Lamb Weston Holdings, Inc.

Good day and welcome to the Lamb-Weston second quarter earnings call. Today's conference is being recorded. At this time, I would like to turn the conference over to Dexter Congloble. Please go ahead.

Good morning and thank you for joining us for Lamb-Weston's second 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 that 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 . With me today are Tom Warner, our President and Chief Executive Officer, and Bernadette Madriada, our Chief Financial Officer. Tom will provide an overview of the current operating environment, while Bernadette will provide details on our second quarter results and our updated fiscal 2023 outlook. With that, let me now turn the call over to Tom.

Thank you, Dexter. Good morning, happy new year, and thank you for joining our call today. We're pleased with our financial performance in the second quarter as we continue to drive strong sales and earnings growth across each of our core segments. Our results reflect the successful execution of our strategies to counter the significant input cost inflation over the past couple of years through a combination of pricing actions, improving business and product mix, and adapting our manufacturing and supply chain to global challenges. Specifically, we delivered sales of nearly $1.3 billion, a record high quarter, healthy gross margins in each of our core business segments, and strong earnings EBITDA and earnings per share growth. Because of our first half results and confidence in our business momentum, we've increased our sales, gross margin, and earnings targets for fiscal 2023. I'm proud of our performance in the first half of the year and how the entire Lamb-Wesson team continues to focus on serving our customers and driving sustainable, profitable growth. Before turning the call over to Bernadette, let me first provide some quick updates on the current operating environment. First, overall French fry demand in the U.S. remains solid, although the total restaurant traffic remains below pre-pandemic levels. It's up versus the prior year quarter, and trends are up sequentially off the lows we saw in the summer as gasoline prices spiked. Demand and traffic trends in the quarter varied by channel as consumers reacted to broad-based inflation and the threat of a recession. QSR traffic was up versus the prior year, and trends improved sequentially versus our physical first quarter as consumers adjusted to less expensive dining options. As expected, casual dining and full-service restaurant traffic in the quarter was down versus the prior year, although trends also improved sequentially versus our physical first quarter. This year-over-year decline in casual dining and full-service restaurant traffic had a more pronounced effect on our food service segment, which has a greater exposure to these sales channels and contributed in part to a decline in the segment's volume. The fry attachment rate, which is the rate at which consumers order fries when visiting a restaurant or other food service outlets, remained above pre-pandemic levels. The attachment rate in QSRs actually increased versus the prior year quarter, which helped stabilize fry demand. Overall, we feel good about how the category in away-from-home channels is performing in this difficult macro environment, but expect restaurant traffic and demand trends will continue to be volatile through fiscal 2023. In contrast, retail fry demand remains solid in the quarter. It's been strong since the start of the pandemic as consumers pulled back spending on dining out. Demand for our retail products sold under licensed restaurant brands, in particular, remained strong over the past year as consumers looked to have the restaurant-style fries they love while at home. While fry demand across all our channels is holding up well, we continue to struggle to meet that demand due to the impact of supply chain disruptions on run rates and throughput in our production facilities. Over the past year, these disruptions have been largely related to the impact of shortages in certain commodities, such as starches and edible oils, as well as factory worker shortages and availability. The availability of key commodities has slowly improved over the past couple of quarters as we've broadened our supplier base and qualified substitute ingredients when possible. Yet it remains a concern, and we expect it will continue to affect our production volumes, at least through the remainder of fiscal 2023. The availability of production team members has also steadily improved over the past couple of quarters, such that we're back to having staffing levels in most of our processing facilities at desired levels. However, run rates and throughput constraints will continue until our newly hired colleagues gain experience to optimize production. We've also experienced production constraints after adjusting operating procedures to reflect changes in product mix and consumer demand, including higher demand for retail fries, premium fries, and batter-coated products. These products generally carry favorable margins. For example, to produce batter-coated fries, which is a high growth and high margin segment of the category, we typically run our lines at slower speeds than when producing uncoated straight-cut fries. This results in reduced throughput. We also require more frequent and longer downtimes to clean and sanitize lines between production runs when batter is used, which affects our run rates and line availability. Together, this results in fewer finished pounds produced relative to making uncoated fries, which ultimately leads to pressure on our customer order fill rates. In short, we expect the impacts of ongoing commodity shortages, the onboarding of recently hired production team members, and adjustments to optimize business mix to continue to pressure volume performance and our ability to meet customer demand through the remainder of fiscal 2023 and until our capacity investments in China, Idaho, and Argentina become available over the next couple of years. With respect to pricing, we continue to drive pricing actions across our portfolio to counter input cost inflation. The environment remains generally favorable as a result of the solid category demand that I just described, coupled with constrained industry supply. Our global segment led the way in the quarter with strong pricing through a combination of inflation-driven price escalators, new pricing structures for customer contract renewals, working with certain customers to accelerate pricing actions for contracts up for renewal in the coming years, and improvements in customer mix. We feel good about how global contract renewal negotiations played out this past year and expect the segment to continue to deliver strong price mix growth as more of these updated pricing structures take effect in the second half. We also expect to drive solid price growth in both the food service and retail segments in the second half of the year. Although the growth rate should decelerate as we begin to lapse some of the pricing actions we took in physical 2022. With respect to the potato crop, we've been processing potatoes from this year's harvest for the past few months and continue to assess the overall quality of the potatoes in our key growing regions, including shape, color, level of defects, and solid content. That's consistent with historical averages. Yields, however, are below historical averages and below the preliminary assessment that we provided during our earnings call in October. To fill our production needs, we have secured additional potatoes in the Columbia Basin and Idaho and are sourcing potatoes from other regions in North America, including the East Coast. This will add to our potato costs for the remainder of fiscal 2023, and we have included the estimated impact in our updated financial targets for the year. With respect to next year's potato crop, we've agreed to nearly a 20% increase in contract prices for potatoes grown in the Columbia Basin and have secured the targeted number of acres to be planted. Our discussions with growers in Idaho and Alberta on price and acres are ongoing. Now, with respect to our acquisition of our partners' interest in Lamb, West and Meyer, we expect the transaction will close during our physical fourth quarter after completing the regulatory review process. I'm excited about welcoming 1,500 value team members and beginning to capture strategic commercial, and operational benefits from the transaction, including, first, strengthening our global manufacturing footprint by leveraging Europe's low-cost infrastructure to serve key markets around the world, as well as adopting best-in-class manufacturing practices to increase efficiency, improve quality, and reduce costs. Second, enhancing our customer-centric operating model by offering a single voice to our global customers, and seamlessly supporting multinational customers with a truly global supply chain. Third, improving our position to further capitalize on growth opportunities in Europe, the Middle East, and Africa. And fourth, pursuing our global growth strategies without the operating restrictions associated with the joint venture. So in summary, we drove strong sales and earning growth in the second quarter and in the first half by executing on our strategies to price the counterinflation, improve mix, generate productivity savings, and drive value for our customers. The category is healthy, with solid overall demand behind strength in QSR traffic and constrained industry supply. The quality of the recently harvested potato crop in the Pacific Northwest is good, and the impact from the shortfall in yields is manageable. And finally, we're confident about the strategic operational and commercial benefits that the Lamb, Wesson, Meyer transaction has to offer, and we look forward to the transaction closing later this year. Now, let me turn the call over to Bernadette to review the details of our second quarter results and our updated physical 2023 outlook. Bernadette?

Thanks, Tom, and good morning, everyone. As Tom said, we're pleased with our financial performance and operating momentum through the first half of the year, which has provided us with a strong foundation to raise our annual sales and earnings targets. Let me review our second quarter results before discussing our updated outlook. Sales in the second quarter grew 27% to nearly $1.28 billion. That's a record for us. A 30% increase in price mix, drove our sales growth as we continued to benefit from product and freight pricing actions across each of our business segments. The increase reflects the carryover impact of product pricing actions that we initiated in fiscal 2022, as well as pricing actions that we began implementing during this fiscal year. The increase also reflects benefits from efforts to improve our portfolio mix. Sales volumes declined 3% as we continued to experience the supply chain constraints and related shortfalls in order fulfillment that Tom described. This primarily affected volumes and service levels in our food service and retail segments. To a lesser extent, volumes in the quarter were also impacted by softer casual dining and full-service restaurant traffic, as well as the timing of replacing losses of some low-margin business in our food service and retail segments. Gross profit in the quarter increased $176 million to $382 million as a result of our sales growth and strong gross margin performance. Our margin expanded 950 basis points versus the prior year quarter and about 550 basis points sequentially to nearly 30%. Broadly speaking, pricing actions in each of our business segments, efforts to improve customer and product mix, and value created from our productivity programs have caught up to the cumulative effect of input and transportation cost inflation over the past couple of years. Input cost inflation, however, continues to be challenging. Once again, it was the primary driver of a double-digit increase in our manufacturing and distribution cost per pound in the quarter, largely due to higher prices for edible oils, ingredients for batter coatings, labor, and transportation. Potato costs were also up as a consequence of the historically poor crop that was harvested last fall. While this is the last quarter that we will realize the financial impact from the 2021 crop, we expect our potato costs to continue to increase in the second half of this year as a result of higher contract prices and the need for significant open market purchases due to poor yields from the 2022 crop. We also continue to incur higher costs and operational inefficiencies associated with shortages of key ingredients and spare parts, onboarding newly hired production team members, and other industry-wide supply chain challenges. While the impacts from these constraints have been slowly easing, we expect they will continue to be a headwind through the remainder of the year. Moving on from cost of sales. Our SG&A, excluding items impacting comparability, increased $45 million to $136 million, largely due to higher compensation and benefit expenses due to improved operating performance and higher expenses relating to improving our IT infrastructure, including designing and building a new ERP system. Equity method earnings from our unconsolidated joint ventures increased $16 million excluding items impacting comparability and mark-to-market adjustments associated with currency and commodity hedging contracts. Higher pricing, especially in Europe, drove the increase. Demand continued to hold up relatively well, despite the impact of significant consumer inflation and volatile energy costs. This set Slam West and Meyer up to deliver solid results in the second half of the year. Moving to our segments. Sales in our global segment were up 34% in the quarter behind a 31% increase in price mix. As Tom noted earlier, most of the increase was driven by price escalators and updated pricing structures. With the increase in price mix, global's product contribution margin more than doubled to $171 million in the quarter. In addition, global's product contribution margin percentage approached pre-pandemic levels which is a key milestone for our overall performance. While we were always confident that we would restore Global's margins, we knew it would take longer than in other segments due to the structure and terms of the channel's customer contracts. Sales in our food service segment grew 14%, driven by a 25% increase in price mix as we continued to realize the carryover benefit of pricing actions that we announced throughout fiscal 2022 as well as actions taken earlier this year to counter inflation. Sales volumes decreased 11%, primarily reflecting production constraints and, to a lesser extent, softer traffic in casual dining and full-service restaurants. In addition, because of these production constraints, we've had to make some tough choices on customer service, which has resulted in the loss of some lower-margin business. Food services product contribution margin increased 25%, as the benefits from pricing actions more than offset higher manufacturing and distribution costs per pound and the impact of lower volumes. Sales in our retail segment increased 34%, behind a 43% increase in price mix, reflecting pricing actions across our branded and private label portfolios. Volume fell 9%, largely as a result of production constraints, It also reflects the incremental losses of certain lower margin private label products. Through a combination of the team's strong execution of pricing and mix management, retail's product contribution margin more than tripled to $66 million. Its production contribution margin percentage is now in line with our away from home channels. Moving to our liquidity position and cash flow. our balance sheet remains solid with strong liquidity and a low leverage ratio. We ended the quarter with about $420 million of cash and a $1 billion undrawn revolver. Our net debt was about $2.3 billion, resulting in a 2.4 times leverage ratio. That's down from 3.1 times at the end of fiscal 2022, reflecting our earnings recovery. In the first half of the year, we generated about $290 million of cash from operations, or about $80 million more than the first half of last year, largely due to the higher earnings. Capital expenditures were about $270 million, which is up about $120 million from the first half of last year. This increase is largely related to construction costs as we continue to expand processing capacity in Idaho, China, and Argentina. As a reminder, our annual maintenance capital expenditures have typically been about $120 to $130 million, as we generally target about 3% to 4% of sales. In the first half of the year, we returned nearly $100 million of cash to shareholders, including more than $70 million in dividends and $28 million in share repurchases. As you may have seen a few weeks ago, our Board of Directors approved a 14% increase in our quarterly dividends, reflecting the successful execution of our strategy to drive strong financial results in cash flow and our confidence in our ability to deliver sustainable, profitable growth over the long term. So now let's turn to the updated fiscal 2023 outlook. Please note that our updated targets do not reflect the financial consolidation of Lamb, West, and Meyer, as that transaction is not yet closed. We believe the transaction will be completed during our fiscal fourth quarter. So for the year, we've increased our sales target to $4.8 to $4.9 billion, which implies a growth rate of 17 to 19.5%. That's up from our previous target of $4.7 to $4.8 billion. We expect that higher price mix will be the primary driver of sales growth in the second half of the year. Forecasting volumes in the second half remains difficult as we anticipate shipments will continue to be affected by supply chain constraints through fiscal 2023. And because of volatility surrounding a potential slowdown in restaurant traffic, and demand as consumers face inflation and a weaker macroeconomic environment. For earnings, we're targeting adjusted net income of $540 to $580 million. That's up from our previous target of $360 to $410 million. Adjusted diluted earnings per share of $3.75 to $4, up from our previous target of $2.45 to $2.85, And finally, adjusted EBITDA, including unconsolidated joint ventures, of $1.05 billion to $1.1 billion, up from our previous estimate of $840 to $910 million. We continue to expect the increase in our earnings will be driven primarily by sales growth and gross margin expansion. We're targeting gross margins during the second half of the year to be between 27% and 28%. which is in line with the more than 27% that we delivered in the first half and up from the 23% that we posted during the back half of fiscal 2022. We expect the seasonal sequential quarterly cadence for gross margins will be less pronounced than in previous years. Specifically, we do not foresee much of the typical seasonal step up in gross margin from Q2 to Q3 or much of the typical step down from Q3 to Q4. for a few reasons. First, beginning in the third quarter, we expect our raw potato costs to increase to reflect the approximately 20% increase in the contracted price of the recently harvested potato crop. In addition, we expect higher potato costs as a result of significant high-cost open market purchases. Second, we expect continued significant inflation for other key inputs during the second half of the year, especially for edible oils and ingredients for batter coatings. Third, we expect a more muted step up in global pricing from Q2 to Q3 due to the acceleration of pricing actions for contracts up for renewal in the coming years. And finally, we expect the year-over-year price increases in our food service and retail segments will decelerate as we begin to lap actions taken in fiscal 2022. With respect to SG&A, we expect expenses excluding items impacting comparability of $525 to $550 million. That's up from our previous target, largely due to higher compensation and benefit expenses, including increased incentive compensation expense due to improved operating performance, as well as expenses for outside services, including support of our IT and ERP upgrades. Our estimates of other financial targets, including interest expense, capital expenditures, depreciation and amortization expenses, and our effective tax rate are unchanged. And with that, let me now turn it back over to Tom for some closing comments.

Thanks, Bernadette. Let me sum it up by saying we're confident in our strategies and business momentum. And as a result, we've significantly increased our financial targets for the year. And we're also confident about the health and prospects of the category. And we believe that our capacity expansion and infrastructure investments will have us well positioned to support sustainable, profitable growth and create value for our shareholders over the long term. Once again, I want to thank the entire Land Weston team for our success this quarter and their ongoing commitment to meet the needs of our customers. Thank you for joining our call today, and now we're ready to take your questions.

If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star one to ask a question. Our first question is going to come from Tom Palmer from JP Morgan. Please go ahead, sir.

Good morning and congratulations on the quarter. Just kick off getting maybe a little color on the inflation outlook. I appreciate the comments and the prepared remarks. The release referenced double-digit inflation. It sounds like there's some moving parts, especially with potatoes stepping up in the second half, but you'll also be lapping some higher rates of inflation. Is the messaging that the absolute rate of inflation will step up in the second half of the year, or would it be more comparable to what we saw in the second quarter?

Yeah, thanks, Tom. This is Bernadette. You know, we don't expect the absolute rate to increase. We will, though, however, continue to see that double-digit inflation for the remainder of the year. And as you said, that's reflecting the higher cost for potatoes and then other key inputs for edible oils, labor, and ingredients. So absolutely expect that double-digit cost increase to continue, but not increase.

Okay. Thank you.

And then the bounce back in Europe. Where are we in kind of the return to normal? I mean, did we exit the second quarter at what you would call a normal earnings run rate for that business? Is there still more work to be done? And as we think about the second half, should we look for another step up in kind of the earnings power of that business as more pricing takes hold?

Yeah, Tom. So this is Tom. Yeah. You know, the team in Lamb Weston Meyers, soon to be Lamb Weston, has made terrific progress. You know, Mark Shorter leads that business and the business has turned a corner. They've implemented a number of actions to stabilize the earnings of that business as we expected. They're showing great progress and, you know, the run rates are you know, trending positively, and we expect that to continue, you know, for the back half of the year. And as we close that transaction, as we stated, you know, we expect that to happen in Q4 to get through all the reviews and regulatory process. We'll provide some more color on that once the transaction is closed in the coming quarters.

Okay. Thank you.

And our next question is going to come from Peter Galbo from Bank of America.

Hey, guys.

Happy New Year.

Thanks for taking the questions. Good morning.

Good morning.

Tom, I was wondering if you could just provide a little bit more context around your comment now that the company is sourcing some potatoes, I think, from the East Coast you mentioned. Just kind of maybe where you're seeing that relative to Last year, I know, when you had to source a decent number from the East Coast. And then anything just in terms of your plant network, you know, is there ability to move those potatoes not all the way to the basin? Can you process them, you know, through the JB in Minnesota? Can you process them through the Delhi plant? Just any additional color would be helpful. Thanks.

Yeah, so the year-over-year, this year, it's not as pronounced as it was last year because of the quality of the crop last year and yields. We got out ahead of it. The ag team in Lamb West has done a terrific job sourcing potatoes to meet our needs. They're still high cost. You've got to freight them across the country. You have some quality issues when you're trucking that far. It's not as pronounced as it was last year. All those costs are reflected in our outlook for the remainder of this physical year. And, you know, good news, bad news is, you know, we had some experience last year, so we were able to rally quickly, and we understand how that all is going to impact the business. But, again, that's all forecasted in our outlook. So, you know, we're doing everything we can to meet our customer demand, and that's the most important thing.

Got it. That's helpful. I just had one clarification on the gross margin commentary for the back half of the year. I think you're still expecting a sequential improvement in 3Q, obviously not as pronounced as it would have been historically, but it would still improve in 3Q. And then is there a step down to expect in the fourth quarter? I just wanted to clarify those two things. Thanks very much.

Yeah, no, thank you. We do expect to see a increase, but as you said, it will not be as pronounced in the third quarter as we've historically seen. And then there will be a step down in fourth quarter, but again, not as pronounced as what we've historically seen.

Got it. Thanks very much, guys. Yep. Thank you.

And our next question is going to come from Chris Bro from Cycle.

Thank you. Good morning. Good morning, Chris.

Hi. Happy New Year. Just a bit of a follow-on to that Peter's question and some of your response there. I guess just to understand the gross margin this quarter, I just want to get a sense of how unique the performance was this quarter. I was thinking around the areas of like mix and perhaps even like limited time offerings, to what degree that's influencing the gross margin this quarter that may not be sustainable. And then to what degree you're walking away from lower margin business and and to what degree that's influencing your margin as well. Perhaps there's other issues too, but those are a couple of things I was thinking about just to get a little sense around and how that could affect the gross margin going forward.

Yeah, no, thank you for that question. And as it relates to the gross margin going forward, you know, LTOs, there isn't anything unusual that we would have experienced this quarter relative to prior quarters or going forward. really what you're seeing is that we were able to pull forward a lot of the pricing actions in global earlier than expected. And then we're going to be lapping some of the food service and retail price increases in the back half of the year, so there'll be more of a muted effect related to that. So, you know, a combination of the higher potato cost, the inflation, and then the deceleration of that price mix growth, that's what you're going to see have an effect on those margins in the back half of the year.

Okay. Thank you for that. And actually, I have a follow-on to that, which would just be that you talked about pulling forward some of those global contract renewal discussions. So it sounds like you had a good renewal from this past summer, and that should start to kick in now. But it sounds like you also then pulled forward maybe some from next summer or even summers ahead. I guess just to get a sense of where you are then on contract renewals, normally it's like a third every year. Were you able to get more of that done is the question.

Yeah, we were able to go out and have conversations with our customers and pull more of that forward than had been anticipated, more than what we would have typically seen with our contract renewals. So we expect that the global pricing will remain strong in the back half. It's just we've been able to pull that forward earlier than expected.

And can you say how much of your contract renewals, how much more you've done this year or how much less you'll have to do going forward?

No, you know, I can't really speak to that. I'd say overall we've got probably about 25% that we'll need to continue to renegotiate. Okay. But again, that's based on pounds and not based on business or dollars.

Okay, great. Thank you for that.

Our next question will come from Adam Samuelson from Goldman Sachs.

Yes, thank you. Good morning, everyone. Morning, Adam. Morning. Morning. So I guess first question is maybe on the demand environment. Some of this was in the prepared remarks, but I'd love to just hear you expand a little bit on just maybe different parts of global between the domestic QSRs versus international. uh food service traffic trends and just as your customers absorb some pretty sizable kind of price increases um just the confidence that you don't see any changes in in in fry attach rates and from a consumption perspective yeah and um you know overall i feel really strong about the health of the category and you know we've we've purposely made had to make choices across our segments

to support our customer base and we've really focused on product mix management across the portfolio and the customers. You know, so the QSR segment continues to be really healthy. You know, as we stated in our prepared remarks, the fast casual, casual dining is, you know, experiencing some You know, weaker traffic, although it's improving versus where it was the first quarter. But we're also making choices. And in terms of customer and supporting customers based on product mix and our capacity. And, you know, there are still challenges within our network to produce and get back to the levels where we were pre-pandemic. And, you know, the team, the supply chain team is working, you know, on that. And it's going to take us the balance of this year to continue to focus on things to improve that. So the category is healthy. And yes, our volume is a little soft in some areas. That's traffic driven. But over the long term, when I look at the category and think about the next two, three, five years, And the investments we're making, we're going to be well positioned in a couple of years to bring on capacity and drive opportunities that right now we're making choices that we don't necessarily like, but we've got to support our key customers going forward.

Yeah, and just to add to that, Tom, in addition to the softness that we have in the casual dining, more of that softness, though, is just related to the supply chain constraints that we've been experiencing. But overall, absolutely, you know, our demand has returned to pre-pandemic levels on a run rate basis prior to what we saw with the war in Ukraine.

Got it. And if I could maybe follow on the point on just capacity a little bit. And you talked earlier about some of the product mix impacting kind of throughput rates and kind of what you could actually produce from an end product perspective. I mean, do you think with the current product mix, if you were properly staffed and there wasn't a raw material constraint around potatoes, that the current capacity with this mix could produce the same volume of finished product as you did pre-pandemic? Or does the actual mix that you've kind of shifted to as it stands right now actually physically constrain your output?

Yeah, Adam, so, you know, I know the team's working on getting to pre-pandemic levels, but the reality is the choices and the mix that we're now producing, you know, really oversimplifying it, we have to slow the lines down when we're making CODA products. So, we can't run as fast, and so there is some capacity disadvantages to running premium products. That's just a fact. However, I think the mix of the portfolio bodes well going forward for the profitability of the company.

Okay.

And maybe just behind the neck, Susan, of your total price mix in the quarter, how much was mixed? Can you share any of our framing?

Yeah, we don't break the out mix from price, Adam. It's predominantly price.

All right. Okay. I appreciate all the color. I'll pass it on. Thanks.

Our next question will come from William from Bank of America. Please go ahead.

Hi. I just have two. Given the changes in your sourcing from the West Coast to the East Coast that you did last year and now again this year, do you anticipate that in future years, if we return to more typical yields, you'll be able to shift that back to the West Coast, and therefore there should be some kind of margin expansion in 2024 and beyond?

Yes.

I expect, you know, next year's crop to be normalized and yields good and all the things that we're historically used to. And, you know, in terms of is that going to provide margin expansion? No, it won't. materially it won't we're going to have inflation in our commodity costs next year again I believe based on how the commodity markets are shaping up and as I stated in the prepared remarks where the potato crop negotiations we settled with Pacific Northwest are going to be up 20% next year and you know you stack that up over two years that's a big lift and it's It's going to be another difficult year, and we'll continue to adjust our thinking on pricing that through the market going forward, but it's not going to be a material margin impact year over year just based on sourcing out of the East Coast.

Got it. And then my second is, based upon your guidance, even pro forma for the acquisition of the rest of the joint venture, you're still going to be below your leverage target of three and a half to four times. You're going to be, I think, in the high twos. I guess, what does that mean in terms of capital allocation? I know you increased the dividend, but how are you thinking about that?

Yeah, no, we're excited about increasing the dividend based on our performance. As we think about capital allocation, we have not changed our priorities in terms of investing in the business for the long term. M&A, if there's M&A that's available, and then we will reward our shareholders as well. But certainly, we're going to invest in the business first.

Okay, so the leverage target remains at three and a half to four times?

It does remain in that range. And as we've said before, we're doing that because we want to make sure that we have enough financial firepower for M&A or other items that may come up.

Got it. All right. That's all for me. Thank you. Thank you.

There are no further questions at this time. I'd like to turn the conference back over to you, Dexter Convale, for any additional remarks.

Thanks for joining the call this morning. If you want to have any follow-up sessions, please email me so we can schedule a time. And Happy New Year and have a good day. Thank you.

This concludes today's call. We appreciate your participation. You may now disconnect.