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Date

Thursday, April 3, 2025, at 10 a.m. ET

Call participants

  • Chief Executive Officer — Mike Smith
  • Chief Financial Officer — Bernadette Madarieta
  • Senior Vice President, Investor Relations — Debbie Hancock

Takeaways

  • Volume -- Increased 9%, fully replacing prior year lost volume related to the ERP transition and reflecting recent customer contract wins, net of ongoing soft restaurant traffic trends.
  • Net sales -- Rose 4%, supported by volume growth but negatively affected by a 5% decline in price mix due to planned investments to compete in a more challenging market.
  • Adjusted EBITDA -- Grew 6% to $364 million, an increase of $20 million, driven by higher sales volume and lower manufacturing costs per pound, with partial offset from unfavorable price mix and higher logistics costs.
  • North America segment -- Net sales up 4%, with an 8% volume gain and a 4% decrease in price mix, reflecting both customer recoveries and increased pricing pressure from competition.
  • International segment -- Sales rose 5%, driven by a 12% increase in volume, while price mix decreased 7% due to price actions in key markets and foreign currency headwinds; constant currency price mix fell 4%.
  • Restaurant traffic trends -- QSR traffic in the U.S. declined 2%, with burger-focused QSRs down approximately 4%-6%; international QSR traffic also weakened across the largest markets in Europe.
  • Cost savings initiatives -- Lamb Weston remains on track for $55 million in pre-tax savings for the current year and $85 million targeted in the following year from restructuring and value creation plans, according to management.
  • Working capital -- Operating cash flow was $485 million for the first three quarters, up $4 million, primarily due to working capital improvements from higher inventory build in the prior year.
  • Capital expenditures -- CapEx totaled $563 million year-to-date, with a full-year target of $750 million; $400 million is earmarked for modernization and maintenance, and $150 million for environmental projects.
  • Shareholder returns -- $151 million returned in the quarter through $100 million in share repurchases and $51 million in dividends; $458 million remains under the repurchase authorization.
  • Tariff exposure -- New U.S. import tariffs, including a 10% baseline, will not significantly impact fiscal 2025 results, and inputs sourced from Canada (~5%) are exempt under USMCA.
  • Guidance -- Revenue is expected between $6.35 billion and $6.45 billion, implying about 1% growth for the fourth quarter; adjusted EBITDA guidance is unchanged at $1.17 billion to $1.21 billion; gross margins for the final quarter are projected to decline by approximately 700 basis points at the midpoint.
  • Potato crop contracts -- North America contracts are nearly finalized, with a mid-single-digit percentage decline in aggregate price and fewer acres contracted due to softer demand and higher inventories; European contract prices are expected to be flat.
  • Capacity rationalization -- The Connell, Washington plant closure and other line curtailments improved overall capacity utilization, and future production adjustments remain possible in response to demand shifts.
  • Strategic consulting engagement -- Lamb Weston engaged Alex Partners for comprehensive business optimization, covering both near-term cost initiatives and long-term growth strategy, with “everything on the table.”
  • SG&A outlook -- Full-year adjusted SG&A now targeted at $675 million, down from the previous range of $680 million to $690 million, with a $20 million to $30 million sequential increase expected in the fourth quarter due to compensation timing, consulting, and royalties.

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Risks

  • Management reported soft restaurant traffic in both North American and international markets, pressuring volume growth and mix, with QSR hamburger traffic in the U.S. down 6% in February.
  • Gross margin in the fourth quarter is expected to decline by approximately 700 basis points, primarily due to seasonal cost shifts and higher factory burden absorption from curtailed production lines.
  • Price mix declined by 5% overall, with further low to mid-single-digit declines projected for North America, reflecting pricing investments and intensified competitive pressures; in international markets, price mix is expected to be approximately flat on a constant currency basis.
  • Management expects the cost per pound to rise due to fixed costs spread over lower production and temporarily curtailed lines, reducing factory absorption efficiency.

Summary

Lamb Weston (LW 2.96%) reported sequential improvements in volume, sales, and adjusted EBITDA, recovering losses related to the prior year’s ERP transition and demonstrating effective execution of operational initiatives. Management affirmed its commitment to ongoing restructuring and long-term value creation, highlighted by the engagement of Alex Partners for end-to-end business optimization. Lamb Weston is adjusting production and acreage in response to continued demand softness, especially in both North American and key international quick service restaurant channels. Recent contract wins contributed to net volume growth and channel diversification, while aggressive cost control and capital discipline are resulting in improved liquidity and lowered expected SG&A expenses. The outlook, however, remains tempered by guidance for declining price mix, further gross margin deterioration in the final quarter, and proactive acknowledgment of ongoing market headwinds.

  • Management stated, Everything is on the table regarding strategic actions and market participation as part of the ongoing value creation initiative.
  • Lamb Weston’s fixed cost pressures are expected to persist into the next quarter due to strategic production curtailments aimed at managing excess inventory.
  • Lamb Weston confirmed the Connell, Washington, facility will not be sold at this time but remains open to further strategic footprint adjustments.
  • Tariff changes announced for U.S. imports of frozen french fries will largely spare Lamb Weston’s Canadian-sourced inputs and production.
  • Capital spending is projected to decrease with major expansion projects nearing completion, reinforcing expectations for elevated cash flow in subsequent periods.

Industry glossary

  • ERP transition: Lamb Weston’s migration to a new enterprise resource planning software system, which impacted operations and volume in the prior year.
  • QSR: Quick Service Restaurant, a segment essential to Lamb Weston’s away-from-home channel sales.
  • Factory burden absorption: The allocation of fixed manufacturing costs across units produced; lower absorption occurs when production is curtailed or lines are idled, resulting in higher per-unit costs.
  • SG&A: Selling, General, and Administrative expenses, a major component of operational cost structure tracked for savings and efficiency initiatives.
  • USMCA: United States-Mexico-Canada Agreement, a governing trade framework that exempts certain imports (including from Canada) from newly imposed U.S. tariffs.

Full Conference Call Transcript

Mike Smith: Thank you, Debbie, and congratulations on your new role. Good morning, everyone. Thank you for joining us today. I am honored to be the CEO of Lamb Weston Holdings, Inc., a company with a long and proud track record of excellence in our industry. Throughout our history, Lamb Weston Holdings, Inc. has been a leader in innovation, product quality, customer relationships, and operations. These are long-term strengths we will build upon to drive growth and shareholder value. I know this industry and this business, I recognize our recent challenges and understand our future risks and opportunities. To meet evolving industry dynamics, Lamb Weston Holdings, Inc. needs to change.

This is where my focus has been since I took over as CEO three months ago and where it remains. Everything is on the table and we are moving with urgency. We are amplifying our efforts with customers and I have been personally meeting and hearing directly from them. We have engaged Alex Partners, a global advisory firm specializing in business optimization, to accelerate an end-to-end value creation plan. Not only are we focused on unlocking value both in the near term and long term, but also on defining the right go-forward strategy. And the Lamb Weston Holdings, Inc. team is talented and experienced. They are engaged and ready to embrace change.

This notably includes our new head of global supply chain who has already identified significant opportunities to win with our customers, reduce complexity and cost, as well as improve performance. We have over thirty projects underway this fiscal year and will deliver quick wins as part of a savings pipeline across multiple years. For example, in the logistics space, we are rightsizing the use of different transportation modes and optimizing railcar loading. Also, see the need for better balancing of our finished goods cold storage capacity and are executing a plan to exit surplus warehouse space. We are combining these projects with the value creation work as part of our enterprise-wide value creation program.

These efforts will be on top of our previously announced restructuring plan. Where we remain on track to deliver at least $55 million of pre-tax savings in fiscal 2025 and $85 million of pre-tax savings in fiscal 2026. Today, I'll update you on our progress to date, how we are controlling what we can control in a challenging market, and what's ahead. On slide six, you'll see our third quarter performance reflects the hard work of the Lamb Weston Holdings, Inc. team to regain business, grow volume, and lower expenses while operating in a challenging macroeconomic environment. Specifically, in the third quarter, we grew volume 9%, rebuilding after the transition to a new ERP in the prior year.

Increased net sales 4%, and grew adjusted EBITDA 6%. Despite this, all indications are that the consumer remains stretched, concerned about the economy, and looking for value. We saw this in the second quarter, and the consumer uncertainty has only increased since then. Turning to slide seven, as we finished our contracting late last year, visibility into our sales improved. We continue to reshape contracts, balancing when they come due, improving our ability to price with changes in the market, and providing customers continuity with Lamb Weston Holdings, Inc. Our improved engagement is also enabling us to expand and retain our existing customers while also pursuing and winning new business. We are seeing success across channels.

In away from home, we recently partnered with a large growing QSR that had previously been cutting their own fries, converting them to a frozen product. They'll be completing a national rollout of our product during the remainder of calendar 2025 and into early calendar 2026. In the in-home consumption space, we recently launched new private label products across the grocery and club channels that are off to a great start. We are working to build upon wins like these as we can to drive long-term sustainable growth in our business. Now turning to slide eight, along with improved customer relations, we are winning business because of our ability to innovate and meet our customers' evolving needs.

In North America, we launched new battered and seasoned products as well as fridge-friendly fries and tots that can be held refrigerated up to seven days, expanding our addressable market by allowing us to sell to customers that may not have freezers. In our North America retail channel, we've expanded our licensed brand portfolio to include onion rings and cheesy potato bites. And internationally, we launched a reimagined classic fry, the three-sided frenzy fries, and are receiving very positive feedback and demand signals. While we do not anticipate a near-term improvement in demand environment, we are controlling what we can control. We are focusing on gaining share, driving growth with existing customers, winning new customers, and operating with excellence.

Now shifting to slide nine into the upcoming potato crop. In North America, contract negotiations for the 2025 crop are nearly complete. Overall, we expect a mid-single-digit percent decline in price in the aggregate and have largely secured the targeted number of acres across our primary growing regions. We contracted fewer acres given softer demand and higher inventory on hand. Planting is on schedule for the early potato varieties and we expect planting for the main harvest to be completed by the end of April. In Europe, prices governed under fixed price contracts are currently in negotiations and expected to be flat on average for the 2025 potato crop.

Contract planning across the European growing regions will continue through the end of April. And we'll provide our typical update on the outlook for potato crops in North America and Europe when we issue our fourth quarter earnings in July. Finally, an update on capacity. As we discussed previously, we took steps to rationalize capacity earlier this fiscal year, closing our Connell, Washington plant and curtailing additional lines across our network. These actions improved our capacity utilization. We are prepared to address changes in demand that require reducing or increasing production through line curtailments and restarts. But in the near term, we expect the demand patterns will impact factory absorption.

Since last quarter, we have seen additional capacity announcements primarily outside the US. The industry has historically been rational in respect to supply and demand and has made the necessary adjustments over the long term to stay in balance. And while we cannot know if or when these plans will come online, and we believe some have been delayed, we will continue to focus on driving productivity while working to exceed our customers' expectations. We are committed to ensuring we have the right capacity in the right geographies to meet our customers' needs while optimizing flexibility in our manufacturing footprint.

As we execute our strategy, our board and management team continue to regularly engage with shareholders and we appreciate constructive input that furthers our goal of creating sustainable long-term value and attractive returns for our investors. This includes several discussions among members of our board, Jana, and Continental Grain. I'll now turn the call over to Bernadette.

Bernadette Madarieta: Thank you, Mike, and good morning, everyone. As a result of the actions we took in early fiscal 2025 to drive operational and cost efficiencies, we closed the quarter with sequentially improved volume trends and profitability in line with our expectations. We were able to accomplish this even while the consumer remained pressured, which is reflected in the restaurant traffic data that I'll speak to in a moment. Despite uncertainty in the consumer macro environment, as well as softer restaurant traffic, we remain on track to meet our full-year fiscal 2025 outlook. Starting on Slide ten, net sales increased 4% compared with the prior year period.

Volume increased 9%, primarily driven by fully replacing the combined regional, small, and retail customer volume lost in the prior year as we transitioned to a new ERP system, as well as incremental volume from recent customer contract wins across each of our channels and geographic regions, net of volume losses. These benefits were partially offset by soft global restaurant traffic trends. While French fry attachment rates remain high, it is almost two points higher than pre-pandemic levels. The net volume increase in the quarter did slightly lag our expectations given soft restaurant traffic in both North America and international markets.

Price mix declined 5% compared to the prior year quarter due to planned investments in price to compete in the increasingly competitive environment in both the North America and international segments. Looking at our segments, North America net sales grew 4% compared with the prior year. Volume improved 8% and included fully replacing volume lost in the prior year as we transitioned to a new ERP system as well as recent customer contract wins across each of our channels net of other volume losses primarily in quick service restaurants. These volume gains were partially offset by soft restaurant traffic trends.

In the U.S., according to industry experts, QSR traffic worsened during our fiscal third quarter, declining 2% compared with the prior year quarter. Traffic at QSR chains specializing in hamburgers was down about twice as much in the quarter, with February traffic down 6%. As a reminder, about 85% of our North American sales are from the food away from home channel, and the majority of that volume is sold through QSRs. Price mix in our North America segment declined 4% due to planned investments in price and trade, which was only partially offset by favorable channel and product mix. The favorable mix was attributable to fully replacing the combined volume of higher-margin regional, small, and retail customers.

For our international segment, sales grew 5% versus the prior year quarter. Despite soft restaurant traffic in many of our key international markets, volume increased 12% driven primarily by recent customer contract wins and to a lesser extent lapping unfilled orders in the prior year. Outside the US, according to industry experts, third-quarter QSR restaurant traffic declined in most frac markets including the UK, our largest market in Europe, as well as France, Germany, and Italy. Price mix was down 7%, reflecting pricing actions in key international markets in response to the ongoing competitive environment along with unfavorable changes in foreign currency rates. On a constant currency basis, price mix decreased about 4%.

Moving on from sales, on slide eleven, you can see that adjusted EBITDA increased $20 million versus the prior year quarter, to $364 million. The increase was primarily attributable to first higher sales volumes and lower manufacturing costs per pound, which included lapping the impact of the ERP transition and a $25 million pre-tax charge for the write-off of excess raw potatoes in the prior year. Second, recent customer and contract wins net of other volume losses.

And third, lower adjusted SG&A, which decreased $7 million primarily related to lapping higher expenses associated with the ERP transition in the prior year quarter and the continued execution of our expense reduction initiatives, including those associated with the restructuring plan announced this past October. These were partially offset by the timing of compensation and benefit accrual. These adjusted EBITDA improvements were partially offset by lower adjusted gross profit, which declined $7 million due to unfavorable price mix in response to a more competitive environment, higher overall transportation and warehousing costs, resulting from higher inventory levels.

And finally, while not impacting EBITDA, $16 million of incremental depreciation expense that's largely related to our capacity expansion in Idaho that was completed last fiscal year and our Netherlands expansion that was completed late in the second. As expected, adjusted gross profit increased sequentially from the second to the third quarter, which reflected the seasonal cost benefit of transporting and processing potatoes direct from the field as well as the benefit from the lower raw potato prices negotiated in North America versus the prior year. For our North America segment specifically, adjusted EBITDA increased $15 million versus the prior year quarter to $301 million.

The increase was driven by a combination of higher sales and lower manufacturing costs attributable to lapping the effect of last year's ERP transition, new customer contract wins, and lower raw potato prices. These increases were partially offset by softer restaurant traffic and price investments made in a competitive environment. For our international segment, adjusted EBITDA declined $8.5 million to $93 million. Unfavorable price mix in an increasingly competitive environment in each region was only partially offset by increased sales volume and lower manufacturing cost per pound. Moving to our liquidity position and cash flows on Slide twelve.

We ended the third quarter with approximately $1.1 billion comprised of approximately $1.05 billion available under our revolving credit facility and $68 million of cash and cash equivalents. Our net debt was $4.2 billion, which keeps our leverage ratio at 3.4 times on a trailing twelve-month basis. In the first three quarters of the year, we generated $485 million of cash from operations, which is up about $4 million versus the prior year due to favorable changes in working capital. These changes were mostly attributable to a greater build of inventory in the third quarter of the prior year related to the ERP transition.

For the remainder of the year, we plan to continue reducing working capital primarily through continued line curtailments and operational downtime. The cash provided by favorable working capital trends was mostly offset by lower income after adjustments for non-cash operating activities. Turning to slide thirteen. Capital expenditures through the end of the third quarter net of proceeds from blue chip swap transactions in Argentina, were $563 million, down $251 million as we get closer to completing our expansion projects. Our full-year fiscal 2025 target remains at $750 million, a decrease of $250 million from last year. Depending on the timing of invoicing, our cash below $750 million and push into fiscal 2026.

Aside from the timing related to cash paid for Argentina expansion-related expenditures, we estimate a $200 million, which or $550 million in total. Of which $400 million will be used for modernization and maintenance, and $150 million for environmental investments, primarily for wastewater treatment. Next, capital return to shareholders on Slide fourteen. We remain committed to returning cash to shareholders. We returned $151 million to shareholders in the quarter. After expanding our share repurchase authorization last quarter, we repurchased $100 million of shares leaving us with $458 million available under the plan. We will continue to repurchase shares opportunistically. And given the current share price, we may temporarily move slightly above 3.5 times net debt to adjusted EBITDA.

We also returned approximately $51 million in cash dividends. Before turning to our outlook, I want to address tariffs. Given the timing of yesterday's announcement, and the uncertainty, have not included any impact from tariffs in our financial outlook. As it relates to our business, we are a global business. Which allows us to supply most of our customers with local regional supply. As it relates to US imports of frozen french fries, a new universal baseline tariff of 10% plus an additional country-specific tariff for select trading partners will be assessed. This tariff relates to all U.S. imports except USMCA compliant imports, which includes French fries imported from Canada.

As such, the products we manufacture at our one plant in Canada and import to the US are exempt from the new tariffs. We source approximately 5% of our inputs from Canada, primarily edible oils and natural gas, which are also USMCA compliant and therefore exempt from the tariffs. We're evaluating other expenditures to assess the impact of yesterday's announcements, but do not currently expect them to have a significant impact on our fiscal 2025 financial results. And finally, as it relates to US exports, our manufacturing operations export in the mid to high teens as a percent of total volume and net sales, which could be subject to future retaliatory tariffs if imposed.

As you can see on Slide fifteen, we continue to expect revenue in the range of $6.35 billion to $6.45 billion, which at the midpoint implies growth of about 1% in the fourth quarter compared with the prior year period. We expect a mid to high single-digit increase in volume in our international segment. Primarily reflecting the benefit of incremental volume from recent customer contract wins across each of our geographic regions, net of recent volume losses. We expect North America volume to slightly decline. While regional, small, and retail volume is expected to increase compared with the prior year fourth quarter, lost QSR customer volume and softer restaurant traffic is expected to offset these volume increases.

We expect overall price mix will be down low to mid-single digits. In North America, we're forecasting price mix will decline low to mid-single digits as pricing actions and softening restaurant traffic negatively impact product and channel mix. In international, we're forecasting price mix to be approximately flat on a constant currency basis as it continues being impacted by pricing actions in our key international markets. Our price investments in both segments are consistent with our prior expectations and will carry over into the next fiscal year. Moving to earnings. Despite continued softening restaurant traffic trends, the work we're doing across the organization to meaningfully reduce costs and improve efficiencies keeps us on track to achieving our full-year guidance.

For fiscal 2025, we continue to expect adjusted EBITDA in the range of $1.17 billion to $1.21 billion. Overall, we expect to benefit from incremental will be largely offset by planned investments in price, and higher cost per pound. Similar to the prior year, we expect a sequential decrease in adjusted gross margin. Using the midpoint of the guidance range, adjusted gross margins are expected to decline about 700 basis points. Which is consistent with the decline between the third and fourth quarters in the prior year.

The expected decline reflects an approximate 260 basis point decrease related to seasonal trends in our business, particularly the third quarter benefit from seasonally lower costs as we transport and process direct from the field, and about a 330 basis point decrease related to higher factory burden absorption. Specifically, fixed costs assigned to our curtailed lines are temporarily being absorbed by lower production levels, which is leading to higher cost per pound. As we've previously discussed, in response to softer restaurant traffic, and to reduce our inventory levels, with temporarily curtailed production, we expect these costs expect to realize from the restructuring actions we've taken.

Moving to SG&A, we now expect adjusted and to $675 million, down from the previous range of $680 million to $690 million. This implies a $20 million to $30 million sequential increase in adjusted SG&A from the third to the fourth quarter, which is expected to be primarily due to the timing of compensation and benefit expenses, expenses for outside adviser services for business optimization, and higher royalty expenses. Finally, we are targeting a full-year effective tax rate of approximately 28% excluding the impact of comparability items, which translates to a mid to high teen fourth quarter tax rate. As Mike noted, our previously announced restructuring plan is well underway.

And we remain on track to deliver at least $55 million of pretax savings in fiscal 2025 with two-thirds of that from reduced selling, general, and administrative expenses, and one-third from cost of goods sold. Let me now turn the call over to Mike for some closing comments.

Mike Smith: Thank you, Bernadette. In closing, we are laser-focused on our customers delivering quality products, and optimizing our cost structure and operations to improve profitability. We're working with speed to complete the work we've begun on our value creation plan and we are committed to providing more details as well as long-term financial targets once this work is further along. Lastly, I want to thank the global Lamb Weston Holdings, Inc. team. I have pushed them hard in a short period of time and found them ready to tackle our mission with urgency. I'm confident that we have the right team to guide the company through this period of change, and deliver enhanced shareholder value.

I'll now turn the time over for questions.

Operator: And if you would like to ask a question, please signal by pressing star one on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. We'll now take our first question from Andrew Lazar with Barclays.

Andrew Lazar: Great. Thanks so much. Good morning, everybody.

Mike Smith: Morning, Andrew.

Andrew Lazar: I guess, Mike, in thinking about some of your comments in the outlook around crop prices, in North America expected to be sort of down mid-single-digit or so. Thinking about, you know, the sort of the ongoing weak restaurant traffic trends and some of the additional inventory, you know, industry capacity, coming on stream. Guess as you roll that all up, how do you think this sort of impacts, you know, key sort of QSR contract negotiations as you approach it sort of this summer. I'm just trying to get a sense of how you approach that given all of these dynamics. Thanks so much.

Mike Smith: I appreciate the question, Andrew. You know, I think it's important to remember we haven't really started those customer contract negotiations yet. Those will start in the summer and move through the fall. And while, you know, potatoes are expected to be down, it's also just a portion of our cost of goods. There's other inflationary impacts that are hitting the business and we're offsetting some of that favorability. So we'll have to see how those effects transpire.

The other thing that's unknown right now is any sort of effects from tariffs or reciprocal tariffs, retaliatory tariffs around the globe, and we'll have to take that into consideration as we're having those discussions and those contract negotiations with customers throughout this next customer contracting cycle.

Bernadette Madarieta: Yeah. That's right, Mike. And if I could just add, Andrew, I think it's important to think through too. It's about a third of our cost of goods sold is raw potatoes. Then there's another 20% to 25% that's a combination of edible oils, packaging, and miscellaneous ingredients where we're seeing some inflation. And then another 40% to 45% of our cost of goods sold, six overhead conversion, fuel, power, water, also where we're seeing some increases.

Andrew Lazar: That's helpful. Thank you for that. And then just a quick one on the Alex Partners agreement. I'm just curious. Obviously, you're just starting getting going with that. But where would how would you put in context sort of where the bigger buckets of potential opportunity are? Is it mostly really on the cost side? And then productivity? Is it more on sort of let's call it, you know, utilization, you know, capital sort of, you know, your capital allocation sort of approach. I'm trying to guess where you see the potentially the bigger buckets versus maybe those that are not as compelling. Thank you.

Mike Smith: Yeah. No. I appreciate that. You know, it's really all the above. Reminder, this is the process we're taking is really two complementary work streams. The first is a value creation plan, and we think about value creation plan, that's not only cost, which is a large focus of where we're spending our time, but it is value across the entire P&L. It's top line, ensuring how we drive more growth from a net sales standpoint, it's obviously the middle of the P&L with the costs and focusing on the things that you talked about. Primarily around manufacturing, you know, our throughputs as well as our transportation, logistics, procurement, and down to SG&A.

The other area that is focused on is around working capital. And we're spending a lot of time in that area. Now that's the one side of it, Andrew, with the value creation. The other side is the long-term growth strategy. And we're really taking a data-driven approach and focusing on where to play and how we're gonna win for the future. And we'll bring that all together in a full plan that we'll share once we've gone through the process.

Andrew Lazar: Thank you.

Operator: We'll now take our next question from Thomas Palmer with Citi.

Thomas Palmer: Morning. I want to maybe just first just ask on the 4Q gross margin. I think you've called out 330 basis points from prior fixed cost absorption. Why is that more of a headwind, I guess, when we think about 4Q versus last quarter? And then I think you also said gross margin down around 700 basis points. In 4Q, but unless I missed something, the two items you called out added up to roughly 600 basis points. So just kind of what else the incremental is there? Thank you.

Bernadette Madarieta: Sure. No. Thanks for the question, Tom. You know, I think it's important to remember how our inventory turns and that the cost of the inventory that's sold in the third quarter was mostly produced in the second quarter, which only had two months of our curtailed production lines. You know, we were also running through the remainder of our crop from that we've negotiated in the prior year. We were running harder during that time period.

And then now as we move forward to the fourth quarter, those are gonna be the costs that relate to the three months where we've had some curtailed production lines, we've got lower production, and therefore, we're going to have more cost per pound as a result of that fixed factory burden. So that's really what is driving in terms of the seasonality of those trends. And then, yes, I did point to the 330 basis points and the 260. You know, that's the majority of it. Certainly, there's another 100 basis points where you're gonna see increases in other input costs and other things. But you know, those were a number of miscellaneous things.

Nothing of material importance that we felt like we needed to call out at this time. But certainly, as we work through our inventories, and we're able, you know, to restart as necessary, that then is going to help us with that absorption of fixed factory burden. So but you know, right now, we're balancing our overall footprint, and we needed to do that as we were pulling the crop out of harvest and finishing off last year's raw potatoes. That's why you're seeing that trend.

Thomas Palmer: Yeah. Well, thanks for all that. That's really helpful. And maybe I'll just follow-up with kind of on that inventory piece. I think when you initially kind of introduced it a couple quarters ago, it sounded like it was more isolated to fiscal 2025. I guess, just any update on kind of working through the excess inventory and when we might start to see more of a positive inflection from that side. Thank you.

Mike Smith: Yeah. The teams are really focused on it right now, Tom. As part of the value creation work that we're doing, we're putting extra emphasis around it, but it is top priority and you know, there's some products and SKUs that were long on inventory and our selling organization is working on burning those down the right way. And our supply and planning team are also ensuring that we're not making product that we don't need to make. And that goes back to what Bernadette was talking about. We're taking some downtime in the plants, and we've curtailed some of those lines so that we can work down that inventory as quickly as possible.

We are taking a very data-driven approach to it, and with the work in our value creation plan, we want to push that even further.

Bernadette Madarieta: Yeah. And the only other thing I'd add, Mike, is that we are on track in terms of the stated targets that we spoke about previous to getting our inventory down to about 65 days. At year-end. Still not where we want to be. We need to continue to work that down, and we have plans to continue to do that. Which is only being emphasized with the work that we have underway in our end-to-end value creation plan that Mike spoke about.

Thomas Palmer: Right. Thank you.

Operator: We'll now take your next question from Ken Goldman with JPMorgan.

Ken Goldman: Hi. Thank you. You gave some reasons helpful reasons why the bottom line might be under a little bit more pressure ahead. Just I won't regurgitate them here. But if you look at the bottom end of your EPS guidance, or implied guidance for 4Q, it does imply a little bit of a steep deceleration, really a drop-off. In that two-year rate. Right? So just, you know, kind of normalizing for last year. And I'm just wondering is there any conservatism built into your implied 4Q number on the bottom line that we should be aware of any more than usual, I guess, is the way to ask.

Bernadette Madarieta: Yeah. No. I would say, Ken, that there isn't any more conservatism that has been built in. We've seen soft restaurant traffic, as I mentioned, the last month of the quarter. QSR hamburgers were down 6%. As it relates to our cost of goods sold, we are gonna be seeing an increase there, particularly related to those curtailed lines that I spoke about. So you know, I would say this is a fair representation of the range that we expect to be in.

Ken Goldman: Okay. Thank you. And then just as we think about Alex Partners, you did talk about the value creation plan and how it's a little broader than maybe it might appear at first glance. You know, guess my question is this. You know, Alex they're known not only for helping and identifying with top line and cost saves, but also with, you know, really kind of broader strategic activities. And I guess my question is, as you think about your work with them, are really, you know, kind of all options for value creation on the table? Or should we really think of this more as focused on fundamental top and bottom line efficiency, if that makes sense?

Mike Smith: Yeah. You know, the way to answer that Ken, is everything's on the table. We're definitely evaluating everything in terms of the markets we play in, and how we're gonna win and where we're gonna win in the future. But the primary focus of the group is to really focus on that value creation piece. All levers of the P&L like I talked about before, not only the top line growth, but also in the middle of the P&L and all the way through it in terms of finding the value and pushing us as an organization using data a little bit harder, taking that unbiased approach.

And, you know, that's where the time and focus is, and it's really about improving the fundamentals of our business and getting the business back on track to execute with excellence and make sure we're delivering for our customers and also our shareholders.

Ken Goldman: And did you have anything further?

Operator: Next question, Anna.

Anna: Yep. Yes, ma'am. We'll move to Yasmin Deswani with Bank of America.

Yasmin Deswani: Morning, guys. Thank you for the question. I just wanted to dig a little bit on slide nine in your slides on just the crop. Was news out a few weeks ago on acreage reductions in the Columbia Basin, I believe, down mid-teens or so. How much of that do you attribute to the Connell closure versus how you see the market shaping up in the next, you know, twelve to eighteen months in terms of demand?

Mike Smith: Yeah. So for us, we did lower the amount of acres that we had going into this contracting season. Part of it is, you know, the softness of the demand that we're seeing in the marketplace, the things that Bernadette talked about in terms of QSR traffic. But the other areas that we have a lot of high finished goods. Inventories, and so we want to make sure that we're working those down the right way. And, you know, over the last couple of years, we've had carryover of raw into the new fiscal years, and we've been running through that raw. And we're in a position this year where we didn't need as much.

Yasmin Deswani: Got it. Helpful. Thank you. And then, you know, you mentioned the mid-single-digit decline in pricing in your slides. How much of that do you expect to fall to the bottom line versus reinvestment?

Mike Smith: Yeah. I think it's a great question. I mean, we have, as I mentioned earlier with Andrew's question, you know, while raw's down, there's other inflationary impact and inputs. Are gonna affect the business. And so we'll just continue to watch that. And as we get in those negotiations, we'll update this group as we do in years past.

Yasmin Deswani: Okay. Great. Thanks, guys.

Operator: Thank you. Alright. Next question will come from Robert Moskow with TD Cowen.

Robert Moskow: Hi. Thanks. I wanted to ask about the Connell plant and what your plans are for the future. I think there was an article in a local paper speculating that you might sell it rather than shut it down. And my concern would be if another operator comes in and keeps the capacity up, it might hurt your capacity utilization outlook. And then similarly, a couple of your biggest competitors here in the US had plans this year to start up new facilities or at least new production lines that were pretty significant. Is it your expectation that those are on track or not?

Mike Smith: Yeah. Let me answer the first part, Rob. As we discussed, we're doing this comprehensive review of our business and so everything's on the table. Part of that, we undertook, really, an exploratory process to understand the possibilities of potentially selling that Connell, Washington building. Obviously, just the building itself, none of the technology or anything that was inside of it. We've gone through our process. We've determined that, you know, a sale of that facility is not in the best interest of our business at this time. So, you know, we'll continue to complete our strategic review of other options that are out there, but yeah, that one's off the table for right now.

You know, in terms of new facilities, from other manufacturers, you know, here or even around the globe, you know, we believe that there's some out there that have been delayed. We believe that some processors are taking extended downtime. We've heard that others have reduced acres similar to what we have as well, but I can't speak to any of the details around, you know, what our competitors or other manufacturers are planning to do with their capacity moving forward.

Robert Moskow: Helpful. Thank you, Mike.

Operator: We'll take our next question from Max Dunfort with BNP Paribas.

Max Dunfort: Hey. Thanks for the question. I was hoping to get a bit more commentary on the weakness in QSR traffic that you're seeing, particularly what you think is driving the sequential weakening in trends in your demand forecast for FY2026. Thanks very much.

Mike Smith: Yeah. So, you know, as Bernadette said, QSR traffic is down. Burger QSR was down 4%. And, you know, it really comes back to the uncertainty with the consumer. There's obviously a lot going on from a macroeconomic perspective. We're taking all those demand signals into account as we think about, as I just mentioned, the raw that we're sourcing. As well as the amount of downtime we're potentially taking in our facilities with curtailments. But also have the flexibility should things turn around. To bring those lines and facilities back on so that we can keep up with any changes in demand. Anything you'd add, Bernadette?

Bernadette Madarieta: No. I think that covers it.

Max Dunfort: Great. Thanks very much, Ali. Good there.

Operator: Thanks, Matt. I'll take our next question from Alexia Howard with Bernstein.

Alexia Howard: Good morning, everyone.

Mike Smith: Good morning.

Alexia Howard: So you've obviously got a pretty spot start on this broad-based turnaround plan. Can you talk about what's been most surprising as you've embarked on this process in terms of the biggest opportunities to improve performance and create value? Anything that's been surprising to the negative side as well. Thank you, and I'll pass it on.

Mike Smith: Yeah. You know, as I think about the work that's been underway, I mean, we are in the early innings. But I will tell you it's a lot of the things that you'd expect around throughputs in our facilities, potato utilization, our logistics, procurement side of things just across the board. The thing that I really appreciate Alexia, that our advisers have been helping with on is really taking an unbiased data-driven approach, you know, to this work. And putting everything on the table. In that way, we can evaluate all the options, and they're pushing us. And I appreciate that and the work they're doing.

I appreciate the leadership team here at Lamb Weston Holdings, Inc. for embracing it, and acting with urgency to make sure we get things turned around.

Alexia Howard: Great. With a quick follow-up, in terms of diagnosing the continuing and deteriorating weakness in the burger chain, particularly in the US, do you have a good handle on what's driving that at this point? Is it the low-income consumer getting worse? Is it a higher-income consumer maybe swallowing traffic in the burger chain? Or is it possibly a GLP-1 drug impact? I'm just wondering, you know, what blocks you're turning over to try and figure it out.

Mike Smith: Yeah. I don't think we have a good read on the why. To answer the first part of your question. I will tell you that the French fry attachment rate, so the percent of orders that have fries as part of that order has remained strong, and it's still up a couple of points from pre-pandemic levels. So folks are still out there purchasing French fries when they are going to QSRs.

Alexia Howard: Great. Thank you. I'll pass it off.

Operator: And I'll take our next question from Matt Smith with Stifel.

Matt Smith: Hey, Hi. Good morning. Thanks for taking the question. North America volume was stronger than I think many were expecting. At the same time, you called out a slight volume decline into the fourth quarter. You walked through some of those factors that benefited the North American volume in the third quarter. But can you can you all bridge the plus eight to kind of down sequentially maybe by the factors that most benefited the third quarter that were more unique?

Bernadette Madarieta: Yeah. I'll take that, Matt. As it relates to the factors that affect it that we expect to affect the fourth quarter, it's primarily the fact that we've seen and expect to see continued increase in our small, regional, and retail volumes as we have lapped the ERP transition in the prior year. We saw that in the third quarter as well, but that was more pronounced because the third quarter is the quarter that was impacted. And then what we're seeing in the fourth quarter then is those increases are being offset by some of the lost customers that we've spoken about previously.

But what I can tell you is we do have a pipeline and Mike mentioned some of those in terms of those QSR volume wins that will be starting and being increased as next year progresses, and we'll give more of an update on that when we give our guidance in next quarter call.

Mike Smith: Yeah, Matt. The thing I'd add is we're putting a full court press on the customer gets back to, you know, a stronger customer-first mentality. And as I mentioned in the prepared remarks, I've been spending time out with these customers, our large customers, and listening directly from them. And, you know, they value the innovation and the product quality and the consistency that Lamb Weston Holdings, Inc. has had in the past. They want to have better continuity of supply. And assured supply. And, you know, that's where we're putting a focus, and I'm happy to share that we have improved our fill rates and, you know, have some momentum behind us.

Matt Smith: Thank you for that. And as a follow-up, it sounds like you've done a you're in process on doing a lot of work with Alex Partners and looking at your expense structure and revenue opportunities. Based on what you've seen to date, you comment on how you view the 19% to 20% EBITDA margin that I think was discussed last quarter as an achievable level perhaps in the medium term. Thank you, and I'll leave it there.

Mike Smith: Yeah. You know, Matt, we're not gonna discuss that today. We have a lot of initiatives in play right now and, you know, I understand the need or the question. We'll come back as we get to this process, as we get through our annual operating plan, and we'll share that. We typically share our guidance on the next fiscal year in Q4 and we'll continue to do that in the future.

Operator: We'll now take our next question from Mark Torrenti with Wells Fargo Securities.

Mark Torrenti: Hey. Good morning, and thank you for the question. I appreciate the update on the capacity outlook. Any change on your level of comfort around pricing to remain rational in North America? And maybe any kind of stabilization international price mix international was pretty weak. Was that in line with your own expectations? Absent FX? And how are you thinking about that progressing from here? Thanks.

Mike Smith: Yeah. You know, as I mentioned in the prepared remarks, we are since last quarter, we have heard of some additional announcements. Most of those have been internationally. Primarily in some of the developing markets. You know, there's been rumors of delays and extended downtimes in areas. So but I, you know, as Bernadette said, with the softness in demand and some of the macroeconomic impacts, we believe price will be pressured over the course of the next over the near term.

Operator: We'll now take our next question from Carla Casella with JPMorgan.

Carla Casella: Hi. Two quick follow-ups. One on CapEx. It's nice to see you can increase your cash flow by as you finish off some of these projects. I'm wondering what's your maintenance level of CapEx beyond that, and you think you've got more opportunities to change that.

Bernadette Madarieta: Yeah. As it relates to capital spending, I think we've previously discussed that maintenance is about 3% of sales. Add another 2% of sales for modernization. And then aside from that, it's environmental expenditures. But those are the three main components as it relates to our capital expenditure plans.

Carla Casella: Okay. Great. And in your new business wins, is there a change in how the QSRs are operating? Are you seeing more it sounds like some were just open to outsourcing, but is there as that happens, are you seeing any different competitive threats that you did on the project the way you and your competitors go after it or how the QSRs look to bid out those projects. Or the first contract?

Mike Smith: Yeah. You know, one thing that we've been working on is and I believe we mentioned this in the prepared remarks is adjusting our contract schedule. You know, in a normalized environment, typically, we'd have about a third of our large chain customers come due for negotiations every year. And we've cycled back to that. So we'll have about a third of those that'll come due this coming contract cycle. You know, customers are starting to look towards, you know, driving traffic to their restaurants, given the environment, and they're open to some new ideas and new innovation as we spoke to already.

Carla Casella: Okay. Great. Thank you.

Operator: And it appears there are no further telephone questions. I'd like to turn the conference back over to Debbie for any additional or closing comments.

Debbie Hancock: Thank you, Anna, and thank you everyone for joining us today. The replay of the call will be available on our website later this afternoon, and just hope everyone has a good rest of your day. Thank you.

Operator: And that does conclude today's conference. We thank you all for your participation.