Q4 2023 Lamb Weston Holdings Inc Earnings Call
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Good day and welcome to the Lamb Weston fourth quarter earnings call. Today's conference is being recorded at this time I would like to turn the conference over to Dexter Com delay. Please go ahead Sir.
Good morning, and thank you for joining us for Lamb Weston its fourth quarter and fiscal 2023 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 that 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 that 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, and Bernadette <unk>, our Chief Financial Officer.
Tom will provide some highlights from the past year as well as an overview of the current operating environment.
Bernadette will that provide details on our fourth quarter results.
Well as our outlook for fiscal 2024.
With that let me now turn the call over to Tom Thank.
Thank you Dexter good morning, and thank you for joining our call today, we delivered strong financial results in the fourth quarter and physical 2023.
Wanted to start by thanking the entire Lamb Weston team for driving these results and their incredible commitment to supporting our customers.
I'm proud of the work, we did and continue to do to grow our business and build momentum as we enter a new year.
Specifically in physical 2023, we delivered record sales of nearly $5.4 billion and drove strong profit growth in each of our core business segments through a combination of pricing actions mix improvement and supply chain productivity.
We acquired the remaining interest in our European joint venture, which added 1500, new colleagues six processing facilities and nearly 2 billion pounds of capacity.
The business integration is well underway and we believe this strategic transaction strengthens our capabilities to serve customers as a unified global Lamb Weston.
We acquired a controlling interest in our joint venture in Argentina, and we broke ground on a 250 million pound capacity expansion, which will improve our ability to serve the growing south American market.
We also made progress on major capital expansion projects in China, Idaho, and the Netherlands, all of which are on track to be completed within the next 18 months.
We opened an innovation center in Bergen Op zoom in the Netherlands were in close partnership with our innovation Center in which Richland, Washington will develop and test new product and processing ideas for customers in Europe and around the world.
We launched new groundbreaking products with proprietary technologies that address customer and consumer needs in non traditional frozen potato channels, such as pizza outlets expanding our total addressable market.
We further stabilized our supply chain by targeting staffing levels and managing through a second consecutive challenging crop cycle, all while executing productivity initiatives and upgrading capabilities at our processing facilities.
We continued to strengthen our operational infrastructure by completing the design work for the next phase of our new Enterprise resource planning system will begin implementing this new system across a portion of our supply chain in North America later this year.
And finally, we returned more than $190 million to shareholders, including increasing our dividend for the sixth straight year and continuing to execute against our share repurchase plan.
I'm, especially proud that we delivered this performance in a highly challenging operating environment and I'm excited to see what our Lamb Weston team can deliver in physical 2024 and beyond.
Let me now turn to the current operating environment.
The overall global frozen potato category remains healthy 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 was largely steady throughout physical 2023 and remain well above pre pandemic levels.
Servings in Europe , and our other key international markets also held up well.
However, the cumulative effect of inflation and other macro pressures on the consumer over the past few years have continued to tamper traffic and certain restaurant channels.
In the quarter total restaurant traffic in the U S grew versus the prior year quarter as Q S. Our traffic growth more than offset declines in casual dining and full service restaurants.
However, total traffic growth decelerated sequentially each month during the fourth quarter as few XR traffic growth slowed and as traffic declines at casual dining and full service restaurants soften further.
Overall restaurant traffic picked up in June behind strength in Q S. Ours, however, traffic at casual dining and full service remained soft.
We expect that near term demand may be somewhat choppy because of the variability of restaurant traffic trends and continued macro pressures on the consumer which makes forecasting global demand for frozen potato is very difficult.
As a result, we incorporated a cautious view of demand in volume when developing our physical 2024 financial targets.
Despite this added volatility we remain confident in the long term growth prospects of the global category and will continue to invest behind the capabilities to support that growth across our key markets.
With respect to cost and pricing.
While we expect input cost inflation to moderate relative to the double digit rates that we experienced in each of the last two physical years. We believe it will continue to have a meaningful impact on our cost structure.
We expect most of our input cost inflation will be driven by higher contract prices for potatoes.
In North America, we have agreed to a 20% increase for this crop this year's crop while in Europe , we have agreed to an increase of 35% to 40%.
We believe the overall environment for inflation driven pricing actions remains generally favorable.
However, it's important to note that any price actions that we may take this year will likely be more modest than what we implemented in fiscal 2023, given that first our pricing actions last year were intended to catch up to the effect of multiple years of high inflation and second we expect total input cost inflation to grow at a lower.
Great.
Although we expect pricing actions will continue to be the primary lever to offset inflation over the long term, we will continue to drive improvements in product and customer mix, resulting from our revenue growth management initiatives as.
As well as supply chain productivity to benefit sales growth and profitability.
Yeah.
With respect to the upcoming potato crop.
We're harvesting and processing the early potato varieties and initial indications are that this portion of the crop which represents about 10% of our potato needs in North America. This year is broadly consistent with historical averages.
At this time the crops in the Columbia Basin, Idaho, Alberta in the Midwest that will be harvested in the fall appear to be largely in line with historical averages as growing conditions in these regions have been generally favorable.
In Europe , a wet and cold spring impacted planning, which may delay the timing of the harvest in some of our growing regions.
We will provide more detail the crop when we report our first quarter results in early October in line with our past practice.
Before Bernadette shares details, our fourth quarter financial performance and physical 2024 outlook I'd like to update you on a change we're making to our reportable segments.
Effective at the start of physical 2024 in connection with our recent acquisition and to align with our expanded global footprint, we began managing our business in two reportable segments.
America and international.
The North America segment includes products sold in the restaurant and foodservice and retail channels in the U S, Canada, and Mexico, including our large multinational chain customers.
The International segment includes products sold in restaurant foodservice and retail channels outside of North America.
These two segments as well as our global supply chain will report to Mike Smith, Our Chief operating officer, Mike's role as focus on execution and is designed to help us drive growth and unlock efficiencies by providing a truly end to end view of our global business.
I'll continue to maintain responsibility for driving our long long term strategies and priorities, including allocating capital and resources to support sustainable profitable growth and create value for our stakeholders.
We will begin to provide our financial results under the new reportable segments with our first quarter results.
So in summary, we delivered a record year of sales and earnings growth and continue to build operating momentum across each of our core segments.
While near term demand may be difficult to predict the category remains healthy and we remain confident about its long term growth prospects.
And finally at this time the potato crop in North America is largely in line with historical averages while late planning may delay the harvest in Europe .
Let me now turn the call over to burn to death.
Thanks, Tom and good morning, everyone.
I want to also thank the Lamb Weston team for finishing the year strong and setting us up well for fiscal 2024.
Let's begin with our fourth quarter results.
Sales were up more than $540 million versus the prior year quarter or 47% to a quarterly record of just under one $7 billion.
That's at the high end of our targeted range for the quarter.
About $380 million of the increase was attributable to the consolidation of our EMEA and Argentina operation.
EMEA amount is above the high end of the targeted $300 million to $325 million range for the quarter, reflecting a strong benefit from pricing actions.
Excluding incremental sales from these acquisitions net sales grew 14%.
Price mix was up 24% as we continued to benefit from pricing actions taken in fiscal 2023 across each of our business segments to counter input and manufacturing cost inflation.
As expected price mix in the quarter decelerated sequentially from the 30% or more increase that we delivered in our second and third quarter as we largely lap all the pricing actions taken in fiscal 2022.
In addition, we received no year over year benefit from freight rates charged to the customer as we reduce these rates further to match the decline in our transportation costs.
We expect lower customer freight rates will soon become a year over year headwind for price mix. Our goal is to match these to our transportation cost so that their effect on our profit is neutral over time.
Our overall sales volumes in the quarter declined 10% due to four factors.
The first and primary driver was our continued effort to strategically improve our product and customer mix by exiting certain lower priced and lower margin business across our domestic and international portfolio.
Second demand was tempered by softer casual dining in foodservice restaurant traffic in the U S.
This had a more pronounced effect on our foodservice segment and drove much of the decline in that segment's volume in the quarter.
Third certain customers in international markets began to right size inventories after carrying unusually high levels of inventory to derisk their supply chains during the pandemic.
And for certain large retail customers temporarily lowered prices to right size inventories of private label products delaying shipments of products that we produce on their behalf.
In addition, we realized some acceptable levels of branded product volume elasticity in response to the inflation driven pricing actions that we implemented over the past year.
Moving on from sales our gross profit in the quarter, excluding comparability items increased more than $170 million to nearly $425 million.
About 40% of the increase was attributable to the incremental earnings from consolidating EMEA.
The remainder was driven by the cumulative benefit of pricing actions mix improvement and supply chain productivity in our legacy Lamb, Weston business, which more than offset higher input and manufacturing cost per pound and the impact of lower volume.
Gross margin was up more than 300 basis points to 25, 1% despite absorbing the dilutive impact on margin at the EMEA acquisition.
Input costs increased high single digits on a per pound basis easing somewhat from the double digit inflation rate earlier in the year.
The increase in cost per pound were again, largely driven by a 20% increase in the contracted price for potatoes in North America.
<unk> higher prices for open market potatoes, due to poor yield from the 2022 crop and continued increases in the cost of labor energy edible oils and ingredients for batter coding.
Our higher per pound cost also reflected reduced fixed cost coverage due to lower throughput as we did take some extended downtime for planned maintenance in some of our production facilities and increase write downs of inventory, primarily consisting of bulk and obsolete finished good.
Our SG&A expenses, excluding comparability items increased $65 million to $183 million.
About half of the increase was from incremental SG&A with the consolidation of EMEA, while the other half was primarily driven by three factors.
First higher compensation and benefit expenses due to improved operating performance.
Second an $8 million increase in advertising and promotion expenses as we restore support behind our branded products in our retail segment to historical level.
And third higher expenses related to improving our I T and ERP infrastructure.
Adjusted EBITDA, including joint ventures increased $117 million or 59% to $318 million with higher sales and gross profit driving the growth.
Moving to our segments sales in our global segment were up 85% in the quarter and included the $380 million of incremental sales from the EMEA and Argentina acquisition.
Net sales, excluding the acquisitions grew 17%.
<unk> mix was up 28%, which is largely comparable to the increases in the previous two quarters.
The increase in price mix reflects the carryover benefit of the domestic and international pricing actions that took effect in our fiscal second and third quarters.
Volume declined 11%, primarily reflecting the impact of exiting certain lower priced and lower margin business in international and domestic markets and the inventory destocking by certain customers in international markets that I mentioned earlier.
Global's product contribution margin, excluding comparability items increased about $145 million.
More than half of the increase was from the cumulative benefit of pricing actions mix improvement and supply chain productivity more than offsetting higher cost per pound and lower volumes.
Incremental earnings from EMEA, which was above our target for the quarter drove the remainder of the increase.
Sales in our foodservice segment grew 4% and <unk>.
Notable deceleration versus the 17% that we delivered through the first three quarters of the year.
Price mix was up a healthy 13%.
Then the 26% that we posted through the first three quarters as we fully lapped our pricing actions taken in fiscal 2022 and realized no tailwind from transportation rates.
As expected the price increase that we began to implement in may only had a modest impact in the quarter. So we will see more benefit come through in early fiscal 2024.
Sales volumes were down, 9%, which is consistent with the prior three quarters.
We attribute most of the decline to the impact from softer casual dining and full service restaurant topic. Although we also continued to realize the impact of exiting some lower priced and lower margin business.
Food services product contribution margin fell about $3 million.
Lower volumes drove the decline as higher price mix more than offset the impact of higher cost per pound.
Sales in our retail segment increased 25% price mix increased 35% driven by pricing actions across our branded and private label portfolios that we began to implement in February to counter input cost inflation.
Trade support during the quarter remained below historical levels given category demand.
Volume fell 10% largely reflecting the challenges that I described earlier for private label products.
Retail's product contribution margin increased more than $40 million and its margin percentage expanded 140 basis points to nearly 38%.
The cumulative benefit from pricing and mix improvement actions over the past couple of fiscal years more than offset higher cost per pound.
Okay.
Moving to our liquidity position and cash flow, we continue to maintain a solid balance sheet with ample liquidity and a low leverage ratio.
We ended the quarter with about $305 million of cash and no borrowings under our $1 billion U S revolver.
Our net debt was nearly $3 2 billion at the end of the fourth quarter.
Using EBITDA on a trailing 12 month basis, which only includes a single quarter of EMEA as earnings our leverage ratio is two six times.
We remain focused on creating value for our shareholders. Our capital allocation priorities remain the same and we continue to prioritize investing in our business to drive long term growth as well as returning capital to our shareholders through dividends and share repurchases to offset management to loosen.
In fiscal 'twenty, three we generated more than $760 million of cash from operations or $340 million above last year, largely due to higher earnings.
Capital expenditures were about $735 million, which is up $430 million from the prior year. This increase is largely related to construction costs as we continue to expand processing capacity.
For the year, we returned more than $190 million of cash to shareholders, including $146 million in dividends and $45 million in share repurchases.
Now, let's turn to our fiscal 2020 for outlook.
We're taking a prudent approach to our financial targets for the year.
Overall, we anticipate that the operating environment will continue to be challenging with inflation and other macro factors affecting our cost structure restaurant traffic and consumer demand.
In addition, we expect our capacity to produce coated fry specialty cuts and chopped and formed varieties such as pumps and hash Brown will remain constrained until our new production facilities in China, and Idaho become available late in fiscal 2024.
For the year, we are targeting sales of $6 seven to $6 9 billion.
This includes one to $1 1 billion of incremental sales attributable to the EMEA transaction during the first three quarters of the year.
And net sales growth excluding acquisitions of six five to eight 5%, which is above our long term sales growth algorithm of low to mid single digits.
Note that since we began to consolidate EMEA sales beginning in the fourth quarter of fiscal 2023. Those results are included in our last year's sales baseline when calculating our sales growth.
We expect sales growth, excluding acquisitions to be largely driven by pricing actions, including both the carryover impact of actions taken in fiscal 2023 as well as any actions that we may take this year to counter input cost inflation.
We also expect to deliver favorable customer and product mix as we continue to benefit from our revenue growth management initiatives.
As Tom noted, while we expect a solid contribution from price, we do not expect pricing actions to be at the same level as fiscal 2023.
Outside of those customer contracts in our global segment that have yet to be fully priced we expect any future pricing actions will be largely in line with a more modest rate of input cost inflation than what we've experienced in the past two fiscal years.
In addition, transportation rates that we charge to customers will likely serve as a price headwind as we continue to adjust rates to reflect lower freight costs.
Okay.
In fiscal 2024, we expect volume excluding acquisitions will continue to be pressured by our ongoing efforts to strategically manage product mix by exiting certain lower priced and lower margin business.
This strategy has proven to be beneficial to earnings and we continue to see opportunities across our domestic and international channels.
In addition, we're taking a cautious approach to consumer demand for two primary reasons.
First <unk> traffic has held up relatively well casual dining and full service restaurant traffic trends have softened in the U S over the past few months.
Second forecasting demand has become increasingly difficult due to conflicting data about the health of the consumer in the U S Europe and our key markets.
As a consequence of inflation, especially for food away from home.
Exploration of temporary government assistance and other consumer support programs put in place during the pandemic employment trends and other macroeconomic headwinds.
Despite these near term factors, we remain confident in the health and long term growth prospects of the global category and we remain committed to investing in our people production capacity and operations to support that growth.
For earnings in fiscal 2024, we expect adjusted EBITDA, including unconsolidated joint ventures of 145 to 152 5 billion.
Assuming potato crops and our primary growing regions are in line with historical averages.
Using the midpoint of this EBITDA range implies growth of more than 20% or about $260 million versus the prior year.
Looking at it another way, it's up $200 million more than our annualized second half of fiscal 2023 run rate of one $3 billion to $5 billion.
In addition to incremental earnings from the Lamb Weston EMEA acquisition, we expect our earnings growth will be largely driven by higher sales and gross profit as we benefit from pricing actions mix improvement and supply chain productivity.
We're projecting that the increase in sales and gross profit will be partially offset by higher SG&A expenses.
We're targeting total SG&A of $765 million to $775 million, which is up about $200 million.
In addition to inflation the increase largely reflects incremental expenses attributable to the consolidation of our EMEA operation.
Increased investments to upgrade our information systems and ERP infrastructure.
Non cash amortization of intangible assets associated with the EMEA acquisition as well as ERP investments, we expect to place in service during the year.
And higher compensation and benefit costs due to increased head count to support our growing business.
In addition to our operating targets, we expect equity earnings which includes our Lamb Weston RTL joint venture in Minnesota to be $30 million to $35 million.
We expect capital expenditures of $800 million to $900 million.
As we continue construction of our previously announced capacity expansion efforts as well as capital associated with our new ERP system and other upgrades.
So to summarize our fiscal 2024 outlook were targeting sales of $6 seven to $6 $9 billion, including one to $1 1 billion of incremental sales attributable to the consolidation of our EMEA operations.
We expect our sales growth, excluding acquisitions will be largely driven by price mix with volume pressure due to our ongoing efforts to strategically manage customer and product mix and a cautious view of demand.
And finally, we're targeting adjusted EBITDA, including unconsolidated joint ventures of nearly one 5 billion.
Using the midpoint of our guidance, which is an increase of 20%.
And largely driven by sales and gross profit growth.
Lastly, as Tom mentioned effective the beginning of fiscal 2024, we began managing our operation as two business segments, North America and international in the coming weeks, we'll provide recast financial information for fiscal years, 2021, 22, and 2023 that is.
Consistent with our new reporting segment structure, including quarterly results for the last two years.
With that let me now turn it back over to Tom for some closing comments. Thanks, Martin Let me sum it up by saying we are super proud of the team's strong performance in fiscal 2023, and believe that we're well positioned to execute our strategies to look to deliver our financial targets for physical 2024.
We also remain committed to investing in our business to support customers around the world and drive people, new production capacity and operations to support sustainable profitable growth over the long term.
Thank you for joining us today now we're ready to take your questions.
Okay.
I would like to ask a question. Please signal by pressing star one on your telephone keypad, if you're using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment again. Please press star one to ask a quick question and our first question is going to come from Andrew Lazar from Barclays. Please go ahead.
Thanks, very much good morning, everybody.
Hey, good morning, Andrew.
And I guess, just a starting point.
You talked about volume declines accelerated pretty significantly in fiscal <unk> versus <unk> and are expected to be pressured again in 'twenty four I know a lot of that or even the majority is just some of the actions that you're taking sort of purposely around product mix, but how much of the sequential change in volumes was due to the inventory Destocking, you mentioned and what I'm trying to get a surge.
Like how does that square with the fact that my sense was most customers are still clamoring for really more supply rather than less and I guess do you see this destocking behind you at this point and then I'll just kind of follow up.
Yes, Andrew this is Tom.
As we look at.
The Q4 trends we.
We did have softness as we remarked in our comments in the foodservice.
Service channel and USR held up well, we did have some destocking in the retail channel.
That we experienced.
And so.
We're watching that closely.
And we also walked away from some volume over the last contract season that we're now starting to see in our results. So.
<unk>.
But I will say in early on in June we saw restaurant traffic pick up a little bit.
So thats a positive, but we're watching it closely and it's.
Kind of a mixed bag as we as we commented on our prepared remarks on what's happening with restaurant traffic and it just depends on the channel right now so we're watching it closely.
And we do that said we have.
Line of sight to some opportunities in the market and we'll evaluate those going forward, but that does take some time to.
<unk> into our business, if we choose to.
Pursue some of those some of those accounts.
Yeah, Andrew if I can just.
If I could just add the destocking was more in our global segment and the international markets as they've gotten more comfortable with ocean freight carriers and service rates and more timely.
On time.
Distribution there so that was more on the global segment there.
Gotcha, and then Tom I think you mentioned potentially some some additional opportunities for those would those be sort of new accounts for you or.
To do more business with current accounts.
It's a mixed bag, Andrew I'm, not going to get into specifics that I'll talk about particular accounts and customers, but it's.
It's a mixed bag.
And Andrew I think it's important as we talk about is restaurant trends have softened. Some the overall demand continues to really be aided by that French fry attachment rates, which continues to be above pre pandemic levels.
Got it and then separately for <unk>.
Doing our math correctly Youre 24 guidance at the midpoint suggest gross margins may be around the 25% level I guess first do we have that sort of rate.
Back of the envelope and if it is it's certainly obviously it would be a level well above historical levels right, even though that would include the likely dilutive impact from the JV.
Trying to get a sense of how much maybe gross margin dilution do you see from the JV and then.
Is this level of gross margin one that obviously I think it is.
View is sustainable moving forward.
So Andrew we.
I'm not going to get into specifics on your mathematics, but we are focused on margin improvement as we have been.
Historically over time, we also evaluate overall profit pool.
We evaluated additional accounts in and opportunities to drive volume and service our customers.
Extremely pleased with where and what the team has done over the last year in terms of returning our margin structure.
Normalized level, and we're going to continue to improve it but we're going to evaluate.
Opportunities going forward.
To improve the overall profit pool.
Thank you.
Hey, Andrew did you say, 25%.
And then 28%.
Okay, Yes.
We can't give specifics on the gross margin, we can kind of go in the model, but I just want to make sure I Didnt hear 25, sorry, you may have you may have I think 28, if I did say 25, sorry.
Okay. Thanks.
And our next question is going to come from Tom Palmer from Jpmorgan. Please go ahead Sir.
Hi, good morning, and thanks for the question.
Just wanted to ask on the cadence of 2020, I think normal seasonality you might have.
The first three quarters, and then a different <unk> you just given the expected timing of pricing actions relative to cost inflation.
Anything to consider this year on that cadence that might cause you to deviate.
Yes.
Yes, the only thing Tom that I would mention there is generally overall margins and profitability declined sequentially versus in the first quarter and that's largely driven by seasonality.
Q1 is generally our lowest.
Margin quarter.
Okay understood.
Just wanted to ask on Europe , I mean, we can see.
On potato prices up quite a bit.
How does this affect you guys believe that from a timing standpoint.
Well you already addressed it.
Exploration.
Still more work to be done.
Seem to be maybe a bit less than what we're seeing in the U S.
Yes, so Tom we have the team in Europe , Mark Schroeder, who runs our international business there.
They are addressing yeah. They are doing a terrific job there getting ahead of it.
As much as they can and we have contracted.
Traditionally higher than what we have in terms of locking in potato prices.
But we still have a little bit of open potatoes, but we're going to price through it manage it as we had as we did last year and the year before so the team's doing a great job. We've got a plan in place and I'm confident on how they're managing the challenges, we're having with that crop right now.
Thank you.
And our next question is going to come from Peter.
<unk> from Bank of America. Please go ahead Sir.
Hey, guys. Good morning, Thanks for taking the question.
Good morning, Peter.
If I could just come back to Andrew's question around the gross margins.
I guess, the first just a clarification point.
On the quarter itself I think if you put some of the adjustments back it's like a 25 one.
But you I think there was an additional hedging losses or mark to market loss. It wasn't adjusted out that would've actually resulted in an exit rate of a year that was much higher.
And maybe you would've square and against that 28 number that Andrew had mentioned that we were kind of also coming up with so I just wanted to clarify that distinctly to start off.
Yeah no. Thanks for the question Peter first I'd, just say that we really are pleased with our gross margin performance this quarter.
It's plus 300 basis points to about 25, 1% and that's despite.
Absorbing the lower margin EMEA business, and we talked about a couple of things. In addition to inflation. The other impact was that reduced fixed cost coverage that we have due to some of that extended maintenance downtime that was planned and then the other piece was the inventory write off so it's those components that are affecting our fourth quarter.
Margins in addition to the regular inflation that we've been seeing.
Okay. That's helpful. And then maybe Tom just just a broader question.
I started to feel some inbound just hey, if the crop comes in normal this year it doesn't matter.
Potatoes, and I mean, thats never historically been an issue in the past for pricing dynamics in the industry. So.
One I just was hoping you could address that kind of upfront and two you spoke about I think some of the capacity constraints youre still expecting through the course of the year for things like coding fries.
I would think that would keep industry supply demand dynamics pretty tight, but just wanted to give you the chance to talk about those topics. Thanks very much.
Yes.
So.
The thing that we manage every year is.
And we do really well is what what happens with the yields on the potato crop.
And right now knock on wood things look pretty good in terms of.
I've said in my prepared remarks, how the crops.
Progressing.
And we keep a close eye on our contracted.
Amount versus forecast versus what the market is doing and we do this globally. So we're tuned into it and we can make adjustments over the course of the next.
90 to 120 days to six months.
And adjusted EBIT of our new crop to balance the overall supply of potatoes out we do it every year the team the AG team does a great job doing that so.
I'm comfortable with where we're at in terms of contracted potatoes, and as with year over year over the next several months, we'll make some adjustments to acres.
And I will report out more in October on the balance of the crop and the quality of the main crop so.
That's really the key.
In terms of AG management that were.
We're really good at and the team does a great job and then in terms of capacity, we got some we're bringing on some capacity over the next 18 months.
And it's a testament to our belief in the category going forward.
While in the near term, we're seeing some softness in some areas over the long term I think the category is going to continue to be resilient as it has over historical timeframe and I feel great about how we're positioned our capacity coming online competition has some capacity coming online but.
Overall, the category is going to.
Absorb.
It is coming at it so I feel good about where the the near term and long term supply and demand is going to be continue to be balanced.
Yeah.
And our next question will come from Rob Dickerson from Jefferies. Please go ahead.
Yeah.
Great. Thanks, so much.
Just a quick question on the on the business exits rate lower.
Businesses is there.
Any kind of visibility to when you think that actually might start to decelerate or actually stopped like are you in the seventh inning or third inning, that's correct.
Yeah no.
It relates to our lower margin exits of the businesses, we have been doing that now.
Very close to being through.
The brunt of that work, we do continue to take a look at that though as our contracts come due and we make decisions to improve our customer and product mix as we look at the availability in our manufacturing footprint and the flexibility that we need to continue to serve our customers optimally.
Okay, Great and then.
Secondly.
In terms of.
Expectations for the.
Facilities.
Sounds like one that is still on track for hopefully maybe sometime Q for this fiscal year and then secondly.
In terms of.
The amount of capital deployed.
On the Capex side for all of facilities.
Yes.
$850 million at the midpoint.
Still clearly elevated relative to history, but.
Ken just to clarify.
Thinking about next fiscal year 'twenty five.
Most of that incremental should flow or should kind of.
Come come off the cash flow statement is that right.
Yeah, Rob So all of our capital projects are on track.
So do we have an elevated number this year and that's all been pre announced.
So as we think about the go forward.
As we have line of sight to some other strategic capitals.
We'll say is we'll give.
Additional guidance in the coming quarters on what the out years look like.
Going forward, so I'm not going to get into all of that on this call, but we.
We are taking a look at a couple of different.
Strategic capital projects that I won't go into detail, but Wolverine.
We will reevaluate guidance going forward here in the next quarter.
Got it Okay cool and then I guess just lastly.
We kind of round up the commentary on volume and pricing for the year.
No.
Okay.
There are usually.
Numerous.
Datasets that we can all look at in terms of industry restaurant traffic.
All things considered right, even though theres rescue remember speaking the pressure.
It does it look at their overall.
Pressure right now.
Is that right I mean, there is some pressure, but relative to pricing it is not that bad.
As you kind of think through the year given do you have baked into the guide.
Assuming these trends kind of stay where they are right and they don't get worse.
It seems like it's still a safe assumption, especially given what you've done historically.
We're not thinking about increased <unk> or pricing give back right.
Prices are where they are where they are in the industry.
As long as things kind of don't get materially worse.
The pricing is sticky.
Thanks.
Yes, Rob I look here the.
We've done a terrific job rebase our business this past year end.
Now we're at a point where.
We have selectively walked away from business.
And based on our capacity constraints and now we're going to evaluate as I said earlier, we're going to evaluate accounts and businesses go.
Globally going forward and the impact of that.
As I look at and how I've always manage this business is we're going to look where we can expand the overall profit pool. This company and drive adjusted EBITDA going forward and we May we may make some decisions where you know.
It may be.
Additive to our earnings.
And.
It may be decretive to our margin percentage, but we're going to make selective strategic choices going forward to do that just like we have in the past.
As we had now are at historic margin levels, and we worked hard over the last 15 months to get us to this level and now now we're in a good spot in terms of growing our company going forward and driving volume and that's what we're going to do and.
So it's going to be a bit of an adjustment over the coming year.
To drive account volume.
Makes sense, thanks, Tom Thanks, Tim.
Yes.
And Adam Samuelson from Goldman Sachs is next please go ahead.
Yes. Thank you good morning, everyone.
Good morning, Adam.
Good morning, maybe first a clarification question.
Dovetails into the perspective is kind of build outs.
For the 24 guidance.
One to $1 1 billion of incremental sales from the acquired businesses.
What's the assumed EBITDA contribution from acquisitions.
On a year on year basis, and 24 for the nine months.
Sorry, didnt consolidate any of them.
Yes, Adam we haven't given any specific earnings contribution related to those businesses. We've just given the top line.
Okay. It was worth a shot.
So I guess maybe holistically.
If you could give us where EMEA is relative to the legacy North America business on margins kind of.
Our understanding was that it was coming in at a lot lower.
At a lot.
Liability levels meaningfully below the U S. Can you help us think about kind of the line of sight you have scenario scenario that gap how much of that can you do it through your own mix management productivity.
Actions and how much is probably going to be dependent on changes in industry contracting for potatoes changes in market structure from consolidation.
That will take probably longer.
Yeah, Adam the way I would explain that as you know, we're not giving specific earnings contribution, but the adjusted EBITDA from the acquired businesses were well above the 20% to $30 million target that we provided.
As it relates to going forward as Tom said, Mark Schroeder is running that business and we're doing a lot of things there as we do look at mix management and pricing and we're confident in the actions that we've taken thus far and that will continue to deliver it going forward.
Okay.
So if I could just ask a follow up.
On the on the parent business again.
You look at your own capacity utilization, especially.
With the new potato crop coming in the fall.
The industry the industry has been.
Constrained from a raw material supply perspective.
And Tommy earlier, you alluded to the need to drive volume growth in the business.
How would you how would you look at your own capacity utilization.
The industry capacity utilization as you kind of go into the calendar 'twenty three.
Kinda crop years.
Yes, I mean as I've said previously our target is to.
Uh huh.
We are on the assets around 95% of capacity.
We're continuing to trend towards that with much improved over the prior year and Thats.
Really the sweet spot I think for us and I can't comment on the industry and what the other guys are doing but that's kind of where we're targeted and we're trending towards that.
Okay got that.
That's all that's all very helpful.
Thanks.
Yeah.
Yes.
And our next question is going to come from Matt Smith with Stifel. Please go ahead.
Hi, Good morning, Thank you for taking my question.
Good morning.
Good morning, Thank you.
A follow up on the.
The outlook, specifically around SG&A, which which is increasing obviously, including the EMEA consolidation, but I was wondering if you could provide some color on perhaps some unique factors impacting fiscal 'twenty. Four is for instance is the ERP spending, peaking here in fiscal 'twenty, four and any insight into the level of.
The amortization expense related to that EMEA would be helpful.
Yeah.
I said in my prepared remarks, SG&A is expected to increase about $200 million. This year, we are replacing again decades of under spending in it.
With the ERP, but also in other areas of the business as it relates to <unk>.
That's going to be about a third of it but then we've also got another.
Impact of the incremental EMEA SG&A for the three quarters that they werent included.
In our previous year results and then I did mention that we are going to have a step up in that noncash amortization related to the intangibles, we took on as well as once we place some of the ERP project and service, we're going to see incremental amortization. There. So it's those factors as well as incremental cost.
<unk> related some head count that will be adding to support the growing business thats, making up that increase.
Okay. Thank you for that and in terms of the IP spending in the ERP.
Investments, it's obviously a multiyear project is this a normal level of expense, we should think about for the coming years or is this a peak level of expense depending on where you are in the process of replacing your your system.
Yes, so the level of expenses going to increase as it relates to the non cash component because as that continues to build and we go live with the different areas of the system, we're going to see more amortization expense.
Some is going to be amortized over five to seven years and so that's more what youre going to see is that non cash component.
Okay. Thanks for that detail I'll pass it on.
Okay.
And once again, if you'd like to ask a question. Please press star one on your telephone keypad, William Reuter from Bank of America.
Next please go ahead.
Hi, My first question is you talked about the French fry attachment rate being above pre pandemic levels I couldnt tell from the tone, whether you're seeing a sequential decline in the French Fry attachment rate, maybe based upon some weakness in casual and other full service dining has there been a sequential change.
No no sequential change continues to remain well above pre pandemic level.
Okay, and then the question around Capex and it being elevated this year and the majority of the current projects being completed.
It sounds like there are some additional projects for future years.
Could some of those include acquisitions or are most of these most of these going to be just organic investments.
Yes, most of those are going to be organic investments again, as we take a look at our manufacturing footprint and the possibility for needs to add incremental flexibility for other products.
Great. That's all for me thank you.
Thank you.
And once again, if you have a question. Please press star one and Carla Casella from Jpmorgan is next please go ahead.
Hi, Tejas.
Two quick clarifications.
Thank you said you ended the year with no revolver borrowings and but I feel that that's up by about $243 million what was the draw was that.
China or elsewhere.
Yeah. So.
Net debt in terms of the cash position and then the other piece that we had was related to the incremental debt we brought on for EMEA acquisition.
Okay great.
And then.
Just on the overall cost you mentioned, the 20% to 30% increase in the potato.
Yes.
Across the different regions, what's the timeframe than that spans like when do we start to lap that full cost increase and where did it go in place.
Yes, so the incremental costs relates to the crop that we are harvesting now.
We'll continue to harvest the main crop through September October and use those potatoes until we get into next year's crop, which the early crop will start at a similar timeframe around July of next calendar year.
Okay, So with Carlos and cost next quarter, Yes, you.
It starts to hit our P&L.
From a P&L standpoint start to slow a bit in the second quarter.
Then.
Towards the end of the second quarter, just because we have with.
With FIFO inventory and we carry about 45 to 60 days of inventory.
Awesome. Thank you so much.
Thank you.
And I have no further questions in the queue I'd like to turn the call back over to Dexter God Blake. Please go ahead.
Thanks for joining the call today, a couple of things one we're on a plan to have our scheduled an investor day for Wednesday October 11 at the New York Stock exchange in the morning. So please hold that on your calendars.
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Send me an E mail and we could set a time for our call during the next few days.
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And this concludes today's call. Thank you for your participation you may now disconnect.
Okay.
Yes.