Lamb Weston Holdings, Inc.

Welcome to the Lamb-Weston Fourth Quarter and Full Year 2024 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Dexter Conboy, Vice President, Investor Relations and Strategy. Please go ahead, sir.

Good morning, and thank you for joining us for Lamb-Weston's Fourth Quarter and Fiscal Year 2024 Earnings Call. This morning, we issued our earnings press release, which is available on our website, lambweston.com. Please note that during our remarks, we'll make some forward-looking statements about the company's expected performance that are based on how we see things today. Actual results may differ materially due to risks and uncertainties. Please refer to the cautionary statements and risk factors contained in our SAC filings for more details on our forward-looking statements. Some of today's remarks include non-GAAP financial measures. These non-GAAP financial measures should not be considered a replacement for and should be read together with our GAAP results. you can find the gap to non-gap reconciliations in our earnings release. With me today are Tom Warner, President and Chief Executive Officer, and Bernadette Madriada, our Chief Financial Officer. Tom will provide an overview of our strategies and priorities for the upcoming year, the current operating environment, and our initial thoughts on this year's potato crop. Bernadette will then provide details on our fourth quarter results, as well as our outlook for fiscal 25. With that, let me now turn the call over to Tom.

Thank you, Dexter. Good morning, and thank you for joining our call today. Our financial results for the fourth quarter and for the year are disappointing, reflecting executional challenges both commercially and in our supply chain, as well as soft global demand for fries. While Bernadette will cover our fourth quarter results in more detail later, our sales and earnings performance fell well short of our targets due to a combination of targeted investments in price, a decision to voluntarily withdraw a product to ensure we meet our quality standards, and more importantly, those of our customers, higher-than-anticipated market share losses, an unfavorable mix, and softer-than-expected restaurant traffic trends in both the U.S. and many of our key international markets. This level of execution is unacceptable, and I and my leadership team take full responsibility for operating and financial results. As we outlined in our Investor Day last October, We believe that frozen potatoes is an attractive, growing global category, and that we have built a solid foundation to serve our customers and this market over the long term. This includes some key actions taken in fiscal 2024, such as integrating the acquisition of our former European joint venture, starting up state-of-the-art processing facilities in China in October 2023, and American Falls, Idaho in May of 2024, strengthening our product portfolio by introducing innovative technologies to expand our total addressable market, implementing pricing actions that offset multiple years of high input cost inflation, taking a big step in upgrading our IT infrastructure by cutting over key central systems processes in North America to a new ERP system, and continuing to drive supply chain productivity savings across our global production network. We believe we're focused on the right strategies and priorities to get land west and back on track to drive sales growth, reduce costs, improve profitability, and generate attractive returns over the long term. That said, the operating environment has changed rapidly during fiscal 2024 as global restaurant traffic and frozen potato demand softened. In fact, the downward traffic trends accelerated during the back half of the year and into early fiscal 2025. This has led to an increase in available industry capacity in North America and Europe. We believe this industry supply-demand imbalance will persist through much, if not all, fiscal 2025. Although this has no impact on our long-term strategies, we are making some operating adjustments in the near term to support improved execution, competitiveness, and our financial results. We are reinvigorating volume growth by matching the right product at the right price to fit customer needs and by also leveraging limited time offerings and innovation to help our customers drive traffic. We're targeting specific investments in price and trade support to protect share and win new business. We're aggressively looking at opportunities to reduce costs further by driving supply chain productivity and tightly managing operating expenses. We're leveraging recent capacity investments to increase flexibility in managing our manufacturing footprint to balance production and shipments. We're reshaping future investments to modernize production capabilities to better match the demand environment. And we're simplifying our key processes to make it easier for customers to do business with Lamwesson. These priorities will change how we expect to drive sales and earnings growth in fiscal 2025. Specifically, our sales growth will be largely volume-driven, unlike the price-driven top line that we've delivered in recent years. Overall, we expect a net impact of our inflation-driven pricing actions in the aggregate will have minimal contribution to our net sales as we employ targeted investments in price to support volume growth. As a result, we expect our earnings performance will be driven by a combination of volume growth, improved mix, and cost savings. In recent years, our earnings growth has been largely driven by price until lesser extent mix. Our expectation for volume growth is dependent in part on an improvement in restaurant traffic trends. According to restaurant industry data providers, U.S. restaurant traffic softened over the past year as consumers continued to adjust to the cumulative effect of menu price inflation. During our physical fourth quarter, overall U.S. restaurant traffic as well as QSR traffic was down about 3% versus the prior year. Traffic at QSR chains specializing in hamburgers, a highly important channel for fry consumption, was down more than 4%. In addition, traffic trends in QSR hamburger weakened sequentially each month of the quarter, with May down nearly 6%. However, we're encouraged that the QSR chains, including QSR hamburger chains, have increased promotional activities to drive restaurant traffic. Given the recent introduction, we believe these promotions did not affect traffic during a physical fourth quarter, and we have not yet received comprehensive data that would indicate a more recent benefit on traffic. But we expect that these promotional efforts will have a positive effect on traffic as they have done so in the past. Outside the U.S., overall restaurant traffic trends in our key international markets in the fourth quarter were generally consistent with what we observed in the third quarter. Overall traffic was up in France and Italy, down modestly in Germany and Spain, and down about 2% in the U.K., our largest market in Europe. In Asia, overall restaurant traffic grew in both China and Japan. While global restaurant traffic trends were mixed, fry attachment rates in the US, Europe, Japan, and China were largely steady. With our key international markets largely stable and the potential for a tailwind from promotional activity in the US, we believe the pressure on restaurant traffic and demand is temporary and remain confident that the global fry category will return to its historical growth rate as consumers continue to adjust to higher menu prices. Nonetheless, we've taken a cautious view of the consumer and have not incorporated any change to current trends in our physical 2025 outlook. As a result, we expect our volume to decline during the first half of physical 2025. Turning now to the upcoming potato crop. We're harvesting and processing the early potato varieties in North America, and initial indications are that this portion of the crop is consistent with historical averages. At this time, the potato crops in the Columbia Basin, Idaho, Alberta, and the Midwest that will be harvested in the fall appear to be largely in line with historical averages as growing conditions in these regions have been generally favorable. That said, we have not yet seen what impact, if any, the recent heat wave may have on the crop. As a reminder, in North America, we've agreed to a 3% decrease in aggregate and contract prices for the 2024 potato crop. and we would begin to realize the benefit of these lower potato prices beginning in our physical third quarter. In Europe, heavy rainfall in the spring in the industry's main growing region in the Netherlands, Belgium, northern France, and northern Germany delayed the completion of planning by about seven weeks. As a result, the futures index for European processing potatoes has climbed significantly, reflecting the market's expectation for a below-average crop. Based on our practice of purchasing a higher portion of our raw potatoes using fixed price contracts, we believe our exposure to the higher market price is less than that of our European competitors. Still, we expect our potato costs in Europe to increase as prices governed under fixed price contracts are up mid to high single digits. We'll provide more detail on the crops in both North America and Europe when we report our first quarter results in early October in line with our past practice. So in summary, we believe we built a solid foundation to support our customers and drive improvement in our financial performance. We continue to operate and invest in this business for the long term and are making the appropriate adjustments this year to manage through the current challenging environment. We're encouraged by the actions that chain restaurants are taking to improve restaurant traffic, as well as the traffic trends in most of our key international markets, but we took a cautious view on the consumer when we developed this year's financial targets. And finally, at this time, we expect the potato crop in North America will be consistent with historical averages, but that the crop in Europe will likely be below average. Let me now turn the call over to Bernadette for more detailed discussion of our fourth quarter results and our physical 2025 outlook.

Thanks, Tom, and good morning, everyone. As Tom noted, our sales and earnings performance fell well short of our targets. Our team members are focused on getting our operations and financial results back on track in fiscal 2025. Before I provide our outlook for the upcoming year, let's begin by reviewing our fourth quarter results. Sales declined $83 million, or 5%, to more than $1.61 billion. Volume declined 8%, and price mix increased 3%. As it relates to volume, nearly 5 percentage points of the decline reflects the impact of share losses, as well as our decision to exit certain lower priced and lower margin business in EMEA earlier in the year. The decline is a couple of points more than what we originally anticipated and was driven in part by higher than estimated share losses. With respect to the ERP transition, the issues we experienced that affected our third quarter order fill rates were temporary and contained in that quarter. we have healthy warehouse inventory levels and flows throughout the system. The remaining three points of the eight-point volume decline reflected about a point loss related to the unexpected voluntary product withdrawal that Tom referenced, and about two points related to soft restaurant traffic trends in North America and many of our key international markets, which was a bit more than we had expected. Price mix increased 3%, reflecting the carryover benefit of inflation-driven pricing actions taken in late fiscal 2023, as well as pricing actions taken in fiscal 2024 across both of our business segments. The increase in price mix, however, was a few points below our expectations. This was largely due to unfavorable mix versus our forecast as customer demand for value-based products increased, as well as targeted investments in price in North America. Moving on from sales, our adjusted gross profit declined $72 million to $363 million. About $40 million of that decline was due to the voluntary product withdrawal. The remaining $32 million was primarily driven by lower volume and an $8 million increase in depreciation expense associated with our capacity expansions in China and Idaho. The carryover benefit of our pricing actions largely offset higher manufacturing costs, which was primarily driven by mid-single-digit input cost inflation. Our gross margin in the quarter was about 23%, which was about 400 basis points below our target of 27%. Of the shortfall, about 250 basis points was related to the voluntary product withdrawal, The remaining roughly 150 basis points largely reflected the unfavorable mix impact from greater than expected share losses of higher-priced, higher-margin customers, as well as the investments in price that we made in our North America segment. Adjusted SG&A declined $6 million to $172 million, reflecting lower performance-based compensation expense which more than offset higher expenses associated with information technology investments, higher advertising and promotion investments to support the launch of retail products in EMEA, and $6 million of incremental non-cash amortization related to our new ERP system. Our SG&A in the quarter was about $20 million below the midpoint of our fourth quarter target of approximately $193 million. largely due to lower performance-based compensation expense and other cost savings efforts. All of this led to adjusted EBITDA of $283 million, which is down $50 million versus the prior year, as lower sales and gross profit more than offset the decline in SG&A. That's about $80 million below the midpoint of our fourth quarter EBITDA target of approximately $363 million. About half of that shortfall is due to the voluntary product withdrawal late in the quarter. The other half is due largely to targeted investments in price and trade support in our North America segment, unfavorable mix, and lower than expected volume, partially offset by favorable SG&A compared with our forecast. Moving to our segments. Compared with the year-ago period, sales in our North America segment, which includes sales to customers in all channels in the U.S., Canada, and Mexico, declined $47 million, or 4% in the quarter. Volume declined 7%, with about 5 points related to share losses, and about 2% related to soft restaurant traffic in the U.S. Price mix increased 3%, driven by the carryover benefit of inflation-driven pricing actions taken in late 2023, as well as pricing actions for contracts with large and regional chain restaurant customers taken in fiscal 2024. Unfavorable mix due to share losses of higher margin customers, as well as targeted investments in price, tempered the increase in price mix. The North America segment's adjusted EBITDA declined $21 million, or 7%, to $277 million. primarily due to an approximately $19 million charge related to the voluntary product withdrawal. The remainder largely reflects a combination of lower sales volumes, unfavorable mix, and higher cost per pound, more than offsetting the benefit of prior pricing actions. Sales in our international segment, which includes sales to customers in all channels outside of North America, declined 36 million, or 7%. Volume declined 9%, with nearly 5 percentage points from share losses, which are due in part to decisions to exit certain lower-price and lower-margin business in EMEA earlier in the year. We expect these strategic exits will continue to be a headwind through the first half of fiscal 2025. More than two points of the volume decline in the quarter reflects the voluntary product withdrawal. while the remaining roughly two points reflected soft restaurant traffic trends in key international markets. Price mix increased 2%, driven primarily by inflation-driven pricing actions taken in fiscal 2023, as well as the carryover benefit of pricing actions taken earlier in fiscal 2024. Our international segment suggested EBITDA declined $43 million, or 52% to $40 million. About $21 million of that decline related to the voluntary product withdrawal. The remainder of that decline was driven by lower sales volume, higher cost per pound, and higher advertising and promotional investments to support the launch of retail products in EMEA and was partially offset by the benefit of prior pricing actions. Moving to our liquidity position and cash flow. Our balance sheet remains strong. We ended the quarter with net debt leverage ratio of 2.7 times adjusted EBITDA, and our net debt declined nearly $40 million as compared to the end of our fiscal third quarter to about $3.75 billion. We continue to have ample liquidity, including nearly $1.2 billion available for a new global revolving credit facility. For the year, we generated about $800 million of cash from operations, which is up about $37 million versus the prior year. As we discussed before, driving long-term growth requires making the right strategic and forward-looking investments. The resilience of our business and our overall financial strength put us in the ideal position to modernize our assets, as well as to invest in critical areas that support customer needs. and unlock efficiencies for our people and our business. This allowed us to spend about $990 million in capital expenditures this year, or about $255 million more than the prior year, largely reflecting strategic investments to complete facilities in China and American Falls, Idaho, our ongoing capacity expansion projects in the Netherlands and Argentina, and our new ERP system. Consistent with our capital allocation priorities, we returned $384 million of cash to our shareholders through dividends and share repurchases during the year. This includes $210 million in share repurchases, including $60 million in the fourth quarter and $174 million in dividends. This reflects the strength of our balance sheet and our confidence in our business. Now, turning to our fiscal 2025 outlook. As Tom discussed, we expect that the operating environment this year will be challenging and that consumers will continue to be more intentional with the dollars they spend in a pressured economic landscape. We expect that soft restaurant traffic and fry demand may result in higher than normal available industry capacity for selected product types and channels in fiscal 2025 and that we will make some targeted investments in price and trade to support volume growth and share. In addition, we're aggressively evaluating opportunities and implementing actions to drive supply chain productivity, balance production based on lower shipments, and reduce operating expenses. Specifically for the year, we're targeting sales of $6.6 to $6.8 billion on a constant currency basis. This implies growth of 2% to 5%, which we expect will be driven largely by volume. However, we anticipate that volume will decline during the first half of the year, primarily due to two factors. First, we'll continue to experience the impact of recent share losses. And second, despite efforts by quick service and casual dining chains to improve traffic through increased promotional activity, we expect that restaurant traffic will remain soft for at least the first half of the year, as the consumer continues to adjust to the cumulative impact of years of menu price inflation, as well as other economic headwinds. During the second half of the year, we expect our volume to increase as we lap the prior year impacts of the ERP transition and voluntary product withdrawal, increasingly benefit from recent customer contract wins in the US and key international markets, and recapture some of the market share we lost in fiscal 2024. In fiscal 2025, we don't expect a meaningful contribution to come from price mix in the aggregate. In North America, we're targeting price mix to decline. We expect to drive improvements in mix as the year progresses as we recapture lost share in higher price, higher margin channels. However, due to the soft demand environment, we believe the mix benefits will be more than offset by targeted investments in price and trade supports. to drive volume growth and share growth across the sales challenge. In international, when possible under the terms of the customer contracts, we'll look to drive pricing actions to offset input cost inflation, which we anticipate will be largely driven by a below average crop in Europe. In addition, we'll begin to gradually leverage our revenue growth management tools to manage our price architectures and improve mix. However, We anticipate that the increase in price mix may be tempered by targeted investments in price and trade support in certain markets and channels to protect market share and win new business. For earnings, we expect adjusted EBITDA of $1.38 to $1.48 billion. For diluted earnings per share, we're targeting $4.35 to $4.85. This includes an adjusted SG&A target of $740 to $750 million, which is up $70 million versus the prior year, reflecting returning performance-based compensation expense back to targeted levels, an incremental $24 million of non-cash amortization related to our new ERP system, and an incremental $10 million of advertising and promotional investments largely to support our retail brands in both North America and EMEA. Excluding these three items, our adjusted SG&A expenses are down due to aggressive cost management. As I previously discussed, we're continuing to evaluate and implement additional cost savings actions. We're targeting total depreciation and amortization expense of $375 million, which is an increase of $75 million. About $50 million of the increase is included in cost of sales and largely associated with the depreciation of the capacity expansions in China, Idaho, and the Netherlands. The remainder of the increase primarily reflects the incremental amortization of our ERP system, which is recorded in SG&A. For interest expense, we're forecasting about $180 million. That's an increase of about $45 million. reflecting higher average debt levels and lower capitalized interest. We're forecasting a full year effective tax rate of approximately 24%, which is similar to last year's rate. Finally, we're targeting cash used for capital expenditures of approximately $850 million as we continue the construction of our previously announced capacity expansion efforts in the Netherlands and Argentina. We currently expect the expansion in the Netherlands to be completed by the end of calendar 2024, while Argentina is targeted to be operational in mid-calendar 2025. In addition, as Tom mentioned, we're looking at refacing future capital investments to modernize production capabilities to better match the demand environment. That said, more than 80% of this year's forecasted capital expenditures are committed. Since we anticipate our two large capacity expansions will be completed by the end of fiscal 2025, we expect a notable decrease in capital expenditures in fiscal 2026. Because of the rapid change in the operating environment, our fiscal 2025 growth rates are below our normalized fiscal 2024 baseline. As it relates to sales, our fiscal 2025 outlook implies a normalized growth rate of 0 to 3% after adjusting for the estimated impact of the ERP transition in fiscal 2024. That growth rate is at the low end of our long-term growth algorithm of low to mid single digits. Our adjusted EBITDA target for fiscal 2025 is about $160 million below our normalized fiscal 2024 baseline of about $1.6 billion. Broadly speaking, that decline reflects targeted investments in price and trade support to retain or win new customers, challenges in certain markets and channels to implement sufficient pricing to offset input cost inflation, an estimated carryover impact of unfavorable mix from lost share of higher price, higher margin customers in North America, and an additional estimated $20 to $30 million loss in the first quarter of fiscal 2025 associated with the voluntary product withdrawal. Before I turn the call back over to Tom, I want to provide some thoughts on the first quarter. While we don't typically provide quarterly guidance, given our recent results, the expected headwinds, and the changes in the operating environment, we're providing more detail on our expectations for the quarter. Specifically, in the first quarter, we're targeting sales to be down mid to high single digits, with volume down mid single digits due to the carryover impact of share losses, soft restaurant traffic, and the voluntary product withdrawal. We believe that the impact of share losses and soft traffic will be the greatest in the first quarter and gradually ease as the year progresses. We expect price mix may be down low to mid-single digits, as the carryover benefit of pricing actions taken in fiscal 2024 are more than offset by the impact of unfavorable mix and targeted investments in price and trade support in North America. For earnings, we expect our EBITDA margin to be the lowest of the year due to our typical seasonality and the $20 to $30 million loss estimated to be associated with the voluntary product withdrawal that I mentioned earlier. We do not expect additional losses related to the product withdrawal beyond the first quarter. We also expect our first quarter margin will be pressured by higher cost per pound, unfavorable mix, and investments in price and trade support. Let me now turn it back over to Tom for some closing comments.

Thanks, Bernadette. We expect fiscal 2025 to be a challenging year, but remain confident in the long-term growth outlook and the health of the category. Despite the current market softness, we're executing on our priorities that drive our long-term strategy. We're aggressively managing costs and evaluating our manufacturing network requirements as demand trends unfold. Our capacity expansion projects remain on schedule as we continue to modernize our production assets, which when combined with improving our core asset performance, positions us to continue to support our customers and create value for our shareholders over the long term. Thank you for joining our call today. Now we're ready to take your questions.

Thank you. Ladies and gentlemen, if you have a question or comment, it is star 1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, star 1 to ask a question. We'll go first to Andrew Lazar with Barclay. Your line is open. Please go ahead.

Great. Thanks so much. Good morning, everybody. Good morning. Good morning. Good morning. I'd love to start, you obviously talked a bit in the remarks and in the release about the sort of building supply-demand imbalance in the industry, and I'd love to get, I guess, as specific as you can, an idea about where do you see Lamb-Weston's capacity utilization sort of right now, and how does that compare to sort of the industry? You know, I'm trying to sort of get a sense of or dimensionalize, you know, how large this sort of imbalance is and whether it's large enough such that you know, some of the more maybe major customers can make shifts in their mix of suppliers or if these share losses are maybe some smaller customers, some of the things you talked about last quarter with respect to, you know, some of the ERP disruption.

Yeah, thank you, Andrew. You know, as it relates to our current capacity utilization rate, that's not a number we want to provide right now. We've got two new facilities that are becoming operational and, you know, we'll have available capacity. China has been operational and through the vertical startup, and then American Falls came on at the end of May and is going through its vertical startup as well during the next few months, and we're looking to gradually ramp that up. So we want to get those plants filled up on a run rate basis over the next 18 months, but the current demand environment will likely stretch that out a bit. As it relates to some of the higher margin customers and the share losses that we referred to, some of those are the customers during the ERP transition that we would have lost during that time. And our sales teams are certainly out there and talking to those customers. It's a competitive environment, though, as we've discussed with some of the incremental supply and the softening restaurant traffic trends. So we continue to keep focused on that.

Yeah, Andrew, and, you know, the other dynamic we're managing through is, you know, the restaurant traffic, particularly in the QSRs, which is 80% of French fry consumption. You know, as I stated earlier, in Q4, we saw a continued deceleration of traffic. So as you mentioned, as we manage through our overall capacity and production, continued softness across our entire customer base is leading to a more challenging environment in terms of contracting than we've ever experienced.

Got it. And I think that was kind of where I was going to go next. You talk about the need for some, obviously, pricing concessions. targeted investments and such. Is that, again, to maybe start gaining back some of these lost smaller sort of customers? Or I guess you sort of touched on this a minute ago, but does that also relate to maybe some of the conversations and negotiations you've been having over the course of the summer with some of the larger customers for some of the annual or every other year sort of contract renewal processes? I guess there's some potential pressure coming there because I guess historically, by precedent anyway, the industry hasn't had to deal with that as utilization has always been so high.

Yeah, Andrew, I'm not going to comment on our contracting because we're in the middle of it right now. But what I will say is with the challenges we had in our Q3 implementation, that over-indexed impacting are the independent restaurants. And so we're working really hard to regain those customers. That's been a significant part of our share loss. And with that, plus you add on the restaurant traffic challenges, which is leading to industry capacity availability. You know, we're going to have to make some, and we're making some strategic choices to invest back with those customers to win their business back and their trust.

Yeah, and Andrew, you know, the only other thing that I just wanted to mention is that, you know, over the long term, we still expect the market is going to be generally balanced. We have confidence in the continued category and absorbing the potential new capacity over time. This is a short-term area with the softer restaurant traffic and some of the things that we're seeing that we're going to need to manage through this year.

And the last quick thing would be, just in light of that, I think you talked about some operational adjustments that you're making. And I know it's hard to talk about some of this, but You've got some facilities that are obviously coming online, very new, very efficient, others that are some 40, 50 years old. Are we in a position where you start to go down that sort of plan B path a little bit and maybe say, hey, there might be some sort of right sizing of capacity that might make sense here? And if so, do you see competitors doing the same thing? Thanks again.

Yeah, Andrew, I'm not going to comment on kind of what you're You're pointing to what I will say is we're evaluating a number of different things across the entire, every part of the company right now to manage our costs based on the current operating conditions we're experiencing and what we expect over the next 12 months. So I'll just, I'll leave it at that.

Thanks so much.

Thanks, Andrew.

We'll go next to Ken Goldman with JP Morgan. Your line is open. Please go ahead.

Hi, good morning. Thank you. Good morning. Hi, I wanted to start, you know, one of the questions that I've received this morning are, is we think that this management team, you know, given the challenges that they faced the last couple of quarters, are they being a little more conservative or prudent than usual with certain items, certain, Areas of guidance where the other my otherwise might not have been. So I'm just. I wanted to put that back to you a little bit. Are there certain areas as you thought about the outlook for 2025 2025, or maybe you were a little more cautious than you otherwise might have been just trying to get a sense for that kind of give and take.

Yeah, I can, you know, the, we're always prudent prudent in our in our guidance and have been over time. I think the thing that we're cautious about, as we've said, is the whole restaurant traffic phenomenon that we're dealing with in terms of we've seen traffic trends negative. before, but we've never seen traffic trends in restaurant collectively this prolonged. And as I stated, you know, in the fourth quarter, we saw it accelerate. And even starting out in our physical 2025, we continue to see declines. So when we kind of look through how this year is going to unfold or our guidance for 2025, We absolutely took a cautious view, and as we get through the next couple of quarters, just like everybody, we'll have a clear view on return. We think it's going to return. It always has in the past, but again, this is kind of uncharted territory for us to see a decline for this prolonged amount of time.

Understood. Thank you for that. And then a quick follow-up. I just wanted to get a little more color, if I could, on the voluntary product withdrawal. I appreciate the details you've provided about the financial impact in the fourth quarter and then into the first quarter of next year. I'm just curious a little bit more about it. I'm also interested in why it only affects two quarters and then seems to stop after the first quarter in terms of the impact on the bottom line. Thank you.

Yeah, Ken, again, this was a product withdrawal that we chose to do. It's not lost on me and my team on the financial impact, but in terms of keeping to our values of integrity and responding to our customers and keeping the specifications of the product at high levels, We chose to do it, and it was the right thing to do. I'd do it all over again, and I know it has a tremendous financial impact on the company. And so I'm not going to get into customer-specific. We've made some adjustments internally on a number of different fronts as we made decisions to do this. So we've adjusted the organization. And, you know, we're 100% confident that those changes are going to continue to keep the integrity of our product quality going forward.

Yeah, that's right. And the other thing that I would add is to your question in terms of why does it affect Q4 and Q1 and stop there. So we identified it soon after the end of the fourth quarter, and that's when we made the withdrawal from the market after discovering that it didn't meet our specs. And so it does impact both fourth quarter and first quarter, where we wrote off the remaining inventory that was on hand.

Got it. Thank you. We'll go next to Peter Galbo with Bank of America.

Your line is open. Please go ahead.

Thanks. Good morning, guys. Thanks for taking the question. Tom, maybe just to start, and this probably goes back to Andrew's comment around reinvestment in price. I mean, historically, this has been an industry, certainly since you've been public, but probably even going back much further than that, that hasn't really given back anything or had to reinvest materially on pricing. And I think that comment probably ties all the way back to the early 1990s. So If you're breaking a 30-year cycle, I'm just curious, like we're in uncharted territories, what does it mean for your ability to price, you know, not just the long-term, given what happened the last time this industry went through that? And maybe there's a more recent example to point to, but I think that that context would be very helpful.

Yeah, I, you know, we're a couple things, right? Again, the operating environment and coupled with some of the share losses we've had, the operating environment right now, there's available capacity. Yes, we're making targeted investments in price in some areas to gain our share back. We believe over the long term that As the restaurant traffic in the category returns to a more normalized growth rate, everything's going to be balanced out. But in the current environment, again, the traffic trends we've experienced really over the last year is really impacting the overall demand architecture of the category. And you have you know, obviously additional supply coming on. So, you know, we're managing the dynamic of the operating environment we're working in right now. And we believe and confident over the long term that as category returns to growth, it'll all balance back out and have a more normalized operating environment.

Okay. And then just, like, on the CapEx number, you know, Bernadette, I think you gave the comment of 80% of it's kind of spoken for for this year. You know, but, like, two projects are projects that aren't fully completed. So I know, Tom, you don't want to talk about existing capacity, but you have capacity that isn't even live. Like, why not delay it further? Why not kick it out more? Do you have to go through the process of it? Because, I mean, it's going to continue probably to be an overhang here. And then, I mean, I know you're talking about a material step down in 26, but, you know, any more quantification you can put around that, what material is would be helpful. Thanks, Rick.

Yeah, so the capacity expansions we have going on, we made those decisions a couple of years ago. And you have to commit to your suppliers. We're, you know, three quarters of the way built. And so it would be more costly not to complete. And so we're at a point where we need to finish it. And again, we'll evaluate. We're looking at all areas of the company to evaluate overall capacity in our footprint.

Yeah, the long term fundamentals of this business are still there and on track and we're investing for the long term. And as Tom said, we make those decisions in advance of knowing in the short term when restaurant traffic trends may soften. But we believe with the capabilities and in the markets that we are adding these expansions that they're gonna be able to improve the asset modernization of our total footprint.

Okay, but, Bernadette, just on the longer-term CapEx, like, is $500 million the right number, $400 million? Like, you know, the 9% of sales number you gave an investor today in October doesn't seem to be relevant anymore. So, just, like, what's the right range?

Yeah, you know, at this point, I would just say you're going to see a notable decrease in 2026. We are refacing our capital investments, as I mentioned, and taking a look at what capabilities we don't believe we need immediately. And so... Um, when we have that update, we'll certainly provide it at that time, but a notable decrease in 2026. Okay, thank you.

So, next to Tom Palmer with city, your line is open. Please go ahead.

Morning and thanks for the question. Um.

I just 1st wanted to just start out kind of understanding some of the moving parts of guidance. It seems like. The primary driver of the expected volume growth is market share gains in the second half of the year. And so I wanted to kind of clarify two parts of this. So first, how much of these share gains have already been secured by the recent customer contract wins referenced on the earnings call? And then second, Look, I know pricing is a maybe bigger factor than in the past. Are there other factors that remain important as we think about driving those share gains in the back half of the year above and beyond pricing?

Yeah, no, thanks for the question, Tom.

You know, as it relates to the share gains in the second half of the year, some of those have already been committed, and we know that we will be seeing those in the second half There are those that we're currently in negotiation with and certainly not going to speak to that, but that is the rationale for those share gains that are coming. We've got a strong sales pipeline that we are currently working through and have those identified targets as it relates to the share gains. The other piece that is impacting our guidance would be changes in MIT. As we talked about, we had in the back half of this year some changes in mix with those small regional customers in our North America segment. That would be regaining share of those higher mix customers.

Okay. Thank you for that.

And then just on the North America crop, if it comes in as expected, how does your contracted volume of potatoes compare to your current volume assumptions? We did see the write-downs this past year and just wanted to understand if that was a possibility this year, just at least based on your current volume expectations.

Yeah, Tom, so we contract our potato crop based on our forecasted volume. You know, and that's always done about 18, almost 18 to 20 months in advance with our negotiations with the contract volume and rates. So, you know, we always take a prudent approach. And, you know, obviously last year we had an issue based on our forecast plan versus As we started going through the year, we realized we're going to come up short. So right now, I think we're pretty balanced, but we'll manage it as we go through the balance of this physical year.

And particularly when we give our updated view of the crop in the first quarter, as we typically do.

Okay, thank you.

We'll go next to Adam Samuelson with Goldman Sachs. Your line is open. Please go ahead.

Yes, thank you. Good morning, everyone. Good morning. Good morning. I wanted to tie together some of the different threads around some of the strategic kind of product exits that you've made over the past 18 months, really, between North America and international kind of the capacity investments that are ongoing and this discussion about phasing kind of future investments back into the business and I guess I'm trying to just make sense of is some of the business that you're going back after now really reclaiming what had been perceived as lower margin less attractive business before and if I think about the market environment which has weakened from a traffic perspective what would it what would have to happen for you to reassess your own internal capacity needs to actually make some tougher decisions around kind of your own internal network and closing kind of old capacity versus refurbishing it down the road?

Yeah, no, thank you for the question.

As it relates to the strategic exits that we've spoke about in the last year, if you recall, that primarily related to four customers in North America. And those strategic exits were made at a time when we were significantly capacity constrained. And they made sense for the business at that time. Now going into softer restaurant traffic trends and incremental capacity coming online, we will continue to take a look at our sales pipeline and our portfolio. And in the current environment, which has changed from when we made those strategic exits, we've determined that it makes sense to make some price investments. And so that's what you're seeing in the current environment.

And how that would kind of influence, kind of what would have to happen from here for you to make an assessment to kind of idle or close kind of older processing kind of facilities versus further investing in them in 26 and beyond? Yeah.

Adam, like we stated, we're phasing some investments out further in terms of kind of normalized CapEx outside of the new capacity coming on. So we've made those adjustments as we continue to you know, as I stated, as we continue, we're evaluating all areas of our company and, you know, we continue to see traffic softness. You know, we're definitely going to think through our overall asset utilization rates and how we adjust that.

Okay, and if I could just squeeze one more in. The international segment, I know there was the discrete impact of the product withdrawal even adjusting for that the margins were pretty notably below where they've been for the past four quarters since you consolidated EMEA and that business did not have the same amount of impact from the ERP disruption so just help us think about kind of how the where the EBITDA margins in international kind of are low double digits kind of adjusted for that product withdrawal in the fourth quarter and kind of where they go from here, especially with more potato inflation in Europe over the next 12 months?

Yeah, as it relates to margins in the international segment, it was, as you say, affected by the product withdrawal. The other things that we have there is we're seeing a competitive environment in international markets, similar to what we've explained in North America, and there will be some price investments where it makes sense. As it relates to the poor crop, those are things that we always look to pass through that price inflation. But as we mentioned, we do have a pretty good mix of fixed pricing as it relates to that crop in Europe. And then any delta between that is where we'll look to price through that incremental cost.

All right. I appreciate the color. I'll pass it on.

We'll go next to Robert Moscow with TD Cowan. Your line is open. Please go ahead.

Hi. Thank you. I just want to try to reconcile the mismatch, I guess, of a volume forecast that looks to be, you know, up like 2% to 5% and maybe even more if price mix is negative with a contracting environment that you're describing as the most challenging ever, and market share losses that got worse in fourth quarter. So maybe really the question is, like if the market share losses got worse during the fourth quarter, you know, how easy is it to reverse those losses and what was causing those losses? Are customers upset with customer service from ERP or is it really just, hey, competitors are offering better prices, we're going to go there? And now Lamb Weston has to react. Is it possible to kind of simplify it that way?

Yeah, I'd, Robert, say it's a little bit of both, quite frankly. And, you know, our commercial team, you know, we've got a visibility to a pipeline of opportunities that we're executing against. you know, every week. And so we have line of sight to regaining volume. But, you know, the environment is different. And so we're making the appropriate adjustments. But to be quite frank, it's a little bit of both.

Yeah, and to keep in mind, the volume in the first half is expected, you know, to decline due to the impact of the share losses in that week global restaurant environment that we've been talking about. It's the back half where we expect to see those volume increases.

And we're seeing wins in the marketplace today. So, you know, that gives me confidence that, yeah, we'll navigate through the first half of this fiscal year, but we expect sequential improvement in the back half.

Okay. I'll stop there. Thanks.

We'll go next to Rob Dickerson with Jefferies. Your line is open. Please go ahead.

Great. Thanks so much. I guess just, you know, first question on the price and the trade investment going in. Are you saying that As you go into price negotiations overall on the contracted basis, clearly that's maybe become a little bit more competitive. Are there any other one-off investments that you would also be doing away from the contracted prices? Let's say if you contracted with someone last year, maybe it's a two-year contract, but their volumes in traffic are a little soft. Are you actually funding maybe some of those customer-related promotions as well? First question.

Yeah, so we're not going to get into specifics about our experience competing in the current operating environment. We've got a number of contracts that are currently underway that we're negotiating, so we're not going to get into the details of those.

Okay. And then I guess, Tom, you know, I know you, I think you called out specifically, you know, a little deceleration or, you know, kind of incremental decline in traffic, you know, as you got through May. Is there any visibility, let's say more specifically on June and then just like any kind of early reads? I know it's like super early from some of these new value offerings.

Yeah.

Hey, Rob, I mean, if you look at, um, May was was a lower point June recovered a little bit but was still down you know still down a pretty strong amount but it was a little bit better than May if you look at the entire quarter our entire fourth quarter June was basically in line with that so the trend I would sit there and say is nothing nothing significant in terms of a change with respect to the promo activity we haven't really seen, you know, a lot of that started towards the end of June. So I wouldn't sit there and say there's really good clean data on that yet.

Okay, fair enough. And then just lastly, kind of a technical question. On the share repo, you know, clearly bought some stock back, which is great, but I'm just kind of curious, kind of, you know, as you were headed into today's print, you know, you probably thought maybe the stock would be down a little bit. Like, why not just buy stock back, like, tomorrow versus in the fourth quarter?

That's it. Thanks.

Yeah, when we make decisions on share repurchases, we do that throughout the year, and I can't comment further on that. Certainly with the stock being down what it is, we will continue to evaluate that and make decisions as we move forward.

All right, super. Thank you so much.

We'll move next to Matt Smith with Stiefel. Your line is open. Please go ahead.

Hi, good morning. I wanted to go back to the international market dynamics. You noted that the competitive environment has stepped up, but at the same time, your competitors may be facing a tougher input cost environment with the upcoming crop. Can you help reconcile those dynamics? Why would your competitors be more price aggressive in front of an unfavorable input cost environment?

Yeah, you know, we don't. specifically comment on our competitors' environments and some of the things that they're doing. We can only comment as it relates to what we're seeing and how Weston is reacting to the market.

I appreciate that. And then a follow-up on the product withdrawal, just for clarity, are you back to shipping to the customer? Did you incur some market share losses associated with that product withdrawal, or is that business back up and running?

Yes, we are back shipping to the customer.

Thanks for that. I can leave it there. We'll go next to Max Gunport with B&P Paribas.

Your line is open. Please go ahead.

Hey, thanks for the question. Returning back to the traffic commentary, I'm trying to get a better sense for what's embedded in your guidance in regards to restaurant traffic, and I realize it could be a range of outcomes, but if we take The midpoint, it sounds like you're saying in the first half you expect restaurant traffic to remain weak. By the time we get to the second half, are you embedding a clean base and essentially restaurant traffic is no longer getting any worse on a year-over-year basis in that second half? Just curious for what you're seeing and what you're embedding in your plans. Thanks very much.

Yeah, that's right. So in terms of the first half of the year, we assumed the consistent restaurant traffic trends being down with what we experienced in the fourth quarter with slight improvement in the back half of the year.

Okay, thank you. I'll leave it there.

Thank you.

And that will conclude the Q&A session. I'll turn the conference back to Mr. Kambale for any additional or closing remarks.

Thanks for joining the call today. If you want to set up a follow-up call, please email me. We can set up a time over the next number of days. Again, thank you and have a good day.

Thank you. Ladies and gentlemen, that will conclude today's call. We thank you for your participation. You may disconnect your line at this time.