Lamb Weston Q4 2022 Earnings Call Transcript

Quartr
Provided by Quartr
July 26, 2022

Key Takeaways

  • In fiscal 2022 Lamb Weston achieved a record $4.1 billion in sales, fueled by favorable price‐mix actions and volume growth as restaurant traffic recovered.
  • The company implemented four rounds of pricing increases and simplified its SKU portfolio to mitigate the highest input and transportation inflation in 40 years, enabling 230 bps of gross margin expansion in Q4.
  • Q4 results featured a 14% sales increase to $1.15 billion (driven entirely by price‐mix), a 1% volume decline, and adjusted EBITDA growth of 21% alongside a 48% rise in EPS.
  • For FY2023 Lamb Weston forecasts sales of $4.7–4.8 billion and adjusted EBITDA of $840–910 million, expecting price-mix and productivity savings to offset elevated costs from inflation, labor shortages and supply-chain constraints.
  • Strategic investments include $475–525 million of CapEx for capacity expansions in Idaho and China (China plant due mid-FY24), an ERP upgrade, consolidation of the Argentina JV, withdrawal from Russia and a target net leverage of ~3.5×.
AI Generated. May Contain Errors.
Earnings Conference Call
Lamb Weston Q4 2022
00:00 / 00:00

There are 9 speakers on the call.

Operator

Good day, and welcome to the Lamb Weston 4th Quarter and Fiscal 2022 Earnings Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Dexter Congolay. Please go ahead, sir.

Speaker 1

Good morning, and thank you for joining us for Lamb Weston's for Q4 and fiscal 2022 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. These statements are based on how we see things today. Actual results may differ materially due to risks and uncertainties.

Speaker 1

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 Madriada, our Chief Financial Officer.

Speaker 1

Tom will provide some key highlights for fiscal 2022 as well as an overview of the current operating environment. Bernadette will then provide details on our 4th quarter results and our fiscal 2023 outlook. 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 solid results in fiscal 2022 and I want to thank all my Land West and colleagues for navigating through this difficult and volatile environment these past 2 years. We've worked together as a focused team to weather pandemic supply chain and macroeconomic headwinds, while continuing to support our customers, Specifically, in fiscal 2022, We delivered a record year of $4,100,000,000 in sales, driven by a combination of favorable price mix And volume growth as restaurant traffic and demand for fries continued to recover from the depths of the pandemic. We implemented pricing actions across each of our sales channels to mitigate some of the highest input and transportation cost Inflation that we've experienced in 40 years.

Speaker 2

This helped to drive year over year gross margin expansion in the second half of the year, We simplified our portfolio by eliminating SKUs, drove productivity savings and worked with our customers to secure product specification changes to offset much of the cost and operational impact of a historically poor potato crop. We also made tough but necessary decisions around customers, sales channels, production and service levels and adopted tools and practices In our production facilities, we continued to leverage our land once and operating culture and changed our ways of working, Including how we manage crewing schedules, this helped to better attract and retain employees and we're making progress in getting our facilities fully staffed. We started up a new chopped and formed production line in Idaho and broke ground on our capacity expansion and modernization projects in Idaho and China. While our plant in China remains on track to be operational by mid fiscal 2024, we pushed back the We have completed the We completed the design work for the 2nd phase of our new enterprise resource planning system. We'll build and Test the new system in fiscal 2023 and implement it in fiscal 2024 in a phased approach.

Speaker 2

We issued our 3rd environmental, social and governance report, which has been prepared in accordance with leading industry standards such as the Global Reporting Initiative. This report includes our progress towards specific ESG goals for 2,030. We refinanced more than $1,700,000,000 of senior notes, which extended our debt maturities and reduced our weighted average interest rate. And finally, we increased our dividend for the 5th straight year and stepped up share repurchases to boost capital return to shareholders. In our joint ventures, Lam Weston Meyer announced its intention to withdraw from its joint venture in Russia in response to Russia's invasion of Ukraine and the Devastating humanitarian crisis the worst created.

Speaker 2

In July, we increased our interest in our joint venture in Argentina from 50% to 90% and will now consolidate its sales and earnings in our results. In short, we've been managing through a turbulent market That said, we expect the environment going forward will remain very challenging with inflation continuing to pose The biggest threat to our cost structure and fry demand. Although the cost of some inputs such as edible oils, Energy and transportation have come off their highs in recent weeks. They remain elevated relative to the past few years. Labor availability continues to be an issue, while other key inputs such as ingredients for fry coatings remain costly and in short supply.

Speaker 2

As a result, we expect input, transportation and labor costs will be a significant headwind through fiscal 2023. Rising food, energy and housing prices have also affected restaurant traffic and consumer demand in the U. S. In the past few months. While traffic at quick service restaurants, which account for more than 80% of fry servings, has held up fairly well, Traffic at casual dining and other full service restaurants has softened recently as consumer scaled back dining out occasions were shifted to QSRs.

Speaker 2

Despite pressure on overall restaurant traffic, the demand for fries remains solid as the fry attachment rate in the U. S, which is a rate at which consumers order fries when visiting a restaurant or other foodservice outlets remains above pre pandemic levels. Going forward, we expect restaurant traffic and consumer demand in the U. S. Will be choppy and less predictable in the near term as consumers face significant cost inflation.

Speaker 2

Dry demand in retail channels, however, should continue to benefit if demand in out of home channels is pressured. Outside the U. S, Consumer demand trends in Europe have been similar to what we have experienced in the U. S. As a result of inflationary pressures, which will also lead to more unpredictable operating environment in fiscal 2023.

Speaker 2

Outside of China, demand in Asia has been relatively stable. The recovery in demand in China has been uneven as the government there maintains its 0 COVID policy. In addition, our shipments to Asia continue constrained by the limited availability of shipping containers, although that availability did improve somewhat in the 4th quarter. The bottom line is that we're forecasting cost and demand in this near term inflationary and volatile macroeconomic environment will be difficult and require us to remain flexible and manage our supply chain and commercial operations. Despite these short term challenges, we're confident in the long term resiliency And we will now begin the Q4 of 2019.

Speaker 2

With respect to pricing, Our price mix growth accelerated for the 3rd consecutive quarter as we continue to execute on our product and freight pricing actions. In early July, we began implementing our 4th round of pricing in the past 12 months in our Foodservice and Retail segments. We expect to see the benefit of this pricing actions as well as the one that we took in April to gradually build as we progress through the first half of fiscal twenty twenty three. In our Global segment, it's clear that in the back half For fiscal 2022, we benefited from price escalators included in multiyear agreements and had some success in securing price increases outside of these contractual escalators. However, it's equally clear that we have yet to fully offset inflation and and product contribution margin percentage in the 4th quarter.

Speaker 2

As you may recall, most of our chain restaurants Contracts in our global segment are multiyear agreements, and we're in the process of negotiating renewals representing about a third of our global segment volume this year. We're being aggressive in discussions with customers to secure price increases to offset inflationary pressures so that we can gradually restore profitability towards pre pandemic levels. We're also seeking to modify other key terms to reduce the chances of again facing a significant pricing lag to recover rising costs. For those agreements up for renewal this year, we'll generally begin to see the results of these new pricing structures during the second half of fiscal twenty twenty three. However, it may take up to a couple of years before we can fully recover costs across our global segment customer portfolio.

Speaker 2

For those multi year contracts that were renewed over the past couple of years, we'll continue to realize the price escalators embedded in those agreements. With respect to this year's upcoming potato crop, we expect the crops in our primary growing regions in the Columbia Basin, Idaho, Alberta and the Midwest to be largely in line with historical averages. While cooler than average weather in the Spring early summer slowed the crops progression. It has largely caught up to historical average with warmer temperatures and sunny days in recent weeks. We'll provide more detail on the crop when we report our Q1 results in early October in line with our past practice.

Speaker 2

As we previously discussed, we've agreed to a 20% increase in the contracted price per pound, reflecting our approach for annual price changes that reflect the cost to grow plus an appropriate return potato prices during the Q2 of fiscal 2023 as we begin to process early potato varieties that are harvested in mid summer. So in summary, we delivered solid results in fiscal 2022, including record high sales In the Q4 and for the year, we continue to successfully execute pricing actions and cost mitigation efforts as we look to offset input cost We remain confident in the resiliency and the long term prospects of the category, Although near term demand will likely be choppy and difficult to predict. And at this time, this year's crop is on track to be in line with historical averages. Let me now turn the call over to Bernadette to review the details of our Q4 results and our fiscal 2023 outlook.

Speaker 3

Thanks, Tom, and good morning, everyone. I want to start by echoing Tom's comments and thanking our employees for their hard work and continued dedication to drive our solid operating and financial performance during these challenging times. We delivered 4th quarter sales growth of 14% or a record $1,150,000,000 With all of the growth coming from price mix as we continue to execute our previously announced pricing actions in each of our core business segments to offset cost inflation. Sales volumes declined 1%, primarily reflecting lower export volumes due to limited shipping container availability and disruptions to ocean freight networks. Total North American volume grew this quarter behind strong sales to large chain restaurant customers.

Speaker 3

While consumer demand in our foodservice and retail channels also grew, our sales volumes to those Customers fell as we were unable to fully service this demand as a result of lower production run rates and throughput at our production facilities. For the year, sales increased 12% to nearly $4,100,000,000 a record high with price mix up 9% and volume up 3%. Gross profit in the quarter increased $56,000,000 and gross margin expanded 230 basis points versus the prior year quarter to 22%. Product and freight price increases drove the improvement more than offsetting the impact of higher costs on a per pound basis and lower sales volumes. Cost per pound increased double digits for the 4th straight quarter With inflation accounting for essentially all of the increase, higher prices for inputs such as edible oils, ingredients for batter and other coatings and packaging were the primary drivers.

Speaker 3

Labor costs were also notably up, reflecting broad competition for production team members. Transportation rates also rose sharply versus the prior year. Transport costs increased as we continue to rely on an unfavorable mix of Higher cost trucking versus rail to meet service obligations for certain customers. And as Tom mentioned, while the cost Some inputs in transportation have come off their highs in recent weeks. They remain elevated relative to the past few years and will continue to pose a headwind through fiscal 2023.

Speaker 3

We also continue to incur higher potato costs as a consequence of the poor crop that was harvested last fall. We will continue to realize the financial impact of this poor potato crop through most of the Q2 of fiscal 2023. And finally, we continue to incur higher costs And operational inefficiencies associated with labor, spare parts and ingredient shortages and other industry wide supply chain challenges. Increased downtimes associated with scheduled maintenance also reduced production run rates, lowering our fixed cost recovery. Partially offsetting these higher costs per pound were benefits from our portfolio simplification, cost mitigation and other productivity efforts.

Speaker 3

Moving on from cost of sales, our SG and A increased $19,000,000 in the quarter, largely due to higher incentive compensation expense and a $3,500,000 contribution to our charitable foundation. Equity method earnings from our unconsolidated joint ventures in Europe, the U. S. And Argentina declined $57,000,000 This included a $63,000,000 non cash charge associated with the European joint venture's intent to withdraw from its joint venture that operates a production facility in Russia as a result of the war in Ukraine. Excluding the impact of this charge, As well as mark to market adjustments associated with currency and commodity hedging contracts, equity earnings increased $2,000,000 versus the prior year.

Speaker 3

So putting it all together, adjusted EBITDA including unconsolidated joint ventures increased 21%, While adjusted diluted EPS rose 48%, higher sales and gross margin expansion drove the increases. Moving to our segments. Sales in our Global segment were up 10% in the quarter. Price mix drove the entire increase, reflecting domestic and international pricing actions associated with customer contract renewals, Inflation Driven Price Escalators and Higher Prices Charge for Freight. Overall segment volume was flat.

Speaker 3

We drove solid growth in shipments to large QSR and casual dining chains in North America. However, this growth Was offset by a more than 10% decline in international shipments, reflecting limited shipping container availability and disruptions to Ocean Freight Networks. While still down versus the prior year, international shipments improved sequentially versus a decline Gross profit less advertising and promotion expenses declined 1% to $56,000,000 Higher manufacturing and distribution costs per pound more than offset the benefit of favorable price mix. Sales in our Foodservice segment grew 21%. Price mix increased 24% as we continue to drive product and freight pricing actions that we announced earlier in the year to mitigate cost inflation.

Speaker 3

Sales volumes decreased 3% as labor and commodity shortages as well as scheduled maintenance downtime impacted run rates and We did see sales volumes slow each successive month during the quarter as restaurant traffic, especially in casual dining, Softened as consumers responded to accelerating inflation. Food services product contribution margin rose 47% to $142,000,000 as favorable price more than offset higher manufacturing and distribution costs per pound. In our Retail segment, sales increased 20%. Price was up 22%, reflecting product and freight pricing actions across our branded and private label portfolios, as well as favorable mix. Volume fell 2%, reflecting incremental losses of certain lower margin private label products.

Speaker 3

This was partially offset by higher shipments of branded products, although this growth was tempered by our inability to fully serve customer demand due to lower production run rates. Retail's product contribution margin nearly doubled to $42,000,000 behind pricing Favorable mix with the sales of more branded products and a $3,000,000 decline in A and P expenses. This was partially offset by higher manufacturing and distribution costs per pound. Moving to our liquidity position and cash flow. We ended the quarter with $525,000,000 of cash and a $1,000,000,000 undrawn revolver.

Speaker 3

We had net debt of about $2,200,000,000 which corresponds to a 3.1 times leverage ratio. For the year, we generated about $420,000,000 of cash from operations, which is down about $135,000,000 versus the prior year, largely due to higher working capital. Capital expenditures for the year were about $305,000,000 That's up about $145,000,000 as we completed the Chopton Form line in Idaho and began construction of our Capacity expansion in China. For the year, we returned nearly 2 $90,000,000 of cash to shareholders in the form of dividends and share repurchases and have just under $275,000,000 of authorization to the company's program. Now turning to our updated fiscal 2023 outlook.

Speaker 3

As Tom noted, We anticipate the overall operating environment to continue to be challenging with inflation continuing to affect our cost structure as well as consumer demand. Accordingly, we're taking a prudent approach to our fiscal 2023 outlook. We're targeting sales of $4,700,000,000 at $4,800,000,000 which implies a growth rate of 15% to 17%. We expect that Price will be the primary driver of sales growth as we continue to implement our previously announced pricing actions in our Foodservice and Retail segments and secure price increases in contracts up for renewal with customers in our Global segment. With respect to volume, forecasting demand has become increasingly difficult.

Speaker 3

Overall, we expect U. S. Demand to remain solid, but will also likely be affected by significant inflation that consumers are facing. In the event of an economic recession, we expect demand for French fries will be resilient, although with little to no growth. That's consistent with what we experienced during the Great Recession from 2,008 to 2010.

Speaker 3

Consumer behavior during inflationary or recessionary times may also have an effect on sales channel and product mix. QSRs and retail outlets may benefit, but this may be at the expense of casual dining establishments. We've already seen some indications of this in the past few months. In addition, we expect our volume growth will be limited by near term And throughput constraints as we continue to face labor shortages, disruptions in the availability of key product inputs and spare parts and limited access to shipping containers for exports. For earnings, we expect net income of $360,000,000 to $410,000,000 diluted EPS of $2.45 to $2.85 and adjusted EBITDA including unconsolidated joint ventures of $840,000,000 to $910,000,000 Using the midpoint of this EBITDA range implies growth of about 20% or about $150,000,000 versus the prior year.

Speaker 3

We expect the earnings increase will be driven primarily by sales growth and gross margin expansion. Favorable price mix and productivity savings should more than offset input, manufacturing and transportation inflation, as well as the cost inefficiencies and potato crop challenges that pressured our results last year. During the first half of fiscal twenty twenty three, we expect our gross margin to improve versus the first half of fiscal twenty twenty two, but will continue to be pressured as compared to our normalized seasonal rates. This reflects the implementation of our pricing actions lagging inflation, as well as the impact of higher raw potato costs on a per pound basis due to the poor crop that we harvested last fall. We also expect our gross margins will be pressured by ongoing industry wide labor and logistics challenges.

Speaker 3

During the second half of fiscal twenty twenty three, we expect our gross margin will approach Our normalized annual rate of 25% to 26%, assuming 4 key factors. First, an average fall 2022 potato crop. As Tom noted, at this time, we believe the crop in our 2nd, the continued successful implementation of our pricing actions to offset input and transportation cost inflation. As our recent results have shown, we've been able to successfully increase price across our portfolio. 3rd, the continued easing of labor pressures that have affected our production run rates and throughput.

Speaker 3

While factory labor availability remains challenging, we feel good about the actions that we've put in place to attract and retain production workers. And finally, the continued easing of logistics pressures that have constrained our shipments, especially our exports. The availability of domestic rail and trucking assets has improved in the past few months, along with access to shipping containers. However, we're closely monitoring the recent expiration of the West Coast Dock Workers Union contract and what impact, if any, may have on our exports. We're projecting the strong increase in sales and gross Profit will be partially offset by higher SG and A expenses.

Speaker 3

We're targeting total SG and A expenses at $475,000,000 to $500,000,000 which is about $100,000,000 higher than fiscal 2022 using the midpoint of that range. The increase largely reflects higher compensation and benefit costs as we adjust our compensation packages to reflect a very competitive environment to attract and retain talent. Additional headcount, recruiting, training, travel and meetings expenses as we look to fill open positions to support growth over the long term and continue to emerge from pandemic related restrictions. Higher spending to build and test our new ERP system In addition to other IT infrastructure upgrades, higher A and P expenses predominantly in support of our retail segment, And finally, overall inflation for 3rd party services. We expect equity earnings to be 25 to $30,000,000 which is up from about $16,000,000 in fiscal 20 $1,000,000 of mark to market commodity and currency contract gains, as well as the impairment charge and about $10,000,000 of earnings from the Russia joint venture.

Speaker 3

In addition to our operating targets, We expect total interest expense of around $115,000,000 an effective tax rate of approximately 24%, Total depreciation and amortization expense of approximately $210,000,000 and capital expenditures of 4.75 to $525,000,000 which includes about $285,000,000 for the construction of our capacity expansions in Idaho and China as well as capital associated with our new ERP system and other IT upgrades. Finally, as Tom noted, we recently acquired a controlling interest in our joint venture in Argentina for $42,000,000 and will now consolidate the results. We do not expect the joint venture to have a material contribution to either sales or earnings growth this year. So looking at our fiscal 2023 outlook at a high level, we're targeting sales of $4,700,000,000 to $4,800,000,000 largely driven by price mix. And we're targeting adjusted EBITDA, including unconsolidated joint ventures of $840,000,000 to $910,000,000 largely driven by strong sales growth as well as gross margins that approach a normalized annual run rate of 25% to 26% during the second half of the fiscal year.

Speaker 3

Now, here's Tom for some closing comments.

Speaker 2

Thanks Bernadette. Let Quickly sum it up by saying we delivered solid results in fiscal 2022 by focusing on what we can control and have built good operating momentum as we enter a new year. We've taken a prudent approach to our fiscal 2023 targets as we expect the operating and demand environment to remain highly challenging, And we're confident in the long term prospects of the category and remain committed to executing on our strategies and investing in our global network to support 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.

Operator

And we'll pause for just a moment. And we'll take our first question from Peter Galbo with Bank of America.

Speaker 4

Hey guys, good morning.

Speaker 5

Thank you for taking the questions.

Speaker 2

Good morning, Peter. Good morning, Peter.

Speaker 5

Tom, I just wanted to maybe unpack your comments around volumes for the year and kind of what you're expecting. I think in the press release, it does talk about positive volume growth marrying that against your comments about maybe a little bit of slowing demand, just how you're thinking about The ability for volumes to grow throughout the year, maybe that means you have more potatoes given a better crop or how we should think And then just the cadence of volume growth throughout the year as well would be helpful.

Speaker 2

Yes. So Peter, the indicator is restaurant traffic And we keep a close eye on that. It's in terms of QSR traffic looks relatively healthy. As we've seen in the past few months, the casual dining Traffic has slowed down a bit, and we'll keep a close eye on that. Retail Volumes continue to be pretty resilient.

Speaker 2

So it's not a matter of Potatoes to support the volume, it really comes down to restaurant traffic. And you guys see the syndicated data just like we do. So that's something we keep an eye on really close, but that's going to be a leading indicator of The volume for the year, I'm confident. As I think about the next year, Certainly, there is concern about the economy, but the French fry category, Even though even if we get into a situation where there's some economic slowdown, over time and Historically, as we mentioned in our prepared remarks, there may be some switching from casual dining to QSR, but the overall category, I'm confident we'll continue to grow.

Speaker 5

Helpful. And Bernadette, I just want to ask about the cadence of gross margins for the year. So understanding that The first half, you should still be up year over year, maybe down versus your historical levels. But I guess, Why would the first half gross margins, if at all, kind of step back versus the 4th quarter? I think historically, 1st quarter and 4th quarter gross margins tend to be relatively similar.

Speaker 5

2Q tends to be kind of 1 100 basis points versus the Q1. So just help us kind of understand the first half as we then think about approaching the second half at a more normalized rate?

Speaker 3

Yes. Thanks, Peter. 1st quarter is typically our lowest margin quarter for the Higher year, we saw that last year as well. And we will be processing or recognizing the costs associated with the potatoes that we Harvested or excuse me, that we processed in the 4th quarter, which are those higher costs and we'll continue to recognize those higher costs throughout the first Half of the year, until we work through this old crop. Then as we start harvesting and Recognizing some of the costs, higher costs associated with this year's crop, we're not going to see much Of a change there in terms of the cost of our potatoes, just given as Tom previously announced, we did have a 20% increase in The cost of that crop this year.

Speaker 3

However, we expect greater yield and other things that's

Operator

We'll now take our next question from Tom Palmer with JPMorgan.

Speaker 4

Hi, and thanks for the question. Maybe just kick off on following up on this cost inflation. I guess quite simply, you've got a lot of moving parts with, especially the crop rolling over Into the new one, which has the big step up in pricing. If we think about that double digit rate of inflation that you discussed throughout this year, How does that change as we look towards next year? And is there a shift from

Speaker 5

quarter to quarter where maybe one period

Speaker 4

is more onerous than another? Yes. So, Tom,

Speaker 2

Yes. So Tom, this is Tom Werner. Here is the way to think about it. Our guidance takes into account the potato cost inflation, all of our input cost inflation, obviously. And as we think about our pricing strategy And the timing of pricing that gets to the market, there is a lag.

Speaker 2

There's been a lag in the global business unit, as I commented It's going to be building over the course This fiscal year in terms of regaining our margin structure to pre pandemic levels. So there's a lot of noise and you're absolutely right. We've got the old crop we're working through as Bernadette just said. So we have a higher cost Crop, we're processing right now. We have inflationary in the inputs for this next year.

Speaker 2

So it's going to be a build, as I've said for the past year. I'm confident where the commercial team has done a tremendous job Getting to the market and executing our pricing strategies, so it's going to take till the back half of next year that we're going to get back to our Pre pandemic normalized margin levels and we're going to build and we will be approaching those levels as we get through the back half of the year.

Speaker 4

Okay. Thank you. And I wanted to ask on the SG and A side, pretty big step up guided this year. I think you've highlighted a few areas, right? Some of it very ongoing in terms of labor just getting paid more effectively.

Speaker 4

But you've also called out investments In IT and in the ERP system. And it sounds like there's kind of 2 pieces, right? Maybe there's an ongoing piece to that once it's Fully rolled out, but there's also implementation costs that are rolling through the P and L. So to what extent is this stepped up cost space Here to stay versus might we actually see a little easing as we look toward future years and those investments aren't needed anymore?

Speaker 3

Yes. No, thanks Tom. As it relates to SG and A, we have stepped up our guidance there. It approximates about 10% of our sales, including advertising and promotion expenses. As we discussed, we're bringing that back more to levels That we had prior to the pandemic and then we do have these incremental ERP expenses that we are incurring.

Speaker 3

The piece that's going to be More here to stay is going to be as it relates to the compensation of benefits as I referred to in my prepared remarks that Have increased as we've looked to grow the team as well as attract the talent that are needed to continue to execute our strategies over the long term.

Speaker 4

Okay, thanks. So no quantification on maybe what might roll off in coming years?

Speaker 3

No quantification at this time. But Having said that, we're always looking for ways to become more efficient and we'll continue to do that.

Speaker 6

Great. Thank you.

Operator

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

Speaker 6

Yes. Thank you. Good morning, everyone.

Speaker 3

Good morning. Good morning.

Speaker 6

So I guess the first question is Thinking about the margins and you talk about getting back to that historical 25% to 26% rate or approaching it in the back half of the fiscal year. And I guess it would seem like, A, the composition of that is going to be different than history When we think about kind of the contribution in global relative to foodservice and retail, the contribution margins just between the different units and the mix looks Very different than it would have pre pandemic, based on kind of where you're exiting fiscal 2022. So and I guess With the amount of inflation that you're pricing for, it would seem like that would imply per pound margins are Going to be actually above pre pandemic levels by the end of the fiscal year if you hit those rates. And I guess I'd just love to hear you reflect on Kind of what would necessitate higher per pound unit margins over time in this space other than Just a greater mix of sales going into the broader foodservice retail channel versus larger QSR customers?

Speaker 2

Yes, Adam, I'll tell you to think about it this way. It's a pretty complex process. So we spend a maniacal amount of time focusing on our mix management right now and have been for the past 12 to 15 months. There is obviously with all the challenges in supply chain and The run rates have changed in terms of our throughput efficiency. So we have to be very selective on our mix management and Making sure that we service our strategic customers, but that does give us opportunity to To think through the overall customer mix And we've done a terrific job of that, but it is a process.

Speaker 2

And Adam, there is again, When we execute our pricing actions, there is a lag through our P and L. So it does take some time to build that up. So we have commented that we have taken a number of pricing actions to even Trying just to catch up in a number of different areas of the company, but we'll start to see that build, But it does take some time. And again, I'm confident with our commercial teams, what they've been executing. The volume trends look solid, but it will be there will be some choppiness in the volume in between channels, but it's a process.

Speaker 2

And I'm again, It's going to be a build, but the back half of the year will get there.

Speaker 3

Yes. And Adam, I think it's just critical to recall that with our global contracts, About a third of those do come open each year. And so it's going to take time to Tom's point as we continue to negotiate those each year. And that's essentially what's driving some of that difference.

Speaker 6

Okay. And maybe if I could ask, if I look at fiscal 2022 and kind of whether it's kind of where you're exiting the year or just the full year, Where would you frame capacity utilization for your business Today, there's a lot of moving pieces in there between labor and potato crop and different parts of the year. I'm just trying to get a sense of how much Latent kind of volume growth exists in the existing footprint versus how much volume Can we kind of then layer in over the next couple of years when the China plant and the Idaho plant eventually come on?

Speaker 2

Yes, Adam, I'm not going to give you a Specific number on our current capacity utilization, it's below where we've been historically. I'll say that. But We've got the China plan will come on in mid-twenty 24. We Definitely have opportunities within our current capacity to improve our throughput and it is improving and we're continuing to work on that. We opened our Chopton form line, so that's given us some capacity on those products.

Speaker 2

But again, as we continue to staff up our plants, labor has improved sequentially over the past 6 months and that gives me confidence that as the market And the category continues to grow. We get our capacity, our plants running close to historical average, we'll be able to meet demand. And I'm again bullish on the category, always have been as everybody knows, and I'm investing behind it for What we see this category doing in the next 5 to 7 years with our investments in China, American Falls in Europe. So, we got to build and we got to get more efficient in our current capacity to meet demand and I'm confident we're going to do that. We have a plan.

Speaker 6

And if I could just squeeze one more one. In the quarter, 15% pricemix, And then you started invoicing for freight surcharges. How much was freight surcharges of the price mix?

Speaker 3

Yes, we're not breaking that out from our product price Increases.

Speaker 6

Okay. All right. Thank you very much.

Speaker 3

Thank you.

Operator

Our next question will come from Chris Growe with Stifel.

Speaker 7

Hi, good morning. Thank you.

Speaker 8

Good morning, Lucas. I just had

Speaker 7

a question for you. Hi. I had a question for you, a bit of a follow on to your commentary there on the global contracts. And just to make sure I'm understanding like your for the rate of pricing in those global contracts. And then is it do you see a point in fiscal 2023 Would the pricing in that division offsets the inflation or is it going to take longer to get the pricing through?

Speaker 2

Chris, this is Tom. Think of it in terms of this. We are, again, focused on pricing to get to pre pandemic margin levels, And we're having discussions with customers. It is a layering effect. So all contracts don't go into effect at the same time.

Speaker 2

So you won't see a full annualized price realization in some of our Global contracts because they may start in October or November or December or January. So there's going to be a lag still Just like we always have, that's been the case forever in this business. But On the other side, you get the carryover effect. So there is a lag. Again, this is why We've been really consistent to ensure that everybody understands that it's all about getting The discussions, the strategies in place and in the back half of fiscal 'twenty three, we'll start seeing The margin is approaching pre pandemic levels.

Speaker 7

Okay. And then in relation to the pricing coming through in the global division today, Is that mostly the escalators kicking in that you've built into some of these contracts?

Speaker 2

Yes. Yes, Chris. That's exactly right.

Speaker 7

Okay. And I had just one other question, which is in relation to the in a situation where, Say the yields from this year's potato crop are greater than average or better. How limited are you in producing that product? So if you have more supply, Can you grow volumes more once the crop comes in? Is there any still kind of ongoing limitation in which you can make, be it labor, Just general supply constraints today?

Speaker 2

Yes, Chris. So think of it in terms of this. We contract the majority of our forecasted volume needs every year. And we do have a percentage Open what we just call open just open potatoes that we'll go out of the market and buy depending upon How the category is growing, how the volume, what opportunities that may come our way. So we have Flexibility and as the crop as we start understanding how the yields, That's the demand and needs, then we'll make decisions in the open market to buy or not buy.

Speaker 2

And so it's and it's been a really good balance as long as I've been running this company and been in the business. So but it is fluid, but it's not a matter of Are you going to have enough potatoes to meet demand? We make those decisions early on in the harvest season If we need to go out in the open market and buy potatoes, just like we have every year. So I feel really good about How we're balanced, how the crops doing this year, but we're the next 6 months, we'll make those decisions or the next 6 weeks, we'll make those decisions On procuring potentially open potatoes in the market.

Speaker 7

And to be clear, if you have more potatoes And therefore, let's just say you had to buy less than the open market. I guess, I'm really more interested in your capacity. Are you able to make the product and sell the product If you can get more volume in the door, more supply in the door, sorry. Okay.

Speaker 2

Yes, Chris. Yes, I mean if we're we'll make our so If we have more potatoes because the yields are greater, then we'll make our standard Lamb Weston

Speaker 1

Okay. Thank you.

Speaker 2

But still now Chris, the other thing to remember is we're still Focused on improving our run rates.

Speaker 7

Okay. Thank you.

Speaker 2

Yes.

Operator

We'll now take our next question from William Reuter with Bank of America. Hi.

Speaker 8

I just have 2. The first is, is there any way to quantify what the impact of the poor potato crop was on your fiscal year 2022 EBITDA?

Speaker 3

Yes, we haven't quantified that impact to discuss outside, but It is in excess of what we experienced in 2014, the last time we had a poor crop, which It was about $30,000,000 that we disclosed at that time. We're continuing to work through this crop. As we said, we'll continue to recognize the impact of that through the first half of

Speaker 8

And share repurchases within I think your leverage target range is 3 to 4 times. I guess When you think about next year, how will you think about share repurchases? Should we assume that basically all free cash flow that will be generated We'll go towards some shareholder activities such as that?

Speaker 3

Yes. So as it relates to our buyback program, we've disclosed and discussed Previously that it's really in place to offset equity dilution. We've demonstrated though that we will be more aggressive if it makes But our plan is in place to offset equity dilution.

Speaker 8

Okay. And the target leverage range is 3 to 4. I do have that correct. Is that right?

Speaker 3

3.5 to 4 times. Okay.

Speaker 8

And is that net or gross?

Speaker 3

Net. That's net.

Speaker 8

Perfect. Okay. All right. Thank you very

Speaker 3

much. Thank you.

Operator

And it appears there are no further telephone questions. I'd like to turn the conference back over to Mr. Kong Belay for any additional or closing remarks.

Speaker 1

Thank you for joining us today. Any follow-up questions, Please e mail me. We can set up a time. And everybody have a good day. Thank you.

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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