Lamb Weston Holdings, Inc.

Good day and welcome to the Lamb-Weston second quarter earnings call. Today's conference is being recorded. At this time, I would like to turn the conference over to Dexter Congloble. Please go ahead.

Good morning and thank you for joining us for Lamb-Weston's second quarter 2023 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 that 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 . With me today are Tom Warner, our President and Chief Executive Officer, and Bernadette Madriada, our Chief Financial Officer. Tom will provide an overview of the current operating environment, while Bernadette will provide details on our second quarter results and our updated fiscal 2023 outlook. With that, let me now turn the call over to Tom.

Thank you, Dexter. Good morning, happy new year, and thank you for joining our call today. We're pleased with our financial performance in the second quarter as we continue to drive strong sales and earnings growth across each of our core segments. Our results reflect the successful execution of our strategies to counter the significant input cost inflation over the past couple of years through a combination of pricing actions, improving business and product mix, and adapting our manufacturing and supply chain to global challenges. Specifically, we delivered sales of nearly $1.3 billion, a record high quarter, healthy gross margins in each of our core business segments, and strong earnings EBITDA and earnings per share growth. Because of our first half results and confidence in our business momentum, we've increased our sales, gross margin, and earnings targets for fiscal 2023. I'm proud of our performance in the first half of the year and how the entire Lamb-Wesson team continues to focus on serving our customers and driving sustainable, profitable growth. Before turning the call over to Bernadette, let me first provide some quick updates on the current operating environment. First, overall French fry demand in the U.S. remains solid, although the total restaurant traffic remains below pre-pandemic levels. It's up versus the prior year quarter, and trends are up sequentially off the lows we saw in the summer as gasoline prices spiked. Demand and traffic trends in the quarter varied by channel as consumers reacted to broad-based inflation and the threat of a recession. QSR traffic was up versus the prior year, and trends improved sequentially versus our physical first quarter as consumers adjusted to less expensive dining options. As expected, casual dining and full-service restaurant traffic in the quarter was down versus the prior year, although trends also improved sequentially versus our physical first quarter. This year-over-year decline in casual dining and full-service restaurant traffic had a more pronounced effect on our food service segment, which has a greater exposure to these sales channels and contributed in part to a decline in the segment's volume. The fry attachment rate, which is the rate at which consumers order fries when visiting a restaurant or other food service outlets, remained above pre-pandemic levels. The attachment rate in QSRs actually increased versus the prior year quarter, which helped stabilize fry demand. Overall, we feel good about how the category in away-from-home channels is performing in this difficult macro environment, but expect restaurant traffic and demand trends will continue to be volatile through fiscal 2023. In contrast, retail fry demand remains solid in the quarter. It's been strong since the start of the pandemic as consumers pulled back spending on dining out. Demand for our retail products sold under licensed restaurant brands, in particular, remained strong over the past year as consumers looked to have the restaurant-style fries they love while at home. While fry demand across all our channels is holding up well, we continue to struggle to meet that demand due to the impact of supply chain disruptions on run rates and throughput in our production facilities. Over the past year, these disruptions have been largely related to the impact of shortages in certain commodities, such as starches and edible oils, as well as factory worker shortages and availability. The availability of key commodities has slowly improved over the past couple of quarters as we've broadened our supplier base and qualified substitute ingredients when possible. Yet it remains a concern, and we expect it will continue to affect our production volumes, at least through the remainder of fiscal 2023. The availability of production team members has also steadily improved over the past couple of quarters, such that we're back to having staffing levels in most of our processing facilities at desired levels. However, run rates and throughput constraints will continue until our newly hired colleagues gain experience to optimize production. We've also experienced production constraints after adjusting operating procedures to reflect changes in product mix and consumer demand, including higher demand for retail fries, premium fries, and batter-coated products. These products generally carry favorable margins. For example, to produce batter-coated fries, which is a high growth and high margin segment of the category, we typically run our lines at slower speeds than when producing uncoated straight-cut fries. This results in reduced throughput. We also require more frequent and longer downtimes to clean and sanitize lines between production runs when batter is used, which affects our run rates and line availability. Together, this results in fewer finished pounds produced relative to making uncoated fries, which ultimately leads to pressure on our customer order fill rates. In short, we expect the impacts of ongoing commodity shortages, the onboarding of recently hired production team members, and adjustments to optimize business mix to continue to pressure volume performance and our ability to meet customer demand through the remainder of fiscal 2023 and until our capacity investments in China, Idaho, and Argentina become available over the next couple of years. With respect to pricing, we continue to drive pricing actions across our portfolio to counter input cost inflation. The environment remains generally favorable as a result of the solid category demand that I just described, coupled with constrained industry supply. Our global segment led the way in the quarter with strong pricing through a combination of inflation-driven price escalators, new pricing structures for customer contract renewals, working with certain customers to accelerate pricing actions for contracts up for renewal in the coming years, and improvements in customer mix. We feel good about how global contract renewal negotiations played out this past year and expect the segment to continue to deliver strong price mix growth as more of these updated pricing structures take effect in the second half. We also expect to drive solid price growth in both the food service and retail segments in the second half of the year. Although the growth rate should decelerate as we begin to lapse some of the pricing actions we took in physical 2022. With respect to the potato crop, we've been processing potatoes from this year's harvest for the past few months and continue to assess the overall quality of the potatoes in our key growing regions, including shape, color, level of defects, and solid content. That's consistent with historical averages. Yields, however, are below historical averages and below the preliminary assessment that we provided during our earnings call in October. To fill our production needs, we have secured additional potatoes in the Columbia Basin and Idaho and are sourcing potatoes from other regions in North America, including the East Coast. This will add to our potato costs for the remainder of fiscal 2023, and we have included the estimated impact in our updated financial targets for the year. With respect to next year's potato crop, we've agreed to nearly a 20% increase in contract prices for potatoes grown in the Columbia Basin and have secured the targeted number of acres to be planted. Our discussions with growers in Idaho and Alberta on price and acres are ongoing. Now, with respect to our acquisition of our partners' interest in Lamb, West and Meyer, we expect the transaction will close during our physical fourth quarter after completing the regulatory review process. I'm excited about welcoming 1,500 value team members and beginning to capture strategic commercial, and operational benefits from the transaction, including, first, strengthening our global manufacturing footprint by leveraging Europe's low-cost infrastructure to serve key markets around the world, as well as adopting best-in-class manufacturing practices to increase efficiency, improve quality, and reduce costs. Second, enhancing our customer-centric operating model by offering a single voice to our global customers, and seamlessly supporting multinational customers with a truly global supply chain. Third, improving our position to further capitalize on growth opportunities in Europe, the Middle East, and Africa. And fourth, pursuing our global growth strategies without the operating restrictions associated with the joint venture. So in summary, we drove strong sales and earning growth in the second quarter and in the first half by executing on our strategies to price the counterinflation, improve mix, generate productivity savings, and drive value for our customers. The category is healthy, with solid overall demand behind strength in QSR traffic and constrained industry supply. The quality of the recently harvested potato crop in the Pacific Northwest is good, and the impact from the shortfall in yields is manageable. And finally, we're confident about the strategic operational and commercial benefits that the Lamb, Wesson, Meyer transaction has to offer, and we look forward to the transaction closing later this year. Now, let me turn the call over to Bernadette to review the details of our second quarter results and our updated physical 2023 outlook. Bernadette?