Dexter Congbalay - Vice President of Investor Relations Tom Werner - President and Chief Executive Officer Robert McNutt - Senior Vice President and Chief Financial Officer.

Bryan Spillane - Bank of America Adam Mizrahi - Berenberg Capital Markets Andrew Carter - Stifel Nicolaus Akshay Jagdale - Jefferies Adam Samuelson - Goldman Sachs Michael Gallo - C.L. King & Associates.

Good day, everyone, and welcome to the Lamb Weston Second Quarter Earnings Call. Today’s conference is being recorded and at this time, I would like to turn the conference over to Dexter Congbalay, Vice President Investor Relations of Lamb Weston. Please go ahead, sir..

Good morning, and thank you for joining us for Lamb Weston’s second quarter 2018 earnings call. This morning, we issued our earnings press release which is available on our website, lambweston.com. Also on our website is a brief presentation that we will use on today’s call.

Please note that during our remarks, we will make some forward-looking statements about the Company’s 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 filings with the SEC for more details on our forward-looking statements. In addition, some of today’s prepared 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 Rob McNutt, our Chief Financial Officer.

During this call, Tom will provide an overview of our overall performance, as well as a summary of our strategic and capital allocation priorities. Rob will then provide the details on our second quarter results, our debt and cash flow and our updated fiscal 2018 outlook.

Tom will wrap up with some closing remarks before opening up the call for questions. With that, let me now turn the call over to Tom..

Thank you, Dexter. Good morning, everyone, and thank you for joining us today.

I am pleased to say that we delivered another solid quarter of sales and earnings growth, specifically, sales increased 4% driven by price/mix improvements, while volume declined slightly versus a tough prior year comparable, as well as decisions we made to exit some lower margin business.

Adjusted EBITDA including unconsolidated joint ventures increased 12% to about a $190 million. Our performance in the quarter reflect strong execution across the organization and our continued focus on delivering the right product at the right time, every time for our customers.

For example, our global teams completed customer contract negotiations and agreed on terms which are in aggregate in line with our expectations. The food service team grew volume across its customer base, while continuing to improve pricing and mix.

The retail team expanded distribution of Grown in Idaho branded products delivering nearly 60% ACV in supermarkets in just six months and in Europe, our Lamb Weston/Meijer joint venture delivered another solid quarter behind disciplined pricing.

The supply chain team started up our new 300 million pound French fry line in Richland, Washington, on time and on budget. We are now ramping up production on the state-of-the-art line and expect to have it operating their full capacity by the end of this fiscal year.

The supply chain team has also had the opportunity to more fully assess this year’s potato crop. We consider the overall quality and storability to be in line with our planned expectations.

So with our solid first half performance, the commercial and supply chain teams executing against our priorities, customer contract negotiations now behind us, the start-up of our new French fry line on track, the potato crop quality and yield in line with our expectations and continued favorable operating conditions, we have clarity on our outlook for the remainder of the year.

As a result, we are raising our outlook for full fiscal year 2018. We now expect sales to grow at a mid-single-digit rate and adjusted EBITDA including unconsolidated joint ventures to be $780 million to $790 million. Rob will provide more details on our updated outlook later on in the call.

This strong execution by our commercial and supply chain teams is a continuation of the performance these teams have been delivering for a number of years and has built a solid foundation for driving our strategic plan as an independent company.

Las month, we reviewed our strategic plan with our Board of Directors and we are fully aligned with the planned strategic priorities. I’d like to walk you through some of the plan’s highlights beginning on Slide 5. Let me start with our vision and mission for the company, which has not changed since Investor Day.

We aim to be the number one global potato company by creating solutions that inspire and serve our customers and consumers with the food they love and trust. Today, we are number one in North America and a strong number two globally.

But being number one means more than just focusing on market share, it also means being preferred with our customers, preferred with our growers, preferred partners in innovation, and perhaps most importantly, preferred with our employees.

As you can see on the next slide, we believe we can become the global leader by executing on three strategic priorities; accelerating category and customer growth; differentiating our global supply chain to drive growth; and investing for growth. These three strategies are what we have been executing over the past year.

They are an evolution of what we presented a year ago at our Investor Day after having completed an extensive market and customer segmentation analysis, we’ve chosen to increasingly focus on these strategies that will drive our capital and organizational investments going forward. Let me give you a quick overview of each.

First, we are looking to accelerate growth of the frozen potato category by investing in and supporting specific customers, restaurant segments and markets, as well as expanding our range of product offerings through innovation.

In our global unit, that means continuing to focus on our traditional restaurant segments and customers, like quick service and fast casual burger and chicken chains, while penetrating non-traditional frozen potato product outlets such as convenient stores and coffee houses.

It also means continued focus on fast-growing markets like China and Southeast Asia and continued support of our growing customers across North America and internationally.

In our food service segment, our strategy is to line resources to focus on the smaller quick service and fast casual chains in North America as they continue to add units and expand geographically, while continuing to support our distributor partners and independent restaurants.

We’ll also look to strengthen ties with other types of fast-growing outlets such as entertainment venues and restaurants within grocery stores.

In our Retail segment, we’ll look to expand distribution and gain share by continuing to leverage our three tier strategy offering premium Alexia branded products, mainstream products through Grown in Idaho, and license brands and private-label products.

Our second strategic priority is to differentiate our global supply chain to support growth and strengthen our competitive advantage as a low-cost producer. We’ll continue to drive productivity and cost savings by leveraging our Lamb Weston operating culture of continuous improvement.

You’ve already seen the benefits of this culture with our supply chain team’s track record of stretching existing capacity to support volume growth, improve raw recovery rates and manage manufacturing costs to expand gross margins.

In addition, we’ll continue to build a true integrated end-to-end global supply chain, grounded and unified information systems and processes. This will further enhance production efficiencies and cost savings across North America and with our joint venture partners.

And as we continue to invest in manufacturing assets outside North America, we will look to create a raw potato sourcing model in emerging growing regions that is similar to the one we built in the Pacific Northwest.

This will enable us to have an ongoing supply of cost advantage raw products that would meet the needs of our customers over the long-term. Our third strategic priority is to continue to invest for growth.

We believe that demand will continue to grow at an attractive rate for the foreseeable future and industry capacity will continue to be challenged to keep up with that growth over the long-term. Lamb Weston has consistently committed capital to increase capacity.

In the past five years, and including a recent announcement to expand our Hermiston facility, we will have invested more than $800 million to expand capacity.

In addition, we remain committed to our [base] [ph] capital program to reduce cost, stretch capacity, and keep our factories well maintained, so that we can operate them at high utilization rates while maintaining our high standards for safety and quality. With these investments, we’ve been able to support our customers’ growth and gain shares.

We’ll continue to invest in new capacity as long as we see opportunities to grow and generate strong returns. We will also complement these investments by seeking acquisitions in regions where we may have an ability to accelerate our growth.

These would generally be bolt-on transactions, which we can readily afford within our capital structure and will be in potato-related categories. Let’s take a deeper look at a specific example of our strategy of investor growth on Slide 7.

A couple of weeks ago, we announced plans to invest $250 million to add 300 million pounds of French fry capacity at our Hermiston Oregon facility by the end of fiscal 2019. The reasons we are doing this now are pretty straightforward.

For the last couple of years, demand growth has been strong, while industry capacity in North America has been operating at unsustainably high levels of utilization. As a result, volume growth has been constrained and service levels have been challenged. These are some of the reasons why our competitors plan to expand capacity over the next few years.

But as you can see on the chart on Slide 7, even with these additions, we anticipate that utilization levels will remain high through fiscal 2022. We anticipate that our capacity expansion in Hermiston will enable industry utilization levels to approach the mid-90’s historical range in fiscal 2020.

However, even with this additional capacity, we believe that demand growth would continue to keep utilization levels above the historical range tampering any industry pricing pressures due to supply/demand dynamics. For Lamb Weston specifically, the Hermiston expansion enables us to continue to support our customers’ growth plans.

It allows us to support increasing demand in North America, as well as exports to Asia where demand growth has been and is expected to remain strong. It will increase our investment in the community by adding 170 full-time positions and generate an attractive rate of return for our shareholders.

I was at the Hermiston plant during the quarter reviewing plans with the team and I am very confident that we’ll execute this important project as well as we did with our expansion in Richland. This decision to invest in new capacity reflects our broader balanced capital allocation policy based on returns and executed with discipline.

As you can see on Slide 8, our first priority has been and will continue to be investing to support growth of our customers in the frozen potato category.

As I mentioned a few minutes ago, we believe that the demand for frozen potato products will continue to grow at an attractive rate over the long-term, both in North America and in international markets.

As a result, we believe that there are number of opportunities to generate solid returns by investing strategically through both capacity expansion and acquisitions. After funding higher return investments to support growth, we’ll look to other opportunities to deploy cash.

With respect to our balance sheet, we will continue to target a leverage range of 3.5 to 4 times adjusted EBITDA. In the near-term, we expect to be at or below the low-end of that range, which will provide flexibility to pursue acquisitions. We expect to reduce our leverage through EBITDA growth rather than by significantly paying down debt.

We will also return capital to shareholders. We recently increased our dividend to 76.5 cents on an annualized basis or about 35% of our latest 12 months adjusted earnings per share. We expect to continue to pay a competitive dividend and we’ll target a payout ratio of 25% to 35% of adjusted EPS.

While we currently do not have a share buyback program, we would consider one if we don’t see sufficient high return capacity expansion or acquisition opportunities. So as our second quarter and first half results show, we are performing well in a favorable operating environment.

We have good visibility into how we see the rest of the year unfolding and we have raised our annual outlook for sales growth and EBITDA accordingly. We also believe that we are well-positioned to create shareholder value over the long-term. We are a leader in a growing global category. We have advantage, scale and capabilities.

We are focused on executing on a clear set of strategic priorities and we take a balanced returns-based approach to capital allocation. Now let me turn the call over to Rob to provide the details on our second quarter results and our updated outlook for the year..

first, we’ll benefit from the U.S. federal corporate tax being reduced from 35% to 21%. However, we haven’t completed our estimated of the law’s impact on our vested tax rate for the second half or the blended effective tax rate for the full year.

Second, based on our preliminary analysis of the new law, we estimate our long-term effective tax rate including foreign and state taxes will be in the mid-20s.

As a primarily U.S.-based exporter this helps level the playing field and improves our competitive position vis-à-vis other historically low jurisdiction competitor – low tax jurisdiction competitors. And third, we will recognize one-time discrete tax impacts when we report our third quarter earnings.

These include a non-cash benefit from remeasuring our U.S. net deferred tax liabilities on our balance sheet at a lower tax rate. This will be partially offset by taxes on historical unremitted foreign earnings with the cash tax – cash impact spread over the next eight years.

We’ll provide a more definitive view of the impact of the new tax law after we examine it in its entirety. And finally, we’ve raised our estimate for capital expenditures for the year to $250 million from the $225 million. The $25 million increase in our CapEx target reflects early spending on our new production line at our Hermiston Oregon facility.

We’ll spend the remaining $225 million associated with this investment in fiscal 2019. Now let me turn the call back over to Tom for some closing comments..

Thanks, Rob. As you can see, we are executing well across the organization. We delivered solid first half results, started up our new production line and have good visibility into how the rest of the year will play out. As a result, we are confident in our ability to deliver the higher sales and EBITDA targets in our updated outlook.

We will continue to execute on our three strategic priorities focusing on specific customers, restaurant segments, and geographies, as well as expanding our range of product offerings through innovation, differentiating our global supply chain to strengthen our competitive advantage as a low cost producer and investing in additional capacity and acquisition opportunities to support growth.

We are well-positioned to serve and grow with our customers, generate solid returns, and create value for all our stakeholders over the long-term. I want to thank you for your interest in Lamb Weston and we are now happy to take your questions..

[Operator Instructions] And we will take our first question from Bryan Spillane with Bank of America..

Good morning everybody and Happy New Year..

Good morning, Bryan..

Good morning, Bryan. Happy New Year..

So, I had a question just back to slide 7 and I think on that slide, in the footnote you talk about off of a 12.7 billion pound base that you expect that the growth rate for North American exports to be between 2% and 2.3% between, I guess, 2017 and 2022.

Can you remind us how that forecast range compares to, I guess, what you were thinking or what you were communicating back at the Investor Day last year. I guess, if I remember it right, at least the North American growth rate was about a 0.5%.

So, to give us some context in terms of just how that’s changed versus which our original expectations were when you first talked to the street..

Right, Bryan, this is Tom. We’ve increased our outlook on what we think the overall category is going to grow based on, really the last 12 to 18 months in North America specifically. Our estimates are, the category has been growing between 1.5% to 2.5% and we expect that to continue.

As you think through the big driver of that is the QSR space and as that continues to improve in traffic, we expect the growth in North America to be in the 2% range and globally, we are forecasting around 2% to 2.5% over the next four, five years..

Okay.

And then, I guess, if we are looking at a – if that forecast being revised higher and then connected back to the long-term growth rate of mid to high-single-digit EBITDA growth and high-single-digit EPS growth, can you just talk to – with, I guess, the sales outlook higher for the industry, how that might impact you versus your long-term algorithm, I guess, at least in the medium-term?.

Yes, I think, Bryan, this is Rob. The – again, as you would expect, as we move the top-line growth up, obviously, that’s going to impact, one, investment opportunities for us, but then, also going to impact the bottom-line. We are still in that same range in terms of EBITDA growth is what we are forecasting at this point..

Okay. And just one last one related to that, just, I guess, with capacity, with the industry over a 100% capacity utilization, is that sort of having a negative effect on leverage? Are you at a point now where you actually need a little bit of buffer in capacity in order to get more optimal in terms of operating leverage? I’ll leave it there..

Yes, Bryan, I would say, certainly in terms of operating leverage as you run at the high utilization rates that we have, you get a benefit and I think, over the long-term, as we bring our capacity online, it’s going to be more balanced in terms of utilization rates that are more sustainable within our factories..

Thank you..

We’ll take our next question from Adam Mizrahi with Berenberg Capital Markets..

Good morning guys. I have a question on the Richland capacity.

How much of the 300 million pounds added do you expect to be incremental versus taking some of the heat of the existing facilities? And then, following up from this, how significant do you think Taco Bell going national with its nacho prices in terms of filling up this Richland capacity? Thank you..

Well, I think, in terms of the Richland capacity, there will be a bit of balancing upfront, Adam. But we expect, based on our outlook that we’ll fill that line up within the next 18 months and that’s the reason that we made the decision to invest in our Hermiston plant.

So the second question you had in terms of that specific customer, we don’t publicly talk about individual customers. So, I’ll leave it at that..

Okay, great.

And then, if I can follow-up on the equity earnings, can you talk about how much of the growth in the quarter is driven by Europe versus the U.S.? And I think on the last call, you mentioned that you are starting to see some pricing pressure in the European export market as new European capacity comes online? Are you starting to now see some of that impact flowing into the domestic European market as well?.

Yes, Adam, this is Rob. The vast majority of that improvement in the equity earnings is out of Europe and again as you know or recall that last year, we had relatively high potato prices in Europe which impacted our cost structure.

The guys in Europe were – the team in Europe was able to pass that through and as potato cost have come off this year, they’ve maintained it within Europe the pricing levels at those higher levels. So therefore expanded margins and so that’s the bulk of it.

Where we’ve seen some pressure is and continue to see pressure is really in Middle Eastern export markets out of Europe and that continues to be a bit of a dogfight. But within Europe, itself, prices continue to remain relatively stable.

Now, having said that, looking forward, based on historical practice, we are expecting some price pressure in Europe back half of this year and into early, maybe next fiscal year..

Great, thanks very much..

Thank you..

We’ll take our next question from Chris Growe with Stifel..

Good morning guys. This is Andrew Carter on for Chris.

Can you hear me?.

Yes, Andrew good morning..

Good morning..

Good morning. Okay, so just, given kind of looking at Slide 7, just the industry be above a historic capacity utilization for the near-term, I mean with Hermiston coming online. I guess, what we are scratching our head with, it would seem that it need another facility expansion side-by-side the Hermiston in the next [12-18] [ph] months.

I mean, is that’s something I mean, am I thinking the right thing there?.

Andrew, this is Tom. I think, as we have in the past, we’ve been very disciplined over the last four, five years as we continue to analyze the category and think through category growth going forward. And as we get down the path in the next couple of years, and we continue to see the category grow at the rates we believe it will.

Certainly, our intent is, as I’ve stated earlier, we continue to invest in this business and capacity investment in Lamb Weston has really good returns. We are focused on the category and that’s what we are going to continue to do over the long-term.

So, to answer your question, yes, that’s going to be a continuation and the timing of that in the out years is going to be really dependent upon what’s happening in the category..

Sure. Okay. Kind of second question just to get back to FY 2018 here. You increased your guidance range for the year, but the back half guidance still kind of implies the deceleration in terms of EBITDA growth. That’s with all the kind of – some of the tailwinds you got coming online, you got additional capacity, additional pricing.

What’s limiting that? Is it just your outlook for higher inflation and also, I don’t know if you gave it, did you give a total input cost inflation number for the year?.

We did not give a - this is Rob. We did not give a total input cost inflation for the year. But as I mentioned in the prepared remarks that we do see higher inflation in the transportation and warehousing. In addition, in terms of the EPS impact, and earnings impact, we’ve got the extra depreciation load coming in.

Now, having said all that, take the caveat, not around EBITDA but around EPS, we are still working out the impacts of the tax law changes..

Sure. Okay. I’ll pass it on. Thanks guys..

Thanks, Andrew..

Our next question comes from Akshay Jagdale with Jefferies..

Hi, good morning and congratulations on another very solid quarter..

Good morning, Akshay..

Good morning..

So, thanks again for all the extra color, especially on the capacity. So my first question is on the utilization rate chart.

How should we think about what you presented and the relationship of that with pricing right? Fractionally for the industry, how would you envision pricing trends given what you are projecting for utilization rates?.

Yes, Akshay, this is Tom. I think, our competitors are putting on capacity over the next couple of years. Certainly, with our announcement, we are adding more capacity. Our belief is, as we look at the category in total and the growth rates that have been happening in the last several years, we expect those to continue.

The new capacity coming online, it will balance itself out just based on demand growth and the North America’s growth is better than we expected and the continued growth in some of the emerging markets.

So, Akshay, I think, there may be pockets of imbalance over the next couple of years, but I don’t expect that to materially impact our pricing going forward..

That’s helpful. And maybe just to follow-up on that, really what I am trying to get your high level perspective on – and again, this is more of an industry question.

Given, we have, on our side have limited history of what the industry looks like, right, I am just trying to get a sense of, has there been a period of time since you’ve been in the industry where pricing has meaningful step-down.

I mean, our research tells us that, it has not and what you are projecting for utilization rates, I mean, it doesn’t seem to me that we will see that any time soon.

So, can you give us some perspective, I mean, directionally, in the sense on this, expecting sort of the price/mix gains for the industry to stabilize as utilization rates come in a little bit or could or to where pricing could come down?.

Akshay, let me give you a perspective. I’ve been around this business off and on for the past eight, nine years both directly and indirectly.

And the only period where there was pressure in terms of the price side of it was after the 2008 financial downturn and that was just a function of – it seems, what was going on economically, but I would say, over the last three, four years, five years, has been very consistent in terms of volume growth and pricing discipline in the marketplace..

Okay, and just one last one, which is more on the long-term strategy. So, you guys have proven that you are the cost by a wide margin and the growth in the numbers have been phenomenal right.

So, help us put into context the three initiatives that you talked about the strategic priorities like, if we look through the next five years, where would you see the most impact in terms of change, right, because you are a standalone company.

We think you’d be more nimble, et cetera, but this is really the first time you see that it’s going to change things, right. So, where do you think in the P&L if you are – we should see the most impact from these strategic priorities? Thank you..

Yes, Akshay. I would say, if you – as I think through the three strategies, it’s really a continuation of what we’ve been executing over the last 12 to 24 months.

In terms of your question on where I see the most change, I am not going to get into all the specific details underneath these three strategies, but, we certainly have initiatives in place within each one of them that, that will deliver the business and the financials going forward.

So, it’s not going to be a lot of dramatic change, I’ll tell you that. But it’s going to be very focused, disciplined, executing the business.

We’ve got – really, the big thing is focusing on resources and setting the organization up to be successful going forward and just being very methodical and disciplined about executing against our initiatives underneath these strategies..

Thank you. I’ll pass it on..

Our next question comes from Adam Samuelson with Goldman Sachs..

Yes, thanks. Good morning everyone..

Good morning, Adam..

Good morning..

First, just a question on the volume in the quarter, the content – and some of the small gains in food service and the capacity constraints that you had on, but there is clearly is a real kind of company level margin mix benefit from those kinds of actions.

Can you talk about how sustainable do you think that mix shift could be or with the new capacity at Richland just comes out at this point was the temporary move because you were just that volume range, it would seem to me that with broad based trends in food service and through distribution that that you should be prioritizing that mix and so some of the global customers where you could?.

Yes, this is Rob. In terms of that impact, I mean, clearly, as we’ve talked about the last couple of quarters that that we’ve really been running the assets hard and so we have capacity constraints. We pulled some out of inventory.

But we’ve continued to look not only within each of the segments, but across the segments of where is the most profitable business, where our strategic customers in terms of the long-term growth customers, long-term profitable, most profitable customers.

And so, that’s where you make those hard decisions to take out some of the more transactional business as lower margin when you get into these capacity constraints like this.

Now that we have that relief, clearly we’ll continue to grow with our very profitable food service business and support those strategic customers in that businesses as we go forward. But I think it also allows us to open up some more capacity into more of the global segment.

So we should get some of the growth back in the global segment as we look forward as Richland comes up, and as the Hermiston line comes up. And so, just as you look at balancing among the segments, clearly, we got some margin push overall here in the near-term.

But as we bring this more capacity online, clearly that’s going to impact margins, still very profitable customers, but maybe not quite as profitable on those incremental customers, those incremental pounds as we’ve been able to get here recently..

Okay, that’s very helpful. And then, prepared remarks, there was a bit more discussion, kind of potential acquisitions, then there had been in recent calls, and I was hoping you could maybe kind of frame with some of the key characteristics and hurdles that you look at on M&A.

I presume that’s high international focus, optimal size, just return hurdles accretion benchmarks that you could share if M&A, maybe bubbling up on the capital allocation agenda a little bit?.

Sure, Adam, it’s part of our playbook and it’s been – if you go back to Investor Day, we’ve specifically called that out in terms of capital allocation and it’s always going to be opportunistic. We are going to look at opportunities within the categories and as everybody knows, those things are hard to predict if and when they are going to happen.

But the point is, when we have those opportunities, we are going to get involved in M&A and it’s part of our investor growth strategic pillar. In terms of the filters we go through, I am not going to get into all of that, right now.

But, it’s more about – it’s part of our strategic pillar and we are going to have our ear to the ground within the category and if we have an opportunity, we are going to execute against that..

Okay, that’s helpful. I’ll pass it on..

Thanks..

Thank you..

And we’ll take our final question from Michael Gallo with C.L. King..

Hi, good morning and congratulations, again on a solid quarter. My question is on, the capacity – the new capacity at Richland and the capacity expansion. It was notable that you are modeling the line at Hermiston on the line at – off the line, you just put up at Richland.

I was wondering, what you are seeing on that line in terms of how it’s performing versus your legacy capacity? And whether we should think about this capacity, that newer capacity as it comes online as perhaps more efficient and higher margin than your legacy capacity? Thanks..

Michael, this is Tom. The last two or three investments we’ve made in terms of adding new capacity, we continued to upgrade technology. We make improvements. So, four years ago, five years ago, we put in Boardman line.

We took learnings from that and applied it to our Richland line and we have a lot of capabilities in terms of freight cuts, sizings on these lines. So it gives us flexibility. And we also, as we started up the Richland line, and have learned even more. We apply that to our next line in terms of the Hermiston blueprints and they are more efficient.

They are more cost-effective. They are lower cost from just in terms of the technology that we invest in these new lines. So, to answer to your question, yes, they are more efficient lines and it gives us the ability as we look across our network and all the production facilities and lines.

We have to really balance it out and help improve our profitability just based on the business mix we can move around in the factories..

Okay, great to hear. Thank you..

And that concludes the question and answer session. I would like to turn the conference back over to our presenters for any additional or closing remarks..

Hi, this is Dexter. Thank you for joining us today. Available for any follow-up calls today and tomorrow and into early next week. For those of you on the East Coast stay safe and we’ll talk to you later. Thank you..

And that concludes today’s presentation. Thank you for your participation and you may now disconnect..