Lamb Weston Holdings, Inc. (NYSE:LW) Q1 2025 Earnings Call Transcript

Lamb Weston Holdings, Inc. (NYSE:LW) Q1 2025 Earnings Call Transcript October 2, 2024

Operator: Good day! And welcome to the Lamb Weston First Quarter Fiscal Year 2025 Earnings Call. Today’s call is being recorded. At this time, I’d like to turn the call over to Dexter Congbalay. Please go ahead.

Dexter Congbalay : Good morning, and thank you for joining us for Lamb Weston’s first quarter 2025 earnings call. Yesterday, we issued our earnings press release, which is available on our website www.lambweston.com. Please note that during our remarks, we’ll make some forward-looking statements about the company’s expected performance that are based on how we see things today. Actual results may differ materially due to risks and uncertainties. Please refer to the cautionary statements and risk factors contained in our SEC filings for more details on our forward-looking statements. Some of today’s remarks include non-GAAP financial measures. These non-GAAP financial measures should not be considered a replacement for, but should be read together with our GAAP results.

You can find the GAAP to non-GAAP reconciliations in our earnings release. With me today are Tom Werner, our President and Chief Executive Officer; and Bernadette Madarieta, our Chief Financial Officer. Tom will provide an overview of the current operating environment and cost reduction actions that we announced yesterday, and an update on this year’s potato crop. Bernadette will then provide details on our first quarter results, as well as our updated fiscal 2025 outlook. With that, let me now turn the call over to Tom.

Tom Werner : Thank you, Dexter. Good morning and thank you for joining our call today. We delivered financial results for the first quarter that were generally in line with our expectations. Sales came in above our target, driven by better than expected volume and price mix. Our volume performance reflected our effort to recapture customer share and win new business, solid execution in many of our key international markets, and only a slight improvement in restaurant traffic trends. Overall, price mix increased as inflation-driven pricing actions in our key international markets more than offset investments in price in North America. Adjusted EBITDA for the quarter was slightly above our target due to better sales and SG&A performance.

However, this was partially offset by higher than anticipated manufacturing costs. While we’re encouraged by our first quarter performance relative to our expectations, we continue to expect frozen potato demand and global restaurant traffic to remain challenging through fiscal 2025. According to restaurant industry data providers, during our fiscal first quarter, we saw early evidence of U.S. restaurant traffic trends improving during the summer months as QSRs stepped up promotional activity, and as consumers continued to adjust to the cumulative effect of menu price inflation. However, traffic remained negative. Overall, U.S. restaurant traffic, as well as QSR traffic, in the quarter was down 2% versus the prior year. That’s a sequential improvement from the down 3% that we observed during our fiscal 2024 fourth quarter.

Q&A Session

Traffic at QSR chains specializing in hamburger, a highly important channel for fry consumption, in our fiscal first quarter was down about 3%. That’s an improvement from down more than 4% during our fiscal 2024 fourth quarter. Importantly, traffic trends in QSR hamburger improved sequentially each month of our first quarter as promotional activity increased. We’re obviously pleased with the growth in restaurant traffic, but it’s important to note that many of these promotional meal deals have consumers trading down from a medium fry to a small fry. So while we benefit from improving traffic trends, consumers trading down in serving size acts as partial headwinds for our volumes. Outside the U.S., overall restaurant traffic trends in our key international markets in our first quarter were softer than what we observed in our fiscal 2024 fourth quarter.

Restaurant traffic in the U.K., our largest market in Europe, declined about 3%, which is down sequentially from a decline of about 2%. In Germany, traffic was also down about 3% after only being down slightly in the fourth quarter. Traffic in France and in Italy continued to rise, but at a slower rate than the fourth quarter, while traffic in Spain was essentially flat. In Asia, overall restaurant traffic grew in both China and Japan. Unlike the changes in global traffic trends, the fry attachment rates in the U.S. and our key international markets were largely steady. This resilience of consumers’ demand for fries, as well as their importance to customers’ menus, are key reasons why we remain confident that the global fry category will return to its historical long-term growth rate over time as global traffic rates improve.

Given our expectations about traffic and demand trends, we also believe that the supply-demand imbalance that’s been driven by the decline in traffic will persist through much, if not all, fiscal 2025. With respect to the bigger customer contracts, the season for competing for these contracts is essentially behind us, and the overall outcome was largely as we expected. We had good success in protecting customer share and retaining business with existing large chain restaurant customers. We also had some success in winning new chain restaurant customer business, most notably in our international segment, and we’ll begin to realize more meaningful volume associated with these new customers beginning in our fiscal third quarter. Pricing associated with contract renewals and customer wins was competitive, but in total was broadly in line with what we expected.

With respect to the smaller and regional customers in the U.S., we continue to leverage our direct sales force to acquire new customers and recapture customers that we lost either directly or indirectly from the transition to our new ERP system in the second half of fiscal 2024. As with the larger chain restaurant contracts, pricing levels needed to regain customer share or win new business have been competitive, but also broadly in line with what we expected. With respect to our cost structure, as we noted during our previous earnings call, we have been evaluating opportunities to drive down supply chain costs, reduce operating expenses, and improve cash flow. Yesterday we announced a restructuring plan, which includes a number of key actions.

First, we permanently closed our Connell, Washington facility, which is one of our older, higher cost facilities. Closing this nearly 300 million pound capacity facility reduces our total capacity in North America by more than 5%. We stopped production at this site yesterday. Second, we’re temporarily curtailing production lines and schedules across our manufacturing network in North America to focus more production on our more efficient, lower cost lines and steadily work down our elevated finished goods inventory levels. And third, we’re reshaping future investments to modernize production capabilities. Together, these actions will help us leverage recently capacity investments, better manage utilization rates across our manufacturing network, and reduce capital expenditures.

In addition, we’re reducing our global headcount by approximately 4% and eliminating certain job positions that are currently unfilled. This affects team members and positions across our manufacturing, supply chain, and commercial organizations in both our North America and international segments, as well as in our corporate functions. Bernadette will provide details about the cost savings that we expect to generate, as well as the charges we’ll incur in connection with our restructuring plan. These are very tough decisions, but necessary proactive steps in the current operating environment to improve our operating efficiency, competitiveness, and financial results. Now, to the potato crop. We’re harvesting and processing the crops in our growing regions in both North America and Europe.

But this time, we believe the crops in the Columbia Basin, Idaho, Alberta, and the Midwest are slightly above historical averages. As a reminder, North America, we’ve agreed to a 3% decrease in the aggregate in contract prices for the 2024 potato crop. And we will begin to realize the benefit of these lower potato prices beginning in our fiscal third quarter. With respect to the crop in Europe, a few months ago, we and the market expected that the crop for the later potato varieties in the industry’s main growing regions in the Netherlands, Belgium, and Northern France and Northern Germany would be well below average since planting was completed late due to poor weather conditions. However, growing conditions were good in August and September, which improved the outlook for the crop.

We currently believe the European potato crop in the aggregate will be in line with historical averages. Overall, we expect our potato costs in Europe will increase, largely reflecting the mid to high single digit price increase associated with our fixed price contracts. We’ll provide our final assessment of the potato crops in North America and Europe when we report our second quarter results in early January. So, in summary, we delivered first quarter results that were generally in line with our expectations, driven by improved volume performance, solid price mix, and strict management of operating costs. While U.S. restaurant traffic trends have improved modestly in recent months, they remain negative, and we continue to take a cautious view of frozen potato demand and the consumer.

We’ve announced a restructuring plan to improve our operating efficiency, protect our bottom line, and improve cash flow during this challenging operating environment. And finally, at this time, we believe the potato crop in North America will be slightly above average, and that the European crop will likely be in line with historical averages. Let me now turn the call over to Bernadette for a more detailed discussion of our first quarter results, our restructuring plan, and our updated fiscal 2025 outlook.

Bernadette Madarieta : Thanks, Tom. And good morning, everyone. As Tom noted, our financial results were generally in line with our expectations. Specifically, while sales declined 1% compared with the year ago quarter, the decline was less than the high single digits we expected due to better than projected volume and price mix. Compared with the first quarter a year ago, volume declined 3%, and largely reflected the carryover effects of customer share losses in North America, the exit of certain lower-priced and lower-margin business in Europe last year, and soft restaurant traffic trends in the U.S. To a lesser extent, the previously announced voluntary product withdrawal that began affecting our sales in fourth quarter of fiscal 2024 also contributed to the first quarter decline.

Volume growth in our key international markets partially offset the overall decline. Price mix increased 2% compared with the prior year due to the benefit of inflation-driven pricing actions in Europe, as well as the carryover benefit of pricing actions we took last year in North America. Unfavorable channel and product mix, as well as targeted investments in price and trade, tempered the increase in price mix. Moving on from sales, our adjusted gross profit declined $137 million to $353 million, due primarily to three factors. First, about $39 million of the decline was due to the voluntary product withdrawal. It was higher than the $20 million to $30 million range that we anticipated in the quarter, primarily due to higher than expected costs to dispose the product.

Second, more than $15 million of the adjusted gross profit decline was due to higher depreciation expense that’s largely related to our capacity expansions in China and Idaho that were completed last fiscal year. The rest of the decline was primarily driven by higher manufacturing costs per pound, which reflects input cost inflation, as well as inefficiencies associated with lower factory utilization rates. To a lesser extent, lower sales volumes and higher warehousing costs also contributed to the decline. Together, these factors more than offset the net benefit from pricing actions. Our gross margin in the quarter was nearly 21.5%, which was about 100 to 150 basis points below our target of 22% to 23%. Of the shortfalls, nearly 100 basis points was related to the greater than expected impact of the voluntary product withdrawal.

The remainder is largely reflected, higher than expected manufacturing costs per pound. Adjusted SG&A increased $6 million to $149 million, due to an incremental $6 million of non-cash amortization related to our new ERP system that went live in the third quarter of fiscal 2024. Aggressive actions to reduce spending, offset inflation, and investments in our information technology infrastructure. All of this led to adjusted EBITDA of $290 million. While that’s better than what we guided, it was down about $123 million versus the prior year quarter, largely due to higher manufacturing costs per pound and the impact of the voluntary product withdrawal, which more than offset the net benefit from pricing actions. Moving to our segments. Sales in our North America segment, which includes sales to customers in all channels in the U.S., Canada, and Mexico, declined 3% versus the prior year quarter.

Volume declined 4% and was largely driven by the carryover impact of smaller and regional customer share losses in food away from home channels, as well as declining restaurant traffic in the U.S. The volume decline was partially offset by growth in retail channels. Price mix increased 1%, reflecting the carryover benefit of inflation-driven pricing actions for contracts with large and regional chain restaurant customers taken in fiscal 2024, which was partially offset by unfavorable channel and product mix, and to a lesser extent, targeted investments in price. North America’s segment-adjusted EBITDA declined $103 million to $276 million and included an approximately $21 million charge related to the voluntary product withdrawal. The remaining decline largely reflects a combination of higher manufacturing costs per pound, unfavorable mix, and investments in price and trade, which combined more than offset the carryover benefit of prior year pricing actions.

Sales in our international segment, which includes sales to customers in all channels outside of North America, increased 4% versus the prior year quarter. Price mix increased 5%, largely reflecting pricing actions announced this year to counter input cost inflation. Volume declined 1% due to our strategic decision to exit certain lower priced and lower margin business in EMEA in early fiscal 2024, and to a lesser extent, the voluntary product withdrawal. These business exits in EMEA will continue to be a headwind during the second quarter of fiscal 2025. Growth in key international markets outside of EMEA tempered the overall volume decline. International segment-adjusted EBITDA declined $39 million to $51 million. About $18 million, or about half of that decline, related to the voluntary product withdrawal.

The remainder was largely driven by higher manufacturing cost per pound, which was partially offset by the benefit of inflation-driven pricing actions. Moving to our liquidity position in cash flow. We continue to maintain a solid balance sheet with ample liquidity. We ended the first quarter with about $120 million of cash and $1 billion available under our global revolving credit facility. Our net debt was about $3.9 billion, which puts our leverage ratio at three times. Last week, we increased our available liquidity, $275 million, by entering into a new $500 million term loan. We used the proceeds from the loan to pay off an existing $225 million term loan and $275 million of borrowings under our global revolving credit facility. As a result, it had no impact on our total debt, increased our available liquidity, and our leverage ratio was not affected.

In the first quarter, we generated $330 million of cash from operations, which, despite a decline in earnings, is about the same amount we generated last year due to favorable changes in working capital. We expect further working capital improvements during the balance of the year as we execute our restructuring plan. Net capital expenditures were about $335 million as we finalized spending for our Idaho capacity expansion and continued construction of our expansion projects in the Netherlands and Argentina. We expect our capital spending in the first quarter will be our highest quarter for the year as it accounted for almost half of our updated annual capital spending target. During the quarter, we returned more than $133 million of cash to shareholders, including $52 million in dividends.

We spent $82 million to repurchase more than 1.4 million shares at an average price of just over $58 per share. Before discussing our outlook, let me first provide additional details on the restructuring plan we announced yesterday. As Tom noted, these were hard but necessary decisions to adjust to the current business trends. These actions will help us manage asset utilization rates, leverage our more efficient lower-cost production assets, and reduce costs and expenses. The actions include a 4% reduction in our global headcount and the elimination of certain unfilled job positions. We do not take this lightly, and we’ve carefully considered the impact on our Lamb Weston family. We currently estimate that these actions will generate total savings of approximately $55 million in fiscal 2025, with about one-third benefiting cost of sales and two-thirds benefiting SG&A expenses.

We’ve incorporated these savings in our updated fiscal 2025 outlook. We expect further benefits in fiscal 2026, with estimated annualized savings of about $85 million. We expect to record a $200 million to $250 million pre-tax charge associated with the restructuring, most of which we expect to record in the second quarter. About 20% of the charge is non-cash and primarily reflects the accelerated depreciation of assets at our Connell facility. The remaining 80% are cash charges comprised of cost of contracted raw potatoes that will not be used due to the production line curtailment, the teardown and other cleanup costs associated with permanently closing the Connell production facility, severance and other employee-related costs associated with the reduction in our workforce and other miscellaneous restructuring costs.

Additionally, we’ve scrutinized every project and every dollar of capital. As a result, we now expect capital expenditures in fiscal 2025 of approximately $750 million, which is down $100 million from our plan entering the year. A significant portion of the reduction reflects deferring the build and implementation of the next phase of our ERP system, which once built, will be deployed first in our manufacturing plants in North America. The remaining decline is largely due to deferring or canceling modernization projects due to the current operating environment. While the next phase of the ERP build and implementation has been deferred, we are committed to the benefits that an integrated system will deliver, but are prioritizing the investments needed to complete our strategic projects in the Netherlands and Argentina.

As it relates to next year’s capital expenditures, we’re currently targeting a notable decrease in spend, as we expect our strategic capacity expansion projects will be completed by the end of this fiscal year. In fiscal 2026, we expect expenditures for base capital and modernization efforts will be in line with our annual depreciation and amortization expense. In addition, we expect to spend approximately $150 million for environmental capital projects at our manufacturing facilities. Our manufacturing processes involve water intake and waste handling and disposal activities, which are subject to a variety of environmental laws and regulations, along with the requirements of permits issued by governmental authorities. To comply with these regulations, we expect the laws and the states in which we operate will require us to spend approximately $500 million over the next five years.

The estimate to comply may vary based on changes in regulations and other factors. We’re evaluating options to lessen these expenditures, including the potential for government incentives. And lastly, fiscal 2026 capital expenditures may include costs to restart the next phase of our ERP build. Consistent with past practice, we’ll provide a specific capital spending target for next year when we provide our fiscal 2026 outlook in late July. Now, turning to our updated fiscal 2025 outlook. We’re continuing to target a net sales range of $6.6 billion to $6.8 billion on a constant currency basis, or growth of 2% to 5%, with volume driving our sales growth. For earnings, we expect to deliver at the low end of our target adjusted EBITDA range of $1.38 billion to $1.48 billion.

We’re targeting the low end of the range due to higher manufacturing costs per pound, which relates to fixed cost deleveraging related to the temporarily curtailed lines in our plants, as well as less favorable customer and product mix. These factors will put additional pressure on our gross margins. We’ll look to offset much of this pressure with the estimated $55 million of manufacturing supply chain and SG&A savings that we expect to generate from our restructuring plan, as well as efforts to aggressively manage costs across the business. Other updates to our financial targets include reducing our adjusted SG&A target to between $680 million and $690 million from our previous range of $740 million to $750 million, increasing our interest expense estimate by $5 million to approximately $185 million to account for higher average debt balances during the year, and increasing our estimated full year effective tax rate to approximately 25% from approximately 24% to reflect a higher proportion of income from our international segment, as well as other discrete items.

In addition, since we’re targeting the lower end of our adjusted EBITDA range, and since we’ve updated our estimates for interest expense and our effective tax rate, we reduced our adjusted diluted earnings per share target range to $4.15 to $4.35. So in summary, we’re responding to the current challenging environment by adjusting our spending to protect profitability and ensure positive free cash flow, while continuing to invest in and execute our strategy. Let me now turn it over to Tom for some closing comments.

Tom Werner: Thanks, Bernadette. I want to thank our Lamb Watson team for their efforts to deliver our first quarter results and for focusing on executing our near-term priorities to reinvigorate growth, improve customer share, drive operating efficiencies, and aggressively manage costs. Our team will also continue to focus on our long-term strategies during this challenging environment. So when demand growth returns to historical levels, we’re better positioned to continue to support our customers and create value for our stakeholders. Thank you for joining us today and now we’re ready to take your questions.

Operator: Thank you. [Operator Instructions] We’ll go first to Andrew Lazar with Barclays.

Andrew Lazar : Great. Good morning everybody.

Tom Werner: Good morning.

Bernadette Madarieta: Good morning.

Andrew Lazar : Tom, I guess my first question is around pricing. I think you had originally said you expected price mix to be down low to mid-single digit in the first quarter, and it was positive, and I guess specifically really in North America, it was also positive as you mentioned. And I get the impact from carryover pricing in North America from last year, but presumably you knew that was coming. So I’m trying to get a sense of what was better on pricing in North America and is it that some of the trade investments and such that you needed to make to retain customers and some of these large customer negotiations were maybe more favorable than you might have expected? And obviously the reason I ask is because, of course, the supply/demand imbalance has investors more worried about the fate of pricing and what’s been obviously historically a very rational sort of environment. So that’s just my first question.

Tom Werner: Yeah Andrew, so the overall, the pricing contracting season was in line with what we expected. We had a better mix and we had some carryover from last year, so that certainly played into it, but the pricing environment that we experienced was in line with what we expected. So, it’s really – a lot of it – some of its mix in the first quarter in terms of overall sales pricing. And, so it’s – the encouraging thing to me is, we’ve kind of stabilized the environment going forward. We’ve got through the contracting season. It was in line with what we expected coming into the contracting season based on the supply/demand dynamics we’re operating in right now. So, I feel good about where we’re at. I feel good about how we ended up the contracting season and we’re – I think we’re in a really good position.

Andrew Lazar : Okay, thank you for that. And then, you generally have good visibility to your competitive set and sort of industry utilization levels. And I guess I’m curious if you’ve heard of or seen other North America players thinking about or taking similar sort of capacity reduction moves, or if utilization at competitors is already much higher than what you are seeing at Lamb Weston, because of some of your specific sort of challenges. Really trying to get a sense of how quickly some of these potential reductions in the industry can start to actually affect in a positive way, the supply and demand imbalance, knowing that restaurant traffic trends will likely continue to be weak for some time. Thank you.

Tom Werner: Yeah, great question Andrew. I think we made some really tough decisions here in the last couple of days based on the operating environment we’re in with restaurant traffic being challenged, and we think it’s going to continue to be challenged for the rest of this fiscal year. So we’re making decisions to manage Lamb Weston. And what the competitive set does, they are going to manage their business, how they want to manage it. I have no insight into what they may or may not do, so. But the best interest of what we do to manage and make decisions is to manage this company, and we’ll continue to do that. I think, the question that everybody is – we’re going to get asked and everybody’s been asking is, there’s been a lot of capacity announcements.

I think people are going to rethink some of those additions based on the environment and may pause them, but it remains to be seen, but time will tell as we work through the near term environment based on what we’re all dealing with around the globe.

Andrew Lazar : Thanks so much.

Tom Werner: Yep.

Operator: We’ll take our next question from Ken Goldman with JPMorgan.

Ken Goldman : Hi, thank you. I wanted to ask a little bit about the commentary about the $500 million that might be spent for environmental improvements in your plans. Can you walk us through a little bit more where that’s coming from? What the timeline is on that, and maybe how you might be able to mitigate that a little bit and where that might really show up in your financial statements as well?

Bernadette Madarieta: Yeah. Good morning, Ken. As it relates to the $500 million, again, this is related to primarily wastewater capital investments that will be needed at our manufacturing plants in order to continue to run them at current capacity levels. So as we look at the timing of that, that’s going to vary depending on different regulations, and we’ll provide more of an update on that as we give our specific guidance. We wanted to though, frame it up in terms of a large capital expenditure over the next five years, and we will certainly be looking to other regulatory bodies, whether it be state, federal, etc., in terms of whether or not there’s opportunities for any government incentives to lessen that. But early in that process, and we’ll provide updates as we move throughout.

Ken Goldman : Okay. Thank you for that. And then I certainly understand the decision to sort of temporarily delay the rest of the ERP implementation, giving all the moving pieces in your business right now. Can you just walk us through a little bit, sort of what you are, I don’t want to use the word sacrificing, but some of the choices that you’ve made in delaying those plans? Any impact to some of your medium-term financial targets as a result, just given that the ERP implementation longer term is done with some positive benefits in mind as well.

Bernadette Madarieta: Yeah. So as far as the ERP timing of the implementation, after the last implementation, we paused work on future releases as we focused on the business and ensuring that we had stabilization. So in terms of timing of where we are in the process, it was an opportune time to pause that at that time. It does delay the benefits that we’ll be able to obtain from the ERP, but we’re confident that once with the capital spending and our major expansions occurring and being complete by the end of this year, that we’ll be able to restart that work and get those benefits at that time. As it relates to future guidance and the opportunity for that delay to affect that, we don’t see any major impact at this time.

Ken Goldman : Great. Thanks so much.

Bernadette Madarieta: You bet.

Operator: We’ll take our next question from Adam Samuelson with Goldman Sachs.

Adam Samuelson : Yes. Thank you. Good morning, everyone.

Bernadette Madarieta: Good morning.

Tom Werner: Hi Adam.

Adam Samuelson : Good morning. I wanted to dig in a little bit just on the updated gross margin expectation for the year. Clearly, part of it is related to the product recall in the first quarter and that being a larger item than you thought a couple of months ago. But you also alluded to a lower – a higher manufacturing cost on a per pound basis given the production curtailments. I was hoping you can maybe just put a little bit more context on the magnitude of those as we think about margins, any differences between the North America and international operations to consider. And how should we, given the restructuring and timing of the closures, is there any impact to the phasing of margins and earnings over the balance of the year that would differ from historic seasonality?

A – Bernadette Madarieta: Yeah. Great question, Adam. As it relates to the higher manufacturing costs, as I explained, a lot of that is attributable to the fixed cost deleveraging from the idle lines that we do have in the plants, and we’re also seeing less favorable channel mix within our segments. We are looking to offset a lot of that incremental cost with the $55 million of savings that we discussed. And another point that I just want to make relates to the modernization of our assets over time, which is something that we’ve been investing in. And as we continue to modernize, as we have been at American Falls, for example, we have that lower cost manufacturing footprint that we don’t necessarily have at some of these older plants.

And that ensures, with that modernization, that we have more flexibility because not every plant is made the same. And so that’s the reason why you’ll see some of the decisions that we’ve made to idle capacity at different plants, and it’s based on what those plants can make from a product perspective. So as we move throughout this year, our gross margin will be impacted because of that fixed cost deleveraging. But as additional volume gets brought back on and we pull those lines back up, we’re going to see that improvement.

Adam Samuelson : Okay. And then just as I think about some of the key items in terms of the cost-saving plans and the updated CapEx, I mean, just kind of think about some of the early items that you are laying out as we think about 2026. Just to be clear, you alluded to an $85 million cost-saving target in ‘26. Is that incremental to the 50 this year or that’s total? So it’s a year-on-year $35 million benefit. Just on the total CapEx piece that you alluded to Bernadette, you said base CapEx equals D&A, which I’m presuming you’re saying is 375 the right go-forward rate or it steps up more, because the Netherlands and Argentina start depreciating, plus the environmental CapEx, which for next year you said was 150. Just to make sure we’re all talking about the same numbers.

Bernadette Madarieta: Yeah, so a couple of things there. First, as it relates to the savings next year, the $85 million, we’ll see an incremental $30 million next year, because it’s additive to the $55 million we’re seeing this year. As it relates to D&A, it’ll be closer to $400 million, which will include the additional D&A related to the new plants that we bring online. And then there was another question in there. Did I miss it?

Adam Samuelson : Well, effectively you’re saying CapEx next year in the range of $550 million plus or minus, including $150 million of environmental.

Bernadette Madarieta: That’s right.

Adam Samuelson: Okay, that’s very helpful.

Bernadette Madarieta: The only other thing I want to say, I did also mention that there would be additional expenditures if and when we begin the next phase of the ERP, on top of the $550 million.

Adam Samuelson : Okay, that’s helpful. I will pass it on. Thank you.

Bernadette Madarieta: Thank you.

Operator: We’ll take our next question from Peter Galbo with Bank of America.

Peter Galbo: Hey, guys. Good morning.

Bernadette Madarieta: Good morning.

Tom Werner: Hey Pete.

Peter Galbo: Thank you for all the detail and for taking the questions. I want to actually go back to Adam’s question, just on the gross margin impact of idling lines and kind of test the other side of the argument. So in theory right, if those lines don’t get pulled back up next year, let’s just say, does that I mean structurally leave the margins lower? I mean, if the demand environment doesn’t improve and those lines stay down, do we stay in a margin environment that looks more like the second through fourth quarter of this year, simply because that fixed cost de-leverage doesn’t go away? Or do you have potential in there to further mitigate fixed cost de-leverage outside of the incremental $30 million of cost savings for next year?

Tom Werner: Yeah. So Peter, the actions we’ve taken is to address the operating environment we’re in right now. And certainly what Bernadette just said, its going – how she talked about it in terms of gross margin impact, that’s going to persist in the near term. However, we believe in – restaurant traffic will rebound and the category will return to growth, so to speak. And so it’s important as we make these decisions which are challenging to make, but we’re also making these decisions looking at the future of the growth of the category. We’ve been modernizing our footprint over the past several years in terms of the capital we put in this business, and so I view this as a short-term issue. And we’ve got to get through a period of time and see what restaurant traffic does.

We’ve seen trends improve in the first quarter, as we said in our comments sequentially, although they are still down, but we are seeing some traction. So this is a short-term management decision. But the great thing I am confident in is that with our new assets coming online in China and the Netherlands and American Falls and Argentina coming up, we’ve modernized our footprint. We’re well positioned when the category rebounds, that we’ll be – we’ll come out of this as strong as ever.

Peter Galbo: Okay. Thanks for that Tom. And then Bernadette, maybe just a clarification. On the SG&A reduction, I think it’s like $60 million at the midpoint. I think you said two-thirds of the $55 million from cost saving goes to SG&A, so that doesn’t make up the whole bucket. Just what’s the rest of the reduction? Is it compensation expense? Like, how should we think about that?

Bernadette Madarieta: The rest of the reduction in SG&A?

Peter Galbo: In SG&A guidance, yep.

Bernadette Madarieta: Yeah, a lot of it is people-related costs.

Peter Galbo: Got it. Thank you.

Operator: We’ll take our next question from Tom Palmer with Citi.

Tom Palmer : Good morning and thanks for the question. I just wanted to follow-up on the composition of the sales growth. A quarter ago, I think the expectation was for flattish price mix for the year and then growth coming from volume. Is this still the expectation, or are there any shifts between these two items?

Bernadette Madarieta: Yeah, thanks for the question, Tom. That is still the expectation for the remainder of the year, is for this to be driven by volume.

Tom Palmer : Okay, thank you. And I guess just on that, I wanted to kind of understand the discussion on fixed cost to leverage. So it sounds like the volume outlook for the year is a little changed. And so kind of what’s being cited is this added margin pressure is closing the lines. I would think that closing lines ultimately has benefits for profitability, so I guess why the added overhang. And again, it sounds like the fixed cost to leverage is not that big of an incremental factor if the volume outlook is unchanged.

Bernadette Madarieta: Yeah, so the permanent capacity curtailment at Connell, that is a benefit. The temporarily curtailed lines throughout our footprint, we have the same fixed costs that are being allocated over fewer pounds if you will. And so that’s where the deleveraging is occurring. We are in the process of also managing down our inventories. We have a very high inventory level. And so we take into combination running less, so that we can get our inventories into a better place as we end this fiscal year.

Tom Palmer : Okay, thank you. I guess I just struggle with why this wasn’t factored in a quarter ago if the volume outlook is so little changed, but we can talk about it later. Thank you.

Operator: We’ll take our next question from Robert Moskow with TD Cowen.

Robert Moskow: Thanks for the question. Two things. Is it fair to say that pricing goes negative for the rest of the year in North America? Because I think you still have to give incentives to food service customers to get them to come back after the ERP disruption. So can you give us an update on how that’s going? Have you started that yet or is there a lot more acceleration to do and a follow-up after?

Tom Werner: Yeah. So our current pricing environment, again, is in line with what we anticipated for this year. And for the kind of how we’re working the food service channel, so to speak, it’s as we do every year, it’s on an account-by-account basis. So we’re managing it with great detail in terms of customer interaction. The larger contracted pricing discussions, like I said, are largely behind us. So as we move forward, it’s really going to be on an account-by-account basis in the market and in the food service channel and the team’s managing it. We have a high-level visibility to some of the actions we’re taking, but it’s going to continue to play out over the coming months and quarters.

A – Bernadette Madarieta: Yeah, and if I could just add, Tom, I just want to emphasize that the overall pricing environment, it’s competitive, but it’s been disciplined. And as Tom said, our pricing investment for the year continues to be on-track. You will see greater pricing investment though during the balance of the year relative to the first quarter, and so we will see some negative price mix.

Robert Moskow: Okay. So it’s just going to step up.

Tom Werner: As we expected.

Bernadette Madarieta: Yeah, as we expected though. Absolutely.

Robert Moskow: Got it. That’s fine. And my follow-up is, I know you don’t like these hypotheticals, but like a year from now, let’s say demand is unchanged or just not getting any worse, and you’ve made all these capacity reductions and they are still in place. Is that sufficient to get the industry supply/demand back in balance? Is that alone enough? And then where do you think utilization would be in that scenario compared to where it is now?

Tom Werner: Yeah. So I’m not going to get into hypotheticals, but I’ll go back to some of the comments I made earlier Robert, is the industry in total, we’re all feeling the same thing. And so we made our decisions based on what’s best for the company in terms of how we’re taking actions. And I think it remains to be seen overall what the industry will do. But again, there’s capacity announcements that may be paused, but it’s again, it’s we’re just, we’re in a trended time watch in terms of restaurant traffic. And as we move through the next several quarters, we’ll be – and we are closely monitoring restaurant traffic, that’s going to determine not only for Lamb Weston, but for the industry, potentially additional actions that we’ve got to take, in terms of getting this thing balanced out and supply and demand.

Robert Moskow: Okay. All right, well, thank you.

Tom Werner: Yep.

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

Rob Dickerson: Great. Thanks so much. So, I guess just kind of first question is just on some of the share loss right, clearly coming out of the ERP disruption in Q3. It seems like maybe it got a little bit better in Q4. Maybe it got a little bit better in Q1, but at the same time it sounds like a fair amount of the volume pressure in North America, at least in Q1 was still from the share loss. And then secondly, as we think through kind of the rest of the year, especially the back half, as you lap that, there is kind of this implied nice lift, right, that should come as you get that share back. So I’m just curious if you could provide like any color as to maybe how the share regain progression might be coming.

Tom Werner: Yeah. So Rob, we are seeing business wins, and we will start seeing that in Q3, Q4 this fiscal year, and so those are known things. The thing that kind of clouds it up, is the base business with restaurant traffic being challenged, volumes are down on some of our key accounts across the board. So while we are confident in the back half in terms of the business we are bringing in, we are closely monitoring what is happening with our base accounts. So we are in the market. We are winning customers back, but it’s going to be a little murky based on what is going on with restaurant traffic right now in the back half of the year.

Rob Dickerson: Yeah, okay, okay. Fair enough. And then just another kind of quick simple one from me is just, the plant closure, I am not sure if you can quantify, maybe just kind of as a percent of your total global in North America capacity, kind of what that estimate is. That is it. Thanks.

Bernadette Madarieta : Yeah. That is about 5% of our capacity in North America, 300 million pounds.

Rob Dickerson: Super. Perfect. Thank you so much.

Operator: We will take our next question from Marc Torrente with Wells Fargo Securities.

Marc Torrente : Hey, good morning. Thank you for the questions. Just building on the last one on the Connell facility, any context around relative manufacturing costs versus other newer facilities? And I appreciate you sizing the capacity there. And then also any other color on sizing and timeline for the plant curtailment?

Tom Werner : Yeah, so just in terms of the Connell decision, it’s a difficult decision. It’s impactful to that community, people, all those things, and we didn’t take any of that lightly. But the decision parameters are, we look at our footprint, look at production capabilities, cost to produce. We go through the litany of things you go through when you make these decisions, and potential future capital expenditures required in the facilities we have right now currently, and then you just go through the decision metrics. That was what drove specifically the decision to close Connell. And, its again, it’s difficult, it’s hard, you are impacting a lot of things. But the long-term footprint of the company, it was the right decision to do.

Marc Torrente: Okay, thank you. And then you also called out some strong volume trends internationally outside of Europe. Maybe some additional color there, key regions, and how much is new international production enabling this?

Bernadette Madarieta : Yeah, no, as it relates to our international business, we are seeing some good wins, particularly in the Asia Pacific region. That’s where we are seeing a large pickup there, also in Latin America, which is positive in light of our upcoming plant that will be coming online in the spring of next year. So that’s driving a lot of it. As Tom was alluding to, customer wins, a lot of our customer wins have been in the international segment, and we are going to see much of that begin to hit in third quarter.

Marc Torrente : Great, thank you.

Bernadette Madarieta : You bet.

Operator: We will take our next question from Matt Smith with Stifel.

Matt Smith : Hi, good morning. I wanted to come back to the discussion around pricing and what you are seeing in the business. It sounds like the amount – so far the investment in pricing has been relatively in line with your expectations. But in part of the explanation for taking EBITDA out of the low end, you referenced higher price investments, or higher investments in price and trade than originally anticipated. So, can you help me balance those two dynamics against each other? Are you seeing perhaps a bit more price investment in the food service business? And that is still to come, and that is the difference?

Bernadette Madarieta : Yeah. Matt, as it relates to our pricing investments, it is fair to say that our pricing is coming in line with what we expected for the year. Most of its on a cost basis as it was relating to our gross profit. In first quarter you did see pricing was up, I think positive 2%, but much of that investment, as I think Tom may have alluded to, is going to be heading beginning in second quarter.

Matt Smith : Thank you for that. I will leave it there.

Bernadette Madarieta : Thank you.

Operator: We will take our next question from Carla Casella with JPMorgan.

Carla Casella: Hi, I am wondering, on the $200 million to $250 million of charges, can you bucket that a little bit in terms of the different items that you talked about? And then also, is the 20% non-cash, is that mostly the potato inventory write-down or is another piece of it that is non-cash versus cash?

Bernadette Madarieta : Yeah, so the 20% that’s non-cash, that is mainly going to be related to the accelerated depreciation on the Connell facility as it related to the balance of the value that we had placed there. The remainder is largely going to be attributable to cash expenditures related to contracted potatoes that we will be paying for, but will not need, related to the curtailments in Connell and in the other production curtailments. That’s about 60% of the cash cost.

Carla Casella : Okay, great. And then, given the lower volumes this year and that potato contract that you won’t be paying for, you haven’t used, will that change any of your negotiations with your suppliers for next year or your contract pricing for next year?

Tom Werner : No, so well, as we do every year, well as we go through the process, we’ll provide insights at the appropriate time that we do every year, which is typically our April call of July. So we are on the front end of those negotiations, but we will not expect any changes in terms of how we go through the process at all based on this. It may change our needs, but that’s about it.

Carla Casella : Okay, but my guess, my thought is if the volumes are lower, would you see materials step up in the pricing? Are you getting a lot of volume based to discounts that you may lose?

Tom Werner : No, I am not going to comment on that. We typically, we are right in the middle of those negotiations. So I am not going to comment and talk about the specifics of how all that works.

Carla Casella : Okay, and then just one debt question. Leverage target, any change to your current leverage target?

Bernadette Madarieta : No changes.

Carla Casella : So that is at 3.5x?

Bernadette Madarieta : That is correct, and I think as I shared, we are at 3x right now. I am comfortable with that as it provides optionality.

Carla Casella : Okay, that is great. Thank you so much.

Bernadette Madarieta : Thank you.

Operator: That will conclude our question-and-answer session. At this time, I would like to turn the call back over to Mr. Congbalay for any additional or closing remarks.

Dexter Congbalay : Thanks for joining the call today. As usual, if you want to set up a follow-up call, please email me. We can set up a time. Other than that, again, thanks for joining the call and have a good day!

Operator: That will conclude today’s call. We appreciate your participation.