Q4 2019 Earnings Call
In Q LDPC flying into the conference please standby.
Thank you.
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[noise] [noise].
Good day, and welcome to the non western fourth quarter and fiscal year 2019 earnings call.
<unk> conference is being recorded at this time I would like to turn the conference over it to Dexter <unk>, Vice President Investor Relations of Lamb Weston. Please go ahead Sir.
Good morning, and thank you for joining us for land once its fourth quarter and fiscal year 2019 earnings call.
This morning, we issued our earnings press release, which is available on our website Lamb Western Dot com.
Please note that doors are remarks will make some forward looking statements about the company's performance.
These statements are based on how we see things today.
Actual results may differ materially due to risks and uncertainties.
Please refer to the cautionary statements and risk factors contained in our in our filing with the S.C.C.
For more details on our forward looking statements.
Some of today's remarks include non got financial measures. These non-GAAP financial measures should not be considered a replacement for as she'd be read together with our gap results.
You can find the gap to non gap reconciliations in our earnings release.
With me today are time, Warner, our President and Chief Executive Officer.
<unk>, our chief Financial Officer.
Tom will provide an overview of our performance for the year.
As well as some comments on the operating environment, we expect to see in fiscal 2020.
Robl that provided details on our fourth quarter full year results as well as our fiscal 2020 applet.
With that let me now turn the call over at the top.
Thank you <unk> good morning, everyone and thank you for joining our call today.
In physical 2019, we delivered another year of record financial results and significantly exceeded the financial targets that we initially outlined a year ago.
We deliver these results with the straw performance in our base business, which more than offset crop related challenges facing our European joint venture.
For the year sales were up nearly 10% with the good balance of higher volume and price mix.
Adjusted EBITDA, including unconsolidated joint ventures was also up 10%.
Driven by strong gross profit growth.
Adjusted earnings per share increase more than 20%.
Driven by operating gains and the benefit of tax reform.
And finally, we generated more than 40% increase in cash flow from operations and invested much of that cash back into the business.
While also returning 145 million of cash to shareholders.
This performance reflects our commercial supply chain and support teams successful execution against our three strategies of accelerating category and customer growth.
Differentiating or global supply chain to drive growth and investing for growth.
Now let me take you through some highlights for each of these.
Excellarate category in customer growth, our global innovation in supply chain teams work closely to develop produce and sell a higher amount of limited time offering products in the U.S. and key markets in Asia.
These L.T.O.'s enable customers to expand their menus with exciting new products.
And increase traffic into their stores.
For the year about a quarter of our global segment volume growth was driven by increased L.T.O. penetration.
In addition, we continue to partner with us and non U.S. restaurant chains as they look to expand operations internationally.
In our food service segment, we successfully reprice replace our broker relationships with the direct sales force solely focused on selling frozen potato products to small and regional chain customers as well as single restaurants.
Over the course of the year, the new team was able to drive overall volume growth, including for Lamb West and branded products.
Over the long term, we expect our direct sales force will lead to deeper customer relationships and brought her customer coverage, leading to faster growth and optimize product mix.
In retail we held dry overall category growth with distribution gains are grown in Idaho less yet in license brand products.
For the year nearly all of our 7% volume growth in retail was from our branded products.
Our investment in part has encouraged retailers to expand freezer shelf space allocated to the frozen potato category.
Regarding our strategy to differentiate our global supply chain to drive growth.
We continue to leverage our Lamb wasn't operating culture degenerate cost savings and efficiencies.
As well as distressed production capacity to improve profitability and support customers growth.
We've also completed most of the up front work to replace or obsolete enterprise resource planning system.
Once the new system is implemented over the next couple of years, we expect it to dry productivity and reduce costs by streamlining supply chain.
Commercial and back office processes, while also improving our demand in operations planning across our global manufacturing footprint.
And finally, we leverage the geographic diversity of our global supply chain platform. This year by having our north American plants or Lamb, Western Meyer and its customers as they managed through the effect of a poor crap in Europe .
We also leveraged our operations in Canada to managed through a shifting trade and tariff environment.
For a third strategy leg invest for growth, we're choirs some businesses built new capacity.
We completed the purses purchase of our joint ventures partner interest in land West and B.S.W., allowing us to realize the full financial benefit of the J.V. production facility.
We also acquired marble Packers 50 million pound potato processor focused on serving the fish and chip market in Australia.
And earlier this month, we completed the acquisition of ready meals.
70 million pound potato processor that also services, the Australian fish and chip market.
Together these two acquisitions provide us with an opportunity to strengthen our position in Australia.
We'll continue to seek other acquisition opportunities to strengthen and broaden our manufacturing footprint outside North America.
And finally, we completed that 300 million pound expansion of our hermit in Oregon facility in May.
This investment willing to enable us to continue to support customers growth in both North America and key export markets.
As well as provide more flexibility to leverage our innovation capabilities to partner with our customers to develop innovative and traffic driving limited time offerings.
We're very pleased with the progress we've made on these initiatives and will continue to focus on executing these strategies to drive sustainable growth over the long term.
In addition to delivering strong business performance, we're proud of the work we're doing to support our local communities.
We continued to focus on combating food insecurity by supporting regional food banks.
And other handle pans on efforts through local outreach programs, an employee volunteer activities.
Through the Lamb Lesson Foundation, we've also provided financial assistance to organizations combating food insecurity and other worthy causes.
And we have contributed another $5 million to the foundation to continue that support over the coming years.
Now turning to our operating environment.
For physical 2020, we believe the overall operating environment will continue to be generally favorable assuming no significant economic shocks or material changes to trade policies.
In the U.S., we expect restaurant traffic will continue to grow supported by low unemployment rising disposable income and additional promotional activity by quick service restaurants, including more limited time product offerings.
This increase traffic typically translate into solid demand growth for our products.
We also see continued solid demand growth in Europe , and or other key developed markets like Australia, Japan, and South Korea.
Largely fueled by many of the same factors driving U.S. demand.
In our key emerging markets, such as China, Southeast Asia, and the Middle East. We anticipate continued strong demand growth as customers build additional restaurant outlets and his traffic continues to increase as consumers look towards western style dining options.
With respect to supply recently at an industry capacity in North America as well as capacity is scheduled to become operational within physical 2020.
Should allow processors to operate their factories closer to normalize rates.
However, due to continued demand growth, we expect industry utilization will remain relatively high.
As a result, we expect that will continue to be able to increase prices overall to offset modest input costs inflation.
And while we've only finalize the handful of the global and regional restaurant chain customer contracts over the past few months.
We were encouraged by how the pricing discussions have been progressing.
We'll have a clear view of how the overall pricing <expletive> situation will shake out as we continue contract negotiations over the next few months.
Oh, those chain restaurant customer contracts that were renewed over the past couple of years.
Especially for customers in our global segment.
Most were renewed on a multi year basis.
As we enter into the second and third year of those agreements will continue to realize the price increases embedded in those contracts.
With respect to cost we expect the environment in North America to be manageable.
Per pound contracted prices for raw potatoes, which account for about a third of our cost of goods sold.
Are set to increase low to mid single digits.
Taken together, we anticipate that inflation rates for our other key inputs in supply chain costs, such as oils packaging transportation and warehousing will also be in that range.
In Europe due to a poor crop last year raw potato prices were high and supplies were limited.
Assuming an average crop this year, we anticipate that operating levels will normalize which may lead to increased competitive intensity in Europe and in the regions key export markets.
Nonetheless, lower raw potato costs, resulting from an average European crops should provide an opportunity for lamb Wesson Meyer to improve profitability.
Especially as these lower cost potatoes become available in the second half of our fiscal year.
So in summary, we expect to continue to build upon the strong financial results that we delivered in physical 2019.
And the good momentum each of our channels.
By continuing to focus on serving our customers and executing against our strategic initiatives.
As a result, we believe that we are well positioned to deliver solid results again and physical 2020.
And remain committed to investing back in our business to support sustainable top and bottom line growth and create value for all our stakeholders over the long term.
Now, let me turn the call over to Rob to provide the details on a results in our physical 2020 outlook trial.
Thanks, Tom Good morning, everyone.
As Tom noted, we're pleased with our strong sales any bit dog growth in the fourth quarter and for the full year.
Specifically in the quarter net sales increased 9% to just over a billion dollars.
Driven by a good balance of favorable price mix and volume.
Mhm price mix was up 3% due to pricing actions in our global and food service segments.
As well as favorable mix.
Volume increased 6% led by growth in our global segment.
Marvel Packers are acquisition, Australia that we closed in the middle of our fiscal year added about a half point volume growth.
For the year sales grew 10% to 3.8 billion.
With volume up 5% and price mix also up five points.
Gross profit increased $18 million or 8% to 251 million in the corridor.
Higher prices favorable mix volume growth and supply chain efficiency savings drove the increase more than offsetting the impact of input manufacturing transportation cost inflation.
The increase in gross profit was tempered by a seven and a half million dollar loss in unrealized mark to market, just mark to market adjustments related to commodity hedging contracts this quarter.
This compares to a 1 million dollar loss in the prior year period.
Gross profit also included approximately $3 million of cost.
Related to the startup of our new French Fry line in her midst in Oregon.
All in our gross margin percentage in the corridor was down 40 basis points to 25%.
However, excluding the unrealized mark to market adjustments and the harvest and startup cost.
Gross margin expanded by 50 basis points.
For the year gross profit group, 14% and gross margin expanded 100 basis points to 26.7%.
The improvements were largely driven by favorable price mix volume growth and supply chain productivity more than offset in cost inflation and higher depreciation expense, primarily associated with our French Fry production line in Richland that became operational in mid fiscal 2018.
S G.N.A. expense, excluding items impacting compatibility increased about $4 million to 103 million in the corridor.
The increase in S.G.N.A. was due to investments in our sales marketing operating and information technology <unk> capabilities to support growth and drive operating efficiencies.
Advertising and promotional expense.
Was down about $4 million due to the timing of spending last year.
Behind grown in Idaho.
For the year.
And P. spending was up less than a million dollars to 32 million.
In addition, as Tom noted.
<unk>, we contributor to an additional $5 million to our charitable foundation, which focuses on combating food insecurity.
We made a similar contribution in the fourth quarter last year. When we initially set up the foundation.
Adjusted operating income increased $14 million or 10% to 148 million and a quarter behind strong sales and gross profit growth.
For the year adjusted operating income was up 14% to $668 million.
Similar to the fourth quarter, the increase was due to higher sales and gross profit.
<unk> <unk>, partially offset by higher S.G.N.A.
Equity method investment earnings from our unconsolidated joint ventures, which include Lamb Western Meyer in Europe , and Lamb, Western already Oh in Minnesota, where $15 million in the corridor.
Excluding mark to market adjustments related to come on commodity hedging contracts.
Equity earnings were down about $12 million.
Largely due to higher raw potato costs and lower sales volumes in Europe associated with poor crop.
For the year equity earnings were $60 million.
Excluding the mark to market impact equity earnings declined about $22 million due to the crop issues in Europe .
So putting it all together adjusted EBITDA, including the proportionately bit off from our two unconsolidated joint ventures increased $13 million or 6% to $215 million for the quarter.
Operating gains by our base business, along with contributions from acquisitions drove about $23 million of eat dog growth.
Even though we absorbed higher mark to market losses, and hermits and start up costs.
This was partially offset by a 10 million dollar decline any but from our unconsolidated joint ventures.
For the year, you would die increased $84 million or about 10% to 904 million.
That's at the high end of the guidance range that we provided at the end of the third quarter.
Despite the mark to market losses in a 5 million dollar contribution to our charitable foundation in the fourth quarter.
Moving down the income statement interest expense was about $27 million, which is similar to prior year.
Are effective tax rate, excluding the impact of compare ability items was about 20% and includes the benefit of discrete items.
For the year or rate was about 22%.
Turning to earnings per share adjusted diluted D.P.S. was up nine cents or 14% to 74 cents in the corridor.
Operating gains in our base business and a two cent benefit from a lower tax rate and are approximately two cent benefit from the B.S.W. acquisition.
Drove the increase partially offset by lower equity aren't earnings.
For the year adjusted diluted D.P.S. was up 56 cents or 21% to $3.22.
The increase was driven by higher income from operations.
17 sent benefit from a lower tax rate do U.S. tax reform and a five cent benefit from the V.S.W. acquisition.
These gains were partially offset by lower equity hearings.
Now, let's review the results for each of the business segments.
Sales for a global segment.
Which includes the top 100, U.S. base change as well as all other sales outside of North America.
We're up 13% in the corridor.
Price mix rose, 3%, primarily reflecting pricing adjustments associated with multi year contracts.
Volume grew 10%.
The strong increase was driven by growth in sales to strategic customers in the U.S. and key international markets.
Including to customers affected by the challenging crop in Europe .
As well as increased sales of limited time offering products.
In addition, the Marvel Packers acquisition contribute about a point volume growth.
For the year global sales grew 12% with volume up seven points.
And price mix up five.
Lobos product contribution margin, which is gross profit less advertising and promotional expense.
Increased $11 million or 11%.
For the year, it's up $71 million or 19%.
Favorable price mix volume growth and supply chain efficiency savings drove the increases.
Which were partially offset by cost inflation.
While global price mix and volume growth more than offset higher costs on a dollar basis in the corridor.
The segments contribution margin percentage declined 40 basis points.
Increased international sales, which generally carry lower margins than the segments average accountants for some of the margin decline.
For the year Globals product contribution margin percentage was up 120 points.
Sales for our food service segment.
Which in which services North American food service distributors and restaurant chains outside the top 100, North American restaurant customers increased 7% in the corridor.
Price mix increased 6%, reflecting the benefit of pricing actions initiated in the fall of 2018.
As well as improved mix.
Volume increased 1% led by growth of Lamb Weston branded products.
For the year sales increased 5%.
With mix up five and volume flat.
Food services product contribution margin increased $15 million or 16% in the corridor.
While contribution margin percentage expanded 260 basis points.
For the year.
The segments contribution was up 37 million or 10%.
And margin percentage expanded 150 basis points.
The increases were driven by favorable price mix and supply chain efficiency savings and were partially offset by cost inflation.
[noise] sales in our retail segment increased 3% in the quarter driven by four points volume growth behind increase sales have grown in Idaho, and other branded products as well as private label.
Price mix fell 1% largely due to increased trade support behind our branded portfolio.
For the year sales were up 11% with volume up seven points in price mix up for.
Retails product contribution margin declined modestly in the corridor as lower advertising and promotional expense offset increased trade support.
Retails contribution margin percentage fell 70 basis points.
For the year.
Retail product retails contribution margin increased $11 million or 13%.
While margin percentage expanded by 40 basis points.
Moving to our balance sheet and cash flow.
Our total debt at the end of the quarter was about $2.3 billion.
This puts our net debt to adjusted EBITDA ratio at 2.8 times.
We continue to target leverage ratio of three and a half to four times over the longer term.
We remain comfortable being below that range as we continue to explore potential acquisition opportunities.
With respect to cash flow for the year, we generated about $680 million of cash from operations.
That's up from about 480 million or about 42% versus last year.
Driven by strong earnings growth and lower cash taxes as a result of us tax reform.
Our top priorities and deploying that cash continue to be investing to grow the business organically and through acquisitions.
And fiscal 2019, we spent about $335 million.
On capital expenditures, including the construction of our new French Fry line in her midst in Oregon.
We also completed the purchase of the remaining interest in Lamb Western B.S.W. for about $80 million.
And expanded our global footprint with the acquisition of Marvel Packers in Australia for about 90 million.
Finally, we returned $145 million in cash to shareholders.
We paid about 113 million and dividends and then a five months in which we had a share buyback program, we repurchased nearly 460000 shares for about $32 million.
At the end of fiscal 2019.
We had about $220 million remaining in our share repurchase authorization.
Turning to our fiscal 2020 outlook.
As Tom noted, we anticipate the overall operating environment to remain generally favorable.
With continued solid demand growth in our markets.
New industry capacity should allow processors.
To operate their factories that more normalized rates easing the strain on those assets, while also providing more flexibility to support customers growth.
Consistent with our overall guidance philosophy, we're taking a prudent approach to our fiscal 2020 outlook.
Specifically, we are targeting sales to grow at mid single digit rate, including the benefit of the 53rd week, which will benefit the fourth quarter.
We expect the volume to be the primary driver of sales growth.
The incremental capacity from available from our 300 million pound <unk>, Oregon production line, which became operational at the end of fiscal 2019 will help support that growth.
In the near term you shouldn't consider all 300 million pounds to be incremental.
As when we commissioned the line at Richland two years ago will take some time to ramp up the facility.
We'll also shift production to her miss done from other lines, which will take down for some deferred maintenance as well as some retooling to meet evolving market needs.
In addition to volume growth.
We expect the prices will increase modestly and enable us to offset input cost inflation.
We've taken a prudent approach when incorporating expected results of pricing discussions in our outlook.
Most of our chain restaurant contracts in our global segment or multi year agreements.
And we're in the process of reading of negotiating renewals for about a quarter of our global segment volume this year.
While we've been encouraged by how the discussions have proceeded so far there's always competition for these contracts.
Will remain disciplined and taken approach designed to maintain and reinforced our strategic customer relationships.
As Tom noted earlier for those multi year chain restaurant contracts that were renewed over the past couple of years will continue to realize the price increases embedded in those contracts.
We are targeting adjusted EBITDA, including unconsolidated joint ventures to be in the range of $950 million to $970 million, including the benefit of the 53rd week.
We expect gross profit growth will drive a significant portion of the but Doc really increase and the volume gains will largely drive gross profit growth.
I was I, just noted favorable price mix and productivity savings should offset higher input manufacturing transportation and warehousing inflation.
As well as an increase in depreciation expense associated with the new her missed in production line.
The rise in our production costs reflect an increase in the weighted average.
Contracted raw potato price in the low to mid single digit range on a per pound basis.
Contracted prices as you may recall are only one element of understanding our total potato cost.
Tomato yield quality and how they hold up in storage are all key to determining how the potatoes perform in our production facilities.
And our actual costs.
As typical when we provide our initial outlook our financial targets assume an average potato crop.
At this point, we don't see anything negative for the North American crop in our growing areas.
We'll have more insight in into the yield and quality the potato crop as a harvest takes place later in the year.
Through a combination of volume growth favorable price mixed and supply chain savings.
We expect to largely sustained gross margin percentages.
We're projecting that the increase in gross profit.
We'll be partially offset by higher S.G.N.A., reflecting inflation and incremental investments in sales innovation and other support capabilities.
As well as in investments to implement a new E.R.P. system.
We expect our base, S.G.N.A., which excludes advertising and promotional expense as well as the R.E.R.P. investments will continue to be within our target.
Of 8% to 8.5% of sales.
While we're targeting a and p. expense to remain in line with what we spent in fiscal 2019 are totally R.P. spending will depend among other factors on the pace of the implementation.
At this point, we're estimating E.R.P. expenditure between 10 and $20 million for the year.
As we've previously noted we expect our total S.G.N.A. spending to be elevated until we create the R.P. implementation over the next couple of years.
After which will begin to reduce our total S.G.N.A. expense, excluding a. and P. expense.
In addition to our expected operating gains are outlook includes in approximately 10 million dollar earnings benefit from acquiring the 50 per cent of our consolidated joint venture Lamb Western B.S.W.
This benefit will be realized in the first half of fiscal 2020.
For equity earnings were assuming an average crop in Europe , which should drive an increase versus fiscal 2019 results as potato costs decline and fit sales volumes improve.
However, our European J. These results through the first half of fiscal 2020 will continue to be challenged as it works through the last of the old crop.
With respect to the new crop while European processing.
<unk> processing potato futures increased in response to the recent <unk> heatwave.
Moderating temperatures in recent rains have helped the crop.
However, it's still too early to determine how the crop there will perform overall.
In addition to our operating targets, we anticipate total interest expense of around $110 million, which is about the same as in fiscal 2019.
We are targeting and effective tax rate of 23% to 24%, which is in line with our long term target.
We expect to capital expenditures about $275 million, which includes capital in support of the R.P. replacement as well as some relatively large maintenance and facility upgrade projects.
And finally, we expect total depreciation and amortization expense.
Will be approximately $175 million up from nearly 160 million this past year.
Primarily reflecting depreciation expense associated with a new her missed in production line.
So looking at our fiscal 2020 outlook at a high level.
We are targeting mid.
Single digit sales growth, largely driven by volume growth and modestly higher price mix.
<unk> earnings, we expect to deliver adjusted Eva dog, including unconsolidated joint ventures of about $950 million to $970 million, largely driven by sales and gross profit growth.
Before turning the call back over to Tom There's one more item to address.
As we stated in this morning's press release, we plan to report in our form 10, K. a material weakness related to a deficiency in an information technology General control.
We do not expect these matters will result in any changes to our financial statements.
<unk> begun remediation efforts and expect that the remediation are the material weakness will be completed as soon as practicable during fiscal 2020.
Now here's Tom for some closing comments.
Thanks, Rob let me quickly sum up by saying.
Again, and physical 2019, we finish strong and delivered another record year of sales and earnings.
We build great operating momentum and are well positioned to deliver solid results and physical 2020.
And we remain focused on executing against our strategic initiatives to support long term growth and create value for all our stakeholders.
I want to thank you for your interest in land Wesson, We're now happy to take your questions.
Thank you.
She would like to ask you a question D. signal by pressing star one.
Keep using a speakerphone copies make sure you mute function is turned off to your signal to reach our equipment again, that's star one to ask a question.
Make a first question.
<unk> go ahead.
[noise] morning, everybody.
<unk> Andrew.
Hi, there two questions for me if I could I guess first would be.
Assuming that that limb western gets a healthy benefit your every year from the equity method earnings has the benefit from the extra week as well as the the B.S.W. and then you know some contribution from recent acquisition as well.
I guess I'm trying to get a sense of what that implies for.
Sort of base business profit growth in fiscal 20.
Would seem like perhaps that might be you know fairly fairly modest are muted I now I realize there's higher ear piece band, which impacts some of that and as you said, you're you're being prudent on sort of pricing and your outlook there but.
Perhaps just some comments around sort of based business profit growth and how that plays out in fiscal 20.
Sure Andrew this is Rob.
If you know you can get to the B.S.W. historically out of the financials, because you see the AD back and so as we say that's call it $10 million of add back there the 53rd week adds a bit.
Taking that altogether take out the E.R.P. increase expenditures expense related to that you still get into low to mid single digit kind of organic growth and profitability in the business.
And then if we're thinking about organic sales again for fiscal 20.
It looking for mid single digit rise, obviously, you take out the benefit from the the 53rd week. So I don't know, maybe we're talking more communal 3% or so and then I assume there's some.
Some benefit from obviously the recent acquisition in Australia. So I mean are we are we talking really more something like you know, 2% or so organic and volume is you know <unk> the largest part of that.
It sounds like you know very limited or as you said very modest in in the way of price. So I'm just trying to get offensive that is if that's right is that consistent I guess with the being encouraged if you will about some of the initial conversations around around pricing that you've had.
Andrew This time.
Morning.
I'm I'm encouraged by the the contract negotiations that are happening right now in terms of the pricing and the other thing to remember to.
You know, we always take a prude approach to guidance. We also have the carry over contracting our global business you know the price and that were put in place.
In the last couple of years.
And you know I would say <unk> when you step back this fiscal year, it's going to be largely driven the net sales by volume and more then it will be by price as it has in the last couple of years, but I'm confident that how the contract discussions are progressing.
Feel good about you know, how we projected our pricing this fiscal year.
And I think you know as we evaluate what's going on in the marketplace I think there's going to be opportunities.
For us to continue to drive the pricing across multiple channels.
Okay. Thanks very much.
Oh.
Chris Growe of Stifel. Please go ahead.
Hi, good morning.
Good morning, Chris Hi, I wouldn't ask 'em, you know there's been a lot of concern around incremental capacity and it sounds like that will have a minimal effect on pricing overall as you're still seeing some good results. So far in your negotiations where is utilization overall for the industry do you have a good sense of that and maybe even including the facilities coming on later this year and into early next year.
Do you have a good sense of that and therefore.
Kind of where the industry operating overall that level.
Yes, generally we believe that the with the additions in North America, including our Ernest and plant.
This years, they're going to we're going to operate around the 95 96 level.
You know in North America in Europe , it's a little bit of a different different story.
There's been a lot of capacity put on in Europe , the compounded with the potato crop issue last year.
It's a bit harder to read at this time until we get.
Further in this fiscal year, but generally we believe they are operating at a pretty high utilization rate as well.
So.
As we stated in the past.
That's kind of the.
Normalized levels I think overtime with the category growth that one of the half to two and a half points as were projecting.
It's going to continue to elevate utilization rates.
Over the next couple of years as it has in the past year or so.
And then then the industry based on how they have been run in the past couple of years at a really high 100% utilization rate.
I know in our business, we had some catch up things to do and maintenance that will take some capacity offline for us for a period of time.
So.
I think I think.
If you think about it Chris rather than running a business that utilization rates that we want to add.
Is that we run at it's a pretty high utilization rate and.
That's just the nature of where we're at right now so.
A lot of these things really just need to normalize and then as the category continues to grow.
We're going to be evaluating.
Additional capacity or sell potentially in the near future.
Okay. That's good to know and I just to be clear at that level of utilization.
You believe you can price to cost inflation at that level is that correct.
Yes, I feel really confident that we can we can do that.
Okay.
And just one follow up would be on the ERP spending I think you said $10 million to $20 million expense. This year have you said how much do you have in capital like the capital Port push a portion of that and they just want to get an idea is that a little higher than next year as you kind of push through this implementation. That's my last question for you.
Yeah, Chris This is Rob.
Yes, the 10 to 20 expense, we have not disclosed specifically the capital on that and the timing of that as I said in prepared remarks that part of that is pace of timing of implementation as well.
But that but but the ERP spending is embedded within the capital guidance overall capital guidance I gave you.
And then that would grow next year then Rob.
Yes, again depends on on timing of implementation, but I think thats fair to say it would be a little bit higher next year.
Okay.
Thanks, so much.
Thanks.
[noise].
Thank you I will now take our next question.
Comes from Adam Samuelson of Goldman Sachs. Please go ahead.
Yes, thanks, good morning, everyone.
Yeah.
So I guess first coming back to the question on price mix and the QSR negotiations a little bit.
Oh, yes, the guidance for the year assumes kind of a modest contribution and this quarter and last year running about 3% price mix at the consolidated level.
We're still in COVID-19 for the first half of fiscal 20, So I My base assumption would we be similar.
To that for the first half of your fiscal year.
And you've got inflation escalators for the contracts that roll into that that are up for renewal for 2020. So in the context of guidance that assumes kind of a modest contribution it would seem like there is a.
Notable do you sell.
Embedded in the back half of the fiscal year on the price mix side and I want to just make sure I'm thinking about that right and if so kind of just talk about whether it's the inflation escalators from contracts not up for renewal or is the price mix on the new contracts.
More like zero to one I'm, just trying to make sure I understand the math there.
Yeah, Adam the again is consistent with the practice, we're being very prudent and as said in prepared remarks, being very prudent of how those negotiations on pricing or or or going to evolve.
Again the.
Also recognize that that growth as we are projecting growth international markets, we assume we're gonna grow bit quicker than domestic markets in terms of demand and those typically as we've talked about before command a lower margin than our domestic markets and so part of it is is is into that mix piece of across business and customer mix was international waiting a little bit that's impacting your math there.
Okay. That's helpful. So maybe that actually is a good segue into the second question and you talked about being kind of happy with the pricing. So far on the QSR negotiations can you talk maybe about on the volume market share side, just the aggregate kind of.
Our rehab just with pricing are we happy with the volume market share price in aggregate, just maybe frame it a little bit more broadly than just the pricing component.
Yeah. So the.
Adam when you step back to your point in aggregate, we're very comfortable with not only the pricing component of it but a volume as well and as I've as we've worked hard over the last two three years to align our segments.
With strategic customers.
That are growing in the marketplace. So we have a really good customer portfolio mix not only in the global segment, but in foodservice and retail.
And when you step back and look at the both pieces volume and pricing weren't sweet spot right. Now. So you know all this has to play out over the next couple of months, but you know I feel good about the growth opportunities we have in all of our segments.
Okay. That's helpful. And then just a very quick follow up for me.
The acquisitions in Australia that you've done in recent months I mean, I would guess that those are $10 million to $15 million EBITDA tailwind to tune into fiscal 20 is that.
Assumption reasonable and that's in the guidance.
Yeah, I think Adam that though we we don't want to talk about individual plant profitability per se.
But I think it's fair to take the capacity volumes of those and apply a margin against those and you're going to get reasonably close and that's going to get you somewhere in that range also recognize that that for the first.
Few months that an acquisition we have the markup on the inventory. So we won't get that margin on those acquisitions for the first few months, but but bottom line answer. Your question is it in the guidance yes. It is.
Okay.
Hey, Tim added mechanically just so you know the Marvel acquisition, we got middle of last year.
Just mechanically we did get the benefit of that in the fourth quarter and we talked about that in the prepared remarks, you know how much that was.
And then the most recent acquisition ready meals 70 million.
We got that at the.
It was that July 2nd very first yes, or about one month and so not all of it is going to be obviously in the first year.
Okay to that.
Helpful color I appreciate ill pass it on thanks.
Thank you.
Take our next question.
Comes from Tom Palmer of JP Morgan.
Good morning.
Thanks for the question.
Could you provide some clarity, but the gross margin outlook, you're calling out modestly higher price mix low to mid single digit input cost inflation plus looks like you'll have higher DNA expenses for the new facility.
All this together seems like it would suggest gross margin pressure, but you're guiding to sustain your gross margin. So I guess am I interpreting these pieces correctly and are there other items that should help the gross margin line that that are not being factored in that I just listed.
Yes, Tom as Tom Warner.
You know I'm real confident that we can maintain margin levels.
Where they are at today and we are we continue to focus on not you know we've had a lot of discussion about prices.
This morning already but you know, we're focusing on mix to across all of our segments and customer mix and were also.
Leveraging our Lamb Weston operating culture and supply chain to drive cost savings across our supply chain network. So you know, it's it's a the business unit leaders sales team everybody's focused on maintaining our margin levels and I'm confident based on how things are playing out early on that we'll be able to maintain our gross margin at these levels and answer them up over the course of time.
Okay. Thanks for that.
And then.
I know, you're a little limited and how much you can discuss here but.
I wanted to follow up on that.
Go shape since again.
You mentioned about a quarter of your global contracts work.
For renewal this year.
How does that compare to the number coming up for renewal next year and are you seeing or looking to kind of changed the terms in terms of the length.
Of how long.
They continue for or any changes in terms of how you have structured escalators relative to the past.
Yes. So we've we've worked over the past several years to spread the the timing.
Across all of our segments as we negotiate contracts with us.
To sequence them.
123 years, where we can.
So we have changed that sequencing in terms of negotiation timing.
You know so as far as next year I'm not going to get into specifics about.
What's coming up for bid next year, you know next year will we will have the same conversation and be talking about negotiations.
Okay. Thank you.
Thank you.
And we'll now take our next question.
It comes from Bryan Spillane of Bank of America.
Hi, good morning, everyone.
Finally, we're on so to two questions just two quick ones from me first the strong.
Volume performance in the global segment in the fourth quarter.
It was there any benefit that you got from I think you might have mentioned this in prepared remarks, but just any benefit me you may have gotten from taking some orders.
From Europe or due to the shortage in Europe in second does any of that strength.
I know it is it all pull forward from from 2020.
Yes.
Brian in terms of in terms of the.
Picking up some orders related to Europe that was really more.
Focused on strategic European customers in support of those the volume wasn't the big driver there.
And in terms of is it pull forward no I wouldn't say any of that pull forward.
Okay, Great and then I guess second one is just as we're modeling.
2020, and I know, there's been a lot of focus on on price.
In the discussion today, but is mix going to be negative I. Just it seems to me that maybe the global segment ends up contributing a little bit more and that might be a negative as you roll up at a consolidated level on mix.
Just trying to get understanding how mix affects the price mix piece on an enterprise level.
Sure on the on the mix side again, I think your point is spot on the global growth is we're expecting to be a bit faster.
Recognize in retail for example, we've had great growth here over the last couple of years.
Expect that growth rate to moderate somewhat.
But continue to push the mix within retail for the branded products and that'll help our mix within the segment foodservice similar drive growth with market, but don't expect outsized growth. It's really the growth in global driven by export that's going to pressure a little bit margins in global margin percentage and global as the mix turns to more export business relative to the growth rates domestically.
And as mentioned those export product export business tends to be a little bit lower margin.
Alright, thank you.
Thank you we'll take our next question.
From David Mandell of consumer edge.
Hi, Hi, good morning, guys. Thank you for taking my question. It's a it's a quick one.
When it comes to Europe .
It looks like the.
The weather is getting a little bit better, but there might be another bad crop.
Can you point to any learnings that.
Came from last year.
We were there any surprises that.
That the European processors are using table potatoes in store inventory.
So I was wondering if you could speak to any learnings that you could share with us.
Sure. David This is Tom one of the things the opportunity in all that for Lamb Weston is the ability for.
Ourselves Lamb, Weston and Lamb Weston Meyer to come together and look at first and foremost the customers that we need to make sure get serviced and we did move some production around to North America from Lamb Weston Meyer the team over there did a terrific job.
Early on making sure we had sourced the potatoes, we needed to service our business.
You know so.
We got ahead of it and.
We organize ourselves more efficiently in terms of moving production around the globe that was the big learning could we.
Obviously as we did that we learned some things in and.
If that situation ever happens again, we're going to be more efficient at it in terms of the table crop. This year, Yes, Europe has been hot.
Again.
And we're obviously close to it on the ground there with Lamb Weston Meyer team the differences are they're getting rain.
Periodically this year, even with the heat.
It's early on and.
So as we get to October call give you an update on that but right now.
You know it is hot but it's still too early to tell the impact on the crop over there.
Great. Thank you very much.
And this concludes our <unk> session for today, so I'd like to hand, the cold back to our speakers.
Hi, everyone. It's Dexter if I'm have any follow up questions. Please send me an email first we can either side of the time or Oh, either today or later on in the next few days and thanks for joining the call and talk to you later thanks.
This concludes today's call. Thank you for your participation you may now disconnect.