The operator introduces the Lamb Weston Second Quarter Earnings Call and hands it over to Dexter Congbalay, who welcomes the participants and provides a disclaimer about forward-looking statements and non-GAAP financial measures. Tom Werner, the CEO, and Bernadette Madarieta, the CFO, will discuss the potato crop, current operating environment, and second quarter results with an updated fiscal 2024 outlook. Tom thanks the team for their solid performance and execution of strategies outlined in the Investor Day presentation.

The company has made strategic investments to expand capacity and improve operations, leading to record sales in the second quarter. However, there was a decline in sales volumes due to the company's decision to exit lower price and lower-margin business. Adjusted EBITDA also grew, but was tempered by a charge to write-off excess raw potatoes. This charge was unexpected and reflects a more aggressive sales forecast that did not align with current demand trends.

Despite slower overall demand growth, the company remains confident in its volume trends and expects them to improve in the second half of fiscal 2024. They also expect volumes to recover in fiscal 2025 and have planned accordingly. The company is disappointed with the write-offs but remains confident in the underlying fundamentals of the business. They have reaffirmed their fiscal 2024 adjusted EBITDA guidance range and raised their EPS estimates. Bernadette will provide more details on the second quarter results and updated outlook.

The speaker thanks the Lamb Weston team for their strong financial results in the second quarter. Sales increased by $455 million, with the majority of the increase coming from the acquisition of the EMEA business. Excluding this acquisition, net sales still grew by 6%, driven by inflation-driven pricing actions and strategic management of product and customer portfolio. Sales volumes declined by 6%, in line with expectations, due to exiting lower-margin business in the previous year. However, this is an improvement from the 8% decline in the first quarter, as the impact of inventory de-stocking in Asia and North America has subsided.

In addition to strong sales, Lamb Weston saw a significant increase in gross profit, excluding unrealized mark-to-market gains and losses and other one-time charges. This growth was driven by pricing actions, mixed improvement, and supply chain productivity in their legacy business, as well as incremental earnings from consolidating their EMEA segment. However, input costs increased, largely due to higher potato prices and ingredient costs. SG&A expenses also increased, mainly due to the consolidation of EMEA and investments in IT and ERP infrastructure. Overall, adjusted EBITDA increased by 15%, or 36% when excluding the one-time charge for excess raw potatoes.

Sales in the North America segment increased by 10% in the quarter, driven by a 14% increase in price/mix due to pricing actions and favorable mix initiatives. However, lower freight revenue and a 4% decline in volume partially offset the increase. The segment's adjusted EBITDA also increased by 7%. In the International segment, sales grew by $350 million, primarily due to the EMEA acquisition. Excluding the acquisition, sales declined by 12%. Price/mix was up 10%, but sales volume fell by 22% due to the impact of exiting lower-margin business. The segment's adjusted EBITDA increased by 66%, mainly due to the consolidation of EMEA's financial results. However, excluding the acquisition, higher cost per pound and lower volumes offset the favorable price/mix.

The company's higher cost per pound was due to a write-off of excess raw potatoes in their International segment. Their balance sheet is strong, with a net debt leverage of 2.4 times adjusted EBITDA. They generated $455 million in cash from operations in the first half of the year, with $565 million in capital expenditures. They also returned $230 million to shareholders through dividends and share repurchases. They have prioritized investing in their business through organic expansion and are committed to returning capital to shareholders.

In October, the company raised their share repurchase authorization to $500 million and announced a 29% increase in their quarterly dividend. They also reaffirmed their full-year sales and EBITDA targets and raised their EPS estimate for fiscal 2024, despite a charge for excess raw potatoes. They expect positive volume growth in the fourth quarter and are maintaining their EBITDA range target. The adjusted diluted EPS estimate has been raised due to two items, including the impact of the raw potato write-off.

The company is reducing its SG&A and interest expense targets, as well as updating its depreciation and amortization expense and capital expenditures targets. They are also experiencing challenges with their ERP implementation, but do not expect it to have a significant impact on their full-year results. The estimated financial impact of the system's go live is included in their fiscal 2024 targets and may result in higher manufacturing costs and reduced fixed cost coverage.

The company expects challenges with inventory visibility to affect sales in the third quarter, but anticipates positive year-over-year volume growth in the fourth quarter. They thank customers and team members for their efforts during the transition and will provide an update on the implementation of a new ERP system in April. Overall, the company remains confident in their strategies and ability to meet financial targets for the year, and believes they are well positioned for long-term growth and value creation for shareholders.

The speaker thanks the audience and announces that they are ready to take questions. The first question is about the company's reiteration of guidance despite a $71 million potato charge. The speaker explains that the initial contracted acres were based on the outlook from January of the previous year and there have been no changes to the volume expectations since the last guidance was given. The excess potato charge represents the full amount and the company will take that into consideration when determining the number of acres to plant for the upcoming year.

Adam Samuelson from Goldman Sachs asks about the impact of the write-off of potatoes on gross profit margins for the quarter and the full year. Bernadette Madarieta confirms that the Q2 gross margin would have been 350 basis points higher without the charge, and the full-year impact would have been around 90 to 100 basis points. She also mentions that the gross profit margins are tracking ahead of the business outlook given at the Investor Day in October, thanks to pricing actions, catching up to inflation, and productivity and mix improvements.

The company's third quarter results will be lower than the previous quarter due to reduced fixed cost coverage as a result of starting up their ERP and taking downtime to ramp up plants. The integration of EMEA is progressing well and the team has reorganized to reflect the global company they are now. The RGM tools have not yet been fully deployed, as the company is currently focused on executing other initiatives, such as the ERP implementation. The team is pleased with the progress of the integration and the company's performance on an organic basis is expected to improve in the fourth quarter. During the Q&A, the team also discussed the progress of the integration and the focus on executing the ERP implementation.

Tom Werner and Bernadette Madarieta discuss the pricing power in the potato industry, which is different from other food industries due to the one-year crop cycle and short shelf life. They explain that this year's crop has put pressure on availability, but they have managed through it and completed contract negotiations with satisfactory pricing and terms.

The company's gross margin trajectory for Q3 is expected to be down sequentially from the previous quarter, which excluded a write-off. This is due to reduced fixed cost coverage resulting from plant shutdowns for ERP implementation. The same logic applies to EBITDA margin. Volume is still expected to be down mid-single digits for the year, despite a potential increase in Q4.

The speaker is discussing the company's performance in the third quarter and fourth quarter. They expect a sequential improvement in volume in the third quarter, but there are challenges with inventory visibility and reduced shipments due to a new ERP system. They also mention that China is growing at double digits and they have a strong partnership with McDonald's in the country.

The company has opened a new factory in China and is seeing double-digit growth in the restaurant industry there. They are well positioned to gain more business in the international market during the current contracting season. The team clarifies that the double-digit growth is in restaurant traffic. The company has also implemented price increases in some contracts, but there will likely be a deceleration in price/mix in the back half of the year compared to the 17% in the first half.

The speaker responded to a question about the impact of upcoming contracts on pricing in the second half of the year and confirmed that the company expects to meet its long-term algorithm in fiscal year 2025. They also mentioned that some volume may be pushed from the third quarter to the fourth quarter due to cutover dynamics, but did not provide a specific amount.

The speaker discusses the projected increase in volume for the fourth quarter and confirms that it would have been positive even without the cutover dynamics. They also mention that they walked away from some lower-margin customers last year and are now gaining new customers, but do not provide specific details on where these new customers were sourcing from before.

During a Q&A session, Marc Torrente from Wells Fargo Securities asks about the company's softer than expected trends and traffic, and how the company remains confident in its sales and volume forecast. CEO Tom Werner explains that the crop acre yield was better than expected, but overall sales were a little softer than originally planned. However, the company's forecast from July remains unchanged and they see improvement in Q4. CFO Bernadette Madarieta adds that the initial estimate was based on data that is available to everyone, and the company remains confident in its forecast.

The restaurant traffic trends have slowed since the pandemic, but the fry attachment rate remains strong. The company has lowered its SG&A outlook for the year due to better cost management. The conference call has concluded and the participants are thanked for their participation.

This summary was generated with AI and may contain some inaccuracies.