Lamb Weston Q2 2023 Earnings Call Transcript

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January 5, 2023

Key Takeaways

  • The company delivered record sales of nearly $1.3 billion in Q2 with strong gross margins (~30%), EBITDA, and EPS growth, prompting an upward revision of its FY 2023 sales, gross margin, and earnings targets.
  • Supply chain disruptions—including shortages of starches, edible oils, factory labor and spare parts, and slower lines for premium and batter-coated products—continue to constrain production volumes and customer fill rates through the remainder of the fiscal year.
  • Robust pricing actions across the Global, Foodservice, and Retail segments (inflation escalators, updated contract structures, and accelerated renewals) drove 30% price-mix growth in Q2, although pricing growth is expected to decelerate in H2 as prior increases are lapped.
  • Below-average yields from the 2022 potato crop will raise raw potato costs for the rest of FY 2023 and into 2024, despite quality remaining within historical norms; the company has secured additional supply from multiple regions and locked in ~20% higher contract prices for the next Columbia Basin harvest.
  • The planned acquisition of the remaining interest in Lamb Weston Meyer is expected to close in Q4, adding 1,500 employees, enhancing the global manufacturing footprint, streamlining customer service, and unlocking EMEA growth opportunities.
AI Generated. May Contain Errors.
Earnings Conference Call
Lamb Weston Q2 2023
00:00 / 00:00

There are 8 speakers on the call.

Operator

Day, and welcome to the Lamb Weston Second Quarter Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Dexter Congloblay. Please go ahead.

Speaker 1

Good morning and thank you for joining us for Lamb Weston's Q2 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.

Speaker 1

Some of today's remarks include non GAAP financial measures. These non GAAP financial measures should not be considered a replacement for That 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 Madrieta, our Chief Financial Officer. Tom will provide an overview of the current operating environment, while Bernadette will provide details on our Q2 results and our updated fiscal 2023 outlook.

Speaker 1

Tim. With that, let me now turn the call over to Tom.

Speaker 2

Thank you, Dexter. Good morning, Happy New Year, and thank you for joining our call today. We're pleased with our financial performance in the Q2 as we continue to drive strong sales and earnings growth across each of our core segments. Our results reflect the successful execution of our strategies to to counter the significant input cost inflation over the past couple of years through a combination of pricing actions, improving business and product mix and adapting our manufacturing and supply chain to global challenges. Specifically, we delivered sales of nearly $1,300,000,000 a record high quarter, healthy gross margins in each of our core business segments and strong earnings EBITDA and earnings per share growth.

Speaker 2

Because of our first half results and confidence in our business momentum, We've increased our sales, gross margin and earnings targets for fiscal 2023. I'm proud of our performance in first half of the year and how the entire Lamb Weston team continues to focus on serving our customers and driving sustainable profitable growth. Before turning the call over to Bernadette, let me first provide some quick updates on the current operating environment. 1st, overall French fry demand in the U. S.

Speaker 2

Remains solid, although the total restaurant traffic remains below pre pandemic levels. It's up versus the prior year quarter and trends are up sequentially off the lows we saw in the summer as gasoline prices spiked. Demand and traffic trends in the quarter varied by channel as consumers reacted to broad based inflation and the threat of a recession. QSR traffic was up versus the prior year and trends improved sequentially versus our physical first quarter As expected, casual dining and full service restaurant traffic And the quarter was down versus the prior year, although trends also improved sequentially versus our physical first quarter. This year over year decline in casual dining and full service restaurant traffic had a more pronounced effect on our foodservice segment, Which has a greater exposure to these sales channels and contributed in part to a decline in the segment's volume.

Speaker 2

The fry attachment rate, which is the rate at which consumers order fries when visiting a restaurant or other food service outlets remained above pre pandemic levels. The attachment rate in QSR is actually increased versus the prior year quarter, which helps stabilize fry demand. Overall, we feel good about how the category in away from home channels is performing in this difficult macro environment, but expect restaurant traffic demand trends will to In contrast, retail fry demand remained solid in the quarter. It's been strong since the start of the pandemic as consumers pull back spending on dining out. Demand for our retail products sold under licensed restaurant brands In particular, remain strong over the past year as consumers look to have the restaurant style fries they love while at home.

Speaker 2

While fry demand across all our channels is holding up well, we continue to struggle to meet that demand due to the impact of supply chain disruptions on run rates and throughput in our production facilities. Over the past year, these disruptions have been largely related to the impact of shortages certain commodities such as starches and edible oils as well as factory worker shortages and availability. The availability of key commodities has slowly improved over the past couple of quarters as we broaden our supplier base and qualified substitute ingredients when possible. Yet it remains a concern and we expect it will continue to affect our production volumes at least through the remainder of fiscal 2023. The availability of production team members has also steadily improved over the past couple of quarters, such that we're back to having staffing levels in most of our processing facilities at desired levels.

Speaker 2

However, run rates and throughput constraints will continue until our newly hired colleagues gain experience to optimize production. We've also experienced production constraints after adjusting operating procedures to reflect changes in product mix and consumer demand, including higher demand for retail fries, premium fries and batter coated products. These products generally carry favorable margins. For example, to produce batter coated fries, which is a high growth and high margin segment We typically run our lines at slower speeds and we're producing uncoated straight cut fries. This results in reduced throughput.

Speaker 2

We also require more frequent and longer downtimes to clean and sanitize lines between production runs when batter is used, Which affects our run rates and line availability. Together, this results in fewer finished pounds produced relative to making uncoated fries, Which ultimately leads to pressure on our customer order fill rates. In short, we expect the impacts of ongoing commodity shortages, the onboarding of recently hired production team members and adjustments to optimize business mix to continue to pressure volume performance and our ability to meet customer demand through the remainder of fiscal 2023 and until our capacity investments in China, Idaho and Argentina become available over the next couple of years. With respect to pricing, We continue to drive pricing actions across our portfolio to counter input cost inflation. The environment remains generally favorable as a result of solid category demand that I just described, coupled with constrained industry supply.

Speaker 2

Our global segment led the way in the quarter with strong pricing through a combination Inflation Driven Price escalators, new pricing structures for customer contract renewals, working with certain customers to accelerate pricing actions contracts up for renewal in the coming years and improvements in customer mix. We feel good about how Global's contract renewal negotiations played out this Bassier and expect the segment to continue to deliver strong price mix growth as more of these updated pricing structures take effect in the second half. We also expect to drive solid price growth in both the Foodservice and Retail segments in the second half of the year, although the growth rate should decelerate as we begin to lap We've been processing potatoes from this year's harvest for the past few months and continue to assess the overall quality of the potatoes in our key growing regions, including shape, color, level of defects and solid content. That's consistent with historical averages. Yields however are below historical averages and below the preliminary assessment that we provided during our earnings call in October.

Speaker 2

To fill our production needs, we have secured additional potatoes in the Columbia Basin and Idaho and are sourcing potatoes from other regions in North America, Including the East Coast. This will add to our potato costs for the remainder of fiscal 2023 and we have included the estimated impact Jim in our updated financial targets for the year. With respect to next year's potato crop, we've agreed to nearly a 20% increase in contract prices For potatoes grown in the Columbia Basin and have secured the targeted number of acres to be planted. Our discussions with growers in Idaho and Alberta on price Now with respect to our acquisition of our partners' interest in Lamb Weston Meyer, We expect the transaction will close during our physical Q4 after completing the regulatory review process. I'm I'm excited about welcoming 1500 value team members and beginning to capture strategic, commercial and operational benefits from the transaction, Including, 1st, strengthening our global manufacturing footprint by leveraging Europe's low cost infrastructure to serve key markets around the world, As well as adopting best in class manufacturing practices to increase efficiency, improve quality and reduce costs.

Speaker 2

2nd, enhancing our customer centric operating model by offering a single voice to our global customers and seamlessly supporting multinational customers With a truly global supply chain. 3rd, improving our position to further capitalize on growth opportunities in Europe, the Middle East and Africa. And 4th, pursuing our global growth strategies without the operating restrictions associated with the joint venture. So in summary, we drove strong sales and earning growth in the second quarter and in the first half by executing on our strategies to price the counter inflation, improve mix, generate productivity savings and drive value for our customers. The category is healthy with solid overall demand behind strength in QSR traffic and constrained industry supply.

Speaker 2

The quality of the recently harvested potato crop in the Pacific Northwest is good and the impact from the shortfall in yields is manageable. And finally, we're confident about the strategic operational and commercial benefits that the Lamb Weston Meyer transaction has to offer And we look forward to the transaction closing later this year. Now let me turn the call over to Bernadette to review the details of our Q2 results our updated fiscal 2023 outlook. Bernadette?

Speaker 3

Thanks, Tom, and good morning, everyone. Tim. As Tom said, we're pleased with our financial performance and operating momentum through the first half of the year, which has provided us with a strong foundation to raise our annual sales and earnings targets. Let me review our Q2 results before discussing our updated outlook. Sales in the Q2 grew 27 percent to nearly $1,280,000,000 That's a record for us.

Speaker 3

A 30% increase in price mix drove our sales growth as we continued to benefit from product and freight pricing actions across each of our business segments. 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. The increase also reflects benefits from efforts to improve our portfolio mix. Sales volumes declined 3% as we continue to experience the supply chain constraints and related shortfalls in order fulfillment that Tom described. This primarily affected volumes and service levels in our Foodservice and Retail segments.

Speaker 3

To a lesser extent, volumes in the quarter were also impacted by softer DIR Casual Dining and Full Service Restaurant Traffic as well as the timing of replacing losses of some low margin business in our Foodservice and Retail segments.

Operator

Gross profit

Speaker 3

in the quarter increased $176,000,000 to $382,000,000 As a result of our sales growth and strong gross margin performance, our margin expanded 9.50 basis points versus the prior year quarter and about 550 basis points sequentially to nearly 30%. Broadly speaking, pricing actions in each of our business segments, Efforts to improve customer and product mix and value created from our productivity programs have caught up to the cumulative effect of input and transportation cost inflation over the past couple of years. Input cost inflation, however, continues to be challenging. Once again, it was the primary driver of a double digit increase in our manufacturing and distribution cost per pound in the quarter, Largely due to higher prices for edible oils, ingredients for batter coatings, labor and transportation. Potato costs were also up as a consequence of the historically poor crop that was harvested last fall.

Speaker 3

While this is the last quarter that we will realize the financial impact from the 2021 crop, we expect our potato costs to continue to increase in the second half of this year Jim as a result of higher contract prices and the need for significant open market purchases due to poor yields from the 2022 crop. We also continue to incur higher costs and operational inefficiencies associated with shortages of key ingredients and spare parts, onboarding newly hired production team members and other industry wide supply chain challenges. While the impacts from these constraints have been slowly easing, We expect they will continue to be a headwind through the remainder of the year. Moving on from cost of sales. Our SG and A, excluding items impacting comparability, increased $45,000,000 to 136,000,000 largely due to higher compensation and benefit expenses due to improved operating performance and higher expenses relating to improving our IT infrastructure, including designing and building a new ERP system.

Speaker 3

Equity method earnings from our unconsolidated joint ventures increased $16,000,000 excluding items impacting comparability and mark Demand continued to hold up relatively well despite the impact of significant consumer inflation and volatile energy costs. This sets Lamb Weston Meyer up to deliver solid results in the second half of the year. Moving to our segments. Sales in our Global segment were up 34% in the quarter behind a 31% increase in price mix. Tim.

Speaker 3

As Tom noted earlier, most of the increase was driven by price escalators and updated pricing structures. With the increase in price mix, Global's product contribution margin more than doubled to $171,000,000 in the quarter. In addition, Global's product contribution margin percentage approached pre pandemic levels, which is a key milestone for our overall performance. While we were always confident that we would restore Global's margins, we knew it would take longer than in other segments due to the structure and terms of the channel's customer contracts. Sales in our Foodservice segment grew 14%, driven by a 25% increase in price mix As we continue to realize the carryover benefit of pricing actions that we announced throughout fiscal 2022 as well as actions taken earlier this year to counterinflation.

Speaker 3

Sales volumes decreased 11%, primarily reflecting production constraints And to a lesser extent, softer traffic in casual dining and full service restaurants. In addition, because of these production constraints, We've had to make some tough choices on customer service, which has resulted in the loss of some lower margin business. Food Services product contribution margin increased 25% as the benefits from pricing actions more than offset higher manufacturing and distribution cost per pound and the impact of lower volumes. Sales in our Retail segment increased 34%, behind a 43% increase in price mix, Reflecting pricing actions across our branded and private label portfolios. Volume fell 9%, Largely as a result of production constraints, it also reflects the incremental losses of certain lower margin private label products.

Speaker 3

Through a combination of the team's strong execution of pricing and mix management, retail's product contribution margin more than tripled to $66,000,000 Its production contribution margin percentage is now in line with our away from home channels. Moving to our liquidity position and cash flow. Our balance sheet remains solid with strong liquidity and a low leverage ratio. We ended the quarter with about $420,000,000 of cash and a $1,000,000,000 undrawn revolver. Our net debt was about $2,300,000,000 resulting in a 2.4 times leverage ratio.

Speaker 3

That's down from 3.1 times at the end of fiscal 2022, reflecting our earnings recovery. In the first half of the year, we generated about $290,000,000 of cash from operations or about $80,000,000 more than the first half of last year, Largely due to the higher earnings. Capital expenditures were about $270,000,000 which is up about $120,000,000 from the first half of last year. This increase is largely related to construction costs as we continue to expand processing capacity in Idaho, China and Argentina. As a reminder, our annual maintenance capital expenditures have typically been about 120 $130,000,000 as we generally target about 3% to 4% of sales.

Speaker 3

In the first half of the year, we returned nearly $100,000,000 of cash to shareholders, including more than $70,000,000 in dividends $28,000,000 in share repurchases. As you may have seen a few weeks ago, our Board of Directors approved a 14% increase So now let's turn to the updated fiscal 2023 outlook. Please note that our updated targets do not reflect the financial consolidation of Lamb Weston Meyer as that transaction is not yet closed. We believe the transaction will be completed during our fiscal Q4. So for the year, we've increased our sales target to $4,800,000,000 to $4,900,000,000 which implies a growth rate of 17% to 19.5%.

Speaker 3

That's up from our previous target of $4,700,000,000 to $4,800,000,000 We expect that higher price mix will be the primary driver of sales growth in the second half of the year. Forecasting volumes in the second half remains difficult as we anticipate shipments will continue to be affected by supply chain constraints through fiscal 2023. And because of volatility surrounding a potential slowdown in restaurant traffic and demand as consumers face inflation and a weaker macroeconomic environment. For earnings, we're targeting adjusted net income of $540,000,000 to $580,000,000 That's up from our previous target of $360,000,000 to $410,000,000 Adjusted diluted earnings per share of $3.75 to $4 up from our previous target of $2.45 to $2.85 And finally, adjusted EBITDA, including unconsolidated joint ventures, of $1,050,000,000 to $1,100,000,000 The increase in our earnings will be driven primarily by sales growth and gross margin expansion. We're targeting gross margins during the second half of the year to be between 27% and 28%, which is in line with the more than 27% that we delivered in the first half and up from the 23% that we posted during the back half of fiscal twenty twenty two.

Speaker 3

We expect the seasonal sequential quarterly cadence for gross margins will be less pronounced than in previous years. Specifically, we do not foresee much of the typical seasonal step up in gross margin from Q2 to Q3 or much of the typical step down from Q3 to Q4 Dine for a few reasons. First, beginning in the Q3, we expect our raw potato costs to increase to reflect the approximately 20% increase in the contracted price of the recently harvested potato crop. In addition, we expect higher potato costs as a result of significant high cost open market purchases. 2nd, we expect continued significant inflation for other key inputs during the second half of the year, especially for edible oils and ingredients for batter coatings.

Speaker 3

3rd, we expect a more muted step up in global pricing from Q2 to Q3 due to the acceleration pricing actions for contracts up for renewal in the coming years. And finally, we expect the year over year price increases in our Foodservice and Retail segments will decelerate as we begin to lap actions taken in fiscal 2022. With respect to SG and A, we expect expenses excluding items impacting comparability of $525,000,000 to $550,000,000 That's up from our previous target, largely due to higher compensation and benefit expenses, including increased incentive compensation expense due to improved operating performance as well as expenses for outside services, including support of our IT and ERP upgrades. Our estimates of other financial targets, Including interest expense, capital expenditures, depreciation and amortization expenses and our effective tax rate are unchanged. And with that, let me now turn it back over to Tom for some closing comments.

Speaker 2

Thanks, Bernadette. Let me sum it up by saying we're confident in our strategies and business momentum. And as a result, we've significantly increased our financial targets for the year. And we're also confident about the health and prospects of the category. And we believe that our capacity expansion and infrastructure investments will have us well positioned to support sustainable profitable growth and create value for our shareholders over the long term.

Speaker 2

Once again, I want to thank the entire Lamb Weston team for our success this quarter and their ongoing commitment to meet the needs of our customers. Thank you for joining our call today and now we're ready to take your questions.

Operator

To speakerphone. Please make sure your mute function is turned off. Our first question is going to come from Tom Palmer from JPMorgan. Please go ahead, sir.

Speaker 4

Good morning and congratulations on the quarter.

Speaker 5

Thanks, Tom. Good morning, Tom.

Speaker 4

Good morning. Just kick off getting maybe a little color on the inflation outlook. I appreciate the comments in the prepared remarks. The release referenced double digit inflation. It sounds like there's some moving parts, especially with potatoes stepping up in the second half, but you'll also be lapping some higher rates of inflation.

Speaker 4

So is the messaging that the Absolute rate of inflation will step up in the second half of the year, or would it be more comparable to what we saw in the second quarter?

Speaker 3

Yes. Thanks, Tom. This is Bernadette. We don't expect the absolute rate to increase. We will though, however, continue to see that double digit inflation for the remainder of the year.

Speaker 3

And as you said, that's reflecting the higher cost for potatoes and then other key inputs for edible oils, labor and ingredients. So absolutely expect that double digit cost increase to continue, but not increase.

Speaker 6

Okay. Thank you.

Speaker 4

And then the bounce back in Europe, where are we in kind of the turn to normal. I mean, did we exit the Q2 at what you would call a normal earnings run rate for that business? Is there still more work to be done. And as we think about the second half, should we look for another step up in kind of the earnings power of that business as more pricing takes hold?

Speaker 2

Yes, Tom. So this is Tom. The team in Lamb Weston, Meyer, soon to be Lamb Weston has made terrific progress. Mark Schroeder leads that business and The business has turned the corner. They've implemented a number of actions to stabilize the earnings of that business as we expected.

Speaker 2

They're showing great progress and the run rates are trending positively and we expect that to continue to for the back half of the year. And as we close that transaction, as we stated, to We expect that to happen in Q4 to get through all the reviews and regulatory process. We'll provide some more color on that once the transaction is closed in the coming quarters.

Speaker 5

Okay. Thank you.

Operator

And our next question is going to come from Peter Galbo from Bank of America.

Speaker 6

Hey, guys. Happy New Year. Thanks for taking the questions. Good morning.

Speaker 1

Good

Speaker 6

morning. Tom, I was wondering if you could just provide a little bit more context around your comment now that The company is sourcing some potatoes, I think, from the East Coast you mentioned. Just kind of maybe where you're seeing that relative to Last year, I know when you had to source a decent number from the East Coast. And then anything just in terms of your plant network, is there ability to move those Not all the way to the basin. Can you process them through the JV in Minnesota?

Speaker 6

Can you process them through the Delhi plant? Just any additional color would be helpful. Thanks.

Speaker 2

Yes. So the year over year, this year it's not as pronounced as it was last year because of the quality of the crop last year and yields. We got out ahead of it, the ag team in Lamb Weston has done a terrific job sourcing potatoes to meet our needs. There's still high cost. You got to freight them across the country.

Speaker 2

And you have some Quality issues when you're trucking that far, but it's not as pronounced as it was last year. And all those costs are reflected in our outlook for the remainder of this fiscal year. And good news, bad news is we had some experience last year. So We were able to rally quickly, and we understand how that all is going to impact the business. But again, that's all forecasted in our outlook.

Speaker 2

To We're doing everything we can to meet our customer demand and that's the most important thing.

Speaker 6

Got it. That's helpful. And Bernadette, I just had one Clarification on the gross margin commentary for the back half of the year. I think you're still expecting a sequential improvement in 3Q, obviously not to Pronounced as it would have been historically, but it would still improve in 3Q. And then is there a step down to To expect in the Q4, just wanted to clarify those two things.

Speaker 6

Thanks very much.

Speaker 3

Yes. No, thank you. We do expect to see an increase. But As you said, it will not be as pronounced in the Q3 as we've historically seen. And then there will be a step down in Q4, but again, not as pronounced as what we've historically seen.

Speaker 5

Got it. Thanks very much, guys.

Speaker 3

Yes. Thank you.

Operator

And our next question is going to come from Chris Growe from Stifel.

Speaker 5

Thank you. Good morning.

Speaker 2

Good morning, Chris.

Speaker 5

Hi. Happy New Year. Hi, just a bit of a follow on to that, Peter's question and some of your response. I guess just to understand the gross margin this quarter, I just want to get a sense of how unique the And I was thinking around the areas of like mix and perhaps even like limited time offerings to what degree that's influencing the gross margin this quarter that may not be sustainable. And then to what degree you're walking away from lower margin business and to what degree that's influencing your margin as well?

Speaker 5

Perhaps there's other issues too, but those are a couple of things I was thinking about just to get a little sense around how that could affect the gross margin going forward?

Speaker 3

Yes. No, thank you for that question. And as it relates to the gross margin going forward, Kiyos. There isn't anything unusual that we would have experienced this quarter relative to prior quarters or going forward. Really what you're seeing is that we were able to pull forward a lot of the pricing actions in Global earlier than expected.

Speaker 3

And then we're going to be lapping some of the food service and retail price increases in the back half of the year. So there'll be more of a muted effect related to that. So a combination of the higher potato costs, the inflation and then the deceleration of that price mix growth, That's what you're going to see have an effect on those margins in the back half of the year.

Speaker 5

Okay. Thank you for that. And actually I have a follow on to that, which would be that You talked about pulling forward some of those global contract renewal discussions. So it sounds like you had a good renewal from this past summer That should start to kick in now, but it sounds like have you also then pulled forward some maybe some from next summer or even summers ahead? I guess just to get a sense of where you are then on Contract renewals, normally it's like a third of every year.

Speaker 5

Did you were you able to get more of that done is the question?

Speaker 3

Yes. We were able to go out and have conversations with our customers and pull more of that forward than had been anticipated, more than what we would have typically seen with our contract renewals. So we expect that the global pricing will remain strong in the back half. It's just we've been able to pull that forward earlier than expected.

Speaker 5

Thank you. Can you say how much of your contract renewals, how much more you've done this year or maybe how much less you'll have going forward?

Speaker 3

No. I can't really speak to that. I'd say overall, we've got probably about 25% that we'll need to continue to renegotiate. Okay. Thanks

Speaker 5

so much. But again,

Speaker 3

that's based on pounds and not based on business or dollars.

Speaker 5

Okay, great. Thank you for that.

Operator

Our next question will come from Adam Samuelson from Goldman Sachs.

Speaker 5

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

Speaker 5

Good morning. So I guess first question is maybe on the demand environment. Some of this was in the prepared remarks, but I'd love to just hear you expand a little bit on just maybe different parts of global between the domestic QSRs versus international foodservice traffic trends and just as your customers absorb some pretty sizable kind of price increases, just the confidence that you don't see any changes in fry attach rates from a consumption perspective. Yes, Adam.

Speaker 2

Overall, I feel really strong about the health of the category. And to We've purposely made had to make choices across our segments to support our customer base and we've really focused on product mix management across the portfolio and the customers. To So the QSR segment continues to be really healthy. As we stated in our prepared remarks, the Fast casual, casual dining is experienced some to weaker traffic, although it's improving versus where it was in the Q1, but we're also making choices. And In terms of customer and supporting customers based on product mix and our capacity.

Speaker 2

And there are still challenges within our network to To produce and get back to the levels where we were pre pandemic and the team, the supply chain team is working to on that and it's going to take us the balance of this year to continue to focus on things to improve that. The category is healthy and yes, our volume is A little soft in some areas that's traffic driven. But over the long term, when I look at the category and think about the next 2, 3, 5 years. And the investments we're making, we're going to be well positioned to In a couple of years, to bring on capacity and drive opportunities that right now we're making choices That we don't necessarily like, but we got to support our key customers going forward.

Speaker 3

Yes. And just to add to that, Tom, in addition to the softness that we have in the casual dining. More of that softness though is just related to the supply chain constraints that we've been experiencing. But overall, absolutely, our demand has returned to those pre pandemic levels on a run rate basis prior to what we saw with corn in Ukraine.

Speaker 5

Got it. And if I could, maybe follow on the point on just capacity a little bit. And you talked Earlier about some of the product mix impacting kind of throughput rates and kind of what you could actually produce from an end product Perspective. I mean, do you think with the current product mix, if you were properly staffed and there wasn't raw material constraint around potatoes that the current capacity with this mix Could produce the same volume of finished product that you did pre pandemic or does the actual mix that you've kind of shifted to As it stands right now, actually constrain your physically constrain your output.

Speaker 2

Yes, Adam. So I know the team is working on getting to pre pandemic levels, but the reality is the choices and the mix that we're now producing, to Really oversimplifying it, we have to slow lines down when we're making coated products. So We can't run as fast. And so there is some capacity disadvantages to Running Premium Products. That's just a fact.

Speaker 2

However, I think the mix of the portfolio bodes well going forward For the profitability of the company.

Speaker 5

Okay. And maybe just a final question, Of your total price mix in the quarter, how much was mix? Can you share if you can or any refraining?

Speaker 3

Yes. We don't break the out mix from price, Adam. It's predominantly price.

Speaker 5

All right. Okay. Have a try. I appreciate all the color. I'll pass it on.

Speaker 5

Thanks.

Operator

Our next question will come from William Reeder from Bank of Zika. Please go ahead.

Speaker 7

Hi. I just have 2. Given the changes in your sourcing from the West Coast to the East Coast that you did last year and now again this year. Do you anticipate that in future years, if we return to more typical yields, You'll be able to shift that back to the West Coast and therefore there should be some kind of margin expansion in 2024 and beyond?

Speaker 2

Yes. I expect next year's crop to To be normalized and yields good and all the things that we're historically used to. And to In terms of is that going to provide margin expansion? No, it won't. Materially, it won't.

Speaker 2

We're going to have inflation in our commodity costs next year. Again, I believe Based on how the commodity markets are shaping up and as I stated in the prepared remarks, where are the potato crop Negotiations, we settled with Pacific Northwest, it's going to be up 20% next year. And you stack that up over 2 years, that's a big lift. And It's going to be another difficult year and we'll continue to adjust our thinking on pricing that through the market going forward, but it's not going to be a material margin impact, year over year just based on sourcing out of the East Coast.

Speaker 7

Got it. And then my second is based upon your guidance, even pro form a for the acquisition of the rest of the joint venture, You're still going to be below your leverage target of 3.5x to 4x. You're going to be, I think, in the high 2s. I guess, what is that I mean, in terms of capital allocation, I know you increased the dividend, but how are you thinking about that?

Speaker 3

Yes. No, we're excited about increasing the dividend based on our performance. As we think about capital allocation, we have not changed our priorities in terms of investing in the business for the long term, M and A, if there's M and A that's available and to we will reward our shareholders, as well. But certainly, we're going to invest in the business first.

Speaker 7

Okay. So the leverage target remains at 3.5 to 4 times?

Speaker 3

It does remain in that range. And as we've said before. We're doing that because we want to make sure that we have enough financial firepower for M and A or other items that may come up.

Speaker 7

Got it. All right. That's all for me. Thank you.

Speaker 3

Thank you.

Operator

There are no further questions at this time. I'd like to turn the conference back over to you, Dexter Conblett, for any additional remarks. Thanks to

Speaker 1

Thanks for joining the call this morning. If you want to have any follow-up sessions, please email me so we can schedule a time. And Happy New Year and have a good day. Thank you.

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