Good day, and welcome to the Lamb Weston Fourth Quarter and Fiscal 2022 Earnings Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Dexter Congbalay. Please go ahead, sir.

Good morning and thank you for joining us for Lamb Weston's fourth quarter and fiscal 2022 earnings call. This morning, we issued our earnings press release, which is available 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 key highlights for fiscal 2022 as well as an overview of the current operating environment. Bernadette will then provide details on our fourth quarter results and our 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 solid results in fiscal 2022, and I want to thank all my Lamb Weston colleagues for navigating through this difficult and volatile environment these past two years. We've worked together as a focused team to weather pandemic, supply chain and macroeconomic headwinds while continuing to support our customers, improve our operations and execute on our long-term strategic objectives. Specifically, in fiscal 2022, we delivered a record year of $4.1 billion in sales, driven by a combination of favorable price/mix and volume growth as restaurant traffic and demand for fries continued to recover from the depths of the pandemic. We implemented pricing actions across each of our sales channels to mitigate some of the highest input and transportation cost inflation that we've experienced in 40 years. This helped to drive year-over-year gross margin expansion in the second half of the year, and we expect to realize a carryover benefit of these pricing actions in fiscal 2023. We simplified our portfolio by eliminating SKUs, drove productivity savings and work with our customers to secure product specification changes to offset much of the cost and operational impact of a historically poor potato crop. We also made tough, but necessary decisions around customers, sales channels, production and service levels and adopted tools and practices to better manage our customer and product portfolio. In our production facilities, we continue to leverage our Lamb Weston operating culture and changed our ways of working, including how we manage crewing schedules. This helped to better attract and retain employees, and we're making progress in getting our facilities fully staffed. We started up a new chopped and formed production line in Idaho and broke ground on our capacity expansion and modernization projects in Idaho…

Thanks, Tom, and good morning, everyone. I want to start by echoing Tom's comments and thanking our employees for their hard work and continued dedication to drive our solid operating and financial performance during these challenging times. We delivered fourth quarter sales growth of 14% or a record $1.15 billion with all of the growth coming from price/mix as we continued to execute our previously announced pricing actions in each of our core business segments to offset cost inflation. Sales volumes declined 1%, primarily reflecting lower export volumes due to limited shipping container availability and disruptions to ocean freight networks. Total North American volume grew this quarter behind strong sales to large chain restaurant customers. While consumer demand in our Foodservice and Retail channels also grew, our sales volumes to those customers fell as we were unable to fully serve this demand as a result of lower production run rates and throughput at our production facilities. For the year, sales increased 12% to nearly $4.1 billion, a record high with price/mix up 9% and volume up 3%. Gross profit in the quarter increased $56 million and gross margin expanded 230 basis points versus the prior year quarter to 22%. Product and freight price increases drove the improvement, more than offsetting the impact of higher costs on a per pound basis and lower sales volumes. Cost per pound increased double digits for the fourth straight quarter with inflation accounting for essentially all of the increase. Higher prices for inputs, such as edible oils, ingredients for batter and other coatings and packaging, were the primary drivers. Labor costs were also notably up, reflecting broad competition for production team members. Transportation rates also rose sharply versus the prior year. Transport costs increased as we continue to rely on an unfavorable mix of higher…

Thanks, Bernadette. Let me quickly sum up by saying we delivered solid results in fiscal 2022 by focusing on what we can control and have built good operating momentum as we enter a new year. We've taken a prudent approach to our fiscal 2023 targets as we expect the operating and demand environment to remain highly challenging, and we're confident in the long-term prospects of the category and remain committed to executing on our strategies and investing in our global network to support growth and create value for our shareholders over the long term. Thank you for joining us today, and now we're ready to take your questions.

[Operator Instructions] And we'll take our first question from Peter Galbo with Bank of America.

Tom, I just wanted to maybe unpack your comments around volumes for the year and kind of what you're expecting. I think in the press release, it does talk about positive volume growth, marrying that against your comments about maybe a little bit of slowing demand, just how you're thinking about the ability for volumes to grow throughout the year, maybe that means you have more potatoes given a better crop or how we should think about that? And then just the cadence of volume growth throughout the year as well would be helpful.

Yes. So Peter, the indicator is restaurant traffic, and we keep a close eye on that. It's -- in terms of -- QSR traffic looks relatively healthy. As we've seen in the past few months, the casual dining traffic has slowed down a bit, and we'll keep a close eye on that. Retail volumes continue to be pretty resilient. So it's not a matter of potatoes to support the volume, it really comes down to restaurant traffic. And you guys see the syndicated data just like we do. So that's something we keep an eye on really close, but that's going to be a leading indicator of the volume for the year. I'm confident, as I think about the next year, certainly, there's concern about the economy. But the French fry category, even though -- even if we get into a situation where there's some economic slowdown, over time and historically, as we mentioned in our prepared remarks, there may be some switching from casual dining to QSR, but the overall category, I'm confident we'll continue to grow.

Okay. Okay. That's helpful. And Bernadette, I just want to ask about the cadence of gross margins for the year. So understanding that the first half, you should still be up year-over-year, maybe down versus your historical levels. But I guess why would the first half gross margins, if at all, kind of step back versus the fourth quarter? I think historically, first quarter and fourth quarter gross margins tend to be relatively similar. 2Q tends to be kind of plus or minus 100 basis points versus the first quarter. So just help us kind of understand the first half as we then think about approaching the second half at a more normalized rate.

Yes. Thanks Peter. First quarter is typically our lowest margin quarter for the entire year. We saw that last year as well. And we will be processing or recognizing the costs associated with the potatoes that we harvested -- or excuse me, that we processed in the fourth quarter, which are those higher costs, and we'll continue to recognize those higher costs throughout the first half of the year until we work through this old crop. Then as we start harvesting and recognizing some of the cost -- higher costs associated with this year's crop, we're not going to see much of a change there in terms of the cost of our potatoes just given, as Tom previously announced, we did have a 20% increase in the cost of that crop this year. However, we expect greater yield and other things that's going to lower those -- improve those margins in the back half of the year. Does that make sense?

Yes. No, it does. Thank you.

We'll now take our next question from Tom Palmer with JPMorgan.

Maybe Just kick off on following up on this cost inflation. I guess, quite simply, you've got a lot of moving parts with especially the crop rolling over into the new one, which has the big step-up in pricing. If we think about that double-digit rate of inflation that you discussed throughout this year, how does that change as we look towards next year? And is there a shift from quarter-to-quarter or maybe one period is more onerous than another?

Yes. So Tom, this is Tom Werner. Here's the way to think about it. Our guidance takes into account the potato cost inflation, all of our input cost inflation, obviously. And as we've think about our pricing strategy and the timing of pricing that gets to the market, there is a lag. There's been a lag in the global business unit, as I commented on. It's going to be building over the course of this fiscal year in terms of regaining our margin structure to pre-pandemic levels. So there's a lot of noise, and you're absolutely right. We've got the old crop we're working through, as Bernadette had just said. So we have a higher cost crop. We're processing right now. We have inflationary in the inputs for this next year. So it's going to be a build, as I've said for the past year. I'm confident where the commercial team has done a tremendous job getting to the market and executing our pricing strategies. So it's going to take until the back half of next year that we're going to get back to our pre-pandemic normalized margin levels, and we're going to build and we will be approaching those levels as we get through the back half of the year.

Okay. And I wanted to ask on the SG&A side. Pretty big step-up guided this year. I think you've highlighted a few areas, right? Some of it is very ongoing in terms of labor, just getting paid more effectively. But you've also called out investments in IT and in the ERP system. And it sounds like there's kind of two pieces, right? Maybe there's an ongoing piece to that once it's fully rolled out, but there's also implementation costs that are rolling through the P&L. So to what extent is this stepped-up cost space here to stay versus might we actually see a little easing as we look towards future years and those investments aren't needed anymore?

Yes. No, thanks, Tom. As it relates to SG&A, we have stepped up our guidance there, it approximates about 10% of our sales, including advertising and promotion expenses, as we discussed. We're bringing that back more to levels that we had prior to the pandemic. And then we do have these incremental ERP expenses that we are incurring. The piece that's going to be more here to stay is going to be as it relates to the compensation and benefits, as I referred to in my prepared remarks that have increased as we've worked to grow the team as well as attract the talent that are needed to continue to execute our strategies over the long term.

Okay. So no quantification on maybe what might roll off in coming years?

No quantification at this time. But having said that, we're always looking for ways to become more efficient, and we'll continue to do that.

We'll now take our next question from Adam Samuelson with Goldman Sachs.

So I guess the first question is thinking about the margins, and you talked about getting back to that historical 25% to 26% the way approaching it in the back half of the fiscal year? And I guess it would seem like, a, the composition of that is going to be different than history when we think about kind of the contribution in Global relative to Foodservice and Retail, the contribution margins just between the different units and the mix looks very different than it would have pre-pandemic based on kind of where you're exiting fiscal '22. So -- and I guess with the amount of inflation that you're pricing for, it would seem like that would imply per pound margins are going to be actually above pre-pandemic levels by the end of the fiscal year, if you hit those rates. And I guess I'd just love to hear you reflect on kind of what would necessitate higher per pound unit margins over time to -- in this space other than just a greater mix of sales going into the broader Foodservice Retail channel versus larger QSR customers?

Yes, Adam, I'll tell you to think about it this way. It's a pretty complex process. So we spend a maniacal amount of time focusing on our mix management right now and have been for the past 12 to 15 months. There's -- obviously, with all the challenges in supply chain and the run rates have changed in terms of our throughput efficiency, so we have to be very selective on our mix management and making sure that we service our strategic customers, but that does give us opportunity to think through the overall customer mix and we've done a terrific job of that, but it is a process. And Adam, there is -- again, when we execute our pricing actions, there is a lag through our P&L. So it does take some time to build that up. So we've commented that we've taken a number of pricing actions to even try just to catch up in a number of different areas of the Company, but we'll start to see that build, but it does take some time. And again, I'm confident with our commercial teams, what they've been executing. The volume trends look solid, but it will be -- there'll be some choppiness in the volume between channels, but it's a process. And I'm -- again, it's going to be a build, but the back half of the year, we'll get there.

Yes. And Adam, I think it's just critical to recall that with our global contracts, about 1/3 of those come open each year. And so it's going to take time, to Tom's point, as we continue to negotiate those each year. And that's essentially what's driving some of that difference.

Okay. And maybe if I could ask -- if I look at fiscal '22 and kind of whether it's kind of where you're exiting the year or just the full year kind of where would you frame capacity utilization for your business today? There's a lot of moving pieces in there between labor and potato crop and different parts of the year, but I'm just trying to get a sense of how much latent kind of volume growth exists in the existing footprint versus how much volume can we kind of then layer in over the next couple of years when the China plant and the Idaho plant eventually come on?

Yes, Adam, I'm not going to give you a specific number on our current capacity utilization. It's below where we've been historically. I'll say that. But we've got -- the China plant will come on in mid-2024. We definitely have opportunities within our current capacity to improve our throughput, and it is improving, and we're continuing to work on that. We opened our chopped and formed line, so that's given us some capacity on those products. But again, as we continue to staff up our plants, labor's improved, sequentially, over the past six months, and that gives me confidence that as the market and the category continues to grow, we get our capacity, our plants running close to historical average, we'll be able to meet demand. And I'm, again, bullish on the category, always have been, as everybody knows, and I'm investing behind it for what we see this category doing in the next five to seven years with our investments in China, American Falls and Europe. So we've got to build and we've got to get more efficient in our current capacity to meet demand, and I'm confident we're going to do that. We have a plan.

And if I could squeeze one more. In the quarter, 15% price/mix, I know you started invoicing for freight surcharges, how much was freight surcharges of the price/mix?

Yes. We're not breaking that out from our product price increases.

[Operator Instructions] Our next question will come from Chris Growe with Stifel.

I had a question for you a bit of a follow-on to your commentary there on the global contracts. And just to make sure I'm understanding like your expectation for the rate of pricing in those global contracts. And then is it -- do you see a point in fiscal '23, where the pricing in that division offsets the inflation? Or is it going to take longer to get the pricing through?

Chris, this is Tom. Think of it in terms of this. We're, again, focused on pricing to get to pre-pandemic margin levels, and we're having discussions with customers. It is a layering effect. So, all contracts don't go into effect at the same time. So you won't see a full annualized price realization in some of our global contracts because they may start in October or November or December or January. So there's going to be a lag still just like we always have. That's been the case forever in this business. But on the other side, you get the carryover effect. So there is a lag. Again, this is why we've been really consistent to ensure that everybody understands that it's all about getting the discussions, the strategies in place and in the back half of fiscal '23, we'll start seeing the margins approaching pre-pandemic levels.

Okay. And then in relation to the pricing coming through in the Global division today, is that mostly the escalators kicking in that you've built into some of these contracts?

Yes, Chris, that's exactly right.

Okay. And just one other question, which is in relation to the -- in a situation where, say, the yields from this year's potato crop are greater than average or better, how limited are you in producing that product? So if you have more supply, can you grow volumes more once the crop comes in? Is there any still kind of ongoing limitation of what you can make, be it labor, just general supply constraints today?

Yes, Chris. So think of it in terms of this. We contract the majority of our forecasted volume needs every year. And we do have a percentage of open, what we just call open -- just open potatoes that will go out of the market and buy, depending upon how the category is growing, how the volume, what opportunities that may come our way. So we have flexibility and as the crop as we start understanding how the yields acres, how the crop is progressing through the growing season, and we evaluate our overall forecasted demand and needs, then we'll make decisions in the open market to buy or. And so it's -- and it's been a really good balance as long as I've been running this company and been in the business. So -- but it is fluid. But it's not a matter of are you going to have enough potatoes to meet demand? We make those decisions early on in the harvest season if we need to go out in the open market and buy potatoes. Just like we have every year. So I feel really good about how we're balanced, how the crop is doing this year. But we're -- in the next six months, we'll make those decisions -- over the next six weeks, we'll make those decisions on procuring potentially open potatoes in the market.

And to be clear, if you have more potatoes from this crop and therefore, you lost just say you had to buy less in the open market, I guess, I'm really more interested in your capacity. Are you able to make the product and sell the product if you can get more volume in the door -- more supply in the door, sorry?

Yes. I mean -- we'll make our -- so if we have more potatoes because the yields are greater than we'll make our standard Lamb Weston SKUs. But still -- Chris, the other thing to remember is we're still focused on improving our run rate.

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

I just have two. The first is, is there any way to quantify what the impact of the poor potato crop was on your fiscal year '22 EBITDA?

Yes. We haven't quantified that impact to discuss outside. But it is in excess of what we experienced in 2014. The last time we had a poor crop, which was about $30 million that we disclosed at that time. We're continuing to work through this crop. As we said, we'll continue to recognize the impact of that through the first half of fiscal '23.

Okay. That's helpful. And then in terms of thinking about your capital allocation and share repurchases, within -- I think your leverage target range is 3x to 4x. I guess when you think about next year, how will you think about share repurchases? Should we assume that basically all free cash flow that will be generated will go towards some shareholder activity such as that?

Yes. So as it relates to our buyback program, we've disclosed and discussed previously that it's really in place to offset equity dilution. We've demonstrated, though, that we will be more aggressive if it makes sense. But our plan is in place to offset equity dilution.

Okay. And the target leverage range is 3x to 4x. I do have that correct. Is that right?

3.5x to 4x.

Okay. And is that net or gross?

That's net.

And it appears there are no telephone questions. I'd like to turn the conference back over to Mr. Congbalay for any additional or closing remarks.

Thank you for joining us today. Any follow-up questions. Please e-mail maybe we can set up a time. And everybody, have a good day. Thank you.

And once again, that does conclude today's conference. We thank you all for your participation, and you may now disconnect.