Lamb Weston Holdings, Inc. Q2 FY2024 Earnings Call

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

Good morning, and thank you for joining us for Lamb Weston's second quarter 2024 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 potato crop and the current operating environment. Bernadette will then provide details on our second quarter results as well as our updated fiscal 2024 outlook. With that, let me now turn the call over to Tom.

Thank you, Dexter. Happy New Year, and thank you for joining our call today. The entire Lamb Weston team delivered another solid quarter, and I want to thank them for these results and continuing to execute the strategies that we outlined in our Investor Day presentation in October. We strongly believe that our investments to expand capacity organically and through acquisitions, improve manufacturing and system capabilities, penetrate new channels and markets around the world, strengthen product, customer and channel mix, and develop our people have generated good near-term operating momentum and have us well positioned to capture our share of growth and profitability over the long term. In the second quarter, we delivered record sales, reflecting the consolidation of our EMEA business and solid price/mix growth. Sales volumes, excluding acquisitions, declined, primarily driven by our decision to exit lower price and lower-margin business. But, as we expect, the year-over-year trend improved sequentially. Adjusted EBITDA growth was also solid behind incremental earnings from consolidating EMEA, as well as higher sales and gross profit in the base business. However, the increase was tempered by a $71 million charge to write-off excess raw potatoes, $65 million of which was recorded in cost of sales and $6 million in equity method investment earnings. The reason and magnitude of this charge is very unusual, so let me give you a little more color on it. In January 2023, we developed an initial sales forecast for the following fiscal year that reflected a gradually strengthening consumer and recovering global demand. That forecast was developed based on the information available at that time. We use this initial sales forecast to determine the number of contracted acres to grow the raw potatoes needed to deliver that sales forecast. Per our agreements with our growers, we're obligated to purchase all the potatoes grown on these contracted acres. However, our initial sales forecast has turned out to be more aggressive than our current estimate, reflecting recent restaurant traffic demand trends as consumers continue to absorb the cumulative effect of inflation. As a result, we have purchased more potatoes than we need to meet our current sales targets and have taken a charge to write-off the estimated excess. Although overall demand growth is slower than we anticipated a year ago, it remains resilient. Fry attachment rates in the U.S. are stable and in line with what we projected in January 2023. Outside the U.S., restaurant traffic in most of our key international markets continues to grow, including double-digit growth in China. We remain confident that our volume trends will continue to improve in the back half of fiscal 2024 as we begin to lap and backfill exited volumes with higher margin business. This includes our target for year-over-year volume growth in the fourth quarter. In addition, we expect our volumes will continue to recover in fiscal 2025 and have planned to contract for acres accordingly. While we are disappointed with the write-offs, the underlying fundamentals of the business, our operations and the category remain solid. Our volume trends are improving in line with our expectations. Global demand is resilient as consumers continue to face stiff food-away-from-home inflation. Our new greenfield processing facility in China is now operational. Price/mix trends in the U.S. and most of our key international markets remain solid, while input cost inflation is decelerating. We delivered strong adjusted EBITDA growth and gross margin expansion excluding the potato write-off. And as Bernadette will explain in greater detail, we're reaffirming our fiscal 2024 adjusted EBITDA guidance range despite absorbing the write-off while raising our EPS estimates. Overall, we continue to be pleased with our operating momentum and confident in our ability to deliver our full-year financial targets. Let me now turn the call over to Bernadette for a more detailed discussion on our second quarter results and updated outlook.

Thanks, Tom, and Happy New Year everyone. I also want to start off by thanking the entire Lamb Weston team for their continued execution of our strategies and for delivering another quarter of strong financial results. For our second quarter, sales increased about $455 million, or 36%, to more than $1.7 billion. About $375 million, or more than 80% of the increase was attributable to the incremental sales from the acquisition of the EMEA business. We'll continue to receive the incremental benefit from the consolidation of the EMEA business in the third quarter. And as a reminder, since we began to consolidate EMEA sales beginning in the fourth quarter of fiscal 2023, those results are included in our last year's sales baseline. Excluding the incremental sales from the EMEA acquisition, net sales grew 6%. Price/mix was up 12%, as we continued to benefit from the inflation-driven pricing actions taken in fiscal 2023 along with the pricing actions taken this year in both our North America and International segments. Mix was also favorable as we continued to strategically manage our product and customer portfolio. Lower freight charges to customers were about a 1-point headwind. Total sales volumes declined 6%, which was in line with our expectations. The decline was primarily due to the carryover impact of exiting the lower-margin business during the second half of fiscal 2023. Volume elasticities or the amount of volume lost in response to inflation-based pricing actions remain low. While sales volumes declined compared to the prior-year period, it's a sequential improvement from the 8% decline that we delivered in our fiscal first quarter. The improving trend largely reflects no further impact of the inventory de-stocking in Asia and North America that we experienced in the first quarter and the gradual backfilling of the business that we chose to exit. Moving on from sales, gross profit, excluding unrealized mark-to-market gains and losses related to derivatives and items impacting comparability, increased $97 million to nearly $480 million. Our gross profit growth was tempered by a $65 million charge for the write-off of excess raw potatoes. Excluding this charge, as well as the mark-to-market and comparability items, gross profit increased $162 million to more than $540 million. About half of this increase 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 costs per pound and the impact of lower volumes. The other half of the increase was from incremental earnings from consolidating EMEA. Input costs increased mid-single digits on a per pound basis, which is a bit lower than the mid- to high-single digits that we saw in the first quarter. The increases were largely driven by a 20% increase in the contracted price for potatoes in North America and continued increases in the cost of ingredients for batter coatings, labor, and other key inputs. The inflation was partially offset by supply chain productivity savings, lower cost for edible oils, and lower freight costs. SG&A, excluding comparability items, increased $42 million to $177 million. More than two-thirds of the increase was from incremental SG&A with the consolidation of EMEA, with the remainder largely driven by higher expenses related to improving our IT and ERP infrastructure, as well as compensation and benefit expenses. All of this led to adjusted EBITDA increasing 15% to $377 million. Excluding the write-off for excess raw potatoes, adjusted EBITDA increased 36% to $448 million. Higher sales and gross profit in the base business drove most of the growth, with the remainder attributable to the incremental earnings from consolidating EMEA. Moving to our segments. Sales in our North America segment, which includes sales to customers in all channels in the U.S., Canada, and Mexico, increased 10% in the quarter. Price/mix was up 14%, which was driven by the carryover benefit of pricing actions that took effect in fiscal 2023 across each of our primary sales channels as well as some pricing actions taken this year and favorable mix as we continue to benefit from our revenue growth management and other mix improvement initiatives. Lower freight revenue partially offset the increase by about 1.5 points. Volume in North America declined 4%, reflecting the carryover impact of exiting lower-margin business during the second half of fiscal 2023. This is a sequential improvement from the 5% decline in our fiscal first quarter. North America segment adjusted EBITDA increased 7% to $321 million. The carryover benefit of pricing actions and favorable mix more than offset a $63 million charge for the write-off of excess raw potatoes, higher cost per pound, and the impact of lower volumes. Sales in our International segment, which includes sales to customers in all channels outside of North America, grew about $350 million, of which $376 million were incremental sales from the EMEA acquisition. Excluding the EMEA acquisition, net sales declined 12%. Price/mix was up 10%, driven primarily by the carryover benefit of pricing actions taken last year, discrete pricing actions taken this year, and favorable mix. Sales volume fell 22%, primarily reflecting the carryover impact of exiting the lower-margin business during the second half of fiscal 2023. International segment adjusted EBITDA increased 66% to $100 million, with incremental earnings from the consolidation of EMEA's financial results driving the increase. Excluding the EMEA acquisition, higher cost per pound along with the impact of lower volume more than offset the favorable price/mix. The higher cost per pound included an $8 million charge allocated to the International segment for the write-off of excess raw potatoes, which was based on the percentage of finished goods shipments to international markets. Moving to our liquidity position and cash flow. Our balance sheet is strong. We ended the quarter with our net debt leverage at 2.4 times adjusted EBITDA, up from 2.3 times at the end of our fiscal first quarter. Our net debt ticked up a couple hundred million dollars to more than $3.5 billion as we drew on our U.S. revolver to largely finance seasonal working capital needs and increase capital expenditures. We also accelerated some payments to suppliers in advance of our ERP system go live at the beginning of the third quarter. In the first half of the year, we generated $455 million of cash from operations, or nearly $170 million more than the first half of last year, largely due to higher earnings. Capital expenditures in the first half were about $565 million, which is up about $300 million from the prior-year period, primarily due to construction and equipment purchases as we continue to expand processing capacity in Idaho, Argentina, and the Netherlands. As Tom mentioned, we started up our new facility in China a couple of months ago. As we discussed during our Investor Day in October, our first priority is investing in our business, which we are doing organically with our capacity expansions. We also remain committed to returning capital to our shareholders. During the first half of the year, we returned more than $230 million of cash to our shareholders, comprised of $82 million in dividends and $150 million in share repurchases. This includes $50 million of stock repurchased in the second quarter at an average price of $87.41 as we acted opportunistically based on our stock price. In addition, in October, we raised our share repurchase authorization to $500 million, and in December, we announced a 29% increase in our quarterly dividend to $0.36 per share. Turning now to our fiscal 2024 outlook. We reaffirmed our full-year sales and EBITDA targets and raised our EPS estimate despite the charge to write-off excess raw potatoes. Specifically, we reaffirmed our annual net sales target of $6.8 billion to $7 billion. This includes $1.1 billion to $1.2 billion of incremental sales attributable to the EMEA acquisition during the first three quarters of the year, and 6.5% to 8.5% net sales growth excluding our acquisitions. For the year, we continue to target price/mix to be up low-double digits, with price/mix in the second half slowing sequentially from the 17% increase that we delivered in the first half as we lap more of last year's price actions. We continue to target our full-year volume, excluding acquisitions, to be down mid-single digits compared with the prior year as we maintain our cautious view of the consumer. That said, we expect year-over-year volume trends in each of our segments will continue to improve in the second half of the year as we lapse some of the significant low-margin, low-profit volume that we chose to exit in the second half of last year, and as we gradually backfill the exited lower-margin business with more profitable business. We expect volume growth to be positive in the fourth quarter. For earnings, we're reaffirming our adjusted EBITDA range to $1.54 billion to $1.62 billion. We're maintaining our EBITDA range target despite absorbing a $71 million charge for the write-off of excess raw potatoes. We're raising our adjusted diluted EPS estimate to $5.70 to $6.15 from our previous range of $5.50 to $5.95. The increase, which also includes the impact of the raw potato write-off, is largely due to two items. First, we're reducing our SG&A target by $20 million to a range of $745 million to $755 million as we continue to manage our operating costs. And second, we're reducing our interest expense target by $15 million to $140 million as we expect to capitalize more interest associated with our capacity expansions. We're also updating a couple of other financial targets. We reduced our depreciation and amortization expense by $20 million to $305 million. We also increased our capital expenditures target to $900 million to $950 million, up from our previous estimate of $800 million to $900 million to account for the timing of spending for our capacity expansion projects. Before I turn the call back over to Tom, let me give you a quick update on our ERP implementation. At the beginning of our fiscal third quarter, we transitioned some of our central systems in North America that manage supplier payments, inventories, warehousing, customer invoicing, and customer shipments to SAP. We're experiencing the usual bumps associated with these highly challenging large-scale projects, but don't expect that the cutover will have a material impact on our full-year business or operating results. The estimated financial impact of the systems' go-live is included in our fiscal 2024 targets, including the impact of pausing production and increasing planned downtime at our processing facilities, followed by a gradual ramp-up of production, and reduced shipments due to short-term inventory visibility challenges at our third-party finished goods warehouses in the period immediately following the cutover. As a result of the increased production downtime, our third-quarter gross margin, which is typically our strongest, will be pressured by higher manufacturing costs, reflecting reduced fixed cost coverage and other cost inefficiencies. With respect to sales, we expect the inventory visibility challenges that we experienced at the third-party warehouses to affect shipments and temper the sequential improvement in our third-quarter volume trends. But, as I mentioned earlier, we continue to expect positive year-over-year volume growth in our fiscal fourth quarter. I want to thank our customers and our warehousing and logistics service partners for working with us to manage through the transition. Most importantly, I want to thank our Lamb Weston team members that have been working tirelessly on this project, including throughout the holiday season. We will provide a further update on the transition of the central systems and processes, as well as a general timeline for implementing the new ERP system throughout our manufacturing network during our third-quarter earnings call in April. In summary, we delivered another strong quarter of top- and bottom-line growth as we continued to execute our strategies, manage our portfolio mix, and manage costs. We continue to expect volume trends to improve in the second half of the year, while remaining cautious about the effect of inflation on the consumer. Finally, we updated our earnings estimates for the year, including reaffirming our annual EBITDA range despite absorbing a write-off for excess raw potatoes and raising our annual EPS estimates to reflect lower SG&A and interest expense.

Thank you, Bernadette. Let me sum it up by saying we feel good about the overall health of the global category and the drivers for demand growth. We also feel good about our operating momentum and are confident in our ability to deliver our updated financial targets for the year. And finally, we believe that our focus on executing our strategies will continue to have us well positioned to drive sustainable, profitable growth and create value for our shareholders over the long term. Thank you for joining us today. And now, we're ready to take your questions.

We'll take our first question from Matt Smith with Stifel.

Hi, good morning.

Hi. Good morning, Matt.

I want to ask a question about your reiteration of guidance despite the $71 million potato charge. If you could talk about what led to the potato charge? It sounds like your initial contracted acres were based on your outlook from January of the past year. So, have you changed your shipment volume expectations relative to the guidance that you initially provided us in July? And then, with the excess potato charge, does that represent the full amount of excess potatoes? Or were you able to utilize some of the higher-than-expected yields either through processing finished goods or holding more raw potatoes into next year? And how does that impact how you go about contracting acres for next year based on your current expectation for volumes into next year?

Yeah, Matt, thank you for the question. I think it relates to the first one and it relates to guidance. The amount of shipments and volumes that we had in our guidance in July has not changed from what we have now. Again, we had to determine the number of acres to plant back in January of 2023. But the last time we gave guidance, there's been no changes. And then the second question, as we think through the crop this year, there are mitigants that we would have taken into consideration in terms of carrying some higher finished goods inventory for products that we know that we're going to sell. And then, as we always do, we will take that into consideration as we determine the number of acres that we're going to plant for the upcoming year.

Thank you, Bernadette. And maybe as a follow-up, could you talk about how your contract negotiations are progressing with farmers into next year, given it sounds like maybe you're going to contract for fewer acres? How does that change the pricing conversation?

Matt, this is Tom. As we do every year, we're currently in the midst of negotiations, so we won't discuss our progress at this time. In July and October, we will provide an overview of where we ended up and discuss it in more detail. For now, we are focused on the negotiation process.

Thank you, Tom and Bernadette. I'll pass it on.

We'll now take our next question from Adam Samuelson with Goldman Sachs.

Hi. Yes. Thank you. Good morning, everyone.

Good morning.

Good morning. I want to clarify that without this charge, your gross profit margin for this quarter would have been around 350 basis points higher, and the full-year impact would be approximately 90 to 100 basis points. If we consider that this charge does not reoccur in 2025, all else being equal, your gross profit margins are performing quite well ahead of your business outlook as presented at the Investor Day in October. Or am I misunderstanding the outlook?

Yeah. No, thanks, Adam. You're correct. Our Q2 gross margin implies a 31.3% margin, excluding the write-off of the potatoes. And as we've been talking about, that increase is related to the pricing actions and then catching up to the multiyear impact of inflation, and also allowing the benefit of the productivity and mix that will fall through. So, those are some of the things that you're seeing. As it relates to the third quarter, keep in mind that it's going to be down sequentially from that and that is going to reflect that reduced fixed cost coverage that we're going to have as we started up our ERP and we needed to take some downtime and ramp our plants up slowly.

Okay. That's helpful. And then maybe, Tom or Bernadette, provide a little bit more detail on the progress on integrating EMEA? And just how do we think about where you are with that group on some of the revenue growth management tools that you've been implementing successfully in North America? And how kind of that business has been performing on an organic basis? Well, it'll start to be in the year-on-year comparisons organically in fourth quarter, but just are you tracking ahead of where you thought or what inning do you think those RGM tools are in terms of being deployed?

Yeah, Adam, this is Tom. And I'll tell you, I'm really pleased on where we're at in terms of the integration of EMEA at this point. We're towards the tail end of that, and the team has done a terrific job across the organization functionally, commercially, really connecting up. And we've reorganized the organization to reflect the global company that we are now. So, I'm pleased with where we're at. In terms of initiatives, your specific question on RGM, that's definitely on the radar, but that's going to be down the road based on a number of other initiatives we have going on in the company that we really need to keep our focus on executing specifically the ERP implementation right now. So, we're at the tail end of it. Feel great. The team is doing a magnificent job getting integrated, and I'm pleased with where we're at today.

Okay. I appreciate the color. I'll pass it on. Thanks.

We'll now take our next question from Robert Moskow with TD Cowen.

Hi, thanks for the question. In a lot of other food industries, when raw material supplies far exceed what the demand expectations were, you'd expect some impact on pricing, some negative impact on pricing. But your industry is not like a lot of those others. So, Tom, maybe you could talk a little bit about your pricing power and the industry's pricing, and why the excess potatoes are not a concern?

The key point to understand is that potatoes are a one-year crop, and once harvested, they need to be processed. As Bernadette mentioned, we considered all the mitigating factors as we do annually, but this year presents an unusual situation in terms of scale. Normally, we adjust our strategies based on our forecasts, but this year is different. Overall, the crop is excellent, and decisions need to be made based on demand forecasts, plant utilization, and running the crop longer. Economically, this is the best path forward as we transition from this crop to the next one around June or July. Potatoes have a shorter shelf life compared to many other commodities we've encountered, which is something we manage every year. Unfortunately, the interplay of the operating environment and the conditions affecting this crop has created significant pressure on availability, despite the fact that there are ample potatoes available.

Got it. I guess a follow-up. I think you said on the last call that about 20% of your North American business was still in contract discussions. Is all of that done now? And did you get the pricing that you expected to get in those discussions?

Yeah. So, the contract renewal process is complete now, and we feel really good about where, in the aggregate, we ended on both pricing and terms. A lot of that relates to the large chain restaurants that we typically will finalize in the back half of the year, and that's what makes up that 20% that you're referencing.

We'll now take our next question from Rob Dickerson with Jefferies.

Great. Sorry about that. Thank you. Just a quick clarification question. I want to come back to the kind of sequential, I guess, implied gross margin trajectory for Q3. I guess it's more for Bernadette. I think you said there are some plants that maybe were kind of being shut down kind of temporarily by implementing some of the ERP initiatives. But then, at the same time, right, Q3 is usually the highest gross margin quarter and at the same time, we're comparing it to Q2, inclusive of the write-down, but then extra write-down or like closer to 31%. So, the very basic question with the long buildup was, if you were saying that the gross margin would be down sequentially a little bit from the normalized gross margin in Q2 once we ex out the inventory, is that how you were speaking to that?

Yeah, exactly. So, I'd say it's going to be down sequentially from the 31%, that's excluding that write-off, and that's really reflecting the reduced fixed cost coverage that we're going to have as a result of taking those plants down while we cutover.

Got it. And then, in terms of the EBITDA margin, the same logic flows through?

Absolutely.

Okay. Cool. And then, I guess, just back to the volume piece, no change there. Still expected for volume to be down mid-single digits for the year. I remember coming out of the last call, there were some questions around that because getting like down, like real down, like mid-single digits. Seem kind of challenging if we're thinking Q4 is up even if it's up a little bit and now we have the first half. So, if we kind of put it all together and think, well, what about Q3, you're still saying that kind of overall volume should improve year-over-year sequentially relative to Q2 and then Q4 is up a little bit that still gets you down to at least a 4% decline. And I'm just asking that kind of in a detailed way because it is kind of challenging to get down any more than 4%, right?

We are pleased with the volume growth and the sequential improvement we've seen. We expect to be positive in the fourth quarter, but we need to consider the reduced shipments due to the transition to our new ERP system. I mentioned the challenges with inventory visibility in our third-party warehouses. While I am confident we are addressing these issues, we will need to moderate our volume increases in the third quarter because of this.

Okay. So, kind of in theory, like, volumes could be down in Q3, maybe in a similar way relative to Q2, hopefully a little better, but there are a bunch of moving pieces that we shouldn't be expecting, like, a nice sequential improvement in Q3?

That's right.

Okay. Cool. And then, thirdly, I just want to touch on China quickly, Tom, I think you said China is growing double digit kind of normalized, I guess, once we ex out some of the business exits. Maybe just kind of touch on kind of overall environment in China, kind of what you're seeing, given all the news flow over the past few months? And then, maybe just if you could touch on kind of your ability, let's say, to continue to partner with McDonald's over the next couple of years, clearly, as they look to truly expand within the country? That's it. Thank you.

Yeah, Rob. So, as we stated earlier, China is growing at double digits. We're well positioned. We just opened up our second factory over there. It's up and running and operating. It gives us considerable flexibility as we're thinking about the next year's contracting coming up. And so, there's a lot of news flow on China and the economy and all that's going on. But in terms of the category, we feel good about where that's at based on the data we look at, which is telling us it's growing double digits. We've got our plant up and coming. We've got line of sight to how we're going to look at that market and potential customers that we can support and more to come on that. But as we go through this contracting season in that international market, we're well positioned to gain some business.

Yeah. And then just to clarify, the double-digit growth has been in restaurant traffic that we're seeing in China.

We'll now take our next question from Peter Galbo with Bank of America.

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

Good morning, Pete.

Good morning, Pete.

I would like to discuss the pricing situation, particularly regarding your ongoing contract negotiations. If I recall correctly, you recently initiated some contracts with your global customers at the beginning of Q3. Could you provide an update on what the dynamics are in that area and what factors we should consider regarding pricing and mix for the latter half of the year?

We did have some contracts where the pricing changes took effect in the second half of the year. It's important to expect a slowdown from the 17% growth we achieved in the first half as we continue to factor in those price increases. However, we will see the impact of those contracts on our pricing in the second half of the year, as we always have.

Got it. Okay. And then, Tom, maybe just back to the Investor Day, I know there was a conversation around getting back to algorithm kind of in fiscal '25 and noting some of the volume challenges that you'll begin to lap by then and maybe into Q4. I mean is that kind of still the expectation where we sit today relative to October that as we get into '25, the volume trends could at least get back to what you stated as kind of the long-term algorithm? Thanks very much.

Yeah, Peter, we fully expect to continue to drive and deliver our algorithm over the long term as we stated in October. And we're working all the channels to deliver that. As we have in the past, we've been very consistent on meeting those commitments. I expect, as we look forward, with the category and how we're getting positioned with some of the capacity additions, I fully expect us to drive volume and meet our commitments as we talked about in October.

We'll now take our next question from Andrew Lazar with Barclays.

Great. Good morning, everybody.

Good morning, Andrew.

I guess to start with, I was wondering if you're able to sort of help us quantify a little bit, maybe how much sort of volume gets pushed from Q3 to Q4 based on some of the cutover dynamics that you mentioned. I'm really trying to get a sense of about what like the underlying sort of volume picture looks like for Q4, particularly as it relates to as we move into next year.

Yeah, Andrew, I think the way to think about that is we're not going to quantify any amount. But certainly, there are some shipments that would be retail and food service that would be lost in third quarter, whereas the chain would be more of a carryover. So, again, down or it's going to be tempered in terms of the any increase as it relates to volume in the third quarter, but definitely positive in the fourth quarter as we had originally projected.

If we excluded some of the cutover dynamics, do you think volume in 4Q would have been positive anyway or maybe closer to flattish or even down a little bit, maybe...

No, absolutely positive in the fourth quarter. That's what we've been anticipating since we gave our July guidance, and it continues to remain sound.

Great. Thanks for that. Tom, I'm interested to know that you clearly moved away from some lower-margin customers in the latter half of last year, and you'll start to see the effects of that as we enter the second half of this year. As you begin to bring in new customers with the new capacity available, can you tell me where these new customers were previously sourcing their supply? Are you replacing other suppliers now that you have some additional capacity? I'm trying to understand because it seems like you have consistently been able to provide French fries. So, I'm curious about where these new customers were getting their products before you became their supplier, if that makes sense.

Yeah, Andrew, I understand the question. I'm not going to get into very specifics on customers or where it's coming from. But ideally, we have line of sight to markets, opportunities as we go through our normal contracting season coming up, ideally, it'd be perfect timing, but it doesn't always match when you potentially win business. But we do have a plan. We have line of sight, and I'm not going to get into specifics of where and who with respect to our customers, and I'll just leave it at that, Andrew.

Okay. Thank you.

We'll take our next question from Marc Torrente with Wells Fargo Securities.

Good morning. Thank you for the question. It seems that trends are slightly weaker than our initial expectations from January 2023, although you mentioned that demand has remained strong compared to our initial guidance. Can you clarify some of those comments about the trends and traffic you're observing that gives you confidence in the improvement of volumes at a fundamental level?

Yes, the crop acres and potato yields have performed better than we had anticipated based on our initial projections for this crop cycle. However, the overall forecast for volume and sales turned out to be a bit weaker than our original plans. The guidance we provided in July and later adjusted in October was aligned with the forecasts we had at that time. While the results were not as favorable as we hoped when we planted the crop, we maintain that our forecasts from July regarding sales and volume have not changed for the rest of the year. The write-off we experienced was primarily due to lower crop acre yields compared to our initial expectations for fiscal year 2024. Despite this, we remain confident in the fundamental strength of our business, and our guidance remains intact. We anticipate improvements in volume for the fourth quarter, as we've shared in this call. Overall, we still expect sequential improvements for the remainder of the year, although we acknowledge that the third quarter will face some challenges due to the ERP cutover.

And Tom, if I could add to that, when we made the initial estimate and planted those acres, you guys see the same data that we do. And U.S. restaurant traffic trends have slowed since that time, and that was included in our updated July forecast. But the fry attachment rate continues to be about pre-pandemic levels and continues to be strong, as Tom mentioned.

Okay. Great. That makes sense. And then you lowered the SG&A outlook for the year. A little more color here? Is that timing around some of those special projects? Are you pulling back on any of the underlying expenses? Or is that better leverage on the core?

It's going to be some better leverage, but just overall cost management that we're doing as we look forward to the second half of the year.

And that does conclude our question-and-answer session. I'd like to turn the conference back over to Mr. Congbalay for any additional or closing comments.

Thanks, everyone, for joining the call today. Any follow-up discussion, please send me an e-mail. We can schedule some time. Other than that, have a great day, and Happy New Year. Thank you.

And once again, that does conclude today's conference. We thank you all for your participation. You may now disconnect.