Lamb Weston (LW) Q4 2025 Earnings Call Transcript

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DATE

Wednesday, July 23, 2025 at 10 a.m. ET

CALL PARTICIPANTS

Chief Executive Officer — Mike Smith

Chief Financial Officer — Bernadette Madarieta

Vice President, Investor Relations — Debbie Hancock

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RISKS

Declining Price Mix: Price mix declined 4% in the quarter, directly reflecting pricing actions in response to heightened competition and soft restaurant traffic.

North America Net Sales Decrease: North America net sales declined 1%, primarily due to lower net selling prices.

Adjusted Gross Profit Pressure: Adjusted gross profit fell versus the prior year, driven by pricing investments, $19 million in higher factory burden from production curtailments, and continued low single-digit input cost inflation.

EBITDA Margin Floor: CEO Smith acknowledged, "we're going to be below that normalized range here in fiscal 2026," with a midpoint adjusted EBITDA margin of 17% in FY2026, marking the lowest level since the spin-off.

TAKEAWAYS

Net Sales: Increased 4%, supported by 8% volume growth, offset by a 4% price mix decline.

North America Segment Sales: Declined 1% due to a 5% decrease in price mix, partially offset by a 4% volume increase from regional small and retail customer wins.

International Segment Sales: Increased 15%, driven by a 16% volume increase from customer contract wins and lapping a prior-year voluntary product withdrawal, with price mix down 1%.

Adjusted EBITDA: Essentially flat or up $2 million compared to last year; North America segment adjusted EBITDA declined 7% to $258 million, while International segment adjusted EBITDA increased by $22 million to $63 million.

Cost Savings: Achieved $59 million in savings in FY2025, surpassing the previously set target; announced a new $250 million annualized run rate cost savings plan to be reached by FY2028.

Adjusted EBITDA Guidance (Fiscal 2026): Targeting $1.0 billion to $1.2 billion, following a revision in reporting methodology to exclude noncash share-based compensation beginning in FY2026.

Revenue Guidance (Fiscal 2026): Projected revenue of $6.35 billion to $6.55 billion for FY2026, representing a 2% decline to 2% growth in constant currency, including an additional (fifty-third) week.

Working Capital Improvement: Generated $860 million in operating cash flow in FY2025, up $70 million in cash from operations versus the prior year, mainly from a $349 million reduction in inventories (eight days) and improvement in accrued liabilities.

Capital Expenditures: Down $323 million from the prior year, below the $750 million target; Fiscal 2026 capital spending guidance is approximately $500 million (maintenance/modernization: $400 million, environmental projects: $100 million).

Returns to Shareholders: Returned $489 million in FY2025 ($282 million in share repurchases; $207 million in cash dividends); $358 million remains under the repurchase plan as of the end of Q4 FY2025.

Leverage and Liquidity: Net debt totaled $4.1 billion in FY2025, with $1.24 billion in liquidity as of FY2025; trailing twelve-month adjusted EBITDA to net debt leverage ratio of 3.3x in FY2025.

Potato Crop and Raw Costs: Early North America potato harvest is slightly above historical averages; with lower-cost benefits realized from the second quarter of fiscal 2026.

Cost Savings Plan Execution: The plan anticipates $200 million of the total $250 million target by FY2027, with about $100 million in cost savings realized in FY2026 (with two-thirds benefiting adjusted gross profit and one-third SG&A in FY2026).

Tax Rate Guidance: Expecting an effective tax rate near 26% for fiscal 2026, varying between the high 20s (first half) and low 20s (second half) in FY2026 due to the timing of discrete items.

International Capacity Delays: Approximately 1 to 1.5 billion pounds of new capacity canceled or delayed internationally, according to CEO Smith.

Strategic Alignment: Both CEO and board have aligned compensation plans to sales, adjusted EBITDA, free cash flow, and returns on capital in FY2026; board compensation to be received in company equity.

Segment Mix and Demand Trends: U.S. QSR traffic declined 1% (2% at hamburger-specialists), with category fry attachment rates about two points higher than pre-pandemic levels.

SUMMARY

Lamb Weston Holdings, Inc.(NYSE:LW) was supported by an 8% volume increase, despite a 4% price mix decline tied to competitive pricing actions and soft restaurant traffic. Management rolled out a new $250 million annualized cost savings plan, building on $59 million already achieved in savings in FY2025, with fiscal 2026 guidance incorporating these savings and an updated EBITDA reporting approach, excluding noncash share-based compensation. The company improved operating cash flow by $70 million in FY2025 and sharply reduced capital expenditures year-over-year, committing to continued capital discipline and targeted investments in modernization and environmental projects. Board and management compensation have been realigned to performance metrics, supporting the strategic "focus to win" plan amid evolving industry dynamics and volume momentum in both North America and international markets.

CEO Smith described Lamb Weston Holdings, Inc. as positioned to support growth by leveraging available production capacity and focusing on premium market segments.

CFO Madarieta stated exposure to tariffs effective August 1 would be approximately $25 million in fiscal 2026 results, if implemented.

The company's North America volume grew 4% and International volume increased 16% in FY2025, with management citing strong contract wins as a primary growth driver.

Capital allocation will prioritize business modernization over expansion, with base capital spending expected at 3% of sales and modernization around 2%.

INDUSTRY GLOSSARY

QSR: Quick Service Restaurant, a fast-food establishment emphasizing speed, standardization, and high-volume turnover.

Attachment Rate: The frequency with which a menu item (e.g., French fries) is ordered alongside other menu items in foodservice outlets.

Factory Burden Absorption: Allocation of fixed manufacturing overhead costs to units produced; higher absorption occurs when production rates are lower relative to fixed cost base.

Run Rate Savings: The ongoing annualized cost reductions expected once cost-saving initiatives are fully implemented.

Full Conference Call Transcript

Mike Smith: Thank you, Debbie. Good morning, and thank you for joining us today. I first want to thank our Lamb Weston Holdings, Inc. team around the globe for their hard work and strong execution. Fiscal 2025 was a year of substantial change for Lamb Weston Holdings, Inc. In addition to me becoming CEO, we recently added significant new and relevant experience to the board with six new members, including a new chairman, Bradley Alford, as well as Lawrence Kurzius, Paul Mace, Timothy McClevish, Ruth Kimmelschu, and Scott Ossfeld. Management and the new board have a high sense of urgency and are aligned on capitalizing on the many opportunities we collectively see to drive results in our business.

Today's results evidence the momentum we continue to build with customers and the visibility we have in our business as we work to rebuild credibility with investors. We are focused on controlling what we can control and are taking advantage of opportunities to drive results and improve execution through a cost savings program we announced today along with our customer-centric focus to win strategy for long-term success. Successful execution of these plans will help drive improved performance, including free cash flow and long-term returns. To drive further alignment, along with sales and adjusted EBITDA, free cash flow and returns on capital have been added to our compensation plans for fiscal 2026.

This alignment continues at the board level, which for 2020 the board has unanimously elected to receive their compensation in equity in the company. We believe these cumulative actions are readying the organization to further support customers and accelerate our performance when demand returns to growth. Turning to business results, Lamb Weston Holdings, Inc. ended the year with momentum in customer wins and retention, delivering results ahead of our updated expectations for fiscal 2025. The team is executing at a high level, and our long-standing commitment to quality, service, and innovation is driving success with customers globally. We had a strong fourth quarter that came in above our expectations.

Volume was up with wins across channels and geographies, and net sales grew. Price mix declined, reflecting our support of customers with price and trade as we manage the competitive environment and soft restaurant traffic. We are also seeing the benefits of our cost savings in our cost structure. Adjusted EBITDA increased in the quarter, and we made significant progress in improving working capital. For the full year, our success in the second half enabled us to end the year with volume up. As discussed on earlier calls, our full-year profit was impacted by actions to support customers in a competitive environment, higher costs from production curtailments, and higher inventories during the year, as well as inflationary pressures.

We offset some of this impact by delivering slightly above our cost savings target with $59 million of savings for the year. Since January, when I took on the role of CEO, I've worked closely with the board and management team to drive change with urgency and better position our business for success. Over the past several months, and with the support of outside resources, we undertook an end-to-end assessment of our operations. We developed a strategic plan to drive targeted decision-making and actions, and we are now executing on a plan to unlock near and long-term value. This plan, which we call focus to win, includes zero-based budgeting, assessing our non-core assets, and augmenting our commercial go-to-market.

We're already making progress. You can see it in our better-than-expected results announced today. But we know that the work and the real opportunities are ahead of us. We are operating in an industry with rapidly changing dynamics and a global consumer environment that remains uncertain. It requires a new approach, a focus to win. Global demand for french fries remains strong, but the market dynamics are evolving in important ways. Growth in food delivery, expanding QSR concepts, and air fryers changing how we cook at home are creating an opportunity that demands innovation and new approaches. Geographic growth is greatest in emerging markets where margin profiles are lower but also where QSR formats are expanding.

Following market shortages during COVID, the long-term attractiveness of our industry has created the potential for future supply-demand imbalance, most notably outside the U.S. As previously discussed, while new capacity has been announced globally, we do not expect it all to be built. We have already begun to see industry consolidation and decisions to postpone or cancel capacity additions. We believe these postponements and cancellations could continue as the industry has been rational over time. Importantly, not all new capacity is created equal. Geographic exposure, capabilities, reliability of new raw material sourcing, and quality determine the markets and channels impacted by new capacity.

We believe that much of the new capacity in developing markets like India and the Middle East does not have the capability to produce higher-margin premium items, which is the strategic focus for Lamb Weston Holdings, Inc. We believe the work we performed on the market confirmed our right to win in our key geographies, segments, and product categories. We are operating in some of the lowest-cost potato growing regions, and we are investing in capabilities aligned to growth opportunities and to our customers' needs to win and grow profitably over time. Let's talk about our focus to win strategy.

To differentiate Lamb Weston Holdings, Inc. in today's market, we are defining where to play through a strategic framework that focuses our resources and efforts on the most attractive growth opportunities across markets, channels, and product segments. How we expect to win is targeted. Strengthen our customer partnerships, execute with excellence, and set the pace for innovation. We are creating a repeatable cycle with four elements that drive growth and profitability for Lamb Weston Holdings, Inc. First, we are focusing investments on priority global markets and segments. Second, we are strengthening customer partnerships. Third, we are achieving executional excellence. And finally, we are setting the pace for innovation. We'll talk more about these shortly.

But at the core, we will do what our team does better than anyone else, be our customer's number one partner, a world-class potato company, and an industry-leading innovator. Our focus will be on geographies, channels, and products where we can both differentiate and lead. We've built our business in part by being something for everyone. But going forward, we will continue to partner with excellence in our core markets. We will invest to grow in markets, channels, and product categories with more attractive profit opportunities where customers value our full product and service offerings. We will focus our resources on markets and segments where we have the greatest advantage and reevaluate non-core assets and markets.

We will close the capability gaps in our organization, and we will target premium market segments where innovation is a differentiator. We must transform how we operate. It is how we will win. First, strengthen customer partnerships. Lamb Weston Holdings, Inc. remains a partner of choice for our customers. Our third-party research confirms that our value relationships and service are best in class. Our opportunity is to expand what we've done with our largest customers to our priority customer targets and geographies, enhancing our joint business planning activities and capabilities. Second, achieve executional excellence.

To be a partner of choice for our customers and to successfully and profitably operate in an increasingly competitive market, everything we do, we must do with excellence across all functions of the company. For example, in supply chain, we are focused on operating an advantaged global footprint aligned to our growth plan with a streamlined distribution network and revamped continuous improvement team with a focus on plant productivity. This includes simplifying and standardizing operations across locations, driving OEE improvement via our Lamb Weston Holdings, Inc. manufacturing operating culture, and embedding a zero-loss mindset in raw potato and materials usage.

Finally, to differentiate in a competitive marketplace with changing customer preferences, we must continue Lamb Weston Holdings, Inc.'s long track record of being an innovation leader. Our innovation efforts have delivered incremental improvements that directly enhance the customer and consumer experience. Looking ahead, we're expanding our ambition to include breakthrough innovations, such as Lamb Weston Holdings, Inc. Fast Fries, that allow operators in nontraditional fry channels to provide customers with fast and crispy fry offerings. These customers unlock new sources of value in channels that don't traditionally serve fries. This next chapter broadens our innovation efforts beyond product level and into areas such as process technology. Finally, we have created global innovation hubs to orchestrate disruptive innovation platforms.

We believe this will create a global network of insights and innovation specialists centered on two innovation hubs, North America and international. In concert with these plans, and as part of our focus to win strategy, today, we announced cost savings that are designed to better align our organization with the environment, improve efficiency, and focus on our biggest opportunities. We have identified at least $250 million of annualized run rate savings that we expect to achieve by the end of fiscal 2028, that Bernadette will talk about more in a moment. We believe these actions will lower our cost base and help ensure we remain competitive while reallocating resources on a more targeted basis to invest for growth.

As I've discussed, customer and consumer preferences for our products remain high, though execution in this period of macro uncertainty will be paramount to the future success of the company. We must control what we can control to continue delivering best-in-class returns on our business. This includes streamlining our organization, implementing zero-based budgeting, strategically investing to improve productivity, and strengthening our manufacturing network. But we also should not lose sight of the bigger picture, which is that Lamb Weston Holdings, Inc. will be poised to deliver for our customers with an improved cost structure and operations.

When our customers see increased demand in their business, we don't know exactly when that will be, but when it does happen, we have confidence that it will, and we will be well-positioned to win when it does. I'll now turn it over to Bernadette to review the fourth quarter and fiscal year performance and walk through our outlook.

Bernadette Madarieta: Thank you, Mike, and good morning, everyone. I want to start by thanking our teams for their hard work in fiscal 2025 as we navigated a challenging year. Halfway through the year, we made important changes to adapt to the evolving environment and put our business on a path back to growth. Our fourth quarter results reflect the progress we made throughout the year to address the dynamic and changing environment. We delivered volume growth in the fourth quarter and for the full year, disciplined cost management, and a focus on cash flow, with significant working capital improvement and lower capital expenditures. Let's begin with our fourth quarter results on slide 17.

Net sales increased 4% compared with the prior year. Volume increased 8%, primarily driven by contract wins across each of our channels and geographic regions, and lapping an approximate $22 million negative impact in the prior period from a previously announced voluntary product withdrawal. These gains were partially offset by soft global restaurant traffic trends, which were down low single digits in our largest markets of the U.S. and UK. Despite lower traffic trends, there are some positive trends in the consumption data. In the U.S., French fry attachment rates continue to remain approximately two points higher than pre-pandemic levels. The French fry category grew 1% in the quarter, and QSR fry serving sizes also increased 1%.

Price mix declined 4% in the quarter compared to the prior year, reflecting efforts to support customers on price and trade in an increasingly competitive environment in both our North America and international segments. Looking at our segments, North America net sales declined 1% compared with the prior year, primarily due to lower net selling prices. Price mix in our North America segment declined 5%, due to pricing actions to support our customers, which was only partially offset by favorable channel and product mix. The favorable mix was attributable to growth in higher-margin regional small and retail customers. Volume increased 4%, primarily related to regional small and retail customer wins. These volume gains were partially offset by soft restaurant traffic.

In the U.S., QSR traffic improved from February's level, but compared with the prior year, was down 1% in the quarter and the fiscal year. Traffic at QSR chains specializing in hamburgers was down 2% in the quarter and 3% for the year. It's important to note that this is on top of declines in the prior year. Restaurant traffic on a two-year stack is down mid-single digits, with QSR hamburger-focused restaurants down high single digits over the two-year period. For our international segment, sales grew 15% versus the prior year quarter with little impact from foreign exchange.

Despite restaurant traffic being down 3% in the UK, our largest international market, and relatively flat in key international markets, the international segment's volume increased 16%, driven primarily by recent customer contract wins and to a lesser extent lapping the voluntary product withdrawal in the prior year. Price mix declined 1%, reflecting pricing actions to support customers in key international markets in response to the continued competitive environment. Moving on from sales, as expected, adjusted gross profit declined compared with the prior year quarter, due primarily to first pricing actions to support our customers. Second, deliberate choices we made to temporarily curtail some production resulting in approximately $19 million of higher factory burden absorption.

Specifically, fixed costs assigned to our curtailed lines are being temporarily absorbed by lower production levels, which leads to increased cost per pound. Third, low single-digit input cost inflation, including the benefit of lower raw potato prices, and finally, while not impacting EBITDA, higher depreciation expense from our recent capacity expansions. These actions were partially offset by increased sales volume and lapping the impact of the voluntary product withdrawal in the prior year. Adjusted SG&A declined $6 million on lower advertising and promotional spend, lapping of higher ERP transition expenses in the prior year, as well as the benefit of our cost-saving initiative.

All of this led to adjusted EBITDA of $285 million, which is essentially flat or up $2 million versus the prior year. Lower adjusted SG&A offset lower adjusted gross profit and equity method earnings after adjustments for depreciation and amortization. Turning to segment EBITDA performance on slide 19. Adjusted EBITDA in our North America segment declined 7% or $19 million versus the prior year quarter to $258 million, primarily related to pricing actions to support our customers and $17 million of incremental fixed factory burden absorption. This was only partially offset by lapping a $19 million charge for the voluntary product withdrawal in the prior year and lower SG&A expenses.

For our International segment, adjusted EBITDA increased $22 million to $63 million. Higher net sales, lower manufacturing cost per pound, including lapping a $21 million charge related to the voluntary product withdrawal in the prior year, and lower SG&A offset the impact of a 1% decrease in price mix. Moving to our liquidity position and cash flows on slide 20. We ended the year with approximately $1.24 billion of liquidity, comprised of approximately $1.17 billion available under our revolving credit facility and $71 million of cash and cash equivalents. Our net debt was $4.1 billion, and our adjusted EBITDA to net debt leverage ratio was 3.3 times on a trailing twelve-month basis.

In fiscal 2025, we generated $860 million of cash from operations. This is up $70 million versus the prior year, due primarily to $349 million of favorable changes in working capital, which was primarily attributable to lower inventories, which reduced eight days and a favorable change in accrued liabilities. We expect to continue to drive inventory improvements as part of our Focus to Win plan. This plan includes approximately $60 million of cash flow from inventory improvement in fiscal 2026 and 2027, or $120 million in total by the end of fiscal 2027. Turning to slide 21.

Capital expenditures for fiscal 2025, net of proceeds from blue chip swap transactions in Argentina, were $651 million, down $323 million with our expansion projects nearing completion. We ended the year below our initial $750 million target due to continued capital discipline, cost savings initiatives, and the timing of projects and cash outlays. For fiscal 2026, our capital spending is expected to be approximately $500 million, with approximately $400 million in maintenance and modernization and $100 million for environmental projects, which are mostly for wastewater treatment. On slide 22, you can see that we remain committed to returning cash to shareholders. For the year, we returned $489 million.

In the fourth quarter, we repurchased $100 million of shares and $282 million in the year, leaving us with $358 million available under the plan. We also returned $207 million in cash dividends during the year. We plan to continue to follow a disciplined capital allocation approach anchored around investment in the business, its capabilities, and areas we are working to competitively differentiate Lamb Weston Holdings, Inc. to execute our business strategy, while maintaining a strong balance sheet and opportunistically returning capital to shareholders. Let's turn to our outlook. Starting with the potato crop on Slide 23.

We've started harvesting and processing the early potato varieties in North America, and initial indications are that this portion of the new crop is slightly above 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 within historical ranges as growing conditions in these regions have been favorable. As a reminder, in North America, we've agreed to a mid-single-digit decrease in the aggregate and contract prices for the 2025 potato crop.

Because we ended the year with lower inventories, we expect that we will begin realizing the benefits of lower-cost potatoes harvested out of the field in the second quarter of fiscal 2026. This is earlier than last year and in line with historical seasonal timing. In Europe, favorable dry and warm growing conditions in the industry's main growing regions of The Netherlands, Belgium, Northern France, and Germany, are expected to result in an average crop. We currently expect our potato costs in Europe to be flat to slightly lower than the previous year's fixed price contracts. We will provide more details on the crops in both North America and Europe when we report our second quarter results.

Turning to slide 24 and our fiscal 2026 outlook. The outlook includes the contribution of a fifty-third week, with the additional week falling in the fourth quarter. In fiscal 2026, we expect our category to continue to be in high demand, with customers and consumers prioritizing french fries as a menu and an at-home item. However, our guidance assumes continued pressure on consumers from macroeconomic and geopolitical factors. Our outlook assumes no improvement in global restaurant traffic from fiscal 2025 levels, but it does plan for customer momentum that began in 2025 to continue. It also does not include additional impacts of evolving trade, including changes in tariffs and retaliatory countermeasures.

With this as a backdrop, we expect revenue for fiscal 2026 in the range of $6.35 billion to $6.55 billion, which is a 2% decline to 2% growth on a constant currency basis. The carryover pricing actions we made in fiscal 2025 to support our customers will have a negative impact on net sales in the first half of the year. Based on the timing of contract renewals, most of the fiscal 2026 pricing actions will impact the second half of the year, and they are expected to have a lesser impact than those made in fiscal 2025.

In total, we expect sales to be stronger in the second half of the fiscal year, which will benefit from the additional week. Turning to our adjusted EBITDA outlook on Slide 25. Beginning in fiscal 2026, we are implementing changes in our reporting of adjusted SG&A and adjusted EBITDA to fully exclude noncash share-based compensation expense. In fiscal 2025, stock-based compensation expense was $40 million. After this call, we will publish a schedule recasting prior periods to reflect this new methodology on our investor website. With this change, we expect adjusted EBITDA for fiscal 2026 of $1 billion to $1.2 billion.

We expect adjusted gross profit to be down, negatively impacted by the carryover pricing and further efforts to support customers with price and trade in fiscal 2026. Low single-digit inflation, including the benefit of lower raw potato costs, and higher fixed factory burden and startup costs in our International segment, primarily related to our new plant in Argentina, which is expected to begin producing sellable product in August.

Before the benefits of our cost savings program, we expect adjusted SG&A will increase compared with the prior year, due to an incremental $40 million headwind related to normalizing incentive compensation expenses after a couple of years of lower than planned incentive achievement, and approximately $10 million of incremental investments, including, for example, innovation and advertising and promotion expenses to support our long-term strategic plan. Our adjusted gross margin and SG&A will benefit from the cost savings program that we announced today. We expect to deliver approximately $200 million of the full savings target by 2027, with about half on a run rate basis in fiscal 2026.

In fiscal 2026, we expect approximately two-thirds of the $100 million of savings to be realized in the second half of the year. About two-thirds will benefit adjusted gross profit, and one-third will benefit adjusted SG&A this year. Over the program's life, however, we anticipate approximately 75% of the benefit in gross profit and 25% in SG&A. To deliver the savings, we expect to recognize $70 million to $100 million of cash pretax charges, most of which are expected to be paid in fiscal 2026. Keep in mind that these savings are on top of the remaining approximately $25 million of incremental benefits that we expect to deliver under the restructuring plan we announced in fiscal 2025.

And finally, adjusted EBITDA will benefit from the contribution of an additional week of sales and earnings. We are targeting a full-year effective tax rate of approximately 26% for fiscal 2026, excluding the impact of comparability items. This tax rate is forecast to be in the high 20s in the first half of the year and low 20s in the second half of the year, reflecting the expected timing of discrete items, most notably in the fourth quarter. We do not expect the recently enacted U.S. Federal tax legislation to have a material impact on our fiscal 2026 tax rate.

In summary, Lamb Weston Holdings, Inc. is operating from a strong financial foundation, and we believe the steps we announced today will enable us to improve our competitiveness and financial position through cost savings, establishing clear strategic priorities, and working capital improvements. We believe these expected savings, together with lower levels of capital expenditures and working capital improvements, will help drive improved profitability and cash flow over the long term. I'll now turn the call back over to Mike.

Mike Smith: Thank you, Bernadette. I'm confident in the direction we are taking Lamb Weston Holdings, Inc., and we are making important and significant changes to our business to compete more effectively in today's marketplace. We have organizational alignment to capitalize on the tremendous opportunities in front of us. We will drive performance by focusing on the controllables, but we do so knowing it will provide an even bigger opportunity for us and our customers when restaurant traffic returns to growth. And we will be ready. With that, we're happy to take your questions.

Operator: Thank you. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. Please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star 1 to ask a question. We will go first to Peter Galbo with Bank of America.

Peter Galbo: Hey, good morning, Mike and Bernadette. Thanks for the question. I wanted to start on the EBITDA margin target for the year, I think, is around 17 at the midpoint. And that would kinda be the, I think, the lowest it's been since the company was spun public on a standalone basis. So maybe you can just kind of help us understand if you think this is a floor in terms of a margin percentage. And I know you guys probably care about dollars more than percentages, but what the push and pull factors might be over the next couple of years that could push that number either higher or lower from that new kinda 17 base.

Mike Smith: Yes, Peter, appreciate the question. I think as I think about it, obviously, we're going to be below that normalized range here in fiscal 2026. I think despite the fact that, you know, our key customers are experiencing headwinds, you know, we're supporting them with price and trade in what's really a competitive environment. We've talked about that in the past. You know, we're also investing in markets and channels that are strategic and where we believe we have the right to win for the long term. And those are gonna be, you know, longer-term opportunities that we believe will deliver, you know, whole EBITDA dollars as you talked about.

But I'll tell you, you know, when I think about our category, compared to some of the other categories in CPG where the challenges might be a little bit structural in nature, you know, we operate in a really attractive category. And you've heard me talk about how, you know, it's one of the most ordered items across all generations, french fries. One of the most profitable items on restaurant menus, and the attachment rate remains high. And so, you know, we believe we're gonna continue to invest in the business for the long term, and we're also making significant changes around our cost structure.

And, you know, we've done a lot of work, as we talked about in our prepared remarks over the last several months, and it's shown us where we have some opportunities. And so we're addressing those with the announced $250 million cost savings program over the next few years. And so I'll tell you, listen, we believe our strategy has us on a path to return to those margin levels, but we'll provide more details once we're further along with our focus to win strategy.

Peter Galbo: Great. That's helpful. And maybe just as a follow-up, to both of you, there was a lot of discussion around the improvement of working capital, both in the prepared remarks and in the press release this morning. I guess, Mike, there's a lot of ways to get there in terms of the working capital improvement, and it looks to be on the inventory side. But maybe just a little bit more detail on what specifically you're planning to do around inventory levels, what that might look like in the supply chain as we contemplate the go forward? Thanks very much.

Mike Smith: Yes. No, great question around working capital. When you think about our focus to win strategy, a big part of its value creation, and that's across the entire P&L. When I look at the progress we made really in Q4, you know, we improved our inventories, and a lot of that had to do with the stronger volumes that we saw coming through the P&L. You know, keep in mind for this coming fiscal year, in the crop season, we've reduced our acres. And, you know, we have higher inventories, and so we're making sure that we work through those inventories in the right ways.

You know, I talked a little bit about improving our capabilities as an organization, and one of those capabilities that we are investing behind for the future is around planning. And integrating planning from, you know, the ad side all the way through to finished goods. And so we're really confident in our ability to improve our working capital over the next couple of years.

Peter Galbo: Great. Thanks very much, guys.

Bernadette Madarieta: Thanks, Peter.

Operator: We'll go next to Scott Marks with Jefferies.

Scott Marks: Hey, good morning. Thanks so much for taking our questions. First one, I wanted to ask about international capacity. You made some comments, I believe, that there's been some announced capacity internationally, but that you don't necessarily expect those to get off the ground. So just wondering if, one, if I have that correct, and then two, maybe what gives you confidence that some of those projects won't be moving forward?

Mike Smith: Yeah. I appreciate this question, Scott. I'm not gonna speculate on what the capacity will or won't happen, what will or won't be announced, but we do believe that the industry has been pretty rational in the past as it relates to capacity. And through our competitive intelligence, we believe that there's roughly one to 1.5 billion pounds that's been canceled or delayed. I'll also tell you, you know, the pace of new announcements has also slowed. And so when we think about our business, we're really taking the steps to control what we can control and ensure that, you know, our production lines up with our demand.

And the great thing about the position that we're in as we see restaurant traffic return and as our customers start to grow, we're well-positioned with available capacity to take advantage of those improved demand signals.

Scott Marks: Appreciate the answer. Thanks for that. And then secondly, just wanted to ask about kind of the CapEx guide for the year and maybe go forward, how we should be thinking about it. I think in the presentation, mentioned that about 3% of sales should be a kind of a maintenance CapEx number. And obviously, the guide you gave came in a little bit below what folks were looking for. So just wondering if you can kinda share some thoughts around that and kinda puts and takes and how we should think about that going forward. Thanks.

Bernadette Madarieta: You bet. So first, we are reducing the capital intensity as we shift away from our growth investments to modernization and maintenance, as you mentioned. Generally, we would expect about 3% of sales for base capital and 2% for modernization. And then as I mentioned, there's about $100 million we have now that's related to wastewater treatment. So all in, we expect that this $500 million CapEx plan is really something that is going to support Lamb Weston Holdings, Inc. continuing to maintain its assets and the capabilities that we need to drive our strategy forward.

Scott Marks: Got it. That's fine. Thanks so much.

Operator: We will move next to Alexia Howard at Bernstein.

Alexia Howard: Good morning, everyone.

Bernadette Madarieta: Morning, Alexia.

Alexia Howard: Hi there. So two quick things from me. First of all, can you talk about what went better than expected this quarter and whether any of those trends could persist into fiscal 2026?

Mike Smith: Yeah. You know, the one that comes to mind, Alexia, for Q4 is how we're engaging with our customers. You've heard me talk a lot about the importance of driving customer centricity through our organization, and that starts at the top. And I've been personally out meeting with several of our top customers and talking about where we have opportunities to improve and where we can help support them and their growth into the future. And so we're continuing to do that. The other area, obviously, that we've talked about here is around our focus to win strategy and the cost savings program.

And, obviously, we've been doing a lot of analysis over the last several months, but we've already started to focus in some of those areas to start implementing some of the opportunities that we see specifically around better execution on the business, as well as focusing on our innovation moving forward.

Bernadette Madarieta: And, Alexia, the only other thing I'd mention is just the really strong volume growth across all of our channels and all of our regions. I think as we mentioned, North America volume was up 4% and international volume up 16%. And as Mike mentioned, that's a big reason we were able to also drive down our inventories at the end of the year.

Alexia Howard: Very helpful. Can I follow-up with a question about the burger channel? I think you said on a two-year stack, the traffic in there is still down, I believe, single digits you mentioned. How much exposure do you have to that channel in North America? Because I'm trying to figure out if there's a risk if GLP-1 weight loss drugs really step up next year with the pill version coming out, could that have a material impact? Or are there ways that you can insulate yourself from that kind of outcome next year? Thank you, and I'll pass it on.

Mike Smith: Yeah. Good question. You know, Alexia, when you look at QSR servings or fry servings, 85 or over 80% of fry servings come from the QSR space. Specific to GLP-1s, you know, we don't see a material impact on our business right now. When you look at, you know, the retail frozen potato category data, you know, seems to be in a good spot. Also, when I look at fry menu importance, it remains above pre-pandemic levels. So when consumers are going to restaurants, they're ordering fries at a higher level than they were prior to the pandemic.

You know, we continue to engage in industry studies, and we're evaluating the consumer just like all the other companies out there on what the impact of GLP-1s might have. And we have our innovation team aligned to make sure that we adjust and change with any sort of consumer preferences that may come our way.

Alexia Howard: Great. Thank you very much. I'll pass it on.

Operator: Pulling in next to Steve Powers with Deutsche Bank.

Steve Powers: Great. Good morning. Thanks. Mike, I think as part of your outlook, you mentioned that it assumes continued positive customer momentum that you've built in the back half of 2025. I just wanted a little bit more clarity there. Is that just the carryover of recent business wins? Or are you assuming, you know, a degree of incremental wins that may not have yet been finalized? Just trying to understand exactly what that commentary means.

Mike Smith: Yeah. It's both, Steve. I mean, we've had a lot of strong volume, as Bernadette mentioned. But the teams are also out there, you know, pounding the pavements and talking to our customers and making sure that they understand that Lamb Weston Holdings, Inc. is here to support them for growth. You know, last call, we talked about a new large QSR chain that's switching to a frozen fry, and, you know, that transition continues to move forward, and we're continuing to, you know, pick up new opportunities as our teams out there, engaging with customers in a more profound way.

Steve Powers: Okay. Great. And then if I could, the outlook, as you mentioned a couple of times, doesn't include the impact of any additional tariffs or retaliatory countermeasures, which I think, you know, I understand. I guess, around that, is there a way maybe to offer a little bit of commentary just around how you're assessing the risks and opportunities associated with potential changes in the current status quo and what work you're doing just to position yourself against different scenarios that may develop, you know, as recent as the next few weeks? So just how you're thinking about that. Thanks.

Bernadette Madarieta: Yes. No, I appreciate the question. As you know, just from a business perspective, we're a global business. And so we're supplying most of our customers locally or regionally. As it relates to our cost structure, our biggest area where we will be impacted by tariffs is oil and some of our ingredients. We continue to look at opportunities for us to look at different blends and other things to mitigate exposure. But in total, if the August 1 tariffs do come to fruition, the exposure to our financial results and our outlook is about $25 million.

Steve Powers: Very good. Perfect. Thanks for that. Appreciate it.

Operator: We'll go next to Marc Torrente with Wells Fargo Securities.

Marc Torrente: Hey, good morning, and thank you for the questions. First, just on your outlook for sales, expected flattish overall price mix is expected to be down, implying volumes could be flat to up even. How much of that is driven by the fifty-third week falling in Q4? Then with your carryover customer wins and your level of visibility into the year, any more color on expected sales cadence through the year? Thanks.

Bernadette Madarieta: Yes. No, thank you for the question. As we look at the first half and the back half of the year, our sales are going to be much more pressured in the first half of the year, primarily due to the carryover pricing from fiscal 2025. From a volume perspective, we've got the carryover volume momentum that was included in there, but most of the volume impact is going to be in the fifty-third week in the back half of the year. That's where you're gonna see some of the increase in volume.

And to a lesser extent, you will see the impact of pricing in the back half of the year with the fiscal 2026 pricing actions that relate to the fall contract renewals.

Marc Torrente: Okay. Appreciate that. And then bridging out the EBITDA a little more, the decrease seems primarily due to lower gross profit, pre-cost savings. Could you help with quantifying some of those larger buckets between pricing investment, inflation, fixed cost absorption? Any other color on front half versus back half phasing on those costs? And when could those costs start to stabilize versus being a headwind? Thanks.

Bernadette Madarieta: Yeah. So the way to look at this year from a margin perspective is we're going to see more of an increase from first to second quarter and then to third. Last year, if you recall, there was a large increase in margins in the third quarter, and that was because we had a lot of raw inventories that we continued to process. This year, we will get back to the more seasonal trend where we will begin out of field, and we'll see the impact of some of the lower pricing of potatoes as well as the cost benefit of harvesting out of field beginning in the second quarter.

So really, the lowest margin impact from an adjusted gross profit perspective will be in the first quarter and then sequentially increasing. And then the typical seasonal decline that we see in the fourth quarter. Does that help explain a little bit about how we're expecting the year to play out? Anything else I can cover?

Marc Torrente: No. That's helpful. Appreciate it.

Bernadette Madarieta: Great. You bet.

Operator: We'll go next to Robert Moskow with TD Cowen.

Robert Moskow: I appreciate the commentary about what's happening in terms of how you interpret global capacity increases. I was wondering if you could be a little more specific about what's happening in North America. Are there projects going on by your competitors that are still ramping in North America? And, if so, I know it's too early to kinda fast forward a year from now, but I think we're all wondering at what point does your pricing structure kind of stabilize? And I think, you know, what's happening from competitors probably has a lot to do with it.

So more specifically, when you said that 1 to 1.5 billion pounds of projects have been delayed, was any of that in North America as well? Thanks.

Mike Smith: Yeah. To answer the last part of your question, Rob, that 1 to 1.5 billion pounds, none of that was in North America. Keep in mind, there are some projects that are still being finalized. Those were decisions on those projects were made a couple of years or so ago, so they're just in the final stages. But the majority of the new capacity that has been announced and coming online is overseas in international markets. You know, a large portion of that is in Europe, as well as some of the other developing markets that we talked about. I think the important thing to note is that not all capacity is created equal.

And so as I talked about in the prepared remarks, you know, it depends on the quality of raw. It depends on the capabilities in those facilities on the types of opportunities these manufacturers can go after. And so again, like I said, you know, the pace of new announcements has definitely slowed over the last quarter.

Bernadette Madarieta: Yeah. And the only other thing I'd add to that is that our strategy, as Mike talked about it today, really is positioning us to gain share and lean into those premium segments of the market. And to Mike's point, not all capacity is created equal. So you'll see a lot from us in that respect as it relates to carrying out our strategy as we move forward.

Robert Moskow: Okay. Thank you.

Operator: We will go next to Carla Casella with JPMorgan.

Carla Casella: Hi. Thanks for taking the question. Just wanted to ask you, your leverage target, is it still about 3.5 to four times range? And do you see taking leverage up to that level? Or is that more just the level in case you see the right opportunity in terms of M&A?

Bernadette Madarieta: Hi, Carla. Thanks for the question. Yes. We do continue to target a ratio of about 3.5 times. And we'll reduce debt as warranted to make sure we maintain this level.

Mike Smith: Okay. Yeah. What we also, Carla, I was just gonna say the other thing for us is we also are open and then we'll entertain M&A or other, you know, joint venture partnerships in the future.

Carla Casella: Okay. That's great. I mean, just on that, I was just doing a follow-up, actually, on that note. Are there what are you seeing in terms of opportunities? I know you had been looking to more international M&A and buying in some of the regions. Is there any more opportunity for those kind of easier, you know, businesses you already know type M&A or anything more off board you would look at?

Mike Smith: No. We're continuing to focus on the potato industry and we'll continue to look at M&A globally as long as it's in the right markets with the right capabilities that support our focus to win strategy. And so, you know, we'll continue to keep our options open. And like we said in the past, we'll look at M&A, we'll look at joint venture partnerships and other ways to grow our business around the globe.

Carla Casella: Okay. Great. Thanks for the time.

Operator: We'll go next to Max Gumport with BNP Paribas.

Max Gumport: Hey, thanks for the questions. First, with regard to your strategic framework in determining the geographies that you wanna focus on, could you give a bit more color on what your plan might be for geographies where you don't believe you have a competitive advantage or you don't see strong growth potential? And then specifically, how would you view Europe with regard to setting into this framework?

Mike Smith: Yeah. I appreciate the question. You know, I'm not gonna give details around those geographies right now. We've done a lot of work over the last several months, and, for competitive reasons, I'm not gonna share the details of what those might look like. But I know that as we get into those plans a little bit further on, we'll update the investment community on those decisions as they move forward.

Max Gumport: Okay. And then the decision to remove noncash stock-based compensation as an expense with regard to your adjusted metrics? I mean, it seems to me a bit like a step backward as an accounting practice. So I was hoping to get a sense for the motivation. I mean, I would view that as a real expense. It's like pertaining employees, and I think given you're going into a year when incentive comp is normalizing and the board is gonna be receiving their typical cash retainer and shares restricted stock, the timing feels a bit odd to me. So could you talk more about the justification for this decision? Thank you.

Bernadette Madarieta: Yeah. I'll speak to that. So, you know, our annual incentive plan, which is normalizing and the $40 million incremental cost that I referred to, that's a cash award that certainly will be included in our EBITDA metrics. As we take a look at EBITDA, some of the noncash items that are affected with volatility in terms of whether or not performance is achieved or not, those are items that are driving volatility and change that really aren't something that we wanna manage the business towards. And so we took this opportunity now to add that back.

It's very common in the industry where we've seen this added back, we took that opportunity to do it as that is an item that we as a team, as we evaluate this business, do generally add back.

Max Gumport: Okay. Thanks very much.

Operator: We will conclude our Q&A session. We will now turn the conference back to Debbie Hancock for any additional or closing remarks.

Debbie Hancock: Thank you, Jess, and thank you, everyone, for joining us today. The replay of the call will be available on our website later this afternoon. Thank you.

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

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