Good day, everyone, and welcome to the Lamb Weston Third Quarter Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Dexter Congbalay. Please go ahead.

Good morning and thank you for joining us for Lamb Weston's third quarter 2023 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 that 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 an overview of the current operating environment, while Bernadette will provide details on our second quarter results and our updated fiscal 2023 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 delivered strong results in our fiscal third quarter as we continued to build good operating momentum. Specifically, sales grew 31%, while gross margin expanded in each of our core business segments. This in turn drove strong EBITDA and earnings per share growth. I want to thank the entire Lamb Weston team for their dedication and focus on serving our customers, so that together we delivered another great quarter and positioned us for a strong finish to the year. This thank you is also to our more than 1,500 colleagues in Europe, who are now officially members of the global Lamb Weston team after we've recently completed the purchase of the remaining interest in Lamb-Weston/Meijer. Lamb Weston Europe, Middle East and Africa or Lamb Weston EMEA add six factories and about 2 billion pounds of production capacity to our global manufacturing footprint. It strengthens our ability to serve customers in key markets around the world and it enhances a world-class management, operating and commercial team with deep knowledge of the frozen potato industry. We've kicked off the process to integrate Lamb Weston EMEA's operations and are excited to see that what we can deliver together both now and over the long-term. Before turning the call over to Bernadette, let me first provide some quick updates on the current operating environment. While the macro environment remains highly challenging overall french fry demand remains healthy. Total restaurant traffic improved versus the prior year quarter when traffic was negatively affected by the Omicron variant. QSR is essentially accounted for the entire growth in traffic, including strong growth across burger and chicken restaurant chains, which are significant contributors to driving fry demand. In contrast, traffic at casual dining and full service…

Thanks, Tom, and good morning, everyone. I want to also thank the Lamb Weston team for delivering another quarter of strong results and continuing to build good operating momentum across the company. This momentum has enabled us to raise our financial targets for the remainder of the year. I also want to add a warm welcome to the Lamb Weston EMEA team. Let's begin with our third quarter results. Sales in the third quarter were up 31% to $1.25 billion. Price/mix was up 31% as we continue to benefit from pricing actions across each of our core business segments to counter input and manufacturing cost inflation. The increase reflects the carryover impact of product pricing actions that we initiated in fiscal 2022, as well as pricing actions that we began implementing during this fiscal year. Our overall sales volumes were flat. While we increased shipments to our large QSR chain customers and to retail customers in North America, which generally reflects demand and restaurant traffic trends that Tom described earlier, our growth in volume was offset by a couple of factors. First, we continued efforts to strategically improve our product and customer mix by exiting certain lower price, lower-margin business. Second, and to a lesser extent, softer casual dining and full service restaurant traffic also affected volumes in the quarter, which is largely reflected in our Foodservice shipments. It's worth noting that in the quarter, we also continue to make progress in stabilizing our supply chain with better availability of production team members and key ingredients, as well as improved production forecasting. As a result, the impact on production in the quarter was relatively modest, which helped drive improvements in our customer fill rates versus our first and second quarters. This improvement is more apparent in our Retail and Foodservice…

Thanks, Bernadette. Let me sum it up by saying we are executing in this challenging operating environment and are confident in our increased financial targets for the year. We also continue to feel good about growth trends in the category and believe that the investments we're making in our people, new production capacity and infrastructure will have us well positioned to support sustainable profitable growth over the long-term. Thank you for joining us today, and we're now ready to take your questions.

Thank you. [Operator Instructions] We'll take your first question from Andrew Lazar from Barclays. Please go ahead, sir.

Great. Thanks so much. Good morning, everybody.

Good morning, Andrew.

Good morning, Andrew.

Yes. To start off, I know that Lamb Weston did not necessarily see pre-pandemic gross margins as a ceiling. But with margins now above pre-pandemic levels, excluding the recent transaction, of course, I guess what are the key factors that provide visibility to further margin expansion moving forward to the extent that, that's how you see it? And then I've just got a follow-up. Thanks.

Yes. Good morning, Andrew. This is Bernadette. As we look at our margins, I think the key piece that we're focused on now is our revenue growth management and our execution capabilities that Tom mentioned. We're focused on continuing to work on maximizing revenue, as well as margin and we'll continue to do that as we look across our markets and our sales channel to make sure that we're managing those.

I think you said in the fourth quarter, we shouldn't expect any incremental pricing actions. With grower costs expected to be up as you mentioned another 20% for the current coming crop, should we expect some incremental pricing going forward as I guess as we roll into fiscal ’24? Or have you implemented all that you need for the coming year? And with capacity constraints starting to ease, I guess what I'm getting at is, could we have a scenario in the coming fiscal year where you have both some incremental pricing and some positive volume growth as well, given constraints have been one of the main reasons for volume being flattish to down the last couple of quarters? Thank you.

Yes, Andrew, this is Tom. So a couple of things. As we noted, we have taken some pricing actions here at the end of the third quarter. The -- we're going to continue to evaluate as we roll up our plan for fiscal 2024, which starts in June, kind of, what the overall inflation number is going to be. And we are not at all in a deflationary period. Our crop cost is going to be up 20%. And so as we start evaluating the overall input cost complex, as we do every year, we're going to determine the pricing actions we may have to take. And the team and the marketing orders, we've done a very good job to offset inflation, we're going to continue to do that. And so as we noted in the prepared remarks, we've had to over the last 12, 15 months, do a lot of catch-up pricing just based on the nature of what our contract constraints were. And so I feel good about where we're at in terms of really getting back to more normalized margin levels before the pandemic. And we're going to continue to execute and evaluate what's going on in the inflationary input environment going forward, so that's first part. Second part, in terms of the overall volume, I feel good about where the category is. It's -- as we noted, QSRs are performing tremendously well in terms of traffic. Our Foodservice, so the casual dining segment, we're seeing some softness as we do when you have some economic things happening like is going on today, so people are trading down. We have rationalized our customer and product mix over the last 12 to 15 months, which is part of our revenue growth management initiative. And as we continue to evaluate opportunities in the marketplace, Andrew, I think, and get our operations running back to a higher throughput level, that's going to give us opportunities to take on business or going forward. So the other thing to remember is we've got a lot of capacity coming on. Our first capacity turn off is going to be this fall in China, so we're evaluating how that's going to look in terms of production shifts from North America to China. And then shortly after that, we'll have American falls, Argentina [Indiscernible] again over the next directionally 18 to 24 months. So we're getting prepared as we turn that capacity on to evaluate opportunities around the globe.

Great. Thank you so much.

Yes.

We'll hear next from Tom Palmer from JPMorgan.

Good morning, and thanks for the question.

Good morning, Tom.

Good morning.

Maybe I could just start off clarifying expectations for the Europe business. You noted normal EBITDA of about $100 million and then the fourth quarter guidance is pretty consistent with that. But I think the business has been doing a bit better than this over the past couple of quarters at least. Are there reasons such as certain costs that are not excluded from adjusted earnings or other cost headwinds or seasonality that might make this figure a bit lower in the fourth quarter? And then when we look at results this year, would the general assumption be that next year EBITDA grows year-over-year on top of that?

Yes. Good morning, Tom. As we take a look at our fourth quarter guidance that we provided, excluding EMEA, you will typically see a step down in our gross margins as you move from third quarter to fourth quarter just based on seasonality. And then we're also going to be lapping prior year price increases. And so we're going to see a deceleration of the effects of that as we continue to move forward. Again, we also mentioned that we did see some pricing pull forward as well. And so there's some effect of that, that you're noting in third quarter that we wouldn't see in fourth quarter. And as we always do, we take a step back and take a prudent approach as we guide to where we think we're going to end at the end of the fourth quarter. But those are the main triggers that are going to affect what you're seeing in guidance for the fourth quarter.

Understood. Thank you. And then just maybe on the gross margin, I know you noted, kind of, a more normal seasonal decline in the fourth quarter. I think a quarter ago, you were talking about maybe less than a normal quarterly decline in the fourth quarter. I know Bernadette, you mentioned it being prudent in your prepared remarks. Is there anything to consider that has shifted that expected cadence beyond that? I mean, for instance, was 3Q much better than you expected and therefore you're expecting more than normalization or anything with the timing of pricing, because it would seem like you're getting a bit of help at least on the retail side given the late quarter pricing action?

Yes, I think there was a couple of things. There was a little bit more pull forward and benefit in the prior quarter and then also we are seeing more open market purchases that we ended up bringing in at much higher prices just given the way that the crop ended up this year from a yield perspective. So those are the two items that I would say are impacting that the greatest.

Great. Thank you.

Adam Samuelson from Goldman Sachs. Your line is open.

Yes. Thank you. Good morning, everyone.

Good morning, Adam.

Good morning.

Good morning. So, the first question is on Europe and as you can kind of roll that now into the consolidated business. Bernadette, you alluded to the fourth quarter guidance for the business, kind of, reflecting, kind of, learning consistent with that pre-pandemic EUR100 million given our run rate. Do you have the actual trailing 12-months or what the fiscal ‘23 EBITDA would be for the JV on a 100% basis just as a point of reference? And as we think about moving into fiscal ‘24, seem like fiscal ‘23 is above that pre-pandemic run rate, kind of, reasons why, kind of, profitability would -- could be lower year-on-year or higher? Just help us think about, kind of, some of the key moving pieces you're thinking about the European business over the next 12-months?

Yes, thanks for the question, Adam. A couple of responses to that, I would say first, as we look at the fourth quarter guidance, that's what I would take to look at the normalized amount for this year in terms of being that EUR100 million on a run rate basis. And then certainly there's going to be a number of things as we bring EMEA into our operations that we're looking forward to having that one phase to the customer, introducing our revenue growth management capabilities and bringing in our supply chain common methodologies and ways of working that we're looking to work on over time as we integrate this business with ours to bring in more upside as we continue to progress. But it’s not going to happen overnight, it’s going to happen over time. But those are some of the opportunities that we see to be able to continue to grow this business.

Yes. And I'll just add, Adam. We have a tremendous management team running that business and they've managed it through a tremendous amount of volatility over the last 15 months with all the things that are going on. And we -- I'm more confident now with the trajectory of EMEA in that business and the foundation that the management team has put in place and the overall global reach we now have to serve our customers in all the international markets. So we have a lot to do to get that business integrated into one global team. And over time, I'm super confident where the capabilities is going to allow us to really serve our customers in a different manner than we ever have. So it's a tremendous accomplishment what the team has done with that business. I can't emphasize that enough. We got a great leadership team over there and I'm excited and looking forward to what we're going to do as we integrate that business going forward.

All right. That's helpful color. And then just on the CapEx, which with one quarter left in the year was a pretty sizable, kind of, increase in the outlook even inclusive of the Groningen CapEx at the JV that you are now, kind of, consolidating. Does this change any of the timing around the Argentine, Idaho or Chinese capacity or the things you're doing in the rest of the network or capabilities around coatings or battering that, kind of, you're pulling forward. Just help us think about, kind of, magnitude of that CapEx step up? Well, how it's been, kind of, timing of new capacity and what should we think about as a range for the consolidated CapEx for next year even at a low high level?

Yes, no so as we take a look at our capital spending, there were a number of items where we have long lead times just given the supply chain dynamics that are out there. And we've been able to accelerate some of those things in terms of equipment and other pieces to come in, which is being reflected in our overall capital spending for this year. Really happy with that, but that's not going to bring on this capacity any sooner as we continue to build those factories. We just wanted to make sure that we have the items when needed to make sure that we would bring these up on time. So no change when we're going to bring that capacity online. As we look to next year, certainly as we do every year-end, when we give our fourth quarter guidance, we'll update with our capital spending at that time, but we'll have another year of significant capital expenditures given bringing on over 1 billion pounds in the next 18 to 24 months with all of the capacity expansions that we referred to.

All right. That's all really helpful, I'll pass it on.

Yes. Hey, Adam, it's [Indiscernible], just kind of for everybody. Just kind of here's the timing of the capacity coming online. China is going to be sometime fall of ‘23, American falls, Idaho is going to be spring of ‘24, Argentina is fall of ‘24, right? And then quite again in the Netherlands initial thoughts right now are going to be early calendar ‘25. Is, kind of -- yes, early to mid, that one's a little bit more influx. But that's kind of where the timing is right now.

Thank you.

[Operator Instructions] We'll hear next from Peter Galbo from Bank of America.

Hey, guys. Good morning. Thanks for taking the question.

Good morning, Peter.

Good morning, Peter.

Tom, I think in your comments you mentioned the incremental pricing in retail that you took, kind of, towards the end of 3Q. In global, it seems like there was no more incremental that was at least expected to come this year, but maybe you could opine a little bit just on Foodservice maybe in one area where we didn't hear about, if there's any incremental pricing actions? And then in addition to that, just would love any, kind of, first thoughts as plantings have gone into the ground here in early April?

Yes. So in terms of the Foodservice segment, we've done a really good job over the past year or two, kind of, catch up to our inflation. And so I feel comfortable where we're at on that. We're -- as I said earlier, we're evaluating as we look to our fiscal 2024, our input cost inflation and how that's going to materialize. And then as we do every year, then we'll get together and think about what we need to do to offset inflation. And I can't say this enough, we're still in an inflationary environment in our business. And so as we have in the past and we'll continue to do, we're going to evaluate our pricing actions in all segments to offset inflation and that's, kind of, what we're going to do. So…

Yes, so with the Foodservice increase, there'll just be a small impact in the fourth quarter given the timing of that announcement. And then the only other thing is, as it relates to the crop, we are currently in the process of planting there, the Columbia Basin in Idaho, so we'll provide more of an update on our next call.

Okay, no that's helpful. And then maybe just to follow-up on Adam's question on CapEx. Obviously, kind of, from a position of strength, you guys are accelerating some of the spend. Bernadette, it didn't sound like you were, kind of, pulling forward any spend from next year, but maybe just wanted to clarify that? And then just in a broader context on, kind of, capital allocation with the CapEx spend being as high as it is and maybe you're going to move past through a lot of that. The debt's turned out pretty far at this point. You started to buy back a little bit of stock in the quarter. The dividend yield is pretty low relative to peers, just maybe you can kind of comment on how you're seeing the setup for some of the other pillars within capital allocation? Thanks very much.

Yes. So if I take the latter question first, As Tom mentioned, we're still really confident in the strength of this category and we're going to continue to invest for the long-term. As it relates to our cash position and our overall low debt to equity ratio, we want to maintain flexibility for the long-term should certain things happen or open up for us from an M&A or other perspective. And so we feel good about where we're at. So our capital allocation hasn't changed, and we're going to continue to take into consideration share buybacks as we have in the past to offset management dilution. But as we've also shown, we will opportunistically buyback when it makes sense. And then just to confirm your first question on the capital spending, we haven't necessarily pulled much forward in terms of total capital spending. We've got a lot of large projects happening over the next 18 to 24 months. And some of that was just on some long lead time equipment.

Got it. Thanks very much guys.

Rob Dickerson from Jefferies. Your line is open.

Great. Thanks so much. Maybe just my first question, more mechanical [Indiscernible]. It looks like the interest expense expectation for the year hasn't changed, but clearly taking on the term loan and then maybe some assumed pre-existing debt I would think from Meijer. Maybe just, kind of, quickly explain, so maybe I just missed it in the prepared remarks, kind of how that interest expense doesn't change with the assumption of debt?

Yes. No, that's a great question. What we're finding is that we're having more capitalized interest related to some of these heavy capital projects, which is putting more of that -- which is offsetting some of that interest expense overall. So that's all that you're seeing there.

Got it. So that -- but that would probably more like a Q4 event like we would still assume that even though you're not guiding that there would be incremental debt and interest given the deal. Just thinking about the mechanics of the actual acquisition?

Yes, you're exactly right. You're thinking about it right.

Okay, super. And then maybe just Tom and Bern, just kind of we're talking about a lot of commentary around that $100 million on the Meijer -- sorry, yes, on the Meijer JV and kind of what the potential run rate could be? Maybe just another kind of way to ask it is just that seed number we've been -- we've all been talking about vis-à-vis, kind of, pre-pandemic? But then also there are all these synergies or some synergies that should come through. So I'm just curious like over the past few months, you've actually closed the transaction, do you feel like you have better line of sight on, kind of, synergy potential without having to quantify them over the next two to three years?

Yes. So, again, we -- the business is on a much better trajectory than it has been over the last 12-months and that's a testament to terrific management team we have that have implemented a number of different strategies to get that business back on track. I fully expect over the next 12-months that we will improve our run rate that we've indicated prior, and I'm not going to give a specific number, but I'm more confident now than ever that this -- where that business is going and the trajectory that the team and has got that business on and the synergies and integration that we're going to do over the next 12-months is going to well position EMEA better than it ever has. And we're not going to give specific numbers, but I will tell you I'm confident that we will move that business in a direction that that I believe is much better than what we've indicated.

Got it. super. And then just quickly, maybe a little bit more fun to talk about. I saw your -- let's say your ability to enter Domino's with product, I guess, is not fried. It seems like it's more baked. Maybe if you could just spend a minute, kind of, speaking, kind of, to the technology that maybe you have on a proprietary basis that allows you to do that? And then is that something that I would assume you would clearly try to attack with other customers that let's say don't have fryers? That's it. Thanks.

Yes. So I'm not going to get into all the product technology, but we're super excited about that product. And how it's performing, it's performing better-than-expected. I've been talking about that for a long time in terms of getting into non-fry channels and that was a big first step. We've done that with other well-known chains also, and we're going continue to monitor it, we're going to work with non-fry channel customers. As we do today, we'll continue to do that and we have a great innovation team working on non-fried potato products, but those are long lead time items. But I will tell you what is happening with that particular product is exciting and it's performing amazingly. So, we'll continue to monitor it. But it's been a long time comment and hats off to the team that put a lot of years of work into getting that to market and it's great to see it pay off and really do well in the marketplace.

Got it, super. Thanks so much.

[Operator Instructions] We'll hear next from William Reuter from Bank of America.

Good morning. I just -- I have two questions, the first is you mentioned M&A, you also are active in building a handful of new facilities. You're going to be consolidating the JV and you talked about a lot of the operational changes you're going to make there? I guess, do you feel like you're at the point now where you still could be active? And I guess, what types of businesses or where within the supply chain do you expect that you would be more active?

Yes. So, the intent and part of our strategic playbook is we're always going to be evaluating potential acquisitions within the potato category, that's the number one focus. Category strong, it's good returns, great investment, it's growing and we have not only invested in expanding our current manufacturing footprint around the globe as we're doing with the four projects we have going on. But to the point Bernadette made earlier, it's important for me and the company to make sure we have a strong balance sheet, so if an opportunity comes up, we'll be able to execute it. And so that's always going to be on the table. And I've been consistent in that over the past six years. So, I feel good about where our capital -- our balance sheet is. We're investing to expand our footprint, it’s right on strategy. We're positioning ourselves in the industry to support our customers in all the markets around the world. I feel good about where we're at.

Okay. And then my second question, is there any way for you to provide some additional colour around what the impact of open market purchases were this year? Just trying to think about in the event that you're able to fill that with contracted purchases next year, what that tailwind could be?

Yes, we haven't quantified the impact of those open market purchases. A little bit different this year in that we were short on yield versus last year there was an impact for yield and quality. While we are needing to bring in fewer open market purchases, the cost this year is significantly higher. So we have not quantified that, but there is a meaningful impact this year similar to last year.

Great. Okay. That's all for me. Thank you.

Hey, Bill, one other thing. I mean, the reason that we had to go to the open market is because crop yields weren't good this year. And typically, we have an average crop and you really don't have to go into the open market that much at all.

Great. Thank you.

We do have a follow-up from Andrew Lazar from Barclays. Please go ahead.

Thanks so much. Just a super quick one. Tom, when you announced the joint venture acquisition, with Meijer. I think one of the things you'd mentioned was that you also hope that or intended that this action would, kind of, send a message right to the broader, sort of, European, sort of, competitive environment there that you were certainly looking for there to be over time the potential for further consolidation in what is a much more fragmented, right operating theatre in Europe? And I'm just curious if this transaction now that you've closed it in a couple of months or since announcing it, whether the -- I don't know, the dialogue or pace of conversations maybe with others has picked up more generally. We saw another one outside of you, right, the transaction that happened, whatever it was a couple of months ago in Belgium. I'm just curious if your expectation would be that we're likely to see more somewhat sooner or not and if you're hearing more chatter and dialogue? Thanks.

Yes, Andrew, great question. Obviously, I can't get into what conversations are or not happening, but consistent, Andrew, with how I position this over the last several years is we’re continuing to be as active as we can. I think the intention of what I would love to do from an industry standpoint is known and certainly transaction with Lamb Weston Meijer, people took notice, but we'll -- I'll leave it at that and hopefully the fragmentation of the market it's a private sector and you got to -- people got to come to the table and but I'm pretty sure they're clear they know what I want to do.

Thank you.

That does conclude today's Q&A portion of today's conference. I would like to turn the conference back over to Dexter for any additional or closing comments.

Thanks for joining the call this morning. If you want to have any follow-up sessions, please feel to send an e-mail and [Technical Difficulty] time. Thanks for everybody for joining the call. Thank you.

That does conclude today's teleconference. We thank you all for your participation. You may now disconnect.