Good day, and welcome to the Lamb Weston Fourth Quarter and Fiscal Year 2019 Earnings Call. Today's conference is being recorded. 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 Fourth Quarter and Fiscal Year 2019 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 for the year as well as some comments on the operating environment we expect to see in fiscal 2020. Rob will then provide the details on our fourth quarter and full year results as well as our fiscal 2020 outlook. 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. In fiscal 2019, we delivered another year of record financial results and significantly exceeded the financial targets that we initially outlined a year ago. We delivered these results with the strong performance in our base business, which more than offset crop-related challenges facing our European joint venture. For the year, sales were up nearly 10% with a good balance of higher volume and price mix. Adjusted EBITDA, including unconsolidated joint ventures was also up 10%, driven by strong gross profit growth. Adjusted earnings per share increased more than 20%, driven by operating gains in the benefit of tax reform. And finally, we generated more than 40% increase in cash flow from operations and invested much of that cash back into the business, while also returning $145 million of cash to shareholders. This performance reflects our commercial, supply chain and support team's successful execution against our 3 strategies of accelerating category in customer growth, differentiating our global supply chain to drive growth and investing for growth. Now let me take you through some highlights for each of these. To accelerate category and customer growth, our global innovation and supply chain teams work closely to develop, produce and sell a higher amount of limited time offering products in the U.S. and key markets in Asia. These LTOs enable customers to expand their menus with exciting new products and increase traffic into their stores. For the year, about a quarter of our Global segment volume growth was driven by increased LTO penetration. In addition, we continued to partner with U.S. and non-U.S. restaurant chains as they look to expand operations internationally. In our Foodservice segment, we successfully replaced our broker relationships with the direct sales force solely focused on…

Thanks, Tom. Good morning, everyone. As Tom noted, we're pleased with our strong sales and EBITDA growth in the fourth quarter and for the full year. Specifically in the quarter, net sales increased 9% to just over $1 billion driven by a good balance of favorable price mix and volume. Price mix was up 3% due to pricing actions in our Global and Foodservice segments as well as favorable mix. Volume increased 6% led by growth in our Global segment. Marvel Packers, our acquisition in Australia that we closed in the middle of our fiscal year, added about 0.5 point of volume growth. For the year, sales grew 10% to $3.8 billion with volume up 5% and price mix also up 5 points. Gross profit increased $18 million or 8% to $251 million in the quarter. Higher prices, favorable mix, volume growth and supply chain efficiency savings drove the increase, more than offsetting the impact of input manufacturing, transportation, cost inflation. The increase in gross profit was tempered by a $7.5 million loss in unrealized mark-to-market adjustments related to commodity hedging contracts this quarter. This compares to a $1 million loss in the prior-year period. Gross profit also included approximately $3 million of cost related to the start-up of our french fry line in Hermiston, Oregon. All in, our gross margin percentage in the quarter was down 40 basis points to 25%. However, excluding the unrealized mark-to-market adjustments and the Hermiston start-up cost, gross margin expanded by 50 basis points. For the year, gross profit grew 14% and gross margin expanded 100 basis points to 26.7%. The improvements were largely driven by favorable price mix, volume growth and supply chain productivity more than offsetting cost inflation and higher depreciation expense, primarily associated with our french fry production line in Richland…

Thanks, Rob. Let me quickly sum up by saying, again, in fiscal 2019, we finished strong and delivered another record year of sales and earnings. We built great operating momentum and are well positioned to deliver solid results in fiscal 2020. And we remain focused on executing against our strategic initiatives to support long-term growth and create value for all our stakeholders. I want to thank you for your interest in Lamb Weston and we're now happy to take your questions.

[Operator Instructions]. We'll take our first question from Andrew Lazar of Barclays.

Two questions from me, if I could. I guess, first would be, assuming that the Lamb Weston gets a healthy benefit year-over-year from the equity method earnings, has the benefit from the extra week as well as the BSW and then some contribution from the recent acquisition as well. I guess I'm trying to get a sense of what that implies for sort of base business profit growth in fiscal '20. It would seem like perhaps that might be fairly modest or muted and I realize there is higher ERP spend, which impact some of that and as you said, you're being prudent on sort of pricing and your outlook there, but perhaps just some comments around sort of base business profit growth and how that plays out in fiscal '20?

Sure, Andrew. This is Rob. You can get to the BSW historically out of the financials as you see the add back and so as we say, let's call it $10 million of add back there, the 53rd week adds a bit. Taking that all together, take out the ERP, increased expense, expense related to that, you still get into low to mid-single-digit kind of organic growth and profitability in the business.

And then if we're thinking about organic sales again for fiscal '20 and looking for mid-single digit rise, obviously, you take out the benefit from the 53rd week. So maybe we're talking more 3% or so and then I assume there is some benefit from obviously the recent acquisition in Australia. So, I mean, are we talking really more or something like 2% or so organic and if volume is the largest part of that, it sounds like very limited or as you said, very modest in the way of price. So I'm just trying to get a sense if that is -- if that's right, is that consistent, I guess, with the being encouraged, if you will, about some of the initial conversations around pricing that you've had?

Andrew, this is Tom. Good morning. I'm encouraged by the contract negotiations that are happening right now in terms of the pricing. And the other thing to remember too, we always take a prudent approach to guidance. We also have the carryover contracting our global business unit, the pricing that we put in place last couple of years. And I would say, when you step back, this fiscal year, it's going to be largely driven net sales by volume and more than it will be by price as it has in the last couple of years. But I'm confident that how the contract discussions are progressing, feel good about how we've projected our pricing this fiscal year and I think, as we evaluate what's going on in the marketplace, I think there is going to be opportunities for us to continue to drive the pricing across multiple channels.

Let me take our next question. Chris Growe of Stifel.

I want to ask, there's been a lot of concern around incremental capacity and it sounds like that will have a minimal effect on pricing overall as you're seeing some good results so far in your negotiations. Where is utilization overall for the industry? Do you have a good sense of that? And maybe even including the facilities coming on later this year and early next year. Do you have a good sense of that and therefore, kind of where the industry will be operating, overall, at that level?

Yes, generally, we believe with the additions in North America, including our Hermiston plant, this year, we're going to operate around the 95, 96 level in North America. In Europe, it's a little bit of a different story. There has been a lot of capacity put on in Europe. Compounded with the potato crop issue last year, it's a bit harder to read at this time until we get further in this fiscal year, but generally, we believe they are operating at a pretty high utilization rate as well. So as we stated in the past, that's kind of normalized levels. I think, over time, with the category growth at 1.5 to 2.5 points as we're projecting, it's going to continue to elevate utilization rates over the next couple of years as it has in the past year. So -- and then the industry, based on how they've been running in the past couple of years, at a really high, 100% utilization rate, I know in our business, we've got some catch up things to do in maintenance, but we'll some capacity off-line for us for a period of time. So I think if you think about it, Chris, running a business at utilization rates that we want at -- is that we run at, it's a pretty high utilization rate and that's just the nature of where we're at right now. So a lot of these things really just need to normalize and then, as the category continues to grow, we're going to be evaluating additional capacity ourself, potentially, in the near future.

Okay, that's good to know. Just to be clear, at that level of utilization, you believe you can price the cost inflation at that level, is that current?

Yes, I feel really confident that we can do that.

Okay. And just one follow-up will be on the ERP spending. I think you said $10 million to $20 million expense this year you said how much you have in capital -- at the capital portion of that? And then just to get an idea, is that a little higher than next year as you kind of push through this implementation? That's my last question for you.

Yes, Chris, this is Rob. Yes, the $10 million to $20 million expense, we have not disclosed specifically the capital on that and the timing of that as I said in prepared remarks that part of that is pace of timing of implementation as well, but the ERP spending is embedded within the capital guidance -- overall capital guidance I gave you.

And that would grow next year then, Rob?

Yes, again, it depends on timing of implementation, but I think that's fair to say it would be a little bit higher next year.

And we'll now take out next question. It comes from Adam Samuelson of Goldman Sachs.

So I guess, first coming back to the question on price mix and the QSR negotiations a little bit. The guidance for the year assumes kind of modest contribution. And this quarter and last, you are running about 3% price mix at the consolidated level. We're still in calendar '19 for the first half of fiscal '20 so my base assumption will be similar to that for the first half of your fiscal year. And you've got inflation escalators for the contracts that roll into -- that aren't up for renewal for 2020. So in the context of guidance that it assumes kind of modest contribution, it would seem like there's a notable decel embedded in the back half of the fiscal year on the price mix side. And I want to just make sure I'm thinking about that right. And if so, kind of just talk about whether it is inflation escalators from contracts not up for renewal or is the price mix on the new contracts more like 0 to 1? I'm just trying to make sure I understand the math there.

Adam, again, as consistent with practice, we're being very prudent. And as I said in the prepared remarks, being very prudent of how those negotiations on pricing are going to evolve. Again, also recognize that growth -- as we're projecting growth, international markets, we assume we're going to grow a bit quicker than domestic markets in terms of demand and those typically as we've talked about before, command a lower margin than our domestic markets and so, part of it is into that mix peace across business and customer mix with international, waiting a little bit that is impacting your math there.

Okay. That's helpful. So maybe that actually is a good segue into the second question. And you talked about being kind of happy with the pricing so far on the QSR negotiations. Can you talk maybe on the volume, market share side, just the aggregate kind of, are we happy just with pricing? Are we happy with the volume, market share price in aggregate, just maybe frame it a little bit more broadly than just the pricing component?

Yes. So Adam, when you step back to your point in aggregate, we're very comfortable with not only the pricing component of it, but volume as well. And as I have -- as we worked hard over the last 2, 3 years to align our segments with strategic customers that; are growing in the marketplace. So we have a really good customer portfolio mix, not only in the Global segment, but in Foodservice and retail. And when you step back and look at both pieces, volume and pricing, we are in a sweet spot right now. So all this has to play out over the next couple of months, but I feel good about the growth opportunities we have in all of our segments.

Okay. That's helpful. And then just a very quick follow-up from me. The acquisitions in Australia that you've done in recent months, I mean, I would guess that those are $10 million to $15 million EBITDA tailwind to fiscal '20. Is that assumption reasonable and that's in the guidance?

Yes, I think, Adam, we don't want to talk about individual planned profitability per se, but I think it's fair to take the capacity volumes of those and apply a margin against those and you are going to get reasonably close and that's going to get you somewhere in that range. Also recognize that for the first few months that an acquisition, we have the markup on the inventory. So we won't get that margin on those acquisitions for the first few months, but bottom line answer to your question is, is it in the guidance? Yes, it is.

Adam, mechanically, just, the Marvel acquisition, we got middle of last year, just mechanically, we did get the benefit of that in the fourth quarter and we talked about that in the prepared remarks, how much that was. And then, most recent acquisition, Ready Meals, that's $70 million, we got that at the... When was that?

July 2, very first [indiscernible]...

Yes, so we're about one month in, and so not all of it is going to be obviously in the first year.

And we will now take our next question. It comes from Tom Palmer of JPMorgan.

Could you provide some clarity about the gross margin outlook? You're calling out modestly higher price mix, low to mid-single-digit input cost inflation plus looks like you'll have higher D&A expenses from the new facility. All this together seems like it would suggest gross margin pressure, but you're guiding to sustain your gross margin. So I guess, am I interpreting these pieces correctly? And are there other items that should help the gross margin line that are not being factored in that I just listed?

Tom, this is Tom Werner. I'm real confident that we could maintain margin levels where they're at today and we continue to focus on. We've had a lot of discussion about prices this morning already, but we're focusing on mix too across all of our segments and customer mix. And we're also leveraging our Lamb Weston operating culture, supply chain to drive cost savings across our supply chain networks. So the business unit leaders, sales team, everybody is focused on maintaining our margin levels and I'm confident, based on, how things are playing out early on, that we'll be able to maintain our gross margin at these levels and interim up over the course of time.

Okay. Thanks for that. And then I know you're a little limited in how much you can discuss here, but I wanted to follow-up on negotiations again. You mentioned about a quarter of your global contracts were up for renewal this year. How does that compare to the number coming up for renewal next year? And are you seeing or looking to kind of change the terms in terms of the length of how long they continue for or any changes in terms of how you have structured escalators relative to the past?

Yes. So we've worked over the past several years to spread the timing across all of our segments that we negotiate contracts with to sequence them 1, 2, 3 years where we can. So we have changed that sequencing in terms of negotiation timing. So as far as next year, I'm not going to get into specifics about what's coming up for bid next year, next year, we will have the same conversation and be talking about negotiations.

And will now take our next question. It comes from Bryan Spillane of Bank of America.

So two questions, just two quick ones from me. First, the strong volume performance in the Global segment in the fourth quarter. Is there any benefit that you got from -- I think, you might have mentioned this in prepared remarks, but just any benefit you may have gotten from taking some orders from Europe or due to the shortage in Europe? And second, does any of that strength kind of -- is it all pull forward from 2020?

Bryan, in terms of the picking up some orders related to Europe, that was really more focused on strategic European customers in support of those. The volume wasn't the big driver there. And in terms of is it pull forward, no, I wouldn't say any of that is pull forward.

Okay. Great. And then I guess, second one is just as we're modeling 2020, I know there has been a lot of focus on price in the discussion today, but is mix going to be negative? It just seems to me that maybe the Global segment ends up contributing a little bit more and that might be negative as you roll up at a consolidated level on mix? I'm just trying to get understanding how mix affects the price mix piece on an enterprise-level?

Sure. On the mix side, again, I think your point is spot on. The global growth is we are expecting to be a bit faster. Recognize in retail, for example, we've had great growth here over the last couple of years. Expect that growth rate to moderate somewhat, but continue to push the mix within retail for the branded products and that will help our mix within the segment. Foodservice, similar drive growth with market, but don't expect outsized growth. It's really the growth in Global driven by export that's going to pressure a little bit margins in Global -- margin percentage in Global as the mix turns to more export business relative to the growth rates domestically. And as mentioned, those exports business tends to be a little bit lower margin.

And we'll take our next question from David Mandel of Consumer Edge Research.

It's a quick one. When it comes to Europe, it looks like the weather is getting a little bit better, but there might be another bad crop. Can you point to any learnings that came from last year? Were there any surprises that the European processors were using table potatoes and stored inventory? So I was wondering if you could speak to any learnings that you could share with us?

Sure, David. This is Tom. One of the things -- the opportunity in all that for Lamb Weston is the ability for ourselves, Lamb Weston and Lamb-Weston/Meijer to come together and look at first and foremost, the customers that we needed to make sure get serviced. And we did move some production around to North America from Lamb-Weston/Meijer. The team over there did a terrific job early on making sure we had sourced the potatoes we needed to service our business. So we got ahead of it and we organized ourselves more efficiently in terms of moving production around the globe. That was the big learning. Could we -- we've obviously, as we did that, we learned some things. And if that situation ever happens again, we're going to be more efficient at it. In terms of the potato crop this year, yes, Europe has been hot again, and we're obviously close to it on the ground there with Lamb-Weston/Meijer team. The difference is, they're getting rain periodically this year even with the heat. It's early on and as we get to our October call, we'll give you an update on that. But right now it is hot but it's still too early to tell the impact on the crop over there.

And this concludes our Q&A session for today. So I'd like to hand the call back to our speakers.

Hi, everyone. It's Dexter. If you have any follow-up questions, please send me an e-mail first. We could either set up a time or -- either today or later on in the next few days. Thanks for joining on the call. Talk to you later. Thanks.

This concludes today's call. Thank you for your participation. You may now disconnect.