Lamb Weston – North American Recovery & Strategic
Update – 14 April 2021
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Specialist: Mark Hayden (MH)
Title:
Moderator: Nyree Hinton (NH), Third Bridge Sector Analyst
Former SVP, Supply Chain at Lamb Weston (Conagra Foods)
Agenda:
1. QSR (quick-service restaurant) customer segment recovery
2. Competitive dynamics across main suppliers – Lamb Weston (NYSE: LW), McCain, Simplot and
Cavendish Farms
3. Frozen potato market innovation and consumer trends
4. Revenue diversification opportunities
5. Outlook for 2021 and beyond
Contents
Q: Could you give an overview of the commercial potato market? What are the main drivers and who are the
top competitors?
3
Q: What were the key industry trends pre-coronavirus?
Q: Could you outline the demand-supply dynamic? How easy is it for companies such as Lamb Weston to
quickly add capacity?
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Q: Could you give an overview of Lamb Weston and the different markets it operates in? Could you elaborate
4
on the international expansion trend?
Q: How would you assess Lamb Weston’s performance and the impact of coronavirus on its business?
Q: Could you describe any input cost inflation impacting Lamb Weston and what this means for pricing?
You mentioned Lamb has historically had a stronger footing on pricing.
Q: How strong a position is Lamb Weston in to pass higher prices on to customers?
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Q: What are the production requirements for QSRs [quick-serve restaurants]? Is there a significant
difference in the production process for Chick-fil-A vs McDonald’s? How does that translate into the higher
input costs you mentioned?
Q: Would you classify Lamb Weston as the go-to for the nuanced and more personalised ingredient mix in
production?
Q: 95% of Lamb Weston’s revenue is potato-based. What are the consumer risks of this exposure? What
impact is the trend towards health and wellness having on the potato market?
Q: What are the drivers of frozen potato demand between Lamb Weston’s global food service and retail
channels?
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Q: How might international expansion in Lamb Weston’s potato sales differ between a North American food
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service and a different channel?
Q: McDonald’s represents 10% of Lamb Weston’s sales.
Q: Demand from non-commercial customers, including lodging, hospitality, healthcare, education, sports,
entertainment and other workplace environments, remains around 50% of 2020 levels. How important is
non-commercial recovery to Lamb Weston’s return to financial normality?
Q: Lamb Weston expects strong demand for french fries over the next few years. How could it capitalise on
this growth and improve its product? What is the state of innovation at Lamb Weston and in the potato
market overall?
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Q: Could you elaborate on the capital intensity of this industry and why the market is so concentrated? Do
you expect further consolidation or new market entrants?
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Q: What are your thoughts on Lamb Weston’s USD 250m capital investment in a new french fry processing
facility in China?
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Q: How important are relationships with international QSR chains in driving international growth? You
mentioned McDonald’s trying to expand internationally and its dependence on a strong supply chain.
Q: What would you say are Lamb Weston’s most pressing challenges?
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Q: Is there anything you think investors should know about Lamb Weston’s management team and ability to
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execute on priorities?
Lamb Weston – North American Recovery & Strategic
Update
Transcription begins at 00:00:00 of the recorded material
NH: Welcome to Third Bridge Forum’s Interview, entitled Lamb Weston – North American Recovery and
Strategic Update. I am Nyree Hinton and I will be facilitating today’s Interview with Mr Mark Hayden, former
SVP, Supply Chain at Lamb Weston.
Mark, before we get started with today’s Interview, please state I agree or I disagree to the following
statement: You understand the definition of material non-public information and agree not to disclose any
such information, or any other information which is confidential, during this Interview.
MH: I agree.
NH: Thank you, Mark. Could you just start by giving the audience an overview of your background and
various roles you’ve held in the industry?
MH: I spent 29 years in the frozen potato industry, rising through various sales roles to ultimately 21 years at
Lamb Weston, where I led global supply chain and global sales concurrently and then separately. Left that
industry to go into the brokerage industry, where we represented Lamb Weston for food service in North
America for a number of years. Then have left that and now involved with a good friend of mine in frozen
vegetable and potato processing, along with fruit.
[00:01:30]
Q: Could you give an overview of the commercial potato market? What are the main drivers and who are the
top competitors?
MH: Starting out, the North American marketplace really led by Lamb Weston, McCain in the secondary
position, followed by Simplot and then Cavendish. Interesting, all three of those competitors to Lamb are
private family-owned businesses. Ore-Ida is still a pretty good factor, owned by Kraft Heinz, in the retail sector
with a little bit of club store. A big driver is food service, the food-away-from-home channel in North America
for frozen potato products. My opinion, probably today running about 85-86% of volume consumption would
be the food service market, with retail, club being that balance of 14% or 15%. Inside of that food service
channel, quick-service restaurants, which are going to be your McDonald’s, Wendy’s, Burger King, Chick-fil-A-
type operations, are going to be somewhere toward 70-75% of the volume, which seems a little unusual but
makes sense when you think about the number of french fries sold by McDonald’s, Chick-fil-A, those types of
operations. Food service distribution, big, big factor, with private label a relatively strong piece of what their
strategy is. Today, the distributor brands are probably running, in my opinion, somewhere around 40% of the
industry volume, with that being the up and down the street-type business or small local, regional chains. The
large chains are going to carry their own labels on the product to differentiate those and help franchisees know
what’s going on.
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[00:03:49]
Q: What were the key industry trends pre-coronavirus?
MH: Fairly dramatic for several years, demand was really outstripping supply. The frozen potato
manufacturers in general had not made many investments toward capacity expansion. The margins really
didn’t support a lot of that investment, which is quite expensive. That led to really strong pricing in the
marketplace for several years, with pretty strong advances, and that did include the export channels, which are
an important part of the North American potato production. A lot of product ships into the Pacific Rim and
down through Mexico, Latin America, South America. Lamb did a nice job, in my opinion, adding capacity
with expansions to their Richland, Washington, Boardman, Oregon, Hermiston, Oregon facilities. McCain was
adding capacity in their Burley, Idaho facility and had started some expansion in Othello, Washington.
Cavendish had done a plant replacement up in Alberta, Canada. All of those came online at different times.
McCain’s was impaired a bit. They came out around 2019 with new crop and had some crop failures in the
Midwest and the east, so they had to use that capacity added in Burley to help support their other plants. By
the time they started ramping up in the 2020 year, COVID hit and really brought the overall demand to a
pretty fast halt. All the fried processors really started to scramble to reset raw product requirements and
working with their growers to try to figure out what they were going to need through the 2020 and the 2021
years. That demand play and then the COVID really had some impact, predominantly with pricing. Hard to
know now how that capacity-demand balance sits with the impact of COVID.
[00:06:29]
Q: Could you outline the demand-supply dynamic? How easy is it for companies such as Lamb Weston to
quickly add capacity?
MH: Yes, it’s a bit challenging. I would say the types of projects that at least Lamb and McCain did, I would
estimate are about a 12-month process, at least, from the planning to completion phases. Lamb was pretty
public with the expense on their expansions was running somewhere toward USD 250m, which was adding
somewhere toward 300-350 million pounds of capacity annualised. Really, fairly expensive capacity vs
historical industry averages, but the new pricing models that have come into play with demand outstripping
supply have really made that viable, whether it be the large chains are paying significantly more today than
they paid 10 years ago. That supports the CAPEX investments that are going on to also fix what I’d call
bottlenecks, so that a given plant may still put more volume out by, say, replacing a blancher that could blanch
products faster at higher speed than what might exist. Really, the capacity is complex and expensive to add
and one of the reasons people were slow to probably jump into that activity.
[00:08:33]
Q: Could you give an overview of Lamb Weston and the different markets it operates in? Could you elaborate
on the international expansion trend?
MH: Lamb Weston, I would say, on the North American-based business, is by far the best balance in my
opinion, with number one share in food service, looks to me like they’re probably pushing number one share
in retail, club. Very strong position historically with the contract management companies in food service,
which are really important for pushing your brand through the marketplace. Very, very strong in the
international export channels vs competition. I think they’ve done a really nice job. McCain is in a really nice
position as well out of North America, not nearly as strong in the retail, club channels but does a good job in
the food service space and a fairly good job with export.
To your point, the international markets are really where a lot of growth is showing itself. Coming down the
Pacific Rim, China continues to be very, very strong. You’re seeing a combination of supply from export out of
North America and/or Europe but also a great deal of now construction for capacity in China, which is greatly
Private and confidential 4
driven by the Chinese government and how they try to create infrastructure and domestic manufacturing jobs
by putting pressure on the large customers and those suppliers to create a domestic Chinese supply chain.
Seen quite a bit of that. Lamb has made investments down, it looks like, in the Australia, New Zealand areas
and, of course, continues to work aggressively in the Russia, Georgia-type areas, in addition to Europe. We’re
seeing Simplot and McCain making investments similarly on the international stage, with looks like a lot of
effort in South America for them specifically. Your large growth will come out of the international markets vs
the North American market for frozen potatoes in the years ahead.
[00:11:32]
Q: How would you assess Lamb Weston’s performance and the impact of coronavirus on its business?
MH: Certainly, COVID, big, big impact. Fortunately, for the fried processors, quick service maintained their
businesses better through COVID than most. They were more in the 80-85% of prior year-type position vs,
say, family dining or casual that tended to be more in the 40-50%. Of course, college and university and K-12
severely impacted on food service operations, so I’m sure Lamb saw some impact on the food service street
side. I separate it by food service major, small chains, your up and down the street independent restaurants,
national accounts are going to be your large McDonald’s, Burger King, etc, and then you have retail, club and
export. Food service generally your most profitable channel, so with the impact that that channel saw, which I
would guess overall was probably down about 30-35% most likely, probably some big impact and even the
chain business being down hurt. I think international export probably saw some impact in the first six months
of COVID, with Japan being a very strong market, Korea, China. I believe those have probably come back fairly
well in the last four or five months. Of course, retail, club, where Lamb in particular has done a really nice job
with their Grown In Idaho, the Alexia and licensed brands, retail was up probably 30-40%, but it is a very
small part of frozen potato market share, being somewhere toward 14-15%. Lamb probably had the best
benefit from that, even better than Heinz Ore-Ida, would be my guess.
[00:14:08]
Q: Could you describe any input cost inflation impacting Lamb Weston and what this means for pricing? You
mentioned Lamb has historically had a stronger footing on pricing.
MH: The overall farming landscape, you always have to start with raw product in the frozen potato processing
industry, has seen some various, I must say, market pressures. If you look at the commodity markets for
wheat, field corn, soybeans, those commodity-traded ag crops, those saw a great deal of strength in Q1 2021
and those are easier crops to grow at lower cost, in general, than certainly potatoes. Potatoes are a very
expensive crop to grow. With that option to lock in pricing and grow an easier crop, it puts pressure to raise
the price for alternate crops such as potatoes, sweetcorn, peas, beans, etc, so there was definitively pressure for
price increases on potatoes with that commodity pressure for one. The base price of raw potatoes will see some
inflation. The inputs, liquid nitrogen and phosphate products are really important to potatoes. Those are
running about 15-17% above year-ago levels, so some of the input costs are also higher on the crop. Then
labour costs are fairly strong in Washington and Oregon due to state legislation and hauling costs are seeing
pressures as well. All things said, I would say expectation for higher raw costs for all the frozen processors for
those various reasons, which will need to be either priced into the market or we’ll see some challenge with
margins.
[00:16:53]
Q: How strong a position is Lamb Weston in to pass higher prices on to customers?
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MH: I think really in a very good position. I think they’ve worked on a number of different models with
customers to be a little more transparent on some of these cost factors. The french fries are critically important
to the quick-service industry. They drive a huge percentage of their profits. If you look at McDonald’s or
Burger King or Wendy’s, you’re going to see soft drinks and fries driving somewhere towards 70% of their
profit. As much as nobody likes price increases, they certainly can afford it, which is the lion’s share of the
marketplace for frozen potato processors. Even your casual dining and family dining see fries as a low-cost
side item, so, again, they’ve got the ability to take on higher price. I think Lamb has done the best job of
positioning why an operator should agree to higher prices and the minimal impact it has on their margin.
Their business is, I think, by far the best diversified between the various channels, which should further help
them. Probably should mention other pressures will be edible oils have seen some pressure with higher price,
packaging is seeing pressure for higher prices, so it won’t just be raw product. You’ve got almost every factor
under pressure. The good news is they’ve got good third-party information, like packaging, of what’s going on
that’s driving those costs, so should be able to push those through to the marketplace.
[00:19:07]
Q: What are the production requirements for QSRs [quick-serve restaurants]? Is there a significant difference
in the production process for Chick-fil-A vs McDonald’s? How does that translate into the higher input costs
you mentioned?
MH: Some of the biggest differences you’re going to see between products, if you think about a waffle-type fry
at Chick-fil-A vs, say, the shoestring used at McDonald’s, your line speeds are significantly higher, faster with a
conventional fry like McDonald’s vs a speciality-cut fry like Chick-fil-A or the spiral-type fry at Arby’s. They
just run slower, they have to be handled more carefully to avoid breakage, so there’s definitively higher cost to
produce in the speciality cuts. For the operator or the chain account, those have been proven to have value in
the eye of the consumer and the consumer will pay more for, say, a spiral-type fry or a waffle, CrissCut-type
french fry. Similarly, with seasoned french fries, a consumer sees value, sweet potato fries. The industry has
done a nice job, where they have higher cost, being able to do consumer work that shows the operator can
charge more for those and the consumer will accept those charges. Really comes down to the style of fry, and
then, inside of that style of fry, certain chains have additional specifications that could cause unique attributes
and processing, whether that’s how to blanch the french fry strips. The varieties of potatoes that they’ll allow
to be used can sometimes create challenge. There are quite a few nuances in each chain account.
[00:21:38]
Q: Would you classify Lamb Weston as the go-to for the nuanced and more personalised ingredient mix in
production?
MH: Yes, I really would and I think Lamb just over the years had a lot of foresight toward moving customers
toward value-added products and creating, number one, the innovation. Lamb has been the innovation leader
for years, years and years and years. It seems to me they continue to be that innovation leader, watching now
from the outside. They’ve been able to make their manufacturing investments be directed toward that type of
processing. I think they make better quality more consistently, candidly, at higher speed and therefore lower
cost. Imagine having the best quality and consistency but doing it at a lower cost. They’ve got really, I think, a
tremendous advantage over the rest of the industry. Combining that with their R&D capabilities and
innovation they’ve brought to bear really gives them a strong position. Competition is not sitting just letting
that go on. McCain’s new capacity was very much directed toward value-added products and improving
quality. Cavendish, I know, in Alberta was very similar to improving their capabilities toward value-added and
trying to improve their quality and consistency.
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[00:23:47]
Q: 95% of Lamb Weston’s revenue is potato-based. What are the consumer risks of this exposure? What
impact is the trend towards health and wellness having on the potato market?
MH: That’s really fairly fascinating. Let me say I was involved in the industry directly 29 years and through
the course of that time there were lots of different events that would come along, whether it was back in
the ’80s, when most processors were using tallow, for instance, and out came all the information that that was
a huge problem for heart disease, and leading to further out with the Atkins diet. Probably the biggest single
concern when I was around was acrylamide, which was blown up for a 2-3 years, the browning effect of french
fries and any other food with browning could lead to different cancers. Through all of that, really didn’t see
much impairment on the consumer demand for frozen french fries. I think the best I ever saw was, back in the
early ’90s, a futurist compared french fries to chocolate, that, in their belief, consumers just craved french fries
primarily because they couldn’t make a good french fry at home the same like they could buy away from home,
and so they were going to continue to want that product. I think that’s proven itself out. As much as diet and
other factors are certainly out there and one needs to be aware of them, they have really not had an impact on
the consumption of frozen french fry products. As heavily as Lamb is skewed toward the category, I don’t see it
being a huge, huge concern. Particularly, with the amount of markets internationally that are very, very low
penetration with frozen french fry products, I think they’ve got quite a runway for growth.
[00:26:27]
Q: What are the drivers of frozen potato demand between Lamb Weston’s global food service and retail
channels?
MH: Internationally, I would say Lamb’s strategy, and probably the others to a degree, was really to get very
strongly connected to the growing North American-based quick-service chains. If you look at McDonald’s and
the growth that they’ve driven by adding stores to international markets, if, as a french fry supplier, you’re
very closely attached to that, you’re going to benefit from that growth with new stores. I think they, and,
candidly, others, have done a nice job of using then that new business and volume that’s driven by these chains
to gain entry to these countries and then start work to connect with the more local fast-food restaurants,
quick-service restaurants to show them the innovation opportunities and/or the quality difference,
particularly of North American-produced french fries. There is a dramatic difference in the length of french
fries produced in North America vs anywhere else in the world. The russet variety grows very, very well in
North America, not so well in Europe, for instance, so you have different textures. Almost the gold standard
was established via McDonald’s via North American production. That gives any of these folks, including Lamb,
an advantage going into these international markets on why the local operations should look to source that
product, and then connecting, again, to these large international chains that are driving new store placement.
I think importantly even some of the smaller chains, like Shake Shack, are seeing pretty good traction
internationally. If one can get them aligned domestically, then one is going to enjoy that same opportunity for
international growth as they add stores outside of the country. There’s definitely a strong strategy there on
using quick-service restaurants, or even back in the day TGI Fridays was pretty strong internationally, to
catapult one’s business into new countries. Hopefully, that makes sense.
[00:29:41]
Q: How might international expansion in Lamb Weston’s potato sales differ between a North American food
service and a different channel?
MH: It’s interesting. As I mentioned, in North America, the food service channel should probably be carrying
the highest margin. It did for all the years I was directly involved. Export, and a lot of this, too, depends on
mix, so if you’ve got a good mix of value-added products, those are going to carry superior margin as
Private and confidential 7
compared to conventional quarter-inch shoestring french fry. Some of it is mix-based as well. Food service
should be best margin, generally followed by international export, chain or, I should say, retail, club depends
on where products are in their life cycle. Something like Grown In Idaho, if there’s a lot of investment in
slotting and promotion to get the product on-shelf and get awareness with the consumer, obviously that
margin is going to be impacted in the near term, but in the long term should enjoy relatively good margins in
the retail, club channels. Finally, QSR tends to have the tightest margins just with the pressure and
professionalism of their procurement agents or teams. The majority of them do buy a more conventional
product. Generally, that large chain area is going to have the tightest margin and, as indicated before, is going
to be the highest volume generally for that overall portfolio mix. As you look across these competitors, say a
Simplot, very, very small retail, club presence, much bigger presence in the international chains, third position
in the food service channel. McCain, relatively weak in the retail, club channel, with the exception of Canada,
pretty strong internationally, fairly strong with the chains, number two position in food service but quite a way
smaller than Lamb Weston. Cavendish, really far behind all of them in all of the channels.
[00:32:51]
Q: McDonald’s represents 10% of Lamb Weston’s sales. What stops McDonald’s from choosing a different,
cheaper supplier?
MH: Yes, several points on that. Number one is capacity. There just aren’t enough viable alternatives to take
on the volume that McDonald’s demands. They really, at least for the last several years, haven’t had viable
options to move volume, say, away from a Lamb or a Simplot or McCain. I would imagine a Cavendish is
trying to get approved, for instance, at McDonald’s to have that opportunity for really consistent volume.
McDonald’s, pretty loyal to their suppliers. They know they need those suppliers just to have a culture of
working closely with them. The McDonald’s specification is actually fairly complex. They demand very high
quality very consistently. That also puts some restriction on how much they can move around, because, all the
way to the raw product, you have to start with the right raw product to make the right finished goods for
McDonald’s. There’s always some risk with any customer, but McDonald’s is a good one from the standpoint
of they understand their need for the right high-quality product consistently, they’ve shown, over a very long
period of time, alignment to their suppliers against all their categories of products and they need strong
suppliers to help them with their international growth. It’s sometimes not easy to get the product into some of
the countries they’re trying to enter and so it’s really a pretty strong back-and-forth relationship with that
particular account.
Most of the large chains really understand they need balance between their suppliers, because, again, the
french fry is so important to the profitability of those restaurant chains. They’ve, I’m going to say figured it out
finally, with the tight supply that happened for those several years recently. It was the point that the
manufacturers were saying to the chains, “Fine, we just won’t sell to you.” When they finally looked at what
that was going to mean to their bottom line, it really woke them up to, “We can afford to pay,” in their mind,
“A lot more.” It’s still a very low food cost vs what they sell french fries for.
[00:36:12]
Q: Demand from non-commercial customers, including lodging, hospitality, healthcare, education, sports,
entertainment and other workplace environments, remains around 50% of 2020 levels. How important is non-
commercial recovery to Lamb Weston’s return to financial normality?
MH: All of their volume between that is important but not huge. The contract management side of all of that,
that non-commercial, is super important with the Compass Foodbuys, the Aramarks, the Sodexos. Those
businesses were gaining huge penetration over the last many years, taking on a great amount of the college,
university food management, quite a lot of K-12. As that occurred, it gave them a great amount of strength in
negotiating contracts across products, because it also gives that contracted, say, Sodexo supplier a lot of
strength with their brand. Sodexo is going to specify, “We want to focus on these 20 different frozen potato
Private and confidential 8
products for our different operations,” and they’ll specify those generally in the manufacturer brand, so the
authorised Sodexo distributors have to carry those products. It forces those items into distribution everywhere
that Sodexo has operations that need those kinds of products. Once you’re in distribution, you can start to
push those same items to the non-Sodexo food service business. If you know, let’s say, your hash browns are in
stock for some Sodexo accounts and you can go pick up 15 different new hash brown restaurants, now that
distributor is going to be very, very aligned to buying that product from you.
As distributors rationalise their supply chains, they’re going to want to buy from fewer suppliers, carry fewer
products, particularly with COVID, to be as efficient as they can be. The manufacturers who have the contract
management contracts are in the very best position for the distributors to then align their other purchasing
with them. That has become dramatically apparent with COVID, as they’re trying to not have redundant items.
If you look, for years, a distributor had their private label or brand, they would carry the products demanded
by the contract management companies and occasionally even other manufacturer brands. They’re trying to
consolidate those. That non-commercial area is super, super important over time, for who carries those
contract management contracts, because of their influence on distribution. french fries have enough volume
and importance that they’re still specified by the manufacturer brand. Most other food products, I shouldn’t
say most, a great many other food products, the contract management companies accept distributor label. Say
you were looking at the corn or peas or beans or frozen carrots, they’ll generally use Sysco brand, US Foods
brand, Gordon Food brand. On french fries, they’re going to specify Lamb brand or Simplot brand or McCain
brand. I think that is going to be very important to watch, because it will influence the overall food service up
and down the street business according to the alignment of the contract management companies, I think.
[00:40:39]
Q: Lamb Weston expects strong demand for french fries over the next few years. How could it capitalise on
this growth and improve its product? What is the state of innovation at Lamb Weston and in the potato market
overall?
MH: I think I’ve seen, from the outside, a couple of things from, I want to say all the processors but Lamb
specifically. A lot of work around varietals, so red potatoes, gold potatoes, to some degree purple potatoes,
certainly sweet potatoes, so trying to bring innovation with other varieties and colours. A lot of work continues
to go on around holding time. Lamb has been pushing now, for, gosh, a couple of years, some long-hold french
fries. The COVID really drove a shift in consumer behaviour to delivered meals from restaurants. It used to
run around 3% or 4%, with that predominantly being pizza and, to some degree, sandwich. That has moved up
more toward 12% of food service transactions are being delivered to home. You’ve seen that with Uber Eats
and a great many of these other service providers, as consumers didn’t want to go out. One of the things that
doesn’t travel well is french fries. I give credit to the industry is trying to continually solve for, “How can we
deliver a french fry that stays crisp?” The temperature isn’t as important as the characteristic of crispness. I’ve
seen a lot of that work in particular from Lamb through their advertising and industry event work. Obviously,
they’ve been a little more held back and mainly doing that through media, whether that’s print media, digital
media, talking about holding time.
I think innovation is going to be super important to capturing growth. The ability to grab non-traditional
accounts, so if you look at Taco Bell, I believe Lamb is supplying the majority, if not all of that product. A non-
user of frozen potato products for years and years, introduced the item to the menu, probably created a huge
jump in overall volume for those suppliers. If you think about the pizza segment still doesn’t really utilise
frozen potato products, huge sector of the food service channel. The sandwich chains pretty much are all pre-
packaged chips. If there could be a frozen potato solution for the Subway, Jimmy John’s, Firehouse Subs of the
world, huge opportunity. I think still a lot of upside, but it’s going to require a lot of innovation from the frozen
potato processors.
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[00:44:24]
Q: Could you elaborate on the capital intensity of this industry and why the market is so concentrated? Do you
expect further consolidation or new market entrants?
MH: I think, in the North American market, I’d be surprised if there would be any further consolidation. As
indicated, Cavendish, McCain, Simplot, all family-held, pretty long-term personal attachment to those
businesses, can’t really picture any of them wanting to sell. Really, in North America, just leaves then the
Heinz Ore-Ida operation in the border of Idaho, Ontario, Oregon. I could see Kraft Heinz spinning that
business at some point would be about the only consolidation. Because of the extensive capital required to be
in the industry, I think, is a huge barrier to entry, I just don’t see any individual or company saying, “Let’s go
make a greenfield investment to get into the frozen potato processing industry.” It has a fairly unique supply
chain and the relationships with the big chains and others, as indicated, are super important. I think North
America, for sure, is going to be very difficult to see new players and probably not see further consolidation
with, like I say, maybe the exception of the Kraft Heinz Ore-Ida operation.
I think Europe continues to have quite a lot of small manufacturers. There’s, I think, a lot of potential for
consolidation in Europe. Still a lot of independently owned operations in other countries around the world. I
think you’re seeing some of that consolidation with efforts that Lamb has shown, and others, through the
years. I would say consolidation will happen internationally, rather than in the North American market, and
would be shocked to see any greenfield operation from a new competitor in the frozen potato space in North
America.
[00:47:23]
Q: What are your thoughts on Lamb Weston’s USD 250m capital investment in a new french fry processing
facility in China? What is the longer-term opportunity here? Could you elaborate on the government support
throughout the supply chain and production capabilities?
MH: My experience in China, very interesting place to do business. Obviously, tremendous, tremendous
upside for growth in China. You’re seeing Yum! Brands continue to aggressively grow restaurants,
McDonald’s, I think you’ll see additional chains moving into the Chinese market. You’ve got a lot of domestic
chains that have grown to pretty big scale as well. It’s interesting that the cost to produce in China is high
because of the challenges with agriculture, the right type of land, the amount of water that’s available generally
make things like frozen french fries are cheaper to actually process and ship to China than they are to produce
in China. Yet the government is looking for employment, and so they put a lot of pressure on the customers
who are buying products. We’ll stay with french fries. They’ll put pressure on Yum! Brands or McDonald’s, or
even the local chains to say, “You need to require a certain percentage of your french fries be grown and
manufactured in China.” Then they’ll put pressure on the suppliers to say, “If you don’t grow and process a
certain percentage, we’re going to put restrictions on how much you can import to China.” Because of that,
you’ve seen Simplot was first to China years and years ago, built a plant, McCain put in a facility up in
northeast China, Lamb made their entrance through some joint ventures and then investment and that
pressure will continue.
I think Lamb’s big step to say, “We’re going to further invest in China,” is a good move. The penetration with
consumers, of frozen potato products, is very, very low, primarily driven by the types of operations in China
that offer frozen potato products. That is also shifting as more local independent operators in China do offer
frozen potatoes as part of their meals, and those might even be dices or slices, don’t just think french fries. Yes,
I think it’s very smart. I think the first to reach scale in China is going to really have the opportunity to
maintain that share for a long period of time, because it is just so difficult to find the right growing areas,
secure the right amount of raw product, train the right workforce and have even the right supply chains from
those manufacturing facilities. It’s a long-term vision and so I would give them credit for continuing to invest
there with the amount of upside, long term.
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[00:51:24]
Q: How important are relationships with international QSR chains in driving international growth? You
mentioned McDonald’s trying to expand internationally and its dependence on a strong supply chain.
MH: Right. Yes, it’s really, really critical. As you look historically, it’s really been McDonald’s and Burger King
out of North America that drove a lot of international expansion. There have been some hiccups with Burger
King. It seems they’re back on track. Wendy’s, kind of hit or miss with some of their efforts in the past. It is
interesting, as you get out of the US, I mentioned the pizza channel, a great many pizza chains internationally
use frozen potato products and have a great deal of success utilising those products. It is a little different world
when you get into other countries, in terms of what’s accepted by whom. That creates additional opportunity.
Eventually, I think you’ll see somebody like Chick-fil-A, again, try some international expansion. They’ve been
a bit hesitant after trying to go to South Africa years ago with not too much success. As folks like that maybe
start to jump into that space, with Yum! Brands has been extremely successful with international, I think
you’re going to continue to see that relationship be super important.
[00:53:20]
Q: What would you say are Lamb Weston’s most pressing challenges?
MH: I’d say labour in the short term. It appeared all of the processors had a really challenging time getting
labour consistently. As much automation as they’ve created in their industry, and Lamb is, I would say, still a
great leader in that, it still requires people for a number of the functions and labour just continues to be a
pretty big challenge. I think the capacity is going to create some challenge. Going into COVID has indicated
there was at least good balance. With the loss of sales and that capacity added by McCain and Cavendish and
Lamb, there’s probably a surplus, and if that surplus starts to chase customers, that will put pressure on the
price points. It just becomes an issue of how badly do Cavendish and McCain in particular want to backfill that
capacity that they constructed and really didn’t have the opportunity to backfill. McCain has restarted their
effort in Othello to add another line, over in Washington. They had put that on shutdown when COVID hit and
recently restarted that work, so there’ll be more capacity coming on stream with that line. That’ll probably be
up by, yes, I’m guessing, I’d say next winter. That certainly has the biggest risk to it, I think, for somebody like
Lamb, that pricing could become more volatile as competition tries to fill their plants.
[00:55:40]
Q: Is there anything you think investors should know about Lamb Weston’s management team and ability to
execute on priorities?
MH: They’ve brought in a number of different folks from different industry into some important roles, I think,
to try to bring some different thinking into that industry, which is always positive to get some different views. I
think they’ve done a good job maintaining a number of their legacy folks. From what I hear, there has been
some turnover with some fairly long-tenured people as they’ve reached retirement stage. It’ll be a balance for
them with their people talent. Seems like they’re doing a really nice job internationally with investments
they’re making, the vision they’ve got for that space and, again, the people they’ve brought in have exposure to
international markets, in terms of supply chains and customer connectivity. I think that’s a real positive.
They have shifted some strategy in North America on how they’re going to market, with more of a direct
approach. I think that is one of those that has certain benefits and certainly certain risks, so that is worth
watching. That’s predominantly in the food service space and where that’ll be important is, again, that’s, at
least in my opinion, the highest-margin space and has the most, probably, risk for shifts between competition.
A lot of that’ll be dictated over time by the contract management companies, the alignments of distribution for
their own brands. In food service, the distributor brands are probably 35-40% of the volume and generally it’s
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been a balance. Somebody like Lamb will produce, say, a US Foods brand portfolio and with that carry the
value-added products and some core products, so there’s a strong supply relationship producing both sides of
manufacturer brand and distributor brand. That piece will be important because distributor brands gained
traction as operators looked to save money. Generally, a distributor brand is a lower price and they’ve done a
good job with quality. I think the area to watch is probably food service. Certainly, the retail channel is fairly
easy to watch with IRI data. Lamb is showing really good strength, I give them a lot of credit for the innovation
they’re driving in retail with Alexia, Grown In Idaho, really good things there.
[00:58:58]
NH: Let me close by saying thank you, Mark, for your input. Clients, if you would like to speak to Mark in a
private call or meeting, please let your relationship manager know. Thank you again for joining Third Bridge
Forum's Interview today, this now concludes our meeting. Goodbye.
MH: Thank you.
Transcription ends at 00:59:08 of the recorded material
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