Q1 2022 Lamb Weston Holdings Inc Earnings Call
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[music].
And welcome to the Lamb Weston first quarter 2022 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 as first quarter of 2022 earnings call. This morning, we issued our earnings press release, which is available on our website Lamb Weston Dot com.
Please note that during our remarks, we'll make some forward looking statements about the company's 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 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 measures should not be considered a replacement for and should be read together with our GAAP results.
You can find the GAAP to non-GAAP reconciliations in our earnings release.
With me today are Tom Werner, our President and Chief Executive Officer.
Bernadette Badri.
<unk> Financial Officer Tom.
Tom will provide some comments on our performance as well as a brief overview of the current operating environment.
Brett will then provide details on our first quarter results and fiscal 2022 outlook.
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're pleased with our strong sales growth in the quarter, which reflects the ongoing broad recovery in demand across our out of home sales channels as well as continued improvement in our key international markets.
However, our margin improvement lags, our volume recovery as a result of the timing of pricing actions to offset cost inflation as well as challenging macro factors that increase our cost and affected our production run rates and throughput.
These ongoing challenges combined with the extreme summers heat.
You can have impact on potato crops in the Pacific Northwest will result in higher cost as the year progresses.
As a result, we now expect our gross profit margins will remain below pre pandemic levels through fiscal 2022.
We believe many of these costs and supply chain challenges are transitory and we're taking aggressive actions to mitigate their effects on our operations and financial performance.
We're confident that our actions along with our investments to improve productivity and operations over the long term will get us back on track to deliver higher margins and sustainable growth.
Before virtu that gets into some of the specifics of our first quarter results and outlook, Let's briefly review the current operating environment starting with demand.
In the U S. We continue to be encouraged by the pace of recovery in restaurant traffic and demand for Fry's overall restaurant traffic has largely stabilized at about 5% below pre pandemic levels led by the continued solid performance at quick service restaurants.
Traffic at full service restaurants continued to rebound in June and July but it did soften a bit in August is a delta variant surged across most of the country.
Demand improved at noncommercial foodservice outlets, especially in the education market, which helped to offset the near term slowdown in full service restaurants.
The Fry attachment rate in the U S, which is the rate at which consumers order fries when visiting a restaurant or other foodservice outlets also continued to help support the recovery in demand by remaining above pre pandemic levels.
Demand in U S. Retail channels also remained solid with overall category ball volumes in the quarter still up 15% to 20% from pre pandemic levels.
Outside the U S. Overall fry demand continued to improve in the quarter, although the rate of improvement varied widely among our key international markets.
Demand in Europe, which is served by our Lamb Weston Meyers joint venture gradually recovered as vaccination rates climbed dim.
Demand in Asia, and Oceania was solid but also softened in August due to the spread of the Delta area in South America remain challenged especially in Brazil.
So overall, we're happy with the recovery in global demand and believe it provides a solid foundation for continued volume growth in fiscal 2022.
With respect to the pricing environment I'm pleased with the progress of our recently implemented pricing actions to manage sharp input cost inflation.
In our foodservice and retail segments as well as in some of our international business will begin to realize some of the pricing benefits in the second quarter and more fully in the third quarter.
In our global segment the contract renewables for large chain restaurant customers have largely progressed as we expected and will generally begin to see the impact of any pricing actions associated with these contracts in our third quarter.
In addition, we'll continue to benefit from price escalators for most of the global contracts that are not up for renewal this year.
These price adjustments reset based on the underlying timing of the contract renewals are largely during our physical third quarter.
Overall, we expect our price increases across our base business segments will in aggregate mitigate most of the cost inflation, however, depending on the pace and scope of inflation and increase in potato costs, resulting from this year's poor crop we may take further price actions as the year progresses.
In contrast, the demand and pricing the manufacturing and distribution environment continues to be difficult.
Our supply chain costs on a per pound basis have increased significantly due to input and transportation cost inflation as well as labor availability and other macro supply chain disruptions that are continuing to cause production inefficiencies across our global manufacturing network.
Although we are making gradual progress to mitigate these challenges they have slowed our efforts to stabilize our manufacturing operations during the first half of fiscal 2022.
As a result, we expect the turnaround in our supply chain will take longer than we initially anticipated.
Now turning to the crop.
As we're still in the middle of the main crop harvest the extent of the financial impact of the crop condition will be determined over the coming quarter as the harvest is completed.
While we expect this impact will be significant we're examining a variety of levers to mitigate the effect on our earnings as well as our customer service and supply.
As usual, we'll provide a more complete assessment of the crop and its impact on earnings when we release, our second quarter results in early January.
So in summary, I feel good about the overall pace of recovery in French Fry demand, especially in the U S believe it provides a solid foundation for future growth.
I also feel good about the current pricing environment and how we're executing pricing actions in the marketplace. We.
We do expect higher potato costs input and transportation inflation labor challenges in other industry wide operational headwinds to continue for the remainder of this fiscal year.
While we're taking specific actions to mitigate these challenges they will keep our gross margins below pre pandemic levels through physical 2022.
And finally, I'm confident that we're taking the right steps to get our company back on track to delivering more normalized profit margins let.
Let me now turn the call over to part of that to review the details of our first quarter results and our physical 2022 outlet.
Thanks, Tom and good morning, everyone.
As many of you know this is my first earnings call as CFO of Lamb Weston I've now been in the role for about nine weeks.
But that was on the line that I haven't met it's a pleasure to meet you over the phone I'm looking forward to meeting many of you in person over the coming months as we get back into the cadence of in person investor meetings and industry events.
As Tom discussed we feel good about the health of the category in our topline performance in the first quarter and expect our gross margins going forward will improve as we benefit from our recent pricing actions as well as from other actions that we're taking to mitigate some of the macro challenges affecting our supply chain.
Specifically in the quarter sales increased 13% to $984 million with volume up 11% and price mix up 2%.
As expected volume was the primary driver of sales growth, reflecting the ongoing recovery and fry demand outside the home in the U S and in some of our key international markets as well as the comparison to a relatively soft shipments in the prior year quarter.
Lower retail segment sales volume, partially offset this growth largely as a result of incremental locker of low margin private label business.
Overall, our sales volume in the first quarter was about 95% of what it was during the first quarter of fiscal 2020 before the pandemic impacted demand.
Moving to pricing.
Pricing actions and favorable mix drove an increase in price mix.
Each of our core business segments.
As I'll discuss in more detail later, our pricing actions include the benefit of higher prices charged to customers for product delivery in an effort to pass through rising freight cost.
The offset to this is higher transportation costs and cost of goods sold.
Gross profit in the quarter declined $63 million as the benefit of higher sales was more than offset by higher manufacturing and transportation costs on a per pound basis.
The decline in gross profit also includes a $6 million decrease in unrealized mark to market adjustment, which includes a $1 million gain in the current quarter compared with a $7 million gain in the prior year quarter.
The increase in cost per pound primarily related to three factors.
First we incurred double digit cost inflation for key commodity inputs.
Notably edible oils, which has more than doubled versus the prior year quarter.
Other inputs that saw significant inflation include ingredients, such as wheat, and starches used to make batter and other coating and containerboard and plastic film for packaging.
Higher labor costs were also a factor as we incurred more expense from increased unplanned overtime.
Second our transportation costs increased due to rising freight rates as global logistics network continue to struggle.
Our costs also rose due to an unfavorable mix of higher cost trucking versus rail as we took extraordinary steps to deliver product to our customers.
Together and placement for commodity inputs and transportation accounted for approximately three quarters of the increase in our cost per pound.
The third factor driving the increase in cost per pound was lower production run rates and throughput at our plants from lost production days and unplanned downtime.
This resulted in incremental costs and inefficiencies.
Some of this is attributable to ongoing upstream supply chain disruptions, including the timely delivery of key inputs and other vendors applied materials and services.
However, most of the impact on run rate was attributable to volatile labor availability and shortages across our manufacturing network.
So what are we doing to mitigate these higher costs and stabilize our supply chain.
First price.
We are executing our recently announced price increases across each of our business segments and implementation of these pricing actions are on track.
Our price cost relationship will progressively improve as our pass through pricing catches up with the inflationary cost increases.
We'll begin to see some benefit from these actions in the second quarter and it will continue to build through the year.
If needed we will implement additional rounds of price increases to mitigate the impact of further cost inflation.
We've also increased the freight rates that we charge customers to recover the cost of product delivery and we are adjusting them more frequently to better reflect changes to the market rates.
These adjustments have also lagged the cost increases while we saw some benefit in the first quarter, we expect to see more of a benefit beginning in the second quarter.
In addition, we're significantly restricting the use of higher cost spot rate trucking.
Second we are optimizing our portfolio, we're eliminating underperforming skus to drive savings through simplification in terms of procurement production inventory management and distribution.
We're also partnering with our customers to modify products specifications without compromising food safety and quality.
These modifications will help mitigate the impact of lower potato crop yields from this year's crop as well as some of the impact of Virtus potato utilization that results from poor raw potato quality.
Third we're increasing productivity savings with our win is one program.
While realized savings to date have been small given that the initiative is still fairly new we began to execute specific cost reduction programs around procurement commodity utilization manufacturing waste inventory management and logistics as well as programs to improve demand planning and throughput.
We expect savings from these and other productivity programs will steadily built as our supply chain stabilizes.
And finally, we're managing labor availability and volatility.
This includes changing how we schedule our labor crews, which provides our employees more control and predictability over their personal schedules and reduces unplanned overtime.
We're also reviewing compensation levels to make sure we remain an employer of choice in each of our local communities. This is in addition to the other recruiting tool then incentives such as signing and retention bonuses.
Moving on from cost of sales.
Our SG&A increased $13 million in the quarter. This increase was largely driven by three factors.
First it reflects the investments, we're making behind information technology commercial and supply chain productivity initiatives that should improve our operations over the long term.
About $4 million this quarter represents nonrecurring ERP related expenses.
Second it reflects higher compensation and benefits expense.
Third it includes an additional $3 million of advertising and promotional support behind the launch of new branded items in our retail segment.
This increase compares to a low base in the prior year, when we significantly reduced A&P activities at the onset of the pandemic.
Diluted earnings per share in the first quarter was 20.
Down from 61 cents in the prior year, while adjusted EBITDA, including joint ventures was $123 million down from $202 million.
Moving to our segments.
Sales for our global segment were up 12% in the quarter with volume up 10% and price mix up 2%.
Overall, the segment's total shipments are trending above pre pandemic levels due to strength in our north American chain restaurant business, especially at <unk>.
Our international shipments in the quarter also approached pre pandemic levels.
Spike congestion at West Coast ports, and the worldwide shipping container shortage continuing to disrupt our exports as well as softening demand in Asia due to the spread of the Delta variant.
The 2% increase in price mix reflected the benefit of higher prices charged for freight inflation, driven price escalators and favorable customer mix.
Global's product contribution margin, which is gross profit less advertising and promotional expenses declined 45% to $43 million.
Input and transportation cost inflation as well as higher manufacturing cost per pound more than offset the benefit of higher sales volume and favorable price mix.
Moving to our foodservice segment.
Sales increased 36% with volume up 35% and price mix up 1%.
The strong increase in sales volume largely reflected the year over year recovery in shipments to small and regional restaurant chains and independently owned restaurants.
However shipments to these end customers along with restaurant traffic slowed in August due to the surge of the delta variant across the U S.
Volume growth in August was also tempered by the inability to service full customer demand due to lower production run rates and throughput at our plant largely due to labor availability.
Our shipments to noncommercial customers improved through the quarter as the education lodging and entertainment channels continued to strengthen.
Overall noncommercial shipments were up sequentially to 75% to 80% of pre pandemic levels from about 65% during the fourth quarter of fiscal 2021.
The increase in price mix, largely reflected pricing actions, including the benefit of higher prices charged for freight.
Food services product contribution margin rose, 12% to $96 million.
Higher sales volumes and favorable price mix more than offset input and transportation cost inflation as well as higher manufacturing cost per pound pound.
Moving to our retail segment.
Sales declined 14% with volume down, 15% and price mix up 1%.
The sales volume decline largely reflects lower shipments of private label products, resulting from incremental losses of certain low margin business.
Sales of branded products were down slightly from a strong prior year quarter that benefited from very high in home consumption demand due to the pandemic, but remain well above pre pandemic levels.
The increase in price mix was largely driven by favorable price, including higher prices charged for freight.
Retail's product contribution margin declined 59% to $15 million.
Input and transportation cost inflation higher manufacturing cost per pound lower sales volumes and a 2 million dollar increase in A&P expenses to support the launch of new products drove the decline.
Let's move to our cash flow and liquidity position.
In the first quarter, we generated more than $160 million of cash from operations.
That's down about $90 million versus the prior year quarter due primarily to lower earnings.
We spent nearly $80 million in capital expenditures and paid 34 million in dividends.
We also bought back nearly $26 million worth of stock or about double what we have typically repurchased in prior quarters.
During the quarter, we amended our revolver to increase its capacity from $750 million to $1 billion and extended its maturity date to August 2026.
At the end of the first quarter, our revolver was undrawn and we had nearly $790 million of cash on hand.
Our total debt was about $77.0 billion and our net debt to EBITDA, including joint ventures ratio was two seven times.
Okay.
Now, let's turn to our updated outlook.
We continue to expect our sales growth in fiscal 2022 to be above our long term target of low to mid single digits.
In the second quarter, we continue to anticipate sales growth will be largely driven by higher volume as we lap a comparison to relatively soft shipments during the second quarter of fiscal 2021 due to the pandemic.
We expect price Smith will be up sequentially versus the 2% that we delivered in Q1 as the execution of pricing actions in all of our segments remain on track.
For the second half of the year, we continue to expect our sales growth will reflect more of a balance of higher volume and improved price mix as we begin to lap some of the softer volume comparisons from the prior year and as the benefit from our earlier pricing actions continue to build.
Our volume growth, however may be tempered by global logistics disruption and container shortages that affects both domestic and export shipments.
It may also be tempered by lower factory production due to macro industry and labor challenges as well as a poor quality crop.
With respect to earnings we expect net income and adjusted EBITDA, including joint ventures will continue to be pressured through fiscal 2022.
That's a change from our previous expectation of earnings gradually approaching pre pandemic levels in the second half of the year.
Driving most of this change is our expectation of significantly higher potato costs, resulting from poor yield and quality of the crops in our growing regions.
We previously assumed a potato crop that approached historical averages.
Outside of raw potatoes, we expect double digit inflation for key production inputs, such as edible oils transportation and packaging to continue through fiscal 2022.
We had previously assumed these costs would begin to gradually ease during the second half of the year.
We also expect the macro challenges that have slowed the turnaround in our supply chain to continue through fiscal 2022.
That said, we expect the labor and transportation actions that I described earlier along with our win is one productivity initiatives will help us continue to gradually stabilize operations improve production run rates and throughput and manage costs as the year progresses.
For the full year, we expect our gross margin may be at least five to eight points below our normalized annual margin rate of 25% to 26%.
While we recognize this is a wide range. It reflects the volatility and high degree of uncertainty regarding the cost pressures that I've discussed.
Consistent with prior year old years, we'll have a better understanding of the crops financial impact in the next couple of months and we will provide an update when we release our second quarter results in early January.
Hello gross margin, we expect our quarterly SG&A expense will be in the high nineties as we continue our investments to improve our operations over the long term, while equity earnings will likely remain pressured due to input cost inflation and higher manufacturing costs, both in Europe and the U S.
We've also updated a couple of our other targets for the year.
First we've reduced our capital expenditure estimate to $450 million from our previous estimate of $650 million to $700 million.
This significant reduction is due to the timing of spend behind our large capital projects and effectively shifts the spend into early 2023.
Fiscal 2023.
Despite the shift in expenditures our expansion projects in Idaho, and China remain on track to open in the spring and fall of 2023, respectively.
And second we are reducing our estimated full year effective tax rate to approximately 22% down from our previous estimate of between 47%.
Our estimates for total interest expense of around $115 million and total depreciation and amortization expense of approximately $190 million remain unchanged.
So in summary, the strong recovery in demand helped fuel our top line growth in the first quarter, but higher manufacturing and distribution costs led to lower earnings for.
For fiscal 2022 we expect net sales growth will be above our long term target of.
Low to mid single digits, but that our earnings will continue to be pressured for the remainder of the year due to higher potato costs from a poor crop and persistent inflationary and macro challenges.
Nonetheless, we expect to begin to see earnings improve in the second quarter behind our pricing actions and the steps, we're taking to improve our cost now.
Now here's Tom for some closing comments thanks for that.
Let me just sum it up we feel good about the near term recovery in demand in the U S. In our key international markets as well as the long term health and growth of the category.
We're taking the necessary steps with respect to pricing and continuing to focus on stabilizing our supply chain to mitigate near term operational headwinds and improve profitability. We are on track with our recently announced capacity investments to support our customer and category growth as well as our long term strategic and financial objectives.
Thank you for joining us today and now we're ready to take your questions.
And if you'd like to ask a question signaled by pressing star one on your telephone keypad. If you were using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment again press star one to ask a question.
Our first question from Tom Palmer with Jpmorgan.
Good morning, and thank you for the questions.
Tommy I guess.
Just to kick off maybe asked on the pricing side.
I know your initial round.
Just starting to work its way through the market.
It sounds like it's not going to fully offset inflation could you maybe talk about at what point just from a timing standpoint, you could think about that second round being instituted and then to what extent do you think you'll be able to price for our potato inflation I know that you're sourcing is maybe a little bit different than what the broader U.
The us might be facing this year in terms of the caito cost. So just trying to kind of understand that pricing dynamic.
So the pricing this is Tom Warner.
The pricing generally we have price through to offset inflation across the portfolio, it's a matter of timing.
So as we've stated we will start realizing some of that here in Q2, but the full impact of our pricing actions across our segments. We will start to realize in Q3 and that's pretty typical.
Previous years in and you know one of the things.
It impacted this quarter is we got behind on it quite frankly, so we're catching up and as we've as we evaluate the go forward.
You know, we're closer to it and we're taking a number of different actions.
Securely in our afraid area to pass those costs through based on freight availability and managing.
Customer service. So you know we've adjusted.
And we'll evaluate it going forward and determined.
Based on how inflation is coming at US, we'll react a lot quicker.
Okay. Thanks for that and then I know this is a small segment, but it actually was a I guess a meaningful margin overhang. This quarter. The other segment swinging to a loss despite mark to market gains what drove that this quarter is that something we should expect to recur or was it kind of.
Unusual items.
Hey, Tom it's Dexter.
You had a sizable gain I think last year, so and mark to market and that flows through other than the gain in mark to market. This year is smaller.
Okay, Yeah, I mean, even excluding that I think youre looking at around a $15 million decline year over year.
No.
I'd have to look that up again, okay, it's not that.
It's much more of that I mean, the details on that will come out in the K, but we'll we'll circle back to on this call to give you the answer on that but we'll just look it up real quick.
Thanks.
Well take our next question from Adam Samuelson with Goldman Sachs.
Yeah. Thank you good morning, everyone.
Good morning, good morning, good morning.
So sure.
First hoping to ask on some of the gross margin commentary Burns at you you just gave in your prepared script.
The 2022 gross margins coming in 500 to 800 basis points below you.
Your normalized range and I know that.
There was expectations that the first half of the fiscal year would have lower gross margins.
Then the second half.
When you reported back in July so I'm, just trying to get a sense of how much that has actually changed and what the increment.
To further decrement to the outlook as this year on margins and specifically in terms of how that outlook has changed how much is the potato crop at this point.
Yeah. Thanks for your question you know the five to eight basis points that we referenced or a lot of that is due to the potato crop. So the things that I mentioned that has changed is we've got a worst potato crop than we've seen in many years Theres a couple of things that we're doing as I mentioned in.
In terms of SKU rationalization, and you know the product spec changes that we're doing that we're hoping to offset some of that impact on cost, but most of that is related to a poor crop and then the other thing that I mentioned is that we had previously anticipated the inflation would.
Gradually ease and we no longer expect that so you know we are getting given the guidance of five to eight points, but we will come back in January and we'll update that further depending on what we learn more about the crop as we typically have done.
So just to be clear because the there wasn't a similar kind of margin number framed it back in July what how much did it change versus the outlook in July.
Well I think the outlook in July we said, we were approaching our normal margins, which is the 25% to 26% and so now we're saying it's five to eight points below.
Okay, and I guess the second question is more of a conceptual one because clearly this these inflationary dynamics are not are not using it.
Is the goal not just to recover cost.
One for one but actually the price for margins as well, it's a very different item. If we're thinking okay, well unit margins on a per pound basis go back to pre pandemic levels.
As opposed to percent margins in an inflationary environment go back to pre pandemic levels.
I'm really also thinking as we go into calendar 'twenty, two and even your fiscal 'twenty three.
The way some of these input markets would be shaping up it would seem like youre contracted potato costs for next year.
We're going to be up a lot.
And I'm just trying to think about conceptually is it.
Is the goal to price for unit margins or is the goal to actually price for those percent margins.
Yeah, Adam So the goal is to continue to price through inflation and.
As you know.
Levels, we historically do.
So that's number one number two.
You know the the 'twenty to 'twenty two crop I'll comment on that.
We do as we get through negotiations.
On how that's shaping out for the next crop year.
The good the thing I would just want to remind everybody is we're dealing with.
The challenging crop there's no question about it.
And we'll work through it we're focused on all the right things.
The good news in this business, we get to start all over for next crop so well manage through it as best we can.
Because in all the right things, but you know as things start playing out like I said to the previous questions. We'll evaluate additional actions we need to take to price through inflation.
Okay, Alright, that's helpful I'll pass it on thanks.
[noise].
Yeah.
Thank you our next question from Rob Dickerson with Jefferies.
Sure I can see mark.
Robert can you hold off for a second I just wanted to close off Toms question on the other product margin.
Year over year with the reported basis down 20 ex Mark to market were down four so as you can see the biggest swings due to.
The mark to market this year and last year and from an operational basis again down $4 million, that's due to manufacture higher manufacturing costs and lower volumes, especially in our vegetable business sorry, Robert.
No problem. Thanks.
Oh, great. Thanks.
I guess just first question.
Hum.
It sounds like upfront.
Upfront you said the demand is overall, maybe around 5% lower than it was pre pandemic, but maybe shipments are a little bit lower just kind of given all the supply chain issues. So.
Yeah. As you then speak to you know trying to stabilize.
The supply and improve the cost situation going forward.
How do you kind of view that shipment piece relative to the bad because they may have seen strong midyear.
You're underperforming a bit relative to that demand equation, but sounds like there is obviously a good line of sight to get there. So I'm just kind of curious is the cadence.
For the year.
Yeah. So this is Tom the you know that the international business.
<unk> has been you know whats the container.
Shortages challenges the on the ports and the exports and even the containers coming in.
You know, we're essentially allocated a certain number of containers. So we're managing to that level base are our freight partners and you know every day is a little bit different so the team's doing a good job of making sure we're allocating product.
You know Cherokee customers internationally, but it's a challenge and you know.
On the flip side of that that does.
As we look at.
Our forecast weekly.
You know, we're managing to pile on on production and other customers domestically to ensure they are getting their products. So it's a really dynamic situation with the containers and even the trucking and the rail and all of those things, but essentially we're managing to what we can ship.
Based on our allocation of containers and that's that's that's what we're dealing with and you know as that frees up.
And we get more.
Diners available.
That'll help the exports to our international markets.
Okay great.
And then Tom maybe just kind of another.
A question on kind of broader competitive dynamic.
Heard some people say.
Maybe including yourself, so that you know kind.
Kind of given your geographic sourcing focus.
Then maybe you might be then.
Less about.
You know kind of beneficial.
<unk> position versus some of the.
The other larger processors.
That being said I've also heard some of the other processor say cut.
Not so fast just given you know where demand is and kind of where kind of it overall crop that's coming in that supply in general.
Sure right not just for you. So just curious if you can provide any color youre basically your perspective.
Kind of where you stand you know protection in this environment relative to some of the other players that you're aware of in the market and then I have a quick follow up yes.
Yeah, Rob it's.
Fluid situation right now because we're right in the middle of main crop harvest.
So obviously, we're we've got a.
We're getting an early read like I said on how the.
Quality and the yields are we really won't have a clear view until the end of this month on what the overall.
Potato yields what that means we have an idea then I'd rather as I do every year in January to give you a clear understanding.
You know so right now it's.
Just learning how the main crops can underperform.
As we harvest and how it's running through the plants and we'll have more info on that in January.
Okay Fair enough and then just a quick technical question.
In the Foodservice division in Q1.
Price mix was up 1%.
Obviously, though is.
Some material deceleration relative to what we saw in Q4, which is likely very mixed driven just any clarity.
Clarity yet to kind of how we should think about that going forward on the mix side, just given the Delta Q1, sorry, Q4 to tier one thanks.
Yeah, a lot of that is this has started at Rob a lot of that is mix driven and then what we see in the foodservice side is we're not going to see a lot of those pricing increases.
Effective until second quarter, and then more in third quarter as we discussed but you know then again too we are seeing increases in our noncommercial segment in first quarter relative to fourth quarter, where now you know 70% to 80% there. So a lot of it is mix.
Okay got it. Thank you branded products and then last last year Q4 was such an anomaly because that's the first quarter that was really impacted by the pandemic.
A lot of the.
With respect and we saw a lot less branded product during that quarter as inventories with destock.
Got it got it alright, thank you so much.
Yeah.
And we'll go to our next question.
From Andrew Lazar with Barclays.
Thanks, Good morning, everybody good.
Good morning, Andrew.
I seem to remember at one point.
Any conversation around and correct me, if I'm wrong about back many years ago. When it was like the worst potato crop anyone in the industry sort of could remember.
It was sort of like a $25 million hit to EBITDA for Lamb Weston at the time.
And I may be off on that but I'm curious, if there's any way and it might be tough to do but dimensionalize.
What you know what kind of an impact to EBITDA.
Specifically sort of this crop is likely to have an EBITDA. This year and maybe it's just too early to do that but I don't have that data point right. In this crop be worse than the one previously that was the worst than anybody in the industry had seen I'm just trying to get some perspective on that.
Yeah, Andrew I think the the how you framed up what we talked about on the 20 <unk>.
The worst crop historically.
<unk>.
2014, so your numbers around $25 million to $30 million right.
And secondly, Andrew you know it is too early to frame it up.
In terms of what the overall financial impact you're going to be.
And.
What I will say is.
Its worst this is this crops going to be worse than the previously worst crop ever so the financial impact will we will put some.
Put some guardrails around it in January as we get harvested and we're running it through the plant and we understand what you know what we're dealing with.
That's helpful. Thanks for that and then I.
I guess as we.
A lot of us certainly knew that.
Even from the fourth quarter call that there was going be a lot of pressure points and sort of pain points on the cost side for host of reasons in fiscal 'twenty, two and that was really all about just like sequential sequential improvement as you went through the year and obviously that that'll take a little more time now so I'm trying to think out if we just think ahead for a minute to fiscal 'twenty three.
And just maybe if you could play out.
The potential sort of puts and takes and what are the things that in theory could be.
More positive where some of the things that maybe you still don't really have a lot of clarity on what others Youre clearly, putting a lot of pricing through potentially could put more through there's always a little bit of a timing lag, but one would think that's going to certainly better help you.
Get a lot closer to where where your costs are.
Like I'm trying to I'm trying to I'm struggling with like the labor piece or are you, making progress on that is it just slow and I'm trying to get a sense of some of these negatives can kind of bleed into 'twenty three or is there a reason that there could be a pretty dramatic bounce back in <unk>.
Operating margin and gross margins in 'twenty three.
In the next three quarters gives you enough time essentially to figure out some of these these issues or or frankly, you know.
Or are some of these.
Already enough that they could go beyond that you know even if you don't think there is some structural reason quote longer term.
To not get back to historical margins.
Yes, Andrew.
And my 100% confident over.
We don't have any structural issues in the in the company and everything you're poking at we were focus on.
Addressing labor challenges were you know were there.
<unk> made a number of references of what we're doing differently and we're seeing progress. It's just it's just slow slow going.
You know the.
The thing that.
We will take time is even within our supply chain and our supply or supply chain.
It's disrupting our production and driving inefficiencies in our plants that you know, we're doing a number of things to address that as well and from.
You know last summer to now it's just it's just going to take more time, we are seeing progress it's not as fast as we add any of us want.
But as I think through the next three quarters.
Where we will be a year from now you know with with the things we're doing in the company in terms of off the dressing inflation.
Hum.
Adjusting to how our supply chain, we're focused on our supply chain differently. Some of the actions we're taking.
And you know.
A year from now we're in a new potato crop and thats going to be you know hopefully back to an average normalized levels. We will have certain amount of probably inflation over that time that will address but everything we're doing it's going to take time, Andrew and.
You know the category is very healthy.
And you know so we're preparing for.
He was a number of capacity investments that were doing right now.
You know our long term strategy sound, it's just we're going to be a little choppy in the near term, but the things we're doing operationally I'm, 100% confident it may take more time than any of us want.
But we are addressing all the right things.
Yeah, great. Thanks, Yeah.
Hi, Brian.
I was just going to add that you know the portfolio optimization that I talked about that's just going to benefit us even more into fiscal 'twenty three and then the increases in productivity.
You know around a lot of those cost reduction programs around when it's one again that should just continue to gain momentum into fiscal 'twenty three as well.
Alright, thank you so much.
Okay.
Our next question from Peter Galbo with Bank.
Bank of America.
Hey, guys. Good morning, Thanks for taking the question.
Maybe just to piggyback off of Andrew's question, there I guess.
Bernadette as we're thinking about some of the things that are within your control some of the SKU rationalization and cost savings just is there any way to kind of help us frame how much of that.
Five to 800 basis points of normalized margin that you are losing this year like how much could that potentially make up as we start to think about you know.
Normal a more normalized year for fiscal 'twenty three.
Yeah. So the way I'd answer that Peter is a lot of the decrease that we've explained in terms of the five to eight points.
That's taking into consideration that SKU rationalization and the spec modifications.
So the impact of the crop is what is significantly decreasing.
Our margin estimate and then we are looking to get some gains on that to get to the five to eight basis point decrease with the SKU rationalization and products that modifications otherwise it could've been even greater without that is the way I would explain it.
Got it Okay. No. That's that's that's helpful. And then I guess just as we're thinking about the second quarter. I think you had mentioned kind of sequential gross margin improvement can you just dimension, maybe a little bit more how youre thinking about that and Tom I know you talked about.
On premise or foodservice kind of an August being impacted by by Delta, but just how did September trend was it materially better worse or kind of the same thanks very much.
Yeah, so for second quarter, and the sequential improvement that we're expecting to see there are generally our lowest margin quarter is our first quarter and even though the crop is not what it had been in the previous years, we are going to get some benefits in the second quarter of running out of field and not having to you know.
Moved those potatoes to storage before we start running those through and then Additionally, these other actions that we're taking in terms of further SKU rationalization, we're going out with our second round.
Around those and then the product spec changes you know, we're expecting to see some benefit from that and should see an increase from Q1, which again is our lowest margin quarter historically.
Well thanks, Tom.
But anything in September.
Okay.
And the pricing absolutely, we'll definitely see the benefit of pricing and I'm sorry, Peter was there another follow on question that I missed.
Sorry, just on kind of foodservice you know Tom you talked a bit about the softening in August but just was curious if there was any early takes on September or even the first week of October.
Similar to August Yeah, that's pretty similar to August.
It's softened a bit, but it's kind of leveled out.
Yeah, and what I'd say there Peter is that you know that foodservice demand is there and we are seeing just difficulty in some respects and making sure that you know we can provide that product given the lower throughput that we're getting through the plants.
The logistics and logistics issues right.
Great.
Thanks very much.
We'll take our next question from Matt Smith with Stifel.
Hi, Thank you I just had a quick.
<unk> for you. In addition to the margin headwind I believe you mentioned volume growth may be tempered by the challenges you're seeing in global logistics and supply chain disruption and the potato crop is that potential volume weakness reflected in your guidance, calling for sales growth above your long term targets.
Yes that has been included.
Okay, and then is the potential impact from the potato crop should we think of that more as a second half event as you run some older potatoes with the poor quality.
Yes, it'll definitely be insight second half it'll it'll start manifesting itself.
Okay, and then as a follow up to that is there can you talk about how you can mitigate the impact of that as we look forward to the first half of next year and I'll leave it there and pass it on.
Yeah, Matt as I reference you know the way, we're looking to mitigate that is with some of our product spec changes and the other things that we are doing them by working with our customers.
Great. Thank you.
Okay.
Today's.
A question and answer session.
Mr. <unk> I'll turn the call back to you for any additional or closing remarks, great. Thanks for joining today.
Happy to take some follow up questions. If you would just please send me an email that we could schedule something.
For either later this week, but today later this week or sometime next week I. Appreciate the time. Thank you.
This concludes today's call. Thank you for your participation you may now disconnect.
Okay.
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