Good morning and thank you for joining us for Lamb Weston's second quarter 2021 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 be - should not be considered a replacement for and should be read together with our GAAP results. You can find the GAAP to non-GAAP reconciliations in our earnings release.

With me today are Tom Werner, our President and Chief Executive Officer; and Rob McNutt, our Chief Financial Officer. Tom will provide an overview of the current operating environment, while Rob will provide some details on our second quarter results as well as some shipment trends for the third quarter.

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

Tom Werner - President and Chief Executive Officer

Thank you, Dexter. Good morning and thank you for joining our call today. We delivered solid financial results in the second quarter as our entire Lamb Weston team continues to execute well through this challenging environment. That's only possible because of their ongoing commitment to serving our customers, suppliers and communities. And I can't thank them enough for their dedication and support.

Our second quarter results also reflect operating conditions that were generally similar to what we experienced in the first quarter. Overall restaurant traffic in the US was resilient quite holding steady at around 90% of pre-pandemic levels for much of the quarter. However, traffic and frozen potato demand rates continued to vary widely by channel.

Traffic at large chain restaurants were essentially at prior year levels as quick service restaurants continued to leverage drive-through, takeout and delivery formats. Traffic at full service restaurants was 70% to 80% of the prior year levels for much of the quarter. However, traffic began to soften in November as governments reimpose social and on-premise dining restrictions in an effort to contain the resurgence of COVID and as the onset of colder weather tempered outdoor dining opportunities across many markets.

Traffic and demand at non-commercial customers, which includes lodging, hospitality, healthcare, schools and universities, sports and entertainment, and workplace environment was fairly steady at around 50% of prior year levels for the entire quarter. In retail, consumer demand continued to be strong with weekly category volume growth between 15% and 20% versus the prior year. Outside the US, restaurant traffic in fry demand were uneven across markets and varied within the quarter.

In Europe, which is served by our Lamb Weston Meijer joint venture, fry demand during much of the quarter was similar to last year, but softened the 75% to 85% of prior year levels during the latter part of the quarter as governments reimpose social restriction and as weather turn colder. As you may recall, unlike in the US, QSRs in Europe generally have only limited drive-through capabilities.

Demand in our other key international markets was mixed. In China and Australia, demand was near prior year levels. In our other key markets in Asia and Latin America, overall demand improved sequentially from our first quarter, but remained well below prior year levels. Going forward, we expect many of the softer traffic and demand trends that we began to see in November to carryover into our fiscal third quarter. The sharp resurgence in COVID in the US and Europe has led government to imposed even more rigid social restrictions, In addition, we expect outdoor restaurant dining traffic in our largest markets to fall further as we enter the coldest months of the year in the northern atmosphere.

Not surprisingly, we expect traffic at full service restaurants will continue to be disproportionately affected. Major QSR chains in the US should be able to continue to hold up well due to their ability to serve customers via drive-through and delivery. Retail should also benefit as consumers eat more meals at home. And as Rob will discuss later, while still early, our shipments to those channels in December support that view. So on one hand in the near term, we anticipate facing even more challenging and volatile operating conditions than what we experienced in the first half of our fiscal year. On the other hand, we believe this COVID shock to demand is temporary. We're confident in the strength of the frozen potato category and do not see any structural impediments to recovery in demand and growth over the long term.

As COVID vaccines become more widely available in the coming months and as the virus is more broadly contained, we expect governments will gradually less social restrictions. This should lead to steady growth in restaurant traffic as the year progresses. We believe this growth will lead to overall frozen potato demand approaching pre-pandemic levels on a run rate basis by the end of calendar 2021. In the meantime, we're confident in our business fundamentals, the pricing capacity utilization and potato supply and our ability to manage through the pandemics impacts on our manufacturing operations.

Our recently announced increase in our quarterly dividend in the planned resumption of our share repurchase program reinforce our conviction in the strength of our business and the category, as well as our commitment to support customers and create value for our stakeholders.

In summary, we delivered solid Q2 results and are executing well in a challenging environment. We expect frozen potato demand has softened in the near term due to reduced traffic, following government reimpose, social restrictions as well as the onset of colder weather, and we're optimistic that the increasing availability of COVID vaccines will enable restaurant traffic to gradually improve as the year progresses and that demand will approach pre-pandemic levels by the end of calendar 2021.

Now let me turn the call over to Rob.

Robert McNutt - Senior Vice President and Chief Financial Officer

Thanks, Tom. Good morning, everyone. As Tom noted, we delivered solid financial results in the second quarter, as our teams continued to manage through an ever changing demand environment as well as COVID-related disruptions to our manufacturing and distribution networks. For the quarter, net sales declined 12% to $896 million. Sales volume was down 14% largely due to fry demand at restaurants and foodservice being negatively impacted following government imposed restrictions to contain the spread of COVID, as well as colder weather beginning to limit outdoor dining across many of our markets.

In addition, volume was down as we lap the benefit of additional shipping days related to the timing of Thanksgiving of last year. Overall, as Tom described earlier, restaurant traffic and our sales volumes in the US stabilized at approximately 90% of pre-pandemic levels, although performance varied widely by sales channel. International sales were mixed but improved sequentially versus our first quarter. Price mix increased 2% driven by improved price in our Foodservice and Retail segments as well as favorable mix in retail.

Gross profit declined $62 million as lower sales and higher manufacturing costs more than offset the benefit of favorable price mix and productivity savings. As we discussed in our previous earnings call, we expect that our manufacturing cost to increase in the quarter. This was partly due to processing potatoes from the 2019 crop through early September, which is a couple of months longer than usual. We did this in order to manage finished goods inventories in light of the pandemics impact on fry demand.

Processing older crop results in increased cost due to significant - due to higher raw material storage fees and lower recovery rates. Since we typically carry upwards of 60 days of finished goods inventory, we realize the impact of these costs in our second quarter income statement as we sold that inventory. We also realized higher manufacturing costs due to input cost inflation, primarily related to edible oils, raw potatoes and other raw ingredients. Overall, our input cost inflation was in the low-single digits.

Finally, we continue to realize incremental costs and inefficiencies resulting from the pandemic's disruptive effect on our manufacturing and supply chain operations. As a reminder, these costs largely relate to labor and other cost to shutdown, sanitize and restart manufacturing facilities impacted by COVID. Cost associated with modifying production schedules reducing run-times and manufacturing retail products on lines primarily designed for foodservice products and cost per enhancing employee safety and sanitation protocols as well as for incremental warehousing, transportation and supply chain costs.

Specifically in the quarter, we had notable disruptions in our facilities in Idaho, as well as lesser ones in some other facilities. We expect to continue to incur COVID-related costs through at least the remainder of fiscal 2021. As a result, we consider these costs and disruptions as part of our ongoing operations and are no longer disclosing these costs separately.

SG&A declined by nearly $8 million in the quarter, largely due to lower incentive compensation expense accruals and a $3.5 million reduction in advertising and promotional expense. The decline was partially offset by investments to improve our operations and IT infrastructure, which included about $5 million of non-recurring consulting and training expenses associated with implementing Phase 1 of our new ERP system.

Equity method earnings were $19 million, which is up $4 million versus last year. Excluding the impact of unrealized mark-to-market adjustments equity earnings increased about $2 million due to better performance by our European joint venture. However, like in the US, our shipments softened during the latter part of the quarter reflecting the effect on restaurant traffic of governments reimposing, social restrictions, as well as colder weather on outdoor dining.

EBITDA, including joint ventures was $213 million which is down $48 million. The decline was driven by lower income from operations and it was partially offset by higher equity method earnings. Diluted EPS in the quarter was $0.66, down $0.29 largely due to lower income from operations. EPS was also down due to higher interest expense reflecting our higher average total debt and the write-off of some debt issuance costs as we paid off the term loan, a year early. The decline was partially offset by higher equity earnings.

Moving to our segments. Sales for our Global segment, which generally includes sales for the top 100 North American based QSR and full service restaurant chains, as well as all sales outside of North America were down 12% in the quarter. Volume was down 11% due to softer demand for fries outside the home, especially in our international markets. Shipments to large chain restaurant customers in the US of which approximately 85% are to QSRs approach prior year levels as QSRs leveraged drive-through and delivery formats. However, some of that strength also reflected pulling forward sales of customized and limited time offering products from the third quarter.

International sales, which historically comprised about 40% of segment sales, we're at about 80% of prior year levels in the aggregate, but vary by market. Shipments in China and Australia approach prior year levels. Our shipments to other parts of Asia and Latin America, improved sequentially as customers and distributors in many of these markets were able to right-size inventories, however, they remained well below prior year levels. Price mix declined 1% as a result of negative mix. Price alone was flat.

Global's product contribution margin, which is gross profit less A&P expense declined 28% to $93 million. Lower sales volume, higher manufacturing costs, and unfavorable mix drove the decline. Sales for our Foodservice segment, which services North American foodservice distributors and restaurant chains generally outside the top 100 North American restaurant customers, declined 21% in the quarter.

Volume declined 25%. Segments to smaller chain and independent full service and quick service restaurants tracked around 70% to 80% of prior year levels through much of October, but slowed to 60% to 70% in November, following government's reimposing, social restrictions and as colder weather tempered restaurant traffic in some of our markets. Shipments to non-commercial customers improved modestly since summer but remain at around 50% of prior year levels, with strength in healthcare more than offset by continued weakness in the other channels.

Price mix increased 4% behind the carryover benefit of pricing actions taken in the latter half of fiscal 2020. Mix continued to be unfavorable with some hard hit independent restaurants looking to reduce costs by purchasing more value-added products rather than the premium Lamb Weston branded ones. While we've regained much of this business since the pandemic first struck last spring on a year-over-year basis, it remains a mix headwind.

Foodservices product contribution margin declined 21% to $88 million. Lower sales volumes, higher manufacturing costs and unfavorable mix drove the decline and was partially offset by favorable price. Sales for our Retail segment increased 7% in the quarter. Price mix increased 7%, primarily reflecting favorable mix benefit at selling more of our higher margin branded portfolio of Alexia, Grown in Idaho and licensed restaurant trademarks. Volume increased nominally.

Sales of our branded products were up about 30% which is well above category growth rates, which ranged between 15% and 20%. The increase in our branded volume was offset by the loss of certain low margin, private label volume to began late in the second quarter of fiscal 2020, as well as an additional amount that began a couple of months ago. As a result, we expect private label losses to continue to be a headwind. Retail's product contribution margin increased 6% to $30 million. The increase was driven by favorable mix and lower A&P expense and was partially offset by higher manufacturing costs.

Moving to our cash flow and liquidity position. We are comfortable with our liquidity positioned and confident in our ability to continue to generate cash. In the first half, we generated nearly $320 million of cash from operations, which is down about $25 million versus last year, due to lower sales and earnings. We spent $54 million in capex, including expenditures for our new ERP system. We paid $67 million in dividend and a few weeks ago, announced a 2% increase in our quarterly dividend. In addition, we plan to resume our share repurchase program this quarter.

As you may recall, we temporarily suspended our buyback program in late fiscal 2020 in order to help preserve our liquidity during the early days of the pandemic. As we discussed in our previous earnings call, in September, we amended our credit agreement to put in place a new three-year $750 million revolver. At the same time, using a portion of the more than $1 billion of cash on hand, we prepaid approximately $270 million outstanding balance on the term loan that was due in November of 2021. At the end of the second quarter, we had more than $760 million of cash on hand and our new revolver was undrawn. Our total debt was $2.75 billion and our net debt to EBITDA ratio was 3.1 times.

Now turning to our shipments so far in the third quarter. Broadly speaking, in US, demand at QSRs and at retail are holding up well, while traffic at full service restaurants continues to soften. Specifically, US shipments in the four weeks ending December 27, were approximately 85% of prior year levels. In our Global segments, shipments to our large QSR and full-service chain customers in the US, where more than 95% of prior year levels. We expect that rate will largely continue for the remainder of the third quarter.

In our Foodservice segment, shipments to our full service restaurants regional and small QSRs and non-commercial customers in aggregate were 60% to 65% of prior year levels. That is largely in line with what we realized during the latter part of the second quarter. We anticipate that shipments to full-service restaurants and small and regional QSRs will continue to soften as social restrictions broaden and as winter weather takes a bigger bite out of outdoor dining.

Shipments to non-commercial customers, which have historically comprised about 25% of the segment's volume were roughly half of prior year levels and will likely remain soft for the remainder of the quarter. In our Retail segments, shipments were above prior year levels with strong volume of our branded products, partially offset by a decline in shipments of private label products. We believe that this rate will largely continue for the remainder of the quarter. Outside the US, overall demand has slowed, but it's varied by market.

In Europe, shipments by our Lamb Weston Meijer joint venture were approximately 85% of prior year levels, continuing the softer demand that we realized during the latter part of the second quarter. We believe that shipments will continue to soften due to severe social restrictions and colder weather. Shipments to our other international markets, which primarily include Asia, Oceana, Latin America were mixed. In aggregate, international shipments so far in the quarter have been softer than what we realized during the latter half of the second quarter. As a reminder, all of our international sales are included as part of our Global results.

In short, other than at US QSRs, which can leverage drive-through access, global demand for fries at restaurants and foodservice will be soft in the third quarter, following government's reimposing restrictions to combat the resurgence of COVID, as well as colder weather in our Northern Hemisphere markets limits outdoor dining opportunities. With respect to contract pricing, after completing discussions for contracts that were up for renewal, we expect pricing across our domestic large chain restaurant portfolio in aggregate to be flat versus prior year.

Outside of these large chain restaurant contracts on balance domestic pricing is holding up well. However, we continue to see increased competitive activity in more value-added oriented products in some international markets and to a lesser extent in some value tiered domestic market segments. With respect to costs, the potato crop in our growing regions in the Columbia Basin, Idaho, Alberta, and the upper Midwest is consistent with historical averages in aggregate. We don't see any notable impact on cost outside of inflation.

Crop in our growing areas in Europe is also broadly consistent with historical averages, which should help ease cost pressures there versus last year. However, we do expect to continue to incur additional cost as a result of COVID's disruptive impact on our manufacturing and supply chain operations and we expect that we'll continue to do so until the virus is broadly contained.

Now here's Tom for some closing comments.

Tom Werner - President and Chief Executive Officer

Thanks, Rob. Let me just quickly sum up by saying while the near-term environment will be volatile. We believe that the restaurant traffic will gradually recover to pre-pandemic levels by the end of calendar 2021. We'll continue to focus on the right strategic and operating priorities to serve our customers and build upon the long-term health of the category in order to create value for our stakeholders.

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

Question & Answers

Operator

[Operator Instructions] We can take our first question from Andrew Lazar of Barclays. Please go ahead.

Andrew Lazar - Barclays - Analyst

Good morning, everybody and Happy New Year.

Tom Werner - President and Chief Executive Officer

Good morning, Andrew. Happy New Year.

Andrew Lazar - Barclays - Analyst

Two questions from me, if I could. First, with visibility to getting back to pre-pandemic levels of demand by calendar year-end. I'm curious if there are any signs you were seeing of - any of the lasting ships and competitive dynamics among sort of the key North American players that could result in Lamb Weston coming out of this in a stronger relative position than it went in?

Tom Werner - President and Chief Executive Officer

Yeah. Andrew. So I think, right now, the industry - we're all navigating through the pandemic and from Lamb Weston standpoint, our strategy has not changed. And while we have paused a few things that we are thinking about pre-pandemic, I will tell you that we're actively engaged in some projects and it's all of our positioning this company, as we believe the demand is going to return by calendar year. And if you think about 18 months from now, we got to be ready to capture share demand across the whole globe. So while we have paused a few things we have reengaged in some things, projects that we are working on and we're going to move those forward to get ourselves in position 12 months to 18 months from now to capture the demand that we believe going to come back to pre-pandemic levels.

Andrew Lazar - Barclays - Analyst

That's a good segue into my second question which is, I know it's an odd time in some regards to ask about incremental industry capacity. But if you see frozen potato demand approaching pre-pandemic levels again by calendar year-end and then assuming demand globally grows it normalized levels from there, and knowing, it takes a few years to get new capacity for the industry online. When would you think we might hear of new industry capacity additions being announced whether that would be Lamb Weston or others?

Tom Werner - President and Chief Executive Officer

Yeah. One of our competitors, they're in the process of expanding capacity that they were working on pre-pandemic. From our standpoint, again, we've got some things that we're moving forward and the right time, and we'll do all the work around it. We will make that decision. The other thing that - one of the silver linings with all this is, we've really focused internally on our efficiency that operating efficiencies within our current footprint and it's given us visibility to opportunities we believe within the current manufacturing footprint to unlock capacity. So that's something that the supply chain team in Lamb Weston is focused on. We have a big initiative within supply chain to unlock capacity and drive efficiencies.

And if you think about, Andrew, the timing of new capacity versus what we have in our current footprint. I'm not 100% confident that with our supply chain initiative unlock, hidden capacity in our current footprint that we're absolutely in a great position as demand returns to support not only our current customers as there business returns, but also future demand in category girls. So I feel we're really in a position. But again at the right time we got to make those decisions in terms of getting ourselves ready for demand resurgence 18 months, 24 months out.

Andrew Lazar - Barclays - Analyst

Thanks for your time.

Tom Werner - President and Chief Executive Officer

Yeah.

Operator

And we can now take our next question from Adam Samuelson of Goldman Sachs. Please go ahead.

Adam Samuelson - Goldman Sachs - Analyst

Yes. Thanks. Good morning, everyone.

Tom Werner - President and Chief Executive Officer

Good morning, Adam.

Robert McNutt - Senior Vice President and Chief Financial Officer

Good morning, Adam.

Adam Samuelson - Goldman Sachs - Analyst

Good morning. Hi. So I guess my first question is really related to some of the pricing comments that you made you made earlier and just some of where you're seeing some of that incremental competitive activity internationally is that - I presume that's in your export markets out of the US not in the European JV. But is that European competitors who are looking up to push into Asia. Just help me think about kind of from frame kind of where you're seeing that, it is that places they haven't played before? And then in domestically in the value-tier side, is that just European imports into the East Coast? How do you think about the origin of that competitive threat and kind of how salient and how much your volumes are really kind of framing in the exposure there?

Robert McNutt - Senior Vice President and Chief Financial Officer

Yeah, Adam. This is Rob. In terms of the pricing in the international, it is a mix of where that's coming from the competitive some of that in some markets where there is some of that lower end production is coming from local producers just run in the cash flow and some of it is coming from excess capacity in Europe. Similarly, in the US, again, it's in that lower end value market and we have seen some increases from the Europeans. That is certainly having some impact in that limited part of the market.

Adam Samuelson - Goldman Sachs - Analyst

And just anyway Tom if you can help that just how much that for your business is really in those kind of categories where you're seeing and contextualize kind of pockets where there is some, a little bit of competitive intensity?

Tom Werner - President and Chief Executive Officer

Yeah. We don't necessarily disclose that, but to Rob's point, it's the lower line flow, what we call it, so it's really not a material piece of our business. The point is, it's more pronounced in Asia and the Europeans are being competitive in Asia and it's not one market, specifically, it's branded new markets in Asia and our teams did a good job trying to hold serve. But when you get no situations customers are going to think, think about going to different direction, but we're watching it closely. It is more pronounced than it has been, but I will say, it's nothing that we're not used to dealing with. It's just more aggressive. And the team will work through it and capture opportunities where we can.

Adam Samuelson - Goldman Sachs - Analyst

Okay. That's really helpful. And then, just my second one was going to be and I think about the fiscal third quarter and kind of volumes, kind of slowing down from where they were. I mean it seems - seemingly a little bit more orderly than you might have been in the spring. I'm just trying to make sure, I'm sensitive and thinking about the gross margin kind of implications of softer volumes in the near term. And just kind of the levers you can pull over or just the ability to plan better to manage that kind of lower volume near-term?

Tom Werner - President and Chief Executive Officer

Yeah. I'll talk to this patterns and Rob you can hit the margin. If you think back through the initial started the whole pandemic, our business of operated were down 60% in total 50%, 60%. So as we look over this next quarter, while we're seeing softness in some of the channels specifically foodservice. I don't believe it's going to be anywhere near was when all these things started. Now that said, we gave guidance on what's happening through December. And I think that's going to be where it plays out over the next 30, 60 days we get winter things are open it back up.

The most important thing for us to be prepared for the opening back up and we learned a lot of lessons last spring, as a management team and myself personally that we have to be ready. And what does that mean, it means if you think about April, May make - we're taking some measures right now to ensure we've got the right inventory, the right products, so wind demand snaps back, which we believe it will in the spring and start increasing we can service our customers. All the while recognize that we're still dealing with manufacturing operating issues because of COVID in terms of efficiencies.

So on the one hand, while, so things are slowing down in some areas. On the other hand, it's a great opportunity for us to get ourselves positioned to meet demand on this thing snaps back. So the near term is going to be volatile, but as we come out, get in the spring and summer, and you got vaccines and this thing hopefully starts getting behind us. I believe there's going to be some pent-up demand for people to get out, go out again. And so we're going to be prepared for that.

Adam Samuelson - Goldman Sachs - Analyst

Okay. Great. That's really helpful. I'll pass it on. Thank you.

Operator

We can now take our next question from Rob Dickerson of Jefferies. Please go ahead.

Rob Dickerson - Jefferies - Analyst

Great. Thank you very much. So just to kind of circle back, couple of comments you made on kind of where you are now in terms of, with your inventories and kind of how you have to be ready, right for potential demand snap back in, that's called April, May and June, whatever it is? Like, how do you feel, I guess for around or about Lamb Weston's kind of current inventory levels, and maybe the industry's inventory levels kind of B2B, right some of this kind of hopefully temporary softness in the Q3 and part of the business, right or is there like, if you step back, you say okay?

This is where we are now. It's only potatoes we have, it's how many potatoes the industry has? I feel like we kind of see the forecast that somewhat appropriately relative to demand when we go back to raise March, April's of last year. And now as you said here do you think about Q3 into the spring and summer, do you kind of say, yeah, we still feel pretty good. The industry feels pretty good about this inventory levels as long as that demand does snap back. So we're now once again, kind of, so to speak over inventory is that fair?

Tom Werner - President and Chief Executive Officer

Yeah. I think my point of view is, I believe the industry's balance from Lamb Weston standpoint where we're balanced. I feel good about where we're at on raw availability and what we have in storage to meet the needs, Even if there is demand, I think we're in good shape. The thing that we're working on right now is to make sure we got the right inventory levels of product that was really pulled when the economy open back in May, June. And so we've got data and we can look and see what the customers, the products they were, we were shipping to all, so we're positioning those products to have a different level of safety stock, if you will to anticipate that. And I think we're in good shape from finished good inventory raw inventory.

The thing to remember is the timing of whether it's April-May or June, the timing of consumer demand going out to eat more or maybe it's further down the road, we will manage it and we can manage our production schedules, we can manage inventory levels. So those things we could do and have done it, always do just to manage the supply and demand side of it. And so I feel good about where we're at. Now, like I said, we're getting ourselves prepared for demand returns as we get through Q3, and I think the company of being in shape and will react as needed just based on the ordering signals we're getting from our customers.

Robert McNutt - Senior Vice President and Chief Financial Officer

Yeah. Rob, the other point, I'd make or the distinction, initially when the pandemic first hit demand it - it's felt like when I have perfect insight into the downstream distribution through the channel, but it felt like they were working with old models and so the orders continue to come even as an end-user demand was coming off. We're seeing a quicker adjustment in that now. And so I think as we've learned, they've also learned and so that I'm not concerned about downstream channel being overloaded.

Rob Dickerson - Jefferies - Analyst

Okay. Great. And then this might be too specific of a modeling question, like shot, your Global division right organic sales declined 12%, but two year stack basis like given we actually shipping days, maybe some LTOs is essentially flat, right? So that's pretty good all things considered. I'd argue, if I'm thinking about Q3, right, you don't have that big tough compare, so to speak on the volume side, then the speaking to global. So is there like, should we be thinking on the global side that it's sales the trajectory of that year-over-year should in theory really improve right assuming that shipments are still due to a pretty good relative to pre-pandemic because it kind of, it feels like we kind of all run a model down still, but obviously the year-ago does matter. So just any color on that would be helpful. Thanks.

Tom Werner - President and Chief Executive Officer

Yeah. I would say that in the QSR side, the big QSRs that demand seems to be just fine there. They figured out the model, and they're leveraging the drive-throughs and so forth. And there are other parts of that business, that sell to more sit-down restaurants and that's going to continue to look like our Foodservice. And then, in our international sales, okay, again that varies by country. We cited China and Australia being relatively strong, but there are some other international locations, which aren't strong. European to take you now, recognize Europe's not in our sales line. It's down in the equity earnings. And so, in Europe, the QSR don't have to drive-through, so we'll have some headwinds there just because they don't have the same model.

Rob Dickerson - Jefferies - Analyst

Okay. And then just lastly very quickly, so if I kind of have to ask the past month or so, I think a lot of investors kind of come to and sale we've heard there might have been some contract pressure over the larger QSR domestically. I have no evidence of that from here you speaking to it sounds like things are pretty good, so to speak and what I'm hearing, so kind of give you the opportunity to address that so I just asked, because we've had - so many people asked me, is there any contract pressure in any larger QSRs? That's all. Thanks.

Tom Werner - President and Chief Executive Officer

Yeah. We don't specifically talk about customers and negotiations. What I will tell you is just like every other year we go through contract season with our customers, so to speak. And just like last year, just like the year before, this year we kind of came through as we expected and so that's generally where we ended up.

Rob Dickerson - Jefferies - Analyst

Okay. Perfect. Thanks guys. Appreciate it.

Operator

And we can now take our next question from Tom Palmer of JP Morgan. Please go ahead.

Tom Palmer - JPMorgan - Analyst

Good morning and thanks for all the detail on current trends. In the press release and in the prepared remarks, you mentioned your view that the overall frozen potato industry demand could approach pre-pandemic levels by the end of this calendar year. I just wanted to clarify, how this would have quite a Lamb Weston would you assume that the company's sales trends would be comparable to the overall industry? Or are there reasons why you might diverged from the industry, either because of a different channel mix than the industry or because of some customer wins or losses that have been taken place?

Robert McNutt - Senior Vice President and Chief Financial Officer

Yeah, Tom. This is Rob. In terms of our overall performance again, the Foodservice business, that's where we expect to see the snapback. As we talked about the QSRs have largely kind of held their own. So really in the foodservice is where we'll see a lot of that strength. And so, and then some of those international markets where we've talked about that has been a little more challenge. And so those are the areas where we think we'll see the strength. And again, as Tom talked about in terms of the capacity unlock that supply chain team is working on, while we haven't spent the capital for a new line per se. The guys are figuring out some ways to get some capital out. So if you think about that, the ability to service that capacity. I think our international sales team is well set up and well positioned. And we've talked about our foodservice sales team with that direct sales model movement to being in a favored position relative to maybe some of our competitors who are more broker oriented that adjusted their service model, a little bit cost of that and so we do feel good that we'll have relative opportunities.

Tom Palmer - JPMorgan - Analyst

Okay. So just to clarify what you mean by that is, you think you could either grow with the industry, if not better when you say return to pre-pandemic?

Tom Werner - President and Chief Executive Officer

Exactly.

Tom Palmer - JPMorgan - Analyst

Okay. Thank you. And then just wanted to ask, you wrapped up prepared remarks with the commentary on contract renegotiations. I just wanted to clarify exactly what this means. So if you're saying that the contracts that were renegotiated this year were flat and then should we assume that the contracts that kind of rollover have the typical price increases that are normally baked into them. And so kind of the net-net of your contract basket would be positive or do you mean the net-net would be flattish?

Tom Werner - President and Chief Executive Officer

Well, the contracts, as I stated earlier were - that we talked about and worked on this year and got negotiated we're at what we expected. And we don't necessarily get into the economics of that, so it's just we go through it, just like we do every other year. And there are some contracts that we have that there is inflationary pricing mechanisms that are adjusted every year and those contracts are in place, automatically the changes based on inflation just gets pass-through, so it's where we're at, just take every other year nothing's really changed.

Tom Palmer - JPMorgan - Analyst

Okay. Understood. Thank you.

Operator

And we can now take our next question from Bryan Spillane of Bank of America. Please go ahead.

Bryan Spillane - Bank of America - Analyst

Hey. Thank you operator and Happy New Year, everyone.

Tom Werner - President and Chief Executive Officer

Happy New Year, Bryan.

Bryan Spillane - Bank of America - Analyst

Thank you. So maybe just to pick up first on the Tom questions on around inflation and pricing and I guess more on just focused on inflation. Can you give us sort of an update on what you're seeing now? I think like cooking oils have inflated recently and we know that freight costs are higher. Don't really know or would like to get maybe get some insight too is, in terms of grower inflation just is there inflation and things like, I don't know fertilizer seed potatoes, order. Just trying to get a sense of whether or not the industry or you'll feel maybe a little bit more input inflation as we move into the out-year versus what you've seen over the last - over the last few years?

Tom Werner - President and Chief Executive Officer

Yeah. Bryan, I'm not - but that I'm going to address the crop. As we do every year, we don't get into specifics, until we get through the negotiating which that's happening as we're talking here. So down the road, July, October we'll talk about what the overall crop looks like and economics of all that, just like we do every year, so…

Robert McNutt - Senior Vice President and Chief Financial Officer

Yeah, Bryan, it is Rob. If you think about it, I mean a lot of that is driven by energy fuel whether it's diesel to run the tractor, whether it's gas going into fertilizer production, things like that and those tend to move together. You've mentioned edible oils specifically, and yeah, there has been a little bit of an upswing in the market, recognize we do hedge and so - and enter into longer-term contracts in that. And so if you put all that together, I think that low-single digit inflation overall is what we're looking at in the near term. And as Tom said, as we go through raw negotiations, we'll see how that comes out.

Bryan Spillane - Bank of America - Analyst

Okay. And then just a second one related to innovation pre-pandemic, you look at last year and there is some nice upside, I guess, from some of the limited time offers and some of the more value added innovation, particularly with QSRs. So as we start to normalize, is there - can you give us just some color on kind of what the innovation pipeline maybe looking like and whether there is maybe a little bit of maybe a pipeline I guess that's maybe backed up a little bit in terms of getting some new products and some innovation into the market, just because it's been so disrupted over the last 10 months or 11 months.

Tom Werner - President and Chief Executive Officer

Yeah, Bryan. You can understand is, I'm not going to get into a lot of the specifics of some of the things we're working on. We do have a full pipeline. I will tell you one thing that we are accelerating is our Crispy on Delivery offering and we came out with that about 15 months, 18 months ago and we're applying that technology to some different fry formats. So with the - and it's right in the sweet spot of delivery and drive-through and all those kind of things and we're getting some traction on it. It's a small base, but it's the growth on Crispy on Delivery is accelerating.

Bryan Spillane - Bank of America - Analyst

Okay. Great. Thanks guys.

Operator

We can now take our next question from Chris Growe of Stifel. Please go ahead.

Chris Growe - Stifel - Analyst

Hi. Good morning. I'll let my Happy New Year as well to you.

Tom Werner - President and Chief Executive Officer

Good morning, Chris.

Chris Growe - Stifel - Analyst

Hi. Good morning. Sort of a couple of questions on. The first one just be it in the bit of follow-ons earlier questions. You did note the higher cost approximately potatoes out of storage, that have been storage longer. I'm just trying to get a sense of your potato supply and the adjustments you made to supply to potentially that was later in the year. Do you feel like you're in a good place on the supply and therefore the future cost for processing those potatoes?

Tom Werner - President and Chief Executive Officer

Yeah, Chris. Like I said earlier, we're very well balanced with raw needs based on our latest forecast for the remainder of the year. So I feel very comfortable where we're at. And just in terms of the raw cost impact with the demand change last spring-summer, we made a decision to store and around potatoes longer than we ever had. And the implications of that is you just don't get the yield that we're used to based on in stores longer and it's just as a perform in the factories as well as the laundry storage. So we're through all that. Going forward with the current crop in storage, we will process that on a normal timeline as we have in previous years, so it was just a one-off thing. It was a decision based on the change in demand to utilize the old crop longer. So it's, but that's all behind us now.

Chris Growe - Stifel - Analyst

Okay. That's make sense. Just wanted to clear on that. And then I just have a second question. We've had a number of questions around the - with the large chain contracts and some of the potential pricing elements. So just curious, are there one-time things you're doing or I mean that may weigh on pricing of it that I meant to drive better demand. I know we've talked about limited time offering, quite the opposite of that there could be an item at restaurants used to try to regenerate demand. Are other things are doing that are more pricing promotion driven the short-term and your pricing in those large contracts?

Tom Werner - President and Chief Executive Officer

No. We're not seeing anything, any change that's driving demand. The interesting thing Chris that we - I wish to look at all kinds of different data. The encouraging thing is the importance of fries on menu is at an all time high. Now in theory if you say look if that holds as demand returns that's going to further add to overall French Fry demand going forward. And that's an interesting thing that we're monitoring, right now to understand and whether that holds or not remains we seen, but again, you look for positive in this and that's one thing that is really intriguing to us, because that could be, if it holds to the level that's holding on the importance, menu importance that's going to elevate demand even further than what we believe it's going to come back by the end of the calendar year, which is close of pre-pandemic levels.

Chris Growe - Stifel - Analyst

Okay. Thank you for that.

Operator

We can now take our next question from William Roger of Bank of America. Please go ahead.

William Roger - Bank of America - Analyst

Good morning. I just have two quick ones. Last quarter you laid out what the one-time costs were associated with COVID. I was wondering if you could lay out that again for the second quarter and then what of those will remain post COVID?

Robert McNutt - Senior Vice President and Chief Financial Officer

Yeah. This is Rob. In terms of the detail of that cost, we've really concluded that those are just part of our operating cost now. And frankly, if you go back to the first quarter and then when we took a write-off on raw and we were shutting down lines for a long period of time. They were really easy to carve out. We did give some detail on like what the increased sanitation protocols and so forth and PPE and so forth are in the plants and that continues on. The rest of it, as you bring in lines up and down. It's become more difficult to really separate out what's operating versus COVID. And so just embedded into our cost structure on an ongoing basis now and so, it clearly our cost structure should improve as the virus gets less and less. And we have less impact on our pruning, and so forth. It's just gotten to the point where it's part of our normal operations of our business and embedded in our costs. So we're not breaking that out.

William Roger - Bank of America - Analyst

That's makes sense. And then in terms of the gross margin pressures in the quarter that capacity utilization as well as this aged potato crop that had larger storage costs associated with that. I guess, which one of those was larger and will we continue to see the headwind of the elevated storage costs on your inventory or are you through that?

Robert McNutt - Senior Vice President and Chief Financial Officer

Yeah. In terms of the storage cost that was just the carryover from old crop. We got through the manufacturer that crop in the first and early part of the second quarter. And so, sitting in inventory and then sold and we're out of that now in the second quarter. So we shouldn't see that as a headwind going forward.

William Roger - Bank of America - Analyst

Okay. And I guess just one more, if I can sneak it in. The last time you gave us an update on a leverage target, it was 3 times to 4 times, is that still the range?

Robert McNutt - Senior Vice President and Chief Financial Officer

Yeah. We haven't changed our leverage targets at all.

William Roger - Bank of America - Analyst

Great. I'll pass to others. Thank you.

Operator

And we can now take our next question from Carla Casella of JPMorgan. Please go ahead.

Carla Casella - JPMorgan - Analyst

Hi. Most of my questions have been answered, but I guess given some of the weakness you're seeing. Is there ability to pick up new contracts and new business has that changed. You talked about some of the competition on the lower end and the contracts for the private, but I guess that sounds like it's more your existing. Can you just talk about new businesses and the opportunities there?

Tom Werner - President and Chief Executive Officer

Yeah. This is Tom. The team we're always talking to potential new customers, obviously, with the demand change those are more difficult. A lot of the customers that we have embark to is, initially, it was about assured supply, so kind of we got all that settled down as we go through the pandemic and our team, our sales team, are on the ground searching for new opportunities. And that really hasn't changed from a market standpoint.

Carla Casella - JPMorgan - Analyst

Okay. Great. Thanks a lot.

Operator

This concludes the Q&A session, Mr. Congbalay I would like to hand the call back to you for any additional or closing remarks.

Dexter Congbalay - Vice President, Investor Relations

Thank you all for joining our second quarter call. If you want to step a follow-up session, please pass me an email and we can get that scheduled, but again thanks for joining us and have a good day.

Operator

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LAMB WESTON HOLDINGS INC

Q2 2021

Earnings Transcript

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