Q1 2025 Lamb Weston Holdings Inc Earnings Call
Speaker Change: Good day and welcome to the Lamb Western 1st quarter fiscal year 2025 earnings call. Today's call is being recorded. At this time, I'd like to turn the call over to Dexter Congbalay. Please go ahead.
Speaker Change: Good morning and thank you for joining us for lambwessence 1st quarter 2025 earnings call. Yesterday we issued our earnings press release which is available on our website lambwessence.com
Speaker Change: Please note that during our remarks.
Speaker Change: Will make them forward looking statements about the company's expected performance of 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 filing for more details on our forward-booked statements.
Speaker Change: Some of today's remarks include non-gap financial measures, these non-gap financial measures not be considered a replacement for and should be read together with our gap results. We can find the Gap to non-gap reconciliation in our earnings release.
Tom Warner: With me today at Tom Warner, our President of Chief Executive Officer in Bernadette Madarieta, our Chief Financial Officer, Tom will provide an overview of the current operating environment and cost reduction actions that we announce yesterday and an update on this year's potato crops.
Bernadette Madarieta: Bernadette will then provide details on our first quarter results as well as our updated fiscal 2025 outlook.
Bernadette Madarieta: With that, let me now turn the call over with Tom. Thank you, Dexter. Good morning and thank you for joining our call today. We delivered financial results for the first quarter that were generally in line with our expectations. Sales came in above our target driven by better than an expected volume and price mix.
Tom Warner: Our volume performance reflected our effort to recapture customers' sharing when new business. Solid execution and many of our key international markets.
Bernadette Madarieta: and only slight improvement in restaurant traffic trends.
Bernadette Madarieta: Overall, price mix increase as inflation-driven pricing actions in our key international markets more than all set investments in price and North America.
Justin Ibadoff: Justin Ibadoff for the quarter was slightly above our target due to better sales and SNA performance.
Justin Ibadoff: However, this is partially all set by higher than anticipated manufacturing costs.
Justin Ibadoff: Well, we're encouraged by our first quarter performance relative to our expectations. We continue to expect frozen potato demand and global restaurant traffic to remain challenging through fiscal 2025.
Justin Ibadoff: According to restaurant industry data providers, during our physical first quarter, we saw early evidence of U.S. restaurant traffic transit proving during the summer months as U.S.R. stepped up promotional activity, and as consumers continue to adjust to the cumulative effect of menu price inflation.
Justin Ibadoff: I'll ever traffic remain negative.
Justin Ibadoff: Overall, U.S. restaurant traffic as well as U.S. art traffic in the quarter is down 2% versus a prior year. That's a sequential improvement from the down 3% that we observed during our physical 24th quarter.
Justin Ibadoff: Graphic at QSR change, specializing in Amberder, a highly important channel for fried consumption and our physical first quarter was down about 3%. That's an improvement from down more than 4% during our physical 20-24-4th quarter.
Justin Ibadoff: and Portland Traffic Transit USR hamburger improves sequentially each month of our first quarter as promotional activity increased.
Speaker Change: We're obviously pleased with the growth in restaurant traffic but it's important to know that many of these promotional meal deals have consumers trading down from a medium fry to a small fry So while we benefit from improving traffic trends, consumers trading down and serving size acts as a parcel headwinds for our volumes
Speaker Change: Outside the U.S. overall restaurant traffic trends in our key international markets in our first quarter, we're softer than what we observed in our physical 2024 or fourth quarter.
Speaker Change: Breast on Trafficking the UK, or Largest Markin in Europe to climb to about 3%, which is down to coincidentally from a climb to about 2%.
Speaker Change: In Germany, traffic was also down about 3% after only being down slightly in the fourth quarter. Traffic in France and Italy continued to rise, but as slower rate in the fourth quarter, while traffic in Spain was essentially flat.
Speaker Change: In Asia, overall restaurant traffic grew in both China and Japan.
Speaker Change: Unlike the changes in global traffic trends, the frytachment rates in the U.S. and our key international markets were largely steady. This resilience of consumers demand for fries, as well as their importance to customers' menus.
Speaker Change: Our key reasons why we remain confident that the global fri-category will return to its historical long-term growth rate over time as global traffic rates improve.
Speaker Change: Given our expectations about traffic and demand trends, we also believe that the supply demand imbalance that's been driven by the decline in traffic will persist through much if not all physical 2025.
Speaker Change: With respect to the bigger customer contracts, the season for competing for these contracts is essentially behind us and the overall outcome was largely as we expected, we had good success in protecting customer share and retaining business with existing large chain restaurant customers.
Speaker Change: We also had some success in winning new chain restaurant customer business, most know the in our international segment and will begin to realize more meaningful volume associated with these new customers beginning in our physical third quarter.
Speaker Change: Fracing associated with contract renewals and customer wins was competitive, but in total was probably in line with what we expected.
Speaker Change: With respect to the smaller and regional customers of the U.S., we continue to leverage our direct sales force to acquire new customers and recaps our customers that we lost either directly or indirectly from the transition to our new ERP system in the second half of physical 2024.
Speaker Change: As with the larger chain restaurant contracts, pricing levels needed to be getting customer share or when new business have been competitive, but also broadly in line with what we expected.
Speaker Change: With respect to our cost structure, as we noted during our previous earnings call, we have an evaluating opportunities to drive down supply chain costs, reduce operating expenses, and approve cash flow.
Speaker Change: Yesterday we announced the restructuring plan which includes a number of key actions.
Speaker Change: First, we permanently close our canal Washington facility, which is one of our older higher costs with facilities. Fosing this nearly 300 million pound capacity facility reduces our total capacity in North America by more than 5%. We stop production at this site yesterday.
Speaker Change: Second, we're temporarily curtailing production lines and she has us across our manufacturing network in North America to focus more production on our more efficient, lower cost lines, and steadily work down our elevated finished goods inventory levels. And third, we're reshaping future investments to modernize production capabilities.
Speaker Change: Together, these actions will help us leverage recently to facilitate investments, better manage utilization rates across our manufacturing network and reduce capital expenditures.
Speaker Change: In addition, we're reducing our global head count by approximately 4% and eliminating certain job positions that are currently unfilled.
Speaker Change: This affects team members and positions across our manufacturing, supply chain and commercial organizations in both our North America and international segments as well as in our corporate productions.
Speaker Change: Bernadette will provide details about the cost savings that we expect to generate as well as the charges will incur in connection with our restructuring plan.
Speaker Change: He's a very tough decision but necessary practice steps in the current operating environment to produce, to improve our operating efficiency, competitive and financial results.
Speaker Change: Now to the potato crop. We're harvesting and processing the crops and are growing regions in both North American Europe. At this time we'll leave the crops in the Columbia Basin, Idaho, Alberta and the Midwest, our slightly above historical averages.
Speaker Change: As a reminder of North America, we've agreed to 3% decrease in the aggregate in contract prices for the 2024 potato crop. And we will begin to realize the benefit of these lower potato prices beginning in our fiscal third quarter.
Speaker Change: With respect to the crop in Europe a few months ago, we and the market expected that the crop for the later potato varieties in the industry's main growing regions in the Netherlands, Belgium and Northern France and Northern Germany would be well below.
Speaker Change: Ever since planning was completed late due to poor weather conditions.
Speaker Change: However, growing conditions were good in August and September which approved the outlook for the crop. We currently believe that European potato crop in the aggregate will be in line with historical averages.
Speaker Change: Well, we're all we expect our potato costs in Europe will increase, large of reflecting the mid to high single-digit price increase associated with our fixed price contracts.
Speaker Change: We'll provide our final assessment of the potato crops in North America and Europe when we report our second quarter results in early January.
Speaker Change: Don't celebrate.
Speaker Change: We delivered first quarter results that were generally in line with our expectations driven by improved volume performance solid price mix and strict management of operating costs.
Speaker Change: While U.S. restaurant traffic transit improved modestly in recent months, the remain negative. And we continue to take a cost-as-view of frozen potato demand and the consumer.
Speaker Change: We've announced a restructuring plan to improve our operating efficiency, protect our bottom line, and improve cash flow during this challenging operating environment. And finally this time we believe the potato crop North America will be slightly above average, and that the European crop will likely be in line with the historical averages.
Speaker Change: Let me now turn the call over to Bernadette for more detailed discussion of our first quarter results, our restructuring plan in our updated fiscal 2025 outlook.
Bernadette Madarieta: Thanks Tom, and good morning everyone. As Tom noted, our financial results were generally in line with our expectations.
Bernadette Madarieta: Specifically, while sales declined 1% compared with the year ago quarter, the decline was less than the high single digits we expected due to better than projected volume and price mix.
Bernadette Madarieta: Comparative of the first quarter of year ago, volume to climb 3%, and largely reflected the carryover effects of customer share losses in North America, the exit of certain lower price and lower margins business in Europe last year, and soft restaurant traffic trends in the US.
Bernadette Madarieta: To a lesser extent, the previously announced voluntary product withdrawal that began affecting our sales in fourth quarter of fiscal 2024 also contributed to the first quarter of decline.
Bernadette Madarieta: Volume growth in our team and our national markets partially offset the overall decline.
Bernadette Madarieta: Price Next increased 2% compared with the prior year due to the benefit of inflation-driven pricing actions in Europe, as well as the carryover benefit of pricing actions we took last year in North America.
Bernadette Madarieta: Unfavorable channel and products mix, as well as targeted investments in price and trade, temporary increase in price mix.
Bernadette Madarieta: Moving on from sales are adjusted gross profits decline to $137 million to $353 million to $353 million. Do primarily to three factors.
Bernadette Madarieta: First, about $39 million of the decline was due to the voluntary product withdrawal. It was higher than the 20 to 30 million dollar range that we anticipated in the quarter. Primarily due to higher than expected costs to dispose the product.
Bernadette Madarieta: Second, more than $15 million that the adjusted gross profit decline was due to higher depreciation expense, that's largely related to our capacity expansions in China and Idaho that were completed last fiscal year.
Bernadette Madarieta: The rest of the decline was primarily driven by higher manufacturing costs per pound, which reflects input cost inflation as well as inefficiencies associated with lower factory utilization rates.
Bernadette Madarieta: To a lesser extent, lower sales volumes in higher warehousing costs also contributed to the decline. Together, these factors more than offset than net benefit from pricing actions.
Bernadette Madarieta: Our gross margin in the quarter was nearly 21.5%, which was about 150 basis points below our target of 22 to 23%.
Bernadette Madarieta: Of the shortfall, nearly a hundred basis points was related to the greater than expected impact of the voluntary product withdrawal. The remainder largely reflected, higher than expected, manufacturing costs per pound.
Bernadette Madarieta: Adjusted SGNA increased $6 million to $149 million. Due to an incremental $6 million of non-cash amortization related to our new ERP system that went live in the third quarter of fiscal 2024.
Bernadette Madarieta: Aggressive actions to reduce spending, offset inflation and investments in our information technology infrastructure.
Bernadette Madarieta: All of this led to adjusted EBITDA of $290 million.
Speaker Change: Well, that's better than what we've guided. It was down about a 123 million versus the prior year quarter, largely due to higher manufacturing costs per pound and the impact of the voluntary product withdrawal, which more than offset the net benefit from pricing actions.
Speaker Change: Moving to our segments, sales in our North America segment, which includes sales to customers in all channels in the US, Canada and Mexico, declined 3% versus the prior year quarter.
Speaker Change: Volume Decline 4% was largely driven by the carryover impact of smaller and regional customer share losses in food away from home channels, as well as declining restaurant traffic in the US.
Speaker Change: The volume decline was partially offset by growth in retail channels.
Speaker Change: Price mix increased 1%. Reflecting the carryover benefit of inflation-driven pricing actions for contracts with large and regional chain rest-point customers.
Speaker Change: taken in fiscal 2024, which was partially offset by unfavorable channel and product mix, and to a lesser extent targeted investments in price.
Speaker Change: North America's segment of Justice Ibadad declined $103 million to $276 million and included an approximately $21 million charged related to the voluntary product withdrawal.
Speaker Change: The remaining decline largely reflects the combination of higher manufacturing cost per pound, unfavorable mix, and investments in price and trade, which combined more than offset the carryover benefit of prior year pricing actions.
Speaker Change: Fails in our International segment, which includes sales to customers and all channels outside of North America, increased 4% versus the prior year quarter.
Speaker Change: Price Mix increased 5% largely reflecting pricing actions announced this year to counter input cost inflation.
Speaker Change: Falling declined 1% due to our strategic decision to exit certain lower price and lower margin business in Amia in early fiscal 2024, and to a lesser extent the voluntary product withdrawal.
Speaker Change: These business exits in Amia will continue to be a headwind during the second quarter of fiscal 2025.
Speaker Change: Rothe and Key International markets outside of Amia, tempered the overall volume decline.
Speaker Change: International segment adjusted EBITDA to climb $39 million to $51 million.
Speaker Change: About $18 million for about half of that decline related to the voluntary product withdrawal. The remainder was largely driven by higher manufacturing cost per pound, which was partially offset by the benefit of inflation's driven pricing action.
Speaker Change: Moving to our liquidity position and cash flow.
Speaker Change: We continue to maintain the solid balance sheet with ample liquidity. We ended the first quarter with about 120 million dollars of cash, and one billion dollars available under our global revolving credit facility.
Speaker Change: Our net debt was about 3.9 billion, which puts our leverage ratio at 3 times.
Speaker Change: Last week, we increased our available liquidity, $275 million by entering into a new $500 million term loan.
Speaker Change: We used the proceeds from the loan to pay off an existing $225 million term loan and $275 million of borrowing under our global revolving credit facility.
Speaker Change: As a result, it had no impact on our total debt, increased our available liquidity and our leverage ratio was not affected.
Speaker Change: In the first quarter, we generated $330 million of cash from operations.
Speaker Change: Which despite a decline in earnings is about the same amount we generated last year due to favorable changes in working capital. We expect further working capital improvements during the balance of the year as we execute our restructuring plan.
Speaker Change: Net Capital expenditures were about $335 million as we finalize spending for Idaho capacity expansion. And continue construction of our expansion projects in the Netherlands and Argentina.
Speaker Change: We expect our capital spending in the first quarter, will be our highest quarter for the year as it accounted for almost half of our updated annual capital spending target.
Speaker Change: During the quarter we returned more than $133 million of cash to shareholders, including 52 million in dividend. We spent $82 million to repurchase more than 1.4 million shares at an average price of just over $58 per share.
Speaker Change: Before discussing our outlook, let me first provide additional details on the restructuring plan we announced yesterday.
Speaker Change: As Tom noted, these were hard, but necessary decisions to adjust to the current business trend.
Tom Warner: These actions will help us manage asset utilization rates.
Tom Warner: Leverage our more efficient, lower cost production assets and reduce cost and expenses.
Tom Warner: The actions include a 4% reduction in our global head count.
Tom Warner: and the elimination of certain unfilled job divisions.
Tom Warner: We do not take this lightly, and we carefully consider the impact on our lambless and family.
Tom Warner: We currently estimate that these actions will generate total savings of approximately $55 million in fiscal 2025 with about one-third benefiting cost of sales and two-thirds benefiting SGNA expenses.
Tom Warner: We've incorporated these savings in our updated fiscal 2025 outlook.
Tom Warner: We expect further benefits in fiscal 2026 with estimated annualized savings of about 85 million dollars.
Tom Warner: We expect to record a 200 to $250 million pre-tax charge associated with the restructuring.
Tom Warner: Most of which we expect to record in the second quarter.
Tom Warner: About 20% of the charge is non-cash and primarily reflects the accelerated depreciation of assets that are Cornell's facility.
Tom Warner: The remaining 80% are cash charges, comprised of cost of contracted raw potatoes that will not be used due to the production line curtailments.
Tom Warner: The tear down and other cleanup costs associated with permanently closing the Cornell Production Facility.
Tom Warner: Severance and other employee-related costs associated with the reduction in our workforce and other miscellaneous restructuring costs.
Tom Warner: Additionally, we've scrutinized every project and every dollar of capital.
Tom Warner: As a result, we now expect capital expenditures in fiscal 2025 of approximately $750 million, which is down $100 million from our plan entering the year.
Tom Warner: A significant portion of the reduction reflects deferring the build and implementation of the next phase of our ERP system, which once built will be deployed first in our manufacturing plants in North America.
Tom Warner: The remaining decline has largely due to deferring or canfully modernization projects due to the current operating environment.
Tom Warner: While the next phase of the ERP build and implementation has been deferred, we are committed to the benefits that an integrated system will deliver. But our prioritizing the investments needed to complete our strategic projects in the Netherlands and Argentina.
Tom Warner: As the relates to next year's capital expenditures, we're currently targeting a notable decrease in spend. As we expect our strategic capacity expansion projects will be completed by the end of this fiscal year.
Tom Warner: In fiscal 2026 we expect expenditures for base capital and modernization efforts will be in line with our annual depreciation and amortization expense.
Tom Warner: In addition, we expect to spend approximately $150 million dollars for environmental capital projects at our manufacturing facilities.
Tom Warner: Our manufacturing processes involve water intake and waste handling and disposal activities, which are subject to a variety of environmental laws and regulations along with the requirements of permits issued by governmental authorities.
Tom Warner: To comply with these regulations, we expect the laws in the states in which we operate will require us to spend approximately $500 million over the next five years.
Tom Warner: The estimate to comply may vary based on changes in regulations and other factors.
Tom Warner: We're evaluating options to lessen these expenditures, including the potential for government incentives.
Tom Warner: And lastly, fiscal 2026 Capital expenditures may include costs to restart the next phase of our ERP build.
Tom Warner: Consistent with past practice will provide a specific capital spending target for next year when we provide our fiscal 2026 outlook in late July.
Tom Warner: Now, turning to our updated fiscal 2025 outlook.
Tom Warner: We're continuing to target a net sales range of 6.6 billion to 6.8 billion dollars on a constant currency basis or growth of 2 to 5 percent with volume driving our sales growth.
Tom Warner: For earnings, we expect to deliver at the low end of our target adjusted EBITDAB range of 1.38 to 1.48 billion dollars.
Tom Warner: We're targeting the low end of the range due to higher manufacturing cost per pound, which relates to fixed-cost-deleveraging related to the temporarily curtailed lines in our plans.
Tom Warner: as well as less favorable customer and product mix.
Tom Warner: These factors will put additional pressure on our gross margins.
Tom Warner: We'll look to offset much of this pressure with the estimated $55 million of manufacturing, supply chain, and SGANA savings that we expect to generate from our restructuring plan, as well as efforts to aggressively manage costs across the business.
Tom Warner: Other updates to our financial targets include reducing our adjusted SDNA target to between 680 and 690 million dollars from our previous range of 740 to 750 million.
Tom Warner: Increasing our interest expense estimate by $5 million to approximately 185 million to account for a higher average debt balance is during the year.
Tom Warner: and increasing our estimated full-year effective tax rates to approximately 25% from approximately 24%. To reflect a higher proportion of income from our international segment, as well as other discrete items.
Tom Warner: In addition, since we're targeting the lower end of our adjusted EBITDA range, and since we've updated our estimates for interest expense and our effective tax rate, we reduced our adjusted deluded earnings per share target range to $4.15 to $4.35.
Tom Warner: So in summary, we're responding to the current challenging environment by adjusting our spending to protect profitability and ensure positive free cash flow while continuing to invest in an executor strategy.
Tom Warner: Let me now turn it over to Tom for some closing comments.
Tom Warner: Thanks for that. I want to thank our landwats and team for their efforts to deliver our first quarter results and for focusing on executing our near-term priorities to reinvigorate growth, improve customer share, drive operating and pick and seize and aggressively manage costs.
Speaker Change: Our team will also continue to focus on a long-term strategy during this challenging environment. So when demand growth returns to historical levers, levels, we're better positioned to continue to support our customers and create value for our stakeholders.
Speaker Change: Thank you for joining us today and now we're ready to take your questions.
Speaker Change: Thank you. If you would like to ask a question, you may signal by pressing star 1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment.
Speaker Change: Once again, star one for questions. We'll go first to Andrew Lazar with Barclays.
Craig: Craig, the morning everybody.
Craig: Boring!
Andrew Lazar: Tom, I guess I first question, is around pricing. I think you'd originally said your expected price mix to be download a mid-single digit in the first quarter.
Andrew Lazar: and was positive, and I guess specifically really in North America, it was also positive, as you mentioned. And I get the impact from carryover pricing in North America from last year, but presumably you knew that was coming. So I'm trying to get a sense of what...
Speaker Change: What was better on pricing in North America and is it fit?
Speaker Change: Some of the trade investments in such that you needed to make to retain customers and some of these large customer negotiations were maybe more favorable than you might have expected, and obviously the reason I ask is because of course the supply demand and balance has investors more worried about
Speaker Change: the fate of pricing and what's been obviously a historically very rational sort of environment. So that's my first question.
Speaker Change: You know, the pricing...
Speaker Change: Contracting season was in line with what we expected, you know we had a better mix.
Speaker Change: And we had some carry over from last year, so that's certainly played into it, but, you know, the pricing environment.
Speaker Change: That we experience within line of what we expected so it's really a lot of it some of it's mix.
Speaker Change: and the first quarter in terms of overall sales pricing.
Speaker Change: and the encouraging thing to be.
Speaker Change: is...
Speaker Change: We've kind of stabilized the environment going forward, we've got through the contracting season, and it was in line with what we...
Speaker Change: Expected coming into the contracting season based on the supply demand.
Speaker Change: Dynamics were already in right now, so you know, I feel good about where we're at, I feel good about how we ended up with the contracting season and you know, we're, I think we're in a really good position.
Speaker Change: Thank you for that, and you generally have good visibility, you know, to your competitive set and sort of industry utilization levels, I guess I'm curious if you've heard of or we're seeing other North America players.
Speaker Change: Thinking about or taking similar sort of capacity reduction moves.
Speaker Change: or if utilization of competitors is...
Speaker Change: You know, it's already much higher than what you're seeing at Lam Wyston, because it's a mere specific.
Speaker Change: Sort of challenges. Really trying to get a sense of how quickly some of these potential reductions in the industry can start to actually affect, you know, in a positive way, the supply demand imbalance, knowing that restaurant traffic trends will likely continue to be weak for some time. Thank you.
Speaker Change: Yeah, great question Andrew. I think you know...
Speaker Change: We made a really tough decisions.
Speaker Change: Here in the last couple days, based on the operating environment we're in with restaurant traffic being challenged.
Speaker Change: and we think it's going to continue to be challenged for the rest of this physical year. So we're making decisions to manage the lamblustin.
Speaker Change: and you know the...
Speaker Change: What the competitive set does, they're going to manage their business, how they want to manage it. I have, you know, no.
Speaker Change: Insides into what they may or may not do, but the best interest of what we do to manage and make decisions as a man as this company. And we'll continue to do that. I think the question...
Speaker Change: Everybody's going to get asked and everybody's been asking is there's been a lot of capacity announcements I think you know people are going to rethink some of those
Speaker Change: Editions based on the environment and may possum, but it remains to be seen, but time will tell as we work through the near term environment based on what we're all dealing with around the globe.
Speaker Change: Thanks so much.
Speaker Change: Yep.
Speaker Change: We'll take our next question from Ken Goldman with JP Morgan.
Ken Goldman: Hi, thank you.
Ken Goldman: I wanted to ask a little bit about the commentary, about the $500 million that might be spent for environmental improvements in your plans. Can you walk us through a little bit more?
Speaker Change: Where that's coming from with the timeline is on that and maybe how you might be able to mitigate that a little bit and where that might really show up in your financial statements as well.
Ken Goldman: Yeah, good morning, Ken.
Ken Goldman: As it relates to the $500 billion, again, this is related to primarily wastewater capital investments that will be needed at our manufacturing plants in order to continue to run them at current capacity levels.
Speaker Change: So, as we look at the timing of that, that's going to vary depending on different regulations, and we'll provide more of an update on that as we give our specific guidance.
Speaker Change: We wanted to though frame it up in terms of a large capital expenditure over the next five years.
Speaker Change: and we will certainly be looking to other regulatory bodies, whether it be state, federal, etc. in terms of whether or not there's opportunities for any government incentives to lessen that. But early in that process, and we'll provide updates as we move throughout.
Speaker Change: Okay, thank you for that. And then, you know, I certainly understand the decision to sort of, um,
Speaker Change: Temporarily delay the rest of the ERP implementation, giving all the moving pieces in your business right now. Can you just walk us through a little bit sort of what you're...
Speaker Change: I don't want to use the word sacrificing, but some of the choices that you've made in delaying those plans, you know, any impact to some of your...
Speaker Change: Media and Term Financial targets as a real reservoir. Just given that the ERP implementation, longer term is done with some positive benefits in mind as well.
Speaker Change: Yeah, so as far as the ERP timing of the implementation, after the last implementation, we paused work on future releases as we focused on...
Speaker Change: the Business and ensuring that we had stabilization.
Speaker Change: So, in terms of timing of where we are in the process, it was an opportune time to pause that at that time.
Speaker Change: It does delay the benefits that will be able to obtain from the ERP, but we're confident that once with the capital spending and our major expansions occurring and being complete by the end of this year that will be able to restart that work and get those benefits at the time.
Speaker Change: As it relates to future guidance and the opportunity for that delay to affect that we don't see any major impact at this time.
Speaker Change: Great, thanks so much.
Speaker Change: You That.
Speaker Change: We'll take our next question from Adam Samuelson with Goldman Sachs.
Adam Samuelson: Yes, thank you. Good morning everyone.
Adam Samuelson: Good morning.
Adam Samuelson: I wanted to take an a little bit of this on the updated Gross Margin expectation for the year.
Speaker Change: Clearly, part of it is related to the product recall and the first quarter and that being a larger item than you thought a couple months ago. But you also alluded to lower a higher manufacturing cost on a propound basis given.
Kirtel Mints: Give me the production crew, Kirtel Mints.
Speaker Change: There's something you can maybe just put a little bit more context on the magnitude of those as we think about margins and differences between the North America and international.
Speaker Change: Operations to consider. And how should we give it the restructuring and timing of the closures? Is there any impacts of the phasing of margins and earnings over the balance of the year that would differ from historic seasonality?
Speaker Change: Yeah, a good, great question Adam, you know, as it relates to the higher manufacturing costs.
Speaker Change: As I explained, a lot of that is attributable to the fixed costly leveraging from the idle lines that we do have in the plants.
Speaker Change: and we're also seeing less favorable channel, you know, mix within our segments. We are looking to offset a lot of that incremental cost with the $55 million savings that we discussed.
Speaker Change: and another point that I just want to make relates to the modernization of our assets over time, which is something that we've been investing in.
Speaker Change: and as we continue to modernize, as we have been at American Falls, for example, we have that lower cost manufacturing footprint that
Speaker Change: We don't necessarily have at some of these older plants and that ensures with that modernization that we have more flexibility because not every plant is made the same.
Speaker Change: And so that's the reason why you'll see some of the decisions that we've made to idle capacity at different plants and it's based on...
Speaker Change: What those plants can make from a product perspective. So as we move throughout this year, our gross margin will be impacted because of that fixed costy leveraging. But as additional volume gets brought back on and we pull those lines back up, we're going to see that improvement.
Speaker Change: Okay, and then just as I think about some of the key items in terms of the cost saving plans, the updated catbacks, spamming, just for that.
Speaker Change: Think about some of the early items that you're laying up as we think about 2026.
Speaker Change: Just to be clear, you lose an $85 million cost saving.
Speaker Change: Target in 26 that...
Speaker Change: Bank for Mentals to the 50th year, that's total, so it's a year and a year, 35 million dollar benefit. Just on the total capex piece that you learned to burn a debt, you set base capex equal to DNA, which is presenting your saying.
Speaker Change: 375 in the right, go forward grade or step up more because it's not a lens and our container can start depreciating plus the...
Bob: Bob, the Environmental Capback, which for Dexter you said is 150 is a picture where I'll talk to what the same numbers.
Speaker Change: Yeah, so a couple of things there. First is it relates to the savings next year, the $85 million. We'll see an incremental $30 million next year because it's additive to the 55 we're seeing this year.
Speaker Change: as it relates to DNA.
Speaker Change: It'll be closer to 400 million, which will include the additional DNA related to the new plants that we bring online. And then there was another question in there. Did I miss it?
Speaker Change: Well, it says that, but it's effectively, you're saying capex next year, in the range of 550 million plus or minus if it's right, that's right, 50 million of environmental.
Speaker Change: And that's very helpful.
Speaker Change: The only other thing I want to say, I did also mention that there would be additional expenditures if and when we begin the next phase of the ERP.
Speaker Change: on top of the state, quite 50.
Speaker Change: Okay, that's the trouble. I will have a pass now. Thank you
Speaker Change: Thank you.
Speaker Change: We'll take our next question from Peter Galbow with Bank of America.
Peter Galbow: Hey, guys. Good morning. Thank you for all the detail that's for taking the questions.
Peter Galbow: I want to actually go back to Adam's question just on the gross margin impact of a hathling line and kind of test the other side of the argument.
Speaker Change: So, in theory, if those lines don't get pulled back up next year, let's just say, is that, I mean structurally leave the margins lower or if the demand environment doesn't improve and those lines stay down.
Speaker Change: Do we stay in a margin environment that looks more like the 2nd through 4th quarter of this year simply because that fixed cost e-leverage doesn't go away or do you have potential in there to further mitigate fixed cost e-leverage outside of the incremental 30 million cost savings for next year?
Speaker Change: Yeah, so Peter, the actions we've taken is to address the operating environment we're in right now and certainly what Bernadette just said.
Bernadette Madarieta: You know, it's going, how she talked about it in terms of gross margin impact.
Speaker Change: That's going to persist in the near term, however, you know, we believe in...
Speaker Change: Rebound and the category will be released in the next episode.
Speaker Change: Return to growth, so to speak.
Speaker Change: and so it's important as...
Speaker Change: and we make these decisions worth.
Speaker Change: which are challenging to make, but...
Speaker Change: But we're also making these decisions looking at the future of the growth of the category. We've been modernizing our footprint over the past several years in terms of the capital we put in this business. And so I view this as a short term.
Speaker Change: Issue, and we've got to get through a period of time and see what restaurant traffic does. We've seen trends improve.
Speaker Change: In the first quarter, as we said in our comments, sequentially, although they're still down.
Speaker Change: but we're seeing some traction so...
Speaker Change: This is a short term.
Speaker Change: Management and Assistant, but the great thing I am confident in is that with our new assets coming online, China and the Netherlands and American Falls and Argentina coming we modernise our footprint well positioned.
Speaker Change: when the category rebounds that we'll come out of this as strong as we ever.
Speaker Change: Thanks for that Tom, and then Bernadette Madarieta.
Bernadette Madarieta: Just a clarification.
Bernadette Madarieta: On the SGA in a reduction, I think it's like 60 million at the midpoint. I think you said two-thirds of the 55 million from cost saving goes to SGA. So that doesn't make up the whole bucket. What's the rest of the reduction? Is it compensation expense? How should we think about that?
Speaker Change: the rest of the reduction in S.T.A. and S.T.A. guidance.
Speaker Change: Yeah, a lot of its people were laid at cost.
Carol: Carol. Thank you.
Speaker Change: We'll take our next question from Tom Palmer with City.
Speaker Change: Good morning and thanks for the question.
Tom Palmer: I just wanted to follow up on the composition and the sales growth. A quarter ago, I think the expectation was for flat-ish price mix for the year, and then growth coming from volume. Is this still the expectation or are there any shifts between these two items?
Tom Palmer: Yeah, thanks for the question, Tom. That is still the expectation for the remainder of the year, is for just to be driven by volume.
Speaker Change: Okay, thank you. And I guess just on that, I wanted to kind of understand a discussion on fixed cost of leverage. So it sounds like the volume outlook for the year is little change.
Speaker Change: and so kind of what's being cited as this added marching pressure is closing the line. I think that closing line ultimately has benefits for profitability.
Speaker Change: So, I guess why we added overhang and again it sounds like the fixed cross-deliverage is not that big of an incremental factor, the volume outlook is unchanged.
Speaker Change: Yeah, so, you know, the permanent capacity curtailment at Cornell, that is a benefit.
Speaker Change: The temporarily curtailed lines at throughout our footprint.
Speaker Change: We have...
Speaker Change: The same fixed costs that are being allocated over fewer pounds, if you will.
Speaker Change: and so that's where the de-leveraging is occurring. We are in the process of also managing down our inventories. We have a very high inventory level and so we take into combination.
Speaker Change: Running less so that we can get our inventories into a better place as we end this fiscal year.
Speaker Change: Okay, thank you. I guess I just struggled with why this wasn't factored in a quarter ago if the volume outlook is so little change, but we can talk about it later. Thank you.
Speaker Change: it
Speaker Change: We'll take our next question from Robert Moscow with TD Cowan.
Robert Moscow: Thanks for the question. Two things. Is it fair to say that pricing goes negative for the rest of the year in North America?
Speaker Change: Because I think you still have to give incentives to food service customers to get them to come back after the ERP disruption.
Speaker Change: So can you give us an update on how that's going? Have you started that yet or is there a lot more acceleration to do and a follow-up after?
Speaker Change: Yeah, so our current pricing environment, again, is in line with what...
Speaker Change: We anticipated for this year and you know for the for the.
Speaker Change: Fricing discussions, like I said, are largely behind us.
Speaker Change: So, you know, as we move forward, it's really going to be on a count-by-count basis in the market and the...
Speaker Change: Food Service Channel and the teams.
Speaker Change: Managed in it, we have a high level visibility to some of the actions we're taking, but it's going to continue to play out over the coming months and quarters.
Speaker Change: Yeah, and if I could just add Tom, you know, I just want to emphasize that the overall patient environment is competitive, but it's been disciplined. And as Tom said, our pricing...
Speaker Change: Investment for the year is continued to be on track.
Speaker Change: You will see greater pricing investment though during the balance of these year relative to the first quarter and so we will see some negative price mix.
Speaker Change: Okay, so it's going to step down. Yeah, as we expected though.
Abda: Abda, like her.
Speaker Change: That's fine. And my follow-up is...
Speaker Change: I know you don't like these hypotheticals, but like a year from now, but let's say demand is, you know, unchanged or just not getting any worse.
Speaker Change: and you've made all these capacity reductions in their still in place. Is that sufficient to get the industry supplied demand back in balance? Is that alone enough?
Speaker Change: and then what do you think utilization would be in that scenario compared to where it is now?
Speaker Change: Yeah, so, I'm not going to get into hypotheticals, but I'll go back to some of the comments I made earlier, Robert, is.
Robert Moscow: He's got the industry in total.
Rolf Films: Rolf Films, same thing.
Rolf Films: You know, we made our decisions based on what's best for the company in terms of how we're...
Rolf Films: Will do, but, you know, again, there's, there's capacity announcements that may be paused.
Rolf Films: You know, but it's, again, it's, you know, we're just trying to time watch in terms of restaurant traffic and, you know, as we move through the next several quarters,
Rolf Films: Will be, and we are closely monitoring restaurant traffic that's going to determine not only for landlust and for the industry, but potentially additional actions that we've got to take in terms of getting this thing balanced out and supplied demand.
Speaker Change: All right, well, thank you.
Speaker Change: Yo!
Speaker Change: We'll take our next question from Rob Dickerson with Jeffries.
Rob Dickerson: Great, thanks so much.
Speaker Change: So I guess just kind of first question, it's just on some of the share lost, right? Clearly coming out of the R.P. disruption in Q3 seems like maybe got a little bit better in Q4, maybe got a little bit better in Q1 but at the same time.
Speaker Change: I think it sounds like a fair amount of the volume pressure North America, at least in Q1 was still from the chair loss and then, secondly...
Speaker Change: You know, as we think through kind of the rest of the years, especially the back half as you lap that, you know, there is kind of this implied, nice lift, right, that should come as you get that chair back, so I'm just curious.
Speaker Change: You know, if you can provide any color as to maybe how the share regain, you know, progression might be coming.
Speaker Change: Gerrero.
Speaker Change: Robert, we are seeing business wins.
Robert Moscow: and we will start seeing that in Q3Q4 this physical year and you know so those are known things.
Speaker Change: The thing that kind of clouds it up is, you know, the base business with restaurant traffic being challenged.
Williams: Williams or down on some of our key accounts across the board.
Williams: While we're confident in the back half in terms of the business we're bringing in, you know, we're closely monitoring what's happening with our basic counts and, you know, so...
Williams: We're in the market, we're winning customers back, but you know, together to be
Williams: You know, little murky based on what's going on with restaurant traffic right now the back half the year.
Speaker Change #101: and then just another kind of quick simple one for me.
Speaker Change #101: The Plant Closure.
Speaker Change #102: I'm not sure if you can quantify, maybe just kind of, you know, as a percent of your total global in North America capacity, kind of what that estimate is, that's it, thanks.
Speaker Change #103: Yeah, that's about 5% of our capacity in North America, 300 million pounds.
Speaker Change #104: Super. Perfect. Thank you so much.
Speaker Change #104: We'll take our next question from Mark Terrente with Wells Fargo Securities.
Speaker Change #105: Hey, good morning. Thank you for the questions.
Mark Terrente: Building on the last one on the Connell Facility, any context around relative and manufacturing cost versus other newer facilities.
Mark Terrente: and I appreciate you sizing the capacity there and then also any other color on sizing and kind line for the plant curtailments.
Speaker Change #107: Yeah, so just in terms of the kind of ill decision.
Speaker Change #107: Um...
Speaker Change #108: You know what it's...
Speaker Change #109: It's a difficult decision and it's impactful to that community.
Speaker Change #110: People, all those things, and...
Speaker Change #110: You know we didn't take any of that lightly in.
Speaker Change #110: but the decision parameters.
Bård: Bard, Bard, you know, we're looking at our footprint, look at it.
Bård: Bow.
Bård: Production capabilities.
Bård: Cost to produce, you know, we go through the litany of things, you go through when you make these decisions.
Bård: and potential future capital expenditures required in the facilities we have right now currently. And then you just go through the decision metrics and that was what drove.
Bård: Specifically, the decision to close Cornell and, you know, it's, again, it's difficult, hard, you're impacting a lot of things, but the long term, um,
Bård: Footprint of the company, it was the right decision to do.
Speaker Change #112: Okay, thank you. And then you also called out some strong volume trends internationally out that year. Maybe some additional color there. Key regions and how much is new international production in May, boy, best.
Speaker Change #113: Yeah, no, as a release to our international business, we are seeing some good winds, particularly in the Asia Pacific.
Speaker Change #114: Regen, that's where we're seeing a large pickup there also in Latin America, which is positive and light of our upcoming plants that will be coming online in the spring of next year. So that's driving a lot of it. It's time with the looting to customer wins. A lot of our customer wins have been in the international segment and we're going to see much of that begin to hit in third quarter.
Speaker Change #115: Great, thank you.
Speaker Change #115: Yvonne.
Speaker Change #116: We'll take our next question from Matt Smith with Steephle.
Matt Smith: Hi, good morning. I wanted to come back to the discussion around pricing and what you're seeing in the business. It sounds like
Speaker Change #118: The amount so far the investment in pricing has been relatively in line with your expectations.
Speaker Change #119: In part of the explanation for taking you back out of the low end, you referenced higher price investments and higher investments in price and trade than originally anticipated. So, can you help me balance those two dynamics against each other or are you seeing?
Speaker Change #120: Perhaps a bit more price investment in the food service business and that's still the common. That's the difference.
Speaker Change #121: Yeah, I think...
Speaker Change #121: You know Matt, as it relates to our pricing investments.
Matt Smith: It's fair to say that our pricing is coming in line with what we expected for the year. Most of it's on a cost basis, as it was relating to our gross profit. In first quarter, you did see pricing was up, I think, positive 2%. But...
Matt Smith: Much of that investment as I think Tom may have alluded to is going to be heading beginning in second quarter.
Speaker Change #122: Thank you for that, I'll leave it there.
Speaker Change #123: Thank you.
Speaker Change #124: We'll take our next question from Carl LaCacella with J.P. Morgan.
Carl LaCacella: Hi, I'm working on the 250 million of charges. Can you book it that a little bit in terms of how...
Carl LaCacella: The different items that you talked about, and then also is the 20% non-cash, is that most of the potato inventory right down, or is another piece of it that's non-cash versus cash?
Speaker Change #126: Yeah, so the 20% that's non-cash, that's commonly going to be related to the accelerated depreciation on the conel facility.
Speaker Change #127: As it related to the balance of the value that we had placed there, the remainder is largely going to be attributable to cash expenditures related to contracted potatoes that we will be paying for, but will not need related to the curtailments in Connell and then the other.
Speaker Change #127: Productions for Tailments. That's about 60% of the cash costs.
Speaker Change #128: Okay, great. And then give it a lower volume this year and that potato contracts that you won't pay for you. Will that change any of your negotiations with your suppliers for next year or your contract pricing for next year?
Speaker Change #129: Now, as we go through the process, we'll provide insights.
Speaker Change #129: at the appropriate time that we do every year, which is typically...
Ravero: Ravero Call of July.
Speaker Change #131: You know, we're on the front end of those negotiations, but we will not expect any changes in terms of how we go through the process at all. Based on this, it may change our needs, but that's about it.
Speaker Change #132: Okay, and remember, I guess my thought is if the volumes are lower, would you see the materials to step up in the pricing? Are you getting a lot of volume based to discounts that you may lose?
Speaker Change #133: No, I'm not going to comment on that. We typically, you know, we're right in the middle of those negotiations. So I'm not going to comment and talk about the specifics of how all that works.
Speaker Change #134: Okay, and this is one debt question. On leverage target, any change to your current leverage target?
Speaker Change #134: No changes.
Speaker Change #135: is the 3.5 times.
Speaker Change #135: That's correct and I think as I shared, we're at times right now comfortable with that as it provides optionality.
Speaker Change #136: Thank you so much.
Speaker Change #137: Thank you.
Speaker Change #137: That will conclude our question and answer session. At this time I'd like to turn the call back over to Mr. Congbalay for any additional or closing remarks.
Mr. Congbalay: Thanks for joining the call today. As usual, if you want to set up a follow-up call, please email me, we can set up a time. Other than that, again, thanks for joining the call and have a good day.
Mr. Congbalay: That will conclude today's call. We appreciate your participation.