Lamb Weston Holdings, Inc. (LW) Earnings Call Transcript & Summary

Good morning, everyone, and thank you for joining us for Lamb Weston's 2023 Investor Day. As many of you may know, my name is Dexter Congbalay, and I'm Vice President of Investor Relations and Strategy for Lamb Weston. I have the pleasure of giving you the forward-looking statement today. So before we begin today, 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 that should be read together with our GAAP results. You can find the GAAP to non-GAAP reconciliations at the end of this presentation. With that, I will turn it over to Tom, our President and Chief Executive Officer.

Thank you, Dexter. Good morning, everyone, and thank you for joining us today for our Investor Day. This morning, we're going to cover 3 areas. I'll begin by introducing you to our business strategy and the compelling opportunity that exists within the sector. Mike Smith, our Chief Operating Officer, will then provide color around the frozen potato category, our strategies for North America and international in addition to showcasing some of our innovation. Bernadette Madarieta, our Chief Financial Officer, will discuss our recent financial performance, capital allocation strategy and long-term outlook. After which, I'll wrap up today's event and then we'll go into Q&A. And at the conclusion of today, be sure to swing by, we're going to have Fry Bar ready for you to try some of our great products. So many of you are familiar with Lamb Weston, but I want to begin with a little bit of a refresher in the progress we've made over the past 7 years. We've demonstrated consistent growth. We drove record sales and earnings growth in FY '23, nearly doubling our net sales. We began '24 with a strong momentum and anticipate net sales in the range of $6.8 billion to $7 billion this fiscal year. We are projecting continued adjusted EBITDA in the range of $1.54 billion to $1.62 billion at the end of fiscal '24. We're very confident in these expectations, which are supported by continued sales and profit growth in each of our business segments through a combination of pricing actions, mix management and supply chain productivity which we're going to discuss in more detail today. We remain #1 in North America and #2 globally. We've added 4 -- 5 factories since 2017 and now have 27 factories. We're in the process of building three factories, Kruiningen, Netherlands; American Falls, Idaho; and Mar del Plata, Argentina that we expect to be completed by 2025. Organizationally, we welcomed over 3,500 employees, most of those driven by acquisitions. And today, we have over 10,000 employees worldwide, and we're headquartered in Eagle, Idaho. In February '23, we acquired the remaining interest in our European joint venture, Lamb-Weston/Meijer, and gained full control over 6 factories with nearly 2 billion pounds of capacity to our platform. Lamb Weston/RDO remains -- is the remaining 50-50 joint venture, but we also have minority interest in a joint venture in Argentina and Austria. Now let me share the Lamb Weston investment opportunity. First, we are an industry leader with a strong track record of execution. Second, we are strategically positioned in an attractive category that continues to experience growth. Third, we maintain a strong financial position that is driven by our consistent growth. Fourth, our global footprint positions us well to increase our share in key markets. And finally, we maintain a disciplined returns-based capital allocation framework, both in the short and long term. And taking all these together, Lamb Weston is ideally positioned to continue to drive peer-leading shareholder returns. We have consistently been executing our 4 strategies over the past 7 years, with a focus on driving value for our shareholders. We are guided by these 4 strategic pillars, invest for growth, accelerate category and customer growth, differentiate global supply chain to drive growth and our people pillar. Let me give you some examples of some things we've done in each of these pillars over the last 7 years. First, invest for growth. We've completed acquisitions in Europe, Argentina and Australia, and we've added capacity in North America; second, accelerate category and customer growth; we've transformed our customer and product portfolio, introduced innovative products, formed a direct sales force and launched a retail Grown an Idaho brand. Third, differentiate supply chain to drive growth. We launched Win as 1 to drive productivity, safety, quality and cost savings and modernize select production lines to support our premium product portfolio. And finally, our people pillar. We reconfigured staffing across functions and factories, instituted programs for leadership, development and training and implemented talent management to support recruitment and retention. These strategies have remained consistent over the last 7 years and have been foundational to the success of Lamb Weston. They form the road map that is driven and will continue to drive our strategic growth for years to come, and they've resulted in a track record of performance. In '23, we delivered record sales of $5.4 billion. This marks a more than 9% CAGR from 2017. Adjusted gross margins has increased 340 basis points since 2017 to 28% and adjusted EBITDA since FY '17 with higher sales and gross profit, adjusted EBITDA stood at $1.25 billion or a 10% CAGR since the spin which -- so this has delivered peer-leading shareholder returns, which is largely due to our execution of growth strategies. And you can see here on the chart, our relative stock price performance and total shareholder return since PEN is outperforming the S&P 500 and the S&P Food and Beverage as well. Now let me turn to our segments. Starting in FY '24, we consolidate our reportable segments in the North America and international. This realignment reflects our recent EMEA acquisition and better aligns with our expanded global footprint and our continued commitment to serve our customers around the globe. In North America, which includes products sold in restaurants, foodservice and retail channels in the U.S., Canada and Mexico. This segment generated $4.4 billion over the last 12 months and includes 16 factories. The International segment includes products sold in restaurant, foodservice and retail channels outside of North America, and the segment generated $1.5 billion over the last 12 months and currently has 11 factories under operation. This change allows us to have more focused leadership and enables us to more effectively serve differentiated international markets through our expanded global scale. It also drives continued improvement in our channel and customer mix in North America and provides the opportunity for us to optimize our cost to serve model around the globe. And with this reorganization of our reporting segments, we've also evolved and expanded our leadership team. We have a highly experienced executive team. This includes myself, Bernadette Madarieta, our Chief Financial Officer; Mike Smith, our Chief Operating Officer; Eryk Spytek, our General Counsel and Chief Compliance Officer; Steven Younes, our Chief Human Resource Officer; and Sukshma Rajagopalan, our Chief Information and Digital Officer. Our leadership team has a proven record of execution that has created shareholder value, and we have a diverse mix of experiences across the executive team. With that, let me also introduce our operations leadership team reporting to Mike Smith. Sharon Miller is President of North America; Marc Schroeder, President of International; Gerardo Scheufler is our Chief Supply Chain Officer, Kim Cupelli, our Senior Vice President of Marketing and Innovation; Steve Bannworth is our Vice President of Agricultural Services; and Trudy Slagle is our Senior Director of ESG Administration. We have experienced well seasoned leaders in our operations leadership roles. Each of these individuals have 20 to 30 years of experience. Our new segment realignment and leadership structure reflect the evolution of our business, including our recent EMEA transaction. So let me touch on the strategic benefits of the EMEA transaction. As I mentioned, we acquired the remaining interest in our European joint venture in 2023. The transaction significantly strengthens our global manufacturing footprint. It also enhances our customer-centric operating model by providing 1 voice and global supply chain to support our global customers. It enables continued growth in the attractive European market. We are currently working through the integration process. But I think it's important that you hear from some of our team members who've been working on these efforts. [Presentation]

As you can see, we have a lot of collaboration happening across the company to fully integrate EMEA and drive 1 voice of the customer in our markets. Now let me pivot and provide an outlook for industry supply and demand over the next several years. In the last 5 years, global demand has increased 4.5 billion pounds at a 3% CAGR rate to over 33 billion pounds. In the same period, global supply increased 5.5 billion pounds to over 34 billion pounds as of 2022. As you can see from the implied capacity utilization rate at the bottom of the screen, our estimates had the industry capacity running around 100% in 2017. The additional capacity serve 2 purposes: one, to support customer and category growth; and secondly, to allow the industry to operate the factories in a more sustainable manner. Now let me move to the growth outlook. We expect the category to grow between 2% and 4% by 2027. Based on our category growth estimates, this puts overall pounds from 3.5 billion to over 7 billion pounds to a total of 37 billion to 41 billion pounds by 2027. We base our outlook on growth models that we have been refining for years which include market inputs, category inputs, consumer inputs, economic factors and customer inputs that we've been using for several years and feel confident in the projections that we're looking at here going forward. From a geographical perspective, we estimate North America and Europe will grow volume consistent at the low single digits over the next 5 years. These represent our largest 2 markets. Emerging markets are growing at volume at a bit faster rate and mid-single-digit growth. We remain confident in the long-term growth prospects of the global category. Now let me turn to the supply side. North America and EMEA remain the primary processing centers for French fries. Over the last several years, capacity has been added to meet demand and relieve pressure on utilization rates. We anticipate another 5.6 billion pounds of new capacity will be added over the next 5 years, including 1.25 billion pounds of capacity by Lamb Weston alone. We have invested strategically in capacity and upgraded our capabilities at our factories across regions to better serve customers, mitigate supply chain risk and optimize our cost to serve model. Now combining both the supply and demand side, we expect demand growth to be in line with historical rates of 2% to 4%. And Capacity utilization is anticipated to sit in the mid-90s using a 3% global growth assumption. Supply chain growth is projected to meet demand and growth over the next 5 years, assuming new capacity is not delayed. While we're confident in these projections, we continue to expect that near-term demand may be somewhat uneven due to restaurant traffic trends and continued macro pressures on the consumer. Over the long term, we expect supply and demand in the category to remain balanced. Our recent and current investments have us well positioned around the globe. This will expand over the next couple of years. And as I mentioned, we have over 10,000 French fries experts around the world, 27 global factories and our products are sold in almost in over 100 countries. We have sales offices, factories, joint ventures across the world, and we have a leading platform that allow us to serve customers wherever they are. Our footprint allows us to reach markets all over the world. From our North America operations, we service not only North America, but we export to Asia, Oceania, the Middle East and Central America, and we'll continue in the future to export to these markets. From our European operations, we service Europe, but we also export to the Middle East, Europe, South America and Asia. By 2025, we will have approximately 9 billion pounds of total capacity across 30 factories worldwide, and this includes the factories under construction currently in North America, Europe and South America. The global expansion will allow us to better capture growth of the broader category, and we have strategically and methodically expanded our footprint to maximize our ability to serve customers in more markets and optimize our cost structure so we can serve them more efficiently and profitably. And as we begin to fully integrate EMEA and start up our new capacity, we are focused on optimizing our cost to serve model. We are continuing to execute our strategies through our investments in business growth such as our expansion projects in North America, South America and Europe. Our ERP and IT system upgrades and the pursuit of attractive acquisitions. We are focused on executing our initiatives to accelerate customer and category growth through the integration of Lamb Weston EMEA, the continued transition of our customer and product portfolio and driving innovation for growth. On the supply chain side, we are committed to modernizing and upgrading our factories to provide flexibility to meet growing demand of premium products, driving our Win as 1 initiative to increase productivity and cost savings and optimize our cost-to-deliver model. And finally, with respect to people, we'll continue to drive our leadership and talent management programs across the organization and invest in our people to retain and recruit talent. With that, let me turn it over to Mike Smith, our Chief Operating Officer.

Good morning. It's great to see many of you. It's been a little while. And as Tom noted earlier, I'm Mike Smith. I've been with the company for a little over 15 years. And today, I'm going to discuss with you the really compelling opportunity that we see in the potato category and the global opportunity that we see in French fries. Really leveraging our global scale, our innovation expertise but also our track record of execution, Tom's really given a great overview of our business but also our investment thesis. And I'm now going to dive into a little bit further into our category as well as our reporting segments and an update on our supply chain initiatives. You're going to hear a common theme today. And that's that we operate in an outstanding category that's proven to be quite resilient over time. And it's something that we say a lot, but it's truly unique for this industry, and it's worth repeating. The global frozen potato category and fry market continues to demonstrate strong growth and really sustained consumer demand that's going to continue to fill growth -- or fuel our growth in many years to come. Fries are one of the most popular items on the restaurant menus. In fact, they're on 42% of restaurant menus worldwide and 60% of U.S. menus. Pre-pandemic, about 21% of all orders included fries, and we call that the attachment rate. Keep in mind, that includes all leading occasions like breakfast or when you go out just to grab a quick beverage. It also includes restaurants that don't typically carry french fries. But during the pandemic, operations simplified their menus, operators did and consumers start ordering takeout and delivery more. And that attachment rate increased 2 points, and the consumers are still ordering fries at increasing rate, which really results in a great tailwind for this category. Consumers love fries. Regardless of their age, their demographic, their geography, their lifestyle, which is why fries are the #1 food ordered on U.S. restaurants or in U.S. restaurants. And this love of fries transcends generations. So while taste for other food categories have shifted up and down, fries remain a constant favorite across all demographics and ages. There's no other category that can claim that. So while frequency may change or the rate at which people consume fries may vary across consumer segments compared to other items on the menu fries remain #1. In a recent study of U.S. consumers, nearly 2/3 of respondents say that fries are one of their favorite foods. And they aren't just popular, they are profitable, and that's why our customers love them, too. Fries remain one of the most profitable food items on the menu with exceptionally high gross margins. And while there's other food items that offer similar margins for operators, servings of fries are much greater than any other side dish or appetizer. For context, fries garner 8x more servings than the next most popular side dish or appetizer, and they generate approximately 80% gross margins for the restaurant owner. Now this is particularly important as operators have rising costs facing their businesses, whether that's food inflation, minimum wage increases, insurance premiums or real estate they're looking for additional margin to offset those costs. And the result has been a category with really strong demand even despite the pandemic. In fact, global demand is well ahead of prepandemic levels, increasing at a CAGR of nearly 3% since 2017. And the drivers of this growth have been per capita consumption across really key developed and emerging fry markets, an increased attachment rate as well as population growth and increasingly more access to quick service restaurants around the globe. In the growth of the category over the last decade, combined with these strong tailwinds, reiterates our confidence in the category moving forward and really underscores the global growth opportunity for Lamb Weston. And today, we see the same demand drivers facilitating the future growth of this category. As Tom pointed out earlier, we expect the global frozen potato category to grow by 2% to 4% or 3.5 billion to 7 billion pounds over the next 3 years. And while developed markets are projected to grow at a slower rate in the low single digits over the next 3 years, keep in mind, they're also off of a much larger base. Whereas emerging fry markets are expected to grow in the mid-single digits over the next 3 years, consistent with the more than 5% growth that they've experienced over the last 5 years. Now let me put this growth into perspective for you. The global industry would need at least roughly 3 to 4 new large-scale lines annually to keep up with that demand. Much of this growth is driven by the -- as people continue to eat more and more French fries. And per capita consumption continues to grow even across already established markets. Developed markets have led the way in per capita consumption. In places like Australia and the U.K., they have per capita consumption of more than 40 pounds per year. And the U.S. per capita consumption is more than 35 pounds and growing. But emerging fry markets like Brazil, Southeast Asia, China, they also continue to grow. In markets with large populations like China, per capita consumption is just under 1 pound. This provides a significant opportunity for expansion. If per capita consumption in China increased by just 1 pound, it would translate to over 1 billion pounds of increased demand for this global category. And we found over the years that the expansion of QSRs around the world facilitate this consumption. As QSRs account for 2/3 of the total U.S. restaurant traffic, QSR traffic is driving the overall restaurant traffic recovery. And that is great for fry volume as 83% of total U.S. fry servings are ordered from QSRs. This traffic is really anticipated to recover to pre-pandemic levels by 2025. Meanwhile, we don't expect U.S. full-service restaurants to fully recover from the pandemic in this time frame. As I said, QSRs are anticipated to grow by more than 6% globally by 2027 according to global data forecast, much of which is anticipated to be led by emerging prime markets like Latin America, Asia and the Middle East. And as multinational QSR growth continues around the globe, it increases these markets access to fries, leading to increased fry consumption. This leads to other local full service or local QSRs adding fries to their menu. And the momentum builds to more fry servings and a higher per capita consumption of fries. As the opportunity within emerging markets continues to grow, established markets like the U.S. are also anticipated to continue their growth trajectory through additional menu penetration. As Tom mentioned earlier, innovation is at the heart of our business. And one area that we've seen tremendous growth is around battered and coated products. Coated fry consumption across the U.S. has consistently grown over the last 5 years. In the last 3 years, specifically, coated fry consumption grew at a compound annual growth rate of nearly 6%. That's 2x faster than the overall U.S. fry demand. And we have been steadily gaining share over the last 5 years. Today, we have a solid majority share of the U.S. coated fry market. Coated products require increased investment. The result is a higher value product that drive higher margins, not only for the operator but also for Lamb Weston. And we are experiencing this phenomenon around the globe as operators and consumers look for longer holding and crispier fries, respectively. Further driving this shift to coated fries is the growing percent of the population ordering takeout and delivery, which was really accelerated during the pandemic. And specifically, more fries are being eaten off-premise. In fact, 77% of fry servings are served off-premise, and consumers are also demanding crispier fries. 42% of them are selecting crispiness as the most important fry attribute. In fact, we almost can't make fries crispy enough. Coated fries remain crispy for longer, which makes them ideal for takeout and delivery occasions. And for our customers, although coated fries are more expensive than uncoated products, there are longer hold times mean less waste. So what does this mean for Lamb Weston? Well, the trade-off is a higher cost product, but it results in a higher margin. And we're going to continue to invest in these capabilities across our factories. Leveraging our legacy innovation, our global footprint and our added capacity that we have around the globe, Lamb Weston is strategically positioned to capitalize on consumers' desire for new flavor and crispy fries, really while delivering value to our shareholders. At the conclusion of our Q&A today, you're going to have the chance to sample some of these products at our Fry Bar. So you can see for yourself why our customers and consumers love the products from Lamb Weston. Specifically, we'll be sharing with you an uncoated fry as well as our Crispy on Delivery fries, which we launched just prior to the pandemic and our Colossal Crisp fries which have even a heavier crispier batter. Now let's talk a little bit more about the breadth of our innovation capabilities. Innovation is in our DNA. And it's something we pride ourselves on as a leader in the industry. It's ingrained in our day-to-day operations as we continue to build on our rich history of innovation. We innovate to remain ahead of the curve, realize efficiencies, drive shareholder value and deliver the best quality products for our customers and consumers. And we've been at the forefront of this innovation with cutting styles like CrissCuts, Dippers and our Twister products. We've also led the industry in the retail category with our Grown in Idaho and licensed brand offerings in the U.S. and our crunchy fries in some of our international markets. And as mentioned before, we've also led the way with battered and coated products to support the consumer shift to takeout and delivery. And we continue to invest in innovation with global centers to support our commercial organizations around the globe. And this really allows our customers to have a curated experience to support their consumer needs. The innovation centers are located in Washington, China and most recently in the Netherlands, which are dedicated to really fine-tuning our technology and developing our cutting-edge innovation. And we're excited about some of the great things we have coming down the pipeline in our segments. In North America, we've launched new cut styles of our successful Crispy on Delivery and our Colossal Crisp products, really leaning on consumers' desire for even crispier fries. Also in North America, in our retail business, we continue to have success with our licensed brand portfolio, supporting both mainstream and specialty retailer products. And in our International segment, we have had many new product introductions in the respective geographies around the world, but we're very excited about our award-winning really crunchy fries that are taking crispiness to the new level across foodservice and retail in the Middle East. So how do we take our leading market position, our innovation capabilities and our efficient supply chain and further expand our total addressable market. Well, traditionally, our core product portfolio is dependent on freezers and fryers to hold and prepare our products. But when you look across the different restaurant segments, of which many of these on the screen are growing, they often don't have freezers or fryers. This represents 47% of the U.S. restaurant traffic that can't use our core products. So a few years ago, we put together a very small nimble group of innovators to address the opportunity as we work to expand our total addressable market. And the results have been exciting and has truly opened up the door to even more opportunities with some really great customers. Let's hear from one of those great customers now. [Presentation]

Yes, we're really excited about these products, and we haven't stopped there. You can enjoy Lamb Weston and other nontraditional fry customers like Starbucks and Chipotle. You can even find us in the sky on some airplanes and in convenience stores with our other non prior potato offerings. And as Tom mentioned, we've consolidated our reporting segments under North America and International. These segments have very different go-to-market approaches, in addition to different supply sources and customer bases. With the integration of our EMEA business, this structure helps us get the right focus on these 2 important geographies in a way that's going to set us up for continued growth. So let's start with North America. As we've said, Lamb Weston is the industry leader. Our North America segment represents the largest share of our business, and we operate in really well established and developed markets. The market is supplied by local production, and we maintain long-standing relationships with very large customers. We're the leader in both retail and foodservice in that market and offer both private label and branded offerings. And our strategic priorities to drive growth include optimizing our customer and product mix across our channels, to ensure that we're winning with the customers that are poised for significant growth. We call this winning with our winners. We also drive retail growth and our retail strategy is working to provide a broad and innovative product offering to all consumers. We have products that reach the value consumer with our private label products, our licensed brand and Grown in Idaho offerings for the mainstream consumer. And for the premium consumer, we offer our non-GMO and specialty products underneath our Alexia label. Expanding our total addressable market, in addition to leveraging our revenue growth management initiative, provides us with a strong runway for more market share. Bernadette is going to share with you a little bit more about our RGM approach later on in the presentation. Further, this segment has seen consistently strong category demand despite the significant headwinds stemming from the pandemic. Category volume has recovered. And over the last 2 years, the demand has outpaced pre-pandemic levels. The category achieved this growth despite slower traffic as increased attachment rates and improved QSR traffic have helped offset any declines. In the strength of the category, throughout difficult macroeconomic conditions, gives us confidence that we can continue to drive top line growth through our strategic priorities. And our team has done a great job of not taking our leadership position for granted and really continuing working to increase our financial performance. Our leaders across the segment have maintained the courage to manage pricing through the inflation while supporting our customers and managing product mix to maximize our profit. This has driven consistent improvements in net sales, adjusted EBITDA and adjusted EBITDA margin over the last 3 years. In our international business, we now have the scale to enhance our operations under this new structure with the integration of EMEA, really bringing on EMEA strength in our international footprint and to really optimize the supply in other important global geographies. With large multinational customers, our structure allows us to increase our customer-centric model and also gives us better control of our opportunities and strategies around the globe. This is really important given the fragmented nature of the international markets in the industry. For example, sources of supply come from varying growing regions around the globe. The segment has many more customers and shipping lanes, and they also have many different regulatory requirements in the different countries. As an underdeveloped retail business, but we maintain a #2 position globally and a #3 position in EMEA as well as strong positions in key developed and emerging fry markets around the world. Our focus is to further our position in both areas, which we believe we're in a good shape to do. Our strategic priorities are well aligned with those of the North American segment. As we drive volume growth and we improve our share, we'll also manage our product and customer mix to maximize our profit. We're also focused on pricing really to offset our inflation and rolling out our revenue growth management work, enterprise-wide, that we initiated in North America. With a supply platform of Europe, China, Australia and Argentina, this team is well positioned to leverage the global platform to optimize our cost to deliver. And the international category has also returned to growth as demand has come back higher than pre-pandemic levels. The growth in these emerging fry markets is driving new demand. The increase of the international category performance has been faster than that in North America due to these emerging fry markets where growth has been driven by per capita consumption and global QSR expansion in addition to population increases. In fact, we expect continued growth, including mid-single digits in key regions in emerging fry markets where we're introducing new capacity, including Asia and Latin America. Markets like Europe and Oceania have -- are well-developed prime markets, and the growth rates are more similar to those rates we see in North America. And finally, we have new capacity coming online in Europe, which will support our ability to leverage Europe as a key export region to optimize our delivery to other countries around the world. Now as you can see here, our net sales, adjusted EBITDA and adjusted EBITDA margin are up significantly over 2021 and 2022. Most of this recent growth is attributed to the consolidation of our JVs in EMEA and Latin America and our team's success in actively working through to price inflation to offset any negative impacts on our performance. As I discussed earlier, we're enhancing our competitive differentiation by leveraging our robust global supply chain network. Our supply chain capabilities span multiple regions and provide us with a valuable opportunity to determine the best region to source our supply, produce our products and deliver them to our customers. This strength not only allows us to drive efficiencies across our supply chain, but also reach our customers in a better way. Taken together, it creates more opportunities to drive growth and profits. Our global breadth of scale is a key differentiator of Lamb Weston compared to other manufacturers. In addition to our advantaged scale, a lot of our success can be attributed to our Win as 1 initiative and focus on core areas that are most important to our customers, those being safety, quality, service and cost. This has focused our team on driving continuous improvement across our supply chain to ensure we're doing the right thing for our customers. After a couple of years of focus in this area, we consistently hone in on identifying cost savings across our operations. It's become really a constant in our operating culture. If you were to visit one of our factories, you would hear the team talk about velocity. The capital LOC being our Lamb Weston operating culture with a focus on lean operations. Let's see veLOCity in action. [Presentation]

As we continue our lean operating model, we're confident we can continue to deliver productivity and favorability. So far, we've seen gross supply chain productivity savings of about $185 million since fiscal 2021. This includes reduced costs across procurement, transportation and warehousing as well as manufacturing. While inflation has offset much of our savings in the near term, over the long term, we expect these efforts to increase our profitability. We remain focused on optimizing our portfolio and maximizing productivity to yield additional operational efficiencies, a more simplified portfolio at higher margins. Let me provide you with a couple of examples. First, over the last 2 years, we've reduced our portfolio of SKUs by about 30%. This has allowed us to have less changeovers in our factories, improving throughput and improving our planning and execution to our customers. Second, improved productivity in our factories is important. And our VeLOCity culture empowers our employees and our factories to have more ownership of their lines. The team is ensuring we have the right preventative maintenance in place and investing in our lines to support a shift to thicker batters. We are committed to Win as 1 in our VeLOCity culture, and it has become a normal way in which we operate. Taking a closer look at our manufacturing strategy, we have invested significantly to support demand in key regions around the world with new supply. Our existing lines require some modernization to drive agility and flexibility within our footprint. Things like investments in batter coating capabilities as well as packaging flexibility and also ensuring we have -- continue to keep up with food safety standards. While Bernadette will get into more detail on our capital expenditures, extending the life of our lines in a thoughtful, cost-effective way will be critical to maintaining our base capacity. And finally, we will continue to invest in opportunities to reduce climate environmental risk to further our drive of our sustainability priorities. And when we look at our raw sourcing, our goal is to reduce the volatility and maximize land and crop management. We are carefully managing the right crop rotations, and we share best practices with our growing partners. We value the collaborations we have with research institutions to ensure we have the right varieties long term that will reduce volatility of our crops, especially around drought. And we continue to reduce our environmental footprint by finding and implementing ways to improve soil health. Now I want to briefly discuss the commitments that we've made to further our sustainability goals. As I mentioned, we continue to invest in ways to reduce environmental risk to support our sustainability priorities. We've committed to a 20% reduction in Scope 1 and Scope 2 emissions per pound produced, and have committed to reducing our water usage rate by 20%. We've also established a 50% reduction goal around food waste with the ultimate goal of 0 waste to landfills that will help further reduce our environmental footprint. We're committed to pushing these initiatives forward with investments in capital but also investments in how we operate and the culture that we create within our factories. All of this information and any additional questions you may have or details can be found in our latest sustainability report that's on our website. Before I turn things over to Bernadette, I want to quickly summarize what I've discussed today. We are in a great category and established strong consumer acceptance and profit. We're going to continue to innovate both in our core fries, but also as we look across the total addressable market, and our segments are set up and organized for growth with the right leadership and leveraging our global scale to win in both developed and emerging fry markets. And we're going to continue to invest in our factories, especially around modernization to drive flexibility and productivity. I want to thank you for your time today, and I'll now turn it over to Bernadette.

Thanks, Mike, and good morning, everyone. Thank you all for joining us today. My name is Bernadette Madarieta, and I'm Lamb Weston CFO. Today, I'm excited to be here and share some of the financial progress with you as well as share some of the initiatives that's going to translate into increased value for our shareholders over the long term. So as Tom said, we are confident that Lamb Weston is positioned to drive long-term shareholder value. Our confidence is grounded in 3 key areas, and the first is as a clear industry leader. As you heard this morning, we're #1 in North America as a producer of frozen French fries in terms of both volume and dollars and #2 globally. We have a diversified geographic presence. We're located on 5 continents, giving us the ability to supply local and expand in key markets. We're investing in new production capabilities and adding flexibility to focus on higher-margin premium products. And we have strong customer relationships that span decades. Our customers are growing, and we are growing along with them. We also have a broad potato grower network. And we have a commitment to innovation that supports our ability to drive growth and expand the total addressable market. Second, we lead in an attractive category. As Mike said, French fries are one of the most popular items on restaurant menus today and our customers like offering them because they're one of the most profitable items on menus today. We have seen resilient demand for our products even in the softness of macroeconomic conditions, and we continue to expect solid growth across both developed and emerging markets. Finally, we maintain a strong financial position that is guided by a clear and consistent growth strategy that will continue to drive revenue and profit growth. We have a track record of delivering strong, sustainable financial performance and exceptional cash flows. We've got a strong balance sheet, low debt leverage that provides us with the financial flexibility to support growth in our business to pursue M&A while returning cash to our shareholders. Looking ahead, we have the opportunity to further enhance our financial performance by optimizing and driving further productivity as we leverage all of these strengths across our platform. So let's take a closer look at our financial profile. Since becoming an independent publicly traded company, Lamb Weston has driven strong net sales while improving margins, EBITDA growth and navigating uncertain pandemic related market conditions. Even during a difficult cost environment, we drove record sales and earnings in fiscal 2023. We did this through a combination of pricing actions, mix improvement and supply chain productivity. We generated $5.4 billion in net sales in fiscal 2023, marking a 6-year compound annual growth rate of 9.1%. At the end of last fiscal year, we posted a 21.5% adjusted EBITDA margin. That's an increase of 100 basis points since the company's spin-off, regaining margin strength quicker than most public food and beverage peers following the pandemic. We reported $1.2 billion of adjusted EBITDA in fiscal 2023, representing a 6-year compound annual growth rate of 10%. We're proud that we've been able to maintain a strong financial profile relative to the broader food and beverage sector and the market at large. As of October 6, Lamb Weston's total shareholder return was 221% since our spin-off. We significantly outpaced the S&P 500 and the S&P Food and Beverage indices, and we've achieved these results by leveraging our competitive strengths, leading market share, effective price mix management, strong cash flow generation to support growth and to return cash to our shareholders. We have expanded our global footprint and our production capabilities and our capital allocation has created a more profitable, high-growth business, well positioned to support our customers. And finally, we are led by an experienced leadership team that is laser-focused on maximizing shareholder value as we execute our strategic vision. Turning to our top and bottom line growth opportunities. There's numerous drivers that give us confidence in our ability to deliver sustainable, profitable growth and cash flow over the long term. First, we will continue to strategically invest in our business and transform our capabilities and enhance our capacity to support demand. Second, we remain focused on better serving our existing customers and winning with the new ones by driving improvements in customer and product mix and supply chain productivity initiatives. Third, we will continue to capitalize on our global scale and benefit from the integration of our acquisition in Europe and the new expansions that we'll be opening in Idaho, Argentina, China and the Netherlands. And finally, we'll leverage the innovation leadership that we've gotten to unlock opportunities to grow the total addressable market. Further supporting our growth, we are enhancing our ability to win in the attractive and growing international markets. We anticipate net sales in our International segment to grow to 34% of total sales by the end of fiscal 2024. That's up from 15% in 2022. Sales in the International segment increased with the incremental sales from the European and the Argentina acquisitions, and they'll continue to grow as our new capacity expansions come online. Similarly, adjusted EBITDA in our International business is anticipated to be about 20% at the end of fiscal 2024. That's up from 10% in 2022. We are confident in our ability to continue to drive sales that are supported by our long-term algorithm aimed at delivering both top and bottom line growth. In fiscal 2023, we grew our organic sales an impressive 20%. Our price/mix increased 26% as we continue to benefit from pricing actions across each of our business segments to counter input and manufacturing cost inflation. In fiscal 2024, we continue to expect strong net sales with a 6.5% to 8.5% increase in net sales, excluding acquisitions. So while the overall potato category continues to be solid, we have made decisions to exit primarily for low-margin, low-profit accounts. That will result in our full year fiscal 2024 volume, excluding acquisitions, to be down mid-single digits compared with the prior year. But we do expect that volume trends will continue to improve as the year progresses and into 2025. As we can lap that lower-margin business that we chose to exit in the second half of fiscal 2023 as well as we gradually backfill that low-profit business. We're confident in the decisions we made to exit that business as the right strategic business for Lamb Weston over the long term. We're also confident that we will hit our long-term targets of net sales growth in the low to mid-single digits with volume in the 2% to 4% range and price/mix in the 2% to 3% range in an inflationary environment. We're pleased with our adjusted gross margin performance. In just 1 year, we increased our adjusted gross margin 7.5% to 28% in fiscal 2023 from 20.5% in 2022. We achieved this performance despite the dilutive impact of the EMEA acquisition in the fourth quarter and the ongoing macroeconomic inflationary pressures. We anticipate that our gross margins will increase in fiscal 2024 and continue to expand into 2025. We have multiple strategic levers that we can pull to drive margin improvement, including the supply chain productivity initiatives that Mike discussed with our Win as 1 program, optimizing our global manufacturing network over the long term, which will be aided by a global ERP system once it's fully implemented, continuing to modernize our production lines to support premium product demand and our revenue growth management initiatives. So one of the key areas that we pulled during the pandemic was our revenue growth management initiative. We started in our food service business in North America, and we see further opportunity to expand this across our business. We looked at how menu pricing for our products were increasing compared with how we were pricing. We've been increasing our prices in line with the consumer price index, which equated to an average net price increase of about 3%. However, the average increase in menu pricing during that same period was 5%. As a result, we lost some of our share of that value pool that our products were creating. So we also took a look at our contract structures. And on this slide, we provide an end-market example of the impact of our fixed price contracts. You can see that this customer continue to increase their menu prices for French fries from $2.44 to $3.59 between the first quarter of 2021 and 2023. But based on the terms of our fixed price contract, which we honored while absorbing that double-digit cost inflation, we continue to provide these same French fries at a fixed amount per serving. The increase in menu prices expanded the value pool $30 million annually. And because of that fixed price contract, the customer retained all of that value. On the chart on the right, you can see that this customer took the cost of french fries to the end customer, up 33%, more than any other item on the menu. So we began focusing on the 4 key principles of revenue growth management. When all 4 of these principles are working together, sustainable revenue growth can be achieved. We started looking at price, utilizing internal, external data, looking at contract structures, menu pricing and elasticity in response to the pricing actions we were taking, prioritizing our product mix, evaluating our promotional investments, where they boosting brand loyalty, leveraging discounts to drive market share and growth. We're measuring volume elasticity in response to our pricing actions. This slide demonstrates that volume elasticity in response to our pricing actions to date have been generally low. As a result, we are confident that our strategies are working. We'll continue to remain nimble and responsive to shifts in elasticity moving forward. So since 2021, we've consistently improved our EBITDA margins across both our North America and our international segments. As of fiscal 2023, our North American adjusted segment EBITDA margin was 26.6% versus our international segment that was 15%. While the international markets are more highly fragmented than in North America, we see significant opportunity to drive margin improvement in our International segment by executing the same core principles of revenue growth management that propelled the margins in our North America segment. While the packaged food and beverage industry average SG&A is approximately 14% of sales, we are targeting a long-term SG&A goal of between 10.5% and 11%. We reported fiscal 2023 SG&A at 10.1% and we anticipate that our fiscal 2024 SG&A will be approximately 11%. It's important to note that the increase in SG&A in recent years reflects a judicious approach to investments during the peak COVID years and increasing expenses related to our information technology initiatives and our people initiatives that Tom referenced a bit ago. So now let me dive a bit deeper into our capital allocation strategy. Our business generates exceptional cash flow. At the end of 2023, net cash from operating activities was $762 million, up about $315 million from 2017 due to higher earnings and cash provided by working capital. We anticipate continued increases in operating cash flow, which we expect to be around $1 billion in 2024 with continued growth into 2025 and beyond. We remain committed to leveraging our strong cash flow generation to enable the continuation of our trajectory as a growth company. Our balanced approach to capital allocation that has supported our success to date remains consistent going forward and focuses on 3 priorities: First is growing our business by pursuing investments with attractive return profiles. Second is returning capital to our shareholders through dividends and share repurchases. Since spin, we've returned more than $1.2 billion to shareholders through the first quarter of fiscal 2024, and we've increased our dividend every year since spin. Finally, maintaining a solid balance sheet and an attractive capital structure. As it relates to our capital expenditures, we invest to upgrade our capabilities at our factories and add capacity to better serve our customers to mitigate supply chain risk. Leading up to fiscal 2020 when the COVID pandemic hit, our capital expenditures averaged about 9% of sales. From fiscal 2023 to 2025, when our capital expenditures are expected to average between 12% to almost 14% of sales, these are considered peak investment years that offset the underinvestment during COVID between the years of 2020 and 2022. The 2023 to '25 expenditures largely relates to adding 1.2 billion pounds of capacity in the U.S. China, Argentina and the Netherlands to meet demand and improve our cost to deliver to our customers. Beginning in fiscal 2026, we expect capital expenditures will begin to normalize towards 9% of sales, 3% of expected sales is expected to be for maintenance of our asset base. And then the remainder will relate to asset modernization and technology investments, including the ability to make premium products such as coatings that will drive our margins. So M&A is an important complement to our growth strategy. We seek opportunities to accelerate growth, to expand our manufacturing footprint and to lower our overall cost to deliver to our customers. We use a clear framework when we're pursuing M&A opportunities with the ultimate goal focused on an attractive return on our investment. We look for flexible production capabilities, access to key markets, innovation to further our leadership position and channel access. Importantly, it's the ability to pursue these types of investments. It's only made possible because of the significant cash generation and the commitment to maintaining balance sheet strength and flexibility. So creating long-term sustainable shareholder value. It's a top priority for our team. We're pleased to have returned $1.2 billion to our shareholders through share repurchases and dividends since spin. We use stock repurchases to protect the long-term returns of our shareholders. With stock-based compensation expected to be the primary driver of our share count, we expect to repurchase about $60 million a year. But as we demonstrated in the first quarter of this year, we may make opportunistic purchases. We remain committed to returning cash to our shareholders, and we are targeting a dividend payout ratio of 25% to 35% of net income and making opportunistic share repurchases under our newly expanded $500 million authorization that we announced this morning. So our strong balance sheet, it's the foundation from which we are able to execute our allocation plan. We ended the first quarter of 2024 with ample liquidity and a low leverage ratio. We had about $160 million of cash and no borrowings under our $1 billion U.S. revolver. Our net debt was $3.3 billion at the end of the first quarter, which puts our leverage ratio at 2.3x. We're targeting a leverage ratio of up to 3.5x, but we are comfortable going beyond this range for the right opportunity as long as there's a quick path to deleveraging. We feel comfortable with where we're at in our current leverage as it does preserve optionality for us as we move forward. We do maintain an attractive debt maturity schedule with about 85% of our debt maturing after 2026. 60% of our debt is fixed rate, while the other 40% is floating. So let's move to our fiscal 2024 and our long-term outlook. As you've heard today, our momentum has continued into 2024. We laid out during our first quarter earnings call last week that we raised our financial targets to net sales of a record $6.8 billion to $7 billion, adjusted EBITDA of $1.54 billion to $1.62 billion and earnings per share of $5.50 to $5.95. While we continue to expect that macro operating conditions will be challenging, we are confident in these expectations, which are supported by continued sales and strong profit growth in each of our business segments through a combination of pricing actions, mix improvement and supply chain productivity. Lamb Weston has consistently grown over the past 7 years, and we are confident in our ability to continue to meet our long-term financial goals and drive peer-leading shareholder returns. As we continue to execute our strategies that have been foundational to our success, I'm happy to introduce our long-term financial targets to deliver both top and bottom line growth. Including net sales growth in the low to mid-single digits, that will be driven by both volume and price mix. Adjusted EBITDA growth in the mid- to high single digits supported by net price realization, mix improvement, supply chain productivity and SG&A leverage and adjusted earnings per share growth in the high single digits driven by a flexible capital structure and share repurchases. To wrap it up, we believe that we are positioned for long-term growth and success. As we believe these targets provide significant value creation upside for our shareholders. So with that, I'm going to turn it back over to Tom for some closing remarks before we open it up for Q&A. Thank you. Tom?

Thank you, Bernadette. So our strategies and investments have positioned us well to capture our share of growth. We expect global supply and demand to remain balanced over the long term. We expect continued category growth in North America and international. We have a solid track record of performance, a focused and seasoned executive leadership team, and we'll maintain our disciplined returns-based capital allocation. On behalf of all the Lamb Weston employees around the globe, I want to thank you again for joining us here today and your continued interest in Lamb Weston. With that, I'm going to turn it over to Dexter as we set up for Q&A.

Thanks, Tom. We're going to get some chairs set up over here, and we're going to have a Q&A with Tom, Bernadette and Mike, half hour, half hour plus. So if you wait until your call upon, and we're going to get a microphone to you, so we can have your question recorded on the webcast as well. So just give us 1 minute, and we'll be ready to go.

Andrew.

Thank you. Good morning. Maybe to start off, I think based on your target leverage ratio and free cash flow generation, it looks like you'll have over $4 billion, maybe even $4.5 billion of cash available or about 30% of your market cap. So I guess in that context, $500 million of share repurchase maybe seems a bit low. I guess, why wouldn't that be higher? And what do you plan to do with the cash? And then I've got a follow-up.

No, thanks for the question, Andrew. As we evaluated and as I spoke earlier, we're focused on a disciplined capital approach. And we're certainly very comfortable with where we are operating in the 2s, understand that we've got room to go there. But the main reason there is to preserve optionality as we move forward. We're going to continue to go through our capital allocation priorities in terms of investing in our business first and then returning cash to our shareholders. Our intent, as we return cash to our shareholders, is really to offset management dilution at this point in time. So the $500 million seems very appropriate. However, if we want to take advantage of different markets and opportunistically buy back, we will at that time.

And then you're obviously now getting close to or eclipsing sort of your pre-COVID gross margin and EBITDA margins. I guess, what do you think the right longer-term margin structure is? And will future increases come primarily from international? Or is there still some room in North America as well?

Yes, Andrew, I think as we have worked really hard in the last 15 months to rebuild our margin and improve our customer portfolio mix and product mix, I believe, in North America, we'll continue to focus on that and grind it higher where we can. I think the opportunity that we really see, as Bernard had alluded to in her remarks, is really applying the revenue growth management strategies to our European and international business. And it's a real disciplined approach. And I think that's going to have a big unlock for us in our international markets around the globe, specifically in Europe.

Rob?

Rob Moskow, TD Cowen. Two questions. I noticed in the slides that North America volume didn't grow much in 2022. And it looks like probably wouldn't grow much in 2023. And I want to know if you could focus a little more on that and give us a sense like do you think that you would hit your volume number in fiscal '24, if not for walking away from the unprofitable volume. Would you still be in your long-term range? Or would you be a little bit below.

Yes. I absolutely believe that we would. Had we not walking away from that business, but it was the right thing to do as we walk through our disciplined strategy as a revenue growth management because it was very important for us to get our margins back up to where they needed to be.

Okay. And 1 follow-up. You made some assumptions on industry expansion over the next several years. And obviously, you know what you're doing. Are there any new updates on what the rest of the industry is doing right now? And how quickly do you think that they will start adding?

Yes, Rob, I think our what we know right now, we've included in our projections over the next -- through 2027. The thing to remember is from announcement to start-up is typically 2-ish years. And that assumes no equipment delays and all those kind of things. So as we looked at the market, and obviously, we have a pulse on the market, we're trying to understand what our competitors are doing. So everything that we laid out today is what we know as of right now. And we keep a pulse on it. And certainly, if things change, we evaluate what that means to the overall industry.

Tom?

Tom Palmer, JPMorgan. I wanted to ask on the M&A side. I think for a good number of years, you've kind of acknowledged the potential for M&A. We haven't seen a lot up to this point. I guess what does the pipeline look like? Are you seeing kind of a more attractive opportunity now that the EMEA business is kind of fully under your umbrella? And is that where we should think about the greatest potential for M&A as we look out over the next few years?

Yes, Tom. It's -- certainly, the first step as we've been consistently saying is to consolidate our joint venture in Europe. And that gives us a complete full control of that platform to continue to look at other opportunities in Europe. That's been consistent. I've said it. I think that's a strategic path forward in M&A. It's -- I believe it has a tremendous unlock. But we're dealing with privately held companies, and that has some different dynamics that you got to work through if anything starts happening. So we're focused on it. We've got a pulse on the market. I think I'm pretty clear the industry understands what our aspirations are, but you got to have somebody on the other side of the table that wants to do a transaction and we'll stay disciplined and if that starts happening with our capital and multiple and all those kind of things. So -- so it's always on the radar, and we're going to continue to work it as best we can.

And maybe just a follow-up on your longer-term targets, what time line should we be thinking about that at least penciling in your business starts to revert towards those? Is this at this point, maybe more a 2026 type time frame?

Yes. As it relates to long-term targets, it's certainly going to take '25 -- the end of '25 into '26 as we work through these contracts. And again, we're going to continue to work through our revenue growth management, but we're focused on growing both the top line and the bottom line in the right manner.

We call in order. First we'll go to Pete, then Adam and then Matt. And Tom has blown up his drink.

Pete Galbo from BofA. Tom, I wanted to go back to maybe follow-up on Rob's question on the capacity adds. So a 2-part question. Really first, kind of based on what you said today about adding more specialized product and obviously, that, I think, lowers kind of how much product you can actually produce. Are these numbers you're giving us kind of gross capacity adds and so the net as you do more specialized in terms of add might be a bit lower. Then the second part of that is our understanding is the existing asset base across the industry is pretty old. So just does this assume any potential, I don't know, shutdowns or mothballing of kind of old capacity as it hits the end of useful life.

Yes. So the first part of the question, this is total capacity. So all French fries aren't created equal in terms of run rates and throughput. And there's a difference between coated. It slows the lines down as we stated. We're not going to say how much specifically. We don't disclose that. But they're higher margin. So the trade-off is profitable. And in terms of aging assets in the industry, it is. And we've been really disciplined over time to continue to modernize our plans. And we've been doing that pretty consistently over the last 10 years. And the capital targets CapEx that Bernadette Madarieta, alluded to, as we look over the next 5 years, we have a very methodical strategic plan, and that does include some of the modernization things that some -- the equipment at times it just needs to be replaced. And so all that's taken into consideration as we think through our CapEx targets going forward.

And Mike, maybe more of a lighthearted question. But just on Chipotle and Starbucks, just are those test products? What are they? Can you give us a little bit more detail on what's happening there?

Yes, quickly, at Starbucks, it's a diced item that's going into their breakfast wrap. In Chipotle, it's actually a corn item. And as a reminder, on our farms, some of our rotational crops are vegetables. And so it's an entry point into that area.

Adam Samuelson, Goldman Sachs. Maybe just the first question, clarifying on the long-term capital allocation. The EBITDA and EPS are entirely organic, and the share repurchase in the EPS line there is largely the -- under the current authorization. So it doesn't contemplate you utilizing the full extent of what seems to be excess free cash flow nor the sizable debt capacity that the company maintains today. And second, within that bridge between EBITDA and EPS, how do we think about D&A growing. This year, it's a little less than 5% of sales. Your CapEx is north of 10%; long-term CapEx, 9% of sales. So how do we think about the ramp in D&A kind of diluting that EBITDA to EPS growth?

Yes. So the first question, I think, was related to capital allocation and the amount of share repurchases. You're absolutely correct in terms of it anticipates we're going to buy back the $60 million a year, which will offset management dilution. We haven't taken anything over and above into that as it relates to our targets today. As I said, we always remain opportunistic. But our goal is to offset management dilution. The second question that you had, remind me.