U.S. Markets closed

Edited Transcript of LW.N earnings conference call or presentation 2-Oct-19 2:00pm GMT

Q1 2020 Lamb Weston Holdings Inc Earnings Call

EAGLE Oct 3, 2019 (Thomson StreetEvents) -- Edited Transcript of Lamb Weston Holdings Inc earnings conference call or presentation Wednesday, October 2, 2019 at 2:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Dexter P. Congbalay

Lamb Weston Holdings, Inc. - VP of IR

* Robert M. McNutt

Lamb Weston Holdings, Inc. - Senior VP & CFO

* Thomas P. Werner

Lamb Weston Holdings, Inc. - President, CEO & Director

================================================================================

Conference Call Participants

================================================================================

* Adam L. Samuelson

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Andrew Lazar

Barclays Bank PLC, Research Division - MD & Senior Research Analyst

* Bryan Douglass Spillane

BofA Merrill Lynch, Research Division - MD of Equity Research

* Christopher Robert Growe

Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Analyst

* David Mandel

Consumer Edge Research, LLC - Research Associate

* Thomas Hinsdale Palmer

JP Morgan Chase & Co, Research Division - Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good day, and welcome to the Lamb Weston First Quarter 2020 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Dexter Congbalay, VP Investor Relations of Lamb Weston. Please go ahead.

--------------------------------------------------------------------------------

Dexter P. Congbalay, Lamb Weston Holdings, Inc. - VP of IR [2]

--------------------------------------------------------------------------------

Good morning, and thank you for joining us for Lamb Weston's First Quarter 2020 Earnings Call. This morning, we issued our earnings press release, which is available on our website, lambweston.com.

Please note that during our remarks, we'll make some forward-looking statements about the company's performance. These statements are based on how we see things today. Actual results may differ materially due to risks and uncertainties. Please refer to the cautionary statements and risk factors contained in our filings with the SEC for more details on our forward-looking statements.

Some of today's remarks include non-GAAP financial measures. These non-GAAP financial measures should not be considered a replacement for and should be read together with our GAAP results. You can find the GAAP to non-GAAP reconciliations in our earnings release.

With me today are Tom Werner, our President and Chief Executive Officer; and Rob McNutt, our Chief Financial Officer. Tom will provide an overview of our performance as well as some comments on the current operating environment. Rob will then provide the details on our first quarter results.

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

--------------------------------------------------------------------------------

Thomas P. Werner, Lamb Weston Holdings, Inc. - President, CEO & Director [3]

--------------------------------------------------------------------------------

Thank you, Dexter. Good morning everyone, and thank you for joining our call today. We're pleased with our solid start to the year, with each of our core business segments driving volume, price/mix and earnings growth. Specifically, sales increased 8% behind strong volume growth; EBITDA, including unconsolidated joint venture increased 9% driven by strong sales growth and higher gross profit; diluted earnings per share increased 8%, reflecting operating gains; and finally, we generated nearly $240 million of cash flow from operations.

These results provide us with a good foundation to deliver on our full year commitments. They also reflect how our commercial and supply-chain teams continue to execute on our strategic and operational objectives.

For example, in our Global segment, we drove strong growth by supporting customers in North America and internationally. We also continue to grow sales of limited time offering products in the U.S. and key markets in Asia, despite lapping a very strong prior year quarter. In our Foodservice segment, we delivered our third consecutive quarter of volume growth behind sales of Lamb Weston branded products as our direct sales force continues to strengthen relationships with customers.

In retail, our Alexia, Grown In Idaho and licensed branded products each grew volume. Grown In Idaho continue to expand distribution, helped in part by the recent launch of 2 new items that are phenomenal, dipper and waffle fries. And finally, our supply chain team continued to ramp up our new 300 million-pound French fry line in Hermiston, Oregon, providing us with additional flexibility to service and upgrade other production lines that have been operating at peak capacity.

Although, we delivered a solid quarter, we did face some challenges in our supply chain. As you know, we've enjoyed the benefits of our -- of operating our manufacturing assets at very high utilization rates over the past couple of years. When possible, and without compromising food or employee safety, we've taken opportunities to divert maintenance in an order to continue to support our customers' growth. However, it has also placed a strain on our production assets. During the quarter, that's strain showed. As Rob will discuss later, we had instances of production issues resulting in unplanned maintenance and repair costs as well as some unscheduled operating downtimes. In turn, this increased our costs. Our manufacturing plants are now operating better. While we're making good progress and working through the issues that affected our performance, we expect to realize residual impact on our result in the near term.

Before turning to the operating environment, let me give you a few quick updates. First, on a preliminary basis, we believe the crop in our growing areas in the Columbia Basin and Idaho, where we source the vast majority of raw potatoes, will be consistent with historical averages. While crop yields in Alberta and Minnesota may be just below average due to weather events, we do not expect this to have a notable impact on our overall results.

So at this time, we do not expect any significant issues with the crop in North America. As usual, we'll provide an update -- updated view of the crops yield and quality, and how we expect the crop will hold up in storage when we report our second quarter results in early January. These factors are all key to determining how the potatoes perform in our production facilities, and along with contracted raw potato prices are actual cost for raw potatoes. Second, our early read on the potato crop in our growing areas in Europe is that it will be a bit below the long-term average. This is due to hot weather conditions this summer. However, despite being below average, we believe it will be better than last year's historically poor crop. As a result, we expect that Lamb Weston/Meijer's performance will gradually improve as the year progresses, as cost pressures ease in the second half of our fiscal year once the new potato crop begins to be processed.

And finally, with respect to contracts with our large customers, we finalized most of the agreements that are up for renewal this year. In aggregate, we're satisfied with how the discussions progressed and the terms on which we ultimately agreed including price. These contracts reflect our balanced approach to improving price and mix in order to offset inflationary pressures, and importantly, to maintain and reinforce our strategic customer relationships.

Now turning to our operating environment. We believe the current global environment is generally favorable. We believe industry capacity utilization rates in North America remain elevated during the first quarter. For the remainder of fiscal 2020, we anticipate that new capacity in North America will allow processors to operate their facilities closer to normalized rates, but utilization rates will remain elevated. With respect to demand growth in our fiscal first quarter was strong. In the U.S., positive restaurant traffic trends continued to be supported by low unemployment. Quick-serve restaurant traffic growth was especially strong, led by growth at chicken based outlets. Growth in French fries servings was also encouraging. These trends help drive our Global segment strong volume growth in the quarter. In our key international markets, demand continued to grow in line with recent trends. And in Europe, demand growth was solid despite higher frozen potato prices as a result of last year's crop. While recent frozen potato demand has been higher than average, we're monitoring signs of softening macroeconomic conditions, which may temper demand growth towards more normalized rates. However, French fry demand has proven somewhat resistant to the effect of challenging economic times as most fries are consumed at QSRs. Generally, consumer traffic at QSRs tends to weather periods of slower economic growth better than fast casual and other casual restaurant formats. That's why we've stayed in line with our strategic QSR customers and partnered with up-and-coming QSRs in many of our key markets. As a result, along with our broad market coverage, advantage global manufacturing footprint, focus on execution and commitment to serving our customers, we believe we're well positioned to deliver our financial objectives for the year and create value for our stakeholders over the long term.

So in summary, we delivered a strong start to the year despite some manufacturing-related challenges. The potato crop in North America is in line with historical averages, and the crop in Europe has improved versus the prior year. We're satisfied with the outcome of customer contract renewals, and we're on track to deliver on our fiscal 2020 financial targets.

And one more thing before I turn it over to Rob. Earlier this year, Rick Martin, our Global Head of Supply Chain, told me of his intention to retire. For the past 25 years, he's been a tremendous asset to Lamb Weston and especially to me through the last 3 years as we transitioned to a standalone public company. Rick's been a steady hand leading the supply chain organization during our transition, including billing and starting up several new alliances to support our growth. He's also been a tireless champion for safety in our manufacturing facilities, and a great partner for me and my management team. On behalf of Lamb Weston, we wish Rick a happy and healthy retirement. And as we announced a couple of months ago, we're welcoming Gerardo Scheufler as our new supply chain leader. Gerardo has more than 25 years of supply chain experience, most recently as the Vice President of Global Operations at Mondelez International, where he oversaw major global restructuring program to optimize the global supply chain footprint that included more than 50,000 employees at more than 150 global locations. Prior to Mondelez, he spent more than 20 years at Procter & Gamble in a variety of roles of increasing responsibility. We're happy to have Gerardo join the team and to leverage his experience as we make progress against our strategic plan.

Now let me turn the call over to Rob to provide details on our first quarter results.

--------------------------------------------------------------------------------

Robert M. McNutt, Lamb Weston Holdings, Inc. - Senior VP & CFO [4]

--------------------------------------------------------------------------------

Thanks, Tom. Good morning, everyone. As Tom noted, we're pleased with our solid start to the year. Net sales increased 8% to $989 million, with growth in each of our business segments. Volume increased 6%, led by growth in our Global segment. Together, our 2 acquisitions in Australia, Marvel Packers and Ready Meals, added about a point of volume growth. Price/mix was up 2% due to pricing actions and favorable mix.

Our strong sales growth drove an $18 million or 8% increase in gross profit. Specifically, higher prices, volume growth and favorable mix drove the increase, more than offsetting the impact of higher manufacturing costs due to inefficiencies, cost inflation and higher depreciation expense associated with our new production line in Hermiston. It's important to note that the increase in price was enough to offset input cost inflation on a dollar basis.

In addition, the increase in gross profit includes nearly $2 million benefit from unrealized mark-to-market adjustments related to commodity hedging contracts compared to a $5.5 million loss in the prior year period. While we drove a solid increase in gross profit dollars, our gross margin percentage was down a modest 10 basis points to 25%. However, excluding the mark-to-market adjustments, it was down 80 basis points.

The gross margin decline, excluding the mark-to-market adjustments, was primarily driven by manufacturing inefficiencies. As Tom noted earlier, these inefficiencies were largely a result of the strain that we've placed on our assets by operating at very high utilization levels over the past few years. In the quarter, we incurred higher maintenance, repair and related costs such as additional labor expense. We also had higher-than-normal periods of unscheduled operating downtimes.

Together, both scheduled and unscheduled maintenance affected our production levels, which in turn, impacted our fixed cost absorption, raised overall maintenance cost and lowered recovery rates. Most of our plants are now operating at more normal levels. In addition, getting our new Hermiston line operational and qualify to make a range of products has provided more flexibility across our network, and the overall transition to processing the new potato crop is going well. Nonetheless, we'll continue to realize some carryover effect from these manufacturing inefficiencies on gross profit as we make progress on correcting these issues over the coming months, and as we work through finished goods inventories early in the second quarter.

SG&A expense increased less than $1 million to about $79 million. The increase in SG&A was due to higher expenses related to information technology services and infrastructure, including approximately $1 million associated with designing a new enterprise resource planning system as well as investments in our sales, marketing and operating capabilities. We expect SG&A will increase as we ramp up the training and transition process for the new ERP system. The increase in SG&A in the quarter was largely offset by a $4 million decline in foreign exchange expense, and a $1.5 million decline in advertising and promotional expense. As a result, income from operations increased $17 million or 11% to $170 million, reflecting solid sales and gross profit growth.

Equity method investment earnings from our unconsolidated joint ventures, which include Lamb Weston/Meijer in Europe and Lamb Weston RDO in Minnesota, were $11 million in the quarter. Excluding mark-to-market adjustments, equity earnings were down about $10 million.

The decline was largely due to higher raw potato and manufacturing costs associated with last year's poor crop in Europe carrying through inventory during the quarter, more than offsetting the benefit of higher prices and volume growth. This impact is largely behind us, and we should see profitability improve in the second quarter.

So putting it all together, EBITDA, including the proportional EBITDA from our 2 unconsolidated joint ventures increased $20 million or 9% to $233 million. Operating gains by our base business along with contributions from the BSW and that Australian acquisitions drove $28 million of EBITDA growth. This was partially offset by an $8 million decline in EBITDA from our unconsolidated joint ventures. Moving down the income statement, interest expense was about $28 million which is about $1.5 million more than last year.

This increase reflects the write-off of debt issuance cost in connection with the refinancing of a portion of our term loan facility to secure lower cost and to extend the maturity date. Our effective tax rate was about 24%, consistent with our full year guidance.

Turning to earnings per share, diluted EPS was up $0.06 or 8% to $0.79. Operating gains in our base business and an approximately $0.03 benefit from the BSW Acquisition drove the increase. This was partially offset by lower equity earnings.

Now let's review the results for each of our business segments. Sales for our Global segment, which includes the top 100 U.S.-based change -- chains as well as all other sales outside of North America, were up 11%. Volume grew 9%, with growth driven by higher sales, including increased sales of limited time offering products to strategic customers in the U.S. and key international markets. It also includes a 2-point benefit from Marvel Packers and Ready Meals acquisitions in Australia. Price/mix rose 2%, primarily reflecting pricing adjustments associated with multiyear contracts. Global's product contribution margin, which is gross profit less advertising and promotional expense, increased $8 million or 9%. Favorable price/mix and volume growth drove the increase, which was partially offset by higher manufacturing cost, input cost inflation and higher depreciation expense associated with our Hermiston production line.

Sales for our Foodservice segment, which services North American food service distributors and restaurant chains outside the top 100 North American restaurant customers, increased 3%. Price/mix increased 2%, reflecting improved mix and a benefit of pricing actions initiated in the fall of 2018. Volume increased 1%, led by growth of Lamb Weston branded products.

Foodservice's contribution margin was essentially flat, increasing about $0.5 million. Price/mix and volume growth offset higher manufacturing cost, input cost inflation and higher depreciation expense.

Sales in our Retail segment increased 11% driven by 8 points of volume growth behind increased sales of branded and private-label products across our portfolio. Price/mix increased 3% largely due to favorable mix and pricing actions. Retail's product contribution margin increased $6 million or 27%. Higher price/mix, volume growth and the timing of A&P spending drove the increase.

Moving to our balance sheet and cash flow, our total debt at the end of the quarter was about $2.2 billion. This puts our net debt-to-EBITDA ratio at 2.7x. With respect to cash flow, we generated nearly $240 million of cash flow from operations, that's up about 5% versus last year driven by earnings growth. We used nearly half that cash to purchase Ready Meals in Australia for about $117 million, and invested about $60 million combined in capital expenditures and IT projects.

We bought back about $5 million worth of stock or more than 72,000 shares at an average price of $66.67. Our ability to repurchase shares in the first quarter was limited since we only had a very narrow trading window in August. We also paid $29 million in dividends to our shareholders.

Turning to our fiscal 2020 outlook, as Tom noted, our financial targets are unchanged, and we remain on track to deliver our financial commitments for the year. Our targets include the contribution of a 53rd week that will benefit the fourth quarter. For the year, we continue to target sales to grow at mid-single-digit rate, primarily driven by volume and price/mix to increase in order to offset input cost inflation. We also continue to anticipate adjusted EBITDA, including unconsolidated joint ventures, to be in the range of $950 million to $970 million, with sales and gross profit growth driving the increase. We expect gross profit growth will drive a significant portion of the EBITDA increase with volume growth and favorable price/mix more than offsetting input cost inflation and higher depreciation expense as well as the effect of some manufacturing inefficiencies.

As I noted earlier, we'll continue to realize some effect from the manufacturing inefficiencies on gross profit as we work through finished goods inventories early in the second quarter.

Turning to SG&A, for the year, we continue to expect our base SG&A, which excludes advertising and promotional expense as well as the ERP investments, to be within our target of 8% to 8.5% of sales. We're targeting A&P expense to remain in line with what we spent in fiscal 2019. We also continue to anticipate total ERP spending of between $10 million and $20 million, and that it should ramp up over the course of the year depending on the pace of the implementation of the system. We continue to expect equity earnings to gradually improve as we put the challenges of last year's poor crop in Europe behind us. In addition to our expected operating gains, our outlook includes an approximately $10 million year-over-year earnings benefit from the BSW Acquisition in the first half of fiscal 2020.

Most of our other financial targets also remain the same, including total interest expense around $110 million, and effective tax rate of 23% to 24%, and total depreciation and amortization expense of approximately $175 million. We're raising our capital expenditure target to $300 million from $270 million to reflect updated spending estimates for our new ERP system and other projects.

Now here's Tom for some closing comments.

--------------------------------------------------------------------------------

Thomas P. Werner, Lamb Weston Holdings, Inc. - President, CEO & Director [5]

--------------------------------------------------------------------------------

Thanks, Rob. Let me quickly sum up by saying, we are pleased with our solid sales, earnings and cash flow growth to start the year. We're on track to deliver on our fiscal 2020 financial targets, and we remain focused on serving our customers, executing against our strategic initiatives to support long-term growth and creating value for all our stakeholders. I want to thank you for your interest in Lamb Weston, and we're now happy to take your questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) And we'll take our first question from Andrew Lazar with Barclays.

--------------------------------------------------------------------------------

Andrew Lazar, Barclays Bank PLC, Research Division - MD & Senior Research Analyst [2]

--------------------------------------------------------------------------------

So I've got just one quick one on some of the supply chain challenges, and then a broader follow-up. With the supply chain piece, you mentioned some of the higher cost you incurred. Were there any -- it didn't sound like it, but were there any, I guess, supply issues with any key customers or shorting customer product, given some of the unexpected planned downtime, things like that? Or were you able to make that up just albeit with higher cost?

--------------------------------------------------------------------------------

Thomas P. Werner, Lamb Weston Holdings, Inc. - President, CEO & Director [3]

--------------------------------------------------------------------------------

Yes. Andrew we -- this is Tom. We -- with our manufacturing footprint, you know these things unexpectedly happen. We do have the ability to move production around to other facilities. So to pointblank answer your question, there wasn't any customer disruption associated with planned downtime and the manufacturing challenges we had in the first quarter.

--------------------------------------------------------------------------------

Andrew Lazar, Barclays Bank PLC, Research Division - MD & Senior Research Analyst [4]

--------------------------------------------------------------------------------

Great. And then in the release this morning and then in your prepared remarks, you mentioned how Lamb is monitoring the potential for a softening of macroeconomic conditions that I guess, could temper frozen potato demand towards more normalized level.

--------------------------------------------------------------------------------

Thomas P. Werner, Lamb Weston Holdings, Inc. - President, CEO & Director [5]

--------------------------------------------------------------------------------

Right. Andrew, we, obviously, look at all the syndicated data, and we also have some data that we look at in the international markets, and it's exactly what I just stated this morning, we're monitoring it. And we had a great quarter in terms of traffic in the U.S. with QSRs. So it's counterintuitive to what we're concerned about economically, but it's been choppy, the last 3, 4 quarters in terms of traffic. So we're continuing to watch it. It's -- there's a lot of economic concern in the market, but right now, it's just something we monitor. But again, we had a great traffic quarter in the QSR segment in the U.S. International markets are on trend in terms of what traffic and what -- or what we're seeing in our growth, so it's just something we're monitoring.

--------------------------------------------------------------------------------

Andrew Lazar, Barclays Bank PLC, Research Division - MD & Senior Research Analyst [6]

--------------------------------------------------------------------------------

Okay. And the last piece of that would really be maybe could you remind us of what demand has been? We can see obviously what demand has been more running at, but can you remind us what you see as more normalized rates of growth in North America and internationally? And just the reason I ask is, I want to make sure how we should think about if you get to a point where there's more normalized rates, and I realize right now that's not the case. What that means in the context of some increased industry supply in the market, even though current utilization remains pretty tight, as you said.

--------------------------------------------------------------------------------

Thomas P. Werner, Lamb Weston Holdings, Inc. - President, CEO & Director [7]

--------------------------------------------------------------------------------

Yes. So Andrew, a normalized rate that we look at is 1.5% to 2.5% globally. And, obviously, there's going to be different growth rates in different markets. And just to give you context, broad-strokes, it's a GBP 30 billion market category globally. So 1.5% to 2.5%, that's a big chunk of volume growth on a normalized basis. So that's how -- when I talk about normalized growth rates, that's the window you need to think about.

--------------------------------------------------------------------------------

Operator [8]

--------------------------------------------------------------------------------

We'll now take our next question from Adam Samuelson with Goldman Sachs.

--------------------------------------------------------------------------------

Adam L. Samuelson, Goldman Sachs Group Inc., Research Division - Equity Analyst [9]

--------------------------------------------------------------------------------

So I guess, first, I wanted to just touch on the pricing discussion a little bit and in the capacity side. And in the quarter, I mean, you talked about being pleased mixed being favorable and getting pricing in to cover costs. Any additional color you can have as you've gone through additional contracting discussions with your global customers into 2020? And then the Foodservice side, the price/mix line did decelerate pretty notably from where you were last quarter, and I thought the lapping of a price increase was going to be more in the upcoming quarters. So just any color on this -- the 400 basis point deceleration in price/mix in Foodservice?

--------------------------------------------------------------------------------

Thomas P. Werner, Lamb Weston Holdings, Inc. - President, CEO & Director [10]

--------------------------------------------------------------------------------

Yes, so just generally -- Adam, this is Tom. Overall, the contracting exercise we just finished up by in large, our pricing kind of landed where we thought it was going to be. And I know there was some concern out there that with the capacity coming on that there was going to be some pressure, a lot of pressure on pricing. And by in large, where we ended up is exactly where we thought we would be. Historically, based on my experience with this business, in these times where you have a little extra capacity, yes, you are not going to get maybe the lifts that you've had in the past, the raw pricing landed exactly where we thought it would be. So I'm pleased with where all that ended up.

In terms of the Foodservice pricing deceleration, I would say it's at a more normalized level based on -- from a historical standpoint, and we've had significant price increases over the last few years based on a number of economic reasons, of business reasons. And we were able to get some pricing through as we expected. And even though it's decelerated, we're lapping some big price increases from prior year. I'm super happy where we landed on all this so I feel good about where we're positioned in terms of that. And again, the belief out there was there was a lot of concern whether or not we were going to be able to price and the team did a great job, getting it through the marketplace.

--------------------------------------------------------------------------------

Adam L. Samuelson, Goldman Sachs Group Inc., Research Division - Equity Analyst [11]

--------------------------------------------------------------------------------

Okay. I appreciate that color. And then second for me just on the potato crop said, I think you indicated in your key growing regions in the Pacific Northwest, you're comfortable with the supplies. Are there any pockets though, you talked about Alberta, Minnesota's areas where the cop might be a little weaker? Any residual impacts to the broader market or broader industry capacity utilization that could be potentially opportunities where you have potatoes that some of your competitors plants might be more challenged or any pockets of supply disruptions on that front that you could call out?

--------------------------------------------------------------------------------

Thomas P. Werner, Lamb Weston Holdings, Inc. - President, CEO & Director [12]

--------------------------------------------------------------------------------

Yes. Adam, I'm going to try to defer answering that question. We are right in the middle of harvest. And as I do in Q2, I'll give you a broader base point of view on the crop in total. All that I'll say right now, is exactly what I said on the call is, we feel good about Pacific Northwest. There is some challenges in Alberta and the Midwest, and right now, it's really about understanding how that crop is going to process. And we really just need time, another month and then we'll have a good idea, and I'll get back in Q2 like I do every year and give you point of view on whether there are challenges or not.

--------------------------------------------------------------------------------

Adam L. Samuelson, Goldman Sachs Group Inc., Research Division - Equity Analyst [13]

--------------------------------------------------------------------------------

Okay. If I could just squeeze a quick clarification. Just the other segment, the profit jumps about $5 million year-on-year. Any color on what drove that?

--------------------------------------------------------------------------------

Robert M. McNutt, Lamb Weston Holdings, Inc. - Senior VP & CFO [14]

--------------------------------------------------------------------------------

No. The other profits also includes our mark-to-market, and so the other category does and so that's really the noise in there, nothing operationally.

--------------------------------------------------------------------------------

Operator [15]

--------------------------------------------------------------------------------

We'll now move to Tom Palmer with JPMorgan.

--------------------------------------------------------------------------------

Thomas Hinsdale Palmer, JP Morgan Chase & Co, Research Division - Analyst [16]

--------------------------------------------------------------------------------

Firstly, I just wanted to ask about the higher ERP related CapEx. Is this any type of shift in terms of the spending from operating expenses to CapEx, either for this year or down the road? And then is the increase -- like a pull forward of expenses or just a outright increase in terms of expected spending for the ERP? Just some color on that would be great.

--------------------------------------------------------------------------------

Robert M. McNutt, Lamb Weston Holdings, Inc. - Senior VP & CFO [17]

--------------------------------------------------------------------------------

Yes, Tom, the ERP project, and again recognized the accounting around those kinds of things in computer systems has changed here recently. And so some of that is, when you're doing these licenses gets put into SG&A expense and then there's some of the things that go into CapEx. So there's a little bit change in the accounting standards, but from us, for our spending is, we're exactly on plan, as expected, and we're very deliberately going through and making these upgrades. And so the adjustment to the CapEx is just -- we've got a little more clarification and specificity over the spending for that project and so that's where we raised our CapEx for to (inaudible) that as well as some other project work we're doing.

--------------------------------------------------------------------------------

Thomas Hinsdale Palmer, JP Morgan Chase & Co, Research Division - Analyst [18]

--------------------------------------------------------------------------------

Okay. I wanted to also ask just on the volume side. You called out both planned and unplanned downtime for maintenance, but your volume growth was -- didn't seem to be negatively affected by a large amount. Why was this, and should we expect volume growth to decelerate as we look at the remainder of the year? Or do you think these rates are -- you are able to maintain them?

--------------------------------------------------------------------------------

Thomas P. Werner, Lamb Weston Holdings, Inc. - President, CEO & Director [19]

--------------------------------------------------------------------------------

Well, just in terms of, kind of what I said earlier, Tom, the great thing about Lamb Weston and our diversified asset base is when we have some of these challenges in the business, with the startup at Hermiston that gives us flexibility in terms of capacity -- additional capacity, we're able to move production around, if you will. So we didn't impact customers, and tend to the needs of the unplanned downtime. So you're not going to feel the impact in the quarter because we're able to flex our asset base in terms of production. The -- in terms of volume expectations going forward, we're very prudent in our forecast and our outlook. We had a strong volume quarter. It was -- a lot of it was driven by strong QSR traffic. So I would not take this quarter and extrapolate it out because we have remained prudent in our outlook base on what we think volume is going to be for the year.

--------------------------------------------------------------------------------

Thomas Hinsdale Palmer, JP Morgan Chase & Co, Research Division - Analyst [20]

--------------------------------------------------------------------------------

Okay. So just to clarify. It sounds like you're essentially not factoring in this 5% growth just to be safe on the traffic side? Or are there specific reasons that volume was particularly strong this quarter and you do not see those recurring?

--------------------------------------------------------------------------------

Thomas P. Werner, Lamb Weston Holdings, Inc. - President, CEO & Director [21]

--------------------------------------------------------------------------------

Again, Tom, we had -- the traffic in the quarter was as good as we've seen it. And my -- what we do as a company is we're very prudent in our outlook. And these traffic trends, if you look at the syndicated data, they can turn on a dime. So yes, we're monitoring our customers, yes we have an outlook on what our customers were thinking about doing in terms of end market promotional activity, but we will always be prudent in our projections going forward, and that's -- historically, that's what we've done, and that's what we're going to continue to do.

--------------------------------------------------------------------------------

Operator [22]

--------------------------------------------------------------------------------

Our next question comes from Chris Growe with Stifel.

--------------------------------------------------------------------------------

Christopher Robert Growe, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Analyst [23]

--------------------------------------------------------------------------------

Just wanted to follow-up a little bit on the -- just a couple of questions around volume. You talked about this kind of 1.5% to 2.5% global growth and it may kind of gravitate back towards that level. Do you have -- like what volume growth was globally in the quarter? I think you said about 5% traffic growth. Was that a U.S. comment, or was that a global comment?

--------------------------------------------------------------------------------

Thomas P. Werner, Lamb Weston Holdings, Inc. - President, CEO & Director [24]

--------------------------------------------------------------------------------

That was a U.S. comment.

--------------------------------------------------------------------------------

Christopher Robert Growe, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Analyst [25]

--------------------------------------------------------------------------------

Okay. Go it. And then it would seem like based on your volume performance, you gained significant market share. Did you give a little bit of breakdown of volume by international versus U.S? Was -- were they above the same? Was one better than the other?

--------------------------------------------------------------------------------

Dexter P. Congbalay, Lamb Weston Holdings, Inc. - VP of IR [26]

--------------------------------------------------------------------------------

Chris, it's Dexter. International was stronger overall than domestic, as you would expect. And I would say a little bit of meeting between so -- but the category of raw I mean, normalized is 1.5% to 2.5% it had -- the category has been a little bit better than that over the last, call, 9, 12 months. I think we've talked about that before, and that's why we're saying that -- in our prepared remarks, we said, you've seen higher than average category growth, particularly this past quarter, and obviously, we were part of beneficiary to that as well.

--------------------------------------------------------------------------------

Christopher Robert Growe, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Analyst [27]

--------------------------------------------------------------------------------

Sure, that make sense and I think you're just trying to prudent in your expectations going forward for the category if I heard that properly, so that makes sense. And then just one other question if I could ask SG&A. You talk about SG&A in a less advertising, less ERP. What was that on that basis in the first quarter? I guess what I'm just trying to understand, is the ERP spending sort of picking up throughout the year? SG&A was a little below than what I thought for the year -- for the quarter, which is good. I just want to get a sense of what it was on the basis of which you're modeling for the year?

--------------------------------------------------------------------------------

Thomas P. Werner, Lamb Weston Holdings, Inc. - President, CEO & Director [28]

--------------------------------------------------------------------------------

Yes. SG&A in the first quarter, ex A&P, and I don't want to have an extra million dollars of ERP spend, but it was about 7.5% ex-A&P, just put that in the context, last yearQ1 was $78 million -- $78 million sorry.

--------------------------------------------------------------------------------

Robert M. McNutt, Lamb Weston Holdings, Inc. - Senior VP & CFO [29]

--------------------------------------------------------------------------------

Yes. Chris, I would say that anticipate that the ERP spend is going to increase over the course of the balance of the year, and so that $10 million to $20 million I talked about, that's going to take place really in the back half of the year. So you will see the growth.

--------------------------------------------------------------------------------

Operator [30]

--------------------------------------------------------------------------------

We'll now take our next question from Bryan Spillane from Bank of America.

--------------------------------------------------------------------------------

Bryan Douglass Spillane, BofA Merrill Lynch, Research Division - MD of Equity Research [31]

--------------------------------------------------------------------------------

So couple of questions. I guess the first one just as we've touched on pricing a couple of times in the quarter, we had heard that some of your competitors had put some price increase letters out in the food -- what would be I guess, kind of relative to the Foodservice segment to you. I guess, like, during the course of the quarter so is that something you've seen and is there a potential like as for some more price in -- incremental pricing in that segment as we move forward?

--------------------------------------------------------------------------------

Thomas P. Werner, Lamb Weston Holdings, Inc. - President, CEO & Director [32]

--------------------------------------------------------------------------------

Yes. Bryan, it's Tom. I'm not going to get into specifics about pricing and competitive pricing, but we executed our planned pricing in the marketplace across all of our segments as we normally do. And I will tell you, like I said earlier, I'm pleased with how all that -- how the team did, they executed it. So we'll start seeing that pricing in the marketplace here. It takes a while for the pricing to get in the marketplace, and so we'll start seeing the benefit of that, but it does take a while from the time we announce it till it actually starts flowing through to the business. But we've executed across all of our segments on the pricing that we felt we could get through.

--------------------------------------------------------------------------------

Bryan Douglass Spillane, BofA Merrill Lynch, Research Division - MD of Equity Research [33]

--------------------------------------------------------------------------------

So just to be clear. So whatever it was announced, is it really even reflected in what we saw in this quarter's results because it's going to take some time to flow through?

--------------------------------------------------------------------------------

Thomas P. Werner, Lamb Weston Holdings, Inc. - President, CEO & Director [34]

--------------------------------------------------------------------------------

That's correct, Bryan.

--------------------------------------------------------------------------------

Bryan Douglass Spillane, BofA Merrill Lynch, Research Division - MD of Equity Research [35]

--------------------------------------------------------------------------------

Okay. And then second on potato supply. I know you commented on your growing regions, I guess, in the trade press it seems like the Eastern Canada crop may be not as good. So can you just kind of talk about how -- if there is tight supplies and potatoes on the East Coast, just how that affects the industry, right? Is it possible that some of your competitors that are more East Coast dependent will be kind of tight on potato supply? And just how that affects the whole supply demand dynamic in the market?

--------------------------------------------------------------------------------

Thomas P. Werner, Lamb Weston Holdings, Inc. - President, CEO & Director [36]

--------------------------------------------------------------------------------

Yes, Brian. So again, it's early on, and there's been some weather challenges in Canada and Midwest and the East. And it does put pressure on raw potato supply, and it causes some unnatural things to happen, like shipping potatoes across the country. And potatoes, -- when you ship potatoes, they don't travel very well. So as potentially the competitors are facing these issues, historically, they have a shared supply, but they have to do some unnatural things and increase our costs. And typically, my experience when that goes on, we haven't seen a lot of disruptions. Do we get a few calls from customers here and there? Yes we do, but typically the competitive set, even though they have to do unnatural things and incur cost by shipping potatoes across the country, they're going to support their customers, too. But it's really comes down to, it pressures their margins.

--------------------------------------------------------------------------------

Robert M. McNutt, Lamb Weston Holdings, Inc. - Senior VP & CFO [37]

--------------------------------------------------------------------------------

Bryan, I'm sorry. I'd just add to that. That in terms of the impact on us, I mean because we contract such a high percentage, high 90% of our raw ahead of the season. Going into the season, there really isn't going to impact our cost structure, even though their pulling potatoes may be out of Idaho or something.

--------------------------------------------------------------------------------

Bryan Douglass Spillane, BofA Merrill Lynch, Research Division - MD of Equity Research [38]

--------------------------------------------------------------------------------

Okay. And then just a last one for me, may be, Robert, if you could help a little bit, the gross margin in the first quarter, I guess, there was a few kind of one off items that affected gross margin, right? You mentioned the supply chain inefficiencies as being one of them. I think tariff's also creped in this quarter and would've affected gross margins. Can you just give us a sense of how much of was pressuring gross margin in the first quarter, the magnitude of what it was? And I guess it's going to linger a little bit in the 2Q. And then how much we might get back if things are more normal in the back half of the year? Just trying to understand how much of the gross margin pressure was kind of more transient in nature versus when it's carried through the year?

--------------------------------------------------------------------------------

Robert M. McNutt, Lamb Weston Holdings, Inc. - Senior VP & CFO [39]

--------------------------------------------------------------------------------

Yes. If you take the 80 basis points down that I called ex the mark-to-market, ex the noise in the manufacturing facilities, we would've been modestly positive in terms of gross margin, percentage growth, right?

--------------------------------------------------------------------------------

Bryan Douglass Spillane, BofA Merrill Lynch, Research Division - MD of Equity Research [40]

--------------------------------------------------------------------------------

Okay. And some of that will kind of linger into the second quarter, but we should sort of be through that by the time we get to the second half?

--------------------------------------------------------------------------------

Robert M. McNutt, Lamb Weston Holdings, Inc. - Senior VP & CFO [41]

--------------------------------------------------------------------------------

Exactly.

--------------------------------------------------------------------------------

Operator [42]

--------------------------------------------------------------------------------

We will now take our next question from David Mandel with Consumer Edge Research.

--------------------------------------------------------------------------------

David Mandel, Consumer Edge Research, LLC - Research Associate [43]

--------------------------------------------------------------------------------

So just to pick up on the tariffs and the slowing growth possibly reverting to normalized rates? I was wondering, how prudent is that exactly. I mean if there is a macro slowdown and tariffs are issued in export market particularly, China, is the slow down to normalized rates really prudent? Or could it get even worse?

--------------------------------------------------------------------------------

Thomas P. Werner, Lamb Weston Holdings, Inc. - President, CEO & Director [44]

--------------------------------------------------------------------------------

Yes, David. The -- with all addressed tariffs questioned first, we -- with all the tariffs discussions and everything that's going on, we have a pretty sizable business in China, obviously we got a manufacturing plant in China. And we have executed our contingency plan as the tariffs rates change so we've adjusted production. And it's been -- how we've been impacted, absolutely have. It's been immaterial. So the team's done a great job looking at ways to mitigate. Tariff increases on French fries specifically. So nothing material in the tariffs right now.

The second part of your question is -- I'll answer it. It's interesting, I'll give you a perspective. When you go back 10, 11 years when we had the financial crisis and the interesting thing in our business is a little bit, what I said earlier in my prepared remarks is even through all that period, our volume held pretty steady. And it's a combination of consumer behavior, this is my belief of the QSR traffic. People still believe they have QSRs and the traffic, and we saw it in our volume and we have international markets that continue to grow. So our experience if something economically happens, even in that time, our volume continued to -- it did -- it grew but it kind of grew, I don't remember what the rates are, but it continued to grow. So that's the data point I have, and we have as a business when we have a significant economic downturn, and again back to my earlier comments, that's why we're always going to prudent with our outlook going forward.

--------------------------------------------------------------------------------

David Mandel, Consumer Edge Research, LLC - Research Associate [45]

--------------------------------------------------------------------------------

That's really helpful. Earlier in the call, you referred to maintenance issues. Did the Hermiston plant come online faster-than-usual to kind of rescue maintenance issues or...

--------------------------------------------------------------------------------

Thomas P. Werner, Lamb Weston Holdings, Inc. - President, CEO & Director [46]

--------------------------------------------------------------------------------

No. I mean the Hermiston plant came online as planned. The Hermiston plant was online in May as planned, and on target. So we're ramping it up...

--------------------------------------------------------------------------------

David Mandel, Consumer Edge Research, LLC - Research Associate [47]

--------------------------------------------------------------------------------

Sorry, fully ramp up. That's unusual.

--------------------------------------------------------------------------------

Thomas P. Werner, Lamb Weston Holdings, Inc. - President, CEO & Director [48]

--------------------------------------------------------------------------------

No. It was right on track, and the team did a great job getting up and running and it certainly helped release some of the pressures we were feeling in some of the other manufacturing facilities, but by in large it was on track.

--------------------------------------------------------------------------------

David Mandel, Consumer Edge Research, LLC - Research Associate [49]

--------------------------------------------------------------------------------

Great. And my last one. Can you break up the mid-single-digit sales growth a little bit? I mean if I think about the 53rd week adding about 2% and pricing to kind of offset input cost but it's really -- sales growth is going to be volume-driven? I'm just trying to think about how much volume and how much pricing because there, once you back out the 53rd week there isn't all that much left.

--------------------------------------------------------------------------------

Thomas P. Werner, Lamb Weston Holdings, Inc. - President, CEO & Director [50]

--------------------------------------------------------------------------------

Yes, David it is. I mean if you think about broad-strokes sales is mid-singles is for calling out 4 to 6, right? And that's the 53rd week, I've been basically saying think 3 to 5. So I'd say a couple of points probably look a little bit more than a point and then we're saying the bulk of that is going to be largely driven by volume. So you can use your assumption whatever you want to use for price/mix.

--------------------------------------------------------------------------------

Operator [51]

--------------------------------------------------------------------------------

And it appears there are no further telephone questions at this time. I'd like to turn the conference back to our presenters for any additional or closing remarks.

--------------------------------------------------------------------------------

Dexter P. Congbalay, Lamb Weston Holdings, Inc. - VP of IR [52]

--------------------------------------------------------------------------------

Thank you for -- everybody for joining us today. If you have any follow-up questions, please pop me an email, we can schedule a call. And I look forward to talking to you later. Thank you.