Good day, everyone, and welcome to the Lamb Weston Second Quarter Earnings Call. Today’s conference is being recorded and at this time, I would like to turn the conference over to Dexter Congbalay, Vice President Investor Relations of Lamb Weston. Please go ahead, sir.

Good morning, and thank you for joining us for Lamb Weston’s second quarter 2018 earnings call. This morning, we issued our earnings press release which is available on our website, lambweston.com. Also on our website is a brief presentation that we will use on today’s call. Please note that during our remarks, we will 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. In addition, some of today’s prepared 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. During this call, Tom will provide an overview of our overall performance, as well as a summary of our strategic and capital allocation priorities. Rob will then provide the details on our second quarter results, our debt and cash flow and our updated fiscal 2018 outlook. Tom will wrap up with some closing remarks before opening up the call for questions. With that, let me now turn the call over to Tom.

Thank you, Dexter. Good morning, everyone, and thank you for joining us today. I am pleased to say that we delivered another solid quarter of sales and earnings growth, specifically, sales increased 4% driven by price/mix improvements, while volume declined slightly versus a tough prior year comparable, as well as decisions we made to exit some lower margin business. Adjusted EBITDA including unconsolidated joint ventures increased 12% to about a $190 million. Our performance in the quarter reflect strong execution across the organization and our continued focus on delivering the right product at the right time, every time for our customers. For example, our global teams completed customer contract negotiations and agreed on terms which are in aggregate in line with our expectations. The food service team grew volume across its customer base, while continuing to improve pricing and mix. The retail team expanded distribution of Grown in Idaho branded products delivering nearly 60% ACV in supermarkets in just six months and in Europe, our Lamb Weston/Meijer joint venture delivered another solid quarter behind disciplined pricing. The supply chain team started up our new 300 million pound French fry line in Richland, Washington, on time and on budget. We are now ramping up production on the state-of-the-art line and expect to have it operating their full capacity by the end of this fiscal year. The supply chain team has also had the opportunity to more fully assess this year’s potato crop. We consider the overall quality and storability to be in line with our planned expectations. So with our solid first half performance, the commercial and supply chain teams executing against our priorities, customer contract negotiations now behind us, the start-up of our new French fry line on track, the potato crop quality and yield in line with our expectations…

Thanks, Tom. Good morning, everyone. As Tom noted, we delivered another strong quarter behind solid execution by our commercial and supply chain teams, specifically, net sales grew 4% to $825 million. Price/mix was up 5% as we continue to benefit from pricing and mix improvement actions taken in fiscal 2017, as well as actions implemented in the first half of fiscal 2018. Volumes declined 1% against a 4% increase in the prior year quarter, as constrained capacity led us to balance incremental business opportunities with maintaining high levels of service by exiting some lower margin business. Clearly, our new Richland line will mitigate this issue considerably. For the first half, volume was up 1%. Gross profit increased $10 million or up 5% versus the prior year. Higher price/mix, volume and productivity drove that improvement. This more than offset the impact of commodity, manufacturing, transportation and warehouse cost inflation, as well as about $3 million of additional costs related to the start-up of our new production line in Richland. Gross margin expanded 20 basis points to 25.4%, despite a nearly 40 basis point headwind from the Richland start-up costs. SG&A expense in the second quarter, excluding items impacting comparability was $65 million, that’s up about $1 million versus last year. Essentially, all of that increase was related to incremental cost associated with building capabilities to operate as a standalone public company. Adjusted operating income in the quarter was up $9 million or 7% to $144 million. Solid sales and gross profit growth drove the increase. Equity method investment earnings from our unconsolidated joint ventures were $12 million, up from about $6 million last year. These amounts included an unrealized loss of $2.7 million in the current quarter related to mark-to-market adjustments associated with foreign currency hedging contracts and a $0.7 million…

Thanks, Rob. As you can see, we are executing well across the organization. We delivered solid first half results, started up our new production line and have good visibility into how the rest of the year will play out. As a result, we are confident in our ability to deliver the higher sales and EBITDA targets in our updated outlook. We will continue to execute on our three strategic priorities focusing on specific customers, restaurant segments, and geographies, as well as expanding our range of product offerings through innovation, differentiating our global supply chain to strengthen our competitive advantage as a low cost producer and investing in additional capacity and acquisition opportunities to support growth. We are well-positioned to serve and grow with our customers, generate solid returns, and create value for all our stakeholders over the long-term. I want to thank you for your interest in Lamb Weston and we are now happy to take your questions.

[Operator Instructions] And we will take our first question from Bryan Spillane with Bank of America.

Good morning everybody and Happy New Year.

Good morning, Bryan.

Good morning, Bryan. Happy New Year.

So, I had a question just back to slide 7 and I think on that slide, in the footnote you talk about off of a 12.7 billion pound base that you expect that the growth rate for North American exports to be between 2% and 2.3% between, I guess, 2017 and 2022. Can you remind us how that forecast range compares to, I guess, what you were thinking or what you were communicating back at the Investor Day last year. I guess, if I remember it right, at least the North American growth rate was about a 0.5%. So, to give us some context in terms of just how that’s changed versus which our original expectations were when you first talked to the street.

Right, Bryan, this is Tom. We’ve increased our outlook on what we think the overall category is going to grow based on, really the last 12 to 18 months in North America specifically. Our estimates are, the category has been growing between 1.5% to 2.5% and we expect that to continue. As you think through the big driver of that is the QSR space and as that continues to improve in traffic, we expect the growth in North America to be in the 2% range and globally, we are forecasting around 2% to 2.5% over the next four, five years.

Okay. And then, I guess, if we are looking at a – if that forecast being revised higher and then connected back to the long-term growth rate of mid to high-single-digit EBITDA growth and high-single-digit EPS growth, can you just talk to – with, I guess, the sales outlook higher for the industry, how that might impact you versus your long-term algorithm, I guess, at least in the medium-term?

Yes, I think, Bryan, this is Rob. The – again, as you would expect, as we move the top-line growth up, obviously, that’s going to impact, one, investment opportunities for us, but then, also going to impact the bottom-line. We are still in that same range in terms of EBITDA growth is what we are forecasting at this point.

Okay. And just one last one related to that, just, I guess, with capacity, with the industry over a 100% capacity utilization, is that sort of having a negative effect on leverage? Are you at a point now where you actually need a little bit of buffer in capacity in order to get more optimal in terms of operating leverage? I’ll leave it there.

Yes, Bryan, I would say, certainly in terms of operating leverage as you run at the high utilization rates that we have, you get a benefit and I think, over the long-term, as we bring our capacity online, it’s going to be more balanced in terms of utilization rates that are more sustainable within our factories.

Thank you.

We’ll take our next question from Adam Mizrahi with Berenberg Capital Markets.

Good morning guys. I have a question on the Richland capacity. How much of the 300 million pounds added do you expect to be incremental versus taking some of the heat of the existing facilities? And then, following up from this, how significant do you think Taco Bell going national with its nacho prices in terms of filling up this Richland capacity? Thank you.

Well, I think, in terms of the Richland capacity, there will be a bit of balancing upfront, Adam. But we expect, based on our outlook that we’ll fill that line up within the next 18 months and that’s the reason that we made the decision to invest in our Hermiston plant. So the second question you had in terms of that specific customer, we don’t publicly talk about individual customers. So, I’ll leave it at that.

Okay, great. And then, if I can follow-up on the equity earnings, can you talk about how much of the growth in the quarter is driven by Europe versus the U.S.? And I think on the last call, you mentioned that you are starting to see some pricing pressure in the European export market as new European capacity comes online? Are you starting to now see some of that impact flowing into the domestic European market as well?

Yes, Adam, this is Rob. The vast majority of that improvement in the equity earnings is out of Europe and again as you know or recall that last year, we had relatively high potato prices in Europe which impacted our cost structure. The guys in Europe were – the team in Europe was able to pass that through and as potato cost have come off this year, they’ve maintained it within Europe the pricing levels at those higher levels. So therefore expanded margins and so that’s the bulk of it. Where we’ve seen some pressure is and continue to see pressure is really in Middle Eastern export markets out of Europe and that continues to be a bit of a dogfight. But within Europe, itself, prices continue to remain relatively stable. Now, having said that, looking forward, based on historical practice, we are expecting some price pressure in Europe back half of this year and into early, maybe next fiscal year.

Great, thanks very much.

Thank you.

We’ll take our next question from Chris Growe with Stifel.

Good morning guys. This is Andrew Carter on for Chris. Can you hear me?

Yes, Andrew good morning.

Good morning.

Good morning. Okay, so just, given kind of looking at Slide 7, just the industry be above a historic capacity utilization for the near-term, I mean with Hermiston coming online. I guess, what we are scratching our head with, it would seem that it need another facility expansion side-by-side the Hermiston in the next [12-18] [ph] months. I mean, is that’s something I mean, am I thinking the right thing there?

Andrew, this is Tom. I think, as we have in the past, we’ve been very disciplined over the last four, five years as we continue to analyze the category and think through category growth going forward. And as we get down the path in the next couple of years, and we continue to see the category grow at the rates we believe it will. Certainly, our intent is, as I’ve stated earlier, we continue to invest in this business and capacity investment in Lamb Weston has really good returns. We are focused on the category and that’s what we are going to continue to do over the long-term. So, to answer your question, yes, that’s going to be a continuation and the timing of that in the out years is going to be really dependent upon what’s happening in the category.

Sure. Okay. Kind of second question just to get back to FY 2018 here. You increased your guidance range for the year, but the back half guidance still kind of implies the deceleration in terms of EBITDA growth. That’s with all the kind of – some of the tailwinds you got coming online, you got additional capacity, additional pricing. What’s limiting that? Is it just your outlook for higher inflation and also, I don’t know if you gave it, did you give a total input cost inflation number for the year?

We did not give a - this is Rob. We did not give a total input cost inflation for the year. But as I mentioned in the prepared remarks that we do see higher inflation in the transportation and warehousing. In addition, in terms of the EPS impact, and earnings impact, we’ve got the extra depreciation load coming in. Now, having said all that, take the caveat, not around EBITDA but around EPS, we are still working out the impacts of the tax law changes.

Sure. Okay. I’ll pass it on. Thanks guys.

Thanks, Andrew.

Our next question comes from Akshay Jagdale with Jefferies.

Hi, good morning and congratulations on another very solid quarter.

Good morning, Akshay.

Good morning.

So, thanks again for all the extra color, especially on the capacity. So my first question is on the utilization rate chart. How should we think about what you presented and the relationship of that with pricing right? Fractionally for the industry, how would you envision pricing trends given what you are projecting for utilization rates?

Yes, Akshay, this is Tom. I think, our competitors are putting on capacity over the next couple of years. Certainly, with our announcement, we are adding more capacity. Our belief is, as we look at the category in total and the growth rates that have been happening in the last several years, we expect those to continue. The new capacity coming online, it will balance itself out just based on demand growth and the North America’s growth is better than we expected and the continued growth in some of the emerging markets. So, Akshay, I think, there may be pockets of imbalance over the next couple of years, but I don’t expect that to materially impact our pricing going forward.

That’s helpful. And maybe just to follow-up on that, really what I am trying to get your high level perspective on – and again, this is more of an industry question. Given, we have, on our side have limited history of what the industry looks like, right, I am just trying to get a sense of, has there been a period of time since you’ve been in the industry where pricing has meaningful step-down. I mean, our research tells us that, it has not and what you are projecting for utilization rates, I mean, it doesn’t seem to me that we will see that any time soon. So, can you give us some perspective, I mean, directionally, in the sense on this, expecting sort of the price/mix gains for the industry to stabilize as utilization rates come in a little bit or could or to where pricing could come down?

Akshay, let me give you a perspective. I’ve been around this business off and on for the past eight, nine years both directly and indirectly. And the only period where there was pressure in terms of the price side of it was after the 2008 financial downturn and that was just a function of – it seems, what was going on economically, but I would say, over the last three, four years, five years, has been very consistent in terms of volume growth and pricing discipline in the marketplace.

Okay, and just one last one, which is more on the long-term strategy. So, you guys have proven that you are the cost by a wide margin and the growth in the numbers have been phenomenal right. So, help us put into context the three initiatives that you talked about the strategic priorities like, if we look through the next five years, where would you see the most impact in terms of change, right, because you are a standalone company. We think you’d be more nimble, et cetera, but this is really the first time you see that it’s going to change things, right. So, where do you think in the P&L if you are – we should see the most impact from these strategic priorities? Thank you.

Yes, Akshay. I would say, if you – as I think through the three strategies, it’s really a continuation of what we’ve been executing over the last 12 to 24 months. In terms of your question on where I see the most change, I am not going to get into all the specific details underneath these three strategies, but, we certainly have initiatives in place within each one of them that, that will deliver the business and the financials going forward. So, it’s not going to be a lot of dramatic change, I’ll tell you that. But it’s going to be very focused, disciplined, executing the business. We’ve got – really, the big thing is focusing on resources and setting the organization up to be successful going forward and just being very methodical and disciplined about executing against our initiatives underneath these strategies.

Thank you. I’ll pass it on.

Our next question comes from Adam Samuelson with Goldman Sachs.

Yes, thanks. Good morning everyone.

Good morning, Adam.

Good morning.

First, just a question on the volume in the quarter, the content – and some of the small gains in food service and the capacity constraints that you had on, but there is clearly is a real kind of company level margin mix benefit from those kinds of actions. Can you talk about how sustainable do you think that mix shift could be or with the new capacity at Richland just comes out at this point was the temporary move because you were just that volume range, it would seem to me that with broad based trends in food service and through distribution that that you should be prioritizing that mix and so some of the global customers where you could?

Yes, this is Rob. In terms of that impact, I mean, clearly, as we’ve talked about the last couple of quarters that that we’ve really been running the assets hard and so we have capacity constraints. We pulled some out of inventory. But we’ve continued to look not only within each of the segments, but across the segments of where is the most profitable business, where our strategic customers in terms of the long-term growth customers, long-term profitable, most profitable customers. And so, that’s where you make those hard decisions to take out some of the more transactional business as lower margin when you get into these capacity constraints like this. Now that we have that relief, clearly we’ll continue to grow with our very profitable food service business and support those strategic customers in that businesses as we go forward. But I think it also allows us to open up some more capacity into more of the global segment. So we should get some of the growth back in the global segment as we look forward as Richland comes up, and as the Hermiston line comes up. And so, just as you look at balancing among the segments, clearly, we got some margin push overall here in the near-term. But as we bring this more capacity online, clearly that’s going to impact margins, still very profitable customers, but maybe not quite as profitable on those incremental customers, those incremental pounds as we’ve been able to get here recently.

Okay, that’s very helpful. And then, prepared remarks, there was a bit more discussion, kind of potential acquisitions, then there had been in recent calls, and I was hoping you could maybe kind of frame with some of the key characteristics and hurdles that you look at on M&A. I presume that’s high international focus, optimal size, just return hurdles accretion benchmarks that you could share if M&A, maybe bubbling up on the capital allocation agenda a little bit?

Sure, Adam, it’s part of our playbook and it’s been – if you go back to Investor Day, we’ve specifically called that out in terms of capital allocation and it’s always going to be opportunistic. We are going to look at opportunities within the categories and as everybody knows, those things are hard to predict if and when they are going to happen. But the point is, when we have those opportunities, we are going to get involved in M&A and it’s part of our investor growth strategic pillar. In terms of the filters we go through, I am not going to get into all of that, right now. But, it’s more about – it’s part of our strategic pillar and we are going to have our ear to the ground within the category and if we have an opportunity, we are going to execute against that.

Okay, that’s helpful. I’ll pass it on.

Thanks.

Thank you.

And we’ll take our final question from Michael Gallo with C.L. King.

Hi, good morning and congratulations, again on a solid quarter. My question is on, the capacity – the new capacity at Richland and the capacity expansion. It was notable that you are modeling the line at Hermiston on the line at – off the line, you just put up at Richland. I was wondering, what you are seeing on that line in terms of how it’s performing versus your legacy capacity? And whether we should think about this capacity, that newer capacity as it comes online as perhaps more efficient and higher margin than your legacy capacity? Thanks.

Michael, this is Tom. The last two or three investments we’ve made in terms of adding new capacity, we continued to upgrade technology. We make improvements. So, four years ago, five years ago, we put in Boardman line. We took learnings from that and applied it to our Richland line and we have a lot of capabilities in terms of freight cuts, sizings on these lines. So it gives us flexibility. And we also, as we started up the Richland line, and have learned even more. We apply that to our next line in terms of the Hermiston blueprints and they are more efficient. They are more cost-effective. They are lower cost from just in terms of the technology that we invest in these new lines. So, to answer to your question, yes, they are more efficient lines and it gives us the ability as we look across our network and all the production facilities and lines. We have to really balance it out and help improve our profitability just based on the business mix we can move around in the factories.

Okay, great to hear. Thank you.

And that concludes the question and answer session. I would like to turn the conference back over to our presenters for any additional or closing remarks.

Hi, this is Dexter. Thank you for joining us today. Available for any follow-up calls today and tomorrow and into early next week. For those of you on the East Coast stay safe and we’ll talk to you later. Thank you.

And that concludes today’s presentation. Thank you for your participation and you may now disconnect.