Good, Dan. Welcome to the Lamb Weston Holdings, Inc. third quarter FY2025 earnings call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Ms. Debbie Hancock, Vice President of Investor Relations. Please go ahead, ma'am.

Thank you, Anna. Good morning, and thank you for joining us for Lamb Weston Holdings, Inc.'s third quarter 2025 earnings call. I am Debbie Hancock, Lamb Weston Holdings, Inc.'s Vice President of Investor Relations. Earlier today, we issued our press release and posted slides that we will use for our discussion today. You can find both on our website lambweston.com. Please note that during our remarks, we will make forward-looking statements about the company's expected performance that are based on our current expectations. Actual results may differ materially due to the risks and uncertainties. Please refer to the cautionary statements and risk factors contained in our SEC filings for more details on our forward-looking statements. Some of today's remarks include non-GAAP financial measures. These non-GAAP financial measures should not be considered a replacement for and should be read together with our GAAP results. You can find the GAAP to non-GAAP reconciliations in our earnings release and the appendix to our presentation. Joining me today are Mike Smith, our President and CEO, and Bernadette Madarieta, our Chief Financial Officer. Let me now turn the call over to Mike.

Thank you, Debbie, and congratulations on your new role. Good morning, everyone. Thank you for joining us today. I am honored to be the CEO of Lamb Weston Holdings, Inc., a company with a long and proud track record of excellence in our industry. Throughout our history, Lamb Weston Holdings, Inc. has been a leader in innovation, product quality, customer relationships, and operations. These are long-term strengths we will build upon to drive growth and shareholder value. I know this industry and this business, I recognize our recent challenges and understand our future risks and opportunities. To meet evolving industry dynamics, Lamb Weston Holdings, Inc. needs to change. This is where my focus has been since I took over as CEO three months ago and where it remains. Everything is on the table and we are moving with urgency. We are amplifying our efforts with customers and I have been personally meeting and hearing directly from them. We have engaged Alex Partners, a global advisory firm specializing in business optimization, to accelerate an end-to-end value creation plan. Not only are we focused on unlocking value both in the near term and long term, but also on defining the right go-forward strategy. And the Lamb Weston Holdings, Inc. team is talented and experienced. They are engaged and ready to embrace change. This notably includes our new head of global supply chain who has already identified significant opportunities to win with our customers, reduce complexity and cost, as well as improve performance. We have over thirty projects underway this fiscal year and will deliver quick wins as part of a savings pipeline across multiple years. For example, in the logistics space, we are rightsizing the use of different transportation modes and optimizing railcar loading. Also, see the need for better balancing of…

Thank you, Mike, and good morning, everyone. As a result of the actions we took in early fiscal 2025 to drive operational and cost efficiencies, we closed the quarter with sequentially improved volume trends and profitability in line with our expectations. We were able to accomplish this even while the consumer remained pressured, which is reflected in the restaurant traffic data that I'll speak to in a moment. Despite uncertainty in the consumer macro environment, as well as softer restaurant traffic, we remain on track to meet our full-year fiscal 2025 outlook. Starting on Slide ten, net sales increased 4% compared with the prior year period. Volume increased 9%, primarily driven by fully replacing the combined regional, small, and retail customer volume lost in the prior year as we transitioned to a new ERP system, as well as incremental volume from recent customer contract wins across each of our channels and geographic regions, net of volume losses. These benefits were partially offset by soft global restaurant traffic trends. While French fry attachment rates remain high, it is almost two points higher than pre-pandemic levels. The net volume increase in the quarter did slightly lag our expectations given soft restaurant traffic in both North America and international markets. Price mix declined 5% compared to the prior year quarter due to planned investments in price to compete in the increasingly competitive environment in both the North America and international segments. Looking at our segments, North America net sales grew 4% compared with the prior year. Volume improved 8% and included fully replacing volume lost in the prior year as we transitioned to a new ERP system as well as recent customer contract wins across each of our channels net of other volume losses primarily in quick service restaurants. These volume gains were…

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

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

Great. Thanks so much. Good morning, everybody.

Morning, Andrew.

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

I appreciate the question, Andrew. You know, I think it's important to remember we haven't really started those customer contract negotiations yet. Those will start in the summer and move through the fall. And while, you know, potatoes are expected to be down, it's also just a portion of our cost of goods. There's other inflationary impacts that are hitting the business and we're offsetting some of that favorability. So we'll have to see how those effects transpire. The other thing that's unknown right now is any sort of effects from tariffs or reciprocal tariffs, retaliatory tariffs around the globe, and we'll have to take that into consideration as we're having those discussions and those contract negotiations with customers throughout this next customer contracting cycle.

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

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

Yeah. No. I appreciate that. You know, it's really all the above. Reminder, this is the process we're taking is really two complementary work streams. The first is a value creation plan, and we think about value creation plan, that's not only cost, which is a large focus of where we're spending our time, but it is value across the entire P&L. It's top line, ensuring how we drive more growth from a net sales standpoint, it's obviously the middle of the P&L with the costs and focusing on the things that you talked about. Primarily around manufacturing, you know, our throughputs as well as our transportation, logistics, procurement, and down to SG&A. The other area that is focused on is around working capital. And we're spending a lot of time in that area. Now that's the one side of it, Andrew, with the value creation. The other side is the long-term growth strategy. And we're really taking a data-driven approach and focusing on where to play and how we're gonna win for the future. And we'll bring that all together in a full plan that we'll share once we've gone through the process.

Thank you.

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

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

Sure. No. Thanks for the question, Tom. You know, I think it's important to remember how our inventory turns and that the cost of the inventory that's sold in the third quarter was mostly produced in the second quarter, which only had two months of our curtailed production lines. You know, we were also running through the remainder of our crop from that we've negotiated in the prior year. We were running harder during that time period. And then now as we move forward to the fourth quarter, those are gonna be the costs that relate to the three months where we've had some curtailed production lines, we've got lower production, and therefore, we're going to have more cost per pound as a result of that fixed factory burden. So that's really what is driving in terms of the seasonality of those trends. And then, yes, I did point to the 330 basis points and the 260. You know, that's the majority of it. Certainly, there's another 100 basis points where you're gonna see increases in other input costs and other things. But you know, those were a number of miscellaneous things. Nothing of material importance that we felt like we needed to call out at this time. But certainly, as we work through our inventories, and we're able, you know, to restart as necessary, that then is going to help us with that absorption of fixed factory burden. So but you know, right now, we're balancing our overall footprint, and we needed to do that as we were pulling the crop out of harvest and finishing off last year's raw potatoes. That's why you're seeing that trend.

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

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

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

Right. Thank you.

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

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

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

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

Yeah. You know, the way to answer that Ken, is everything's on the table. We're definitely evaluating everything in terms of the markets we play in, and how we're gonna win and where we're gonna win in the future. But the primary focus of the group is to really focus on that value creation piece. All levers of the P&L like I talked about before, not only the top line growth, but also in the middle of the P&L and all the way through it in terms of finding the value and pushing us as an organization using data a little bit harder, taking that unbiased approach. And, you know, that's where the time and focus is, and it's really about improving the fundamentals of our business and getting the business back on track to execute with excellence and make sure we're delivering for our customers and also our shareholders.

And did you have anything further?

Next question, Anna.

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

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

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

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

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

Okay. Great. Thanks, guys.

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

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

Yeah. Let me answer the first part, Rob. As we discussed, we're doing this comprehensive review of our business and so everything's on the table. Part of that, we undertook, really, an exploratory process to understand the possibilities of potentially selling that Connell, Washington building. Obviously, just the building itself, none of the technology or anything that was inside of it. We've gone through our process. We've determined that, you know, a sale of that facility is not in the best interest of our business at this time. So, you know, we'll continue to complete our strategic review of other options that are out there, but yeah, that one's off the table for right now. You know, in terms of new facilities, from other manufacturers, you know, here or even around the globe, you know, we believe that there's some out there that have been delayed. We believe that some processors are taking extended downtime. We've heard that others have reduced acres similar to what we have as well, but I can't speak to any of the details around, you know, what our competitors or other manufacturers are planning to do with their capacity moving forward.

Helpful. Thank you, Mike.

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

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

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

No. I think that covers it.

Great. Thanks very much, Ali. Good there.

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

Good morning, everyone.

Good morning.

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

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

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

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

Great. Thank you. I'll pass it off.

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

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

Yeah. I'll take that, Matt. As it relates to the factors that affect it that we expect to affect the fourth quarter, it's primarily the fact that we've seen and expect to see continued increase in our small, regional, and retail volumes as we have lapped the ERP transition in the prior year. We saw that in the third quarter as well, but that was more pronounced because the third quarter is the quarter that was impacted. And then what we're seeing in the fourth quarter then is those increases are being offset by some of the lost customers that we've spoken about previously. But what I can tell you is we do have a pipeline and Mike mentioned some of those in terms of those QSR volume wins that will be starting and being increased as next year progresses, and we'll give more of an update on that when we give our guidance in next quarter call.

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

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

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

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

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

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

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

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

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

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

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

Okay. Great. Thank you.

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

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

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