Good day, and welcome to the Liam Weston First Quarter 2020 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Dexter Congboli, VP, Investor Relations of Lamb Weston. Please go ahead.
Good morning and thank you for joining us for Lamb Weston's Q1 2020 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 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 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 McNutt, our Chief Financial Officer.
Tom will provide an overview of our performance as well as some comments on the current operating environment. Rob will then provide the details on our Q1 results. With that, let me now turn the call over to Tom.
Thank you, Dexter. Good morning, everyone, and thank you for joining our call today. We're pleased with our solid start to the year with each of our core business segments driving volume, price mix and earnings growth. Specifically, sales increased 8% behind strong volume growth. EBITDA, including unconsolidated joint venture, increased 9%, driven by strong sales growth and higher gross profit.
Diluted earnings per share increased 8%, reflecting operating gains. And finally, we generated nearly $240,000,000 of cash flow from operations. These results provide us with a good foundation to deliver on our full year commitments. They also reflect how our commercial and supply chain teams continue to execute on our strategic and operational objectives. For example, in our Global segment, we drove strong growth by supporting customers in North America and internationally.
We also continued to grow sales of limited time offering products in the U. S. And key markets in Asia despite lapping a very strong prior year quarter. In our Foodservice segment, we delivered our 3rd consecutive quarter of volume growth behind sales of Lamb Weston branded products as our direct sales force continues to strengthen relationships with customers. In retail, our Alexia, Grown in Idaho and licensed branded products each grew volume.
Grown in Idaho continued to expand distribution helped in part by the recent launch of 2 new items that are phenomenal, Dipper and waffle fries. And finally, our supply chain team continued to ramp up our new £300,000,000 French fry line in Hermiston, Oregon, providing us with additional flexibility to service and upgrade other production lines that have been operating at peak capacity. Although we delivered a solid quarter, we did face some challenges in our supply chain. As you know, we've enjoyed the benefits of operating our manufacturing assets at very high utilization rates over the past couple of years. When possible and without compromising food or employee safety, we've taken opportunities to defer maintenance in order to continue to support our customers' growth.
However, it has also placed a strain on our production assets. During the quarter, that strain showed. As Rob will discuss later, we had instances of production issues resulting in unplanned maintenance and repair costs as well as some unscheduled operating downtimes. In turn, this increased our costs. Our manufacturing plants are now operating better.
While we're making good progress and working through the issues that affected our performance, we expect to realize some residual impact on our results in the near term. Before turning to the operating environment, let me give you a few quick updates. 1st, on a preliminary basis, we believe the crop in our growing areas in the Columbia Basin and Idaho, where we source the vast majority of raw potatoes, will be consistent with historical averages. While crop yields in Alberta and Minnesota may be just below average due to weather events, we do not expect this to have a notable impact on our overall results. So at this time, we do not expect any significant issues with the crop in North America.
As usual, we'll provide our updated view of the crops yield and quality and how we expect the crop will hold up in storage when we report our 2nd quarter results in early January. These factors are all key to determining how the potatoes perform in our production facilities and along with contracted raw potato prices are actual costs for raw potatoes. 2nd, our early read on the potato crop in our growing areas in Europe is that it will be a bit below the long term average. This is due to hot weather conditions this summer. However, despite being below average, we believe it will be better than last year's historically poor crop.
As a result, we expect that Lamb Weston Meyers performance will gradually improve as the year progresses as cost pressures ease in the second half of our fiscal year once the new potato crop begins to be processed. And finally, with respect to contracts with our large customers, we finalized most of the agreements that are up for renewal this year. In aggregate, we're satisfied with how the discussions progressed and the terms on which we ultimately agreed, including price. These contracts reflect our balanced approach to improving price and mix in order to offset inflationary pressures and importantly to maintain and reinforce our strategic customer relationships. Now turning to our operating environment.
We believe the current global environment is generally favorable. We believe industry capacity utilization rates in North America remain elevated during the Q1. For the remainder of fiscal 2020, we anticipate that new capacity in North America will allow processors to operate their facilities closer to normalized rates, but utilization rates will remain elevated. With respect to demand growth in our physical Q1 was strong. In the U.
S, positive restaurant traffic trends continue to be supported by low unemployment. Quick serve restaurant traffic growth was especially strong, led by growth at chicken based outlets. Growth in French fries servings was also encouraging. These trends helped drive our global segment strong volume growth in the quarter. In our key international markets, demand continued to grow in line with recent trends.
And in Europe, demand growth was solid despite higher frozen potato prices as a result of last year's crop. While recent frozen potato demand has been higher than average, we're monitoring signs of softening macroeconomic conditions, which may temper demand growth towards more normalized rates. However, French fry demand has proven somewhat resistant to the effect of challenging economic times as most rides are consumed at QSRs. Generally, consumer traffic at QSRs tends to weather periods of slower economic growth better than fast casual and other casual restaurant formats. That's why we've stayed aligned with our strategic QSR customers and partnered with up and coming QSRs in many of our key markets.
As a result, along with our broad market coverage, advantaged global manufacturing footprint, focus on execution and commitment to serving our customers, we believe we're well positioned to deliver our financial objectives for the year and create value for our stakeholders over the long term. So in summary, we delivered a strong start to the year despite some manufacturing related challenges. The potato crop in North America is in line with historical averages and the crop in Europe is improved versus the prior year. We're satisfied with the outcome of customer contract renewals and we're on track to deliver on our fiscal 2020 financial targets. And one more thing before I turn it over to Rob.
Earlier this year, Rick Martin, our Global Head of Supply Chain told me of his intention to retire. For the past 25 years, he's been a tremendous asset to Lamb Weston and especially to me through the last 3 years as we transition to a standalone public company. Rick's been a steady hand leading the supply chain organization during our transition, including building and starting up several new lines to support our growth. He's also been a tireless champion for safety in our manufacturing facilities and a great partner for me and my management team. On behalf of Lamb Weston, we wish Rick a happy and healthy retirement.
And as we announced a couple of months ago, we're welcoming Gerardo Shifler as our new supply chain leader. Gerardo has more than 25 years of supply chain experience, most recently as the Vice President of Global Operations at Mondelez International, where he oversaw a major global restructuring program to optimize the global supply chain footprint that included more than 50,000 employees at more than 150 global locations. Prior to Mondelez, he spent more than 20 years at Procter and Gamble in a variety of roles of increasing responsibility. We're happy to have Gerardo join the team and to leverage his experience as we make progress against our strategic plan. Now let me turn the call over to Rob to provide details on our Q1 results.
Thanks, Tom. Good morning, everyone. As Tom noted, we're pleased with our solid start to the year. Net sales increased 8% to $989,000,000 with growth in each of our business segments. Volume increased 6% led by growth in our global segment.
Together, our 2 acquisitions in Australia, Marvel Packers and Ready Meals added about a point of volume growth. Price mix was up 2% due to pricing actions and favorable mix. Our strong sales growth drove an $18,000,000 or 8% increase in gross profit. Specifically, higher prices, volume growth and favorable mix drove the increase, more than offsetting the impact of higher manufacturing costs due to inefficiencies, cost inflation and higher depreciation expense associated with our new production line in Hermiston. It's important to note that the increase in price was enough to offset input cost inflation on a dollar basis.
In addition, the increase in gross profit includes nearly $2,000,000 benefit from unrealized mark to market adjustments related to commodity hedging contracts compared to a $5,500,000 loss in the prior year period. While we drove a solid increase in gross profit dollars, our gross margin percentage was down a modest to 25%. However, excluding the mark to market adjustments, it was down 80 basis points. The gross margin decline excluding the mark to market adjustments was primarily driven by manufacturing inefficiencies. As Tom noted earlier, these inefficiencies were largely a result of the strain that we've placed on our assets by operating at very high utilization levels over the past few years.
In the quarter, we incurred higher maintenance, repair and related costs such as additional labor expense. We also had higher than normal periods of unscheduled operating downtimes. Together both scheduled and unscheduled maintenance affected our production levels, which in turn impacted our fixed cost absorption, raised overall maintenance cost and lowered recovery rates. Most of our plants are now operating at more normal levels. In addition, getting our new Hermiston line operational and qualified to make a range of products has provided more flexibility across our network.
And the overall transition to processing the new potato crop is going well. Nonetheless, we'll continue to realize some carryover effect from these manufacturing efficiencies on gross profit as we make progress on correcting these issues over the coming months and as we work through finished goods inventories early in the second quarter. SG and A expense increased less than $1,000,000 to about $79,000,000 The increase in SG and A was due to higher expenses related to information technology services and infrastructure, including approximately $1,000,000 associated with designing a new enterprise resource planning system, as well as investments in our sales, marketing and operating capabilities. We expect SG and A will increase as we ramp up the training and transition process for the new ERP system. The increase in SG and A in the quarter was largely offset by a $4,000,000 decline in foreign exchange expense and a $1,500,000 decline in advertising and promotional expense.
As a result, income from operations increased $17,000,000 or 11% to 170,000,000 dollars reflecting solid sales and gross profit growth. Equity method investment earnings from our unconsolidated joint ventures, which include Lamb Weston Meyer in Europe and Lamb Weston RDO in Minnesota were $11,000,000 in the quarter. Excluding mark to market adjustments, equity earnings were down about $10,000,000 The decline was largely due to higher raw potato and manufacturing costs associated with last year's poor crop in Europe carrying through inventory during the quarter, more than offsetting the benefit of higher prices and volume growth. This impact is largely behind us and we should see profitability improve in the Q2. So putting it all together, EBITDA including the proportional EBITDA from our 2 unconsolidated joint ventures increased $20,000,000 or 9% to $233,000,000 Operating gains by our base business along with contributions from the BSW and Australian acquisitions drove $28,000,000 of EBITDA growth.
This was partially offset by an $8,000,000 decline in EBITDA from our unconsolidated joint ventures. Moving down the income statement, interest expense was about $28,000,000 which is about $1,500,000 more than last year. This increase reflects the write off of debt issuance cost in connection with a refinancing of a portion of our term loan facility to secure lower cost and to extend the maturity date. Our effective tax rate was about 24% consistent with our full year guidance. Turning to earnings per share, diluted EPS was up $0.06 or 8 percent to $0.79 Operating gains in our base business and approximately $0.03 benefit from the BSW acquisition drove the increase.
This was partially offset by lower equity earnings. 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 chains as well as all other sales outside of North America were up 11%. Volume grew 9% with growth driven by higher sales including increased sales of limited time offering products to strategic customers in the U.
S. And key international markets. It also includes a 2 point benefit from Marvel Packers and Ready Meals acquisitions in Australia. Price mix rose 2%, primarily reflecting pricing adjustments associated with multi year contracts. Global's product contribution margin which is gross profit less advertising and promotional expense increased $8,000,000 or 9%.
Favorable price mix and volume growth drove the increase, which was partially offset by higher manufacturing cost, input cost inflation and higher depreciation expense associated with the Hermiston production line. Sales for our Foodservice segment, which services North American foodservice distributors and restaurant chains outside the top 100 North American restaurant customers increased 3%. Price mix increased 2%, reflecting improved mix and the benefit of pricing actions initiated in the fall of 2018. Volume increased 1% led by growth of Lamb Weston branded products. Food Services contribution margin was essentially flat increasing about $500,000 Price mix and volume growth offset higher manufacturing cost, input cost inflation and higher depreciation expense.
Sales in our retail segment increased 11%, driven by 8 points of volume growth behind increased sales of branded and private label products across our portfolio. Price mix increased 3% largely due to favorable mix and pricing actions. Retail's product contribution margin increased $6,000,000 or 27%. Higher price mix, volume growth and the timing of A and P spending drove the increase. 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 2.7 times. With respect to cash flow, we generated nearly $240,000,000 of cash flow from operations. That's up about 5% versus last year driven by earnings growth. We used nearly half that cash to purchase ready meals in Australia for about $117,000,000 and invested about $60,000,000 combined in capital expenditures and IT projects. We bought back about $5,000,000 worth of stock or more than 72,000 shares at an average price of 66 point $6.7 Our ability to repurchase shares in the Q1 was limited since we only had a very narrow trading window in August.
We also paid $29,000,000 in dividends to our shareholders. Turning to our fiscal 2020 outlook. As Tom noted, our financial targets are unchanged and we remain on track to deliver our financial commitments for the year. Our targets include the contribution of a 53rd week that will benefit the 4th quarter. For the year, we continue to target sales to grow at mid single digit rate, primarily driven by volume and price mix to increase in order to offset input cost inflation.
We also continue to anticipate adjusted EBITDA, including unconsolidated joint ventures to be in the range of $950,000,000 to $970,000,000 with sales and gross profit growth driving the increase. We expect gross profit growth will drive a significant portion of the EBITDA increase with volume growth and favorable price mix more than offsetting input cost inflation and higher depreciation expense as well as the effect of some manufacturing inefficiencies. As I noted earlier, we'll continue to realize some effect from the manufacturing inefficiencies on gross profit as we work through finished goods inventories early in the second quarter. Turning to SG and A. For the year, continue to expect our base SG and A, which excludes advertising and promotional expense as well as the ERP investments to be within our target of 8% to 8.5% of sales.
We're targeting A and P expense to remain in line with what we spent in fiscal 2019. We also continue to anticipate total ERP spending of between $10,000,000 $20,000,000 and that it should ramp up over the course of the year depending on the pace of the implementation of the system. We continue to expect equity earnings to gradually improve as we put the challenges of last year's poor crop in Europe behind us. In addition to our expected operating gains, our outlook includes an approximately $10,000,000 year over year earnings benefit from the BSW acquisition in the first half of fiscal twenty twenty. Most of our other financial targets also remain the same, including total interest expense around $110,000,000 an effective tax rate of 23% to 24% and total depreciation and amortization expense of approximately $175,000,000 We're raising our capital expenditure target to $300,000,000 from $270,000,000 to reflect updated spending estimates for our new ERP system and other projects.
Now here's Tom for some closing comments.
Thanks, Rob. Let me quickly sum up by saying we are pleased with our solid sales, earnings and cash flow growth start the year. We're on track to deliver on our fiscal 2020 financial targets, and we remain focused on serving our customers, executing against our strategic initiatives to support long term growth and creating 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 And we'll take our first question from Andrew Lazar with Barclays.
Good morning, everybody. Good morning, Andrew.
So I've got just one quick one on some of the supply chain challenges and then a broader follow-up. With the supply chain piece, you mentioned some of the higher costs you incurred. Were there any it didn't sound like it, but were there any, I guess supply issues with any key customers or shorting customer of product given some of the unexpected plant downtime and things like that? Or were you able to kind of make that up just albeit with higher costs?
Yes. Andrew, we this is Tom. We with our manufacturing footprint, these things unexpectedly happen. We do have the ability to move production around to other facilities. So to point blank answer your question, there wasn't any customer disruption associated with the planned downtime and the manufacturing challenges we had in the Q1.
Great. Thanks for that. And then in the release this morning and then in your prepared remarks, you mentioned how Lam is monitoring the potential for a softening of macroeconomic conditions that I guess could temper frozen potato demand towards more normalized levels. So I'm just trying to get a sense of maybe what signs that you're either currently seeing or that you're monitoring and are they regional in nature or maybe more broad based? And then I've got a follow-up to that.
Right. Andrew, we obviously look at all the syndicated data and we also have some data that we look at in the international markets and it's exactly what I just stated this morning. We're monitoring it. And we had a great quarter in terms of traffic in the U. S.
With QSRs. So that's counterintuitive to the what we're concerned about economically. But it's been choppy the last 3, 4 quarters in terms of traffic. So we're continuing to watch it. It's there's a lot of economic concern in the market.
But right now, it's just something we monitor. But again, we had a great traffic quarter in the QSR segment in the U. S. International markets are on trend in terms of what traffic and what we're seeing our growth. So it's just something we're monitoring.
Okay. And then the last piece of that would really be, maybe could you just remind us of what demand has been we can see obviously what demand has been more running at, but can you remind us what you see as more normalized rates of growth in North America and internationally? Just the reason I ask is, I want to make sure how we should think about if we get to a point where there's more normalized rates and I realize right now that's not the case. What that means in the context of some increased industry supply in the market even though current utilization remains pretty tight as you said?
Yes. So Andrew, a normalized rate that we look at is 1.5% to 2.5% globally. And obviously, there's going to be different growth rates in different markets. And just to give you context, broad strokes, it's a £30,000,000,000 market category globally. So 1.5% to 2.5%, that's a big chunk of volume growth on a normalized basis.
So that's how when I talk about normalized growth rates, that's the window you need to think about.
Okay. Thanks very much.
Yes.
We'll now take our next question from Adam Samuelson with Goldman Sachs.
Yes, thanks. Good morning, everyone.
Good morning, Adam.
So I guess first, I wanted to just touch on the pricing issue discussion a little bit and it ties into the capacity side. And in the quarter, I mean, you talked about kind of being pleased, mix being favorable and getting pricing to cover costs. Any additional color you can have as you've gone through additional contracting discussions with your global customers into 2020? And then on the foodservice side, the price mix line did decelerate pretty notably from where you were last quarter. And I thought the lapping of a price increase was going to be more in the upcoming quarter.
So just any color on the 400 basis point deceleration in price mix in Foodservice?
Yes. So just generally, Adam, this is Tom. Overall, the contracting exercise we just finished up by and large, our pricing kind of landed where we thought it was going to be. And I know there was some concern out there that with the capacity coming on that there was going to be some pressure, a lot of pressure on pricing. And by and large, where we ended up is exactly where we thought we would be.
Historically, based on my experience with this business, in these times where you have a little extra capacity, yes, you're not going to get maybe the lifts that you've had in the past, but overall pricing landed exactly where we thought we would be. So I'm pleased with where all that ended up. In terms of the foodservice pricing deceleration, I would say it's at a more normalized level based on from a historical standpoint and we've had significant price increases over the last few years based on a number of economic reasons and business reasons. And we were able to get some pricing through as we expected. And even though it's decelerated, we're lapping some big price increases from prior year.
I'm super happy where we landed on all this. So I feel good about where we're positioned in terms of that. And again, the belief out there was there was a lot of concern whether or not we were going to be able to price and the team did a great job getting it through the marketplace.
Okay. I appreciate that color. And then second for me just on the potato crop side, I think you indicated in your key growing regions in the Pacific Northwest, you're comfortable with the supplies. Are there any pockets though, you talked about Alberta, Minnesota as areas where the crop might be a little bit weaker, any residual impacts to the broader market or broader industry capacity utilization that could be potentially opportunities where you have potatoes that some of your competitors' plants might be more challenged or any pockets of supply disruption on that front that you could call out?
Yes, Adam, I'm going to kind of defer answering that question. We are right in the middle of harvest. And as I do in Q2, I'll give you a broader base point of view on the crop in total. Also I will say right now is exactly what I said on the call is we feel good about Pacific Northwest. There are some challenges in Alberta and the Midwest.
And right now, it's really about understanding how that crop is going to process. And we really just need time, another month, and then we'll have a good idea. And I'll get back to you in Q2 like I do every year give you a point of view on where there are challenges or not.
Okay. And if I
could just squeeze a quick clarification, just the other segment, the profit jumped about $5,000,000 year on year. Any color on what drove that?
No. The other profits also includes our mark to market. And so the other category does and so that's really the noise in there, nothing operationally.
Okay, perfect. Thank you very much.
We'll now move to Tom Palmer with JPMorgan.
Good morning.
Good morning, Tom.
First, I just wanted to ask about the higher ERP related CapEx. Is this any type of shift in terms of the spending from operating expenses to CapEx either for this year or down the road? And then, is the increase like a pull forward of expenses or just a outright increase in terms of expected spending for the ERP? Just some color around that would be great.
Yes, Tom. The ERP project and again recognize the accounting around those kinds of things in computer systems has changed here recently. And so some of that is when you're doing these licenses gets put into SG and A expense and then there's some of the things that go into CapEx. So there's a little bit of change in the accounting standards. But from us for our spending is we're exactly on plan as expected and we're very deliberately going through and making these upgrades.
And so the adjustment to the CapEx is just we've got a little more clarification and specificity over the spending for that project. And so that's where we raised our CapEx for that as well as some other project work we're doing.
Okay. Thank you. I wanted to also ask just on the volume side. You called out both planned and unplanned downtime for maintenance, but your volume growth was didn't seem to be negatively affected by a large amount. Why was this?
And should we expect volume growth to decelerate as we look at the remainder of the year? Or do you think these rates are you're able to maintain them?
Well, just in terms of kind of what I said earlier, Tom, the great thing about Lamb Weston and our diversified asset base is when we have some of these challenges in the business with the start up of Hermiston that gives us flexibility in terms of capacity, additional capacity, we're able move production around, if you will. So we didn't impact customers and tend to the needs of the unplanned downtime. So you're not going to feel the impact in the quarter because we were able to flex our asset base in terms of production. The in terms of volume expectations going forward, we are very prudent in our forecast and our outlook. We had a strong volume quarter.
It was a lot of it was driven by the strong QSR traffic. So I would not take this quarter and extrapolate it out because we have remained prudent in our outlook based on what we think the volume is going to be for the year.
Okay. So just to clarify, it sounds like you're essentially not factoring in this 5% growth just to be safe on the traffic side or are there specific reasons that volume was particularly strong this quarter and you do not see those recurring?
Again, Tom, we had the traffic in the quarter was as good as we've seen it.
And my
what we do as a company is we're very prudent in our outlook. And these traffic trends, if you look at this indicated data, they can turn on a dime. So yes, we're monitoring our customers. Yes, we have an outlook on what our customers are thinking about doing in terms of end market promotional activity, but we will always be prudent in our projections going forward. And that's historically, that's what we've done.
That's what we're going to continue to do.
Understood. Thank you.
Our next question comes from Chris Growe with Stifel.
Hi, good morning.
Good morning, Chris.
Hi. Just wanted to follow-up a little bit on the just a couple questions around volume. You talked about this kind of 1.5 to 2.5% global growth and it may kind of gravitate back towards that level. Do you have like what volume growth was globally in the quarter? I think you just talked about 5% traffic growth.
Was that a U. S. Comment or was that a global comment?
That was a U. S. Comment.
Okay, got it. And then, it would seem like based on your volume performance, you gained significant market share. Did you give a little better breakdown of volume by international versus U. S? Was were they about the same?
Or was one better than the other?
Hey, Chris, it's Dexter. Yes, international was stronger overall than domestic, as you would expect and I would say a little bit meaningfully so. But the category overall, I mean normalized is 1 point 5%, 2.5%. The category has been a little bit better than that over the last, call it, 9, 12 months. I think we've talked about that before.
And that's why we're saying that in our prepared remarks we said that we've seen higher than average category growth particularly this past quarter And obviously, we were part of a beneficiary to that as well.
Sure. That makes sense. And I think you're trying to be prudent in your expectations going forward for the category, if I heard that properly. So that makes sense.
And then
just one other question if I could on SG and A. You talked about SG and A less advertising, less ERP. What was it on that basis in the Q1? I guess I'm just trying to understand, is the ERP spending sort of picking up throughout the year? SG and A was a little below what I thought for the year, which is for the quarter, which is good.
I want to get a sense of what it was on that basis of what you're modeling for the year?
I got it. Yes. SG and A in the Q1 ex A and P, and I don't have it ex the $1,000,000 of ERP spend, but it was about 7.5% ex A and P.
Just
put that in context, last year Q1 was 7.8%, 7.8%, sorry.
Yes. Chris, I would say that anticipate that the ERP spend is going to increase over the course of the balance of the year. And so that 10% to 20%, I talked about, that's going to take place really in the back half of the year.
Got it.
So you'll see. Okay.
That sounds great. Thank you so much for your time.
Thank you.
We'll now take our next question from Bryan Spillane from Bank of America.
Hey, good morning, everyone. Good morning. So a couple of questions. I guess the first one, just as we've touched on pricing a couple of times in the quarter, we had heard that some of your competitors had put some price increase letters out in the food what would be, I guess, kind of relative to the foodservice segment to you, I guess, like during the course of the quarter. So is that something that you've seen?
And is there potential, I guess, for some more pricing incremental pricing in that segment as we move forward?
Yes, Brian, it's Tom. I'm not going to get into specifics about pricing and competitive pricing, but we executed our planned pricing in the marketplace across all of our segments as we normally do. And I will tell you, like I said earlier, I'm pleased with how all that how the team did and they executed it. So we'll start seeing that pricing in the marketplace here. It takes a while for the pricing to get in the marketplace.
And so we'll start seeing the benefit of that, but it does take a while from the time we announced until it actually starts flowing through to the business. But we've executed across all of our segments on the pricing that we felt, we could get through.
So just to be clear, so is whatever it was announced, is it really even reflected in what we saw in this quarter's results because it's going to take some time to flow through?
That's correct, Brian.
Okay. And then second on potato supply, I know you commented on your growing regions. I guess in the trade press, it seems like the Eastern Canada crop maybe not as good. So can you just kind of talk about how if there's tight supplies in potatoes on the East Coast, just how that affects the industry, right? Is it possible that some of your competitors that are more East Coast dependent will be kind of tight on potato supply and just how that affects the whole supply demand dynamic in the market?
Yes, Brian. So again, it's early on and there's been some weather challenges in Canada, Midwest and the East. And it does put pressure on raw potato supply and it causes some natural things to happen like shipping potatoes across the country and potatoes when you ship potatoes they don't travel very well. So as the potentially the competitors are facing these issues, historically, they've have assured supply, but they have to do some unnatural things and it increased their costs. And typically, my experience when that goes on, we haven't seen a lot of disruptions.
Do we get a few calls from customers here and there? Yes, we do. But typically, the competitive set, even though they have to do unnatural things and incur costs by shipping potatoes across the country, they're going to support their customers too. But it's really comes down to it pressures their margins.
Okay. And then I'm
sorry, I'd just add to that that in terms of the impact on us, I mean, because we contract such a high percentage, high 90% of our raw ahead of the season, Going into the season, it really isn't going to impact our cost structure even though they're pulling potatoes maybe out of Idaho or something.
Okay. And then just the last one for me. Maybe Rob, if you could just help a little bit, the gross margin in the Q1, I guess there was a few kind of one off items that affected gross margin, right? You mentioned the supply chain inefficiencies as being one of them. I think tariffs also crept in this quarter and would have affected gross margins.
Could you just give us
a sense of how much of was pressuring gross margin in the Q1, the magnitude of what it was? And I guess it's going to linger a little bit into 2Q. And then how much we might get back if things are more normal in the back half of the year? Just trying to understand how much of the gross margin pressure was kind of more transient in nature versus going to carry through the year?
Yes. If you take the 80 basis points down that I called ex the mark to market, ex the noise in the manufacturing facilities, we would have been modestly positive in terms of gross margin percentage growth, right?
Okay. And some of that will kind of linger into the second quarter, but we should sort of be through that by the time we get to the second half?
Exactly.
Okay. All right. Thank you.
Thank you.
We'll now take our next question from David Mandel with Consumer Edge Research.
Morning, David.
And David, you may be on mute.
I was on mute. I'm sorry. Good morning.
Good morning, David.
So just to pick
up on the tariffs and the slowing growth possibly reverting to normalized rates. I was just wondering how prudent is that exactly? I mean, if there's a macro slowdown and tariffs are an issue in export market, particularly China, is a slowdown to normalized rates really prudent or could it get even worse?
Yes, David. I'll address the tariff question first. We with all the tariff discussion and everything that's going on, we have a pretty sizable business in China. Obviously, we've got a manufacturing plant in China. And we have executed our contingency plan as the tariff rates change.
So we've adjusted production and it's been have we been impacted? Absolutely have. It's been immaterial. So the team's done a great job looking at ways to mitigate tariff increases on French fries specifically. So nothing material in the tariffs right now.
The second part of your questions, I'll answer it. It's interesting. I'll give you a perspective. When you go back 10, 11 years when we had the financial crisis and the interesting thing in our business is a little bit what I said earlier in my prepared remarks is even through all that period, our volume held pretty steady. And it's a combination of consumer behavior.
This is my belief of the QSR traffic. People still eat out, but they eat out at QSRs and the traffic and we saw it in our volume and we have international markets that continue to grow. So our experience, if something economically happens, Even in that time, our volume continued to it grew, but it kind of grew. I don't remember what the rates are, but it continued to grow. So that's the data point I have and we have as a business when we have a significant economic downturn.
And again, back to my earlier comments, that's why we're always going to be prudent with our outlook going forward.
Thank you. That's really helpful. Earlier in the call you referred to maintenance issues.
Did the
Hermiston plants come online faster than usual to kind of rescue maintenance issues or?
No, I mean the Hermiston plant came online in May as planned and on target. So we're ramping it up.
Sorry, fully
ramp up faster than usual?
No, it was right on track. And the team did a great job getting up and running and it certainly helped relieve some of the pressures we're feeling in some of the other manufacturing facilities. But by and large, it was on track. Great.
Thank you for that. And my last one, can you break up the mid single digit sales growth a little bit? I mean, if I think about the 53rd week adding about 2% and pricing to kind of offset input costs, but it's really sales growth is going to be volume driven. I'm just trying to think about how much volume and how much pricing because there once you back out the 53rd week, there isn't all that much left?
Yes. Hey, David, it's Dexter. I mean, if you think about broad stroke sales is mid singles, call that 4 to 6, right? And after the 53rd week, I've been basically saying think 3 to 5. So I said a couple of points, probably a little bit more than a point.
And then we're saying the bulk of that is going to be largely driven by volume. So you can use your assumption whatever you want to use for price mix.
Great. Thank you for that. And that's all I have. I'll pass it on.
And it appears there are no further telephone questions at this time. I'd like to turn the conference back to our presenters for any additional or closing remarks.
Thank you for everybody for joining us today. If you have any follow-up questions, please pop me an email. We can schedule a call. And look forward to talking to you later. Thank you.
And once again, that does conclude today's conference. And we thank you all for your participation. You may now