Lamb Weston Holdings, Inc. (NYSE:LW) Q4 2024 Earnings Call Transcript

Lamb Weston Holdings, Inc. (NYSE:LW) Q4 2024 Earnings Call Transcript July 24, 2024

Lamb Weston Holdings, Inc. misses on earnings expectations. Reported EPS is $0.894 EPS, expectations were $1.24.

Operator: Good day, and welcome to the Lamb Weston Fourth Quarter and Full Year 2024 Earnings Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Dexter Congbalay, Vice President, Investor Relations and Strategy. Please go ahead, sir.

Dexter Congbalay: Good morning and thank you for joining us for Lamb Weston’s fourth quarter and fiscal year 2024 earnings call. This morning, we issued our earnings press release, which is available on our website, lambweston.com. Please note that during our remarks, we’ll make some forward-looking statements about the company’s expected performance that are based on how we see things today. Actual results may differ materially due to risks and uncertainties. Please refer to the cautionary statements and risk factors contained in our SEC filings for more details on our forward-looking statements. Some of today’s remarks include non-GAAP financial measures. These non-GAAP financial measures should not be considered a replacement for and should be read together with our GAAP results.

You can find the GAAP to non-GAAP reconciliations in our earnings release. With me today are Tom Werner, our President and Chief Executive Officer; and Bernadette Madarieta, our Chief Financial Officer. Tom will provide an overview of our strategies and priorities for the upcoming year, the current operating environment, and our initial thoughts on this year’s potato crop. Bernadette will then provide details on our fourth quarter results as well as our outlook for fiscal ’25. With that, let me now turn the call over to Tom.

Tom Werner: Thank you, Dexter. Good morning and thank you for joining our call today. Our financial results for the fourth quarter and for the year are disappointing, reflecting executional challenges both commercially and in our supply chain as well as soft global demand for fries. While Bernadette will cover our fourth quarter results in more detail later, our sales and earnings performance fell well short of our targets due to a combination of targeted investments in price, a decision to voluntarily withdraw our product to ensure we meet our quality standards and more importantly, those of our customers, higher than anticipated market share losses, an unfavorable mix and softer than expected restaurant traffic trends in both the U.S. and many of our key international markets.

This level of execution is unacceptable and I and my leadership team take full responsibility for our operating and financial results. As we outlined in our Investor Day last October, we believe that frozen potatoes is an attractive growing global category and that we have built a solid foundation to serve our customers in this market over the long term. This includes some key actions taken in fiscal 2024 such as integrating the acquisition of our former European joint venture, starting up state of the art processing facilities in China in October 2023 and American Falls, Idaho in May of 2024, strengthening our product portfolio by introducing innovative technologies to expand our total addressable market, implementing pricing actions that offset multiple years of high input cost inflation, taking a big step in upgrading our IT infrastructure by cutting over key central systems processes in North America to a new ERP system and continuing to drive supply chain productivity savings across our global production network.

Q&A Session

We believe we’re focused on the right strategies and priorities to get Lamb Weston back on track to drive sales growth, reduce costs, improve profitability and generate attractive returns over the long term. That said, the operating environment has changed rapidly during fiscal 2024 as global restaurant traffic and frozen potato demand softened. In fact, the downward traffic trends accelerated during the back half of the year and into early fiscal 2025. This has led to an increase in available industry capacity in North America and Europe. We believe this industry supply/demand imbalance will persist through much, if not all, of fiscal 2025. Although this has no impact on our long-term strategies, we are making some operating adjustments in the near term to support improved execution, competitiveness in our financial results.

We are reinvigorating volume growth by matching the right product at the right price to fit customer needs and by also leveraging limited time offerings and innovation to help our customers drive traffic. We’re targeting specific investments in price and trade support to protect share and win new business. We’re aggressively looking at opportunities to reduce costs further by driving supply chain productivity and tightly managing operating expenses. We’re leveraging recent capacity investments to increase flexibility in managing our manufacturing footprint to balance production and shipments. We’re reshaping future investments to modernize production capabilities to better match the demand environment. And we’re simplifying our key processes to make it easier for customers to do business with Lamb Weston.

These priorities will change how we expect to drive sales and earnings growth in fiscal 2025. Specifically, our sales growth will be largely volume-driven unlike the price-driven top line that we’ve delivered in recent years. Overall, we expect the net impact of our inflation-driven pricing actions in the aggregate will have minimal contribution to our net sales as we employ targeted investments in price to support volume growth. As a result, we expect our earnings performance will be driven by a combination of volume growth, improved mix and cost savings. In recent years, our earnings growth has been largely driven by price and to a lesser extent mix. Our expectation for volume growth is dependent in part on an improvement in restaurant traffic trends.

According to restaurant industry data providers, U.S. restaurant traffic softened over the past year as consumers continue to adjust to the cumulative effect of menu price inflation. During our fiscal fourth quarter, overall U.S. restaurant traffic as well as QSR traffic was down about 3% versus the prior year. Traffic at QSR chains specializing in hamburger, a highly important channel for fry consumption, was down more than 4%. In addition, traffic trends in QSR hamburger weakened sequentially each month of the quarter, with May down nearly 6%. However, we’re encouraged that the QSR chains, including QSR hamburger chains, have increased promotional activities to drive restaurant traffic. Given the recent introduction, we believe these promotions did not affect traffic during our fiscal fourth quarter and we have not yet received comprehensive data that would indicate a more recent benefit on traffic.

But we expect that these promotional efforts will have a positive effect on traffic as they have done so in the past. Outside the U.S., overall restaurant traffic trends in our key international markets in the fourth quarter were generally consistent with what we observed in the third quarter. Overall traffic was up in France and Italy, down modestly in Germany and Spain, and down about 2% in the UK, our largest market in Europe. In Asia, overall restaurant traffic grew in both China and Japan. While global restaurant traffic trends were mixed, fry attachment rates in the U.S., Europe, Japan and China were largely steady. With our key international markets largely stable and the potential for a tailwind from promotional activity in the U.S., we believe the pressure on restaurant traffic and demand is temporary and remain confident that the global fry category will return to its historical growth rate as consumers continue to adjust to higher menu prices.

Nonetheless, we’ve taken a cautious view of the consumer and have not incorporated any change to current trends in our fiscal 2025 outlook. As a result, we expect our volume to decline during the first half of fiscal 2025. Turning now to the upcoming potato crop. We’re harvesting and processing the early potato varieties in North America, and initial indications are that this portion of the crop is consistent with historical averages. At this time, the potato crops in the Columbia Basin, Idaho, Alberta and the Midwest that will be harvested in the fall appear to be largely in line with historical averages as growing conditions in these regions have been generally favorable. That said, we have not yet seen what impact, if any, the recent heat wave may have on the crop.

As a reminder, in North America, we’ve agreed to a 3% decrease in aggregate in contract prices for the 2024 potato crop and we would begin to realize the benefit of these lower potato prices beginning in our fiscal third quarter. In Europe, heavy rainfall in the spring in the industry’s main growing region in the Netherlands, Belgium, northern France and northern Germany delayed the completion of planning by about seven weeks. As a result, the futures index for European processing potatoes has climbed significantly, reflecting the market’s expectation for a below-average crop. Based on our practice of purchasing a higher portion of our raw potatoes using fixed price contracts, we believe our exposure to the higher market price is less than that of our European competitors.

Still, we expect our potato costs in Europe to increase as prices governed under fixed price contracts are up mid to high single digits. We’ll provide more detail on the crops in both North America and Europe when we report our first quarter results in early October, in line with our past practice. So in summary, we believe we’ve built a solid foundation to support our customers and drive improvement in our financial performance. We continue to operate and invest in this business for the long term and are making the appropriate adjustments this year to manage through the current challenging environment. We’re encouraged by the actions that chain restaurants are taking to improve restaurant traffic as well as the traffic trends in most of our key international markets, but we took a cautious view on the consumer when we developed this year’s financial targets.

And finally, at this time, we expect the potato crop in North America will be consistent with historical averages, but that the crop in Europe will likely be below average. Let me now turn the call over to Bernadette for a more detailed discussion of our fourth quarter results and our fiscal 2025 outlook.

Bernadette Madarieta: Thanks, Tom, and good morning, everyone. As Tom noted, our sales and earnings performance fell well short of our targets. Our team members are focused on getting our operations and financial results back on track in fiscal 2025. Before I provide our outlook for the upcoming year, let’s begin by reviewing our fourth quarter results. Sales declined $83 million or 5% to more than $1.61 billion. Volume declined 8% and price/mix increased 3%. As it relates to volume, nearly 5 percentage points of the decline reflects the impact of share losses, as well as our decision to exit certain lower-priced and lower-margin business in EMEA earlier in the year. The decline is a couple of points more than what we originally anticipated and was driven in part by higher-than-estimated share losses.

With respect to the ERP transition, the issues we experienced that affected our third quarter order fill rates were temporary and contained in that quarter. We have healthy warehouse inventory levels and flows throughout the system. The remaining 3 points of the 8-point volume decline reflected about 1 point loss related to the unexpected voluntary product withdrawal that Tom referenced and about 2 points related to soft restaurant traffic trends in North America and many of our key international markets, which was a bit more than we had expected. Price/mix increased 3%, reflecting the carryover benefit of inflation-driven pricing actions taken in late fiscal 2023 as well as pricing actions taken in fiscal 2024 across both of our business segments.

The increase in price/mix, however, was a few points below our expectations. This was largely due to unfavorable mix versus our forecast as customer demand for value-based products increased, as well as targeted investments in price in North America. Moving on from sales, our adjusted gross profit declined $72 million to $363 million about $40 million of that decline was due to the voluntary product withdrawal. The remaining $32 million was primarily driven by lower volume and an $8 million increase in depreciation expense associated with our capacity expansions in China and Idaho. The carryover benefit of our pricing actions largely offset higher manufacturing costs, which was primarily driven by mid-single-digit input cost inflation. Our gross margin in the quarter was about 23%, which was about 400 basis points below our target of 27%.

Of the shortfall, about 250 basis points was related to the voluntary product withdrawal. The remaining roughly 150 basis points largely reflected the unfavorable mix impact from greater-than-expected share losses of higher-priced, higher-margin customers, as well as the investments in price that we made in our North America segment. Adjusted SG&A declined $6 million to $172 million reflecting lower performance-based compensation expense, which more than offset higher expenses associated with information technology investments. Higher advertising and promotion investments to support the launch of retail products in EMEA and $6 million of incremental noncash amortization related to our new ERP system. Our SG&A in the quarter was about $20 million below the midpoint of our fourth quarter target of approximately $193 million largely due to lower performance-based compensation expense and other cost savings efforts.

All of this led to adjusted EBITDA of $283 million, which is down $50 million versus the prior year as lower sales and gross profit more than offset the decline in SG&A, that’s about $80 million below the midpoint of our fourth quarter EBITDA target of approximately $363 million. About half of that shortfall is due to the voluntary product withdrawal late in the quarter. The other half is due largely to targeted investments in price and trade support in our North America segment, unfavorable mix and lower-than-expected volume, partially offset by favorable SG&A compared with our forecast. Moving to our segments. Compared with the year ago period, sales in our North America segment, which includes sales to customers in all channels in the US, Canada, and Mexico, declined $47 million or 4% in the quarter.

Volume declined 7% with about 5 points related to share losses and about 2% related to soft restaurant traffic in the US. Price/mix increased 3%, driven by the carryover benefit of inflation-driven pricing actions taken in late 2023, as well as pricing actions for contracts with large and regional chain restaurant customers taken in fiscal 2024. Unfavorable mix due to share losses of higher-margin customers, as well as targeted investments in price tempered the increase in price/mix. The North America segment’s adjusted EBITDA declined $21 million or 7% to $277 million primarily due to an approximately $19 million charge related to the voluntary product withdrawal. The remainder largely reflects a combination of lower sales volumes, unfavorable mix and higher cost per pound more than offsetting the benefit of prior pricing actions.

Sales in our International segment, which includes sales to customers in all channels outside of North America declined $36 million or 7%. Volume declined 9% with nearly 5 percentage points from share losses, which are due in part to decisions to exit certain lower-priced and lower-margin business in EMEA earlier in the year. We expect these strategic exits will continue to be a headwind through the first half of fiscal 2025. More than 2 points of the volume decline in the quarter reflects the voluntary product withdrawal, while the remaining roughly 2 points reflected soft restaurant traffic trends in key international markets. Price/mix increased 2%, driven primarily by inflation-driven pricing actions taken in fiscal 2023, as well as the carryover benefit of pricing actions taken earlier in fiscal 2024.

Our International segment’s adjusted EBITDA declined $43 million or 52% to $40 million about $21 million of that decline related to the voluntary product withdrawal. The remainder of that decline was driven by lower sales volume, higher cost per pound and higher advertising and promotional investments to support the launch of retail products in EMEA and was partially offset by the benefit of prior pricing actions. Moving to our liquidity position and cash flow, our balance sheet remains strong. We ended the quarter with net debt leverage ratio of 2.7x adjusted EBITDA and our net debt declined nearly $40 million as compared to the end of our fiscal third quarter to about $3.75 billion. We continue to have ample liquidity, including nearly $1.2 billion available for a new global revolving credit facility.

For the year, we generated about $800 million of cash from operations, which is up about $37 million versus the prior year. As we discussed before, driving long-term growth requires making the right, strategic and forward-looking investments. The resilience of our business and our overall financial strength put us in the ideal position to modernize our assets, as well as to invest in critical areas that support customer needs and unlock efficiencies for our people and our business. This allowed us to spend about $990 million in capital expenditures this year or about $255 million more than the prior year, largely reflecting strategic investments, to complete facilities in China and American Falls, Idaho. Our ongoing capacity expansion projects in the Netherlands and Argentina, and our new ERP system.

Finally, consistent with our capital allocation priorities, we returned $384 million of cash to our shareholders through dividends and share repurchases during the year. This includes $210 million in share repurchases, including $60 million in the fourth quarter and $174 million in dividends. This reflects the strength of our balance sheet and our confidence in our business. Now turning to our fiscal 2025 outlook. As Tom discussed, we expect that the operating environment this year will be challenging and that consumers will continue to be more intentional with the dollars they spend in a pressured economic landscape. We expect that soft restaurant traffic and fry demand may result in higher-than-normal available industry capacity for selected product types and channels in fiscal 2025 and that we will make some targeted investments in price and trade to support volume growth and share.

In addition, we’re aggressively evaluating opportunities and implementing actions to drive supply chain productivity balanced production based on lower shipments, and reduced operating expenses. Specifically for the year, we’re targeting sales of $6.6 billion to $6.8 billion on a constant currency basis. This implies growth of 2% to 5%, which we expect will be driven largely by volume. However, we anticipate that volume will decline during the first half of the year, primarily due to two factors: first, we’ll continue to experience the impact of recent share losses. And second, despite efforts by quick service and casual dining chains to improve traffic through increased promotional activity, we expect that restaurant traffic will remain soft for at least the first half of the year as the consumer continues to adjust to the cumulative impact of years of menu price inflation as well as other economic headwinds.

During the second half of the year, we expect our volume to increase as we lap the prior year impacts of the ERP transition and voluntary product withdrawal, increasingly benefit from recent customer contract wins in the U.S. and key international markets, and recapture some of the market share we lost in fiscal 2024. In fiscal 2025, we don’t expect a meaningful contribution to come from price/mix in the aggregate. In North America, we’re targeting price/mix to decline. We expect to drive improvements in mix as the year progresses as we recapture lost share in higher-priced, higher-margin channels. However, due to the soft demand environment, we believe the mix benefits will be more than offset by targeted investments in price and trade support to drive volume growth and share growth across the sales channels.

In international, when possible under the terms of the customer contracts, we’ll look to drive pricing actions to offset input cost inflation, which we anticipate will be largely driven by a below-average crop in Europe. In addition, we’ll begin to gradually leverage our revenue growth management tools to manage our price architectures and improve mix. However, we anticipate that the increase in price/mix may be tempered by targeted investments in price and trade support in certain markets and channels to protect market share and win new business. For earnings, we expect adjusted EBITDA of $1.38 billion to $1.48 billion. For diluted earnings per share, we’re targeting $4.35 to $4.85. This includes an adjusted SG&A target of $740 million to $750 million which is up $70 million versus the prior year, reflecting returning performance-based compensation expense back to targeted levels, an incremental $24 million of noncash amortization related to our new ERP system and an incremental $10 million of advertising and promotional investments largely to support our retail brands in both North America and EMEA.

Excluding these three items, our adjusted SG&A expenses are down due to aggressive cost management. As I previously discussed, we’re continuing to evaluate and implement additional cost savings actions. We’re targeting total depreciation and amortization expense of $375 million, which is an increase of $75 million about $50 million of the increase is included in cost of sales and largely associated with the depreciation of the capacity expansions in China, Idaho, and the Netherlands. The remainder of the increase primarily reflects the incremental amortization of our ERP system, which is recorded in SG&A. For interest expense, we’re forecasting about $180 million, that’s an increase of about $45 million, reflecting higher average debt levels and lower capitalized interest.

We’re forecasting a full year effective tax rate of approximately 24%, which is similar to last year’s rate. Finally, we’re targeting cash use for capital expenditures of approximately $850 million as we continue the construction of our previously announced capacity expansion efforts in the Netherlands and Argentina. We currently expect the expansion in the Netherlands to be completed by the end of calendar 2024, while Argentina is targeted to be operational in mid-calendar 2025. In addition, as Tom mentioned, we’re looking at rephasing future capital investments to modernize production capabilities to better match the demand environment. That said, more than 80% of this year’s forecasted capital expenditures are committed. Since we anticipate our two large capacity expansions will be completed by the end of fiscal 2025, we expect a notable decrease in capital expenditures in fiscal 2026.

Because of the rapid change in the operating environment our fiscal 2025 growth rates are below our normalized fiscal 2024 baseline. As it relates to sales, our fiscal 2025 outlook implies a normalized growth rate of 0% to 3% after adjusting for the estimated impact of the ERP transition in fiscal 2024. That growth rate is at the low end of our long-term growth algorithm of low to mid-single digits. Our adjusted EBITDA target for fiscal 2025 is about $160 million, below our normalized fiscal 2024 baseline of about $1.6 billion. Broadly speaking, that decline reflects targeted investments in price and trade support to retain or win new customers, challenges in certain markets and channels to implement sufficient pricing to offset input cost inflation, an estimated carryover impact of unfavorable mix from lost share of higher-priced, higher-margin customers in North America and an additional estimated $20 million to $30 million loss in the first quarter of fiscal 2025 associated with the voluntary product withdrawal.

Before I turn the call back over to Tom, I want to provide some thoughts on the first quarter. While we don’t typically provide quarterly guidance, given our recent results, the expected headwinds and the changes in the operating environment, we’re providing more detail on our expectations for the quarter. Specifically in the first quarter, we’re targeting sales to be down mid- to high single digits, with volume down mid-single digits due to the carryover impact of share losses, soft restaurant traffic, and the voluntary product withdrawal. We believe that the impact of share losses and soft traffic will be the greatest in the first quarter and gradually ease as the year progresses. We expect price mix may be down low to mid-single digits as the carryover benefit of pricing actions taken in fiscal 2024 are more than offset by the impact of unfavorable mix and targeted investments in price and trade support in North America.

For earnings, we expect our EBITDA margin to be the lowest of the year due to our typical seasonality and the $20 million to $30 million loss estimated to be associated with the voluntary product withdrawal that I mentioned earlier. We do not expect additional losses related to the product withdrawal beyond the first quarter. We also expect our first quarter margin will be pressured by higher cost per pound, unfavorable mix, and investments in price and trade support. Let me now turn it back over to Tom for some closing comments.

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

Operator: Thank you. [Operator Instructions]. We’ll go first to Andrew Lazar with Barclays. Your line is open. Please go ahead.

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

Bernadette Madarieta: Good morning.

Tom Werner: Good morning.

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

Bernadette Madarieta: Yes. Thank you, Andrew. As it relates to our current capacity utilization rate, that’s not a number we want to provide right now. We’ve got two new facilities that are becoming operational and we’ll have available capacity. China has been operational and through the vertical start-up, and then American Falls came on at the end of May and is going through its vertical start-up as well during the next few months, and we’re looking to gradually ramp that up. So we want to get those plants filled up on a run rate basis over the next 18 months, but the current demand environment will likely stretch that out a bit. As it relates to some of the higher-margin customers and the share losses that we referred to, some of those are the customers during the ERP transition that we would have lost during that time.

And our sales teams are certainly out there and talking to those customers. It’s a competitive environment, though, as we’ve discussed, with some of the incremental supply and the softening restaurant traffic trends. So we continue to keep focus on that.

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

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

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

Bernadette Madarieta: Yes. And Andrew the only thing — go ahead.

Andrew Lazar: Keep going.

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

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

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

Andrew Lazar: Thanks so much.

Bernadette Madarieta: Thanks, Andrew.

Operator: We’ll go next to Ken Goldman with JPMorgan. Your line is open, please go ahead.

Ken Goldman: Hi, good morning. Thank you.

Tom Werner: Good morning.

Bernadette Madarieta: Hi, Ken.

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

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

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

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

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

Ken Goldman: Got it. Thank you.

Operator: We’ll go next to Peter Galbo with Bank of America. Your line is open. Please go ahead.

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

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

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

Tom Werner: Yes. So the capacity expansions we have going on we made those decisions a couple of years ago and you have to commit to your suppliers. We’re three quarters of the way built and so it would be more costly not to complete. And so we’ve got — we’re at a point where we need to finish it. And again we’ll evaluate. We’re looking at all areas of the company to evaluate overall capacity in our footprint .

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

Peter Galbo: Okay. But Bernadette just on the longer-term CapEx, like is 500 million the right number, 400 million like the 9% of sales number you gave at Investor Day in October doesn’t seem to be relevant anymore. So just like what’s the right range?

Bernadette Madarieta: Yes. At this point, I would just say you’re going to see a notable decrease in 2026. We are rephasing our capital investments as I mentioned and taking a look at what capabilities we don’t believe we need immediately. And so when we have that update we’ll certainly provide it at that time but a notable decrease in 2026.

Peter Galbo: Okay. Thank you.

Operator: We’ll go next to Tom Palmer with Citi. Your line is open. Please go ahead.

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

Bernadette Madarieta: Yes. No, thanks for the question, Tom. As it relates to the share gains in the second half of the year, some of those have already been committed and we know that we will be seeing those in the second half. There are those that we’re currently in negotiation with and certainly not going to speak to that. But that is the rationale for those share gains that are coming. We’ve got a strong sales pipeline that we are currently working through and have those identified targets as it relates to the share gains. The other piece that is impacting our guidance would be changes in mix. As we talked about we had in the back half of this year some changes in mix with those small regional customers in our North America segment. That would be regaining share of those higher mix customers.

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

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

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

Tom Palmer: Okay. Thank you.

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

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

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

Adam Samuelson: And how that would influence — what would have to happen from here for you to make an assessment to idle or close older processing facilities versus further investing in them in ’26 and beyond?

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

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

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

Adam Samuelson: All right. I appreciate the color. I’ll pass it on.

Operator: We’ll go next to Robert Moskow with TD Cowen. Your line is open, please go ahead.

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

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

Bernadette Madarieta: Yes. And keep in mind, the volume in the first half is expected to decline due to the impact of the share losses in that weak global restaurant environment that we’ve been talking about. It’s the back half where we expect to see those volume increases.

Tom Werner: And we’re seeing wins in the marketplace today so that gives me confidence that, yes, we’ll navigate through the next — the first half of this fiscal year, but we expect sequential improvement in the back half.

Robert Moskow: Okay, I’ll stop here. Thanks.

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

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

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

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

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

Rob Dickerson: And then just lastly, kind of a pedicle question. On the share repo, clearly bought some stock back, which is great. But I’m just kind of curious as you were headed into today’s print, you probably thought maybe the stock could be down a little bit. Why not just buy stock back like tomorrow versus in the fourth quarter? That’s it. Thanks.

Bernadette Madarieta: Yes. When we make decisions on share repurchases, we do that throughout the year, and I can’t comment further on that. Certainly, with the stock being down what it is, we will continue to evaluate that and make decisions as we move forward.

Rob Dickerson: All right. Super. Thank you so much.

Operator: We’ll move next to Matt Smith with Stifel. Your line is open. Please go ahead.

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

Bernadette Madarieta: Yes. We don’t specifically comment on our competitors’ environments and some of the things that they’re doing. We can only comment as it relates to what we’re seeing and how Lamb Weston is reacting to the market.

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

Bernadette Madarieta: Yes. We are back shipping to the customer.

Matt Smith: Thank you for that. I can leave it there.

Operator: We’ll go next to Max Gumport with BNP Paribas. Your line is open. Please go ahead.

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

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

Max Gumport: Okay. Thank you. I’ll leave it there.

Bernadette Madarieta: Thank you.

Operator: And that will conclude the Q&A session. I’ll turn the conference back to Mr. Congbalay for any additional or closing remarks.

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

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