Lamb Weston Holdings, Inc.

and welcome to the Lamb-Weston Fourth Quarter and Fiscal 2021 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Dexter Congbele, VP Investor Relations of Lamb-Weston. Please go ahead.

Good morning, and thank you for joining us for Lamb-Weston's Fourth Quarter and Fiscal 2021 Earnings Call. This morning, we issued our earnings press release, which is available on our website, lambweston.com. Please note that during our remarks we'll make some forward-looking statements about the company's expected performance. These statements are based on how we see things today. Actual results may differ materially due to risks and uncertainties. Please refer to the cautionary statements and risk factors contained in our SEC filings for more details on our forward-looking statements. Some of today's remarks include non-GAAP financial measures. These non-GAAP financial measures should not be considered a replacement for and should be read together with our GAAP results. You can find the GAAP to non-GAAP reconciliations in our earnings release. With me today are Tom Warner, our President and Chief Executive Officer, Rob McNutt, our Chief Financial Officer, and Bernadette Madriada, our CFO Designate. Tom will provide a brief overview of fiscal 2021, as well as the current operating environment. Rob will provide some details on our fourth quarter results, and Bernadette will discuss our fiscal 22 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. Let me start by saying that I'm proud of how the entire Lamb-Wesson team stepped up this year to navigate through the most challenging operating environment in our company's history. We took necessary steps across our organization to focus on the health and well-being of our employees while continuing to focus on supporting our customers. At the same time, we continue to make timely investments to execute on our long-term strategic objectives. For our larger customers in our global and food service segments, we work through production and distribution challenges to maintain customer service levels and support them as they manage through near-term volatility in demand and inventories. We also partnered with several large chain QSRs to broaden their menus with new products and limited time offerings and to position them for a more aggressive set of offerings in a post-pandemic environment. In our food service segment, despite lower volumes in the near term, We maintain our direct sales force that services independent restaurants. We believed it was important to continue to invest in these sales capabilities to provide these customers with uninterrupted support as they adapted to capacity restrictions and new operating models. That investment is now paying off as sales of Lamb Weston branded products have rebounded. In retail, the surge in food at home consumption during the pandemic provided a strong tailwind to our branded portfolio. Each of our Alexia, grown in Idaho, and licensed restaurant brands gained share as compared to pre-pandemic levels. Our branded portfolio market share in aggregate has nearly doubled in the past five years, and we've significantly closed the gap with the leading branded competitor. Including what we produce for private label retail customers, we are now the clear leader in the category. In our supply chain, we're making some significant investments to support long-term growth and profitability. First, we began construction of a new chops and form line at our facility in American Falls, Idaho, that will be available in spring 2022. Second, we announced major capacity expansion projects in China and the U.S. We expect both lines to be operational in the next couple of years, which will have us well-positioned to support market growth. In addition, through our joint venture in Europe, Lammwassen-Meyer, we announced a capacity expansion project in Russia, and just this morning, a 400 million pound expansion in the Netherlands. These two expansions will be focused on supporting continued growth in their respective primary markets. Finally, we began to implement our Win as One series of safety, quality, and productivity initiatives in our manufacturing facilities, and across our procurement, transportation, and distribution networks. This is an ambitious program that adopts and tailors lean manufacturing and other productivity tools that have been successfully used by other world-class manufacturing organizations. We're excited about how these initiatives will further strengthen our land-west and operating culture of continuous improvement and drive financial benefits that should enhance margins and cash flow over the long term. We're targeting up to $300 million of gross productivity savings by reducing variable costs and waste while also increasing potato and asset utilization. We're also targeting up to 300 million pounds of incremental capacity from de-bottlenecking and other tools to increase throughput on existing assets. To put that into context, 300 million pounds is equivalent to a new production line. Finally, we're targeting up to a 10% reduction in finished goods inventory while continuing to target high service levels and case fill rates. As I mentioned, these are long-term targets. We expect benefits from the win-as-one initiatives to gradually build as they become fully incorporated across the entire supply chain organization. We completed the initial phase of a new enterprise resource planning system early in the year. However, we defer the second phase, which would have had a more direct effect on our manufacturing facilities at a time when those operations were managing through pandemic-related disruptions. We continue to map out phase two and expect to begin implementation later this fiscal year. This project will tie into our win-as-one initiatives to provide better data and systems to drive more efficient execution. So, although our results in fiscal 2021 were somewhat choppy due to the pandemic, we focused on the right near-term priorities while making sure we continued the pursuit of our long-term strategic objectives. The pandemic showed the resilience of the category and our business model, with demand in most of our food service segment channels largely offset by the performance in QSR and at retail. Our operating cash flow and financial liquidity were solid, enabling us to invest in the infrastructure to support growth opportunities. As a result, I'm confident that we are well positioned to drive sustainable, profitable growth and create value for our stakeholders over the long term. Now turning to the current operating environment. While the pandemic continues to impact people and economies in the U.S. and around the world, we believe the worst of its direct effect on our business, restaurant traffic, and French fry demand is behind us. We're encouraged by the pace of recovery in restaurant traffic in the U.S. While overall restaurant traffic remains below pre-pandemic levels, it's recovered much of the lost ground and continues trending in the right direction. In May, QSR traffic was down low single digits versus pre-pandemic levels, which is a modest improvement versus what we saw earlier in the year. The larger QSR chains have been generally outperforming small and regional ones, with chicken-based chains outperforming more burger-oriented chains. Overall traffic at full-service restaurants in May was still down mid-teens as compared to pre-pandemic levels. but that's a significant improvement versus down mid-20s that we saw just a few months ago. This reflects fewer social restrictions and consumers' increased willingness to eat on-premises. What's helped to offset the effect of lower restaurant traffic during the year has been an increase in fry attachment rate. Simply put, this is a rate at which consumers order fries when visiting a restaurant. The increase in fry attachment rate has been largely consistent through most of fiscal 2021, and we believe that rate may have some staying power. We believe that if fry orders continue at the higher rate as restaurant traffic normalizes, it would lead to a meaningful amount of additional volume demand in the U.S. annually. The increase in fry attachment rate, in part, helps to explain how our shipments in most of our key restaurant and food service channels have already reached or are close to pre-pandemic levels on a run rate basis despite restaurant traffic not yet fully recovering. Our shipments to large QSR chains essentially reached that level last fall as customers leveraged drive-through and delivery formats. Shipments to commercial customers in our food service segment have essentially returned in aggregate to pre-pandemic levels in the last few months behind strength in small and regional QSRs, as well as independent restaurants. The recovery in shipments to our non-commercial food service customers, which include lodging and hospitality, healthcare, schools and universities, sports and entertainment, and workplace environments, continues to lag that in restaurants. However, we expect the rate of improvement will steadily increase through the fall, especially in our education, lodging, and entertainment channels. While restaurant food service demand continues to recover, demand in the retail channel continues to be strong. May volumes for the category were 15 to 20% above pre-pandemic levels, and our shipment of branded products were in line with those trends. However, we expect category growth will likely slow as it lapsed strong prior year results and as consumers step up food-away-from-home purchases. We have seen these factors already begin to play out in the fourth quarter and in the first couple of months of fiscal 2022. In short, we feel good about the frozen potato category in the U.S. because of increasing strength in restaurant and food service channels, as well as continued solid performance in retail. As a result, we remain confident that overall U.S. fry demand will return to pre-pandemic levels on a run rate basis by the end of calendar 2021. Outside the U.S., it's a more complicated story. While demand has improved in Europe and our key international markets, the pace of recovery has been much more uneven and generally behind that in the U.S. as a result of slower vaccine availability and rates. In addition, the spread of COVID variants in many markets has also led governments to delay lifting and in some cases reimposing social restrictions. which has further increased volatility in demand and stretched out the timing of recovery. Overall, we expect the pace of recovery outside the U.S. will continue to vary, with Europe and the developed markets in Asia continuing to generate gradual improvement in demand. We expect the pace of recovery in emerging markets in Asia, Latin America, and the Middle East to be more volatile and take a bit longer. With respect to supply chain and our cost environment, As with the pandemic's impact on fry demand, we believe the worst of its effect on our supply chain is also behind us. We're making progress in stabilizing our manufacturing operations with the number of production days and throughput at most of our plants during the fourth quarter, improving on a year-over-year basis as well as sequentially versus the third quarter. However, we're not yet consistently operating at targeted levels across our networks. and it will take some time as we gradually return to operating at normalized levels. In the near term, we'll realize incremental costs and inefficiencies incurred during and since the fourth quarter as we sell finished goods inventory in the first half of the year. Going forward, the lingering effects of the pandemic and the sharp recovery of the broader economy in the U.S. has disrupted supply chain operations across all industries, including ours, which has resulted in increased costs. As a result, we expect input cost inflation, especially for edible oils, packaging, and transportation, to be a significant headwind for fiscal 2022. Our goal is to offset inflation using a combination of levers, including pricing. To that end, we just began implementing broad-based price increases in our food service and retail segments and don't expect to see the most of their benefit until our fiscal third quarter.