Good day and welcome to the Lamb Weston Second Quarter 2019 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Dexter Congbalay, VP, Investor Relations of Lamb Weston. Please go ahead, sir.

Good morning, and thank you for joining us for Lamb Weston second quarter 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 overall performance, some recent capital deployment actions, and an update on the operating environment in North America and Europe. Rob will then provide the details on our second quarter results and our updated fiscal 2019 outlook. With that, let me now turn the call over to Tom.

Thank you. Dexter. Good morning, everyone, Happy New Year, and thank you for joining our call today. We delivered another quarter of strong sales, earnings, and cash flow growth, demonstrating our consistent performance since becoming an independent company a little over two years ago. The Lamb Weston team remains focused on executing against our annual and long-term strategic priorities, and this focus and organizational alignment across our entire company continues to drive our results and positions us for the long term. Specifically, sales increased 11% both in the quarter and through the first half of the year. This was driven by a good balance of price mix and volume growth. Adjusted EBITDA, including unconsolidated joint ventures increased 18% to $223 million in the quarter driven by strong sales and gross profit growth. Through the first half, it's up 15% to $436 million. And through the first half, we generated more than $350 million of cash flow from operations, largely driven by earnings growth. Because of our strong year-to-date results, good operating momentum and confidence in our team's ability to manage through the challenging environment in Europe, we've raised our fiscal 2019 outlook for both sales and EBITDA. In addition, we continue to take actions that show our balanced, returns-driven approach when deploying capital. This includes the construction of our new 300-million-pound expansion in Hermiston, Oregon, which remains on track to start up in May of 2019. This new line will help us continue to support the growth of our strategic customers in the U.S., as well as support export markets. It also includes a couple of recent acquisitions. In December, we completed the purchase of our joint venture partner’s interest in Lamb Weston BSW for about four times EBITDA. This consolidation allows us to realize the full financial benefit of…

Thanks, Tom. Good morning, everyone. As Tom noted, we delivered another strong performance in the quarter and for the first half of the year. So, our teams continue to execute well in generally favorable operating environment in North America. Specifically, in the quarter, net sales increased 11% to $911 million. Price mix was up 6% as we continue to benefit from pricing structures in our Global segment contracts renewed last year, as well as from pricing actions and improved mix in our Foodservice and Retail segments. Volume increased 5% led by growth in our Global and Retail segments. Gross profit increased 20% to nearly $250 million, higher price-mix, volume growth, and supply chain efficiency savings drove the increase more than offsetting the impact of higher transportation and warehousing costs and material input and manufacturing cost inflation. Our gross margin percentage expanded 210 basis points to more than 27%. SG&A expense excluding items impacting comparability increased about $11 million to $75 million. This included a $2 million unfavorable impact from foreign exchange, which was more than offset by a $4 million benefit related to an insurance settlement. In addition, advertising and promotional expense was up about $1 million. In addition to inflation, the majority of the rest of the increase in SG&A was due to increased investments in our sales, marketing, operating, and information technology capabilities to support growth and drive operating efficiencies. While IT costs were up in the quarter, we expect them to build further as the year progresses and we continue to work on a new ERP system. Because of our strong sales and gross profit growth, adjusted operating income was up $30 million or 21% to $174 million. Equity method investment earnings from our unconsolidated joint ventures, which include Lamb Weston/Meijer in Europe and Lamb Weston/RDO in…

Thanks, Rob. Let me quickly sum up by saying, our strong financial results in the quarter and in the first half of the year provided a strong foundation to raise our financial targets for the full-year. We demonstrated our commitment to our capital allocation priorities through investment in growth, in our base business and strategic acquisitions, continued support of a competitive dividend and the adoption of an opportunistic share buyback program. I'm confident that we remain well-positioned to continue to create value for all our stakeholders. I want to thank you for your interest in Lamb Weston and we're now happy to take your questions.

Thank you. [Operator Instructions] We will now take our first question from Andrew Lazar of Barclays. Please go ahead. Your line is now open.

Morning everybody and Happy New Year.

Good morning, Andrew.

Tom, I think you mentioned a couple of times about the potential opportunity to service some of the export demand that potentially some of the European suppliers might be less able to do. And I'm just curious if the potential size or magnitude of that opportunity is, I guess is enough to – continue to impact the tightness of the U.S. or North American marketplace such that that helps to keep that marketplace reasonably tight even as we head into a period of time where there is expected to be some additional industry capacity coming online.

Yes. Andrew, I – it's still early with respect to how the difficulty with the European crop is going to play out, and I will tell you right now, I anticipate in the next couple of months that it's going to start to really – from an industry perspective, in a couple of months it's going to start moving around in terms of the overall crop availability in Europe. We haven't seen anything right now that indicates there is going to be some big movement in volume in terms of European availability versus U.S. support. We've taken actions within our business to help support our Lamb Weston/Meijer joint venture with some material volume that we moved to the U.S. My experience with this kind of situation in the past is it takes time, and I think in the next couple of months, we'll start seeing some impact of volume movement with customers, but it's always – the interesting thing in these situations, it always comes down to like the fourth quarter of a football game where the customers will realize that the impact and the availability of volume, they won’t have an idea until the end of the crop year. So, it's going to take a couple more months to play out. I think we're going to have opportunities that are going to come our way, but it's going to be one-offs as this situation plays out.

Got it. And then on some of the previous calls, you've given us kind of an overall perspective, a little bit around what you're seeing from a trend perspective in the overall sort of key QSR sort of space with respect to consumption and takeaway and things of that nature. I'm curious if you've got just an updated view on how some of those trends look at some of your key strategic end customers?

Yes, Andrew, it's a mixed bag. Right now, I think the last two, three quarters, the data we look at, the QSRs that have -- the traffic’s been up, check’s been up, so that's a great trend. You go down the line and you look at the fast-casual mid-scale, they are still down, but they're not down as pronounced as they have been. So, we see it in our numbers, obviously, we’ve got a broad customer mix within our portfolio. But right now, in the past two, three quarters, the QSRs, it's been pretty positive overall, and we can see it in our trends, our numbers, and obviously our quarterly report today, you’ll see it in our global business unit, volume has been up. So, we are watching it closely, there is a lot of mixed indicators, but right now, everything looks positive for us.

Thanks very much everyone.

We will now take our next question from Chris Growe of Stifel. Please go ahead. Your line is now open.

Thank you. Good morning.

Good morning, Chris.

Hi. I just had a question for you in relation to – you're transitioning to kind of the so called the second year of some of these contracts and pricing is expected to weaken a bit in the second half as you've noted. Can you give any color around the sort of pricing you expect in the second half, particularly in the Global division? And if I could just add to that, will the pricing coming through the second half be enough to offset inflation, which I think is remaining at a little higher pace in the second half of the year?

Yes, Chris. This is Rob. Just to clarify, we will still see price increases in the Global business that are built into the contract. They just aren't as strong as what we saw last year in the third quarter. So, they're still up. And again, as I mentioned in my comments that, we are seeing inflation and especially transportation, warehousing continues to push on the inflation side, that is going to put pressure on margins in the back half of the year.

So, your pricing wouldn't be sufficient to offset the total inflation coming through, is that what I read through that comment then Rob?

Well, I think it's going to be closer, it's going to tighten that margin up a bit.

Okay.

So, where we saw nice margin expansion in the first half, it’s going to be a little closer in the second half.

Okay. And then just a quick follow-on to, let’s say Andrew's question in relation to Europe. With that weak potato crop, are you seeing any potential opportunity to acquire businesses in that area given kind of the turmoil in that market? Is that -- and your balance sheet is in great shape and below your targeted debt-to--EBITDA range, is that the area you've been – that you think could provide some opportunity for you in the future?

Chris, it’s Tom. I'm not going to get into specifics obviously, but certainly I think the fragmented market in Europe, I believe there is great opportunity there. The cycle we're in right now with Europe, we've been through before, and what I will say is, we're continually active in terms of M&A, but right now, I'm not going to comment on how things are playing out.

Okay. Thank you.

Thanks, Chris.

We will now take our next question from Akshay Jagdale of Jefferies. Please go ahead. Your line is now open.

Hi, good morning, Happy New Year, and congrats on a solid quarter, again.

Good morning, Akshay.

Good morning. First one is clarification, just follow-up on for Rob. Can you explain the – you said 10 million versus 20 million for the JV the difference relative to what you had modeled, and you said all of it is timing related. Can you just walk me through just high level the math there if it's complicated, we can definitely take it offline, but that I'm not sure I'm following that?

No, it's pretty straightforward, that – again, if you go back to last year for the full-year, that JV, the partner share of that, that we deducted out of the bottom was about $20 million for the full-year in terms of EBITDA, right? And so, we had exercised our option at first date that we could and then it took us six months or so to negotiate through the detail of that and get that close. So, in our initial outlook when we had budgeted and provider a forecast, we assumed we close that out at the very first of the fiscal year, which we would have picked up that extra $20 million because it took us until December to get it closed about $10 million of that wasn't realized.

Got it. Helpful. Second question, you mentioned, if I'm not wrong, some incremental price increases in Foodservice, is that correctly and can you just give us some color around that? Is that just on your brand, is it across the board, are you seeing your competitors follow et cetera?

Yes, that's in September. There is a price increase announced in Foodservice, again, in Foodservice contracts vary and how that works and so that will play out and be implemented over several months and even quarters here. So, we are seeing that come through, others also announced price increases similarly, and again, I think it's again driven by the relatively tight capacity relative to demand.

Awesome. And then just one last one, this is more, it's probably related to Europe, but it's more a broader question about capacity and supply and demand globally, right. So, if I'm hearing or interpreting your comments correctly, Tom and just correct me if I'm wrong, but the way I'm interpreting it is, we all know that there is a supply shortage globally, right, that seems to be pretty clear because of what's happened in Europe. The way I'm interpreting your comments about fourth quarter decision making is, be potential positive impacts of that for our North American operator like you, who has capacity to deploy haven't yet and most likely aren't going to play out in this fiscal year. So, number one, I mean, am I hearing that correctly? And if you can just give us your latest thoughts on the cost outlook on Europe that would be super helpful? Thank you.

Sure, Akshay. I think, again, we've got a couple of months before this whole situation in Europe plays out and I think we're going to have opportunities to your point, Akshay. It's going to – potentially those opportunities are going to be more pronounced in our fiscal 2020 because it's going to be old crop, new crop transition, especially if there's customers that our service on the European industry that realize that they're going to have quality, crop, shortage issues that they may not understand right now. So, it's – it's a situation is going to play out. And I think that we'll have a clearer understanding in the next couple of months on what our opportunities are going to be with that. So, it's kind of – and to your point, it is going to be a fiscal 2020 opportunity for us because this is going to bleed over through our fiscal 2019 and our 2020. So, again, it's a volatile situation, our team is doing a fantastic job both in Europe and in the U.S. making sure first and foremost that we're supporting our customers and that's the priority. But I'm optimistic that we're going to have some opportunities and we'll see how it all plays out going forward.

Thank you.

We will now take our next question from Bryan Spillane of Bank of America. Please go ahead. Your line is now open.

Hi, good morning, everybody, and Happy New Year.

Good morning, Bryan.

Just two quick ones for me. One, I might have missed it, but did you give an update on CapEx for the year? And also, I guess with the acquisitions, just how we would think about capital spending sort of go forward, is there any sort of I guess uptick in CapEx related to acquisitions?

Yes, Bryan, it's Rob. Yes, I did mention that we maintained our $360 million target for the year on CapEx that does exclude the M&A, okay, to make that clear. BSW, the purchase of that interest in the joint venture because that was already consolidated that CapEx is already in that number. And so that doesn't move the needle and the Australian pieces are relatively small operation and so it's not going to be material, and certainly not going to be material this year. And so, we're still maintaining a $360 million.

Okay, thanks. And then in the Retail segment, you've had the – you've been able to take advantage of some of the supply issues that your large competitors had and it seems as though you've got pretty good traction with your own brands. So, can you just kind of talk about going forward is there opportunity still to gain more distribution kind of where do you stand today in terms of maybe where your ACV is and is there opportunity to kind of get yourself into maybe more larger customers going forward?

Yes, Bryan, I think, I'm super optimistic with our Retail business and we've had great traction with Grown in Idaho, no question about it. Our strategy, the 3-tier approach to remind everybody with Alexia the premium brand, we do a lot of private label for a lot of customers and we have our license brands that have a lot of momentum right now and Grown in Idaho has been – it's well ahead of our expectations at this particular point and we have opportunity with Grown in Idaho to get more distribution with some large customers. So, we've got a lot of traction, we've certainly had the benefit of misstep by one of our competitors, but the team has done a great job supporting our brands, our private label, our license brands in the market. We've got a lot of momentum and I think we've got plans to continue to support that business in the media and drive Grown in Idaho distribution. So, I feel good about where it's at. We certainly have opportunities and we got a lot of momentum. So, I'm excited about what the next year holds for that.

Thank you.

Thanks Bryan.

We will now take our next question from Michael Gallo of CL King. Please go ahead. Your line is open.

Yes, hi, good morning, and also congratulations on another strong quarter.

Thanks.

My question is on just the gross margin line, just kind of delving in a little bit, obviously, the commentary that gross margin for the year will grow at a similar to slightly better rate than sale, I think you're up, call it 19% in the first half versus 11% sales growth implies gross margin would be down in the back half. So, I guess, bigger picture, you've been able to increase your gross margins, call it 600 basis points over the last 4 or 5 years. You haven't had a lot of – you've had a very good spread of pricing versus cost inflation. It would seem like we're coming to environment where you're not going to have as much pricing will have some more inflation. So, do you think kind of looking bigger picture, you can still expand your margins further all things being equal, how volume dependent, does that become and if things slow from a volume standpoint are there any kind of offsets that you can prevent margin degradation from here? Thanks.

Yes, I think Michael that margin expansion is going to be more modest. We've had a terrific run to your point as you pointed out last 4, 5 years, and one of the things that we continue to do to drive overall profitable growth is invest in our business and expand capacity and we've been pretty consistent over the last 4, 5 years, expanding our operations. Obviously, part of our invest for growth is looking at opportunistic M&A, and that's going to be part of the play book going forward. And we're coming into an environment that's going to be a lot different than it has been in the last 3 or 4 years in terms of overall industry competitiveness. We've got our competitors, it's well known in Europe and North America that capacities coming online, we've got capacity coming on in our business and we're going to maintain discipline in our business and maintain our pricing, maintain our discipline, but the overall margin expansion is not going to be as pronounced as it has been in the last 3 or 4 years to your point. So – but I feel really confident about – when you step back and look at the big picture, the category continues to grow, our projections are 1.5% to 2.5%, that's a big – that's a critical element of driving our overall profitability, but the margin expansion is not going to be as pronounced as it has been in the last 3 or 4 years. There's no doubt about it.

Thank you.

We will now take our next question from Adam Samuelson of Goldman Sachs. Please go ahead. Your line is now open.

Yes, thanks. Good morning, everyone.

Good morning, Adam.

A lot of ground has been covered. I just wanted to go back on the guidance. Make sure, I've got the pieces correct to understand how you've adjusted the outlook. So, you've taken the range of $10 million, that includes $10 million less contribution from the purchase of the JV share. So, the base business outlook is up at least $20 million probably a little higher above that given what would seem to be a weaker outlook in Europe given the cost side there. Just making sure on the domestic side, how – is it volume domestically has price mix come in stronger, has unit costs in the first half of the year been better than the domestic kind of base business performance has exceeded the expectations to that extent there, just help me with that bridge?

No, I think your bridge Adam is spot on and in terms of what's driving, it's really across the board. As I mentioned that – on the commercial side, the teams are doing a great job. We've got some pricing momentum, especially in the Foodservice and then good volume really in our Global in our Retail business has been playing out nicely for us. At the same time, we have gotten some benefit from mix. And then on the supply chain side, the folks running our manufacturing operations have done a very, very good job of continuing to drive and squeeze efficiencies out of the manufacturing facilities. And so, it's really throughout the income statement that we're seeing that benefit in our base business.

Okay, that's helpful. And then just on the base business as I think about the balance of the year usually this is when you get a better feel for the performance of the 2018 crop through the plants that – are the yields there and the recovery rates meaningfully different than average or normal that caused the outlook to change at all?

Adam, the crops is right at historical averages, yield is good, recovery is good, storage is good. So, right down the middle of the fairway on the crop for this – the balance of the rest of the year.

Okay. And then just finally from me going back to late December, you did announce the repurchase program, which is a new feature to your capital allocation. Just there isn't a deadline or an expiration date on the program. Just any thoughts on how we should think about you utilizing that and is it really just come down to – would you actually add debt to buy back stock, or is it just excess cash flow that can't be deployed with – through other inorganic opportunities that they're going to repurchase?

Yes. Adam, that share repurchase program is really opportunistic and as you mentioned, it is open-ended. So, it's really just to give us flexibility to buy back shares on an opportunistic basis.

Okay. So, sort of thing I'll have to think that necessarily gets used up in the short term, it's just there if the excess cash comes through and you don't have the M&A?

Yes, I think that's fair way to read it.

Okay. All right, very helpful. I appreciate the color.

We will now take our next question from Carla Casella of JP Morgan. Please go ahead. Your line is now open.

Hi. Just want a little more clarity on the ERP roll-out, timing of it when you're going to start, I guess turning on the switch and if it's scale, if it's scheduled geography by geography or just more clarity on the timing?

Yes. So, we're on the front-end of the ERP project transformation. It's – these things always take some time, obviously everybody understands that. So, our projection right now is over the next couple of years, we'll start rolling on that and implementing it in terms of how we're going to do that organizationally, we're still working through that on the front-end of our planning.

Okay. And do you expect to have it done in – is it in the next fiscal year or is it 18 months?

No. Carla, I think as Tom mentioned that this will be over a couple of years, because again, it's the global exercise and it's not something that we feel the need to rush or jam in. There is no fuse on this thing, and so we want to do it thoughtfully, deliberately. And so, we'll take our time and do it thoughtfully, so it will take couple of years for us to fully roll it out.

Okay, great. Thank you.

Thank you.

It appears we have no further questions at this time. I would now like to hand the call back over for any additional or closing remarks.

Hi, it's Dexter, thanks again for everybody joining the call. If you like to have a follow-up discussion, please e-mail me first and we'll try to set-up a time to have a discussion. Again, a Happy New Year, and good morning, everyone. Thank you.

This concludes today's conference call. You may now disconnect.