Lamb Weston Holdings, Inc.

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

Good morning and thank you for joining us for Lamb Weston's third quarter 2024 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 SAC 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, Bernadette Madriada, our Chief Financial Officer. Tom will provide an overview of the ERP transition, the current demand environment, and the status of this year's potato crop. Bernadette will then provide details on our third quarter results, as well as our updated outlook for the remainder of fiscal 2024. With that, let me now turn the call over to Tom.

Thank you, Dexter. Good morning, and thank you for joining our call today. This was a challenging quarter as we transitioned certain central systems and functions in North America from a decades-old legacy enterprise resource planning system to SAP. The transition is the first step towards a multi-year global rollout. Among other areas, the scope of this transition affected receiving and processing customer orders, trade pricing and promotion management, managing inventories and warehousing, scheduling transportation and shipments, invoicing customers, and treasuring cash management. While the transition went well in many areas, it proved more difficult than we expected, despite the countless hours we spent planning, testing, and preparing for the transition. Specifically, we experienced significant challenges with inventory visibility at distribution centers, which led to shipment delays, canceled orders, and ultimately lower than expected volumes in the quarter. In particular, we had more difficulty filling shipments of mixed product loads, which are generally higher margin than shipments of single product loads. This pressured margins in the quarter. We partnered closely with our third-party and company-owned distribution centers to minimize the impact of these challenges. This included co-locating Land West and team members at our distribution centers to resolve data errors and processing issues in real time and adjusting systems and processes for balancing inventory between distribution centers, and SAP. We also work closely with our customers to limit the impact on their operations, and I want to thank them for their patience and commitment as we manage through the transition. Importantly, I also want to thank our land, west, and team members who worked around the clock to help restore customer shipments and service back to pre-transition levels. As Bernadette will cover in more detail later, we estimate that the ERP transition reduced net sales by about $135 million and volume growth by approximately 8 percentage points in the third quarter. We also estimate that adjusted EBITDA was negatively impacted by approximately $95 million, with more than half of that due to lower sales and unfulfilled customer orders, and the remainder due to incremental costs and expenses directly related to the transition. As with any transition, our teams are still adapting to the new system. I'm pleased that we have contained the effect of the inventory visibility issues to our physical third quarter and have restored customer order fulfillment rates to pre-transition levels. We understand that some customers affected by either delayed or canceled shipments may have temporarily secured supply from alternative sources until they gain confidence in our service levels. With healthy warehouse inventory levels and flows throughout the system, we're actively engaging customers with our direct sales force to earn their trust and their business. Turning now to the demand environment. Overall, global French fry demand remains resilient, but we believe it's currently at or below the historical annual growth rate of about 2% to 4%. According to restaurant industry data providers, restaurant traffic trends in the U.S. have been generally flat to slightly down during the past six to nine months as consumers continue to adjust to the cumulative effect of inflation on menus. USR traffic during the third quarter was flat versus the prior year after growing modestly during the first half of fiscal 2024. Several QSRs have attributed this to less visits by lower-income consumers as their disposable income has been more affected by the overall inflationary environment. Meanwhile, traffic at full-service restaurants has declined each quarter during fiscal 2024. Outside the U.S., restaurant traffic continued to increase versus the prior year in most of our key markets, but growth has also slowed sequentially from our fiscal second quarter. Similar to the US, we believe traffic in these markets is also affected by consumers adjusting to the cumulative effect of inflation, as well as other macro headwinds. Restaurant traffic growth in our larger markets in Europe in the third quarter was mixed. Traffic was up in France, Germany, and Italy, but at notably slower rates than during the first half of fiscal 2024. Traffic was down in the UK and Spain. In Asia, traffic growth in both China and Japan was solid, while in the Middle East, traffic was down. While global restaurant traffic has slowed, the fry attachment rates in North America and in our key international markets have been generally stable. So on the one hand, fries remain as popular as ever with consumers. But on the other hand, consumers are going out to eat less often. Because of these recent trends, we're taking a more cautious view of the consumer. In our previous financial outlook, we expected restaurant traffic and demand would pick up in the fourth quarter. As Bernadette will cover in more detail, we're now taking a more prudent approach to our expected sales and volume performance in the near term. We currently anticipate volume will decline mid single digits as opposed to our previous expectation of modest volume growth in the fourth quarter. Despite this near term caution, we believe the pressure on restaurant traffic and demand is temporary. and we remain confident that the global fry category will return to its historical growth rates as consumers continue to adjust to higher menu prices. Turning now to the upcoming potato crop. In North America, we've agreed to a 3% decline in the aggregate in contract prices for the 2024 potato crop and have largely secured the targeted number of acres to be planted across our primary growing regions. Planting is on schedule for the early potato varieties, and we expect planting for the main harvest to be completed by the end of April. Although we expect our potato costs in North America to decline somewhat during the second half of fiscal 2025, assuming an average crop, they will likely be offset by a rise in our other input costs. In Europe, prices governed under fixed price contracts are up mid to high single digits. and we've contracted for our targeted amount of acres. We'll provide our typical update on the outlook for potato crops in North America and Europe when we issue our fourth quarter earnings in late July. So, in summary, we believe the impact of the order fulfillment issues has been contained as the third quarter as service levels have been restored to pre-transition levels. Overall, global fry demand remains resilient, although restaurant traffic trends continue to be challenged as consumers adjust to higher menu prices. We have reduced our physical 2024 financial targets to reflect these softer traffic trends and the higher-than-expected financial impact of the ERP transition. And finally, we have largely locked in the pricing and acreage needed for this year's crop in North America and Europe. Let me now turn the call over to Bernadette for more detailed discussion on our third quarter results and updated outlook.