Good day, and welcome to the Lamb Weston’s Third Quarter 2022 Earnings Call. Today's call 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 third 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 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 Bernadette Madarieta, our Chief Financial Officer. Tom will provide some comments on our performance, as well as an overview of the current operating environment. Bernadette will then provide details on our third quarter results and updated 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. First of all, I want to thank all my colleagues for their continued dedication and perseverance to keep Lamb Weston as an industry leader and a strong business partner. Our solid financial results in the third quarter are a direct result of how well our manufacturing, supply chain and commercial teams have remained focused on improving our operations and serving our customers during a challenging macro environment, which includes the impact of an exceptionally poor potato crop. We continue to be encouraged by strong French fry demand and feel good about our continued progress. Specifically, in the third quarter, we delivered solid sales growth and drove sequential and year-over-year gross margin expansion and we did this despite the impact of Omicron variant slowing restaurant traffic and disrupting our production and distribution operations more than we expected. We benefited from our previously announced pricing actions to mitigate this significant cost inflation across our supply chain. We’ve also been driving improvements in our manufacturing operations as we focus on what’s in our control. This includes mitigating some of the effects of the poor potato crop with product specification changes and portfolio optimization work that we’ve discussed previously. Factory labor remains challenging as we remain below preferred staffing levels, but we are making steady progress in a highly difficult labor market. We are addressing the labor gap by focusing on retention and new ways of attracting talent. We’ll continue to push hard on our staffing initiatives and are encouraged by the improvements we are seeing. However, it will take time to get all of our factory staff where they need to be. Like others, we are managing through freight challenges including both cost increases and shipping delays. The freight challenges…

Thanks Tom and good morning everyone. Let me start by echoing Tom’s comments thanking our employees. We appreciate your hard work and dedication. As Tom discussed we feel good about the benefits from our pricing actions and cost savings efforts to offset much of the significant cost inflation that we’ve been experiencing and I am confident in our ability to continue to manage through this volatile business environment. Specifically, in the quarter, our sales increased 7% to $955 million. Price mix was up 12% as we continued to execute our previously announced product and freight pricing actions in each of our business segments to offset input, manufacturing and transportation cost inflation. Most of the increase in the quarter reflects these pricing actions, while mix was also favorable. Sales volumes declined 5% as we were unable to fully serve market demand due to logistics constraints, especially for our international shipments as well as lower production runrates and throughput at our factories resulting from labor shortages. Increased shipments in our food service segment and through our large chain restaurant customers in North America that are served by our global segment, partially offset the volume decline. However, while volume increased in these channels, it was tempered by the Omicron variant’s negative effect on restaurant traffic, on the availability of labor to keep restaurants open and on our production facilities and supply chain. Gross profit in the quarter increased $24 million. Product and freight price increases, along with favorable mix more than offset the impact of higher costs on a per pound basis and lower sales volumes. We expanded gross margin by 110 basis points versus the prior year quarter and 270 basis points sequentially to more than 23%. Looking at our costs, double-digit inflation drove the increase in cost per pound for the…

Thanks, Bernadette. Let me just quickly reiterate our thoughts on the quarter by saying I am proud of how our Lamb Weston manufacturing, supply chain and commercial teams are continuing to take the right operating steps to manage through this challenging business environment. We are on track to deliver on our targets for the year and we remain committed to investing to support growth and create value for our stakeholders over the long-term. Thank you for joining us today and we are now ready to take your questions.

[Operator Instructions] We’ll take our first question from Peter Galbo with Bank of America.

Hey guys. Good morning. Thank you for taking the questions.

Good morning, Peter.

Hey.

Tom, I just wanted to get your thoughts kind of now that the summer 2022 crop has started to go into the ground, just how are you thinking about some of the different puts and takes, obviously, nobody has the perfect crystal ball, but it seems like drought in the Pac Northwest is still kind of relatively high. You are using the seed crop from last year of a poor crop. Heat last year was obviously an issue; fertilizer, like, how are you thinking about all those puts and takes encompassed in what’s gone in the ground?

Yes, Peter, so it’s early on in the planning and how we look at every crop year. Certainly, we look at history, but we plan it at average historical levels and in terms of the impact that we had last year because of the high heat which is highly abnormal, it’s early innings and we are going to have to really – we’ll monitor it. No impact from a seed standpoint, but as I said in my prepared remarks, as the crop progresses as we always do in July and October, we’ll give you an update. But we planned for an average yield quality crop year-over-year. So, we’ll adjust it as we learn more as the growing season progresses.

Got it. No that’s helpful. And Bernadette, maybe if I could ask on gross margins, in your prepared remarks, you mentioned the fourth quarter would follow kind of historical seasonality or a more normal historical seasonality. As we continue to process this kind of lower quality crop through the first half of next year, would you still expect, I guess, first quarter or second quarter seasonality to kind of come back into play as other elements of the business start to normalize?

Yeah, absolutely, Peter. The first half of next year will continue to be affected by this year’s poor crop. And then once we move into next year’s crop which as Tom mentioned, where planning will be average that’s when we should be able to get closer to those pre-pandemic margins.

Still there, Peter?

Yes, yes. Sorry, still here. No, thanks very much guys. I’ll pass it on.

Thank you. We’ll take our next question from Andrew Lazar with Barclays.

Good morning, everybody.

Good morning, Andrew.

Morning.

Hi. So I think, if I’m not mistaken you just mentioned that your – I guess, your anticipation will be that you still get back to sort of your more normalized margins in the second half of fiscal 2023. With some of the – just the recent news and knock on effects, the next wave of inflation for a lot of items even potatoes sort of out of the mix for a minute as those are contracted, I guess, how do you continue to sort have the comfort level and that is – that just you are seeing obviously the pricing goes through and therefore given what we’ve seen more recently in terms of incremental cost, there is the confidence that that more can be passed through in a timeframe that allows you to get back to those margins as you had initially expected or is there something else?

Yeah, Andrew, it’s couple things. Certainly the average crop is going to help that obviously, significantly. And as we plan our – we are in the middle of planning our fiscal 2023, we have a point of view on what inflation is going to be which I won’t get into until the next call as we wrap our plan for 2023 up. But we have – and have been executing our pricing actions and this – as we are all dealing with inflation is a challenge. But I am confident in how we’ve been executing and we are in the early innings of contract negotiations with some of our bigger customers and we are going to work – we’ll work through it and the team is doing a great job. So, I feel very confident we will pass through this inflation and we are going to get some help from the crop next year but if it comes in on an average level. So, those are really the two things that gives me a lot of confidence that we are going to get back to pre-pandemic margin levels and there is no indication right now that’s telling me that we are not. And so I feel really good about it.

Okay. And then, I realize you are in the early innings of some contract negotiations for the third of those large customer contracts that are coming up for renewal. For the remainder of them that aren’t not yet up for renewal, I know you’ve talked about the possibility of sort of, maybe a expanding – or kind of expanding the definition of what some of those sort of inflation escalators or how they are defined in those contracts to try and get some relief even for contracts where they are not up for renewals just yet? And I am just trying to get a sense of how sort of progress has been made there? Are you able to get some additional pricing through even where there is not, not a contract that’s up for renewal?

Yeah, I mean, we are having very robust conversations with those customers, Andrew. And we are partnering with them. We are working through it. And we are being very transparent with what’s – what our inflation is, what we are dealing with. And I would say those conversations have been very positive. Everybody understands the environment we are all working in. And so, again, the team is doing a great job having those conversations being very transparent with the customers, letting them know what we are dealing with and what is potentially coming out and when their contracts are coming due. So it’s a work in progress, but we are making progress.

Thank you.

Thank you. We’ll take our next question from Tom Palmer with JPMorgan.

Good morning. Thanks for the questions.

Good morning, Tom.

Good morning, Tom.

So, first I just wanted to ask on the potato side. When you consider yield losses and spot market purchases, what is your potato inflation? I am really just trying to understand how much of the 20% higher contracted rate might be offset by normalized yield per acre in your spot market purchases next year?

Yeah, Tom, we won’t get into our yield and our processing performance, those kind of things. We don’t talk about that. But the cost increase is 20%. The big impacts are two things to our P&L this year from a potato processing standpoint. It’s yield per acre, which is down because of the weather conditions. So we’ve had to procure more potatoes on the open market. And it’s no secret, we truck potatoes from the East Coast like other processors have and that costs more money obviously and it’s also how the quality of the potato is processed through our factories. So, the yield to make a pound of French fries, it takes more potatoes just because of the quality and size and all that. So, it’s a – we take the hit in two different areas. It’s yield per acre and it’s processing efficiency in our factories. And we haven’t disclosed what the overall impact is because we are still trying to understand and as we take these potatoes out of storage, typically this time of year, it’s always a cyclical issue because your quality of potatoes coming out of storage is less than when it’s coming out of our field. So we are still – we have an estimate on what the overall impact for the year is going to be, but we are still have two months to go here, two, three, four, five months to go in processing these potatoes.

Okay understood. And then, maybe switching just to the capital expansion plan, CapEx, I mean, quite a bit below your initial outlook. But you indicated in the prepared remarks that both plan expansions remain on track. So, what’s really causing the delays of this year and why is that not affecting the timing? Is it, there is just a ton of catch up coming next year and as long as that takes place you’ll still be on track?

Yes. That’s absolutely right. This is Bernadette. It’s just a matter of timing and when those equipment pieces are coming in. But based on our current projections and what we are seeing from our vendors, we are still on track with the estimated completion date. It’s just a function of timing between this and next year.

Great. Great. Thank you.

You bet.

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

Great. Thanks so much. So, Tom, just kind of a question on segment margins and kind of the differencing factors between let’s say food service and the global segment. If we look at food service now, op margin for Q3 actually already higher I believe than pre-pandemic which is very positive and obviously driven by pricing. The global side not so much, right. Thanks for a bit more time there and maybe just kind of ties into Andrew’s question on the contracted side, I guess, first, if we think about the go forward where pricing is now with food service, we are assuming kind of more normalized demand environment. In your perspective that that’s the margin that we – you hope you can retain but as you get into Q4, maybe next year, all things considered. And on the global side, even as you get into the back half of next year, even if the crop is or if they are more normalized and some of those costs roll off, should that global margin just be going up anyway just because of the external pricing would be getting from your other negotiations in that segment as you get through the summer? So I am just trying to get a sense of kind of margin potential on the go forward, even if the crop bottom well up?

That makes sense. Yeah, well, I – the plan is, as we look at our inflation, our plan for 2023, we are factoring in pricing actions and cost savings to offset all the inflation and to get our margins back to pre-pandemic levels. That’s where we are headed. And there is going to be puts and takes as we negotiate these contract prices with our customers. But again, the – it is dependent upon an average crop which we’ll know in the next six months where the crop is going to end up, but that’s where we are driving the business. And again, my confidence level is very high that we are going to continue to execute towards that based on how we’ve been executing with some of the – with the pricing actions we’ve taken today. And – but it’s going to take time. The global segments are laagered. We’ll get through the negotiations and you’ll see improvement in the back half in the global segment specifically.

Okay. Okay. And then, maybe just so understand this little bit better. Obviously, potatoes are contracted with the growers it’s got if the market but it’s more understood. If we are thinking out multi-year period, right, as you get to the end of this year, and then, let’s say you re-contract with those growers, if they are more some increased costs to the growers, right as we get to the end of this year for the forward. I mean, it’s still challenged that it’s kind of pass through pricing ability in the business would be still alive and well and the potential for further pricing, right, on the multi-year would still be possible? Right, it’s not that you would say, right now we have taken a lot of pricing. We feel like we are in a good spot. We have to be careful about it and it’s still very contingent or kind of what the cost of those potatoes would be on the go forward? Is that right?

Well, yes, it is and you got to – let me step back, you have to understand what we are doing from a pricing standpoint. We are just – we are pricing through inflation and it’s – as pervasive as I’ve ever seen it, a lot of us in the industry. So, when you think about that and you also think about the importance of French fries, our menu promo it’s a proper driver. So, it’s going to be a continuation, cost to grow is potentially going to go up and we’ll continue pricing just as we have in past years. So, it’s a question of, to me, there is an element that at some point as – if the cost continue to increase to the levels they are, what’s the elasticity of a French fry. And right now we have seen it. So, we’ll continue to run our game plan and we’ll adjust to the market down the road.

Alright. Super. Thank you.

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

Thank you. Good morning.

Good morning, Chris.

Hi, Chris.

Hi. I had a first question that’ll follow on to Rob’s question there. And you have another price increase going through, I guess, I think you have some food service in retail. It sounds like, that would take hold roughly in September or so, if we think about the timing it takes to get that through. I am just curious how to think about, is that related to cost that you are bearing now? Is it any way getting in front of what is going to be a higher potato cost next year and given the timing when this takes hold? So I just want to understand that’s price increase if I could?

Yes, Chris. This is Bernadette. It absolutely is related to the significant cost inflation that Tom was just referring to that we are seeing now and we are passing those costs through. And we’ll continue to monitor the environment and the inflation that we continue to see in packaging ingredients OAO et cetera, and make decisions in terms of when further pricing actions may be necessary to offset that significant inflation that we are seeing.

Did you say what percentage this price increase is?

No.

Do you want to?

Chris, we don’t disclose that.

Okay. Thank you. I had sort of one more question for us if I could, which is that if I am thinking about the piece of your global division that was affected by and you mentioned how was down 20 plus percent in volume. A quick math that says about a 4% drag on volume on the overall company? I just want to make sure, is that math in the right area there? And related to that more importantly, is export volume clearing anymore now? You are getting more on the road and maybe our competitor is coming in? Is anyone else that will come in, in and satisfy that volume?

Yeah, so, as it relates to the global volume, the math you did there is right in terms of the impact on the total company. And then, as we look at export volume, it is starting to increase. We are seeing a few more containers be available than what we saw during the third quarter. So that is a positive sign that it’s still much lower than what we’ve seen previously and what we’ve come to expect for that international business.

Okay. Thank you for your time today.

Thanks, Chris.

[Operator Instructions] We’ll take our next question from Adam Samuelson with Goldman Sachs.

Good morning, everyone. Thank you for taking my questions.

Good morning, Adam.

This is actually [Indiscernible] stepping in for Adam. I was wondering if you could provide some additional color on few items. If we think about the next 6 to 12 months, what are your expectations on cost inflation and what parts of your COGS basket become more or less inflationary compared to your prior costs?

Yeah, so, we’ve indicated we are up 20% of potato raw price. In terms of the overall basket inflation, we are right in the middle of putting together our 2023 plan. And we’ll give some more color on that in the upcoming earnings calls on what our overall view of inflation is for 2023.

That’s helpful. Thanks and if I could ask a follow-up, best performance in your JV compared to your base business, any differences in volume turns or inflationary pressures?

Yeah, as it relates to our joint venture, they are seeing very similar inflationary cost increases and then more recently certainly as a result of what’s going on between Russia and Ukraine, there have been large increases in prices for natural gas and then we’ve had to make some changes to the oil that’s used in that joint venture. But, absolutely, they are seeing the same impact on their business as what we are seeing here from an inflation standpoint.

Thanks, and congrats on the quarter.

Thank you.

We’ll take our next question from William Reuter with Bank of America.

Good morning. So, I know you contract for your raw material, sort for your raw potatoes, in terms of the other oils that are part of your cost of goods sold, other ingredients and packaging, what level of forward contracting purchases do you do there?

Yeah, so as it relates to our oil purchases and contracting as it relates to price, we have contracts in place for first quarter of 2023 and some of second quarter, but a pretty minimal amount. Beyond there, we don’t have any other contracts in place.

Perfect. And then, secondarily, given the delay in CapEx associated with the two expansion projects, do you have an early sense of even ballpark where CapEx could be for fiscal year 2023?

Yeah, we are in our planning process right now. So, we don’t have anything to share today. But certainly, we’ll provide you an update at our next earnings call.

I understand. Okay. Thank you.

Thank you.

At this time, that will conclude our question and answer session. I would like to turn the call back over to Mr. Congbalay for any additional or closing remarks.

Thanks for joining the call today. Happy to take any follow-up questions over next number of days. Please email me, so we can schedule a time. Happy Opening Day everybody, and kind of go from there. Thank you.

That will conclude today's call. We appreciate your participation.