Dexter Congbalay - VP, IR Tom Werner - President and CEO Rob McNutt - CFO.

Andrew Lazar - Barclays Andrew Carter - Stifel Bryan Spillane - Bank of America Akshay Jagdale - Jefferies Adam Samuelson - Goldman Sachs Michael Gallo - C.L. King Brett Hundley - Vertical Group.

Good day and welcome to the Lamb Weston Fourth Quarter 2018 Earnings Call. Today’s conference is being recorded. At this time, I would like to turn the call over to Dexter Congbalay, VP, Investor Relations of Lamb Weston. Please go ahead, sir..

Good morning and thank you for joining us for Lamb Weston’s fourth quarter and fiscal year 2018 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 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.

In addition, please note that all references to our financial results reflect the reclassification of a portion of our intensive compensation cost from selling, general and administrative expense to cost to good sold. On our website you can find a schedule that provide amount of reclassified by quarter for fiscal years 2016, 2017 and 2018.

With me today on our call are Tom Werner, our President and Chief Executive Officer; and Rob McNutt, our Chief Financial Officer. Tom will provide an overview of our overall performance and the operating environment. Rob will then provide the details on our fourth quarter and full year results and fiscal 2019 outlook.

With that, let me now turn the call over to Tom..

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

We’re pleased with our strong performance for the quarter and for the full year, our financial results reflects our commitment to our customers, our unwavering focus on our operating with excellence and a continuation of the favorable environment that we’ve enjoyed over the last couple of years.

We’re proud of the operating momentum that we’ve been building since becoming an independent company less than two years ago. Fiscal 2018 was a continuation of the entire Lamb Weston organization executing at the high level against our strategic and financial objectives, creating value for all our stakeholders.

Our strong fiscal 2018 performance provides us with a solid foundation for future growth. Let me take you through some of the highlights. Sales increased to $3.4 billion, which is up 8% and above our target growth rate of the upper end of the mid single-digit range. The increase was driven by price mix and volume growth in each of our core segments.

Adjusted EBITDA including unconsolidated joint ventures increased 16% to $820 million, which is above our target of $805 million to $810 million. We generated more than $480 million of cash flow from operations.

We reinvested nearly a $310 million of net cash flow in the capital expenditures, which much of towards expanding capacity to support future growth. We reduced our leverage to 3.2 times adjusted EBITDA from 3.7 times. We increased our dividend and paid out a $110 million to our shareholders.

And finally, we established the New Lamb Weston Charitable Foundation focused on fighting hunger and food and security. Our strong financial performance in fiscal 2018 is a direct result of the entire Lamb Weston team's sense of pride and ownership, our focus on our customers and the accomplishments of our supply chain and commercial teams.

First of all, our supply chain team continued to improve our safety performance with OSHA Recordable Incident Rate of below 1.5 for the first time in our history of the Company, a major milestone.

During the year, our supply chain team supported demand growth and service levels by continuing to operate our manufacturing asset at a very high utilization level. At the same time, the team invested in capacity expansions and productivity programs that will help offset inflationary pressures in the coming fiscal year.

In the second quarter, we started up our 300 million pound french-fry line in Richland, Washington, on-time and on-budget. In fact, we were able to ramp up production on the line in record time, which gave us added flexibility to take down other lines for extended maintenance in the back half of the year.

Early in the third quarter, we announced another capacity expansion with the addition of a 300 million pound french-fry line in Hermiston, Oregon, at a total cost of about $250 million and construction is on schedule with a target operational date of May 2019, this line will serve both domestic and international demand.

Also in the third quarter, our new 180 million pound facility in Russia became operational and is in the process of ramping up. As you may recall, our interest in this plant is through our Lamb Weston/ Meijer joint venture in Europe which is a minority owner in this facility.

And finally, our 115 million pound French-fry plant in China continues to ramp up production levels to serve strategic customers in that fast growing market. In addition, our raw potato procurement team completed negotiations and entered into agreements with our grower network for the current crop year with price increases in line with expectations.

On the commercial side, our teams were able to continue to drive profitable growth and capture market share. In our global segment, we continue to focus on our traditional customer base of chain restaurants to drive domestic growth.

We successfully renewed contracts for our large portion of our North American volume base including implementing new price structures and partnering with customers to drive growth through limited time offerings and innovation.

Going forward, we’ll continue to support customer growth across North America and in fast growing international markets like China and Southeast Asia, while expanding our innovation focus to increasingly include non-traditional outlets such as convenient stores, sandwich and bakery concepts.

In our foodservice segment, we've taken steps to align resources to build and strengthen relationships across our foodservice customer base including our distributor partners, small and regional restaurant chains, and independent restaurants.

Most notably, over the past few months, we've expanded our direct sales force and eliminated our remaining broker relationships. We've completed hiring a new sales and support team that hit the ground array as we transition to a direct sales model in June. The initial response in the market has been positive.

Over the long term, we expect this change will lead to deeper customer relationships and broader customer coverage leading to faster growth and improved mix. In retail, we drove category growth and gain market share by leveraging our three tier strategy of offering premium Alexia-branded, mainstream branded and private label products.

At the beginning of our fiscal year, we launched our new mainstream brand Grown in Idaho. Today, Grown in Idaho has an ACV of nearly 85% in the grocery channel and total market share of about 4%. In additional, Alexia branded and licensed brand products have increased share over the past year.

With respect to new products and innovation, we teamed with existing and new chain restaurant customers on limited time offers, helping them expand menus and drive consumer traffic.

In addition, we announced Crispy on Delivery, a first of its kind comprehensive proprietary fries and packaging solution that enables fries to stay hot and crispy for the fast-growing home delivery channel.

We are in the process of working with some larger chain restaurant customers about adding it to their menus and will begin rolling it out to foodservice customers later this year. In summary, fiscal '18 was a terrific year our.

Performance reflected our entire team's laser focus on execution against our priority as well as each team members' passion and commitment to each other, our customers and all our stakeholders. Now turning to fiscal 2019. We are targeting another year of solid sales and earnings growth.

We anticipate demand growth for frozen potato products in North America to be in line with recent trends, barring any unforeseen economic event that would significantly impact consumer sentiment. We continue to expect that industry capacity in North America will be tied to fiscal 2019 given current utilization levels of around 100%.

This is consistent with the view that we presented in January, which already included the impact of new capacity additions later this calendar year. With solid demand growth and tight industry capacity, we believe the environment to improve both price and mix will remain relatively favorable in the near term.

However, as we demonstrated, we'll continue to take balanced approach to improve price and mix so that we can maintain and reinforce our strategic customer relationships and deliver sustainable profitable growth over the long term.

In addition, consistent with our growth strategy, we've given notice to our partner and our Lamb Weston/BSW joint venture to exercise our call option to purchase our interest. We'll move to close that transaction as soon as practicable. Despite the continued favorable environment, we do see some potential risk and headwinds in the coming year.

First, inflation is accelerating for many of our production costs and more significantly for transportation costs.

As Rob will describe later in our outlook, we anticipate being able to offset these costs through improved price mix and productivity, but the higher inflation will likely temper opportunities for significant gross margin percentage expansion. Second, we expect increased market volatility outside the United States.

The imposition of tariffs or other trade barriers raises landing cost for products made in the U.S. and opens the door for more competition from non-U.S. sources in key international markets. At the very least, the threat of retaliatory tariffs on U.S. products may encourage customers to seek alternative suppliers.

In addition, significant new capacity in Europe becoming operational within the next 12 months may lead to some near-term supply demand dislocation. The third potential risk is one we face each year, potato crop quality and yield. As usual, we tend to be cautious about the potato crop given that we're very early in the growing season.

We'll have much better insight as we enter the September and October harvesting period. And finally, as Rob will describe later, we're strategically investing in our infrastructure resulting in higher selling, general and administrative costs.

While significant step up versus fiscal 2018, these investments will help us support future growth and drive operating efficiencies over the long-term. So as you can see, we've delivered strong results by supporting our customers and executing well across the organization. We expect the operating environment to remain favorable through fiscal 2019.

And we're strategically investing in our capacity, infrastructure, and capabilities to support growth over the long-term. I'm confident that we'll deliver solid top and bottom line growth in fiscal 2019 and create value for all our stakeholders.

Now, let me turn the call over to Rob to provide the details on results and our outlook for the coming year. Rob..

Thanks, Tom. Good morning everyone. As Tom noted, we're pleased with our strong results in the fourth quarter and the full year, as we grow sales and EBITDA growth above our long-term targets. Specifically, net sales in the fourth quarter increased 10% to $918 million.

Price mix was up 8% as we benefited from new pricing structures and recently renewed contracts in our global segment and we improve mix in our retail segment. In addition, in foodservice, we continue to benefit from pricing and mix improvement actions taken in fiscal 2017 as well as action taken the in the first half of fiscal 2018.

Volume increased 2%, led by growth in our global and retail segments. For the year, sales grew 8% to $3.4 billion with price mix up 6% and volume up 2%. Gross profit in the quarter increased 18% to $233 million.

Higher price mix, volume growth and supply chain efficiency savings drove the increase more than offsetting the impact of higher transportation and warehousing costs, input costs inflation, higher fixed manufacturing cost per unit as we took some downtime for maintenance, higher depreciation expense primarily associated with our new production line in Richland, and higher incentive compensation expense.

Our gross margin percentage in the quarter expanded 160 basis points to more than 25%. For the year, gross profit grew 13% and gross margin expanded 110 basis points to 25.7%.

The improvement was largely driven by favorable price mix, volume growth, and supply chain productivity more than offsetting higher inflation, depreciation, and incentive compensation cost. In the quarter, SG&A expense excluding items impacting comparability increased $23 million to $98 million. Three factors primarily drove the increase.

First, incremental labor benefits and infrastructure cost related to operating as a standalone public company. Second, a $7 million increase in advertising and promotional sport in our retail segment, which was driven by our first on-air campaign for Grown in Idaho branded products, as it achieved some key distribution milestones.

And third, higher incentive compensation in cost based on our actual performance for all the fiscal 2018. The increase in SG&A also includes two additional expenses that we do not expect to recur. The first is approximately $5 million of seed funding to establish our new charitable foundation.

The second is roughly $3 million of cost in the fourth quarter and $4 million in the year associated with transitioning our foodservice segment go-to-market strategy to a direct sales model. This included the cost of hiring and training sales representatives as well as the cost related to terminating our broker relationship.

Adjusted operating income was 10% to $134 million in the quarter, driven by the increase in gross profit. For the year, adjusted operating was up 9% to $589 million. Again, this was due to higher gross profit partially offset by higher SG&A.

In the fourth quarter, equity method investment earnings from our unconsolidated joint ventures, which include Lamb Weston/Meijer in Europe and Lamb Weston/RDO in Minnesota, were $25 million.

Excluding the year-over-year impact of unrealized gains and losses related to mark-to-market of commodity and foreign currency hedging contracts, equity earnings increased about $8 million in the quarter. Lowering potato cost in Europe as well as volume growth by both joint ventures primarily drove the increase.

In addition, about $2 million in the increase is due to favorable currency translation benefit. For the year, equity earnings were $84 million.

Excluding the mark-to-market impact, equity earnings increased about $34 million driven by solid operating result of $5 million of currency translation benefit and a $4 million gain related to a divestiture of a non-core business.

So putting it all together, in the fourth quarter, adjusted EBITDA including the proportional EBITDA from our two unconsolidated joint ventures increased 15% to $203 million. For the year, it was up 16% to $820 million. Moving down the income statement. Interest expense was about $28 million for the quarter and $109 for the year.

Our effective tax rate excluding the impact of comparability items and provisional impacts from tax reform was 25% in the quarter and 27% for the year. This is below the 28% that we anticipated due to benefit of timing and discrete items. Turning to earnings per share.

Adjusted diluted EPS increased $0.14 to $0.65 in the quarter and includes a $0.10 benefit from applying a lower tax rate as a result of recently enacted tax reform. The remaining increase was driven by operating gains and higher equity earnings. For the year, adjusted EPS was up $0.34 to $2.66.

Operating gains and higher equity earnings drove the increase. The benefit of a lower tax rate was offset by higher interest expense related to debt incurred in connection with the spin off. Now let's review the results for each of our business segments. Sales for our global segments, which includes the top-100 U.S.

based chains as well as all other sales outside of North America, were up 10% in the quarter. Price mix rose 8% as we continue to benefit from new pricing structures associated with the recently renewed contracts that continue to improve both customer and product mix.

We expect these new pricing structures will continue to look to deliver solid price mix growth through the first half of fiscal 2019. Volume grew 2% primarily driven by sales to strategic customers in the U.S. For the year, net sales increased 7% with price mix up 5 and volume up 2.

Global's product contribution margin, which is gross profit less advertising and promotional expense increased $17 million or about 21% in the quarter. The increase was driven by favorable price mix and volume.

This was partially offset by higher transportation, warehousing, commodity input and manufacturing cost inflation, higher depreciation expense primarily associated with the new Richmond line and higher incentive compensation costs.

Global's contribution margin percentage expanded by about 190 basis points in the quarter and about 70 basis points for the year. Sales for our foodservice segment, which services North American foodservice distributors and restaurant chains outside the top-100 North American restaurant customers, increased 6% in the quarter.

Price mix increased 6% compared to an 8% increase in the prior year period, reflecting pricing actions and continued improvement in customer and product mix. In fiscal 2019, we continue to expect favorable pricing and foodservice as pricing actions taken in November 2017 continue to be implemented.

Because of the timing of contract renewals, broad pricing actions such as these takes 6 to 9 months to be fully reflected in marketplace. Foodservice volume grew nominally behind increased shipments of higher margin Lamb Weston branded and operator label products.

However, this was mostly offset by the continued effect of losing some lower margin distributor label volume earlier in the year. As we mentioned in our last earnings call, we anticipate the loss of this volume will continue to be a headwind through the first half of fiscal 2019.

For the year, foodservice sales grew 7% with price mix up 6 and volume up 1. In the quarter, foodservices product contribution margin increased 6% as favorable price mix more than offset higher transportation warehousing input and manufacturing costs, the Richmond depreciation and higher incentive compensation costs.

As a result, foodservices contribution margin percentage was essentially flat. For the year, it was up about 120 basis points driven by favorable price mix. Sales in our retail segment grew 26%. Volume was a 14 driven by distribution gains have Grown in Idaho and other branded products as well as growth of private label products.

Price mix increased 12% with higher prices across our branded and private label portfolio as well as improved mix. For the year, sales grew 17% with volume up 12% and price mix up 5%.

Retail's product contribution margin in the quarter increased 47%, as higher volume and price mix more than offset costs inflation and significantly stepped up advertising and promotional investments behind Grown an Idaho. Product contribution margin percentage expanded by 230 basis points.

For the year, retails product contribution margin increase 13% while margin percentage decline 17 basis points due to higher trade spending earlier in the year and advertising and promotional support behind grown an Idaho. Switching to our balance sheet and cash flow, our total debt at the end of the year was about $2.4 billion.

This puts our net debt to adjusted EBITDA ratio at 3.2 times, slightly below our target range of 3.5 to 4. As we've previously noted, we're comfortable being below our target range for a period of time as it provides additional balance sheet flexibility. With respect to cash flow, we generated more than $480 million of cash from operations.

We invested $309 million in capital expenditures, which included the completion of our new production line in Richland, Washington, and about $50 million to begin construction of a new production line in Hermiston, Oregon. We use the remainder of the cash we generated paid dividends to our shareholders, as well as debt service.

Let me now turn to our fiscal 2019 outlook. As Tom noted, we anticipate overall favorable operating environment with continued growth in global demand for frozen potato products and high capacity utilization in North America.

Higher inflation rates for our production costs and increased volatility in international markets, post some macro risks and headwinds. Consistent with our overall guidance philosophy, we're taking a prudent approach to our fiscal 2019 outlook.

Specifically, we're targeting sales to grow in the mid single-digit rate for the year, with stronger growth in the first half as a result of the carryover benefit of pricing actions in our global and retail segments.

The benefit of incremental volume availability from our new Richland Washington capacity, which became fully operational in the third quarter of fiscal 2018 and more difficult year-over-year comparisons as the year progresses. We anticipate adjusted EBITDA including unconsolidated joint ventures to be in the range of $860 million to $870 million.

We expect sales and growth profit growth to drive the increase in adjusted EBITDA. We’re targeting gross profit to grow at least in line with sales with favorable price mix and productivity more than offsetting higher input, manufacturing transportation warehousing inflation as well as well higher depreciation expense.

We anticipate our total production cost per pound to increase in the mid single-digit range. Cost per pound will be a little higher in the first quarter as the effective planned added down time in maintenance cost that we incurred in our fourth quarter continue to be realized as we sell that inventory produced during that period.

As we previously stated, we expect our weighted average contracted raw potato price to increase in the low to mid single-digit range on a per pound basis.

Contracted prices as you may recall are only one element to understanding our total potato cost, potato yield, quality and how they hold up in storage are all key to determining how the potatoes perform in our production facilities and our actual costs.

Our outlook anticipates an average potato crop, allowed more insight on yield and quality of potato crop as the harvest takes place later in the year. We’re projecting that the increase in gross profit will be partially offset by significantly higher SG&A.

The majority of the increase in SG&A relates to information systems including investments to modernize our overall IT infrastructure, as we continue to fully standalone capabilities after transitioning off ConAgra Systems a few months ago.

In addition, it includes some cost related to beginning the process of replacing our mid 1980s vintage enterprise resource planning system.

In addition to inflation, the remainder of the increase in SG&A includes investment in sales, marketing, innovation operations and other functional capabilities to execute our growth strategy and drive operating efficiencies over the long-term.

We anticipate that we’ll incur an elevated level of investment behind our IT and the ERP infrastructure over the next couple of years, after which we expect our SG&A cost to normalize.

With respect to equity method earnings, we anticipate that it will increase modestly reflecting solid underlying operating growth in our joint ventures in Europe and the U.S. as well as lapping a $4 million gain on sale in fiscal 2018.

Altogether, operating gains in our base business as well as the modest increase in equity earnings will drive a majority of our adjusted EBITDA growth. We’re targeting the rest to be from acquiring the 50% of our consolidated joint venture Lamb Weston BSW that we currently don’t own.

As Tom mentioned in June, we exercised our call option for that stake. We’ll finalize transaction as soon as practicable. We anticipate the total cost will be about $65 million and we’ll finance the transaction using cash on hand and our existing credit line as needed. For more details on Lamb Weston BSW, please to refer to our SEC filings.

In addition, we anticipate total interest expense of around $110 million which is about the same as fiscal 2018 due to higher interest rates on our variable rate credit agreement. We’re targeting of effective tax rate of about 24% in line with our previous expectation of mid-20s.

We expect capital expenditures of about $360 million, approximately $200 million of that is related to completing the construction of our new french-fry production line in Hermiston, Oregon which we anticipate will be operational in May 2019.

And finally, total depreciation and amortization expense will be approximately $150 million, up from nearly 140 this past year. In summary, we're pleased with our performance and the operating momentum that we built.

We expect to deliver another year of solid results in fiscal 2019 driven by sales and gross profit growth while strategically investing in our capacity, infrastructure and capabilities to support future growth and operating efficiencies. Let me now turn the call back to Tom for some closing comments..

Thanks Rob. As you can see, we feel good about how we're executing across the organization and the investments we're making to serve our customers, generate attractive returns and creating value for all our stakeholders over the long term.

We're well positioned to deliver our fiscal 2019 and long-term strategic and financial objectives, as we continue on our journey to become the number one global potato company. I want to thank you for your interest in Lamb Weston. And now we're happy to take your questions..

[Operator Instructions] Our first question comes from Andrew Lazar, Barclays..

Two questions for you. First one would be. I think on your fiscal 2Q call you had a slide that going to put your expectation for industry capacity utilization to still be above 100% in fiscal '19 even with some of the new industry capacity coming online. It sounds like that's broadly still very much to your expectations.

The reason I ask this because you talked about the carryover benefit right from pricing taken last year.

So, I'm trying to get a sense of maybe what percentage of your North American volume sort of have you finished your pricing negotiations with for that coming fiscal year? And given your expectation for continued industry tight capacity and some inflation cropping up, how should we think about what incremental pricing might be in store as we even lap through the first half of carryover price?.

Good morning, Andrew. This is Tom. First, the first part of your question in terms of capacity, obviously, there is some capacity coming on this fall. Our outlook as we've stated 6 months ago is that even with that additional capacity coming on, the industry is going to be still at high utilization levels.

And there is some normalization within our capacity in terms of as we brought Richland on. We're running mid-90s. We had to take some downtime on some other facilities just for catch up maintenance.

So, we feel good about where the capacity is as an industry even with capacity coming online because there is going to be a normalization of fact across the industry network in terms of utilization levels. The second part of your question is we had a pretty big contracting season last year in our global business unit.

In terms of percentages, I would say we roughly contracted about over around 75% of our North America business. So, in Global -- excuse me. So, that's largely in place. The timing of those contracts vary in terms of the length of them.

But, as Rob noted in his remarks, we will have a carryover effect of that pricing particularly in the first half on those contracts. And then the second part of that in our foodservice segment, we do have a portion of that business that list pricing and like we do every year.

We continue to evaluate the market demand, what's going on with our inflationary costs. So, we have the ability to react a lot faster in that portion of our business in terms of just taking less pricing..

A quick follow-up would just be, you noted that in Europe where some more capacities coming online. There's always the chance closer, really more closer range just for some near-term supply demand disruptions as folks try and fill some of that capacity.

And I wonder, is that something that we should be concerned about at all, as some of these capacities come online in North America? Or is it just that the utilization rates are still so high and tight here that's just less of a concern for you?.

It is absolutely a concern and the where we're at today as an industry, we've experienced a lot of capacity coming online that quite frankly hasn't happened in the past. So, it's imperative for us to continue to execute our business and our plans. We obviously keep a close eye on what's going on in the marketplace.

I will tell you right now, we haven't had a material impact with the capacity coming on and I think that's a function of two things. One is what I was saying earlier where people are normalizing production and maintaining their plans. And the second thing is the demand continues to grow based on our outlook that we gave six months ago.

So, we're watching it, it's a different environment than we've had in the past in the industry, and we'll continue to react the way we need to drive our value creation model..

Our next question comes from Andrew Carter, Stifel..

So couple for me real quick -- real quick.

So could you discuss in your FY '19 guidance kind of the degree of incremental spending you are expecting? And could you quantifying that and then letting us know how much will be recurring and when will these fully level off?.

Thanks Andrew. It's Rob. In terms of quantifying -- I don't want to get into specific numbers in the income statement and guidance, but I think you can work backwards into it from the growth and sales guidance that we've given and the EBITDA guidance and the margin guidance. I think you put that together to come pretty close.

Again, the bulk of that spending is related towards IT and specifically ERP. Those are typically from start to finish in that. It will be over the course of this come of 2019 and 2020 that we expect to put that in place and thereafter we expect SG&A levels to normalize..

Second one kind of returning to the top line. You mentioned some difficult comparisons that consider from FY '18 here, but overall what’s your volume growth outlook assuming robust operating environment.

Should we expect 2% volume in line with kind of your long-term guidance or something south of that?.

Well, the guidance that we've given was the low to mid single-digits in terms of revenue..

Yes, yes. Well.

Andrew, you’re looking for volume or total?.

Volume, yes, that’s correct..

Yes, volume is in that that low single-digits and again we’ll get carryover benefit from those prices as mentioned..

Our next question comes from Bryan Spillane, Bank of America..

So, a couple of questions. First, I guess as we were looking at some of the spending that you had in the fourth quarter, some of the more discretionary spending.

Had you pull forward anything that you had originally planned to do in fiscal '19 into the fourth quarter of '18?.

No..

And then second question just on the Grown in Idaho distribution gains. I would assume some of that has come from some of the supply disruption that has been experienced with Ore-Ida.

So, just kind of curious as to maybe how sticky some of that distribution is? Is there is a chance that you might give some back as Ore-Ida comes back in full production?.

Yes, Bryan, this is Tom. I’d like to think of it as it is going to stick and we’ve had great recession from our customers with Grown in Idaho. We have certainly invested behind the brand in Q4 and right now we’re continuing to invest into brand. It’s a terrific product. We get great response, great trial, great repeat, once we get the trial.

So, there is no doubt our competitors had some issues in the marketplace and I feel good about we’re Grown in Idaho’s position and we’re gaining velocities and we're going to continue to divest behind it. And we have -- the other thing we’ve done is serviced our customers, so they understand that and we’ve supported their category needs.

And it’s a great place to be, so I feel good about we’re Grown in Idaho is. We’re going to continue invest in it. I will acknowledge there was some gain based on the disruption, but I think we’re passed all that and we continue to see good velocities..

And then just last one for me, I guess the industry outlook is really important, right. I mean it sort of will really dictate whether or not enough too much capacity has or hasn’t been added in the market and obviously has an effect on the ability to price.

And so, I guess could you remind us there was an acceleration in your -- in the industry growth in North America since the spin? Think a lot of that has been driven by just how well the foodservice like specially QSRs have marketed.

But, could you just sort of remind us of the factors that have driven this elevated growth in kind of what drives your confidence that, that will continue?.

Yes. So, as I’ve stated before, the accelerator was North America and Europe probably now 2.5 years ago, started growing at the 2-ish range and 2% on those two marketplaces that as a lot of french-fries. So that really accelerated the overall category.

In addition to that time, we continue to see a lot of our -- a lot of the international markets continue to grow at levels that were consistent to their past. So that was really the changer. I think as I've stated, we think the category is going to grow at 1.5% to 2.5%, I feel good about that continuing.

And as that happens, that's going to drive capacity utilization even with the oncoming capacity. So I feel good about how we're positioned. The category, everything we're looking at continues to be positive. So, I think we're set up to have another really solid year..

Our next question comes from Akshay Jagdale, Jefferies..

I wanted to -- so my question is for Rob. I wanted you to help us with the JV issue, right. So I'm trying to parse out what your guidance is excluding the JV, the buying of the stake of the RDO JV. So, can you help us quantify the impact there? I mean obviously it's fully consolidated.

So the only impact is going to be on the EBIT line, not on the sales line.

And then I'm assuming some of that is coming up [technical difficulty] on the income would be?.

Yes, exactly. If you go down the income statement and that you can see where we basically take out the non-controlling interest there. And if you go back over the course of last year, that 50% is in the $17 million range. And if you look at it from an EBITDA perspective, it's in the $20 million range last year. So I think that there is some guidance.

And I think if you dig into those filings in the income statement you can pull that out..

Got it okay perfect. And secondly just on volume growth. So obviously you're assuming again low-single digit volume growth as you mentioned before. With the capacity from the new line that's come on, what are the puts and takes as to sort of why wouldn't it be the higher, right? Demand is pretty strong. You're at 95% utilization rates.

You have the ability to flex that up significantly.

So, can you help us understand sort of the puts and takes, as to why you're at low single digit and not let's say mid-single digit on volume?.

Yes, the issue is as you look, I mean the $300 million of incremental capacity we added again was partway through last year. So, we had the benefit of that partway through the year. And again that's on our $5.5 billion base.

And so, you run that math and then you look at where we have been running at really effectively over 100% where we've been running the assets very, very hard and now we get more normalized capacity utilization, so that we can get some of the preventive maintenance done that we need to don't need to do during the year.

Now, some of that as I mentioned, took place in Q3, Q4, especially Q4, and we'll see some of the costs results of that in to Q1. But specifically on the volume issue, it will be more balanced in terms of capacity utilization and utilization of some of that maintenance downtime.

The other piece is that with the extra capacity we want to leave some of that available for LTOs, which helps support our customers' traffic and growth and their profitability, and those are -- that's attractive business for us as well..

And just one last one on the change on the foodservice go-to-market model, I mean, I'm actually pretty thrilled to hear that. But can you give us some perspective on how you arrived to that decision? From my perspective I mean the foodservice business has been doing really, really well. So, it seems like an offensive move.

Just trying to get a sense of what kind of positive impact this could have and why you actually took the step?.

Akshay, it was clear to me and our team, as we went through our strategic planning process that this move is the next evolution in our foodservice organization and/or where we want to take that business. And I'm a big proponent of having control of our product. So our sales people now -- we're going to have great coverage across the marketplace.

They'll all be focused on selling french-fries, and when you have a broker, they've got a lot of different things in their bag. So I'm excited about it. The team is excited about it. We are great people that came on into the organization. And it's early innings right now, but I'm excited about the opportunities and that these folks are going to fine.

And it's just the next evolution in our foodservice strategy..

The next question comes from Adam Samuelson, Goldman Sachs..

I guess first question is on Europe, I'm just making sure. I want understand a little bit what's in the outlook for the Lamb Weston/Meijer joint venture. Obviously, there's more capacity in the industry and that's having I mean there is competitive back there.

Potato futures in Europe have been up pretty significantly of late given what seems to be a long time for weather in Northwest Europe and also currency.

Just make -- help me understand the moving pieces of the outlook for the European business and what's actually embedded in the guidance there?.

Sure Adam. And our European business much like our North American business has really been operating at pretty strong capacity levels there. They've been operating the assets pretty hard. And so from our perspective that last year, as you recall raw prices dropped significantly and we were able to hold on to prices.

And so that helped us expand margins in that business there.

I think it's important to understand that all capacity is not equal and some of the capacity being added is it tends to be more what we were refer to as line flow capacity as opposed to some of the QSR capable capacity that is really the sweet spot of the market that we participated in Europe.

And so, the demand capacity in our markets where we service, we feel pretty good about in Europe. Again, the additional capacity we anticipate will have some impact, but feel good about our position and where we’re position in the market.

Your point on raw cost in Europe and in the futures market, again Europe has been seeing some drought conditions here recently and some hot weather. Again, one hot day doesn’t make a summer, but -- and so we’re monitoring that closely. The early crop appears to be okay in the hot fall region.

The later crop again we are watching that closely and looking and how that’s going to impact. But as you know historically product prices tend to be moved more in Europe with those raw prices. And so, we’re watching that closely, watching our ability to move market price et cetera in Europe.

The other point I’d make is that our plant in Austria as well as in the UK give us a little bit different climate from what we’re seeing in the hot falls. So, overall in Europe and again we don’t forecast the currency into our outlook per say any different and it’s going than it is today.

And so, overall as mentioned, we’ll be up modestly in Europe again with some of the increase sales gains there. But again, recognized that we are lapping, we’ve got that $4 million gain on the sale of the non-core business in Austria that we saw. And really early in 2019, FX is a bit of a drag..

Okay. That color is helpful. And then maybe just a question back in the North American business. Some color about going after some kind of new market opportunities in different channels and convenient bakery, and then also on the delivery side.

I think we have to quantify any impact from those or how -- what kind of opportunities you think those could be over 2, 3, 4 year period?.

Yes, Adam, it’s really early to quantify that right now, but I will tell you we’ve reorganized our innovation organization 6 to 9 months ago. And it’s a focus area as I mentioned before.

We have some really interesting new products that obviously I can’t get into on the call, but I’m excited about where we’re at right now, it’s really early in the process as we explore those channels. We have terrific Crispy on Delivery product and innovation and packaging that we’ve launched.

That’s early innings to, I will -- those start to develop and opportunity start to present themselves and we started executing in the marketplace. I’ll keep you updated on those developments..

The next question comes from Michael Gallo, C.L. King..

Just a couple of questions. First, in terms of the transition the go-to-market strategy from the broker led sales model to the direct sales model.

Can you talk about where -- how long you think it will take to kind of ramp things up or start to see the benefit? And just more specifically what -- where you think you’ll get the biggest benefits from that change?.

Sure Michael. We’ve been very prudent in our planning and our ramp up time. Obviously, we've got a lot of new talented folks. We've brought onboard. There is a training element with that as you can imagine. And I expect to start seeing some impact modestly in the second half of this year. So, we're in startup mode. It's early innings like I said.

And we'll start seeing opportunities in H2. And the other thing is it's really about coverage directly with the lot of the independence that I believe is continues to grow. And it's an area that we're going to be laser focused on going forward, that's really where the big benefit is going to be..

And then just a follow-up question. Where we think about LTOs and we think about the overall rate of industry growth. It would seem that the industry growth rate perhaps kind of even higher over the last year.

Have you had -- had the industry had capacity to pursue more LTOs? So I was wondering as we think about some of this new capacity coming online in the back half whether that might actually lead to a higher industry growth rate than we've seen because there just the more capacity to do some of the perhaps some of the less non-traditional LTOs?.

Yes, Michael. I think the way to think about it is LTOs with customers that's part of their playbook and their plan. And at time those take a long time to go to market. And when the customer decided to do an LTO, it's really got to fit with their strategy and their consumer. There is a lot of product development that goes into it.

So just the addition of capacity doesn't not translate into more LTO offerings, but certainly as we interact with our customers, we're always bringing them creative ideas based on products and opportunities and thing that we see in other markets.

So it's a process, like I said, open capacity is not again translate in the more LTOs, but there is other opportunities with customers and new customers that we're pursuing with capacity that we brought online..

We have time for one final question. Next question comes from Brett Hundley of Vertical Group..

I just have two for you. Rob, the first is, I just want to make sure I'm crystal clear on what you said at the end of your prepared remarks about SG&A remaining elevated across the next couple of years. When we think about the guidance that you gave for fiscal '19, and I just think about my model beyond that.

Should I be thinking about that SG&A expense ratio continuing to grow beyond fiscal '19? Or should I just think about that step up in absolute terms from fiscal '19 maybe continuing into end of fiscal '20 before it potentially falls up? I hope that question make sense. And then Tom, just my second question is for you.

You've referenced contracting and how you have the majority of that done into parts of fiscal '19 and it sounds like you're being very open and honest about where the industry fits today, that the industry remains favorable and in a good place today.

And then, it sounds like you're being very open and honest about potential risks on the horizon down the road.

And the one thing I wanted to revisit with you is just, maybe if you could go deeper into the nature of contract talks with customers because one thing that I found really odd was there were some recent media reports that McCain was looking at property in Idaho for a potential processing facility.

And they actually came out publicly and said, oh, we're just evaluating, that doesn't mean that we're going to build. It just seemed like a very odd action from them.

And so, I'm just wondering if you could maybe further describe in nature of contract talks with customers? And if customers are really starting to bring up forward capacity additions and just what that price discussion looks like? I really appreciate it. Thank you..

Yes. Let me take the SG&A first, and then let Tom follow-up on the capacity issue. On the SG&A, again recognize that we spent some money getting off of ConAgra and building our IT capabilities internally, as we came off of that in the back half of the prior year '18.

And so, as we go through building the IT infrastructure and the new ERP, we'll have -- that will elevate our dollars here for the next couple of years as I said, '19 and '20 I anticipate.

So I think about SG&A as a percentage of sales and where we've been running in the kind of 80% range will elevate that as a percentage of sales for a couple of years and then revert back to normal once we get the IT infrastructure in place.

Again, while we're elevating from where we have been historically, I think it's important to note that, if you look at our comps and again there is no straight potato comp as we are, but if you look at other CPGs and adjust for things like advertising and promotion, we're still at the low end of the range and in discipline in terms of SG&A spending.

I think that's important to keep in mind..

Yes, Brett. And as in terms of your second question, I do not specifically talk about our customer and our contracting process and the nuances around that. As I said, we've contracted large proportion of our global business unit, North America chain business this past year. And this is our more process.

And I will tell you the other part of this is, our competitors, we keep a close eye on what's going on in the industry with capacity. We have a really good feel for what's happening or not happening or what's announced and what it really means. And we'll continue to do that in terms of how they're adding capacity and where and when.

That's something that that we've got a good handle on, but that's their decision. My focus, my team's focus is on continuing to execute against our operational activities and make sure all that lines up with our strategic plan going forward. So that's what we're focused on. We keep a pulse on what's going on in the market.

And again, in terms of as you can respect, in terms of talking specific customer contracting, I will never get into that..

This is Dexter. Just one quick clarification there. Somebody asked a question or we misspoke on one thing, we exercise the option on our joint venture with on Lamb Weston BSW either a question or we misspoke somebody might have heard Lamb Weston RDO, it is -- we exercise the option Lamb Weston BSW.

Our relationship in our joint venture with RDO remains the same and there are no plans to have a change associated with that. With that, this could be the end of our call. Happy to have any questions, follow up down the -- later on today or next week or so.

Please shoot me an email, if you have -- would like to schedule some time, and we'll go from there. Thank you very much..

Thank you, ladies and gentlemen. This concludes today's teleconference. You may now disconnect..