Dexter Congbalay:

Good morning and thank you for joining us for Lamb Weston's fourth quarter and fiscal year 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 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 Werner, our President and Chief Executive Officer; and Bernadette Madarieta, our Chief Financial Officer. Tom will provide an overview of our strategies and priorities for the upcoming year, the current operating environment, and our initial thoughts on this year's potato crop. Bernadette will then provide details on our fourth quarter results as well as our outlook for fiscal '25. With that, let me now turn the call over to Tom.

Bernadette Madarieta:

Thanks, Tom, and good morning, everyone. As Tom noted, our sales and earnings performance fell well short of our targets. Our team members are focused on getting our operations and financial results back on track in fiscal 2025. Before I provide our outlook for the upcoming year, let's begin by reviewing our fourth quarter results. Sales declined $83 million or 5% to more than $1.61 billion. Volume declined 8% and price/mix increased 3%. As it relates to volume, nearly 5 percentage points of the decline reflects the impact of share losses, as well as our decision to exit certain lower-priced and lower-margin business in EMEA earlier in the year. The decline is a couple of points more than what we originally anticipated and was driven in part by higher-than-estimated share losses. With respect to the ERP transition, the issues we experienced that affected our third quarter order fill rates were temporary and contained in that quarter. We have healthy warehouse inventory levels and flows throughout the system. The remaining 3 points of the 8-point volume decline reflected about 1 point loss related to the unexpected voluntary product withdrawal that Tom referenced and about 2 points related to soft restaurant traffic trends in North America and many of our key international markets, which was a bit more than we had expected. Price/mix increased 3%, reflecting the carryover benefit of inflation-driven pricing actions taken in late fiscal 2023 as well as pricing actions taken in fiscal 2024 across both of our business segments. The increase in price/mix, however, was a few points below our expectations. This was largely due to unfavorable mix versus our forecast as customer demand for value-based products increased, as well as targeted investments in price in North America. Moving on from sales, our adjusted gross profit declined $72 million to $363 million about $40 million of that decline was due to the voluntary product withdrawal. The remaining $32 million was primarily driven by lower volume and an $8 million increase in depreciation expense associated with our capacity expansions in China and Idaho. The carryover benefit of our pricing actions largely offset higher manufacturing costs, which was primarily driven by mid-single-digit input cost inflation. Our gross margin in the quarter was about 23%, which was about 400 basis points below our target of 27%. Of the shortfall, about 250 basis points was related to the voluntary product withdrawal. The remaining roughly 150 basis points largely reflected the unfavorable mix impact from greater-than-expected share losses of higher-priced, higher-margin customers, as well as the investments in price that we made in our North America segment. Adjusted SG&A declined $6 million to $172 million reflecting lower performance-based compensation expense, which more than offset higher expenses associated with information technology investments. Higher advertising and promotion investments to support the launch of retail products in EMEA and $6 million of incremental noncash amortization related to our new ERP system. Our SG&A in the quarter was about $20 million below the midpoint of our fourth quarter target of approximately $193 million largely due to lower performance-based compensation expense and other cost savings efforts. All of this led to adjusted EBITDA of $283 million, which is down $50 million versus the prior year as lower sales and gross profit more than offset the decline in SG&A, that's about $80 million below the midpoint of our fourth quarter EBITDA target of approximately $363 million. About half of that shortfall is due to the voluntary product withdrawal late in the quarter. The other half is due largely to targeted investments in price and trade support in our North America segment, unfavorable mix and lower-than-expected volume, partially offset by favorable SG&A compared with our forecast. Moving to our segments. Compared with the year ago period, sales in our North America segment, which includes sales to customers in all channels in the US, Canada, and Mexico, declined $47 million or 4% in the quarter. Volume declined 7% with about 5 points related to share losses and about 2% related to soft restaurant traffic in the US. Price/mix increased 3%, driven by the carryover benefit of inflation-driven pricing actions taken in late 2023, as well as pricing actions for contracts with large and regional chain restaurant customers taken in fiscal 2024. Unfavorable mix due to share losses of higher-margin customers, as well as targeted investments in price tempered the increase in price/mix. The North America segment's adjusted EBITDA declined $21 million or 7% to $277 million primarily due to an approximately $19 million charge related to the voluntary product withdrawal. The remainder largely reflects a combination of lower sales volumes, unfavorable mix and higher cost per pound more than offsetting the benefit of prior pricing actions. Sales in our International segment, which includes sales to customers in all channels outside of North America declined $36 million or 7%. Volume declined 9% with nearly 5 percentage points from share losses, which are due in part to decisions to exit certain lower-priced and lower-margin business in EMEA earlier in the year. We expect these strategic exits will continue to be a headwind through the first half of fiscal 2025. More than 2 points of the volume decline in the quarter reflects the voluntary product withdrawal, while the remaining roughly 2 points reflected soft restaurant traffic trends in key international markets. Price/mix increased 2%, driven primarily by inflation-driven pricing actions taken in fiscal 2023, as well as the carryover benefit of pricing actions taken earlier in fiscal 2024. Our International segment's adjusted EBITDA declined $43 million or 52% to $40 million about $21 million of that decline related to the voluntary product withdrawal. The remainder of that decline was driven by lower sales volume, higher cost per pound and higher advertising and promotional investments to support the launch of retail products in EMEA and was partially offset by the benefit of prior pricing actions. Moving to our liquidity position and cash flow, our balance sheet remains strong. We ended the quarter with net debt leverage ratio of 2.7x adjusted EBITDA and our net debt declined nearly $40 million as compared to the end of our fiscal third quarter to about $3.75 billion. We continue to have ample liquidity, including nearly $1.2 billion available for a new global revolving credit facility. For the year, we generated about $800 million of cash from operations, which is up about $37 million versus the prior year. As we discussed before, driving long-term growth requires making the right, strategic and forward-looking investments. The resilience of our business and our overall financial strength put us in the ideal position to modernize our assets, as well as to invest in critical areas that support customer needs and unlock efficiencies for our people and our business. This allowed us to spend about $990 million in capital expenditures this year or about $255 million more than the prior year, largely reflecting strategic investments, to complete facilities in China and American Falls, Idaho. Our ongoing capacity expansion projects in the Netherlands and Argentina, and our new ERP system. Finally, consistent with our capital allocation priorities, we returned $384 million of cash to our shareholders through dividends and share repurchases during the year. This includes $210 million in share repurchases, including $60 million in the fourth quarter and $174 million in dividends. This reflects the strength of our balance sheet and our confidence in our business. Now turning to our fiscal 2025 outlook. As Tom discussed, we expect that the operating environment this year will be challenging and that consumers will continue to be more intentional with the dollars they spend in a pressured economic landscape. We expect that soft restaurant traffic and fry demand may result in higher-than-normal available industry capacity for selected product types and channels in fiscal 2025 and that we will make some targeted investments in price and trade to support volume growth and share. In addition, we're aggressively evaluating opportunities and implementing actions to drive supply chain productivity balanced production based on lower shipments, and reduced operating expenses. Specifically for the year, we're targeting sales of $6.6 billion to $6.8 billion on a constant currency basis. This implies growth of 2% to 5%, which we expect will be driven largely by volume. However, we anticipate that volume will decline during the first half of the year, primarily due to two factors

Operator:

Thank you. [Operator Instructions]. We'll go first to Andrew Lazar with Barclays. Your line is open. Please go ahead.

Bernadette Madarieta:

Good morning.

Andrew Lazar:

Good morning. I'd love to start, you obviously talked a bit in the remarks and in the release about the sort of building supply-demand imbalance in the industry. And I'd love to get, I guess, as specific as you can. An idea about, where do you see Lamb Weston's capacity utilization sort of right now? And how does that compare to sort of the industry? And I'm trying to sort of get a sense of or dimensionalize how large this sort of imbalance is, and whether it's large enough such that some of the more maybe major customers can make shifts in their mix of suppliers, or if these share losses are maybe some smaller customers, some of the things you talked about last quarter with respect to some of the ERP disruption?

Tom Werner:

Yes, Andrew. And the other dynamic we're managing through is the restaurant traffic, particularly in the QSRs, which is 80% of French fry consumption. As I stated earlier, in Q4, we saw a continued deceleration of traffic. So as you -- as we manage through our overall capacity and production, continued softness across our entire customer base is leading to a more challenging environment in terms of contracting than we've ever experienced.

Tom Werner:

Yes, Andrew, I'm not going to comment on our contracting because we're in the middle of it right now. But what I will say is with the challenges we had in our Q3 implementation, that over-indexed impacting are the independent restaurants and so we're working really hard to regain those customers. That's been a significant part of our share loss. And with that, plus you add on the restaurant traffic challenges, which is leading to industry capacity availability, we're going to have to make some and we're making some strategic choices to invest back with those customers and win their business back and their trust.

Andrew Lazar:

Keep going.

Andrew Lazar:

And the last quick thing would be, just in light of that, I think you talked about some operational adjustments that you're making. And I know it's hard to talk about some of this, but does that -- you've got some facilities that are obviously coming online, very new, very efficient. Others that are some 40, 50 years old. Are we in a position where you start to go down that sort of plan B path a little bit and maybe say, there might be some sort of rightsizing of capacity that might make sense here and if so, do you see competitors doing the same thing?

Andrew Lazar:

Thanks so much.

Operator:

We'll go next to Ken Goldman with JPMorgan. Your line is open, please go ahead.

Tom Werner:

Good morning.

Ken Goldman:

Hi. I wanted to start, one of the questions that I've received this morning are -- is as we think that this management team, given the challenges that they faced the last couple of quarters, are they being a little more conservative or prudent than usual with certain items, certain areas of guidance where they otherwise might not have been? So I just -- I wanted to put that back to you a little bit. Are there certain areas, as you thought about the outlook for 2025 or maybe you were a little more cautious than you otherwise might have been? Just trying to get a sense for that kind of give and take.

Ken Goldman:

Understood. Thank you for that. And then a quick follow-up. I just wanted to get a little more color, if I could, on the voluntary product withdrawal. I appreciate the details you've provided about the financial impact in the fourth quarter and then into the first quarter of next year. I'm just curious a little bit more about it. Also interested in why it only affects two quarters and then seems to stop after the first quarter in terms of the impact on the bottom line? Thank you.

Bernadette Madarieta:

Yes, that's right. And the other thing that I would add is to your question in terms of why does it affect Q4 and Q1 and stop there. So we identified it soon after the end of the fourth quarter. And that's when we made the withdrawal from the market after discovering that it didn't meet our specs and so it does impact both fourth quarter and first quarter where we wrote off the remaining inventory that was on hand.

Operator:

We'll go next to Peter Galbo with Bank of America. Your line is open. Please go ahead.

Tom Werner:

Yes, a couple of things. Again, the operating environment and coupled with some of the share losses we've had, the operating environment right now, there's available capacity. And so yes we're making targeted investments in price in some areas to gain our share back. And we believe over the long term as the restaurant traffic and the category returns to a more normalized growth rate everything is going to be balanced out, but in the current environment again the traffic trends we've experienced really over the last year is really impacting the overall demand architecture of the category. And you have obviously additional supply coming on. So we're managing the dynamic of the operating environment, we're working in right now. And we believe and confident over the long term that as category returns to growth it will all balance back out and have a more normalized operating environment.

Tom Werner:

Yes. So the capacity expansions we have going on we made those decisions a couple of years ago and you have to commit to your suppliers. We're three quarters of the way built and so it would be more costly not to complete. And so we've got -- we're at a point where we need to finish it. And again we'll evaluate. We're looking at all areas of the company to evaluate overall capacity in our footprint .

Peter Galbo:

Okay. But Bernadette just on the longer-term CapEx, like is 500 million the right number, 400 million like the 9% of sales number you gave at Investor Day in October doesn't seem to be relevant anymore. So just like what's the right range?

Peter Galbo:

Okay. Thank you.

Tom Palmer:

Good morning and thanks for your question. I just -- first wanted to start out kind of understanding some of the moving parts of guidance because it seems like the primary driver of the expected volume growth is market share gains in the second half of the year. And so I wanted to kind of clarify two parts of this. So first how much of these share gains have already been secured by the recent customer contract wins referenced on the earnings call? And then look, I know pricing is maybe a bigger factor than in the past. Are there other factors that remain important as we think about driving those share gains in the back half of the year above and beyond pricing?

Tom Palmer:

Okay. Thank you for that. And then just on the North America crop if it comes in as expected, how does your contracted volume of potatoes compare to your current volume assumptions? We did see the write-downs this past year. I just wanted to understand if that was a possibility this year just at least based on your current volume expectations?

Bernadette Madarieta:

And particularly when we give our updated view of the crop in the first quarter as we typically do.

Operator:

We'll go next to Adam Samuelson with Goldman Sachs. Your line is open. Please go ahead.

Bernadette Madarieta:

Yes. Thank you for the question. As it relates to the strategic exits that we've spoken about in the last year, if you recall, that primarily related to four customers in North America. And those strategic exits were made at a time when we were significantly capacity constrained and they made sense for the business at that time. Now going into softer restaurant traffic trends and incremental capacity coming online, we will continue to take a look at our sales pipeline and our portfolio. And in the current environment, which has changed from when we made those strategic exits, we've determined that it makes sense to make some price investments. And so that's what you're seeing in the current environment.

Tom Werner:

Yes. So, Adam, like we stated, we're phasing some investments out further in terms of, normalized CapEx outside of the new capacity coming on. So we've made those adjustments as we continue to -- as I stated, as we continue, we're evaluating all areas of our company. And we continue to see traffic softness. We're definitely going to think through our overall asset utilization rates and how we adjust that.

Bernadette Madarieta:

Yes, as it relates to margins in the International segment it was as you say, affected by the product withdrawal. The other thing that we have there is we're seeing a competitive environment in international markets, similar to what we've explained in North America and there will be some price investments where it makes sense. As it relates to the poor crop, those are things that we always look to, to pass through that price inflation. But as we mentioned, we do have a pretty good mix of fixed pricing as it relates to that crop in Europe and then any delta between that is where we'll look to price through that incremental cost.

Operator:

We'll go next to Robert Moskow with TD Cowen. Your line is open, please go ahead.

Tom Werner:

Yes. I'd, Robert, say it's a little bit of both, quite frankly. And the -- our commercial team, we've got visibility to a pipeline of opportunities that we're executing against every week. And so we have line of sight to regaining volume, but the environment is different. And so we're making the appropriate adjustments. But to be quite frank, it's a little bit of both.

Tom Werner:

And we're seeing wins in the marketplace today so that gives me confidence that, yes, we'll navigate through the next -- the first half of this fiscal year, but we expect sequential improvement in the back half.

Operator:

We'll go next to Rob Dickerson with Jefferies. Your line is open. Please go ahead.

Bernadette Madarieta:

Yes. So we're not going to get into specifics about our experience competing in the current operating environment. We've got a number of contracts that are currently underway that we're negotiating, so we're not going to get into the details of those.

Dexter Congbalay:

Rob, if you looked at, May was a lower point, June recovered a little bit but was still down a pretty strong amount, but it was a little bit better than May. If you look at the entire fourth quarter, June was basically in line with that. So the trend, I would sit there and say nothing significant in terms of a change. With respect to the promo activity, we haven't really seen -- a lot of that started towards the end of June, so I wouldn't sit there and say there's really good clean data on that yet.

Bernadette Madarieta:

Yes. When we make decisions on share repurchases, we do that throughout the year, and I can't comment further on that. Certainly, with the stock being down what it is, we will continue to evaluate that and make decisions as we move forward.

Operator:

We'll move next to Matt Smith with Stifel. Your line is open. Please go ahead.

Bernadette Madarieta:

Yes. We don't specifically comment on our competitors' environments and some of the things that they're doing. We can only comment as it relates to what we're seeing and how Lamb Weston is reacting to the market.

Bernadette Madarieta:

Yes. We are back shipping to the customer.

Operator:

We'll go next to Max Gumport with BNP Paribas. Your line is open. Please go ahead.

Bernadette Madarieta:

Yes, that's right. So in terms of the first half of the year, we assumed the consistent restaurant traffic trends being down with what we experienced in the fourth quarter with slight improvement in the back half of the year.

Bernadette Madarieta:

Thank you.

Dexter Congbalay:

Thanks for joining the call today. If you want to set up a follow-up call, please e-mail me. We can set up a time over the next number of days. Again, thank you and have a good day.

Dexter Congbalay:

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 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 Werner, our President and Chief Executive Officer; Bernadette Madarieta, 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.

Bernadette Madarieta:

Thanks, Tom and good morning, everyone. As Tom noted, we're not happy with the magnitude of the impact to the ERP transition on our customers, our business and our P&L. However, I do want to take a moment and say how proud I am of our Lamb Weston team members who did work tirelessly to remedy the issues we experienced and bring our customer order fulfillment rates back to pre-transition levels within the quarter. I also want to thank our sales team members who stayed close to our customers to limit the impact as much as possible on their businesses. Let's review our third quarter results. Sales increased $205 million or 16% to $1.46 billion. The entire increase was driven by $357 million of incremental sales from the acquisition of the EMEA business. This is the last quarter that we'll receive the incremental benefit from the EMEA consolidation since we began to consolidate EMEA sales beginning in the fourth quarter of fiscal 2023. If we exclude the incremental sales from the EMEA acquisition, net sales declined $152 million or 12%. We estimate that the majority of the decline or approximately $135 million was due to unfilled orders attributable to the ERP transition. Price/mix was up 4% as we continued to benefit from the inflation-driven pricing actions taken in fiscal 2023 and pricing actions taken this year in both our North America and international segments. However, unfavorable mix related to the type of orders we were able to fill during the ERP transition partially offset the benefit of the pricing actions. In addition, lower freight charges to customers were nearly a 5-point headwind which was driven by lower volume shipped and the pass-through of lower freight rates when shipping products to customers. Total sales volumes declined 16%, with about 8 points of the decline associated with unfilled customer orders due to the ERP system transition. The other 8 points of the decline was primarily driven by 2 factors

Operator:

[Operator Instructions] We'll go first to Andrew Lazar with Barclays.

Tom Werner:

Yes Andrew, thank you for the question. Certainly, the restaurant traffic trends have been soft as we stated in our comments and everybody knows we've got capacity coming on in the industry. And the thing to remember is as the capacity comes on, it's not all created equal. So the capabilities of the capacity are different. And as we have in the past, when we've had capacity coming online, we're going to be very -- we're going to manage it very closely and be -- and look at the opportunities we have in the different markets based on the capacity coming online as we have in the past. And so the difference is, obviously, the trends in the restaurant traffic are softer. We expect that to be a temporary outlier at this point. Time will tell but we'll manage the capacity coming online like we have in the past with ourselves and competitors and the category has been resilient and we remain confident and the long-term trajectory of this category which we expect to get back to 2% to 4% growth at a minimum.

Bernadette Madarieta:

Andrew, this is Bernadette. You're absolutely thinking about it correctly. We did absorb those costs and I think you would add those back as you look to fiscal '25. I think what's going to be key is we'll need to take a look at the restaurant traffic trends and impact on volume as we move forward and how that translates to fiscal '25. And we're in the process of rolling that up right now and we'll have more information when we give our outlook in July.

Peter Galbo:

I wanted to unpack maybe just the underlying volume comment that you made, Bernadette. So I mean at the total company level, right, if we strip out the 8 points from ERP and there's obviously a piece that was walkaway business it seems like underlying volumes would have been down, I don't know, 4% or 5%. And that's kind of what you're extrapolating into 4Q. Just want to understand if that's kind of the logic as to how you're applying whatever the 3Q rate was forward?

Peter Galbo:

Okay. Got it. And I think what's implied again in the fourth quarter guidance, again just thinking about this as it starts rolling forward into next year, is that price/mix kind of steps back up at least sequentially or the contribution rate based on kind of the updated guidance? And I wasn't sure how much of that is just mix as you get back to fulfillment versus anything else that we might be considering.

Operator:

We'll go next to Adam Samuelson with Goldman Sachs.

Tom Werner:

Yes, this is Tom. So a couple of things. We're getting ready to go through our contracting season as we do every year at this time. We're on the front end of it. So we have a robust plan on how we're going to work through that. And so I'm confident the team and our direct sales force and Mike Smith and his commercial leaders are focused on that. So more to come on that but it's going to take some time. It's not perfectly matched as we've stated in the past in terms of the volume, we've exited versus what we're targeting in the marketplace and we're going to do it at the right margin levels. So that's number one. Number two, this is a tough transition. There's no question about it. And it materially impacted the company and we're not happy about it. And so we have to win back the trust of a lot of -- some of our smaller customers and we're working hard to do that with our direct sales force. But it's going to take some time and that's an unfortunate thing that has happened but I'm confident we have a plan. We've got everybody activated our direct sales force, 300 salespeople on the street but it's going to take some time. And your question about -- your point about market share is absolutely true. And so we're going to have to work hard to get it back and we will. We have a resilient sales force but it's going to take some time and I'm confident that the team, we got a great plan in place but it will take some time and we're going to get there.

Tom Werner:

Yes. So Adam, as we communicated in our Investor Day in October, we're going to have an elevated level this year, next year. The projects that you mentioned, those are baked and we're committed to it. And so we expect '25 will be elevated as we stated. And as we continue to evaluate the market and what's happening we'll evaluate all of our capital expenditures going forward in terms of base capital levels that are needed.

Operator:

We'll go next to Tom Palmer with Citi.

Tom Werner:

No. Right now, as we sit, my belief is over the next 3 to 5 months, we'll have some clarity on it. That's going to be in conjunction to a lot of the contracting that we go through with the customers this cycle. So Tom, I think we'll have good visibility by the time we get to our next call in July and we'll get some more color on it by then.

Bernadette Madarieta:

Yes. No, I would say that it's more industry is where you're going to be seeing that with the softer traffic trends. And then the other piece will be any hangover that we have from the ERP transition but definitely more traffic trends softening that's impacting that.

Robert Moskow:

A few small ones. I don't know, maybe you wait a few months before you tell us this. But you said you've contracted with growers already for potatoes. I would imagine you have a volume assumption like internally related to that in terms of demand for fiscal '25. Is there anything or you can give us on how much volume you're contracting with those growers? And then secondly, you say that the ERP project is a multiyear and I guess I need to know more about it. But are there any other steps along the way that you think will possibly impact your execution with customers.

Robert Moskow:

Okay. And maybe a follow-up to that. Just mathematically, I think you said traffic is kind of flattish at restaurants and attachment rates are still pretty good. How does that translate to a mid-single-digit volume decline? If I just qualitatively put those two numbers together, I would think volume would have held up a little bit better.

Robert Moskow:

Sequential declines?

Robert Moskow:

Yes. Is that a year-over-year decline also? Or is it kind of...

Robert Moskow:

Foodservice. Okay, separate. Got it.

Rob Dickerson:

Great. Just a couple of quick ones for me. I guess, kind of more broadly speaking, kind of given the, I guess, shift in, let's say, at least the near-term traffic outlook. Is there anything broadly speaking, the kind of changes kind of everything you walked through at the Investor Day in October just regarding kind of the long-term outlook, like long-term outlook like based with 2% to 4%, you are saying, you think temporary -- I'm not sure kind of how temporary that is. But then there was also an implied margin uptick each year over the next few years. Just trying to gauge kind of all the moving pieces as we think longer term.

Rob Dickerson:

Got it. Super. That's clear. And then just very quickly, I also think you had stated back in October, right, increasing the dividend over time but then potentially some incremental repurchase activity outside of employee option exercises. So I'm just curious, I mean we can all see clearly, stock looks a little pressured today. I'm trying to gauge your appetite on buyback potential as you think forward to the next 12 months.

Operator:

We'll go next to Matt Smith with Stifel.

Tom Werner:

As we sit here today, I think there's 2 things. I think the consumers has to adjust to the menu pricing in terms of the inflation. I believe we're going to start seeing more menu value meal offerings going forward to drive traffic trends. That's been typically the case in the past when things have slowed down a bit. So I think it's a combination of both going forward but it's going to take some time.

Tom Werner:

Yes. So just to reset, even though it's down like we stated 2% to 3%. If you go back and stack it up the last 2 years, it's been up significantly. And when -- we're in the middle of rolling up our entire input basket right now for '25, as we've stated, there are commodity inflationary pressures in other areas of our input basket. So while our inflation, we don't expect it to be double digits like it has been in the last 2 to 3 years. We're still going to be dealing with some inflation at this point. I'm not going to give you a specific number, we'll talk about that in July because we're in the middle of kind of rolling up our '25 operating plan right now.

Marc Torrente:

You touched on sort of the net -- on the ERP process. The recent implementation was a heavy lift. It sounds as though you are more confident in ability to limit the transition impact for the next steps. Maybe how are those next steps different and some of the learnings you have gained from the recent transition?

Marc Torrente:

Okay. And then in the third quarter due to the transition, as fulfillment normalizes, how should we think about, I guess, price/mix trends flowing through the next several quarters, considering both wraparound pricing, potentially more muted new pricing and then actual underlying mix? And how much of a contributor will be that underlying mix going forward?

Operator:

We'll go next to Max Gumport with BNP Paribas.

Tom Werner:

Yes. So number one, we got the fry attachment rate has stayed pretty consistent. It's been above historical levels for the past 2, 3 years. So that's one thing. The other thing that we monitor continually is restaurant traffic every month that we look at and while it's been slowing recently, as we've discussed on the call, we believe based on kind of how we model some things that we expect that to -- the consumer to get adjusted to the inflationary menu pricing and we expect that to return here going forward. So it's not a perfect, linear assumption that we're making but overtime we think it's going to return back to in-store restaurant business.

Max Gumport:

Got it. And then turning back to the sort of the backfilling of the contracts that you exit in '23, it feels like it's been pushed off a bit, right, given the ERP transition. But I'm just curious because right now, I feel like you're going to be trying to maintain relationships with customers that were impacted by the ERP transition. So how far that has your ability to start to make progress on backfilling some of those contracts you exited with higher margin business has been pushed, is that more of a middle of '25-type event now? I'll leave it there.

Operator:

We'll go next to William Reuter with Bank of America.

Bernadette Madarieta:

We're back to our previous order fulfillment rates.

Tom Werner:

No, I don't -- we don't have any -- from a customer standpoint, we were communicating well with them. With the challenges we had, a lot of our bigger customers, we made sure they understood all the things we're going through. So generally, they didn't like it but they understood. But there's no fallout from a lot of our bigger customers as we went through this. And we did our best to protect everybody as we could.

Bernadette Madarieta:

That's correct. So we did the central systems in North America. The next phase will be plant in North America. And then after that, we will go international.

Carla Casella:

In the past, you've talked about M&A and internationally. Is that all kind of off the table for now until you get the ERP system done? Or are you still looking at opportunities? And can you just talk about what you're seeing in the market?

Carla Casella:

And has the market -- I mean, given the kind of softness in the QSR today internationally, is the market opening up more? Are there more -- are you getting more looks in the past? Anything you can give us on the market?

Operator:

With no additional questions in queue. At this time, I'd like to turn the call back over to our speakers for any additional or closing remarks.

Operator:

That will conclude today's call. We appreciate your participation.

Dexter Congbalay:

Good morning, and thank you for joining us for Lamb Weston's second 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 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 Werner, our President and Chief Executive Officer; and Bernadette Madarieta, our Chief Financial Officer. Tom will provide an overview of the potato crop and the current operating environment. Bernadette will then provide details on our second quarter results as well as our updated fiscal 2024 outlook. With that, let me now turn the call over to Tom.

Bernadette Madarieta:

Thanks, Tom, and Happy New Year everyone. I also want to start off by thanking the entire Lamb Weston team for their continued execution of our strategies and for delivering another quarter of strong financial results. For our second quarter, sales increased about $455 million, or 36%, to more than $1.7 billion. About $375 million or more than 80% of the increase was attributable to the incremental sales from the acquisition of the EMEA business. We'll continue to receive the incremental benefit from the consolidation of the EMEA business in the third quarter. And as a reminder, since we began to consolidate EMEA sales beginning in the fourth quarter of fiscal 2023, those results are included in our last year's sales baseline. Excluding the incremental sales from the EMEA acquisition, net sales grew 6%. Price/mix was up 12%, as we continued to benefit from the inflation-driven pricing actions taken in fiscal 2023 along with the pricing actions taken this year in both our North America and International segments. Mix was also favorable as we continued to strategically manage our product and customer portfolio. Lower freight charges to customers were about a 1 point headwind. Total sales volumes declined 6%, which was in-line with our expectations. The decline was primarily due to the carryover impact of exiting the lower-margin business during the second half of fiscal 2023. Volume elasticities or the amount of volume lost in response to inflation-based pricing actions remain low. While sales volumes declined compared to the prior-year period, it's a sequential improvement from the 8% decline that we delivered in our fiscal first quarter. The improving trend largely reflects no further impact of the inventory de-stocking in Asia and North America that we experienced in the first quarter and the gradual backfilling of the business that we chose to exit. Moving on from sales, gross profit, excluding unrealized mark-to-market gains and losses related to derivatives and items impacting comparability, increased $97 million to nearly $480 million. Our gross profit growth was tempered by a $65 million charge for the write-off of excess raw potatoes. Excluding this charge, as well as the mark-to-market and comparability items, gross profit increased $162 million to more than $540 million. About half of this increase was driven by the cumulative benefit of pricing actions, mixed improvement and supply chain productivity in our legacy Lamb Weston business, which more than offset higher input and manufacturing costs per pound and the impact of lower volumes. The other half of the increase was from incremental earnings from consolidating EMEA. Input costs increased mid-single digits on a per pound basis, which is a bit lower than the mid- to high-single digits that we saw in the first quarter. The increases were largely driven by a 20% increase in the contracted price for potatoes in North America and continued increases in the cost of ingredients for batter coatings, labor, and other key inputs. The inflation was partially offset by supply chain productivity savings, lower cost for edible oils, and lower freight costs. SG&A, excluding comparability items, increased $42 million to $177 million. More than two-thirds of the increase was from incremental SG&A with the consolidation of EMEA, with the remainder largely driven by higher expenses related to improving our IT and ERP infrastructure, as well as compensation and benefit expenses. All of this led to adjusted EBITDA increasing 15% to $377 million. Excluding the write-off for excess raw potatoes, adjusted EBITDA increased 36% to $448 million. Higher sales and gross profit in the base business drove most of the growth, with the remainder attributable to the incremental earnings from consolidating EMEA. Moving to our segments. Sales in our North America segment, which includes sales to customers in all channels in the U.S., Canada, and Mexico, increased 10% in the quarter. Price/mix was up 14%, which was driven by the carryover benefit of pricing actions that took effect in fiscal 2023 across each of our primary sales channels as well as some pricing actions taken this year and favorable mix as we continue to benefit from our revenue growth management and other mix improvement initiatives. Lower freight revenue partially offset the increase by about 1.5 points. Volume in North America declined 4%, reflecting the carryover impact of exiting lower-margin business during the second half of fiscal 2023. This is a sequential improvement from the 5% decline in our fiscal first quarter. North America segment adjusted EBITDA increased 7% to $321 million. The carryover benefit of pricing actions and favorable mix more than offset a $63 million charge for the write-off of excess raw potatoes, higher cost per pound, and the impact of lower volumes. Sales in our International segment, which includes sales to customers in all channels outside of North America, grew about $350 million, of which $376 million were incremental sales from the EMEA acquisition. Excluding the EMEA acquisition, net sales declined 12%. Price/mix was up 10%, driven primarily by the carryover benefit of pricing actions taken last year, discrete pricing actions taken this year, and favorable mix. Sales volume fell 22%, primarily reflecting the carryover impact of exiting the lower-margin business during the second half of fiscal 2023. International segment adjusted EBITDA increased 66% to $100 million, with incremental earnings from the consolidation of EMEA's financial results driving the increase. Excluding the EMEA acquisition, higher cost per pound along with the impact of lower volume more than offset the favorable price/mix. The higher cost per pound included an $8 million charge allocated to the International segment for the write-off of excess raw potatoes, which was based on the percentage of finished goods shipments to international markets. Moving to our liquidity position and cash flow. Our balance sheet is strong. We ended the quarter with our net debt leverage at 2.4 times adjusted EBITDA, up from 2.3 times at the end of our fiscal first quarter. Our net debt ticked up a couple hundred million dollars to more than $3.5 billion as we drew on our U.S. revolver to largely finance seasonal working capital needs and increase capital expenditures. We also accelerated some payments to suppliers in advance of our ERP system go live at the beginning of the third quarter. In the first half of the year, we generated $455 million of cash from operations, or nearly $170 million more than the first half of last year, largely due to higher earnings. Capital expenditures in the first half were about $565 million, which is up about $300 million from the prior-year period, primarily due to construction and equipment purchases as we continue to expand processing capacity in Idaho, Argentina, and the Netherlands. As Tom mentioned, we started up our new facility in China a couple of months ago. As we discussed during our Investor Day in October, our first priority is investing in our business, which we are doing organically with our capacity expansions. We also remain committed to returning capital to our shareholders. During the first half of the year, we returned more than $230 million of cash to our shareholders, comprised of $82 million in dividends and $150 million in share repurchases. This includes $50 million of stock repurchased in the second quarter at an average price of $87.41 as we acted opportunistically based on our stock price. In addition, in October, we raised our share repurchase authorization to $500 million, and in December, we announced a 29% increase in our quarterly dividend to $0.36 per share. Turning now to our fiscal 2024 outlook. We reaffirmed our full-year sales and EBITDA targets and raised our EPS estimate despite the charge to write-off excess raw potatoes. Specifically, we reaffirmed our annual net sales target of $6.8 billion to $7 billion. This includes $1.1 billion to $1.2 billion of incremental sales attributable to the EMEA acquisition during the first three quarters of the year, and 6.5% to 8.5% net sales growth excluding our acquisitions. For the year, we continue to target price/mix to be up low-double digits, with price/mix in the second half slowing sequentially from the 17% increase that we delivered in the first half as we lap more of last year's price actions. We continue to target our full-year volume, excluding acquisitions, to be down mid-single digits compared with the prior year as we maintain our cautious view of the consumer. That said, we expect year-over-year volume trends in each of our segments will continue to improve in the second half of the year as we lapse some of the significant low-margin, low-profit volume that we chose to exit in the second half of last year, and as we gradually backfill the exited lower-margin business with more profitable business. We expect volume growth to be positive in the fourth quarter. For earnings, we're reaffirming our adjusted EBITDA range to $1.54 billion to $1.62 billion. We're maintaining our EBITDA range target despite absorbing a $71 million charge for the write-off of excess raw potatoes. We're raising our adjusted diluted EPS estimate to $5.70 to $6.15 from our previous range of $5.50 to $5.95. The increase, which also includes the impact of the raw potato write-off, is largely due to two items. First, we're reducing our SG&A target by $20 million to a range of $745 million to $755 million as we continue to manage our operating costs. And second, we're reducing our interest expense target by $15 million to $140 million as we expect to capitalize more interest associated with our capacity expansions. We're also updating a couple of other financial targets. We reduced our depreciation and amortization expense by $20 million to $305 million. We also increased our capital expenditures target to $900 million to $950 million, up from our previous estimate of $800 million to $900 million to account for the timing of spending for our capacity expansion projects. Before I turn the call back over to Tom, let me give you a quick update on our ERP implementation. At the beginning of our fiscal third quarter, we transitioned some of our central systems in North America that manage supplier payments, inventories, warehousing, customer invoicing, and customer shipments to SAP. We're experiencing the usual bumps associated with these highly challenging large-scale projects, but don't expect that the cutover will have a material impact on our full-year business or operating results. The estimated financial impact of the system's go live is included in our fiscal 2024 targets, including the impact of pausing production and increasing planned downtime at our processing facilities, followed by a gradual ramp-up of production, and reduced shipments due to short-term inventory visibility challenges at our third-party finished goods warehouses in the period immediately following the cutover. As a result of the increased production downtime, our third quarter gross margin, which is typically our strongest, will be pressured by higher manufacturing costs, reflecting reduced fixed cost coverage and other cost inefficiencies. With respect to sales, we expect the inventory visibility challenges that we experienced at the third-party warehouses to affect shipments and temper the sequential improvement in our third-quarter volume trends. But as I mentioned earlier, we continue to expect positive year-over-year volume growth in our fiscal fourth quarter. I want to thank our customers and our warehousing and logistics service partners for working with us to manage through the transition. And most importantly, I want to thank our Lamb Weston team members that have been working tirelessly on this project, including throughout the holiday season. We will provide a further update on the transition of the central systems and processes, as well as a general timeline for implementing the new ERP system throughout our manufacturing network during our third quarter earnings call in April. In summary, we delivered another strong quarter of top- and bottom-line growth as we continued to execute our strategies, manage our portfolio mix, and manage costs. We continue to expect volume trends to improve in the second half of the year, while remaining cautious about the effect of inflation on the consumer. And finally, we updated our earnings estimates for the year, including reaffirming our annual EBITDA range despite absorbing a write-off for excess raw potatoes and raising our annual EPS estimates to reflect lower SG&A and interest expense. Let me now turn it back over to Tom for some closing comments.

Operator:

[Operator Instructions] We'll take our first question from Matt Smith with Stifel.

Tom Werner:

Hi. Good morning, Matt.

Bernadette Madarieta:

Yeah, Matt, thank you for the question. I think it relates to the first one and it relates to guidance, the amount of shipments and volumes that we had in our guidance in July has not changed from what we have now. Again, that was -- we had to determine the number of acres to plants back in January of 2023. But the last time we gave guidance, there's been no changes. And then the second question, as we think through the crop this year, there are mitigants that we would have taken into consideration in terms of carrying some higher finished goods inventory for products that we know that we're going to sell. And then, as we always do, we will take that into consideration as we determine the number of acres that we're going to plant for the upcoming year.

Tom Werner:

Matt, this is Tom. I'll -- as we do every year, we're right in the middle of negotiations, so we're not going to get into where we're at in that process. As we always do in July, October, we'll give you an overview of kind of where we ended up and talk about that in more detail. But right now, we're right in the middle of it, so we're going to respect that process.

Operator:

We'll now take our next question from Adam Samuelson with Goldman Sachs.

Bernadette Madarieta:

Good morning.

Bernadette Madarieta:

Yeah. No, thanks, Adam. You're correct. Our Q2 gross margin implies a 31.3% margin, excluding the write-off of the potatoes. And as we've been talking about, that increase is related to the pricing actions and then catching up to the multiyear impact of inflation, and also allowing the benefit of the productivity and mix that'll fall through. So, those are some of the things that you're seeing. As it relates to the third quarter, keep in mind that it's going to be down sequentially from that and that is going to reflect that reduced fixed cost coverage that we're going to have as we started up our ERP and we needed to take some downtime and ramp our plants up slowly.

Tom Werner:

Yeah, Adam, this is Tom. And I'll tell you, I'm really pleased on where we're at in terms of the integration of EMEA at this point. We're towards the tail end of that, and the team has done a terrific job across the organization functionally, commercially, really connecting up. And we've reorganized the organization to reflect the global company that we are now. So, I'm pleased with where we're at. In terms of initiatives, your specific question on RGM, that's definitely on the radar, but that's going to be down the road based on a number of other initiatives we have going on in the company that we really need to keep our focus on executing specifically the ERP implementation right now. So, we're at the tail end of it. Feel great. The team is doing a magnificent job getting integrated, and I'm pleased with where we're at today.

Operator:

We'll now take our next question from Robert Moskow with TD Cowen.

Tom Werner:

Yeah. Robert, the thing to remember is the commodity in our business, the potato, it's a one-year crop. And so, you have to process it. And certainly, like Bernadette alluded to, we looked at all of the mitigating factors like we do every year. And it's just an unusual circumstances to the order of magnitude. Typically, we manage through different positions based on our forecast. And this year is different. And the crop overall is really, really good, and it's just a matter of -- you got to make some decisions based on the demand forecast, utilizing your plants, running the crop longer. And economically, this is the best decision to move forward based on as we're going through the end of this crop and moving into the next crop in kind of June, July. So, it's a different commodity. It has a shelf life that's rather short than a lot of the other commodity businesses I've been around. And so, it's something we manage through every year. And unfortunately, how the operating environment and the environment with this particular crop shaped up, the quality of the crop yields just put a lot of pressure on availability, which there's plenty of potatoes around.

Bernadette Madarieta:

Yeah. So, the contract renewal process is complete now, and we feel really good about where, in the aggregate, we ended on both pricing and terms. A lot of that relates to the large chain restaurants that we typically will finalize in the back half of the year, and that's what makes up that 20% that you're referencing.

Operator:

We'll now take our next question from Rob Dickerson with Jefferies.

Bernadette Madarieta:

Yeah, exactly. So, I'd say it's going to be down sequentially from the 31%, that's excluding that write-off, and that's really reflecting the reduced fixed cost coverage that we're going to have as a result of taking those plants down, while we cutover.

Bernadette Madarieta:

Absolutely.

Bernadette Madarieta:

Yeah. So, Rob -- yeah. So, the way to look at it is, first, we're really pleased with what we're seeing from a volume perspective and the sequential improvement that we've continued to post. We will be positive in the fourth quarter, but the thing we've got to keep in mind is that we are having reduced shipments as a result of converting over to our new ERP. I spoke about the inventory visibility challenges that we have with our third-party warehouses. I'm confident and -- that we're correcting those, but we are going to temper our volume increases in the third quarter as a result of that.

Bernadette Madarieta:

That's right.

Tom Werner:

Yeah, Rob. So, as we stated earlier that China is growing at double digits. We're well positioned. We just opened up our second factory over there. It's up and running and operating. It gives us considerable flexibility as we're thinking about the next year's contracting coming up. And so, we're -- there's a lot of news feed on China and the economy and all that's going on. But in terms of the category, we feel good about where that's at based on the data we look at, which is telling us it's growing double digits. We've got our plant up and coming. We've got line of sight to how we're going to look at that market and potential customers that we can support and more to come on that. But as we go through this contracting season in that international market, we're well positioned to gain some business.

Rob Dickerson:

All right, super. All right, that's all. Thanks, team.

Peter Galbo:

Hey, guys, good morning. Thanks for taking the question.

Tom Werner:

Good morning, Pete.

Bernadette Madarieta:

Yeah. So, we did have some contracts where that pricing took effect in the back half of the year. I think it's key, though, to -- as you look at the back half of the year to expect to see a deceleration from the 17% that we delivered in the first half as we continue to lap those price increases. But yes, we will see the impact of those contracts that are coming up to -- are affecting our pricing in the back half of the year, just like we always have.

Tom Werner:

Yeah, Peter, we fully expect to continue to drive and deliver our algorithm over the long term as we stated in October. And we're working all the channels to deliver that. And as we have in the past, we've been very consistent on meeting those commitments. And I expect and as we look forward, with the category and how we're getting positioned with some of the capacity additions, I fully expect us to drive volume and meet our commitments as we talked about in October.

Operator:

We'll now take our next question from Andrew Lazar with Barclays.

Tom Werner:

Good morning, Andrew.

Bernadette Madarieta:

Yeah, Andrew, I think the way to think about that is we're not going to quantify any amount. But certainly, there are some shipments that would be retail and food service that would be lost in third quarter, whereas the chain would be more of a carryover. So, again, down or it's going to be tempered in terms of the any increase as it relates to volume in the third quarter, but definitely positive in the fourth quarter as we had originally projected.

Bernadette Madarieta:

No, absolutely positive in the fourth quarter. That's what we've been anticipating since we gave our July guidance and it continues to remain sound.

Tom Werner:

Yeah, Andrew, I understand the question. I'm not going to get into very specifics on customers or where it's coming from. But ideally, we have line of sight to markets, opportunities as we go through our normal contracting season coming up, ideally, it'd be perfect timing, but it doesn't always match when you potentially win business. But we do have a plan. We have line of sight, and I'm not going to get into specifics of where and who and with respect to our customers, and I'll just leave it at that, Andrew.

Operator:

[Operator Instructions] We'll take our next question from Marc Torrente with Wells Fargo Securities.

Tom Werner:

Yeah. As I stated, the crop acres, potato yields, based on what we always -- what we plan for in the initial front end of the crop cycle, certainly was better than what we expected and have seen in the last several years. And the overall forecast, as I stated earlier, that we had in terms of overall volume and sales was a little softer than what we had originally planned. As we've been consistent, the guidance we gave in July and continue -- and we upped it in October was based on the forecast we were seeing at the time. And so, certainly, there's -- it was not as good as we had planned when we planted the crop. But again, to Bernadette, as she reiterated, we see our forecast from July in terms of sales and volume has not really changed for the balance of the year. So, it's really just crop acre yield issue that caused a write-off based on what we initially forecasted in July for FY '24. So again, we feel confident about the underlying fundamentals of the business, where we're at our guidance from last time has not changed, and we see line of sight to Q4 volume improving, as we've stated on this call. So, all things are pointing towards sequential improvement for the balance of the year, albeit just keep in mind that Q3 is going to have some challenges with the ERP cutover.

Marc Torrente:

Okay. Great. That makes sense. And then you lowered the SG&A outlook for the year. A little more color here? Is that timing around some of those special projects? Are you pulling back on any of the underlying expenses? Or is that better leverage on the core?

Marc Torrente:

Okay, great. Thank you.

Dexter Congbalay:

Thanks, everyone, for joining the call today. Any follow-up discussion, please send me an e-mail. We can schedule some time. Other than that, have a great day, and Happy New Year. Thank you.

Dexter Congbalay:

Good morning, and thank you for joining us for Lamb Weston's first 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 will 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 earnings release. With me today are Tom Werner, our President and Chief Executive Officer; and Bernadette Madarieta, our Chief Financial Officer. Tom will provide an overview of the current operating environment. Bernadette will then provide details on our first quarter results, as well as our updated outlook for fiscal 2024. With that, let me now turn the call over to Tom.

Bernadette Madarieta:

Thanks, Tom, and good morning, everyone. I want to start off by thanking the entire Lamb Weston team for the strong start to the year. Our performance speaks for itself and it's a testament to the passion and dedication of our entire Lamb Weston team. We recognize that we are operating in a challenging macro-environment, but the strong first quarter performance has allowed us to raise our fiscal 2024 financial targets. Let's start with reviewing our first quarter results. Compared with the prior year, sales increased $540 million or 48% to about $1.7 billion. About $375 million or 70% of the increase was attributable to the incremental sales from acquisitions with most coming from our EMEA business. We lapped our Argentina acquisition this quarter, but we'll continue to receive the incremental benefit from the consolidation of the EMEA operations in the second and third quarters. As a reminder, since we began to consolidate EMEA's sales beginning in the fourth quarter of fiscal 2023, those results are included in our last year's sales baseline. Excluding the incremental sales from our acquisitions net sales grew 15%; price-mix was up 23% as we benefited from the pricing actions taken in fiscal 2023 in both our North-America and International segments to counter input and manufacturing cost inflation. Mix was also favorable, as we continue to strategically manage our product and customer portfolio. In addition, we estimate the price-mix in the quarter benefited by a couple of percentage points from lower-than-expected trade spending associated with pricing actions that we began implementing in the last month of fiscal 2023. This may be largely timing-related. And as a result, could be a slight headwind as the year progresses. The trade spend benefit in the quarter, however, was mostly offset by roughly two point headwind related to lower freight charges passed on to customers as transportation costs have come down from the prior year period. As a reminder, our goal is to match freight charges to our customers with our transportation costs, so that their effect on our profits is neutral over time. In-line with expectations overall sales volumes declined 8%. The decline was primarily due to our decisions to exit volume-related primarily to four of our lower-priced and lower-margin contracts as part of our revenue growth management initiatives and to a lesser extent continued inventory destocking by certain customers in international markets and in select US retail channels also impacted volume. We believe the effect of these destocking actions is largely behind us and should have little impact, if any, on our results going-forward. It's important to note that volume elasticities or the amount of volume lost in response to inflation-based pricing actions have been generally low. We expect our year-over-year volume trends to improve as the year progresses as we lap the volume we exited and backfill volume with higher-margin business. Moving on from sales. Gross profit in the quarter excluding comparability items increased $213 million to $490 million. Nearly three-quarters of the increase was driven by the cumulative benefit of pricing actions, the timing of trade spending, mix improvement, and supply chain productivity in our legacy Lamb Weston business, which more than offset higher input and manufacturing cost per pound and the impact of lower volumes. The remaining roughly one-quarter of the increase was attributable to incremental earnings from consolidating EMEA. Including the dilutive impact of the EMEA acquisition, our gross margin percentage, excluding comparability items, increased 480 basis points to 29.4%. While first quarter margins have historically been our lowest margin quarter, we estimate that the timing of trade spending that I mentioned earlier, accounted for approximately 200 basis points of the increase, which would put our normalized first quarter gross margin, including acquisitions, approaching 28%. Input costs continued to increase mid-to-high single-digits on a per pound basis. The increases were largely driven by a 20% increase in the contracted price for potatoes in North America. Higher prices for open market potatoes due to poor yields from the 2022 crop and continued increases in the cost of labor, energy, and ingredients for batter coatings. The increase was partially offset by supply chain productivity savings, lower costs for edible oils, and lower freight costs. SG&A, excluding comparability items, increased $45 million to $160 million. More than half of the increase was from incremental SG&A with the consolidation of EMEA. The remainder was largely driven by higher expenses related to improving our IT and ERP infrastructure, and to a lesser extent higher compensation and benefit expenses and higher advertising and promotion expenses. All of this led to adjusted EBITDA increasing 76% to $413 million. Higher sales and gross profit in the base business drove most of the growth with the remainder attributable to incremental earnings from consolidating EMEA. Moving to our segments. This is the first quarter that we operated in our two new reporting segments, North America and International. Beginning with our North America segment, which includes sales to customers in all channels in the US, Canada and Mexico, sales were up 19% in the quarter. Price mix was up 24%, which was driven by the carryover benefit of pricing actions that took effect in fiscal 2023, across each of our primary sales channels, the timing of trade spending, and favorable mix as we benefit from our revenue growth management initiatives. Lower freight revenue partially offset the increase. Volume in North America declined 5%. This primarily reflects our decision to exit volumes related primarily to two lower-priced and lower-margin contracts that largely began to impact our sales in the second and third quarters of fiscal 2023. To a lesser extent, inventory destocking by certain customers in retail channels also pressured volumes. We don't anticipate further effects from the retail destocking after the first quarter. North America segment adjusted EBITDA increased $148 million to $379 million as the carryover benefit of pricing actions, the timing of trade spending, and favorable mix more than offset higher cost per pound and the impact of lower volumes. Moving to our International segment, which includes sales to customers in all channels outside of North America. Sales grew $360 million or 212% and included $375 million of incremental sales from the EMEA and Argentina acquisitions. Excluding these acquisitions, net sales declined 9% while price mix was up 18% driven by the carryover benefit of pricing actions taken in fiscal 2023, as well as favorable mix, lower volume, and freight revenue offset the increase. As expected, volume, excluding acquisitions declined 27%. The decrease primarily reflects our decision to exit two very low-price, low-margin accounts that largely began to impact our international sales volumes in our fiscal fourth quarter of 2023. To a lesser extent, continued inventory destocking also impacted volumes in the quarter, but as I mentioned earlier, we believe the effect of destocking is largely over. Despite a 27% decline in our International segment's volume, segment adjusted EBITDA increased $57 million to $90 million. Incremental earnings from the consolidation of EMEA's financial results as well as favorable price mix drove most of the increase, more than offsetting the impact of higher cost per pound and lower volumes in our legacy Lamb Weston business. Moving to our liquidity position and cash flow. We continue to maintain a solid balance sheet with ample liquidity and a low leverage ratio. We ended the quarter with more than $160 million of cash and no borrowings under our $1 billion US revolver. Our net debt was about $3.3 billion, which puts our leverage ratio at 2.3 times. We generated about $335 million of cash from operations, or about $140 million more than the prior-year quarter, largely due to the higher earnings. Capital expenditures were about $305 million, which is up about $180 million from the prior year quarter, primarily due to construction costs as we continue to expand processing capacity in China, Idaho, Argentina, and the Netherlands. During the quarter, we returned more than $140 million of cash to our shareholders, including $41 million in dividends. Most of the cash return was from repurchasing $100 million of shares. That's more than double what we repurchased in all of 2023 as we acted opportunistically based on our stock price performance during our August open trading window. While our share buyback program is targeted to offset annual equity compensation dilution, we will continue to be opportunistic based on other capital allocation needs and the potential for generated solid returns based on our stock's trading value. Turning to our updated fiscal 2024 outlook. Based on our strong first quarter performance, we raised our financial targets for the year. While we continue to expect macro operating conditions to remain challenging, the overall current demand and pricing environment remains solid. In addition, as Tom mentioned, we believe the potato crops in our growing regions in North America and Europe will be consistent with pre-pandemic historical averages and we are generally pleased with how the discussions to renew remaining contracts are progressing in aggregate. Specifically, we continue to expect strong net sales gains for the year and have increased our annual net sales target to $6.8 billion to $7 billion, which is up from our previous target of $6.7 billion to $6.9 billion. This includes $1.1 billion to $1.2 billion of incremental sales attributable to EMEA during the first three quarters of the year, which is up $100 million from our previous estimate. This represents a 6.5% to 8.5% net sales growth, excluding acquisitions. For the year, we are targeting price mix to be up low-double-digits, which means that we expect price mix will slow sequentially from the 23% increase that we delivered in the first quarter as we begin to lap some of our price actions that we began implementing in the second quarter of last year. While the overall potato category continues to be solid, due to the timing of contract openers, we are targeting our full year volume excluding acquisitions to be down mid-single-digits compared with the prior year. And we expect year-over-year volume trends will continue to improve as the year progresses, as we lap some of the significant low-margin, low product profit volume that we chose to exit in the second half of last year and as we gradually backfill the exited lower-margin business with more profitable business. For earnings, we've raised our adjusted EBITDA target by about $90 million to $1.54 billion to $1.62 billion, up from our previous estimate of $1.45 billion to $1.525 billion. Using the midpoint of this updated range implies growth of about 26%, or about $330 million versus the prior year. We left our target for SG&A unchanged at $765 million to $775 million. While our first quarter run rate suggests a lower target, we continue to anticipate spending will build as the year progresses. We reduced our interest expense target by $10 million to $155 million as we expect to partially offset cash interest with more capitalized interest associated with our capacity expansions. Our other financial targets remain the same, including depreciation and amortization expense of approximately $325 million and capital expenditures of $800 million to $900 million. In summary, we are executing our strategies to deliver strong top and bottom-line growth by improving our customer and product portfolio mix and offsetting input cost inflation through pricing actions and driving productivity savings across our supply chain. Volume elasticities in response to inflation-based pricing actions have been generally low, and we expect volume trends to improve as the year progresses. While we remain cautious about the effect of inflation on the consumer, we feel good about the start of the year and the health of the category, which gives us the confidence to raise our full year sales and earnings targets. And with that, let me now turn it back over to Tom for some closing comments.

Operator:

[Operator Instructions] And we'll take our first question from Peter Galbo with Bank of America.

Tom Werner:

Good morning.

Peter Galbo:

Tom and Bernadette, thank you both very much for the color around price mix and volume for the year. Tom, I was hoping to ask maybe a two-part question on volume. One, just maybe help us a little bit with cadence on when some of these backfill higher-margin customers potentially start to come online for you? And then, Bernadette, I know you kind of gave order of magnitude on International, but if there's anything more a finer point on volumes between just what was intentional walk away versus the destocking impact in a quarter would be helpful? Thanks very much.

Bernadette Madarieta:

Yes. And Peter just to the --

Bernadette Madarieta:

To the second question you asked, you know that those volume exits started impacting our International sales in our fiscal fourth quarter of 2023, and the business that we chose to walk away from, I would say about 90% of that relates to that in terms of volume decline with the remainder of being the destocking.

Tom Werner:

Yes. Peter, I think, the crops -- and we will have a -- as we do every January on our earnings call, kind of a debrief on how we are feeling about the overall crop and storage, crop is in great shape worldwide. So, I don't expect any impacts in any region in terms of challenges with the crop at this point.

Tom Werner:

Yes.

Operator:

We'll now take our next question from Tom Palmer with J.P. Morgan.

Bernadette Madarieta:

Yes. So we feel good about the operating momentum that we have had. It's been primarily related to pricing. When we think that those financial targets are really prudent given the macro-environment that we are faced -- facing, as well as just uncertainty regarding consumer health. So most of that's pricing and we feel really good about the operating momentum of the business.

Bernadette Madarieta:

Yes, so you're right, typically we do see a sequential step up in Q2. I think we will still a see sequential step up, but it may be more muted because we are going to be lapping some of those pricing actions that were taken last year, as well as the timing of the customer trade claims that I talked about.

Tom Werner:

Yes. Hey, Tom, remember that what Bernad had mentioned before, yes, we printed 29.4%, but if you take away some of the timing impacts of that trade spend probably a little bit south of 28% as a base.

Tom Palmer:

Okay. Understood. Thanks.

Operator:

We'll now take our next question from Adam Samuelson with Goldman Sachs.

Tom Werner:

Good morning.

Adam Samuelson:

Good morning. So, I guess the first question is related maybe to mix, and clearly you are making some conscious decisions on moving away from low margin -- from some lower margin business. But just more broadly, can you speak to maybe the -- if we try to cut your volumes between kind of more traditional straight run fries versus some of the more upgraded products and battered encoded and the like that you're now producing? Help -- can you help quantify kind of what that represents as a proportion of the business today? And where that can be getting to, whether it's with some of these business exits more recently, or over the next couple of years consider that's the mix has been a very powerful margin driver margin driver for the business and trying to dimensionalize how much more room there's there to go.

Adam Samuelson:

Okay. And then if I could just ask a second one. I know you talked about kind of customer trends in Europe. What the EMEA -- the acquired EMEA business, what was their organic volume growth in the quarter? And the increased revenue contribution in EMEA, is that a more positive volume outlook, more positive price mix outlook, or both?

Adam Samuelson:

Okay. All right. I appreciate that color. I will pass it on. Thanks.

Matt Smith:

Hi. Good morning.

Matt Smith:

I wanted to ask about the impact of walking away from low-margin contracts in this mix management you have been pursuing. That's weight on volumes over the past couple of quarters, and you mentioned that the actions in the International segment and the US segment will be fully lapped by the fourth quarter. So, do you expect to be in a position to be growing volumes as you exit this year? Meaning you've lapped those -- you've lapped the drag from walking away from those contracts and you've made some progress on the backfill with higher margin business?

Matt Smith:

Okay. Thank you for that. And maybe if I could ask one more question here. You mentioned that the capacity in China came online in the quarter. Do you have any update to the timing for the American Falls facility? Is that still expected to be on time for beginning production early in 2024?

Matt Smith:

Thank you, Tom. I'll leave it there, and pass it on.

Operator:

We will now take our next question from Rob Dickerson with Jefferies.

Operator:

Due to no response, we'll move on to --

Operator:

Would you like to move on?

Operator:

Okay. We will now move on to Robert Moskow with TD Cowen.

Bernadette Madarieta:

Good morning.

Bernadette Madarieta:

Yes.

Bernadette Madarieta:

As it relates to the volume in our North America segment, I think I alluded to the fact that we started to walk away from that in third and fourth quarter. In our International segment, we started to see the effect of what we exited in the fourth quarter of last year. So, as we said, we do expect to see volume continue to improve both as we lap that business we exited and as we bring on new business.

Bernadette Madarieta:

Yes. No. I would just think of it as the second half of the year.

Tom Werner:

Yes. Sure, Robert, in our remarks, we got about 20% in play. We feel confident about where we are at, where we are at in those discussions, how things are progressing for us this year. So, we will get through all that over the course of the rest of this year. And at a later time, as we always do, we will give some color on what we've got coming up in terms of contracting for our next fiscal year and how that's progressing. But, right now, we've worked through most of it. Feel good about where we are at. Obviously, it's all baked into our guidance. We have 20% in play. Feel good about where it's at. Commercial team is executing at a high level, great discussions and more to come on that. And then, the next -- like we do usually in our July call, we will talk about what's coming up for contract renewal in the next fiscal year.

Tom Werner:

Nothing.

Dexter Congbalay:

That's fine. No problem.

Tom Werner:

Typically, it's -- we start late spring through early fall when we start the contracting discussions.

Bernadette Madarieta:

Thanks, Robert.

Andrew Lazar:

Great. Thanks. Hey, guys. It's Andrew Lazar. Hope all is well. And I joined late as well. So, I apologize if some of this was covered. But, I think, Tom, I remember -- I think, last quarter, you started to talk a little bit about the planned sort of pivot, right, to a little bit more of a focus on profit dollars going forward as that's the way you obviously grow the business and you've had the significant margin recovery, you know, kind of, much of which has already taken place and that kind of makes sense, right, as you think about what you are looking to do. But I think there was some confusion and maybe some might have taken that to mean that, you know, as you move towards profit dollars that somehow you were expecting, you know, sort of ongoing or structural margin erosion going forward as some of the new capacity comes online and you know that you would have to sort of go after lower-margin business somehow to, you know, fill that capacity. I was just hoping you could maybe and maybe you'll get into this a lot more obviously next week, but maybe just to clarify a little bit of that, because I do think there was some confusion around that. You know, I logically understand, right, the shift now that margins have kind of recovered to much more of a profit dollar focus. Thanks so much.

Robert Moskow:

Great. Thanks. See you next week.

Operator:

We will now take a question from Rob Dickerson with Jefferies.

Tom Werner:

Yes. So, the China facility, we are in early stages of our start-up. So it takes some time to get it up and running. We are running production there today. It's going to be specifically targeted for that market. We have got things identified in -- in China market from an opportunity business standpoint, but it takes some time to get the plant up and running and efficient and kind of work the kinks out. But we are early on. So it's going to be several more quarters before we see the impact of that coming online.

Tom Werner:

Hey, Rob. It's probably a little bit of, might have a little bit of softness last year, just coming out of COVID and everything like that. But overall trends seem to be pretty good. I think with inflation still a factor, but it's cooling or at least a little bit better than people were expecting at least from the energy cost standpoint. [indiscernible] income helping traffic generate or we're holding up pretty well.

Tom Werner:

Yeah, Rob, so just a reminder, our cost and contract raw input structure is baked. So, wherever the crop yields and all that comes out, it really isn't going to impact our overall input cost for the balance of this fiscal year. So it's -- you're not going to see any, any decline in our cost structure, because the crop is great. It's just we have agreed to a contract last year ago and it is what it is.

Rob Dickerson:

Right. But I'm thinking all the way forward to, let's say, the end of back half of next fiscal year, right, I'm assuming as we go into these contract negotiations go kind of toward the end of this calendar year, right, harvesting could this year probably put you in a pretty good position in those discussions.

Rob Dickerson:

All right. Great. Thank you. See you next week.

Bernadette Madarieta:

Thank you.

William Reuter:

Hi.

William Reuter:

Just quickly to make sure on the last question, you contract for 75% in Europe, but that's 100% in North America. Is that right?

William Reuter:

Okay. And then, you have 20% of your contracts that are up for renewal. How does that compare to where you would have been last year or in a typical year?

William Reuter:

Okay. And then just lastly for me. The elevated CapEx of $800 million to $900 million, how should we think about that CapEx number over the next handful of years?

William Reuter:

I assume that might have been the answer. Okay. That's all from me. Thank you.

Dexter Congbalay:

Thanks for joining the call today. If you do plan on or want to come to our Investor Day, please shoot me an email and I can send you the invite if you haven't gotten it already. If you do -- if you have gotten it and you do want to attend since it's at the New York Stock Exchange, you do have to register in advance so you can put you on the list to get in. Any questions on the call today or kind of going forward, shoot me a note, we can set up some time. But, again thanks for joining the call and we'll talk to you next week.

Dexter Congbalay:

Good morning and thank you for joining us for Lamb Weston's fourth quarter and fiscal 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 earnings release. With me today are Tom Werner, our President and Chief Executive Officer; and Bernadette Madarieta, our Chief Financial Officer. Tom will provide some highlights from the past year as well as an overview of the current operating environment. Bernadette will then provide details on our fourth quarter results as well as our outlook for fiscal 2024. With that, let me now turn the call over to Tom.

Bernadette Madarieta:

Thanks Tom and good morning everyone. I want to also thank the Lamb Weston team for finishing the year strong and setting us up well for fiscal 2024. Let's begin with our fourth quarter results. Sales were up more than $540 million versus the prior year quarter or 47% to a quarterly record of just under $1.7 billion. That's at the high end of our targeted range for the quarter. About $380 million of the increase was attributable to the consolidation of our EMEA and Argentina operations. The EMEA amount is above the high end of the targeted $300 million to $325 million range for the quarter, reflecting a strong benefit from pricing actions. Excluding incremental sales from these acquisitions, net sales grew 14%. Price/mix was up 24% as we continued to benefit from pricing actions taken in fiscal 2023 across each of our business segments to counter input and manufacturing cost inflation. As expected, price/mix in the quarter decelerated sequentially from the 30% or more increase that we delivered in our second and third quarters as we largely lapped all the pricing actions taken in fiscal 2022. In addition, we received no year-over-year benefits from freight rates charged to customers as we reduced these rates further to match the decline in our transportation costs. While we expect lower customer freight rates will soon become a year-over-year headwind for price/mix, our goal is to match these to our transportation costs so that their effect on our profits is neutral over time. Our overall sales volumes in the quarter declined 10% due to four factors. The first and primary driver was our continued effort to strategically improve our product and customer mix by exiting certain lower-priced and lower-margin business across our Domestic and International portfolio. Second, demand was tempered despite softer casual dining and full-service restaurant traffic in the US. This had a more pronounced effect on our Foodservice segment and drove much of the decline in that segment's volume in the quarter. Third, certain customers in international markets began to right-size inventories after carrying unusually high levels of inventory to derisk their supply chains during the pandemic. And fourth, certain large retail customers temporarily lowered prices to right-size inventories of private label products, delaying shipments of products that we produced on their behalf. In addition, we realized some acceptable levels of branded product volume elasticity in response to the inflation-driven pricing actions that we implemented over the past year. Moving on from sales. Our gross profit in the quarter, excluding comparability items, increased more than $170 million to nearly $425 million. About 40% of the increase was attributable to the incremental earnings from consolidating EMEA. The remainder was driven by the cumulative benefit of pricing actions, mix improvement and supply chain productivity in our legacy Lamb Weston business, which more than offset higher input and manufacturing cost per pound and the impact of lower volumes. Gross margin was up more than 300 basis points to 25.1% despite absorbing the dilutive impact on margin of the EMEA acquisition. Input costs increased high single-digits on a per pound basis, easing somewhat from the double-digit inflation rate earlier in the year. The increase in cost per pound were again largely driven by a 20% increase in the contracted price for potatoes in North America, significantly higher prices for open market potatoes due to poor yields from the 2022 crop and continued increases in the cost of labor, energy, edible oils, and ingredients for batter coatings. Our higher per pound cost also reflected reduced fixed cost coverage due to lower throughput, as we did take some extended downtime for planned maintenance in some of our production facilities; and increased write-downs of inventories, primarily consisting of bulk and obsolete finished goods. Our SG&A expenses, excluding comparability items, increased $65 million to $183 million. About half of the increase was from incremental SG&A with the consolidation of EMEA, while the other half was primarily driven by three factors. First, higher compensation and benefit expenses due to improved operating performance. Second, an $8 million increase in advertising and promotion expenses as we restore support behind our branded products in our Retail segment to historical levels. And third, higher expenses related to improving our IT and ERP infrastructure. Adjusted EBITDA, including joint ventures, increased $117 million or 59% to $318 million, with higher sales and gross profit driving the growth. Moving to our segments. Sales in our Global segment were up 85% in the quarter and included the $380 million of incremental sales from the EMEA and Argentina acquisitions. Net sales, excluding the acquisitions, grew 17%. Price/mix was up 28%, which is largely comparable to the increases in the previous two quarters. The increase in price/mix reflects the carryover benefit of the domestic and international pricing actions that took effect in our fiscal second and third quarters. Volume declined 11%, and primarily reflecting the impact of exiting certain lower-priced and lower-margin business in international and domestic markets, and the inventory destocking by certain customers and international markets that I mentioned earlier. Global's product contribution margin, excluding comparability items, increased about $145 million. More than half of the increase was from the cumulative benefit of pricing actions, mix improvement and supply chain productivity, more than offsetting higher cost per pound and lower volumes. Incremental earnings from EMEA, which was above our target for the quarter, drove the remainder of the increase. Sales in our Foodservice segment grew 4%, a notable deceleration versus the 17% that we delivered through the first three quarters of the year. Price/mix was up a healthy 13%, but lower than the 26% that we posted through the first three quarters, as we fully lapped our pricing actions taken in fiscal 2022 and realized no tailwind from transportation rates. As expected, the price increase that we began to implement in May only had a modest impact in the quarter, so we'll see more benefit come through in early fiscal 2024. Sales volumes were down 9%, which is consistent with the prior three quarters. We attribute most of the decline to the impact of softer casual dining and full-service restaurant traffic, although we also continue to realize the impact of exiting some lower-priced and lower-margin business. Foodservice's product contribution margin fell about $3 million. Lower volumes drove the decline as higher price mix more than offset the impact of higher cost per pound. Sales in our Retail segment increased 25%. Price/mix increased 35%, driven by pricing actions across our branded and private label portfolios that we began to implement in February to counter input cost inflation. Trade support during the quarter remained below historical levels given category demand. Volume fell 10%, largely reflecting the challenges that I described earlier for private label products. Retail's product contribution margin increased more than $40 million and its margin percentage expanded 140 basis points to nearly 38%, as the cumulative benefit from pricing and mix improvement actions over the past couple of fiscal years more than offset higher cost per pound. Moving to our liquidity position and cash flow. We continue to maintain a solid balance sheet with ample liquidity and a low leverage ratio. We ended the quarter with about $305 million of cash and no borrowings under our $1 billion US revolver. Our net debt was nearly $3.2 billion at the end of the fourth quarter. Using EBITDA on a trailing 12-month basis, which only includes a single quarter of EMEA's earnings, our leverage ratio is 2.6 times. We remain focused on creating value for our shareholders. Our capital allocation priorities remain the same and we continue to prioritize investing in our business to drive long-term growth as well as returning capital to our shareholders through dividends and share repurchases to offset management dilution. In fiscal 2023, we generated more than $760 million of cash from operations or $340 million above last year, largely due to higher earnings. Capital expenditures were about $735 million, which is up $430 million from the prior year. This increase is largely related to construction costs as we continue to expand processing capacity. For the year, we returned more than $190 million of cash to shareholders, including $146 million in dividends and $45 million in share repurchases. Now, let's turn to our fiscal 2024 outlook. We're taking a prudent approach to our financial targets for the year. Overall, we anticipate that the operating environment will continue to be challenging, with inflation and other macro factors affecting our cost structure, restaurant traffic, and consumer demand. In addition, we expect our capacity to produce coated fries, specialty cuts, and chopped in form varieties, such as puffs and hash browns, will remain constrained until our new production facilities in China and Idaho become available late in fiscal 2024. For the year, we are targeting sales of $6.7 billion to $6.9 billion. This includes $1 billion to $1.1 billion of incremental sales attributable to the EMEA transaction during the first three quarters of the year. And net sales growth, excluding acquisitions, of 6.5% to 8.5%, which is above our long-term sales growth algorithm of low to mid-single-digits. Note that since we began to consolidate EMEA's sales beginning in the fourth quarter of fiscal 2023, those results are included in our last year's sales baseline when calculating our sales growth. We expect sales growth, excluding acquisitions, to be largely driven by pricing actions, including both the carryover impact of actions taken in fiscal 2023 as well as any actions that we may take this year to counter input cost inflation. We also expect to deliver favorable customer and product mix as we continue to benefit from our revenue growth management initiatives. As Tom noted, while we expect a solid contribution from price, we do not expect pricing actions to be at the same level as fiscal 2023. Outside of those customer contracts in our Global segment that have yet to be fully priced, we expect any future pricing actions will be largely in line with the more modest rate of input cost inflation than what we've experienced in the past two fiscal years. In addition, transportation rates that we charge to customers will likely serve as a price headwind as we continue to adjust rates to reflect lower freight costs. In fiscal 2024, we expect volume, excluding acquisitions will continue to be pressured by our ongoing efforts to strategically manage product mix by exiting certain lower-priced and lower-margin business. This strategy has proven to be beneficial to earnings, and we continue to see opportunities across our domestic and international channels. In addition, we're taking a cautious approach to consumer demand for two primary reasons. First, while QSR traffic has held up relatively well, casual dining and full-service restaurant traffic trends have softened in the US over the past few months. Second, forecasting demand has become increasingly difficult due to conflicting data about the health of the consumer in the US, Europe, and our key markets as a consequence of inflation, especially for food away from home, the expiration of temporary government assistance and other consumer support programs put in place during the pandemic, employment trends, and other macroeconomic headwinds. Despite these near-term factors, we remain confident in the health and long-term growth prospects of the Global category and we remain committed to investing in our people, production capacity and operations to support that growth. For earnings in fiscal 2024, we expect adjusted EBITDA, including unconsolidated joint ventures, of $1.45 billion to $1.525 billion, assuming potato crops in our primary growing regions are in line with historical averages. Using the midpoint of this EBITDA range implies growth of more than 20% or about $260 million versus the prior year. Looking at it another way, it's up $200 million more than our annualized second half of fiscal 2023 run rate of $1.325 billion. In addition to incremental earnings from the Lamb Weston EMEA acquisition, we expect our earnings growth will be largely driven by higher sales and gross profit as we benefit from pricing actions, mix improvement and supply chain productivity. We're projecting that the increase in sales and gross profit will be partially offset by higher SG&A expenses. We're targeting total SG&A of $765 million to $775 million, which is up about $200 million. In addition to inflation, the increase largely reflects incremental expenses attributable to the consolidation of our EMEA operations, increased investments to upgrade our information systems and ERP infrastructure, non-cash amortization of intangible assets associated with the EMEA acquisition, as well as ERP investments we expect to place in service during the year, and higher compensation and benefit costs due to increased headcount to support our growing business. In addition to our operating targets, we expect equity earnings, which includes our Lamb Weston RDO joint venture in Minnesota to be $30 million to $35 million. We expect capital expenditures of $800 million to $900 million as we continue construction of our previously announced capacity expansion efforts, as well as capital associated with our new ERP system and other IT upgrades. So, to summarize our fiscal 2024 outlook, we're targeting sales of $6.7 billion to $6.9 billion, including $1 billion to $1.1 billion of incremental sales attributable to the consolidation of our EMEA operations. We expect our sales growth, excluding acquisitions, will be largely driven by price/mix, with volume pressure due to our ongoing efforts to strategically manage customer and product mix and a cautious view of demand. And finally, we're targeting adjusted EBITDA, including unconsolidated joint ventures of nearly $1.5 billion using the midpoint of our guidance, which is an increase of 20%, and largely driven by sales and gross profit growth. Lastly, as Tom mentioned, effective the beginning of fiscal 2024, we began managing our operations as two business segments, North America and International. In the coming weeks, we'll provide recast financial information for fiscal years 2021, 2022, and 2023 that is consistent with our new reporting segment structure, including quarterly results for the last two years. And with that, let me now turn it back over to Tom for some closing comments.

Operator:

[Operator Instructions] And our first question is going to come from Andrew Lazar from Barclays. Please go ahead.

Tom Werner:

Good morning Andrew.

Tom Werner:

Yes, Andrew, this is Tom. As we look at the Q4 trends, we did have softness as we remarked in our comments in the Foodservice channel, and QSR held up well. We did have some destocking in the Retail channel that we experienced. And so the -- we're watching it closely. And we also walked away from some volume over the last contract season that we're now starting to see in our results. So, it's -- but I will say in -- early on in June, we saw restaurant traffic pick up a little bit. So, that's a positive. But we're watching it closely. And it's kind of a mixed bag, as we commented on our prepared remarks, on what's happening with restaurant traffic and it just depends on the channel right now. So, we're watching it closely. And we do -- that said, we have line of sight to some opportunities in the market and we'll evaluate those going forward. But that does take some time to transfer into our business that we choose to pursue some of those accounts.

Andrew Lazar:

Got you. And then, Tom, I think you mentioned potentially some additional opportunities. For those, would those be sort of new accounts for you or potentially more business with current accounts?

Bernadette Madarieta:

Yes. And Andrew, I think it's important, as we talk about, as restaurant trends have softened some, the overall demand continues to really be aided by that French fry attachment rate, which continues to be above pre-pandemic levels.

Tom Werner:

So, Andrew, we -- I'm not going to get into specifics on your mathematics, but we are focused on margin improvement as we have been historically over time. We also evaluate overall profit pool when we evaluate additional accounts and opportunities to drive volume and service our customers. I'm extremely pleased with where and what the team has done over the last year in terms of returning our margin structure to normalized level, and we're going to continue to improve it. But we're going to evaluate opportunities going forward to improve the overall profit pool.

Dexter Congbalay:

Andrew, did you say 25%?

Dexter Congbalay:

Okay. We're not -- yes, we can't give specifics on the gross margin. We can cut on the model, but I just want to make sure I didn't hear 25%.

Dexter Congbalay:

Okay. Thanks.

Tom Palmer:

Hi, good morning and thanks for the question. Just wanted to ask on the cadence of 2024. I think normal seasonality might have sent increases in the first three quarters and a dip in 4Q. Just given the expected timing of pricing actions relative to cost inflation, is there anything to consider this year on that cadence that might cause it to deviate?

Tom Palmer:

Okay. Understood. And I just wanted to ask on Europe. I mean we can see frozen potato prices up quite a bit. How does this affect you guys from a timing standpoint? Is this -- are you already addressing it with pricing? Is this still more work to be done? It does seem to be maybe a bit more info there than what we're seeing in the US.

Tom Palmer:

Thank you.

Peter Galbo:

Hey guys. Good morning. Thanks for taking the question.

Bernadette Madarieta:

Hey Peter.

Bernadette Madarieta:

Yes. No, thanks for the question, Peter. First, I'd just say that we really are pleased with our gross margin performance this quarter. It's plus 300 basis points to about 25.1%, and that's despite absorbing the lower-margin EMEA business and we talked about a couple of things. In addition to inflation, the other impact was that reduced fixed cost coverage that we had due to some of that extended maintenance downtime that was planned, and then the other piece was the inventory write-off. So, it's those components that are affecting our fourth quarter margins in addition to the regular inflation that we've been seeing.

Tom Werner:

Yes. So, the thing that we manage every year is -- and we do it really well, is what happens with the yields on the potato crop. And right now, knock on wood, things look pretty good in terms of, like I've said in my prepared remarks, how the crop is progressing. And we keep a close eye on our contracted amount versus forecast, versus what the markets do, and we do this globally. So, we're tuned into it. And we can make adjustments over the course of the next 90 to 120 days to six months, and adjust even our new crop to balance the overall supply of potatoes out. We do it every year. The team, the ag team does a great job doing that. So, I'm comfortable with where we're at in terms of contracted potatoes. And as we do every year over the next several months, we'll make some adjustments to acres and I'll report out more in October on the balance of the crop and the quality of the main crop. So, that's really the key in terms of ag management that we're really good at and the team does a great job. And then in terms of capacity, we got some -- we're bringing on some capacity over the next 18 months. And it's a testament to our belief in the category going forward. While in the near-term, we're seeing some softness in some areas. Over the long-term, I think the category is going to continue to be resilient as it has over historical timeframe. And I feel great about how we're positioned. Our capacity coming online, competition has some capacity coming online. But I think overall, the category is going to absorb what's coming at it. So, I feel good about where the near-term and long-term supply and demand is going to be -- continue to be balanced.

Rob Dickerson:

Great. Thanks so much. Just a quick question from the business exits, right, the lower margin businesses. Is there any kind of visibility as to when you think that actually might start to decelerate or actually stop? Like are you in the seventh inning or third inning? Just curious.

Rob Dickerson:

Okay, great. And then, I guess, secondly, in terms of expectations for the facility China, it sounds like one that is still on track for hopefully maybe sometime Q4 this fiscal year? And then secondly, just in terms of the amount of capital pool on the CapEx side for all the facilities, I mean, $850 million this year, the midpoint still clearly elevated relative to history. But again, just to clarify, if we're thinking about next fiscal year, right, in 2025, I mean, most of that incremental should float or should kind of come off the cash flow statement. Is that right?

Rob Dickerson:

Got it. Okay, cool. And then I guess just lastly, to kind of round up the commentary on volume and pricing for the year. There are usually numerous datasets that we can all look at in terms of industry restaurant traffic like all things considered, right? Even though there's risk, even though we're feeling the pressure, it doesn't look as if overall the pressure right now is that bad, right? I mean there's some pressure, but pricing is not that bad. So, as you kind of think through the year, given you had baked this into the guide, assuming these trends kind of stay where they are, right, they don't get worse, I mean, it seems like it's still a safe assumption, especially given what you've done historically, that we're not thinking about increased LTOs or pricing give back, right? If the prices are where they are, trends are where they are in the industry as long, as things kind of don't get materially worse, the pricing is sticky? That's it. Thanks.

Rob Dickerson:

Makes sense. Thanks Tom. Thanks team.

Operator:

And Adam Samuelson from Goldman Sachs is next. Please go ahead.

Bernadette Madarieta:

Good morning Adam.

Bernadette Madarieta:

Yes, Adam, we haven't given any specific earnings contribution related to those businesses, we've just given topline.

Bernadette Madarieta:

Yes, Adam, the way I'd explain that is we're not giving specific earnings contribution, but the adjusted EBITDA from the acquired businesses were well above the $20 million to $30 million target that we provided. As it relates to going forward, as Tom said, Marc Schroeder is running that business, and we're doing a lot of things there as we do look at mix management and pricing, and we're confident in the actions that we've taken thus far and that we'll continue to deliver it going forward.

Tom Werner:

Yes, I mean, as I've said previously, our target is to run the assets around 95% capacity, and we continue to trend towards that. We've much improved over the prior year, and that's really the sweet spot, I think, for us. And I can't comment on the industry and what the other guys are doing, but that's kind of where we're targeted, and we're trending towards that.

Operator:

And our next question is going to come from Matt Smith with Stifel. Please go ahead.

Bernadette Madarieta:

Good morning.

Bernadette Madarieta:

Yes. No, as I said in my prepared remarks, SG&A is expected to increase about $200 million this year. We are replacing, again, decades of underspending in IT with the ERP, but also in other areas of the business as it relates to IT, that's going to be about a third of it. But then we've also got another impact of the incremental EMEA SG&A for the three quarters that they weren't included in our previous year results. And then I did mention that we are going to have a step-up in that noncash amortization related to the intangibles we took on, as well as once we placed some of the ERP project in service, we're going to see incremental amortization there. So, it's those factors as well as incremental costs related to some headcount that we'll be adding to support the growing business that's making up that increase.

Bernadette Madarieta:

Yes. So, the level of expense is going to increase as it relates to the noncash component, because as that continues to build and we go live with the different areas of the system, we're going to see more amortization expense. The system is going to be amortized over five to seven years and so that's more what you're going to see is that non-cash component.

Operator:

[Operator Instructions] William Reuter from Bank of America is next. Please go ahead.

Bernadette Madarieta:

No. No sequential change. Continue to remain well above pre-pandemic levels.

Bernadette Madarieta:

Yes, most of those are going to be organic investments. Again, as we take a look at our manufacturing footprint and the possibility for needs to add incremental flexibility for other products.

Bernadette Madarieta:

Thank you.

Carla Casella:

Hi. Just two quick clarifications. I think you said you ended the year with no revolver borrowings and -- but still that's up by about $243 million. What was the draw? Was that a draw from China or elsewhere?

Carla Casella:

Okay, great. And then just on the overall cost, you mentioned the 20% to 30% increase in the potato cost across the different regions. What's the timeframe in that stance? Like when do we start to lap that full cost increase? And when did it go in place?

Carla Casella:

Okay. So, we'll see in the costs next quarter?

Carla Casella:

Awesome. Thank you so much.

Operator:

And I have no further questions in the queue. I'd like to turn the call back over to Dexter Congbalay. Please go ahead.

Operator:

And this concludes today's call. Thank you for your participation. You may now disconnect.

Dexter Congbalay:

Good morning and thank you for joining us for Lamb Weston's third 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 earnings release. With me today are Tom Werner, our President and Chief Executive Officer; and Bernadette Madarieta, 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.

Bernadette Madarieta:

Thanks, Tom, and good morning, everyone. I want to also thank the Lamb Weston team for delivering another quarter of strong results and continuing to build good operating momentum across the company. This momentum has enabled us to raise our financial targets for the remainder of the year. I also want to add a warm welcome to the Lamb Weston EMEA team. Let's begin with our third quarter results. Sales in the third quarter were up 31% to $1.25 billion. Price/mix was up 31% as we continue to benefit from pricing actions across each of our core business segments to counter input and manufacturing cost inflation. The increase reflects the carryover impact of product pricing actions that we initiated in fiscal 2022, as well as pricing actions that we began implementing during this fiscal year. Our overall sales volumes were flat. While we increased shipments to our large QSR chain customers and to retail customers in North America, which generally reflects demand and restaurant traffic trends that Tom described earlier, our growth in volume was offset by a couple of factors. First, we continued efforts to strategically improve our product and customer mix by exiting certain lower price, lower-margin business. Second, and to a lesser extent, softer casual dining and full service restaurant traffic also affected volumes in the quarter, which is largely reflected in our Foodservice shipments. It's worth noting that in the quarter, we also continue to make progress in stabilizing our supply chain with better availability of production team members and key ingredients, as well as improved production forecasting. As a result, the impact on production in the quarter was relatively modest, which helped drive improvements in our customer fill rates versus our first and second quarters. This improvement is more apparent in our Retail and Foodservice segments as we have largely maintained high fill rates in our global segment, since the start of the pandemic. That said, we expect changes in product mix and consumer demand will continue to pressure our near-term production. And therefore shipments of high demand products, including retail fries, premium fries and batter-coated products. We expect this volume pressure and our ability to meet growing consumer demand will continue until our capacity investments in China, Idaho, Argentina and the Netherlands become available over the next couple of years. Gross profit in the quarter increased $177 million to nearly $400 million as a result of our sales growth and gross margins expanding 860 basis points versus the prior year quarter to 31.7%. Our strong gross margin performance reflects the cumulative benefit of executing pricing actions in each of our business segments, to counter input and manufacturing cost inflation, as well as leveraging efforts to improve customer and product mix and supply chain productivity. On the cost side in the quarter, we again realized a double-digit increase in input and manufacturing cost per pound. This was largely driven by about a 20% increase in contracted prices for potatoes in North America, significantly higher prices for open market potato purchases, due to poor yields from the calendar year 2022 crop and continued increases in the cost of edible oils, ingredients for batter coatings, labor and energy. In contrast, our transportation costs fell in the quarter as industry rates for rail, trucking and ocean freight services continued their steady decline over the past couple of quarters. We're continuing to reduce our freight charges to customers to match the decline in costs, which will steadily reduce the tailwind from transport prices in our sales line. However, the impact on our gross profit over time will be largely neutral. Moving on from gross profit. Our SG&A excluding items impacting comparability increased $49 million to $136 million, primarily reflecting higher compensation and benefit expenses due to improved operating performance, as well as actions to maintain competitive pay levels across our organization. We also had higher expenses related to improving our IT infrastructure, including designing and building a new ERP system and a $6 million increase in advertising and promotion expenses largely behind support of our branded products in our retail segment. Equity method earnings from our unconsolidated joint ventures increased $12 million, excluding items impacting comparability and mark-to-market adjustments associated with currency and commodity hedging contracts. Favorable price/mix, largely reflecting pricing actions in Europe drove the increase. Moving to our segments. Sales in our Global segment were up 33% in the quarter. Price/mix was up 33%, reflecting the revenue growth management initiatives and pricing actions to counter inflation that Tom described earlier. Global volume was flat, solid growth of shipments to large QSR chain customers in North America was offset by the impact of exiting certain lower priced and lower margin business in international and domestic markets as we actively manage our customer mix. Global's product contribution margin increased to $168 million from a relatively weak prior year quarter, which at the time reflected significant input in manufacturing cost increases and only a modest benefit from product pricing actions. Global segment's product contribution margin percentage in the quarter was 25.8%, which is back to a seasonal pre-pandemic level and was also a bit better-than-expected as we realize more benefits from pulling forward pricing actions for some customers than we originally anticipated. Sales in our Foodservice segment grew 22%, driven by a 25% increase in price/mix as we continue to realize the carryover benefit of product pricing actions that we announced throughout fiscal 2022, as well as the actions taken in fiscal 2023 to counter inflation. Sales volumes were down about 3%, primarily reflecting -- exiting of some lower price, lower margin business to manage our customer and product mix, as well as softer traffic in casual dining and full service restaurants. Foodservices product contribution margin increased to $143 million or up 34% as a cumulative benefit from pricing actions more than offset higher manufacturing cost per pound and the impact of lower volumes. Our retail segment delivered another strong quarter with sales up 50%, price/mix increased 44%, reflecting pricing actions across our branded and private label portfolios to counter inflation. This was aided in part by limited trade support given the strong category demand and constrained supply environment. Volume in this segment was up 6% behind better customer fill rates for our branded products. Private label volume was also up as we lap the incremental losses of certain lower priced and lower margin products over the past couple of years. Retail's product contribution margin increased to $83 million and its margin percentage topped 38%, as the cumulative benefits from pricing actions more than offset higher manufacturing costs per pound. We're very pleased with how our retail team has strengthened our market share, profitability and portfolio mix over the past couple of years and we remain confident in our ability to remain the overall category leader. Moving to our liquidity position and our cash flow. Our balance sheet remains solid with strong liquidity and a low leverage ratio. We ended the quarter with about $675 million of cash and a $1 billion undrawn revolver. Our cash balance was inflated as we did take on a new $450 million term loan at the end of January to fund most of the cash consideration for the EMEA transaction, which closed a couple days into our fiscal fourth quarter. Our net debt was more than $2.5 billion at the end of the third quarter, resulting in a 2.3 times leverage ratio on a trailing 12-month basis. After accounting for the EMEA transaction, the estimated net debt at the beginning of our fiscal fourth quarter would be about $3.3 billion, resulting in a 2.6 times leverage ratio using our updated fiscal 2023 earnings target and an annualized contribution from our EMEA operations. Our capital allocation priorities remain the same. We continue to prioritize investing in the business to drive long-term growth, as well as delivering dividend growth for our shareholders and share repurchases to offset management dilution. In the first three quarters of the year, we generated about $335 million of cash from operations, that's about $160 million more than the first three quarters of last year. This is largely due to the higher earnings, partially offset by increased working capital. Capital expenditures were nearly $500 million, which is up about $270 million from the first three quarters of last year. This increase is largely related to construction costs as we continue to expand processing capacity in Idaho, China and Argentina. In the first three quarters, we returned nearly $146 million of cash to shareholders, including $106 million in dividends and about $41 million in share repurchases. Now let's turn to our 2023 outlook. Our updated targets include the financial consolidation of Lamb Weston EMEA beginning in our fiscal fourth quarter. For the year, we've increased our sales target to $5.25 billion to $5.35 billion, up from our previous target of $4.8 billion to $4.9 billion, about $300 million to $325 million of the increase reflects the consolidation of Lamb Weston EMEA. The additional $100 million to $150 million increase reflects our strong results in our fiscal third quarter and our expected continued momentum in the fourth quarter. Excluding the contribution from EMEA, we expect our net sales growth in the fourth quarter to be driven by price/mix as volumes will continue to be affected by certain -- exiting certain lower price and lower margin volume business to strategically manage customer and product mix and the potential for a slowdown in restaurant traffic and consumer demand. For earnings, we're targeting adjusted diluted earnings per share of $4.35 to $4.50, that's up from our previous target of $3.75 to $4. And adjusted EBITDA including unconsolidated joint ventures of $1.18 billion to $1.21 billion, up from our previous estimate of $1.05 billion to $1.1 billion. Of the $110 million to $130 million increase in our adjusted EBITDA target, we estimate that EMEA will contribute an incremental $10 million to $15 million of that amount. That implies then that EMEA's total EBITDA contribution of $20 million to $30 million in the fourth quarter, which is in line with the normalized full-year pre-pandemic EBITDA of about EUR100. The additional $100 million to $115 million increase in our full-year EBITDA target reflects our strong results in our fiscal third quarter and our expected strong sales and earnings growth in the fourth quarter. Including the consolidation of EMEA, we're targeting a full-year gross margin of 27% to 27.5%, implying a fourth quarter gross margin of 23% to 24.5%. Excluding EMEA, we've raised our full-year gross margin target to 28% to 28.5%, up from our previous target of 27% to 28%. This implies a fourth quarter gross margin target excluding EMEA of 25% to 27%. While this would be a healthy gross margin expansion versus the prior year quarter, it also implies a notable step down from our fiscal third quarter gross margin of 31.7%. We believe this estimate is prudent, reflecting typical seasonal patterns in our cost structure. Significantly higher cost open market potatoes, continued inflation for key inputs, and the impact of volume declines as a result of inflationary pressures on consumers. With respect to SG&A, we expect expenses excluding items impacting comparability of $550 million to $570 million, that's up from our previous target of $525 million to $550 million. The increase largely reflects the consolidation of Lamb Weston EMEA. In addition, we increased our estimate for capital expenditures to between $700 million to $725 million, up from our previous estimate of $475 million to $525 million. This increase reflects accelerated spending behind capital expansion investments, as well as capital spending associated with the consolidation of EMEA. We also made adjustments to other financial targets, which you can find in our earnings release. And with that, let me turn the call back over to Tom for some closing comments.

Operator:

Thank you. [Operator Instructions] We'll take your first question from Andrew Lazar from Barclays. Please go ahead, sir.

Tom Werner:

Good morning, Andrew.

Andrew Lazar:

Yes. To start off, I know that Lamb Weston did not necessarily see pre-pandemic gross margins as a ceiling. But with margins now above pre-pandemic levels, excluding the recent transaction, of course, I guess what are the key factors that provide visibility to further margin expansion moving forward to the extent that, that's how you see it? And then I've just got a follow-up. Thanks.

Andrew Lazar:

I think you said in the fourth quarter, we shouldn't expect any incremental pricing actions. With grower costs expected to be up as you mentioned another 20% for the current coming crop, should we expect some incremental pricing going forward as I guess as we roll into fiscal ’24? Or have you implemented all that you need for the coming year? And with capacity constraints starting to ease, I guess what I'm getting at is, could we have a scenario in the coming fiscal year where you have both some incremental pricing and some positive volume growth as well, given constraints have been one of the main reasons for volume being flattish to down the last couple of quarters? Thank you.

Andrew Lazar:

Great. Thank you so much.

Operator:

We'll hear next from Tom Palmer from JPMorgan.

Tom Werner:

Good morning, Tom.

Tom Palmer:

Maybe I could just start off clarifying expectations for the Europe business. You noted normal EBITDA of about $100 million and then the fourth quarter guidance is pretty consistent with that. But I think the business has been doing a bit better than this over the past couple of quarters at least. Are there reasons such as certain costs that are not excluded from adjusted earnings or other cost headwinds or seasonality that might make this figure a bit lower in the fourth quarter? And then when we look at results this year, would the general assumption be that next year EBITDA grows year-over-year on top of that?

Tom Palmer:

Understood. Thank you. And then just maybe on the gross margin, I know you noted, kind of, a more normal seasonal decline in the fourth quarter. I think a quarter ago, you were talking about maybe less than a normal quarterly decline in the fourth quarter. I know Bernadette, you mentioned it being prudent in your prepared remarks. Is there anything to consider that has shifted that expected cadence beyond that? I mean, for instance, was 3Q much better than you expected and therefore you're expecting more than normalization or anything with the timing of pricing, because it would seem like you're getting a bit of help at least on the retail side given the late quarter pricing action?

Tom Palmer:

Great. Thank you.

Adam Samuelson:

Yes. Thank you. Good morning, everyone.

Bernadette Madarieta:

Good morning.

Bernadette Madarieta:

Yes, thanks for the question, Adam. A couple of responses to that, I would say first, as we look at the fourth quarter guidance, that's what I would take to look at the normalized amount for this year in terms of being that EUR100 million on a run rate basis. And then certainly there's going to be a number of things as we bring EMEA into our operations that we're looking forward to having that one phase to the customer, introducing our revenue growth management capabilities and bringing in our supply chain common methodologies and ways of working that we're looking to work on over time as we integrate this business with ours to bring in more upside as we continue to progress. But it’s not going to happen overnight, it’s going to happen over time. But those are some of the opportunities that we see to be able to continue to grow this business.

Adam Samuelson:

All right. That's helpful color. And then just on the CapEx, which with one quarter left in the year was a pretty sizable, kind of, increase in the outlook even inclusive of the Groningen CapEx at the JV that you are now, kind of, consolidating. Does this change any of the timing around the Argentine, Idaho or Chinese capacity or the things you're doing in the rest of the network or capabilities around coatings or battering that, kind of, you're pulling forward. Just help us think about, kind of, magnitude of that CapEx step up? Well, how it's been, kind of, timing of new capacity and what should we think about as a range for the consolidated CapEx for next year even at a low high level?

Adam Samuelson:

All right. That's all really helpful, I'll pass it on.

Adam Samuelson:

Thank you.

Peter Galbo:

Hey, guys. Good morning. Thanks for taking the question.

Bernadette Madarieta:

Good morning, Peter.

Tom Werner:

Yes. So in terms of the Foodservice segment, we've done a really good job over the past year or two, kind of, catch up to our inflation. And so I feel comfortable where we're at on that. We're -- as I said earlier, we're evaluating as we look to our fiscal 2024, our input cost inflation and how that's going to materialize. And then as we do every year, then we'll get together and think about what we need to do to offset inflation. And I can't say this enough, we're still in an inflationary environment in our business. And so as we have in the past and we'll continue to do, we're going to evaluate our pricing actions in all segments to offset inflation and that's, kind of, what we're going to do. So…

Peter Galbo:

Okay, no that's helpful. And then maybe just to follow-up on Adam's question on CapEx. Obviously, kind of, from a position of strength, you guys are accelerating some of the spend. Bernadette, it didn't sound like you were, kind of, pulling forward any spend from next year, but maybe just wanted to clarify that? And then just in a broader context on, kind of, capital allocation with the CapEx spend being as high as it is and maybe you're going to move past through a lot of that. The debt's turned out pretty far at this point. You started to buy back a little bit of stock in the quarter. The dividend yield is pretty low relative to peers, just maybe you can kind of comment on how you're seeing the setup for some of the other pillars within capital allocation? Thanks very much.

Peter Galbo:

Got it. Thanks very much guys.

Rob Dickerson:

Great. Thanks so much. Maybe just my first question, more mechanical [Indiscernible]. It looks like the interest expense expectation for the year hasn't changed, but clearly taking on the term loan and then maybe some assumed pre-existing debt I would think from Meijer. Maybe just, kind of, quickly explain, so maybe I just missed it in the prepared remarks, kind of how that interest expense doesn't change with the assumption of debt?

Rob Dickerson:

Got it. So that -- but that would probably more like a Q4 event like we would still assume that even though you're not guiding that there would be incremental debt and interest given the deal. Just thinking about the mechanics of the actual acquisition?

Rob Dickerson:

Okay, super. And then maybe just Tom and Bern, just kind of we're talking about a lot of commentary around that $100 million on the Meijer -- sorry, yes, on the Meijer JV and kind of what the potential run rate could be? Maybe just another kind of way to ask it is just that seed number we've been -- we've all been talking about vis-à-vis, kind of, pre-pandemic? But then also there are all these synergies or some synergies that should come through. So I'm just curious like over the past few months, you've actually closed the transaction, do you feel like you have better line of sight on, kind of, synergy potential without having to quantify them over the next two to three years?

Rob Dickerson:

Got it. super. And then just quickly, maybe a little bit more fun to talk about. I saw your -- let's say your ability to enter Domino's with product, I guess, is not fried. It seems like it's more baked. Maybe if you could just spend a minute, kind of, speaking, kind of, to the technology that maybe you have on a proprietary basis that allows you to do that? And then is that something that I would assume you would clearly try to attack with other customers that let's say don't have fryers? That's it. Thanks.

Rob Dickerson:

Got it, super. Thanks so much.

William Reuter:

Good morning. I just -- I have two questions, the first is you mentioned M&A, you also are active in building a handful of new facilities. You're going to be consolidating the JV and you talked about a lot of the operational changes you're going to make there? I guess, do you feel like you're at the point now where you still could be active? And I guess, what types of businesses or where within the supply chain do you expect that you would be more active?

William Reuter:

Okay. And then my second question, is there any way for you to provide some additional colour around what the impact of open market purchases were this year? Just trying to think about in the event that you're able to fill that with contracted purchases next year, what that tailwind could be?

William Reuter:

Great. Okay. That's all for me. Thank you.

William Reuter:

Great. Thank you.

Andrew Lazar:

Thanks so much. Just a super quick one. Tom, when you announced the joint venture acquisition, with Meijer. I think one of the things you'd mentioned was that you also hope that or intended that this action would, kind of, send a message right to the broader, sort of, European, sort of, competitive environment there that you were certainly looking for there to be over time the potential for further consolidation in what is a much more fragmented, right operating theatre in Europe? And I'm just curious if this transaction now that you've closed it in a couple of months or since announcing it, whether the -- I don't know, the dialogue or pace of conversations maybe with others has picked up more generally. We saw another one outside of you, right, the transaction that happened, whatever it was a couple of months ago in Belgium. I'm just curious if your expectation would be that we're likely to see more somewhat sooner or not and if you're hearing more chatter and dialogue? Thanks.

Andrew Lazar:

Thank you.

Dexter Congbalay:

Thanks for joining the call this morning. If you want to have any follow-up sessions, please feel to send an e-mail and [Technical Difficulty] time. Thanks for everybody for joining the call. Thank you.

Dexter Congbalay :

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 earnings release. With me today are Tom Werner, our President and Chief Executive Officer; and Bernadette Madarieta, 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.

Bernadette Madarieta :

Thanks, Tom, and good morning, everyone. As Tom said, we're pleased with our financial performance and operating momentum through the first half of the year, which has provided us with a strong foundation to raise our annual sales and earnings targets. Let me review our second quarter results before discussing our updated outlook. Sales in the second quarter grew 27% to nearly $1.28 billion. That's a record for us. A 30% increase in price mix drove our sales growth as we continued to benefit from product and great pricing actions across each of our business segments. The increase reflects the carryover impact of product pricing actions that we initiated in fiscal 2022 as well as pricing actions that we began implementing during this fiscal year. The increase also reflects benefits from efforts to improve our portfolio mix. Sales volumes declined 3%, as we continued to experience the supply chain constraints and related shortfalls in order fulfillment that Tom described. This primarily affected volumes and service levels in our Foodservice and Retail segments. To a lesser extent, volumes in the quarter were also impacted by softer casual dining and full-service restaurant traffic as well as the timing of replacing losses of some low-margin business in our Foodservice and Retail segments. Gross profit in the quarter increased $176 million to $382 million, as a result of our sales growth and strong gross margin performance. Our margin expanded 950 basis points versus the prior year quarter and about 550 basis points sequentially to nearly 30%. Broadly speaking, pricing actions in each of our business segments, efforts to improve customer and product mix, and value created from our productivity programs have caught up to the cumulative effect of input and transportation cost inflation over the past couple of years. Input cost inflation, however, continues to be challenging. Once again, it was the primary driver of a double-digit increase in our manufacturing and distribution cost per pound in the quarter, largely due to higher prices for edible oils, ingredients for batter coatings, labor and transportation. Potato costs were also up as a consequence of the historically poor crop that was harvested last fall. While this is the last quarter that we will realize the financial impact from the 2021 crop, we expect our potato costs to continue to increase in the second half of this year as a result of higher contract prices and the need for significant open market purchases due to poor yields from the 2022 crop. We also continue to incur higher costs and operational inefficiencies associated with shortages of key ingredients and spare parts, onboarding newly hired production team members and other industry-wide supply chain challenges. While the impacts from these constraints have been slowly easing, we expect they will continue to be a headwind through the remainder of the year. Moving on from cost of sales. Our SG&A, excluding items impacting comparability, increased $45 million to $136 million, largely due to higher compensation and benefit expenses due to improved operating performance and higher expenses relating to improving our IT infrastructure, including designing and building a new ERP system. Equity method earnings from our unconsolidated joint ventures increased $16 million, excluding items impacting comparability and mark-to-market adjustments associated with currency and commodity hedging contracts. Higher pricing, especially in Europe, drove the increase. Demand continued to hold up relatively well despite the impact of significant consumer inflation and volatile energy costs. This sets Lamb Weston/Meijer up to deliver solid results in the second half of the year. Moving to our segments. Sales in our Global segment were up 34% in the quarter behind a 31% increase in price/mix. As Tom noted earlier, most of the increase was driven by price escalators and updated pricing structures. With the increase in price/mix, Global's product contribution margin more than doubled to $171 million in the quarter. In addition, Global's product contribution margin percentage approached pre-pandemic levels, which is a key milestone for our overall performance. While we were always confident that we would restore Global's margins, we knew it would take longer than in other segments due to the structure and terms of the channels' customer contracts. Sales in our Foodservice segment grew 14%, driven by a 25% increase in price/mix as we continue to realize the carryover benefit of pricing actions that we announced throughout fiscal 2022 as well as actions taken earlier this year to counter inflation. Sales volumes decreased 11%, primarily reflecting production constraints and to a lesser extent softer traffic in casual dining and full-service restaurants. In addition, because of these production constraints, we've had to make some tough choices on customer service, which has resulted in the loss of some lower-margin business. Foodservice's product contribution margin increased 25% as the benefits from pricing actions more than offset higher manufacturing and distribution cost per pound and the impact of lower volumes. Sales in our Retail segment increased 34% behind a 43% increase in price/mix, reflecting pricing actions across our branded and private label portfolios. Volume fell 9%, largely as a result of production constraints. It also reflects the incremental losses of certain lower-margin private label products. Through a combination of the team's strong execution of pricing and mix management, Retail's product contribution margin more than tripled to $66 million. Its production contribution margin percentage is now in line with our away-from-home channels. Moving to our liquidity position and cash flow. Our balance sheet remains solid with strong liquidity and a low leverage ratio. We ended the quarter with about $420 million of cash and $1 billion undrawn revolver. Our net debt was about $2.3 billion, resulting in a 2.4 times leverage ratio. That's down from 3.1 times at the end of fiscal 2022, reflecting our earnings recovery. In the first half of the year, we generated about $290 million of cash from operations or about $80 million more than the first half of last year, largely due to the higher earnings. Capital expenditures were about $270 million, which is up about $120 million from the first half of last year. This increase is largely related to construction costs as we continue to expand processing capacity in Idaho, China and Argentina. As a reminder, our annual maintenance capital expenditures have typically been about $120 million to $130 million as we generally target about 3% to 4% of sales. In the first half of the year, we returned nearly $100 million of cash to shareholders, including more than $70 million in dividends and $28 million in share repurchases. As you may have seen a few weeks ago, our board of directors approved a 14% increase in our quarterly dividend, reflecting the successful execution of our strategy to drive strong financial results and cash flow and our confidence in our ability to deliver sustainable, profitable growth over the long-term. So now let's turn to the updated fiscal 2023 outlook. Please note that our updated targets do not reflect the financial consolidation of Lamb Weston/Meijer as that transaction has not yet closed. We believe the transaction will be completed during our fiscal fourth quarter. So for the year, we've increased our sales target to $4.8 billion to $4.9 billion, which implies a growth rate of 17% to 19.5%. That's up from our previous target of $4.7 billion to $4.8 billion. We expect that higher price/mix will be the primary driver of sales growth in the second half of the year. Forecasting volumes in the second half remains difficult as we anticipate shipments will continue to be affected by supply chain constraints through fiscal 2023 and because of volatility surrounding a potential slowdown in restaurant traffic and demand as consumers face inflation and a weaker macroeconomic environment. For earnings, we're targeting adjusted net income of $540 million to $580 million. That's up from our previous target of $360 million to $410 million. Adjusted diluted earnings per share of $3.75 to $4, up from our previous target of $2.45 to $2.85. And finally, adjusted EBITDA, including unconsolidated joint ventures of $1.05 billion to $1.1 billion, up from our previous estimate of $840 million to $910 million. We continue to expect the increase in our earnings will be driven primarily by sales growth and gross margin expansion. We're targeting gross margins during the second half of the year to be between 27% and 28%, which is in line with the more than 27% that we delivered in the first half and up from the 23% that we posted during the back half of fiscal 2022. We expect the seasonal, sequential quarterly cadence for gross margins will be less pronounced than in previous years. Specifically, we do not foresee much of the typical seasonal step-up in gross margin from Q2 to Q3 or much of the typical step down from Q3 to Q4 for a few reasons. First, beginning in the third quarter, we expect our raw potato costs to increase to reflect the approximately 20% increase in the contracted price of the recently harvested potato crop. In addition, we expect higher potato costs as a result of significant high-cost open market purchases. Second, we expect continued significant inflation for other key inputs during the second half of the year, especially for edible oils and ingredients for batter coatings. Third, we expect a more muted step-up in global pricing from Q2 to Q3 due to the acceleration of pricing actions for contracts up for renewal in the coming years. And finally, we expect the year-over-year price increases in our Foodservice and Retail segments will decelerate as we begin to lap actions taken in fiscal 2022. With respect to SG&A, we expect expenses, excluding items impacting comparability of $525 million to $550 million. That's up from our previous target, largely due to higher compensation and benefit expenses, including increased incentive compensation expense due to improved operating performance as well as expenses for outside services, including support of our IT and ERP upgrades. Our estimates of other financial targets, including interest expense, capital expenditures, depreciation and amortization expenses and our effective tax rate are unchanged. And with that, let me now turn it back over to Tom for some closing comments.

Operator:

[Operator Instructions] Our first question is going to come from Tom Palmer from JPMorgan. Please go ahead, sir.

Tom Werner :

Good morning, Tom.

Bernadette Madarieta :

Yeah. Thanks, Tom. This is Bernadette. We don't expect the absolute rate to increase. We will, though, however, continue to see that double-digit inflation for the remainder of the year. And as you said, that's reflecting the higher cost for potatoes and then other key inputs for edible oils, labor and ingredients. So absolutely expect that double-digit cost increase to continue but not increase.

Tom Werner :

Yeah, Tom. So this is Tom. The team in Lamb Weston/Meijer soon to be Lamb Weston has made terrific progress. Marc Schroeder leads that business, and the business has turned the corner. They've implemented a number of actions to stabilize the earnings of that business as we expected. They're showing great progress. And the run-rates are trending positively, and we expect that to continue for the back half of the year. And as we close that transaction, as we stated, we expect that to happen in Q4 to get through all the reviews and regulatory process. We'll provide some more color on that once the transaction is closed in the coming quarters.

Operator:

And our next question is going to come from Peter Galbo from Bank of America.

Tom Werner :

Good morning.

Tom Werner :

Yeah. So the year-over-year this year, it's not as pronounced as it was last year because of the quality of the crop last year and yields. We got out ahead of it, the ag team in Lamb Weston has done a terrific job sourcing potatoes to meet our needs. They're still high cost. You got to freight them across the country and you have some quality issues when you're trucking that far. But it's not as pronounced as it was last year. And all those costs are reflected in our outlook for the remainder of this fiscal year. And good news, bad news is we had some experience last year, so we were able to rally quickly, and we understand how that all is going to impact the business. But again, that's all forecasted in our outlook. So we're doing everything we can to meet our customer demand, and that's the most important thing.

Bernadette Madarieta :

Yeah. No, thank you. We do expect to see an increase. But as you said, it will not be as pronounced in the third quarter as we've historically seen. And then there will be a step down in fourth quarter, but again, not as pronounced as what we've historically seen.

Bernadette Madarieta :

Yep, thank you.

Chris Growe :

Thank you. Good morning.

Chris Growe :

Hi. Happy New Year. Hi. Just a bit of a follow-on to that Peter's question and some of your response there. I guess just to understand the gross margin this quarter. I just want to get a sense of how unique the performance was this quarter. And I was sticking around the areas of like mix and perhaps even like limited time offerings to what degree that's influencing the gross margin this quarter that may not be sustainable? And then to what degree you're walking away from lower-margin business, and to what degree that's influencing your margin as well, perhaps there's other issues, too. But those are a couple of things I was thinking about just to get a little sense around and how that could affect the gross margin going forward.

Chris Growe :

Okay. Thank you for that. And actually, I have a follow-on to that, which just be that you talked about pulling forward some of those global contract renewal discussions. So it sounds like you had a good renewal from this past summer, and that should start to kick in now. But it sounds like you also then pulled forward some -- maybe some from next summer. -- or even summers ahead. I guess just to get a sense of where you are then on contract renewals normally. It's like a third every year. Did you -- were you able to get more of that done is the question?

Chris Growe :

And can you say how much of your contract renewals, how much more you've done this year? Or how much less you'll have for you going forward?

Chris Growe :

Okay.

Chris Growe :

Thanks so much.

Chris Growe :

Okay, great. Thank you for that.

Adam Samuelson :

Yes, thank you. Good morning, everyone.

Bernadette Madarieta :

Good morning.

Tom Werner :

Yeah, Adam, overall, I feel really strong about the health of the category. And we've purposely had to make choices across our segments to support our customer base, and we've really focused on product/mix management across the portfolio and the customers. So the QSR segment continues to be really healthy. As we stated in our prepared remarks, the fast casual, casual dining is experiencing some weaker traffic. Although it's improving versus where it was in the first quarter, but we're also making choices and in terms of customer and supporting customers based on product mix and our capacity. And there are still challenges within our network to produce and get back to the levels where we were pre-pandemic. And the team, the supply chain team is working on that. And it's going to take us the balance of this year to continue to focus on things to improve that. So the category is healthy. And yes, our volume is a little soft in some areas. That's traffic driven. But over the long-term, when I look at the category and think about the next two, three, five years, and the investments we're making, we're going to be well positioned in a couple of years to bring on capacity and drive opportunities that right now we're making choices that we don't necessarily like we got to support our key customers going forward.

Adam Samuelson :

Got it. And if I could maybe follow on the point on just capacity a little bit. You talked earlier about some of the product/mix impacting kind of throughput rates and kind of what you could actually produce from an end product perspective? I mean, do you think with the current product mix, if you were properly staffed and there wasn't raw material constraint around potatoes that the current capacity with this mix could produce the same volume of finished product that you did pre-pandemic? Or does the actual mix that you've kind of shifted to as it stands right now actually constrain your -- physically constrain your output going forward?

Adam Samuelson :

Okay. And maybe just a final, if I could squeeze in. Of your total price/mix in the quarter, how much was mix? Can you share if you can -- or any reframing?

Adam Samuelson :

All right. Okay, I just try. I appreciate all the color. I'll pass it on. Thanks.

William Michael :

Hi. I just have two. Given the changes in your sourcing from the West Coast to the East Coast that you did last year now again this year, do you anticipate that in future years, if we return to more typical yields, you'll be able to shift that back to the West Coast and therefore, there should be some kind of margin expansion in 2024 and beyond?

William Michael :

Got it. And then my second is based upon your guidance, even pro forma for the acquisition of the rest of the joint venture, you're still going to be below your leverage target of 3.5 times to 4 times, you're going to be, I think, in the high twos. I guess what is that, I mean, in terms of capital allocation. I know you increased the dividend, but how are you thinking about that?

William Michael :

Okay. So the leverage target remains at 3.5 times to 4 times?

William Michael :

Got it. All right. That's all for me. Thank you.

Operator:

There are no further questions at this time. I'd like to turn the conference back over to you, Dexter Congbalay for any additional remarks.

Operator:

This concludes today's call. We appreciate your participation. You may now disconnect.

Dexter Congbalay:

Good morning and thank you for joining us for Lamb Weston's first 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. 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 Werner, our President and Chief Executive Officer; and Bernadette Madarieta, our Chief Financial Officer. Tom will provide an overview of the current environment. Bernadette will then provide details on our first quarter results and our fiscal 2023 outlook. With that, let me now turn the call over to Tom.

Bernadette Madarieta :

Thanks, Tom, and good morning, everyone. As Tom said, we're pleased with our performance in the quarter, and we are confident in our ability to deliver at the high end of our financial target ranges for the year. In the quarter, our sales grew 14% to more than $1.1 billion. Price/mix was up 19% as we continued to benefit from product and freight pricing actions that we announced last fiscal year and as we began to execute new pricing actions during the fiscal - for the first quarter. Our sales volumes were down 5%, primarily reflecting the softer restaurant traffic trends in U.S. casual dining and full-service outlets that Tom described earlier, as well as the timing of shipments to large chain restaurant customers. In Retail, while branded product volumes were up, overall Retail segment volumes were down with the ongoing effect of losing certain low margin private label business. Sales volumes in Foodservice and Retail also continued to be affected by our inability to fully serve customer demand as a result of constrained production at our facilities. Gross profit increased $122 million to $273 million in the quarter. Gross margin expanded nearly 900 basis points versus the prior year quarter, and 230 basis points sequentially to more than 24%. Pricing actions and productivity savings drove these improvements, more than offsetting the impact of higher costs on a per pound basis and lower sales volumes. Cost per pound increased high-single-digits with inflation, again, accounting for essentially all of the increase. Higher prices for inputs such as edible oils, ingredients for batter and other coatings, labor and transportation were the primary drivers. Potato costs were also up as a result of the poor crop that was harvested last fall. We'll continue to realize the financial impact of this crop through most of the second quarter of fiscal 2023 as we sell the final finished goods produced from the crop. And finally, we continue to incur higher costs and operational inefficiencies associated with labor, spare parts and ingredient shortages and other industry-wide supply chain challenges. Benefits from our portfolio simplification, and other cost mitigation efforts, however, offset some of these higher costs. Moving on from cost of sales, our SG&A increased $25 million to $116 million, largely due to higher compensation and benefits expense and expenses related to improving our IT infrastructure, including designing a new ERP system. Equity method earnings from unconsolidated joint ventures in Europe and the U.S. increased nearly $170 million. More than $140 million of the increase was related to the change in unrealized gains for mark-to-market adjustments related to changes in natural gas and electricity derivatives, as commodity markets in Europe have experienced significant volatility. Another $15 million of the increase relates to a gain recognized in connection with us acquiring an additional 40% interest in our joint venture in Argentina. Excluding these comparability items as well as other mark-to-market adjustments not associated with natural gas and electricity derivatives, equity earnings increased $13 million. This largely reflects improved results in our joint venture in Europe. In addition, in September, our European joint venture withdrew from its joint venture in Russia after receiving all regulatory approvals. In the prior year quarter, earnings from the Russia joint venture were not material. So putting it all together, adjusted EBITDA, including unconsolidated joint ventures nearly doubled to $228 million, while adjusted diluted earnings per share more than tripled to $0.75 per share. Strong sales growth and gross margin expansion primarily drove the increases. Moving on to our segments. Sales in our Global segment were up 12% in the quarter, price/mix was up 14% reflecting domestic and international pricing actions associated with customer contract renewals, inflation driven price escalators and higher prices charged for freight. Mix was also positive. Overall segment volumes declined 2% as North American volumes fell primarily due to the timing of shipments to large QSR chain customers, including the effect of lapping a notable limited time product offering in the prior year quarter. Global's product contribution margin, which is gross profit less advertising and promotion expenses, nearly doubled to $84 million. Favorable price/mix more than offset the impact of higher manufacturing and distribution cost per pound. Sales in our Foodservice segment grew 14%, price/mix increased 26% as we continue to drive product and freight pricing actions that we announced throughout fiscal 2022 and earlier in the quarter to counter inflation. Sales volumes decreased 12% as casual dining and full-service restaurant traffic softened. While traffic trends progressively softened each month since the war in Ukraine began at the end of February, it began to tick upward in August. Sales volumes were also affected by the timing of incremental losses of certain low margin non-commercial business, as well as our inability to fully serve demand as a result of constrained production. Foodservice's product contribution margin rose more than 40% to $138 million as favorable price more than offset higher manufacturing and distribution cost per pound and the impact of lower volumes. In our Retail segment, sales increased 28%, price/mix was up 32% reflecting pricing actions across our branded and private label portfolios, as well as favorable mix with the sale of more branded products. Volume was down 4% reflecting incremental losses of certain lower margin private label products. We will be lapping the last of that lost private label business in the second quarter. Sales volumes were also tempered by our inability to fully serve customer demand due to the constrained production. Retail's product contribution margin more than tripled to $49 million behind pricing actions and favorable mix. This was partially offset by higher manufacturing and distribution cost per pound. Moving to our liquidity position and cash flow. We ended the quarter with $485 million of cash and a $1 billion undrawn revolver. While our net debt remained relatively flat at about $2.25 billion, our leverage ratio fell to 2.7x from 3.1x at the end of the fiscal 2022 as earnings grew. We generated more than $190 million of cash from operations, which is up about $30 million versus the prior year quarter, largely due to higher earnings. Capital expenditures were about $120 million, that's up about $40 million as we continue to construct new French fry lines in Idaho and China. In addition, we paid about $42 million to acquire the additional 40% interest in our joint venture in Argentina. We now own 90% of that joint venture. We returned $64 million of cash to our shareholders in the form of dividends and share repurchases and have about $240 million of authorization remaining under our share repurchase program. Turning to our fiscal 2023 outlook, our financial targets for the year remain unchanged as we continue to build our operating momentum. While the macro environment remains volatile, we're on track to deliver at the high end of our sales target of $4.7 billion to $4.8 billion with price driving the growth. We'll continue to realize the carryover benefit of product pricing actions in our Foodservice and Retail segments. And in our Global segment, we expect to see the benefit of pricing actions, including pricing structures for contract renewals build as the year progresses. Forecasting volume continues to remain more difficult due to the near-term volatility in restaurant traffic and demand. As we saw in the first quarter, we believe that consumer behavior during inflationary or recessionary times will continue to affect overall demand, as well as our sales channel and product mix, with QSRs and retail outlets benefiting at the expense of casual dining, and full-service restaurants. In addition, we expect our sales volumes will be affected by near-term production and throughput constraints as we continue to face disruptions in the availability of key product inputs and spare parts. Additionally, while labor and access to shipping containers have improved, we continue to see the impact of shortages. We're on track to deliver at the high-end of the range of our earnings targets, including adjusted net income of $360 million to $410 million, adjusted diluted earnings per share of $2.45 to $2.85 and adjusted EBITDA including unconsolidated joint ventures of $840 million to $910 million. These targets exclude the items impacting comparability that I described earlier. We expect our earnings increase will be driven primarily by sales growth and gross margin expansion. We continue to expect gross margins during the second half of fiscal '23 that approach our normalized annual rate of 25% to 26% and we feel good about the four key factors underlying this target. First, as Tom noted, we believe that potato crops in our primary growing regions will be at the lower end of the historical average range, and that any effect on our operations and financial performance will be manageable. Second, we're pleased with the continued progress in implementing pricing actions to counter cost inflation. Third, we're making steady progress in adding production workers in order to ease labor pressures in our factories. And finally, the availability of domestic rail and trucking assets as well as access to shipping containers continues to improve. While abroad rail strike has likely been averted, we continue to closely monitor the status of discussions with the West Coast dockworkers' union and the impact of potential work slowdown or stoppage may have on our exports. We continue to target SG&A expenses of $475 million to $500 million, which reflects higher compensation and benefits expenses to attract and retain talent, higher spending for our new ERP system and other IT infrastructure upgrades, higher advertising and promotion expenses as we look to return support back to historical levels, and overall inflation for third-party services. We continue to expect equity earnings of $25 million to $30 million, excluding items impacting comparability, but also expect increased volatility given the likelihood of a poor crop in Europe, as well as possible limitations on natural gas usage that may affect our production. In addition, we believe that the severe inflation outlook for Europe will likely translate into more pressure on restaurant traffic and demand. Our estimates for our other financial targets are unchanged, including capital expenditures of $475 million to $525 million, excluding acquisitions; interest expense of approximately $115 million; depreciation and amortization expense of about $210 million; and an effective tax rate, excluding items impacting comparability, of about 24%. Now, here's Tom for some closing comments.

Operator:

[Operator Instructions] Our first question will come from Chris Growe with Stifel.

Tom Werner:

Yes, Chris. It’s Tom. I'll just reiterate, we're off to a terrific start this fiscal year. And our focus -- you think about a year ago, our focus has been rebuilding our margin structure back to pre-pandemic levels. That's the focus of the team and they've done a terrific job. And just in terms of SG&A and I'll let Bernadette add on to this, we have some elevated spend due to the ERP, a lot of it. There's some wages, also, that has increased our SG&A based on the market conditions we have, but it's really about focusing on the mix margin management. That's what we've been focused on for the last year, when I started talking about it. Team has done a great job executing that. It’s -- the volumes are a little bit choppy right now. And I think that's going to continue for the balance of this fiscal year, just based on the economic environment we're all operating in, and as well as some of the supply chain issues we continue to experience within freight and containers, those kinds of things. So, it's early, we got to understand how the crop processes through the factories the next 60 days. And on that note, in Q2 we will reassess kind of how we're feeling about the year.

Tom Werner:

Yes. Chris, the main factor, if you think about a year ago, we were at 15 margin. And so, it's really focused on pricing through inflation. We have absorbed a tremendous amount of cost inflation in this business, just like everybody else has in the space. So it's really driving pricing to offset inflation and we're making obviously great progress against that. We have a lot more to do. It's still from an input cost standpoint, we're going to see more inflation coming at us in the future. So we're adjusting our pricing architecture to offset that as much as we can and we believe we will. So that's kind of -- that's the driver, Chris.

Tom Werner:

Yes, and just one of the one of the big challenges we still have is container issues for our international business, Chris. And it’s -- while it's getting better, it's still hindering our ability to ship to some of our international markets in a pretty significant way which is impacting the overall volume in our Global business unit. The team is working through it as best we can. But it's still challenging from a container standpoint on the West Coast.

Peter Galbo:

Tom, I just wanted to ask actually, like a more of a technical question, I guess, around the 2022 potato crop. Realizing that the yields are down and maybe the sizing is down a bit but with the quality being good, can you just, I guess educate us a little bit more on why the quality being above average or very good kind of helps pull up maybe a down yield year, what that does for you from a manufacturing standpoint?

Bernadette Madarieta:

Yes, and Tom, if I add on to that. In terms of the quality component being better this year where it was worse last year, last year that lower quality really resulted in lower potato utilization. So it required more potatoes to produce the same amount of finished goods. And we're not going to have that issue this year with a better crop in terms of quality. And then potato quality also affects line speed times in our plants. Again, we won't have that issue this year with a better quality crop.

Bernadette Madarieta:

Yes. As it relates to our gross margin, we'll continue to see the normal seasonality. And then as it relates to the first question and the impact to the QSR, we don't give certain guidance as to relate to specifics, but essentially, that will flow through in the second quarter in terms of timing just given the delay in shipments.

Tom Palmer:

I wanted to ask on COGS inflation expectations. Sounds like based on Bernadette's prepared remarks that maybe it decelerated just a little bit in the first quarter is the assumption that as the year progresses, you see the rate of inflation ease a little bit? Just wondering what's kind of embedded in that?

Tom Palmer:

And then just maybe get a quick recap of pricing actions at this point. You cited list price increases that flowed through during the first quarter. So I guess presumably, though, there'll be carryover in the second quarter. From a list price standpoint, is there anything beyond that at this point, or is kind of a next step up, as we move into the New Year and Global contracts are adjusted?

Bernadette Madarieta:

That's right. And then the last pricing crease that we announced in Foodservice, Retail in July, you'll begin to see more benefit of that in Q2, Q3.

Operator:

And our next question will come from Rob Dickerson with Jefferies.

Tom Werner:

Hey, Rob, you're breaking up a little bit.

Tom Werner:

Yes. Rob, the -- as we've been very consistent, I feel good about where our gross margins are going to progress towards our historical averages in the back half, pre-pandemic. So that's what our focus is on. And we're off to making good progress against that, obviously. And so I feel confident about us returning back to normalized levels. And so I'm not going to talk about high-end, low-end, all those kinds of things, Rob, I just -- it's about making progress. And we're doing that as an organization and the team is executing against that.

Tom Werner:

Yes. Rob, I feel great. We have great partner growers. We work in tandem with them on our needs and we got a great ag team that has tremendous relationships with our growers. So feel confident that we'll be able to execute against our production plan and sales plan for the year and we have some things we can do to adjust new crop, old crop. So I feel good about where we're positioned going forward.

Unidentified Analyst:

It’s actually [Gary Moore] stepping in for Adam. I was wondering if you could help us understand a little bit better your underlying assumptions as it relates to your guidance you reaffirm it. Now that we have three more months, has anything changed in terms of your underlying price/mix assumptions or volumes?

Unidentified Analyst:

That's helpful. Thank you. And as a follow-up, as it relates to your investment in Argentina, how does it benchmark in terms of profitability versus the rest of the portfolio?

Bernadette Madarieta:

Yes. And we expect that the return on that expansion to be attractive and in line with our other expansions.

William Reuter:

I just have two. The first is, with the second year of below average crop yields, has there been any change in the amount of area or land that is being dedicated to the production of potatoes? I'm wondering whether there could be long term implications if some of the growers aren't making as much money as they historically did?

William Reuter:

Great to hear. And then kind of on a related topic, there is some trade press that suggests that some of your contract negotiations in the Columbia Basin are already complete for calendar year '23. Is there anything you can provide there in terms of color?

Operator:

[Operator Instructions] And moving on to Carla Casella with JPMorgan.

Tom Werner:

It’s Tom. The -- strategically, our investment in expanding capacity has been very consistent. As we see the category growth and we think about the next really two, three, four, five, seven years, as the category continues to grow even at low-single-digits, it's a big growth number in terms of overall volume. So overtime, we're going to continue to invest in the business and invest in the growth of the category. In terms of M&A, I've been very consistent since I've been sitting in this chair that we are as active as we can be in pursuing M&A actions. But the timing of those are always hard to predict. But it is absolutely going forward part of our growth strategic plan, organic capacity, investment and potential M&A as those opportunities present themselves.

Bernadette Madarieta:

Yes, so our leverage target remains the same at 3.5x to 4x. Certainly, we're considerably below that right now. But we maintain that strong balance sheet during these periods of economic volatility, and it preserves optionality for M&A.

Bernadette Madarieta:

Yes, just high-level we do hedge our natural gas and oil that's used in processing our potatoes. Our policies have not changed. We've always had a risk oversight committee that has monitored the markets and we've entered into those contracts as we've seen appropriate.

Bernadette Madarieta:

We haven't disclosed that.

Dexter Congbalay:

Thanks for joining us today. If you want to set up a follow-up call, please email me and we can set up a time to either today or in the following days. Thanks again for joining and I'll talk to you later. Bye.

Dexter Congbalay:

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 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 Werner, our President and Chief Executive Officer; and Bernadette Madarieta, 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.

Bernadette Madarieta:

Thanks, Tom, and good morning, everyone. I want to start by echoing Tom's comments and thanking our employees for their hard work and continued dedication to drive our solid operating and financial performance during these challenging times. We delivered fourth quarter sales growth of 14% or a record $1.15 billion with all of the growth coming from price/mix as we continued to execute our previously announced pricing actions in each of our core business segments to offset cost inflation. Sales volumes declined 1%, primarily reflecting lower export volumes due to limited shipping container availability and disruptions to ocean freight networks. Total North American volume grew this quarter behind strong sales to large chain restaurant customers. While consumer demand in our Foodservice and Retail channels also grew, our sales volumes to those customers fell as we were unable to fully serve this demand as a result of lower production run rates and throughput at our production facilities. For the year, sales increased 12% to nearly $4.1 billion, a record high with price/mix up 9% and volume up 3%. Gross profit in the quarter increased $56 million and gross margin expanded 230 basis points versus the prior year quarter to 22%. Product and freight price increases drove the improvement, more than offsetting the impact of higher costs on a per pound basis and lower sales volumes. Cost per pound increased double digits for the fourth straight quarter with inflation accounting for essentially all of the increase. Higher prices for inputs, such as edible oils, ingredients for batter and other coatings and packaging, were the primary drivers. Labor costs were also notably up, reflecting broad competition for production team members. Transportation rates also rose sharply versus the prior year. Transport costs increased as we continue to rely on an unfavorable mix of higher cost trucking versus rail to meet service obligations for certain customers. And as Tom mentioned, while the cost of some inputs and transportation have come off their highs in recent weeks, they remain elevated relative to the past few years and will continue to pose a headwind through fiscal 2023. We also continue to incur higher potato costs as a consequence of the poor crop that was harvested last fall. We will continue to realize the financial impact of this poor potato crop through most of the second quarter of fiscal 2023. And finally, we continue to incur higher costs and operational inefficiencies associated with labor, spare parts, and ingredient shortages, and other industry-wide supply chain challenges. Increased downtimes associated with scheduled maintenance also reduced production run rates, lowering our fixed cost recovery. Partially offsetting these higher costs per pound were benefits from our portfolio simplification, cost mitigation and other productivity efforts. Moving on from cost of sales. Our SG&A increased $19 million in the quarter, largely due to higher incentive compensation expense and a $3.5 million contribution to our charitable foundation. Equity method earnings from our unconsolidated joint ventures in Europe, the U.S. and Argentina, declined $57 million. This included a $63 million noncash charge associated with the European joint venture's intent to withdraw from its joint venture that operates a production facility in Russia as a result of the war in Ukraine. Excluding the impact of this charge as well as mark-to-market adjustments associated with currency and commodity hedging contracts, equity earnings increased $2 million versus the prior year. So putting it all together, adjusted EBITDA, including unconsolidated joint ventures, increased 21% while adjusted diluted EPS rose 48%. Higher sales and gross margin expansion drove the increases. Moving to our segments. Sales in our Global segment were up 10% in the quarter. Price/mix drove the entire increase, reflecting domestic and international pricing actions associated with customer contract renewals, inflation-driven price escalators, and higher prices charged for freight. Overall segment volume was flat. We drove solid growth in shipments to large QSR and casual dining chains in North America. However, this growth was offset by a more than 10% decline in international shipments, reflecting limited shipping container availability and disruptions to ocean freight networks. While still down versus the prior year, international shipments improved sequentially versus a decline of 20% in the third quarter as more shipping containers were made available. Global's product contribution margin, which is gross profit less advertising and promotion expenses, declined 1% to $56 million. Higher manufacturing and distribution cost per pound more than offset the benefit of favorable price/mix. Sales in our Foodservice segment grew 21%. Price/mix increased 24% as we continue to drive product and freight pricing actions that we announced earlier in the year to mitigate cost inflation. Sales volumes decreased 3% as labor and commodity shortages as well as scheduled maintenance downtimes impacted run rates and throughput at our production facilities, creating the inability to fully serve customer demand. We did see sales volumes slow each successive month during the quarter as restaurant traffic, especially in casual dining, softened as consumers responded to accelerating inflation. Foodservices product contribution margin rose 47% to $142 million as favorable price more than offset higher manufacturing and distribution cost per pound. In our Retail segment, sales increased 20%. Price was up 22%, reflecting product and freight pricing actions across our branded and private label portfolios as well as favorable mix. Volume fell 2%, reflecting incremental losses of certain lower margin private label products. This was partially offset by higher shipments of branded products, although this growth was tempered by our inability to fully serve customer demand due to lower production run rate. Retail's product contribution margin nearly doubled to $42 million behind pricing actions, favorable mix with the sales of more branded products and a $3 million decline in A&P expenses. This was partially offset by higher manufacturing and distribution costs per pound. Moving to our liquidity position and cash flow. We ended the quarter with $525 million of cash and a $1 billion undrawn revolver. We had net debt of about $2.2 billion, which corresponds to a 3.1x leverage ratio. For the year, we generated about $420 million of cash from operations, which is down about $135 million versus the prior year, largely due to higher working capital. Capital expenditures for the year were about $305 million. That's up about $145 million as we completed the chopped and formed line in Idaho and began construction of our capacity expansion in China. For the year, we returned nearly $290 million of cash to shareholders in the form of dividends and share repurchases and have just under $275 million of authorization -- this program. Now turning to our updated fiscal 2023 outlook. As Tom noted, we anticipate the overall operating environment to continue to be challenging, with inflation continuing to affect our cost structure as well as consumer demand. Accordingly, we're taking a prudent approach to our fiscal 2023 outlook. We're targeting sales of $4.7 billion to $4.8 billion, which implies a growth rate of 15% to 17%. We expect that price will be the primary driver of sales growth as we continue to implement our previously announced pricing actions in our Foodservice and Retail segments and secure price increases in contracts up for renewal with customers in our Global segment. With respect to volume, forecasting demand has become increasingly difficult. Overall, we expect U.S. demand to remain solid, but will also likely be affected by significant inflation that consumers are facing. In the event of an economic recession, we expect demand for French fries will be resilient, although with little to no growth. That's consistent with what we experienced during the great recession from 2008 to 2010. Consumer behavior during inflationary or recessionary times may also have an effect on sales channel and product mix. QSRs and retail outlets may benefit, but this may be at the expense of casual dining establishments. We've already seen some indications of this in the past few months. In addition, we expect our volume growth will be limited by near-term production and throughput constraints as we continue to face labor shortages, disruptions in the availability of key product inputs and spare parts and limited access to shipping containers for exports. For earnings, we expect net income of $360 million to $410 million. Diluted EPS of $2.45 to $2.85, and adjusted EBITDA, including unconsolidated joint ventures, of $840 million to $910 million. Using the midpoint of this EBITDA range implies growth of about 20% or about $150 million versus the prior year. We expect the earnings increase will be driven primarily by sales growth and gross margin expansion. Favorable price/mix and productivity savings should more than offset input, manufacturing and transportation inflation as well as the cost inefficiencies and potato crop challenges that pressured our results last year. During the first half of fiscal '23, we expect our gross margin to improve versus the first half of fiscal '22, but will continue to be pressured as compared to our normalized seasonal rates. This reflects the implementation of our pricing actions, lagging inflation as well as the impact of higher raw potato costs on a per pound basis due to the poor crop that we harvested last fall. We also expect our gross margins will be pressured by ongoing industry-wide labor and logistics challenges. During the second half of fiscal '23, we expect our gross margin will approach our normalized annual rate of 25% to 26%, assuming four key factors. First, an average fall 2022 potato crop. As Tom noted, at this time, we believe the crop in our primary growing regions in the Columbia Basin and Idaho will be consistent with historical averages. Second, the continued successful implementation of our pricing actions to offset input and transportation cost inflation. As our recent results have shown, we've been able to successfully increase price across our portfolio. Third, the continued easing of labor pressures that have affected our production run rates and throughput. While factory labor availability remains challenging, we feel good about the actions that we've put in place to attract and retain production workers. And finally, the continued easing of logistics pressures that have constrained our shipments, especially our exports, the availability of domestic rail and trucking assets has improved in the past few months, along with access to shipping containers. However, we're closely monitoring the recent expiration of the West Coast dock workers union contract and what impact, if any, may have on our exports. We're projecting the strong increase in sales and gross profit will be partially offset by higher SG&A expenses. We're targeting total SG&A expenses of $475 million to $500 million, which is about $100 million higher than fiscal 2022, using the midpoint of that range. The increase largely reflects higher compensation and benefit costs as we adjust our compensation packages to reflect a very competitive environment to attract and retain talent. Additional headcount, recruiting, training, travel and meeting expenses as we look to fill open positions to support growth over the long term and continue to emerge from pandemic-related restrictions. Higher spending to build and test our new ERP system, in addition to other IT infrastructure upgrades, higher A&P expenses, predominantly in support of our retail segment and finally, overall inflation for third-party services. We expect equity earnings to be $25 million to $30 million, which is up from about $16 million in fiscal 2022 after excluding the $27 million of mark-to-market commodity and currency contract gains as well as the impairment charge and about $10 million of earnings from the Russia joint venture. In addition to our operating targets, we expect total interest expense of around $115 million, an effective tax rate of approximately 24%. Total depreciation and amortization expense of approximately $210 million and capital expenditures of $475 million to $525 million, which includes about $285 million for the construction of our capacity expansions in Idaho and China as well as capital associated with our new ERP system and other IT upgrades. Finally, as Tom noted, we recently acquired a controlling interest in our joint venture in Argentina for $42 million and will now consolidate their results. We do not expect the joint venture to have a material contribution to either sales or earnings growth this year. So, looking at our fiscal 2023 outlook at a high level, we're targeting sales of $4.7 billion to $4.8 billion, largely driven by price/mix, and we're targeting adjusted EBITDA, including unconsolidated joint ventures, of $840 million to $910 million, largely driven by strong sales growth as well as gross margins that approach a normalized annual run rate of 25% to 26% during the second half of the fiscal year. Now, here's Tom for some closing comments.

Operator:

[Operator Instructions] And we'll take our first question from Peter Galbo with Bank of America.

Tom Werner:

Yes. So Peter, the indicator is restaurant traffic, and we keep a close eye on that. It's -- in terms of -- QSR traffic looks relatively healthy. As we've seen in the past few months, the casual dining traffic has slowed down a bit, and we'll keep a close eye on that. Retail volumes continue to be pretty resilient. So it's not a matter of potatoes to support the volume, it really comes down to restaurant traffic. And you guys see the syndicated data just like we do. So that's something we keep an eye on really close, but that's going to be a leading indicator of the volume for the year. I'm confident, as I think about the next year, certainly, there's concern about the economy. But the French fry category, even though -- even if we get into a situation where there's some economic slowdown, over time and historically, as we mentioned in our prepared remarks, there may be some switching from casual dining to QSR, but the overall category, I'm confident we'll continue to grow.

Bernadette Madarieta:

Yes. Thanks Peter. First quarter is typically our lowest margin quarter for the entire year. We saw that last year as well. And we will be processing or recognizing the costs associated with the potatoes that we harvested -- or excuse me, that we processed in the fourth quarter, which are those higher costs, and we'll continue to recognize those higher costs throughout the first half of the year until we work through this old crop. Then as we start harvesting and recognizing some of the cost -- higher costs associated with this year's crop, we're not going to see much of a change there in terms of the cost of our potatoes just given, as Tom previously announced, we did have a 20% increase in the cost of that crop this year. However, we expect greater yield and other things that's going to lower those -- improve those margins in the back half of the year. Does that make sense?

Operator:

We'll now take our next question from Tom Palmer with JPMorgan.

Tom Werner:

Yes. So Tom, this is Tom Werner. Here's the way to think about it. Our guidance takes into account the potato cost inflation, all of our input cost inflation, obviously. And as we've think about our pricing strategy and the timing of pricing that gets to the market, there is a lag. There's been a lag in the global business unit, as I commented on. It's going to be building over the course of this fiscal year in terms of regaining our margin structure to pre-pandemic levels. So there's a lot of noise, and you're absolutely right. We've got the old crop we're working through, as Bernadette had just said. So we have a higher cost crop. We're processing right now. We have inflationary in the inputs for this next year. So it's going to be a build, as I've said for the past year. I'm confident where the commercial team has done a tremendous job getting to the market and executing our pricing strategies. So it's going to take until the back half of next year that we're going to get back to our pre-pandemic normalized margin levels, and we're going to build and we will be approaching those levels as we get through the back half of the year.

Bernadette Madarieta:

Yes. No, thanks, Tom. As it relates to SG&A, we have stepped up our guidance there, it approximates about 10% of our sales, including advertising and promotion expenses, as we discussed. We're bringing that back more to levels that we had prior to the pandemic. And then we do have these incremental ERP expenses that we are incurring. The piece that's going to be more here to stay is going to be as it relates to the compensation and benefits, as I referred to in my prepared remarks that have increased as we've worked to grow the team as well as attract the talent that are needed to continue to execute our strategies over the long term.

Bernadette Madarieta:

No quantification at this time. But having said that, we're always looking for ways to become more efficient, and we'll continue to do that.

Adam Samuelson:

So I guess the first question is thinking about the margins, and you talked about getting back to that historical 25% to 26% the way approaching it in the back half of the fiscal year? And I guess it would seem like, a, the composition of that is going to be different than history when we think about kind of the contribution in Global relative to Foodservice and Retail, the contribution margins just between the different units and the mix looks very different than it would have pre-pandemic based on kind of where you're exiting fiscal '22. So -- and I guess with the amount of inflation that you're pricing for, it would seem like that would imply per pound margins are going to be actually above pre-pandemic levels by the end of the fiscal year, if you hit those rates. And I guess I'd just love to hear you reflect on kind of what would necessitate higher per pound unit margins over time to -- in this space other than just a greater mix of sales going into the broader Foodservice Retail channel versus larger QSR customers?

Bernadette Madarieta:

Yes. And Adam, I think it's just critical to recall that with our global contracts, about 1/3 of those come open each year. And so it's going to take time, to Tom's point, as we continue to negotiate those each year. And that's essentially what's driving some of that difference.

Tom Werner:

Yes, Adam, I'm not going to give you a specific number on our current capacity utilization. It's below where we've been historically. I'll say that. But we've got -- the China plant will come on in mid-2024. We definitely have opportunities within our current capacity to improve our throughput, and it is improving, and we're continuing to work on that. We opened our chopped and formed line, so that's given us some capacity on those products. But again, as we continue to staff up our plants, labor's improved, sequentially, over the past six months, and that gives me confidence that as the market and the category continues to grow, we get our capacity, our plants running close to historical average, we'll be able to meet demand. And I'm, again, bullish on the category, always have been, as everybody knows, and I'm investing behind it for what we see this category doing in the next five to seven years with our investments in China, American Falls and Europe. So we've got to build and we've got to get more efficient in our current capacity to meet demand, and I'm confident we're going to do that. We have a plan.

Bernadette Madarieta:

Yes. We're not breaking that out from our product price increases.

Chris Growe:

I had a question for you a bit of a follow-on to your commentary there on the global contracts. And just to make sure I'm understanding like your expectation for the rate of pricing in those global contracts. And then is it -- do you see a point in fiscal '23, where the pricing in that division offsets the inflation? Or is it going to take longer to get the pricing through?

Chris Growe:

Okay. And then in relation to the pricing coming through in the Global division today, is that mostly the escalators kicking in that you've built into some of these contracts?

Chris Growe:

Okay. And just one other question, which is in relation to the -- in a situation where, say, the yields from this year's potato crop are greater than average or better, how limited are you in producing that product? So if you have more supply, can you grow volumes more once the crop comes in? Is there any still kind of ongoing limitation of what you can make, be it labor, just general supply constraints today?

Chris Growe:

And to be clear, if you have more potatoes from this crop and therefore, you lost just say you had to buy less in the open market, I guess, I'm really more interested in your capacity. Are you able to make the product and sell the product if you can get more volume in the door -- more supply in the door, sorry?

Operator:

We'll now take our next question from William Reuter with Bank of America.

Bernadette Madarieta:

Yes. We haven't quantified that impact to discuss outside. But it is in excess of what we experienced in 2014. The last time we had a poor crop, which was about $30 million that we disclosed at that time. We're continuing to work through this crop. As we said, we'll continue to recognize the impact of that through the first half of fiscal '23.

Bernadette Madarieta:

Yes. So as it relates to our buyback program, we've disclosed and discussed previously that it's really in place to offset equity dilution. We've demonstrated, though, that we will be more aggressive if it makes sense. But our plan is in place to offset equity dilution.

Bernadette Madarieta:

3.5x to 4x.

Bernadette Madarieta:

That's net.

Dexter Congbalay:

Thank you for joining us today. Any follow-up questions. Please e-mail maybe we can set up a time. And everybody, have a good day. Thank you.

Dexter Congbalay:

Good morning and thank you for joining us for Lamb Weston’s third 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 Werner, our President and Chief Executive Officer; and Bernadette Madarieta, 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 third quarter results and updated fiscal 2022 outlook. With that, let me now turn the call over to Tom.

Bernadette Madarieta:

Thanks Tom and good morning everyone. Let me start by echoing Tom’s comments thanking our employees. We appreciate your hard work and dedication. As Tom discussed we feel good about the benefits from our pricing actions and cost savings efforts to offset much of the significant cost inflation that we’ve been experiencing and I am confident in our ability to continue to manage through this volatile business environment. Specifically, in the quarter, our sales increased 7% to $955 million. Price mix was up 12% as we continued to execute our previously announced product and freight pricing actions in each of our business segments to offset input, manufacturing and transportation cost inflation. Most of the increase in the quarter reflects these pricing actions, while mix was also favorable. Sales volumes declined 5% as we were unable to fully serve market demand due to logistics constraints, especially for our international shipments as well as lower production runrates and throughput at our factories resulting from labor shortages. Increased shipments in our food service segment and through our large chain restaurant customers in North America that are served by our global segment, partially offset the volume decline. However, while volume increased in these channels, it was tempered by the Omicron variant’s negative effect on restaurant traffic, on the availability of labor to keep restaurants open and on our production facilities and supply chain. Gross profit in the quarter increased $24 million. Product and freight price increases, along with favorable mix more than offset the impact of higher costs on a per pound basis and lower sales volumes. We expanded gross margin by 110 basis points versus the prior year quarter and 270 basis points sequentially to more than 23%. Looking at our costs, double-digit inflation drove the increase in cost per pound for the third straight quarter and accounted essentially for all of the increase in the quarter. There were four key areas that drove the increase in cost. First, commodities played the biggest role led by edible oils, ingredients for batter and other coatings and packaging. Labor cost also increased due to competition for factory workers. Second, transportation rates continued to climb due to the persistent disruption in global logistics networks. We also continued to use an unfavorable mix of higher cost trucking versus rail to meet service obligations for certain customers. Third, we began to see higher potato costs resulting from the poor crop that was harvested last fall in our primary growing regions. The increase in potato cost reflects the impact of purchasing potatoes in the open market at a significant premium to contracted prices; higher transportation cost for shipping potatoes from the Midwest and Eastern North America to our plants in the Pacific Northwest; lower potato utilization rates and running production lines at lower speeds to accommodate low quality potatoes. The increase in our potato costs, decrease in potato utilization rates, and how the crop is performing storage are all in line with the expectations that we shared with you last quarter and we believe we’ve secured enough potatoes to deliver our volume forecast until we begin to harvest the early potato varieties in July. As a reminder, we will continue to realize the financial impacts of this year’s poor potato crop through most of the second quarter of fiscal 2023. The final key area that drove the increase in costs are operational inefficiencies explained by labor shortages, omicron-related absenteeism, especially in January and into early February and other industry-wide supply chain challenges. This resulted in lower production runrates and throughput in our factories leading to fewer pounds to cover fixed overhead. As I’ll discuss later, we’ll continue to see the impact of these costs in the fourth quarter. The effect of lower potato utilization and production runrates in the third quarter was largely offset by a range of cost mitigation efforts including eliminating underperforming SKUs, changes to product specifications, and increased productivity savings from our winner's one and other cost saving initiatives. So in short, we are managing well through the highly inflationary and poor potato crop environment. We feel good about how we are controlling those things that we can control, which led to the year-over-year and sequential gross margin expansion. Moving on from cost of sales, our SG&A declined $9 million in the quarter, largely due to lower consulting expenses associated with improving our commercial and supply chain operations as those projects ended. Overall compensation and benefits expense and a $2 million decline in advertising and promotion expenses. The decline in SG&A was partially offset by higher information technology infrastructure cost, including cost to design the next release of a new enterprise resource planning system. Equity method earnings in the quarter were $30 million and included a $20 million unrealized gain related to mark-to-market adjustments associated with currency and commodity hedging contracts. The large mark-to-market gain in the quarter primarily relates to changes in the value of natural gas derivatives at Lamb Weston/Meijer as commodity markets fare have experienced significant volatility. Excluding the impact of these mark-to-market adjustments, equity earnings increased $1 million versus the prior quarter. Favorable price mix and higher sales volumes were largely offset by input inflation and higher manufacturing and distribution cost in both Europe and U.S. Moving to our segments, sales in our global segment were up 2% in the quarter. Price mix increased 8% reflecting domestic and international pricing actions associated with customer contract renewals and inflation-driven price escalators. It also reflects higher prices charged for freight. Volume fell 6%. International shipments, which have historically accounted for about 40% of the segment’s total volume were down nearly 20% versus the prior year quarter due to limited shipping container availability and disruptions to ocean freight networks. Sales volumes to North American large QSR and casual dining restaurant customers increased but at a slower rate than previous quarters due to the Omicron’s negative impact on consumer traffic. Global’s product contribution margins, which is gross profit less advertising and promotional expenses declined 8% to $73 million. Higher manufacturing and distribution cost per pound, as well as the impact of lower sales volumes more than offset the benefit of favorable price mix. Moving to our food service segment. Sales increased 34% with price mix up 22% and volume up 12%. As expected, the rate of increase in food service’s price mix accelerated sequentially to 22% in the third quarter from 8% in the second quarter as the benefits of the product and freight pricing actions that we began implementing earlier this fiscal year to mitigate inflation continued to build. In addition, the increase reflects favorable product and customer mix. The ongoing recovery in demand from small and regional restaurant chains and independently owned restaurants, as well as some non-commercial customers drove a 12% increase in sales volumes. While our shipments to restaurants have essentially returned to pre-pandemic levels, our shipments to non-commercial channels have not yet fully rebounded. As with our sales to large chain restaurants in our global segment, the food service segment’s volume growth was tempered by Omicron’s negative impact on restaurant traffic and labor availability in those restaurants. In addition, manufacturing labor shortages and the effect of Omicron-related absenteeism limited our ability to fully serve demand due to lower production runrates and throughput in our factories. Food service’s product contribution margin rose 52% to $107 million with favorable price, volume and mix more than offsetting higher manufacturing and distribution cost per pound. In our retail segment, sales declined 12% with volume down 24% and price mix up 12%. The volume decline reflected two factors. First, more than half of the decline was due to incremental losses of certain lower margin private-label products. And second, despite solid category growth, branded product volumes were down as labor and supply chain disruption limited our ability to service demand. The increase in price mix was driven by product and freight pricing actions across our portfolio to offset inflation as well as favorable mix. Retail’s product contribution margin declined 5% to $32 million. Lower sales volumes and higher manufacturing and distribution cost per pound drove the decline, which was partially offset by favorable price mix and a $2 million decrease in A&P expenses. Moving to our liquidity position and cash flow, we ended the quarter with nearly $430 million and cash and $1 billion of availability on our undrawn revolver. Through the first three quarters of the year, we generated about $175 million of cash from operations. That’s down about $200 million versus the first three quarters of the prior year due primarily to higher working capital and lower earnings. Year-to-date, we’ve spent more than $225 million in capital expenditures as we continued construction of our capacity expansions in Idaho and China. We’ve also returned nearly $230 million of cash to our shareholders including $103 million in dividends and $126 million in share repurchases. After repurchasing $50 million of shares in the third quarter, we have just under $300 million remaining under our buyback authorization. Now let’s turn to our updated fiscal 2022 outlook. We expect our full year sales growth to be above our long-term target of low to mid-single digits. In the fourth quarter, we expect sales to be driven by price mix as we continue to execute our previously announced product and transportation pricing actions to offset input and transportation cost inflations. However, we expect sales volumes will continue to be pressured as export volumes remain constrained due to limited shipping container availability, supply chain volatility and labor shortages, challenge runrates and throughput at our factories and as restaurant traffic and consumer demand may slow due to inflation and the persistent effect of COVID variants in the U.S. and key international markets. In addition, please note that we’ll be lapping a high volume comparison in the prior year. With respect to earnings, for the full year, we expect our gross margin will be 19% to 20%. This update puts us at the high end of the 18% to 20% range that we provided in our previous outlook. We are comfortable to be at the higher end of that range because of our confidence in the pace and execution of product and freight price increase that we’re currently implementing in the market. We have more clarity on the net impact and margin from this year’s poor potato crop and we are making steady progress in stabilizing our supply chain operations and driving savings behind our cost mitigation initiatives. Based on our updated full year estimate, we expect our gross margin in the fourth quarter to be 19% to 21%. That’s down sequentially from the 23% we delivered in the third quarter and reflects in part our usual gross margin seasonality. It also includes the impact of significantly higher cost held in finished goods inventory that were produced during the third quarter. These costs were driven by incremental cost and inefficiencies associated with very high levels of omicron-related factory worker absenteeism in January and February that resulted in broad based production disruptions. Since we typically hold 50 to 60 days of finished goods inventory, we’ll realize these costs during our fiscal fourth quarter as that inventory is sold. The low gross margins we expect our SG&A expenses in the fourth quarter to step up to $105 million to $110 million as we continue to invest in the design and build of our new ERP system. We expect equity earnings excluding the impacts of any mark-to-market adjustments will remain pressured due to input cost inflation and higher manufacturing cost in both Europe and the U.S. For the year, we continue to expect interest expense to be approximately $110 million excluding the $53 million of cost associated with the senior notes that we redeemed in the second quarter; total depreciation and amortization expense of approximately $190 million and an effective tax rate of approximately 22%. We’ve reduced our estimate for our capital expenditures to $325 million from our previous target of $450 million to reflect the timing of expenditures related to our capacity expansion projects in Idaho and China. So in sum, in the third quarter, we delivered solid sales growth and expanded our gross margins behind our pricing actions and our cost mitigation efforts. For the year, we are targeting the upper end of our previous gross margin range due to our confidence in our pricing execution to offset inflation. The more clarity that we now have on our potato cost and the steady progress that we are making in stabilizing labor in our supply chain. Now, here is Tom for some closing comments.

Operator:

[Operator Instructions] We’ll take our first question from Peter Galbo with Bank of America.

Tom Werner:

Good morning, Peter.

Peter Galbo :

Tom, I just wanted to get your thoughts kind of now that the summer 2022 crop has started to go into the ground, just how are you thinking about some of the different puts and takes, obviously, nobody has the perfect crystal ball, but it seems like drought in the Pac Northwest is still kind of relatively high. You are using the seed crop from last year of a poor crop. Heat last year was obviously an issue; fertilizer, like, how are you thinking about all those puts and takes encompassed in what’s gone in the ground?

Peter Galbo :

Got it. No that’s helpful. And Bernadette, maybe if I could ask on gross margins, in your prepared remarks, you mentioned the fourth quarter would follow kind of historical seasonality or a more normal historical seasonality. As we continue to process this kind of lower quality crop through the first half of next year, would you still expect, I guess, first quarter or second quarter seasonality to kind of come back into play as other elements of the business start to normalize?

Tom Werner:

Still there, Peter?

Operator:

Thank you. We’ll take our next question from Andrew Lazar with Barclays.

Tom Werner:

Good morning, Andrew.

Andrew Lazar :

Hi. So I think, if I’m not mistaken you just mentioned that your – I guess, your anticipation will be that you still get back to sort of your more normalized margins in the second half of fiscal 2023. With some of the – just the recent news and knock on effects, the next wave of inflation for a lot of items even potatoes sort of out of the mix for a minute as those are contracted, I guess, how do you continue to sort have the comfort level and that is – that just you are seeing obviously the pricing goes through and therefore given what we’ve seen more recently in terms of incremental cost, there is the confidence that that more can be passed through in a timeframe that allows you to get back to those margins as you had initially expected or is there something else?

Andrew Lazar :

Okay. And then, I realize you are in the early innings of some contract negotiations for the third of those large customer contracts that are coming up for renewal. For the remainder of them that aren’t not yet up for renewal, I know you’ve talked about the possibility of sort of, maybe a expanding – or kind of expanding the definition of what some of those sort of inflation escalators or how they are defined in those contracts to try and get some relief even for contracts where they are not up for renewals just yet? And I am just trying to get a sense of how sort of progress has been made there? Are you able to get some additional pricing through even where there is not, not a contract that’s up for renewal?

Andrew Lazar :

Thank you.

Tom Palmer:

Good morning. Thanks for the questions.

Bernadette Madarieta:

Good morning, Tom.

Bernadette Madarieta:

Yeah, Tom, we won’t get into our yield and our processing performance, those kind of things. We don’t talk about that. But the cost increase is 20%. The big impacts are two things to our P&L this year from a potato processing standpoint. It’s yield per acre, which is down because of the weather conditions. So we’ve had to procure more potatoes on the open market. And it’s no secret, we truck potatoes from the East Coast like other processors have and that costs more money obviously and it’s also how the quality of the potato is processed through our factories. So, the yield to make a pound of French fries, it takes more potatoes just because of the quality and size and all that. So, it’s a – we take the hit in two different areas. It’s yield per acre and it’s processing efficiency in our factories. And we haven’t disclosed what the overall impact is because we are still trying to understand and as we take these potatoes out of storage, typically this time of year, it’s always a cyclical issue because your quality of potatoes coming out of storage is less than when it’s coming out of our field. So we are still – we have an estimate on what the overall impact for the year is going to be, but we are still have two months to go here, two, three, four, five months to go in processing these potatoes.

Bernadette Madarieta:

Yes. That’s absolutely right. This is Bernadette. It’s just a matter of timing and when those equipment pieces are coming in. But based on our current projections and what we are seeing from our vendors, we are still on track with the estimated completion date. It’s just a function of timing between this and next year.

Bernadette Madarieta:

You bet.

Robert Dickerson :

Great. Thanks so much. So, Tom, just kind of a question on segment margins and kind of the differencing factors between let’s say food service and the global segment. If we look at food service now, op margin for Q3 actually already higher I believe than pre-pandemic which is very positive and obviously driven by pricing. The global side not so much, right. Thanks for a bit more time there and maybe just kind of ties into Andrew’s question on the contracted side, I guess, first, if we think about the go forward where pricing is now with food service, we are assuming kind of more normalized demand environment. In your perspective that that’s the margin that we – you hope you can retain but as you get into Q4, maybe next year, all things considered. And on the global side, even as you get into the back half of next year, even if the crop is or if they are more normalized and some of those costs roll off, should that global margin just be going up anyway just because of the external pricing would be getting from your other negotiations in that segment as you get through the summer? So I am just trying to get a sense of kind of margin potential on the go forward, even if the crop bottom well up?

Robert Dickerson :

Okay. Okay. And then, maybe just so understand this little bit better. Obviously, potatoes are contracted with the growers it’s got if the market but it’s more understood. If we are thinking out multi-year period, right, as you get to the end of this year, and then, let’s say you re-contract with those growers, if they are more some increased costs to the growers, right as we get to the end of this year for the forward. I mean, it’s still challenged that it’s kind of pass through pricing ability in the business would be still alive and well and the potential for further pricing, right, on the multi-year would still be possible? Right, it’s not that you would say, right now we have taken a lot of pricing. We feel like we are in a good spot. We have to be careful about it and it’s still very contingent or kind of what the cost of those potatoes would be on the go forward? Is that right?

Robert Dickerson :

Alright. Super. Thank you.

Chris Growe :

Thank you. Good morning.

Bernadette Madarieta:

Hi, Chris.

Bernadette Madarieta:

Yes, Chris. This is Bernadette. It absolutely is related to the significant cost inflation that Tom was just referring to that we are seeing now and we are passing those costs through. And we’ll continue to monitor the environment and the inflation that we continue to see in packaging ingredients OAO et cetera, and make decisions in terms of when further pricing actions may be necessary to offset that significant inflation that we are seeing.

Bernadette Madarieta:

No.

Tom Werner:

Chris, we don’t disclose that.

Bernadette Madarieta:

Yeah, so, as it relates to the global volume, the math you did there is right in terms of the impact on the total company. And then, as we look at export volume, it is starting to increase. We are seeing a few more containers be available than what we saw during the third quarter. So that is a positive sign that it’s still much lower than what we’ve seen previously and what we’ve come to expect for that international business.

Bernadette Madarieta:

Thanks, Chris.

Unidentified Analyst:

Good morning, everyone. Thank you for taking my questions.

Unidentified Analyst:

This is actually [Indiscernible] stepping in for Adam. I was wondering if you could provide some additional color on few items. If we think about the next 6 to 12 months, what are your expectations on cost inflation and what parts of your COGS basket become more or less inflationary compared to your prior costs?

Unidentified Analyst:

That’s helpful. Thanks and if I could ask a follow-up, best performance in your JV compared to your base business, any differences in volume turns or inflationary pressures?

Unidentified Analyst:

Thanks, and congrats on the quarter.

Operator:

We’ll take our next question from William Reuter with Bank of America.

Bernadette Madarieta:

Yeah, so as it relates to our oil purchases and contracting as it relates to price, we have contracts in place for first quarter of 2023 and some of second quarter, but a pretty minimal amount. Beyond there, we don’t have any other contracts in place.

Bernadette Madarieta:

Yeah, we are in our planning process right now. So, we don’t have anything to share today. But certainly, we’ll provide you an update at our next earnings call.

Bernadette Madarieta:

Thank you.

Dexter Congbalay:

Thanks for joining the call today. Happy to take any follow-up questions over next number of days. Please email me, so we can schedule a time. Happy Opening Day everybody, and kind of go from there. Thank you.

Dexter Congbalay:

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 Werner, our President and Chief Executive Officer; and Bernadette Madarieta, 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.

Bernadette Madarieta:

Thanks Tom and good morning everyone. As Tom discussed we're pleased with our progress in the quarter. We generated strong sales and solid demand across our restaurant and food service channels in North America, drove growth, and we implemented pricing actions. We believe our pricing and cost mitigation actions have us positioned to navigate through this difficult operating environment and to support sustainable profitable growth over the long-term. Specifically, in the quarter sales increased 12% to a little over $1 billion. This is only the fourth time in Lamb Weston's history that we topped $1 billion of sales in the quarter. Sales volumes were up 6%. Volume growth was driven by our food service segment which reflects the continued year-over-year recovery in on premise dining and by strong shipments to our large chain restaurant customers in North America that is served by our global segment. Sales volumes of branded products in our retail segment were also up in the quarter, but the segments overall volume decline due primarily to lower shipments of private label products. While our overall volume growth in the quarter was strong, it was tempered by industry wide upstream and downstream supply chain constraints, including delays in the availability of spare parts, edible oils, and other key materials to our factories, as well as labor shortages, which impacted production run rates and throughput at our processing plants. In our global segment, volume growth was also tempered by the limited availability of shipping containers and disruptions at ports and in ocean freight networks. We expect these production and logistic challenges, as well as the near-term impact of COVID variants to limit our volume growth through at least the end of fiscal 2022. Price mix was up 6% as we realized benefits from our previously announced pricing actions in each of our core segments. As a reminder, we began implementing product pricing actions in the first quarter as the primary lever to offset inflationary cost pressures. And it generally takes a couple of quarters before these actions are fully realized in the marketplace. We've also taken actions to more frequently change the freight rates that we charge to customers so they better reflect market rates. Historically, we only adjusted these rates once or twice a year. Most of the increase in price mix in the quarter reflects these product and freight pricing actions, with favorable mix providing only a modest benefit. Gross profit in the quarter declined $18 million as the benefit of increased sales was more than offset by higher manufacturing and transportation costs on a per pound basis. Double-digit inflation for commodities and transportation costs accounted for almost 90% of the increase in cost per pound. Of the two commodities played a bigger role and we're again led by edible oils, including canola oil, which nearly doubled versus the prior year quarter. Ingredients such as wheat and starches used to make batter and other coatings and containerboard and plastic film for packaging. Freight costs rose, especially for ocean freight and trucking, as global logistics networks continued to struggle. Our costs also increased due to an unfavorable mix of higher cost trucking versus rail in order to meet service obligations for certain customers. As Tom mentioned, we also incurred higher cost per pound versus the prior year due to incremental costs and inefficiencies driven by lower production run rates and throughput at our factories, which resulted in fewer pounds to cover fixed overhead. Lost production days and unplanned downtimes were primarily due to labor shortages across our manufacturing network, including COVID related absenteeism. While the cost drivers in the first two quarters of the year have been largely consistent, in the second quarter we began to realize the initial benefits of the pricing and cost mitigation actions that we discussed during our last earnings call. As a result of these efforts, gross margin increased sequentially versus the first quarter by 500 basis points to more than 20%. While pricing actions provided the larger lift to the sequential improvement to gross margins, our production run rates and throughput improved sequentially, primarily due to our efforts to stabilize factory labor. While still lower than average, labor retention rates improved modestly versus the first quarter and the number of new applicants has been steady. With more stability we in turn drove more factory throughput. Finally, our actions to optimize our portfolio are also providing benefits. We've eliminated underperforming SKUs to simplify our portfolio and increase throughput in our factories. We've also successfully partnered with our large customers to secure changes to product specifications to mitigate a portion of the operating impact of the poor quality of this year's potato crop. In short, while our run rates and cost structure are not yet where we want them to be, we look forward to building on the notable sequential progress that we made in the quarter and believe that we positioned ourselves to manage through this challenging near-term increased cost and poor potato crop environment. Moving on from cost of sales, our SG&A increased $7 million in the quarter, largely due to a couple of factors. First, it reflects higher labor and benefit costs and higher sales commissions associated with increased sales volumes. Second, it includes a $2.5 million increase in advertising and promotional expenses as we stepped up support for our retail products. While these expenses are up compared with the prior year, they are still below pre-pandemic levels. The increase in SG&A was partially offset by a reduction in consulting expenses associated with improving our commercial and supply chain operations as those consulting projects ended, as well as fewer expenses in the current quarter related to the design of a new enterprise resource planning system. We had approximately $2 million of ERP related expenses in the quarter, which consisted primarily of consulting expenses. That's down from about $5 million of similar type expenses in the prior year quarter. We're resuming our efforts in the second half of fiscal 2022 to design the next phase of our new ERP system. Diluted earnings per share in the quarter was $0.22 down $0.44. About $0.28 of the decline was related to costs associated with the redemption and write off of previously unamortized debt issuance costs related to the senior notes that were originally issued in connection with our spin off from ConAgra in November 2016. We identified these costs as items impacting comparability in our non-GAAP results. Excluding the impact of these items, adjusted diluted EPS was $0.50, which was down $0.16 due to lower income from operations and equity method earnings. Moving to our segments. Sales for our global segment were up 9% in the quarter. Price mix was up 5% reflecting a balance of higher prices charged for freight, pricing actions associated with customer contract renewals, and inflation driven price escalators. Volume was up 4%. Higher shipments to large chain restaurant customers in North America drove the volume increase, while logistics constraints tempered our international shipments. Overall, the global segment's total shipments continued to trend above pre-pandemic levels. Global product contribution margin, which is gross profit less A&P expenses declined 13% to $81 million. Higher manufacturing and distribution cost per pound more than offset the benefit of favorable price mix and higher sales volumes. Moving to our food service segment. Sales increased 30% with volume up 22% and price mix up 8%. The ongoing recovery in demand from small and regional restaurant chains and independently owned restaurants, as well as from non-commercial customers drove the increase in sales volumes. The initial benefits of product and freight pricing actions that we began implementing earlier this fiscal year, as well as favorable mix drove the increase in price mix. Food services product contribution margin rose 19% to $104 million as favorable price mix and higher sales volumes more than offset higher manufacturing and distribution costs per pound. Moving to our retail segment, sales increased 1%. Price mix increased 4%, reflecting the initial benefits of pricing actions in our branded portfolio, higher prices charged for freight and improved mix. Sales volume declined 4% as an increase in branded product volume was more than offset by lower shipments of private label products, resulting from incremental losses of certain low margin business. Retail shipments in the quarter were also tempered by the industry wide supply chain constraints and production disruptions that I discussed earlier. Retails product contribution margin declined 29% to $21 million. Higher manufacturing and distribution cost per pound, a $2 million increase in A&P expenses and lower sales volumes drove the decline. Moving to our liquidity position and cash flow. Our liquidity position remains strong. We ended the first half of fiscal 2022 with almost $625 million of cash and $1 billion of availability on our undrawn revolver. In the first half we generated more than $205 million of cash from operations. That's down about $110 million versus the first half of the prior year due primarily to lower earnings. During the first half of the year we spent nearly $150 million in capital expenditures as we continued construction of our top [ph] informed expansion in American Falls Idaho and our new processing lines in American Falls in China. We continued to put significant effort into managing certain material equipment and labor availability issues to keep our capital projects on track. In the first half of the year we returned $145 million to shareholders including nearly 70 million in dividends and 76 million of share repurchases. This includes $50 million of share repurchases in the second quarter alone. Last month we announced a 4% increase in our quarterly dividend rate which equates to approximately $144 million annually and a $250 million increase to our current share repurchase plans reflecting our confidence in the long-term potential of our business. As a result, we have about $344 million authorized for share repurchases under the updated plan. As I referenced earlier, during the quarter we redeemed and issued nearly $1.7 billion of senior notes. In doing so our average debt maturity increased from four years to more than seven years and we reduced our annual interest expense by approximately $8.5 million. We remain committed to our capital allocation priorities, first to reinvest in our business both organically and with M&A and then to return free cash flow to shareholders through a combination of dividends and share repurchases over time. Now turning to our updated outlook, we continued to expect our full year sales growth in fiscal 2022 to be above our long-term target of low to mid-single-digits. In the third quarter we anticipate price mix will be up sequentially versus a 6% increase that we delivered in the second quarter as the benefit of previously announced product pricing actions in each of our core segments continues to build. We expect volume growth in the third quarter will decelerate sequentially versus the 6% we delivered in the second quarter as a result of the near-term impact of COVID variants on restaurant traffic and demand, the macro industry supply chain constraints and labor challenges that will continue to affect production run rates and throughput in our factories, and global logistics disruptions and container storages that affect both domestic and export shipments. We expect further deceleration in the fourth quarter as we begin to lap some of the higher volume comparisons from the prior year. With respect to earnings we continue to expect net income and adjusted EBITDA including joint ventures will be pressured through fiscal 2022, reflecting significantly higher potato costs in the second half of the year resulting from the poor crop, double-digit inflation for key production inputs and freight and higher SG&A expenses. For the full year we expect our gross margin will be 600 to 700 basis points below our pre-pandemic margin rate of 25% to 26%, implying a target range of 18% to 20%. That's a change from the 17% to 21% range that we provided in our previous outlook. We narrowed the range for a number of reasons. First, we're confident about the pace and execution of the product and freight price increases that we are implementing in the market. Second, we expect to build upon the incremental progress that we made in the second quarter to stabilize our supply chain operations and drive savings behind our cost mitigation initiatives. However, we expect that the improvement in our run rate, throughput, and costs will continue to be gradual, reflecting the broader macro challenges facing the labor market that will likely persist through fiscal 2022. And third, we have greater clarity on the net cost impact from this year’s exceptionally poor potato crop. As a reminder, will begin to realize the full financial impact of this year's poor potato crop in the third quarter, and will continue to realize its effect through most of the second quarter of fiscal 2023. For low gross margins we expect our SG&A expenses to step up to $100 million to $110 million in the third and fourth quarters as we begin to design the second phase of our new ERP project. Equity earnings will likely remain pressured due to input cost inflation and higher manufacturing costs both in Europe and the U.S. We expect our interest expense to be approximately $110 million, excluding the $53 million of costs associated with the redemption of the senior notes in the second quarter. We previously estimated interest expense to be approximately $115 million. Our estimates for total depreciation and amortization expense of approximately $190 million and effective tax rates of approximately 22%, and capital expenditures of approximately $450 million remains unchanged. So in sum, we're seeing the benefit of our pricing actions which drove the sequential improvement in our top line and gross margin in the quarter. Along with our pricing actions we're on track with our other cost mitigation initiatives, positioning us to manage through the impact of the very poor crop. And finally, for fiscal 2022 we continue to expect net sales growth will be above our long-term target of low to mid-single-digits, and we have enough clarity in our sales and cost outlook to narrow our previous target gross margin rates. Now, here's Tom for some closing comments.

Operator:

Thank you. [Operator Instructions]. We'll take our first question from Chris Growe with Stifel. Please go ahead.

Tom Werner:

Good morning Chris.

Chris Growe:

Hi, nice quarter there for the second quarter here. I had two questions for you. I first wanted to ask in relation to pricing, you’ve mentioned Tom that pricing will mitigate much of the input cost and pressure but not all of it and that's not surprising as pricing picks up here. I know you also have some product spec changes, probably some productivity savings coming through, perhaps even some lower COVID costs year-over-year, I just want to get a sense of if I bundle all of it together and I look ahead whether it's third quarter, fourth quarter, in the second half there will be a point where you are able to offset the majority or all of the inflation, and are those other factors beyond pricing helping offset some of the inflation?

Chris Growe:

Okay. And then I had another question, there are couple items you noted in the press release around production run rates which are down and raw potato utilization, and not to get too deep in the weeds, but those are items that are hard for us to model and are things that are unique to your business. I just want to get a sense of like, from a production run rate standpoint, how much is it down if you can even say that and raw potato utilization, how much are you able to utilize the potato maybe that's different from what it was in the past?

Chris Growe:

That does, yeah, thank you for that color and that outlook, I appreciate it.

Bernadette Madarieta:

Good morning, Peter.

Tom Werner:

Yeah, in terms of productivity, we have a winner's one initiative, which is call it a pretty systematic savings program that we kicked off in the summer of 2020, and we're making progress against that. And as we become more stable in our operating environment, my expectation is that's going to drive savings that will be apparent as we get through a more stabilized cost environment going forward. And we're rolling it out systematically across our network, we're not all the way bright rolling it out to all of our plants, it's taking a bit more time because of the current operating environment and the focus on ensuring we get our throughput, breaks up, and staffing and all that. So, I expect it to be more visible in our margins, once the operating environment stabilizes. And, with respect to the 2022 crop, it's early on. I'm not going to get into specifics on discussions with growers. And there'll be some news coming out and I'll talk more about it in the third quarter.

Tom Werner:

It's really hard to say across the entire menu of a restaurant. What I will tell you is from a side options standpoint, obviously French fries are a really good category and they're an important part of the operator's menu item because of profitability. So, while there has been a lot of simplification and we've done the same thing within our portfolio with our SKU rationalization project, I think the simplification of menus is going to be around for a while. And, a lot of it is going to have to do with the overall supply chain worldwide and food and having availability of the products to menu at a normalized regular basis. So I think this is going to be around for a while. The good news is our categories is more or less back to pre-pandemic levels and it remains an important menu driver and profit driver for our customers.

Operator:

Thank you. We'll take our next question from Tom Palmer with J.P. Morgan.

Bernadette Madarieta:

Yeah, thanks Tom. This is Bernadette. We do expect price mix to go up sequentially in Q3 from the plus 6% that we reported in Q2. Again, that's just broad based pricing actions becoming more fully implemented.

Bernadette Madarieta:

No. No, I wouldn't expect that large of an increase.

Bernadette Madarieta:

Yeah, I can't speak to what competitors are doing but I can say from our standpoint, we aren't seeing a lot of our customers switching freight lanes or that sort of thing. So we continue to remain competitive.

Operator:

Thank you. We'll take our next question from Adam Samuelson with Goldman Sachs. Please go ahead.

Adam Samuelson:

Okay, and the clarity...

Adam Samuelson:

Okay, and just to clarify on the point of a normal potato crop, does the normal potato crop that just yields because I'm thinking about kind of what your -- what contract of potato prices are going to look like in calendar 2022 and they're probably going to be up a lot so I'm just trying to think about, normal yield?

Adam Samuelson:

Okay. And then just a separate question, you talked to Tom about your capacity utilization, maybe running about 10 points below kind of your normal. But you also talked about underlying demand in the category returning to pre-pandemic levels, pre pandemic you were running basically at capacity. Do you think -- have you exceeded some business in some areas or just areas do you think there's competitors who gain market share in areas of the market that you want to keep or is it more just the low end retail in areas that you kind of walked away from?

Adam Samuelson:

Okay, that color is really helpful. I'll pass it on. Thanks.

Robert Dickerson:

Great, thanks so much. This first question, just to clarify on the guidance a range scenario to 18% to 20%, which is great and helpful. But you also now only have a half a year relative to the full year. So just to ask you, Tom, I'm curious kind of given that range, and kind of what that could imply at the low end or the high end, and the back half is still fairly wide. So maybe if you could just kind of come in on what could be some of the drivers that would get you to the lower end and then what could be some of the drivers that could actually get you to the higher end? And then I have a quick follow up.

Robert Dickerson:

Okay, super, very helpful. And then I guess Tom just quickly, I heard you briefly before comment that kind of hope to have some of the labor situation kind of self-corrected sometime in the spring which sounds like what would imply that as we look forward into 2023, hopefully, you are seeing a good position on the labor front, and I kind of ask, because obviously, that flows through into some incremental costs and throughput, but what have you, so just any additional commentary on that would be helpful? That's it. Thanks.

Robert Dickerson:

Okay, Super, thanks so much.

Unidentified Analyst :

Good morning. My question it sounds like the context of the December increase versus the one which was pushed through earlier this year, that it was relatively small, I guess, is that the case? And two, I guess I'm just wondering how much ability do you think you have for further price increases should they be needed next year?

Unidentified Analyst :

Okay, and then just a second one for me on capital allocation, you accelerated the share repurchases in the second quarter, also increased the dividends. What are your thoughts on uses of capital given that you do have such high, such large capex projects over the next several years in terms of share repurchases?

Unidentified Analyst :

Okay, all pass to others. Thank you.

Andrew Lazar:

Thank you. Good morning, Happy New Year, everybody.

Andrew Lazar:

I missed a little bit of the prepared remarks so I apologize if some of this was covered. But it's good to see that some of the more -- the efforts around trying to make the pricing model around transportation and freight more dynamic, and to see some of that coming through, I know that was a big effort over the last quarter or two. I think you had mentioned at one point that maybe over time that you could start to make some of these multi-year contracts with larger customers as they reprice or come up for renewal. A little bit more dynamic as well, when you're building in some aspects that if there is such significant volatility going forward, that you'd be able to sort of maybe account for that a little bit more effectively. And quickly, then then maybe the contracts allowed for this past go around. And I know you don't operate in a vacuum so this is not something that you would necessarily be able to do if others didn't, but I don't know how many of these contracts that these larger contracts have yet really sort of are priced in any big way or come up for renewal. I know more of that I think happens more later in the spring but is there any evidence yet that any of that’s happened or could happen or are you at least certain having maybe some have those discussions or is the environment right now just having those sorts of discussions just a lot tougher to have yet? I'm just sort of curious about.

Andrew Lazar:

That's helpful. And then one last one would be, I think, after the first quarter, I think you were pretty hopeful and seemed pretty confident that that margin performance in fiscal 1Q hopefully would kind of represent sort of the bottom if you will, and you can start to make some sequential progress moving forward through the year, albeit maybe not totally in a linear fashion and that certainly came through right in a bigger way than most expected in this fiscal second quarter? And if you have covered this already, I'm sorry, with the margins, would you be able to say that the margin structure this quarter, similarly, maybe represents a base from which you can sequentially improve to as you move forward or is it -- I wouldn't necessarily expect that and a lot of it depends on some of the three factors Bernadette that you just mentioned, which would determine where you fall in for the full year in terms of that 18% to 20% range?

Andrew Lazar:

Thanks so much.

Dexter Congbalay:

Thanks everybody for joining today. If you'd like to schedule a follow-up call of course please send me an email. We can schedule one then. Other than that Happy New Year, and I look forward to speaking with you later. Thank you.

Dexter Congbalay:

Good morning, and thank you for joining us for Lamb Weston’s first 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 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 Werner, our President and Chief Executive Officer; and Bernadette Madarieta, our Chief Financial Officer. Tom will provide some comments on our performance, as well as a brief overview of the current operating environment. Bernadette will then provide details on our first quarter results and fiscal 2022 outlook. With that, let me now turn the call over to Tom.

Bernadette Madarieta :

Thanks, Tom, and good morning, everyone. As many of you know, this is my first earnings call as CFO of Lamb Weston. I've now been in the role for about nine weeks. For those on the line that I haven't met, it's a pleasure to meet you over the phone. I am looking forward to meeting many of you in person over the coming months as we get back into the cadence of in person investor meetings and industry events. As Tom discussed, we feel good about the health of the category and our top line performance in the first quarter and expect our gross margins going forward will improve as we benefit from our recent pricing actions, as well as from other actions that we are taking to mitigate some of the macro challenges affecting our supply chain. Specifically, in the quarter, sales increased 13% to $984 million, with volume up 11% and price mix up 2%. As expected, volume was the primary driver of sales growth, reflecting the ongoing recovery in fry demand outside the home in the U.S. and in some of our key international markets, as well as the comparison to relatively soft shipments in the prior year quarter. Lower Retail segment sales volume partially offset this growth, largely as a result of incremental losses of low-margin private-label business. Overall, our sales volume in the first quarter was about 95% of what it was during the first quarter of fiscal 2020 before the pandemic impacted demand. Moving to pricing, pricing actions and favorable mix drove an increase in price mix in each of our core business segments. As I'll discuss in more detail later, our pricing actions include the benefit of higher prices charged to customers for product delivery in an effort to pass through rising freight costs. The offset to this is higher transportation cost and cost of goods sold. Gross profit in the quarter declined $63 million as the benefit of higher sales was more than offset by higher manufacturing and transportation cost on a per pound basis. The decline in gross profit also includes a $6 million decrease in unrealized mark-to-market adjustments, which includes a $1 million gain in the current quarter compared with a $7 million gain in the prior year quarter. The increase in cost per pound, primarily related to three factors. First, we incurred double-digit cost inflation for key commodity inputs, most notably, edible oils which have more than doubled versus the prior year quarter. Other inputs that saw significant inflation include ingredients, such as wheat and starches used to make batter and other coatings and containerboard and plastic film for packaging. Higher labor costs were also a factor as we incurred more expense from increased unplanned over time. Second, our transportation costs increased due to rising freight rates as global logistics networks continue to struggle. Our costs also rose due to an unfavorable mix of higher cost trucking versus rail as we took extraordinary steps to deliver products to our customers. Together, inflation for commodity inputs and transportation accounted for approximately three quarters of the increase in our cost per pound. The third factor driving the increase in cost per pound was lower production run-rates and throughput at our plants from lost production days and unplanned downtimes. This resulted in incremental costs and inefficiencies. Some of this is attributable to ongoing upstream supply chain disruptions, including the timely delivery of key inputs and other vendor supplied materials and services. However, most of the impact on run-rates was attributable to volatile labor availability and shortages across our manufacturing network. So, what are we doing to mitigate these higher costs and stabilize our supply chain? First, price. We are executing our recently announced price increases across each of our business segments and implementation of these pricing actions are on track. Our price cost relationship will progressively improve as our past due pricing catches up with inflationary cost increases. We'll begin to see some benefit from these actions in the second quarter, and it will continue to build through the year. If needed, we will implement additional rounds of price increases to mitigate the impact of further cost inflation. We've also increased the freight rates that we charge customers to recover the cost of product delivery, and we are adjusting them more frequently to better reflect changes to the market rates. These adjustments have also lagged the cost increases. While we saw some benefit in the first quarter, we expect to see more of a benefit beginning in the second quarter. In addition, we are significantly restricting the use of higher cost spot rate trucking. Second, we are optimizing our portfolio. We are eliminating underperforming SKUs to drive savings through simplification in terms of procurement, production, inventory management and distribution. We are also partnering with our customers to modify product specifications without compromising food safety and quality. These modifications will help mitigate the impact of lower potato crop yields from this year's crop, as well as some of the impact of reduced potato utilization that results from poor raw potato quality. Third, we are increasing productivity savings with our Win As One program. While realized savings to-date have been small, given that the initiative is still fairly new, we began to execute specific cost reduction programs around procurement, commodity utilization, manufacturing waste, inventory management and logistics, as well as programs to improve demand planning and throughput. We expect savings from these and other productivity programs will steadily build as our supply chain stabilizes. And finally, we are managing labor availability and volatility. This includes changing how we schedule our labor crews, which provides our employees, more control and predictability over their personal schedules and reduces unplanned over time. We are also reviewing compensation levels to make sure we remain an employer of choice in each of our local communities. This is an addition to the other recruiting tools and incentives such as signing and retention bonuses. Moving on from cost of sales, our SG&A increased $13 million in the quarter. This increase was largely driven by three factors. First, it reflects the investments we are making behind information technology, commercial and supply chain productivity initiatives that should improve our operations over the long-term. About $4 million this quarter represents non-recurring ERP-related expenses. Second, it reflects higher compensation and benefits expense; and third, it includes an additional $3 million of advertising and promotional support behind the launch of new branded items in our Retail segment. This increase compares to a low base in the prior year when we significantly reduced A&P activities at the onset of the pandemic. Diluted earnings per share in the first quarter was $0.20, down from $0.61 in the prior year while adjusted EBITDA including joint ventures was $123 million, down from $202 million. Moving to our segments. Sales for our Global segment were up 12% in the quarter with volume up 10% and price mix up 2%. Overall, the segment's total shipments are trending above pre-pandemic levels due to strength in our North American chain restaurant business, especially at QSRs. Our international shipments in the quarter also approached pre-pandemic levels despite congestion at West Coast Ports and the worldwide shipping container shortage continuing to disrupt our exports, as well as softening demand in Asia due to the spread of the Delta variant. The 2% increase in price mix reflected the benefit of higher prices charged for freight, inflation-driven price escalators and favorable customer mix. Global’s product contribution margin, which is gross profit less advertising and promotional expenses declined 45% to $43 million. Input and transportation cost inflation, as well as higher manufacturing cost per pound, more than offset the benefit of higher sales volume and favorable price mix. Moving to our Foodservice segment. Sales increased 36% with volume up 35% and price mix up 1%. The strong increase in sales volumes largely reflected the year-over-year recovery in shipments to small and regional restaurant chains and independently owned restaurants. However, shipments to these end-customers along with restaurant traffic slowed in August due to the surge of the Delta variant across the U.S. Volume growth in August was also tempered by the inability to service full customer demand due to lower production run-rates and throughput at our plants, largely due to labor availability. Our shipments to non-commercial customers improved through the quarter as the education, lodging and entertainment channels continued to strengthen. Overall, non-commercial shipments were up sequentially to 75% to 80% of pre-pandemic levels from about 65% during the fourth quarter of fiscal 2021. The increase in price mix largely reflected pricing actions, including the benefit of higher prices charged for freight. Foodservice’s product contribution margin rose 12% to $96 million. Higher sales volumes and favorable price mix more than offset input and transportation cost inflation, as well as higher manufacturing cost per pound. Moving to our Retail segment. Sales declined 14% with volume down 15% and price mix up 1%. The sales volume decline largely reflects lower shipments of private-label products resulting from incremental losses of certain low margin business. Sales of branded products were down slightly from a strong prior year quarter that benefited from very high in-home consumption demand due to the pandemic, but remain well above pre-pandemic levels. The increase in price mix was largely driven by favorable price, including higher prices charged for freight. Retail’s product contribution margin declined 59% to $15 million. Input and transportation cost inflation, higher manufacturing cost per pound, lower sales volumes and a $2 million increase in E&P expenses that support the launch of new products drove the decline. Let's move to our cash flow and liquidity position. In the first quarter, we generated more than $160 million of cash from operations. That's down about $90 million versus the prior year quarter, due primarily to lower earnings. We spent nearly $80 million in capital expenditures and paid $34 million in dividends. We also bought back nearly $26 million worth of stock or about double what we have typically repurchased in prior quarters. During the quarter, we amended our revolver to increase its capacity from $750 million to $1 billion and extended its maturity date to August 2026. At the end of the first quarter, our revolver was undrawn and we had nearly $790 million of cash on hand. Our total debt was about $2.75 billion and our net debt-to-EBITDA including joint ventures ratio was 2.7 times. Now let's turn to our updated outlook. We continue to expect our sales growth in fiscal 2022 to be above our long-term target of low to mid-single-digits. In the second quarter, we continue to anticipate sales growth will be largely driven by higher volume as we lap a comparison to relatively soft shipments during the second quarter of fiscal 2021 due to the pandemic. We expect price mix will be up sequentially versus the 2% that we delivered in Q1 as the execution of pricing actions in all of our segments remain on track. For the second half of the year, we continue to expect our sales growth will reflect more of a balance of higher volume and improved price mix as we begin to lap some of the softer volume comparisons from the prior year and as a benefit from our earlier pricing actions continue to build. Our volume growth however may be tempered by global logistics disruptions and container shortages that affects both domestic and export shipments. It may also be tempered by lower factory production due to macro industry and labor challenges, as well as a poor quality crop. With respect to earnings, we expect net income and adjusted EBITDA including joint ventures will continue to be pressured through fiscal 2022. That's a change from our previous expectation of earnings gradually approaching pre-pandemic levels in the second half of the year. Driving most of this change is our expectation of significantly higher potato costs resulting from poor yields and quality of the crops in our growing regions. We previously assumed the potato crops that approached historical averages. Outside of raw potatoes, we expect double-digit inflation for key production inputs such as edible oils, transportation and packaging to continue through fiscal 2022. We had previously assumed these costs would begin to gradually ease during the second half of the year. We also expect the macro challenges that have slowed the turnaround in our supply chain to continue through fiscal 2022. That said, we expect the labor and transportation actions that I described earlier, along with our Win As One productivity initiatives will help us continue to gradually stabilize operations, improve production run-rates and throughput and manage cost as the year progresses. For the full year, we expect our gross margin may be at least five to eight points below our normalized annual margin rate of 25% to 26%. While we recognize this is a wide range, it reflects the volatility and high degree of uncertainty regarding the cost pressures that I've discussed. Consistent with prior years we will have a better understanding of the crop’s financial impact in the next couple of months and we will provide an update when we release our second quarter results in early January. Below gross margin, we expect our quarterly SG&A expense will be in the high 90s as we continue our investments to improve our operations over the long-term, while equity earnings will likely remain pressured due to input cost inflation and higher manufacturing costs, both in Europe and the U.S. We've also updated a couple of our other targets for the year. First, we've reduced our capital expenditure estimate to $450 million from our previous estimate of $650 million to $700 million. This significant reduction is due to the timing of spend behind our large capital projects and effectively shifts the spend into early 2023 - fiscal 2023. Despite the shift in expenditures, our expansion projects in Idaho and China remain on track to open in the spring and fall of 2023 respectively. And second, we're reducing our estimated full year effective tax rate to approximately 22%, down from our previous estimate of between 23% and 24%. Our estimates for total interest expense of around $115 million and total depreciation and amortization expense of approximately $190 million remain unchanged. So in summary, the strong recovery in demand helped fuel our top-line growth in the first quarter, but higher manufacturing and distribution costs led to lower earnings. For fiscal 2022, we expect net sales growth will be above our long-term target of both mid-single-digits, but that our earnings will continue to be pressured for the remainder of the year due to higher potato cost from a poor crop and persistent inflationary and macro challenges. Nonetheless, we expect to begin to see earnings improve in the second quarter behind our pricing actions and the steps we are taking to improve our costs. Now, here is Tom for some closing comments.

Operator:

[Operator Instructions] We’ll take our first question from Tom Palmer with JPMorgan.

Bernadette Madarieta:

Good morning, Tom.

Tom Palmer:

I guess just – thanks. Just to kick off, maybe asked on the pricing side. I know your initial round is just starting to work its way through the market. But it sounds like it's not going to fully offset inflation. Could you maybe talk about at what point, just from a timing standpoint, you could think about that second round being instituted? And then, to what extent do you think you'll be able to price for potato inflation? I know that your sourcing is maybe a little bit different than what the broader U.S. might be facing this year in terms of potato cost. So just trying to kind of understand that pricing dynamic? Thanks.

Tom Palmer:

Okay. Thanks for that. And then, I know this is a small segment, but it actually was a - I guess, a meaningful margin overhang this quarter. The other segment swing to a loss despite mark-to-market gains. What drove that this quarter? Is that something we should expect to recur? Or was it kind of unusual item?

Tom Palmer:

Okay. Yes. I mean, even excluding that, I think you are looking at around a $15 million decline year-over-year.

Tom Palmer:

Okay. Thanks.

Adam Samuelson:

Yes. Thank you. Good morning, everyone.

Bernadette Madarieta:

Good morning.

Bernadette Madarieta:

Yes. Thanks for your question. The 5 to 8 basis points that we referenced, a lot of that is due to the potato crops. So the things that I mentioned that has changed is we've got a worst potato crop than we've seen in many years. There is a couple of things that we are doing as I mentioned in terms of SKU rationalization and the products spec changes that we are doing that we are hoping to offset some of that impact on cost. But most of that is related to a poor crop. And then the other thing that I mentioned is that we had previously anticipated the inflation would gradually ease and we do no longer expect that. So, we've given the guidance of 5 to 8 points, but we will come back in January and we'll update that further depending on what we learn more about the crop as we typically have done.

Bernadette Madarieta:

Well, I think the outlook in July we said we were approaching our normal margins, which is the 25% to 26%. And so, now we are saying, it's 5 to 8 points below.

Tom Werner:

Yes. Adam, so the goal is to continue to price through inflation and at levels we historically do. So that's number one. Number two, the 2022 crop, I'll comment on that as we do - as we get through negotiations on how that shaping out for the next crop year. And the thing I would just want to remind everybody is we are dealing with a challenging crop. There's no question about it. And we'll work through it. We are focused on all the right things. The good news in this business, we get started all over for next crop. So we'll manage through as best as we can. We're focused on all the right things. But as things start playing out, like I said to the previous questions, we'll evaluate additional actions we need to take to price through inflation.

Operator:

We’ll take our next question from Rob Dickerson with Jefferies.

Rob Dickerson:

Yes.

Rob Dickerson:

Yes. No problem, Dexter. Great. Thanks. I guess just first question. It sounds like upfront you said, demand is kind of overall maybe around 5% lower than it was pre-pandemic, but maybe shipments are a little bit lower, just kind of given all the supply chain issues. So, as you then speak to trying to stabilize, the supply to improve the cost situation going forward, like how do you kind of view that shipment piece relative to demand? Because demand seems strong maybe you are - kind of you are underperforming a bit relative to that demand equation. But it sounds like there is obviously good line of sight how to get there. So I'm just kind of curious as the cadence after the year? Thanks.

Rob Dickerson:

Okay. Great. And then Tom, maybe just – now that just a question on kind of broader competitive dynamic. I heard some people say, maybe including yourself a bit kind of given your geographic sourcing focus then maybe you might be in less of a kind of beneficial competitive position versus just some of the other larger processors. That being said, I've also heard some of the other processors say kind of not so fast just given where demand is and kind of where kind of overall crop that’s coming in that's supply in general could just be short, right? Not just for you. So, just curious if you can provide any color basically your perspective around kind of where you stand potentially in this environment relative to some of the other players that you are aware of in the market? And then I have a quick follow-up.

Rob Dickerson:

Okay, fair enough. And then just a quick technical question. In the Foodservice division in Q1, price mix was up 1%. Obviously, there was some material deceleration in outlook with what we saw in Q4, which is likely very mix-driven. So just any clarity as to kind of how we should think about that going over on the mix side just given the delta Q1 sorry, Q4 to Q1? Thanks.

Rob Dickerson:

Okay. Got it. Thank you.

Tom Werner:

And then, last year, Q4 was such an anomaly, because that's the first quarter that was really impacted by the pandemic. And a lot of the perspective we sold a lot less branded product during that quarter as inventories were destocked.

Operator:

And we'll go to our next question from Andrew Lazar with Barclays.

Tom Werner:

Good morning, Andrew.

Tom Werner:

Yes, Andrew, I think the - how you framed up, what we talked about in the 20 – the worst crop historically was 14. So, your numbers around $25 million to $30 million are right. And secondly, Andrew, it is too early to frame it up in terms of what the overall financial impact is going to be. And what I will say is, it's worst. This crop is going to be worse than the previously worst crop ever. So the financial impact will put some guardrails around it in January as we get it harvested and we're running it through the plant and we understand what we are dealing with.

Tom Werner:

Yes, Andrew. I am a 100% confident over - we don't have any structural issues in the company and everything you're poking at, we focused on addressing labor challenges. Bernadette made a number of references of what we're doing differently and we're seeing progress. It's just slow going. The thing that will take time is even within our supply chain and our supplier’s supply chain is disrupting our production and driving inefficiencies in our plants that we're doing a number of things to address that, as well. And from last summer to now, it's just going to take more time. We are seeing progress. It's not as fast as we or any of us want. But as I think through the next three quarters, where we will be a year from now, with the things we're doing in the company in terms of addressing inflation, adjusting how our supply chain, we're focused on our supply chain differently, some of the actions we're taking. And a year from now, we're in a new potato crop and that's going to be hopefully back to average normalized levels. We will have certain amount of probably inflation over that time that we will address. But everything we're doing it's going to take time, Andrew. And the category is very healthy. And so, we're preparing for to - with the number of capacity investments that we're doing right now, our long-term strategy sound, it's just we're going to be a little choppy in the near-term, but the things we're doing operationally, I'm a 100% confident. It may take more time than any of us want. But we're addressing all the right things.

Bernadette Madarieta:

Yes, Andrew.

Bernadette Madarieta:

What I was just going to add that, the portfolio optimization that I talked about, that's just going to benefit us even more into fiscal 2023 and then the increases in productivity around a lot of those cost reduction programs around Win As One. Again, that should just continue to gain momentum into fiscal 2023, as well.

Operator:

Take our next question from Peter Galbo with Bank of America.

Bernadette Madarieta :

Yes. So, the way I'd answer that, Peter is, a lot of the decrease that we've explained in terms of the five to eight points, that's taking into consideration that SKU rationalization and the spec modifications. So, the impact of the crop is what is significantly decreasing our margin estimate. And then, we are looking to get some gains on that to get to the five to eight basis point decrease with the SKU rationalization and product spec modifications. Otherwise, it could have been even greater without that, is the way I would explain it.

Bernadette Madarieta :

Yes. So for second quarter and the sequential improvement that we're expecting to see there, generally, our lowest margin quarter is our first quarter. And even though the crop is not what it has been in the previous years, we are going to get some benefits in the second quarter of running out of field and not having to move those potatoes to storage before we start running those through. And then additionally, these other actions that we're taking in terms of further SKU rationalization, we're going out with our second round of those and then the product spec changes. We're expecting to see some benefit from that and should see an increase from Q1, which again is our lowest margin quarter historically.

Bernadette Madarieta :

And the pricing, absolutely. We'll definitely see the benefit of pricing. And I am sorry, Peter. Was there another follow-on question that I missed?