Q4 2021 Lamb Weston Holdings Inc Earnings Call

[music].

Please standby.

Good day and welcome to the Lamb Weston fourth.

And fiscal 'twenty 'twenty 1 earnings call. Today's conference is being recorded at this time I would like to turn the conference over to Dexter <unk> VP Investor Relations of Lamb Weston. Please go ahead.

Good morning, and thank you for joining us for Lamb, Weston and fourth quarter and fiscal 2021 earnings call.

This morning.

Quarterly 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.

Please refer to the cautionary statements.

As 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.

Non-GAAP financial measures should not be considered a replacement for and shouldn't be congrats 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.

Robert <unk>, our Chief financial Officer, and bad debt might be on our CFO designate Tom will provide a brief overview of fiscal 2021 as well as the current operating environment.

Rob will provide some details on our fourth quarter results and burn debt will discuss our fiscal 'twenty 2.

And risk book.

With that let me now turn the call over to Tom.

Good morning, and thank you for joining our call today, let me start by saying that I'm proud of how the entire Lamb Weston team stepped up this year to navigate through the most challenging operating environment and our company's history.

We took necessary steps across our organization to focus on the health and wellbeing.

And 2 of our employees, while continuing to focus on supporting our customers at the same time, we continued to make timely investments to execute on our long term strategic objectives.

For our larger customers and our global and foodservice segments, we worked through production and distribution challenges to maintain customer service levels and support them.

And being managed through near term volatility and demand and inventories and we also partnered with several large change usr's broaden their menus with new products and limited time offerings and to position them for a more aggressive set of offerings and a post pandemic environment.

And our foodservice segment, despite lower volumes in the.

Zimmer, we maintained our direct sales force that services independent restaurants, we believed it was important and continue to invest and knee sales capabilities to provide these customers with uninterrupted support as they adapt to day capacity restrictions and new operating models.

Net investment is now paying off as sales of Lamb Weston branded products.

Products have rebounded.

And retail the surge in food at home consumption. During the pandemic provided a strong tailwind to our branded portfolio each of our Alexia grown in Idaho and license restaurant brands gained share as compared to pre pandemic levels.

Our branded portfolio market share in Agra.

Aggregate has nearly doubled in the past 5 years and we've significantly close the gap with the leading branded competitor, including what we produced for private label retail customers. We are now the clear leader and the category.

And our supply chain, we're making some significant investments to support long term growth and profit.

Profitability.

First we began construction of a new chops and form a line at our facility and American falls, Idaho that will be available on spring 2022.

Second we announced major capacity expansion projects in China, and the U S. We expect both lines to be operational and the next couple of years, which will have.

Is well positioned to support market growth and.

In addition through our joint venture and Europe, Lamb Weston Meyer, we announced a capacity expansion project in Russia, and just this morning, a 400 million pound expansion and the Netherlands.

And these 2 expansions will be focused on supporting continued growth and their respective primary markets.

Finally, we began to implement our winters, 1 series of safety quality and productivity initiatives and our manufacturing facilities and across our procurement transportation and distribution networks.

This is an ambitious program that adopt and Taylor's lean manufacturing and other productivity tools that have.

It's actually used by other world class manufacturing organizations.

We're excited about how these initiatives will further strengthen our lamb Weston operating culture of continuous improvement and drive financial benefits it should enhance margins and cash flow over the long term.

We're targeting up to $300 million of gross.

And then 6 activity savings by reducing variable cost and waste, while also increasing potato and asset utilization.

We're also targeting up to 300 million pounds of incremental capacity from Debottlenecking and other tools to increase throughput on existing assets to put that into context 300 million pounds is equivalent.

Quibbling to a new production line.

And finally, we're targeting up to a 10% reduction and finished goods inventory, while continuing to target high service levels and case fill rates.

As I mentioned these are long term targets, we expect benefits from the win as 1 initiatives to gradually build as they become.

Gross protocol.

Across the entire supply chain organization.

We completed the initial phase of a new enterprise resource planning system early in the year. However, we deferred the second phase, which would have had a more direct effect on our manufacturing facilities.

Fully and time when those operations, we're managing through pandemic related disruptions.

We continue to map out phase II and expect to begin implementation later this fiscal year. This project will tie into our winters, 1 initiatives to provide better data and systems and drive more efficient execution.

So although.

And adults and physical 2021 were somewhat choppy due to the pandemic, we focus on the right near term priorities, while making sure. We continue the pursuit of our long term strategic objectives.

The pandemic showed the resilience of the category and our business model with demand and most of our foodservice segment channels.

And though obviously offset by the performance and <unk> and at retail.

Our operating cash flow and financial liquidity, where solid enabling us to invest and the infrastructure to support growth opportunities.

As a result, I am confident that we are well positioned to drive sustainable profitable growth and create value for our.

<unk> <unk> over the long term.

Now turning to the current operating environment.

While the pandemic continues to impact people and economies and the U S and around the world. We believe the worst of its direct effect on our business restaurant traffic and French Fry demand is behind us.

We're encouraged by the pace.

Stay covering and restaurant traffic and the U S. While overall restaurant traffic remains below pre pandemic levels. It's recovered much of the loss ground and continues trending and the right direction.

And may USR traffic was down low single digits versus pre pandemic levels, which is a modest improvement.

Versus what we saw earlier and the year.

The larger <unk> chains have been generally outperforming small and regional ones with chicken based chains outperforming more burger oriented chains.

Overall traffic at full service restaurants, and May was still down mid teens as compared to pre pandemic levels.

But that's a significant improvement versus down mid <unk> that we saw just a few months ago.

This reflects fewer social restrictions and consumers increase willingness to eat on premises.

What's helped to offset the effect of lower restaurant traffic during the year has been and increase in free attachment rate.

Simply put this is the rate at which consumers order fries when visiting our restaurants.

The increase and free attachment rate has been largely consistent through most of fiscal 2021, and we believe that rate may have some staying power.

We believe that a free orders continue at the higher rate as restaurant traffic normalizes it would.

With a meaningful amount of additional volume day.

And in the U S annually.

The increase in free cash, but rate and part helps to explain how our shipments and most of our key restaurant and foodservice channels have already reached or are close to pre pandemic levels on a run rate basis. Despite restaurant.

On traffic not yet fully recovered.

Our shipments to large DSR change essentially reset level last fall as customers leverage drive through and delivery formats.

Shipments to commercial customers and our foodservice segment have essentially return in aggregate to pre pandemic levels.

<unk>, 2 and the last few months behind strength, and small and regional <unk> as well as independent restaurants.

The recovery and shipments to our non commercial foodservice customers, which include lodging and hospitality healthcare schools and universities.

<unk> and entertainment and workplace environment.

<unk> continues to lag that and restaurants however.

However, we expect the rate of improvement will steadily increase through the fall, especially in our education lodging and entertainment channels.

While restaurant and foodservice demand continues to recover demand and the retail channel continues to be strong.

And may volumes.

<unk> for the category, we're 15% to 20% above pre pandemic levels and our shipment of branded products were in line with those trends.

However, we expect category growth will likely slow as it lapped strong prior year results and has consumer step up food away from home purchases.

We have seen these factors are.

And to play out and the fourth quarter and and the first couple of months of fiscal 2022.

In short we feel good about the frozen potato category and the U S because of increasing strength and restaurant and foodservice channels as well as continued solid performance and retail as a result.

Begin confident that overall U S. Fry demand will return to pre pandemic levels on a run rate basis by the end of calendar 2021.

Outside the U S and more complicated story, while demand has improved and Europe and our key international markets pace of recovery has been much more uneven and generally behind.

Behind that and the U S. As a result of slower vaccine availability and rates and.

In addition, the spread of Covid variance in many markets has also led governments to delay lift to delay lifting and in some cases reimposing social restrictions, which has further increased volatility and demand and <unk>.

<unk> at the timing of recovery.

Overall, we expect the pace of recovery outside the U S. We will continue to vary with Europe, and the developed markets and Asia, continuing to generate gradual improvement and demand.

We expect the pace of recovery and emerging markets in Asia, Latin America, and the middle east to be more.

More volatile and take a bit longer.

With respect to supply chain and our cost environment.

As with the pandemic impact on Fry demand, we believe the worst of its effect on our supply chain is also behind us, we're making progress and stabilizing our manufacturing operations with a number of production days and throughput and most of our plants.

During the fourth quarter, improving on a year over year basis, as well as sequentially versus the third quarter.

However, we are not yet consistently operating at targeted levels across our network and it will take some time as we gradually returned to operating at normalized levels.

And the near term we will realize.

Incremental costs and inefficiencies incurred during and since the fourth quarter as we sell finished goods inventory and the first half of the year.

Going forward, the lingering effects of the pandemic and the sharp recovery of the broader economy and the U S has disrupted supply chain operations across all industries, including ours, which.

As a result of and increased costs.

As a result, we expect input cost inflation, especially for edible oils packaging and transportation to be a significant headwind from physical 2022.

Our goal is to offset inflation use a combination of levers including pricing.

To that and we just began.

Implementing broad based price increases and our foodservice and retail segments and.

And don't expect to see the most of their benefit until our fiscal third quarter.

Before I turn the call over to Rob Let me review a couple of items first a few words about the current potato crop.

We have recently begun processing early.

Total varieties and the Pacific Northwest and early indications are that the recent high temperatures in the Pacific Northwest did not have a negative impact on yield or quality.

With respect to the main crop that we harvest and the fall. We expect the recent heat waves may have some negative effect on yield and.

Early <unk>, but it's too early to tell.

We will provide our usual updates on the crop and we report our first and second quarter earnings.

Second as you May you may have seen last week, we announced an expansion of our facility and American falls, Idaho, which will add about 350 million pounds and French Fry capacity.

Quality of investment of around $450 million over the next couple of years is for a new production line as well as to modernize the infrastructure at the facility.

We anticipate starting up the new line by mid 2023, just as we expect capacity will be needed to support demand growth.

So in summary.

While this has been a challenging year I am proud of how the team has navigated through the pandemic impact and remained focused on supporting our customers and the near term while continuing to execute on our long term strategic priorities.

We're pleased by the strong recovery and demand in the U S.

S and continue to believe that it will be back to pre pandemic levels on a run rate basis by the end of calendar 2021.

And finally, while on our supply chain is not yet operating where we wanted to be I am encouraged by the improvement that we're making towards getting back to normalized levels as well as the actions, we're taking to offset input cost.

Inflation.

Finally, as we announced a couple of months ago, Rob will be retiring after more than 4 years with Lamb Weston as part of the leadership team. He has been instrumental in setting up Lamb Weston as an independent company and creating a world class finance and it organization.

With this.

Experience and manufacturing companies and capital markets, along with his insights into the business Robert has been a valuable voice as we drove growth broadened our global footprint and navigated through the challenges of the pandemic.

Okay.

As you know Bernadette will be succeeding Robert CFO on August 6 after.

As fast as our controller since just before the spin.

And it's been a key member of the leadership team from the beginning and has and has had a hand and all our major decisions and initiatives.

This succession has been long plans and we expect a smooth transition.

So I just wanted to say, thanks, Rob for being part of the Lamb Weston and <unk>.

Serving on grateful that Bernadette stepping into your new role.

And with that here's Rob to review, our fourth quarter results.

Thanks, Tom and good morning, everyone.

Overall, we delivered solid top line results and the fourth quarter and as demand trends improved.

While our earnings continued to reflect.

Family Amex disruptive impact on our supply chain as well as higher inflation.

Specifically in the quarter sales increased 19% to more than $1 billion, which is a company record for the fourth quarter.

And within about $10 million of our best quarter ever.

<unk> volume was up 13% and price mix up 6.

Excluding the benefit of the extra selling week last year net sales increased 28% and volume was up 21.

The sales volume increase largely reflected the strong recovery and demand in the U S.

Especially on full service restaurants, as well as improvement and some of our key international markets.

It also reflected the comparison to soft shipments last year due to the pandemic, which included the impact of customers significantly destocking inventories as they adjusted to the abrupt change and the operating environment.

The increase and price mix was driven by favorable price and mix and each of our core business segments.

For the year net sales, excluding the benefit and the 50 <unk> week last year was down 2% with volume down 6 and price mix up 4.

Gross profit.

Profit and the fourth quarter increased $87 million, driven by higher sales and lower supply chain costs on a per pound basis.

The overall reduction and cost per pound as compared to the prior year was largely driven by lower incremental cost and inefficiencies related to the pandemic disruptive impact.

Moving on our manufacturing and distribution operations.

And also includes a $27 million year over year benefit from unrealized mark to market adjustments as well as the absence of a $14 million write off of raw potatoes that we incurred last year.

The reduction.

And per pound cost was partially offset by inflation for key inputs, especially for edible oils and packaging.

Canola oil prices in particular have nearly doubled and the last 12 months.

Our transportation.

<unk> costs were also up sharply.

While we've reduced pandemics.

Dream disruptive effect on our distribution network, we continue to use and unfavorable mix of higher cost trucking versus rail as we took extraordinary steps to maintain and customer service levels as demand turned up sharply.

However, the significant increase and our transportation cost was also.

Driven by inflation as rail trucking and ocean freight suppliers, all struggled to keep up with demand and as economic activity Serge.

Moving on from cost of sales.

Our SG&A increased $19 million and the quarter.

The increase was largely driven by 3 factors.

First it reflects higher incentive compensation expense, which was significantly down and the first quarter fourth quarter last year after the pandemic hit.

Second and reflects investments, we're making behind our supply chain productivity commercial and information technology initiatives that should improve our operating.

Operations over the long term.

And third and includes an additional $3 million of advertising and promotional support behind the launch of new branded items and our retail segment.

Equity method earnings were $10 million, excluding the impact of the unrealized mark to market adjustments equity earnings.

<unk> increased $14 million versus the prior year.

Higher sales volumes compared to soft shipments in Europe, and the U S last year as well as lower manufacturing cost per pound drove the increase.

Diluted EPS and the fourth quarter was <unk> 44, compared to a loss of 1 and the prior.

The increase reflects higher sales and income from operations and equity method earnings.

For the year adjusted diluted EPS was $2.16.

Adjusted EBITDA, including joint ventures was $166 million, which is up 80.

$88 million.

The increase was driven by higher sales income from operations and equity method earnings.

For the year, adjusted EBITDA, including joint ventures were $748 million down $51 million.

Moving to our segments sales for our global.

Year.

Which generally includes sales from the top 100, North American based <unk> and full service restaurant chains as well as all sales outside of North America were up 19% and the quarter with volume up 16% and price mix up 3 <unk>.

Excluding the extra selling week last year sales.

Segment, 28% and volume was up 24.

The volume increase largely reflected the year over year recovery.

And demand, especially at large chain <unk> and full service restaurants, and the U S shipments to these customers in the aggregate have essentially returned to pre pandemic levels.

Increased shipments to customers and our key international markets also increased and the aggregate, but remain below pre pandemic levels as demand recovery continues to lag the U S and some of these markets.

In addition, traffic and logistics issues affecting ports, along the west coast hindered our export shipments in the quarter.

Yes.

The 3% increase and price mix reflected the benefit of inflation, driven price escalators, and our Malta, and our multiyear customer contracts as well as favorable customer mix.

Global's product contribution margin, which is gross profit less A&P expense increased 68% to 56 million.

<unk>.

Higher sales volumes favorable price mix and lower manufacturing and distribution cost per pound drove the increase.

Sales for our Foodservice segment, which services North America, and foodservice distributors and restaurant chains generally outside the top 100, North American restaurant customers.

Increased 82% with volume up 64% and price mix up 18.

Sales increased 94% and volume Rose 74, excluding the benefit of the extra selling week last year.

The strong increase in sales volumes largely reflected the year over year recover.

Recovery and shipments to small and regional restaurant chains and independently owned restaurants as governments further use social restrictions.

The increase also reflected a comparison to soft shipments and the prior year quarter as customers significantly destock inventories.

Our shipments to non commercial customers.

<unk> increased at a more modest rate.

And currently remain at about 2 thirds of pre pandemic levels.

As Tom noted, we expect the rate of improvement to steadily increase through the fall as travel and lodging continues to ramp up and as schools and universities returned to full capacity.

Overall.

Shipments, but by our foodservice segment exited the quarter at around 95% of pre pandemic volume.

The increase from the segments price mix largely reflected the benefit of favorable mix from higher sales of Lamb Weston branded and premium products as you may recall sales.

All these products declined sharply in the fourth quarter of fiscal 2020.

And as customers, which primarily included independent restaurants, destock inventories or traded down to more value added value oriented products. During the early days of the pandemic.

Since then our direct sales force.

Are the only rebuilt shipments of Lamb Weston branded products close to pre pandemic levels.

Food services product contribution margin rose, 127% to $96 million higher sales volumes favorable price mix and lower manufacturing and distribution cost per pound drove the.

Sales for our retail segment declined 28% with volume down, 30% and price mix up 2%, excluding the extra sales week last year sales declined 22% and volume declined 24.

We expected this decline as it was against a very strong fourth quarter and fiscal 'twenty.

As Stephanie which included weekly retail sales for the category that we're up around 50% on average as consumers switch switched consumption patterns due to government imposed stay at home orders.

The decline in sales also includes the loss of certain low margin private label volume, which will continue.

<unk> thousand and headwind through fiscal 2022.

With social and on premise dining restrictions largely lifted and the U S consumer consumption patterns have begun to swing back towards restaurants and away from and away from home outlets. Despite this trend the frozen potato category at retail.

<unk> remained strong.

Overall category sales are currently up about 25% from pre pandemic levels and each of our branded equities continued to outperform the call it the category.

The retail segments price mix increased 2%, reflecting favorable mix benefit of our <unk>.

<unk> business.

Retail's product contribution margin declined 32% to $21 million lower sales volumes and a $3 million increase and A&P expense to support the launch of new products drove the decline.

Moving to our cash flow and liquidity position.

Branded continued to generate solid cash flow, even while the pandemic severely impacted demand and.

In fiscal 2021, we generated more than $550 million of cash from operations, which is down about $20 million versus last year due to lower sales and earnings partially offset by.

Working capital.

We spent $161 million and capex paid $135 million and dividends and bought back nearly $26 million worth of stock at an average price of just over $78 per share.

We continue to be comfortable with our liquidity position and at the end of.

Of our fiscal year, we had nearly $785 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, including joint ventures ratio was 2.6 times.

Before turning.

The call over to burn a debt I want to thank Tom and the entire Lamb Weston and family for letting me be part of the team.

It's been an incredibly rewarding experience and I know that this team will continue to drive the company's success.

In terms of my successor, I've, known and worked with burn of debt for around 20 years on and off.

And I expect that Youll find that C&I approach things in many respects with a similar mindset.

As Tom said, she has been deeply involved and all of the key decisions and Lamb Weston and that's certainly true and developing the broader finance team and strategy.

And I'm excited for Bernadette step into the role and see the impact that I know she'll deliver.

Now here is born of debt to review our fiscal 2022 outlook.

Thanks, Rob and good morning, and I look forward to meeting everyone in the coming months.

As you've heard this morning, we feel good about our top line momentum in the past couple of quarters and expect that to continue and fiscal 'twenty 'twenty 2.

For the year, we expect sales growth will be above our long term target of low to mid single digits with the drivers of that growth being somewhat different and the first half versus the second.

For the first half, we expect growth to be largely driven by higher volume. Although we also anticipate that overall price mix.

Will be positive.

The expected volume increase reflects the continuing recovery and demand in the U S and our key international markets as well as the comparison to a relatively soft shipments during the first half of fiscal 2021 due to the pandemic.

For the second half of.

We expect our sales growth will reflect more of a balance of higher volume and improved price mix.

While the volume drivers should be similar to those and the first half the benefit of the shipment comparisons will be less pronounced, especially late in the year.

Pricing and the SEC.

And second half will benefit from the broad based actions and our foodservice and retail segments that became effective in mid July but won't be mostly realized until our fiscal third quarter.

Price and the global segment and the second half should also benefit from price escalators built into multi year customer.

The year agreements.

In addition mix should benefit as our shipments continue to steadily recover and some of our noncommercial channels and our foodservice segment.

And as Tom mentioned, we continue to expect overall U S. French Fry demand will return to pre pandemic levels on.

And rate basis around the end of calendar 2021, which is essentially the beginning of our fiscal third quarter.

Okay.

With respect to earnings we expect adjusted EBITDA, including joint ventures, and net income to gradually normalize as the year progresses.

But.

On a runny pressure during the first half by a step up and input and transportation cost inflation as well as some residual effects of the pandemic disruptive impact on our manufacturing and distribution operations.

As we noted earlier, we believe the worst of the pandemic impact on our operations.

Operations is behind us so.

So we expect these near term cost pressures will steadily ease as we progress to the second half of the year.

As you May recall, we generally hold about 60 days of finished goods inventory.

So production costs that we incurred within the law.

Last couple of months are held on our balance sheet until the inventory is sold.

Accordingly, we already have a good idea about the expected impact on our fiscal first and second quarter results from the disruption and our manufacturing assets in the past few months.

We expect inflation to be a headwind throughout fiscal 2020, 2 especially in the first half of the year.

As Tom noted, we expect volatility and the broader supply chain and the overall economy continues to recover from the pandemic impact.

We believe this will contribute to significant.

<unk> inflation for key inputs and.

Especially edible oils and transportation and packaging continuing the trend that we began to see during the latter months of fiscal 2021.

That said, we're pulling a combination of levers, which made collectively offset most of the beef inflation.

<unk> pressures.

First theres pricing as we've discussed we began implementing a round of broad based price increases and our foodservice and retail segments a couple of weeks ago.

These increases generally take 3 to 6 months to be mostly realized and.

And the market.

And will therefore lag the impact of inflation by a couple of quarters.

We're also not ruling out the possibility of subsequent rounds of price increases based on the pace and scope of inflation.

And our global segment, we're in the middle of negotiating contracts for our.

Customers and the result of those discussions including price won't be known until later this year.

However, we will continue to benefit from inflation driven price escalators built into multiyear customer contracts.

Second there's mix as I also mentioned earlier.

Earlier, we expect a continued recovery and shipments to customers and higher margin foodservice channel.

And third we expect to steadily drive increased productivity.

With our witness 1 lean manufacturing initiatives.

So while the ongoing impact.

Fact of the pandemic is uncertain. We expect these levers together may largely offset inflation and allow us a more stable manufacturing and distribution operations.

Will enable us to improve gross profit during the second half of fiscal 2022.

We expect that some of this improvement will be offset by continued investments and our supply chain commercial and operations, especially in the first half of the year vs.

These investments will increase our operating expenses and the near term.

But should improve our ability to support growth and margin.

And over the long term.

In addition to our operating targets, we anticipate total interest expense of around $115 million.

We estimate our full year effective tax rate of between 23, and 24% and expect total depreciation and amortization expense.

Will be approximately $190 million.

And finally, we expect capital expenditures of $650 million to $700 million, depending on the timing of spending behind our large capital projects.

This capex amount is high relative to our past annual levels.

And it's largely a function of growth capital to complete the construction of our chopped and formed line and Idaho as well as to begin construction of new French Fry lines, and Idaho and China.

It also includes capital associated with the second phase of our ERP implementation.

So and some mixed.

We expect net sales growth for the year will be above our long term target of low to mid single digits with growth largely driven by volume and the front half and more of a balance of volume and price mix and the back half.

We expect adjusted EBITDA, including joint ventures will growth.

Sir.

With earnings pressure and the first half and gradual improvements towards more normalized results and the second half as operations stabilize and price mix improve.

At this time, we're taking a prudent approach by not providing a specific earnings growth target given.

Given the increased volatility of key inputs and transportation cost as.

As well as the potential impact of the recent heat waves and the Pacific northwest on potato yield and quality.

Now here's Tom for some closing comments thank.

Thanks, Brian and we feel good about how all the category has been recovering from the pandemic.

Emmick and believe these positive trends provide a good tailwind for above algorithm sales growth in fiscal 2022.

And we're making progress and stabilizing our manufacturing network, and we will pull and pulling the right levers to gradually normalize operations and offset significant inflationary pressures to improve profitability as the year progresses.

Progresses with our women's 1 productivity initiatives, we're putting in place the lean manufacturing and productivity tools to improve our operations and cost structure. So that we can return to you or even exceed pre pandemic margin levels and the coming years, and finally, I'm confident that we're making the right investments to strategically expand.

And our production capacity, so that we can deliver sustainable profitable growth and create value for our stakeholders over the long term.

Thank you for joining us today and now we're ready to take your questions.

Thank you if you would like to ask a question. Please signal by pressing star 1 on your.

Telephone keypad, if you are using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment again that is star 1 to ask a question and we'll pause for just a moment to allow everyone an opportunity to signal.

We'll.

First question from Tom Palmer with Jpmorgan.

Good morning, I look forward to working with you burn a debt and Rob Congratulations on your retirement. Thank you for your help over the past few years.

I wanted to ask about how costs have ramped over the past few months do.

Do you expect Cogs inflation.

I'll take on from in the first half of the fiscal year to come in above the Cogs inflation you faced in the fourth quarter is there a range you can provide.

What are the items that have gotten worse.

Over the last couple of months and then just to what extent did your Cogs inflation ramp subsequent to you announcing these recently.

Recent price actions.

Yes. This is Rob I'll take that in terms of Cogs inflation.

First remind you that our Cogs does have some seasonality just as the crop the storage and the crops are encouraging and incurring the storage costs as well as the.

The physical deterioration on the crop impacts yields from that seasonal so pull that aside.

The key elements of the inflation has been and.

Side, and Thats, just normal seasonality have been and edible oils.

Where we've seen sharp inflation and that really over the last 12 months.

And so that started moving up.

<unk>.

Not quite a year ago about almost a year ago and has been moving up now recently there.

And then a little bit more up and down rather than steadily up so we'll see how that continues to develop and evolve.

And the place where we've seen inflation is and packaging.

And I think Thats, just driven by general demand for packaging and.

And again, the packaging producers containerboard producers, having the same challenges.

And why is everybody else's.

Those are 2 key elements that are driving our cost of goods manufactured up another piece, that's driving our cost of goods manufactured.

Upper has had an impact on it.

Ben the volatility and our manufacturing operations that have is really a carryover from some of the pandemic related things and as we recover what we're seeing is.

As demand comes up sharply and.

We're trying to maintain customer service levels.

Debt that we're doing some some more break in to be customer service levels on manufacturing.

B.

And so those are the elements driving manufacturing.

On the on the operation side as I think Tom mentioned, we're stabilizing those operations and seeing seeing significant improvement there.

Sure.

The other piece that gets into cost of goods sold is transportation.

And 2 elements to that 1 is just the overall inflation and thats really happening and trucking and rail and and ocean freight across the board and I think it's pretty calm and across industries to see that the other piece again as we're maintaining.

And customer service levels at a high level.

Ben.

And incurring more spot truck then we have our normal mix of primarily rail to move product to the east coast. So those are the elements and in terms of the outlook for inflation.

Again.

And <unk> oils, we continue to hedge those and so a lot of that oil is hedged through the year.

The transportation as we continue to stabilize operations and as demand stabilizes, we expect that we will get to more normalized.

Our mix of rail.

The truck freight, but we think that there is still some choppiness going to incur and cost in terms of spot trucking and certainly ocean freight off the west coast for us as we shipped to our to our export markets. So it's a bit of a mixed bag, we think that debt a lot of the oil inflation feels like it's more behind us.

Not to say there won't be more but the rate of increase over last 12 months as I mentioned has really doubled and canola. So that's a kind of a long weighted answer, but I think that covers it.

Coverage the basis there.

Okay. Thank you for all that detail.

And the press release, and then on the prepared remarks.

Marks you reference.

Earnings gradually normalize and the second half of the fiscal year could you maybe clarify what normalized means should we think about margins back within historical ranges such as what we saw in 2018 and 2019.

Yes.

And that's what we're.

Expecting again, Rob walked through as Tom or Bob walked through.

The inflationary.

Challenges, we're facing and as we've priced and the market pricing will catch up and the back half we expect our operations manufacturing plants.

2 had pre pandemic throughput levels.

And therefore on the back half, we think things on margins will be back.

Pandemic levels.

Okay. Thank you I'll leave it at that.

Okay.

We will take our next question from Adam Samuelson with Goldman Sachs.

Yes, thanks, good morning, everyone.

Good morning, Adam.

Good morning, and Rob congratulations on the retirement.

I guess first maybe continuing on Tom's last line.

Your line of questioning I just wanted to.

See if we could maybe dimensionalize a little bit kind of.

How much of the margin kind of impact and the quarter and what youre expecting over the next couple of quarters is kind of unit costs and efficiencies as it relates to the manufacturing plants and kind of all the COVID-19 impacts relative to underlying kind of non potato.

Cost inflation.

And and freight transport and freight and edible oils et cetera.

Yeah.

And just as a as a I'm not going to get into specifics line by line item, but I will tell you that more than half of that is.

Related to just to inflation.

With less of it being in terms of operating performance and again as I mentioned and as we go.

And on prepared remarks.

And to improve through the quarter, so we exited the quarter and better shape and we started the quarter.

And turned to sales okay.

Alright.

And that's really helpful.

And then maybe just on the demand side.

And you went through some of this and in the prepared remarks, Tom, but just especially on the global business internationally and it seems like things are a little bit kind of more uneven between different geographies.

Any color you could provide there and <unk>.

Specifically how.

Paul.

How do you think about potential competition from from European suppliers, and some of your export markets over time.

Yes, Adam.

It's it's really choppy and the international markets and I mean, you.

And you read the headlines every day and some countries are shutting down.

And put more restrictions on and we're certainly seeing it and our markets.

And in Asia, Oceana and Europe.

So it's really we kind of week by week on what's going on especially with the.

On the Delta of area and Thats going on so.

<unk>.

The team is doing a great job managing.

The volatility and the demand forecast plus.

Throw on top of that container challenges and every manufacturing company as having especially on the west coast.

Just getting product to the markets and.

So while.

All of that is B is pretty volatile right now.

We're just managing through it real time, just like everybody else. So.

That said the.

The second part of your question is.

<unk> landscape right now from the Europeans.

And as pretty.

I'll call it normalized and what it's been and there hasnt been any.

And so there is always spot.

Pressures in certain markets.

But it's been pretty.

And I'll call it normalized and.

And Thats.

1 of the things I attribute that to as everybody is experiencing the same thing we're experiencing so.

It's.

Manufacturing challenges and its shipping challenges a number of different things.

Just to get product to the market and serve your customers and that's the number 1 goal right now I think for everybody. So I think it's going to be choppy, especially on the international markets with all the freight pressure going forward until things kind of normalize and.

And the question is when is that going to happen.

Market.

Right now we're going to see we're going to see freight challenges and the near term for a while and Thats just going to be the way we have to operate.

Alright.

And that's really helpful color I'll pass it on thanks.

Our next.

And it comes from Rob Dickerson with Jefferies.

Great. Thank you so much.

So just first question I just want to focus on the top line for a minute.

So Tom.

It seems like just kind of given from the pricing that we saw come through in Q4.

Especially in foodservice, and then kind of where demand seems to be coming in and you're kind of forecast for that demand through the end of the year fiscal.

Fiscal year is it fair.

To say that although kind of profits are more back half weighted debt. We're also thinking just in terms of year over year growth debt revenues could be up let's say like mid <unk>.

Question first half and then Mike maybe mid single back half just trying to get proper cadence for the year on the top line.

Yes.

And specifically on what the.

It's a comparable.

Year over year.

But that's that's fair.

And I would say.

1 of the things.

And I feel really great about is how the category has responded.

And it's been sharply.

Lately, it's been a really strong and the U S specific.

And I noted in my prepared remarks about <unk> incident rate.

That's a big deal in terms of when people go to restaurants or ordering fries vs.

And a different side, so thats good for the category and Thats certainly has.

Yeah.

And that's helped.

<unk> category rebound and we feel good about and obviously.

Over the long term we are.

Very bullish on the category based on all the investments we've announced over the last 12 months.

So I think I think the demand is going to be there. It's just we got to execute our operating.

And the casual side of it.

Okay Fair enough and then.

And I guess, just 1 thing on you.

You're talking about foodservice pricing.

And and really the bulk of that was related to mix the improvement there.

Okay. Okay Fair right and then the rest comes through in Q3.

Okay.

Okay Cool and then.

I think at least you provided some incremental detail.

Around the winter it's 1.

Program.

Or would you say and remarks, I think and with $300 million and <unk>.

Targeted variable expense reduction.

So just kind of wanted to get.

A little bit more color on that.

As you said these are long term targets I don't know long term, maybe 3 years 5 years.

And obviously I'm asking because at least <unk>.

<unk> III investment $300 million.

And that variable expense reduction implies a 30% lift to pre COVID-19.

And that EBITDA fell and maybe if you could just kind of talk about that for a minute and I'll pass it on thanks.

Just in terms of the in terms of the cost reduction.

You said variable is really it's really cost cost of goods manufacturers. So some of that is related to.

Getting more productivity out of the line and so youre spreading the same fixed cost over over more pounds and so think about it is if you've got consistently higher line speeds. Your changeover times are down those kinds of things optimizing the mix and line by line those kinds of elements are part of that and so part of its fixed costs.

Part of it is variable cost whether its recovery or usage of raw free usage of oil et cetera in terms of the timeframe. We haven't put a time frame to that specifically externally at this point.

Okay Fair enough I'll pass it on.

Our next question comes from Peter Galbo with.

With bank of America.

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

Morning.

And.

Just wanted to ask 1 specific on on global.

I know you said, we would know kind of more later this summer around the pricing and contract negotiations, but for the inflation escalators.

But those kick in in <unk> of 'twenty, 2 as well or is it sooner than that.

Yes, it varies depending upon the contract renewal date.

So it's really mixed but generally.

And general term of the contracts that.

Did it.

We have in place today will be and <unk> Q.

Got it okay.

And then just on the gross margins and the fourth quarter. Just just wanted to get a sense, maybe where those came in relative to your expectations.

And when.

That kind of provided some thoughts around it at <unk>.

Understanding going forward into the first quarter. It seems like a lot of that is just being driven by.

Higher finished goods inventory, but just wanted to on kind of understand where where you landed in the fourth quarter relative to your own internal expectations.

And I'll take.

This is rob the we weren't that far off I will tell you that the pieces that that maybe were sharper on the Cogs side than we had anticipated transportation.

<unk> was a bit sharper and then really the 1 of the things that volume was stronger than.

When you had probably anticipated.

Going into Q4, and so there was more volatility and so more break into line as more hotshot and maintain customer service levels and those kinds of elements and so as we think about it we think that the long term of maintaining the customer service.

There's a lot more important than incurring a little bit of extra cost and this kind of an environment and the short term and.

So that's where maybe that you would say that our margins were pressured a little bit more than what we had anticipated.

Got it thank you very much.

Level. Our next question comes from Jenna Giannelli with Goldman Sachs.

Hi, there and thanks for taking my question.

And just about it a little bit with respect to the international business. The Delta variant, but I guess I'm curious there still seems to be a high degree of confidence for the U S demand being back.

Pre pandemic levels by the end of this year I guess are you hearing anything from your customers, whether its restaurants or some of your non commercial customers that the strong demand that we've seen.

Okay.

A little bit with that on slide or the growth and the Gulf of very appear on the U S.

Yes, thanks for the question.

Questions Tom.

It's really.

It's hard to we're not hearing things directly from the customer in terms of a pause or what they are thinking about.

If you think about our large and our global business unit are large.

And <unk>.

And our customers they are pretty much back and they have been operating through drive thru format or takeout and Dave.

And then at or exceeded pre pandemic levels for quite some time now and.

And as I talked about the independent smaller USR.

Saar chains and.

And our foodservice segment have steadily recovered and they are.

Down.

Somewhat but they continue to improve and it did.

And.

With a new variant, it's hard to say and the barometer for me is some of the international markets.

On that.

Ram posed restrictions.

And we've seen.

Volume step back but.

This this whole thing.

It's going to depend upon the restrictions that are imposed or not imposed and if we kind of.

To navigate through it here in North America, we expect with Friday incident rates and I alluded to in my remarks.

And if that continues and holds which we believe it will.

And then the volume is going to be there, it's just a matter of service and the customers.

Thanks for.

For that and that actually took me.

Next question is the higher incidence and just the higher attachment rate that you were talking about that is really interesting is this something that you've seen before I guess, just any thoughts on what's driving and as that menu there more limited or perhaps people haven't been out in a while for them, we're willing to forego on French fries.

And thoughts on the drivers and the sustainability of that trend.

Yes.

I'll give you a couple of different perspectives and my mind first of all there has been menu simplification and a lot of independents and what does that mean that means.

There are there are slim.

Lemming down their menu. So you may not have as many side.

Menu items, that's number 1 number 2.

Yeah.

And the Fry offering is very important and profitable to our customers across all.

Outlets so that's important.

And especially in times like this when you're fighting for.

<unk>.

Incident.

You're trying to get people on the restaurant. So that's a couple of different perspectives and I think the other thing to remember.

Friday into net pre pandemic was pretty.

Study.

You know you look over the years and it's been pretty flattish.

And the uptick is because everything I just said so.

And price.

It's a great obviously, a great product.

And people love it.

And so.

We'll see where it all goes but if it does stick, it's going to be meaningful volume going forward.

I appreciate it thanks for the color.

And our final question comes from William Reuter with Bank of America.

Hi.

Hi.

My question is around you guys remain below your leverage target of 3 to 4 times.

I guess given the high Capex this year, you're certainly going to be burning through some capex and the conversation around EBIT being pressured and the first half of the year do you have a sense, where EBIT where leverage.

And May peak this year and at what time of the year that will be and then when we might see leverage declining again.

Yes. This is rob.

I think.

As we had mentioned that the pressure.

On the margins and the first half of the year.

As Tom mentioned, a more normalization on the back back half of the year and so I'll. Let you guys run your models for what EBITDA is going to do I will tell you that the spending on that debt.

And especially those 2 large capital projects.

And China and American fall.

And those are going to play out through this year and next.

And it's really a kind of a 18 to 24 months Bill is the bulk of the spending there and so it will ramp up so a lot of that spending is going to happen and the back half of this fiscal year and the front half of next fiscal year.

Okay and then.

1 more if I could just in terms.

Are those.

Contracts here and negotiating now that have 3 to 6 month timing delays I guess.

In terms of the tone of those conversations do you guys have a high degree of confidence that the price increases.

It will be implemented.

Pretty much broadly and.

More or less that there won't be customer pushback or you haven't heard customers pushing back.

Yes.

All the color I'll give you is it's.

The tones normalize just like it has been every other year certainly everybody understands.

Inflationary pressures, we're all dealing with.

But you go through the process negotiated in good faith and <unk>.

We will see where it all lands but.

Early indications are we're we're in a good spot.

Great to hear Alright, that's all from me. Thank you.

Thanks Bill.

And that concludes today's question and answer.

Session at this time I would like to turn the conference back to Dexter <unk> for any additional or closing remarks.

Thanks, everyone for joining the call today, if you want to start the call with me. Please E Mail me and we can set it up for later either.

And were later this week and.

And enjoy rest of the day.

Once again that does conclude today's conference. We thank you for your participation you may now disconnect.

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