Welcome to the Lamb Weston First Quarter 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 of Investor Relations for Lamb Weston. Please go ahead.

Good morning and thank you for joining us for Lamb Weston’s first quarter earnings call. This morning, we issued our earnings press release which is available on our website, lambweston.com. Please note that during our remarks, we’ll make some forward-looking statements about the Company’s performance. These statements are based on how we see things today. Actual results may differ materially due to risks and uncertainties. Please refer to the cautionary statements and risk factors contained in our filings with the SEC for more details on our forward-looking statements. Some of today’s remarks include non-GAAP financial measures. These non-GAAP financial measures should not be considered a replacement for and should be read together with our GAAP results. You can find the GAAP to non-GAAP reconciliations in our earnings release. With me today are Tom Werner, our President and Chief Executive Officer; and Rob McNutt, our Chief Financial Officer. Tom will provide an overview of our overall performance and the operating environments in North America and Europe. Rob will then provide the details on our first quarter results and our fiscal 2019 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. We delivered a strong start to the year reflecting our continued focus on execution, as well as our commitment to invest in supporting our customers and our growth over the long-term. Our performance in the quarter also provides us with the solid foundation to deliver on our full year commitments. Let me take you through some of the highlights. Sales increased 12% with strong growth in each of our core segments. Adjusted EBITDA including unconsolidated joint ventures increased 11% to $213 million driven by sales and gross profit growth, and we generated nearly $230 million of cash flow from operations driven by strong earnings growth and working capital management. These results reflect how well our commercial and supply chain teams continue to execute on our strategic and operational objectives. For example, in our Global segment, we drove strong volume growth by capitalizing on some limited time offering opportunities in both the U.S. and internationally. The team also continued to drive growth by supporting our chain restaurant customers in North America and increasing exports. In our Foodservice segment, customer response to our shift to a direct sales model has been positive. We will continue to strengthen these relationships and we believe we are well-positioned to begin to drive incremental volume. In Retail, our Grown in Idaho, Alexia, and licensed brand products performed well as we continued to build distribution and gain share. And finally, our supply chain team again drove cost savings and operated our assets effectively while maintaining customer service rates. In addition, the team continued to make great progress on the construction of our new 300 million pound french fry line in Hermiston Oregon. That line remains on track to be operational in May of…

Thanks, Tom and good morning everyone. As Tom noted, we are pleased with our first quarter results and remain confident in our full year outlook. Specifically in the quarter, net sales increased 12% to $915 million. Price mix was up 8% as we continue to benefit from pricing structures in our Global segment contracts renewed last year, as well as from carryover pricing and mix improvement actions in our Foodservice and Retail segments. Volume increased 4% led by growth in our Global and Retail segments. Gross profit increased 17% to $231 million. Higher price mix, volume growth, and supply chain efficiency savings drove the increase more than offsetting the impact of higher transportation and warehousing costs, input and manufacturing cost inflation, and higher depreciation expense, primarily associated with our new production line in Richland, which started up in the second quarter of fiscal 2018. In addition, gross profit includes about $6 million loss related to unrealized mark-to-market adjustments and realized settlements associated with commodity hedging contracts in the current quarter as opposed to a $3 million gain related to the contracts in the prior-year period. Our gross margin percentage expanded 120 basis points to more than 25%. SG&A expense excluding items impacting comparability increased $22 million to $78 million. About $15 million of that increase was driven by a few items. First, about $7 million was due to unfavorable foreign exchange while some of that was transaction related, most was translation related to normal revaluation of intercompany balances. Second, about $5 million was due to higher incentive compensation cost, the majority of this relates to share-based compensation expense reflecting the increase in our stock price, as well as the absolute number of share-based awards outstanding related to post-spin equity grants. And third, while we increased advertising and promotional support by…

Thanks, Rob. Let me quickly sum up by saying that, we are pleased with our strong financial results in the quarter. We are committed to strategically investing in our capacity, infrastructure and capabilities to support our customers, as well as our future growth and operating efficiencies and despite some near-term volatility in Europe, we’ve remained well positioned to deliver our fiscal 2019 targets as we continue to execute on our strategic and financial objectives and create value for all our stakeholders. I want to thank you for your interest in Lamb Weston and now we are happy to take your questions.

[Operator Instructions] And we’ll go first to Bryan Spillane with Bank of America.

Hey, good morning everyone.

Good morning.

Good morning, Bryan.

Couple questions, I guess first, just in terms of sort of the situation in Europe, can you give us a sense of kind of, where you stand versus, maybe some of your larger competitors in terms of being able to cope with this? I guess, what I was trying to drive that was, do you have less fewer potatoes in storage versus some of your competitors or some other sort of mitigating factor that might either enable you to gain share or lose share in this situation?

Thanks, Bryan. It’s Tom. I think, as we continue to evaluate the situation in Europe, the way we are handling it is, as I stated earlier, we are working across our network to make sure, first and foremost that we are servicing our customers and in terms of how the industry is going to be impacted, it’s going to be very different within our competitive set. The good news is, for us, with our global networks, we have more flexibility to service our customers. The team in Europe is doing a terrific job making sure that as we look at the crop and understand how the quality and the yield is going to play out, we’ve taken actions to make sure that we have potatoes available to service our customers, and again where we can we are shipping some of that production to the U.S. to make sure that we are servicing our customers. So, we are running our playbook. The other folks, the other competitors, they are taking actions too. So, it’s really just a wait and see and make sure we understand how this is going to play out.

All right. Thank you. And then, just, one other one, related to the market in North America, if you kind of look at the Global segment and then in Foodservice, the independent restaurants, I think one of the things that – one of the questions we have fielded quite a bit over the course of this quarter was this concern in general that maybe things were slowing, especially among some of the big QSRs. So, could you just give us a sense of, if you kind of think about that collective universe, just kind of what’s happening from a demand perspective and any color maybe that you might have, maybe QSR versus casual dining versus independents would be helpful. Thank you.

Yes, Bryan, I would tell you, based on the data we look at, June, July, August was one of the best industry traffic quarters that we’ve seen in long time across the entire restaurant industry. So, it was a good quarter and in terms of people going out to eat across most all the segments and that’s certainly reflective in our results for this quarter.

Okay, thank you.

We’ll go next to Andrew Lazar with Barclays.

Good morning everybody.

Good morning, Andrew.

Tom, you referenced some of the issues in fiscal 2017, I think in discussing the lag between higher costs and pricing actions. I guess, with that mind, I think in 2017, you mentioned the equity method earnings were flat year-over-year and then in 2018, this line item obviously increased dramatically, I think up over like 50% to $82 million or so. So, I guess, just based on your experience, then and what you know now and some of the remedial actions that you are obviously aggressively taking to deal with things in Europe, I guess, are there any key reasons that are maybe very different structurally that would prevent Lamb from seeing, not exactly that type of recovery, but a sizable recovery in magnitude in fiscal 2020 like we saw in 2018 versus 2017 in the equity income method line.

Andrew, I would say, it’s going to be pretty similar and the key thing here again is, we still have to get the potatoes out of the ground, see what the quality of the yield is, but the lag and how this all is going to play out is, we are taking actions that are going to remediate some of the difficulties we are having with the potato crop and the timing of our pricing actions versus the cost, there is always a little bit of a lag, but typically, it should be very similar to how 2017, 2018 played out in terms of cost and then recovery.

Got it. That’s helpful. Thank you. And then, just as we think about the industry maybe doing its best to shift to source some of the supply to Europe from North America to help service those customers. If that does become the case, I assume that always well for even tighter supply with respect to the incremental capacity coming online and therefore, maybe continuing to sort of support, I guess, this supply – this tight sort of supply/demand environment. Would that – do you think that’s an accurate way to think about it?

Andrew, I think it is. But this is the beauty of this business, when you have a situation like this, you work through it this year and you start over. So, it’s going to be a bit of a one year situation we are dealing with and there will be some movement like I said earlier, with some production we are going to move within North America that help supplement the European situation. But, once we get through this crop, we start all over. So, all bets are off so to speak as we start the 2019 crop year.

Yes, understood. Thanks very much, Tom.

Yes.

We’ll go next to Adam Samuelson with Goldman Sachs

Yes, thanks. Good morning everyone.

Yes, good morning, Adam.

Good morning, Adam.

Maybe just kind of following up on Andrew’s question in kind of a different light, just clear that the pressure in Europe this year, the base business in North America is offsetting as well as some of the actions you are taking in Europe to mitigate the cost pressures. But is there anyway just to dimensionalize kind of what incremental pressure you’ve kind of absorbed in Europe in the guidance that you gave you, you said flat now down. Just want to make sure we are thinking about the magnitude properly because as you kind of alluded to as we move past this crop into the next crop, next year assuming more normal conditions the business is in a better position, just want to make sure we understand kind of that magnitude.

Yes, Adam, we don’t – a couple of pieces. One, as Tom mentioned, the crop is still coming out of the ground in Europe, so we have to fully assess that. Secondly, the actions that we are taking, especially related to pricing are in flight today and so we will see how that plays out over time. And frankly, I don’t want to get into detailed forecasting throughout the income statement. I don’t think that that makes sense for us. So, again, the overall focus is that, continue to deliver that 860 to 870 guidance.

Okay. All right. That’s helpful and then, maybe just going back to the base business in the Global segment. You alluded to limited time offers kind of – half of the volume growth in the quarter and also a contributor to the price mix. Can you talk what the visibility that you have looking into the balance of the year on LTO activity with some of your major partners there both domestically and overseas and I mean, from a margin perspective, that seems like it’s been a nice tailwind and kind of visibility that could continue?

Yes, certainly, Adam, we are working hand-in-hand with our customers. I am not going to get into specifics. But we do have line of sight to what their plans are for the balance of the year and we’ve reflected that into our outlook.

Is the activity level that you saw in the fiscal first quarter kind of, is that, abnormally higher that – kind of thinking about that kind of runrate prospectively reasonable?

Hey, it’s Dexter. We don’t want to get into specifics on basically how much we do on LTOs every single quarter. We do have LTOs almost every single quarter when we report. So I just don’t want to get into that type of detail. Just a little bit on the back half of this year as you know that, we did talk about this a little bit in our prepared remarks, but starting Q3, we had a very strong quarter both in our Global segment and in our Retail segment, in our Global in particular had some strong activity in LTOs. So, just keep that in mind in terms from a modeling standpoint.

Understood. I appreciate. Thanks.

We’ll go next to Akshay Jagdale with Jefferies.

Hey, good morning. I just wanted to ask about the top-line guidance, right. So, you are to get to 5% mid-single-digits, the rest of the year, would that could be like 2.6%. I know you – there is a lot of moving parts right now and it’s still early. But, how are we going to get there? Because the next quarter seems to be one where you should have similar price mix of this quarter just because of the way you are going to be lapping timing-wise some of the initiatives in Global. So can you help me understand your guidance and how much of this is conservatism given its early stages so?

Yes, Akshay, Rob. In terms of the outlook, again, as Dexter just mentioned, we had some tailwinds in the back half of the year on both top-line and bottom-line last year. So, the comps are little tougher. And again, as you say, it’s – this is Q1 and so we think it’s best at this point in the year to be prudent in terms of our outlook and guidance and so, that’s why we elected to keep it as we had initially indicated.

Sounds good. And then, just, I know you don’t want to be specific for a number of reasons on various items, but just high level if you could give some qualitative commentary? It seems to me that your guidance today obviously accounts for some negative impacts from the European JV. But I am not sure if it takes into account any positive impacts related to that as it relates to your export business or incremental pricing as a result of what’s happening in Europe. Is that fair? I mean, are you accounting for any gains in your guidance related to Europe in North America right now?

Akshay, it’s Tom. I would say, we certainly have a point of view on all the moving pieces right now which is we’ve taken our estimate in our guidance and I think, the important thing here to remember is, in sixty days, we are going to have a pretty clear understanding of what we are dealing with in Europe. And when we have our January call, we will give clear guidance as to the impacts pluses and minuses, both in Europe and potential opportunities that could be realized in our North American business in some of these international markets where the European competitors may have a problem servicing those markets. So, the bottom-line is, it’s just going to take 30 to 60 days to understand what we are dealing with. We have reflected our best estimate in our outlook today and we’ll update our investors in January as this thing starts to become more clear.

Got it. One last one, it’s probably for Rob. The information systems investments typically when companies go through that, there is some disruptions. Can you give us a sense of what the plan is and how you are accounting for the uncertainty that comes with that kind of change? Thank you.

Yes. Sure, Akshay. And again, the planning related to this, I mean, I have done a few of these over the course of my career in different companies and our CIO, Don Barber has done a few of these in the course of his career. And so, I think we’ve seen those potential disruptions and so, it’s a matter of good deliberate planning and just working through the process. And so, again, these things are never perfect, but the objectives that we have in mind and we’ve successfully been able to do this in the past is, do not disrupt the business, so.

Perfect. I’ll pass it on. Thank you.

We’ll go next to Andrew Carter with Stifel.

Good morning guys.

Good morning, Andrew.

Hey guys. Could you all give us an update on your capacity utilization kind of your estimate for the industry and in particular just if you had the capacity out there to take advantage of any shortfalls from your European competitors caused by the adverse conditions in Europe?

Andrew, I would say, our capacity utilization has been similar to what it’s been the last couple of years. We were running at a high utilization rates. The industry we believe continues to operate at high utilization rates. That’s – the biggest priority right now is get our Hermiston line up and running and that’s on track to come online in May of 2019. But we have not – there is nothing that’s changed from a capacity utilization significantly in the last two years. So, everybody is running wide open and we are doing some things from a maintenance standpoint, moving some things around to support our customers. So, we continue to operate at a high level. The industry continues to operate at high levels and that’s going to – with this situation in Europe, that’s going to pressure some areas in the industry in terms of capacity.

Got it. It’s helpful. Second question, does your guidance contemplate any incremental pricing actions particularly on smaller foodservice customers? I know, you are not going to talk about prospective pricing. But we just want to understand how another round of contract negotiations could affect your pricing for the year and have any incremental pricing actions had been announced?

Andrew, I would say, our outlook, we certainly have contemplated the things that we can do in the market in terms of pricing and some pricing actions we’ve taken. We are in the middle of some few contract negotiations right now. So, we have folded that into our outlook. So, right now, our best estimate, again is, has taken all that into consideration when we are guiding for the full year and any additional things we may do to offset any pressures of the business, that’s just normal course of business going forward.

Thanks. I’ll pass it on.

Yes.

We’ll go next to Michael Gallo with C.L. King.

Hi, good morning.

Hi.

I wanted to just delve in on - again on Europe and speak to whether you see perhaps some M&A opportunities emerging in this. I would think that there will be a number of distressed producers and obviously you have an opportunity to certainly grow your share that way. So, is that something you are kind of stepping up focus? Is that’s something you are focused on and how should we expect to pursue that? Thanks.

Yes, Michael, it was always been a focus. As I have stated in the past, we are certainly interested in opportunities in Europe from an M&A perspective. This is going to pressure some of the competitors and as you can imagine, we are as active as we can be. But those things are hard to – it’s always hard to predict when that’s going to happen. But this, who knows, it may give us an opportunity with the situation that’s going on and if some shakes loose, we are going to be active in it.

Thank you.

We’ll go next to Carla Casella with J.P. Morgan.

Hi, on that same front on the retail side of the business, can you just talk about your strategy there inside of your business where you consider selling to invest more heavily in the Foodservice and Global business?

Carla, I am a 100% committed to our Retail business. It plays an important part within our network in terms of balancing out the overall potato crop based on some of the retail products we make. So I have no interest in divesting any retail business. We are committed to it. We launched Grown in Idaho. It’s been an awesome launch and we are gaining share and right now, based on how we look at the category with all of our private-label license brands, Grown in Idaho, we are the share leader in the category and it’s growing. So I am committed to it. Team does a great job and I have no interest in divesting that.

Okay, great and I wasn’t suggesting that that – this does more than that frozen category is hot right now. I know there is probably a lot of demand. Just one clarification on the CapEx for the new facility that will all be spent by May, but will it be lumpy to the year or give a sense for the timing of that CapEx?

Yes, we – that – just to clarify, the cash spend won’t all done by the year end necessarily. The line will be up and running by May, but there is typically some carryover on that because of payment terms and needing to hit performance milestones and so forth. But in terms of the timing of that, we haven’t talked about how lumpy that’s going to be on capital spending we have forecasted quarter-by-quarter on that, so.

Okay, but that’s all – that was the forecast that was included in the guidance for 2019 or was that the total 200 spend over the period - over the restructuring?

Yes, 250 is the total cost. 360 is our total program for this year.

Okay.

So, part of that 250 or a big chunk of that 250 is going to be spent in this fiscal year.

200 of it, yes, it’s 200 – with the 250.

And the SG&A, the SG&A increase that you talked about, you have significant increase in SG&A. We saw that this quarter. Is that something that would be that is lumpy through the year or it looks like, it maybe front-end loaded? Am I reading that correctly? Or could we see similar increases as we go into the back half?

Yes, we had indicated that we were going to have increases over the year related to one, the standalone company issues and then, some of the investments we are making specifically in IT, infrastructure and systems and so forth. So we anticipate that SG&A is going to be higher for the full year and that was included in those guidance numbers. As I mentioned, there are some lumpy things that flows through SG&A including FX, including things like equity compensation when stock price moves around that so forth. So there is lumpiness from things like that. But we expect SG&A to be elevated over the course of the year.

Okay, great. Thank you.

And that concludes today’s question and answer session. I would like to turn the call back over to Mr. Congbalay for any additional or closing remarks.

Hi, it’s Dexter. Any questions or follow-ups, just send me an email probably be the best way to get me and we can schedule a quick call. Other than that, thanks to everybody for joining us for our call today.

And that concludes today’s presentation. Thank you for your participation. You may now disconnect.