Yet Another Value Podcast - Firstlight Management's AJ Secrist provides update on $LW thesis post-earnings and pre-Investor Day

Episode Date: August 31, 2023

AJ Secrist from Firstlight Management is back on the podcast today to provide an update on Lamb Weston Holdings Inc. (NYSE: LW), a key supplier of french fries to fast-food chains, following their recent quarterly update and in advance of their investor day. Check out his first appearance on YAVP laying out his $LW thesis (December 2022): https://youtu.be/lNY8sQVttks Chapters: [0:00] Introduction + Episode sponsor: Stream by Alphasense [1:24] Update on Lamb Weston Holdings $LW since AJ's last appearance on YAVP in December 2022; how the stock has performed / fundamental issues [5:44] $LW recent conference call: French fry attachment rate and why it matters / inventory destocking [13:07] Current valuation for $LW and justifying AJ's $7 EPS thesis / key drivers of value [20:30] Gross margins and SG&A expenses [23:45] Expectations from the $LW investor day / should they be doing an investor day? [31:43] Buybacks [34:18] $LW final thoughts / bear case? Today's episode is sponsored by: Stream by Alphasense Are traditional expert calls in the investment world becoming obsolete? According to Stream, they are, and you can access primary research easily and efficiently through their platform. With Stream, you'll have the right insights at your fingertips to make the best investment decisions. They offer a vast library of over 26,000 expert transcripts, powered by AI search technology. Plus, they provide competitive rates on expert call services, and you can even have an experienced buy-side analyst conduct the calls for you. But that's not all. Stream also provides the ability to engage with experts 1-on-1 and get your calls transcribed free-of-charge—all for 40% less than you would pay for 20 calls in a traditional expert network model. So, if you're looking to optimize your research process and increase ROI on investment research spend, Stream has the solution for you. Head over to their website at streamrg.com to learn more. Thanks for listening, and we'll catch you next time. For more information: https://www.streamrg.com/

Are traditional expert calls in the investment world becoming obsolete? According to Stream, they are, and you can access primary research easily and efficiently through their platform. With Stream, you'll have the right insights at your fingertips to make the best investment decisions. They offer a vast library of over 26,000 expert transcripts powered by AI search technology. Plus, they provide competitive rates on expert call services, and you can even have an experienced by-side analysts conduct the calls for you.

But that's not all. Stream also provides the ability to engage with experts one-on-one and get your calls transcribed free of charge, all for 40% less than you would pay for 20 calls and a traditional expert network model. So if you're looking to optimize your research process and increase ROI on investment research spend, Stream has the solution for you. Head over to their website at streamrg.com to learn more. Thanks for listening, and we'll catch you next time. Hello, and welcome to yet another value podcast.

I'm your host, Andrew Walker. If you like this podcast, we mean a lot if you could rate, subscribe, you wherever you're watching or listening to it. With me today, I'm happy to have on for a follow podcast, my friend, AJ Secreist. AJ, how's it going? I'm good, Andrew. Thanks for having me. Thanks for coming back on. We'll talk in a second about why you're coming back on, but before we get there, just quick disclaimer. Nothing on this podcast is investing in advice. That's always true. Everyone should consult a financial advisor, do their own due diligence. This isn't financial advice. That out the way, the stock we're going to talk about is in December, you came on

and did a pitch on Land Weston. The ticker is LW. Stock did swimmingly right after that podcast. I think it went from, what, it was probably low 80s when we talked at the time. Yeah, something like that, yeah. Yeah, it went up to about 120. And then over the past couple of weeks,

they reported kind of saw if it was their fiscal Q423 earnings. And the stock has come back to mid-90s where, you know, it's still up pretty nicely since when we talked about it. But I know you've been saying, hey, like, this is a great business. It's pretty much firing. And I know you wanted to,

come on and talk about it because still a top idea for you and you want to talk about the softness and the opportunity. So I'll pause there. What's going on with LW right now? Yeah. Well, I mean, it's frustrating. It's been frustrating, right? They came out in July. This was their year ends, May 31st. So this was their Q4, Q4 earnings plus guide for the upcoming fiscal year. So fiscal 24. And they beat estimates, as I had hoped. And they raised, they came out with Guidance ahead of Street, as I hoped. And the stock, I think, was up, like, three pre-market. Ended up down seven that day.

I think down three the following day. And for, like, the last month, it feels like it's been down one or two percent every single day. And it's just bled. So it's been tough, especially in the wake of a beaten raise. And, yeah, I think the reasons for the stock getting sort of, sort of, mauled after a beaten raise. I mean, I've heard a lot about positioning.

That's hard for me to quantify. I have no idea. It's not enough of an AI play. You know, they didn't come on and say, hey, we're using AI to make better French fries, so they can't go up. Yeah, yeah. I mean, I should talk to the board about that.

But, you know, I've heard positioning used as a rationale. I don't know. I have no idea how you quantify something like that. that. But I think the fundamental issues where volumes were were ugly, right? It was a big beaten raise on the back of price and volumes were down, abruptly down across several segments. You know, in the big global QSR segment, volumes were down 11. And this was after a series of quarters where it was basically plus or minus low single digits. So all of a sudden it took a steep dive. The food service business was down nine and that was against the negative three

comp so down 12 on a two-year stack retail is down 10 against a two negative two comp so down like 12 on a two-year stack and so i think the market you know the market has has real concerns here right you know have they pushed price too far have they found the limit to their pricing power our customers pushing back our competitors getting more aggressive on price and are we going to they compete away the margins that, you know, the industry has made progress on over the past several years. So I think those are the fundamental issues. I mean, you know, apart from that, we had a big, big increase in the CAPEX guide. You know, they're building four plants simultaneously at the moment. So you sort of expect that, but management doesn't really help you

figure out, you know, what spend is attributable to what plant and when that's going to roll off, more importantly. They also had a big sort of step up in SG&A, and they don't really help you figure out, if and when that's going to roll off. And really, I think ultimately the biggest fear is just, you know, lamb is losing volumes. And, you know, the industry, not only land,

but everybody else is bringing on supply as well over the next couple of years. And so the real, you know, nightmare scenario is, oh, you know, industry demand is falling through, the floor at the same time as everybody's bringing on new supply, and then you can dream up a scenario where we've got lots and lots of access capacity and pricing margins really get involved. Right? So that's, I think, the real fear in the market. And obviously, I still own the stock. I still like it. I'm pretty comfortable with all of those. Let me just, so I want

to do two questions that were kind of in the quarter, but are broader strong questions. Then I want to do like kind of a thesis update question. So one of the questions was, somebody came on in the call and said, hey, you guys have been pitching for years, French fry attach rate went up during kind of COVID, right? And probably because everybody was inside, so nobody cared about what they look like and we were all looking for comfort food and everything. So you guys have been pitching for the past several years. French fry attach rate has gone up.

But now we've seen one quarter, this was the first quarter of demand drop. And I think it's an obvious question is, hey, is the world like, we're ex-pandemic now, right? as we're extemic at this point, does French fry attach rate normalize, you know, in a, not disaster scenario, but does it normalize back to where it was pre-pandemic or does it come somewhere in between? Basically, are we going to see French fry attach rates decrease? And then that would play into everything you're saying where, hey, you know, it's really bad for an industry when you're seeing demand decrease right as supply is coming online. Yeah. No, I mean, you know, it's funny. They talk about the fry attach rate, but they don't give you any numbers. There's no

public index there's like there's no no data like what is this like i have i have never seen any data around the so-called fri attach rate um and they keep you know i mean i wish i wish they would stop talking about it honestly um but you know i have no ability to assess that um what i do you know what i can assess um is number one the rationale that they provided on the call um makes makes it's at least plausible um and number two you know global demand still looks good um the private competitors are still seeing volume growth um you know the biggest competitor is seeing high single digit falling growth so um we can at least say that demand isn't falling through the floor across the industry you know so the so-called fry attach rate must be okay i just i do understand the

fry attach rate matters, right? Like McDonald's moves, if McDonald's takes the fry tax rate from 69 to 69.5%, like it's going to move hundreds and hundreds of thousands of tons of potatoes. But I'm with you. It seems like a weird thing to focus on. If it matters, for your models, I was in Montreal last weekend, and I ate more Putin than I think any humans eating in history. So you can build that into your models if you want to. But now I'm trying to cut back on fries. So I don't know, it might be a wash. Well, thank you. Thank you. Let me ask a slightly different question. One thing that just jumped out to me as strange is on the call,

they talked about French fry attach rate, but they also mentioned something about their customers having inventory de-stocks and drawing down on inventories. And look, I understand like everything with it is supply chain has inventory. But it just like broke my mental model a little bit that LW would have their customers saying, oh, actually we're oversupplied. We need to draw down because like I've got a bowl of potatoes in my kitchen. that if I'm oversupplied on potatoes, right,

they start, like, sprouting the little bumps and then the potatoes got the door, so the oversupply goes away real quickly. And I understand a lot of this frozen potatoes, but I was just, I was kind of surprised by that in like a fast-moving industry where the turn should be pretty high and it's a good product.

But remember, I mean, these things are frozen. Yeah. There's a pretty long shelf life on these things. And the potatoes, I mean, think about the processing cycle, right? You're gonna harvest potatoes in July, August, September, October, that you'll be processing for the next 12 months. So, you know, the potatoes are frozen. They're, you know, they could be processed 12 months later. And then the fries themselves are frozen as well. So the shelf life, shelf life is

longer than you would think. And, you know, I ran around chatting with, with folks in industry just to say, like, you know, does this actually make sense? You know, the rationale, the reasons for the bond declines on the call, I think were, one, inventory de-stocking. Folks have said, you know, that's a reasonable, that's a reasonable explanation. They've seen it because of all the supply chain issues, people were over over. Okay, fine. It's at least plausible. I don't know how much or who.

Well, I understand it was in Asia, but, you know, it's at least plausible. You know, number two was, what was the other issue? Well, they had a private label customer, a big one based. in Arkansas that is dropping their existing private label supplier and bringing lamb back on as a private label supplier. And they are basically just trying to burn down the private label incumbent and making room for lamb. And lamb just had a more aggressive supply schedule than that, than they did.

So that was another issue. They talked about, you know, QSR traffic and casual dining traffic. and that was you know that's that's sort of mixed right casual dining traffic was certainly down those singles and it was offset by kSR traffic um so that's that's fine i mean you can actually test that you can see that um you would rather you know from from lambs perspective you'd rather have the traffic and food service than kSR because higher margin but but at least demand is still there um so um you know i think their rationale is at least credible and I think the most important point is that, you know, Lamb and, or sorry, McCain and Simplot are still

seeing volume growth. And so they are actively taking share from these guys. And, you know, that is sort of normal, sort of ordinary course market share jockeying for different contracts. You know, if you have capacity at a plant, that's better position than somebody else. You know, you can take that business without, you know, gutting price. No, that all makes total sense. You know, to me, it's just one of those things like, look, I'm willing to accept like business is messy and sometimes it all doesn't have in a quarter. But you and I were emailing a little bit about my post on Sinclair over the weekend. And, you know, it's once management says something to me where it just, it raised a red flag to me or kind of raised the hairs and back to that because it didn't fit with how I understood like food service and inventory and stuff where they say, hey, our suppliers drew our customers drew down inventory so much.

And if it's true, that's fine. But, you know, if they're kind of pulling one over your eyes, I'm like, ooh, that's, that's where the big. red flies come in, but I think that's completely credible. And now, a quick word from our sponsor. Are traditional expert calls in the investment world becoming obsolete? According to Stream, they are. And you can access primary research easily and efficiently through their platform. With Stream, you'll have the right insights at your fingertips to make the best investment

decisions. They offer a vast library of over 26,000 expert transcripts powered by AI search technology. Plus, they provide competitive rates on expert call services, and you can even have an experienced byside analysts conduct the calls for you. But that's not all. Stream also provides the ability to engage with experts one-on-one and get your calls transcribed free of charge, all for 40% less than you would pay for 20 calls in a traditional expert network model. So if you're looking to optimize your research process and increase ROI on investment research spend, Stream has the solution for you. Head over to their website at streamrg.com to learn more.

Thanks for listening and we'll catch you next time. Let's back up a second. So when I reviewed the last podcast, and I shouldn't mention this earlier, I'll include a link to the podcast we did in December that went over kind of the full William thesis. And I think that podcast actually holds up really well. And we talked a lot about other like longer term issues like, hey, what if Andrew does give up carbs for a while? And, you know, the whole nation joins him. And how would like potato demand do with that? And I think we answered potato demand like the American eater always wins. But at the time, if I was simply summing up your thesis, you said, hey, this is an $80 stock. I think the right multiple for this is kind of in the 20 to 24 range.

So call it 22. And I think we've got line of sight to this business doing $7 per share in earnings. And so slap to 22 multiple on $7 per share earnings, that would get you to $150 per share, right? So I want to ask this year, alongside their earnings, they gave, hey, here's our guidance for fiscal 2024, right? And the midpoint of the guidance is about $5.20 per share in EPS. So right now at 95, they're trading for about $18. $18 PD, right? So my two questions are like, yeah, there's a little bit, my one question is, yeah, there's

a little bit of multiple discrepancy there. But I think the big difference between your fair value and where the stock is setting is, hey, they're guiding for five and you think they can do seven, right? So can you kind of walk me through how they get to seven and like which parts of the thesis are still supporting intact on that? Yeah, yeah. Well, look, I mean, the midpoint of the guide, I think is now like 5.25 for this year. and I think there's there's lots of conservatism

baked into that guide for this year and I think looking into fiscal 25 you know I still think we're going to see you know this year volume will be choppy but next year I think we'll be back to sort of low single digit growth cadence maybe a bit more because we've got more

plants coming online and you presumably are aren't going to bring those on without you know filling at least a decent chunk of that and you know so I think next year will be, you know, somewhere in the $6.50 to $7 range. And, you know, one hopes that, you know, I think the multiple is compressed today because of, you know, all the fears that we've talked about. And I think if those fears are dispelled next year by, you know, new supply coming online and pricing remaining intact, I think we'll be back to a 20, 24 times

P business. So, you know, if you say rough numbers, you know, seven bucks at 20 times, you're at 140 in 18 months. You know, so I still think, you know, that price target over 18 months is still quite valid. The only thing that's really changed here is volumes are joffier than I had hoped this year. And the SG&A guide is higher than I had hoped. Yep, yep. If we just for next year, right, so not this year,

but next year is where they're kind of getting into the mid-sixes and stuff. What's the big driver to you? Is it just pure volume, or do you think that it's some, and I wanted to differentiate between prices because they are going to get price, but as they said on the call, hey, a lot of the price has been us just passing through or catching up on inflationary price. Like the real price that investors want are the price on top of inflation. So is it going to be kind of that profitable pricing growth, or is it just going to be all volumes as kind of the customer drawdown normalizes and maybe we get some better trends

with going out to restaurants and everything? Yeah, I mean, so the way I model it is I basically just run through the price increases announced to date and the cogs per pound that I have a view on. And from there, I just assume we hold on the margins. So price and cogs move in concert together. So I'm assuming no pricing power going forward beyond what pricing has been announced so far. But I think they're still upside on cogs because they're basically guiding to mid to high single division. cogs per pound growth this year, right? And the way they get there is they say, well, you know, contracted price for potatoes is up 20 and that's about a third of our cost structure.

So there's six points right there. But remember, we're coming off two of the worst years in potato crop history. And last year, they had to buy a ton of potatoes in the spot market. They had to shift them across the country from eastern Canada and the East Coast. And I think there's something like 100 to 150 bucks of cogs relief on a normal crop there. So the cogs per pound inflation is going to be, I think, a lot more muted than what the street thinks. And if you'll you talk to the private guys, this upcoming year, the potato costs is the only thing that's really ripping. They sort of expect everything else to be basically flat. So in my view, You know, we're still lapping these residual price hikes, and we will over the next 12 months.

The latest price was in May of this year in food service. And we're going to start benefiting from having a normal crop over the next 12 months. So we're still going to get a pretty big chunk of margin expansion this year. On top of that, you know, I think volumes, maybe not this year, but volumes next year, I think will be better, right? Because we've got, they're adding about 8% to their own capacity. over the next two years, and presumably, you know, half of that should be filled out of the gate. So that's a 4% volume tailwind. And on top of that, we're still running about somewhere between 10 to 15% south of pre-COVID levels volumes. So if there's some kind of recovery

there, you know, we could, we could pick some additional volumes up beyond there. And then I think the last interesting thing here is just Europe. So that's, you know, they're guiding to about a billion one of revenues in Europe over the next nine months, which is on a run rate basis, basically flat with Q4, what it did in Q4. But the potato crop in Europe, or the next 12 months, is up 35 to 40 percent. And this is a much more spot market. And so everybody is eating those costs. So presumably pricing is going to go up 35 to 40 percent on top of that. you know so i think that the guide in europe is is really quite conservative as well so you put all

those things together and um you know i think we're going to be in for a pretty massive beat still this year um and then you know looking out next year we've got volume growth we've got um still a bit more additional pricing coming to lap um but um you know i think that the biggest difference is just what's going to happen this year those capacity at inches that they're doing What sort of return on invested capital do they look for when they're doing capacity additions? I mean, they won't give you a number. They won't give you a number. But, you know, as I've done the math on an unlevered basis, it's something like high, singles, low doubles.

So it's- That was kind of what I would guess in my head. And, you know, on an unlevered basis, high, singles, low doubles, it's feeling like, oh, well, you know, Nvidia does a cajillion percent like high, singles, low doubles and a stable business like this on levered where you can, you know, I think they've got a pretty conservative cap structure. But even if you apply 20% debt to it, like you start getting to IRAs that, you know, any, any hedge fund manager would, you wouldn't be the greatest in the world, but you'd be retiring pretty well if you generated those returns on equity. Let me ask another question. So in reviewing our last podcast, you know, one of the things you talked about was, hey, margins are still well below where they were pre-COVID. And I think there's a lot of room for margins from.

And we actually are seeing some of that, right? You were talking about, if I remember quickly on the last podcast, gross margins getting approaching 30%. and gross margins this year are are approaching 30%. Actually, one analyst came on the call and said, hey, I've got your gross margins for this year around 25%, which looks good, is that right? And they're like, blah, blah, wait, did you say 25%. It's not 25%.

We don't guide a gross margin, but it's not 25% and the company was kind of like, okay, 28%. That's fine. Yeah, it was like a record screech stuff, right? It was pretty funny. And I realized people who didn't listen to it or don't listen to calls, and I'd be like, 25% but it was quite funny. But they are guiding too.

they're approaching that 30% range. So, you know, that, that looks to me like you are getting the margin part of the story that you talked about, but it's not all falling through to the bottom line. And part of that, a large part of that, obviously, is the SGNA investment they're doing. So I just want to talk about the SGA investment because I think a skeptic could look and say, hey, okay, the gross margins played out, but the SG&A is there. So either maybe they're pulling stuff out of the gross margin line into the SGNA line, or maybe they need this investment to support it, but we're not seeing that operating leverage.

So, you know, it's going to be tough to get to that $7. So just want to ask you about that. Yeah, yeah, no, look, I think the SG&A is, it's kind of a mystery to me, too. I mean, the company will talk about their ERP spend and the IT spend and how, you know, that's hurt them in the last couple years. But like, you know, the end is in sight. But if you go back to like, you know, 2018 transcripts, they've been talking about ERP since that. And the old goal, the old guidance for SGNA was 8 to 8.5%. of sales and you know now they're they're talking about 10 to 10 and a half percent yep um and so

you know it's kind of a it's honestly a mystery to me where where the spend is going I don't think it's accounting you know if this is going to be at 8% of sales this is a 22% EBIT out business at 10% it's at 20% like that is literally a 10% difference in earnings right there right and it's actually higher on a net income line because you're going to get leverage going down to the net income line so yeah yeah I mean I think think, and it's also kind of incredible that SGNA bloat has happened at the same time as volumes of it down too, right? So SGNA on a per pound basis is bad. You know, so, and it's kind of a mystery, you wouldn't expect an agricultural adjacent company

based in Idaho to be spending money like water, but here we are. So I think, you know, I take about their word. I bake in the SGM. A guide, I assume it remains kind of bad. It's hard to imagine it getting worse from here. But, you know, I think operationally on pricing on COGS, you know, as long as the business continues to perform, like I hope it will, you know, we'll still be looking at $150 stock in a couple years. Last question, and then I think we can wrap this with, but, you know, the company is having

an investor day in October. I think this is their first investor day since, I'd have to go check my notes. Since then, yeah, yeah. So what do you expect them to show at the Investor Day? You know, Investor Day is for those who don't know. If you've got a company that does an Investor Day every year, probably nothing really is going to be. But when you've got a company that's never done one or that does one every three or five years, a lot of times the investor days are big catalyst.

Like they're going to tell the story that companies like to reveal new products, new stories, put out long-term guidance that investor days. A lot of times you'll see stocks move 10, 15%, sometimes more on an investor day. So I just want to ask you, what do you expect them to focus on them to the investor day? Obviously, you're not going to say, obviously you can't plan for them to do something that pops the stock 20%. But what do you want them to focus on? Is it explaining the SGNA, new capacity, diving into the French friday rate. What are you looking for?

Yeah, well, first of all, I'll be looking for the French fry bar. Do they have a French try? Will they have a French try bar? Yeah, I've been pushed. I've suggested it to IR and he says they're looking into it. It's going to be Manhattan, right? I think they said it's at the New York Stock Exchange. Yeah, I might be sending I are a note to see if I can't on that list that you and I can take an Uber over together.

Yeah, yeah, let's do it. I'll be there. You know, I'm a little bit gun shy by investor days. I think nine times out of ten, stocks go down on investor days. Is that right? I would have guessed, I probably would have guessed two times out of ten down, six times out of ten flat and five times out of ten flat and three times out of ten out would have been my guess. Maybe I just invest in bad companies. There's no statistical study here. This is completely my gut.

Yeah, yeah. I mean, just in my experience, I've seen a lot more stocks go down on investor days than go off. But this is totally anecdotal. So I'm braced for that. And I've also, you know, I've thought about, you know, it doesn't really make sense for them to do an investor. Because, I mean, you know, at its core, this is a really good business, right? a really good industry and there's a there's a joke um an old joke that you know the CEO of a great business lies about how great his business is and the CEO of a terrible business lies about

how terrible it's the zero to one thing right the Chinese stuff the Chinese restaurant down the street says we don't have any competition we're the best Chinese stand in the world and then Google says we have so much competition I mean it is just brutal out here being the only global search engine used by people it is so hard yeah yeah so I mean I I I I I have sort of reservations about that. This is a business that has real pricing power. They're the only public company in the space. So do you really want to spotlight how great your business is for all your competitors and customers and all that? But, you know, those are just thoughts that have been running in the back of my mind. I let's dive. I agree with you, right? Because here's a

company. They are two times levered. So it's not like they need better access to the capital markets, right? They can easily roll their depth. I actually think they should be a little higher levered. They've got a almost 20 times earnings multiple. So yeah, maybe it should be higher, but it's not like the street is giving them an eight times multiple. And by the way, if they thought their multiple was too low, they could just take advantage of it and get more aggressive on the repurchase program. I don't really, you know, a company that the market kind of gets their story, no need for capital. I don't know what an investor day is doing for them, to be honest. I mean, you could say that about 90% of companies. Yeah. And, and you could say that about having, you know,

investor relations teams at all, right? I don't tell you. the investor relations teams I talk to, but I do say that about investor relationship. Yeah. I mean, like, why does anybody even bother with us? Like, right? You run your business, the stock's going to go where the stock goes, regardless of whether they're talking to investors. The only ones I really think should do it are ones with complicated accounting stories or like emerging stories, but where they are going to need the markets at some point, right? Because even if you don't need the equity markets, if you need the debt markets and your stock is two versus your stock is 200, you're going to get a different interest rate.

So you kind of, but for LW, like, I just don't see it. There's, it's not like they need to explain, hey, we've got 500 plants coming on in the next year. We need to help you model this. Like, I don't see it. Well, I mean, I think, I think, you know, getting back to your original question, I mean, I think the things that would be helpful is just a full, full picture of global supply and demand, right? And stratified by regions, stratified importantly by product type, because not all capacity is as equal as they will tell you. A lot of the new capacity coming on in Europe is the basic sort of either private label or McDonald's-grade shoe string fries, whereas a lot of the lamb's capacity coming on is specialty encoded, think, you know, chick-filet waffle fries. And those aren't necessarily going to be competing with each other.

When I buy, if I go to the store and I buy like, you know, the Popeyes or Arby's brand seasoned frozen fries, does LW put that seasoning on them when they sell the they should okay I'm guessing that's higher margin than when I go to store and I buy as you said the McDonald's non-season fries like you're just getting margin for the seasoning and obviously some of it's going to the brand that's licensing it but that's got to be higher margin right yeah yeah I mean the more coded the more specialty the higher margin it's going to be it's just interest this isn't going to blow anyone's mind but it is just interesting like I do think society as you get richer and progress like you get more or more into specialty and coatings and that type of stuff. And that obviously plays right into longer term margins for them, as is the demand. We all want to eat potatoes that that demand does keep going up. But anyway, anything else on the investor day? Yeah. Well, I mean, I think it'd be great to have a, you know, long-term view of global supply

and demand. Demand would be really, really interesting because that nobody publishes that. They've got plays in China that they're starting up. And I could see if they could provide some data on China, like, I don't particularly know, but I could see, hey, you guys are really underestimating China and India as they get richer and kind of as their diets get a little bit more Western, how much demand for potatoes there are there. And we're in a, we're kind of in the driver seat to provide a lot of that. Yeah. Yeah.

I mean, that would be extremely interesting. They haven't provided an update on that kind of stuff since the spinoff in their 2016 investor day. So I think getting a very, very good view on global supply and demand. who's bringing on what supply, where, what kind of capacity is it, and what regions are going at what rates will be hugely, hugely interesting and probably go a long way to helping the market feel better about this potential oversupply situation. And especially if they can put numbers on the page, and I've done this,

but how much is supply growing relative to demand and what does that mean for excess capacity? Right? People hear, you know, oh, they're 400 million tons coming online this year and 500 million tons coming on next year. Oh my gosh. These are huge numbers. But if you map it out, you know, nobody knows what the installed base looks like. Unless you've been obsessed with this company and French fries for a while like I have.

And, you know, on my numbers, you know, North American supply is growing at, I don't know what it was. Like high singles over the next two years or sorry, no, global supply is growing 10 over the next three years. So call it three to three and a half percent per year. against global demand growing at, you know, one hopes three percent. So we're looking at oversupply or excess supply of, you know, in the basis points rather than percentage points. And it's hard to imagine that really upsetting, you know, global pricing.

But, you know, it would be really helpful for them to just put that on a page for people. And I think, you know, ultimately, ultimately, I mean, if they're going to have the investor, they'd love for them to put out, you know, a three-year EPS target or five-year EPS target, just to give people some comfort around, you know, margins, SG&A and all that kind of stuff. But, you know, I think those are just the two most important pieces. Last quick question, then we'll kind of wrap it up. You know, just share repurchases, right?

The stock is here in the high 90s. Obviously, you've got a fair value of, let's just call it, around $150 per share. They bought back, I'm looking at their 10-K right now, a, let's be generous and call it a token amount of stock in Q4. Now, the stock was at 1-10 at the time, but they bought back about $4 million. worth, that's, that's really nothing. Do you think the management team will, you know, if the stock lingers around here, kind of let's call it two thirds of your fair value, do you think they'll step up to the plate and kind of get aggressive with repurchases? I mean, I would love that. Obviously,

I think, I think they're probably too conservative to do that, especially with the, the Cappex slate ahead of them over 12 to 24 months. And they're still sort of integrating Lamb West and Meyer in Europe. So I don't expect them to get more aggressive. I would love that, but wouldn't count on it. And now, a quick word from our sponsor. Are traditional expert calls in the investment world becoming obsolete? According to Stream, they are. And you can access primary research easily and efficiently through their platform.

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more. Thanks for listening and we'll catch you next time. I would just, I'd love to see him get more aggressive with the buybacks. And also, again, I said it earlier, but this business at a little over two times leverage, it's just not leveraged enough for what, for a steady business like this. Like, I'd love to see him. I think I'm looking at a 2019 earnings release. I think they were closer to three in 2019. I'd love to see like, just take it up a turn and you could buy back a lot of stock.

And I think that all the metrics get a lot more interesting if you do that. And I don't think three is like, at three, it's not like we're talking about, hey, we're running on a knife's edge with our leverage or something, right? So I think that would be fine. I'm with you. I'm with you. I'm just bringing it on this world. Anything else we should be mentioned?

I think this was an, again, the call we did in December holds up really well. People should go listen to that for if they went like the full story. I just wanted to do an update. But anything else in your mind here? Yeah, I think, I mean, I think that the last thing. that I think is pretty interesting is, you know, I think people have this fear of over-earning

like, oh, this is a cyclical industry, they've taken so much price because supply was artificially suppressed for whatever reason, and now supply's coming back, so we're going to give everything back. You know, if you actually do the math, and this is really interesting, margins aren't

all that much higher versus pre-COVID. No. That's what we were talking about. No. Yeah. So in 2019, pre-COVID, the global business was a 22.8% gross margin. And on a like-for-like basis, it's probably like 23, they just reported. And then, you know, so some marginal increase. In food service, they were doing 35.

They're now doing 37. And by the way, they took SG&A way up. So it's not like on a bottom line basis. They're making a lot more. Yeah, yeah. And the only segment where they really had massive, massive improvement was in retail. and that one from 20% gross margin to 35. But there's also a mix shift in there going from private label to a lot more branded product.

It's impossible to tease out how much of that was price, how much of that was mix. But that's probably the segment that's most susceptible to price competition, especially because that's where you're going to be competing with the European guys that are bringing on capacity. But what I think is really interesting, if you say, okay, they're over-earning, we're going to revert to pre-COVID margins, which again, we're still good. They're all-time highs. But the trajectory of the business was up until the right,

up until that point. But if you revert to those margins on fiscal 25 numbers, I'm still basically at, you know, 5.20, right? And at that point, if we've dispelled the over-earning fears and we get a historical multiple in the low 20s, you know, you're still at 110 to 120. So if this industry does, you know, at least revert to 2019 pre-COVID margins, you know, it's hard to lose money. You're still probably making money.

And the only way you really get destroyed is if this industry completely, completely unravels. And nobody in the space is saying that's going to happen. You need the ultimate bear case, which is Andrew and five million of his best friends stop eating potatoes, right? So you need the potato demands. Not only stop eating, but open 500 new plants. Oh, well, I was saying potato demand because you mentioned global supplies going up kind of 3% annually. So you need global demand goes down 2% annually while that supply is going up 3%. Like there's your bear case.

But again, I think just the history of consuming, I guess you know what the other bear case is that we haven't mentioned? GLP1, this would be a good if 15% of the American population. population starts taking GLP1 because, you know, everyone, I don't know that I know of. I don't know anyone on GLP 1, but I've looked at it. And when you start taking it, you know, I'm hearing doctors need to prescribe protein shakes to people because they lose their interest in eating so much that they're not eating anything. GLP1 would be a great bear thesis. Hey, 10% of America is going to be on GLP1. They're not going to be eating. They're going to eat 500 calories per day. There's your demand of destruction. Yeah. I mean, I think it's, I don't have a great

answer for that still. I mean, I've looked at it. I don't know if anybody knows exactly what the impact is going to be, but you know, you can look at at the stocks of crispy cream and dominoes and Mondelees and, you know, Hershey and like, they're all doing fine here to date. I mean, so I don't think, I mean, as far as impacting a stock to date, I don't think it has. But, you know, the market's looking at guys that are much more directly exposed and completely agreed so far. And like a particular, We think french fries, but it is a lot of potato processing, so they've got other stuff. And yeah, I just think, like, as you said, a Hershey's or a Krispy Cream are the ones where I really think that GLP1 are in the targets. And you're not seeing any fear there, but it is an interesting beer case. Yeah, yeah, but ultimately, I mean, I think you're, the impact, I mean, I would like to think it would be pretty manageable because you're talking about, you know, a fraction of the American population going on this thing.

which, you know, from, from Lamb Weston's perspective, you know, you've only got X percent of your business in the U.S. and then X percent of your customers would go on GLP1. And of those X percent, you know, they would reduce their consumption by Y percent. So I think, you know, we'd be talking about a fraction of a fraction of a fraction in terms of impact to the business. But, you know, I would be very, very skeptical of a GLP1 thesis, but I do think, like, if you're talking 10 percent of of Americans go on GLP1 and they reduce their calorie, their consumption by, I think 50% would actually be generous versus what people are actually doing, like 10% and 50%. That starts to move the needle.

Though there is going to be the counter. Like once you start reducing calories, I think people are going to be looking for, they're going to be looking for an upgrading calories. So I think they look for less like, I can see a shift from breads or junk foods to more like polar foods. And I know people think chickens and beefs when they think that. but I could see a shift, hey, like, what are people's favorite foods? Generally, potato base.

I could see a shift towards, if I'm going to eat something, even though I don't want to, I might as well have it be a potato or something versus a sandwich that I think is kind of nasty. Yeah, I mean, it's, I mean, we're like way off the way into perspective. Yeah, yeah, yeah, I, it was just sometimes you chat, sometimes you chat. Oh, cool. Well, AJ, look, let's wrap it up there. And I will say, thank you for coming on for the second time. I really enjoyed it.

It's a really interesting company, a great company. But what I'm really looking forward to is I know. you're working on another big one, and I'm hoping in September or October, when you're ready to talk about it, we can have you back on. I'm really excited for that as well. Yeah, that'd be awesome. That'd be great. Cool. All right. Talk to you, buddy. All right. Thanks, Andrew. See you. A quick disclaimer. Nothing on this podcast should be considered investment advice. Guests or the hosts may have positions in any of the stocks mentioned during this podcast. Please do your own work and consult a financial advisor. Thanks.