Lamb Weston Holdings, Inc. (NYSE:LW) Q4 2023 Earnings Call Transcript

Lamb Weston Holdings, Inc. (NYSE:LW) Q4 2023 Earnings Call Transcript July 25, 2023

Lamb Weston Holdings, Inc. beats earnings expectations. Reported EPS is $1.22, expectations were $1.05.

Operator: Good day and welcome to the Lamb Weston Fourth Quarter Earnings Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Dexter Congbalay. Please go ahead, sir.

Dexter Congbalay: Good morning and thank you for joining us for Lamb Weston’s fourth quarter and fiscal 2023 earnings call. This morning, we issued our earnings press release, which is available on our website, lambweston.com. Please note that during our remarks, we’ll make some forward-looking statements about the company’s expected performance that are based on how we see things today. Actual results may differ materially due to risks and uncertainties. Please refer to the cautionary statements and risk factors contained in our SEC filings for more details on our forward-looking statements. Some of today’s remarks include non-GAAP financial measures. These non-GAAP financial measures should not be considered a replacement for and should be read together with our GAAP results.

You can find the GAAP to non-GAAP reconciliations in our earnings release. With me today are Tom Werner, our President and Chief Executive Officer; and Bernadette Madarieta, our Chief Financial Officer. Tom will provide some highlights from the past year as well as an overview of the current operating environment. Bernadette will then provide details on our fourth quarter results as well as our outlook for fiscal 2024. With that, let me now turn the call over to Tom.

Tom Werner: Thank you, Dexter. Good morning and thank you for joining our call today. We delivered strong financial results in the fourth quarter and fiscal 2023. I want to start by thanking the entire Lamb Weston team for driving these results and their incredible commitment to supporting our customers. I’m proud of the work we did and continue to do to grow our business and build momentum as we enter a new year. Specifically, in fiscal 2023, we delivered record sales of nearly $5.4 billion and drove strong profit growth in each of our core business segments through a combination of pricing actions, mix improvement, and supply chain productivity. We acquired the remaining interest in our European joint venture, which added 1,500 new colleagues, six processing facilities and nearly 2 billion pounds of capacity.

The business integration is well underway, and we believe this strategic transaction strengthens our capabilities to serve customers as a unified global Lamb Weston. We acquired a controlling interest in our joint venture in Argentina, and we broke ground on a 250 million-pound capacity expansion, which will improve our ability to serve the growing South American market. We also made progress on major capital expansion projects in China, Idaho, and The Netherlands, all of which are on track to be completed within the next 18 months. We opened an innovation center in Bergen Op Zoom in The Netherlands, wherein close partnership with our innovation center in Richland, Washington, will develop and test new product and processing ideas for customers in Europe and around the world.

We launched new groundbreaking products with proprietary technologies that address customer and consumer needs in non-traditional frozen potato channels, such as pizza outlets, expanding our total addressable market. We further stabilized our supply chain by targeting staffing levels and managing through a second consecutive challenging crop cycle, all while executing productivity initiatives and upgrading capabilities at our processing facilities. We continue to strengthen our operational infrastructure by completing the design work for the next phase of our new enterprise resource planning system. We’ll begin implementing this new system across a portion of our supply chain in North America later this year. And finally, we returned more than $190 million to shareholders, including increasing our dividend for the sixth straight year and continuing to execute against our share repurchase plan.

I’m especially proud that we delivered this performance in a highly challenging operating environment and I’m excited to see what our Lamb Weston team can deliver in fiscal 2024 and beyond. Let me now turn to the current operating environment. The overall global frozen potato category remains healthy. The fry attachment rate in the US, which is the rate at which consumers order fries when visiting a restaurant or other food service outlets, was largely steady throughout fiscal 2023 and remain well above pre-pandemic levels. Servings in Europe and our other key international markets also held up well. However, the cumulative effect of inflation and other macro pressures on the consumer over the past few years have continued to temper traffic in certain restaurant channels.

In the quarter, total restaurant traffic in the US grew versus the prior year quarter as QSR traffic growth more than offset declines in casual dining and full-service restaurants. However, total traffic growth decelerated sequentially each month during the fourth quarter as QSR traffic growth slowed and as traffic declines at casual dining and full-service restaurants softened further. Overall, restaurant traffic picked up in June behind strength in QSRs. However, traffic at casual dining and full service remain soft. We expect that near-term demand may be somewhat choppy because of the variabilities of restaurant traffic trends and continued macro pressures on the consumer, which makes forecasting global demand for frozen potatoes very difficult.

As a result, we incorporated a cautious view of demand and volume when developing our fiscal 2024 financial targets. Despite this added volatility, we remain confident in the long-term growth prospects of the global category and we’ll continue to invest behind the capabilities to support that growth across our key markets. With respect to costs and pricing, while we expect input cost inflation to moderate relative to the double-digit rates that we experienced in each of the last two fiscal years, we believe it will continue to have a meaningful impact on our cost structure. We expect most of our input cost inflation will be driven by higher contract prices for potatoes. In North America, we’ve agreed to a 20% increase for this crop — this year’s crop, while in Europe, we have agreed to an increase of 35% to 40%.

We believe the overall environment for inflation-driven pricing actions remains generally favorable. However, it’s important to note that any price actions that we may take this year will likely be more modest than what we implemented in fiscal 2023. Given that, first, our pricing actions last year were intended to catch up to the effect of multiple years of high inflation. And second, we expect total input cost inflation to grow at a lower rate. Although we expect pricing actions will continue to be the primary lever to offset inflation over the long-term, we’ll continue to drive improvements in product and customer mix resulting from our revenue growth management initiatives as well as supply chain productivity to benefit sales growth and profitability.

With respect to the upcoming potato crop, we’re harvesting and processing the early potato varieties and initial indications are that this portion of the crop, which represents about 10% of our potato needs in North America this year, is broadly consistent with historical averages. At this time, the crops in the Columbia Basin, Idaho, Alberta, and the Midwest, that will be harvested in the fall appear to be largely in line with historical averages, as growing conditions in these regions have been generally favorable. In Europe, a wet and cold spring impacted planning, which may delay the timing of the harvest in some of our growing regions. We’ll provide more detail on the crop when we report our first quarter results in early October, in line with our past practice.

Before Bernadette shares details on our fourth quarter financial performance and fiscal 2024 outlook, I’d like to update you on a change we’re making to our reportable segments. Effective at the start of fiscal 2024, in connection with our recent acquisition and to align with our expanded global footprint, we began managing our business in two reportable segments; North America and International. The North America segment includes products sold in Restaurant, Foodservice and Retail channels in the US, Canada, and Mexico, including our large multinational chain customers. The International segment includes products sold in Restaurant, Foodservice and Retail channels outside of North America. These two segments as well as our global supply chain will report to Mike Smith, our Chief Operating Officer.

Mike’s role is focused on execution and is designed to help us drive growth and unlock efficiencies by providing a truly end-to-end view of our global business. I’ll continue to maintain responsibility for driving our long-term strategies and priorities, including allocating capital and resources to support sustainable, profitable growth and create value for our stakeholders. We’ll begin to provide our financial results under the new reportable segments with our first quarter results. So, in summary, we delivered a record year of sales and earnings growth, and continue to build operating momentum across each of our core segments. While near-term demand may be difficult to predict, the category remains healthy, and we remain confident about its long-term growth prospects.

And finally, at this time, the potato crop in North America is largely in line with historical averages, while late planning may delay the harvest in Europe. Let me now turn the call over to Bernadette.

Bernadette Madarieta: Thanks Tom and good morning everyone. I want to also thank the Lamb Weston team for finishing the year strong and setting us up well for fiscal 2024. Let’s begin with our fourth quarter results. Sales were up more than $540 million versus the prior year quarter or 47% to a quarterly record of just under $1.7 billion. That’s at the high end of our targeted range for the quarter. About $380 million of the increase was attributable to the consolidation of our EMEA and Argentina operations. The EMEA amount is above the high end of the targeted $300 million to $325 million range for the quarter, reflecting a strong benefit from pricing actions. Excluding incremental sales from these acquisitions, net sales grew 14%.

Price/mix was up 24% as we continued to benefit from pricing actions taken in fiscal 2023 across each of our business segments to counter input and manufacturing cost inflation. As expected, price/mix in the quarter decelerated sequentially from the 30% or more increase that we delivered in our second and third quarters as we largely lapped all the pricing actions taken in fiscal 2022. In addition, we received no year-over-year benefits from freight rates charged to customers as we reduced these rates further to match the decline in our transportation costs. While we expect lower customer freight rates will soon become a year-over-year headwind for price/mix, our goal is to match these to our transportation costs so that their effect on our profits is neutral over time.

Our overall sales volumes in the quarter declined 10% due to four factors. The first and primary driver was our continued effort to strategically improve our product and customer mix by exiting certain lower-priced and lower-margin business across our Domestic and International portfolio. Second, demand was tempered despite softer casual dining and full-service restaurant traffic in the US. This had a more pronounced effect on our Foodservice segment and drove much of the decline in that segment’s volume in the quarter. Third, certain customers in international markets began to right-size inventories after carrying unusually high levels of inventory to derisk their supply chains during the pandemic. And fourth, certain large retail customers temporarily lowered prices to right-size inventories of private label products, delaying shipments of products that we produced on their behalf.

In addition, we realized some acceptable levels of branded product volume elasticity in response to the inflation-driven pricing actions that we implemented over the past year. Moving on from sales. Our gross profit in the quarter, excluding comparability items, increased more than $170 million to nearly $425 million. About 40% of the increase was attributable to the incremental earnings from consolidating EMEA. The remainder was driven by the cumulative benefit of pricing actions, mix improvement and supply chain productivity in our legacy Lamb Weston business, which more than offset higher input and manufacturing cost per pound and the impact of lower volumes. Gross margin was up more than 300 basis points to 25.1% despite absorbing the dilutive impact on margin of the EMEA acquisition.

Input costs increased high single-digits on a per pound basis, easing somewhat from the double-digit inflation rate earlier in the year. The increase in cost per pound were again largely driven by a 20% increase in the contracted price for potatoes in North America, significantly higher prices for open market potatoes due to poor yields from the 2022 crop and continued increases in the cost of labor, energy, edible oils, and ingredients for batter coatings. Our higher per pound cost also reflected reduced fixed cost coverage due to lower throughput, as we did take some extended downtime for planned maintenance in some of our production facilities; and increased write-downs of inventories, primarily consisting of bulk and obsolete finished goods.

Our SG&A expenses, excluding comparability items, increased $65 million to $183 million. About half of the increase was from incremental SG&A with the consolidation of EMEA, while the other half was primarily driven by three factors. First, higher compensation and benefit expenses due to improved operating performance. Second, an $8 million increase in advertising and promotion expenses as we restore support behind our branded products in our Retail segment to historical levels. And third, higher expenses related to improving our IT and ERP infrastructure. Adjusted EBITDA, including joint ventures, increased $117 million or 59% to $318 million, with higher sales and gross profit driving the growth. Moving to our segments. Sales in our Global segment were up 85% in the quarter and included the $380 million of incremental sales from the EMEA and Argentina acquisitions.

Net sales, excluding the acquisitions, grew 17%. Price/mix was up 28%, which is largely comparable to the increases in the previous two quarters. The increase in price/mix reflects the carryover benefit of the domestic and international pricing actions that took effect in our fiscal second and third quarters. Volume declined 11%, and primarily reflecting the impact of exiting certain lower-priced and lower-margin business in international and domestic markets, and the inventory destocking by certain customers and international markets that I mentioned earlier. Global’s product contribution margin, excluding comparability items, increased about $145 million. More than half of the increase was from the cumulative benefit of pricing actions, mix improvement and supply chain productivity, more than offsetting higher cost per pound and lower volumes.

Incremental earnings from EMEA, which was above our target for the quarter, drove the remainder of the increase. Sales in our Foodservice segment grew 4%, a notable deceleration versus the 17% that we delivered through the first three quarters of the year. Price/mix was up a healthy 13%, but lower than the 26% that we posted through the first three quarters, as we fully lapped our pricing actions taken in fiscal 2022 and realized no tailwind from transportation rates. As expected, the price increase that we began to implement in May only had a modest impact in the quarter, so we’ll see more benefit come through in early fiscal 2024. Sales volumes were down 9%, which is consistent with the prior three quarters. We attribute most of the decline to the impact of softer casual dining and full-service restaurant traffic, although we also continue to realize the impact of exiting some lower-priced and lower-margin business.

Foodservice’s product contribution margin fell about $3 million. Lower volumes drove the decline as higher price mix more than offset the impact of higher cost per pound. Sales in our Retail segment increased 25%. Price/mix increased 35%, driven by pricing actions across our branded and private label portfolios that we began to implement in February to counter input cost inflation. Trade support during the quarter remained below historical levels given category demand. Volume fell 10%, largely reflecting the challenges that I described earlier for private label products. Retail’s product contribution margin increased more than $40 million and its margin percentage expanded 140 basis points to nearly 38%, as the cumulative benefit from pricing and mix improvement actions over the past couple of fiscal years more than offset higher cost per pound.

Moving to our liquidity position and cash flow. We continue to maintain a solid balance sheet with ample liquidity and a low leverage ratio. We ended the quarter with about $305 million of cash and no borrowings under our $1 billion US revolver. Our net debt was nearly $3.2 billion at the end of the fourth quarter. Using EBITDA on a trailing 12-month basis, which only includes a single quarter of EMEA’s earnings, our leverage ratio is 2.6 times. We remain focused on creating value for our shareholders. Our capital allocation priorities remain the same and we continue to prioritize investing in our business to drive long-term growth as well as returning capital to our shareholders through dividends and share repurchases to offset management dilution.

In fiscal 2023, we generated more than $760 million of cash from operations or $340 million above last year, largely due to higher earnings. Capital expenditures were about $735 million, which is up $430 million from the prior year. This increase is largely related to construction costs as we continue to expand processing capacity. For the year, we returned more than $190 million of cash to shareholders, including $146 million in dividends and $45 million in share repurchases. Now, let’s turn to our fiscal 2024 outlook. We’re taking a prudent approach to our financial targets for the year. Overall, we anticipate that the operating environment will continue to be challenging, with inflation and other macro factors affecting our cost structure, restaurant traffic, and consumer demand.

In addition, we expect our capacity to produce coated fries, specialty cuts, and chopped in form varieties, such as puffs and hash browns, will remain constrained until our new production facilities in China and Idaho become available late in fiscal 2024. For the year, we are targeting sales of $6.7 billion to $6.9 billion. This includes $1 billion to $1.1 billion of incremental sales attributable to the EMEA transaction during the first three quarters of the year. And net sales growth, excluding acquisitions, of 6.5% to 8.5%, which is above our long-term sales growth algorithm of low to mid-single-digits. Note that since we began to consolidate EMEA’s sales beginning in the fourth quarter of fiscal 2023, those results are included in our last year’s sales baseline when calculating our sales growth.

We expect sales growth, excluding acquisitions, to be largely driven by pricing actions, including both the carryover impact of actions taken in fiscal 2023 as well as any actions that we may take this year to counter input cost inflation. We also expect to deliver favorable customer and product mix as we continue to benefit from our revenue growth management initiatives. As Tom noted, while we expect a solid contribution from price, we do not expect pricing actions to be at the same level as fiscal 2023. Outside of those customer contracts in our Global segment that have yet to be fully priced, we expect any future pricing actions will be largely in line with the more modest rate of input cost inflation than what we’ve experienced in the past two fiscal years.

In addition, transportation rates that we charge to customers will likely serve as a price headwind as we continue to adjust rates to reflect lower freight costs. In fiscal 2024, we expect volume, excluding acquisitions will continue to be pressured by our ongoing efforts to strategically manage product mix by exiting certain lower-priced and lower-margin business. This strategy has proven to be beneficial to earnings, and we continue to see opportunities across our domestic and international channels. In addition, we’re taking a cautious approach to consumer demand for two primary reasons. First, while QSR traffic has held up relatively well, casual dining and full-service restaurant traffic trends have softened in the US over the past few months.

Second, forecasting demand has become increasingly difficult due to conflicting data about the health of the consumer in the US, Europe, and our key markets as a consequence of inflation, especially for food away from home, the expiration of temporary government assistance and other consumer support programs put in place during the pandemic, employment trends, and other macroeconomic headwinds. Despite these near-term factors, we remain confident in the health and long-term growth prospects of the Global category and we remain committed to investing in our people, production capacity and operations to support that growth. For earnings in fiscal 2024, we expect adjusted EBITDA, including unconsolidated joint ventures, of $1.45 billion to $1.525 billion, assuming potato crops in our primary growing regions are in line with historical averages.

Using the midpoint of this EBITDA range implies growth of more than 20% or about $260 million versus the prior year. Looking at it another way, it’s up $200 million more than our annualized second half of fiscal 2023 run rate of $1.325 billion. In addition to incremental earnings from the Lamb Weston EMEA acquisition, we expect our earnings growth will be largely driven by higher sales and gross profit as we benefit from pricing actions, mix improvement and supply chain productivity. We’re projecting that the increase in sales and gross profit will be partially offset by higher SG&A expenses. We’re targeting total SG&A of $765 million to $775 million, which is up about $200 million. In addition to inflation, the increase largely reflects incremental expenses attributable to the consolidation of our EMEA operations, increased investments to upgrade our information systems and ERP infrastructure, non-cash amortization of intangible assets associated with the EMEA acquisition, as well as ERP investments we expect to place in service during the year, and higher compensation and benefit costs due to increased headcount to support our growing business.

In addition to our operating targets, we expect equity earnings, which includes our Lamb Weston RDO joint venture in Minnesota to be $30 million to $35 million. We expect capital expenditures of $800 million to $900 million as we continue construction of our previously announced capacity expansion efforts, as well as capital associated with our new ERP system and other IT upgrades. So, to summarize our fiscal 2024 outlook, we’re targeting sales of $6.7 billion to $6.9 billion, including $1 billion to $1.1 billion of incremental sales attributable to the consolidation of our EMEA operations. We expect our sales growth, excluding acquisitions, will be largely driven by price/mix, with volume pressure due to our ongoing efforts to strategically manage customer and product mix and a cautious view of demand.

And finally, we’re targeting adjusted EBITDA, including unconsolidated joint ventures of nearly $1.5 billion using the midpoint of our guidance, which is an increase of 20%, and largely driven by sales and gross profit growth. Lastly, as Tom mentioned, effective the beginning of fiscal 2024, we began managing our operations as two business segments, North America and International. In the coming weeks, we’ll provide recast financial information for fiscal years 2021, 2022, and 2023 that is consistent with our new reporting segment structure, including quarterly results for the last two years. And with that, let me now turn it back over to Tom for some closing comments.

Tom Werner: Thanks Bernadette. Let me sum it up by saying we are super proud of the team’s strong performance in fiscal 2023 and believe that we’re well-positioned to execute our strategies to deliver our financial targets for fiscal 2024. We also remain committed to investing in our business to support customers around the world and drive people, new production capacity and operations to support sustainable profitable growth over the long-term. Thank you for joining us today, and now we’re ready to take your questions.

Q&A Session

Operator: [Operator Instructions] And our first question is going to come from Andrew Lazar from Barclays. Please go ahead.

Andrew Lazar: Thanks very much. Good morning everybody.

Tom Werner: Good morning Andrew.

Andrew Lazar: I guess just a starting point, as you talked about volume declines accelerated pretty significantly in fiscal 4Q versus 3Q, and are expected to be pressured again in 2024, I know a lot of that or even the majority is some of the actions that you’re taking is sort of purposely around product mix. But how much of the sequential change in volumes was due to the inventory destocking you mentioned? And what I’m trying to get a sense of is, like, how does that square with the fact that — my sense was most customers are still clamoring for really more supply rather than less. And I guess, do you see this destocking behind you at this point? And then I’ve just got a follow-up.

Tom Werner: Yes, Andrew, this is Tom. As we look at the Q4 trends, we did have softness as we remarked in our comments in the Foodservice channel, and QSR held up well. We did have some destocking in the Retail channel that we experienced. And so the — we’re watching it closely. And we also walked away from some volume over the last contract season that we’re now starting to see in our results. So, it’s — but I will say in — early on in June, we saw restaurant traffic pick up a little bit. So, that’s a positive. But we’re watching it closely. And it’s kind of a mixed bag, as we commented on our prepared remarks, on what’s happening with restaurant traffic and it just depends on the channel right now. So, we’re watching it closely. And we do — that said, we have line of sight to some opportunities in the market and we’ll evaluate those going forward. But that does take some time to transfer into our business that we choose to pursue some of those accounts.

Bernadette Madarieta: Yes, Tom. And Andrew, if I could just add. The destocking was more in our global segment in the international markets as they got more comfortable with ocean freight carriers and service rates and more timely on-time distribution there. So, that was more in the Global segment there.

Andrew Lazar: Got you. And then, Tom, I think you mentioned potentially some additional opportunities. For those, would those be sort of new accounts for you or potentially more business with current accounts?

Tom Werner: It’s a mixed bag, Andrew. I’m not going to get into specifics. I don’t talk about particular accounts and customers, but it’s a mixed bag.

Bernadette Madarieta: Yes. And Andrew, I think it’s important, as we talk about, as restaurant trends have softened some, the overall demand continues to really be aided by that French fry attachment rate, which continues to be above pre-pandemic levels.

Andrew Lazar: Got it. And then separately, for doing our math correctly, your 24% guidance at the midpoint suggests gross margins maybe around the 25% level. I guess, first, do we have that sort of right? It was back on the envelope. And if it is, it certainly obviously would be a level well above historical levels, right, even though that would include the likely dilutive impact from the JV. I’m just trying to get a sense of how much maybe gross margin dilution do you see from the JV, and then is this level of gross margin, one that — obviously I think it is, but you view as sustainable moving forward?

Tom Werner: So, Andrew, we — I’m not going to get into specifics on your mathematics, but we are focused on margin improvement as we have been historically over time. We also evaluate overall profit pool when we evaluate additional accounts and opportunities to drive volume and service our customers. I’m extremely pleased with where and what the team has done over the last year in terms of returning our margin structure to normalized level, and we’re going to continue to improve it. But we’re going to evaluate opportunities going forward to improve the overall profit pool.

Andrew Lazar: Thank you.

Dexter Congbalay: Andrew, did you say 25%?

Andrew Lazar: I meant 28%.

Dexter Congbalay: Okay. We’re not — yes, we can’t give specifics on the gross margin. We can cut on the model, but I just want to make sure I didn’t hear 25%.

Andrew Lazar: Yes. Sorry. You may have. 28%. I did say 25%, sorry.

Dexter Congbalay: Okay. Thanks.

Operator: Our next question is going to come from Tom Palmer from JPMorgan. Please go ahead sir.

Tom Palmer: Hi, good morning and thanks for the question. Just wanted to ask on the cadence of 2024. I think normal seasonality might have sent increases in the first three quarters and a dip in 4Q. Just given the expected timing of pricing actions relative to cost inflation, is there anything to consider this year on that cadence that might cause it to deviate?

Bernadette Madarieta: Yes, the only thing, Tom, that I’ve mentioned there is generally, overall, margins and profitability declined sequentially in the first quarter and that’s largely driven by seasonality. Q1 is generally our lowest margin quarter.

Tom Palmer: Okay. Understood. And I just wanted to ask on Europe. I mean we can see frozen potato prices up quite a bit. How does this affect you guys from a timing standpoint? Is this — are you already addressing it with pricing? Is this still more work to be done? It does seem to be maybe a bit more info there than what we’re seeing in the US.

Tom Werner: Yes. So, Tom, we have the team in Europe, Marc Schroeder, who runs our International business, they’re addressing it. They’re doing a terrific job. They’re getting ahead of it as much as they can. And we have contracted traditionally higher than what we have in terms of locking in potato prices. But we still have a little bit of open potatoes, but we’re going to price through it, manage it as we had — as we did last year and the year before. So the team is doing a great job. They’ve got a plan in place. And I’m confident on how they’re managing the challenges we’re having with that crop right now.

Tom Palmer: Thank you.

Operator: Our next question is going to come from Peter Galbo from Bank of America. Please go ahead sir.

Peter Galbo: Hey guys. Good morning. Thanks for taking the question.

Tom Werner: Good morning.

Bernadette Madarieta: Hey Peter.

Peter Galbo: If I could just come back to Andrew’s question around the gross margin. I guess the first just clarification point. Bernadette, on the quarter itself, I think if you put some of the adjustments back, it’s like a 25%. But you — I think there was an additional hedging loss or mark-to-market loss that wasn’t adjusted out, that would have actually resulted in an exit rate of the year that was much higher and maybe would have squared against that 28% number that Andrew had mentioned that we were kind of also coming up with. So, I just wanted to clarify that, the statement to start off.

Bernadette Madarieta: Yes. No, thanks for the question, Peter. First, I’d just say that we really are pleased with our gross margin performance this quarter. It’s plus 300 basis points to about 25.1%, and that’s despite absorbing the lower-margin EMEA business and we talked about a couple of things. In addition to inflation, the other impact was that reduced fixed cost coverage that we had due to some of that extended maintenance downtime that was planned, and then the other piece was the inventory write-off. So, it’s those components that are affecting our fourth quarter margins in addition to the regular inflation that we’ve been seeing.

Peter Galbo: Okay, that’s helpful. And then maybe, Tom, just a broader question. I started to field some inbound, hey, if the crop comes in normal this year, doesn’t that mean depth of potatoes? And I mean that’s never historically been an issue in the past for pricing dynamics in the industry. So, one, I just was hoping you could address that kind of upfront? And two, you spoke about, I think, some of the capacity constraints you’re still expecting through the course of the year for things like coated fries. I would think that would keep industry supply/demand dynamics pretty tight, but just wanted to give you a chance to talk on those topics? Thanks very much.

Tom Werner: Yes. So, the thing that we manage every year is — and we do it really well, is what happens with the yields on the potato crop. And right now, knock on wood, things look pretty good in terms of, like I’ve said in my prepared remarks, how the crop is progressing. And we keep a close eye on our contracted amount versus forecast, versus what the markets do, and we do this globally. So, we’re tuned into it. And we can make adjustments over the course of the next 90 to 120 days to six months, and adjust even our new crop to balance the overall supply of potatoes out. We do it every year. The team, the ag team does a great job doing that. So, I’m comfortable with where we’re at in terms of contracted potatoes. And as we do every year over the next several months, we’ll make some adjustments to acres and I’ll report out more in October on the balance of the crop and the quality of the main crop.

So, that’s really the key in terms of ag management that we’re really good at and the team does a great job. And then in terms of capacity, we got some — we’re bringing on some capacity over the next 18 months. And it’s a testament to our belief in the category going forward. While in the near-term, we’re seeing some softness in some areas. Over the long-term, I think the category is going to continue to be resilient as it has over historical timeframe. And I feel great about how we’re positioned. Our capacity coming online, competition has some capacity coming online. But I think overall, the category is going to absorb what’s coming at it. So, I feel good about where the near-term and long-term supply and demand is going to be — continue to be balanced.

Operator: And our next question will come from Rob Dickerson from Jefferies. Please go ahead.

Rob Dickerson: Great. Thanks so much. Just a quick question from the business exits, right, the lower margin businesses. Is there any kind of visibility as to when you think that actually might start to decelerate or actually stop? Like are you in the seventh inning or third inning? Just curious.

Bernadette Madarieta: Yes. No, as it relates to our lower-margin exits of the businesses, we’ve been doing that now and we’re very close to being through the brunt of that work. We do continue to take a look at that, though, as our contracts come due, and we make decisions to improve our customer and product mix as we look at the availability in our manufacturing footprint and the flexibility that we need to continue to serve our customers optimally.

Rob Dickerson: Okay, great. And then, I guess, secondly, in terms of expectations for the facility China, it sounds like one that is still on track for hopefully maybe sometime Q4 this fiscal year? And then secondly, just in terms of the amount of capital pool on the CapEx side for all the facilities, I mean, $850 million this year, the midpoint still clearly elevated relative to history. But again, just to clarify, if we’re thinking about next fiscal year, right, in 2025, I mean, most of that incremental should float or should kind of come off the cash flow statement. Is that right?

Tom Werner: Yes, Rob. So, all of our capital projects are on track. Obviously, we have an elevated number this year and that’s all been preannounced. So, as we think about the go forward, as we have line of sight to some other strategic capitals, what I will say is we’ll give additional guidance in the coming quarters on what the outyears look like going forward. So, I’m not going to get into all that on this call. But we are taking a look at a couple of different strategic capital projects that I won’t go into detail. But we’ll reevaluate guidance going forward here in the next quarter.

Rob Dickerson: Got it. Okay, cool. And then I guess just lastly, to kind of round up the commentary on volume and pricing for the year. There are usually numerous datasets that we can all look at in terms of industry restaurant traffic like all things considered, right? Even though there’s risk, even though we’re feeling the pressure, it doesn’t look as if overall the pressure right now is that bad, right? I mean there’s some pressure, but pricing is not that bad. So, as you kind of think through the year, given you had baked this into the guide, assuming these trends kind of stay where they are, right, they don’t get worse, I mean, it seems like it’s still a safe assumption, especially given what you’ve done historically, that we’re not thinking about increased LTOs or pricing give back, right? If the prices are where they are, trends are where they are in the industry as long, as things kind of don’t get materially worse, the pricing is sticky? That’s it. Thanks.

Tom Werner: Yes. Rob, look, the — we’ve done a terrific job rebasing our business this past year. And now we’re at a point where we have selectively walked away from business. And based on our capacity constraints, and now we’re going to evaluate. As I said earlier, we’re going to evaluate accounts and businesses globally going forward. And the impact of that, as I look at it and how I’ve always managed this business, is we’re going to look where we can expand the overall profit pool of this company and drive adjusted EBITDA going forward. And we may make some decisions where it may be additive to our earnings and it may be accretive to our margin percentage. But we’re going to make selective strategic choices going forward to do that, just like we have in the past.

As we had — now we’re at historic margin levels and we worked hard over the last 15 months to get us to this level, and now we’re in a good spot in terms of growing our company going forward and driving volume and that’s what we’re going to do. And so it’s going to be a bit of an adjustment over the coming year to drive account volume.

Rob Dickerson: Makes sense. Thanks Tom. Thanks team.

Tom Werner: Yes.

Operator: And Adam Samuelson from Goldman Sachs is next. Please go ahead.

Adam Samuelson: Yes. Thank you. Good morning everyone.

Bernadette Madarieta: Good morning Adam.

Adam Samuelson: Good morning. Maybe first, a clarification question, and I think it kind of dovetails into the perspective kind of build out. In the 2024 guidance, the $1 billion to $1.1 billion of incremental sales from the acquired businesses, what’s the assumed EBITDA contribution from acquisitions on a year-on-year basis in 2024 for the nine months you’ve been consolidating EBITDA?

Bernadette Madarieta: Yes, Adam, we haven’t given any specific earnings contribution related to those businesses, we’ve just given topline.

Adam Samuelson: Okay. That was worth a shot. So, I guess, though, maybe holistically, if we think about where EMEA is relative to the legacy North America business on margins, kind of our understanding was that it was coming in — it was a lot lower, kind of at a lot — more profitability levels meaningfully below the US. Can you help us think about kind of the line of sight you have to narrowing that gap? How much of that can you do through your own mix management, productivity actions? And how much is probably going to be dependent on changes in industry contracting for potatoes, changes in market structure from consolidation that will take probably longer?

Bernadette Madarieta: Yes, Adam, the way I’d explain that is we’re not giving specific earnings contribution, but the adjusted EBITDA from the acquired businesses were well above the $20 million to $30 million target that we provided. As it relates to going forward, as Tom said, Marc Schroeder is running that business, and we’re doing a lot of things there as we do look at mix management and pricing, and we’re confident in the actions that we’ve taken thus far and that we’ll continue to deliver it going forward.

Adam Samuelson: Okay. And if I could just ask a follow-up on the parent business. And again, as you look at your own capacity utilization, especially with the new potato coming in the fall, and you look at the industry, I mean, the industry has been constrained from a raw material supply perspective? And Tom, earlier you alluded to the need to drive volume growth in the business. How would you — first, how would you look at your own capacity utilization and the industry’s capacity utilization as you kind of go into the calendar 2023 kind of crop years?

Tom Werner: Yes, I mean, as I’ve said previously, our target is to run the assets around 95% capacity, and we continue to trend towards that. We’ve much improved over the prior year, and that’s really the sweet spot, I think, for us. And I can’t comment on the industry and what the other guys are doing, but that’s kind of where we’re targeted, and we’re trending towards that.

Adam Samuelson: Okay. That’s all really helpful. I’ll pass on thanks.

Operator: And our next question is going to come from Matt Smith with Stifel. Please go ahead.

Matt Smith: Hi, good morning. Thanks for taking my question.

Bernadette Madarieta: Good morning.

Matt Smith: Good morning. Thank you. I had a follow-up on the outlook, specifically around SG&A, which is increasing, obviously including the EMEA consolidation. But I was wondering if you could provide some color on perhaps some unique factors impacting fiscal 2024? Is — for instance, is the ERP spending peaking here in fiscal 2024? And any insight into the level of the amortization expense related to that EMEA would be helpful.

Bernadette Madarieta: Yes. No, as I said in my prepared remarks, SG&A is expected to increase about $200 million this year. We are replacing, again, decades of underspending in IT with the ERP, but also in other areas of the business as it relates to IT, that’s going to be about a third of it. But then we’ve also got another impact of the incremental EMEA SG&A for the three quarters that they weren’t included in our previous year results. And then I did mention that we are going to have a step-up in that noncash amortization related to the intangibles we took on, as well as once we placed some of the ERP project in service, we’re going to see incremental amortization there. So, it’s those factors as well as incremental costs related to some headcount that we’ll be adding to support the growing business that’s making up that increase.

Matt Smith: Okay. Thank you for that. And in terms of the IT spending and the ERP investments, it’s obviously a multiyear project. Is this a normal level of expense we should think about for the coming years? Or is this a peak level of expense depending on where you are in the process of replacing your system?

Bernadette Madarieta: Yes. So, the level of expense is going to increase as it relates to the noncash component, because as that continues to build and we go live with the different areas of the system, we’re going to see more amortization expense. The system is going to be amortized over five to seven years and so that’s more what you’re going to see is that non-cash component.

Matt Smith: Okay. Thanks for that detail. I’ll pass it on.

Operator: [Operator Instructions] William Reuter from Bank of America is next. Please go ahead.

William Reuter: Hi. My first question is you talked about the French fry attachment rate being above pre-pandemic levels. I couldn’t tell from the tone whether you’re seeing a sequential decline in the French fry attachment rate, maybe based upon some weakness in casual and other full-service dining. Has there been a sequential change?

Bernadette Madarieta: No. No sequential change. Continue to remain well above pre-pandemic levels.

William Reuter: Okay. And then in the question around CapEx and it being elevated this year and the majority of the current projects being completed, it sounds like there are some additional projects for future years. Could some of those include acquisitions? Or are most of these going to be just organic investments?

Bernadette Madarieta: Yes, most of those are going to be organic investments. Again, as we take a look at our manufacturing footprint and the possibility for needs to add incremental flexibility for other products.

William Reuter: Great. That’s all from me. Thank you.

Bernadette Madarieta: Thank you.

Operator: [Operator Instructions] Carla Casella from JPMorgan is next. Please go ahead.

Carla Casella: Hi. Just two quick clarifications. I think you said you ended the year with no revolver borrowings and — but still that’s up by about $243 million. What was the draw? Was that a draw from China or elsewhere?

Bernadette Madarieta: Yes. So, the net debt in terms of the cash position and then the other piece that we had was related to the incremental debt we brought on for the EMEA acquisition.

Carla Casella: Okay, great. And then just on the overall cost, you mentioned the 20% to 30% increase in the potato cost across the different regions. What’s the timeframe in that stance? Like when do we start to lap that full cost increase? And when did it go in place?

Bernadette Madarieta: Yes. So, the incremental cost relates to the crop that we are harvesting now. And we’ll continue to harvest the main crop through September, October and use those potatoes until we get into next year’s crop, which the early crop will start at a similar time frame around July of next calendar year.

Carla Casella: Okay. So, we’ll see in the costs next quarter?

Dexter Congbalay: Yes. Starts to our P&L in — from a P&L standpoint, starts is a little bit in the second quarter. And then towards the end of the second quarter, it’s going to be about — with FIFO inventory and we carry about 45, 60 days of inventory.

Carla Casella: Awesome. Thank you so much.

Bernadette Madarieta: Thank you.

Operator: And I have no further questions in the queue. I’d like to turn the call back over to Dexter Congbalay. Please go ahead.

Dexter Congbalay: Thanks for joining the call today. A couple of things. One, we’re going to plan to have our scheduled Investor Day for Wednesday, October 11th at the New York Stock Exchange in the morning. So, please hold that on your calendars. Our official invites and RSVP logistics will go out sometime over probably in the next month or so. Second, if you want to schedule any follow-up calls with me, please send me an e-mail and we can set a time for a call during the next few days. Thank you for joining today.

Operator: And this concludes today’s call. Thank you for your participation. You may now disconnect.