Q1 2020 Earnings Call
Hi, Dan welcome to the Lamb Weston first quarter 2020 earnings Conference call Today's conference is being recorded.
At this time it relates to turn the conference over to Mr., Dexter Congbalay VP Investor Relations Lamb Weston. Please go ahead.
Good morning, and thank you for joining us for land Watson's first quarter 2020 earnings call.
This morning, we issued our earnings press release, which is available on our website Lamb Weston dotcom.
Please note that during our remarks, we'll 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 filings with the FCC for more details on our forward looking statements.
Some of today's remarks include non-GAAP financial measures. These non-GAAP financial measures should not be considered a replacement for I should be read together with our GAAP results you can find the GAAP to non-GAAP reconciliations in our earnings release.
With me today, our time, Warner <unk>, President and Chief Executive Officer, and Robert Dodd, Our Chief Financial Officer.
Tom will provide an overview of our performance as well some comments on the current operating environment.
Rob will then provide the details on our first quarter results.
With that let me now I'll turn the call over to Tom.
Thank you Dexter good morning, everyone and thank you for joining our call today, we're pleased with our solid start to the year with each of our core business segments, driving volume price mix and earnings growth.
Specifically sales increased 8% behind strong volume growth EBITDA, including unconsolidated joint venture increased 9% driven by strong sales growth and higher gross profit.
Diluted earnings per share increased 8%, reflecting operating gains.
And finally, we generated nearly $240 million of cash flow from operations.
These results provide us with a good foundation to deliver on our full year commitments. They also reflect how our commercial and supply chain teams continue to execute on our strategic and operational objectives.
For example in our global segment, we drove strong growth by supporting customers in North America and internationally. We also continued to grow sales of limited time offering products in the U.S. and key markets in Asia, Despite lapping a very strong prior year quarter.
In our foodservice segment, we delivered our third consecutive quarter of volume growth behind sales of Lamb Weston branded products as our direct salesforce continues to strengthen relationships with customers.
And retail Ari Lexia grown in Idaho and license branded products each grew volume.
Grown at Idaho continued to expand distribution helped in part by the recent launch of two new items that are phenomenal differ and waffle fries.
And finally, our supply chain team continued to ramp up our new 300 million pound French Fry line in herbison, Oregon, providing us with additional flexibility to service that upgrade other production lines that have been operating at peak capacity.
Although we delivered a solid quarter, we did face some challenges in our supply chain.
As you know we've enjoyed the benefits of our off of operating our manufacturing assets at very high utilization rates over the past couple of years.
When possible and without compromising food or employee safety, we've taken opportunities to defer maintenance in order to continue to support our customers growth.
However, it is also plays a strain on our production assets.
During the quarter that strain showed as Rob will discuss later, we had instances of production issues, resulting in unplanned maintenance and repair costs as well as some unscheduled operating downtimes in turn this increased our costs.
Our manufacturing plants are now operating better while we're making good progress and working through the issues that affected our performance, we expect to realize some residual impact on a result in the near term.
Before turning to the operating environment, Let me give you a few quick updates.
First on a preliminary basis, we believe the crop in our growing areas in the Columbia Basin, and Idaho, where we source the vast majority of raw potatoes will be consistent with historical averages.
Well crop yields in Alberta, and Minnesota may be just below average due to weather events, we do not expect us to have a notable impact on our overall results.
So at this time, we do not expect any significant issues with the crop in North America.
As usual, we'll provide our update view updated view of the crops yield and quality and how we expect the crop will hold up in storage. When we report our second quarter results in early January .
These factors are all key to determining how the potatoes perform in our production facilities and along with contracted raw material prices, our actual cost for raw potatoes.
Second our early read on the potato crop in our growing areas in Europe is that it will be a bit below the long term average.
This is due to hot weather conditions. This summer however, despite being below average we believe it will be better than last year's historically poor crop.
As a result, we expect that Lamb Weston Myers performance will gradually improve it as the year progresses as cost pressures ease in the second half of our fiscal year once the new potato crop begins to be processed.
And finally with respect to contracts with our large customers. We finalize most of the agreements that are up for renewal this year.
In aggregate, we're satisfied with how the discussions progressed in the terms on which we ultimately ultimately agreed including price.
These contracts reflect our balanced approach to improving price and mix in order to offset inflationary pressures and importantly to maintain and reinforce our strategic customer relationships.
Now turning to our operating environment.
We believe the current global environment is generally favorable.
We believe industry capacity utilization rates in North America remain elevated during the first quarter.
For the remainder of physical 2020, we anticipate that new capacity in North America will allow processors to operate their facilities closer to normalize rates, but utilization rates will remain elevated.
With respect to demand growth in our fiscal first quarter was strong.
In the U.S. positive restaurant traffic trends continue to be supported by low unemployment.
A quick serve restaurant traffic growth was especially strong led by growth at chicken base outlets growth in French Fries Servings was also encouraging these trends helped drive our global segment's strong volume growth in the quarter.
In our key international markets demand continued to grow in line with recent trends.
And in Europe demand growth was solid despite higher frozen potato prices as a result of last year's crop.
While recent frozen potatoes demand has been higher than average we're monitoring signs of softening macroeconomic conditions, which may temper demand growth towards more normalized rates.
However, French fries demand has proven somewhat resistant to the effect of challenging economic times as most rides are consumed at QSR us.
Generally consumer traffic at QSR as tends to weather periods of slower economic growth better than fast casual and other casual restaurant formats.
That's why we've stayed aligned with our strategic QSR customers and partnered with up and coming QSR and many of our key markets.
As a result, along with our broad market coverage advantage global manufacturing footprint focus on execution and commitment to serving our customers.
We believe we're well positioned to deliver our financial objectives for the year and create value for our stakeholders over the long term.
So in summary, we delivered a strong start to the year, despite the manufacturing related challenges.
The potato crop in North America is in line with historical averages and the crop in Europe is improved versus the prior year.
We are satisfied with the outcome of customer contract renewals and we're on track to deliver on our fiscal 2020 financial targets.
And one more thing before I turn it over to Rob earlier this year, Rick Martin our global head of supply chain told me of his intention to retire.
For the past 25 years, he's been a tremendous asset to Lamb, Weston and especially to me through the last three years as we transition to stand alone public company.
We spent a steady hand, leading the supply chain organization during our transition, including building and starting up several new licenses to support our growth.
He has also been a tireless champion for safety and our manufacturing facilities and a great partner for me and my management team.
On behalf of Lamb, Weston, we wish Rick a happy and healthy retirement.
And as we announced a couple of months ago were welcoming Geraldo schoeffler as our new supply chain later.
Geraldo has more than 25 years, a supply chain experience. Most recently as the vice President of global operations at Monolines International where he oversaw major global restructuring program to optimize the global supply chain footprint that included more than 50000 employees at more than 150 global locations.
Prior to Monolines. He spent more than 20 years of Procter and gamble in a variety of roles of increasing responsibility.
We're happy to have Hurghada joined the team into Leverages experience as we make progress against our strategic plan.
Now, let me turn the call over to Rob to provide details our first quarter results.
Thanks, Tom Good morning, everyone.
As Tom noted, we're pleased with our solid start to the year.
Net sales increased 8% to $989 million with growth in each of our business segments.
Volume increased 6% led by growth in our global segment.
Together, our two acquisitions in Australia, Marvel Packers and ready meals added about a point of volume growth.
Price mix was up 2% due to pricing actions and favorable mix.
Our strong sales growth drove an $18 million or 8% increase in gross profit.
Specifically higher prices volume growth and favorable mix drove the increase more than offsetting the impact of higher manufacturing costs due to inefficiencies cost inflation and higher depreciation expense.
Associated with our new production line in harvested.
It's important to note that the increase in price was enough to offset input cost inflation on a dollar basis.
In addition, the increase in gross profit includes nearly 2 million dollar benefit from unrealized mark to market adjustments related to commodity hedging contracts compared to a five and a half million dollar loss in the prior year period.
While we drove a solid increase in gross profit dollars. Our gross margin percentage was down a modest 10 basis points to 25%.
However, excluding the market mark to market adjustments it was down 80 basis points.
Gross margin decline, excluding the mark to market adjustments was primarily driven by manufacturing inefficiencies.
As Tom noted earlier. These inefficiencies were largely a result of the strain that we've placed on our assets by operating at very high utilization levels over the past few years.
In the quarter, we incurred higher maintenance repair and related costs, such as additional labor expense.
We also had higher than normal periods of unscheduled operating downtimes.
Together, both scheduled and unscheduled maintenance affected our production levels, which in turn impacted our fixed cost absorption.
Raised overall maintenance costs and lower recovery rates.
Most of our plants are now operating at more normal levels. In addition, getting our new harvest in line operational and qualified to make a range of products has provided more flexibility across our network.
And the overall transition to processing, the new potato crop is going well.
Nonetheless will continue to realize some carryover effect from these manufacturing of the inefficiencies on gross profit as we made progress on correcting these issues over the coming months and as we work through finished goods inventories early in the second quarter.
SGN, a expense increased less than $1 million to about 79 million.
The increase in SDMA was due to higher expenses related information technology services and infrastructure, including approximately $1 million associated with designing a new enterprise resource planning system as well as investments in our sales marketing and operating capabilities.
We expect SDMA will increase as we ramp up the training and transition process for the new ERP system.
The increase in SGN, a in the quarter was largely offset by a $4 million decline in foreign exchange expense and a one at half million dollar decline in advertising and promotional expense.
As a result income from operations increased $17 million or 11% to 170 million, reflecting so solid sales and gross profit growth.
Equity method investment earnings from our unconsolidated joint ventures, which include Lamb Weston Meyer in Europe , and Lamb Weston audio in Minnesota were $11 million in the quarter.
Excluding mark to market adjustments equity earnings were down about $10 million.
The decline was largely due to higher raw potato and manufacturing costs associated with last year's poor crop in Europe carrying through inventory during the quarter more than offsetting the benefit of higher prices and volume growth.
This impact is largely behind us and we should see profitability improve in the second quarter.
To putting it all together EBITDA, including the proportional EBITDA from our two unconsolidated joint ventures increased $20 million or 9% to $233 million.
Operating gains by our base business, along with contributions from the BMW and Australian acquisitions drove $28 million of EBITDA growth.
This was partially offset by an 8 million dollar decline in EBITDA from our unconsolidated joint ventures.
Moving down the income statement interest expense was about $28 million, which is about one and a half million dollars more than last year.
This increase reflects the write off of debt issuance costs in connection with a refinancing of a portion of our term loan facility to secure lower costs and to extend the maturity date.
Our effective tax rate was about 24% consistent with our full year guidance.
Turning to earnings per share diluted EPS was up six cents or 8% to 79 cents.
Operating gains in our base business and approximately three cents benefit from the DSW acquisition drove the increase.
This was partially offset by lower equity earnings.
Now, let's review the results for each of our business segments.
Sales for our global segment, which includes the top 100 us based change.
Chains as all as well as all other sales outside of North America.
Up 11%.
Volume grew 9% with growth driven by higher sales, including increased sales of limited time offering products to strategic customers in the us and key international markets.
It also includes a two point benefit from Marvel Packers and ready meals acquisitions in Australia.
Price mix rose, 2%, primarily reflecting pricing adjustments associated with multiyear contracts.
Globals product contribution margin, which is gross profit less advertising and promotional expense increased $8 million or 9%.
Favorable price mix and volume growth drove the increase which was partially offset by higher manufacturing cost input cost inflation and higher depreciation expense associated with the harvest in production line.
Sales for our foodservice segment, which is which services north American foodservice distributors and restaurant chains outside the top 100, North American restaurant customers increased 3%.
Price mix increased 2%, reflecting improved mix and the benefit of pricing actions initiated in the fall of 2018.
Volume increased 1% led by growth of Lamb Weston branded products.
Foodservices contribution margin was essentially flat increasing about half a million dollars price mix and volume growth offset higher manufacturing cost input cost inflation and higher depreciation expense.
Sales in our retail segment increased 11% driven by eight points of volume growth behind increased sales of branded and private label products across our portfolio.
Price mix increased 3% largely due to favorable mix and pricing actions.
Retails product contribution margin increased 6 million or 27%.
Higher price mix volume growth and the timing of NP spending drove the increase.
Moving to our balance sheet and cash flow our total debt at the ended the quarter was about $2.2 billion.
This puts our net debt to EBITDA ratio at 2.7 times.
With respect to cash flow, we generated nearly $240 million of cash flow from operations, that's up about 5% versus last year driven by earnings growth.
We use nearly half that cash purchase ready meals in Australia for about $117 million and invested about 60 million combined and capital expenditures and it projects.
We bought back about $5 million worth of stock or more than 72000 shares at an average price of $66.67.
Our ability to repurchase shares in the first quarter with limited since we only had a very narrow trading window in August .
We also paid 29 million in dividends to our shareholders.
Turning to our fiscal 2020 outlook.
As Tom noted our financial targets are unchanged and we remain on track to deliver our financial commitments for the year.
Our targets include the contribution of a 50 threerd week that will benefit the fourth quarter.
For the year, we continue to target sales to grow at mid single digit rate, primarily driven by volume and price mix the increase in order to offset input cost inflation.
We also continue to anticipate adjusted EBITDA, including unconsolidated joint ventures to be in the range of $950 million to $970 million with sales and gross profit growth driving the increase.
We expect gross profit growth will drive a significant portion of the EBITDA increase with volume growth and favorable price mix more than offsetting input cost inflation and higher depreciation expense as well as the effect of some manufacturing inefficiencies.
As I noted earlier, we'll continue to realize some effect from the manufacturing inefficiencies on gross profit as we work through finished goods inventories early in the second quarter.
Turning to ask Jna for the year, we continue to expect our base SGN, a which excludes advertising and promotional expense as well as ERP investments to be within our target of 8% to 8.5% of sales.
We're targeting a NP expense to remain in line with what we spent in fiscal 2019.
We also continue to anticipate total ERP spending of between 10 and $20 million and this should ramp up over the course of the year, depending on the pace of the implementation of the system.
We continue to expect equity earnings to gradually improve as we put the challenges of last year's poor crop in Europe behind us.
In addition to our expected operating gains our outlook includes and approximately $10 million year over year earnings benefit from the BMW acquisition in the first half of fiscal 2020.
Most of our other financial targets also remain the same including total interest expense around $110 million, an effective tax rate of 23% to 24% and total depreciation and amortization expense of approximately $175 million.
We're raising our capital expenditure target to $300 million from 270 million to reflect updated spending estimates for our new ERP system and other projects.
Now here's Tom for some closing comments, thanks, Rob let me quickly some up by saying we are pleased with our solid sales earnings and cash flow growth to start the year, we're on track to deliver on our physical 2020 financial targets.
And we remain focused on serving our customers executing against our strategic initiatives to support long term growth and creating value for all our stakeholders.
I want to thank you for your interest in Lamb Weston and we're now happy to take your questions.
Thank you and if you're willing to answer your question. Please tell by pressing star one on your telephone keypad, if hearing AIDS speakerphone. Please make sure your immune function is turn up from the layers to announce returning equipment.
Again, it's star one if you're willing to signal.
Take our first question from Andrew LENSAR with Barclays.
Morning, everybody.
Morning, Andrew.
So got done just one quick one on some of the supply chain challenges and then a broader follow up.
With the supply chain piece, you mentioned some of the higher costs you incurred.
Were there any.
It didn't sound like it but were there any.
Yes supply issues with any key customers are shorting customer product given some of the unexpected plant downtime things like that or were you able to kind of make that up just albeit with higher costs.
Yeah, Andrew we this is Tom.
We with our manufacturing footprint.
The things unexpectedly happen, we do have the ability to move production around to other facilities. So.
To point blank answer your question there was a customer disruption associated with with the unplanned downtime in the manufacturing challenges we had the first quarter.
Great. Thanks for that and then.
In the release this morning, and then in your prepared remarks, you you mentioned, how Lam is monitoring.
Potential for a softening of macroeconomic conditions that yes crude timber frozen potato demand towards more normalized levels. So I'm just trying to give a sense of maybe what signs that you're either currently seeing or where that you're monitoring and are they regional in nature or maybe more broad based.
And then I've got a follow up to it.
Right, Andrew we we obviously look at all the the syndicated data and.
We also have some data that we look at in the international markets and it's exactly what I. Just stated this morning, we are monitoring it and.
We had a great quarter in terms of traffic in the us with Qs ours, so let's as counterintuitive to.
What we're concerned about economically.
But it's been it's been choppy the last three four quarters in terms of traffic.
So we're continuing to watch it it's there's lot of economic concern in them in the and the market.
Right now it's it's just.
It's just something we monitor.
But again, we had a great traffic quarter in the QSR segment in the us.
International markets are on trend in terms of what.
The traffic and what are what we're seeing our growth. So it's just some were monitoring.
And then the last piece of that would really be.
Maybe you could you just remind us of what.
Demand has been we can see obviously with demand has been more running at but can you remind us what you see is.
More normalized rates of growth.
In North America, and internationally and just the reason I ask is.
I want I want to make sure how we should think about if we get to a point, where theres more normalized rates and I realize right now that's not the case what that means in the context of some increased industry supply.
In the market, even though current utilization remains pretty tight because you said.
Yes, so Andrew a normalized rate that that.
We look at as one of the aptitude and a half percent globally.
And obviously, there is going to be different growth rates in different markets and just to give you context.
You know broad strokes is a 30 billion pound market category globally. So one of the aptitude half percent.
You know that's a big chunk of volume growth on a normalized basis. So that's that's how when I talk about normalized growth rates.
That's the window you need to think about.
Thanks very much.
Yep.
We'll now take our next question from Adam Samuelson with Goldman Sachs.
Yes, thanks, good morning, everyone.
Good morning, Adam.
So I guess first I wanted to just touch on on the pricing.
Issued discussion a little bit and it ties into the capacity side and.
In the quarter.
I mean, you talked about kind of being please mix being favorable and getting pricing the cover to cover costs.
Any additional color you could have as you've gone through additional.
Contracting discussions with your global customers into to into 2020, and then in the foodservice side.
The price mix line did decelerate pretty notably from where you are last quarter and.
I thought the lapping of a price increase was going to be more.
In the in the upcoming quarters. So just any color on the 400 basis point deceleration in price mix in foodservice.
Yes, so just generally Adams Tom.
Overall the contracting.
Exercise, we just finished by and large our pricing.
Kind Atlanta, where we thought it was going to be and I know there was some concern.
Out there that with the capacity coming on that there was going to be some pressure a lot of pressure on pricing and by and large where we ended up is exactly where we thought we'd be.
Historically based on my experience with this business.
You know in these times, where you have a little extra capacity, yes, you're not going to get maybe the lifts that you've had in the past, but overall pricing landed exactly where we thought we would be so im pleased with where all that ended up in terms of the food service pricing deceleration.
I would say, it's at a more normalized level based on.
From a historical standpoint, and we've had significant price increases over the last few years based on a number of economic reasons of business reasons, and we were able to get some pricing through as we expected and I'm, even though its decelerated, we're lapping some some big price increases from.
Prior year.
I'm Super Happy where we landed on all this so I feel good about where we're positioned in terms of that and again.
Well the the belief out there was was that was there was a lot of concern whether or not we were we were going to be able to price and the team did a great job getting that through the marketplace.
Okay I appreciate that color and then second for me just on the on the potato crop side I think you'd indicated in your key growing regions in the Pacific northwest you're comfortable with that with the supplies are there any pockets, though you talked about Alberta, Minnesota as areas, where the crop might be a little bit weaker any residual impacts to the broader market or.
Broader industry capacity utilization that could be potentially opportunities, where you have potatoes.
Some of your competitors plants might be more challenged or any any pockets of supply disruption on that front that you can call. It.
Yes, Adam I'm going to I'm going to.
Got to defer answering that question, we are right in the middle of harvest.
And as I do in Q2, I'll give you a broader base point of view on.
The crop in total although I will say right now is exactly what I said on the call is we feel good about Pacific Northwest Theres, some challenges in Alberta, and the Midwest and right now, it's really about understanding how that that crop.
It's going to process and we really just need time. Another month and then we'll have a good idea and and I'll get back in Q2 like I do every year and give you a point of view on where there are challenges or not.
Okay, and if I could just squeeze a quick clarification just the other segment the profit.
John It's about 5 million year on year any color on what drove that.
Yes.
No. It is the the other profits also includes our mark to market.
And so the other category does and so thats really the noise in there nothing operationally.
Okay perfect. Thank you very much.
Well 10, Tom Palmer with JP Morgan.
Good morning.
Morning.
First I just wanted to ask about the higher ERP related Capex is this any type of shift in terms of the spending from operating expenses to capex either for this year or down the road and then is the increase.
Like pull forward of expenses or just stay outright increase in terms of expected spending for the ERP just some color on that would be great.
Yeah, Tom the ERP project and again recognize the accounting around those kinds of things and computer systems has has changed here recently and so some of that is when you're doing these licenses gets put into SGN a expense and then theres some of the things that go into.
To capex, so theres, a little bit changing accounting standards, but from us for our spending is we're exactly on plan as expected and and were very deliberately going through and making these upgrades and so the adjustment to the Capex is just we've got a little more clarification and spec.
Sufficiently over the spending for that project and so.
That's that's where we raised our capex for to reflect that as well as some other project work we're doing.
Okay. Thank you.
Wanted to also ask just on the volume side, you called out both planned and unplanned downtime for maintenance.
But your volume growth was didnt seem to be negatively affected by a large amount.
Why was this an should we expect volume growth to decelerate as we look at the remainder of the year or do you think these rates or.
You are able to maintain them.
Well just in terms of.
Kind of what I said earlier.
The.
Great thing about Lamb, Weston and our diversified asset base is when when we have some of these challenges in the business.
With the startup a hearst and that gives us flexibility in terms of capacity additional capacity, we're able to you know.
Move production around if you will so we didnt impact customers and tend to the needs of the unplanned downtime. So.
You're not going to feel the impact in the quarter, because we were able to flex our asset base in terms of production.
The in terms of.
Volume expectations going forward, we're very prudent in our forecast in our outlook, we had a strong volume quarter. It was a lot of it was driven by the strong QSR traffic.
So I would not take this quarter and extrapolated out because we have remain prudent in our outlook based on what we think volumes going to be for the year.
Okay. So so just to clarify.
It sounds like you're essentially not factoring in this 5% growth.
Just to be safe on the traffic side or are there specific reasons that volume was particularly strong this quarter and and you do not see those recurring.
Again again, we had the traffic.
In the quarter was as good as we've seen it and.
Mining.
What we do as a company is we're very prudent in our outlook and this these traffic trends. If you look at the syndicated data they can turn on a dime. So yes, we're monitoring our customers. Yes, we have an outlook on what our customers are thinking about doing in terms of end market.
70, but we will always be prudent in our projections going forward.
And Thats historically, that's what we've done so we're going to continue to do.
Understood. Thank you.
Your next question comes from Chris Brown with Stifel.
Hi, good morning.
Morning, Chris.
Just wanted to follow up a little bit on the just a couple of questions around volume.
You talked about this kind of wanting to have to two and half percent global growth and it may kind of gravitate back towards that level.
Do you have look what volume growth was globally in the quarter at least at about 5% traffic growth was that it was that a U.S. comment was that a global comment.
That was a U.S. comment.
Okay got it and then.
It would seem like based on your volume performance you gained significant market share did you give a little bit of breakdown of volume by international adverse you us was where they about the same was one better than the other.
Hey, Chris its Dexter.
Yet international was was stronger overall than domestic as you would expect and and it was a little bit meeting too so.
But the category overall, I mean normalizes when an EPS, 2.5%. It at the category has been little bit better than that over the last call 912 months I think we've talked about that before and that's why we're saying that.
Prepared remarks is that you've seen higher than average category growth.
Particularly this past quarter.
And obviously, we were part of best beneficiary to that as well.
Sure if that makes sense and then just trying to be prudent and your expectations going forward for the category if I heard that properly so that makes sense.
And then just one other question, but could unless you day.
You talk about assuming a less advertising less ERP what was that on that faces in the first quarter I guess im just trying to understand is the ERP spending sort of picking up throughout the year actually there was a little below what I thought for the year, which for the quarter, which was good I want to get a sense of what it was on the basis of what's your modeling for the year.
Yes, yes, you name it in the first quarter X a NP.
And I don't have attached ex the $1 million of.
ERP spend goes by 7.5% Exane BNP.
But that in the context last year Q1 was seven eight.
Sorry, Yes, Chris I would say that.
Anticipates that the ERP spend is going to increase over the course of the balance of the year and so that 10 to 20 I talked about that is going to take place really in the back half of the year.
Got it so you'll see okay growth, but it sounds great. Thank you so much for John .
Thank you.
Well now take our next question from Brian Lane from Bank of America.
Hey, good morning, everyone.
So couple of questions I.
I guess the first one just.
As we've touched on pricing a couple of times in the quarter.
We had heard.
That some of the your competitors head.
Put some price increase letters out in the food what would be I guess.
On a relative to the foodservice segment to you.
I guess like during the course of the quarter. So.
Is that something that you've seen and is there potential I guess for some more price into incremental pricing in that segment as we as we move forward.
Okay.
Yes, Brian it's Tom.
Im not going to get into specifics about.
Pricing in competitive pricing, but we executed our plan pricing in the marketplace across all of our segments as.
We normally do and I will tell you look like I said earlier I'm I'm.
Pleased with how all that.
The team did they executed it so.
We'll start seeing.
You know that pricing in the marketplace here it takes a while further pricing to get in the marketplace.
And.
So we'll start seeing the benefit of that but it does take a while you know from the time, we announced until it actually starts flowing through to the business, but we've executed across all of our segments on the pricing that we felt.
We could get through.
So just to be clear so is whatever it was announced.
It didn't really even reflected in what we saw in this quarter's results because it's going to take some time to flow through.
That's correct, Brian Okay, and then second on potatoes supply I know you commented on your growing regions I.
I guess in the trade press it seems like the Easter and you know like.
Eastern Canada.
Crop maybe not as good so it can you just kind of talk about.
How if there is tight supplies in potatoes on the east coast, just how that affects.
The industry right is it possible that some of your competitors that are more.
East coast dependent will be kind of tight on on potatoes supply and just how that affects the whole supply demand dynamic in the market.
Brian So.
Again, it's early on and Theres been some weather challenges and.
Canada, Midwest and the east and.
No. It is it does put pressure on raw potato supply and it causes.
Some of natural things to happen like shifting potatoes across the country and potatoes, when you ship potatoes, they don't travel very well.
So.
So as the potentially to competitors are facing these issues.
Historically, Dave.
Have assured supply, but they have to do some unnatural things and increase our costs.
And you know typically.
My experience when when that goes on we Havent seen a lot of disruptions do we get a few calls from customers here and there yes, we do.
But typically the competitive set even though they have to do a natural things and incur costs by shipping potatoes across the country.
They are going to theyre going to support their customers do but it's.
It's it's really comes down to it pressures their margins.
Okay, and then to admit right.
Sorry, I just add to that did that in terms of the impact on us I mean, because we contracts such a high percentage high 90% of our raw ahead of the season going into the season, there really isn't going to impact our cost structure, even though they're pulling potatoes, maybe out of Idaho or something.
Okay and then just last one from me maybe Rob if you could just help a little bit the gross margin in the first quarter. I guess, there was a few kind of one off items that affected gross margin right you mentioned the supply chain inefficiencies.
As being one of them I think Harris also crept in this quarter and would have affected gross margin can you just give us a sense of how much of.
What is pressuring gross margin in the first quarter the magnitude of what it was and I guess, it's going to linger a little bit into Twoq and then how much we might get back if things are more normal in the back half of the year just trying to understand how much of the gross margin pressure was kind of more transient in nature versus.
Going to carry through the year.
If if if you take the 80 basis points down that I called ex the mark to market.
Ex the noise in the manufacturing facilities, we would've been modestly positive in terms of gross margin.
Percentage growth right.
Okay.
And some of at will.
Kind of linger into the second quarter, but we should sort of.
Through that by the time, we get to the second half.
Exactly.
Alright, thank you.
Thank you.
We will now taking our next question, David Mandell with consumer edge research.
Turning to.
David.
I was on mute I'm sorry, good morning.
David.
So just to pick up on the tariff and the.
And the slowing growth, possibly reverting to normalize rate.
I'm just wondering how how prudent is that exactly.
I mean, if if there's a macro slowdown.
And tariffs art issue and export market, particularly China.
Is the flow down to normalize the rates really prudent or could it get even worse.
Yes, David.
You know the.
Ill address a tariff.
Question first you know, we with all the tariffs.
Discussion and everything that's going on.
We have a pretty sizable business in China, obviously, we got to manufacturing plant in China and we have.
Executed our contingency plan.
As the tariff rates change so we've adjusted production.
And it's been had we been impacted absolutely have it's been immaterial. So the teams done a great job looking at.
Ways to mitigate tariff increases on French fries, specifically so.
Nothing material on the terrorists right now the.
The second part of your questions.
I'll answer it it's interesting I'll give you a perspective.
When the when you go back.
10, 11 years, when we had the financial crisis.
And.
The interesting thing in our business is a little bit what I said earlier in my in my prepared remarks is even through all that period.
Our volume held pretty steady.
And you know it's a it's a combination of.
Consumer behavior. This is my belief of the QSR traffic.
People silly to our they eat out it QSR isn't the traffic and we saw it in our volume and we have international markets continue to grow so.
Our experience if you know something financial some economically happens.
Even in that time, our volume continued to it it grew but.
You know kind of drew I don't remember what the rates are but it continues to grow so.
Yes, the data point I have.
We have as a business when we have a significant economic downturn and again back to my earlier comments, that's why we're always going to be prudent with our outlook.
Going forward.
Thank you that's that's really helpful.
Earlier in the call you referred to.
Maintenance issues.
Did the hermanson plants come online faster than usual to kind of rescue maintenance issues or.
No I mean that hurts the plant canine and Atlanta.
Yeah. There wasn't plant was online in may as planned and on target. So we're ramping it up sorry birds eye <unk>.
I fully fully ramp up faster than usual.
No. It was it was right on track and.
The team did a great job.
Getting up and running at its certainly helped relieve some of the some of the pressures we're filling in some of the other manufacturing facilities.
But by and large it was on track.
Great. Thank you for that and my last one.
Can you break up the.
The mid single digit sales growth.
No bid I mean, if I think that the 50 threerd week, adding about 2%.
And pricing.
To kind of offset input costs, but it's really sales growth is going to be volume driven I'm just I'm just trying to.
Think about how much volume and how much of pricing because there once you back out the 50 Threerd week, there isn't all that much left.
Yes, Hey, David actually I mean, if you think about broad strokes sales as you know mid single so call that four to six right and next fit the 50 Threerd week.
I've been business I think three to five so said couple of points, probably little bit more than a point.
And then we're saying the bulk of that is going to be were largely driven by volume. So you can use your assumption whatever you want to use for price moves.
Great. Thank you for that and that's all add up ethanol.
Okay fair enough for their telephone questions at this time I'd like to turn the conference back to our presenters for any additional or closing remarks.
Thank you for everybody for joining us today, if you have any follow up questions. Please pop mean email with schedule call and look forward to talk is later thank you.
And once again that does conclude today's conference. We thank you all for your participation you may now disconnect.