Lamb Weston Holdings, Inc.

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 Kongbale. 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 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 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 physical 2022, and I want to thank all my Land West and 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 worked 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 continued to leverage our land-wise and 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 and China. While our plant in China remains on track to be operational by mid-physical 2024, we pushed back the completion of our new fry line in Idaho at least a few months to mid-physical 2024 as a result of some equipment delays. We completed the design work for the second phase of our new enterprise resource planning system. We'll build and test the new system in physical 2023 and implement it in physical 2024 in a phased approach. We issued our third environmental, social, and governance report, which has been prepared in accordance with leading industry standards such as the Global Reporting Initiative. This report includes our progress towards specific ESG goals for 2030. We refinanced more than $1.7 billion of senior notes, which extended our debt maturities and reduced our weighted average interest rate. And finally, we increased our dividend for the fifth straight year and stepped up share repurchases to boost capital return to shareholders. In our joint ventures, Lamb, West, and Meyer announced its intention to withdraw from its joint venture in Russia in response to Russia's invasion of Ukraine and the devastating humanitarian crisis the war has created. In July, we increased our interest in our joint venture in Argentina from 50% to 90% and will now consolidate its sales and earnings in our results. In short, we've been managing through a turbulent market to build good operating and financial momentum by controlling what we can control. while continuing to best to support long-term growth. That said, we expect the environment going forward will remain very challenging with inflation continuing to pose the biggest threat to our cost structure and fry demand. Although the cost of some inputs such as edible oils, energy, and transportation have come off their highs in recent weeks, they remain elevated relative to the past few years. Labor availability continues to be an issue, while other key inputs such as ingredients for fry coatings remain costly and in short supply. As a result, we expect input, transportation, and labor costs will be a significant headwind through fiscal 2023. Rising food, energy, and housing prices have also affected restaurant traffic and consumer demand in the U.S. in the past few months. While traffic at quick service restaurants, which account for more than 80% of fry servings, has held up fairly well, traffic at casual dining and other full-service restaurants has softened recently as consumers scaled back dining out occasions or shifted to QSRs. Despite pressure on overall restaurant traffic, the demand for fries remains solid as 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, remains above pre-pandemic levels. Going forward, we expect restaurant traffic and consumer demand in the U.S. will be choppy and less predictable in the near term as consumers face significant cost inflation. Fry demand in retail channels, however, should continue to benefit if demand in out-of-home channels is pressured. Outside the U.S., Consumer demand trends in Europe have been similar to what we have experienced in the U.S. as a result of inflationary pressures, which will also likely lead to a more unpredictable operating environment in fiscal 2023. Outside of China, demand in Asia has been relatively stable. The recovery in demand in China has been uneven as the government there maintains its zero COVID policy. In addition, our shipments to Asia continue to be constrained by the limited availability of shipping containers, although that availability did improve somewhat in the fourth quarter. The bottom line is that we're forecasting costs and demand in this near-term inflationary and volatile macroeconomic environment will be difficult and require us to remain flexible in managing our supply chain and commercial operations. Despite these short-term challenges, we're confident in the long-term resiliency and growth prospects of the category in the U.S. and in our key international markets. With respect to pricing, our price mix growth accelerated for the third consecutive quarter as we continued to execute on our product and freight pricing actions. In early July, we began implementing our fourth round of pricing in the past 12 months in our food service and retail segments. We expect to see the benefit of this pricing actions as well as the one that we took in April to gradually build as we progress through the first half of fiscal 2023. In our global segment, it's clear that in the back half of fiscal 2022, we benefited from price escalators included in multi-year agreements and had some success in securing price increases outside of these contractual escalators. However, it's equally clear that we have yet to fully offset inflation and other costs given the more rigid structures and terms of customer agreements in this segment, resulting in a 110 basis point decline in product contribution margin percentage in the fourth quarter. As you may recall, most of our chain restaurants contracts in our global segment are multi-year agreements, and we're in the process of negotiating renewals representing about a third of our global segment volume this year. We're being aggressive in discussions with customers to secure price increases to offset inflationary pressures so that we can gradually restore profitability towards pre-pandemic levels. We're also seeking to modify other key terms to reduce the chances of again facing a significant pricing lag to recover rising costs. For those agreements up for renewal this year, we'll generally begin to see the results of these new pricing structures during the second half of fiscal 2023. However, it may take up to a couple of years before we can fully recover costs across our global segment customer portfolio. For those multi-year contracts that were renewed over the past couple of years, we'll continue to realize the price escalators embedded in those agreements. With respect to this year's upcoming potato crop, we expect the crops in our primary growing regions in the Columbia Basin, Idaho, Alberta, and the Midwest to be largely in line with historical averages. While cooler than average weather in the spring and early summer slow the crop's progression, it has largely caught up to historical average with warmer temperatures and sunny days in recent weeks. We'll provide more detail on the crop when we report our first quarter results in early October in line with our past practice. As we previously discussed, we've agreed to a 20% increase in the contracted price per pound, reflecting our approach for annual price changes that reflect the cost to grow plus an appropriate return for our growers such that they are viable over the long term. We'll begin to see the impact of these higher contracted potato prices during the second quarter of fiscal 2023 as we begin to process the early potato varieties that are harvested in mid-summer. So, in summary, we delivered solid results in fiscal 2022, including record high sales in the fourth quarter and for the year. We continue to successfully execute pricing actions and cost mitigation efforts as we look to offset input cost inflation and the impact of a historically poor crop. We remain confident in the resiliency and the long-term prospects of the category, although near-term demand will likely be choppy and difficult to predict. And at this time, this year's crop is on track to be in line with historical averages. Let me now turn the call over to Bernadette to review the details of our fourth quarter results and our physical 2023 outlook.