Good day, and welcome to the Lamb Weston Second Quarter 2020 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 second quarter 2020 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 and due to risks and uncertainties. Please refer to the cautionary statements and risk factors contained in our filings with the SEC for more details on our forward-looking statements. Some of today's remarks include non-GAAP financial measures. These non-GAAP financial measures should not be considered a replacement for, and should be read together with, our GAAP results. You can find the GAAP to non-GAAP reconciliations in our earnings release. With me today are Tom Werner, our President and Chief Executive Officer; and Rob McNutt, our Chief Financial Officer. Tom will provide an overview of our performance, some recent capital allocation actions, and an update on the current operating environment. Rob will then provide the details on our second quarter results and our updated fiscal 2020 outlook. With that, let me now turn the call over to Tom.

Thank you, Dexter. Happy New Year everyone and thank you for joining our call today. We delivered another strong quarter as we continue to execute well, specifically sales increased 12% behind strong volume growth and favorable price mix in each of our core business segments. EBITDA, including unconsolidated joint ventures increased 17% while adjusted diluted earnings per share increased 19%, and in the first half of the year we generated $345 million of cash flow from operations. Because of our strong year-to-date results and good operating momentum, we’ve raised our fiscal 2020 outlook for both sales and EBITDA. As Dexter mentioned, I’d like to update you on some capital allocation actions we’ve recently taken, as well as our thoughts on the potato crop in the current operating environment. On capital allocation, in October we acquired a 50% ownership interest in a new joint venture in Argentina. This JV will provide us better access to a strategic and growing market where we have been under-represented. Before this investment, our market share in South America was less than 2%. While this JV is a modest side operation today, it provides a good base for expansion to serve the broader South American market with a low-cost high-quality product. This should enable us to drive faster share growth over the long-term. We also remain committed to reinvesting capital back in this business to support customer growth. We’ve added three new French fry lines since 2014. And despite these additions, our current capacity utilization is above our targeted operating rates, due to recent demand growth being faster than historical averages. While we are not prepared to announce any capacity expansion projects today, we are aggressively evaluating opportunities to expand production capacity inside and outside North America to support our customers growth. We look forward to…

Thanks, Tom. Good morning everyone. As Tom noted, we delivered another strong performance in the quarter and for the first half of the year. Specifically, in the quarter, net sales increased 12% to $1.019 billion with volume growth and favorable price mix in each of our core business segments. Volume increased 10%, led by growth in our Global and Food-Service segments. Our two acquisitions in Australia, Marvel Packers and Ready Meals, added about a point and half of volume growth. In addition, we had a couple of extra shipping days than we had in the second quarter of fiscal 2019, due to the timing of Thanksgiving. These extra couple of days contribute about another point of volume growth. As a result, this will pose a headwind to our Q3 results on a year-over-year basis. Price mix was up 2%, due to pricing actions and favorable mix. Our strong sales growth drove a $36 million or 14% increase in gross profit. Favorable price mix, volume growth, along with lower transportation cost drove the increase, more than offsetting the impact of higher manufacturing costs due to inefficiencies and higher depreciation expense associated with our new production line in Hermiston. In addition, the increase in gross profit includes a $4 million benefit from unrealized mark-to-market adjustments related to commodity hedging contracts. That’s compared to a $2 million loss in the prior year period. Our gross margin percentage increased about 65 basis points to 28%. Excluding the mark-to-market adjustments, it was up about five points. While we made a lot of progress improving our plant operating performance from the first quarter, in the second quarter, we continue to incur higher than normal periods of unscheduled operating downtimes, which affected our production levels. This impacted fixed cost absorption, raised overall maintenance costs, and lowered recovery…

Thank you, Rob. Let me sum up by saying, we’re pleased with our strong first half performance as we continue to execute well on a generally favorable environment. We’ve raised our sales and EBITDA targets for the full year and remain prudent with our updated outlook. We are well-positioned with our raw potato supply to deliver our volume target and support customers growth and we remain focused on reinvesting in our business to drive long-term growth, return capital to shareholders, and create value for all our stakeholders. I want to thank you for your interest in Lamb Weston, and we’re now happy to take your questions.

Thank you. [Operator Instructions] We will take our first question and that is from Andrew Lazar with Barclays. Please go ahead.

Good morning everybody and Happy New Year.

Happy New Year Andrew.

Two questions if I could. Tom, I guess, first as you mentioned through fiscal 1H Lamb Weston sale was running close to 10% or so, even excluding the benefit of the holiday timing, to get to the high end of mid-single digit for the full year suggest some sales growth in the back half of something like low-single digits maybe 2% or so? And I realize that you and Rob went through some of the factors that drove sales growth to be above your expectations through the first half, but I guess – what I guess would drive this sort of pretty significant deceleration, particularly with favorable restaurant trend expected to continue? And then I just got a follow-up.

Hi Andrew, it’s Rob. Again, as consistent we think we're prudent with our outlook. As you say, mid – at the high-end of the mid-single digits, we may be stretch it out further than you do, and you said 6, and I think you go to somewhere in the 7% range is more where we think that ends up. But again, going through those individual elements there, again, we're anticipating that we’re going to return to more normal growth rates in the back half of the year where we had accelerated growth rates, especially in our international business in the Global segment.

Andrew, this is Tom. I think the other thing, as we've been very consistent with our outlook to be prudent, a couple of things that I’ve alluded to on prior calls, the restaurant traffic trends have been favorable. The Q1 that was up 2% traffic, is up 1% this last quarter, which is significant and that's an area where it's really hard to predict. So, we're being conservative absolutely, but we got work – that's a trend we're monitoring going forward. And obviously if the trends continue as is, then we could see some upside to this.

Got it. That's helpful perspective. Thanks. And then you mentioned the 1% price mix that you saw in the Global segment was primarily driven by multi-year contracts, and I'm curious if given some of the pricing – some of the incremental pricing that went into place more recently would – in Global, I guess, would your expectation be that price mix there accelerates a bit sequentially as we go into the back half of the fiscal year, or do I have that wrong?

Yes. So, just to reset, Andrew, our global contracting ended up where we projected it to end up and there was pluses and minuses, net-net as we plan this fiscal year based on what we thought the environment would allow us to price it kind of ended up, where we thought. So, what you're seeing in Global relative to the pricing that we got through during the contract negotiations, it's going to be pretty stable for the balance of the year and I would say, remember when we have international volume growth like we have, it's been – again ahead of where we projected. The pricing in those international markets are different than our pricing in our North American markets. So, you get a dilutive pricing factor in that.

Yeah. Got it. Okay, very helpful. Thank you so much.

Yeah.

Thank you. We will go and take our next question. And that is from Adam Samuelson with Goldman Sachs. Please go ahead.

Yes, thanks. Good morning and Happy New Year everyone.

Happy New Year Adam.

I guess I was hoping maybe [indiscernible] the discussion on the global business a little bit and if you could contrast a little bit some of the growth rates in your export business as North America relative to domestic, I mean the volume growth [indiscernible] put up, I mean, again, well in excess of the 1% traffic growth for QSRs that you just cited? I'm just trying to get a sense of, kind of, maybe geographies that are contributing. If you think the U.S. is gaining share from other export regions? Just any additional color there would be helpful.

I'm not going to get into specific market growth rates. We don't – haven't typically talked about that, but what I will tell you and just reiterate is, the international markets at least this last quarter have grown above historical averages. And that's true for North America as well. So, you know, as we think about the go forward, again, we're being prudent in our outlook. And we've got a strong first half of growth across the international and North American markets in the Global Business Unit, and we'll see how it all plays out in the next several quarters, but it's just been strong demand quite frankly.

Yeah, Adam, this is Rob. The other thing I'd say related to that, Tom mentioned it in his comments that that – while the traffic maybe 1%, our weighting of customers in North America maybe a little stronger and that we’re weighted to the chicken side, maybe heavily, more heavily than the market and that's where they had outsized growth.

Okay. That color is very helpful. And then just as we think about the impact of some of the raw potato shortages in different parts of North America, how – just tell us, not just the fiscal 2020 per se, but all of calendar 2020. Help me think through kind of how you think the market will absorb that or handle that? And if there were pricing and mix opportunities that would emerge, is that something that would happen in the May quarter, is it more of – do you think there is more pressure in August before you get to the next harvest, if you can lay out the calendar a little bit, just how some of those raw potato issues could have could affect the marketplace and how some opportunities may present themselves?

Yeah, I think it's – my experience with situations like this is, you got to – you have to be patient and we'll see how this all plays out in the spring, quite frankly. And there are several things that the industry can do to augment potato supply whether it's harvest early, plant more acres, there’s a number of different things. So, it's really, Adam, a little bit early to speculate on what's going to happen. We have an idea, but we have to – the most important thing for us is, we are well-positioned with the raw potatoes that we’ve secured, we got ahead of it. So, we're going to take care of all of our customers' needs. We will opportunistically evaluate opportunities that may come our way, but our focus is to execute against our customers and the plans that they have and drive their growth. That's it. And you know, if there’s things that come our way, we'll evaluate it as they happen.

Okay. I appreciate all the color. Thanks.

Thank you. We will take our next question. And that is from Tom Palmer with JPMorgan. Please go ahead.

Thanks, good morning and Happy New Year. You gave a lot of helpful color on the potato crop in North America, I hope you could maybe provide a bit of quantification on your annual outlook for potato and non-potato costs, and also, how you see COGS inflation in the second half of the year relative to what seemed to be low-single digit inflation in the first half?

Yeah, Tom, this is Rob. In terms of our inflation. Again, as we've talked about before, we contract the vast majority, I mean, in the high 90s of our needs for the year. And as Tom mentioned in his remarks, before things started to run up, our guys did a great job of getting ahead of it and contracting for the remainder of the potatoes that we needed a small amount additional that we needed. And so, we're still targeting our COGS inflation to be really in-line with what it's been in the first half of the year. And so those kind of low-single-digit inflation.

Okay, great, thanks for the color there. And then I just wanted to clarify something, you've mentioned a few times opportunities that may come your way on the price mix side. I just wanted to clarify, this is more related to potentially seeing a migration of customers who might not be able to get the volumes that they might typically procure from others or are you also considering maybe a regularly-timed list price increase?

It's more of the first, I would say, but again like I said earlier, we'll see how that all plays out. I've seen instances when we had situations like this with the raw in other areas of the world where everybody just managed through it. So, we just again have to be patient execute against what our plans are to take care of our customer needs and if there is customers that come to us, that are – want us to provide product and we'll evaluate that.

Okay. Thank you.

Thank you. We will take our next question from Chris Growe with Stifel. Please go ahead.

Hi, good morning and Happy New Year, as well.

Good morning, Chris.

Hi. I just had a question for you. First on comment you made about capacity utilization, and we're seeing this really strong volume growth, and I just want to understand how limiting this could be to your volume growth going forward perhaps around LTOs. And then given the time it takes to build capacity, I know you're always thinking about that, but I'm just trying to understand where we are in that thought process, because we see more capacity, and the need for more capacity coming more quickly.

Yeah, Chris this is Tom. A couple of things. As I said in my prepared remarks, yeah, we're aggressively evaluating capacity addition in our current footprint inside and outside North America. That's number one. And the second thing is, our supply chain team has full core press on operating efficiency and projects on unlocking capacity in our footprint today. So, in terms of where we're at, I feel good about the near future if you will, on our ability to unlock capacity and drive efficiencies to support volume growth on a normalized level, but again to your point, what you're pushing at is, you know, we're evaluating additional capacity in our network and that's just a function of the overall category growth that we continue to see.

Sounds like a good place to be in. I got that. Thank you. And then just one quick follow-on and perhaps it relates to the strong volume growth in the quarter, but you had a much stronger gross margin performance this quarter and pricing was just a touch below what I thought, but it sounds like that would more than compensate for the cost inflation, so was it just the volume growth and the efficiencies in the quarter that allowed for the stronger gross margin performance?

Yeah. Chris, this is Rob. We did have good gross margin performance and spot on. I mean, we had good pricing, especially in the Foodservice as you see, but really good cost control. I would say. And recall in Q1, we had some headwinds that we talked about in terms of operating inefficiencies and the plants not running particularly well. And so, a lot of that’s cleaned up and we operated better. We're still not all the way to bright through Q2, but a lot closer and so we cleaned up a lot of that, and so input cost inflation was managed well and then the operating level of the plants was a lot better.

Okay, thank you.

Thank you. We will take our next question from Rebecca Scheuneman with Morningstar. Please go ahead.

Good morning and Happy New Year. So, I just, you know I'm really impressed with this volume growth in your Global segment, and I'm – you did mention that part of that was driven by some benefits to the chicken segment, I'm wondering also, if given your relative favorable sourcing of raw potatoes in your regions, how the quality – your experiences is better than some of your competitors [out there], if there's also some share gains possibly that is driving some of the strength?

Yes, this is Tom. In terms of quality, kind of your first question, the industry is kind of on an even playing field. There is areas that are better. There is areas that are worse in terms of raw potatoes. So, I wouldn't attribute the volume growth, any raw quality advantages. It's all about getting ourselves positioned over the crop year to ensure that we have the raw potatoes available for our customers’ growth, and I've talked about this on this call at [indiscernible] but we're in a great position. So, it's not about the raw potatoes, it's about traffic and it's about the markets – in our global markets across the globe, the demand was just better than we expected and so it's really about what I talked about previously, we've had Q1, we had good traffic; Q2, we've seen an increase in traffic year-over-year. You know, so if that continues, then we're in a great position to support that.

Okay, great, thank you for clarifying that. And the second question I have is just, is it safe to assume that the negative hit in Q3 from the timing of Thanksgiving is also going to be about 1%?

Yeah. I went through those details earlier. You can follow up with Dexter again to reiterate that.

Yeah, that's fine. Okay, thank you so much.

Thank you. We will take our next question from Bryan Hunt with Wells Fargo Securities. Please go ahead.

Thank you. My first question and I'm sorry if I'm beating on the subject, but if you look at your global sales, they accelerated sequentially and even backing out the adjustment for the calendar, as well as the acquisitions you saw acceleration and that's with a declining trend in restaurant traffic, so based on the previous comments you saw QSR traffic up 2 , and then up 1, but yet your sequential growth accelerated. So, I was wondering if you could dive into that, were there any contract wins, do you see some incremental initial benefits of the shortages in parts of the world where you all took share? Again, it's a very important topic and I was just wondering if you could dig into it a little bit more for us?

Yeah, Brian, this is Rob. Again, as I talked about in prepared remarks that we did have good growth in the international side of our global business and then, and then good QSR growth here domestically. And then as we talked about our waiting in QSRs maybe some customers that had a little stronger growth rates. And so, I think that that contributes a lot of it and then as we look forward, again went through the comps and where we had some good LTO performance last year in the third quarter that we may not see this year in the third quarter.

So, I guess, basically there is no reason for us to believe that there is a level of permanence that you all will grow above the industry overall.

Nothing that we’ve reflected to you know.

My next question is, and thank you for the incremental color. The next question is, you all mentioned historically looking at capital allocation your target leverage is 3.5 times to 4 times, you're running at 2.6, based on your comments and you will generate significant free cash flow based on our projections over and above your incremental dividend and your maybe $40 million with share repurchase. So, basically, you all have to do something meaningful to get back within that 3.5 times to 4 times bandwidth, so do you all feel like you adjust your financial targets down to something lower in terms of leverage and if that's the case, do you feel like that makes you an investment grade company instead of a high yield company?

Yes. So, it's Tom. You know, consistent with what we've talked about in the past. Since we've been public, we have three priorities. First one is, we're going to continue to invest in this business and that means adding capacity and that costs $350 million to $400 million when we decide to pull that trigger. Second, we are going to actively pursue M&A. And third, we return capital to shareholders. And so, I'm comfortable with where our leverage is. I think our investment rating right now gives us the opportunity to pursue potential M&A as we have in the past. Now, branded they've been a small bolt on acquisitions, but I want to make sure I've got plenty balance sheet capacity to do a potential big deal that comes around. So, I feel good about where our leverage is and it gives us, you know with our cash flow we're returning shareholder – we were returning capital to shareholders with a dividend increase that we just recently announced and our share buyback program. And I want to have some balance sheet available in order to pursue opportunities in the marketplace.

Yeah, I guess the only thing, you know based on our math would get you back into that 3.5 to 4 churns of leverage would be a sizable acquisition, is there anything on the horizon, or is there anything out there available for sale that is sizable in your opinion at this moment?

Well, I'm not going to get into specifics. What I will tell you is, we're as active as we can be in the market.

Very good, I'll hand it off to others and Happy New Year and I appreciate your time.

Thank you.

Thank you. We will take our next question from Carla Casella with JPMorgan. Please go ahead.

Hi. On the CapEx side, I had a question. The 300 million CapEx, can you just remind us, how much of your CapEx is maintenance and do you have a sense for any other major projects beyond 2020 that we should be considering in our kind of go forward CapEx?

Yeah Carla this is Rob. The maintenance level of CapEx we've talked about in the past has been in the 115 to 125 range, somewhere in that 120-ish range and really, the only thing that you may think to – think about is, Tom’s comment in the not too distant future. We're going to have to add some capacity. And so, think about it in those terms and we've talked about that in the past.

Okay, great. And then on the Thanksgiving timing shift, you mentioned it added about a point of growth this quarter, did you – I don't think I heard you, did you quantify how much you expect that to take some growth in the next quarter?

Yeah. Hi, it's Dexter, Carla. It's not the same, it's a pull-forward. That's all.

Okay, great, thanks.

[Indiscernible] your last question. So, this is Dexter, if anybody who wants to have a follow-up conversation just email me and we’ll set up a time. Other than that, Happy New Year to everyone and have a good weekend.

Thank you. Ladies and gentlemen, this concludes today's conference. All participants may now disconnect.