Lamb Weston Holdings, Inc. 10-Q

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of our financial condition and results of operations, which we refer to as “MD&A,” should be read in conjunction with our condensed consolidated financial statements and related notes included in "Financial Information" of this Quarterly Report on Form 10-Q (this “Form 10-Q”) and in “Financial Statements and Supplementary Data” of the Company's Annual Report on Form 10-K for the fiscal year ended May 28, 2023 (the “Form 10-K”), which we filed with the United States (“U.S.”) Securities and Exchange Commission (the “SEC”) on July 25, 2023. Forward-Looking Statements This report, including the MD&A, contains forward-looking statements within the meaning of the federal securities laws. Words such as “will,” “continue,” “may,” “expect,” “would,” “believe,” “deliver,” “manage,” “anticipate,” “drive,” “leverage,” “benefit,” “increase,” “outlook,” and variations of such words and similar expressions are intended to identify forward-looking statements. Examples of forward-looking statements include, but are not limited to, statements regarding our business and financial outlook and prospects, our plans, execution, capital expenditures and investments, pricing actions, cash flows, liquidity, dividends, enterprise resource planning (“ERP”) system implementation, integration of our former European joint venture, Lamb-Weston/Meijer v.o.f. (“LW EMEA”), and inflation, conditions in our industry, and the global economy. These forward-looking statements are based on management’s current expectations and are subject to uncertainties and changes in circumstances. Readers of this report should understand that these statements are not guarantees of performance or results. Many factors could affect these forward-looking statements and our actual financial results and cause them to vary materially from the expectations contained in the forward-looking statements, including those set forth in this report. These risks and uncertainties include, among other things: the availability and prices of raw materials and other commodities; labor shortages and other operational challenges; an uncertain general economic environment, including inflationary pressures and recessionary concerns, any of which could adversely impact our business, financial condition or results of operations, including the demand and prices for our products; difficulties, disruptions or delays in implementing new technology, including our new ERP system; risks associated with integrating acquired businesses, including LW EMEA; levels of labor and people-related expenses; our ability to successfully execute our long-term value creation strategies; our ability to execute on large capital projects, including construction of new production lines or facilities; the competitive environment and related conditions in the markets in which we operate; political and economic conditions of the countries in which we conduct business and other factors related to our international operations; disruptions in the global economy caused by conflicts such as the war in Ukraine and conflicts in the Middle East and the possible related heightening of our other known risks; impacts on our business due to health pandemics or other contagious outbreaks, such as the COVID-19 pandemic, including impacts on demand for our products, increased costs, disruption of supply, other constraints in the availability of key commodities and other necessary services or restrictions imposed by public health authorities or governments; disruption of our access to export mechanisms; risks associated with other possible acquisitions; our debt levels; changes in our relationships with our growers or significant customers; actions of governments and regulatory factors affecting our businesses; the ultimate outcome of litigation or any product recalls; our ability to pay regular quarterly cash dividends and the amounts and timing of any future dividends; and other risks described in our reports filed from time to time with the SEC. We caution readers not to place undue reliance on any forward-looking statements included in this report, which speak only as of the date of this report. We undertake no responsibility for updating these statements, except as required by law. Overview Lamb Weston Holdings, Inc. (“we,” “us,” “our,” the “Company,” or “Lamb Weston”) is a leading global producer, distributor, and marketer of value-added frozen potato products. We are the number one supplier of value-added frozen potato products in North America and a leading supplier of value-added frozen potato products internationally, with a strong and growing presence in high-growth emerging markets. We offer a broad product portfolio to a diverse channel and customer base in over 100 countries. French fries represent the majority of our value-added frozen potato product portfolio. This MD&A is provided as a supplement to the consolidated financial statements and related condensed notes included elsewhere herein to help provide an understanding of our financial condition, changes in financial condition and results of our operations. Our MD&A is based on financial data derived from the financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). We have also presented Adjusted EBITDA, Adjusted Gross Profit, Adjusted Selling, General and Administrative (“SG&A”) expenses, and Adjusted Equity Method Investment Earnings, each of which is considered a non-GAAP financial measure, to supplement the financial information 17 Table of Contents included in this report. Refer to “Non-GAAP Financial Measures” below for the definitions of Adjusted EBITDA, Adjusted Gross Profit, Adjusted SG&A, and Adjusted Equity Method Investment Earnings, and a reconciliation of these non-GAAP financial measures to their most directly comparable GAAP financial measures, net income, gross profit, SG&A, or equity method investment earnings, as applicable. For more information, refer to the “Results of Operations” and “Non-GAAP Financial Measures” sections below. Executive Summary Our third quarter results include a higher-than-expected impact from the transition to a new ERP system in North America. As previously disclosed, at the beginning of our third quarter of fiscal 2024, we began transitioning certain central systems and functions in North America to a new ERP system, as part of our multi-year effort to upgrade our information systems and ERP infrastructure across the company. The transition resulted in a temporary reduction in visibility into our finished goods inventories at distribution centers, which affected our ability to fulfill customer orders. As a result, our sales volume performance declined in the quarter and margins were pressured more than we initially anticipated, as more fully described below in “Results of Operations.” By the end of the quarter, we restored the visibility into our finished goods inventories and customer order fulfillment rates to pre-transition levels. In the third quarter of fiscal 2024, our net sales growth was driven by incremental sales related to our acquisition of the remaining equity interest in LW EMEA (the “LW EMEA Acquisition”), our former joint venture in Europe. Excluding this benefit from the LW EMEA Acquisition, our sales declined, due to a slower-than-expected ramp up to pre-ERP system transition customer order fulfillment levels, the carryover impact of our decisions to exit lower-margin business to strategically manage our sales mix in the prior year, and soft restaurant traffic and frozen potato demand trends in North America and other key international markets. The decline in sales volume more than offset the carryover benefit of inflation-driven pricing actions taken in the prior year, as well as selected pricing actions in the current year. Our net income declined in the third quarter of fiscal 2024, largely reflecting lower income from operations and higher interest expense. Our Adjusted EBITDA declined as compared to the prior year quarter primarily due to the impact of the ERP system transition, input cost inflation, and a $25.0 million pre-tax charge for the write-off of excess raw potatoes more than offsetting incremental earnings from the LW EMEA Acquisition and favorable price/mix. The charge to write-off excess potatoes largely reflects a reduction in our sales volume estimate to reflect soft restaurant traffic trends in North America and other key international markets, and lower order fulfillment rates in our fiscal third quarter related to the ERP system transition. The charge in the current quarter is in addition to the $70.9 million pre-tax write-off of excess raw potatoes that we incurred in the second quarter of fiscal 2024. In the first three quarters of fiscal 2024, we generated net cash from operating activities of $481.5 million, up $146.4 million compared to the first three quarters of fiscal 2023, primarily due to higher earnings. We returned an aggregate of $272.0 million to our common stockholders in the form of cash dividends and share repurchases. We ended the third quarter with $62.3 million of cash and cash equivalents and $908.8 million of available liquidity under committed revolving credit facilities in the U.S. and Europe. Our capacity expansion and modernization efforts in Idaho and the Netherlands remain on track, while the expected availability from our capacity expansion in Argentina has been postponed from fall 2024 to mid-2025. Outlook For the remainder of fiscal 2024, we expect to deliver net sales growth that is driven by the carryover benefit of pricing actions taken in fiscal 2023, as well as pricing actions in select sales channels taken in fiscal 2024. We expect volume growth will be pressured, with performance mixed by geography and sales channel. We continue to anticipate that demand for our products in the near term may be tempered by soft restaurant traffic trends, as compared to the prior year period, in North America and other key international markets as our customers and consumers generally respond to the cumulative effect of inflation for food consumed away from home. We do not expect the ERP system transition to have a material impact on our financial performance for the remainder of fiscal 2024 as customer order fulfillment rates have been restored to pre-transition levels. 18 Table of Contents We expect net income and Adjusted EBITDA growth for the remainder of fiscal 2024, as compared to the prior year period, to be largely driven by sales and Adjusted Gross Profit growth, and that the rate of input cost inflation, driven largely by higher potato costs, will, in aggregate, moderate as compared to fiscal 2023 inflation rates. We anticipate that the increase in Adjusted Gross Profit during this period will be partially offset by higher SG&A, reflecting: increased information technology investments, including expenses associated with the transition to the new ERP system and related amortization, and higher compensation and benefits expenses due to increased employee headcount. We continue to believe in the long-term growth outlook for the frozen potato category and that Lamb Weston is well-positioned to drive sustainable, profitable growth, and to better serve customers around the world as we seek to leverage the commercial and operational benefits from the LW EMEA Acquisition, as well as the benefits we expect from our previously announced capacity expansion investments in the U.S., the Netherlands, and Argentina. Results of Operations Effective May 29, 2023, to align with our expanded global footprint following the completion of the LW EMEA Acquisition, management, including our chief executive officer (who is our chief operating decision maker), began managing operations in two business segments based on management’s change to the way it monitors performance, aligns strategies, and allocates resources. As a result of this change, we now have two operating segments, each of which is a reportable segment: North America and International. We report net sales and Adjusted EBITDA by segment (Segment Adjusted EBITDA) and on a consolidated basis (Adjusted EBITDA), which are the primary measures reported to our chief operating decision maker for purposes of allocating resources to our segments and assessing their performance. Adjusted EBITDA is a non-GAAP financial measure. For additional information on our reportable segments, Segment Adjusted EBITDA, and Adjusted EBITDA, see Note 12, Segments, of the Condensed Notes to Consolidated Financial Statements in “Part I, Item 1. Financial Statements” of this report and “Non-GAAP Financial Measures” below. Prior period segment data has been retrospectively adjusted to conform with current period classification. ERP Transition At the beginning of the fiscal third quarter, we transitioned certain central systems and functions, including order to cash, produce to deliver, source to pay, and inventory management, in North America to a new ERP system. After the transition, we experienced reduced visibility into finished goods inventories at our distribution centers, resulting in a higher-than-expected effect on customer order fulfillment rates. The transition had a greater impact on shipments of higher-margin mixed-product loads than shipments of single-product orders, resulting in unfavorable mix. We partnered closely with our customers to minimize the impact on our sales and estimate the lower order fulfillment rates reduced sales volume growth by approximately 8 percentage points and net sales by approximately $135 million, with $123 million and $12 million in our North America and International segments, respectively, during the fiscal third quarter. In total, we estimate the ERP transition negatively impacted fiscal third quarter net income by approximately $72 million and Adjusted EBITDA by approximately $95 million. With respect to the impact on Adjusted EBITDA, we estimate that approximately $55 million related to lower order fulfillment rates and approximately $40 million related to incremental costs and expenses, of which: • Approximately $7 million was recorded as a reduction in gross sales, and included accrued fees and charges for delayed or unfilled customer orders; • Approximately $26 million was recorded in cost of sales, and included reduced fixed cost coverage and inefficiencies resulting from planned downtime at our processing facilities, as well as additional freight charges; and • Approximately $7 million was recorded in selling, general and administrative expenses, and largely included consulting expenses to restore order fulfillment rates. Of the approximately $95 million negative impact on Adjusted EBITDA, we estimate that approximately $83 million impacted the North America segment, approximately $5 million impacted the International segment, and approximately $7 million impacted unallocated corporate costs. We believe the impact of the order fulfillment issues were contained to the fiscal third quarter as customer order fulfillment rates have been restored to pre-transition levels. 19 Table of Contents Thirteen Weeks Ended February 25, 2024 compared to Thirteen Weeks Ended February 26, 2023 Net Sales and Segment Adjusted EBITDA Thirteen Weeks Ended (in millions, except percentages) February 25, 2024 February 26, 2023 % Increase (Decrease) Segment Net Sales North America $ 947.5 $ 1,070.8 (12)% International 510.8 182.8 179% $ 1,458.3 $ 1,253.6 16% Segment Adjusted EBITDA North America $ 285.9 $ 333.0 (14)% International 101.7 54.1 88% Net Sales Compared to the prior year quarter, net sales for the third quarter of fiscal 2024 increased $204.7 million, or 16%, to $1,458.3 million, and included $356.7 million of incremental sales attributable to the consolidation of the financial results of LW EMEA following the completion of the LW EMEA Acquisition in February 2023. Net sales, excluding the incremental sales attributable to the LW EMEA Acquisition, were down $152.0 million, or 12% versus the prior year quarter, with approximately $135 million of the decline attributable to the ERP transition. Volume declined 16%, with approximately 8 percentage points of the decline reflecting unfilled customer orders resulting from the ERP transition. The other half of the volume decline largely reflects soft restaurant traffic trends in North America and other key international markets, as well as the carryover effect of our decisions to exit certain lower-priced and lower-margin business in the prior year to strategically manage customer and product mix. Price/mix increased 4%, reflecting the benefit of inflation-driven pricing actions across both of our business segments, partially offset by lower customer transportation charges. North America segment net sales, which includes all sales to customers in the U.S., Canada, and Mexico, declined $123.3 million, or 12%, to $947.5 million, with approximately $123 million of the decline attributable to the ERP transition. Volume declined 17%, with more than one-half of the decline reflecting unfilled customer orders resulting from the ERP transition. The remainder of the volume decline largely reflects soft restaurant traffic and retail trends in North America, as well as the carryover impact of our decisions to exit certain lower-priced and lower-margin business in the prior fiscal year. Price/mix increased 5%, reflecting the carryover benefit of inflation-driven pricing actions taken in fiscal 2023, as well as pricing actions for contracts with large and regional chain restaurant customers in fiscal 2024. The increase in price mix was partially offset by lower customer transportation charges and unfavorable mix associated with the transition to a new ERP system. International segment net sales, which includes all sales to customers outside of North America, increased $328.0 million, or 179%, to $510.8 million, and included $356.7 million of incremental sales attributable to the consolidation of the financial results of LW EMEA. International segment net sales, excluding the incremental sales attributable to the LW EMEA Acquisition, declined $28.7 million, or 16% compared to the prior year quarter, with approximately $12 million of the decline attributable to the ERP transition. Volume, excluding the benefit from the LW EMEA Acquisition, declined 17%. More than half of the volume decline reflects our decisions to exit certain lower-priced and lower-margin business in the prior fiscal year, with the remainder primarily reflecting unfilled customer orders served by exports from North America as a result of the ERP transition. Price/mix increased 1% as the carryover benefit of inflation-driving pricing actions taken in fiscal 2023 was mostly offset by lower customer transportation charges. Gross Profit Gross profit increased $5.9 million, or 1%, to $403.7 million, for the third quarter of fiscal 2024, and included a $23.3 million ($17.3 million after-tax, or $0.12 per share) unrealized loss related to mark-to-market adjustments associated 20 Table of Contents with commodity hedging contracts. The prior year quarter included a $5.1 million ($3.8 million after-tax, with $0.03 per share impact) unrealized loss related to mark-to-market adjustments associated with commodity hedging contracts. Adjusted Gross Profit increased $24.1 million versus the prior year quarter to $427.0 million, driven by incremental earnings from the consolidation of the financial results of LW EMEA, and benefits from inflation-driven pricing actions. Gross profit and Adjusted Gross Profit in the current quarter included an estimated $33 million of incremental costs associated with the ERP transition, as well as a $20.5 million pre-tax charge for the write-off of excess raw potatoes, largely reflecting a reduction to our sales volume estimate resulting from soft restaurant traffic trends in North America and other key international markets, as well as from a higher-than-expected impact on customer order fulfillment rates related to the ERP transition. The increase in Adjusted Gross Profit was also partially offset by higher costs per pound, which largely reflected mid-single-digit cost inflation, in the aggregate, for key inputs, including: raw potatoes, labor, energy, and ingredients such as grains and starches used in product coatings. The increase in per pound costs was partially offset by lower transportation rates and lower cost of edible oils. Selling, General and Administrative Expenses SG&A increased $48.3 million to $179.8 million in the third quarter of fiscal 2024, and included: $2.4 million ($1.8 million after-tax, or $0.01 per share) of LW EMEA integration and acquisition-related expenses; $4.0 million ($3.0 million after-tax, or $0.02 per share) of unrealized loss related to mark-to-market adjustments associated with currency hedging contracts; and $9.0 million ($6.8 million after-tax, or $0.04 per share) of foreign currency exchange loss. The prior year quarter included $4.3 million ($2.8 million after-tax, or $0.02 per share) of LW EMEA integration and acquisition-related net gains and $1.8 million ($1.4 million after-tax, or $0.01 per share) of foreign currency exchange losses. Adjusted SG&A increased $30.4 million to $164.4 million, primarily due to incremental expenses attributable to the consolidation of the financial results of LW EMEA, as well as higher expenses associated with information technology investments, which included the transition to a new ERP system and related non-cash amortization costs. The increase in Adjusted SG&A was partially offset by a reduction in compensation and benefits accruals. Net Income, Adjusted EBITDA and Segment Adjusted EBITDA Net Income declined $29.0 million from the prior year quarter to $146.1 million. Net income in the current quarter included a total net loss of $28.9 million for foreign currency exchange and unrealized mark-to-market derivative gains and losses, and items impacting comparability, as well as a $19.0 million charge for the write-off of excess raw potatoes. In addition, we estimate the ERP transition also negatively impacted net income in the current quarter by approximately $72 million. Net income in the prior year quarter included a total net loss of $37.3 million, including $38.7 million in unrealized mark-to-market adjustments associated with commodity and currency hedging contracts (primarily at LW EMEA), foreign currency exchange losses, and items impacting comparability. Adjusted EBITDA declined $8.6 million from the prior year quarter to $343.6 million, as an approximately $95 million negative impact from the ERP transition, higher costs per pound, a $25.0 million pre-tax charge for the write-off of excess raw potatoes (of which $4.5 million was recorded in Equity Method Investment Earnings), and lower volumes largely offset incremental earnings from the consolidation of the financial results of LW EMEA and the benefit of inflation-driven pricing actions. North America Segment Adjusted EBITDA declined $47.1 million to $285.9 million. An approximately $83 million negative impact from the ERP transition, higher costs per pound, a $22.7 million charge for the write-off of excess raw potatoes, and lower volumes drove the decline, which were partially offset by the benefit of inflation-driven pricing actions. International Segment Adjusted EBITDA increased $47.6 million to $101.7 million. Incremental earnings from the consolidation of the financial results of LW EMEA drove the increase. Excluding the benefit from the LW EMEA Acquisition, higher costs per pound, an estimated $5 million negative impact from the ERP transition, lower volumes, and a $2.3 million allocated charge for the write-off of excess raw potatoes, more than offset favorable price/mix. 21 Table of Contents Interest Expense, Net Compared with the prior year quarter, interest expense, net increased $9.9 million to $35.7 million, reflecting the impact of higher total debt outstanding and higher interest rates on our floating rate debt, partially offset by higher capitalized interest related to our manufacturing expansion projects, net of interest income. Income Tax Expense Income tax expense for the third quarter of fiscal 2024 and 2023 was $43.1 million and $42.1 million, respectively. The effective income tax rate (calculated as the ratio of income tax expense to pre-tax income, inclusive of equity method investment earnings) was 22.8% and 19.4% for the third quarter of fiscal 2024 and 2023, respectively. The effective tax rate varies from the U.S. statutory tax rate of 21%, principally due to the impact of U.S. state taxes, foreign taxes and currency, permanent differences, and discrete items. Equity Method Investment Earnings (Loss) Equity method investment earnings (loss) from unconsolidated joint ventures were earnings of $1.0 million and a loss of $23.3 million for the third quarter of fiscal 2024 and 2023, respectively. The results in the current quarter include earnings associated with our 50% interest in Lamb Weston/RDO Frozen, an unconsolidated potato processing joint venture in Minnesota (“Lamb Weston RDO”), while results in the prior year quarter also included earnings associated with our previously held 50% interest in LW EMEA that were classified as equity method investment earnings (losses) prior to the completion of the LW EMEA Acquisition. The results in the prior year quarter include a $47.1 million ($34.9 million after-tax, or $0.24 per share) unrealized loss related to mark-to-market adjustments associated with currency and commodity hedging contracts in LW EMEA. Adjusted Equity Method Investment Earnings declined $22.8 million compared to the prior year quarter, largely due to our share of LW EMEA earnings being included in the prior year quarter. The results in the third quarter also include lower sales from unfilled customer orders related to the transition to a new ERP system and a $4.5 million pre-tax charge for the write-off of excess raw potatoes at Lamb Weston RDO. Thirty-Nine Weeks Ended February 25, 2024 compared to Thirty-Nine Weeks Ended February 26, 2023 Net Sales and Segment Adjusted EBITDA Thirty-Nine Weeks Ended (in millions, except percentages) February 25, 2024 February 26, 2023 % Increase (Decrease) Segment net sales North America $ 3,250.0 $ 3,088.9 5% International 1,605.7 566.8 183% $ 4,855.7 $ 3,655.7 33% Segment Adjusted EBITDA North America $ 986.6 $ 864.4 14% International 291.5 147.4 98% Net Sales Compared to the first three quarters of fiscal 2023, net sales increased $1,200.0 million, or 33%, to $4,855.7 million, and included $1,107.4 million of incremental sales attributable to the consolidation of the financial results of (1) LW EMEA, following the completion of the LW EMEA Acquisition in February 2023, and (2) Lamb Weston Alimentos Modernos S.A., our joint venture in Argentina (“LWAMSA”), following our acquisition in July 2022 of an additional 40% equity interest in LWAMSA (the “LWAMSA Acquisition” and, together with the LW EMEA Acquisition, the “Acquisitions”). 22 Table of Contents Net sales, excluding the incremental sales attributable to the Acquisitions, grew $92.6 million, or 3% compared to the first three quarters of fiscal 2023, with growth tempered by approximately $135 million due to the ERP transition during our fiscal third quarter. Price/mix increased 15%, reflecting the benefit of inflation-driven pricing actions across both of our business segments, partially offset by lower customer transportation charges. Volume declined 12%, with more than half of the decline reflecting the carryover effect of our decisions to exit certain lower-priced and lower-margin business in the prior year to strategically manage customer and product mix. Nearly one quarter of the volume decline reflects unfilled customer orders resulting from the transition to a new ERP system. The remainder of the volume decline was largely due to soft demand trends in North America and other key international markets, inventory destocking by certain customers in international markets and in select U.S. retail channels during the first half of fiscal 2024, and volume elasticity in response to inflation-based pricing actions. North America segment net sales, which includes all sales to customers in the U.S., Canada, and Mexico, increased $161.1 million, or 5%, to $3,250.0 million, with growth tempered by approximately $123 million due to the ERP transition during our fiscal third quarter. Price/mix increased 13%, reflecting the carryover benefit of inflation-driven pricing actions taken in fiscal 2023, as well as pricing actions for contracts with large and regional chain restaurant customers in fiscal 2024, partially offset by lower customer transportation charges. Volume declined 8%, with approximately two-thirds of the volume decline reflecting the carryover effect of our decisions to exit certain lower-priced and lower-margin business in the prior year. The remaining approximately one-third of the volume decline reflects unfilled customer orders resulting from the ERP transition. To a lesser extent, soft restaurant traffic and retail trends, as well as lower shipments in response to inventory destocking by certain customers in select U.S. retail channels, also pressured volumes. International segment net sales, which includes all sales to customers outside of North America, increased $1,038.9 million, or 183%, to $1,605.7 million, and included $1,107.4 million of incremental sales attributable to the Acquisitions. International segment net sales, excluding the incremental sales attributable to the Acquisitions, declined $68.5 million, or 12% compared to the prior year period, with approximately $12 million of the decline attributable to the ERP transition during our fiscal third quarter. Volume declined 22%, primarily reflecting the carryover effect of our decisions to exit certain lower-priced and lower-margin business in the prior year. To a lesser extent, soft restaurant traffic trends in key international markets, as well as lower shipments in response to inventory destocking by certain customers in several markets in the Asia-Pacific region, also pressured volume. Less than 10% of the volume decline reflects unfilled customer orders resulting from the ERP transition. Price/mix increased 10%, driven by the carryover benefit of inflation-driven pricing actions taken in fiscal 2023, partially offset by lower customer transportation charges. Gross Profit Compared to the first three quarters of 2023, gross profit increased $326.1 million, or 31%, to $1,378.8 million, and included $20.7 million of costs ($15.4 million after-tax, or $0.11 per share) associated with the sale of inventory stepped-up to fair value in the LW EMEA Acquisition, and a $3.8 million ($2.9 million after-tax, or $0.02 per share) unrealized gain related to mark-to-market adjustments associated with commodity hedging contracts. The prior year period included a $8.7 million ($6.5 million after-tax, or $0.04 per share) unrealized loss related to mark-to-market adjustments associated with commodity hedging contracts. Adjusted Gross Profit increased $334.3 million versus the prior year quarter to $1,395.7 million, driven primarily by incremental earnings attributable to the consolidation of the financial results of LW EMEA, and benefits from inflation-driven pricing actions. Gross profit and Adjusted Gross Profit included a total of $85.1 million of pre-tax charges for the write-off of excess raw potatoes, largely reflecting a reduction in our initial sales estimate that was developed in January 2023 for the following year, as well as a higher-than-expected impact on customer shipments associated with the transition to a new ERP system. In addition, gross profit and Adjusted Gross Profit included an estimated $33 million of incremental costs associated with the ERP transition during our fiscal third quarter. The increase in Adjusted Gross Profit was also partially offset by higher costs per pound, which largely reflected mid-to-high single-digit cost inflation, in the aggregate, for key inputs, including: raw potatoes, ingredients such as grains and starches used in product coatings, labor, and energy. The increase in per pound costs was partially offset by lower transportation rates, lower cost of edible oils, and supply chain productivity savings. 23 Table of Contents Selling, General and Administrative Expenses Compared to the first three quarters of 2023, SG&A increased $168.4 million to $526.0 million and included: $11.2 million of LW EMEA integration and acquisition-related expenses ($8.4 million after-tax, or $0.05 per share); $5.4 million ($4.0 million after-tax, or $0.03 per share) of unrealized losses related to mark-to-market adjustments associated with currency hedging contracts; and $7.3 million ($5.5 million after-tax, or $0.03 per share) of foreign currency exchange losses. The prior year period included: $30.8 million ($22.0 million after-tax, or $0.15 per share) of LW EMEA integration and acquisition-related net gains; and $4.2 million ($3.2 million after-tax, or $0.02 per share) of foreign currency exchange losses. Adjusted SG&A increased $117.9 million to $502.1 million, primarily due to incremental expenses attributable to the consolidation of the financial results of LW EMEA, and to a lesser extent, higher expenses associated with information technology investments, which included the transition to a new ERP system and related non-cash amortization costs. The increase was partially offset by a reduction in compensation and benefits accruals. Net Income, Adjusted EBITDA and Segment Adjusted EBITDA Compared to the first three quarters of 2023, net income increased $85.7 million to $595.8 million. Net income in the current period included a total net loss of $30.4 million for foreign currency exchange and unrealized mark-to-market derivative gains and losses, and items impacting comparability, as well as a $72.9 million after-tax charge for the write-off of excess raw potatoes. In addition we estimate the ERP transition also negatively impacted net income in the current period by approximately $72 million. Net income in the prior year quarter included a total net gain of $3.1 million for items impacting comparability, unrealized mark-to-market adjustments associated with commodity and currency hedging contracts (primarily at LW EMEA), and foreign currency exchange losses. Compared to the first three quarters of 2023, Adjusted EBITDA increased $217.7 million to $1,133.4 million. The increase largely reflects the benefit of inflation-driven pricing actions and incremental earnings from the consolidation of the financial results of LW EMEA, partially offset by: higher costs per pound; a $95.9 million pre-tax charge for the write-off of excess raw potatoes (of which $10.8 million was recorded in Equity Method Investment Earnings); an approximately $95 million negative impact from the ERP transition; and lower volumes. North America Segment Adjusted EBITDA increased $122.2 million to $986.6 million. The carryover benefit of inflation-driven pricing actions taken in fiscal 2023, as well as pricing actions for contracts with large and regional chain restaurant customers in fiscal 2024, were partially offset by higher costs per pound, an $86.0 million charge for the write-off of excess raw potatoes, an approximately $83 million negative impact from the ERP transition, and the impact of lower volumes. International Segment Adjusted EBITDA increased $144.1 million to $291.5 million, and excluded $20.7 million ($15.4 million after-tax, or $0.11 per share) of costs associated with the sale of inventory stepped-up to fair value in the LW EMEA Acquisition. Incremental earnings from the consolidation of the financial results of LW EMEA drove the increase. Excluding the benefit from the LW EMEA Acquisition, International Segment Adjusted EBITDA declined as higher costs per pound, a $9.9 million allocated charge for the write-off of excess raw potatoes, an approximately $5 million impact from the ERP transition, and the impact of lower volumes, more than offset favorable price/mix. Interest Expense, Net Compared with the first three quarters of fiscal 2023, interest expense, net increased $19.1 million to $95.5 million, reflecting the impact of higher total debt outstanding and higher interest rates on our floating rate debt, partially offset by higher capitalized interest related to our manufacturing expansion projects, net of interest income. Income Tax Expense Income tax expense for the first three quarters of fiscal 2024 and 2023 was $179.3 million and $152.6 million, respectively. The effective income tax rate (calculated as the ratio of income tax expense to pre-tax income, inclusive of equity method investment earnings) was 23.1% and 23.0% for the first three quarters of fiscal 2024 and 2023, respectively. The effective tax rate varies from the U.S. statutory tax rate of 21%, principally due to the impact of U.S. state taxes, foreign taxes and currency, permanent differences, and discrete items. 24 Table of Contents Equity Method Investment Earnings Equity method investment earnings from unconsolidated joint ventures were earnings of $17.8 million and $44.0 million for the first three quarters of fiscal 2024 and 2023, respectively. The results in the current year period include earnings associated with our 50% interest in Lamb Weston RDO, while results in the prior year also included earnings associated with our previously held 50% interest in LW EMEA. The results in the prior year include a $32.7 million unrealized loss ($24.3 million after-tax, or $0.16 per share) related to mark-to-market adjustments associated with currency and commodity hedging contracts and a $15.1 million gain (before and after-tax, or $0.10 per share) recognized in connection with the LWAMSA Acquisition, which related to remeasuring our previously held 50% ownership interest to fair value. Adjusted Equity Method Investment Earnings declined $43.8 million compared to the prior year period, largely due to our share of LW EMEA earnings being included in the prior year. The results in the current period also include a $10.8 million pre-tax charge for the write-off of excess raw potatoes at Lamb Weston RDO. Liquidity and Capital Resources Sources and Uses of Cash As of February 25, 2024, we had $62.3 million of cash and cash equivalents, with $908.8 million of available liquidity under our committed revolving credit facilities in the U.S. and Europe. We believe we have sufficient liquidity to meet our business requirements for at least the next 12 months. Cash generated by operations, supplemented by our cash and cash equivalents and availability under our credit facilities, are our primary sources of liquidity for funding our business requirements. Our funding requirements include capital expenditures for announced manufacturing expansions in Idaho, the Netherlands, and Argentina, as well as capital investments to upgrade information systems and ERP infrastructure, working capital requirements, and shareholder returns, including cash dividends and repurchases under our share repurchase program. Cash Flows Below is a summary table of our cash flows, followed by a discussion of the sources and uses of cash through operating, investing, and financing activities: Thirty-Nine Weeks Ended (in millions) February 25, 2024 February 26, 2023 Net cash flows provided by (used for): Operating activities $ 481.5 $ 335.1 Investing activities (824.8) (535.7) Financing activities 100.1 331.3 (243.2) 130.7 Effect of exchange rate changes on cash and cash equivalents 0.7 19.3 Net decrease in cash and cash equivalents (242.5) 150.0 Cash and cash equivalents, beginning of period 304.8 525.0 Cash and cash equivalents, end of period $ 62.3 $ 675.0 Operating Activities In the first three quarters of fiscal 2024, cash provided by operating activities increased $146.4 million to $481.5 million, compared with $335.1 million in the same period of fiscal 2023. The increase related to a $265.6 million increase in income from operations, adjusted for non-cash income and expenses, partially offset by $119.2 million of cash used for unfavorable changes in working capital, primarily related to changes in compensation and benefit accruals and the timing of accounts payable. See “Results of Operations” in this MD&A for more information related to the increase in income from operations. 25 Table of Contents Investing Activities Investing activities used $824.8 million of cash in the first three quarters of fiscal 2024, compared with $535.7 million in the same period in the prior year. The increase primarily relates to our investments to expand our french fry and chopped and formed capacity and other facility modernization efforts in American Falls, Idaho; the construction of a greenfield french fry processing facility in Ulanqab, Inner Mongolia, China, which became operational in November 2023; and the construction of french fry processing facilities in Mar del Plata, Argentina and Kruiningen, the Netherlands. We expect to use approximately $950 million in fiscal 2024 as we continue construction of our capacity expansion efforts in Idaho, the Netherlands, and Argentina, as well as capital investments to upgrade our information systems and ERP infrastructure. Financing Activities During the first three quarters of fiscal 2024, proceeds from short-term borrowings and debt issuances were $429.2 million, of which $379.1 million were short-term. The increase in short-term borrowings related to continued investments to expand french fry capacity and unfavorable third quarter cash receipts for products shipped due to lower customer order fulfillment rates (reduced product shipments) as we transitioned to our new ERP system. We used $165.1 million of cash to repurchase 1,564,351 shares of our common stock at an average price of $95.89 per share, and we withheld 144,260 shares from employees to cover income and payroll taxes on equity awards that vested during the period. In addition, we paid $122.0 million in cash dividends to common stockholders and $42.0 million of debt and financing obligations. In the first three quarters of fiscal 2023, cash used for financing activities primarily related to issuing a new term loan facility for net proceeds of $450.0 million and borrowing $59.1 million and $1.7 million under our RMB-denominated loan facility and other credit facilities, respectively, offset by $24.6 million of debt and financing obligation repayments, and the payment of $105.8 million of cash dividends to our common stockholders. In addition, we used $47.2 million of cash to repurchase 529,167 shares of our common stock at an average price of $76.66 per share, and we withheld 83,973 shares from employees to cover income and payroll taxes on equity awards that vested during the period. For more information about our debt, interest rates, maturity dates, and covenants, see Note 9, Debt and Financing Obligations, of the Condensed Notes to Consolidated Financial Statements in “Part I, Item 1. Financial Statements” of this report and Note 8, Debt and Financing Obligations of the Notes to Consolidated Financial Statements in “Part II, Item 8. Financial Statements and Supplementary Data” of the Form 10-K. At February 25, 2024, we were in compliance with the financial covenant ratios and other covenants contained in our credit agreements. Obligations and Commitments There have been no material changes to the contractual obligations disclosed in “Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Form 10-K. Non-GAAP Financial Measures To supplement the financial information included in this report, we have presented Adjusted EBITDA, Adjusted Gross Profit, Adjusted SG&A, and Adjusted Equity Method Investment Earnings, each of which is considered a non-GAAP financial measure. Management uses these non-GAAP financial measures to assist in analyzing what management views as our core operating performance for purposes of business decision making. Management believes that presenting these non-GAAP financial measures provide investors with useful supplemental information because they (i) provide meaningful supplemental information regarding financial performance by excluding foreign currency exchange and unrealized mark-to-market derivative gains and losses and items affecting comparability between periods, (ii) permit investors to view performance using the same tools that management uses to budget, make operating and strategic decisions, and evaluate our core operating performance across periods, and (iii) otherwise provide supplemental information that may be useful to investors in evaluating our financial results. In addition, we believe that the presentation of these non-GAAP financial measures, when considered together with their most directly comparable GAAP financial measure and the reconciliations to those GAAP financial measures, provides investors with additional tools to understand the factors and trends affecting our underlying business than could be obtained absent these disclosures. 26 Table of Contents The non-GAAP financial measures presented in this report should be viewed in addition to, and not as alternatives for, financial measures prepared in accordance with GAAP that are also presented in this report. These measures are not substitutes for their comparable GAAP financial measures, such as net income, gross profit, SG&A expenses, equity method investment earnings, or other measures prescribed by GAAP, and there are limitations to using non-GAAP financial measures. For example, the non-GAAP financial measures presented in this report may differ from similarly titled non-GAAP financial measures presented by other companies, and other companies may not define these non-GAAP financial measures the same way we do. The following table reconciles net income to Adjusted EBITDA: Thirteen Weeks Ended Thirty-Nine Weeks Ended (in millions) February 25, 2024 (a) February 26, 2023 February 25, 2024 (a) February 26, 2023 Net income $ 146.1 $ 175.1 $ 595.8 $ 510.1 Interest expense, net 35.7 25.8 95.5 76.4 Income tax expense 43.1 42.1 179.3 152.6 Income from operations including equity method investment earnings 224.9 243.0 870.6 739.1 Depreciation and amortization (b) 80.0 59.5 222.0 176.9 Unrealized derivative losses 27.3 5.1 1.6 8.7 Unconsolidated joint venture unrealized derivative losses — 47.1 — 32.7 Foreign currency exchange losses 9.0 1.8 7.3 4.2 Items impacting comparability: Inventory step-up from acquisition — — 20.7 — Integration and acquisition-related items, net 2.4 (4.3) 11.2 (30.8) Gain on acquisition of interest in joint venture — — — (15.1) Adjusted EBITDA $ 343.6 $ 352.2 $ 1,133.4 $ 915.7 ___________________________________________ (a) Net income included the following: i. A $25.0 million charge ($19.0 million after-tax, or $0.13 per share) and $95.9 million charge ($72.9 million after-tax, or $0.50 per share) for the write-off of excess raw potatoes in North America for both the thirteen and thirty-nine weeks ended February 25, 2024, respectively. For the thirteen weeks ended February 25, 2024, we recorded a $20.5 million charge ($15.6 million after-tax, or $0.11 per share) in cost of sales, and a $4.5 million charge ($3.4 million after-tax, or $0.02 per share) in equity method investment earnings. The total charge to the reporting segments was as follows: $22.7 million to the North America segment; and $2.3 million to the International segment. For the thirty-nine weeks ended February 25, 2024, we recorded a $85.1 million charge ($64.7 million after-tax, or $0.44 per share) in cost of sales, and $10.8 million charge ($8.2 million after-tax, or $0.06 per share) in equity method investment earnings. The total charge to the reporting segments was as follows: $86.0 million to the North America segment; and $9.9 million to the international segment. ii. For both the thirteen and thirty-nine weeks ended February 25, 2024, our results were negatively impacted by the ERP transition, which we estimate impacted net sales by approximately $135 million, with $123 million and $12 million in our North America and International segments, respectively. We estimate net income was impacted by approximately $95 million ($72 million after taxes), including approximately $55 million ($42 million after taxes) related to lower order fulfillment rates and approximately $40 million ($30 million after taxes) of incremental costs and expenses, of which approximately $7 million ($5 million after taxes) was a reduction in gross sales, and included accrued fees and charges for delayed or unfilled customer orders; approximately $26 million ($20 million after taxes) was recorded in cost of sales, and included reduced fixed cost coverage and inefficiencies resulting from planned downtime at our processing facilities, as well as additional freight charges; and approximately $7 million ($5 million after taxes) was recorded in SG&A, and largely included consulting expenses to restore order fulfillment rates. We estimate that approximately $83 million impacted the North America segment, approximately $5 million impacted the International segment, and approximately $7 million impacted unallocated corporate costs. (b) Depreciation and amortization included interest expense, income tax expense, and depreciation and amortization included in equity method investment earnings of $2.1 million and $9.3 million for the thirteen weeks ended February 25, 2024 and February 26, 2023, respectively; and $6.4 million and $26.9 million for the thirty-nine weeks ended February 25, 2024 and February 26, 2023. 27 Table of Contents The following tables reconcile gross profit to Adjusted Gross Profit, SG&A expenses to Adjusted SG&A, and equity method investment earnings to Adjusted Equity Method Investment Earnings: For the Thirteen Weeks Ended February 25, 2024 February 26, 2023 February 25, 2024 February 26, 2023 February 25, 2024 February 26, 2023 (in millions) Gross Profit SG&A Equity Method Investment Earnings (Loss) As reported $ 403.7 $ 397.8 $ 179.8 $ 131.5 $ 1.0 $ (23.3) Unrealized derivative losses 23.3 5.1 (4.0) — — 47.1 Foreign currency exchange losses — — (9.0) (1.8) — — Item impacting comparability: Integration and acquisition-related items, net — — (2.4) 4.3 — — Total adjustments 23.3 5.1 (15.4) 2.5 — 47.1 Adjusted $ 427.0 $ 402.9 $ 164.4 $ 134.0 $ 1.0 $ 23.8 For the Thirty-Nine Weeks Ended February 25, 2024 February 26, 2023 February 25, 2024 February 26, 2023 February 25, 2024 February 26, 2023 (in millions) Gross Profit SG&A Equity Method Investment Earnings (Loss) As reported $ 1,378.8 $ 1,052.7 $ 526.0 $ 357.6 $ 17.8 $ 44.0 Unrealized derivative gains and losses (3.8) 8.7 (5.4) — — 32.7 Foreign currency exchange losses — — (7.3) (4.2) — — Item impacting comparability: Inventory step-up from acquisition 20.7 — — — — — Integration and acquisition-related items, net — — (11.2) 30.8 — — Gain on acquisition of interest in joint venture — — — — — (15.1) Total adjustments 16.9 8.7 (23.9) 26.6 — 17.6 Adjusted $ 1,395.7 $ 1,061.4 $ 502.1 $ 384.2 $ 17.8 $ 61.6 Off-Balance Sheet Arrangements There have been no material changes to the off-balance sheet arrangements disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in the Form 10-K. Critical Accounting Policies and Estimates A discussion of our critical accounting policies and estimates can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in the Form 10-K. There were no material changes to these critical accounting policies and estimates during the first half of fiscal 2024. New and Recently Adopted Accounting Pronouncements For a list of our new and recently adopted accounting pronouncements, see Note 1, Nature of Operations and Summary of Significant Accounting Policies, of the Condensed Notes to Consolidated Financial Statements in “Part I, Item I. Financial Statements” of this report.