藍威斯頓 (LW) 2018 Q2 法說會逐字稿

Good day, everyone, and welcome to the Lamb Weston Second Quarter Earnings. Today's conference is being recorded. And at this time, I would like to turn the conference over to Dexter Congbalay, Vice President Investor Relations of Lamb Weston. Please go ahead, sir.

Good morning, and thank you for joining us for Lamb Weston's Second Quarter 2018 Earnings Call. This morning, we issued our earnings press release, which is available on our website, lambweston.com. Also, on our website is a brief presentation that we'll use on today's call. Please note that during our remarks, we'll make some forward-looking statements about the company's 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 filings with the SEC for more details on our forward-looking statements. In addition, some of today's prepared 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 Rob McNutt, our Chief Financial Officer. During this call, Tom will provide an overview of our overall performance as well as a summary of our strategic and capital allocation priorities. Rob will then provide the details on the second quarter results, our debt and cash flow and our updated fiscal 2018 outlook. Tom will wrap up with some closing remarks before opening up the call for questions. With that, let me now turn the call over to Tom.

Thank you, Dexter. Good morning, everyone, and thank you for joining us. I'm pleased to say that we delivered another solid quarter of sales and earnings growth, specifically, sales increased 4% driven by price/mix improvements, while volume declined slightly versus a tough prior year comparable as well as decisions we made to exit some lower-margin business. Adjusted EBITDA, including unconsolidated joint ventures, increased 12% to about $190 million. Our performance in the quarter reflects strong execution across the organization and our continued focus on delivering the right product at the right time, every time for our customers. For example, our global team completed customer contract negotiations and agreed on terms, which are in aggregate in line with our expectations. The Foodservice team grew volume across its customer base while continuing to improve pricing and mix. The retail team expanded distribution of Grown In Idaho-branded product, delivering nearly 60% ACV in supermarkets in just 6 months. And in Europe, our Lamb Weston/Meijer joint venture delivered another solid quarter behind disciplined pricing. The supply chain team started up our new 300 million pound french fries line in Richland, Washington, on time and on budget. We are now ramping up production on this state-of-the-art line and expect to have it operating near full capacity by the end of this fiscal year. The supply chain team has also had the opportunity to more fully assess this year's potato crop. We consider the overall quality and storeability to be in line with our planned expectations.

So with our solid first-half performance, the commercial and supply chain teams executing against our priorities, customer contract negotiations now behind us, the startup of our new french fries line on track, the potato crop quality and yield in line with our expectations and continued favorable operating conditions, we have clarity on our outlook for the remainder of the year. As a result, we are raising our outlook for full fiscal year 2018. We now expect sales to grow at a mid-single-digit rate and adjusted EBITDA, including unconsolidated joint ventures to be $780 million to $790 million. Rob will provide more details on our updated outlook later on the call. This strong execution by our commercial and supply chain teams is a continuation of the performance these teams have been delivering for a number of years, and has built a solid foundation for driving our strategic plan as an independent company. Last month, we reviewed our strategic plan with our Board of Directors, and we are fully aligned with the planned strategic priorities. I'd like to walk you through some of the plans highlights, beginning on Slide 5. Let me start with our vision and mission for the company, which has not changed since Investor Day. We aim to be the #1 global potato company by creating solutions that inspire and serve our customers and consumers with the food they love and trust. Today, we're #1 in North America and a strong #2 globally. But being #1 means more than just focusing on market share. It also means being preferred with our customers, preferred with our growers, preferred partners in innovation and perhaps most importantly, preferred with our employees.

As you can see on the next slide, we believe we can become the global leader by executing on 3 strategic priorities: accelerating category and customer growth; differentiating our global supply chain to drive growth; and investing for growth. These 3 strategies are what we have been executing over the past year. They are an evolution of what we presented a year ago at our Investor Day. After having completed an extensive market and customer segmentation analysis, we've chosen to increasingly focus on these strategies that will drive our capital and organizational investments going forward. Let me give you a quick overview of each. First, we are looking to accelerate growth of the frozen potato category by investing in and supporting specific customers, restaurant segments and markets as well as expanding our range of product offerings through innovation. In our global unit, that means continuing to focus on our traditional restaurant segments and customers, like Quick Service and fast casual, burger and chicken chains, while penetrating nontraditional frozen potato product outlets, such as convenience stores and coffeehouses. It also means continued focus on fast-growing markets like China and Southeast Asia, and continued support of our growing customers across North America and internationally. In our Foodservice segment, our strategy is to align resources to focus on the smaller Quick Service and fast-casual chains in North America as they continue to add units and expand geographically while continuing to support our distributor partners and independent restaurants. We'll also look to strengthen ties with other types of fast-growing outlets, such as entertainment venues and restaurants within grocery stores. In our Retail segment, we'll look to expand distribution and gain share by continuing to leverage our 3-tier strategy, offering premium Alexia-branded products, mainstream products through Grown In Idaho and licensed brands and private-label products.

Our second strategic priority is to differentiate our global supply chain to support growth and strengthen our competitive advantage as a low-cost producer. We'll continue to drive productivity and cost savings by leveraging our Lamb Weston operating culture of continuous improvement. You've already seen the benefits of this culture with our supply chain team's track record of stretching existing capacity to support volume growth, improve raw recovery rates and manage manufacturing cost to expand gross margins. In addition, we'll continue to build a true integrated end-to-end global supply chain, grounded in unified information systems and processes. This will further enhance production efficiencies and cost savings across North America and with our joint venture partners. And as we continue to invest in manufacturing assets outside North America, we will look to create a raw potato sourcing model in emerging growing regions that is similar to the one we built in the Pacific Northwest. This will enable us to have an ongoing supply of cost-advantage raw products that would meet the needs of our customers over the long term. Our third strategic priority is to continue to invest for growth. We believe that demand will continue to grow at an attractive rate for the foreseeable future. And industry capacity will continue to be challenged to keep up with that growth over the long term. Lamb Weston has consistently committed capital to increase capacity. In the past 5 years and including our recent announcement to expand our Hermiston facility, we will have invested more than $800 million to expand capacity. In addition, we've remained committed to our base capital program to reduce cost, stretch capacity and keep our factories well maintained so that we can operate them at high utilization rates, while maintaining our high standards for safety and quality. With these investments, we've been able to support our customers' growth and gain share. We'll continue to invest in new capacity as long as we see opportunities to grow and generate strong returns. We will also complement these investments by seeking acquisitions in regions where we may have an ability to accelerate our growth. These would generally be bolt-on transactions, which we can readily afford within our capital structure and will be in potato-related categories.

Let's take a deeper look at a specific example of our strategy of investor growth on Slide 7. A couple of weeks ago, we announced plans to invest $250 million to add 300 million pounds of french fries capacity at our Hermiston, Oregon facility by the end of fiscal 2019. The reasons we're doing this now are pretty straightforward. For the last couple of years, demand growth has been strong, while industry capacity in North America has been operating at unsustainably high levels of utilization. As a result, volume growth has been constrained and service levels have been challenged. These are some of the reasons why our competitors planned to expand capacity over the next few years. But as you can see on the chart on Slide 7, even with these additions, we anticipate that utilization levels will remain high through fiscal 2022. We anticipate that our capacity expansion in Hermiston will enable industry utilization levels to approach the mid-90s historical range in fiscal 2020. However, even with this additional capacity, we believe that demand growth would continue to keep utilization levels above the historical range, tampering any industry pricing pressure due to supply-demand dynamics. For Lamb Weston, specifically, the Hermiston expansion enables us to continue to support our customers' growth plans. It allows us to support increasing demand in North America as well as exports to Asia, where demand growth has been and is expected to remain strong. It will increase our investment in the community by adding 170 full-time positions and generate an attractive rate of return for our shareholders. I was at the Hermiston plant during the quarter, reviewing plans with the team. And I'm very confident that we'll execute this important project as well as we did with our expansion in Richland. This decision to invest in new capacity reflects our broader balanced capital allocation policy based on returns and executed with discipline. As you can see on Slide 8, our first priority has been and will continue to be investing to support growth of our customers in the frozen potato category.

As I mentioned a few minutes ago, we believe that the demand for frozen potato products will continue to grow at an attractive rate over the long term, both in North America and in international markets. As a result, we believe that there are number of opportunities to generate solid returns by investing strategically through both capacity expansion and acquisitions. After funding high return investments to support growth, we'll look to other opportunities to deploy cash. With respect to our balance sheet, we will continue to target a leverage range of 3.5 to 4x adjusted EBITDA. In the near term, we expect to be at or below the low end of that range, which will provide flexibility to pursue acquisitions. We expect to reduce our leverage through EBITDA growth rather than by significantly paying down debt. We will also return capital to shareholders. We recently increased our dividend to $0.765 on an annualized basis, or about 35% of our latest 12-month adjusted earnings per share. We expect to continue to pay a competitive dividend, and we'll target a payout ratio of 25% to 35% of adjusted EPS. While we currently do not have a share buyback program, we would consider one if we don't see sufficient high return capacity expansion or acquisition opportunities.

So as our second quarter and first half results show, we are performing well in a favorable operating environment. We have good visibility into how we see the rest of the year unfolding, and we have raised our annual outlook for sales growth and EBITDA accordingly. We also believe that we are well positioned to create shareholder value over the long term. We are a leader in a growing global category. We have advantage, scale and capabilities. We are focused on executing on a clear set of strategic priorities, and we take a balanced returns-based approach to capital allocation.

Now let me turn the call over to Rob to provide the details on our second quarter results and our updated outlook for the year.

Thanks, Tom. Good morning, everyone. As Tom noted, we delivered another strong quarter behind solid execution by our commercial and supply chain teams. Specifically, net sales grew 4% to $825 million. Price/mix was up 5% as we continue to benefit from pricing and mix improvement actions taken in fiscal 2017 as well as actions implemented in the first half of fiscal 2018. Volume declined 1% against a 4% increase in the prior year quarter as constrained capacity led us to balance incremental business opportunities, with maintaining high levels of service by exiting some lower-margin business. Clearly, our new Richland line will mitigate this issue considerably. For the first half, volume was up 1%. Gross profit increased $10 million or up 5% versus the prior year. Higher price mix and productivity drove that improvement. This more than offset the impact of commodity, manufacturing, transportation and warehouse cost inflation as well as about $3 million of additional cost related to the startup of our new production line in Richland. Gross margin expanded 20 basis points to 25.4% despite a nearly 40 basis point headwind from the Richland startup cost. SG&A expense in the second quarter, excluding items impacting comparability was $65 million. That's up about $1 million versus last year. Essentially, all of that increase was related to incremental costs associated with building capabilities to operate a stand-alone public company. Adjusted operating income in the quarter was up $9 million or 7% to $144 million. Solid sales and gross profit growth drove the increase. Equity method investment earnings from our unconsolidated joint ventures were $12 million, up from about $6 million last year. These amounts included an unrealized loss of $2.7 million in the current quarter related to mark-to-market adjustments associated with foreign currency hedging contracts and a $0.7 million gain in the prior year quarter. Excluding these mark-to-market adjustments, equity earnings increased about $9 million due to significantly lower potato cost and modest improvements in price mix in Europe.

In addition, our Minnesota-based Lamb Weston RDO joint venture continued to benefit from the favorable U.S. operating environment. So putting it all together, adjusted EBITDA, including the proportional EBITDA from our 2 unconsolidated joint ventures increased about $21 million or 12% to $190 million. Higher earnings in our base business drove more than 2/3 of the increase. Moving on to earnings per share. Adjusted diluted EPS declined $0.09 to $0.54. Operating gains essentially offset the impact of a higher effective tax rate. EPS decline is due to a $0.09 headwind from higher interest expense, resulting from the additional debt we took on in connection with our spinoff from ConAgra. Now let's take a quick look at the results for each of our business segments. Net sales for our Global segment were up 1% in the quarter. Price mix rose 3%, reflecting price increases as well as improvement in customer and product mix. Volume was down 2% as the global team walked away from some less profitable volume in order to support service levels. This decision was a direct result of our capacity constraints. The decline also reflects the tough compare of plus 5% in the prior year. Another part of the decline relates to lower shipments to some export markets. This includes Korea, where consumer traffic has been down due to unproven claims of food safety issues, none of which are related to our products. Importantly, we continue to have solid demand growth in North America, driven primarily by our strategic chain restaurant customers. Global's product contribution margin, which is gross profit, less advertising and promotional expense declined $4 million or about 4% in the quarter. The decline was essentially the result of higher depreciation expense and startup costs related to the new Richland line.

Similar to the first quarter, we anticipate that while improved price mix would offset our higher manufacturing cost on a dollar basis, it wouldn't be enough to hold our product contribution margin percentage. As a result, along with the Richland startup cost, global product contribution margin percentage declined about 120 basis points versus the prior year. As we mentioned last quarter, we expect global product contribution margin percentage will expand in the back half of fiscal 2018, as we implement new pricing structures associated with recently renewed contracts. Net sales for our Foodservice segment increased 9% in the quarter. Price mix increased 8%, reflecting the carryover impact of pricing actions taken in the latter half of fiscal 2017 as well as some pricing actions taken in the first half of this fiscal year.

We also continue to improve customer and product mix and volume was up a point, driven by broad-based growth across the segment's customer base. Foodservice's product contribution margin increased 15% as favorable price mix more than offset inflation and the Richland depreciation startup cost. As a result, product contribution margin percentage expanded by 180 basis points. Net sales for our Retail segment grew by 6%. Price mix increased 4% due to higher prices across our branded and private label portfolio. This was partially offset by increased trade spending in support of expanding distribution for Grown In Idaho. Volume was up 2%, primarily driven by the introduction of Grown In Idaho and growth of Alexia and other branded products. Despite the sales increase, retail product contribution margin declined about $1.5 million in the quarter and product contribution margin percentage declined 260 basis points. This was mainly due to higher trade and advertising support for Grown In Idaho. Finally, net sales in our other segment increased 6% due to improved price mix in our vegetable business. Product contribution margin was about $4 million versus a modest loss in the second quarter of fiscal 2017. The loss last year included about $2 million of expense related to the recall of some vegetable products that were produced by a third party. Switching to our balance sheet and cash flow, our total debt at the end of the quarter was about $2.5 billion, up about $50 million from the end of the first quarter. That's due to the seasonality of our working capital, which we financed with our revolving credit line. Our revolver balance tends to be highest in the second quarter, when we build raw potato and finished goods inventories during the whole fall harvest period and when we pay our growers. Our net debt-to-adjusted EBITDA ratio remained at 3.6x, which is inside our target range of 3.5 to 4. With respect to cash flow, we generated more than $180 million in cash from operations in the first half of the year, up $20 million versus the prior year period. It's important to note that operating cash flow improves in the back half of the year as we work down raw potato and finished goods inventories. For capital expenditures, we invested about $155 million in the first half, with much of this spent on our newly operational production line in Richland.

Let me now turn to our updated fiscal 2018 outlook. As Tom mentioned, we've raised our outlook for the year based on our solid first half performance in getting past some key operating milestones, including finishing customer contract negotiations, fully assessing the fall potato harvest and starting up our Richland production line. We feel good about how the year is progressing, and believe that we have good visibility on the operating environment and customer and consumer dynamics affecting the North American and global frozen potato category. This gives us confidence that we can deliver our higher sales and earnings targets for fiscal 2018. Specifically, for net sales, we're targeting a growth rate at a mid-single-digit level, up from our previous target of low to mid-single digits. We continue to anticipate price/mix improving in the back half of the year as new pricing structures for recently renewed contracts become effective, especially, in our Global segment. In addition, our new Richland line should begin to ease our capacity constraints. On a per-pound basis, we expect overall cost of potatoes to be in line with our previous guidance. However, we now expect nonpotato costs on a per-pound basis may increase a bit more than our initial low single-digit estimate. This is primarily due to higher transportation and warehousing costs. Nonetheless, we anticipate that our improvements in price mix, volume growth and productivity will more than offset cost inflation, resulting in gross margin expansion. Our view on SG&A is essentially unchanged. For the year, we expect SG&A to increase versus the pro forma 2017 baseline of $260 million due to higher advertising promotional expense in support of the rollout of Grown In Idaho products in retail as well as inflation. Putting this all together, we've increased our adjusted EBITDA, including joint ventures target to a range of $780 million to $790 million from the $740 million to $760 million target we provided at the beginning of the year. The midpoint of this higher range is a 13% increase versus the pro forma 2017 amount of $692 million. We continue to see interest expense in the range of $105 million to $110 million. That's up about $50 million from fiscal 2017 due to the full year impact of our post-spinoff capital structure. As you saw in our first half results, higher interest expense was a significant headwind to our earnings per share, but that headwind should ease beginning in the third quarter. With respect to taxes, our effective tax rate in the first half was about 33.5%. We're still evaluating the impact of the new tax legislation as it was only recently signed into law.

For now, I can say the following: first, we'll benefit from the U.S. federal corporate tax being reduced from 35% to 21%. However, we haven't completed our estimate of the law's impact on our effective tax rate for the second half or the blended effective tax rate for the full year. Second, based on our preliminary analysis of the new law, we estimate our long-term effective tax rate, including foreign and state taxes, will be in the mid-20s. As a primarily U.S.-based exporter, this helps level the playing field and improves our competitive position, vis-à-vis other historically low jurisdiction competitors -- low tax jurisdiction competitors. And third, we'll recognize onetime discrete tax impacts when we report our third quarter earnings. These include a noncash benefit from remeasuring our U.S. net deferred tax liabilities on our balance sheet at a lower tax rate. This will be partially offset by taxes on historical unremitted foreign earnings with the cash impact spread over the next 8 years. We'll provide a more definitive view of the impact of the new tax law after we examine it in its entirety. And finally, we've raised our estimate for capital expenditures for the year to $250 million from the $225 million. The $25 million increase in our CapEx target reflects early spending on our new production line at our Hermiston, Oregon facility. We'll spend the remaining $225 million associated with this investment in fiscal 2019. Now let me turn the call back over to Tom for some closing comments.

Thanks, Rob. As you can see, we are executing well across the organization. We delivered solid first half results, started up our new production line and have good visibility into how the rest of the year will play out. As a result, we're confident in our ability to deliver the higher sales and EBITDA targets in our updated outlook. We will continue to execute on our 3 strategic priorities; focusing on specific customers, restaurant segments and geographies as well as expanding our range of product offerings through innovation, differentiating our global supply chain to strengthen our competitive advantage as a low-cost producer and investing in additional capacity and acquisition opportunities to support growth. We are well positioned to serve and grow with our customers, generate solid returns and create value for all our stakeholders over the long term. I want to thank you for your interest in Lamb Weston. And we're now happy to take your questions.

(Operator Instructions) And we'll take our first question from Bryan Spillane with Bank of America.

So I had a question just back to Slide 7. And I think on that slide, in the footnote, you talk about off of a 12.7 billion pound base, that you expect the growth rate for North America in exports to be between 2% and 2.3% between, I guess, '17 and '22. Can you remind us how that forecast range compares to, I guess, what you were thinking or what you were communicating back at the Investor Day last year? Because if I remember it right, at least the North American growth rate was about 0.5%. So could you give us some context in terms of just how that's changed versus what your original expectations were when you first talked to The Street?

Right, Bryan. This is Tom. We've increased our outlook, on what we think the overall category is going to grow based on really the last 12 to 18 months in North America, specifically. Our estimates are, the category has been growing between 1.5% to 2.5%, and we expect that to continue. As you think through -- the big driver of that is the QSR space. And as that continues to improve in traffic, we expect the growth in North America to be in the 2% range. And globally, we're forecasting around 2% to 2.5% over the next 4, 5 years.

Okay. And then, I guess, if we're looking at a -- that forecast being revised higher and then connected back to the long-term growth rate of mid- to high single-digit EBITDA growth and high single-digit EPS growth, can you just talk to -- with, I guess, the sales outlook higher for the industry, how that might impact you versus your long-term algorithm, I guess, at least in the medium term?

Yes, I think -- Bryan, this is Rob. The -- again, as you would expect, as we move the top line growth up, obviously, that's going to impact one, investment opportunities for us, but then also going to impact the bottom line. We're still in that same range in terms of EBITDA growth, is what we're forecasting at this point.

Okay. And just one last one related to that. Just, I guess, with capacity -- with the industry over like over a 100% capacity utilization, is that sort of having a negative effect on leverage? Are you at a point now where you're actually -- need a little bit of buffer in capacity in order to get more optimal in terms of operating leverage? I'll leave it there.

Yes, Bryan, I would say, certainly, in terms of operating leverage, as you run at the high utilization rates that we have, you get a benefit. And I think, over the long term, as we bring our capacity online, it's going to be more balanced in terms of utilization rates that are more sustainable within our factories.

We'll take our next question from Adam Mizrahi with Berenberg Capital Markets.

I have a question on the Richland capacity. How much of the 300 million pounds added that you expect to be incremental versus taking some of the heat off the existing facilities? And then following up from this, how significant do you think Taco Bell going national with its nacho prices in terms of filling out this Richland capacity?

Well, I think, in terms of the Richland capacity, there will be a bit of balancing upfront, Adam, but we expect, based on our outlook, that we'll fill that line up within the next 18 months. And that's the reason that we made the decision to invest in our Hermiston plant. So the second question you had in terms of that specific customer, we don't publicly talk about individual customers. So I'll leave it at that.

Okay. Great. And then if I can follow-up on the equity earnings. Can you talk about how much of the growth in the quarter was driven by Europe versus the U.S.? And I think on the last call, you mentioned that you were starting to see some pricing pressure in the European export market as new European capacity comes online. Are you starting to now see some of that impact flowing into the domestic European market as well?

Yes, Adam, this is Rob. The vast majority of that improvement in the equity earnings is out of Europe. And again, as you know or recall that last year, we had relatively high potato prices in Europe, which impacted our cost structure. Guys in Europe were -- the team in Europe was able to pass that through. And as potato costs have come off this year, they've maintained it within Europe -- pricing levels at those higher levels, so, therefore, expanded margins. And so that's the bulk of it. Where we've seen some pressure is and continue to see pressure is really in Middle Eastern export markets out of Europe. And that continues to be a bit of a dogfight. But within Europe itself, prices continue to remain relatively stable. Now having said that, looking forward, based on historical practice, we're expecting some price pressure in Europe back half of this year and -- into early maybe next fiscal year.

We'll take our next question from Chris Growe with Stifel.

This is Andrew Carter on for Chris. Can you hear me?

Yes.

Yes, Andrew.

Okay. So just given kind of looking at Slide 7; suggesting the industry will be above historic capacity utilization for the near term even with Hermiston coming online. I guess, what we're scratching head with, it would seem that you'd need another facility expansion beside the Hermiston in the next 12 to 18 months. I mean, is that something -- am I thinking the right thing there?

Andrew, this is Tom. I think as we have in the past, we've been very disciplined over the last 4 or 5 years as we continue to analyze the category and think through category growth going forward. And as we get down the path the next couple of years, and we continue to see the category grow at the rates we believe it will, certainly, our intent is, as I've stated earlier, we'll continue to invest in this business. And capacity investment in Lamb Weston has really good returns. We're focused on the category and that's what we're going to continue to do over the long term. So to answer your question, yes, that's going to be a continuation. And the timing of that in the out years is going to be reality dependent upon what's happening in the category.

Sure. Okay. Kind of second question just to get back to FY '18 here. You increased your guidance range for the year, but then back half guidance still kind of implies a deceleration in terms of EBITDA growth. That's with all kind of some of the tailwinds you've got coming online. You've got the additional capacity, additional pricing. What's limiting that? Is it just your outlook for higher inflation? And also, I don't know, if you gave it, did you give a total input cost inflation number for the year?

We did not give a -- this is Rob. We did not give a total input cost inflation for the year. But as I mentioned in prepared remarks that we do see higher inflation in the transportation and warehousing. In addition, in terms of the EPS impact and earnings impact, we've got the extra depreciation load coming in. Now having said all that, take the caveat, not around EBITDA but around EPS, we're still working out the impacts of the tax law changes.

Our next question comes from Akshay Jagdale with Jeffrey.

So thanks again for all the extra color, especially, on the capacity. So my first question is on the utilization rate chart. The -- how should we think about what you presented and the relationship of that with pricing, right? Fractionally, for the industry, well, how would you envision pricing trends given what you're projecting for utilization rate?

Yes, Akshay, this is Tom. I think there's -- our competitors are putting on capacity over the next couple of years. Certainly, with our announcement, we'll add more capacity. Our belief is, as we look at the category in total and the growth rates that have been happening the last several years, we expect those to continue. The new capacity coming online, it will balance itself out just based on demand growth. The North America growth is better than we expected and the continued growth in some of the emerging markets. So Akshay, I think, there may be pockets of imbalance over the next couple of years, but I don't expect that to materially impact our pricing going forward.

That's helpful. And maybe just to follow-up on that. Really what I'm trying to get your high-level perspective on, and again, this is more of an industry question. Given we have -- on our side, have limited history of what the industry look like, right. I'm just trying to get a sense of has there been a period of time since you've been in the industry, where pricing has taken a meaningful step down. I mean, our research tells us that it has not. And what you're projecting for utilization rates, I mean, it doesn't seem to me that we will see that anytime soon. So can you give us some perspective, I mean, directionally, all -- the sense of it, expecting sort of the price/mix gains for the industry to stabilize as utilization rates come in a little bit or could -- or to where pricing could come down?

Akshay, let me give you a perspective. I've been around this business off and on for the past 9 -- 8, 9 years, both directly and indirectly. And the only period where there was pressure in terms of the price side of it was after the 2008 financial downturn. And that was just a function of what was going on economically. But I would say, over the last 3, 4 years, 5 years, it's been very consistent in terms of volume growth and pricing discipline in the marketplace.

Okay. And just one last one, which is more on the long-term strategy. So you guys have proven that you're at the cost by a wide margin and the growth in the numbers, I mean, has been phenomenal, right? So help us put into context the 3 initiatives that you talked about, the strategic priorities, like, if we look through the next 5 years, where would you see the most impact in terms of change, right, because you're a stand-alone company. We think you'd be more nimble, et cetera, but this is really the first time you've (technical difficulty) that it's going to change things, right. So where do you think in the P&L, if you're successful, we should see the most impact from the strategic priorities?

Yes, Akshay, I would say, if you -- as I think through the 3 strategies, it's really a continuation of what we've been executing over the last 12 to 24 months. In terms of your question on where I see the most change, I'm not going to get into all the specific details underneath these 3 strategies, but we certainly have initiatives in place within each one of them that will deliver the business and the financials going forward. So it's not going to be a lot of dramatic change, I'll tell you that. But it's going to be very focused, disciplined, executing the business. We've got -- really the big thing is focusing our resources and setting the organization up to be successful going forward and just being very methodical and disciplined about executing against our initiatives underneath these strategies.

Our next question comes from Adam Samuelson with Goldman Sachs.

First, just a question on the volume in the (technical difficulty) and as to what the clients in Global and some of the small (technical difficulty) Foodservice and the capacity constraints that you've had (technical difficulty) but clearly, there's a real kind of company-level margin mix benefit from those kinds of actions. Can you talk about how sustainable you think that mix shift could be or with the new capacity at Richland, is that just an afterthought at this point and really this is a temporary move because you were just at volume because it would seem to me that with broad-based trends in Foodservice and distribution that you should be prioritizing that mix in (technical difficulty) some of the global customers where you could?

Yes. This is Rob. In terms of that impact, I mean, clearly, as we've talked about the last couple of quarters that we've really been running the assets hard, and so we have capacity constraints. We pulled some out of inventory. But we've continued to look not only within each of the segments, but across the segments of where's the most profitable business, where are our strategic customers in terms of long-term growth customers, long-term profitable -- most profitable customers. And so that's where you make those hard decisions to take out some of the more transactional business that's lower margin when you get into these capacity constraints like this. Now that we have that relief, clearly, we'll continue to grow with our very profitable Foodservice business and support those strategic customers in that business as we go forward. But I think, it also allows us to open up some more capacity into more of the Global segment. So we should get some of the growth back in the Global segment as we look forward, as Richland comes up and as the Hermiston line comes up. And so just as you look at balancing among the segments, clearly, we got some margin push overall here in the near term. But as we bring this more capacity online, clearly, that's going to impact margin. Still very profitable customers, but maybe not quite as profitable on those incremental customers, those incremental pounds as we've been able to get here recently.

Okay. That's very helpful. And then prepared remarks, there was a bit more discussion into potential acquisitions than there had been in recent calls. And I was hoping you could maybe kind of frame just some of the key characteristics and hurdles that you look at on M&A. I presume it's probably more international focused, optimal size, just return hurdles, accretion benchmarks that you could share, if M&A is maybe doubling up on the capital allocation agenda a little bit?

Sure, Adam. I will talk to you. It's part of our playbook. And it's been -- if you go back to the Investor Day, we've specifically called that out in terms of capital allocation. And it's always going to be opportunistic. We're going to look at opportunities within the category. And as everybody knows, those things are hard to predict if and when they're going to happen. But the point is when we have those opportunities, we're going to get involved in M&A. And it's part of our invest for growth strategic pillar. In terms of the filters we go through, I'm not going to get into all of that right now, but it's more about -- it's part of our strategic pillar, and we're going to have our ear to the ground within the category. And if we have an opportunity, we're going to execute against it.

And we'll take our final question from Michael Gallo with CL King.

My question is on the capacity -- the new capacity at Richland and the capacity expansion. It was notable that you're modeling in the line at Hermiston on the line at -- off the line you just put up at Richland. I was wondering what you're seeing on that line in terms of how it's performing versus your legacy capacity, whether we should think about this capacity -- this newer capacity as it comes online as perhaps more efficient and higher margin than your legacy capacity?

Michael, this is Tom. The last 2 or 3 investments we've made in terms of adding new capacity, we continue to upgrade technology. We make improvements. So 4 years ago, 5 years ago, we put in Boardman line. We took learnings from that and applied it to our Richland line. And we have a lot of capabilities in terms of fry cut sizings on these lines, so it gives us flexibility. And we also -- as we've started up the Richland line and have learned even more, we apply that to our next line in terms of the Hermiston blueprints. And they are more efficient, they're more cost effective, they're lower cost from -- and just in terms of the technology that we invest in these new lines. So to answer your question, yes, they are more efficient lines. And it gives us the ability as we look across our network and all the production facilities and lines we have to really balance it out and help improve our profitability, just based on the business mix we can move around in the factories.

And that concludes the question-and-answer session. I would like to turn the conference back over to our presenters for any additional or closing remarks.

This is Dexter. Thank you for joining us today. Available for any follow-up calls today and tomorrow and -- through early next week. For those of you on the East Coast, stay safe, and we'll talk to you later. Thank you.

And that concludes today's presentation. Thank you for your participation. And you may now disconnect.