Q2 2025 Lamb Weston Holdings Inc Earnings Call
Good day, and welcome to the Lamb Weston second quarter.
Fiscal year 2025 earnings call. Today's conference is being recorded at this time I'd like to turn the conference over to Dexter convoy. Please go ahead.
Speaker Change: Good morning, and thank you for joining us for Lamb Weston second quarter 2025 earnings call.
Speaker Change: Today, we issued our earnings press release and posted our slides that we'll use for today's call you.
Speaker Change: You can find both on our website Lamb Weston dotcom.
Speaker Change: 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 take things today.
Speaker Change: 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.
Speaker Change: Some of today's remarks include non-GAAP financial measures. These non-GAAP financial metrics should not be considered a replacement for and should be read together with our GAAP results.
Speaker Change: You can find the GAAP to non-GAAP reconciliations in our earnings release, and the appendix to our presentation.
Speaker Change: With me today are Tom Werner, our President and Chief Executive Chief Executive Officer.
Speaker Change: <unk>, our Chief Financial Officer, Let me now turn the call over to Tom.
Tom Werner: Thank you Dexter good morning, and thank you for joining our call today, let.
Tom Werner: Let me start with the leadership change, we announced earlier today as you've likely seen I will be stepping down as CEO and Mike Smith, our current CLO will become Lam lessons next president and CEO beginning January <unk> 2025.
Tom Werner: The board and I believe now is the right time to transition to allow new leader to guide Lamb Weston into its next chapter of growth.
Tom Werner: Could not be more thrilled to hand over the reins to Mike.
Speaker Change: His appointment represents the culmination of a thoughtful years' long succession planning process by the board and we are confident he is the right leader to guide Lamb Weston Board.
Speaker Change: Over the course of a 17 year career at Lam Watson, Mike has developed a deep understanding of all critical aspects of our business and operational opportunities and terrific growth across multiple areas of the company.
Speaker Change: I've had the pleasure of working closely with Mike and I've witnessed firsthand his value base leadership style and steadfast focus on people as well as his thorough understanding of the business.
Speaker Change: I'm confident that with Mike at the helm Lamb Weston will drive profit and deliver value for our shareholders.
Speaker Change: Now turning to our results.
Speaker Change: Our second quarter performance was below our expectations and not what we aim to achieve in Lamb Weston.
Speaker Change: <unk> four provides a snapshot of the key themes that we'll be discussing with you today.
Speaker Change: We expect the challenging operating environment will persist in the near term as weak restaurant traffic trends and additional capacity expansions announced by our competitors since our Investor day last year add to the current imbalance in global industry supply and demand, especially outside North America.
Speaker Change: In this new reality, you were evaluating opportunities beyond our initial restructuring plan to adjust our operations, including reducing manufacturing and supply chain costs and operating expenses.
Speaker Change: In addition, we are evaluating opportunities to drive the top line by improving sales execution, while also expanding our total addressable market by leveraging proprietary technology to serve nontraditional Fry customers.
Speaker Change: As we discussed on our last quarter's earnings call, we expect to significantly reduce our capital spending next year as we shift away from growth capital to focus on base modernization and environmental capital.
Speaker Change: We expect these steps to increase our free cash flow, which would provide more flexibility to step up capital returns to our shareholders. We will address each of these points. During this call. Let me now turn it over to <unk> to discuss details on our second quarter results.
Speaker Change: Thanks, Tom and good morning, everyone.
Speaker Change: Starting on slide five you can see that net sales declined 8% compared with the year ago quarter.
Speaker Change: Volume declined 6%, primarily driven by declining restaurant traffic in the U S and many of our key international markets.
Speaker Change: Customer share losses net of gains.
And the carryover impact of our decision last year to exit certain lower priced and lower margin business in EMEA to strategically manage customer and product mix.
While the effects of these three factors were largely in line with our expectation the declines in sales and volume were more than what we anticipated for the quarter as we experienced incremental customer share lockers in both business segments due to an increasingly competitive environment.
Speaker Change: Price mix declined 2% as compared to the prior year quarter, which was just below our target for the period.
Speaker Change: Our pricing actions in North America were in line with our expectation however, pricing in our international markets with more competitive.
Speaker Change: Channel and product mix was also in line with our expectations, but unfavorable versus the prior year quarter, reflecting customer share losses exceeding customer gain.
Speaker Change: So our North America segment specifically.
Speaker Change: <unk> declined 8% versus the prior year quarter.
Speaker Change: Volume declined 5% and included the carryover impact of smaller and regional customers share losses in food away from home channels in the prior year and share losses and certain chain restaurant accounts.
Speaker Change: The majority of the decline however was due to the drop in restaurant traffic in the U S.
According to restaurant industry data providers U S restaurant traffic in the second quarter declined about 2% versus the prior year.
Although trends improved modestly versus our fiscal first quarter <unk> did continue to step up promotional activity.
Speaker Change: Traffic at <unk> changed specializing in hamburgers in the second quarter declined about 1.5% versus the year ago period.
We continue to be encouraged by the improving trend in traffic and the steady fry attachment rate, but as a reminder, many of these promotional meal deals have consumers trading down from a medium serving size to a small French fry servings side.
Speaker Change: As a result, while we benefit from improving traffic trends the effect of the trade down.
Speaker Change: In serving sizes acts as a partial and with some customers a significant headwind to our volumes.
Speaker Change: Price mix in North America declined 3%, reflecting the planned investments that we made to retain and attract volume as well as unfavorable channel and product mix.
Speaker Change: For our international segment sales declined 6% versus the prior year quarter.
Speaker Change: Volume declined 6% driven by several factors.
Speaker Change: First restaurant traffic declined or soften sequentially in many of our key international markets.
Speaker Change: While restaurant traffic in the U K, our largest market in Europe with flat traffic declines in Germany, France, and Spain in.
Speaker Change: In Japan, <unk> traffic grew versus the prior year, but decelerated versus our fiscal first quarter traffic.
Speaker Change: Traffic growth in China remained soft.
Second we experienced incremental customer share losses, resulting from a more intense competitive environment, most notably in the middle East and certain markets in Asia Pacific.
Speaker Change: And third we continued to realize the carryover effect of exiting certain lower priced and lower margin business in EMEA.
Speaker Change: This was the last quarter that this will serve as a headwind.
Speaker Change: Price mix was flat versus the prior year quarter as incremental pricing actions to compete in key international markets offset the benefit of inflation driven pricing actions in EMEA.
Speaker Change: Moving on from sales.
Speaker Change: On slide six you can see that adjusted EBITDA was down $95 million versus the prior year quarter to $282 million.
Speaker Change: The decrease is largely attributable to a $135 million decline in adjusted gross profit.
Speaker Change: That was due primarily to four factors.
Speaker Change: Price mix decline due to the planned pricing actions to retain customers and attract incremental volume.
Speaker Change: Second higher manufacturing cost per pound, which reflect input cost inflation and inefficiencies associated with lower production and lower factory and potato utilization rates.
Third we incurred incremental production costs related to unplanned facility downtime and additional startup costs associated with our new capacity expansion and finally, while not impacting EBITDA, we incurred $16 million of higher depreciation expense, that's largely related to our capacity.
Speaker Change: Expansions in China, and Idaho that were completed last fiscal year.
Adjusted SG&A declined $12 million to $165 million.
Speaker Change: We reduced adjusted SG&A, despite an incremental $7 million of noncash amortization related to our new ERP system that went live in the third quarter of fiscal 2024.
Speaker Change: Continued execution of our expense reduction initiatives, including those associated with our restructuring plan drove most of the improvement with the remainder largely due to lower performance based compensation and benefit accruals.
Speaker Change: For North America, specifically, adjusted EBITDA declined $55 million to $267 million driven by a combination of unfavorable price mix lower sales volumes higher manufacturing cost per pound and incremental production cost.
Speaker Change: For our international segment, adjusted EBITDA declined $53 million to $47 million.
Speaker Change: Higher manufacturing cost per pound and incremental production costs drove the decline and the increasingly competitive environment in each region affected our ability to use price to fully offset inflation.
Speaker Change: Moving to our liquidity position and cash flow on slide seven.
Speaker Change: We ended the second quarter with about $80 million of cash and $1 2 billion available under our revolving credit facility.
Speaker Change: Our net debt was $4 billion, which puts our leverage ratio at three four times on a trailing 12 month basis.
Speaker Change: In the first half of the year, we generated nearly $430 million of cash from operations, which is down about $25 million versus the prior year due to lower earnings which were partially offset by favorable changes in working capital.
Speaker Change: Capital expenditures for the first half of the year net of proceeds from Blue chip swap transactions in Argentina were $486 million as we completed our expansion in the Netherlands during the second quarter and continued construction of our Argentina facility.
Speaker Change: We expect our capital spending during the second half of the year to significantly decline as we continue to target total annual capital expenditures of $750 million in fiscal 2025.
Speaker Change: During the quarter, we returned about $52 million to shareholders in the form of cash dividends, we did not repurchase any shares under our share repurchase authorization during the second quarter.
Tom Werner: I'll now turn it back over to Tom who will cover the next few slides Tom Thanks for that at our Investor day more than a year ago, we provided our view of the global frozen potato industry, including our estimates of future capacity additions as well as demand growth.
Tom Werner: Has changed since then so we wanted to provide you with our updated view.
As shown on slide eight prior to Covid frozen potato demand in the U S. In our key international markets was growing above historical rates, resulting in Lamb Weston and the industry at large operating above full capacity.
Tom Werner: While COVID-19 affected demand for a relatively short period, we saw evidence of frozen potato demand quickly rebounded to pre COVID-19 levels and historical growth rates.
Tom Werner: As a result, we strategically plan to expand capacity, so we would be well positioned to serve our customers and capture our share of growing global demand.
Tom Werner: Starting in early 2021 annoying that it typically takes two to three years to plan construct and qualify new facility. We were one of the first processors to announce major capacity expansions and modernization of our existing production lines.
Tom Werner: Included projects in China, Idaho, the Netherlands in Argentina.
Tom Werner: By the time of our Investor Day in October 2023, as you can see on the chart. Some competitors had also announced capacity expansion projects.
Tom Werner: Then legacy competitors as well as some relatively new market entrants have announced plans to construct more than $3 5 billion pounds of additional capacity between 2024 and 2027.
Tom Werner: This primarily includes expansions in Europe, China, and Brazil, but also in relatively new frozen potato processing regions, such as India and the middle East.
Tom Werner: While competitors expansion announcements are always expected, we did not foresee the timing and aggregate scale. These additional expansions.
Tom Werner: As you can see on slide nine.
Tom Werner: Including these additional announcements we expect the industry in total may add up to $8 6 billion pounds of incremental production capacity over the next four calendar years.
Tom Werner: Given the near term operating environment, we don't know whether all capacity expansions that have been announced will move forward and be operational by the end of calendar 2028.
Tom Werner: That said if all these announced capacity additions are completed on time and if there are no further capacity reductions other than our strategic closure of canal, Washington facility. We estimate total industry capacity may be more than 44 billion pounds by the end of 2028.
Tom Werner: As an additional 10 billion pounds of capacity being added between 2023 and 2028.
Tom Werner: Just 4 billion pounds, what was added in the previous five years.
Tom Werner: This has implications for industry capacity utilization in.
Tom Werner: In 2024, we estimate capacity utilization is around 90%, which itself is down from the high ninety's. During the past couple of years due to the slowdown in global demand and the addition of nearly 3 billion pounds of incremental supply by Lamb Weston and our peers.
Tom Werner: For the next few years, we expect capacity utilization maybe in the mid to high Eighty's Accordingly, and again, assuming all the announced expansion projects are completed or not significantly delayed.
Tom Werner: We expect the operating environment will remain challenged through the medium term, even if demand returns to historical rates as incremental capacity expansions add to the current imbalance of global industry supply and demand, especially outside North America.
Tom Werner: As you see on slide 10, we have again been an early mover to implement actions to combat the challenging environment.
Tom Werner: Nearly three months ago, we announced a restructuring plan to address the imbalance and improve our cost structure. This included reducing head count permanently closing a processing facility temporarily curtailing production lines and schedules, we remain on track to deliver on the $55 million of cost savings associated with this plan of physical 2000.
25, and annualized cost savings of $85 million in physical 2026.
Tom Werner: In addition, as I noted earlier, we're continuing to evaluate and execute opportunities to adjust our supply chain operations and support functions to effectively manage through this challenging environment protect our profitability and improved free cash flow. We brought on a new chief supply chain officer about four months ago and were incurred.
Tom Werner: To see the opportunity she and the team identified to reduce our manufacturing and supply chain costs.
Tom Werner: In the back half of the year, we will have more to say about these initiatives improved performance and profitability.
Speaker Change: Let me now turn over the call to BARDA that to discuss our updated outlook.
Speaker Change: Thanks, Tom.
Speaker Change: We anticipated a challenging environment for the balance of fiscal 2025 during our last earnings call. Our performance. So far has fallen short of expectations. As a result, we're reducing our financial targets for the year to reflect our performance in the second quarter as well as the increasingly competitive environment that Tom just described.
Speaker Change: As you can see on slide 11.
Speaker Change: We are reducing our net sales target range to $6 three five to $6 $45 billion from our previous range of six six to $6 8 billion.
Speaker Change: Using the midpoint of the new sales range implies a sales decline of 1% versus fiscal 2024.
Speaker Change: Also reducing our adjusted EBITDA target range to $1, one seven to one point to $1 billion from our previous estimate of around 1.38 billion.
Speaker Change: Let me walk you through the key changes.
On Slide 12, you can see that about one fourth of the reduction in our annual sales target reflects the shortfall versus expectations during the second quarter.
Speaker Change: The remainder reflects the combination of factors that affect the second half of the year.
In North America, we expect incremental sales volume pressure due to the impact of unexpected loss of a chain restaurant customer, partially offset by the benefit of some new customer wins and a greater than forecasted impact from the downsizing in serving size related to promotional meals at key customers.
Speaker Change: Our forecast for price mix in North America is down modestly from our previous estimate due to less favorable mix than we previously anticipated.
Speaker Change: Our forecast specifically for price is essentially unchanged as the pricing environment, while competitive remains largely in line with our initial expectations.
Speaker Change: In our international segment, we expect volume to be below our previous forecast, primarily reflecting incremental customer share losses, resulting from a more intense competitive environment as well as softer restaurant traffic in key international markets.
Speaker Change: In addition, we expect incremental pricing pressure in each of our regions, but for different reasons.
Speaker Change: In Asia Pacific and Latin America, we're experiencing an increasingly competitive environment as demand growth slows and as additional supply from Europe, and newer entrants in India, China and the middle East gained share.
Speaker Change: In EMEA, we're moderating some of the inflation driven pricing actions that we implemented earlier this year to counter the initial surge in the market price of potatoes.
Speaker Change: In short, we expect the 1% decline in total Lamb Weston that sales versus the prior year will be driven by a low to mid single digit decline in price mix, partially offset by a low single digit increase in volume growth.
Speaker Change: With respect to adjusted EBITDA on Slide 13, you can see that nearly one third of the $190 million reduction in our annual adjusted EBITDA target reflects the shortfall in our performance in the second quarter versus expectations.
Speaker Change: Most of the remaining reduction in our EBITDA forecast is due to the impact of a more competitive environment in our key international markets, which is affecting volume and our ability to pass along input cost inflation.
Speaker Change: It's also due to the reductions in volume and less favorable mix in North America that I described earlier.
In addition relative to our previous forecast, we expect to incur increased manufacturing costs due to inefficiencies from lower asset and potato utilization.
Speaker Change: With respect to SG&A, we're maintaining our current range of $680 to 690 million, but will likely be towards the top end of the range.
Speaker Change: As you can see on slide 14 based on our updated annual financial forecast for the second half of the year, we expect to deliver sales of three 1% to $3 2 billion.
Speaker Change: Implying growth of 1% to 4% as compared with the prior year period.
Speaker Change: We expect higher volume in both international and North America will drive overall sales growth.
Speaker Change: We forecast that our international segment will contribute the majority of the overall volume increase primarily reflecting the benefit of incremental volume from recent chain customer contract wins across each of our geographic regions net of recent share losses.
Speaker Change: Lapping the impact of canceled shipments associated with last year's ERP transition as well as the impact of the voluntary product withdrawal that affected our results in the fourth quarter of fiscal 2024.
Speaker Change: We expect North America volume growth to also reflect the benefit of lapping canceled shipments associated with last year's ERP transition.
<unk> progress in regaining share of regional and small customers loss in the prior year and incremental volume from recent chain customer contract wins net of share losses.
Speaker Change: We expect overall price mix will be down in the second half of the year in North America. We're forecasting price makes it will decline as pricing actions more than offset benefits of improved product and channel mix as.
Speaker Change: As I previously noted our price investments are consistent with our prior expectations.
Speaker Change: In international we're forecasting overall price mix will also decline due to pricing actions in response to competitive dynamics in key international markets.
Speaker Change: Moving to earnings.
Speaker Change: In the second half, we expect to deliver $600 million to $640 million of adjusted EBITDA, which is in line with what we delivered in the prior period.
Speaker Change: Overall, we expect the benefit from incremental volume growth in both international and North America will drive EBITDA growth, but will be largely offset by planned investments in price in North America incremental price actions in key international markets and the impact of <unk>.
Cost inflation and increased manufacturing costs due to inefficiencies from lower asset and potato utilization, which we are actively working to address.
Speaker Change: Now turning to our thoughts on capital expenditures on slide 15.
Speaker Change: As I previously noted we're continuing to target total capital expenditures of approximately $750 million for fiscal 2025.
Speaker Change: We spent about $485 million during the first half of the year as we completed our expansion in the Netherlands and continued construction of our Argentina facility.
Speaker Change: Spending in the second half of the year, we'll focus on maintenance modernization and the continued construction of our Argentina facility, which is on track to be completed in mid calendar 2025.
Speaker Change: For 2026, we're continuing to target total capital expenditures of approximately $550 million.
Speaker Change: We expect about $400 million will be for base maintenance capital and modernization effort, which is in line with our annual depreciation and amortization expense.
Speaker Change: The other $150 million will be for environmental capital projects that largely focus on wastewater treatment at our manufacturing facilities.
Speaker Change: As we highlighted last quarter, we expect to spend about $500 million in total over the next five years to comply with increasingly strict government regulations and permit limitations.
For at least a few years beyond 2026, given our expectations for lower industry capacity utilization, we do not expect to direct any significant investments to growth capital.
Speaker Change: We will focus our spending on base and modernization capital, which together is generally up to 5% of sales plus an additional $75 million or so each year for environmental projects.
As a result fiscal 2026 should be a positive inflection point for our free cash flow.
Speaker Change: Note that the annual amounts that I just described exclude any capital we expect to deploy when we restart the next phase of our ERP implementation.
Speaker Change: Turning to our thoughts on capital returned to shareholders on slide 16.
Speaker Change: Today, we announced a $250 million increase to our share repurchase authorization.
Speaker Change: With this increase we have approximately $560 million remaining under our authorization.
Speaker Change: As has been our practice, we will continue to use a disciplined approach to repurchasing shares.
Speaker Change: But the increased authorization combined with the increase in expected free cash flows provides us with the flexibility to opportunistically buy back shares under the program.
Speaker Change: Yeah.
Speaker Change: With respect to dividends, we declared a <unk> increase in our quarterly dividend to <unk> 37 cents per share. This is consistent with our history of increasing our dividend each year since becoming a public company more than eight years ago.
Our target dividend payout ratio remains 25% to 35% of earnings per share.
Speaker Change: While we are above that range today, that's a result of temporarily depressed earnings.
Tom Werner: Let me now turn the call back over to Tom for some closing comments.
Tom Werner: Thanks for that so let me just summarize today by saying, we expect the operating environment in the near term will remain challenging as additional capacity expansions are announced during a period of ongoing pressure on demand.
Tom Werner: We are proactively adapting to this dynamic environment by strategically adjusting our footprint, reducing capital expenditures managing our cost structure and improving cash flow at the same time, we remain committed to returning capital to our shareholders through opportunistic share repurchases and steady increases in our dividend while continuing to make.
Tom Werner: <unk> and modernize our production assets.
Overall, we remain well positioned with a unique strength and scale that Lam Watson system provides navigated tough industrywide operating environment, we're taking actions to adapt our operations to weather. These transitory challenges and make lasting improvements to our operations and we will continue to leverage our solid fundamentals and balance sheet to.
Tom Werner: To deliver value to our shareholders.
Speaker Change: Before taking questions I, just want to end with saying again that serving as Lam Washingtons, President and CEO has been a privilege and honor.
Speaker Change: And I'm proud of what the entire Lamb Weston team has accomplished during these last eight years.
Speaker Change: With Mike and his leadership team at the helm Lamb Weston as future is in great hands.
Speaker Change: For joining us this morning, now let me turn it back over to Dexter.
Thanks, Tom before opening up the call for questions I just wanted to note that my concern is that it will be on the baby's investors in January we'll provide details for that meeting shortly after the started the new year.
Speaker Change: With that we're now ready to take your questions.
Speaker Change: Yes.
Speaker Change: Thank you if you would like to ask a question you may signal by pressing star one on your telephone keypad, if you're using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment.
Speaker Change: Once again star one for questions well go first to Andrew Lazar with Barclays.
Andrew Lazar: Great. Thanks, very much Tom I guess, even assuming a 3% annual demand growth over time, and obviously, that's you know a lot more than what we currently see.
Andrew Lazar: Talking about capacity utilization by 2028, we'd only get back to around 90% and that's certainly below where it's been historically and more of the mid to high nineties.
Andrew Lazar: I guess in light of this.
Speaker Change: What do you now view Lamb, Weston sort of structural or normalized EBITDA margin.
Speaker Change: Is it lower or maybe appropriately how much lower is it and what you might have previously thought.
Speaker Change: Then I've got a follow up.
Andrew Lazar: Yeah, Andrew I think you know based on our re guide here today and going forward, assuming all that capacity comes online and Theres no other.
Andrew Lazar: Industry.
Adjustments to the footprint.
Andrew Lazar: We believe the go forwards in the range of.
Andrew Lazar: On an EBITDA basis, 19% to 20%.
Speaker Change: Yeah, and then Andrew will expand margins by pricing to offset inflation over the longer term, but as Tom said in the short to medium term environment, we're expecting 19% to 20% EBITDA margins.
Speaker Change: Thanks for that and then.
Speaker Change: In light of the industry dynamic in some of the incremental capacity and such.
Speaker Change: Well why do you think other players have not yet.
Speaker Change: Made similar decisions to curtail production or.
Speaker Change: Perhaps close or shutter older less efficient facilities, given all the new capacity that's coming on stream.
Speaker Change: As you have because typically it's been an industry that's been rational and that obviously seems to be sort of breaking down now quite quite materially.
Andrew Lazar: Yeah, Andrew I think you know.
Andrew Lazar: What is Lamb Weston and we're managing our business based on the environment that we're operating in.
Andrew Lazar: And you know.
No.
Andrew Lazar: Certainly there the rest of the industry is evaluating the dynamics right now and it remains to be seen but.
Andrew Lazar: I would anticipate.
Andrew Lazar: I would anticipate there may be some actions from our competitors, but it remains to be seen based on the environment.
Speaker Change: Yeah, and Andrew over the long term, we expect it's going to be a generally balanced based on the confidence in continued category growth positive French fry attachment rate.
This is just a short term to medium term that we're going to have to work through this and we will continue to evaluate any additional opportunities to reduce costs and make sure. We profitably manage the business as we move forward in this difficult environment.
Thank you.
Speaker Change: Thank you we'll take our next question from Peter Galbo with Bank.
Speaker Change: Bank of America.
Peter Galbo: Hey, good morning.
<unk> for the question.
Speaker Change: Tom I actually wanted to spend some time on the international business, because I think theres a lot of moving parts. There that maybe are not fully appreciated.
Speaker Change: So maybe we can start with with Europe, I mean I think.
Speaker Change: You've called out some incremental pressure it seems like you're expecting more I'm not sure how much of that is tied to the fact that you were expecting maybe a tighter potato crop. This year that ended up coming in better and so competitors feel.
Speaker Change: The ability to kind of price discount a bit more.
Speaker Change: So maybe if you you can start with that on Europe, and then as it relates to Asia.
Speaker Change: Calling out the incremental pressure and I think that the share pressure that youre seeing now just how you think about that you know its already existing.
Speaker Change: In light of the capacity that's coming so so why would it not necessarily get worse in in some of those markets as you know the slide it kind of outlines.
Speaker Change: There's quite a bit of capacity expected to come online. So I know, there's a lot there, but but maybe if you could address you know again Europe and then into the Asia markets kind of separately would be helpful.
Speaker Change: Yes, so Europe initially the crop was.
Speaker Change: Projected to be.
Below average.
Speaker Change: Recovered through the growing season.
Speaker Change: So you had some initial high cost open potatoes, the industry are procured and then the crop came down.
Speaker Change: So with that and you know the competitiveness of that market.
Speaker Change: It's been difficult to get the inflation pass through in terms of to.
Speaker Change: To the customer and so that's really driving the pressure on the European market and the.
Speaker Change: The other.
Speaker Change: Part of your question in terms of.
Speaker Change: Asia.
Speaker Change: I'd say that.
Speaker Change: One of the and where we're getting some traction but as you recall when we had our ERP challenges.
Speaker Change: We protected a lot of the North America customers and we had some impact on our international specifically in Asia customers and so.
Speaker Change: There's there's while the team's doing a great job.
Speaker Change: Winning back some of that business.
Speaker Change: Just a little bit more competitive than we anticipated and will be going forward.
Speaker Change: And Tom the only thing I'd add to that in the Asia market with the increased capacity that's come online there it becomes more of an export markets than it ever has been and so we'll continue to look for that as opportunity.
Speaker Change: Move sales profitably as well.
Speaker Change: Okay. Thanks for that and then I guess just on the back of Andrew's question around EBITDA margins, if I can take it up to the gross margin level.
Speaker Change:
Speaker Change: Been obviously quite a bit of deleverage as a result of I think idling. The capacity you brought it up I think you called out some other factors that hopefully we can go through.
Speaker Change: Hum.
Speaker Change: The question is you know what.
Speaker Change: If the deleverage is it is it more than you expected or are there or are there just other manufacturing elements that have come in.
Speaker Change: That again is this gross margin now we run out at a significantly lower level. Thanks, thanks very much.
Speaker Change: Yes, I think the.
You know the the.
Speaker Change:
Speaker Change: The initial.
Speaker Change: We've had some production manufacturing challenges.
Speaker Change: Early this fiscal year in terms of efficiencies and plants running throughput.
Speaker Change: Hitting production schedules and so that's been really disappointing we've got a new chief supply chain officer, who is focused on that going forward and.
Speaker Change: We have a number of different things identified and we are seeing improvements and but as we continue to.
Speaker Change: Focus on production improvements.
Speaker Change: It's going to take some time to get us back to normal operating efficiency levels.
Speaker Change: Yeah, and then just a reminder, as it relates to the back half margins.
Speaker Change: Seasonally you always see gross margins in the third quarter would be a little bit higher than in the fourth quarter I'm not only will it be affected by seasonality, but you know we'll have the absence of some of those things that affected us in the first half of the year.
Speaker Change: To the product withdrawal and some of the inventory write offs that we had previously talked about.
Speaker Change: Thank you we'll take our next question from Tom Palmer with Citi.
Tom Palmer: Good morning, Thanks for the question.
Speaker Change: Thanks, I wanted to clarify on that.
Speaker Change: Hi, Thanks, I wanted to clarify on the customer losses that were not expected to what extent was pricing determining of these losses I know there was mention of.
Speaker Change: In Asia, some some ERP challenges. So I'm just trying to understand like if customer service was which part of the consideration here with some of the lack of Oh.
Wins that were expected.
Speaker Change: Yeah as it relates to customer losses, you know every year, we go into the negotiation and it's a very competitive environment and so some.
Speaker Change: Some of Thats going to be related to price that there wasn't necessarily any ERP or or other industry service factors at all we continue to service our customers.
Speaker Change: But it's a competitive environment more competitive than we originally thought it was going to be as we entered into the second quarter.
Speaker Change: Okay understood. Thank you.
Speaker Change: I did see the expanded buyback program.
Speaker Change: How aggressive I guess are you willing to be as you watch the us this year is maybe a bit lower today.
Speaker Change: Yeah, So as we move forward and I mentioned the back half of the year, we're going to have more free cash flow because most of our capital investments were made in the first half of the year as we have more free cash flow, we're going to opportunistically be in the market and buy back shares and we're excited to have the increased authorization that we have.
Speaker Change: Today as well the additional $250 million as we move forward. So.
Speaker Change: We'll leave it at that but again.
Speaker Change: We'll have that additional free cash flow as we focus more on maintenance and base capital and modernization efforts moving forward.
Speaker Change: Thank you.
Speaker Change: Oh. Thank you we'll take our next question from Ken Goldman with JP Morgan.
Speaker Change: Hi.
Speaker Change: The activist reiterated its opinion this morning that in addition to management changes.
Speaker Change: Lamb requires significant board change or should be sold just to quote them.
Speaker Change: I know you don't.
Speaker Change: No every board members intention, but Tom you were on the board you may have some insight here.
I'm just curious is it your belief at this time that there will be meaningful board changes that the board is open to land being sold.
Speaker Change: If you can't comment do you at least know if the company plans on issuing a formal response to the activist letter.
Ken we're here today to talk about earnings our outlook, what's going on in the business and more importantly.
Speaker Change: The transition about Mike running the company going forward, so I'll leave it at that but.
Speaker Change: That's what we're here to talk about today.
Speaker Change: Okay.
Speaker Change: Okay following up.
Speaker Change: How do you see in terms of guidance I know theres a lot of moving pieces in the back half certainly some easier comparisons just as we think about underlying volume trends rate excluding changes to customers. The lap are you expecting any kind of improvement sequentially in consumer demand.
For your products again, just on a like for like basis, if that's even possible to kind of parse out.
Speaker Change: Yeah.
Speaker Change: We are expecting incremental volume from customer wins that I think even previously we've been talking about the fact that we'd start seeing the benefit of those in the third quarter.
Speaker Change: Page seven to date, we are seeing the impact of that so a lot of positive momentum there, particularly in the international segment.
Speaker Change: Thank you we'll go next to Robert Moskow with TD Cowen.
Robert Moskow: Hi, Thanks.
Speaker Change: Similar to Ken's question are there any assumptions in your back half about regaining customers that you lost from.
Speaker Change: From the ERP disruption.
Speaker Change: Do you have to get new business wins in the back half from starting from today in order to achieve those numbers.
Speaker Change: Okay.
Speaker Change: The numbers that we've included in the back half of the year.
Speaker Change: <unk> all of our line of sight to customer wins that we have in place. So no there isn't a large amount in there that is unknown business wins.
Speaker Change: Okay, and a quick follow up.
Speaker Change: You lost another chain customer in North America is there any concerns about reputation risks from the missteps in calendar 2024, what are your customers, saying about their willingness to trust Lamb Weston as a supplier.
Speaker Change: Yes, so in terms of the you know.
Speaker Change: It really across the board from a customer standpoint, certainly we've had to.
Speaker Change: Dress and repairs some of those relationships, but by and large I think were.
Speaker Change: Through <unk>.
Speaker Change: Through most of the some of the challenging discussions we've had and you know it takes time, but.
Speaker Change: I feel great about where we are with our large customers.
Speaker Change: And even you know.
Speaker Change: Some of the foodservice channel business, it's taken us more time than what we had previously anticipated.
Speaker Change: To regain some of those accounts that were impacted by some of the challenges we had a year ago.
Speaker Change: Okay. Thank you.
Speaker Change: We'll take our next question from Rob Dickerson with Jefferies.
Speaker Change: Oh, great. Thanks, so much.
Speaker Change: Tom maybe just a kind of a basic question for you on the accrual capacity.
Speaker Change: See coming online over the next three or four years.
Speaker Change: What do you think drove.
Speaker Change: Those players to decide all that capacity.
Speaker Change: Given the operating backdrop.
Speaker Change: Globally number one and number two.
Speaker Change: Always forever kind of spoken about you know.
Speaker Change: You know fairly fragmented market, obviously in the United States with a card opportunity defragment globally.
Speaker Change: Kind of what we're hearing as well.
You can teach an ex U S actually is causing some of this issue because you have some of these smaller players that.
Speaker Change: Leading in decided well that's all.
Speaker Change: This new capacity because maybe we can get some of the margin too we can get some of that profit to it.
Speaker Change: It seems clearly like.
This is the first time this much has been added and outside of the U S and it doesn't sound like we're talking about kind of the core three other players that we normally discuss when we talk Guam and the U S.
Speaker Change: Yeah.
Yeah, Rob so.
When you step back and you go look at between 2017 and 2022. There was about 3 billion pounds that were added in the industry and all of that capacity.
Speaker Change: Got utilized based on the demand growth and as I said in my remarks.
Speaker Change: <unk> three two to three years ago.
Speaker Change: As we saw demand recovering.
Speaker Change: Historical rates.
Speaker Change: You know, we made the strategic decision to expand our footprint.
Speaker Change: And you know so.
So subsequent to that.
Speaker Change: Obviously, there's been some additional capacity expansions in Europe, India, and China as well as North America that I think the industry will see the same.
Speaker Change: Same.
Speaker Change: Our category growth rates.
Speaker Change:
Speaker Change: The environment, we're dealing with today is.
Speaker Change: As you know we're seeing.
Speaker Change: Restaurants slowdown and a lot of markets and.
Speaker Change: So I think I think the industry has seen the same thing.
Speaker Change: In terms of category growth and it slowed down and so you know we view this as a transitory situation and I think as I said earlier some of the capacity announcements we will see.
Speaker Change: If they actually.
Speaker Change: Come to fruition based on the environment or they're delayed.
Speaker Change: So I think it's a combination of you know the industry kind of view and the view on this.
Speaker Change: The category is the same and the categories change.
Speaker Change: And that's been the big driver.
Speaker Change: Okay, Okay fair enough.
Speaker Change: And then Bernard.
Speaker Change: Could you be a little nitpicky here.
Speaker Change: But there is the one side right. When you kind of backed out that capex will be talking about the capex kind of starting to come off at least the growth capex in fiscal 'twenty six.
Speaker Change: You know what I think the total number is still for Capex of $5, 50, which which is similar to what you've spoken to in the past, but there is that is that little circle right, 6% to 8%.
Speaker Change: Which I'm assuming are they look at the chart.
Speaker Change: 60% of sales implied.
Speaker Change: Well clearly.
Speaker Change: You've got it to 25 right. We know capex as we can kind of reverse engineer to get to what you think your implied sales.
Speaker Change: It would be in 'twenty six.
Speaker Change: To get to 60% it does.
Speaker Change: It seems a little high let's say on the sales side. So is that just to clarify like you're very comfortable with the $550 million.
Speaker Change: I guess, we'll see if it winds up being six to eight per cent himself.
Okay.
Speaker Change: Absolutely I'm I'm very comfortable with the $550 million.
Speaker Change: Okay, Okay, great Alright, I'll pass it on thanks a lot.
Speaker Change: We'll go next to Alexia Howard with Bernstein.
Alexia Howard: Good morning, everyone.
Speaker Change: Good morning.
Speaker Change: Excellent.
Speaker Change: Tends to be the demand side of the equation, we talked a lot about capacity and competitors.
Speaker Change: Morning.
Speaker Change: What is your research telling you about the reasons for the weak consumer demand.
And the reasons might be quite different between the U S and Europe and specifically are you seeing any impact at the moment about on the uptake of G. O P. One weight loss drugs, particularly here in the U S.
Speaker Change: I'm just I'm just wondering how that informs your expectations about an improvement in demand going forward and then I have a follow up.
Speaker Change: Okay.
Speaker Change: Sure as it relates to U S demand you know most of the decline in demand versus the prior year relates to there being the fifth consecutive quarter, where.
Speaker Change: Consumers will continue to face inflation and we've seen declines in restaurant traffic.
The primary reason that we're seeing that as it affects our business, there's more value promotion meal and when those value promotion mill drive increased traffic, we see consumers trading down and theres been a bigger impact on that and we've adjusted then are our forecast accordingly.
Speaker Change: If we turn to the international markets.
Speaker Change: Overall, the restaurant traffic trends, there have slowed sequentially as well as compared with the first quarter.
Speaker Change: And they're continuing to adjust to menu price inflation as well we have not seen a large impact from G. L. P. One based on everything that we've seen to date will continue to monitor it but from a demand perspective, we're not expecting anything significant in the long term Hey, Alexia just one thing I'll also state alright.
Speaker Change: Thanks.
Speaker Change: The fire catchment rates have been consistent and steady so it's.
When people are going to restaurants or byproducts at the same time.
Speaker Change: They usually did they might be now buying a smaller fry, but at least they are still buying surprise when they go to the restaurants at the same rate.
Speaker Change: Great. Thank you for that and then as a follow up you mentioned in your opening remarks.
Speaker Change: New Tam opportunities with non traditional customers can I ask about how large those markets are and exactly what you're.
Speaker Change: You're going after.
Alexia Howard: Yeah, So alexia.
Speaker Change: I'm not going to get into specifics in terms of.
Speaker Change: Volume potential.
Speaker Change: Specific.
Speaker Change: Customer opportunities.
Speaker Change: But you know it is the way to think about it is things that we've done in the past with.
Speaker Change: Some of our customers that traditionally did.
Speaker Change: Didn't offer.
Speaker Change: Fries and ore.
Speaker Change: Tito thoughts.
Speaker Change: That's some of the some of the things we're looking at with.
Speaker Change: Some potentially new customer entrance into the frozen potato category and I'll just leave it at that.
Speaker Change: Thank you I'll pass it on.
Speaker Change: We'll go next to Steve powers with Deutsche Bank.
Speaker Change: Great. Thanks, Gordon you've already from you as well.
Speaker Change: I wanted to go back to the capacity utilization from a slightly different perspective, when you're talking about the low ninety's utilization.
Speaker Change: Today.
Speaker Change: I mean, how does how does land utilization compared to that industry benchmark I guess, what I'm trying to get at is how much of the industry slack is in your business.
Speaker Change: Yes, so the footprint adjustments, we made several months ago.
Speaker Change: Got us back up into the low 90 range and that's the reason we did it we feel comfortable about.
Where our utilization is today and as I stated earlier.
Speaker Change: We've had some challenges across our footprint with some unplanned downtime and other maintenance issues that we're addressing.
Speaker Change: And we're seeing.
Speaker Change: No more efficient utilization in the past.
Speaker Change: Period, and it is improving but overall.
Speaker Change: The reasons, we made the changes we made was to get our <unk> utilization rate kind of in the low nineties.
Speaker Change: And we will improve on that.
Speaker Change: Okay very good.
Speaker Change: I guess and then I wanted to just dig back into the business that's been.
Speaker Change: Florida went back then you had hoped.
Speaker Change: I guess.
Speaker Change: To boil it down I guess the question is really what's the sales pitch to those accounts.
Speaker Change: And is there really isn't really any lever you can you can lean on besides price to the extent that the the competition who is now servicing those accounts is doing a good job.
Speaker Change: No we no it's.
Speaker Change: Some of it is price there is no question about it but we also as you know.
Talking to those customers, it's talking about different products different innovation.
Potentially.
Speaker Change: Yeah.
Speaker Change: If theyre doing a like Val.
Value added menu offering so there's some different discussions we're having.
Speaker Change: Going forward and it's you know we're winning some of that back it's just taking longer than what we anticipated.
Speaker Change: Yeah.
Focus on consistency quality.
Speaker Change: Customer service and then if there's anything we can bring to the table in terms of <unk>. Those are the conversations that we're having in addition to price in the competitive environment.
Speaker Change: Got it thank you very much.
Speaker Change: We'll take our next question from Max <unk> with GMP.
Speaker Change: Very well.
Speaker Change: Yeah.
Speaker Change: Hey, Thanks for the question I wanted to turn back to the comment on the 19% to 20% EBITDA margin being an estimate for the go forward level in the current supply demand environment. So that does look to be roughly in line with how you are guiding for the second half EBITDA margin.
Speaker Change: But you've also observed today that your earnings in 2500 temporarily depressed.
Speaker Change: Really there is price investments going on there's manufacturing inefficiencies.
Speaker Change: There are pressures that could abate.
Speaker Change: And then you'll also be getting benefits from all the cost cutting initiatives that you are just starting to get out there. So I'm trying to get more clarity on what you see as your normalized adjusted EBITDA margin and why it would not be higher than the 19% 20% that year.
Speaker Change: Expecting for the second half of this fiscal year. Thank you very much.
Speaker Change: Yeah. Thanks for the question in the short to medium term.
Speaker Change: We expect the pressure to continue certainly we are doing everything we can from a cost view to make sure that we can continue to increase the profitability and we'll continue to do that over time, but right now in the short to medium term with the pressures that we've been saying we're going to go ahead and guide at the 1920.
Speaker Change: Our range for EBITDA margins, and and we'll come back as we're able to show more in terms of what those improvements and other things look to be as again, our new chief supply chain officer has been here four months, but we've got a lot of positive things. We're seeing just this period.
Speaker Change: But want to wait until we've got a more robust plan to come back with on that.
Speaker Change: Okay I'll leave it there thank you.
Speaker Change: We'll go next to Mark Smith with Stifel.
Speaker Change: Hi, Good morning, Tom you talked about initiatives to improve the impact of the lower utilization for manufacturing can you just provide a little more color about how you address that both in the near term and over time and along with that you temporarily suspended production in some lines as the impact of the suspension.
Speaker Change: Has it been in line with your expectations or is it contributed to more of some of the production inefficiencies we've seen.
Speaker Change: No it's been largely in line with our expectations.
Production challenges we've had.
Speaker Change: Were unplanned and the run rates.
Speaker Change: For a number of different reasons weren't up to where we normally expect them to be and again I'll reiterate.
Speaker Change: They've improved and they are improving.
Speaker Change: And we've had some startup issues with.
Speaker Change: You know the chronic <unk> plant and a little bit American falls.
Speaker Change: We didn't anticipate but you know those are those are improving we've got the teams working on them, we expect that to continue to improve and get to normalized levels here in the near term.
Speaker Change: Okay.
Speaker Change #100: Thank you Tom and one clarification you mentioned.
Speaker Change #101: Your utilization rate or land utilization rate improving from here is that a reflection of the improving traffic trends.
Speaker Change #102: I'll leave it there in person thank you.
Speaker Change #101: No.
More of a reflection of how we're processing the potatoes in the plant.
Speaker Change #101:
Speaker Change #101: And the utilization rate and just being more efficient with how we're how we're running the lines and I'm assuming that you know we've got a lot of the issues here in the last three four months addressed going forward, we're expecting to be running more normalized here for the back.
Speaker Change #101: Half of the year.
Speaker Change #101: Yeah.
Speaker Change #103: Thank you we'll go next to Mark <unk> with Wells Fargo Securities.
Speaker Change #101: Okay.
Speaker Change #104: Hey, good morning, and thank you for taking my questions.
Speaker Change #104: A little more on the utilization just asking a different way. So you believe you're currently in line with industry rates in the low nineties and most of the board incremental capacity you laid out through 2008 as from competitors. So would you expect to be ahead of industry capacity utilization over the medium term.
Speaker Change #105: No I think were generally in line I know there is there is some competitors.
Speaker Change #105: You know from what we understand are running higher.
Speaker Change #105: But you know I think overall, we're at kind of industry standard right now.
Speaker Change #106: Okay, and then finished goods inventory.
Speaker Change #107: Elevated coming out of Q1 inventories being higher in Q2 any color on how much progress you had working through that during the quarter, where are you currently versus normalized levels. When would you expect production alignment.
Speaker Change #106: Yeah.
Speaker Change #108: Yeah, you know as it relates to the second and third quarter, our raw material inventory in our finished goods inventory are usually at their peak because we've just harvested potatoes in September and October. So you usually see that peak and then we'll continue to work those inventories down.
Speaker Change #108: As we move forward throughout the balance of the year.
Speaker Change #108: Okay.
Speaker Change #109: Okay. Thanks.
We'll take our next question from Carla Casella with JP Morgan.
Speaker Change #110: Hi, just wanted to question on leverage and I know your Capex is coming down next year, but looking at the balance of the Capex coming down increased buybacks increased dividend.
Speaker Change #110: Have you changed your leverage target are you there right.
Speaker Change #111: First nations with the agencies.
Speaker Change #112: Yeah, no change to our leverage target, we continue to target the three five times leverage ratio.
Speaker Change #113: Okay, great. Thanks.
Speaker Change #114: Thank you. Thank you.
Speaker Change #115: With no additional questions in queue I'd like to turn the call back over to Mr. <unk> for any additional or closing remarks.
Speaker Change #116: Thanks, everyone for joining the call today, if you have any follow up questions.
Speaker Change #116: Please email me and we could schedule a time to do so again, thank you and have a happy holiday everyone.
Speaker Change #116: Okay.
Speaker Change #117: Thank you that will conclude today's call.
Speaker Change #117: Your participant patient.
Speaker Change #117: Yeah.
Speaker Change #117: [music].
Speaker Change #117: Yeah.
Speaker Change #117: Okay.