Lamb Weston Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
October 5, 2023

Key Takeaways

  • We raised our FY2024 net sales target to $6.8–7.0 billion and increased earnings guidance after a strong start to the year.
  • Price mix was up 23% in Q1, and we expect full-year price mix growth of low double digits to offset input cost inflation.
  • Volume declined mid-single digits as we exited lower-margin contracts, but we anticipate sequential improvements in the second half as new higher-margin business ramps up.
  • Potato crops in North America and Europe are projected to be in line with pre-pandemic historical averages, supporting stable supply levels.
  • We maintain a strong liquidity profile with over $1 billion in cash, a net leverage ratio of 2.3×, $335 million in operating cash flow, and $100 million of opportunistic share repurchases.
AI Generated. May Contain Errors.
Earnings Conference Call
Lamb Weston Q1 2024
00:00 / 00:00

There are 11 speakers on the call.

Operator

Good day, and welcome to the Lamb Weston First Quarter Earnings Call. Today's conference is being recorded. At this time, I'd like to turn the

Speaker 1

Good morning and thank you for joining us for Lamb Weston's Q1 2024 Earnings Call. This morning, we issued our earnings press release, which is available on our website, lamweston.com. Please note that during our remarks, we'll make some forward looking statements about the company's expected performance Please refer to the cautionary statements and risk factors contained in our SEC filings for more details on our forward looking statements. Some 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.

Speaker 1

You can find the GAAP to non GAAP reconciliations in our earnings release. With me today are Tom Warner, our President and Chief Executive Officer Bernadette Madriada, our Chief Financial Officer. Tom will provide an overview of the current operating environment. Bernadette will then provide details on our Q1 results As well as our updated outlook for fiscal 2024. With that, let me now turn the call over to Tom.

Speaker 2

Thank you, Dexter. Good morning and thank you for joining our call today. We delivered a strong start to the year as we continue to execute on our strategies to drive sustainable profitable growth. Our integration of our EMEA operations is progressing well. Our capacity expansion in China is now up and running And our other expansion and modernization efforts around the globe remain on track.

Speaker 2

Our supply chain teams continue to drive productivity savings And our commercial teams remain focused on serving our customers and driving innovation across all channels. While our volume was We should see our year over year volume trends improve as the year progresses as we begin to lap and backfill exited volumes with higher margin business. Overall, we feel good about the health of the category, our Q1 financial results and our operating momentum and have raised our sales and earning targets for the year. Let me now turn to the current operating environment. The global frozen potato category continues to be solid with overall demand and supply balanced.

Speaker 2

Fry attachment rates, which is a rate at which consumers order fries when visiting a restaurant or other food service outlets Across our key markets have remained largely steady and above pre pandemic levels. Restaurant traffic in our key markets was generally solid. In the U. S, overall restaurant traffic was flat versus the prior year quarter as QSR traffic growth offset further traffic declines in full service restaurant channels. Call over to Steve.

Speaker 2

We believe that this is the cumulative effect of inflation and other macro pressures on the consumer over the past few years While overall traffic growth did slow sequentially from about 1% in our physical 4th quarter as quick service restaurant traffic growth cooled, Much of that weakness was in June and we're encouraged that both QSR and full service restaurant traffic trends improved as the quarter progressed. In Europe, restaurant traffic grew in many of our key markets. In the U. K, traffic was up mid single digits with growth in both QSR and full service restaurants. Growth was also solid in France, Germany, Italy and Spain.

Speaker 2

In Asia, China restaurant traffic growth was very strong, We suspect that restaurant traffic trends will be volatile in the near term as high interest rates, high inflation and uncertainty continues to affect consumers. That said, frozen potato demand has proven resilient during the most challenging economic times and we continue to be confident presentation to the mid to high single digits, largely driven by higher contract prices for potatoes, including a 20% increase in North America And a 35% to 40% increase in Europe. Much of our inflation driven pricing across our channels has either already been announced or included Customer contracts representing about 20% Our North American business are in the process of being finalized and we feel good in the aggregate about the likely pricing and terms. Over the long term, we continue to expect pricing actions and supply chain productivity improvements will be the primary levers to offset inflation. We'll also continue to drive improvements in product and customer mix to benefit sales growth and profitability.

Speaker 2

Now with respect to the upcoming potato crop, We are harvesting and processing the crops in our growing regions in both North America and Europe. And we believe the crops in the Columbia Basin, Idaho, Alberta In the Midwest are in line with pre pandemic historical averages. In Europe, we believe that the crop will also be in line with historical averages As a result of improved growing conditions, we'll provide our final assessment of the crop, including how it performs out of stores When we report our 2nd quarter results in early January. So in summary, we delivered Solid results in the Q1 and continue to have good operating momentum. The overall category remains healthy with demand and supply largely balanced.

Speaker 2

And finally, at this time, we believe the potato crops in our growing regions in North America or in Europe will be in line with pre pandemic averages. Let me now turn the call over to Bernadette.

Speaker 3

Thanks, Tom, and good morning, everyone. I want to start off by thanking the entire Lamb Weston the present team for the strong start to the year. Our performance speaks for itself and it's a testament to the passion and dedication of our entire Lamb Weston team. We recognize that we're operating in a challenging macro environment, but the strong first quarter performance has allowed us raise our fiscal 2024 financial targets. Let's start with reviewing our Q1 results.

Speaker 3

Compared with the prior year, sales increased $540,000,000 or 48 percent to about 1,700,000,000 About $375,000,000 or 70 percent of the increase was attributable to the incremental sales from acquisitions, With most coming from our EMEA business. We lapped the Argentina acquisition this quarter, but we'll continue to receive the incremental benefit from the consolidation of the call over to EMEA operations in the 2nd 3rd quarters. As a reminder, since we began to consolidate EMEA sales beginning in the Q4 of fiscal 2023. Those results are included in our last year's sales baseline. Excluding the incremental sales from our acquisitions, net sales grew 15%.

Speaker 3

Price mix was up 23 As we benefited from the pricing actions taken in fiscal 2023 in both our North America and International segments note that our press release will be posted

Speaker 4

on the call to counter input and manufacturing cost inflation.

Speaker 3

Mix was also favorable as we continue to strategically manage our product and customer portfolio. In addition, we estimate the price mix in the quarter benefited by a couple of percentage points From lower than expected trade spending associated with pricing actions that we began implementing in the last month of fiscal 2023. This may be largely timing related and as a result could be a slight headwind as the year progresses. The trade spend benefit in the quarter, however, was mostly offset by a roughly 2 point headwind related to lower freight charges passed on to customers As transportation costs have come down from the prior year period. As a reminder, our goal is to match freight charge to our customers And lower margin contracts as part of our revenue growth management initiatives and to a lesser extent continued inventory destocking by certain that the customers in international markets and in select U.

Speaker 3

S. Retail channels also impacted volume. Call over to Mr. President. We believe the effect of these destocking actions is largely behind us and should have little impact, if any, on our results going forward.

Speaker 3

It's important to note that volume elasticities or the amount of volume lost in response to inflation based pricing actions As we lap the volume we exited and backfill volume with higher margin business. Moving on from sales. Gross profit in the quarter, excluding comparability items, increased $213,000,000 to 490,000,000 Nearly 3 quarters of the increase was driven by the cumulative benefit of pricing actions, the timing of trade spending, Mix improvement and supply chain productivity in our legacy Lamb Weston business, which more than offset higher input and manufacturing cost per pound And the impact of lower volumes. The remaining roughly 1 quarter of the increase was attributable to incremental earnings from consolidating EMEA. Including the dilutive impact of the EMEA acquisition, our gross margin percentage excluding comparability items Increased 480 basis points to 29.4%.

Speaker 3

While first quarter margins have historically been our lowest margin quarter, We estimate that the timing of trade spending that I mentioned earlier accounted for approximately 200 basis points of the increase, Which would put our normalized first quarter gross margin, including acquisitions, approaching 28%. Input costs continued to increase mid to high single digits on a per pound basis. The increases were largely driven by A 20% increase in the contracted price for potatoes in North America, higher prices for open market potatoes due to poor yields from the 2022 crop And continued increases in the cost of labor, energy and ingredients for batter coatings. The increase was partially offset by SG and A excluding comparability items increased $45,000,000 to 160,000,000 More than half of the increase was from incremental SG and A with the consolidation of EMEA. The remainder was largely driven by higher expenses And higher advertising and promotion expenses.

Speaker 3

All of this led to adjusted EBITDA increasing 76% With the remainder attributable to incremental earnings from consolidating EMEA. Moving to our segments. This is the Q1 that we operated in our 2 new reporting segments, North America and International. Beginning with our North America segment, which includes sales to customers in all channels in the U. S, Canada and Mexico, Sales were up 19% in the quarter.

Speaker 3

Price mix was up 24%, which was driven by the carryover benefit of pricing actions That took effect in fiscal 2023 across each of our primary sales channels, the timing of trade spending And favorable mix as we benefit from our revenue growth management initiatives. Lower freight revenue partially offset the increase. Volume in North America declined 5%. This primarily reflects our decision to exit volume related primarily note the 2 lower priced and lower margin contracts that largely began to impact our sales in the 2nd and third quarters of fiscal 2023. To a lesser extent, inventory destocking by certain customers in retail channels also pressured volumes.

Speaker 3

We don't anticipate further effects from the retail destocking after the Q1. North America segment adjusted EBITDA increased note that we're going to be conducting a few minutes to discuss the The timing of trade spending and favorable mix more than offset higher cost per pound and the impact of lower volumes. Conference over to our International segment, which includes sales to customers in all channels outside of North America. Sales grew $360,000,000 or 2 12 percent and included $375,000,000 While price mix was up 18%, driven by the carryover benefit of pricing actions taken in fiscal 2023, As well as favorable mix, lower volume and freight revenue offset the increase. As expected, volume excluding

Speaker 5

note that the company's press

Speaker 3

low margin accounts that largely began to impact our international sales volumes in our fiscal Q4 of 2023. To a lesser extent, continued inventory destocking also impacted volumes in the quarter. But as I mentioned earlier, we believe the effect of Talking is largely over. Despite a 27% decline in our international segment volume, Segment adjusted EBITDA increased $57,000,000 to $90,000,000 Incremental earnings from the consolidation of EMEA's financial results as well as favorable price mix drove most of the increase, more than offsetting the impact of higher cost note that the balance sheet is being recorded. Moving to our liquidity position and cash flow.

Speaker 3

We continue to maintain a solid balance sheet with ample liquidity and a low leverage ratio. We ended the quarter with more than 100 the $1,000,000,000 of cash and no borrowings under our $1,000,000,000 U. S. Revolver. Our net debt was about $3,300,000,000 Which puts our leverage ratio at 2.3 times.

Speaker 3

We generated about $335,000,000 of cash from operations $40,000,000 of cash to our shareholders, including $41,000,000 in dividends. Most of the cash return was from repurchasing $100,000,000 of shares. That's more than double what we repurchased in all of 2023 As we acted opportunistically based on our stock price performance during our August open trading window. While our share buyback program is targeted to offset annual equity compensation dilution, we will continue to be opportunistic based on other capital allocation needs Turning to our updated fiscal 2024 outlook. Based on our strong Q1 performance, we raised our financial targets for the year.

Speaker 3

While we continue to expect macro operating conditions to remain challenging, the overall current demand and pricing environment remains solid. In addition, as Tom mentioned, we believe the potato crops in our growing regions in North America and Europe will be consistent with pre pandemic historical averages. And we're generally pleased with how the discussions to renew remaining contracts are progressing in aggregate. Specifically, we continue to expect strong net sales gains for the year and have increased our annual net sales target to $6,800,000,000 to $7,000,000,000 Which is up from our previous target of $6,700,000,000 to $6,900,000,000 This includes $1,100,000,000 to $1,200,000,000 This represents a 6.5% to 8.5% net sales growth, excluding acquisitions. For the year, We're targeting price mix to be up low double digits, which means that we expect price mix will slow sequentially From the 23% increase that we delivered in the Q1, as we begin to lap some of our price actions that we began implementing in the Q2 of last year.

Speaker 3

While the overall potato category continues to be solid, due to the timing of contract openers, We're targeting our full year volume, excluding acquisitions, to be down mid single digits compared with the prior year. And we expect year over year volume trends will continue to improve as the year progresses as we lap some of the significant low margin, low product note 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.

Speaker 5

Call over to the operator for the call over to the operator for the call. Thank you, operator. Thank you, operator. Thank you, operator.

Speaker 3

Thank you, operator. Thank you, operator. Thank you, operator. Thank you, operator. Thank you, operator.

Speaker 3

Thank you, operator. Thank you, operator. Thank you, operator. Thank you. Our next question comes from 1 $620,000,000 up from our previous estimate of $1,450,000,000 to 1 $525,000,000 Using the midpoint of this updated range implies growth of about 26% or about $330,000,000 We left our target for SG and A unchanged at $765,000,000 to $775,000,000 While our Q1 run rate suggests a lower target, we continue to anticipate spending will build as the year progresses.

Speaker 3

We reduced our interest expense target by $10,000,000 to $155,000,000 as we expect to partially offset cash interest With more capitalized interest associated with our capacity expansion. Our other financial targets remain the same, Including depreciation and amortization expense of approximately $325,000,000 and capital expenditures of $800,000,000 to 900,000,000 In summary, we're executing our strategies to deliver strong top and bottom line growth. And driving productivity savings across our supply chain. Volume elasticities in response to inflation based pricing actions have been generally low And we expect volume trends to improve as the year progresses. While we remain cautious about the effect of inflation on the consumer, We feel good about the start of the year and the health of the category, which gives us the confidence to raise our full year sales and earnings targets.

Speaker 3

And with that, let me now turn it back over to Tom for some closing comments.

Speaker 2

Thanks Bernadette. We delivered a strong quarter and our operating momentum As well positioned to deliver another year of solid sales and earnings growth. In addition, we're confident in the health of the global category And finally, as you may know, we will be hosting an Investor Day on Wednesday, October 11th at the New York Stock Exchange. During the presentation, we'll discuss our view of the industry, Our strategies for growth and our long term financial targets and capital allocation policies. If you haven't already, please register if you plan on attending in person Thank you for joining us today.

Speaker 2

Now we're ready to take your questions.

Operator

And we'll take our first question from Peter Galba with Bank of America.

Speaker 6

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

Speaker 2

Good morning.

Speaker 1

Good morning.

Speaker 6

Tom and Bernadette, thank you both very much for the color around price mix and volume for the year. Tom, I was hoping to ask maybe a 2 part question on volume. 1, just maybe help us a little bit with cadence on when some of these backfill higher margin customers potentially start to come online for you. And then Bernadette, I know you kind of gave order of magnitude on international, but if there's anything more a finer point on volumes between just what was intentional walk away versus the destock impact in the quarter would be helpful. Thanks very much.

Speaker 2

Yes. So Peter, it's Tom. So as Bernadette alluded to, it was limited to 4 accounts and you know it was important for us to maintain our pricing discipline. 1 of the accounts in international specifically we're losing money on. So it was time just to part ways and that had a big impact on our international volume.

Speaker 2

So it was a measured Disciplined action we did. And the thing in terms of your the first part of your question, We have line of sight to backfilling that volume. It does take time. It's not a linear match when you walk away. Been through this before, but we have a great commercial team that has you know volume is going to be sequentially getting better over the next quarter and the back half of the year.

Speaker 2

To note that we expect the categories and really it's in good shape. So between organic growth And some things that we have identified, I feel great about where we're at and how we're going to execute And continue to grow the volume in the back half of the year and over the course of the next several quarters.

Speaker 3

Yes. And Peter, just second question. So the second question you asked that those volume exits started impacting our international sales in our fiscal Q4 of 2023 and the business that we chose to walk away from, I'd say about 90% of that relates to that in terms of volume decline you know with the remainder being the destocking.

Speaker 6

Got it. Very helpful. Thank you. And then Tom, one question I've just been getting On the crop itself, obviously, the crop in your main regions has come in pretty well. I think there's been some issues in the East Coast Canada crop.

Speaker 6

Just Curious kind of how you think that might impact the overall category here over the course of the next year in terms of industry tightness? Thanks very much.

Speaker 2

Yes. Peter, I think the crops and we'll have a as we do every January in our earnings call kind of a debrief on how we're feeling about Overall crop and storage, crops in great shape worldwide. So I don't expect any impacts in any region in terms of

Operator

call over to Tom Palmer with JPMorgan.

Speaker 4

Good morning and thanks for the questions. I wanted to ask on the guidance boost. I would assume some flow through of the higher EMEA sales, but the Also the increase on earnings seems to be more related to the gross margin outlook. Is this mainly a reflection of pricing Or a lower compensation outlook. I realized there might have been some conservatism in the prior number, but just trying to understand the moving parts.

Speaker 3

Yes. So we feel good about the operating momentum that we've had. It's been primarily related to pricing. You know, we think that those financial targets are really prudent given the macro environment that we're facing, as well as just uncertainty regarding consumer health. So most of that's pricing and still really good about the operating momentum of the business.

Speaker 5

Call over

Speaker 4

to Steve. Okay. Thank you. I mean, I wanted to just follow-up on that gross margin piece. Traditionally, we've seen 2nd quarter gross margin come in above the Q1 and then Q3 come in above the Q2.

Speaker 4

Is this cadence reasonable when we think about the build for this

Speaker 3

Yes. So you're right. Typically, we do see a sequential step up in Q2. I think we'll still see a sequential step up, but it may be more muted because we're going to be lapping some of those pricing actions

Speaker 4

Understood. Thank you.

Speaker 1

Yes. Hey, Tom, remember that what Bernadette mentioned before, yes, we printed 29.4, you know But if you take away some of the timing impacts of that trade spend, probably a little bit south of 28 As a base. Yes.

Speaker 3

That's right, Tom. So when I'm speaking to the step up, I'm speaking up to more normalized 28%

Speaker 2

call over to you.

Speaker 1

Okay. Understood. Thanks.

Speaker 3

Thank you.

Operator

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

Speaker 1

Call over

Speaker 7

to Steve.

Speaker 8

Yes. Thank you. Good morning, everyone.

Speaker 2

Good morning.

Speaker 8

Good morning. So I guess the first question is Related maybe to mix and clearly you're making some conscious decisions on moving away from low margin from some lower margin business. But just more broadly, can you speak to maybe the if we try to cut your volumes between kind of more traditional straight run fries versus some of the more upgraded products and battered and coated and the like that you're now producing. Can you help quantify kind of what that represents as a proportion of the business today and where that can be getting to whether it's with some of these know that the mix has been a very powerful margin driver for the business and trying to dimensionalize how much more of this are to

Speaker 3

go. Yes. Adam, strong price mix performance was the key driver of our better than expected financial results. As it relates to mix and how that relates to growth going forward, we'll be covering that in our industry investor call next week. And so we'll cover that more then.

Speaker 3

But again, strong price mix was the key driver of our better than expected performance.

Speaker 1

Okay. And then if I could

Speaker 8

just ask the second one. I know you talked about the kind of customer trends in Europe. What And the increased revenue contribution in EMEA, is that a more positive volume outlook, more positive price mix outlook or both?

Speaker 3

Yes. So we feel really good about the EMEA performance. We have not given the prior year comp because as you know, the EMEA Sales were not recorded in the prior year in our sales number. It was recorded in our equity method earnings. But our estimate is largely in line for the remainder of the year at the presentation.

Speaker 3

The segment is largely in line for the remainder of the year at the run rate that we saw for EMEA in Q4 and Q1 note from a sales perspective of about $360,000,000

Speaker 8

Okay. All right. I appreciate that color. I'll pass it on.

Operator

Call back over to Matt Smith with Stifel.

Speaker 2

Call over to Steve. Hi, good morning.

Speaker 5

Good morning.

Speaker 2

I want

Speaker 9

to ask about the impact of walking away from low margin contracts in this mix management you've been Pursuing this weight on volumes over the past couple of quarters and you mentioned that the actions in the international segment and the U. S. Segment will be fully lapped by the Q4. So do you expect to be in a position to be growing volumes as you exit this year, meaning you've lapped those You've laughed at the drag from walking away from those contracts and you've made some progress on the backfill with higher margin business?

Speaker 2

Yes, Max. I fully expect, as I said earlier, that in the back half of the year, we should start to And that's a function of lapping the exit of business, but also we have to line of sight to additional business that we're going to start to backfill with and that takes time. But I fully expect based on how we've got the business forecast and the opportunities we have that we're going to start seeing positive volume trends in the back half. Call

Speaker 5

back over to Mark. Okay.

Speaker 9

Thank you for that. And maybe if I could ask one more question here. You mentioned that the capacity in China came online in the quarter. Do Give any update to the timing for the American Falls facility. Is that still expected to be on time for beginning production early in 2024?

Speaker 2

Yes. We still expect in the late spring of 2024 early summer For American Falls to transition to a vertical start up and it takes some time to get the plant up and running, but Absolutely. Late spring, early summer.

Speaker 9

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

Speaker 1

Call over to Paul. Thanks.

Operator

We'll now take our next question from Rob Dickerson with Jefferies. We'll now move on to Robert Moskow with TD Cowen.

Speaker 10

Hi, there. Thanks for the question.

Speaker 9

Good morning.

Speaker 10

I hate to keep the magnifying glass on volume. Tom, when you talk about positive volume in the back half, the way we have modeled it was that the easy comparisons to the volume you walked away from really started in size in 4th and not in 3rd. So is that correct? And if so, can we expect positive volume in 3rd as well, Even though that the volume walked away from may not have been as much.

Speaker 3

Yes. As it relates to the volume in our North America segment, I think I alluded to the fact that we started to walk away from that in 3rd and 4th quarter. In our International segment, we started to see the effect of what we exited in the Q4 of last year. So as we said, we do expect to see volume continue to improve, both as we lap that business we exited and as we bring on New Business.

Speaker 10

Okay. So is it premature to start dicing it up by quarter? And just Should we just think of it as the second half or could we say 3rd quarter off as well?

Speaker 3

Yes. So I would just think of it as the second half of the year. Okay.

Speaker 10

Got it. And then my other question is, I was hoping you'd give a little more color on like what Percent of your contracts come up for renewal seasonally and also as it relates to like I think a lot of the industry is on 3 year contracts instead of 1. So like how much is up for grabs in the next 3 to 6 months, Roughly speaking, is there a way to quantify that?

Speaker 2

Yes. Sure, Robert. In our remarks, we got about 20% in play. We feel confident about where we're at, where we're at in those discussions, how things are progressing for us this year. So we'll get through all that you know over the course of the rest of this year.

Speaker 2

And at a later time, As we always do, we'll give some color on what we've got coming up in terms of contracting for our next fiscal year and how that's progressing. But right now, we're through most of it. Feel good about where we're at. Obviously, it's all baked into our guidance. We have 20% in play, feel good about where it's at.

Speaker 2

Commercial team is executing at a high level, great discussions and more to come on that. And then the next like we do usually in our July call, we'll talk about What's coming up for contract renewal in the next fiscal year?

Speaker 10

Yes. Sorry, I was on the ConAgra call. So 20% in play And is it all kind of How did that go? Pardon me?

Speaker 2

Nothing for us.

Speaker 10

All right. Is it all in the first half or is

Speaker 2

start late spring through early fall when we start the contracting discussions.

Speaker 10

Early fall. Okay. All right. Thanks so much.

Speaker 5

Call over to Eric.

Operator

Thanks, Robert. We'll now take our next question from Johnny Chamour with Barclays.

Speaker 5

Call over to Andrew Lazar.

Speaker 7

Great. Thanks. Hey, guys. It's Andrew Lazar. Hope all is well.

Speaker 7

And I joined late as well, so I apologize if some of this was covered. I think Tom, I remember, I think last quarter you started to talk a little bit about the plan sort of pivot, right, to a little bit more of a focus turn the call over to Steve. On profit dollars going forward, as that's the way you obviously grow the business and you kind of have this significant margin recovery, you know kind of much of which has already taken place, and that kind of makes sense, right, as you think about what you're looking to do. But I think there was some confusion and maybe Some might have taken that to mean that as you move towards profit dollars that somehow you were expecting sort of ongoing or structural margin erosion Going forward as some of the new capacity comes online and that you'd have to sort of go after lower margin business know somehow to fill that capacity. I was just hoping you could maybe and maybe look into this a lot more obviously next week, but maybe just clarify a little bit of that, because I do think there was some confusion around that.

Speaker 7

I logically understand, right, the shift now that margins have kind of recovered too much more of a profit dollar focus. Thanks so much.

Speaker 2

Yes, Andrew. We're going to stay disciplined with our revenue growth management Initiative. And so as we think about opportunities going forward, we are going to look at maintaining our margin profile and we're going to stay disciplined. And a testament to that is our decision to walk away from some of this lower margin business that we've been talking about. So it's all about maintaining the discipline and what note that we're going to focus on, we've worked really hard to rebuild our margin profile in this business and we're going to continue to focus on that

Operator

call over to Rob Dickerson with Jefferies.

Speaker 2

Call over to Tom. Great. Thanks so much. I was on mute. I guess a quick question for you Tom, just I guess with respect to the China plant, like this up and running, maybe coming back to Andy's question a little bit, but ask the question, Lea.

Speaker 2

I'm just curious, exiting this business back in Q4, but now you have a new facility. Is there now this conversation that you've been having to be activated kind of with the sales force such that you say, okay, there's opportunity here, right, you know, it's up maybe off a lower base, it's still up. There's not real demand destruction you know going forward, it sounds like really expected, such that that sales force can actually go try to take you know material share, let's say, even non U. S. Market just kind of given the new facility?

Speaker 2

First question. Yes. So the China facility, we're in early stages of our start up. So it takes some time to get it up and running. We are running production there today.

Speaker 2

It's going to be specifically targeted for that market. You know we've got things identified in the China market from an opportunity business standpoint, But it takes some time to get the plant up and running and efficient and kind of work the kinks out, but We're early on. So it's going to be several more quarters before we see the impact of that coming online.

Speaker 5

Call back over to Steve.

Speaker 2

All right. Fair enough. And then I just think you said correct me if I'm wrong that traffic was up I believe mid single digit In Europe,

Speaker 4

I

Speaker 7

remember that was just QSRs, but I

Speaker 2

know traffic was up in Europe, sounds like better than the U. S. Maybe just any kind of general perspective as to why that might be the case kind of market vis a vis market?

Speaker 1

Call over to Rob. It's probably a little bit of might have a little bit of softness last year you know coming out of COVID and everything like that. But overall trends seem to be pretty good. I think, with inflation still factor, but it's cooling or at least a little bit better than we were expecting at least from the energy cost standpoint. So I think it was just a disposable income helping

Speaker 2

All right. Great. And then just quickly, to know harvest coming in line with historic averages coming off 2 bad years. Maybe As a reminder, kind of when we start to see that 35% of COGS maybe starts to disinflate or let's call it deflate Year over year. It sounds like that might be what's like a back half fiscal 2025 dynamic?

Speaker 2

Yes, Rob. So just a reminder, our cost and contract raw input Structure is baked. So wherever the crop yields and all that comes out, it really isn't going to impact our Overall input costs for the balance of this fiscal year. So it's you're not going to see Any decline in our cost structure because the crop is great. It's just we agreed to a contract last A year ago and it is what it is.

Speaker 3

Yes. I think that's right, Tom. And the only piece that's different in the end market is that generally will contract for about 75%, whereas there's the open market for the remaining 25%. Then we've seen of late that the open market prices have started to come down.

Speaker 2

Right. But as we're I'm thinking all the way forward to, let's say, the end of back half of next fiscal year, right? I'm assuming as we go into these contract negotiations toward the end of this calendar year, right? Harvest is good this year, probably puts you in a pretty good position in the discussion. We're not going to comment on negotiating discussions publicly, we don't do that.

Speaker 2

And it will be we'll let it play out the way it plays out. We'll be disciplined in the process. We follow every year. And at the appropriate time when we come to some agreement as we always do And the market knows, you'll see what our raw price is going to be for the next year. All right, great.

Speaker 2

Thank you. See you next week.

Speaker 1

Thank

Speaker 5

you.

Operator

Call back over to William Reuter with Bank of America.

Speaker 9

Hi. Just quickly to make sure on the last question. You contract for 75% in Europe, but that's 100% in North America. Is that right?

Speaker 3

That's correct.

Speaker 9

Okay. And then, you have 20% of your contracts that are up for renewal. How does that compare to where you would have been last year or

Speaker 3

Yes. Typically, we have about 25% up for renewal, so slightly down, but around average.

Speaker 9

Okay. And then just lastly for me, the elevated CapEx of $800,000,000 to 900 How should we think about that CapEx number over the next handful of years?

Speaker 3

Yes. So CapEx fluctuates year to year. As we've discussed them in past, we had a pent up demand after COVID where we've had a couple of years of higher spending. I'm going to speak more to that during Investor Day in terms of how to think about that over the next few years. So I'll go ahead and leave it for Investor Day.

Speaker 9

I assume that might have been the answer. Okay. That's all for me. Thank you.

Operator

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

Speaker 1

Call back over to the operator. Thanks for joining the call today. If you do plan on or want to come to our Investor Day, please shoot me an e mail and I can send you the invite if you If you have gotten it and you do want to attend, since it's at the New York Stock Exchange, you do have to register in advance, So we could put you on the list to get in. Any questions on the call today or kind of going forward,

Operator

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

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