Good day, and welcome to the Lamb Weston First Quarter 2022 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.

Good morning, and thank you for joining us for Lamb Weston’s first quarter 2022 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 expected 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 SEC filings 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 Bernadette Madarieta, our Chief Financial Officer. Tom will provide some comments on our performance, as well as a brief overview of the current operating environment. Bernadette will then provide details on our first quarter results and fiscal 2022 outlook. With that, let me now turn the call over to Tom.

Thank you, Dexter. Good morning and thank you for joining our call today. We are pleased with our strong sales growth in the quarter, which reflects the ongoing broad recovery in demand across our out of home sales channels, as well as continued improvement in our key international markets. However, our margin improvement lags our volume recovery as a result of the timing of pricing actions to offset cost inflation, as well as challenging macro factors that increase our cost and affected our production run rates and throughput. These ongoing challenges, combined with the extreme summer's heat, negative impact on potato crops in the Pacific Northwest will result in higher cost as the year progresses. As a result, we now expect our gross profit margins will remain below pre-pandemic levels through fiscal 2022. We believe many of these costs and supply chain challenges are transitory and we are taking aggressive actions to mitigate their effects on our operations and financial performance. We're confident that our actions, along with our investments to improve productivity and operation over the long-term, will get us back on track to deliver higher margins and sustainable growth. Before Bernadette gets into some of the specifics of our first quarter results and outlook, let's briefly review the current operating environment starting with demand. In the U.S., we continue to be encouraged by the pace of recovery in restaurant traffic and demand for fries. Overall, restaurant traffic has largely stabilized at about 5% below pre-pandemic levels led by the continued solid performance at quick service restaurants. Traffic at full-service restaurants continued to rebound in June and July, but it did soften a bit in August as the Delta variant surged across most of the country. Demand improved at non-commercial food service outlets, especially in the education market, which…

Thanks, Tom, and good morning, everyone. As many of you know, this is my first earnings call as CFO of Lamb Weston. I've now been in the role for about nine weeks. For those on the line that I haven't met, it's a pleasure to meet you over the phone. I am looking forward to meeting many of you in person over the coming months as we get back into the cadence of in person investor meetings and industry events. As Tom discussed, we feel good about the health of the category and our top line performance in the first quarter and expect our gross margins going forward will improve as we benefit from our recent pricing actions, as well as from other actions that we are taking to mitigate some of the macro challenges affecting our supply chain. Specifically, in the quarter, sales increased 13% to $984 million, with volume up 11% and price mix up 2%. As expected, volume was the primary driver of sales growth, reflecting the ongoing recovery in fry demand outside the home in the U.S. and in some of our key international markets, as well as the comparison to relatively soft shipments in the prior year quarter. Lower Retail segment sales volume partially offset this growth, largely as a result of incremental losses of low-margin private-label business. Overall, our sales volume in the first quarter was about 95% of what it was during the first quarter of fiscal 2020 before the pandemic impacted demand. Moving to pricing, pricing actions and favorable mix drove an increase in price mix in each of our core business segments. As I'll discuss in more detail later, our pricing actions include the benefit of higher prices charged to customers for product delivery in an effort to pass through rising…

Thanks, Bernadette. Let me just sum it up. We feel good about the near-term recovery demand in the U.S. and our key international markets, as well as the long-term health and growth of the category. We are taking the necessary steps with respect to pricing and continuing to focus on stabilizing our supply chain to mitigate near-term operational headwinds and improve profitability. We are on track with our recently announced capacity investments to support our customer and category growth, as well as our long-term strategic and financial objectives. Thank you for joining us today. And now we are ready to take your questions.

[Operator Instructions] We’ll take our first question from Tom Palmer with JPMorgan.

Good morning, and thank you for the questions.

Good morning, Tom.

Good morning.

I guess just – thanks. Just to kick off, maybe asked on the pricing side. I know your initial round is just starting to work its way through the market. But it sounds like it's not going to fully offset inflation. Could you maybe talk about at what point, just from a timing standpoint, you could think about that second round being instituted? And then, to what extent do you think you'll be able to price for potato inflation? I know that your sourcing is maybe a little bit different than what the broader U.S. might be facing this year in terms of potato cost. So just trying to kind of understand that pricing dynamic? Thanks.

Yes. So the pricing - this is Tom Werner. The pricing generally, we have priced through to offset inflation across the portfolio. It's the matter of timing. So as we've stated, we'll start realizing some of that here in Q2, but the full impact of our pricing actions across our segments will start to realize in Q3 and that's pretty typical in previous years. And one of the things that impacted this quarter is, we got behind on it, quite frankly. So we are catching up. And as we evaluate the go-forward, we are closer to it. We are taking a number of different actions, particularly in our freight area to pass those cost through based on freight availability and managing customer service. So we've adjusted and we'll evaluate it going forward and determine based on how inflation is coming at us, we'll react a lot quicker.

Okay. Thanks for that. And then, I know this is a small segment, but it actually was a - I guess, a meaningful margin overhang this quarter. The other segment swing to a loss despite mark-to-market gains. What drove that this quarter? Is that something we should expect to recur? Or was it kind of unusual item?

I can - hey, Tom, it's Dexter. You had a sizable gain. I think last year, it's still in mark-to-market and that flows to other and the gain in mark-to-market this year is smaller.

Okay. Yes. I mean, even excluding that, I think you are looking at around a $15 million decline year-over-year.

Oh, no, no, no, no. I have to look that up again. But it's not that. It's much small of that. I mean, the details on that will come out in the K offhand. But we'll circle back to you on this call to give you the answer on that. But we're just looking up real quick.

Okay. Thanks.

We will take our next question from Adam Samuelson with Goldman Sachs.

Yes. Thank you. Good morning, everyone.

Good morning.

Good morning.

Good morning. So, sorry, first, I’m hoping to ask on some of the gross margin commentary, Bernadette, that you just gave in your prepared script. The 2022 gross margins coming in 500 to 800 basis points below your normalized range and I know that there was expectations of the first half of the fiscal year would have lower gross margins than the second half when you reported back in July. So I am just trying to get a sense of how much that has actually changed and what the increment to - or the decrement to the outlook is this year on margins and specifically in terms of how that outlook has changed? How much is the potato crop at this point?

Yes. Thanks for your question. The 5 to 8 basis points that we referenced, a lot of that is due to the potato crops. So the things that I mentioned that has changed is we've got a worst potato crop than we've seen in many years. There is a couple of things that we are doing as I mentioned in terms of SKU rationalization and the products spec changes that we are doing that we are hoping to offset some of that impact on cost. But most of that is related to a poor crop. And then the other thing that I mentioned is that we had previously anticipated the inflation would gradually ease and we do no longer expect that. So, we've given the guidance of 5 to 8 points, but we will come back in January and we'll update that further depending on what we learn more about the crop as we typically have done.

All right. So, just to be clear, because there wasn't a similar kind of margin number frames back in July. What - how much did it change versus the outlook in July?

Well, I think the outlook in July we said we were approaching our normal margins, which is the 25% to 26%. And so, now we are saying, it's 5 to 8 points below.

Okay. And I guess, the second question is more of a conceptual one, because clearly these inflationary dynamics are not easing. Is the goal not just to recover cost one for one, but actually to price for margins as well. It's a very different item if we're thinking. Okay. Well, unit margins on a per pound basis go back to pre-pandemic levels as opposed to percent margins in an inflationary environment go back to pre-pandemic levels. And I'm really also thinking as we go into calendar 2022 and even year fiscal 2023, the way some of these input markets would be shaping up, it would seem like your contract to potato cost for next year are going to be up a lot. And I am just trying to think about conceptually, is it - is the goal to price for unit margins? Or is the goal to actually price for those percent margins?

Yes. Adam, so the goal is to continue to price through inflation and at levels we historically do. So that's number one. Number two, the 2022 crop, I'll comment on that as we do - as we get through negotiations on how that shaping out for the next crop year. And the thing I would just want to remind everybody is we are dealing with a challenging crop. There's no question about it. And we'll work through it. We are focused on all the right things. The good news in this business, we get started all over for next crop. So we'll manage through as best as we can. We're focused on all the right things. But as things start playing out, like I said to the previous questions, we'll evaluate additional actions we need to take to price through inflation.

Okay. That's helpful. I'll pass it on. Thanks.

We’ll take our next question from Rob Dickerson with Jefferies.

Hey, Rob. Okay hold on for a second. I just want to close off Tom's question on of the other product margin.

Yes.

Year-over-year, we are - reported basis down 20, ex mark-to-market were down 4. So as you can see the biggest swing is due to the mark-to-market in this year and last year and from an operational basis again down $4 million. That's due to higher manufacturing cost and lower volumes from the vegetable - in our vegetable business. Sorry, Rob.

Yes. No problem, Dexter. Great. Thanks. I guess just first question. It sounds like upfront you said, demand is kind of overall maybe around 5% lower than it was pre-pandemic, but maybe shipments are a little bit lower, just kind of given all the supply chain issues. So, as you then speak to trying to stabilize, the supply to improve the cost situation going forward, like how do you kind of view that shipment piece relative to demand? Because demand seems strong maybe you are - kind of you are underperforming a bit relative to that demand equation. But it sounds like there is obviously good line of sight how to get there. So I'm just kind of curious as the cadence after the year? Thanks.

Yes. So, this is Tom. The international business has been with the container shortages challenges on the ports and the exports and even the containers coming in. We're essentially allocated a certain number of containers. So, we're managing to that level based on our freight partners. And every day is a little bit different. So the team is doing a good job, making sure we're allocating the product to our key customers internationally, but it's a challenge. And on the flip side to that, that does as we look at our forecast, weekly, we are managing the pile on production and other customers domestically to ensure they are getting their products. So, it's a really dynamic situation with the containers and even the trucking and the rail and all those things. But essentially, we're managing through what we can ship based on our allocation of containers and that's what we're dealing with. And as that frees up and we get more containers available that will help the exports to our international markets.

Okay. Great. And then Tom, maybe just – now that just a question on kind of broader competitive dynamic. I heard some people say, maybe including yourself a bit kind of given your geographic sourcing focus then maybe you might be in less of a kind of beneficial competitive position versus just some of the other larger processors. That being said, I've also heard some of the other processors say kind of not so fast just given where demand is and kind of where kind of overall crop that’s coming in that's supply in general could just be short, right? Not just for you. So, just curious if you can provide any color basically your perspective around kind of where you stand potentially in this environment relative to some of the other players that you are aware of in the market? And then I have a quick follow-up.

Yes, Rob, it's a fluid situation right now, because we're right in the middle of main crop harvest. So, obviously, we are – we’ve got – we are getting an early read like I said on how the quality and the yields are. We really won't have a clear view until the end of this month on what the overall potato yields, what that means, we have an idea. And I'd rather - as I do every year, in January, give you clear understanding. So right now, it’s - we're just learning how the main crop is going to perform as we harvest and how it's running through the plants that will have more info on that in January.

Okay, fair enough. And then just a quick technical question. In the Foodservice division in Q1, price mix was up 1%. Obviously, there was some material deceleration in outlook with what we saw in Q4, which is likely very mix-driven. So just any clarity as to kind of how we should think about that going over on the mix side just given the delta Q1 sorry, Q4 to Q1? Thanks.

Yes. A lot of that – This is Bernadette, Rob. A lot of that is mix-driven. And then, what we see in the foodservice side is, we're not going to see a lot of those pricing increases effective until second quarter and then more in third quarter as we discussed. But, then again, two, we are seeing increases in our non-commercial segment in first quarter relative to the fourth quarter. We are now 70% to 80% there. So, a lot of its mix.

Okay. Got it. Thank you.

It’s branded products.

And then, last year, Q4 was such an anomaly, because that's the first quarter that was really impacted by the pandemic. And a lot of the perspective we sold a lot less branded product during that quarter as inventories were destocked.

Got it. Got it. Alright. Thank you so much.

And we'll go to our next question from Andrew Lazar with Barclays.

Thanks. Good morning, everybody.

Good morning, Andrew.

Hi. I seem to remember at one point having a conversation around and correct if I'm wrong about, back many years ago, when it was like the worst potato crop anyone in the industry sort of could remember, it was sort of like a $25 million hit to EBITDA for Lamb Weston at the time. And I maybe off on that. But I'm curious if there is any anyway and it might be tough to do, but to dimensionalize what kind of an impact to EBITDA that specifically sort of this crop is likely to have on EBITDA this year? And maybe too early to do that. But I don't have that data point right? And would this crop be worse than the one previously, that was the worst than anybody in the industry had seen. I am just trying to get some perspective on that.

Yes, Andrew, I think the - how you framed up, what we talked about in the 20 – the worst crop historically was 14. So, your numbers around $25 million to $30 million are right. And secondly, Andrew, it is too early to frame it up in terms of what the overall financial impact is going to be. And what I will say is, it's worst. This crop is going to be worse than the previously worst crop ever. So the financial impact will put some guardrails around it in January as we get it harvested and we're running it through the plant and we understand what we are dealing with.

Yes. So, that's helpful. Thanks for that. And then, I guess, as we - I think a lot of us certainly knew that even from the fourth quarter call that – you are getting a lot of pressure points and sort of pain points on the cost side for a host reasons in fiscal 2022 and that it was really all about just like sequential improvement as you went through the year. And obviously that will take a little more time now. So I am trying to think out, if we just think ahead for a minute to fiscal 2023, and just maybe if you play out the – sort of the potential sort of puts and takes, what are the things that in theory could be more positive? Where are some of the things that maybe you still don't really have a lot of clarity on doing others. You're just clearly putting a lot of pricing through, potentially could put more through. There is always a little bit of a timing lag. But one would think that's going to certainly better help you get a lot closer to where your costs are. I'm trying to - I'm trying to – I am just struggling with like the labor piece and are you making progress on that? Is it just slow? And I am trying to get a sense of some of these negatives can kind of bleed into 2023? Or is there a reason that there could be a pretty dramatic bounce back in operating margin and gross margins in 2023? Like did the next three quarters give you enough time essentially to figure out some of these issues? Or frankly, are some of these thorny enough that they could go beyond that? Even if you don't think there is some structural reason quote longer term, to not get back to historical margins?

Yes, Andrew. I am a 100% confident over - we don't have any structural issues in the company and everything you're poking at, we focused on addressing labor challenges. Bernadette made a number of references of what we're doing differently and we're seeing progress. It's just slow going. The thing that will take time is even within our supply chain and our supplier’s supply chain is disrupting our production and driving inefficiencies in our plants that we're doing a number of things to address that, as well. And from last summer to now, it's just going to take more time. We are seeing progress. It's not as fast as we or any of us want. But as I think through the next three quarters, where we will be a year from now, with the things we're doing in the company in terms of addressing inflation, adjusting how our supply chain, we're focused on our supply chain differently, some of the actions we're taking. And a year from now, we're in a new potato crop and that's going to be hopefully back to average normalized levels. We will have certain amount of probably inflation over that time that we will address. But everything we're doing it's going to take time, Andrew. And the category is very healthy. And so, we're preparing for to - with the number of capacity investments that we're doing right now, our long-term strategy sound, it's just we're going to be a little choppy in the near-term, but the things we're doing operationally, I'm a 100% confident. It may take more time than any of us want. But we're addressing all the right things.

Yes.

Yes, Andrew.

Hi, Bernadette.

What I was just going to add that, the portfolio optimization that I talked about, that's just going to benefit us even more into fiscal 2023 and then the increases in productivity around a lot of those cost reduction programs around Win As One. Again, that should just continue to gain momentum into fiscal 2023, as well.

Great. Thank you so much.

Take our next question from Peter Galbo with Bank of America.

Hey guys. Good morning. Thanks for taking the questions. Maybe just to piggyback off of Andrew's question there. I guess, Bernadette, as we're thinking about some of the things that are within your control, some of the SKU rationalization and cost savings, just, is there any way to kind of help us frame how much of that 500 to 800 basis points of normalized margin that you're losing this year? Like, how much could that potentially make up as we start to think about a normal – a more normalized year for fiscal 2023?

Yes. So, the way I'd answer that, Peter is, a lot of the decrease that we've explained in terms of the five to eight points, that's taking into consideration that SKU rationalization and the spec modifications. So, the impact of the crop is what is significantly decreasing our margin estimate. And then, we are looking to get some gains on that to get to the five to eight basis point decrease with the SKU rationalization and product spec modifications. Otherwise, it could have been even greater without that, is the way I would explain it.

Got it. Okay. Now, that's helpful. And then, I guess, just as we're thinking about the second quarter, I think you had mentioned kind of sequential gross margin improvement. Can you just dimension maybe a little bit more, how you're thinking about that? And Tom, I know you talked about on-premise or foodservice kind of in August being impacted by Delta. But just how did September trend? Was it materially better, worse, or kind of the same? Thanks very much.

Yes. So for second quarter and the sequential improvement that we're expecting to see there, generally, our lowest margin quarter is our first quarter. And even though the crop is not what it has been in the previous years, we are going to get some benefits in the second quarter of running out of field and not having to move those potatoes to storage before we start running those through. And then additionally, these other actions that we're taking in terms of further SKU rationalization, we're going out with our second round of those and then the product spec changes. We're expecting to see some benefit from that and should see an increase from Q1, which again is our lowest margin quarter historically.

Well, thanks. And Tom anything on September?

And the pricing, absolutely. We'll definitely see the benefit of pricing. And I am sorry, Peter. Was there another follow-on question that I missed?

Yes. Sorry. Just on kind of foodservice, know Tom had talked a bit about the softening in August. But just I was curious if there was any early takes on September or even in the first week of October?

Similar to August, yes, it's pretty similar to August. I mean, it's softened a bit, but it's kind of leveled out.

And what I'd say there, Peter, is that, that foodservice demand is there and we are seeing just difficulty in some respects in making sure that we can provide that product given the lower throughput that we're getting through the plants.

And the logistics.

And the logistics issues.

Great. Thanks very much.

We'll take our next question from Matt Smith with Stifel.

Hi, thank you. I just had a question for you. In addition to the margin headwind, I believe you mentioned volume growth may be tempered by the challenges you're seeing in global logistics and supply chain and disruptions and the potato crop. Is that potential volume weakness reflected in your guidance calling for sales growth above your long-term targets?

Yes. That has been included.

Okay. And then, is the potential impacts from the potato crop, should we think that more as a second half event as you run some older potatoes with the poor quality?

Yes. It will definitely be in the second half. It'll start manifesting itself.

Okay. And then, as a follow-up to that, is there - can you talk about how you can mitigate the impact of that as we look forward to the first half of next year? And I'll leave it there and pass it on.

Yes, Matt, as I referenced, the way we're looking to mitigate that is with some of our product spec changes and the other things that we are doing by working with our customers.

Great. Thank you.

That’s today’s question and answer session. Mr. Congbalay, I'll turn the call back to you for any additional or closing remarks.

Great. Thanks for joining today. Happy to take some follow-up questions, if you would, just please send me an email that we can schedule something for either later this week, but today - later this week or sometime next week. I appreciate the time. Thank you.

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