Lamb Weston Holdings, Inc. Q3 FY2023 Earnings Call

Good day, everyone, and welcome to the Lamb Weston Third Quarter Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Dexter Congbalay. Please go ahead.

Good morning and thank you for joining us for Lamb Weston's third quarter 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 an overview of the current operating environment, while Bernadette will provide details on our second quarter results and our updated fiscal 2023 outlook. With that, let me now turn the call over to Tom.

Thank you, Dexter. Good morning, and thank you for joining our call today. We delivered strong results in our fiscal third quarter as we continued to build good operating momentum. Specifically, sales grew 31%, while gross margin expanded in each of our core business segments. This in turn drove strong EBITDA and earnings per share growth. I want to thank the entire Lamb Weston team for their dedication and focus on serving our customers, so that together we delivered another great quarter and positioned us for a strong finish to the year. This thank you is also to our more than 1,500 colleagues in Europe, who are now officially members of the global Lamb Weston team after we recently completed the purchase of the remaining interest in Lamb-Weston/Meijer. Lamb Weston Europe, Middle East and Africa or Lamb Weston EMEA adds six factories and about 2 billion pounds of production capacity to our global manufacturing footprint. It strengthens our ability to serve customers in key markets around the world and it enhances a world-class management, operating and commercial team with deep knowledge of the frozen potato industry. We've kicked off the process to integrate Lamb Weston EMEA's operations and are excited to see what we can deliver together both now and over the long-term. Before turning the call over to Bernadette, let me first provide some quick updates on the current operating environment. While the macro environment remains highly challenging, overall french fry demand remains healthy. Total restaurant traffic improved versus the prior year quarter when traffic was negatively affected by the Omicron variant. QSR essentially accounted for the entire growth in traffic, including strong growth across burger and chicken restaurant chains, which are significant contributors to driving fry demand. In contrast, traffic at casual dining and full-service restaurants fell versus the prior year. This has a more pronounced effect on our Foodservice segment and contributed in part to a decline in that segment's volume. The fry attachment rate, which is the rate at which consumers order fries when visiting a restaurant or other Foodservice outlets, remains solid. As we previously noted, we're encouraged by how the category is currently performing in away-from-home channels, but continue to expect restaurant traffic and demand trends will be volatile through fiscal 2023 and into fiscal 2024, as consumers continue to deal with a challenging macro environment. Demand for fries and food-at-home channels remained solid. Shipments by our retail segment grew in the third quarter, led by strong performance in products sold under licensed restaurant brands. We expect demand in this channel will remain solid into fiscal 2024. With overall category demand holding up relatively well and as industry supply is expected to be constrained for at least the next couple of years, we believe the environment for pricing actions to counter input cost inflation may remain generally favorable. Additionally, we've been building our revenue growth management and execution capabilities. We made good progress, as shown by our ability to offset input cost inflation to drive the recovery in our gross margins over the past year in each of our core business segments. Nonetheless, we're continuing to work on maximizing revenue and margin by further evaluating markets and sales channels by using a broader set of variables and leveraging data-backed insights on our customers and consumers. Pricing in the quarter in our Global segment was in line with our expectation as we continued to incorporate new pricing structures for customer contract renewals, inflation-driven price escalators, and benefits from pulling forward pricing actions for contracts up for renewal in the coming years. Despite lapping some of the pricing actions we took in fiscal 2022, price/mix in both the Foodservice and Retail segments in the quarter was better than we anticipated as we continued efforts to rationalize pricing structures and strategically improve customer and product mix across the respective portfolios. During the remainder of fiscal 2023, in our Global segment, we don't expect any additional notable pricing actions to take effect. In Foodservice, we expect the year-over-year growth rate and price/mix will decelerate as we continue to lap more of the fiscal 2022 pricing and mix improvement actions. And in Retail, we expect the year-over-year growth rate and price/mix will also decelerate as we continue to lap last year's pricing actions, although this will be tempered by a recent price increase that took effect towards the end of the third quarter. With respect to the potato crop in North America, we believe we have secured enough open market potatoes to meet our production forecast until the early potato varieties are harvested in July. We purchased open potatoes from growers in the Columbia Basin and Idaho, but also secured supply from as far away as the East Coast. This adds up to our potato costs through the first half of fiscal 2024. Regarding the upcoming potato crop, as previously discussed, we've agreed to a nearly 20% increase in the contract prices for potatoes grown in the Columbia Basin and have locked in the targeted contracted acres to be planted in that region. We're in the process of securing most of the acres in our other growing regions in North America, and expect to have this process completed shortly, with contract prices largely in line with the 20% increase in the basin. In Europe, we have secured the acres in our key growing regions and expect to complete the contracting process shortly. Like North America, contract prices are up significantly to reflect input cost inflation for growers. So in summary, we delivered another strong quarter of sales and earnings growth, which has enabled us to raise our financial targets for the year and continue to build good operating momentum across each of our core segments. We're excited about more than 1,500 new Lamb Weston EMEA colleagues that have joined the global team and believe that leveraging EMEA's capabilities will help us better serve customers around the world. And finally, category demand remains healthy, and we believe that industry Q3 supply should remain constrained for at least the next couple of years. Let me now turn the call over to Bernadette to review the details of our third quarter results and our updated financial fiscal 2023 outlook.

Thanks, Tom, and good morning, everyone. I want to also thank the Lamb Weston team for delivering another quarter of strong results and continuing to build good operating momentum across the company. This momentum has enabled us to raise our financial targets for the remainder of the year. I also want to add a warm welcome to the Lamb Weston EMEA team. Let's begin with our third quarter results. Sales in the third quarter were up 31% to $1.25 billion. Price/mix was up 31% as we continue to benefit from pricing actions across each of our core business segments to counter input and manufacturing cost inflation. The increase reflects the carryover impact of product pricing actions that we initiated in fiscal 2022, as well as pricing actions that we began implementing during this fiscal year. Our overall sales volumes were flat. While we increased shipments to our large QSR chain customers and to retail customers in North America, which generally reflect demand and restaurant traffic trends that Tom described earlier, our growth in volume was offset by a couple of factors. First, we continued efforts to strategically improve our product and customer mix by exiting certain lower price, lower-margin business. Second, and to a lesser extent, softer casual dining and full-service restaurant traffic also affected volumes in the quarter, which is largely reflected in our Foodservice shipments. It's worth noting that in the quarter, we also continued to make progress in stabilizing our supply chain with better availability of production team members and key ingredients, as well as improved production forecasting. As a result, the impact on production in the quarter was relatively modest, which helped drive improvements in our customer fill rates versus our first and second quarters. This improvement is more apparent in our Retail and Foodservice segments, as we have largely maintained high fill rates in our global segment since the start of the pandemic. That said, we expect changes in product mix and consumer demand will continue to pressure our near-term production and therefore shipments of high-demand products, including retail fries, premium fries, and batter-coated products. We expect this volume pressure and our ability to meet growing consumer demand will continue until our capacity investments in China, Idaho, Argentina, and the Netherlands become available over the next couple of years. Gross profit in the quarter increased $177 million to nearly $400 million as a result of our sales growth and gross margins expanding 860 basis points versus the prior year quarter to 31.7%. Our strong gross margin performance reflects the cumulative benefit of executing pricing actions in each of our business segments to counter input and manufacturing cost inflation, as well as leveraging efforts to improve customer and product mix and supply chain productivity. On the cost side in the quarter, we again realized a double-digit increase in input and manufacturing cost per pound. This was largely driven by about a 20% increase in contracted prices for potatoes in North America, significantly higher prices for open market potato purchases due to poor yields from the calendar year 2022 crop, and continued increases in the cost of edible oils, ingredients for batter coatings, labor, and energy. In contrast, our transportation costs fell in the quarter as industry rates for rail, trucking, and ocean freight services continued their steady decline over the past couple of quarters. We're continuing to reduce our freight charges to customers to match the decline in costs, which will steadily reduce the tailwind from transport prices in our sales line. However, the impact on our gross profit over time will be largely neutral. Moving on from gross profit, our SG&A excluding items impacting comparability increased $49 million to $136 million, primarily reflecting higher compensation and benefit expenses due to improved operating performance, as well as actions to maintain competitive pay levels across our organization. We also had higher expenses related to improving our IT infrastructure, including designing and building a new ERP system and a $6 million increase in advertising and promotion expenses largely behind support of our branded products in our retail segment. Equity method earnings from our unconsolidated joint ventures increased $12 million, excluding items impacting comparability and mark-to-market adjustments associated with currency and commodity hedging contracts. Favorable price/mix, largely reflecting pricing actions in Europe, drove the increase. Moving to our segments, sales in our Global segment were up 33% in the quarter. Price/mix was up 33%, reflecting the revenue growth management initiatives and pricing actions to counter inflation that Tom described earlier. Global volume was flat, with solid growth of shipments to large QSR chain customers in North America offset by the impact of exiting certain lower-priced and lower-margin business in international and domestic markets as we actively manage our customer mix. Global's product contribution margin increased to $168 million from a relatively weak prior year quarter, which at the time reflected significant input and manufacturing cost increases and only a modest benefit from product pricing actions. Global segment's product contribution margin percentage in the quarter was 25.8%, which is back to a seasonal pre-pandemic level and was also a bit better than expected as we realize more benefits from pulling forward pricing actions for some customers than we originally anticipated. Sales in our Foodservice segment grew 22%, driven by a 25% increase in price/mix as we continue to realize the carryover benefit of product pricing actions that we announced throughout fiscal 2022, as well as the actions taken in fiscal 2023 to counter inflation. Sales volumes were down about 3%, primarily reflecting the exit of some lower price and lower margin business to manage our customer and product mix, as well as softer traffic in casual dining and full-service restaurants. Foodservice's product contribution margin increased to $143 million, up 34% as a cumulative benefit from pricing actions more than offset higher manufacturing cost per pound and the impact of lower volumes. Our retail segment delivered another strong quarter with sales up 50%, price/mix increased 44%, reflecting pricing actions across our branded and private label portfolios to counter inflation. This was aided in part by limited trade support given the strong category demand and constrained supply environment. Volume in this segment was up 6% behind better customer fill rates for our branded products. Private label volume was also up as we lap the incremental losses of certain lower-priced and lower-margin products over the past couple of years. Retail's product contribution margin increased to $83 million and its margin percentage topped 38%, as the cumulative benefits from pricing actions more than offset higher manufacturing costs per pound. We're very pleased with how our retail team has strengthened our market share, profitability, and portfolio mix over the past couple of years and we remain confident in our ability to remain the overall category leader. Moving to our liquidity position and our cash flow. Our balance sheet remains solid with strong liquidity and a low leverage ratio. We ended the quarter with about $675 million of cash and a $1 billion undrawn revolver. Our cash balance was inflated, as we did take on a new $450 million term loan at the end of January to fund most of the cash consideration for the EMEA transaction, which closed a couple of days into our fiscal fourth quarter. Our net debt was more than $2.5 billion at the end of the third quarter, resulting in a 2.3 times leverage ratio on a trailing 12-month basis. After accounting for the EMEA transaction, the estimated net debt at the beginning of our fiscal fourth quarter would be about $3.3 billion, resulting in a 2.6 times leverage ratio using our updated fiscal 2023 earnings target and an annualized contribution from our EMEA operations. Our capital allocation priorities remain the same. We continue to prioritize investing in the business to drive long-term growth, as well as delivering dividend growth for our shareholders and share repurchases to offset management dilution. In the first three quarters of the year, we generated about $335 million of cash from operations, that's about $160 million more than the first three quarters of last year. This is largely due to the higher earnings, partially offset by increased working capital. Capital expenditures were nearly $500 million, which is up about $270 million from the first three quarters of last year. This increase is largely related to construction costs as we continue to expand processing capacity in Idaho, China, and Argentina. In the first three quarters, we returned nearly $146 million of cash to shareholders, including $106 million in dividends and about $41 million in share repurchases. Now let's turn to our 2023 outlook. Our updated targets include the financial consolidation of Lamb Weston EMEA beginning in our fiscal fourth quarter. For the year, we've increased our sales target to $5.25 billion to $5.35 billion, up from our previous target of $4.8 billion to $4.9 billion. About $300 million to $325 million of the increase reflects the consolidation of Lamb Weston EMEA. The additional $100 million to $150 million increase reflects our strong results in our fiscal third quarter and our expected continued momentum in the fourth quarter. Excluding the contribution from EMEA, we expect our net sales growth in the fourth quarter to be driven by price/mix, as volumes will continue to be affected by exiting certain lower price and lower margin volume business to strategically manage customer and product mix, and the potential for a slowdown in restaurant traffic and consumer demand. For earnings, we're targeting adjusted diluted earnings per share of $4.35 to $4.50, that's up from our previous target of $3.75 to $4. And adjusted EBITDA, including unconsolidated joint ventures, of $1.18 billion to $1.21 billion, up from our previous estimate of $1.05 billion to $1.1 billion. Of the $110 million to $130 million increase in our adjusted EBITDA target, we estimate that EMEA will contribute an incremental $10 million to $15 million of that amount. This implies EMEA's total EBITDA contribution of $20 million to $30 million in the fourth quarter, which is in line with the normalized full-year pre-pandemic EBITDA of about EUR100. The additional $100 million to $115 million increase in our full-year EBITDA target reflects our strong results in our fiscal third quarter and our expected strong sales and earnings growth in the fourth quarter. Including the consolidation of EMEA, we're targeting a full-year gross margin of 27% to 27.5%, implying a fourth quarter gross margin of 23% to 24.5%. Excluding EMEA, we've raised our full-year gross margin target to 28% to 28.5%, up from our previous target of 27% to 28%. This implies a fourth-quarter gross margin target, excluding EMEA, of 25% to 27%. While this would be a healthy gross margin expansion versus the prior year quarter, it also implies a notable step down from our fiscal third quarter gross margin of 31.7%. We believe this estimate is prudent, reflecting typical seasonal patterns in our cost structure, significantly higher costs for open market potatoes, continued inflation for key inputs, and the impact of volume declines as a result of inflationary pressures on consumers. With respect to SG&A, we expect expenses excluding items impacting comparability of $550 million to $570 million, that's up from our previous target of $525 million to $550 million. The increase largely reflects the consolidation of Lamb Weston EMEA. In addition, we increased our estimate for capital expenditures to between $700 million to $725 million, up from our previous estimate of $475 million to $525 million. This increase reflects accelerated spending behind capital expansion investments, as well as capital spending associated with the consolidation of EMEA. We also made adjustments to other financial targets, which you can find in our earnings release. And with that, let me turn the call back over to Tom for some closing comments.

Thanks, Bernadette. Let me sum it up by saying we are executing in this challenging operating environment and are confident in our increased financial targets for the year. We also continue to feel good about growth trends in the category and believe that the investments we're making in our people, new production capacity, and infrastructure will have us well positioned to support sustainable profitable growth over the long term. Thank you for joining us today, and we're now ready to take your questions.

Thank you. We'll take your first question from Andrew Lazar from Barclays. Please go ahead.

Great. Thanks so much. Good morning, everybody.

Good morning, Andrew.

Good morning, Andrew.

Yes. To start off, I know that Lamb Weston did not necessarily see pre-pandemic gross margins as a ceiling. But with margins now above pre-pandemic levels, excluding the recent transaction, of course, I guess what are the key factors that provide visibility to further margin expansion moving forward to the extent that, that's how you see it? And then I've just got a follow-up. Thanks.

Yes. Good morning, Andrew. This is Bernadette. As we look at our margins, I think the key piece that we're focused on now is our revenue growth management and our execution capabilities that Tom mentioned. We're focused on continuing to work on maximizing revenue as well as margin and we'll continue to do that as we look across our markets and our sales channels to make sure that we're managing those.

I think you said in the fourth quarter, we shouldn't expect any incremental pricing actions. With grower costs expected to be up, as you mentioned, another 20% for the current coming crop, should we expect some incremental pricing going forward as I guess as we roll into fiscal ’24? Or have you implemented all that you need for the coming year? And with capacity constraints starting to ease, I guess what I'm getting at is, could we have a scenario in the coming fiscal year where you have both some incremental pricing and some positive volume growth as well, given constraints have been one of the main reasons for volume being flattish to down the last couple of quarters? Thank you.

Yes, Andrew, this is Tom. We have implemented some pricing changes at the end of the third quarter and will continue to assess the situation as we plan for fiscal 2024, which starts in June. We are experiencing inflation and anticipate our crop costs will increase by 20%. As we evaluate overall input costs, we'll determine any necessary pricing adjustments. Our team has successfully mitigated inflation impacts, and we will maintain that effort. Over the past 12 to 15 months, we've been catching up on pricing due to contract constraints, and I am confident that we are moving towards more normalized profit margins typical before the pandemic. We will keep monitoring the input inflation landscape. Regarding overall volume, I am optimistic about the category's performance. Quick-service restaurants are seeing strong traffic, while casual dining, part of our Foodservice sector, has shown some weakness due to current economic conditions causing customers to downgrade. We have optimized our customer and product mix in line with our revenue growth strategies. As we enhance our operational efficiency, we expect to seize new business opportunities. Additionally, we have significant capacity expansions on the horizon. Our first capacity enhancement will occur this fall in China, and we are assessing potential production relocations from North America. Subsequently, we will see further developments in Argentina over the next 18 to 24 months. We are preparing to leverage this new capacity for opportunities worldwide.

Great. Thank you so much.

We'll hear next from Tom Palmer from JPMorgan.

Good morning, and thanks for the question.

Good morning, Tom.

Good morning.

Maybe I could just start off clarifying expectations for the Europe business. You noted normal EBITDA of about $100 million and then the fourth quarter guidance is pretty consistent with that. But I think the business has been doing a bit better than this over the past couple of quarters at least. Are there reasons such as certain costs that are not excluded from adjusted earnings or other cost headwinds or seasonality that might make this figure a bit lower in the fourth quarter? And then when we look at results this year, would the general assumption be that next year EBITDA grows year-over-year on top of that?

Yes. Good morning, Tom. As we take a look at our fourth quarter guidance that we provided, excluding EMEA, you will typically see a step down in our gross margins as you move from the third quarter to fourth quarter just based on seasonality. And then we're also going to be lapping prior year price increases. And so we're going to see a deceleration of the effects of that as we continue to move forward. Again, we also mentioned that we did see some pricing pull forward as well. And so there's some effect of that, that you're noting in the third quarter that we wouldn't see in the fourth quarter. And as we always do, we take a step back and take a prudent approach as we guide to where we think we're going to end at the end of the fourth quarter. But those are the main triggers that are going to affect what you're seeing in guidance for the fourth quarter.

Understood. Thank you. And then just maybe on the gross margin, I know you noted kind of a more normal seasonal decline in the fourth quarter. I think a quarter ago, you were talking about maybe less than a normal quarterly decline in the fourth quarter. I know Bernadette, you mentioned it being prudent in your prepared remarks. Is there anything to consider that has shifted that expected cadence beyond that? I mean, for instance, was 3Q much better than you expected and therefore you're expecting more than normalization or anything with the timing of pricing, because it would seem like you're getting a bit of help at least on the retail side given the late quarter pricing action?

Yes, I think there was a couple of things. There was a little bit more pull forward and benefit in the prior quarter and then also we are seeing more open market purchases that we ended up bringing in at much higher prices just given the way that the crop ended up this year from a yield perspective. So those are the two items that I would say are impacting that the greatest.

Great. Thank you.

Adam Samuelson from Goldman Sachs. Your line is open.

Yes. Thank you. Good morning, everyone.

Good morning, Adam.

Good morning.

Good morning. The first question is regarding Europe and how that integrates into the consolidated business. Bernadette mentioned the fourth quarter guidance reflecting a pre-pandemic EUR100 million based on our current run rate. Could you provide the actual trailing 12-month fiscal ’23 EBITDA for the joint venture on a 100% basis for reference? As we plan for fiscal ’24, it seems that fiscal ’23 is performing above the pre-pandemic run rate. Could you share your thoughts on the factors that might lead to either lower or higher profitability year-over-year? Please help us understand the key elements you're considering for the European business in the coming 12 months.

Yes, thanks for the question, Adam. A couple of responses to that, I would say first, as we look at the fourth quarter guidance, that's what I would take to look at the normalized amount for this year in terms of being that EUR100 million on a run rate basis. And then certainly there's going to be a number of things as we bring EMEA into our operations that we're looking forward to having that one phase to the customer, introducing our revenue growth management capabilities and bringing in our supply chain common methodologies and ways of working that we're looking to work on over time as we integrate this business with ours to bring in more upside as we continue to progress. But it’s not going to happen overnight, it’s going to happen over time. But those are some of the opportunities that we see to be able to continue to grow this business.

Yes. I want to mention that we have an outstanding management team overseeing that business, and they have navigated significant volatility over the past 15 months with everything that has been happening. I feel more confident now about the trajectory of EMEA and the foundation the management team has established, along with our enhanced global reach to serve customers in all international markets. We have much to accomplish in integrating that business into one global team. Over time, I am very optimistic about the capabilities that will enable us to serve our customers differently than we ever have before. The achievements of the team in that business are truly remarkable, and I can't stress that enough. We have an excellent leadership team there, and I am excited about our future as we integrate that business.

All right. That's helpful color. And then just on the CapEx, which with one quarter left in the year was a pretty sizable, kind of, increase in the outlook even inclusive of the Groningen CapEx at the JV that you are now consolidating. Does this change any of the timing around the Argentine, Idaho or Chinese capacity or the things you're doing in the rest of the network or capabilities around coatings or battering that, kind of, you're pulling forward. Just help us think about, kind of, magnitude of that CapEx step up? Well, how it's been, kind of, timing of new capacity and what should we think about as a range for the consolidated CapEx for next year even at a low high level?

Yes, no so as we take a look at our capital spending, there were a number of items where we have long lead times just given the supply chain dynamics that are out there. And we've been able to accelerate some of those things in terms of equipment and other pieces to come in, which is being reflected in our overall capital spending for this year. Really happy with that, but that's not going to bring on this capacity any sooner as we continue to build those factories. We just wanted to make sure that we have the items when needed to make sure that we would bring these up on time. So no change when we're going to bring that capacity online. As we look to next year, certainly as we do every year-end, when we give our fourth quarter guidance, we'll update with our capital spending at that time, but we'll have another year of significant capital expenditures given bringing on over 1 billion pounds in the next 18 to 24 months with all of the capacity expansions that we referred to.

All right. That's all really helpful, I'll pass it on.

Yes. Hey, Adam, it's just kind of for everybody. Here's the timing of the capacity coming online. China is expected to be sometime in the fall of 2023, American Falls, Idaho is slated for spring of 2024, Argentina will be in fall of 2024, and the Netherlands is projected for early calendar year 2025. That one's a bit more uncertain, but that's the current timing.

Thank you.

We'll hear next from Peter Galbo from Bank of America.

Hey, guys. Good morning. Thanks for taking the question.

Good morning, Peter.

Good morning, Peter.

Tom, I think in your comments you mentioned the incremental pricing in retail that you took, kind of, towards the end of 3Q. In global, it seems like there was no more incremental that was at least expected to come this year, but maybe you could opine a little bit just on Foodservice maybe in one area where we didn't hear about, if there's any incremental pricing actions? And then in addition to that, just would love any, kind of, first thoughts as plantings have gone into the ground here in early April? Yes. So in terms of the Foodservice segment, we've done a really good job over the past year or two, kind of, catching up to our inflation. And so I feel comfortable where we're at on that. We're, as I said earlier, evaluating as we look to our fiscal 2024, our input cost inflation and how that's going to materialize. And then as we do every year, then we'll get together and think about what we need to do to offset inflation. And I can't say this enough, we're still in an inflationary environment in our business. And so as we have in the past and we'll continue to do, we're going to evaluate our pricing actions in all segments to offset inflation, and that's, kind of, what we're going to do. So…

Yes, so with the Foodservice increase, there'll just be a small impact in the fourth quarter given the timing of that announcement. And then the only other thing is, as it relates to the crop, we are currently in the process of planting there, the Columbia Basin in Idaho, so we'll provide more of an update on our next call.

Okay, no that's helpful. And then maybe just to follow-up on Adam's question on CapEx. Obviously, kind of, from a position of strength, you guys are accelerating some of the spend. Bernadette, it didn't sound like you were, kind of, pulling forward any spend from next year, but maybe just wanted to clarify that? And then just in a broader context on, kind of, capital allocation with the CapEx spend being as high as it is and maybe you're going to move past through a lot of that. The debt's turned out pretty far at this point. You started to buy back a little bit of stock in the quarter. The dividend yield is pretty low relative to peers, just maybe you can kind of comment on how you're seeing the setup for some of the other pillars within capital allocation? Thanks very much.

Yes. So if I take the latter question first, as Tom mentioned, we're still really confident in the strength of this category and we're going to continue to invest for the long-term. As it relates to our cash position and our overall low debt to equity ratio, we want to maintain flexibility for the long-term should certain things happen or open up for us from an M&A or other perspective. And so we feel good about where we're at. So our capital allocation hasn't changed, and we're going to continue to take into consideration share buybacks as we have in the past to offset management dilution. But as we've also shown, we will opportunistically buyback when it makes sense. And then just to confirm your first question on the capital spending, we haven't necessarily pulled much forward in terms of total capital spending. We've got a lot of large projects happening over the next 18 to 24 months. And some of that was just on some long-lead time equipment.

Got it. Thanks very much, guys.

Rob Dickerson from Jefferies. Your line is open.

Great. Thank you very much. For my first question, it seems that the expectation for interest expense this year remains unchanged. However, with the new term loan and possibly some existing debt from Meijer, could you clarify how the interest expense stays the same despite this assumption of debt?

Yes, that's a great question. We're finding that we're seeing more capitalized interest related to some of these heavy capital projects, which is offsetting some of the overall interest expense. So that's what you're observing there.

Got it. So that would likely be more of a Q4 event, and we still expect that there will be additional debt and interest due to the deal. I'm just considering how the actual acquisition will work.

Yes, you're exactly right. You're thinking about it right.

Okay, great. Tom and Bern, can you share your thoughts on the $100 million related to the Meijer joint venture and its potential run rate? Another way to frame this question is regarding the seed number we've discussed in relation to pre-pandemic figures. Additionally, are there any synergies that might emerge? Now that the transaction has been closed for a few months, do you have a clearer view of the synergy potential without needing to quantify them over the next two to three years?

Yes, the business is on a much better trajectory than it has been over the last 12 months, which reflects the strong management team we have that has implemented various strategies to get the business back on track. I fully expect that over the next 12 months, we will improve our run rate as indicated previously. While I won't provide a specific number, I'm more confident than ever about the direction in which the business is headed. The team's efforts and the synergies and integration planned for the next year will position EMEA better than it has ever been. Although we won't disclose specific figures, I am confident we will take the business in a direction that is significantly better than what we have previously indicated.

Got it. That's great. Now, shifting gears a bit, I noticed your potential to enter Domino's with your product appears to rely on baking rather than frying. Could you talk about the proprietary technology that enables you to do this? Also, is this something you're looking to pursue with other clients that may not have fryers? Thanks.

Yes. So I'm not going to get into all the product technology, but we're super excited about that product. And how it's performing, it's performing better than expected. I've been talking about that for a long time in terms of getting into non-fry channels and that was a big first step. We've done that with other well-known chains also, and we're going continue to monitor it, we're going to work with non-fry channel customers. As we do today, we'll continue to do that and we have a great innovation team working on non-fried potato products. But those are long lead time items. But I will tell you what is happening with that particular product is exciting and it's performing amazingly. So, we'll continue to monitor it. But it's been a long time comment and hats off to the team that put a lot of years of work into getting that to market and it's great to see it pay off and really do well in the marketplace.

Got it, super. Thanks so much.

We'll hear next from William Reuter from Bank of America.

Good morning. I have two questions. First, you mentioned mergers and acquisitions and your activity in building several new facilities. You will be consolidating the joint venture and discussed many operational changes you plan to implement. Do you feel that you are currently in a position to remain active in this area? Additionally, what types of businesses or which parts of the supply chain do you anticipate being more engaged with?

Yes. Our strategy includes continuously evaluating potential acquisitions in the potato category, which is our primary focus. The category is strong, offers good returns, is a great investment, and is growing. We are currently expanding our global manufacturing footprint through four ongoing projects. Additionally, it's essential for both myself and the company to maintain a strong balance sheet so that we can take advantage of opportunities as they arise. This approach has been consistent for me over the past six years, and I am confident about our capital position. We are investing to expand our footprint, aligning with our strategy, and positioning ourselves to better support our customers in all global markets. I feel positive about our current status.

Okay. And then my second question, is there any way for you to provide some additional color around what the impact of open market purchases were this year? Just trying to think about in the event that you're able to fill that with contracted purchases next year, what that tailwind could be?

Yes, we haven't quantified the impact of those open market purchases. A little bit different this year in that we were short on yield versus last year there was an impact for yield and quality. While we are needing to bring in fewer open market purchases, the cost this year is significantly higher. So we have not quantified that, but there is a meaningful impact this year, similar to last year.

Great. Okay, that's all for me. Thank you.

Hey, Bill, one other thing. I mean, the reason that we had to go to the open market is because crop yields weren't good this year. And typically, we have an average crop and you really don't have to go into the open market that much at all.

We do have a follow-up from Andrew Lazar from Barclays. Please go ahead.

Thanks so much. Just a quick question. Tom, when you announced the joint venture acquisition with Meijer, you mentioned that you hoped this action would send a message to the broader European competitive environment about the potential for further consolidation in what is a fragmented operating arena in Europe. Now that the transaction is closed a couple of months post-announcement, I'm curious if the dialogue or pace of conversations with others has accelerated. We noticed another transaction outside of yours that occurred a couple of months ago in Belgium. Do you expect to see more transactions sooner rather than later, and are you hearing increased chatter and dialogue? Thanks.

Yes, Andrew, that's a great question. While I can't discuss the specifics of ongoing conversations, I want to reiterate that we are doing our best to remain active. My intentions for the industry are clear, and the transaction with Lamb Weston Meijer caught people's attention. I'll keep it at that, but I believe the market's fragmentation will require participation from the private sector, and I think they understand what I'm aiming for.

Thank you.

That does conclude today's Q&A portion of today's conference. I would like to turn the conference back over to Dexter for any additional or closing comments.

Thanks for joining the call this morning. If you would like to have any follow-up sessions, please feel free to send an email and share your availability. Thank you to everyone for being on the call.

That does conclude today's teleconference. We thank you all for your participation. You may now disconnect.