Q2 2024 Lamb Weston Holdings Inc Earnings Call
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Speaker Change: Good day, and welcome to the LAM Western Second Quarter earnings call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Dexter Congbele. Please go ahead, sir.
Good day and welcome to the Lamb Weston second quarter earnings call. Today's conference is being recorded at this time I'd like to turn the conference over to Mr. Dexter Hung Blake. Please go ahead Sir.
Dexter Conboay: Good morning and thank you for joining us for LAM Weston's second quarter of 2024.
Good morning, and thank you for joining us for Lamb Weston second quarter 2020 for a nurse call. This morning, we issued our earnings press release, which is available on our website Lamb Weston Dot com.
Dexter Conboay: This morning we issued our earnings press release which is available on our website lambweston.com.
Dexter Conboay: 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 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.
Dexter Conboay: Please refer to the cautionary statements and risk factors contained in our SEC filings for more details on our forward link.
Please refer to the cautionary statements and risk factors contained in our SEC filings for more details on our forward looking statements.
Dexter Conboay: 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 gap results.
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.
Dexter Conboay: You can find the gap to non-gap reconciliations in our earnings reports.
You can find the GAAP to non-GAAP reconciliations in our earnings real earnings release.
Dexter Conboay: With me today are Tom Warner, our President and Chief Executive Officer, and Bernadette Madreada, our Chief Financial Officer.
With me today are Tom Werner, our President and Chief Executive Officer, and Bernadette <unk>, our Chief Financial Officer.
Dexter Conboay: Tom will provide an overview of the potato crop and the current operating
Tom will provide an overview of the potato crop and the current operating environment.
Dexter Conboay: Bernadette will then provide details on our second quarter results, as well as our updated fiscal 2024 outlook with that. Let me now.
We're in a debt will then provide details on our second quarter results as well as our updated fiscal 2024 outlook.
With that let me now turn the call over to Tom.
Bernard: Thank you, Dexter. Happy New Year and thank you for joining our call today.
Thank you Dexter happy new year, and thank you for joining our call today.
Bernard: The entire LAM Western team delivered another solid quarter and I want to thank them for these results and continuing to execute the strategies that we outlined in our investor day presentation in October .
The entire Lamb Weston team delivered another solid quarter and I want to thank them for these results and continuing to execute the strategies that we outlined in our Investor day presentation in October.
Bernard: We strongly believe that our investments to expand capacity organically and through acquisitions, improve manufacturing and system capabilities, penetrate new channels and markets around the world, strengthen product, customer, and channel mix, and develop our people, have generated good near-term operating momentum, and have us well-positioned to capture our share of growth and profitability over the long term.
We strongly believe that our investments to expand capacity organically and through acquisitions improved manufacturing and system capabilities penetrate new channels and markets around the world strengthened product customer and channel mix and develop our people have generated good near term operating momentum and have as well.
To capture our share of growth and profitability over the long term.
Bernard: In the second quarter, we delivered record sales, reflecting the consolidation of our EMEA business and solid price-mixed growth.
In the second quarter, we delivered record sales, reflecting the consolidation of our EMEA business and solid price mix growth.
Bernard: Sales volumes, excluding acquisitions, declined, primarily driven by our decision to exit lower-price and lower-margin business, but as we expect, the year-over-year trend improved sequentially.
Sales volumes, excluding acquisitions declined primary primarily driven by our decision to exit lower priced and lower margin business, but as we expect the year over year trend improved sequentially.
Bernard: Adjusted EBITDA growth was also solid behind incremental earnings from confalidating AMIA, as well as higher sales and growth profit in the base business.
Adjusted EBITDA growth was also solid behind incremental earnings from consolidating EMEA as well as higher sales and gross profit in the base business.
Bernard: However, the increase was tempered by a $71 million charge to write off excess raw potatoes, $65 million of which was recorded in cost of sales and $6 million in equity method investment earnings.
However, the increase was tampered by $71 million charge to write off excess raw potatoes.
65 million of which was recorded in cost of sales and $6 million in equity method investment earnings.
Bernard: The reason and magnitude of this charge is very unusual, so let me give you a little more color on it.
The reason the magnitude of this charge is very unusual so let me give you a little more color on it.
Bernard: In January 2023, we developed an initial sales forecast for the following physical year that reflected a gradually strengthening consumer and recovering global demand.
In January 2023, we developed an initial sales forecast for the following physical year that reflected a gradually strengthening consumer and recovering global demand.
Bernard: That forecast was developed based on the information available at that time.
That forecast was developed based on the information available at that time.
Bernard: We use this initial sales forecast to determine the number of contracted acres to grow the raw potatoes needed to deliver that sales forecast.
We use this initial sales forecast to determine the number of contracted acres to grow the raw potatoes needed to deliver that sales forecast.
Bernard: For our agreements with our growers, we're obligated to purchase all the potatoes grown on these contracted acres.
Per our agreements with our growers, we're obligated to purchase all the potatoes grown on these contracted acres.
Bernard: However, our initial sales forecast has turned out to be more aggressive than our current estimate reflecting a recent restaurant traffic demand trends as consumers continue to absorb the cumulative effect of inflation.
However, our initial sales forecast has turned out to be more aggressive in our current estimate reflecting recent restaurant traffic and demand trends as consumers continue to absorb the cumulative effect of inflation.
Bernard: As a result, we have purchased more potatoes than we need to meet our current sales targets and have taken a charge to write off the estimated excess.
As a result, we have purchased more potatoes, and we need to meet our card sales targets and have taken a charge to write off the estimated excess.
Bernard: Although overall demand growth is slower than we anticipated a year ago, it remains resilient.
Although over the overall demand growth is slower than we anticipated a year ago remains resilient.
Bernard: Brightashment rates in the U.S. are stable and in line with what we projected in January 2023. Outside the U.S., restaurant traffic in most of our key international markets continues to grow, including double-digit growth in China.
The attachment rates in the U S are stable and in line with what we projected in January 2023.
Outside the U S restaurant traffic in most of our key international markets continues to grow including double digit growth in China.
Bernard: We remain confident that our volume trends will continue to improve in the back half of fiscal 2024 as we begin to lap and backfill exited volumes with higher margin business.
We remain confident that our volume trends will continue to improve in the back half of physical 'twenty 'twenty four is as we begin to lap and backfill exited volumes with higher margin business.
Bernard: This includes our target for year-over-year volume growth in the fourth quarter.
This includes our target for year over year volume growth in the fourth quarter.
Bernard: In addition, we expect our volumes will continue to recover in physical 2025 and have planned to contract for
In addition, we expect our volumes will continue to recover and physical 2025.
And have planned to contract for Akers Accordingly.
Bernard: While we are disappointed with the write-offs, the underlying fundamentals of the business are operations and the category remains solid.
While we are disappointed with the write offs and the underlying fundamentals of the business our operations in the category remains solid.
Bernard: Our volume trends are improving in line with our expectations. Global demand is resilient as consumers continue to face stiff food away from home inflation. Our new greenfield processing facility in China is now operational.
Our volume trends are improving in line with our expectations.
Demand is resilient as consumers continue to face stiff food away from home inflation.
Our new Greenfield processing facility in China is now operational.
Bernard: Price mix trends in the U.S. and most of our key international markets remain solid, while input cost inflation is decelerating. We deliver strong adjusted EBITDA growth and gross margin expansion excluding the potato write-off.
Price mix trends in the U S and most of our key international markets remained solid while input cost inflation is decelerating we.
We delivered strong adjusted EBITDA growth and gross margin expansion, excluding the potato write off.
Speaker Change: And as Bernadette will explain in greater detail, we're reaffirming our physical 2024 Adjusted EBITDA guidance range despite absorbing the write-off while raising our EPS estimates.
And as Bernadette will explain in greater detail, we're reaffirming our physical 'twenty 'twenty four adjusted EBITDA guidance range, despite absorbing the write off.
While raising our EPS estimates.
Speaker Change: Overall, we continue to be pleased with our operating momentum and confident in our ability to deliver our full-year financial target.
Overall, we continue to be pleased with our operating momentum and confident in our ability to deliver our full year financial targets.
Speaker Change: Let me now turn the call over to Bernadette for a more detailed discussion on our second quarter results and updated outlook.
Let me now turn the call over to Bert a dead for a more detailed discussion on our second quarter results and updated outlook.
Bernundad: Thanks, Tom, and Happy New Year, everyone. I also want to start off by thanking the entire LAM Weston team for the continued execution of our strategies and for delivering another quarter of strong financial results.
Thanks, Tom and happy new year, everyone.
I also wanted to start off by thanking the entire Lamb Weston team or the continued execution of our strategy for delivering another quarter of strong financial results.
Bernundad: For our second quarter, sales increased about $455 million or 36% to more than 1.7 billion.
For our second quarter sales increased about $455 million or 36% tomorrow to one 7 billion.
Bernundad: About $375 million, or more than 80% of the increase, was attributable to the incremental sales from the acquisition of the EMEA business.
About 375 million or more than 80%.
It was attributable to the incremental sales from the acquisition of the EMEA business.
Bernundad: We'll continue to receive the incremental benefit from the consolidation of the AMIA business in the third quarter, and as a reminder, since we began to consolidate AMIA's sales beginning in the fourth quarter of fiscal 2023,
We will continue to receive the incremental benefit from the consolidation of the EMEA business in the third quarter.
As a reminder, since we began to consolidate sales beginning in the fourth quarter of fiscal 2023.
Bernundad: Those results are included in our last year's sales baseline.
Those results are included in our last year's sales baseline.
Bernundad: Excluding the incremental sales from the AMIA acquisition, NetSales grew 6%, price mix was at 12%, as we continued to benefit from the inflation-driven pricing actions taken in fiscal 2023.
Excluding the incremental sales from EMEA acquisition net sales grew 6%.
<unk> mix was up 12% as we continued to benefit from the inflation driven pricing actions taken in fiscal 2023.
Bernundad: along with the pricing actions taken this year in both our North America and international segments.
Along with the pricing actions taken this year in both our North America and international segments.
Mix was also favorable as we continue to strategically manage our product and customer portfolio.
Lower freight charges to customers were about a one point headwind.
Bernundad: Total sales volumes declined 6%, which was in line with our expectations.
Total sales volumes declined 6%, which was in line with our expectation.
Bernundad: The decline was primarily due to the carryover impact of exiting the lower margin business during the second half of fiscal 2023.
The decline was primarily due to the carryover impact of exiting the lower margin business during the second half of fiscal 2023.
Bernundad: Volume elasticities, or the amount of volume lost in response to inflation-based pricing actions, remain low.
Volume elasticity or the amount of volume lost in response to inflation based pricing actions remain low.
Bernundad: While sales volumes declined compared to the prior year period, it's a sequential improvement from the 8% decline that we delivered in our fiscal first quarter. The improving trend largely reflects no further impact of the inventory destocking in Asia and North America that we experienced in the first quarter and the gradual backfilling of the business that we chose to exit.
While sales volumes declined compared to the prior year period, it's a sequential improvement from the 8% decline that we delivered in our fiscal first quarter the.
The improving trend largely reflects no further impact of the inventory Destocking in Asia, and North America that we experienced in the first quarter and the gradual back filling of the business that we chose to exit.
Bernundad: Moving on from sales, gross profit, excluding unrealized market market gains and losses related to derivatives and items impacting comparability, increased $97 million to nearly $480 million.
Moving on from sales gross profit, excluding unrealized mark to market gains and losses related to derivatives and items impacting comparability increased $97 million to nearly $480 million.
Bernundad: Our gross profit growth was tempered by a $65 million charge for the write-off of excess raw potatoes.
Our gross profit growth was tempered by a $65 million charge for the write off of excess raw potatoes.
Bernundad: Excluding this charge, as well as the mark-to-market and comparability items, gross profit increased $162 million to more than $540 million.
Excluding this charge as well as the mark to market and comparability items gross profit increased $162 million to more than $540 million.
Bernundad: about half of this increase was driven by the cumulative benefit of pricing actions, mixed improvement and supply chain productivity in our legacy landwreston business, which more than offset higher input and manufacturing cost per pound and the impact of lower volume.
About half of this increase was driven by the cumulative benefit of pricing actions mix improvement and supply chain productivity and our legacy Lamb, Weston business, which more than offset higher input and manufacturing cost per pound and the impact of lower volume.
Bernundad: The other half of the increase was from incremental earnings from consolidating EMEA.
The other half of the increase was from incremental earnings from consolidating EMEA.
Bernundad: Input costs increased, mid to single digits on a per pound basis, which is a bit lower than the mid to high single digits that we saw in the first quarter.
Input cost increase mid single digits on a per pound basis, which is a bit lower than the mid to high single digits that we saw in the first quarter.
Bernundad: The increases were largely driven by a 20% increase in the contracted price for potatoes in North America and continued increases in the cost of ingredients for batter coating, labor, and other key inputs.
The increases were largely driven by a 20% increase in the contracted price for potatoes in North America.
And continued increases in the cost of ingredients for batter coding labor and other key inputs.
Bernundad: The inflation was partially offset by supply chain productivity savings, lower cost for edible oils, and lower freight costs.
The inflation was partially offset by supply chain productivity savings lower costs for edible oils and lower freight costs.
Bernundad: S-GNA, excluding comparability items, increased $42 million to $177 million.
SG&A, excluding comparability items increased $42 million to $177 million.
Bernundad: More than two-thirds of the increase was from incremental S-GNA with the consolidation of AMIA, with the remainder largely driven by higher expenses related to improving our IT and ERP infrastructure, as well as compensation and benefit expenses.
More than two thirds of the increase was from incremental SG&A with the consolidation of EMEA with the remainder largely driven by higher expenses related to improving our it and ERP infrastructure as well as compensation and benefit expenses.
All of this led to adjusted EBITDA, increasing 15% to $377 million.
Excluding the write offs for excess raw potatoes, adjusted EBITDA increased 36% to $448 million.
Higher sales and gross profit in the base business drove most of the growth with the remainder attributable to the incremental earnings from consolidating EMEA.
Moving to our segments.
Sales in our North America segment, which includes sales to customers in all channels in the U S, Canada, and Mexico increased 10% in the quarter.
Price mix was up 14%, which was driven by the carryover benefit of pricing actions that took effect in fiscal 2023 across each of our primary sales channels as well as some pricing actions taken this year and favorable mix as we continued to benefit from our revenue growth management and other mix improvement.
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Lower freight revenue, partially offset the increase by about one five points.
Volume in North America declined, 4%, reflecting the carryover impact of exiting lower margin business. During the second half of fiscal 2023. This is a sequential improvement from the 5% decline in our fiscal first quarter.
North America segment, adjusted EBITDA increased 7% to $321 million.
The carryover benefit of pricing actions and favorable mix more than offset a $63 million charge for the write off of excess raw potatoes, higher cost per pound and the impact of lower volumes.
Sales in our international segment, which includes sales to customers in all channels outside of North America grew about $350 million.
Of which $376 million were incremental sales from the EMEA acquisition.
Excluding the EMEA acquisition net sales declined 12%.
<unk> mix was up 10% driven primarily by the carryover benefit of pricing actions taken last year discrete pricing actions taken this year and favorable mix.
Sales volumes fell 22%, primarily reflecting the carryover impact of exiting the lower margin business during the second half of fiscal 2023.
International segment, adjusted EBITDA increased 66% to $100 million with incremental earnings from the consolidation of EMEA financial results driving the increase.
Excluding the EMEA acquisition higher cost per pound, along with the impact of lower volume more than offset the favorable price mix.
The higher cost per pound included an $8 million charge allocated to the international segment for the write off of excess raw potatoes, which was based on the percentage of finished goods shipments to international markets.
Moving to our liquidity position and cash flow.
Our balance sheet is strong we ended the quarter with our net debt leverage at two four times adjusted EBITDA up from two three times at the end of our fiscal first quarter.
Net debt ticked up a couple of hundred million dollars to more than $3 5 billion as we drew on our U S revolver to largely finance seasonal working capital needs and increased capital expenditures.
We also accelerated some payments to suppliers in advance of our ERP system go lives at the beginning of the third quarter.
In the first half of the year, we generated $455 million of cash from operations or nearly $170 million more than the first half of last year.
<unk> due to higher earnings.
Capital expenditures in the first half were about $565 million.
Which is up about $300 million from the prior year period, primarily due to construction and equipment purchases as we continue to expand processing capacity and Idaho, Argentina and the Netherlands.
As Tom mentioned, we started up our new facility in China, a couple of months ago.
As we discussed during our Investor day in October our first priority is investing in our business, which we are doing organically with our capacity expansions.
We also remain committed to returning capital to our shareholders.
During the first half of the year, we returned more than $230 of cash to our shareholders comprised of $82 million in dividends and $150 million in share repurchases.
This includes $50 million of stock repurchased in the second quarter at an average price of $87 imported one cents.
We acted opportunistically based on our stock price.
In addition in October we raised our share repurchase authorization to $500 million.
And in December we announced a 29% increase in our quarterly dividend to <unk> 36 per share.
Turning now to our fiscal 2020 for outlook.
We reaffirmed our full year sales and EBITDA targets and raised our EPS estimate despite the charge to write off excess raw potatoes.
Specifically, we reaffirmed our annual net sales target of six $8 billion to $7 billion.
This includes $1 one to $1 2 billion of incremental sales attributable to the EMEA acquisition during the first three quarters of the year.
Six five to eight 5% net sales growth excluding our acquisition.
For the year, we continue to target price mix to be up low double digits with price mix in the second half slowing sequentially from the 17% increase that we delivered in the first half as we lap more of last year's price actions.
We continue to target our full year volume, excluding acquisitions to be down mid single digits compared with the prior year as we maintain our cautious view of the consumer.
That said, we expect year over year volume trends in each of our segments will continue to improve in the second half of the year as we lap some of the significant low margin low profit volume that we chose to exit in the second half of last year and as we gradually backfill the exited lower margin business with more profitable business.
We expect volume growth to be positive in the fourth quarter.
For earnings we're reaffirming our adjusted EBITDA range to one five points to $162 billion were.
We're maintaining our EBITDA range target, despite absorbing a $71 million charge for the write off of excess raw potatoes.
We're raising our adjusted diluted EPS estimate to $5 70.
To $6 15 from our previous range of $5 50 to $5 95.
The increase which also includes the impact of the raw potato write off is largely due to two items.
First we are reducing our SG&A target by $20 million to a range of $745 million to $755 million as we continue to manage our operating cost.
And second we are reducing our interest expense target by $15 million to $140 million as we expect to capitalize more interest associated with our capacity expansion.
We're also updating a couple of other financial targets.
We reduced our depreciation and amortization expense by $20 million to $305 million.
We also increased our capital expenditures targets of $900 million to $950 million up from our previous estimate of 800 to 900 million to account for the timing of spending for our capacity expansion projects.
Before I turn the call back over to Tom Let me give you a quick update on our ERP implementation.
At the beginning of our fiscal third quarter, we transitioned some of our central systems in North America that manage supplier payments inventories warehousing customer invoicing and customer shipments to S. P.
We're experiencing the usual bumps associated with these highly challenging large scale projects, but don't expect that the cutover will have a material impact on our full year business or operating results.
The estimated financial impact of the systems go live is included in our fiscal 2024 targets, including the impact of pausing production and increasing planned downtime at our processing facilities.
Road by a gradual ramp up of production at.
Reduced shipments due to short term inventory visibility challenges at our third party finished goods warehouses in the period immediately following the cutover.
As a result of the increased production downtime, our third quarter gross margin, which is typically our strongest will be pressured by higher manufacturing costs, reflecting reduced fixed cost coverage and other cost inefficiencies.
With respect to sales, we expect the inventory visibility challenges that we experienced at the third party warehouses to affect shipments and temper the sequential improvement in our third quarter volume trends, but as I mentioned earlier, we continue to expect positive year over year volume growth in our fiscal fourth quarter.
I want to thank our customers and our warehousing and logistics service partners for working with us to manage through the transition.
And most importantly, I want to thank our Lamb Weston team members that have been working tirelessly on this project, including throughout the holiday season.
We will provide a further update on the transition of the central systems and processes as well as the general timeline for implementing the new ERP system throughout our manufacturing network during our third quarter earnings call in April.
In summary, we delivered another strong quarter of top and bottom line growth as we continued to execute our strategies manage our portfolio mix and manage costs. We continue to expect volume trends to improve in the second half of the year, while remaining cautious about the effect of inflation on the consumer.
And finally, we updated our earnings estimates for the year, including reaffirming our annual EBITDA range. Despite absorbing a write offs for excess raw potatoes, and raising our annual EPS estimates to reflect lower SG&A and interest expense.
Let me now turn it back over to Tom for some closing comments.
Thank you Bernadette, let me sum it up by saying we feel good about the overall health of the global category and the drivers for demand growth. We also feel good about our operating momentum momentum and are confident in our ability to deliver our updated financial targets for the year.
And finally, we believe there are focused on executing our strategies will continue to have us well positioned to drive sustainable profitable growth and create value for our shareholders over the long term.
Thank you for joining us today now we're ready to take your questions.
And if you would like to ask a question. Please signal by pressing star one on your telephone keypad. If you are using a speaker phone. Please make sure. Your mute function is turned off to meyerson mill to reach our equipment.
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We'll take our first question from Matt Smith with Stifel.
Hi, good morning.
Thank you Matt.
To ask a question about your reiteration of guidance, despite the $71 million potato charge. If you could talk about what led to the potato charge. It sounds like your initial contracted acres, where based on your outlook from January of the past year or so have you changed your Val <unk>.
Your shipment volume expectations relative to the guidance that you initially provided us in July.
And then with the excess potato charge does that represent the full amount of excess potatoes or were you able to utilize some of the higher than expected yields either through processing finished goods are holding more raw potatoes into next year and how does that impact how you go about contracting acres for next year.
Based on your current expectation for volumes into next year.
Okay.
Yeah, Matt. Thank you for the question I think as it relates to the first one and it relates to guidance.
The amount of shipments and volume that we had in our guidance in July has not changed from what we have now again that was we had to determine the number of acres to plants back in January of 2023, but the last time, we gave guidance theres been no changes.
And then the second question as we think through the crop. This year. There are met against that we would have taken into consideration in terms of carrying some higher finished goods inventory for products that we know that we're going to sell.
And then as we always do we will take that into consideration as we determine the number of acres that we're going to plan for the upcoming year.
Thank you Bernadette and maybe as a follow up could you talk about how your contract negotiations are progressing with farmers into next year given it sounds like maybe you are going to contract for fewer acres, how does that change the pricing conversation.
Matt This is Tom.
Al.
As we do every year, we're right in the middle of negotiations, so we're not going to get into.
Where we're at in that process as we always do in July October.
We will give you an overview of kind of where we ended up in and talk about that in more detail, but right now.
<unk>.
Right in the middle of it so we're going to reach that we respect that process.
Thank you Tom Werner that I'll pass it on.
Yeah.
We will now take our next question from Adam Samuelson with Goldman Sachs.
Yes. Thank you good morning, everyone.
Yes. Good morning, So maybe just good morning, just on the charge and I wanted to just be clear as we think about.
Otherwise your gross profit margin in this quarter would have been 350 or so basis points higher.
Your full year gross margins would have been.
The impact for the full year is about 100 basis 90 to 100 basis points and so as we think about.
The absence of this charter assuming it wouldn't repeat in 2025.
All else equal.
Profit margins are tracking kind of pretty comfortably ahead of how you frame your business outlook.
At the Investor Day in October.
Characterizing that.
Yeah, no. Thanks Adam.
Correct, our Q2 gross margin implies a 31, 3%.
Margin, excluding the write off of the potatoes, and as we've been talking about.
That increase is related to the pricing actions and then catching up to the multiyear impact of inflation.
Also allowing the benefit of the productivity and mix that fall through so those are some of the things that you are seeing as it relates to the third quarter keep in mind that it's going to be down sequentially from that.
That's going to reflect that reduced fixed cost coverage that we're going to have as we started up our ERP and we needed to take some downtime and ramp our plants up slowly.
Okay. That's helpful and then.
Maybe one for Brian.
A little bit more detail on the progress on integrating EMEA.
And just how do we think about where you are with that group on some of the revenue growth management tools.
Been implemented successfully in North America.
How kind of that business has been performing on an organic basis.
They will start to begin the year on year comparisons organically in fourth quarter, but just are you tracking ahead of where you thought or what do you think do you think those are GM tools are in terms of being deployed.
Yes, Adam this is Tom and I'll tell you.
Really pleased on where we're at in terms of the integration of EMEA at this point.
We're towards the tail end of that and the team has done a terrific job.
Across the organization functionally commercially.
Really connecting up and we've we've reorganized the.
The organization to reflect the global company that we are now so I'm pleased with where we're at in terms of initiatives.
Your specific question on <unk>, that's definitely on the radar.
But that's going to be down the road based on.
A number of other initiatives, we have going on in the company that really need to keep our focus on executing specifically to the ERP implementation right now so.
We are at the tail end of it feel great. The team is doing a magnificent job getting integrated.
And I am pleased with where we're at today.
Okay I appreciate the color I'll pass it on.
We will now take our next question from Robert Moskow with TD Cowen.
Hi, Thanks for the question.
And a lot of other food industries, when when raw material supplies far exceed.
What's the demand expectations, where you would expect some <unk>.
Impact on pricing some negative impact on pricing, but your industry is not like a lot of those others. So Tom maybe you could talk a little bit about.
Your pricing power in the industry's pricing.
And why the excess potatoes are are not a concern.
Yes, Robert the thing to remember is.
The commodity in our business potato, it's a one year crop and so you have to process it and certainly like Virtu that alluded to we looked at all of the mitigating factors like we do every year and.
It was just an unusual circumstances to the order of magnitude typically we manage through.
Different positions based on our forecast.
And this.
This year is different and the crop overall is really really good and it's just a matter of.
You got to make some decisions based on the demand forecast utilizing your plants running the crop longer.
And economically this was the best decision to move forward based on as we're going through.
The end of this crop and moving into the next crop in comp.
Come June July so.
It's a different it's a different commodity it's it has a shelf life.
That's rather short and a lot of the other commodity businesses I've been around and so.
It's something we manage through every year and unfortunately.
How the operating environment and the environment with this particular crop shaped up.
The quality of the crop yields.
Just put a lot of pressure on availability, which there is plenty of potatoes around.
Got it got it.
Hi, I guess a follow up.
Think you said on the last call that about 20% of your North American.
<unk> was still in contract discussions.
As all of that done now and did you get the pricing that you expect it to get in those discussions.
Yeah. So the contract renewal process is complete now and we feel really good about where in the aggregate we ended on both pricing and terms.
A lot of that relates to the large chain restaurants that we typically will finalize in the back half of the year and that's what makes up that 20% that you're referencing.
Great. Okay. Thank you.
Okay.
We will now take our next question from Rob Dickerson with Jefferies.
Okay.
Great sorry about that thank you.
Yes.
A quick clarification question I wanted to come back to the.
Kind of a sequential I guess implied gross margin trajectory for Q3, I guess its more for Bert I think you said right there.
So maybe you were kind of being shut down temporarily to implement some of the ERP.
Initiatives.
But then at the same time right Q3 is usually the highest gross margin quarter.
And at the same time, we're comparing it to Q2, we are inclusive of the write down but then extra right now are like closer to a 31. So it's a very basic question.
With a long buildup.
If you were saying that the gross margin would be down sequentially, a little bit from the normalized gross margin in Q2, once we X out the inventory is that how you were speaking to that.
Yeah, exactly so I'd say, it's going to be down sequentially from the 31%, that's excluding that write off and thats really reflecting the reduced fixed cost coverage that we're going to have as a result of taking those plants down.
Fully cut over.
Got it and then in terms of the EBITDA margin in the same state.
<unk> closed.
Absolutely.
Okay cool.
Then I guess.
Just back to the volume piece.
No change there still expected for volumes to be down mid single digit for the year.
I remember coming out of the last call there were some questions around that because getting.
Al real down like mid mid single digits.
<unk> seen kind of challenging for thinking Q4 is up even if it's up a little bit.
Now we have the first half so.
Got it.
Put it all together and think well what if.
Q3, youre still seeing that kind of.
Overall volume should improve year over year sequentially relative to Q2, and then Q4 is up a little bit that still get you down to at least.
A 4% decline and I'm just asking that.
Kind of in a detailed way because.
It is challenging to get down any more than.
4% right.
Yeah, Rob yes, so the way to look at it is first we're really pleased with what we're seeing from a volume perspective, and a sequential improvement that we've continued to post.
We will be positive in the fourth quarter, but the thing we've got to keep in mind is that we are having reduced shipments as a result of converting over to our new ERP I spoke about the inventory visibility challenges that we've had with our third party warehouses.
I'm confident and that we're correcting those but we are going to temper our volume.
Increases in the third quarter as a result of that.
Okay. So kind of in theory like volumes could be down in Q3, maybe similar way relative to Q2, hopefully a little bit better but.
There are a bunch of moving pieces that we shouldnt be expecting like a nice sequential improvement in Q3.
Right.
Okay Cool and then.
<unk>.
I just want to touch on China quickly Tom I think you said, China is growing double digit kind of normalized I guess once we ex out some of the business exits.
Maybe just kind of touch on kind of overall environment in China, and kind of what youre seeing given all the news flow over the past few months and then maybe just if.
If you could touch on.
Your ability, let's say to continue to partner with Mcdonald's over the next couple of years clearly as they look to truly expand within the country. That's it. Thank you.
Yeah, Rob so.
As we stated earlier.
Earlier that.
China is growing at double digits.
We're well positioned we've just opened up our second factory over there, it's up and running and operating.
It gives us.
Considerable flexibility as we're thinking about the next years.
Contracting coming up.
And so we're there's a lot a lot of news feed on China, and the economy and all that that is going on.
But in terms of the category.
We feel good about where that's at based on the data. We look at I will just tell this has grown double digits, we've got a plan up and coming we've got.
Line of sight to how we're going to.
Look at that market and potential customers that we can support and more to come on that but as we go through this contracting season in that international market.
Well positioned.
Sure.
<unk>.
<unk> gained some business.
Yeah, and then just to clarify the double digit growth as it has been in restaurant traffic that we're seeing in China.
Alright, that's all thanks James.
Once again that is star one if you would like to ask a question. We will now take our next question from Peter Galbo with Bank of America.
Hey, guys. Good morning, Thanks for taking the question.
Good morning, good morning, Pete.
I guess just.
On the pricing front, obviously, you're going through some contract negotiations, but if I remember correctly you have some contracts I think with your global customers that that actually kicked in.
A couple of days ago, or I guess the start of Q3. So just can you remind us kind of what the what the dynamic looks like there or that embedded price that we should be thinking about price mix that we should be thinking about in the back half of the year.
Yeah. So we did have some contracts where that pricing took effect in the back half of the year I think it's key though too as you look at the back half of the year to expect to see a deceleration from the 17% that we delivered in the first half as we continue to lap those price increases.
But yes, we will see the impact of those contracts that are coming up.
Two are affecting our pricing in the back half of the year.
Just like we always have got it okay. Okay, and then and then Tom maybe just back to the Investor Day, I know there was a conversation around.
Getting back to algorithm kind of in fiscal 'twenty five.
Noting some of the volume challenges.
You know that youll that you'll begin to lap by that and maybe into Q4. I mean is that is that kind of still the expectation, where we sit today relative to October that.
As we get into 'twenty five the <unk>.
<unk> trends could at least get back to what you stated is kind of a long term algorithm. Thanks very much.
Yes, Peter we fully expect.
To continue to drive and deliver our algorithm over the long term as we stated in October and we're working all the the <unk>.
Panels.
To deliver that and as we have in the past we've been very consistent.
All meeting those commitments and I expect and as we look forward.
With the category and how we're getting positioned with some of the capacity additions and I fully expect us to.
Drive volume in meet our commitments as we talked about in October.
Great. Thanks, so much guys.
We will now take our next question from Andrew Lazar with Barclays.
Great Good morning, everybody.
Good morning, Andrew.
I guess I'll start with I was wondering if you're able to sort of help us quantify a little bit maybe how much sort of volume gets pushed from Q3 to Q4 based on some of the cutover dynamics that you mentioned I'm really trying to get a sense about what the underlying sort of volume picture looks like for Q4, particularly as it.
It's too as we move into next year.
Yeah, Andrew I think the way to think about that is.
We're not going to quantify any amount, but certainly there are some shipments that would be retail and foodservice that would be lost in third quarter, whereas the chain would be more of a carryover so again down or.
So it's going to be tempered in terms of the any increase as it relates to volume in the third quarter, but definitely positive in the fourth quarter as we had originally projected.
Okay.
If we excluded some of the cutover dynamics do you think volume and <unk> would have been positive anyway, or maybe closer to flattish or even down a little bit maybe.
No absolutely absolutely positive in the fourth quarter, that's what we've been anticipating since we gave our July guidance and it continues to remain sound.
Great. Thanks for that and then Tom I'm curious.
We walked away from some lower margin customers in the back half of last year that youre going to start to lap as we go into the back half of this year.
And as you start to replace or start to add in new customers with some of the new capacity coming in I am curious, where we're where those maybe some of these new customers that youre, gaining where where they are or have they been getting supply from before.
Yeah.
And are you displacing others now that you have some capacity or im trying to get a sense because it doesn't seem like you've ever gone anywhere and not been able to get franchise. So I'm just wondering where some of these new customers were.
Sourcing product, maybe before you became a supplier to them if that makes sense.
Yes, Andrew I understand the question I am not going to get into very specifics on customers or where it's coming from but.
Ideally we have line of sight to.
Market's opportunities.
And as we go through our normal contracting season coming up ideally it would be perfect timing, but it doesn't always match.
When you potentially wind business.
But we do have a plan we have line of sight and I'm not going to get into the specifics of where and who and.
With respect to our customers and.
I'll just leave it at that Andrew.
Okay. Thank you.
As a reminder that is star one if you would like to ask a question. We will take our next question from Mark towards with Wells Fargo Securities.
Hey, good morning. Thanks for the question it sounds like trends are a little softer than initial plan from January 23, but you noted demand remained solid relative to the initial guide could you maybe reconcile that commentary.
Some of those trends in traffic that youre seeing that gives you confidence.
Volumes, improving on an underlying basis.
Yes.
As I stated.
The crop acres tomato yields.
Based on what we always what we planned for.
Initial front end of the crop cycle.
Certainly.
<unk>.
You know better than what we expected and have seen the last several years and the overall forecast as I stated earlier that we had in terms of overall volume and sales.
Was a little softer than what we had originally planned.
As we've been.
The guidance, we gave in July and continue.
We update in October was based on.
The forecast, we're seeing at the time and so certainly there as.
It was not as good as we had planned when we plan on the crop.
But again to Bernadette <unk> reiterated we see are our forecast from July in terms of sales and volume has has not really changed for the balance of the year. So it's really just.
<unk>.
Crop acre yield issue that caused the write off based on what we initially forecasted in July for the FY 'twenty four so again, we feel confident about.
The underlying fundamentals of the business, where we're at our guidance from last time has not changed.
And we see line of sight to Q4 volume improving as we've stated on this call. So.
All things are pointing towards sequential improvement for the balance of the year, albeit just keep in mind that Q3 is going to.
We have some challenges with the ERP cutover.
And Tom if I could add to that when we made the initial plan of those acres you guys see the same data that we do in U S restaurant traffic trends have slowed.
Since that time and that was included in our updated July forecast, but the Fry attachment rate continues to be allowed to pre pandemic levels continues to be strong as Tom mentioned.
Okay, great that makes sense and then.
The SG&A outlook for the year, a little more color here is that timing around some of those special projects are you pulling.
Pulling back.
<unk> expenses or is that better leverage on the core.
It's going to be some better leverage, but just overall cost management that we're doing as we look forward to the second half. Thank you.
Yes.
Okay, great. Thank you.
Okay.
And that does conclude our question and answer session I would like to turn the conference back over to Mr. Conway for any additional or closing comments.
Thanks, everyone for joining the call today.
Follow up discussions.
Please send me an email we can schedule some time.
Have a great day and happy new year. Thank you.
And once again that does conclude today's conference. We thank you all for your participation you may now disconnect.
Okay.
Okay.
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Sure.
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