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AJ Secrist updates the $LW thesis (Podcast #190)
AJ Secrist from Firstlight Management is back on the podcast today to provide an update on Lamb Weston Holdings Inc. (NYSE: LW), a key supplier of french fries to fast-food chains, following their recent quarterly update and in advance of their investor day.
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Transcript begins below
Andrew Walker: Hello and welcome to the Yet Another Value podcast. I'm your host, Andrew Walker. If you like this podcast, it'd mean a lot if you could rate, subscribe, review wherever you're watching or listening to it. With me today, I'm happy to have on for a follow-up podcast, my friend, AJ Secrist. AJ, how's it going?
Aj Secrist: I'm good, Andrew. Thanks for having me.
Andrew: Thanks for coming back on. We'll talk in a second about why you're coming back on, but before we get there, just a quick disclaimer, nothing on this podcast is investing advice that's always true. Everyone should consult a financial advisor, do their own due diligence. This isn't financial advice. That out the way, the stock we're going to talk about is, in December, you came on and did a pitch on Lynn Weston. The ticker is LW, stock did swimmingly right after that podcast. I think it went from, what? It was probably low 80s when we talked at the time.
AJ: Yeah, something like that. Yeah.
Andrew: It went up to about 120, and then over the past couple of weeks, they reported kind of soft. It was their fiscal Q4,23 earnings and the stock has come back to mid-90s where it's still up pretty nicely since when we talked about it. I know you've been saying, "Hey, this is a great business. It's pretty much firing." And I know you wanted to come on and talk about it because it's still a top idea for you and you want to talk about the softness in the opportunity. So I'll pause there. What's going on with LW right now?
AJ: Yeah. Well, I mean it's frustrating. It's been frustrating. They came out in July. Their year ends May 31st, so this was their Q4 earnings plus guide for the upcoming fiscal year. So fiscal 24 and they beat estimates as I had hopedand they came out with guidance ahead of the street as I had hoped and the stock I think was up like three pre-market ended up down seven that day. I think down three the following day, and for like the last month, it feels like it's been down one or 2% every single day. It's just bled. So it's been tough, especially in the wake of a beaten raise. I think the reason for the stock getting sort of mauled after a beaten raise. I've heard a lot about positioning. That's hard for me to quantify, I have no idea.
Andrew: It's not enough of an AI play. They didn't come on and say, "Hey, we're using AI to make better French fries so that they can't go up."
AJ: Yeah. I should talk to the board about that. I've heard positioning used as a rationale. I don't know. I have no idea how you quantify something like that but I think the fundamental issues where volumes were ugly. It was a big beaten raise on the back of price and volumes were abruptly down across several segments, in the big global QSR segment, volumes are down 11, and this was after a series of quarters was basically plus or minus low single digits. So all of a sudden it took a steep dive. The food service business was down nine and that was against the negative three comp. So down 12 on a two-year stack, retail is down 10 against negative two comps. So it's down like 12 on a two-year stack. The market has real concerns here. Have they pushed price too far? Have they found the limit to their pricing power? Are customers pushing back? Are competitors getting more aggressive on price? And are we going to compete away the margins that the industry has made progress on over the past several years?
So I think those are the fundamental issues. Apart from that, we had a big increase in the Capex guide.
They're building four plants simultaneously at the moment. So you'd sort of expect that, but man, it doesn't really help you figure out what spend is attributable to what plant and when that's going to roll off more importantly. They also had a big sort of step up in SGNA and they don't really help you figure out if and when that's going to roll off and really ultimately the biggest fear is just, Lam [/] is losing volumes, and the industry, not only Lam, but everybody else is bringing on supply as well over the next couple of years. And so the real nightmare scenario is, industry demand is falling people floor at the same time as everybody's bringing on new supply and then you can [inaudible] a scenario where you've got lots and lots of backstacks capacity and pricing margins really get involved. So that's the real fear in the market and obviously, I still own the stock. I still like it. I'm pretty comfortable with all of those.
Andrew: So I want to do two questions that were kind of in the quarter, but our broader strong questions. Then I want to do like kind of a thesis update question. So one of the questions was somebody came on in the call and said, "Hey, you guys have been pitching for years. French fry attach rate went up during kind of COVID, and probably because everybody was inside, so nobody cared about what they looked like and we were all looking for comfort food and everything. So you guys have been pitching for the past several years, French fry attach rate has gone up, but now we've seen one quarter, this was the first quarter of demand drop and I think it's an obvious question is, "Hey, as the world, like- we're X pandemic now, right?" As we're X demic at this point, does French fry attach rate normalize in a, not disaster scenario, but does it normalize back to where it was pre-pandemic or does it come somewhere in between? Basically, are we going to see french fry attach rates decrease and then that would play into everything you're saying where, "Hey, you know what's really bad for an industry when you're seeing demand decrease right as supply is coming online?"
AJ: Yeah. It's funny, they talk about the fry attach rate, but they don't give you any numbers. There's no public index. There's no data. Like what is this? I have never seen any data around the so-called fry attach rate and I wish they would stop talking about it honestly. But I have no ability to assess that. What I can assess is number one, the rationale that they provided on the call, it's at least plausible. And number two, global demand still looks good. The private competitors are still seeing volume growth. The biggest competitor is seeing high single-digit volume growth. So we can at least say that demand isn't falling through the floor across the industry so the so-called fry attach rate must be okay.
Andrew: I do understand the fry attach rate matters. If McDonald's takes the fry tax rate from 69% to 69.5%, it's going to move hundreds and hundreds of thousands of tons of potatoes but I'm with you. It seems like a weird thing to focus on. If it matters for your models. I was in Montreal last weekend and I ate more poutine than I think any humans ever in history. So you can build that into your models if you want to, but now I'm trying to cut back on fries, so I don't know. It might be a wash.
AJ: Well, thank you.
Andrew: Let me ask a slightly different question. One thing that just jumped out to me as strange is on the call, they talked about french fry attach rate, but they also mentioned something about their customers having inventory D-stocks and drawing down on inventories and look, I understand like everything with it's supply chain has inventory, but it just like broke my mental model a little bit that LW would have their customers saying, "Oh, actually we're oversupplied, we need to draw down because I've got a bowl of potatoes in my kitchen that if I'm oversupplied on potatoes they start sprouting the little bumps and then the potatoes got the door. So the oversupply goes away real quickly." I understand a lot of this frozen potatoes, but I was kind of surprised by that in a fast-moving industry where the turn should be pretty high, and it's a food product.
AJ: But remember, I mean, these things are frozen. There's a pretty long shelf life on these things. And the potatoes, think about the processing cycle. You're going to harvest potatoes in July, August, September, or October that you'll be processing for the next 12 months. So, the potatoes are frozen, they could be processed 12 months later, and then the fries themselves are frozen as well. So the shelf life is longer than you would think and I ran around chatting with folks in the industry just to say, "Does this actually make sense?" The reasons for the volume declines on the call I think were, one, inventory destocking. Folks have said that's a reasonable explanation. They've seen it because of all the supply chain issues, people were over, "Okay, fine. It's at least plausible." I don't know how much or who well, I understand it was in Asia but it's at least plausible.
Number two was, what was the other issue? Well, they had a private label customer a big one based in Arkansas, that is dropping their existing private label supplier and bringing Lam back on as a private label supplier and they are basically just trying to burn down the private label incumbent in making room for Lam and Lam just had a more aggressive supply schedule than they did. So that was another issue. They talked about QSR traffic and casual dining traffic, and that's sort of mixed, casual dining traffic was certainly down low singles and it was offset by QSR traffic. So that's fine. You can actually test that, you can see that. From Lam's perspective, you'd rather have the traffic and food service than QSR because it's a higher margin, but at least demand is still there. So I think their rationale is at least credible, and I think the most important point is that lam and, or sorry, McCain and Simple Water are still seeing volume growth, and so they're actively taking share from these guys. That is sort of normal, sort of ordinary course market share jockeying for different contracts. If you have capacity at a plant that's better positioned than somebody else, you can take that business without gutting price.
Andrew: No, that all makes total sense. To me, it's just one of those things like, "Look, I'm willing to accept business is messy and sometimes it all doesn't happen a quarter." But you and I were emailing a little bit about my post on Sinclair over the weekend, and once management says something to me where it raised a red flag to me or kind of raised the hair on back of that because it didn't fit with how I understood food service and inventory and stuff where they say, "Hey, our customers drew down inventory so much, and if it's true, that's fine," but if they're kind of pulling one over your eyes, I'm like, "Ooh, that's where the big red flags come in." But I think that's completely credible.
Let's back up a second. So when I reviewed the last podcast, and I should have mentioned this earlier, I'll include a link to the podcast we did in December that went over kind of the full William thesis and I think that podcast actually holds up really well. And we talked a lot about other longer-term issues, like, "Hey, what if Andrew does give up carbs for a while and the whole nation joins him, how would potato demand do with that?" And I think we answered, potato demand, like the American eater always wins. But at the time, if I was simply summing up your thesis, you said, "Hey, this is an $80 stock, I think the right multiple for this is kind of in the 20 to 24 range, so call it 22, and I think we've got line of sight to this business doing $7 per share in earnings."
So slap to 22 multiple on $7 per share earnings, that would get you to $150 per share. So I want to ask this year alongside their earnings, they gave, "Hey, here's our guidance for fiscal 2024," and the midpoint of the guidance is about $5 and 20 cents per share in EPS. So right now at 95, they're trading for about $18 PDE. So my two questions are like, yeah, there's a little bit of- my one question is, yeah, there's a little bit of multiple discrepancies there, but I think the big difference between your fair value and where the stock is setting is, "Hey, they're guiding for five and you think they can do seven." So can you kind of walk me through how they get to seven and which parts of the thesis are still supporting and intact on that?
AJ: Yeah. Well look, I mean the midpoint of the guide I think is now like 525 for this year, and I think there's lots of conservatism baked into that guide for this year. And I think looking into fiscal 25, I still think we're going to see this year volume will be choppy but next year I think we'll be back to sort of a low single-digit growth cadence maybe a bit more because we've got more plants coming online and presumably aren't going to bring those on without filling at least a decent chunk of that. So I think next year we'll be somewhere in the $650 to $7 range, and one hopes that I think the multiples compressed today because of all the fears that we've talked about.
And I think if those fears are dispelled next year by new supply coming online and pricing remaining intact, I think we'll be back to a 2024 times PE business. So, if you say rough numbers $7 at 20 times, you're at 140 in 18 months, so I still think that price target over 18 months is, is still quite valid. The only thing that's really changed here is volumes are choppier than I had hoped this year and the SGA guide is higher than I had hoped.
Andrew: Yes. If we just for next year, right? So not this year, but next year is where they're kind of getting into the mid sixties and stuff. What's the big driver to you? Is it, is it just pure volume or do you think think that it's some, and I wanted to differentiate between price 'cause they are going to get price, but as they said on the call, hey, a lot of the price has been us just passing through or catching up on inflationary price. Like the real price that investors want are the price on top of inflate Yeah. Inflation. So is it going to be kind of that profitable pricing growth or is it just going to be all volumes as kind of the customer drawdown, normalizes and maybe we get some better trends with the going out to restaurants and everything?
AJ: Yeah, so the way I model it is I basically just run through the price increases announced to date and the cogs per pound that I have a view on, and from there, I just assume we hold on to margins. So price and cogs move in concert together. So I'm assuming no pricing power going forward beyond what pricing has been announced so far. But I think there's still upside on cogs because they're basically guiding to mid to high single-digit cogs per pound growth this year. And the way they get there is they say, well, contracted price for potatoes is up 20, and that's about a third of our cost structure. So there's six points right there. But remember we're coming off two of the worst years in potato crop history.
And last year they had to buy a ton of potatoes in the spot market. They had to ship them across the country from eastern Canada and the East Coast and I think there's something like 100 to 150 bucks of cogs relief on a normal crop there. So the cogs per pound inflation is going to be, I think a lot more muted than what the street thinks. And if you talk to the private guys, this upcoming year the potato costs is the only thing that's really ripping. They sort of expect everything else to be basically flat. So in my view, we're still lapping these residual price hikes and we will over the next 12 months, the latest price was in May of this year in food service. And we're going to start benefiting from having a normal crop over the next 12 months.
So we're still going to get a pretty big chunk of margin expansion this year. On top of that, I think volumes, maybe not this year, but volumes next year I think will be better. Because they're adding about 8% to their own capacity over the next two years and presumably half of that should be filled out of the gate. So that's a 4% volume tailwind and on top of that, we're still running about somewhere between 10% to 15% south of pre-COVID levels, volumes. So if there's some kind of recovery there, we could pick some additional volumes up beyond there. And then I think the last interesting thing here is just Europe. So they're guiding to about a billion one of revenues in Europe over the next nine months, which is on a run rate basis, basically flat with Q4, what it did in Q4 but the potato crop in Europe over the next 12 months is up 35% to 40% and this is a much more spot market. And so everybody's eating those costs, so presumably, pricing is going to go up 35% to 40% on top of that. So I think that the guide in Europe is really quite conservative as well. So you put all those things together and I think we're going to be in for a pretty massive beat still this year. And then looking out next year we've got volume growth, we've got still a bit more additional pricing coming to lap. But I think that the biggest difference is just what's going to happen this year.
Andrew: Those capacity ions [?] that they're doing, what sort of return on invested capital do they look for when they're doing capacity additions?
AJ: They won't give you a number, but as I've done the math on an unleveled basis, it's something like high singles, low doubles. So it's...
Andrew: That was kind of what I would guess in my head and on an unleveled basis, high singles, low doubles people might be like, "Oh, well, Nvidia does a kajillion percent like high singles, low doubles, and a stable business like this unleveled where you can- I think they've got a pretty conservative cap structure, but even if you apply 20% debt to it, you start getting to IRRs that any hedge fund manager would- you wouldn't be the greatest in the world, but you'd be retiring pretty well if you generated those returns on equity. Let me ask another question. So in reviewing our last podcast, one of the things you talked about was, hey, margins are still well below where they were pre-COVID, and I think there's a lot of room for margins to run, and we actually are seeing some of that. You were talking about, if I remember correctly, on the last podcast, gross margins approaching 30% and gross margins this year are approaching 30%. Actually, one analyst came on the call and said, "Hey, I've got your gross margin for this year on 25%, which looks good. Is that right?" And they're like, "Blah, blah, wait, did you say 25%? It's not 25%. We don't guide a gross margins, but it's not 25%." And they know this came on, it was like, "28%." and the company was kind of like, "Okay, 28%. That's fine."
AJ: Yeah, it was like a record screech stop, right?
Andrew: It was pretty funny. And I realized people who didn't listen to it or don't listen to calls might be like, "What, 25, 28?" But it was quite funny. So they are guiding, so they're approaching that 30% range. So that looks to me like you are getting the margin part of the story that you talked about, but it's not all falling through to the bottom line and a large part of that obviously is the SGA investment they're doing. So I just want to talk about the SGA investment because I think a skeptic could look and say, "Hey, okay, the gross margins played out, but the SGA is there." So maybe they're pulling stuff out of the gross margin line into the SGA line, or maybe they need this investment to support it, but we're not seeing that operating leverage. So it's going to be tough to get to that $7. So just want to ask you about that.
AJ: Yeah. No, look, I think the SGA it's kind of a mystery to me too. The company will talk about their ERP spend and the IT spend and how that's hurt them over the last couple of years but the end is in sight. But if you go back to like 2018 transcripts, they've been talking about ERP since then. And the old guidance for SGA was 8% to eight and a half percent of sales. Now they're talking about 10% to 10 and a half percent.
AJ: So, it's honestly a mystery to me, where the spend is going. I don't think it's accounting.
Andrew: [crosstalk] If this is going to be at 8% of sales, this is a 22% EBITDA business at 10%, it's a 20%. That is literally a 10% difference in earnings right there, right?
Andrew: It's actually higher on a net income line because you're going to get leverage going down to the net income line.
AJ: Yeah. And it's also kind of incredible that that SGA has happened at the same time as volumes of down too. So SGA on a per-pound basis is bad and it's kind of a mystery. You wouldn't expect an agricultural adjacent company based in Idaho to be spending money like water but here we are. So I take them out their word, I bake in the SGA guide, I assume it remains kind of bad. It's hard to imagine it getting worse from here. But I think operationally on pricing on cogs as long as the business continues to perform like I hope it will, we'll still be looking at $150 stock in a couple of years.
Andrew: Last question, and then I think we can wrap this up, the company is having an investor day in October. I think this is their first investor day since I'd have to go check my notes...
AJ: Since the day. Yeah.
Andrew: So what do you expect them to show at the investor day? Investor days is for those who don't know- if you've got a company that does an investor day every year, it probably, nothing really is going to be- but when you've got a company that's never done one or that does one every three or five years, a lot of times the investor day, a big catalyst, like they're going to tell the story. The companies like to reveal new products, new stories put out long-term guidance at investor days. A lot of times you'll see stocks move 10%, 15%, sometimes more on an investor day. So I just want to ask you, what do you expect them to focus on at the investor day? Obviously, you can't plan for them to do something that pops the stock 20%, but what do you want them to focus on? Is it explaining the SGA new capacity, diving into the French fry rate? What do you looking for?
AJ: Yeah. Well, first of all, I'll be looking for the french fry bar.
Andrew: Will they have a french fry bar?
AJ: Yeah. I've been pushed. I've suggested it to IR and he says they're looking into it.
Andrew: It's going to be Manhattan, right? I think they said it's at the New York Stock Exchange.
Andrew: Yeah. I might be sending IR a note to see if I'm on that list so of that you and I can take an Uber over it together.
AJ: Yeah, let's do it. I'll be there. I'm a little bit gun-shy by investor days. I think nine times out of 10 stocks go down on investor days.
Andrew: Is that right? I probably would've guessed two times out of 10 down, six times out of 10 flat and five times out of 10 flat, and three times out of 10 up would've been my guess.
AJ: Maybe I just invest in bad companies.
Andrew: There's no statistical study here. This is completely my gut.
AJ: Yeah. Just in my experience, I've seen a lot more stocks go down on investor days than go up, but this is totally anecdotal. So I'm braced for that. And I've thought about, does it really make sense for them to do an investor. Because at its core, this is a really good business. A really good industry and there's an old joke that the CEO of a great business lies about how great his business is and the CEO of a terrible business lies about how terrible business is.
Andrew: It's the zero-to-one thing. The Chinese restaurant down the street says, "We don't have any competition. We're the best Chinese stand in the world." And then Google says, "We have so much competition." It is just rude [?] out here being the only global search engine used by people. It is so hard.
AJ: Yeah. So I have sort of reservations about that. This is a business that has real pricing power. They're the only public company in the space. So do you really want to spotlight how great your business is for all your competitors and customers and all that? But those are just thoughts that have been running in the back of my mind.
Andrew: I agree with you. Because here's a company, they are two times levered, so it's not like they need better access to the capital markets, they can easily roll their debt. I actually think they should be a little higher-levered. They've got an almost 20 times earnings multiple. So yeah, maybe it should be higher, but it's not like the street is giving them an eight-times multiple. And by the way, if they thought their multiple was too low, they could just take advantage of it and get more aggressive on the repurchase program. A company that the market kind of gets their story, no need for capital, I don't know what an investor day is doing for them, to be honest.
AJ: You could say that about 90% of companies, and you could say that about having investor relations teams at all.
Andrew: I don't tell the investor relations teams I talk to, but I, I do say that about investor relations.
AJ: Why does anybody even bother with us? You run your business, the stock's going to go where the stock goes regardless of whether they're talking to investors or not.
Andrew: The only ones that I really think should do it are ones with complicated accounting stories or emerging stories, but where they are going to need the markets at some point. Because even if you don't need the equity markets, if you need the debt markets and your stock is two versus your stock is 200, you're going to get a different interest rate. So you kind of- but for LW, I just don't see it. It's not like they need to explain, "Hey, we've got 500 plants coming on in the next year, we need to help you model this.' I don't see it.
AJ: Right. Well, getting back to your original question, I think the things that would be helpful is just a full picture of global supply and demand. And stratified by regions stratified importantly by product type, because not all capacity is equal as they will tell you. A lot of the new capacity coming on in Europe is the basic sort of either private label or McDonald's grade shoestring fries. Whereas a lot of the lam's capacity coming on is specialty and coated. Think chick-fil-a waffle fries, and those aren't necessarily going to be competing with each other.
Andrew: If I go to the store and I buy Popeye's or Arby's brand seasoned frozen fries, does LW put that seasoning on them when they sell the...
AJ: They should.
Andrew: Okay. I'm guessing that's a higher margin than when I go to the store and I buy, as you said, the McDonald's non-seasoned fries. Like you're just getting margin for the seasoning and obviously, some of it's going to the brand that's licensing it, but that's got to be a higher margin, right?
AJ: Yeah. The more coated, the more specialty, the higher margin it's going to be.
Andrew: This isn't going to blow anyone's mind, but it is just interesting. I do think society as you get richer and progress you get more and more into specialty and coatings and that type of stuff, and that obviously plays right into longer-term margins for them, as is the demand. We all want to eat potatoes that demand does keep going up. But anyway, anything else on the investor day?
AJ: Yeah. Well, think it'd be great to have a long-term view of global supply and demand. Demand would be really, really interesting because nobody publishes that. They have...
Andrew: They got a place in China that they're starting up. And if they could provide some data on China I don't particularly know, but I could see, "Hey, you guys are really underestimating China and India as they get richer and kind of as their diets get a little bit more western, how much demand for potatoes there are there and we're in the driver's seat to provide a lot of that."
AJ: Yeah. That would be extremely interesting. They haven't provided an update on that kind of stuff since the spinoff in their 2016 investor day. So I think getting a very good view on global supply and demand, who's bringing on what supply, where, what kind of capacity is it, and what regions are growing at what rates will be hugely interesting and probably go a long way to helping the market feel better about this potential oversupply situation. Especially if they can put numbers on the page and I've done this, but how much is supply growing relative to demand and what does that mean for excess capacity? People hear, "Oh, they're 400 million tons coming online this year and 500 million tons coming on next year. Oh my gosh, these are huge numbers."
But if you, if you map it out, nobody knows what the installed base looks like unless you've been obsessed with this company and french fries for a while like I have, and on my numbers, North American Supply is growing at I don't know what it was, it's like high singles over the next two years, or sorry, no, global supply is growing 10 over the next three years. So call it three to three and a half percent per year against global demand growing at one hope 3%. So we were looking at overly or excess supply in the basis points rather than percentage points and it's hard to imagine that really upsetting global pricing. But it'd be really helpful for them to just put that on a page for people. And I think ultimately, if they're going to have the investor day, I'd love for them to put out a three-year EPS target or five-year EPS target just to give people some comfort around margins, SGA, and all that kind of stuff. But I think those are just the two most important pieces.
Andrew: Last quick question and then we'll kind of wrap it up. Just share repurchases. The stock is here in the high nineties. Obviously, you've got a fair value of let's just call it around $150 per share. They bought back, I'm looking at their $10,000 right now. Let's be generous and call it a token amount of stock in Q4. Now the stock was at 110 at the time, but they bought back about $4 million worth that. That's really nothing. Do you think the management team will- if the stock lingers around here, kind of, let's call it two-thirds of your fair value, do you think they'll step up to the plate and kind of get aggressive with repurchases?
AJ: I would love that. Obviously, I think they're probably too conservative to do that, especially with the CapEx slate ahead of them over 12 to 24 months. And they're still sort of integrating lam, Wes, and Meyer in Europe. So I don't expect them to get more aggressive. I would love that, but wouldn't count on it.
Andrew: I'd love to see them get more aggressive with the buybacks. Again, I said it earlier, but this business is at a little over two times leverage, it's just not leveraged enough for a steady business like this. Like I'd love to see them, I think I'm looking at it a 2019 earnings release. I think they were closer to three in 2019.
Andrew: I'd love to see, just take it up a turn and you could buy back a lot of stock and I think that all the metrics get a lot more interesting if you do that. At three, it's not like we're talking about, "Hey, we're running on a knife's edge with our leverage or something. So I think that would be fine.
AJ: I'm with you.
Andrew: I know you're with me. I'm just bringing it on this world. Anything else we should be mentioning? Again, the call we did in December holds up really well. People should go listen to that if they want the full story. I just wanted to do an update, but anything else in your mind here?
AJ: Yeah, I think the last thing that I think is pretty interesting is I think people have this fear of over-ear, like, "Oh, this is a cyclical industry. They've taken so much price because supply was artificially suppressed for whatever reason, and now supply's coming back, so we're going to give everything back." If you actually do the math, and this is really interesting, margins aren't all that much higher versus pre-COVID.
Andrew: No, that's what we're talking about.
AJ: Yeah. So in 2019, pre-COVID the global business was a 22.8% gross margin. And on a, like, for like basis, it's probably like 23% they just reported and then some marginal increase. So, and food service, they were doing 35%, they're now doing 37%.
Andrew: And by the way, they took SGA way up. So it's not like on a bottom-line basis they're making a lot more.
AJ: Yeah, and the only segment where they really had massive improvement was in retail, and that one from 20% gross margin to 35% but there's also a mix shift in there going from private label to a lot more branded product. It's impossible to tease out how much of that was priced, how much of that was mixed. But that's probably the segment that's most susceptible to price competition especially because that's where you're going to be competing with the European guys that are bringing on capacity. But what I think is really interesting if you say, "Okay, they're over earning, we're going to revert to pre-COVID margins, which again, we're still good, they were all-time highs but the trajectory of the business was up until that point.
But if you revert to those margins on fiscal 25 numbers, I'm still basically at five 20. And at that point, if we've dispelled the over-ear fears and we get a historical multiple in the low twenties, you're still at 110 to 120. So if this industry does at least revert to 2019 pre-COVID margins, it's hard to lose money, you're still probably making money and the only way you really get destroyed is if this industry completely unravels. And nobody in the space is saying that's going to happen.
Andrew: You need the ultimate bear case, which is Andrew and 5 million of his best friends stop eating potatoes. So you need the potato demand to...
AJ: Not only stop eating but open 500 new plants.
Andrew: Oh, well I was saying potato demand because you mentioned global supply is going up kind of 3% annually, so you need global demand goes down 2% annually while that supply is going up 3%, there's your bear case. But again, I think just the history of consuming, I guess, you know what the other bear case is that we haven't mentioned, GLP1. This would be a good if 15% of the American population starts taking GLP one because, everyone that I know of, I don't know anyone on GLP1, but I've looked at it and when you start taking it, I'm hearing doctors need to prescribe protein shakes to people because they lose their interest in eating so much that they're not eating anything. GLP1 would be a great bear thesis. Hey, 10% of America is going to be on GLP1, they're going to eat 500 calories per day. They's your demand of destruction.
AJ: Yeah, I don't have a great answer for that still. I've looked at it, I don't know if anybody knows exactly what the impact is going to be, but you can look at the stocks of Krispy Kreme and Dominoes and Mondelez and Hershey, and they're all doing fine here to date. So as far as impacting the stock to date, I don't think it has. But the market's looking at guys that are much more directly exposed and...
Andrew: Completely, agree.
AJ: ...so far.
Andrew: And a potato, we think french fries, but it is a lot of potato processing, so they've got other stuff and I just think as you said, Hershey's or Krispy Kreme are the ones where I really think that GLP1 or in the targets, and you're not seeing any fear there, but it is an interesting beer[?] case.
AJ: Yeah. But ultimately, I think the impact, I would like to think it would be pretty manageable because you're talking about a fraction of the American population going on this thing. Which from Lam Weston's perspective, you've only got X percent of your business in the US and then X percent of your customers would go on GLP1, and of those X percent they would reduce their consumption by Y percent. So I think we'd be talking about a fraction of a fraction of a fraction in terms of impact to the business but it's still...
Andrew: I would be very skeptical of a GLP1 thesis, but I do think like if you're talking 10% of Americans go on GLP1 and they reduce their calorie consumption by- I think 50% would actually be generous versus what people are actually doing, 10% and 50%, that starts to move the needle. Though there is going to be the counter, like once you start reducing calories, I think people are going to be looking for an upgrade in calories. So I think they look for less. I could see a shift from bread or junk foods, some more polar foods and I know people think chickens and beef when they think that, but I could see a shift. What are people's favorite foods? Generally potato-based. I could see a shift towards, "If I'm going to eat something, even though I don't want to, I might as well have it be a potato or something versus a sandwich that I think is kind of nasty."
AJ: Yeah, we're way off in the land of spectrum...
Andrew: Yeah. Sometimes you chat. Cool. Well, Aj, look, let's wrap it up there and I will say thank you for coming on for the second time. I really enjoyed it. It's a really interesting company, a great company. But what I'm really looking forward to is I know you're working on another big one, and I'm hoping in September or October when you're ready to talk about it, we can have you back on. I'm really excited for that as well.
AJ: Yeah, that'd be awesome. That'd be great.
Andrew: Cool. All right, talk to you soon, buddy.
AJ: All right, thanks, Andrew. See you.