific to called Covid, and the and things like and places that might it might not be so we just try and be careful in terms of.
And doing that and trying to for that I kind of going forward because of this isn't a precise science at the end of the day, but.
The three biggest drivers plus the inflation on R. R.
And our Cogs so.
And it's tough to give you a sense of how much of the specific to each of them to be.
The dry dock, so sorry about that.
Okay, Alright, and maybe we'll circle back with that one.
And follow up question was really on the on the the new China plant and just.
Thinking about the timing and market impact and.
Is that do you think if we look at that when it comes online and that is.
As the market is there sufficient market growth in China that that wouldn't actually need to displace imports and that the market growth.
And it could be there could.
And could absorb that while the important number of stays roughly the same or how do you think about the knock on effect of the kind of plans in terms of very important and how that would have to get back for the U S.
And it absolutely.
The tender of our long term strategic plan and China is a big market. It's the $1 billion billion, one pound of its figure of one of 10% to 15% annually and for a number of years, we expect that growth to continue and you know a lot of the bigger.
Bigger customers are expanding their store for us and continue to do so.
And you know sort of the you know the plants kind of take about two years come on line.
And you know Adam it gives us flexibility of the shift.
Current export production, two and country, which is another strategic reason.
To build that plant and we're committed to China and will be committed to a long term, but it is again as the geographical flexibility to our overall operating network around the globe and you know, but it's two years out. So these things you've got to think through what the categories kind of look like of two years and some of these markets and.
Well you got to.
Investing in it and that's part of one of our strategic pillars is to continue investing in this company for the long term and we'll continue to do that.
Okay, Great I'll pass.
That's not true.
Thanks, Ed.
We'll take our next question from Tom Palmer with Jpmorgan.
Good morning, and thanks for the questions.
Good morning.
I appreciate that it's not to be overly precise but I wanted to ask you about year and segment mix expectations and you noted the volume could be back to pre pandemic levels by the end of the calendar year. How are you thinking about the mix between global foodservice based on what you're seeing from customers do you think the both segments could upper.
Roche free pandemic volumes or should we be thinking about a shift towards the global side.
Yeah. This is Tom and I expect you know at the end of the calendar year based on.
You know some of the data we look at things were.
And we're projecting you.
You know of foodservice to be back to pre pandemic levels and.
And you know as.
As we've seen markets and the U S. Not all of them open up and just lift restrictions.
We've seen them the approach or get pretty darn close to pre pandemic levels.
Now the.
We need some time to work through.
Overall, the consumer behavior of going back to eat of restaurants or over a longer period of time.
But that gives me confidence it you know there's some there's some pent up.
Demand for the restaurants, and our foodservice segment and I think we will get back to the old.
Go back to pre pandemic levels by the end of calendar year, and and you know the.
Thanks will.
Cell line to where it was before all of this happened in terms of segment.
Okay, and thanks for that really helpful and and then I had kind of a different type of index.
So you you noted mixed headwinds from a pricing standpoint, and both global and foodservice during the third quarter, we're lapping some pretty big Mac mixed headwinds a year ago, and the fourth quarter and and here you are a month and with improving volume trends should we think about mix kind of swinging to a tailwind as we think about the fourth quarter.
Yeah, and I you know the.
And obviously, there is going to be a significant mix change versus.
The Q4 of last year, which everybody knows where the the deep and of the.
And the pandemic.
You know so the the foodservice, we expect foodservice trends improve globals and I'm.
Pretty steady state and growing the pre pandemic levels and retail if you recall last year of retail Directionally was up like 150%.
That's kind of taper off.
Q3 of the 105 to 115 roughly.
So the mix shift for us will be scaling back to I call. It a more normalized segment mix.
You know and Q4.
Okay. Thanks, guys.
Thank you and we'll take our next question from Rob Dickerson with Jefferies with Jefferies.
Alright, great. Thank you very much hum.
And just a question around capacity and the stream and they don't figure of the people.
Obviously, we need the China, a little debt.
And I guess, the combined solve the kind of if you were talking about today.
And just kind of shifting maybe some volume and to some less efficient plants.
You should and should we take the shine and that's the kind of as a kind of go forward.
The use of cash as you think about incremental capacity versus potentially looking at some of your footprint within the U S and maybe.
And now making some of those plants more modernized so to speak and more efficient.
Uh huh.
Terms of.
China and use of cash.
You know that's sort of the that's.
And we're evaluating that.
And the the way the way to think about our North America footprint as we have we've had of continual monetization program for you know 510 years. So we're upgrading of these plants with the latest technology, there's a certain amount of maintenance. We do every year, we're committed to for for.
Food and safety and people safety and and some of the bigger equipment, that's as we replace it.
And you know just in terms of overall capacity and the industry.
You know I think about the category.
Two to three years out and.
And based on our projections on the Cat us category growth overall, and that's what drives a lot of our decisions in terms of investing because we got to make a decision now for what we think is going to happen of two two and a half of years and.
And that's the way, we've always operated and I think.
You know I think the category will come back by the end of the calendar year on all of the normalized run rate basis, and I believe it's going to return to growth and you know the things that we're going to do.
And the near term is make sure were positioned.
To capture our share and capture the growth and service, our customers and and continue to evaluate the footprint and and the cost competitiveness of our footprint and the marketplace and that will drive that will drive the investment decisions and.
You know going forward here and the next 12 to 15 months.
Got it okay. So I mean for for now obviously, it's a kind of wait and see where the growth.
And it goes in the next 12 months and it sounds like the footprint for nine hours.
The good right, but it's not really of needs necessary to lead and to the U S side with the incremental capacity.
The district and its Greg.
And that's obviously the use of cash potential going forward over the next two years.
Yeah, I'll jump in and I think about it this way.
Well you got to think through the book the next two years to three years of the categories and Gotta look like.
I'm not going to sit and wait and see what happens.
And what we're gonna make some decisions and and potentially move some things forward and get ourselves ready for what for the next two three years. So we have available capacity to meet the demand and the category growth and service our customers just like we have been and the pass you know we make decisions now anticipating all of two and three years is going to look like.
Yeah fair enough. Thanks, a lot I appreciate it.
Okay.
Thank you as a reminder, star one if you'd like to ask a question. We'll take our next question from Jenna Giannelli with Goldman Sachs.
Hi, there. Thanks for taking my question and I, just kind of follow up on and on the China plant.
Did you talk or have you talked about the cadence of the Capex and that you're planning here and then just in terms of the impact you know potential.
And anything that you can point to from maybe past examples where you've expanded capacity and the type of alcohol benefit from a margin standpoint.
Okay.
Yes, Jana we have not talked about the cadence of of of that the cash.
Cash capex spend there again, it's $250 million and it'll take us about two years.
To get it and and and you know again.
And you've got lead time order on equipment, and and progress payments against that and so I think you know to some degree that it's going to be the bulk of it's going to be.
A big chunk of the spend is going to be in next fiscal year and then following into the.
And the last several months before startup there. So some of it will be this year, but for the bulk of and it's gonna be and next year and into the following year in terms of efficiencies.
Clearly, we're going to gain technical.
Efficiencies and areas like recovery, but there are so many variables that go into that clearly the labor cost are lower in China, and then they would be and the U S. But you know you get some offsets and some other things but.
Clearly, we'll gain some efficiencies there I will tell you the that the folks who have been running our existing plant and Chengdu and we've done some debottlenecking there to service growth there have done a great job of managing those assets and and.
And and and extracting the real value out of them. So we're very confident and the team there and their ability to deliver when we give them the new asset to work with.
Okay perfect. That's super helpful and I just have one more if I can and I know that you mentioned that you may have seen it's hard to gauge the from pull forward of demand from your food service customers and at Empress.
Operating for what Youre expecting and more demand.
From your standpoint, how are you thinking about working capital requirements and the NAND ramps for you and namely.
And kind of at the food service and through electric and the global Bank.
Thank you.
Yeah, I think if if if you think about the the ramp up and that you know just look at the demand looking at our DSO Hum on the receivable side and.
And and what it's been historically and we will ramp back up to those kinds of of of.
You know levels and our foodservice so that debt. That's what we anticipate is it will just get back and kind of normal DSO levels. When you get to year end and you know you don't carry through for the receivables number.
Thank you, we'll take our final question from Carla Casella with Jpmorgan.
Hi, and one five on the cost of question have you can you give me a sense for how much of your total comp is and.
The feed grade oil and have a great oil.
Just kind of on unless Youre. Just go ahead and no we havent Carlisle and let me.
Let me take that we don't give the specific on that.
What we have said on Cogs.
Breaking down.
Normal environment about you know roughly a third is raw potatoes.
Roughly another call it 20% to 25% is gonna be accommodation and in no particular order here of <unk>.
Notable oil packaging and miscellaneous ingredients and the remaining you know call. It 40, 45% again in no particular order here of combination of fixed overhead conversion costs, which is largely the labor.
Fuel electric power and water and.
And then finally transportation and warehousing.
And I'll break it down any finer than that.
Okay, Great and that's helpful. Thank you.
That will conclude our question and answer session. At this time I would like to turn the call back over to Mr. <unk>.
Oh boy for any additional or closing remarks.
Hi, everybody appreciate the the time of day and listening to the call any follow up questions and I need to speak.
The thing to do the pop me an email that we can get scheduled time and have a good day everyone. Thank you.
That will conclude today's call. We appreciate your participation.
Okay.
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Uh huh.