Good day, and welcome to the Lamb Weston’s Second Quarter 2022 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Dexter Congbalay, VP of Investor Relations of Lamb Weston. Please go ahead..

Good morning and thank you for joining us for Lamb Weston’s second quarter 2022 earnings call. This morning, we issued our earnings press release, which is available on our website lambweston.com. Please note that during our remarks, we'll make some forward-looking statements about the company's expected performance.

These statements are based on how we see things today. Actual results may differ materially due to risks and uncertainties. Please refer to the cautionary statements and risk factors contained in our SEC filings for more details on our forward-looking statements. Some of today's remarks include non-GAAP financial measures.

These non-GAAP financial measures should not be considered a replacement for, and should be read together with our GAAP results. You can find the GAAP to non-GAAP reconciliations in our earnings release. With me today are Tom Werner, our President and Chief Executive Officer; and Bernadette Madarieta, our Chief Financial Officer.

Tom will provide some comments on our performance, as well as an overview of the current operating environment. Bernadette will then provide details on our second quarter results and updated fiscal 2022 outlook. With that, let me now turn the call over to Tom..

Thank you Dexter. Good morning and thank you for joining our call today. We are pleased with the improvement in our manufacturing and supply chain operations as well as the progress on our financial performance in the quarter, and I am proud of how Lamb Weston team has been able to navigate through this difficult macro environment.

We generated strong sales and solid demand across our food away from home channels, drove volume growth, and the initial benefits of our recent pricing actions began to offset inflationary pressures.

In addition, our efforts to stabilize our manufacturing operations are on track, including increasing staffing at our processing plants to improve production run rates and throughput.

Together, our sales and operating momentum drove sequential gross margin improvement in the quarter and have us well positioned to better manage the upcoming cost pressures from this year’s exceptionally poor potato crop in the Pacific Northwest.

While our operations and financial results are not yet where we want them to be, we are on track to deliver our financial targets for the year, and our investments in capacity and productivity will get us well positioned to deliver higher margins and sustainable growth over the long term.

Before Bernadette gets into some of the specifics of our second quarter results and outlook, lets briefly review the current operating environment starting with demand. In the U.S.

overall fry demand and restaurant traffic in the quarter remained solid especially at quick service restaurants where demand has continued to be strong and above pre-pandemic levels. Traffic at full service restaurants during the quarter was also solid but remained below pre-pandemic levels.

Restaurant traffic though has softened recently as the spread of COVID variants have tempered consumer demand for on premise dining and as restaurants closed temporarily due to staff shortages.

While we expect the COVID wave will continue to temper demand for on-premise dining in the near-term, we do not anticipate that it will have a meaningful effect on traffic or demand at QSRs. Demand at non-commercial outlets also improved during the quarter but continued to be below pre-pandemic levels.

As with on-premise dining, we expect the spread of COVID variants will affect near-term demand. The fry attachment rate in the U.S. which is the rate at which consumers order fries when visiting a restaurant or other food service outlets continue to be above pre-pandemic levels. This served to support our out of home fry demand in the quarter.

The increase in the fry attachment rate has been fairly consistent since the beginning of the pandemic, and we do not see that changing in the near-term. Fry demand in U.S.

retail channels in the quarter was up mid-teens from pre-pandemic levels, and we anticipate it will remain strong in the near-term as the pandemic continues to affect demand in out of home channels. Now outside the U.S.

demand in Asia and Oceana has been solid, although the lack of shipping containers and disruptions to ocean freight networks continues to hinder our ability to fully serve our customers in these markets.

Demand in Europe which is served by our Lamb Weston/Meijer joint venture has also been solid, although consumer reaction and the effect of recently imposed government lockdowns may reverse some of the recovery in restaurant traffic and fry demand in the near term.

So, overall we are encouraged by the resiliency of demand and the long-term trends for the category but expect that there will be some near-term softness with another COVID wave in the U.S. and our key international markets. With respect to pricing, we're making good progress in implementing recent pricing actions to manage input cost inflation.

In the second quarter we began to see the initial benefits of the price increases that took effect in the summer in our foodservice and retail segments as well as in some of our international businesses. We expect the benefit of these prices will continue to build as the year progresses.

In December, we began implementing another round of pricing actions in our foodservice and retail segments. While these actions do not affect our second quarter results, we'll see a gradual benefit from them over the next six months.

In our global segment, we saw some benefit of pricing actions in the second quarter but expect to see a greater impact during the back half of the year. This reflects price increases related to contract renewals as well as the benefit of price escalators for most of the global contracts that are not up for renewal this year.

We expect these price increases across our business segments will in aggregate mitigate much but not all of our cost inflation pressures. We will continue to assess the pace and scope of further cost inflation, and we may take further price actions as the year progresses.

With respect to costs, input cost inflation remains the primary driver to the increase in our cost per pound in the quarter. Commodity and transportation costs were each up double digits and we expect that trend will continue through fiscal 2022, especially as our raw potato costs significantly increased in the second half of the year.

Outside of cost inflation, we're making good progress to stabilize our supply chain in order to improve cost, production run rates, and throughput. We've taken actions to simplify our manufacturing process to drive savings through a series of productivity initiatives eliminating underperforming skews and increasing potato utilization rates.

Importantly, after making changes to how we staff production crews, compensation, and other incentives we steadily reduced our staffing shortfall. We are working to continue this positive trend but realize it is difficult in a very challenging labor environment.

The pending implementation of government mandated COVID testing and vaccine regulations may also slow our progress and that of our suppliers in attracting and retaining workers in the near-term. Now turning to the crop.

The yields and quality of the potato crops in our primary growing regions in the Columbia Basin, Idaho, and Alberta are well below average due to the extreme heat over the summer. Similar to prior years we have contracted with farmers to purchase potatoes to meet our production needs assuming an average crop year.

But because of the extreme heat, the contracted acres yielded fewer potatoes and the quality is also poor. As a result, we're purchasing our remaining potato needs in the open market to meet our production forecast.

We were able to reduce the number of potatoes we otherwise have been required to purchase in the open market by successfully partnering with our customers to secure changes to product specifications.

Given that raw potato supply is tight and that fry demand is largely recovered, we've been purchasing open potatoes at a premium to contract at potato prices.

When possible we've been securing them from a nearby growing regions but we have also transported potatoes from the Midwest and East and North America which results in increased transportation costs. We included an estimate of these additional costs in our updated earnings outlook.

We'll begin to see more of the financial impact of this year's poor crop including the high cost of open market potatoes in our third quarter results. So in summary we feel good about our financial and operating progress in the quarter.

The overall demand environment is solid but may soften in the near-term due to another COVID wave and we're pulling the right pricing and operating levers to manage through this challenging environment. Let me now turn the call over to Bernadette to review the details of our second quarter results and updated fiscal 2022 outlook. .

Thanks Tom and good morning everyone. As Tom discussed we're pleased with our progress in the quarter. We generated strong sales and solid demand across our restaurant and food service channels in North America, drove growth, and we implemented pricing actions.

We believe our pricing and cost mitigation actions have us positioned to navigate through this difficult operating environment and to support sustainable profitable growth over the long-term. Specifically, in the quarter sales increased 12% to a little over $1 billion.

This is only the fourth time in Lamb Weston's history that we topped $1 billion of sales in the quarter. Sales volumes were up 6%.

Volume growth was driven by our food service segment which reflects the continued year-over-year recovery in on premise dining and by strong shipments to our large chain restaurant customers in North America that is served by our global segment.

Sales volumes of branded products in our retail segment were also up in the quarter, but the segments overall volume decline due primarily to lower shipments of private label products.

While our overall volume growth in the quarter was strong, it was tempered by industry wide upstream and downstream supply chain constraints, including delays in the availability of spare parts, edible oils, and other key materials to our factories, as well as labor shortages, which impacted production run rates and throughput at our processing plants.

In our global segment, volume growth was also tempered by the limited availability of shipping containers and disruptions at ports and in ocean freight networks. We expect these production and logistic challenges, as well as the near-term impact of COVID variants to limit our volume growth through at least the end of fiscal 2022.

Price mix was up 6% as we realized benefits from our previously announced pricing actions in each of our core segments. As a reminder, we began implementing product pricing actions in the first quarter as the primary lever to offset inflationary cost pressures.

And it generally takes a couple of quarters before these actions are fully realized in the marketplace. We've also taken actions to more frequently change the freight rates that we charge to customers so they better reflect market rates. Historically, we only adjusted these rates once or twice a year.

Most of the increase in price mix in the quarter reflects these product and freight pricing actions, with favorable mix providing only a modest benefit. Gross profit in the quarter declined $18 million as the benefit of increased sales was more than offset by higher manufacturing and transportation costs on a per pound basis.

Double-digit inflation for commodities and transportation costs accounted for almost 90% of the increase in cost per pound. Of the two commodities played a bigger role and we're again led by edible oils, including canola oil, which nearly doubled versus the prior year quarter.

Ingredients such as wheat and starches used to make batter and other coatings and containerboard and plastic film for packaging. Freight costs rose, especially for ocean freight and trucking, as global logistics networks continued to struggle.

Our costs also increased due to an unfavorable mix of higher cost trucking versus rail in order to meet service obligations for certain customers.

As Tom mentioned, we also incurred higher cost per pound versus the prior year due to incremental costs and inefficiencies driven by lower production run rates and throughput at our factories, which resulted in fewer pounds to cover fixed overhead.

Lost production days and unplanned downtimes were primarily due to labor shortages across our manufacturing network, including COVID related absenteeism.

While the cost drivers in the first two quarters of the year have been largely consistent, in the second quarter we began to realize the initial benefits of the pricing and cost mitigation actions that we discussed during our last earnings call.

As a result of these efforts, gross margin increased sequentially versus the first quarter by 500 basis points to more than 20%. While pricing actions provided the larger lift to the sequential improvement to gross margins, our production run rates and throughput improved sequentially, primarily due to our efforts to stabilize factory labor.

While still lower than average, labor retention rates improved modestly versus the first quarter and the number of new applicants has been steady. With more stability we in turn drove more factory throughput. Finally, our actions to optimize our portfolio are also providing benefits.

We've eliminated underperforming SKUs to simplify our portfolio and increase throughput in our factories. We've also successfully partnered with our large customers to secure changes to product specifications to mitigate a portion of the operating impact of the poor quality of this year's potato crop.

In short, while our run rates and cost structure are not yet where we want them to be, we look forward to building on the notable sequential progress that we made in the quarter and believe that we positioned ourselves to manage through this challenging near-term increased cost and poor potato crop environment.

Moving on from cost of sales, our SG&A increased $7 million in the quarter, largely due to a couple of factors. First, it reflects higher labor and benefit costs and higher sales commissions associated with increased sales volumes.

Second, it includes a $2.5 million increase in advertising and promotional expenses as we stepped up support for our retail products. While these expenses are up compared with the prior year, they are still below pre-pandemic levels.

The increase in SG&A was partially offset by a reduction in consulting expenses associated with improving our commercial and supply chain operations as those consulting projects ended, as well as fewer expenses in the current quarter related to the design of a new enterprise resource planning system.

We had approximately $2 million of ERP related expenses in the quarter, which consisted primarily of consulting expenses. That's down from about $5 million of similar type expenses in the prior year quarter. We're resuming our efforts in the second half of fiscal 2022 to design the next phase of our new ERP system.

Diluted earnings per share in the quarter was $0.22 down $0.44. About $0.28 of the decline was related to costs associated with the redemption and write off of previously unamortized debt issuance costs related to the senior notes that were originally issued in connection with our spin off from ConAgra in November 2016.

We identified these costs as items impacting comparability in our non-GAAP results. Excluding the impact of these items, adjusted diluted EPS was $0.50, which was down $0.16 due to lower income from operations and equity method earnings. Moving to our segments. Sales for our global segment were up 9% in the quarter.

Price mix was up 5% reflecting a balance of higher prices charged for freight, pricing actions associated with customer contract renewals, and inflation driven price escalators. Volume was up 4%.

Higher shipments to large chain restaurant customers in North America drove the volume increase, while logistics constraints tempered our international shipments. Overall, the global segment's total shipments continued to trend above pre-pandemic levels.

Global product contribution margin, which is gross profit less A&P expenses declined 13% to $81 million. Higher manufacturing and distribution cost per pound more than offset the benefit of favorable price mix and higher sales volumes. Moving to our food service segment. Sales increased 30% with volume up 22% and price mix up 8%.

The ongoing recovery in demand from small and regional restaurant chains and independently owned restaurants, as well as from non-commercial customers drove the increase in sales volumes.

The initial benefits of product and freight pricing actions that we began implementing earlier this fiscal year, as well as favorable mix drove the increase in price mix.

Food services product contribution margin rose 19% to $104 million as favorable price mix and higher sales volumes more than offset higher manufacturing and distribution costs per pound. Moving to our retail segment, sales increased 1%.

Price mix increased 4%, reflecting the initial benefits of pricing actions in our branded portfolio, higher prices charged for freight and improved mix. Sales volume declined 4% as an increase in branded product volume was more than offset by lower shipments of private label products, resulting from incremental losses of certain low margin business.

Retail shipments in the quarter were also tempered by the industry wide supply chain constraints and production disruptions that I discussed earlier. Retails product contribution margin declined 29% to $21 million. Higher manufacturing and distribution cost per pound, a $2 million increase in A&P expenses and lower sales volumes drove the decline.

Moving to our liquidity position and cash flow. Our liquidity position remains strong. We ended the first half of fiscal 2022 with almost $625 million of cash and $1 billion of availability on our undrawn revolver. In the first half we generated more than $205 million of cash from operations.

That's down about $110 million versus the first half of the prior year due primarily to lower earnings. During the first half of the year we spent nearly $150 million in capital expenditures as we continued construction of our top [ph] informed expansion in American Falls Idaho and our new processing lines in American Falls in China.

We continued to put significant effort into managing certain material equipment and labor availability issues to keep our capital projects on track. In the first half of the year we returned $145 million to shareholders including nearly 70 million in dividends and 76 million of share repurchases.

This includes $50 million of share repurchases in the second quarter alone. Last month we announced a 4% increase in our quarterly dividend rate which equates to approximately $144 million annually and a $250 million increase to our current share repurchase plans reflecting our confidence in the long-term potential of our business.

As a result, we have about $344 million authorized for share repurchases under the updated plan. As I referenced earlier, during the quarter we redeemed and issued nearly $1.7 billion of senior notes.

In doing so our average debt maturity increased from four years to more than seven years and we reduced our annual interest expense by approximately $8.5 million.

We remain committed to our capital allocation priorities, first to reinvest in our business both organically and with M&A and then to return free cash flow to shareholders through a combination of dividends and share repurchases over time.

Now turning to our updated outlook, we continued to expect our full year sales growth in fiscal 2022 to be above our long-term target of low to mid-single-digits.

In the third quarter we anticipate price mix will be up sequentially versus a 6% increase that we delivered in the second quarter as the benefit of previously announced product pricing actions in each of our core segments continues to build.

We expect volume growth in the third quarter will decelerate sequentially versus the 6% we delivered in the second quarter as a result of the near-term impact of COVID variants on restaurant traffic and demand, the macro industry supply chain constraints and labor challenges that will continue to affect production run rates and throughput in our factories, and global logistics disruptions and container storages that affect both domestic and export shipments.

We expect further deceleration in the fourth quarter as we begin to lap some of the higher volume comparisons from the prior year.

With respect to earnings we continue to expect net income and adjusted EBITDA including joint ventures will be pressured through fiscal 2022, reflecting significantly higher potato costs in the second half of the year resulting from the poor crop, double-digit inflation for key production inputs and freight and higher SG&A expenses.

For the full year we expect our gross margin will be 600 to 700 basis points below our pre-pandemic margin rate of 25% to 26%, implying a target range of 18% to 20%. That's a change from the 17% to 21% range that we provided in our previous outlook. We narrowed the range for a number of reasons.

First, we're confident about the pace and execution of the product and freight price increases that we are implementing in the market. Second, we expect to build upon the incremental progress that we made in the second quarter to stabilize our supply chain operations and drive savings behind our cost mitigation initiatives.

However, we expect that the improvement in our run rate, throughput, and costs will continue to be gradual, reflecting the broader macro challenges facing the labor market that will likely persist through fiscal 2022. And third, we have greater clarity on the net cost impact from this year’s exceptionally poor potato crop.

As a reminder, will begin to realize the full financial impact of this year's poor potato crop in the third quarter, and will continue to realize its effect through most of the second quarter of fiscal 2023.

For low gross margins we expect our SG&A expenses to step up to $100 million to $110 million in the third and fourth quarters as we begin to design the second phase of our new ERP project. Equity earnings will likely remain pressured due to input cost inflation and higher manufacturing costs both in Europe and the U.S.

We expect our interest expense to be approximately $110 million, excluding the $53 million of costs associated with the redemption of the senior notes in the second quarter. We previously estimated interest expense to be approximately $115 million.

Our estimates for total depreciation and amortization expense of approximately $190 million and effective tax rates of approximately 22%, and capital expenditures of approximately $450 million remains unchanged.

So in sum, we're seeing the benefit of our pricing actions which drove the sequential improvement in our top line and gross margin in the quarter. Along with our pricing actions we're on track with our other cost mitigation initiatives, positioning us to manage through the impact of the very poor crop.

And finally, for fiscal 2022 we continue to expect net sales growth will be above our long-term target of low to mid-single-digits, and we have enough clarity in our sales and cost outlook to narrow our previous target gross margin rates. Now, here's Tom for some closing comments..

Thanks Bernadette. Let me just quickly reiterate our thoughts on the quarter by saying we are pleased with our progress in the quarter and we're taking the right steps on pricing actions and in our supply chain operations to navigate through this difficult operating environment.

We are on track to deliver on our targets for the year and we believe we're on a path to get back to pre-pandemic profit levels after we get past the impact of the poor crop in the first half of fiscal 2023 and remain committed to investing to support growth and create value for our stakeholders over the long term.

Thank you for joining us today, and we're now ready to take your questions..

Thank you. [Operator Instructions]. We'll take our first question from Chris Growe with Stifel. Please go ahead. .

Hi, good morning. .

Good morning Chris..

Good morning Chris. .

Hi, nice quarter there for the second quarter here. I had two questions for you. I first wanted to ask in relation to pricing, you’ve mentioned Tom that pricing will mitigate much of the input cost and pressure but not all of it and that's not surprising as pricing picks up here.

I know you also have some product spec changes, probably some productivity savings coming through, perhaps even some lower COVID costs year-over-year, I just want to get a sense of if I bundle all of it together and I look ahead whether it's third quarter, fourth quarter, in the second half there will be a point where you are able to offset the majority or all of the inflation, and are those other factors beyond pricing helping offset some of the inflation?.

Yes, it's a combination of everything you just said, Chris, and we expect as we progress through the back half of the year. As we said, we'll start seeing more price realization based on the actions we have taken to this point.

And also, as we continue to evaluate our input cost inflations and what's going on with the crop and the open potatoes, all those factors, the commercial team, we're constantly evaluating, when we're introducing new pricing in the market.

So, it's multiple factors as you indicated, we're managing it real time, and we're going to have to continue to do that because the inflationary environment right now is pretty volatile. .

Okay. And then I had another question, there are couple items you noted in the press release around production run rates which are down and raw potato utilization, and not to get too deep in the weeds, but those are items that are hard for us to model and are things that are unique to your business.

I just want to get a sense of like, from a production run rate standpoint, how much is it down if you can even say that and raw potato utilization, how much are you able to utilize the potato maybe that's different from what it was in the past?.

Yeah, broad strokes, historically we talked about running our factories at capacity. I'd say we're down around 10 points to that right now. And in some weeks, a little below that, a couple of points even down further. The team is making great progress.

As Bernadette has stated, our staffing is improving although gradually, and we expect hopefully by the spring-ish, we'll have our staffing situation squared away, but the labor market is tough. And, in terms of potato utilization, it's historically I'll just give you the numbers broad strokes. We utilize about 62% of the potato to make fries.

With the poor crop right now, that's down five to seven points, and that's something we're really watching close, it's going to be pretty volatile in the back half of the year as we start chewing up the new crop potatoes making fries. So hopefully that gives you something to range. .

That does, yeah, thank you for that color and that outlook, I appreciate it..

Thank you. We will hear next from Peter Galbo with Bank of America..

Good morning, Peter. .

Hey, guys good morning. Thanks for taking the questions. Tom, I was wondering, you spent a bit of time talking about some of the manufacturing initiatives and if you could expand some of the details there on just what exactly you're doing to set yourself up in a position.

Once we get beyond this poor crop, what's really going to kind of help you regain some of that profitability and, I know Dexter is sending around kind of some of the videos you guys have put out on automating more of the plants, but just what you're doing in the plant to improve there? And then also, just as you start thinking about, planting for this next crop, right, the 2022 crop, what are the conversations you're having with farmers, are you starting earlier, is there more acreage being planted, anything you can do to help us kind of think about the go forward?.

Yeah, in terms of productivity, we have a winner's one initiative, which is call it a pretty systematic savings program that we kicked off in the summer of 2020, and we're making progress against that.

And as we become more stable in our operating environment, my expectation is that's going to drive savings that will be apparent as we get through a more stabilized cost environment going forward.

And we're rolling it out systematically across our network, we're not all the way bright rolling it out to all of our plants, it's taking a bit more time because of the current operating environment and the focus on ensuring we get our throughput, breaks up, and staffing and all that.

So, I expect it to be more visible in our margins, once the operating environment stabilizes. And, with respect to the 2022 crop, it's early on. I'm not going to get into specifics on discussions with growers. And there'll be some news coming out and I'll talk more about it in the third quarter. .

Okay, now that's helpful and I appreciate that. I guess the other just broader question, you spent a bit of time in your prepared remarks talking about fry attachment rate running at a pretty healthy level even from pre-pandemic.

And just in the sales force conversations with restaurant customers, is it really a structural change that you're seeing at this point.

We've heard a lot about menu, restaurant operators SKU routing their menus and do you feel like that's just temporary until we get through all the supply chain noise across everything or do you really feel like it's structural?.

It's really hard to say across the entire menu of a restaurant. What I will tell you is from a side options standpoint, obviously French fries are a really good category and they're an important part of the operator's menu item because of profitability.

So, while there has been a lot of simplification and we've done the same thing within our portfolio with our SKU rationalization project, I think the simplification of menus is going to be around for a while.

And, a lot of it is going to have to do with the overall supply chain worldwide and food and having availability of the products to menu at a normalized regular basis. So I think this is going to be around for a while.

The good news is our categories is more or less back to pre-pandemic levels and it remains an important menu driver and profit driver for our customers. .

Thanks very much guys..

Thank you. We'll take our next question from Tom Palmer with J.P. Morgan..

Good morning and thanks for the question. I wanted to ask on the price mix side. So you indicated in prepared remarks price mix should continue to ramp as the year progresses.

Based on what you have secured thus far, how should we think about the pace of that step up, is the biggest sequential step up as we go quarter-by-quarter going to be what we just saw from the first quarter to the second quarter or should we look for even more substantial increases taking hold as you will see pricing flow through it more clearly in that global segment?.

Yeah, thanks Tom. This is Bernadette. We do expect price mix to go up sequentially in Q3 from the plus 6% that we reported in Q2. Again, that's just broad based pricing actions becoming more fully implemented. .

So, maybe just to clarify the step up that we saw from 1Q to 2Q, should we see something similar to that?.

No. No, I wouldn't expect that large of an increase..

Okay, thank you.

And then just wanted to ask on the freight surcharge, have you seen that have much impact from a competitive standpoint, are you seeing competitors take similar actions, and that is just kind of a broader industry change?.

Yeah, I can't speak to what competitors are doing but I can say from our standpoint, we aren't seeing a lot of our customers switching freight lanes or that sort of thing. So we continue to remain competitive..

Great, thank you. .

Thank you. We'll take our next question from Adam Samuelson with Goldman Sachs. Please go ahead..

Yes, thanks. Good morning, everyone.

So my first question is really trying to take a step back, and you've updated kind of the margin framework for this year to 18% to 20% and maybe just as we think about those longer term aspirations to get back, the margins back to pre-pandemic levels 25% to 26%, can you help us think about kind of the key buckets of that bridge and the 500 to 700 basis points, and you still have to get whether it is just much more aggressive pricing, recapturing kind of that 10 points of capacity utilization and the benefits that would have on your unit cost, I am just trying to think about the productivity actions you're taking, just trying to think about how we walk back up to 25 and kind of some of the key milestones to think about getting there? Yeah, so as we think about our tactics to getting back to those levels, it's going to be important that we have an average crop year, first of all.

And then we're going to have to have sufficient pricing to offset input in transportation inflation. Our supply chain will have had to have stabilized and no significant impact on demand, which we're not anticipating. So those are going to be the key things that are going to be important to return to that pre-pandemic margin level.

And we think that, that's absolutely there and that's supported by the solid health and the long term growth of the frozen potato category that we continue to see. .

Okay, and the clarity....

The other thing I'll add on that is, the productivity initiative that we're rolling out and the cost saving projects we're introducing into some of our factories are also going to help us hopefully bridge back to that, and then some. .

Okay, and just to clarify on the point of a normal potato crop, does the normal potato crop that just yields because I'm thinking about kind of what your -- what contract of potato prices are going to look like in calendar 2022 and they're probably going to be up a lot so I'm just trying to think about, normal yield?.

Yeah, Adam it's a combination of a couple different things. Its yield per acre and its recovery as we're processing them in the plant on kind of the range of numbers I said earlier. And, it's size and quality and all those kinds of things that there's kind of three or four factors there. .

Okay. And then just a separate question, you talked to Tom about your capacity utilization, maybe running about 10 points below kind of your normal. But you also talked about underlying demand in the category returning to pre-pandemic levels, pre pandemic you were running basically at capacity.

Do you think -- have you exceeded some business in some areas or just areas do you think there's competitors who gain market share in areas of the market that you want to keep or is it more just the low end retail in areas that you kind of walked away from?.

Yeah, I mean, we're managing our customer portfolio Adam and there is areas where we made some tough decisions, not to serve some customers. But it's a pretty -- we have to be very nimble and flexible.

And this environment have been and the team's doing a good job, but we've made some tough calls and in terms of the market share, and all those kinds of things, I haven't seen the latest data. But the category share, pie so to speak, really hasn't changed that much.

And, so I think everybody's battling the current operating environment and working through as best they can. .

Okay, that color is really helpful. I'll pass it on. Thanks. .

Thank you. We'll take our next question from Robert Dickerson with Jeffries. .

Great, thanks so much. This first question, just to clarify on the guidance a range scenario to 18% to 20%, which is great and helpful. But you also now only have a half a year relative to the full year.

So just to ask you, Tom, I'm curious kind of given that range, and kind of what that could imply at the low end or the high end, and the back half is still fairly wide.

So maybe if you could just kind of come in on what could be some of the drivers that would get you to the lower end and then what could be some of the drivers that could actually get you to the higher end? And then I have a quick follow up..

Yeah, so talk about couple of things as it relates to our guidance. In the first half, we're already plus 13% as it relates to growth. And in the second half, we do expect price to accelerate from the plus 6% that we recorded, or reported in Q2.

So, in the second half volume is going to continue to grow, although below the 6% that we delivered in the second quarter. And we talked about all the reasons for that. As we looked at the range of guidance that we provided, we wanted to provide the prudent guidance as the operating environment does still remain really challenging.

And, we've got volatility in our near put -- near-term input costs and ongoing production disruptions and things. And that's what's going to result in whether or not we end up at the bottom or the top of the range. The other key piece that's going to affect where we land in that range is going to be the storage performance of these potatoes.

We talked about it being a very poor crop and we don't know how it's going to store and that's going to affect our potato utilization. And then the other piece is what we feel good about our cost estimates related to our open market purchases.

And we procured most of those, we still are out and procuring those potatoes and so that's what's going to tend to pull us from one end to the other of our gross margin range that we provided..

Okay, super, very helpful.

And then I guess Tom just quickly, I heard you briefly before comment that kind of hope to have some of the labor situation kind of self-corrected sometime in the spring which sounds like what would imply that as we look forward into 2023, hopefully, you are seeing a good position on the labor front, and I kind of ask, because obviously, that flows through into some incremental costs and throughput, but what have you, so just any additional commentary on that would be helpful? That's it.

Thanks. .

Yeah, sure. So, like I said, we've made really good progress with staffing up in our factories in particular, based on some of the actions we've taken, and they're sticky too.

So, I -- and that gives me confidence based on the last couple 60-90 day trends just in terms of labor filling jobs, those kinds of things that if that continues, then we should be in really good shape in the next 60-90 days..

Okay, Super, thanks so much. .

Thank you. We'll take the next question from William Reuter [ph] with Bank of America. .

Good morning.

My question it sounds like the context of the December increase versus the one which was pushed through earlier this year, that it was relatively small, I guess, is that the case? And two, I guess I'm just wondering how much ability do you think you have for further price increases should they be needed next year?.

Yeah, thanks for the question. As it relates to the price increases, as a reminder, it does take either one to two quarters for that price increase to show its results in the quarter. So I think, take a look for that.

And then as it relates to any future price increases, you know, we don't comment on those other than to say, we are expecting to see higher potato costs next year, just given the higher costs to grow, fertilizer, etc. And so, there could potentially be future price announcements..

Okay, and then just a second one for me on capital allocation, you accelerated the share repurchases in the second quarter, also increased the dividends.

What are your thoughts on uses of capital given that you do have such high, such large capex projects over the next several years in terms of share repurchases?.

Yeah, so we have announced many expansions that we believe have attractive returns. And so we will continue to have our same capital allocation policy where we're going to invest first in the business. Certainly, as we demonstrated in the second quarter, if there are attractive returns to repurchasing more stock, we will do that.

And we just take a look at where those returns are and could potentially opportunistically take advantage of that. But our capital allocation priorities remain the same in terms of investing in the business first, followed by share repurchases and dividends..

Okay, all pass to others. Thank you. .

Thank you. We'll take our next question from Andrew Lazar with Barclays..

Thank you. Good morning, Happy New Year, everybody..

Good morning, Andrew..

I missed a little bit of the prepared remarks so I apologize if some of this was covered. But it's good to see that some of the more -- the efforts around trying to make the pricing model around transportation and freight more dynamic, and to see some of that coming through, I know that was a big effort over the last quarter or two.

I think you had mentioned at one point that maybe over time that you could start to make some of these multi-year contracts with larger customers as they reprice or come up for renewal.

A little bit more dynamic as well, when you're building in some aspects that if there is such significant volatility going forward, that you'd be able to sort of maybe account for that a little bit more effectively. And quickly, then then maybe the contracts allowed for this past go around.

And I know you don't operate in a vacuum so this is not something that you would necessarily be able to do if others didn't, but I don't know how many of these contracts that these larger contracts have yet really sort of are priced in any big way or come up for renewal.

I know more of that I think happens more later in the spring but is there any evidence yet that any of that’s happened or could happen or are you at least certain having maybe some have those discussions or is the environment right now just having those sorts of discussions just a lot tougher to have yet? I'm just sort of curious about. .

Yeah, Andrew, great question. And, it's early on in the contract cycle this year. We get more into it typically mid late spring through summer.

Obviously, internally we're having the conversations on with the inflation we've experienced, which has been a long time that that business have experienced this type of input cost increases and potentially broad increases.

That's something we're talking about and we're going to certainly adjust to our customers, but it's something that they're experiencing too and I think it's prudent for all of us to sit down and make sure when we get an environment like this, that we have the proper agreements on how to navigate through this a lot better. .

That's helpful.

And then one last one would be, I think, after the first quarter, I think you were pretty hopeful and seemed pretty confident that that margin performance in fiscal 1Q hopefully would kind of represent sort of the bottom if you will, and you can start to make some sequential progress moving forward through the year, albeit maybe not totally in a linear fashion and that certainly came through right in a bigger way than most expected in this fiscal second quarter? And if you have covered this already, I'm sorry, with the margins, would you be able to say that the margin structure this quarter, similarly, maybe represents a base from which you can sequentially improve to as you move forward or is it -- I wouldn't necessarily expect that and a lot of it depends on some of the three factors Bernadette that you just mentioned, which would determine where you fall in for the full year in terms of that 18% to 20% range?.

Yeah, no. Great question, Andrew. And we talked a bit about in the prepared remarks that we do expect to see large and sequentially increase in the third quarter. And then just seasonally, they'll come down a bit in the fourth quarter. But, that's the pattern that we're expecting to see in the last half of the year..

Thanks so much. .

Thank you. That does conclude today's question-and-answer session. I would like to turn the conference back over to management for any additional or closing remarks..

Thanks everybody for joining today. If you'd like to schedule a follow-up call of course please send me an email. We can schedule one then. Other than that Happy New Year, and I look forward to speaking with you later. Thank you. .

Thank you. That does conclude today's conference. We thank you all for your participation and you may now disconnect..