Lamb Weston Holdings, Inc.

Stand by, we're about to begin. Good day, and welcome to the Lamb Weston Second Quarter 2022 Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Dexter Congolet, VP Investor Relations of Lamb Weston. Please go ahead.

Good morning, and thank you for joining us for Lamb Weston's Second Quarter 2022 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, and Bernadette Madriada, our Chief Financial Officer. Tom will provide some comments on our performance as well as an overview of the current operating environment. Bernadette will then provide details on our second quarter results and updated fiscal 2022 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're pleased with the improvement in our manufacturing and supply chain operations, as well as the progress in our financial performance in the quarter. And I'm proud of how Lam Weston's team has been able to navigate through this difficult macro environment. We generated strong sales as solid demand across our food-away-from-home channels drove volume growth and the initial benefits of our recent pricing actions began to offset inflationary pressures. In addition, our efforts to stabilize our manufacturing operations are on track, including increasing staffing at our processing plants to improve production run rates and throughput. Together, our sales and operating momentum drove sequential gross margin improvement in the quarter. and have us well positioned to better manage the upcoming cost pressures from this year's exceptionally poor potato crop in the Pacific Northwest. While our operations and financial results are not yet where we want them to be, we're on track to deliver our financial targets for the year, and our investments in capacity and productivity will get us well positioned to deliver higher margins and sustainable growth over the long term. Before Bernadette gets into some of the specifics of our second quarter results and outlook, let's briefly review the current operating environment, starting with demand. In the U.S., overall fry demand and restaurant traffic in the quarter remained solid, especially at quick service restaurants, where demand has continued to be strong and above pre-pandemic levels. Traffic at full service restaurants during the quarter was also solid, but remained below pre-pandemic levels. Restaurant traffic, though, has softened recently as the spread of COVID variants have tempered consumer demand for on-premise dining and as restaurants closed temporarily due to staff shortages. While we expect the COVID wave will continue to temper demand for on-premise dining in the near term, we do not anticipate that it will have a meaningful effect on traffic or demand at QSRs. Demand at noncommercial outlets also improved during the quarter but continued to be below pre-pandemic levels. As with on-premise dining, we expect the spread of COVID variants will affect near-term demand. The fry attachment rate in the U.S., which is the rate at which consumers order fries when visiting a restaurant or other food service outlets, continued to be above pre-pandemic levels. This served to support our out-of-home fry demand in the quarter. The increase in the fry attachment rate has been fairly consistent since the beginning of the pandemic, and we do not see that changing in the near term. Freight demand in U.S. retail channels in the quarter was up mid-teens from pre-pandemic levels, and we anticipate it will remain strong in the near term as the pandemic continues to affect demand in out-of-home channels. Now, outside the U.S., demand in Asia and Oceania has been solid, although the lack of shipping containers and disruptions to ocean freight networks continues to hinder our ability to fully serve our customers in these markets. Demand in Europe, which is served by our Lamb, West, and Meyer joint venture, has also been solid, although consumer reaction and the effect of recently imposed government lockdowns may reverse some of the recovery in restaurant traffic and fry demand in the near term. So overall, we're encouraged by the resiliency of demand and the long-term trends for the category, but expect that there will be some near-term softness with another COVID wave in the U.S. and our key international markets. With respect to pricing, we're making good progress in implementing recent pricing actions to manage input cost inflation. In the second quarter, we began to see the initial benefits of the price increases that took effect in the summer in our food service and retail segments, as well as in some of our international businesses. We expect the benefit of these prices will continue to build as the year progresses. In December, we began implementing another round of pricing actions in our food service and retail segments. While these actions did not affect our second quarter results, we'll see a gradual benefit from them over the next six months. In our global segment, we saw some benefit of pricing actions in the second quarter, but expect to see a greater impact during the back half of the year. This reflects price increases related to contract renewals as well as the benefit of price escalators for most of the global contracts that are not up for renewal this year. We expect these price increases across our business segments will, in aggregate, mitigate much but not all of our cost inflation pressures. We will continue to assess the pace and scope of further cost inflation and we may take further price actions as the year progresses. With respect to costs, input cost inflation remains the primary driver to the increase in our cost per pound in the quarter. Commodity and transportation costs were each up double digits, and we expect that trend will continue through fiscal 2022, especially as our raw potato costs significantly increase in the second half of the year. Outside of cost inflation, we're making good progress to stabilize our supply chain in order to improve costs, production run rates, and throughput. We've taken actions to simplify our manufacturing processes and drive savings through a series of productivity initiatives, eliminating underperforming skews and increasing potato utilization rates. Importantly, after making changes to how we staff production crews, compensation and other incentives, we steadily reduced our staffing shortfall. We're working to continue this positive trend, but realize it's difficult in a very challenging labor environment. The pending implementation of government mandated COVID testing and vaccine regulations may also slow our progress. and that of our suppliers in attracting and retaining workers in the near term. Now turning to the crop, the yields and quality of the potato crops in our primary growing regions in the Columbia Basin, Idaho, and Alberta are well below average due to the extreme heat over the summer. Similar to prior years, we had contracted with farmers to purchase potatoes to meet our production needs, assuming an average crop year. But because of the extreme heat, the contractor's acres yielded fewer potatoes and the quality is also poor. As a result, we're purchasing our remaining potato needs in the open market to meet our production forecast. We were able to reduce the number of potatoes we'd otherwise have been required to purchase in the open market by successfully partnering with our customers to secure changes to product specifications. Given that raw potato supply is tight and that fry demand is largely recovered, we've been purchasing open potatoes at a premium to contracted potato prices. When possible, we've been securing them from our nearby growing regions, but we have also transported potatoes from the Midwest and eastern North America, which results in increased transportation costs. We included an estimate of these additional costs in our updated earnings outlook. We'll begin to see more of the financial impact of this year's poor crop, including the high cost of open market potatoes in our third quarter results. So in summary, we feel good about our financial and operating progress in the quarter. The overall demand environment is solid, but may soften in the near term due to another COVID wave, and we're pulling the right pricing and operating levers to manage through this challenging environment. Let me now turn the call over to Bernadette to review the details of our second quarter results and updated physical 2022 outlook.