Good day, and welcome to the Lamb Weston Second Quarter 2020 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Dexter Congolay, VP, Investor Relations of Lamb Weston. Please go ahead.
Good morning, and thank you for joining us for Lamb Weston's Q2 2020 earnings call. This morning, we issued our earnings press release, which is available on our website, lambleston.com. Please note that during our remarks, we'll make some forward looking statements about the company's 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 the
risk factors contained in our filings with the SEC for more details on our forward looking statements. Some of today's remarks include non GAAP financial measures. These non GAAP financial measures should not be considered a replacement for and should be read together with our GAAP results. You can find the GAAP to non GAAP reconciliations in our earnings release. With me today are Tom Werner, our President and Chief Executive Officer and Rob Hennep, our Chief Financial Officer.
Tom will provide an overview of our performance, some recent capital allocation actions and an update on the current operating environment. Rob will then provide the details on our 2nd quarter results and our updated fiscal 2020 outlook. With that, let me now turn the call over to Tom. Thank you, Dexter. Happy New Year, everyone, and thank you for joining our call today.
We delivered another strong quarter as we continue to execute well. Specifically, sales increased 12% behind strong volume growth and favorable price mix in each of our core business segments. EBITDA, including unconsolidated joint ventures, increased 17%, while adjusted diluted earnings per share increased 19%. And in the first half of the year, we generated $345,000,000 of cash flow from operations. Because of our strong year to date results and good operating momentum, we braked our fiscal 2020 outlook for both sales and EBITDA.
As Dexter mentioned, I'd like to update you on some capital allocation actions we've recently taken as well as our thoughts on the potato crop and the current operating environment. On capital allocation. In October, we acquired a 50 percent ownership interest in a new joint venture in Argentina. This JV will provide us better access to a strategic and growing market where we have been underrepresented. Before this investment, our market share in South America was less than 2%.
While the JV is a modest sized operation today, it provides a good base for expansion to serve the broader South American market with a low cost, high quality product. This should enable us to drive faster share growth over the long term. We also remain committed to reinvesting capital back in this business to support customer growth. We've added 3 new French fry lines since 2014. And despite these additions, our current capacity utilization is above our targeted operating rates due to recent demand growth being faster than historical averages.
While we are not prepared to announce any capacity expansion projects today, we are aggressively evaluating opportunities to expand production capacity inside and outside North America to support our customers' growth. We look forward to sharing our expansion plans with you soon. In the meantime, we're actively working to stretch existing capacity by debottlenecking lines and driving productivity. And finally, in addition to reinvesting back into the business, we remain committed to returning capital to shareholders. Last month, we announced a 15% increase in our quarterly dividend of $0.23 a share or $0.92 on an annual basis.
That puts our dividend payout ratio at about 27% on a latest 12 month basis, which is within our target payout range of 25% to 35%. We will continue to supplement our dividends with share repurchases. In the Q2, we bought back about $8,500,000 of stock, which is largely consistent with our goal to at least offset equity compensation dilution. To do so, we estimate that we need to buy back around $40,000,000 of stock annually. Now switching to the potato crop.
Recent press reports have led to market fears of raw potato and French rice shortages. As we discussed on our last earnings call, the crop in our growing areas in the Columbia Basin and Idaho will resource the vast majority of our raw potatoes and where we have most of our production facilities is consistent with historical averages in terms of both yield and quality. As a result, we expect to operate our plants there at normal utilization rates. In Alberta, Canada, where we have one plant, crop yields and quality are below average as a result of adverse weather conditions during the growing season and harvest periods. However, we've been able to secure enough potatoes to operate that plant at normal rates.
Nonetheless, overall potato availability in Alberta is limited. In Minnesota, where we have a single plant through our joint venture, Lamblex and RDO, crop yields and quality are below average, also due to poor weather conditions during the growing season and harvest periods. As a result, potato availability in the upper Midwest will also be limited. However, our partner in that plant is the primary supplier of raw potatoes, and they expect to provide adequate supply for the plant to operate as planned. Also, we understand that the crops in other key growing regions such as Manitoba and Prince Edward Island are below average due to adverse weather.
This limits the availability of potatoes in North America. It's important to note that we do not currently source raw potatoes from these regions. So let me be clear. Given our concentration of processing facilities in the Columbia Basin and Idaho as well as our strong roller relationship in Alberta and the Midwest. And most importantly, our decision to source open potatoes several months ago, we're confident that we have raw potatoes to deliver our volume growth targets for the remainder of our fiscal year.
However, potato supply in North America is tight, and this may pressure our ability to pursue incremental volume growth opportunities, both domestically and internationally Now turning Now turning to Europe. The potato supply there is also expected to be challenging due to quality and late harvest weather conditions. Compared to last year's historically poor harvest, the potato crops in the Netherlands and Belgium this year are better but still below average. The crops in Germany, Poland and the U. K.
Are more challenged. As a result, raw potato prices in Europe remain elevated versus historical averages but are below prices that we experienced last year. So we expect that Lamb Weston Myers performance will continue to improve compared to last year as cost pressures ease in the second half of our fiscal year as a result of the new crop. With respect to the operating environment, we believe that industry capacity utilization rates in North America remain elevated during the Q2, and they will likely remain so for the remainder of our fiscal year subject to raw potato availability. We believe global demand growth for frozen potato products is generally favorable and will remain so through fiscal 2020.
Similar to what we saw earlier in the year, U. S. Demand in the second quarter continued to be underpinned by positive restaurant traffic trends, and quick service traffic growth was strong, again led by growth at shipping based outlets. Demand in our key international markets as well as in Europe continued to grow in line with recent trends. Together, these factors help drive our strong volume growth in the quarter, especially in our Global segment.
So in summary, we delivered a strong second quarter and first half results. We expect the overall operating environment to remain generally favorable for the balance of the year, underpinned by solid demand growth. We are well positioned with raw potatoes to deliver our volume targets. And finally, our successful execution of our strategy is generating strong cash flows, which allowed us to continue to reinvest in the business to support growth and step up cash return to shareholders. Now let me turn the call over to Rob to provide details on our Q2 results and our updated outlook.
Thanks, Tom. Good morning, everyone. As Tom noted, we delivered another strong performance in the quarter and for the first half of the year. Specifically in the quarter, net sales increased 12% to $1,019,000,000 with volume growth and favorable price mix in each of our core business segments. Volume increased 10%, led by growth in our Global and Foodservice segments.
Our 2 acquisitions in Australia, Marble Packers and Ready Meals, added about 1.5 of volume growth. In addition, we had a couple of extra shipping days than we had in the Q2 of fiscal 2019 due to the timing of Thanksgiving. These extra couple of days contribute about another plenty of volume growth. As a result, this will pose a headwind to our Q3 results on a year over year basis. Pricemix was up 2% due to pricing actions and favorable mix.
Our strong sales growth drove a $36,000,000 or 14% increase in gross profit. Favorable pricemix, volume growth, along with lower transportation costs drove the increase, more than offsetting the impact of higher manufacturing costs due to inefficiencies and higher depreciation expense associated with our new production line in Hermiston. In addition, the increase in gross profit included a $4,000,000 benefit from unrealized mark to market adjustments related to commodity hedging contracts. That's compared to a $2,000,000 loss in the prior year period. Our gross margin percentage increased about 65 basis points to 28%.
Excluding the mark to market adjustments, it was up about 5 points. While we made a lot of progress improving our plant operating performance from the Q1, in the second quarter, we continued to incur higher than normal periods unscheduled operating downtimes, which affected our production levels. This impacted fixed cost absorption, raised overall maintenance costs and lowered recovery rates. In addition, some of the costs that we realized in the second quarter was a carryover effect as we work through finished goods inventories from the Q1. Since our plants are now operating at more normal levels, we expect only a modest carryover effect in these manufacturing efficiencies in our fiscal Q3 results.
SG and A expense was $92,000,000 an increase of about $17,000,000 About $6,000,000 of this increase was related to higher incentive compensation accruals based primarily on our performance. About $4,000,000 of the change reflects an insurance settlement that we had last year, but this was partially offset by a $2,000,000 reduction in foreign exchange losses. About $7,000,000 of the increase related to investments in our sales, marketing and operating capabilities. Finally, more than $2,000,000 of the increase was related to designing and implementing our new enterprise resource planning system. As we previously discussed, we expect to spend about $10,000,000 to $20,000,000 of one time costs this year on implementing a new ERP system.
To date, we've spent about $4,000,000 so we expect spending to ramp up in the second half of the year. Income from operations increased about $20,000,000 or 11 percent to 194,000,000 dollars This reflected solid sales and gross profit growth. Equity method investment earnings from our unconsolidated joint ventures, which include Lam Weston Meyer in Europe, Lam Weston RDO in Minnesota and our new joint venture in Argentina, were $15,000,000 in the quarter. Excluding mark to market adjustments, equity earnings increased $6,000,000 largely reflecting lower raw potato prices in Europe. So putting it all together, EBITDA, including joint ventures, increased $38,000,000 or 17 percent to 261,000,000 dollars Operating gains by our base business, along with contributions from the BSW Consolidation and the Australian acquisitions, drove about $32,000,000 of EBITDA growth.
Our unconsolidated joint ventures added about 6,000,000 dollars Moving down the income statement. Interest expense was about $25,000,000 which is about $1,000,000 below last year. Our effective tax rate was more than 23% or about 2 points higher than last year due to discrete items. Turning to earnings per share. Adjusted diluted EPS was up $0.15 or 19 percent to $0.95 Operating gains in our base business and higher equity earnings drove the increase.
We also had an approximately $0.04 benefit from the BSW consolidation. Now let's review the results for each of our business segments. Sales for our Global segment, which includes the top 100 U. S.-based change as well as all sales outside of North America, were up 15%. Volume grew 14%.
The increase was driven by higher sales, including increased sales of limited time offerings to strategic customers in the U. S. And key international markets. It also includes a 3 point benefit from the acquisitions in Australia and a 1 point benefit from the additional shipping days related to the timing of Thanksgiving. Pricemixrose1%, primarily reflecting pricing adjustments associated with multiyear contracts.
Global product contribution margin, which is gross profit less advertising and promotion expense, increased $17,000,000 or 15%. Volume growth, favorable price mix and lower transportation costs drove the increase, which was partially offset by higher manufacturing costs and higher depreciation expense associated with the Hermiston line. Sales for our Foodservice segment, which services North American Foodservice distributors and restaurant chains outside the top 100 North American restaurant customers, increased 9%. Volume increased 5%, led by growth of distributor private label and lamb Weston branded products. About half of the volume increase was due to the additional shipping delays in the quarter.
Even after adjusting for the Thanksgiving shift, we delivered our 4th consecutive quarter of volume growth as our direct sales force continued to strengthen customer relationships. Price mix increased 4%, primarily reflecting pricing actions taken in October. Food services product contribution margin increased $14,000,000 or 14%. Favorable price mix, volume growth and lower transportation costs more than offset higher manufacturing costs and depreciation expense. Sales in our retail segment increased 7%, driven by 4 points of volume growth behind increased sales of branded and private label products.
About 2 points of the volume growth was due to the additional shipping days in the quarter. Price mix increased 3%, largely due to favorable mix and pricing actions. Retail product contribution margin increased $3,000,000 or 10%. Favorable price mix and volume growth drove the increase and was partially offset by higher manufacturing costs, depreciation expense and A and P spending. Moving to our balance sheet and cash flow.
Our total debt at the end of the quarter was about $2,200,000,000 This puts our net debt to EBITDA ratio at 2.6x. With respect to cash flow, we generated nearly $345,000,000 of cash from operations in the first half of the year. That's up about 9% versus last year, driven by our earnings growth. We used about $135,000,000 towards acquisitions, including a $17,000,000 initial payment for our half of the new joint venture in Argentina. We also invested nearly $110,000,000 combined in capital expenditures and IT related projects.
In addition, we bought back more than $13,000,000 of stock and paid $59,000,000 in dividends to our shareholders. Turning to our updated fiscal 2020 outlook. As Tom noted, because of our first strong first half performance, we've raised our sales and earnings outlook for the full year. As a reminder, our targets include the contribution of a 53rd week that will benefit the 4th quarter. Overall, we continue to be prudent when updating our annual outlook.
For the full year, we're now targeting sales to grow at the high end of our original mid to high single digit rate range. We continue to expect that sales will be primarily driven by volume and it will deliver price mix increases to offset input cost inflation. As you know, we delivered 10% sales growth in the first half, including a 2% higher price mix and robust 8% volume growth. We expect our volume growth will moderate in the second half for a number of reasons. In our Global segment, volume growth in the first half of the year was faster than we had anticipated due to domestic QSR traffic growth above historical trends and international demand was also above our initial expectations.
While we expect global demand will remain generally favorable in the back half of the year, we expect these trends may begin to normalize towards historical growth rates. Also in our Global segment, in the 3rd quarter, we'll be lapping strong sales of limited time offering products. Also in the Q3, we'll realize a headwind of approximately 1 percentage point due to a lower number of shipping days versus the prior year quarter as a result of the timing of Thanksgiving. This will affect each of our core business segments with the most pronounced impact in our Foodservice segment. Finally, in our Retail segment, we'll realize the effect of losing some low margin contracts in our private label retail business.
In short, we expect to drive solid sales growth in the second half, led primarily by volume growth with modestly higher price mix. For earnings, we've increased our full year target for adjusted EBITDA, including unconsolidated joint ventures, to a range of $965,000,000 to $985,000,000 That's up from a range of $950,000,000 to 970,000,000 For the second half, we expect that gross profit will rise largely in line with sales growth with volume growth and favorable price mix offsetting input cost inflation and higher depreciation expense. As a result, we expect that gross margin percentage will be essentially flat in the second half. However, gross margin in the 3rd quarter may be pressured as a result of difficult prior year comparison. Gross margin in the Q3 of fiscal 2019 included a $4,000,000 benefit from unrealized gains on hedging contracts, a mix benefit due to strong sales of higher margin limited time offering products in our Global segment and a cost benefit from supply chain efficiencies, especially around edible oils and transportation.
Regarding SG and A, for the year, we continue to expect our base SG and A, which excludes advertising and promotional expenses as well as onetime ERP investments, will be within our target range of 8% to 8.5% of sales. A and P expense in the second half should be a bit above the $11,000,000 we've spent so far. As I previously noted, we anticipate total ERP system implementation spending to ramp up versus the $4,000,000 of one time expense that we incurred in the first half. We continue to target total one time expenses related to the project between $10,000,000 $20,000,000 for the full year. With respect to equity earnings, we continue to expect that it will continue to gradually improve in the second half despite the potato crop in Europe again being somewhat challenged.
To summarize, in the second half of the year, we delivered solid growth in EBITDA, including joint ventures, driven by sales and gross profit growth as well as improved equity earnings. This growth will be tempered by higher SG and A expense as we step up spending behind our ERP implementation. In addition, it's important to note that we had an approximately $10,000,000 year over year earnings benefit from the BSW consolidation in the first half of fiscal twenty nineteen 2020, excuse me, since we completed that transaction around mid fiscal 2019, we'll no longer have that benefit in the back half of this fiscal year. Finally, most of our other financial targets remain the same. We continue to target total interest expense of around $110,000,000 total depreciation and amortization expense of approximately 175 $1,000,000 and total capital expenditures, which includes some CapEx for our new ERP system of around $300,000,000 We've updated our effective tax rate target to be about 24%.
That's on the high end Rob. Let me sum up by saying we're pleased with our strong first half performance as we continue to execute well in a generally favorable environment. We've raised our sales and EBITDA target for the full year and remain prudent with our updated outlook. We are well positioned with our raw potato supply to deliver our volume target and support customers' growth, And we remain focused on reinvesting in our business to drive long term growth, return capital to shareholders and create value for all our stakeholders. I want to thank you for your interest in Lamb Weston, and we're now happy to take your questions.
Thank We will take our first question and that is from Andrew Lazar with Barclays. Please go ahead.
Good morning everybody and happy New Year.
Happy New Year, Andrew.
Two questions, if I could, Tom. I guess, first, as you mentioned, through fiscal 1H, Lamb Weston sales running close to 10% or so, even excluding the benefit of the holiday timing. To get to the high end of mid single digit for the full year suggests sales growth in the back half of something like low single digits, maybe 2% or so. And I realize that you and Rob went through some of the factors that drove sales growth to be above your expectations through the first half. But I guess, what I guess would drive this sort of pretty significant deceleration, particularly with favorable restaurant trends expected to continue?
And then I just got a follow-up.
Andrew, it's Rob. Again, it's consistent. We think we're prudent with our outlook. As you say, mid the high end of the mid single digits, we maybe stretch it out a little further than you do, and you said 6. I think you go to somewhere in the 7% range is more where we think that ends up.
But again, going through those individual elements there, again, we're anticipating that we're going to return to more normal growth rates in the back half of the year where we had accelerated growth rates, especially in our international business in the global segment. And Andrew, this is Tom. I think the other thing as we've been very consistent with our outlook to be prudent, A couple of things that I've alluded to on prior calls, the restaurant traffic trends have been favorable. Q1 was up 2%, traffic was up 1% this last quarter, which is significant. And that's an area where it's really hard to predict.
So we're being conservative, absolutely. But we got that's a trend we're monitoring going forward. And obviously, if the trends continue as is, then we could see some upside to this.
That's helpful perspective. And then you mentioned the 1% price mix that you saw in the global segment was primarily driven by multiyear contracts. And I'm curious if given some of the pricing, some of the incremental pricing that went into place more recently in global. I guess, would your expectation be that price mix there accelerates a bit sequentially as we go into the back half of the fiscal year? Or do I have that wrong?
Yes. So just to reset, Andrew, our global contracting ended up where we projected it to end up. And there is pluses and minuses, net net, as we plan this fiscal year based on what we thought the environment would allow us to price. We kind of ended up where we thought. So what you're seeing in global relative to the pricing that we got through during the contract negotiations, it's going to be pretty stable for the balance of the year.
And I would say, remember, when we have international volume growth like we have, it's been, again, ahead of where we projected. The pricing in those international markets are different than our pricing in our North America market. So you get a dilutive pricing factor in that.
Yes. Got it. Okay. Very helpful. Thanks so much.
Yes.
Thank you. We will go ahead and take our next question, and that is from Adam Samuelson with Goldman Sachs. Please go ahead.
Yes, thanks. Good morning and happy New Year, everyone. Happy New Year, Adam. I guess I was hoping maybe you could go on the discussion on the global business a little bit. And if you could contrast a little bit some of the growth rates in your export business out of North America relative to domestic.
I mean, the volume growth that you said you put up, I mean, again, well in excess of the 1% traffic growth for QSRs that you just cited. I'm just trying to get a sense of kind of maybe geographies that are contributing, if you think the U. S. Is gaining share from other export regions. Just any additional color there would be helpful.
Yes. I'm not going to get into specific market growth rates. We don't haven't typically talked about that. But what I will tell you and just reiterate is the international markets, at least this last quarter, have grown above historical averages, and that's true for North America as well. As we think about the go forward, again, we're being prudent in our outlook.
And we've got a strong first half of growth across the international and North America market and the global business unit. And we'll see how it all plays out in the next several quarters, but it's just been strong demand, quite frankly. Yes. Adam, this is Rob. The other thing I'd say related to that, Tom mentioned in his comments that while the traffic may be 1%, our weighting of customers in North America may be a little stronger and that we're weighted to the chicken side maybe heavily more heavily than the market, and that's where they had outsized growth.
Okay. That color is very helpful. And then just as we think about the impact of some of the raw potato shortages in different parts of North America, how just tell me not just the fiscal 2020 percent, but all of calendar 2020, how do we think through kind of how you think the market will absorb that or handle that? And if there were pricing and mix opportunities that would emerge, is that something that would happen in the May quarter? Is it more do you think there's more pressure in August before you get to the next harvest?
Just laying out the calendar a little bit, just how some of those raw potato issues could affect the marketplace and how some opportunities are going to present themselves? Yes. I think it's my experience with situations like this is you got to you have to be patient. And we'll see how this all plays out in the spring, quite frankly. And there's several things that the industry can do to augment potato supply, whether it's harvest early, plant more acres.
There's a number of things. So it's really, Adam, a little bit early to speculate on what's going to happen. We have an idea, but we have to the most important thing for us is we are well positioned with the raw potatoes that we've secured and got ahead of it. So we're going to take care of all of our customers' needs. We will opportunistically evaluate opportunities that may come our way.
But our focus is to execute against our customers and the plans that they have and drive their growth. That's it. And if there's things that come our way, we'll evaluate it as they happen. Okay. I appreciate all the color.
I'll pass it on. Thanks.
Thank you. Will take our next question and that is from Tom Palmer with JPMorgan. Please go ahead.
Thanks. Good morning and Happy New Year. Good morning, Mark. You gave a lot of helpful color on the potato crop in North America. I hope you could maybe provide a bit of quantification on your annual outlook for potato and non potato costs and also how you see COGS inflation in the second half of the year relative to what seemed to be low single digit inflation in the first half?
Yes, Tom, this is Rob. In terms of our inflation, again, as we've talked about before, we contract the vast majority, I mean, in the high 90s of our needs for the year. And as Tom mentioned in his remarks, before things started to run up, we REA did a great job of getting ahead of it and contracting for the remainder of the potatoes that we needed, the small amount additional that we needed. And so we're still targeting our cost inflation to be really in line with what it's been in the first half of the year and so those kind of low single digit inflation.
Okay. Thanks for the color there. And then I just wanted to clarify something. You've mentioned a few times opportunities that may come your way on the price mix side. I just wanted to clarify, this is more related to potentially seeing the migration of customers who might not be able to get the volumes that they might typically procure from others?
Or are you also considering maybe a regularly timed list price increase?
It's more of the first, I would say. But again, like I said earlier, we'll see how that all plays out. I've seen instances when we've had situations like this with the rod in other areas of the world where everybody just managed through it. So we just, again, have to be patient, execute against what our plans are, take care of our customer needs. And if there's customers that come to us that are want us to provide product, then we'll evaluate that.
Okay. Thank you.
Thank you. We will take our next question from Chris Growe with Stifel. Please go ahead.
Hi, good morning and happy New Year as well. Good morning, Chris. Hi. I just had a question for you first on a comment you made about capacity utilization and we're seeing this really strong volume growth. And I just want to understand how limiting this could be to your volume growth going forward, perhaps around LTOs?
And then given the time it takes to build capacity, I know you're always thinking about that, but I'm just trying to understand where we are in that thought process. And could we see more capacity the need for more capacity coming more quickly? Yes, Chris. It's Tom. A couple of things.
As I said in my prepared remarks, we're aggressively evaluating capacity addition in our current footprint inside and outside North America. That's number 1. And the second thing is our supply chain team has full court press on operating efficiency and projects on unlocking capacity in our footprint today. So in terms of where we're at, I feel good about the near future, if you will, on our ability to unlock capacity and drive efficiencies to support volume growth on a normalized level. But again, to your point, what you're pushing at is we're evaluating additional capacity in our network, and that's just a function of the overall category growth that we continue to see.
Sounds like a good place to be in. I got that. And then just one quick follow on. And perhaps this relates to the strong volume growth in the quarter. But you had a much stronger gross margin performance this quarter and pricing was just a touch below what I thought, but it sounds like that was more than compensated for the cost inflation.
So was it just the volume growth and the efficiencies in the quarter that allowed for stronger gross margin performance? Yes. Chris, this is Rob. We did have good gross margin performance. And spot on, I mean, we had good pricing, especially in the foodservice, as you see, but really good cost control, I would say.
And recall in Q1, we had some headwinds that we talked about in terms of operating inefficiencies, and the plant is not running particularly well. And so a lot of that's cleaned up, and we operated better. We're still not all the way to bright through Q2 but a lot closer. And so we cleaned up a lot of that. And so input cost inflation was managed well, and then the operating level of the plants was a lot better.
Okay. Thank you.
Thank you. We will take our next question from Rebecca Schumann with Morningstar. Please go ahead.
Good morning and Happy New Year. So I just I'm really impressed with this volume growth in your Global segment. And you did mention that part of that was driven by some benefits to the chicken segment. I'm wondering also, if given your relative favorable sourcing of raw potatoes in your regions? How the quality your experiences is better than some of your competitors out East?
If there's also some share gains possibly that is driving some of the strength?
Yes, this is Tom. In terms of quality, your kind of your first question, the industry is kind of on an even playing field. There's areas that are better. There's areas that are worse in terms of raw potatoes. So I wouldn't attribute the volume growth to any raw quality advantages.
It's all about getting ourselves positioned over the crop year to ensure that we have the raw potatoes available for our customers' growth. And I've talked about this on this call ad nauseam, but we're in a great position. So it's not about the raw potatoes. It's about traffic. And it's about the markets and in our global markets across the globe, the demand was just better than we expected.
And so it's really about what I talked about previously. We've had Q1, we had good traffic. Q2, we've seen an increase in traffic year over year. So if that continues, then we're in a great position to support that.
Okay, great. And the second question I have is just, is it safe to assume that the negative hit in Q3 from the timing of Thanksgiving is also going to be about 1%?
Yes. I went through those details earlier. You can follow-up with Dexter again to reiterate that.
Yes. That's fine. Okay. Thank you so much.
Thank you. We'll take our next question from Brian Hunt with Wells Fargo Securities. Please go ahead.
Thank you. My first question and I'm sorry if I'm beating on the subject, But if you look at your global sales, they accelerated sequentially and even backing out the adjustment for the calendar as well as the acquisitions, you saw acceleration. And that's with a declining trend in restaurant traffic. So based on the previous comments, you saw QSR traffic up 2 and then up 1, but yet your sequential growth accelerated. So I was wondering if you could dive into that.
Were there any contract wins? Did you see some incremental initial benefits of shortages in parts of the world where you all took share? Again, it's a very important topic. I was just wondering if you could dig into it a little bit more for us. Yes.
Brian, this is Rob. Again, as I talked about in prepared remarks that we did have good growth in the international side of our global business and then good QSR growth here domestically. And then as we talked about, our weighting in QSR is maybe some customers that had a little stronger growth rate. And so I think that contributes a lot of it. And then as we look forward, again, went through the comps and we had some good LPO performance last year in Q3 that we may not see this year in Q3.
So I guess, basically, there's no reason for us to believe that there's a level of permanence that you all will grow above the industry overall? Nothing that we reflected to you, no. Okay. My next question is and thanks for the incremental color. Next question is you all mentioned historically, looking at capital allocation, that your target leverage is 3.5x to 4x.
You're running at 2.6 based on your comments. And you'll generate significant free cash flow based on our projections over and above your incremental dividend and your maybe $40,000,000 share repurchase. So basically, you all have to do something meaningful to get back within that 3.5x to 4x bandwidth. So do you all feel like you're do you adjust your financial targets down to something lower in terms of leverage? And if that's the case,
do you feel
like that makes you an investment grade company instead of a high yield company? Yes. So this is Tom. Consistent with what we've talked about in the past since we've been public, we have 3 priorities. First one is we're going to continue to invest in this business, and that means adding capacity and that costs $350,000,000 to $400,000,000 when we decide to pull that trigger.
2nd, we are going to actively pursue M and A. And 3rd, we're going to return capital to shareholders. And so I'm comfortable with where our leverage is. I think our investment rating right now gives us the opportunity to pursue potential M and A as we have in the past. Now granted, they've been small bolt on acquisitions, but I want to make sure I've got plenty of balance sheet capacity to do a potential big deal that comes around.
So I feel good about where our leverage is. And it gives us with our cash flow, we're returning capital to shareholders with dividend increase that we just recently announced and our share buyback program, and I want to have some balance sheet available to pursue opportunities in the marketplace. I guess the only thing, based on our math, that would get you back into 3.5 to 4 turns of leverage with the sizable acquisition. Is there anything on the horizon? Or is there anything out there available for sale that is sizable in your opinion at this moment?
Well, I'm not going to get into specifics. What I will tell you is we're as active as we can be in the market. Very good. I'll hand it off to others, and Happy New Year, and I appreciate your time.
Thank you. Thank you. We will take our next question from Carla Casella with JPMorgan. Please go ahead.
Hi. On the CapEx side, I had a question. The $300,000,000 CapEx, can you just remind us how much of your CapEx is maintenance? And do you have a sense for any other major projects beyond 20 20 that we should be considering in our kind of go forward CapEx?
Yes. Tyler, this is Rob. The maintenance level of CapEx we've talked about in the past has been in the $115,000,000 $125,000,000 range, somewhere in that $120,000,000 ish range. And really, the only thing that you may think, too, think about is Tom's comment in the not too distant future, we're going to have to add some capacity. And so think about it in those terms, and we've talked about that in the past.
Okay, great. And then on the Thanksgiving timing shift, you mentioned it's about a it added about a point of growth this quarter. Did you I don't think I heard you quantify how much you expect it to take from growth in the next quarter?
Yes. Hi, it's Dexter, Karl. It's about to end. It's just a pull forward, that's all it is.
Okay, great. Thanks.
The last question is going to be our last question. So this is back to everyone. If anybody who wants to have a follow-up conversation, just e mail me and we'll set up a time. Other than that, Happy New Year to everyone, and have a good weekend.
Thank you. Ladies and gentlemen, this concludes today's conference. All participants may now disconnect.