LW

Lamb Weston Holdings, Inc.

85.98
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85.98
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Lamb Weston Holdings, Inc. (LW) Q1 2023 Earnings Call Transcript

Lamb Weston Holdings, Inc. (NYSE:LW) Q1 2023 Earnings Conference Call October 5, 2022 10:00 AM ET Company Participants Dexter Congbalay - VP, IR Tom Werner - President and CEO Conference Call Participants Chris Growe - Stifel Peter Galbo - Bank of America Tom Palmer - JPMorgan Rob Dickerson - Jefferies William Reuter - Bank of America Carla Casella - JPMorgan Operator Good day, and welcome to the Lamb Weston First Quarter Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Dexter Congbalay. Please go ahead. Dexter Congbalay Good morning and thank you for joining us for Lamb Weston's first quarter 2023 earnings call. This morning, we issued our earnings press release, which is available on our website lambweston.com. Please note that during our remarks, we'll make some forward-looking statements about the company's expected performance. These statements are based on how we see things today.Actual results may differ materially due to risks and uncertainties. Please refer to the cautionary statements and risk factors contained in our SEC filings for more details on our forward-looking statements. Some of today's remarks include non-GAAP financial measures. These non-GAAP financial measures should not be considered a replacement for and should be read together with our GAAP results.You can find the GAAP to non-GAAP reconciliations in our earnings release. With me today are Tom Werner, our President and Chief Executive Officer; and Bernadette Madarieta, our Chief Financial Officer. Tom will provide an overview of the current environment. Bernadette will then provide details on our first quarter results and our fiscal 2023 outlook. With that, let me now turn the call over to Tom. Tom Werner Thank you, Dexter. Good morning and thank you for joining our call today. We're pleased with our performance in the quarter.We drove strong sales growth, expanded our gross margin and nearly doubled adjusted EBITDA including unconsolidated joint ventures. Our results reflect our continued focused on implementing pricing actions to offset input and transportation cost inflation, driving productivity and cost saving initiatives,increasing service levels for our customers in each of our sales channels, and supporting our people and talent. We’ve built good operating momentum over the past few quarters by focusing on these near-term objectives. And we're confident in our ability to deliver the upper end of our sales and earning target ranges for the year. I'm especially proud thatLamb Weston team has continued to generate solid results in a very difficult macroeconomic environment. We expect this environment to remain challenging at least through fiscal 2023,as inflation, a growing threat of recession and industry-wide supply chain disruptions continue to pressure demand for friesas well as our cost structure. It's no surprise that inflationary trends for food, energy and housing have affected restaurant traffic in the U.S. over the past six months. We saw similar restaurant traffic trends during The Great Recession as the consumer discretionary income came under pressure. While traffic at quick-service restaurants has held up relatively well,it's come at the expense of casual dining and full-service restaurants as consumers increasingly choose less expensive options when dining away from home. In the past month or so, we've seen casual dining and full-service restaurant traffic tick up from summer lows, but traffic remains below levels achieved just prior to the war in Ukraine. Unlike traffic trends, fry demand continues to be solid when dining out.The fry attachment rate which is the rate at which consumers order fries when visiting a restaurant or other foodservice outlets remains above pre-pandemic levels. Fry demand in retail channels has also benefited as restaurant traffic slows. Overall, we expect volatility in restaurant traffic and demand trends will continue through fiscal 2023. But history has shown that this category is resilient during economic downturns. Although we may see some category weakness in the near-term, we remain confident in the long term growth prospects of the category in the U.S. and in our key international markets. In addition, as category growth returns to historical rates, we should be well positioned to capture at least our share of growth with our investments in new processing capacity in Idaho and China, as well as our newly announced expansion in Argentina. With respect to pricing, our overall price/mix growth accelerated for the fourth consecutive quarter. In our Foodservice and Retail segments, we continue to realize the carryover benefit of multiple product pricing actions that we have taken over the past 15 months and expect the benefit of these actions will continue to gradually build through the first half of fiscal 2023. In our Global segment, we made good progress in increasing price/mix through price escalators included in multiyear contracts, while also securing some price adjustments outside of these agreements. In addition, we nearly completed negotiation -- negotiating contract renewals that represent about 1/3 of our Global segment volume. Overall, we feel good about how the discussions played out and we'll generally begin to see the results of these new pricing structures during the second half of fiscal 2023. Finally, with respect to this year's potato crop. Our preliminary view is the potato crop in our growing regions in the aggregate will be around the lower end of historical average range. Specifically, the overall quality of the crop including shape, color, level of defects and solid content is good and consistent with historical averages. Yields, however, are below average. The unusually hot weather during August affected the growth of the potatoes and resulted in a greater than average proportion of potatoes failing to bulk up to the desired size. In response, we've already begun to secure the additional potatoes needed to meet our production forecast, and expect to purchase most of this from growers in the Columbia Basin and Idaho. That's in contrast to last year when we purchased potatoes at significant premiums to contracted prices and transported them from as far away as the East Coast. As you may recall, our financial targets for the year were predicated in part on an average potato crop. And we believe this crop is broadly consistent with our expectations. While below average yields will result in additional open market purchases at higher than contracted prices,we do not expect this to affect our ability to deliver our financial targets. To be clear, we view this crop as significantly better than last year's which was poor both in terms of yield and quality due to the prolonged extreme summer heat in the Pacific Northwest.We'll provide our final assessment of the crop, including how it performs out of storage when we report our second quarter results in early January. So in summary, we generated strong sales and earnings growth in the first quarter by executing pricing actions in each of our business segments and driving productivity savings. We expect restaurant traffic and fry demand will be volatile in the near-term, as consumers continue to adjust to the inflationary environment.And on a preliminary basis, we believe that potato crops in our growing regions are at the lower end of historical average range, and that any effect on our operations or financial performance will be manageable. Let me now turn the call over to Bernadette to review the details of our first quarter results and our progress towards our fiscal 2023 financial commitments. Bernadette Madarieta Thanks, Tom, and good morning, everyone. As Tom said, we're pleased with our performance in the quarter, and we are confident in our ability to deliver at the high end of our financial target ranges for the year. In the quarter, our sales grew 14% to more than $1.1 billion. Price/mix was up 19% as we continued to benefit from product and freight pricing actions that we announced last fiscal yearand as we began to execute new pricing actions during the fiscal for the first quarter. Our sales volumes were down 5%, primarily reflecting the softer restaurant traffic trends in U.S. casual dining and full-service outlets that Tom described earlier, as well as the timing of shipments to large chain restaurant customers. In Retail, while branded product volumes were up,overall Retail segment volumes were down with the ongoing effect of losing certain low margin private label business. Sales volumes in Foodservice and Retail also continued to be affected by our inability to fully serve customer demand as a result of constrained production at our facilities. Gross profit increased $122 million to $273 million in the quarter. Gross margin expanded nearly 900 basis points versus the prior year quarter, and 230 basis points sequentially to more than 24%. Pricing actions and productivity savings drove these improvements, more than offsetting the impact of higher costs on a per pound basis and lower sales volumes. Cost per pound increased high-single-digits with inflation, again, accounting for essentially all of the increase. Higher prices for inputs such as edible oils, ingredients for batter and other coatings, labor and transportation were the primary drivers. Potato costs were also up as a result of the poor cropthat was harvested last fall. We'll continue to realize the financial impact of this crop through most of the second quarter of fiscal 2023 as we sell the final finished goods produced from the crop. 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. Benefits from our portfolio simplification, and other cost mitigation efforts, however, offset some of these higher costs. Moving on from cost of sales, our SG&A increased $25 million to $116 million, largely due to higher compensation and benefits expense and expenses related to improving our IT infrastructure, including designing a new ERP system. Equity method earnings from unconsolidated joint ventures in Europe and the U.S. increased nearly $170 million. More than $140 million of the increase was related to the change in unrealized gains for mark-to-market adjustments related to changes in natural gas and electricity derivatives, as commodity markets in Europe have experienced significant volatility. Another $15 million of the increase relates to a gain recognized in connection with us acquiring an additional 40% interest in our joint venture in Argentina. Excluding these comparability items as well as other mark-to-market adjustments not associated with natural gas and electricity derivatives, equity earnings increased $13 million. This largely reflects improved results in our joint venture in Europe. In addition, in September, our European joint venture withdrew from its joint venture in Russia after receiving all regulatory approvals. In the prior year quarter, earnings from the Russia joint venture were not material. So putting it all together, adjusted EBITDA, including unconsolidated joint ventures nearly doubled to $228 million,while adjusted diluted earnings per share more than tripled to $0.75 per share. Strong sales growth and gross margin expansion primarily drove the increases. Moving on to our segments.Sales in our Global segment were up 12% in the quarter, price/mix was up 14% reflecting domestic and international pricing actions associated with customer contract renewals, inflation driven price escalators and higher prices charged for freight. Mix was also positive. Overall segment volumes declined 2% as North American volumes fell primarily due to the timing of shipments to large QSR chain customers, including the effect of lapping a notable limited time product offering in the prior year quarter. Global's product contribution margin, which is gross profit less advertising and promotion expenses, nearly doubled to $84 million. Favorable price/mix more than offset the impact of higher manufacturing and distribution cost per pound. Sales in our Foodservice segment grew 14%, price/mix increased 26% as we continue to drive product and freight pricing actions that we announced throughout fiscal 2022 and earlier in the quarter to counter inflation. Sales volumes decreased 12% as casual dining and full-service restaurant traffic softened. While traffic trends progressively softened each month since the war in Ukraine began at the end of February,it began to tick upward in August. Sales volumes were also affected by the timing of incremental losses of certain low margin non-commercial business, as well as our inability to fully serve demand as a result of constrained production.Foodservice's product contribution margin rose more than 40% to $138 million as favorable price more than offset higher manufacturing and distribution cost per pound and the impact of lower volumes. In our Retail segment, sales increased 28%, price/mix was up 32% reflecting pricing actions across our branded and private label portfolios, as well as favorable mix with the sale of more branded products.Volume was down 4% reflecting incremental losses of certain lower margin private label products.We will be lapping the last of that lost private label business in the second quarter. Sales volumes were also tempered by our inability to fully serve customer demand due to the constrained production. Retail's product contribution margin more than tripled to $49 million behind pricing actions and favorable mix. This was partially offset by higher manufacturing and distribution cost per pound. Moving to our liquidity position and cash flow.We ended the quarter with $485 million of cash and a $1 billion undrawn revolver. While our net debt remained relatively flat at about $2.25 billion, our leverage ratio fell to 2.7x from 3.1x at the end of the fiscal 2022 as earnings grew. We generated more than $190 million of cash from operations, which is up about $30 million versus the prior year quarter, largely due to higher earnings. Capital expenditures were about $120 million, that's up about $40 million as we continue to construct new French fry lines in Idaho and China. In addition, we paid about $42 million to acquire the additional 40% interest in our joint venture in Argentina. We now own 90% of that joint venture. We returned $64 million of cash to our shareholders in the form of dividends and share repurchases and have about $240 million of authorization remaining under our share repurchase program. Turning to our fiscal 2023 outlook, our financial targets for the year remain unchanged as we continue to build our operating momentum. While the macro environment remains volatile, we're on track to deliver at the high end of our sales target of $4.7 billion to $4.8 billion with price driving the growth. We'll continue to realize the carryover benefit of product pricing actions in our Foodservice and Retail segments. And in our Global segment, we expect to see the benefit of pricing actions, including pricing structures for contract renewals build as the year progresses. Forecasting volume continues to remain more difficult due to the near-term volatility in restaurant traffic and demand. As we saw in the first quarter, we believe that consumer behavior during inflationary or recessionary times will continue to affect overall demand, as well as our sales channel and product mix, with QSRs and retail outlets benefiting at the expense of casual dining, and full-service restaurants. In addition, we expect our sales volumes will be affected by near-term production and throughput constraints as we continue to face disruptions in the availability of key product inputs and spare parts. Additionally, while labor and access to shipping containers have improved, we continue to see the impact of shortages. We're on track to deliver at the high-end of the range of our earnings targets, including adjusted net income of $360 million to $410 million,adjusted diluted earnings per share of $2.45 to $2.85 and adjusted EBITDA including unconsolidated joint ventures of $840 million to $910 million. These targets exclude the items impacting comparability that I described earlier. We expect our earnings increase will be driven primarily by sales growth and gross margin expansion. We continue to expect gross margins during the second half of fiscal '23 that approach our normalized annual rate of 25% to 26% and we feel good about the four key factors underlying this target. First, as Tom noted, we believe that potato crops in our primary growing regions will be at the lower end of the historical average range, and that any effect on our operations and financial performance will be manageable. Second, we're pleased with the continued progress in implementing pricing actions to counter cost inflation. Third, we're making steady progress in adding production workers in order to ease labor pressures in our factories. And finally, the availability of domestic rail and trucking assets as well as access to shipping containers continues to improve. While abroad rail strike has likely been averted, we continue to closely monitor the status of discussions with the West Coast dockworkers' union and the impact of potential work slowdown or stoppage may have on our exports. We continue to target SG&A expenses of $475 million to $500 million, which reflects higher compensation and benefits expenses to attract and retain talent, higher spending for our new ERP system and other IT infrastructure upgrades, higher advertising and promotion expenses as we look to return support back to historical levels, and overall inflation for third-party services. We continue to expect equity earnings of $25 million to $30 million, excluding items impacting comparability, but also expect increased volatility given the likelihood of a poor crop in Europe, as well as possible limitations on natural gas usage that may affect our production. In addition, we believe that the severe inflation outlook for Europe will likely translate into more pressure on restaurant traffic and demand. Our estimates for our other financial targets are unchanged, including capital expenditures of $475 million to $525 million, excluding acquisitions;interest expense of approximately $115 million; depreciation and amortization expense of about $210 million; and an effective tax rate, excluding items impacting comparability, of about 24%. Now, here's Tom for some closing comments. Tom Werner Thanks, Bernadette. Let me quickly sum up by saying we are managing well through this challenging environment and continue to build good operating momentum. We're well positioned to deliver at the upper end of our financial target ranges for the year, and we're making the necessary investments in our production capacity, and operating infrastructure to support long-term growth and create value for our shareholders. Thank you for joining us today and now we're ready to take your questions. Question-and-Answer Session Operator [Operator Instructions] Our first question will come from Chris Growe with Stifel. Chris Growe I just had a quick question for you.And, obviously, a very strong first quarter performance.Congratulations on that. Obviously, you are looking more towards the higher end of your guidance now for the year. With a strong first quarter and this recovery in the gross margin, it would seem like you could see even stronger EBITDA performance, I realize it's early in the year. But I just want to get a sense of items, maybe like in SG&A, if there's investments you can make there or perhaps even in -- as you start to kind of rebuild your production with better labor and availability now, if there's some items like that we should keep in mind as we move through the year that could put a bit of a limit on the EBITDA performance? Tom Werner Yes, Chris. It’s Tom. I'll just reiterate, we're off to a terrific start this fiscal year. And our focus -- you think about a year ago, our focus has been rebuilding our margin structure back to pre-pandemic levels.That's the focus of the team and they've done a terrific job. And just in terms of SG&A and I'll let Bernadette add on to this, we have some elevated spenddue to the ERP, a lot of it.There's some wages, also, that has increased our SG&A based on the market conditions we have, but it's really about focusing on the mix margin management.That's what we've been focused on for the last year, when I started talking about it. Team has done a great job executing that.It’s -- the volumes are a little bit choppy right now. And I think that's going to continue for the balance of this fiscal year, just based on the economic environment we're all operating in,and as well as some of the supply chain issues we continue to experience within freight and containers, those kinds of things. So, it's early, we got to understand how the crop processes through the factories the next 60 days. And on that note, in Q2 we will reassess kind of how we're feeling about the year. Chris Growe And just a follow-up question on your gross margin. Obviously, it's a much stronger gross margin here in the first quarter than we expected and really more like your historical first quarter gross margin performance. I realize there's a lot going in the gross margin today from pricing and cost inflation and the old crop and all that. I just want to get a sense of the factors that are aiding the gross margin performance this quarter. And maybe along with that, just to get a sense of how much the supply chain challenges are still weighing on the gross margin? Tom Werner Yes. Chris, the main factor, if you think about a year ago, we were at 15 margin.And so, it's really focused on pricing through inflation. We have absorbed a tremendous amount of cost inflation in this business, just like everybody else has in the space. So it's really driving pricing to offset inflation and we're making obviously great progress against that. We have a lot more to do. It's still from an input coststandpoint, we're going to see more inflation coming at us in the future.So we're adjusting our pricing architecture to offset that as much as we can and we believe we will. So that's kind of -- that's the driver, Chris. Bernadette Madarieta Yes. And we are making steady progress as we add production workers, based on some of the actions that we've taken to attract and retain employees, while there’s still those labor shortages. We are seeing the impact of that, and some of the changes we've made to shift schedules and other things. Just getting back to your run rates and throughput question. Tom Werner Yes, and just one of the one of the big challenges we still have is container issues for our international business, Chris. And it’s -- while it's getting better, it's still hindering our ability to ship to some of our international markets in a pretty significant way which is impacting the overall volume in our Global business unit. The team is working through it as best we can. But it's still challenging from a container standpoint on the West Coast. Operator Our next question comes from Peter Galbo with Bank of America. Peter Galbo Tom, I just wanted to ask actually, like a more of a technical question, I guess, around the 2022 potato crop. Realizing that the yields are down and maybe the sizing is down a bit but with the quality being good,can you just, I guess educate us a little bit more on why the quality being above average or very good kind of helps pull up maybe a down yield year, what that does for you from a manufacturing standpoint? Tom Werner Yes.So, the way to think about it is the quality of the potato as we're manufacturing it, or running it through the factories, it will provide good solids and good color,and the length is fine, which last year, we had all kinds of issues with the crop. So, set that aside, so quality is good, you're going to be able to -- the finish product is going to be more normalized I’ll say. The yield impact is literally -- there's just less potatoes on the plant as it grows than what we historically have. So it's just -- you just have less potatoes per acre. And so we're -- I feel great about our ability to procure open potatoes, as we have every year.We do it every year. So while it's not at historical levels, like we said on the call, we will manage through it.We have a great ag team that will help us manage through it and procure the potatoes and we'll be able to deliver our customers the product they need. Bernadette Madarieta Yes, and Tom, if I add on to that. In terms of the quality component being better this year where it was worse last year, last year that lower quality really resulted in lower potato utilization. So it required more potatoes to produce the same amount of finished goods. And we're not going to have that issue this year with a better crop in terms of quality. And then potato quality also affects line speed times in our plants. Again, we won't have that issue this year with a better quality crop. Peter Galbo Got it. That was going to be my follow-up, so thanks for that Bernadette. And then maybe just as a second question, more of a technical question for modeling purposes. Just can you quantify at all that the shipment timing impact on QSRs in the first quarter? Does that shift to the second quarter at all? And then just again, seasonally, I think historically gross margins tick up from 1Q to 2Q in a normal year.Should we expect some of that normal sequential acceleration into the second quarter? Bernadette Madarieta Yes. As it relates to our gross margin, we'll continue to see the normal seasonality. And then as it relates to the first question and the impact to the QSR,we don't give certain guidance as to relate to specifics, but essentially, that will flow through in the second quarter in terms of timing just given the delay in shipments. Operator And our next question comes from Tom Palmer with JP Morgan. Tom Palmer I wanted to ask on COGS inflation expectations. Sounds like based on Bernadette's prepared remarks that maybe it decelerated just a little bit in the first quarter is the assumption that as the year progresses,you see the rate of inflation ease a little bit? Just wondering what's kind of embedded in that? Bernadette Madarieta Yes. So we did end the quarter with high-single-digit cost inflation, including transportation. But then we also had some of the increased costs related to inefficiencies for run rates. So those were the two pieces. As it relates to inflation though going forward,although they've come off their recent highs, they still do remain well elevated compared with pre-pandemic levels. And then it also will be impacted going forward by the timing of when some of our hedges drop off for some of our natural gas. Tom Palmer And then just maybe get a quick recap of pricing actions at this point. You cited list price increases that flowed through during the first quarter. So I guess presumably, though, there'll be carryover in the second quarter. From a list price standpoint, is there anything beyond that at this point, or is kind of a next step up, as we move into the New Year and Global contracts are adjusted? Tom Werner So the big thing, Tom is our Global contract negotiations are kind of wrapping up for this next fiscal year. Most of those will start falling through in the back half. And as I said in the remarks, we feel good about where all those ended up. So we'll start seeing realizing those in the back half. In terms of the other segments, we've been ahead of the curve in terms of the pricing to offset inflation. And we, as we always do, we'll continue to evaluate based on what we're seeing on our cost structure, evaluating when we go to market and change prices going forward in the Retail and Foodservice segment. Bernadette Madarieta That's right. And then the last pricing crease that we announced in Foodservice, Retail in July, you'll begin to see more benefit of that in Q2, Q3. Tom Werner You might start to see a little bit of slowdown in transport,though, to say. You have that. So remember, you've been talking about product pricing here. But transport will start to come off a little bit, just as the cost of transport goes down as most people on the call know that we try to make that as a pass-through as possible. It's -- over time, it tends to be gross profit neutral, but it will be a little bit more volatility on the top-line because of that. Operator And our next question will come from Rob Dickerson with Jefferies. Rob Dickerson Maybe just got a follow-up on the gross margin in the back half.Q1gross margin was obviously pretty impressive… Tom Werner Hey, Rob, you're breaking up a little bit. Rob Dickerson Yes. I'm sorry. Yes, sorry. I was just saying, gross margin in the first quarter was obviously impressive, not that far from expectations in the back half. And it sounds like contract negotiations this summer in Global going well. So I guess, as we think kind of just to that Q3 time period with some of the incremental pricing coming through, Tom, what would you consider some of the drivers that might get you at the high-end of that gross margin guide in the back half, maybe some of the drivers to get you to the lower half or to the lower end? It sounds likeit’s kind of more of the demand side relative to maybe volatility on cost or pricing or anything around the crop. Thanks. Tom Werner Yes. Rob, the -- as we've been very consistent, I feel good about where our gross margins are going to progress towards our historical averages in the back half, pre-pandemic. So that's what our focus is on. And we're off to making good progress against that, obviously. And so I feel confident about us returning back to normalized levels. And so I'm not going to talk about high-end, low-end, all those kinds of things, Rob, I just -- it's about making progress. And we're doing that as an organization and the team is executing against that. Rob Dickerson Got it, fair enough. And then just quickly, Tom, I know you said early on in the call,it sounds like you've been able to secure incremental supply, just given a little, the lower yield on the crop. At this point kind of given where you stand,is it fair to say that you have plenty of supply, right, you have plenty of potatoes?As you kind of get through the fiscal year, this shouldn't be like an issue, or sitting here in March or April such that the markets all out trying to fight for potatoes in the open market?And that's it. Thanks. Tom Werner Yes. Rob, I feel great.We have great partner growers. We work in tandem with them on our needs and we got a great ag team that has tremendous relationships with our growers. So feel confident that we'll be able to execute against our production plan and sales plan for the year and we have some things we can do to adjust new crop, old crop.So I feel good about where we're positioned going forward. Operator And our next question will come from Adam Samuelson with Goldman Sachs. Unidentified Analyst It’s actually [Gary Moore] stepping in for Adam. I was wondering if you could help us understand a little bit better your underlying assumptions as it relates to your guidance you reaffirm it. Now that we have three more months, has anything changed in terms of your underlying price/mix assumptions or volumes? Bernadette Madarieta Yes, I think that, no. There's four key factors that we've alluded to in our prepared remarks as it relates to our guidance that we've been watching and that's crop, pricing, our run rates and then logistics.And we feel good about where we're at on all of those.And therefore, we will be at the higher end of the range of our earnings targets that we have outlined. So feel good about all four of those factors. Unidentified Analyst That's helpful. Thank you. And as a follow-up, as it relates to your investment in Argentina,how does it benchmark in terms of profitability versus the rest of the portfolio? Tom Werner Well, this is Tom. It's right in line with our long-term strategic growth plans.It gives us in-country production capabilities,alongside of our -- we have a joint venture down there. And it's gives us a footprint in the South America market, which is a huge market and we're under-indexed in terms of share, so -- and it's super cost competitive. So I feel good about our investment. It's right along with our strategic long-term plan that we've been executing against for the past six years. And I'm excited about it. And it's going to give us a tremendous competitive advantage in that market down there going forward. Bernadette Madarieta Yes. And we expect that the return on that expansion to be attractive and in line with our other expansions. Operator William Reuter I just have two. The first is, with the second year of below average crop yields,has there been any change in the amount of area or land that is being dedicated to the production of potatoes? I'm wondering whether there could be long term implications if some of the growers aren't making as much money as they historically did? Tom Werner No, I mean -- this is Tom. The acres fluctuate a bit, nothing major. So the acres around our growing areas have been pretty consistent over time. There is some change, but it's really not -- has not been material as long as I've been around this business. William Reuter Great to hear.And then kind of on a related topic, there is some trade press that suggests that some of your contract negotiations in the Columbia Basin are already complete for calendar year '23. Is there anything you can provide there in terms of color? Tom Werner Yes. No, we won't provide any color on thatthe next couple of calls as some of those things finalize.As we always do,we'll communicate that on one of these calls in the near future once everything is done. Operator Carla Casella I'm wondering, you've been making a lot -- you've been spending a lot of your investing on additional capacity. Can you talk about your whether your view towards M&A or further JV investments may change as those facilities are done? Or is that not inhibiting any of your M&A, JV investment opportunities? Tom Werner It’s Tom. The -- strategically, our investment in expanding capacity has been very consistent. As we see the category growth and we think about the next really two, three, four, five, seven years, as the category continues to grow even at low-single-digits,it's a big growth number in terms of overall volume. So overtime, we're going to continue to invest in the business and invest in the growth of the category. In terms of M&A, I've been very consistent since I've been sitting in this chair that we are as active as we can be in pursuing M&A actions. But the timing of those are always hard to predict. But it is absolutely going forward part of our growth strategic plan, organic capacity, investment and potential M&A as those opportunities present themselves. Carla Casella Okay, great. And then can you -- did you -- I might have missed it. Did you give a leverage target? Bernadette Madarieta Yes, so our leverage target remains the same at 3.5x to 4x. Certainly, we're considerably below that right now. But we maintain that strong balance sheet during these periods of economic volatility, and it preserves optionality for M&A. Carla Casella That's great. And then just one last one on hedging. Can you just talk about what you can and are hedging and if your view or policies are changing there just in light of the current environment? Bernadette Madarieta Yes, just high-level we do hedge our natural gas and oil that's used in processing our potatoes. Our policies have not changed. We've always had a risk oversight committee that has monitored the markets and we've entered into those contracts as we've seen appropriate. Carla Casella Have you said how much you’re hedgedin for the year? Bernadette Madarieta We haven't disclosed that. Operator Thank you. And that does conclude the question-and-answer session. I'll now turn the conference back over to Mr. Congbalay for any additional or closing remarks. Dexter Congbalay Thanks for joining us today. If you want to set up a follow-up call, please email me and we can set up a time to either today or in the following days. Thanks again for joining and I'll talk to you later. Bye. Operator Thank you. That does conclude today's conference. We do thank you for your participation. Have an excellent day. Comment

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