Lamb Weston Holdings, Inc.

Thank you for joining us for Lamb Weston's second quarter 2025 earnings call. Earlier today, we issued our earnings press release and posted our slides that we'll use for today's call. You can find both 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 SEC 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 GAAP to non-GAAP reconciliations in our earnings release and the appendix to our presentation. With me today are Tom Warner, our President and Chief Executive Officer, and Bernadette Madriada, our Chief Financial Officer. Let me now turn the call over to Tom. Thank you, Dexter.

Good morning, and thank you for joining our call today. Let me start with the leadership change we announced earlier today. As you've likely seen, I will be stepping down as CEO, and Mike Smith, our current COO, will become Lam Weston's next president and CEO beginning January 3, 2025. The Board and I believe now is the right time to transition to allow a new leader to guide Lam Weston's into its next chapter of growth, and I could not be more thrilled to hand over the reins to Mike. His appointment represents the culmination of a thoughtful, years-long succession planning process by the Board, and we are confident he is the right leader to guide Lamwesson forward. Over the course of his 17-year career at Lamwesson, Mike has developed a deep understanding of all critical aspects of our business and operational opportunities, and driven growth across multiple areas of the company. I've had the pleasure of working closely with Mike and have witnessed firsthand his value-based leadership style and steadfast focus on people, as well as his thorough understanding of the business. I'm confident that with Mike at the helm, Lamb-Weston will drive profit and deliver value for our shareholders. Now turning to our results. Our second quarter performance was below our expectations and not what we aimed to achieve at Lamb-Weston. Slide four provides a snapshot of the key themes that we'll be discussing with you today. We expect the challenging operating environment will persist in the near term, as weak restaurant traffic trends and additional capacity expansions announced by our competitors since our investor day last year add to the current imbalance in global industry supply and demand, especially outside North America. In this new reality, we're evaluating opportunities beyond our initial restructuring plan to adjust our operations, including reducing manufacturing and supply chain costs and operating expenses. In addition, we're evaluating opportunities to drive the top line by improving sales execution while also expanding our total addressable market by leveraging proprietary technologies to serve non-traditional Fry customers. As we discussed on our last quarter's earnings call, we expect to significantly reduce our capital spending next year as we shift away from growth capital to focus on base, modernization, and environmental capital. We expect these steps to increase our free cash flow, which would provide more flexibility to step up capital returns to our shareholders. We'll address each of these points during this call. Let me now turn it over to Bernadette to discuss details on our second quarter results.

Thanks, Tom, and good morning, everyone. Starting on slide five, you can see that net sales declined 8% compared with the year-ago quarter. Volume declined 6%, primarily driven by declining restaurant traffic in the US and many of our key international markets. Customer share losses, net of gains, and the carryover impact of our decisions last year to exit certain lower price and lower margin business in EMEA to strategically manage customer and product mix. While the effects of these three factors were largely in line with our expectations, the declines in sales and volume were more than what we anticipated for the quarter as we experienced incremental customer share losses in both business segments due to an increasingly competitive environment. Price mix declined 2% as compared to the prior year quarter, which was just below our target for the period. Our pricing actions in North America were in line with our expectations. However, pricing in our international markets was more competitive. Channel and product mix was also in line with our expectations, but unfavorable versus the prior year quarter, reflecting customer share losses exceeding customer gains. For our North America segment specifically, sales declined 8% versus the prior year quarter. Volume declined 5% and included the carryover impact of smaller and regional customer share losses in food away from home channels in the prior year, and share losses in certain chain restaurant accounts. The majority of the decline, however, was due to the drop in restaurant traffic in the U.S. According to restaurant industry data providers, U.S. restaurant traffic in the second quarter declined about 2% versus the prior year, although trends improved modestly versus our fiscal first quarter as QSRs did continue to step up promotional activity. Traffic at QSR chains specializing in hamburgers in the second quarter declined about 1.5% versus the year-ago period. We continue to be encouraged by the improving trend in traffic and the steady fry attachment rate, but as a reminder, many of these promotional meal deals have consumers trading down from a medium serving size to a small French fry serving size. As a result, while we benefit from improving traffic trends, The effect of the trade down in serving sizes acts as a partial, and with some customers, a significant headwind to our volumes. Price mix in North America declined 3%, reflecting the planned investments that we made to retain and attract volume, as well as unfavorable channel and product mix. For our international segment, sales declined 6% versus the prior year quarter. Volume declined 6%, driven by several factors. First, restaurant traffic declined or softened sequentially in many of our key international markets. While restaurant traffic in the UK, our largest market in Europe, was flat, traffic declined in Germany, France, and Spain. In Japan, QSR traffic grew versus the prior year, but decelerated versus our fiscal first quarter. Traffic growth in China remains soft. Second, we experienced incremental customer share losses resulting from a more intense competitive environment, most notably in the Middle East and certain markets in Asia Pacific. And third, we continued to realize the carryover effect of exiting certain lower priced and lower margin business in EMEA. This was the last quarter that this will serve as a headwind. Price mix was flat versus the prior year quarter, as incremental pricing actions to compete in key international markets offset the benefit of inflation-driven pricing actions in EMEA. Moving on from sales. On slide six, you can see that adjusted EBITDA fell $95 million versus the prior year quarter to $282 million. The decrease is largely attributable to a $135 million decline in adjusted gross profit. That was due primarily to four factors. First, price mix declined due to the planned pricing actions to retain customers and attract incremental volume. Second, higher manufacturing cost per pound, which reflects input cost inflation and inefficiencies associated with lower production, and lower factory and potato utilization rates. Third, we incurred incremental production costs related to unplanned facility downtimes and additional startup costs associated with our new capacity expansions. And finally, while not impacting EBITDA, we incurred $16 million of higher depreciation expense that's largely related to our capacity expansions in China and Idaho that were completed last fiscal year. Adjusted SG&A declined $12 million to $165 million. We reduced adjusted SG&A despite an incremental $7 million of non-cash amortization related to our new ERP system that went live in the third quarter of fiscal 2024. Continued execution of our expense reduction initiatives, including those associated with our restructuring plan, drove most of the improvement, with the remainder largely due to lower performance-based compensation and benefit accruals. For North America specifically, adjusted EBITDA declined $55 million to $267 million, driven by a combination of unfavorable price mix, lower sales volumes, higher manufacturing cost per pound, and incremental production costs. For our international segment, adjusted EBITDA declined $53 million to $47 million. Higher manufacturing cost per pound and incremental production costs drove the decline, and the increasingly competitive environment in each region affected our ability to use price to fully offset inflation. Moving to our liquidity position and cash flow on slide seven. We ended the second quarter with about $80 million of cash and $1.2 billion available under our revolving credit facility. Our net debt was $4 billion, which puts our leverage ratio at 3.4 times on a trailing 12-month basis. In the first half of the year, we generated nearly $430 million of cash from operations, which is down about $25 million versus the prior year due to lower earnings, which were partially offset by favorable changes in working capital. Capital expenditures for the first half of the year Net of proceeds from blue chip swap transactions in Argentina were $486 million as we completed our expansion in the Netherlands during the second quarter and continued construction of our Argentina facility. We expect our capital spending during the second half of the year to significantly decline as we continue to target total annual capital expenditures of $750 million in fiscal 2025. During the quarter, we returned about $52 million to shareholders in the form of cash dividends. We did not repurchase any shares under our share repurchase authorization during the second quarter. I'll now turn it back over to Tom, who will cover the next few slides. Tom?

Thanks, Bernadette. At our Investor Day more than a year ago, we provided our view of the global frozen potato industry, including our estimates of future capacity additions as well as demand growth. Much has changed since then, so we wanted to provide you with our updated view. As shown on slide 8, prior to COVID, frozen potato demand in the U.S. and our key international markets was growing above historical rates, resulting in landless and the industry at large operating above full capacity. While COVID affected demand for a relatively short period, we saw evidence of frozen potato demand quickly rebounding to pre-COVID levels and historical growth rates. As a result, we strategically plan to expand capacity so we would be well-positioned to serve our customers and capture our share of growing global demand. So starting in early 2021 and knowing that it typically takes two to three years to plan, construct, and qualify a new facility, we were one of the first processors to announce major capacity expansions and modernization of our existing production lines. This included projects in China, Idaho, the Netherlands, and Argentina. By the time of our investor day in October 2023, as you can see on the chart, some competitors had also announced capacity expansion projects. Since then, legacy competitors, as well as some relatively new market entrants, have announced plans to construct more than 3.5 billion pounds of additional capacity between 2024 and 2027. This primarily includes expansions in Europe, China, and Brazil, but also in relatively new frozen potato processing regions such as India and the Middle East. While competitors' expansion announcements are always expected, we did not foresee the timing and aggregate scale of these additional expansions. As you can see on slide nine, including these additional announcements, we expect the industry in total may add up to 8.6 billion pounds of incremental production capacity over the next four calendar years. Given the near-term operating environment, we don't know whether all capacity expansions that have been announced will move forward and be operational by the end of calendar 2028. That said, if all these announced capacity additions are completed and on time, and if there are no further capacity reductions other than our strategic closure of Canal Washington facility, we estimate total industry capacity may be more than 44 billion pounds by the end of 2028. That's an additional 10 billion pounds of capacity being added. between 2023 and 2028, which is 4 billion pounds more than what was added in the previous five years. This has implications for industry capacity utilization. In 2024, we estimate capacity utilization is around 90%, which itself is down from the high 90s during the past couple of years due to the slowdown of global demand and the addition of nearly 3 billion pounds of incremental supply by Land West and our peers. Over the next few years, we expect capacity utilization may be in the mid to high 80s. Accordingly, and again, assuming all the announced expansion projects are completed or not significantly delayed, we expect the operating environment will remain challenged through the medium term, even if demand returns to historical rates as incremental capacity expansions add to the current imbalance in global industry supply and demand, especially outside North America. As you see on slide 10, we have again been an early mover to implement actions to combat the challenging environment. Nearly three months ago, we announced a restructuring plan to address the imbalance and improve our cost structure. This included reducing headcount, permanently closing a processing facility, and temporarily curtailing production lines and schedules. We remain on track to deliver on the $55 million of cost savings associated with this plan in fiscal 2025 and annualized cost savings of $85 million in fiscal 2026. In addition, as I noted earlier, we're continuing to evaluate and execute opportunities to adjust our supply chain operations and support functions to effectively manage through this challenging environment, protect our profitability, and improve free cash flow. We brought on a new chief supply chain officer about four months ago, and we're encouraged to see the opportunity she and the team identified to reduce our manufacturing and supply chain costs. In the back half of the year, we'll have more to say about these initiatives to improve performance and profitability. Let me now turn over the call to Bernadette to discuss our updated outlook.

Thanks, Tom. While we anticipated a challenging environment for the balance of fiscal 2025 during our last earnings call, our performance so far has fallen short of expectations As a result, we're reducing our financial targets for the year to reflect our performance in the second quarter, as well as the increasingly competitive environment that Tom just described. As you can see on slide 11, we're reducing our net sales target range to $6.35 to $6.45 billion from our previous range of $6.6 to $6.8 billion. Using the midpoint of the new sales range implies a sales decline of 1% versus fiscal 2024. We're also reducing our adjusted EBITDA target range to $1.17 to $1.21 billion from our previous estimate of around $1.38 billion. Let me walk you through the key changes. On slide 12, you can see that about one-fourth of the reduction in our annual sales target reflects the shortfall versus expectations during the second quarter. The remainder reflects the combination of factors that affect the second half of the year. In North America, we expect incremental sales volume pressure due to the impact of unexpected loss of a chain restaurant customer, partially offset by the benefit of some new customer wins, and a greater than forecasted impact from the downsizing in serving size related to promotional meals at key customers. Our forecast for price mix in North America is down modestly from our previous estimate due to less favorable mix than we previously anticipated. Our forecast specifically for price is essentially unchanged as the pricing environment, while competitive, remains largely in line with our initial expectations. In our international segment, we expect volume to be below our previous forecast, primarily reflecting incremental customer share losses resulting from a more intense competitive environment, as well as softer restaurant traffic in key international markets. In addition, we expect incremental pricing pressure in each of our regions, but for different reasons. In Asia Pacific and Latin America, we're experiencing an increasingly competitive environment as demand growth slows and as additional supply from Europe and newer entrants in India, China, and the Middle East gain share. In EMEA, we're moderating some of the inflation-driven pricing actions that we implemented earlier this year to counter the initial surge in the market price of potatoes. In short, we expect the 1% decline in total lamb Weston net sales versus the prior year will be driven by a low to mid single-digit decline in price mix, partially offset by a low single-digit increase in volume growth. With respect to adjusted EBITDA on slide 13, you can see that nearly one-third of the $190 million reduction in our annual adjusted EBITDA target reflects the shortfall in our performance in the second quarter versus expectations. Most of the remaining reduction in our EBITDA forecast is due to the impact of a more competitive environment in our key international markets, which is affecting volume and our ability to pass along input cost inflation. It's also due to the reductions in volume and less favorable mix in North America that I described earlier. In addition, relative to our previous forecast, we expect to incur increased manufacturing costs due to inefficiencies from lower asset and potato utilization. With respect to SG&A, we're maintaining our current range of $680 to $690 million, but we'll likely be towards the top end of the range. As you can see on slide 14, based on our updated annual financial forecast, for the second half of the year, we expect to deliver sales of $3.1 to $3.2 billion, implying growth of 1% to 4% as compared with the prior year period. We expect higher volume in both international and North America will drive overall sales growth. We forecast that our international segment will contribute the majority of the overall volume increase, primarily reflecting the benefit of incremental volume from recent chain customer contract wins across each of our geographic regions, net of recent share losses, lapping the impact of canceled shipments associated with last year's ERP transition, as well as the impact of the voluntary product withdrawal that affected our results in the fourth quarter of fiscal 2024. We expect North America volume growth to also reflect the benefit of lapping canceled shipments associated with last year's ERP transition, continued progress in regaining share of regional and small customers lost in the prior year, and incremental volume from recent chain customer contract wins, net of share losses. We expect overall price mix will be down in the second half of the year. In North America, we're forecasting price mix will decline as pricing actions more than offset benefits of improved product and channel mix. As I previously noted, our price investments are consistent with our prior expectations. In international, we're forecasting overall price mix will also decline due to pricing actions in response to competitive dynamics in key international markets. Moving to earnings. In the second half, we expect to deliver 600 to 640 million of adjusted EBITDA, which is in line with what we delivered in the prior period. Overall, we expect the benefit from incremental volume growth in both international and North America will drive EBITDA growth, but will be largely offset by planned investments in price in North America, incremental price actions in key international markets, and the impact of input cost inflation, and increased manufacturing costs due to inefficiencies from lower asset and potato utilization, which we are actively working to address. Now, turning to our thoughts on capital expenditures on slide 15. As I previously noted, we're continuing to target total capital expenditures of approximately $750 million for fiscal 2025. We spent about $485 million during the first half of the year as we completed our expansion in the Netherlands and continued construction of our Argentina facility. Spending in the second half of the year will focus on maintenance, modernization, and the continued construction of our Argentina facility, which is on track to be completed in mid-calendar 2025. For 2026, we're continuing to target total capital expenditures of approximately $550 million. We expect about $400 million will be for base maintenance capital and modernization efforts, which is in line with our annual depreciation and amortization expense. The other $150 million will be for environmental capital projects that largely focus on wastewater treatment at our manufacturing facilities. As we highlighted last quarter, we expect to spend about $500 million in total over the next five years to comply with increasingly strict government regulations and permit limitations. For at least a few years beyond 2026, given our expectations for lower industry capacity utilization, we do not expect to direct any significant investments to growth capital. will focus our spending on base and modernization capital, which together is generally up to 5% of sales, plus an additional $75 million or so each year for environmental projects. As a result, fiscal 2026 should be a positive inflection point for our free cash flow. Note that the annual amounts that I just described exclude any capital we expect to deploy when we restart the next phase of our ERP implementation. Turning to our thoughts on capital return to shareholders on slide 16. Today we announced a $250 million increase to our share repurchase authorization. With this increase, we have approximately $560 million remaining under our authorization. As has been our practice, we'll continue to use a disciplined approach to repurchasing shares, but the increased authorization combined with the increase in expected free cash flows provides us with the flexibility to opportunistically buy back shares under the program. With respect to dividends, we declared a one cent increase in our quarterly dividend to 37 cents per share. This is consistent with our history of increasing our dividend each year since becoming a public company more than eight years ago. Our target dividend payout ratio remains 25 to 35% of earnings per share. While we're above that range today, that's a result of temporarily depressed earnings. Let me now turn the call back over to Tom for some closing comments.

Thanks, Bernadette. So let me just summarize today by saying we expect the operating environment in the near term will remain challenging as additional capacity expansions are announced during a period of ongoing pressure on demand. We are proactively adapting to this dynamic environment by strategically adjusting our footprint, reducing capital expenditures, managing our cost structure, and improving cash flow. At the same time, we remain committed to returning capital to our shareholders through opportunistic share repurchases and steady increases in our dividend while continuing to maintain and modernize our production assets. Overall, we remain well-positioned with the unique strength and scale that Lamb-Weston's system provides to navigate a tough, industry-wide operating environment. We're taking actions to adapt our operations to weather these transitory challenges and make lasting improvements to our operations. And we'll continue to leverage our solid fundamentals and balance sheet to continue to deliver value to our shareholders. Before taking questions, I just want to end with saying again that serving as Lamb-Weston's president, and CEO has been a privilege and an honor. And I'm proud of what the entire Lamb Weston team has accomplished during these last eight years. With Mike and his leadership team at the helm, Lamb Weston's future is in great hands. Thank you for joining us this morning. Now let me turn it back over to Dexter.

Thanks, Tom. Before opening up the call for questions, I just want to note that Mike and Bernadette will be on the road with investors in January. We'll provide details for those meetings shortly after the start of the new year. With that, we're now ready to take your questions.

Thank you. If you would like to ask a question, you may signal by pressing 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. Once again, star 1 for questions. We'll go first to Andrew Lazar with Barclays.

Great. Thanks very much. Tom, I guess even assuming 3% annual demand growth over time, and obviously that's a lot more than what we currently see, as you talked about, capacity utilization by 2028 would only get back to around 90%. That's certainly below where it's been historically in more the mid to high 90s. I guess in light of this, what do you now view as Land Weston's sort of structural or normalized EBITDA margin? And is it lower, or maybe appropriately, how much lower is it than what you might have previously thought? And then I've got a follow-up.

Yeah, Andrew, I think, you know, based on our re-guide here today and going forward, you know, assuming all that capacity comes online and there's no other industry adjustments to the footprint, you know, we believe the go-forwards in the range of, on an EBITDA basis, 19% to 20%.

Yeah, and then, you know, Andrew, we'll look to expand margins by pricing to offset inflation over the longer term, but as Tom said, in the short-term, medium-term environment, we're expecting 19% to 20% EBITDA margins.

Thanks for that. And then, Tom, in light of the industry dynamic and some of the incremental capacity and such, why do you think other players have not yet made sort of similar decisions to curtail production or perhaps close or shutter older, you know, less efficient facilities given all the new capacity that's coming on stream as you have, because again, typically it's been an industry that's been rational and that, that obviously seems to be sort of breaking down now quite, quite materially. Thank you.

Yeah, Andrew, I think, you know, you know what, as Lamb Weston, we're managing our business based on the environment that we're operating in. And, you know, I'm, I'm certain that the rest of the industry is evaluating the dynamics right now, and it remains to be seen, but I would anticipate there may be some actions from our competitors, but it remains to be seen based on the environment.

Yeah, and Andrew, over the long term, we expect it's going to be a generally balanced based on the confidence and continued category growth, positive French fry attachment rate. This is just a short-term to medium-term that we're going to have to work through this, and we'll continue to evaluate any additional opportunities to reduce costs and make sure we profitably manage the business as we move forward in this difficult environment.

Thank you.

Thank you. We'll take our next question from Peter Galbo with Bank of America.

Hey, good morning. Thank you for the question. Tom, I actually wanted to spend some time on the international business because I think there's a lot of moving parts there that maybe are not fully appreciated. Maybe we can start with Europe. I think you've called out some incremental pressure. It seems like you're expecting more. I'm not sure how much of that is tied to the fact that You know, you were expecting maybe a tighter potato crop this year that ended up coming in better. And so competitors feel, you know, the ability to kind of price discount a bit more. So maybe if you can start with that on Europe. And then as it relates to Asia, you know, calling out the incremental pressure and I think the share pressure that you're seeing now, just how you think about that, you know, it's already existing now. in light of the capacity that's coming. So why would it not necessarily get worse in some of those markets as, you know, the slide kind of outlines, you know, there's quite a bit of capacity that's expected to come online. So I know there's a lot there, but maybe if you could address, you know, again, Europe and then the Asia markets kind of separately would be helpful.

Yeah, so Europe initially the crop was projected to be below average. It recovered through the growing season. So, you know, you had some initial high-cost open potatoes the industry procured, and then the crop came down. So with that and, you know, the competitiveness of that market, it's been difficult to get inflation passed through in terms of to the customer. And so that's really driving the pressure on the European market. And, you know, the other part of your question in terms of, you know, Asia, I would say that, you know, one of the, and we're getting some traction, but As you recall, when we had our ERP challenges, we protected a lot of the North America customers, and we had some impact on our international, specifically in Asia, customers. And so, you know, while the team's doing a great job, winning back some of that business is just a little bit more competitive than we anticipated, and, you know, we'll be going forward.

Yeah, and Tom, the only thing I'd add to that in the Asia market, you know, with the increased capacity that's come online there, it becomes more of an export market than it ever has been. And so we'll continue to look for that as opportunities to move sales profitably as well.

Okay. Thanks for that. And then I guess just on the back of Andrew's question around, you know, EBITDA margins, if I can take it up to the gross margin level – You know, there's been obviously quite a bit of deleverage as a result of, I think, idling the capacity. Bernadette, I think you called out some other factors that hopefully we can go through. But I guess the question is, you know, look, if the deleverage, is it more than you expected? Or are there just other manufacturing, you know, elements that have come in that, again, this gross margin now we run out at a significantly lower level? Thanks very much.

Yeah, I think the initial, we've had some production manufacturing challenges early this fiscal year in terms of efficiencies and plants running throughput and hitting production schedules. And, you know, so that's been really disappointing. We've got a new chief supply chain officer who's focused on that. going forward and have a number of different things identified. We are seeing improvements, but as we continue to focus on production improvements, it's going to take some time to get us back to normal operating efficiency levels.

Yeah, and then just a reminder, as it relates to the back half margins, seasonally, we'll always see gross margins in the third quarter be a little bit higher than in the fourth quarter. Not only will it be affected by seasonality, but we'll have the absence of some of those things that affected us in the first half of the year related to the product withdrawal and some of the inventory write-offs that we had previously talked about.

Thank you.

We'll take our next question from Tom Palmer with Citi.

Good morning. Thanks for the question. I just wanted to clarify on the customer losses that were not expected. To what extent was pricing the determinant of these losses? I know there was mention in Asia of some ERP challenges, so I'm just trying to understand if customer service was part of the consideration here with some of the lack of wins that were expected.

Yeah, as it relates to customer losses, you know, every year we go into the negotiation, and it's a very competitive environment. And so, you know, some of that's going to be related to price. There wasn't necessarily any ERP or other industry service factors at all. We continue to service our customers regularly. But it's a competitive environment and more competitive than we originally thought it was going to be as we entered into the second quarter.

Okay. Understood. Thank you.

I did see the expanded buyback program. Just how aggressive, I guess, are you willing to be as you watch the shares maybe get lower today?

yeah so as we move forward and i mentioned the back half of the year we're going to have more free cash flow because most of our capital investments were made in the first half of the year as we have more free cash flow we're going to opportunistically be in the market and buy back shares and and we're excited to have the increased authorization that we announced today as well the additional 250 million as we move forward so we'll leave it at that but again We'll have that additional free cash flow as we focus more on maintenance and base capital and modernization efforts moving forward.

Thank you. Thank you.

We'll take our next question from Ken Goldman with JP Morgan.

Hi. You know, the activist reiterated its opinion this morning that in addition to management changes, LAM requires significant board change or should be sold, just to quote them. I know you don't know every board member's intention, but Tom, you're on the board. You may have some insight here. Just curious, is it your belief at this time that, you know, there will be meaningful board changes, that the board is open to LAM being sold? And if you can't comment, do you at least know

if the company plans on issuing a formal response to the activists letter, you know, Ken, we're here today to talk about earnings, our outlook, what's going on in the business. And more importantly, um, the transition about, uh, Mike running the company going forward. So I'll leave it at that, but that's what we're here to talk about today.

Okay. Following up, um, How do you see, in terms of guidance, I know there's a lot of moving pieces in the back half, certainly some easier comparisons. Just as we think about underlying volume trends, right, excluding changes to customers, the lap, are you expecting any kind of improvement sequentially in consumer demand for your products? Again, just on a like-for-like basis, if that's even possible to kind of parse out.

Yeah, you know, we are expecting incremental volume from customer wins that I think even previously we've been talking about the fact that we'd start seeing the benefit of those in the third quarter. P7 to date, we are seeing the impact of that. So a lot of positive momentum there, particularly in the international segment.

Thank you. We'll go next to Robert Moscow with TD Cowan.

Hi, thanks. Similar to Ken's question, are there any assumptions in your back half about regaining customers that you lost from the ERP disruption? Do you have to get new business wins in the back half starting from today in order to achieve those numbers?

The numbers that we've included in the back half of the year include all of our line of sight to customer wins that we have in place. So, no, there isn't a large amount in there that is unknown business wins.

Okay. And a quick follow-up. You know, you lost another chain customer in North America. Is there any concerns about reputation risk from the missteps in calendar 2024? you know, what are your customers saying about their willingness to trust Lamb Weston as a supplier?

Yeah, so, you know, in terms of, you know, really across the board from a customer standpoint, certainly we've had to address and repair some of those relationships, but by and large, I think we're, you know, through most of some of the challenging discussions we've had and, you know, it takes time, but I feel great about where we are with our large customers. And even, you know, some of the food service channel business, it's taken us more time than what we had previously anticipated to regain some of those accounts that were impacted by some of the challenges we had a year ago.

Okay, thank you.

We'll take our next question from Rob Dickerson with Jeffreys.

Great. Thanks so much. Tom, maybe just kind of a basic question for you on the incremental capacity you now see coming online over the next three or four years. What do you think drove those players to decide to have all that capacity now, just given the operating backdrop globally, number one? And then number two, you know, we've always forever kind of spoken about, you know, you know, fairly defragmented market, obviously in the United States with like kind of opportunity to defragment globally. But now kind of what we're hearing as well, you know, that fragmentation ex-US actually is causing some of this issue because you have some of these smaller players that, you know, are leading in and decide, well, let's all, you know, add this new capacity because maybe we can get some of the margin too. We can get some of that profit too. It just seems clearly like, you know, this is the first time this much has been added outside of the U.S. And it doesn't sound like we're talking about kind of the core three other players that we normally discuss when we talk lamb in the U.S. Thanks.

Yeah, Rob. So, you know, when you step back and you go look at between 2017 and 2022, there was about 3 billion pounds that were added in the industry and all that capacity was you know, got utilized based on the demand growth. And as I said in my remarks, you know, 23, two, three years ago, as we saw demand recovering at historical rates, you know, we made this strategic decision to expand our footprint. And, you know, so subsequent to that, obviously there's been some additional capacity expansions and, India, and China, as well as North America, that, you know, I think the industry was seeing the same, you know, category growth rates. You know, the environment we're dealing with today is, you know, we're seeing restaurants slow down in a lot of markets. And, you know, so I think the industry has seen The same thing in terms of category growth, and it's slowed down. And so, you know, we view this as a transitory situation, and I think, as I said earlier, some of the capacity announcements, we'll see if they actually, you know, come to fruition based on the environment or they're delayed. So I think it's a combination of, you know, the industry kind of viewing the – the category is the same, and the categories change. And that's been the big driver.

Okay. Okay. Fair enough. And then, Bernadette, I hate to be a little nitpicky here, but there is the one slide, right, when you kind of map out that CapEx, and we talk about the CapEx kind of starting to come off, at least the gross CapEx, additional 26%. You know, and I think the total number still for CapEx is 550, which is similar to what you've spoken to in this past. But there is that little circle, right? It says 6% to 8%, which I'm assuming, as I look at the chart, you know, 6% to 8% of sales implied. Now, clearly, you've guided to 25, right? We know what CapEx is. We can kind of reverse engineer to get to what then you think you're implied. sales would be in 26 to get to 68%. And it does, I don't know, it seems a little high, let's say on the sales side. So is that like, just to clarify, like you're very comfortable with the 550 million. I guess we'll see if it winds up being 68% of sales.

Absolutely. I'm very comfortable with the 550 million.

Okay. Okay, great. All right. I'll pass it on. Thanks a lot. We'll go next to Alexia Howard with Bernstein.

Good morning, everyone.

Good morning.

So can I turn to the demand side of the equation? We've talked a lot about capacity and competitors this morning. What is your research telling you about the reasons for the weak consumer demand? And I imagine the reasons might be quite different between the U.S. and Europe. And specifically, are you seeing any impact at the moment on the uptake of GLP-1 weight loss drugs, particularly here in the U.S.? I'm just wondering how that informs your expectations about an improvement in demand going forward. And then I have a follow-up. Thank you.

Sure. As it relates to U.S. demand, you know, most of the decline in demand versus the prior year relates to there being the fifth consecutive quarter where consumers have continued to face inflation, and we've seen declines in restaurant traffic. So that's the primary reason that we're seeing that. As it affects our business, there's more value promotion meals, and when those value promotion meals drive the increased traffic, we see consumers trading down, and there's been a bigger impact on that, and we've adjusted then our forecast accordingly. If we turn to the international markets, overall the restaurant traffic trends there have slowed sequentially as well as compared with the first quarter as they're continuing to adjust to menu price inflation as well. We have not, though, seen a large impact from GLP-1 based on everything that we've seen to date. We'll continue to monitor it, but from a demand perspective, we're not expecting anything significant in the long term.

Hey, Alexia, just one thing to also state. Sorry to text her, Alexia. The fry attachment rates have been consistent and steady. So it's, you know, when people are going to restaurants, they're buying fries at the same time, like they usually did. They might be now buying a smaller fry, but at least they're still buying the fries when they go to the restaurants at the same rate.

Great. Thank you for that. And as a follow-up, you mentioned in your opening remarks new TAM opportunities with nontraditional customers. Can I ask about how large those markets are and exactly what they are that you're going after?

Yeah. So, Alexia, I'm not going to get into specifics in terms of volume potential and specific customer opportunities. But, you know, the way to think about it is things that we've done in the past with You know, some of our customers that traditionally didn't offer fries and or tater tots, that's some of the things we're looking at with some potentially new customer entrance into the frozen potato category, and I'll just leave it at that.

Thank you. I'll pass it on.

We'll go next to Steve Powers with Deutsche Bank.

Great. Thanks, Gordon. Good morning from you as well. I wanted to go back to capacity utilization from a slightly different perspective. When you talk about the low 90s utilization today, I mean, how does land utilization compare to that industry benchmark? I guess what I'm trying to get at is how much of the industry slack is in your business?

Yeah, so the footprint adjustments we made several months ago brought us back up into the low 90 range. And that's the reason we did it. We feel comfortable about where our utilization is today. And as I stated earlier, we've had some challenges across our footprint with some unplanned downtime and other maintenance issues that we're addressing. We're seeing more efficient utilization the past period, and it's improving. But overall, you know, the reasons we made the changes we made was to get our utilization rate kind of in the low 90s, and we'll improve on that.

Okay, very good. I guess, and then I want to just dig back into just the business that's been slower to win back. than you had hoped. You know, I guess to boil it down, I guess the question is really like, what's the sales pitch to those accounts? And is there really, is there really any lever you can, you can lean on besides price to the extent that the, the competition who's now servicing those accounts is, is doing a good job.

No, we, we, you know, it's, You know, some of it is price. There's no question about it. But we also, as we're, you know, talking to those customers, it's talking about different products, different innovation, you know, potentially, you know, some if they're doing a, like, value-added menu offering. So there's, you know, some different discussions we're having. going forward. And it's, you know, we're winning some of that back. It's just taking longer than what we anticipated.

Yeah, you know, we're focused on consistency, quality, customer service, and then if there's anything we can bring to the table in terms of LTOs, those are the conversations that we're having, in addition to price and the competitive environment.

Got it. Thank you very much.

We'll take our next question from Max Gumport with BMP Paribas.

Hey, thanks for the question. I wanted to turn back to the comment on the 19 to 20% EBITDA margin being an estimate for the go-forward level in the current supply demand environment so that those look to be roughly in line with how you're guiding for the second half EBITDA margin. But you've also observed today that your earnings in 25 are temporarily depressed. Clearly, there's price investments going on. There's manufacturing inefficiencies. There's other pressures that could abate. And then you'll also be getting benefits from all the cost-cutting initiatives that you're just starting to get after. So I'm trying to get more clarity on what you see as your normalized adjusted EBITDA margin and why it would not be higher than the 19% to 20% that you're expecting for the second half of this fiscal year? Thanks very much.

Yeah, thanks for the question. You know, in the short to medium term, we expect the pressures to continue. Certainly, we are doing everything we can from a cost view to make sure that we can continue to increase the profitability, and we'll continue to do that over time. But right now, in the short to medium term, with the pressures that we've been seeing, We're going to go ahead and guide at the 19-20% range for EBITDA margins, and we'll come back as we're able to show more in terms of what those improvements and other things look to be. As, again, our new chief supply chain officer has been here four months, but we've got a lot of positive things we're seeing just this period, but want to wait until we've got a more robust plan to come back with on that.

Okay. I'll leave it there. Thank you.

We'll go next to Matt Smith with Stiefel.

Hi, good morning. Tom, you talked about initiatives to improve the impact of a lower utilization for manufacturing. Can you just provide a little more color about how you address that, both in the near term and over time? And along with that, you temporarily suspended production on some lines. Has the impact of that suspension, has that been in line with your expectations, or has it contributed to more of some of the production inefficiencies we've seen?

No, it's been largely in line with our expectations. The production challenges we've had were unplanned, and the run rates, for a number of different reasons, weren't up to where we normally expect them to be. And again, I'll reiterate, they've improved, and they're improving. And we've had some startup issues with, you know, the Keranigan plant and a little bit American Falls that we didn't anticipate. But, you know, those are improving. We got, you know, the teams working on them. We expect that to continue to improve and get to normalized levels here in the near term.

Thank you, Tom. And one clarification, you mentioned your utilization rate or lamb's utilization rate improving from here. Is that a reflection of the improving traffic trends? And I'll leave it there and pass it on. Thank you.

No, it's more of a reflection of how we're processing the potatoes in the plant and the utilization rate and just being more efficient with how we're running the lines and assuming that we've got A lot of the issues here in the last three, four months addressed going forward. We're expecting to be running more normalized here for the back half of the year.

Thank you. We'll go next to Mark Tarente with Wells Fargo Securities.

Hey, good morning, and thank you for taking my questions. Just a little more on the utilization, just asking a different way. So you believe you're currently in line with industry rates in the low 90s, and most of the forward incremental capacity you laid out through 28 is from competitors. So would you expect to be ahead of industry capacity utilization over the medium term?

No, I think we're generally in line. I know there's some competitors that – you know, from what we understand are running higher. But, you know, I think overall we're at kind of industry standard right now.

Okay. And then finished goods inventory elevated coming out of Q1, inventory seem higher in Q2. Any color on how much progress you had working through that during the quarter? Where are you currently versus normalized levels, and when would you expect production to align more with equipment?

As it relates to second and third quarters, our raw material inventory and our finished goods inventory are usually at their peak because we've just harvested potatoes in September and October. You usually see that peak, and then we'll continue to work those inventories down as we move forward throughout the balance of the year.

Okay, thanks.

We'll take our next question from Carla Casella with J.P. Morgan.

Hi. Just wanted a question on leverage. I know your CapEx is coming down next year, but looking at the balance of CapEx coming down, increased buybacks, increased dividend, have you changed your leverage target view there, or have you had conversations with the agencies?

Yeah, no change to our leverage target. We continue to target the three and a half times leverage ratio.

Okay, great. Thanks. Thank you.

Thank you. With no additional questions in queue, I'd like to turn the call back over to Mr. Kankabale for any additional or closing remarks.

Thanks, everyone, for joining the call today. If you have any follow-up questions, please email me and we could schedule a time to do so. Again, thank you, and have a happy holiday, everyone.

Thank you. That will conclude today's call. We appreciate your participation.