At the conference this year, for the first time, Lamb Weston, a leading supplier of frozen potato products to restaurants and retailers globally, is nearing the one-year anniversary of beginning to execute against a redefined strategy under new leadership with a sharper focus on customers and returns. CFO Jim Gray joined the company just over a month ago, bringing his financial discipline and focus on driving sustained, profitable growth to enhance Lamb Weston's execution against its strategy. We're pleased to have Jim here to share his initial thoughts, Since joining Lamb Weston and discussed this company's strategic priorities, thanks for being here.

Glad to be here. This is one of the first conferences we've done in a long, long time. So actually really, really appreciate the invite.

Well, we're thrilled that it's here at Farm to Market. Maybe where I would start is just having just joined Lamb Weston. What attracted you to the company? We'll start there.

Well, I think, one, when you look at Lamb and the amazing franchise and the history it's had since the spin from ConAgra, I always thought that, like, there's just got to be inherent value in the company and kind of started doing my homework. and and then maybe other than soda pop and energy drinks you know the ability for their value creation along the entire supply chain right to from the consumer what is the food service operator you know what is the retailer make what is the the processor make and what is the farmer make it's just one of those rare supply chains which offers enormous economic return to kind of all participants and so that is always I think bodes well for when you look at an industry in terms of being able to support top-line innovation etc and then maybe I'm a bit of a contrarian but I actually love having kind of a CEO in his first year and felt that I can offer some hopefully you know constructive council and I kind of like a board that's kind of having fun so I'm not one to shy away from some of the maybe the challenges and stresses and that and so I figure like what you know probably can be a calming voice and probably add quite a bit of value to kind of this leadership

team so so when you think about that setup and coming into the role how do you what do you expect to be able to leverage from your prior experience as you come in and kind of add to what's already going on with the company?

And maybe the one piece that was surprising is just how similar the value chains are, right? And so, you know, Mother Nature gives us something every year that grows, and there's variability in that. And then we run it through a conversion process, and there's efficiencies in scale and cost minding that's important and we come out with a product that needs to be marketed and sold and nurtured to a customer franchise in a way where there's actually quite a bit of value creation in the choices that our customers make and then ultimately to the consumer and the consumer eating experience and how much value add is there so in some ways whether it's you know food and beverage or its ingredients are very similar value chain and so one of the pieces that I see is like I think is always important in delivering consistent profit earnings is how do you reduce the volatility in any step along the way and so there's a number of different you know lessons learned in my prior history and I think some of those can apply absolutely to this company in this

industry so you mentioned surprise about the supply chain any other kind of initial thoughts first month in or surprises that are that are worth mentioning I mean I think

that the the serval the team and kind of our ability to kind of get at data is outstanding and you kind of hear ERP change and you know maybe we fumbled on on that implementation but the fact is is that the systems data is actually quite good surprisingly good there's a remarkable amount of detail there and so So in this day and age, setting up with good data and then being able to say, OK, where am I at on my process? Where am I at on my AI journey? That's always one of the first things you want to check. Or otherwise, that's two or three years of work. So I think that's probably one piece that I'm kind of positively surprised about.

Walk me through the immersion plan, your areas of focus over the next three, six, 12 months.

how you're thinking about your priorities yeah um well i think first is is being able to you know recognizing we're at the end of our fiscal quarter so we end kind of may 31 um so setting up for next year's aop plan uh thinking about hey how are we going to finish this year um relative to the various financial metrics and then you know what are we setting out there for for guidance so i Right now, it's the busy time of the year for my team and myself with the board and being able to just be able to say this is kind of the lie of the ball and this is the game we're playing and this is where we're heading for 27. So I think that's first and foremost. Second is Debbie Hancock and I have been working a lot with shareholders to understand kind of where's the voice of shareholders right now so that we are coalescing all the input and being able to develop a game plan against that. And then just actually knowing the business and knowing my team. And so that's been a little bit busy for them because we've been actually just jumping straight in and doing. But hopefully we'll get more time to actually know the team as well. Go forward.

We've known each other for a while, but maybe for investors that don't have the history with you, how do you think about the key drivers of long-term value creation?

That's a great question. Fully loaded. So first, as someone who always encourages building business, you have to make sure that the your leader and your commercial team and your operations team understanding that they are all playing together to drive operating income growth right and so that can start with top line you know that can start with an efficiency model and in terms of the business but you have to have the front part of the team driving operating income growth and I mean fully measured including depreciation and all the costs then you you work with the finance team on making sure that your fiscal policies impacting smartly all the way down to adjusted EPS and then set set up I think a course forward on you know what you think adjusted EPS growth can be and then probably the last piece of that is just always making sure that the capital investment is very disciplined such that when you know you pull up and you actually measure ROIC you know that that you're actually not just driving a better ROIC. You're actually thinking about, how am I actually improving the ROIC, or how am I actually indirectly creating EVA and growing EVA. But there's only so much I think an organization can understand. But the parts for us are, get the operators focused on driving up income growth, be smart on your fiscal policy and driving adjusted EPS, and maybe dividend or total TSR, but then be thoughtful about capital, capital turns on ROIC.

Shifting gears a little bit, maybe zooming out, can you give us a sense for the structure of your customer base, your mix across channels, kind of the nuts and bolts of what the business mix looks like?

Well, we did change segments a couple years ago, and so we actually report on North America and international, But prior to that, it was some characterization of our customer base. And so we're probably about 80 plus, 85% food service in kind of all elements. So full on the biggest global chains, regional chains, and then through distributors, all of the independent restaurant operators out there. And then we also have a fairly large retail business. I think we're number one in terms of sourcing a product within the U.S. So we have some brands, but we also do private labels. So we actually get to play in grocery and club and mass on both dimensions. So we don't really feel like, you know, the headwinds on the grocery basket if it's against branded because we're also kind of a big supplier in terms of private label. you know on the on the branded side we have we've done that through licensing of some restaurant brands and so some restaurant franchises have a very unique kind of identifying fry or chip that they make and we've branded some of those and been actually quite successful in fact like I like you know the the checkers brand is is out there and I like to say that the checkers brand as the leading retail brand in the PAC Northwest. And if any of you know Checkers, they don't have outlets in the PAC Northwest. So that's sort of interesting, right? So 35 days in, I got to step back and think about it. OK, hey, wait a minute. What's the power of what we're actually doing in the product and the product quality? So I think there's some fun opportunities there as well.

interesting okay um in terms of the uh the crop cycles your sourcing your pricing how does how

does that all work together yeah um so i think the crop cycle in potato is super like it's it's super interesting in that um and it's actually surprising uh the the maturity and the sophistication And so maybe I'll talk just about the PAC Northwest, or North America. So potatoes need to grow in a very loamy soil, sandy soil. So we have a lot of volcanic soil that's all the way from the Yellowstone Basin, follow the Snake River, and then through the Columbia River Basin, an amazing spot to grow potatoes. So just enough moisture during the planting, which is kind of now like well maybe a month ago so kind of feb really not feb's too early a little too cold so probably more march april and then we're going to harvest anywhere between september and october okay but understand so all of the farmers are amazingly sophisticated so we have irrigation uh automatic fertilization so super efficient on the fertilization um constantly monitoring both of the crop health such that we can almost time exactly when we need the the pull up and we'll direct that so our ag team actually works with our partner farmers to actually say okay, we're ready to go right now, and we like the size of your potato, and we want to halt that starch growing and starch degradation into sugar. So it's remarkably precise when we're pulling up, and so why does that matter, right? And it's super subtle, but it's kind of interesting, right? So a potato plant's going to grow eight to ten potatoes, okay? Well, the ones that started early, the good old Idaho potatoes they turn out to be like that big okay and that's what makes those big beautiful french fries right but you also get four or five potatoes that are gonna be that big and you get get one or two that are that big so we're buying the whole crop okay so then when we go and process them we got to make sure that the super big ones get cut a certain way so those are the premium and we can sell those for more value and the medium ones we might make wedges right or something smaller and the very small ones and all the chips, we might make hash browns. So we use the whole crop. We use however the potato shows up, and we use all of the harvest. And if you do that efficiently and you get a great quality crop, you're going to get a lot of margin value add, which is kind of why when you look at our North America segment and you see the profitability there, part of that's because we have the scale in the Columbia River Basin. We have very precise farming, and we actually know how to take that crop and maximize the value out of it interesting yeah um i know i started

with this in my intro but it's been almost a year now since the company began executing against the focus to win strategy so coming in with some fresh eyes how has the execution against that strategy gone so far um are there areas where you guys are ahead of schedule behind pace how would you frame

that yeah I think within you know focus to win first is looking at okay well which markets do you play in and are you prioritizing those markets and so I think probably within our international business we're still poor actually kind of assessing that and some works underway but one of the big tenants was okay so focus on the right customers so winning with the winning customers and make sure that we've gone back and repaired any damage that we had to customer relationships and in that actually that journey probably started more than a year and a half ago and we've been I think demonstrated quite a bit of success right and so how do you say that will you say well Jim I mean volumes up you know in North America probably in a market where we've gained some share and maybe if you said restaurant foot traffic is down the digit down to maybe I mean it's sort of recovered and you know Q1 a little bit but you know the stack year over year over year probably still says you know QSR traffic is down and it's demonstrated because we're rolling over multi-year contracts and we're doing that with expanded volume on top of great service and I would say with pricing that is fair and adjusted from the peaks following the kind of 2022 2023 inflation everywhere pricing was quite easy and so probably overpriced a bit and so those contracts now are rolling over we have nice contract pricing maturation i think which is which is playing out in the business and so that's a good demonstrated achievement with some of the toughest multinational customers around And then I think the second big part is we really wanted to focus on operational excellence and cost savings. And the team has really jumped on both SG&A as well as COGS savings. And we have advertised out there a $250 million run rate savings by fiscal 28. We put $100 million in front of ourselves this fiscal year, fiscal 26, which ends in May. We're well ahead of that. on our earnings call. We'll catch everybody up with where we're at, but we've been able to do it through kind of all the normal elements that you would think of within manufacturing optimization. So not just procurement, not just closing one or two factories, actually the really hard work, driving OEE, driving efficiencies, driving yields, and because we have the data, we can be super focused on where we want to do that and where we want to do that well.

So I want to talk about that in one second. But in terms of strengthening the customer relationships, I guess, what have you found to be most, you know, what moves the needle the most in those discussions? You guys have also talked a little bit about price and trade support, kind of how should we think about the duration of that and how that plays out. We'd love to hear about that.

Yeah, so I think one in terms of the, you know, being able to look at the customer relationships, I mean, especially in some of the most global or the largest franchises, is that it is a multi-decade partnership, right? Even though we make contract in three-year or two-year cycles, we are absolutely in this to protect the availability and the service to each and every one of our restaurant operators. And so when they're making a choice in terms of what they want to serve daily, and if that French fry is a compliment, maybe even it's kind of symbolic of the franchise and how they add value you got a service level and you got a quality level that you have to hit all the time and and believe it or not I mean we get audited and the quality specs are pretty stringent in terms of what shows up in a bag so I just I'll depart I'll give you one example so if you think about a curly fry and you You think, oh, okay, well, yeah, I've had a curly fry, right? Well, how many curls are in the fry, right? Two, three, four, right? You get one of those when it comes out, it's big, it's gnarly, like, wow. Okay, so then you also address those. So that's good, right? But you also get a loop, and you also get a half moon. Well, if you put too many loops and too many half moons in a bag, your operators get upset. They get upset because when they want to serve curly fry, next to a big stacked hamburger. They want the volume and the 3D dimension of the fries to stand up on the plate. They want it to look like it's a voluminous serving. That conveys value add. That impresses the consumer at the eating occasion. By the way, you're actually also serving less ounces because they curl and they form, right? And so you actually have less weight going out on the plate. You're actually getting more value conveyed to the consumer. They're offering that in their meal, and that allows us to actually charge up on price. So delivering quality, that doesn't work if you get a whole bunch of moons in half circles. If you get loops and your plate's flat, that's bad. So quality and the size of that massive potato that you need to cut so that it spins around and you get that loop, that's what we monitor. So the quality from the customer and the franchise is actually really, really important to conveying value to the consumer.

As somebody who really enjoys French fries, this resonates with me. So I appreciate that. I don't know, Andrew. You might be a volume guy. I'm just saying. Generally speaking, yes. In terms of the operational improvements, can you walk through some of the changes that have happened? You talked about some of the metrics, but how have you achieved that?

I think you know when you whenever I sort of look at an operations group I think about really three things so so one you know what what are the what are the people and both the leadership at the plants but also just you know your folks on the front line you know how are your day-to-day operators working within a culture to what are the routines right and then three what's the capital that's there right and if those three things are coming together you're going to be spending capital extremely efficiently and you're going to be surprised by both the culture and the routines coming together to drive whatever leading indicator you want coming out of your manufacturing and just I think under you know Sylvia's leadership who's our global supply chain officer she's been in place about two years she's got her team in place and she's really instilled this culture down so it's not just that we see procurement savings you know we we have a wonderful procurement officer we've done a lot of work with our top 10 suppliers so we have seen rate savings but more importantly what we're seeing is within the network the plants that we really want to run well we're running them with the right schedule with the right type of product quality and we're seeing it come out the back end in terms of usage rates lower utility rates lower water you know lower labor costs etc and so that's actually been a probably the biggest a single driver of the amount of cost savings that we have showing up in the P&L.

How does innovation fit in to the picture here? How does that fit into the strategy? Where are the opportunities? Maybe how do you go about bringing that to market? You could talk through that, please.

CHRIS WILSON- I mean, I get excited. And you know that I kind of love the details and kind of where the price and where the value is. I think if I could channel Mike Smith, our CEO, for a minute and that the ability to do a frozen french fry product is not available in every restaurant operator okay so there's quite a few restaurant units out there that don't have a freezer and maybe don't have a fryer right and so to the extent that we can think about well can we take a product that's baked right and be able to just extend our penetration into restaurant units that don't have those assets in their infrastructure and we can actually make it simple for the back of the kitchen to actually create the product. So there's things that we can do with cut, with coating, with texture, how we actually par fry and then how we freeze and store and ship such that I think that that's kind of market expansive. And then within that again we talked a little bit about curly fries but the amount of different cuts that we can do and how we proportion control exactly for the franchise operator I think is an innovation battle that we should always be running every single day and then just kind of as a platform you know I think there's a lot of LTOs and there's experimentation on flavoring and on coating you can get super texture crunchy you can go crazy on flavors and we have kind of all the ability to do that um and so that is kind of a common discussion the question is is how much does a restaurant operator want to use that as a way to kind of excite uh freshen up you know their their menu value um for a period of time got it okay um just broadly on the demand environment you know with

gas prices higher yeah stretch consumers how are have you seen demand evolve how are customers may be approaching uh this environment today yeah well i think that all of the i think all

of our restaurant partners are kind of fighting a little bit for traffic and they're also super sensitive to the value to the consumer right whether you talk about k economy and necessarily i mean we do focus quite a bit on qsrs and i say both kind of qsrs as well as maybe that kind of next level up in terms of not quite fast casual but the you know the higher end and they're all concerned about you know how much are they conveying in terms of value to the consumer so the thing that i don't see that's changed is the kind of the mega trend which is i still think away from home and the eating occasion away from home or out socially is still a positive trend, right? And whether or not you come out of COVID or you look at Gen Z, the ability to be able to say, hey, I'm going to enjoy the occasion together and meals may be part of that. Alcohol may be less part of that, but the meal and definitely, you know, I think a French fry is, it can be part of that. And so that mega trend of away from home eating, I think still exists and actually is probably even more apparent

and some of the developing countries that we're in on the international business can you kind of walk through the composition of the international business as it stands today and how we should think that think about that evolving over the next number of years I mean I think about markets that are in very different stages right so how do you how do you see that evolving yeah well I mean if

you follow or own lamb I mean the international segments results this year have been super tough not good. Obviously, we need to do better. I think when we peel the onion on international, though, I'd characterize there's kind of two markets where we've invested a bunch of money and are actually in pretty good growth opportunities. So one, we've added a second plant in China, and we have a brand new plant down in Argentina serving kind of the Mercosur Brazil market. Both are in the early stages of their ramp-up. And so just naturally, as we're going to go into the next year or the third year of that ramp up we're going to see kind of incremental volume that will absorb fixed costs and so that's pretty typical of a food manufacturer where we'll kind of invest in an asset and hopefully we can get it ramped within two if not three years the EMEA which is really served by our European manufacturing base and UK base that competitive market i think is in a different world of hurt you know and candidly a lot of the european industry probably was manufacturing to domestic demand probably call it 60 70 maybe as high as 80 percent but export volume out of europe to other parts of the world was a solid 20-25 percent of the capacity and that has been met with kind of localization post-COVID so you got India manufacturers you got some China manufacturers and they can both serve both China they can serve Southeast Asia they can serve India and then India can get to the Middle East so now you have Europe which traditionally had source product into those very very big population areas and now it's facing that headwind so that industry we're going to have to rationalize some capacity at some point I want to ask

about that in in one second okay you mentioned you know some of the softer performance in the international side you know some of that is is the market I'm wondering internally what can you do to improve performance there is there anything kind of outside of the broader market trends that the company is doing?

I think when you always step back, and you have to think about, OK, so my demand has slowed. I have excess capacity. It's a first as a timing question, OK? So is this going to be something that lasts for three months, six months, 12 months, 18 months? How much can I endure, right? And you may curtail. If you have multiple plants, you can curtail a plant you can furlough it you know shut it down temporarily this is a business that you can actually take out capacity and actually save some money and protect the P&L and we have done that we've curtailed one plant if the timing is such that you think it's going to be longer then at any point in time you kind of have to look at four or five or six plants and you got to be able to say okay I got to rationalize now the key to doing that though is not so much identifying which plant, it's making sure that you've actually had conversations with customers about retaining the volume that's sourced from that plant that you would consider shuttering and making sure that you can get the vast majority of that volume back in your other plants. And if you can do that, then usually sometimes the economics sort of work out and you're actually better positioned for the future because you've concentrated volume, you're getting better asset, utilization, your ROIC is up, your future capital investment required has gone down, and you're actually getting a better return. The key, key, key, though, to that is that if you do that, you need to signal to competitors like, let me go through this change, don't attack my customer base so that I can manage this sourcing. And what that does is it allows the other competitors to realize that they can do the same. And if I think if you can get a few of those dominoes to fall you can get some industry capacity rationalization right now if they decide to attack then you're going to attack right and so you know just generally that's you know when you have as many plants as you have in europe and you've got it spread across multiple competitors you just need some thoughtful you know step-by-step planned

rationalization at some point so there was the one plant closure you talked about the curtailments have you seen similar actions across the competitive set or are we still very early in that in what you just described yeah I I think we're still in the first

phase of the timing so people are going well like you know is this conflict slash war in Iran how quickly might that end is it take three months four months six months for Brent oil price to return to some normal I mean that's still a huge uncertainty that's hanging over the balance of this year. And so I think the competition is probably just delaying. They're definitely delaying any capacity expansion. They'll probably choose to do what we've done, which is also just curtail production. And we'll see necessarily kind of where the fulcrum is in terms of a long-term vision. So I have a question here on

the asset footprint globally you kind of touched on it do you is that the scale of rationalization that you think is required when you look at the footprint you know is maybe frame that

well i mean i think that you know we're in the midst of sort of you know thinking about what is the the absolute international footprint um and what are the flows that naturally go in between But the more important question is, OK, so you're close to a wonderful biome where you grow potatoes. You don't want to ship potatoes because they're a lot of water, and they're heavy, and they bruise, right? So you can't really move them a long ways because eventually the starch starts to degrade into sugars, and actually that impacts the quality of the French fry. So your manufacturing is generally close to where your potatoes are growing. and so now what you want to do is say like so coming out of my factory in a frozen supply chain what markets can I get into you know and so markets are always driven by where people live and exist right and so we want to make sure that as we're always looking through that lens is what's our right to win right and whether we do that ourselves with our own assets whether we do it through strategic partnerships maybe we do it with you know with go to market help upfront I think that's sort of the thinking that we're looking at right now before we just pull back and just say like okay well we have a cost problem let's solve our cost problem we really want to solve the strategic answer first and then know that we're setting ourselves up to move the needle in

international as we go forward okay in terms of the geopolitical environment high gas prices higher fertilizer prices maybe supply issues are there implications for your business obviously restaurant traffic i think you know is is a given but just internally as you think about executing against the strategy how do you think about maybe potential

implications from that yeah well if there's one supply chain that can actually tolerate some inflation over time this is probably it um and yet you know obviously you're always going to be transparent with customers around the types of cost inflation that we're getting hit with you know I think probably most directly would probably be you know oil into our packaging right and so our packaging costs well not a big portion of our cogs I mean but significant enough and so and typically packaging is kind of on an index basis and so we'll you know we'll get that cost passed through to us and packaging is a tough one because you can't always just immediately directly go to a customer and say hey I've got to go take up your pricing because of my packaging cost inflation they understand diesel prices they understand freight costs much more and so you know we work with customers in terms of you know because we have three or four different types of contracting methods and kind of when they hit and when they allow us to take pricing and so we'll be obviously actively having that I think maybe the exposure is just a little bit of lag in terms of input cost inflation at the P&L but then having the confidence that

you're going to get it back as you go forward. I wanted to ask about the capital plan if capacity expansions are not a focus anymore as they were under the kind of the prior strategy and potentially pivoting to debt pay down cash returns to shareholders over time how do you think about capital allocation philosophically for this business I know it's early obviously but just

just general thoughts yeah um well never one to not have a hypothesis um so i you know first you know again you know if i went back to generating the operating income and being smart about that growth that translates into okay go generate good cash from operations right consistent and a high level try and manage the the net investment of working capital hopefully that's and maybe a negative even. So you're starting off with a really healthy kind of cash from operations. I think for our business, when we think about reliability capital investment, right now we're probably thinking between $350 and $400 million for next year. We're not quite decided on that. Still have to talk to the board. But then that leaves maybe about $200 million for our dividend. And so we'll have strategic cash to deploy as we think about next year and then so we have four choices so organic growth probably not needed right now M&A probably also not needed and then you know share repurchase and or kind of debt reduction and you know again haven't really made a recommendation to the board but I would probably lean a little bit more towards debt reduction right now I think we run about 3.5 times debt to EBITDA and we'd like to see kind of maybe a little bit more stability on the balance sheet maybe getting us below three point you know three point three times debt to EBITDA although again you know need to make sure I'm aligned with Mike and the board on hey what those preferences are we have purchased back shares too because of you know I always think about buying back shares opportunistically you know we run an intrinsic value on the company and so we'll see you know where those are at but hopefully if we focus on cash from operations and that's a healthy number then we're left with difficult choices

on strategic cash deployment good problem to have certainly we only have a couple minutes left is there any message that you want to kind of leave the

audience with you know on the way out yeah I just think that one in that look Lam and our team have had a lot of input from a lot of folks. We've had some board changes. Always welcome feedback. Diversity of thought from shareholders is actually welcome. Management team is going to coalesce, and we're very much with Jan Krops, our executive chair, and with Mike Smith. We're very much focused on how do we get to a sustainable algorithm, a sustainable business model in this and what we think the financial performance of lamb can be in the next one two three years and very much excited about helping to build that pretty confident that we can get there and hopefully that's you know a bit of a turnaround from kind of what we've demonstrated in in 26 great yeah we'll leave it there thank you very much for being here thanks Thanks for being here.