Good day, and welcome to the Lamb Weston’s Third Quarter 2022 Earnings Call. Today's call 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..

Good morning and thank you for joining us for Lamb Weston’s third 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 third 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. First of all, I want to thank all my colleagues for their continued dedication and perseverance to keep Lamb Weston as an industry leader and a strong business partner.

Our solid financial results in the third quarter are a direct result of how well our manufacturing, supply chain and commercial teams have remained focused on improving our operations and serving our customers during a challenging macro environment, which includes the impact of an exceptionally poor potato crop.

We continue to be encouraged by strong French fry demand and feel good about our continued progress.

Specifically, in the third quarter, we delivered solid sales growth and drove sequential and year-over-year gross margin expansion and we did this despite the impact of Omicron variant slowing restaurant traffic and disrupting our production and distribution operations more than we expected.

We benefited from our previously announced pricing actions to mitigate this significant cost inflation across our supply chain. We’ve also been driving improvements in our manufacturing operations as we focus on what’s in our control.

This includes mitigating some of the effects of the poor potato crop with product specification changes and portfolio optimization work that we’ve discussed previously. Factory labor remains challenging as we remain below preferred staffing levels, but we are making steady progress in a highly difficult labor market.

We are addressing the labor gap by focusing on retention and new ways of attracting talent. We’ll continue to push hard on our staffing initiatives and are encouraged by the improvements we are seeing. However, it will take time to get all of our factory staff where they need to be.

Like others, we are managing through freight challenges including both cost increases and shipping delays. The freight challenges are impacting our top-line as it limits our ability to service full demand. This is caused by lack of containers for international and domestic shipments and truck driver shortages.

This combined with higher fuel cost has also increased our cost to deliver products. We are continuing to navigate through these and other operating challenges and remain on track to deliver our financial commitments for the year. Our capacity expansion investments in Idaho and China also remain on track.

It will have us well positioned to support increasing customer demand over the long-term. Let me provide some brief updates on the operating environment before turning the call over to Bernadette. Let’s start with demand. In the U.S. overall fry demand and restaurant traffic in our third quarter remained solid.

Although it weakened temporarily as the Omicron variant spread quickly. Omicron’s impact peaked in January and affected consumer traffic at both quick service and full service restaurants. In addition, some restaurants closed temporarily or reduced operating hours due to staff shortages which further impacted demand.

Restaurant traffic however has rebounded to pre-Omicron levels. 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 has been fairly consistent since the beginning of the pandemic and remains above pre-pandemic levels.

Going forward, we expect restaurant traffic and consumer demand for fries in the U.S. to remains strong. Although it may be more volatile in the near-term as consumers face significant cost inflation. In contrast, fry demand in retail channels may continue to benefit if demand in out of home channels is affected.

Outside the U.S., demand in Asia and Oceana remains stable. However, we have not been able to meet that demand due to the limited availability of shipping containers for export.

While we expect overall demand in these regions to return to pre-pandemic levels, widespread COVID-related government restrictions in key markets such as China may lead to demand volatility in the near-term.

Demand in Europe which is served by our Lamb Weston/Meijer joint venture has also been fairly stable, although it was temporarily affected by the spread of Omicron during the quarter. As in the U.S., we expect demand in Europe may be volatile in the upcoming months as cost inflation and COVID variants tamper restaurant traffic.

So, overall we expect that demand in the near-term will be choppy, we remain confident in the long-term resiliency and growth prospects of the category in the U.S. and our key international markets.

With respect to pricing, our price mix growth accelerated sequentially in the third quarter as we continue to execute on our previously announced product and freight pricing actions in our food service and retail segments to offset inflation and as we began to implement pricing actions in our global segment.

Going forward, if we see further inflation we are prepared to take additional pricing actions as well as drive opportunities to improve product and customer mix.

To that end, last week, we began implementing another round of pricing actions in our food service and retail segments and we expect to see the benefits of these actions gradually build over the next six months. In our Global segment, contracts representing about one-third of the segment’s volume are up for renewal this year.

We’ve begun discussions with those customers and expect to have most of the contract terms agreed by early fall. With respect to this year’s upcoming potato crop, we’ve agreed to a 20% increase in the contracted price per pound in our primary growing regions in the Columbia Basin, Idaho, Alberta and the Midwest.

This increase reflects our approach for annual price changes that reflect the cost to grow plus an appropriate return for our growers such that they are viable over the long-term.

We’ll begin to see the impact of these higher contracted potato prices during the second quarter of fiscal 2023 as we began to process early potato varieties that are harvested in mid-summer.

In addition over the past few months, we’ve partnered with our growers to contract for acres that represent nearly all of our projected needs associated with this year’s crop. The number of acres contracted assumes an average crop year.

Planning of this year’s potato crop started in March and typically concludes by the end of April and we’ll provide our usual crop updates during future quarterly earning calls as the growing season progresses. Finally, our hearts go out to all the people affected by Russia invasion of Ukraine.

Our exposure to Russia is indirect as it runs through our 50% ownership at Lamb Weston/Meijer. Last month, the Russia JV began winding down production of Lamb Weston branded products and paused construction of its previously announced capacity expansion.

We continue to monitor the situation and any decisions regarding that operation will be made in conjunction with our partner in Europe. So in summary, we feel good about our progress in the quarter, especially given the highly challenging operating environment and we remain on track to deliver our financial commitments for the year.

Our pricing actions and cost mitigation efforts enabled us to drive sequential and year-over-year gross margin expansion. We’ve agreed on contract price and acres to be planted for this year’s potato crop and we remain confident in the resiliency and long-term growth prospects of the category although demand may be volatile in the near-term.

Let me now turn the call over to Bernadette to review the details of our third quarter results and our updated fiscal 2022 outlook. .

Thanks Tom and good morning everyone. Let me start by echoing Tom’s comments thanking our employees. We appreciate your hard work and dedication.

As Tom discussed we feel good about the benefits from our pricing actions and cost savings efforts to offset much of the significant cost inflation that we’ve been experiencing and I am confident in our ability to continue to manage through this volatile business environment. Specifically, in the quarter, our sales increased 7% to $955 million.

Price mix was up 12% as we continued to execute our previously announced product and freight pricing actions in each of our business segments to offset input, manufacturing and transportation cost inflation. Most of the increase in the quarter reflects these pricing actions, while mix was also favorable.

Sales volumes declined 5% as we were unable to fully serve market demand due to logistics constraints, especially for our international shipments as well as lower production runrates and throughput at our factories resulting from labor shortages.

Increased shipments in our food service segment and through our large chain restaurant customers in North America that are served by our global segment, partially offset the volume decline.

However, while volume increased in these channels, it was tempered by the Omicron variant’s negative effect on restaurant traffic, on the availability of labor to keep restaurants open and on our production facilities and supply chain. Gross profit in the quarter increased $24 million.

Product and freight price increases, along with favorable mix more than offset the impact of higher costs on a per pound basis and lower sales volumes. We expanded gross margin by 110 basis points versus the prior year quarter and 270 basis points sequentially to more than 23%.

Looking at our costs, double-digit inflation drove the increase in cost per pound for the third straight quarter and accounted essentially for all of the increase in the quarter. There were four key areas that drove the increase in cost.

First, commodities played the biggest role led by edible oils, ingredients for batter and other coatings and packaging. Labor cost also increased due to competition for factory workers. Second, transportation rates continued to climb due to the persistent disruption in global logistics networks.

We also continued to use an unfavorable mix of higher cost trucking versus rail to meet service obligations for certain customers. Third, we began to see higher potato costs resulting from the poor crop that was harvested last fall in our primary growing regions.

The increase in potato cost reflects the impact of purchasing potatoes in the open market at a significant premium to contracted prices; higher transportation cost for shipping potatoes from the Midwest and Eastern North America to our plants in the Pacific Northwest; lower potato utilization rates and running production lines at lower speeds to accommodate low quality potatoes.

The increase in our potato costs, decrease in potato utilization rates, and how the crop is performing storage are all in line with the expectations that we shared with you last quarter and we believe we’ve secured enough potatoes to deliver our volume forecast until we begin to harvest the early potato varieties in July.

As a reminder, we will continue to realize the financial impacts of this year’s poor potato crop through most of the second quarter of fiscal 2023.

The final key area that drove the increase in costs are operational inefficiencies explained by labor shortages, omicron-related absenteeism, especially in January and into early February and other industry-wide supply chain challenges.

This resulted in lower production runrates and throughput in our factories leading to fewer pounds to cover fixed overhead. As I’ll discuss later, we’ll continue to see the impact of these costs in the fourth quarter.

The effect of lower potato utilization and production runrates in the third quarter was largely offset by a range of cost mitigation efforts including eliminating underperforming SKUs, changes to product specifications, and increased productivity savings from our winner's one and other cost saving initiatives.

So in short, we are managing well through the highly inflationary and poor potato crop environment. We feel good about how we are controlling those things that we can control, which led to the year-over-year and sequential gross margin expansion.

Moving on from cost of sales, our SG&A declined $9 million in the quarter, largely due to lower consulting expenses associated with improving our commercial and supply chain operations as those projects ended. Overall compensation and benefits expense and a $2 million decline in advertising and promotion expenses.

The decline in SG&A was partially offset by higher information technology infrastructure cost, including cost to design the next release of a new enterprise resource planning system.

Equity method earnings in the quarter were $30 million and included a $20 million unrealized gain related to mark-to-market adjustments associated with currency and commodity hedging contracts.

The large mark-to-market gain in the quarter primarily relates to changes in the value of natural gas derivatives at Lamb Weston/Meijer as commodity markets fare have experienced significant volatility. Excluding the impact of these mark-to-market adjustments, equity earnings increased $1 million versus the prior quarter.

Favorable price mix and higher sales volumes were largely offset by input inflation and higher manufacturing and distribution cost in both Europe and U.S. Moving to our segments, sales in our global segment were up 2% in the quarter.

Price mix increased 8% reflecting domestic and international pricing actions associated with customer contract renewals and inflation-driven price escalators. It also reflects higher prices charged for freight. Volume fell 6%.

International shipments, which have historically accounted for about 40% of the segment’s total volume were down nearly 20% versus the prior year quarter due to limited shipping container availability and disruptions to ocean freight networks.

Sales volumes to North American large QSR and casual dining restaurant customers increased but at a slower rate than previous quarters due to the Omicron’s negative impact on consumer traffic. Global’s product contribution margins, which is gross profit less advertising and promotional expenses declined 8% to $73 million.

Higher manufacturing and distribution cost per pound, as well as the impact of lower sales volumes more than offset the benefit of favorable price mix. Moving to our food service segment. Sales increased 34% with price mix up 22% and volume up 12%.

As expected, the rate of increase in food service’s price mix accelerated sequentially to 22% in the third quarter from 8% in the second quarter as the benefits of the product and freight pricing actions that we began implementing earlier this fiscal year to mitigate inflation continued to build.

In addition, the increase reflects favorable product and customer mix. The ongoing recovery in demand from small and regional restaurant chains and independently owned restaurants, as well as some non-commercial customers drove a 12% increase in sales volumes.

While our shipments to restaurants have essentially returned to pre-pandemic levels, our shipments to non-commercial channels have not yet fully rebounded.

As with our sales to large chain restaurants in our global segment, the food service segment’s volume growth was tempered by Omicron’s negative impact on restaurant traffic and labor availability in those restaurants.

In addition, manufacturing labor shortages and the effect of Omicron-related absenteeism limited our ability to fully serve demand due to lower production runrates and throughput in our factories.

Food service’s product contribution margin rose 52% to $107 million with favorable price, volume and mix more than offsetting higher manufacturing and distribution cost per pound. In our retail segment, sales declined 12% with volume down 24% and price mix up 12%. The volume decline reflected two factors.

First, more than half of the decline was due to incremental losses of certain lower margin private-label products. And second, despite solid category growth, branded product volumes were down as labor and supply chain disruption limited our ability to service demand.

The increase in price mix was driven by product and freight pricing actions across our portfolio to offset inflation as well as favorable mix. Retail’s product contribution margin declined 5% to $32 million.

Lower sales volumes and higher manufacturing and distribution cost per pound drove the decline, which was partially offset by favorable price mix and a $2 million decrease in A&P expenses. Moving to our liquidity position and cash flow, we ended the quarter with nearly $430 million and cash and $1 billion of availability on our undrawn revolver.

Through the first three quarters of the year, we generated about $175 million of cash from operations. That’s down about $200 million versus the first three quarters of the prior year due primarily to higher working capital and lower earnings.

Year-to-date, we’ve spent more than $225 million in capital expenditures as we continued construction of our capacity expansions in Idaho and China. We’ve also returned nearly $230 million of cash to our shareholders including $103 million in dividends and $126 million in share repurchases.

After repurchasing $50 million of shares in the third quarter, we have just under $300 million remaining under our buyback authorization. Now let’s turn to our updated fiscal 2022 outlook. We expect our full year sales growth to be above our long-term target of low to mid-single digits.

In the fourth quarter, we expect sales to be driven by price mix as we continue to execute our previously announced product and transportation pricing actions to offset input and transportation cost inflations.

However, we expect sales volumes will continue to be pressured as export volumes remain constrained due to limited shipping container availability, supply chain volatility and labor shortages, challenge runrates and throughput at our factories and as restaurant traffic and consumer demand may slow due to inflation and the persistent effect of COVID variants in the U.S.

and key international markets. In addition, please note that we’ll be lapping a high volume comparison in the prior year. With respect to earnings, for the full year, we expect our gross margin will be 19% to 20%. This update puts us at the high end of the 18% to 20% range that we provided in our previous outlook.

We are comfortable to be at the higher end of that range because of our confidence in the pace and execution of product and freight price increase that we’re currently implementing in the market.

We have more clarity on the net impact and margin from this year’s poor potato crop and we are making steady progress in stabilizing our supply chain operations and driving savings behind our cost mitigation initiatives. Based on our updated full year estimate, we expect our gross margin in the fourth quarter to be 19% to 21%.

That’s down sequentially from the 23% we delivered in the third quarter and reflects in part our usual gross margin seasonality. It also includes the impact of significantly higher cost held in finished goods inventory that were produced during the third quarter.

These costs were driven by incremental cost and inefficiencies associated with very high levels of omicron-related factory worker absenteeism in January and February that resulted in broad based production disruptions.

Since we typically hold 50 to 60 days of finished goods inventory, we’ll realize these costs during our fiscal fourth quarter as that inventory is sold. The low gross margins we expect our SG&A expenses in the fourth quarter to step up to $105 million to $110 million as we continue to invest in the design and build of our new ERP system.

We expect equity earnings excluding the impacts of any mark-to-market adjustments will remain pressured due to input cost inflation and higher manufacturing cost in both Europe and the U.S.

For the year, we continue to expect interest expense to be approximately $110 million excluding the $53 million of cost associated with the senior notes that we redeemed in the second quarter; total depreciation and amortization expense of approximately $190 million and an effective tax rate of approximately 22%.

We’ve reduced our estimate for our capital expenditures to $325 million from our previous target of $450 million to reflect the timing of expenditures related to our capacity expansion projects in Idaho and China.

So in sum, in the third quarter, we delivered solid sales growth and expanded our gross margins behind our pricing actions and our cost mitigation efforts. For the year, we are targeting the upper end of our previous gross margin range due to our confidence in our pricing execution to offset inflation.

The more clarity that we now have on our potato cost and the steady progress that we are making in stabilizing labor in our supply chain. Now, here is Tom for some closing comments. .

Thanks, Bernadette. Let me just quickly reiterate our thoughts on the quarter by saying I am proud of how our Lamb Weston manufacturing, supply chain and commercial teams are continuing to take the right operating steps to manage through this challenging business environment.

We are on track to deliver on our targets for the year and we 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 are now ready to take your questions. .

[Operator Instructions] We’ll take our first question from Peter Galbo with Bank of America. .

Hey guys. Good morning. Thank you for taking the questions. .

Good morning, Peter. .

Hey. .

Tom, I just wanted to get your thoughts kind of now that the summer 2022 crop has started to go into the ground, just how are you thinking about some of the different puts and takes, obviously, nobody has the perfect crystal ball, but it seems like drought in the Pac Northwest is still kind of relatively high.

You are using the seed crop from last year of a poor crop.

Heat last year was obviously an issue; fertilizer, like, how are you thinking about all those puts and takes encompassed in what’s gone in the ground?.

Yes, Peter, so it’s early on in the planning and how we look at every crop year. Certainly, we look at history, but we plan it at average historical levels and in terms of the impact that we had last year because of the high heat which is highly abnormal, it’s early innings and we are going to have to really – we’ll monitor it.

No impact from a seed standpoint, but as I said in my prepared remarks, as the crop progresses as we always do in July and October, we’ll give you an update. But we planned for an average yield quality crop year-over-year. So, we’ll adjust it as we learn more as the growing season progresses. .

Got it. No that’s helpful. And Bernadette, maybe if I could ask on gross margins, in your prepared remarks, you mentioned the fourth quarter would follow kind of historical seasonality or a more normal historical seasonality.

As we continue to process this kind of lower quality crop through the first half of next year, would you still expect, I guess, first quarter or second quarter seasonality to kind of come back into play as other elements of the business start to normalize?.

Yeah, absolutely, Peter. The first half of next year will continue to be affected by this year’s poor crop. And then once we move into next year’s crop which as Tom mentioned, where planning will be average that’s when we should be able to get closer to those pre-pandemic margins. .

Still there, Peter?.

Yes, yes. Sorry, still here. No, thanks very much guys. I’ll pass it on. .

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

Good morning, everybody. .

Good morning, Andrew. .

Morning. .

Hi. So I think, if I’m not mistaken you just mentioned that your – I guess, your anticipation will be that you still get back to sort of your more normalized margins in the second half of fiscal 2023.

With some of the – just the recent news and knock on effects, the next wave of inflation for a lot of items even potatoes sort of out of the mix for a minute as those are contracted, I guess, how do you continue to sort have the comfort level and that is – that just you are seeing obviously the pricing goes through and therefore given what we’ve seen more recently in terms of incremental cost, there is the confidence that that more can be passed through in a timeframe that allows you to get back to those margins as you had initially expected or is there something else?.

Yeah, Andrew, it’s couple things. Certainly the average crop is going to help that obviously, significantly. And as we plan our – we are in the middle of planning our fiscal 2023, we have a point of view on what inflation is going to be which I won’t get into until the next call as we wrap our plan for 2023 up.

But we have – and have been executing our pricing actions and this – as we are all dealing with inflation is a challenge. But I am confident in how we’ve been executing and we are in the early innings of contract negotiations with some of our bigger customers and we are going to work – we’ll work through it and the team is doing a great job.

So, I feel very confident we will pass through this inflation and we are going to get some help from the crop next year but if it comes in on an average level.

So, those are really the two things that gives me a lot of confidence that we are going to get back to pre-pandemic margin levels and there is no indication right now that’s telling me that we are not. And so I feel really good about it. .

Okay. And then, I realize you are in the early innings of some contract negotiations for the third of those large customer contracts that are coming up for renewal.

For the remainder of them that aren’t not yet up for renewal, I know you’ve talked about the possibility of sort of, maybe a expanding – or kind of expanding the definition of what some of those sort of inflation escalators or how they are defined in those contracts to try and get some relief even for contracts where they are not up for renewals just yet? And I am just trying to get a sense of how sort of progress has been made there? Are you able to get some additional pricing through even where there is not, not a contract that’s up for renewal?.

Yeah, I mean, we are having very robust conversations with those customers, Andrew. And we are partnering with them. We are working through it. And we are being very transparent with what’s – what our inflation is, what we are dealing with. And I would say those conversations have been very positive.

Everybody understands the environment we are all working in. And so, again, the team is doing a great job having those conversations being very transparent with the customers, letting them know what we are dealing with and what is potentially coming out and when their contracts are coming due. So it’s a work in progress, but we are making progress. .

Thank you. .

Thank you. We’ll take our next question from Tom Palmer with JPMorgan. .

Good morning. Thanks for the questions. .

Good morning, Tom. .

Good morning, Tom. .

So, first I just wanted to ask on the potato side.

When you consider yield losses and spot market purchases, what is your potato inflation? I am really just trying to understand how much of the 20% higher contracted rate might be offset by normalized yield per acre in your spot market purchases next year?.

Yeah, Tom, we won’t get into our yield and our processing performance, those kind of things. We don’t talk about that. But the cost increase is 20%. The big impacts are two things to our P&L this year from a potato processing standpoint. It’s yield per acre, which is down because of the weather conditions.

So we’ve had to procure more potatoes on the open market. And it’s no secret, we truck potatoes from the East Coast like other processors have and that costs more money obviously and it’s also how the quality of the potato is processed through our factories.

So, the yield to make a pound of French fries, it takes more potatoes just because of the quality and size and all that. So, it’s a – we take the hit in two different areas. It’s yield per acre and it’s processing efficiency in our factories.

And we haven’t disclosed what the overall impact is because we are still trying to understand and as we take these potatoes out of storage, typically this time of year, it’s always a cyclical issue because your quality of potatoes coming out of storage is less than when it’s coming out of our field.

So we are still – we have an estimate on what the overall impact for the year is going to be, but we are still have two months to go here, two, three, four, five months to go in processing these potatoes. .

Okay understood. And then, maybe switching just to the capital expansion plan, CapEx, I mean, quite a bit below your initial outlook. But you indicated in the prepared remarks that both plan expansions remain on track.

So, what’s really causing the delays of this year and why is that not affecting the timing? Is it, there is just a ton of catch up coming next year and as long as that takes place you’ll still be on track?.

Yes. That’s absolutely right. This is Bernadette. It’s just a matter of timing and when those equipment pieces are coming in. But based on our current projections and what we are seeing from our vendors, we are still on track with the estimated completion date. It’s just a function of timing between this and next year. .

Great. Great. Thank you. .

You bet. .

Thank you. We’ll take our next question from Rob Dickerson with Jefferies. .

Great. Thanks so much. So, Tom, just kind of a question on segment margins and kind of the differencing factors between let’s say food service and the global segment. If we look at food service now, op margin for Q3 actually already higher I believe than pre-pandemic which is very positive and obviously driven by pricing.

The global side not so much, right. Thanks for a bit more time there and maybe just kind of ties into Andrew’s question on the contracted side, I guess, first, if we think about the go forward where pricing is now with food service, we are assuming kind of more normalized demand environment.

In your perspective that that’s the margin that we – you hope you can retain but as you get into Q4, maybe next year, all things considered.

And on the global side, even as you get into the back half of next year, even if the crop is or if they are more normalized and some of those costs roll off, should that global margin just be going up anyway just because of the external pricing would be getting from your other negotiations in that segment as you get through the summer? So I am just trying to get a sense of kind of margin potential on the go forward, even if the crop bottom well up?.

That makes sense. Yeah, well, I – the plan is, as we look at our inflation, our plan for 2023, we are factoring in pricing actions and cost savings to offset all the inflation and to get our margins back to pre-pandemic levels. That’s where we are headed. And there is going to be puts and takes as we negotiate these contract prices with our customers.

But again, the – it is dependent upon an average crop which we’ll know in the next six months where the crop is going to end up, but that’s where we are driving the business.

And again, my confidence level is very high that we are going to continue to execute towards that based on how we’ve been executing with some of the – with the pricing actions we’ve taken today. And – but it’s going to take time. The global segments are laagered.

We’ll get through the negotiations and you’ll see improvement in the back half in the global segment specifically. .

Okay. Okay. And then, maybe just so understand this little bit better. Obviously, potatoes are contracted with the growers it’s got if the market but it’s more understood.

If we are thinking out multi-year period, right, as you get to the end of this year, and then, let’s say you re-contract with those growers, if they are more some increased costs to the growers, right as we get to the end of this year for the forward.

I mean, it’s still challenged that it’s kind of pass through pricing ability in the business would be still alive and well and the potential for further pricing, right, on the multi-year would still be possible? Right, it’s not that you would say, right now we have taken a lot of pricing. We feel like we are in a good spot.

We have to be careful about it and it’s still very contingent or kind of what the cost of those potatoes would be on the go forward? Is that right?.

Well, yes, it is and you got to – let me step back, you have to understand what we are doing from a pricing standpoint. We are just – we are pricing through inflation and it’s – as pervasive as I’ve ever seen it, a lot of us in the industry.

So, when you think about that and you also think about the importance of French fries, our menu promo it’s a proper driver. So, it’s going to be a continuation, cost to grow is potentially going to go up and we’ll continue pricing just as we have in past years.

So, it’s a question of, to me, there is an element that at some point as – if the cost continue to increase to the levels they are, what’s the elasticity of a French fry. And right now we have seen it. So, we’ll continue to run our game plan and we’ll adjust to the market down the road. .

Alright. Super. Thank you. .

Thank you. We’ll take our next question from Chris Growe with Stifel. .

Thank you. Good morning. .

Good morning, Chris. .

Hi, Chris. .

Hi. I had a first question that’ll follow on to Rob’s question there. And you have another price increase going through, I guess, I think you have some food service in retail. It sounds like, that would take hold roughly in September or so, if we think about the timing it takes to get that through.

I am just curious how to think about, is that related to cost that you are bearing now? Is it any way getting in front of what is going to be a higher potato cost next year and given the timing when this takes hold? So I just want to understand that’s price increase if I could?.

Yes, Chris. This is Bernadette. It absolutely is related to the significant cost inflation that Tom was just referring to that we are seeing now and we are passing those costs through.

And we’ll continue to monitor the environment and the inflation that we continue to see in packaging ingredients OAO et cetera, and make decisions in terms of when further pricing actions may be necessary to offset that significant inflation that we are seeing. .

Did you say what percentage this price increase is?.

No..

Do you want to?.

Chris, we don’t disclose that. .

Okay. Thank you. I had sort of one more question for us if I could, which is that if I am thinking about the piece of your global division that was affected by and you mentioned how was down 20 plus percent in volume.

A quick math that says about a 4% drag on volume on the overall company? I just want to make sure, is that math in the right area there? And related to that more importantly, is export volume clearing anymore now? You are getting more on the road and maybe our competitor is coming in? Is anyone else that will come in, in and satisfy that volume?.

Yeah, so, as it relates to the global volume, the math you did there is right in terms of the impact on the total company. And then, as we look at export volume, it is starting to increase. We are seeing a few more containers be available than what we saw during the third quarter.

So that is a positive sign that it’s still much lower than what we’ve seen previously and what we’ve come to expect for that international business. .

Okay. Thank you for your time today. .

Thanks, Chris. .

[Operator Instructions] We’ll take our next question from Adam Samuelson with Goldman Sachs. .

Good morning, everyone. Thank you for taking my questions. .

Good morning, Adam. .

This is actually [Indiscernible] stepping in for Adam. I was wondering if you could provide some additional color on few items.

If we think about the next 6 to 12 months, what are your expectations on cost inflation and what parts of your COGS basket become more or less inflationary compared to your prior costs?.

Yeah, so, we’ve indicated we are up 20% of potato raw price. In terms of the overall basket inflation, we are right in the middle of putting together our 2023 plan. And we’ll give some more color on that in the upcoming earnings calls on what our overall view of inflation is for 2023. .

That’s helpful.

Thanks and if I could ask a follow-up, best performance in your JV compared to your base business, any differences in volume turns or inflationary pressures?.

Yeah, as it relates to our joint venture, they are seeing very similar inflationary cost increases and then more recently certainly as a result of what’s going on between Russia and Ukraine, there have been large increases in prices for natural gas and then we’ve had to make some changes to the oil that’s used in that joint venture.

But, absolutely, they are seeing the same impact on their business as what we are seeing here from an inflation standpoint. .

Thanks, and congrats on the quarter. .

Thank you. .

We’ll take our next question from William Reuter with Bank of America. .

Good morning.

So, I know you contract for your raw material, sort for your raw potatoes, in terms of the other oils that are part of your cost of goods sold, other ingredients and packaging, what level of forward contracting purchases do you do there?.

Yeah, so as it relates to our oil purchases and contracting as it relates to price, we have contracts in place for first quarter of 2023 and some of second quarter, but a pretty minimal amount. Beyond there, we don’t have any other contracts in place. .

Perfect.

And then, secondarily, given the delay in CapEx associated with the two expansion projects, do you have an early sense of even ballpark where CapEx could be for fiscal year 2023?.

Yeah, we are in our planning process right now. So, we don’t have anything to share today. But certainly, we’ll provide you an update at our next earnings call. .

I understand. Okay. Thank you. .

Thank you. .

At this time, that will conclude our question and answer session. I would like to turn the call back over to Mr. Congbalay for any additional or closing remarks. .

Thanks for joining the call today. Happy to take any follow-up questions over next number of days. Please email me, so we can schedule a time. Happy Opening Day everybody, and kind of go from there. Thank you..

That will conclude today's call. We appreciate your participation..