藍威斯頓 (LW) 2019 Q2 法說會逐字稿

Good day, and welcome to the Lamb Weston Second Quarter 2019 Earnings Call.

Today's conference is being recorded.

At this time, I would like to turn the conference over to Dexter Congbalay, VP, Investor Relations of Lamb Weston.

Please go ahead, sir.

Good morning, and thank you for joining us for Lamb Weston's Second Quarter Earnings call.

This morning, we issued our earnings press release, which is available on our website at lambweston.com.

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.

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 Rob McNutt, our Chief Financial Officer.

Tom will provide an overview of our overall performance, some recent capital deployment actions and an update on the operating environment in North America and Europe.

Rob will then provide the details on our second quarter results and our updated fiscal 2019 outlook.

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

Thank you, Dexter.

Good morning, everyone.

Happy New Year, and thank you for joining our call today.

We delivered another quarter of strong sales, earnings and cash flow growth, demonstrating our consistent performance since becoming an independent company a little over 2 years ago.

The Lamb Weston team remains focused on executing against our annual and long-term strategic priorities.

And this focus and organizational alignment across our entire company continues to drive our results and positions us for the long term.

Specifically, sales increased 11% both in the quarter and through the first half of the year.

This was driven by a good balance of price/mix and volume growth.

Adjusted EBITDA, including unconsolidated joint ventures, increased 18% to $223 million in the quarter, driven by strong sales and gross profit growth.

Through the first half, it's up 15% to $436 million.

And through the first half, we generated more than $350 million of cash flow from operations, largely driven by earnings growth.

Because of our strong year-to-date results, good operating momentum and confidence in our team's ability to manage through the challenging environment in Europe, we've raised our fiscal 2019 outlook for both sales and EBITDA.

In addition, we continue to take actions that show our balanced returns driven approach when deploying capital.

This includes the construction of our new 300 million pound expansion in Hermiston, Oregon, which remains on track to startup in May of 2019.

This new line will help us continue to support the growth of our strategic customers in the U.S. as well as support export markets.

It also includes a couple of recent acquisitions.

In December, we completed the purchase of our joint venture partner's interest in Lamb Weston, BSW, for about 4x EBITDA.

This consolidation allows us to realize the full financial benefit of the JV's production facility going forward.

Also in December, we acquired Marvel Packers, a frozen potato processor in Australia for about AUD 125 million, which is about USD 90 million.

With Marvel's 50 million pound facility, it gives us the opportunity to increase our position in Australia's 1.1 billion pound market.

The Marvel transaction is a great example of our strategy to strengthen and broaden our manufacturing footprint outside North America, and we'll continue to evaluate other acquisition opportunities as they arise.

And finally, as we announced a couple of weeks ago, our Board of Directors approved 2 items to return more cash to shareholders.

First, we increased our quarterly dividend by about 5% to $0.20 per share.

This is consistent with our stated policy to target a payout ratio of 25% to 35% of adjusted EPS.

And second, we adopted a $250 million share repurchase program.

This is an open-ended program, which will allow us to buy back stock on an opportunistic basis.

Together, these capital deployment actions show our commitment to investing strategically to drive growth both organically and through acquisitions as well as providing a competitive return of capital to shareholders.

Now turning to our operating environment.

In North America, we expect the environment to remain generally favorable through the rest of fiscal 2019, as demand growth continues to be solid, while available manufacturing capacity remains tight.

Our expectations for the cost environment are also unchanged.

We continue to expect modest, but steady inflation in each of our major cost categories.

This includes a low to mid-single-digit cost increase for potatoes, as the crops in our growing areas in North America are consistent with historical averages in terms of yield, quality and performance and storage.

And as we discussed on our last earnings call, we expect the environment in Europe will be volatile through fiscal 2019 and into the first half of fiscal 2020 as a result of a poor potato crop in the region.

Extreme heat and drought conditions in Europe during the growing season resulted in overall crop yields being down about 20% versus historical averages.

The short crop along with poor quality is resulting in sharply higher potato costs for Lamb Weston/Meijer joint venture and for the industry.

While higher potato costs have already begun to affect Lamb Weston/Meijer's results this quarter, we expect the cost impact will be more pronounced in the second half of fiscal 2019.

Since late summer, the team in Europe has been taking the necessary steps to mitigate the cost increase, including raising prices, which will be phased in over the next couple of quarters, working closely with customers as we navigate through poor crop quality and production yields for the balance of this crop year and driving productivity and other cost savings initiatives across the organization.

Despite these efforts, we expect Lamb Weston/Meijer's earnings to decline versus the prior year.

The impact will be felt especially in our fiscal third quarter as the joint venture absorbs the higher cost, but before much of the pricing benefits are realized.

Our teams in Europe and the U.S. are working closely together to capitalize on our global capabilities to further offset this earnings pressure and maintain quality and service levels for our strategic customers.

We are leveraging Lamb Weston's global manufacturing footprint by stressing U.S. production capacity to support Lamb Weston/Meijer's customers in Europe and other markets as needed.

We are also leveraging our U.S. assets to serve other potential customers as opportunities arise in key export markets, especially in Asia and the Middle East.

The bottom line is that I'm confident that our teams in Europe and the U.S. are taking the right actions, and we believe we have a good hand on this year's crop challenges in Europe.

So to quickly sum it up, because of the strong year-to-date results and execution in our base business, the actions our European team is taking to manage through the current volatile environment in Europe and our ability to leverage our global footprint to capitalize on opportunities, we are able to raise our sales and earning targets for the year.

We are strategically investing to drive growth and operating efficiencies, and we are committed to return capital to shareholders through a competitive dividend and modest share repurchase program.

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

Rob?

Thanks, Tom.

Good morning, everyone.

As Tom noted, we delivered another strong performance in the quarter and for the first half of the year.

So our teams continue to execute well in generally favorable operating environment in North America.

Specifically in the quarter, net sales increased 11% to $911 million.

Price/mix was up 6% as we continue to benefit from pricing structures in our Global segment contracts renewed last year as well as from pricing actions and improved mix in our Foodservice and Retail segments.

Volume increased 5%, led by growth in our Global and Retail segments.

Gross profit increased 20% to nearly $250 million.

Higher price/mix, volume growth and supply chain efficiency savings drove the increase, more than offsetting the impact of higher transportation and warehousing costs and material input and manufacturing cost inflation.

Our gross margin percentage expanded 210 basis points to more than 27%.

SG&A expense, excluding impact -- impacting -- items impacting comparability increased about $11 million to $75 million.

This included a $2 million unfavorable impact from foreign exchange, which was more than offset by a $4 million benefit related to an insurance settlement.

In addition, advertising and promotional expense was up about $1 million.

In addition to inflation, the majority of the rest of the increase in SG&A was due to increased investments in our sales, marketing, operating and information technology capabilities to support growth and drive operating efficiencies.

While IT costs were up in the quarter, we expect them to build further as the year progresses and we continue to work on a new ERP system.

Because of our strong sales and gross profit growth, adjusted operating income was up $30 million or 21% to $174 million.

Equity method investment earnings from our unconsolidated joint ventures, which include Lamb Weston/Meijer in Europe and Lamb Weston/RDO in Minnesota, were $10 million.

Excluding the impact of mark-to-market adjustments related to hedging contracts, equity earnings declined about $4 million.

This was largely due to the higher raw potato costs in Europe that Tom described earlier, partially offset by higher price/mix and volume growth in both Europe and the U.S.

So putting it all together, adjusted EBITDA, including the proportional EBITDA from our 2 unconsolidated joint ventures, increased $34 million or 18% to $223 million.

All of the increase was driven by strong sales and earnings growth in our base business.

Moving down the income statement.

Interest expense was about $26 million.

That's about $1 million less than last year despite higher interest rates since we reduced our net debt.

Our effective tax rate, excluding the impacts of comparability items, was about 21.5%.

That's significantly lower than the 33.5% we posted last year due to U.S. tax reform.

It's also a bit lower than we expected since it includes the benefit of some foreign-related discrete items.

Turning to earnings per share.

Adjusted diluted EPS was $0.80.

That's up $0.26 or about 48%.

The majority of the increase was driven by operating gains in our base business, while about $0.10 resulted from applying the lower tax rate as a result of tax reform.

Now let's review the results for each of our business segments.

Sales for our Global segment, which includes the top 100 U.S.-based chains as well as all other sales outside of North America, were up 13%.

Price/mix rose 7% as we continue to benefit from contract pricing structures put in place in the middle of last year.

We also continue to improve mix.

Volume grew 6%.

About 1/4 of the growth was from limited time off -- product offerings in both Asia and the U.S. The remainder was driven by growth in sales to strategic customers in the U.S. and key international markets.

Global's product contribution margin, which is gross profit less advertising and promotional expense, increased $25 million or about 28%.

Its product contribution margin percentage expanded by 290 basis points.

The increases were driven by favorable price/mix and volume as well as supply-chain efficiency savings and were partially offset by higher transportation, warehousing, input and manufacturing cost inflation.

Sales for our Foodservice segment, which services North American foodservice distributors and restaurant chains outside the top 100 North American restaurant customers, increased 3%.

Price/mix increased 5%, reflecting the carryover impact of pricing actions taken last year as well as improved mix.

Volume declined 2% with the loss of some lower-margin products, which was partially offset by increased shipments of higher-margin products.

Foodservice's product contribution margin increased $6 million or 6%, and product contribution -- and contribution margin percentage expanded by 110 basis points.

The increases were driven by favorable price, improved mix and supply chain efficiency savings and were partially offset by higher transportation, warehousing, input and manufacturing costs.

Sales in our Retail segment grew 21%.

Price/mix increased 5%, driven by higher prices across our branded and private label portfolio and improved mix.

Volume was up 16% with distribution gains of Grown In Idaho, other branded products and private label products driving the increase.

Retail's product contribution margin increased $7 million or 34% due to higher price/mix, volume growth and supply chain efficiency savings.

This was partially offset by transportation, warehousing, input and manufacturing cost inflation, while advertising and promotional expense was essentially flat.

Product contribution margin percentage expanded by 200 basis points.

Moving to our balance sheet and cash flow.

Our total debt at the end of the quarter was about $2.4 billion, while cash on hand was about $120 million.

This put our net debt-to-adjusted EBITDA ratio at 2.9x.

However, since the end of the quarter, our net debt has increased somewhat as we used cash on hand and short-term borrowings to pay $50 million of the $78 million cost to acquire our partner's half of the BSW joint venture.

We acquired the potato processor in Australia for about USD 90 million as well as to finance normal seasonal working capital needs.

We continue to target leverage range of 3.5 to 4x and remain comfortable being below that range as we continue to explore potential acquisition opportunities.

With respect to cash flow, in the first half of the year, we generated $317 million of cash from operations, driven by strong earnings growth.

That's up from $182 million generated in the first half of fiscal 2018.

We invested about $170 million in capital expenditures, including for the ongoing construction of our new French fry line in Hermiston, Oregon.

We also paid $56 million in dividends to our shareholders.

Turning to our fiscal 2019 outlook.

As Tom mentioned, our first half performance provided a solid foundation for the year.

We feel good about how well the organization is executing and the operating momentum that we built, and the current business environment in North America and our key international markets.

As a result, we've raised our sales and earnings outlook for the full year.

For sales, we now expect sales to grow at a mid- to high single-digit rate, up from the previous estimate of mid-single digits.

As we indicated in our initial outlook estimate, we continue to expect that our sales growth in the second half of the year will slow from the 11% growth we delivered in the first half.

This is largely a result of lapping strong sales growth that we delivered in the second half of fiscal 2018, especially in the third quarter.

As a reminder, in the back half of fiscal 2018, in our Global segment, we had a large number of contracts that were up for bid and successfully renewed with meaningful pricing step-up effective in the third quarter last year.

In addition, some notable limited time offerings as well as incremental capacity from our new Richland line also helped drive significant volume growth.

In our Foodservice segment, the carryover impact of multiple pricing actions taken in fiscal 2017 and into early fiscal 2018 drove the sales increase.

And in our Retail segment, we delivered exceptionally strong volume growth and price/mix improvement as we broadened distribution of Grown In Idaho branded products and gained market share across their entire portfolio, while our largest competitor faced some temporary issues.

In addition, the timing of some shipments from Q2 into Q3 of last year also benefited volume growth in the second half.

To be clear, we still expect to deliver solid overall sales growth in the back half of the year.

In Global, we're targeting volume to drive most of the growth as price escalators that are built into our multiyear contracts are more modest compared to those this past year.

In addition, we may be able to grow export volumes by leveraging our global footprint, while European processors face potato shortages.

In Foodservice, we anticipate recently enacted price increases will drive most of the sales growth.

Volume growth should improve versus the first half as we begin to lap the loss of some of the distributor label volume early in the third quarter last year and as we drive incremental benefit from our new direct sales force.

And in Retail, while the business is performing well, we expect to see sales relatively flat as we lap very difficult prior year comps, especially for volume.

As a reminder, in the third and fourth quarters of last year, we delivered sales growth of 31% and 26%, respectively, in the Retail segment.

In short, for the total company, we expect to continue to drive solid sales growth in the second half with a good balance of volume growth and improved price/mix.

For earnings, we've increased our target for adjusted EBITDA, including unconsolidated joint ventures, to a range of $870 million to $880 million.

That's up from a range of $860 million to $870 million.

Using the midpoint of the new range, that's an increase of about $55 million or 7% versus last year.

We continue to anticipate the sales and gross profit growth will drive that increase.

For the full year, we're still targeting gross profit growth at least in line with sales, with favorable price/mix and productivity more than offsetting higher transportation, warehousing, input and manufacturing cost inflation as well as higher depreciation expense.

For the second half, we continue to expect the gross profit growth may lag sales growth.

This is largely due to higher transportation, warehousing and production cost inflation, including for raw potatoes.

It's also due to potential unfavorable mix resulting from fewer limited time offerings compared to last year as well as growth in exports, which typically carry a lower margin.

Regarding SG&A for the full year, we continue to target increasing significantly as we make investments in our IT and ERP systems as well as in sales, marketing innovation, operations and other functional capabilities.

As I noted earlier, we expect these investments will build as the year progresses, especially as we begin to step up spending behind our ERP system.

We believe that these investments are necessary to support growth and drive operating efficiencies over the long term.

While we expect spending behind these investments will be elevated for a couple of years, we continue to target total SG&A, excluding advertising and promotional expense, to return to a range of 8% to 8.5% of sales over the long term.

For equity earnings, as Tom mentioned earlier, we anticipate it will decline versus prior year.

Most of this decline will be realized in the second half of the year, largely due to higher potato costs in Europe and will be partially offset by pricing actions and cost savings initiatives.

In addition, due to a typical lag in the implementation of new pricing structures in that market, we expect the decline in equity earnings will be more pronounced in the third quarter.

So looking at our update at a high level, we're targeting mid- to high single-digit sales growth for the full year, while growth will slow from the 11% that we delivered the first half as we strong -- as we lap from -- strong prior year compares will continue to drive solid sales growth in the second half with a good overall balance of volume growth and improved price/mix.

For earnings, we expect to deliver adjusted EBITDA, including unconsolidated joint ventures of $870 million to $880 million.

Strong sales and gross profit growth in our base business will drive most of the increase and will be tempered somewhat by higher investments in SG&A and softer results than we originally anticipated in Europe, especially in the second half of the year.

In addition, about $10 million of EBITDA increase will be from the recent consolidation of our -- of the interest in our joint venture, Lamb Weston BSW, that we didn't know.

That's down from about $20 million that we targeted in our original outlook due to the timing of the close of the transaction.

Except for taxes, our other financial targets for the full year remain the same, including total interest expense of around $110 million, capital expenditures of about $360 million and total depreciation and amortization expense of approximately $150 million.

For taxes, we now expect an effective tax rate for the full year of about 23%.

That's down from our previous estimate of 24% due to the benefit of discrete items.

For the second half, we continue to anticipate it will be about 24%.

Let me now turn the call back over to Tom for some closing comments.

Thanks, Rob.

Let me quickly sum up by saying our strong financial results in the quarter and in the first half of the year provided a strong foundation to raise our financial targets for the full year.

We've demonstrated our commitment to our capital allocation priorities through investment in growth in our base business and strategic acquisitions; continued support of a competitive dividend; and the adoption of an opportunistic share buyback program.

I'm confident that we remain well positioned to continue to create value for all our stakeholders.

I want to thank you for your interest in Lamb Weston, and we're now happy to take your questions.

(Operator Instructions) We will now take our first question from Andrew Lazar of Barclays.

Tom, I think you mentioned a couple of times about the potential opportunity to service some of the export demand that potentially some of the European suppliers might be less able to do.

And I'm just curious if the potential size or magnitude of that opportunity is, I guess, is enough to continue to impact the tightness of the U.S. or North American marketplace such that, that helps keep that marketplace reasonably tight even as we head into a period of time where there is expected to be some additional industry capacity coming online.

Yes, Andrew.

It's still early with respect to how the difficulty with the European crop's going to play out.

And I will tell you right now, I anticipate in the next couple of months that it's going to start to really -- from an industry perspective, in a couple of months, it's going to start moving around in terms of the overall crop availability in Europe.

We haven't seen anything right now that indicates there's going to be some big movement in volume in terms of European availability versus U.S. support.

We've taken actions within our business to help support our Lamb Weston/Meijer joint venture with some material volume that we moved to the U.S. My experience with this kind of situation in the past is it takes time.

And I think in the next couple of months, we'll start seeing some impact of volume movement with customers, but it's always -- the interesting thing in these situations, it always comes down to like the fourth quarter of a football game where the customers will realize that the impact and the availability of volume, they won't have an idea until the end of the crop year.

So it's going to take a couple of more months to play out.

I think that we're going to have opportunities that are going to come our way, but it's going to be one-offs as this situation plays out.

Yes.

Got it.

And then on some of the previous calls, you've given us kind of an overall perspective a little bit around what you're seeing from a trend perspective in the overall sort of key QSR sort of space with respect to consumption and takeaway and things of that nature.

I'm curious if you've got just an updated view on how some of those trends look at some of your key strategic end customers.

Yes, Andrew.

It's a mixed bag right now.

I think the last 2, 3 quarters, the data we look at, the QSRs have -- the traffic's been up, check's been up, so that's a great trend.

You go down the line and you look at the fast casual/midscale, they're still down, but they're not down as pronounced as they have been.

So we see it in our numbers.

Obviously, we've got a broad customer mix within our portfolio.

But right now, the past 2, 3 quarters, the QSRs has been pretty positive overall and we can see it in our trends and our numbers.

And obviously, our quarterly report today, you see that our global business unit volume has been up.

So it's -- we're watching it closely.

There's a lot of mixed indicators.

But right now, everything looks positive for us.

We will now take our next question from Chris Growe of Stifel.

I just had a question for you in relation to -- you're transitioning to kind of the -- so called, the second year of some of these contracts and pricing is expected to weaken a bit in the second half as you've noted.

Can you give any color around the sort of pricing you expect in the second half, particularly in the Global division?

And if I could just add to that, will the pricing coming through the second half be enough to offset inflation, which I think is remaining at a little higher pace in the second half of the year?

Yes, Chris.

This is Rob.

Just to clarify, we'll still see price increases in the Global business that are built into the contract.

They just aren't as strong as what we saw last year in third quarter.

So they're still up.

And again, as I mentioned in my comments that we are seeing inflation and especially transportation, warehousing continues to push on the inflation side, that is going to put pressure on margins in the back half of the year.

So your pricing wouldn't be sufficient to offset the total inflation coming through.

Is that what I read through that comment then, Rob?

Well, I think it's going to be closer.

It's going to tighten that margin up a bit.

So where we saw nice margin expansion in the first half, it's going to be a little closer in the second half.

Okay.

And then just a quick follow-on, let's say, Andrew's question in relation to Europe.

With that weak potato crop, are you seeing any potential opportunity to acquire businesses in that area given kind of the turmoil in that market?

Is that -- your balance sheet is in great shape and below your targeted debt-to-EBITDA range.

Is that the area you've been -- that you think could provide some opportunity for you in the future?

Chris, it's Tom.

I'm not going to get into specifics, obviously.

But certainly, I think the fragmented market in Europe, I believe there's great opportunity there.

The cycle we're in right now with Europe, we've been through it before.

And what I will say is, we're continually active in terms of M&A.

But right now, I'm not going to comment on how things are playing out.

We will now take our next question from Akshay Jagdale of Jefferies.

The first one is clarification, just a follow-up for Rob.

Can you explain the -- you said $10 million versus $20 million for the JV, the difference relative to what you had modeled.

And you've said all of it is timing related.

Can you just walk me through just high level -- the math there?

If it's complicated, we can definitely take it off-line.

But that -- I'm not sure I'm following that.

No.

It's pretty straightforward that, again, if you go back to last year for the full year that, that JV, the partner share of that, that we deducted out of the bottom was about $20 million for the full year in terms of EBITDA, right?

And so we had exercised our option at the first date that we could and then it took us 6 months or so to negotiate through the detail of that and get that closed.

So in our initial outlook, when we had budgeted and provided our forecast, we assumed we'd close that out at the very first of the fiscal year, which we would have picked up that extra $20 million because it took us until December to get it closed.

About $10 million of that wasn't realized.

Got it.

Helpful.

Second question, you mentioned, if I'm not wrong, some incremental price increases in Foodservice.

Is that -- did I hear that correctly?

And can you just give us some color around that?

Is that just on your brand?

Is it across the board?

Are you seeing your competitors follow, et cetera?

Yes.

That's a -- in September, there was a price increase announced in Foodservice.

Again, in Foodservice, contracts vary and how that works.

And so that'll play out and be implemented over several months and even quarters here.

So we are seeing that come through.

Others also announced price increases similarly.

And again, I think it's again driven by the relatively tight capacity relative to demand.

Awesome.

And then just one last one.

This is more -- it's probably related to Europe, but it's more a broader question about capacity and supply and demand globally, right?

So if I'm hearing or interpreting your comments correctly, Tom, and just correct me if I'm wrong, but the way I'm interpreting it is, we all know that there's a supply shortage globally, right?

That seems to be pretty clear because of what's happened in Europe.

The way I'm interpreting your comments about fourth quarter decision-making is the potential positive impacts of that for a North American operator like you who has capacity to deploy haven't yet and most likely aren't going to play out in this fiscal year.

So number one, I mean, am I hearing that correctly?

And if you can just give us your latest thoughts on the cost outlook on Europe that would be super helpful.

Sure, Akshay.

I think, again, we've got a couple of months before this whole situation in Europe plays out.

And I think, we're going to have opportunities.

To your point, Akshay, it's going to -- potentially, those opportunities are going to be more pronounced in our fiscal 2020, because it's going to be old crop, new crop transition, especially if there's customers that are serviced out of the European industry that realize that they're going to have quality crop shortage issues that they may not understand right now.

So it's a situation that's got to play out.

And I think -- we'll have a clearer understanding in the next couple of months on what our opportunities are going to be with that.

So it's kind of -- and to your point, it is going to be a fiscal 2020 opportunity for us because this is going to bleed over through our fiscal 2019 and our 2020.

So again, it's a volatile situation.

Our team is doing a fantastic job, both in Europe and in the U.S., making sure first and foremost that we are supporting our customers and that's the priority.

But I am optimistic that we're going to have some opportunities and we'll see how it all plays out going forward.

We will now take our next question from Bryan Spillane of Bank of America.

Just 2 quick ones for me.

One -- I might have missed it, but did you give an update on CapEx for the year?

And also, I guess, with the acquisitions just how we would think about capital spending sort of go forward.

Is there any sort of, I guess, uptick in CapEx related to the acquisitions?

Yes, Bryan.

It's Rob.

Yes.

I did mention that we maintained our $360 million target for the year on CapEx.

That does include -- exclude the M&A, okay, to make that clear.

BSW, the purchase of that interest in the joint venture, because that was already consolidated, that CapEx is already in that number.

And so that doesn't move the needle.

And the Australian piece is a relatively small operation and so it's not going to be material and certainly not going to be material this year, and so we're still maintaining that $360 million.

And then in the Retail segment, you've had the -- you've been able to take advantage of some of the supply issues that your large competitors had and it seems as though you've got pretty good traction with your own brand.

So can you just kind of talk about going forward, is there opportunity still to gain more distribution?

Kind of where do you stand today in terms of maybe where your ACV is?

And is there an opportunity to kind of get yourself into maybe more larger customers going forward?

Yes, Bryan.

I think I am super optimistic with our retail business and we've had great traction with Grown In Idaho.

No question about it.

Our strategy, the 3-Tier approach, to remind everybody, with Alexia, the premium brand, we do a lot of private label for a lot of customers.

And we have our licensed brands that have a lot of momentum right now.

And Grown In Idaho has been -- it's well ahead of our expectations at this particular point.

And we have opportunity with Grown In Idaho to get more distribution with some large customers.

So we've got a lot of traction.

We've certainly had the benefit of a misstep by one of our competitors, but the team has done a great job supporting our brands, our private label, our licensed brands in the market.

We've got a lot of momentum.

And I think we've got plans to continue to support that business in the media and drive Grown In Idaho distribution.

So I feel good about where it's at.

We certainly have opportunities, and we've got a lot of momentum.

So I'm excited about what the next year holds for that.

We will now take our next question from Michael Gallo of CL King.

My question is on just the gross margin line.

Just kind of delving it a little bit.

Obviously, the commentary that gross margin for the year will grow at a similar to slightly better rate than sales.

I think you're up, call it, 19% in the first half versus 11% sales growth implies gross margin would be down in the back half.

So I guess, bigger picture, you've been able to increase your gross margins, call it, 600 basis points over the last 4 or 5 years.

You haven't had a lot of -- you've had a very good spread of pricing versus cost inflation.

It would seem like we're coming to an environment where you're not going to have as much pricing.

You will have some more inflation.

So do you think kind of looking bigger picture, you can still expand your margins further all things being equal?

How volume dependent does that become?

And if things slow from a volume standpoint, are there any kind of offsets that you can prevent margin degradation from here?

Yes.

I think, Michael, that margin expansion is going to be more modest.

We've had a terrific run to your point, as you pointed out last 4, 5 years.

And one of the things that we continue to do to drive overall profitable growth is invest in our business and expand capacity, and we've been pretty consistent over the last 4, 5 years expanding our operations.

Obviously, part of our invest for growth is looking at opportunistic M&A and that's going to be part of the playbook going forward.

And we're coming into an environment that's going to be a lot different than it has been in the last 3 or 4 years in terms of overall industry competitiveness.

We've got our competitors.

It's well known in Europe and North America that capacity is coming online.

We've got capacity coming on in our business.

And we're going to maintain discipline in our business and maintain our pricing, maintain our discipline.

But the overall margin expansion is not going to be as pronounced as it has been in the last 3 or 4 years, to your point.

So -- but I feel really confident about -- when you step back and look at the big picture, the category continues to grow.

Our projections are 1.5% to 2.5%.

That's a big -- that's a critical element of driving our overall profitability, but the margin expansion is not going to be as pronounced as it has been in the last 3 or 4 years.

There's no doubt about it.

We will now take our next question from Adam Samuelson of Goldman Sachs.

A lot of ground has been covered.

I just want to go back on the guidance to make sure I've got the pieces correct to understand how you've adjusted the outlook.

So you've taken the range of $10 million.

That includes $10 million less contribution from the purchase of the JV share.

So the base business outlook is up at least $20 million, probably a little higher above that given what seem to be a weaker outlook in Europe given the cost side there.

Just making sure on the domestic side, how is -- is it volume domestically?

Has price/mix come in stronger?

Has unit cost in the first half of the year been better that the domestic kind of base business performance has exceeded the expectations?

To that extent there, just help me with that bridge.

No.

I think your bridge, Adam, is spot on.

And in terms of what's driving, it's really across the board.

As I mentioned that on the commercial side, the teams are doing a great job.

We've got some pricing momentum especially in the Foodservice, and then good volume really in our Global and our Retail business has been playing out nicely for us.

At the same time, we have gotten some benefit from mix.

And then on the supply chain side, the folks running our manufacturing operations have done a very, very good job of continuing to drive and squeeze efficiencies out of the manufacturing facilities.

And so it's really throughout the income statement that we're seeing that benefit in our base business.

Okay.

No.

That's helpful.

And then just on the base business, as I think about the balance of the year, usually this is when you get a better feel for the performance of the 2018 crop through the plants that -- are the yields there and the recovery rates meaningfully different than average or normal that changed -- that causes the outlook to change at all?

Adam, the crops is right at historical averages.

Yield's good, recovery's good, storage is good.

So right down the middle of the fairway on the crop for this -- the balance of the rest of the year.

Okay.

And then just finally from me.

Going back to late December, you did announce the repurchase program, which is a new feature to your capital allocation.

Just -- there isn't a deadline or an expiration date on the program.

Just any thoughts on how we should think about utilizing that.

And has it really just come down to -- would you actually add debt to buy back stock or is it just excess cash flow that can't be deployed with -- through other inorganic opportunities that they're going to repurchase?

Yes, Adam.

That share repurchase program is really opportunistic.

And as you mentioned, it is open-ended.

So it's really just to give us flexibility to buy back shares on an opportunistic basis.

Okay.

So no signal to think that necessarily gets used up in the short term.

It's just there if the excess cash comes through, and you don't have the M&A.

Yes.

I think that's a fair way to read it.

We will now take our next question from Carla Casella of JPMorgan.

Just want a little more clarity on the ERP rollout, timing of it, when you're going to start, I guess, turning on the switch.

And if it's scaled -- if it's scheduled geography by geography or just more clarity on the timing.

Yes.

So we're on the front end of the ERP project transformation.

It's -- these things always take some time.

Obviously, everybody understands that.

So our projection right now is over the next couple of years, we'll start rolling it out and implementing it.

In terms of how we're going to do that organizationally, we're still working through that on the front-end of our planning.

Okay.

And do you expect to have it done though in -- is it the next fiscal year, sort of 18 months?

No.

Carla, I think as Tom mentioned, that this will be over a couple of years because, again, it's the global exercise and it's not something that we feel the need to rush or jam in.

There's no fuse on this thing.

And so we want to do it thoughtfully, deliberately and so we'll take our time and do it thoughtfully.

So it'll take a couple of years for us to fully roll it out.

It appears we've no further questions at this time.

I would now like to turn the call back over for any additional or closing remarks.

Hi.

It's Dexter.

Thanks again for everybody joining the call.

If you'd like to have a follow-up discussion, please e-mail me first and we'll try to setup a time to have a discussion.

Again, happy New Year.

And good morning, everyone.

Thank you.

This concludes today's conference call.

You may now disconnect.