Lamb Weston Holdings Inc (NYSE:LW). reported first-quarter earnings that fell short of expectations, with earnings per share (EPS) at $0.66 compared to a forecast of $1.05. This significant miss led to a sharp decline in the company's stock price, which dropped 16.57% in premarket trading. Revenue also underperformed, coming in at $1.6 billion against a projected $1.67 billion.
Key Takeaways
- Lamb Weston reported a 37% miss on EPS compared to forecasts.
- Revenue fell short of expectations, contributing to the stock's decline.
- The company's gross margin was below target, raising cost management concerns.
- International sales showed growth, contrasting with declines in North America.
- Significant cost-saving measures and facility closures were announced.
Company Performance
Lamb Weston's overall performance in the first quarter was marked by a 1% decline in sales to $1.65 billion. The company's adjusted EBITDA decreased by $123 million year-over-year to $290 million. While international sales increased by 4%, North American sales declined by 3%, indicating regional challenges. The gross margin was reported at 21.5%, falling below the company's target by 100-150 basis points.
Financial Highlights
- Revenue: $1.6 billion, down from $1.67 billion forecasted
- Earnings per share: $0.66, compared to $1.05 forecasted
- Gross margin: 21.5%, below target by 100-150 basis points
- Adjusted EBITDA: $290 million, down $123 million year-over-year
Earnings vs. Forecast
Lamb Weston's reported EPS of $0.66 was significantly below the forecasted $1.05, representing a 37% miss. This underperformance is notable compared to previous quarters where the company may have met or exceeded expectations. The revenue miss further compounded investor concerns, as the actual figure of $1.6 billion fell short of the $1.67 billion forecast.
Market Reaction
Following the earnings announcement, Lamb Weston's stock experienced a sharp decline of 16.57% in premarket trading, dropping from a previous close of $78.22 to $65.26. This reaction highlights investor disappointment with the earnings results and the company's immediate financial outlook. The stock's movement is significant when compared to its 52-week range, suggesting a strong market response to the earnings miss.
Company Outlook
Looking ahead, Lamb Weston has set a net sales target of $6.6 billion to $6.8 billion, indicating expected growth of 2-5%. The company aims for an adjusted diluted EPS of $4.15 to $4.35. Despite current challenges, the company remains focused on modernizing its production capabilities and expanding its presence in international markets, including China, the Netherlands, and Argentina.
Executive Commentary
CEO Tom Warner emphasized the company's proactive management approach, stating, "We're making decisions to manage Lamb Weston." CFO Bernadette Madrieta acknowledged the difficult decisions made, noting, "These were hard, but necessary decisions to adjust to the current business trends."
Q&A
During the earnings call, analysts questioned the competitive pricing environment and the company's strategy for managing foodservice accounts. Executives highlighted the disciplined pricing approach and the potential for further industry capacity reductions, expressing confidence in long-term growth prospects.
Risks and Challenges
- Declining North American sales could impact future revenue growth.
- Below-target gross margins suggest potential cost management issues.
- Continued challenges in restaurant traffic may affect sales.
- Supply chain disruptions and macroeconomic pressures could pose additional risks.
- The success of international expansion efforts remains uncertain.
Full transcript - Lamb Weston Holdings Inc (LW) Q1 2025:
Conference Operator: Good day, and welcome to the Lamb Weston First Quarter Fiscal Year 2025 Earnings Call. Today's call is being recorded. At this time, I'd like to turn the call over to Dexter Congolay. Please go ahead.
Dexter Congolay, Investor Relations, Lamb Weston: Good morning, and thank you for joining us for Lamb Watson's Q1 2025 earnings call. Yesterday, we issued our earnings press release, which is available on our website, lambwatson.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 Warner, our President and Chief Executive Officer and Bernadette Madrieta, our Chief Financial Officer. Tom will provide an overview of the current operating environment and cost reduction actions that we announced yesterday and an update on this year's potato crop.
Bernadette will then provide details on our Q1 results as well as our updated fiscal 2025 outlook. With that, let me now turn the call over to Tom.
Tom Warner, President and Chief Executive Officer, Lamb Weston: Thank you, Dexter. Good morning and thank you for joining our call today. We delivered financial results for the Q1 that were generally in line with our expectations. Sales came in above our target driven by better than expected volume and price mix. Our volume performance reflected our effort to recapture customer share and win new business, solid execution in many of our key international markets and only a slight improvement in restaurant traffic trends.
Overall pricemix increased as inflation driven pricing actions in our key international markets more than offset investments in price in North America. Adjusted EBITDA for the quarter was slightly above our target due to better sales and SG and A performance. However, this is partially offset by higher than anticipated manufacturing costs. While we're encouraged by our Q1 performance relative to our expectations, we continue to expect frozen potato demand and global restaurant traffic to remain challenging through fiscal 2025. According to restaurant industry data providers, during our fiscal Q1, we saw early evidence of U.
S. Restaurant traffic trends improving during the summer months as QSR stepped up promotional activity and as consumers continued to adjust to the cumulative effect of menu price inflation. However, traffic remained negative. Overall, U. S.
Restaurant traffic as well as QSR traffic in the quarter was down 2% versus the prior year. That's a sequential improvement from the down 3% that we observed during our fiscal 2024 Q4. Traffic at QSR chains specializing in hamburger, a highly important channel for fry consumption in our fiscal Q1 was down about 3%. That's an improvement from down more than 4% during our fiscal 2024 Q4. Importantly, traffic trends in QSR hamburger improved sequentially each month of our Q1 as promotional activity increased.
We're obviously pleased with the growth in restaurant traffic, but it's important to note that many of these promotional meal deals have consumers trading down from a medium fry to a small fry. So while we benefit from improving traffic trends, consumers trading down in serving size acts as a partial headwinds for our volumes. Outside the U. S, overall restaurant traffic trends in our key international markets in our Q1 were softer than what we observed in our fiscal 2024 Q4. Restaurant traffic in the UK, our largest market in Europe declined about 3%, which is down sequentially from a decline of about 2%.
In Germany traffic was also down about 3% after only being down slightly in the 4th quarter. Traffic in France and Italy continued to rise, but at a slower rate than the 4th quarter, while traffic in Spain was essentially flat. In Asia, overall restaurant traffic grew in both China and Japan. Unlike the changes in global traffic trends, the fry attachment rates in the U. S.
And our key international markets were largely steady. This resilience of consumers demand for fries as well as their importance to customers' menus are key reasons why we remain confident that the global fry category will return to its historical long term growth rate over time as global traffic rates improve. Given our expectations about traffic and demand trends, we also believe that the supply demand imbalance that's been driven by the decline in traffic will persist through much if not all fiscal 2025. With respect to the bigger customer contracts, the season for competing for these contracts is essentially behind us and the overall outcome was largely as we expected. We had good success in protecting customer share and retaining business with existing large chain restaurant customers.
We also had some success in winning new chain restaurant customer business, most notably in our international segment and we'll begin to realize more meaningful volume associated with these new customers beginning in our fiscal Q3. Pricing associated with contract renewals and customer wins was competitive, but in total was broadly in line with what we expected. With respect to the smaller and regional customers in the U. S, we continue to leverage our direct sales force to acquire new customers and recapture customers that we lost either directly or indirectly from the transition to our new ERP system in the second half of fiscal twenty twenty four. As with the larger chain restaurant contracts, pricing levels needed to regain customer share or when new business have been competitive, but also broadly in line with what we expected.
With respect to our cost structure, as we noted during our previous earnings call, we have been evaluating opportunities to drive down supply chain costs, reduce operating expenses and improve cash flow. Yesterday, we announced a restructuring plan which included a number of key actions. First, we permanently closed our Connell Washington facility, which is one of our older higher cost facilities. Closing this nearly £300,000,000 capacity facility reduces our total capacity in North America by more than 5%. We stopped production at this site yesterday.
2nd, we're temporarily curtailing production lines and schedules across our manufacturing network in North America to focus more production on our more efficient lower cost lines and steadily work down our elevated finished goods inventory levels. And third, we're reshaping future investments to modernize production capabilities. Together these actions will help us leverage recently capacity investments, better manage utilization rates across our manufacturing network and reduce capital expenditures. In addition, we're reducing our global headcount by approximately 4% and eliminating certain job positions that are currently unfilled. This affects team members and positions across our manufacturing, supply chain and commercial organizations in both our North America and international segments as well as in our corporate functions.
Bernadette will provide details about the cost savings that we expect to generate as well as the charges we'll incur in connection with our restructuring plan. These are very tough decisions, but necessary proactive steps in the current operating environment to improve our operating efficiency, competitiveness and financial results. Now to the potato crop, we're harvesting and processing the crops in our growing regions in both North America and Europe. At this time, we believe the crops in the Columbia Basin, Idaho, Alberta and the Midwest are slightly above historical averages. As a reminder, North America, we've agreed to a 3% decrease in the aggregate in contract prices for the 2024 potato crop and we will begin to realize the benefit of these lower potato prices beginning in our fiscal Q3.
With respect to the crop in Europe, a few months ago, we in the market expected that the crop for the later potato varieties in the industry's main growing regions in the Netherlands, Belgium and Northern France and Northern Germany would be well below average since planning was completed late due to poor weather conditions. However, growing conditions were good in August September, which improved the outlook for the crop. We currently believe the European potato crop in the aggregate will be in line with historical averages. Overall, we expect our potato costs in Europe will increase largely reflecting the mid to high single digit price increase associated with our fixed price contracts. We'll provide our final assessment of the potato crops in North America and Europe when we report our Q2 results in early January.
So in summary, we delivered 1st quarter results that were generally in line with our expectations driven by improved volume performance, solid price mix and strict management of operating costs. While U. S. Restaurant traffic trends have improved modestly in recent months, they remain negative and we continue to take a cautious view of frozen potato demand and the consumer. We've announced a restructuring plan to improve our operating efficiency, protect our bottom line and improve cash flow during this challenging operating environment.
And finally, at this time, we believe the potato crop in North America will be slightly above average and that the European crop will likely be in line with historical averages. Let me now turn the call over to Bernadette for a more detailed discussion of our Q1 results, our restructuring plan and our updated fiscal 2025 outlook.
Bernadette Madrieta, Chief Financial Officer, Lamb Weston: Thanks, Tom, and good morning, everyone. As Tom noted, our financial results were generally in line with our expectations. Specifically, while sales declined 1% compared with the year ago quarter, the decline was less than the high single digits we expected due to better than projected volume and price mix. Compared with the Q1 a year ago, volume declined 3% and largely reflected the carryover effects of customer share losses in North America, the exit of certain lower priced and lower margin business in Europe last year and soft restaurant traffic trends in the U. S.
To a lesser extent, the previously announced voluntary product withdrawal that began affecting our sales in Q4 of fiscal 2024 also contributed to the Q1 decline. Volume growth in our key international markets partially offset the overall decline. Price mix increased 2% compared with the prior year due to the benefit of inflation driven pricing actions in Europe as well as the carryover benefit of pricing actions we took last year in North America. Unfavorable channel and product mix as well as targeted investments in price and trade tempered the increase in price mix. Moving on from sales, our adjusted gross profit declined $137,000,000 to $353,000,000 due primarily to 3 factors.
1st, about $39,000,000 of the decline was due to the voluntary product withdrawal. It was higher than the $20,000,000 to $30,000,000 range that we anticipated in the quarter, primarily due to higher than expected costs to dispose the product. 2nd, more than $15,000,000 of the adjusted gross profit decline was due to higher depreciation expense that's largely related to our capacity expansions in China and Idaho that were completed last fiscal year. The rest of the decline was primarily driven by higher manufacturing cost per pound, which reflects input cost inflation as well as inefficiencies associated with lower factory utilization rates. To a lesser extent, lower sales volumes and higher warehousing costs also contributed to the decline.
Together, these factors more than offset the net benefit from pricing actions. Our gross margin in the quarter was nearly 21.5%, which was about 100 to 150 basis points below our target of 22% to 23%. Of the shortfall, nearly 100 basis points was related to the greater than expected impact of the voluntary product withdrawal. The remainder largely reflected higher than expected manufacturing cost per pound. Adjusted SG and A increased $6,000,000 to $149,000,000 due to an incremental $6,000,000 of non cash amortization related to our new ERP system that went live in the Q3 of fiscal 2024.
Aggressive actions to reduce spending offset inflation and investments in our information technology infrastructure. All of this led to adjusted EBITDA of $290,000,000 While that's better than what we guided, it was down about $123,000,000 versus the prior year quarter, largely due to higher manufacturing costs per pound and the impact of the voluntary product withdrawal, which more than offset the net benefit from pricing actions. Moving to our segments. Sales in our North America segment, which includes sales to customers in all channels in the U. S, Canada and Mexico, declined 3% versus the prior year quarter.
Volume declined 4% and was largely driven by the carryover impact of smaller and regional customer share losses in food away from home channels as well as declining restaurant traffic in the U. S. The volume decline was partially offset by growth in retail channels. Price mix increased 1%, reflecting the carryover benefit of inflation driven pricing actions for contracts with large and regional chain restaurant customers taken in fiscal 2024, which was partially offset by unfavorable channel and product mix and to a lesser extent targeted investments in price. North America segment adjusted EBITDA declined $103,000,000 to $276,000,000 and included an approximately $21,000,000 charge related to the voluntary product withdrawal.
The remaining decline largely reflects a combination of higher manufacturing cost per pound, unfavorable mix and investments in price and trade, which combined more than offset the carryover benefit of prior year pricing actions. Sales in our international segment, which includes sales to customers in all channels outside of North America, increased 4% versus the prior year quarter. Price mix increased 5%, largely reflecting pricing actions announced this year to counter input cost inflation. Volume declined 1% due to our strategic decision to exit certain lower priced and lower margin business in EMEA in early fiscal 2024 and to a lesser extent the voluntary product withdrawal. These business exits in EMEA will continue to be a headwind during the Q2 of fiscal 2025.
Growth in key international markets outside of EMEA tempered the overall volume decline. International segment adjusted EBITDA declined $39,000,000 to $51,000,000 About $18,000,000 or about half of that decline related to the voluntary product withdrawal. The remainder was largely driven by higher manufacturing cost per pound, which was partially offset by the benefit of inflation driven pricing actions. Moving to our liquidity position and cash flow. We continue to maintain a solid balance sheet with ample liquidity.
We ended the Q1 with about $120,000,000 of cash and $1,000,000,000 available under our global revolving credit facility. Our net debt was about $3,900,000,000 which puts our leverage ratio at 3 times. Last week, we increased our available liquidity $275,000,000 by entering into a new $500,000,000 term loan. We used the proceeds from the loan to pay off an existing $225,000,000 term loan and $275,000,000 of borrowings under our global revolving credit facility. As a result, it had no impact on our total debt, increased our available liquidity and our leverage ratio was not affected.
In the Q1, we generated $330,000,000 of cash from operations, which despite a decline in earnings is about the same amount we generated last year due to favorable changes in working capital. We expect further working capital improvements during the balance of the year as we execute our restructuring plan. Net capital expenditures were about $335,000,000 as we finalized spending for our Idaho capacity expansion and continued construction of our expansion projects in the Netherlands and Argentina. We expect our capital spending in the Q1 will be our highest quarter for the year as it accounted for almost half of our updated annual capital spending target. During the quarter, we returned more than $133,000,000 of cash to shareholders, including $52,000,000 in dividends.
We spent $82,000,000 to repurchase more than 1,400,000 shares at an average price of just over $58 per share. Before discussing our outlook, let me first provide additional details on the restructuring plan we announced yesterday. As Tom noted, these were hard, but necessary decisions to adjust to the current business trends. These actions will help us manage asset utilization rates, leverage our more efficient lower cost production assets and reduce costs and expenses. The actions include a 4% reduction in our global headcount and the elimination of certain unfilled job positions.
We do not take this lightly and we've carefully considered the impact on our Lamb Weston family. We currently estimate that these actions will generate total savings of approximately $55,000,000 in fiscal 2025 with about 1 third benefiting cost of sales and 2 thirds benefiting SG and A expenses. We've incorporated these savings in our updated fiscal 2025 outlook. We expect further benefits in fiscal 2026, with estimated annualized savings of about $85,000,000 We expect to record a $200,000,000 to $250,000,000 pre tax charge associated with the restructuring, most of which we expect to record in the Q2. About 20% of the charge is non cash and primarily reflects the accelerated depreciation of assets at our Connell facility.
The remaining 80% are cash charges comprised of cost of contracted raw potatoes that will not be used due to the production line curtailment. The teardown and other cleanup costs associated with permanently closing the Connell production facility, severance and other employee related costs associated with the reduction in our workforce and other miscellaneous restructuring costs. Additionally, we've scrutinized every project and every dollar of capital. As a result, we now expect capital expenditures in fiscal 2025 of approximately $750,000,000 which is down $100,000,000 from our plan entering the year. A significant portion of the reduction reflects deferring the build and implementation of the next phase of our ERP system, which once built will be deployed first in our manufacturing plants in North America.
The remaining decline is largely due to deferring or canceling modernization projects due to the current operating environment. While the next phase of the ERP build and implementation has been deferred, we are committed to the benefits that an integrated system will deliver, but are prioritizing the investments needed to complete our strategic projects in the Netherlands and Argentina. As it relates to next year's capital expenditures, we're currently targeting a notable decrease in spend as we expect our strategic capacity expansion projects will be completed by the end of this fiscal year. In fiscal 2026, we expect expenditures for base capital and modernization efforts will be in line with our annual depreciation and amortization expense. In addition, we expect to spend approximately $150,000,000 for environmental capital projects at our manufacturing facilities.
Our manufacturing processes involve water intake and waste handling and disposal activities, which are subject to a variety of environmental laws and regulations along with the requirements of permits issued by governmental authorities. To comply with these regulations, we expect the laws in the states in which we operate will require us to spend approximately $500,000,000 over the next 5 years. The estimate to comply may vary based on changes in regulations and other factors. We're evaluating options to lessen these expenditures, including the potential for government incentives. And lastly, fiscal 2026 capital expenditures may include costs to restart the next phase of our ERP build.
Consistent with past practice, we'll provide a specific capital spending target for next year when we provide our fiscal 2026 outlook in late July. Now turning to our updated fiscal 2025 outlook. We're continuing to target a net sales range of $6,600,000,000 to $6,800,000,000 on a constant currency basis or growth of 2% to 5% with volume driving our sales growth. For earnings, we expect to deliver at the low end of our target adjusted EBITDA range of $1,380,000,000 to $1,480,000,000 We're targeting the low end of the range due to higher manufacturing costs per pound, which relates to fixed cost deleveraging related to the temporarily curtailed lines in our plants, as well as less favorable customer and product mix. These factors will put additional pressure on our gross margins.
We'll look to offset much of this with the estimated $55,000,000 of manufacturing, supply chain and SG and A savings that we expect to generate from our restructuring plan, as well as efforts to aggressively manage costs across the business. Other updates to our financial targets include reducing our adjusted SG and A target to between $680,000,000 $690,000,000 from our previous range of $740,000,000 to $750,000,000 increasing our interest expense estimate by $5,000,000 to approximately $185,000,000 to account for higher average debt balances during the year and increasing our estimated full year effective tax rate to approximately 25% from approximately 24% to reflect a higher proportion of income from our international segment as well as other discrete items. In addition, since we're targeting the lower end of our adjusted EBITDA range and since we've updated our estimates for interest expense and our effective tax rate, we reduced our adjusted diluted earnings per share target range to $4.15 to $4.35 So in summary, we're responding to the current challenging environment by adjusting our spending to protect profitability and ensure positive free cash flow, while continuing to invest in and execute our strategy. Let me now turn it over to Tom for some closing comments.
Tom Warner, President and Chief Executive Officer, Lamb Weston: Thanks, Bernadette. I want to thank our Lam Watson team for their efforts to deliver our Q1 results and for focusing on executing our near term priorities to reinvigorate growth, improve customer share, drive operating efficiencies and aggressively manage costs. Our team will also continue to focus on our long term strategies during this challenging environment. So when demand growth returns to historical levels, we're better positioned to continue to support our customers and create value for our stakeholders. Thank you for joining us today and now we're ready to take your questions.
Conference Operator: Thank We'll go first to Andrew Lazar with Barclays (LON:BARC).
Andrew Lazar, Analyst, Barclays: Great. Good morning, everybody.
Bernadette Madrieta, Chief Financial Officer, Lamb Weston: Good morning.
Andrew Lazar, Analyst, Barclays: Tom, I guess my first question is around pricing. I think you had originally said you expected price mix to be down low to mid single digit in the Q1 and was positive. And I guess specifically really in North America, it was also positive, as you mentioned. And I get the impact from carryover pricing in North America from last year, but presumably you knew that was coming. So I'm trying to get a sense of what was better on pricing in North America.
And is it that some of the trade investments and such that you needed to make to retain customers and some of these large customer negotiations were maybe more favorable than you might have expected? And obviously, the reason I ask is because, of course, the supply demand imbalance has investors more worried about the fate of pricing and what's been obviously historically a very rational sort of environment. So that's my first question.
Tom Warner, President and Chief Executive Officer, Lamb Weston: Yes, Andrew. So the overall, the pricing contracting season was in line with what we expected. We had a better mix and we had some carryover from last year, so that certainly played into it. But the pricing environment that we experienced was in line with what we expected. So it's really a lot of it, some of it's mix in the Q1 in terms of overall sales pricing.
And so it's the encouraging thing to me is we've kind of stabilized the environment going forward. We've got through the contracting season. It was in line with what we expected coming into the contracting season based on the supply demand dynamics we're operating in right now. So I feel good about where we're at. I feel good about how we ended up the contracting season and we're I think we're in a really good position.
Andrew Lazar, Analyst, Barclays: Okay. Thank you for that. And then you generally have good visibility to your competitive set and sort of industry utilization levels. And I guess I'm curious if you've heard of or seen other North America players thinking about or taking similar sort of capacity reduction moves or if utilization of competitors is already much higher than what you're seeing at Lamb Weston because of some of your specific sort of challenges. Really trying to get a sense of how quickly some of these potential reductions in the industry can start to actually affect in a positive way the supply demand imbalance knowing that restaurant traffic trends will likely continue to be weak for some time?
Thank you.
Tom Warner, President and Chief Executive Officer, Lamb Weston: Yes, great question, Andrew. I think we made some really tough decisions here in the last couple of days based on the operating environment we're in with restaurant traffic being challenged and we think it's going to continue to be challenged for the rest of this fiscal year. So we're making decisions to manage Lamb Weston. And what the competitive set does, they're going to manage their business, how they want to manage it. I have no, insight into what they may or may not do.
So, but the best interest of what we do to manage and make decisions is to manage this company. And we'll continue to do that. I think the question that everybody's we're going to get asked and everybody's been asking is there's been a lot of capacity announcements. I think people are going to rethink some of those additions based on the environment and may pause them, but it remains to be seen, but time will tell as we work through the near term environment based on what we're all dealing with around the globe.
Andrew Lazar, Analyst, Barclays: Thanks so much.
Peter Galbo, Analyst, Bank of America (NYSE:BAC): Yes.
Conference Operator: We'll take our next question from Ken Goldman with JPMorgan (NYSE:JPM).
Ken Goldman, Analyst, JPMorgan: Hi, thank you. I wanted to ask a little bit about the commentary about the $500,000,000 that might be spent for environmental improvements in your plants. Can you walk us through a little bit more where that's coming from? What the timeline is on that? And maybe how you might be able to mitigate that a little bit?
And where would that might really show up in your financial statements as well?
Bernadette Madrieta, Chief Financial Officer, Lamb Weston: Yes. Good morning, Ken. As it relates to the $500,000,000 again, this is related to primarily wastewater capital investments that will be needed at our manufacturing plants in order to continue to run them at current capacity levels. So as we look at the timing of that, that's going to vary depending on different regulations and we'll provide more of an update on that as we give our specific guidance. We wanted to though frame it up in terms of a large capital expenditure over the next 5 years.
And we will certainly be looking to other regulatory bodies, whether it be state, federal, etcetera, in terms of whether or not there's opportunities for any government incentives to lessen that. But early in that process and we'll provide updates as we move throughout.
Ken Goldman, Analyst, JPMorgan: Okay. Thank you for that. And then I certainly understand the decision to sort of temporarily delay the rest of the ERP implementation, giving all the moving pieces in your business right now. Can you just walk us through a little bit sort of what your I don't want to use the word sacrificing, but some of the choices that you've made in delaying those plans, any impact to some of your medium term financial targets as a result, just given that the ERP implementation longer term is done with some positive benefits in mind as well?
Bernadette Madrieta, Chief Financial Officer, Lamb Weston: Yes. So as far as the ERP timing of the implementation, after the last implementation, we paused work on future releases as we focused on the business and ensuring that we had stabilization. So in terms of timing of where we are in the process, it was an opportune time to pause that at that time. It does delay the benefits that we'll be able to obtain from the ERP, but we're confident that once with the capital spending and our major expansions occurring and being complete by the end of this year, that we'll be able to restart that work and get those benefits at that time. As it relates to future guidance and the opportunity for that delay to affect that, we don't see any major impact at this time.
Ken Goldman, Analyst, JPMorgan: Great. Thanks so much.
Bernadette Madrieta, Chief Financial Officer, Lamb Weston: You bet.
Conference Operator: We'll take our next question from Adam Samuelson with Goldman Sachs (NYSE:GS).
Adam Samuelson, Analyst, Goldman Sachs: Yes. Thank you. Good morning, everyone.
Bernadette Madrieta, Chief Financial Officer, Lamb Weston: Good morning.
Adam Samuelson, Analyst, Goldman Sachs: Good morning. I wanted to dig in a little bit just on the updated gross margin expectation for the year. Clearly, part of it is related to the product recall in the Q1 and that being a larger item than you thought a couple of months ago. But you also alluded to lower higher manufacturing costs on a per pound basis given the production curtailments. I was hoping you can maybe just put a little bit more context on the magnitude of those as we think about margins, any differences between the North America and international operations to consider?
And how should we given the restructuring and timing of the closures, how do is there any impact to the phasing of margins and earnings over the balance of the year that would differ from historic seasonality?
Bernadette Madrieta, Chief Financial Officer, Lamb Weston: Yes. Great question, Adam. As it relates to the higher manufacturing costs, as I explained, a lot of that is attributable to the fixed cost deleveraging from the idle lines that we do have in the plants. And we're also seeing less favorable channel mix within our segments. We are looking to offset a lot of that incremental costs with the $55,000,000 of savings that we discussed.
And another point that I just want to make relates to the modernization of our assets over time, which is something that we've been investing in. And as we continue to modernize as we have been at American Falls, for example, we have that lower cost manufacturing footprint that we don't necessarily have at some of these older plants. And that ensures with that modernization that we have more flexibility because not every plant is made the same. And so that's the reason why you'll see some of the decisions that we've made to idle capacity at different plants and it's based on what those plants can make from a product perspective. So as we move throughout this year, our gross margin will be impacted because of that fixed cost deleveraging.
But as additional volume gets brought back on and we pull those lines back up, we're going to see that improvement.
Adam Samuelson, Analyst, Goldman Sachs: Okay. And then just as I think about some of the key items in terms of the cost saving plans and updated CapEx, I mean, I'm just trying to think about some of the early items that you're laying out as we think about 2026. Just to be clear, you alluded to an $85,000,000 cost saving target in 2026. Is that incremental to the $50,000,000 this year or that's total, so it's a year on year $35,000,000 benefit? Just on the total CapEx piece that you alluded to Bernadette, you said base CapEx equal to G and A, which presuming you're saying $375,000,000 the right go forward rate or it steps up more because Netherlands and Argentina start depreciating plus the environmental CapEx, which for next year you said was $150,000,000 to make sure we're all talking about the same numbers?
Bernadette Madrieta, Chief Financial Officer, Lamb Weston: Yes. So a couple of things there. First, as it relates to the savings next year, the $85,000,000 we'll see an incremental $30,000,000 next year because it's additive to the $55,000,000 we're seeing this year. As it relates to D and A, it will be closer to $400,000,000 which will include the additional D and A related to the new plants that we bring online. And then there was another question in there.
Did I miss it?
Adam Samuelson, Analyst, Goldman Sachs: Let's see. Well, so effectively you're saying CapEx next year in the range of $550,000,000 plus or minus.
Bernadette Madrieta, Chief Financial Officer, Lamb Weston: That's right.
Adam Samuelson, Analyst, Goldman Sachs: That's right. Including $150,000,000 of environmental.
Bernadette Madrieta, Chief Financial Officer, Lamb Weston: Okay. All right.
Adam Samuelson, Analyst, Goldman Sachs: That's very helpful.
Bernadette Madrieta, Chief Financial Officer, Lamb Weston: The only other thing I want to say, I did also mention that there would be additional expenditures, if and when we begin the next phase of the ERP on top of the phase 550.
Adam Samuelson, Analyst, Goldman Sachs: Okay. That's helpful. I will pass it on. Thank you.
Carla Casella, Analyst, JPMorgan: Thank you.
Conference Operator: We'll take our next question from Peter Galbo with Bank of America.
Peter Galbo, Analyst, Bank of America: Hey guys, good morning. Thank you for all the detail and for taking the questions. I want to actually go back to Adam's question just on the gross margin impact of idling lines and kind of test the other side of the argument. So in theory, right, if those lines don't get pulled back up next year, let's just say, does that, I mean, structurally leave the margins lower? I mean, if the demand environment doesn't improve and those lines stay down, do we stay in a margin environment that looks more like the second through Q4 of this year simply because that fixed cost deleverage doesn't go away?
Or do you have potential in there to further mitigate fixed cost deleverage outside of the incremental $30,000,000 of cost savings for next year?
Tom Warner, President and Chief Executive Officer, Lamb Weston: Yes. So, Peter, the actions we've taken is to address the operating environment we're in right now. And certainly what Bernadette just said, it's going how she talked about it in terms of gross margin impact, that's going to persist in the near term. However, we believe in restaurant traffic will rebound and the category will return to growth, so to speak. And so it's important as we make these decisions with which are challenging to make, but we're also going we're also making these decisions looking at the future of the growth of the category.
We've been modernizing our footprint over the past several years in terms of the capital we put in this business. And so I view this as a short term issue and we got to get through a period of time and see what restaurant traffic does. We've seen trends improve in the Q1 as we said in our comments sequentially although they're still down, but we're seeing some traction. So this is a short term management decision, but the great thing I am confident in is that with our new assets coming online in China and the Netherlands and American Falls and Argentina coming up, we've modernized our footprint. We're well positioned when the category rebounds that will be will come out of this as strong as we as ever.
Peter Galbo, Analyst, Bank of America: Okay. Thanks for that, Tom. And then Bernadette, maybe just a clarification. On the SG and A reduction, I think it's like $60,000,000 at the midpoint. I think you said 2 thirds of the $55,000,000 from cost saving goes to SG and A.
So that doesn't make up the whole bucket. Just what's the rest of the reduction? Is it compensation expense? Like how should we think about that?
Bernadette Madrieta, Chief Financial Officer, Lamb Weston: The rest of the reduction in SG and A?
Peter Galbo, Analyst, Bank of America: In SG and A guidance, yes.
Bernadette Madrieta, Chief Financial Officer, Lamb Weston: Yes. A lot of it's people related costs. Got it. Thank you.
Conference Operator: We'll take our next question from Tom Palmer with Citi.
Tom Palmer, Analyst, Citi: Good morning and thanks for the question. I just wanted to follow-up on the composition and the sales growth. A quarter ago, I think the expectation was for flattish price mix for the year and then growth coming from volume. Is this still the expectation or are there any shifts between these two items?
Bernadette Madrieta, Chief Financial Officer, Lamb Weston: Yes. Thanks for the question, Tom. That is still the expectation for the remainder of the year is for this to be driven by volume.
Tom Palmer, Analyst, Citi: Okay. Thank you. And I guess just on that, I wanted to kind of understand the discussion on fixed cost deleverage. So it sounds like the volume outlook for the year is little changed. And so kind of what's being cited is this added margin pressure is closing the lines.
I would think that closing lines ultimately has benefits for profitability. So I guess why the added overhang and again it sounds like the fixed cost deleverage is not that big of an incremental factor if the volume outlook is unchanged.
Bernadette Madrieta, Chief Financial Officer, Lamb Weston: Yes. So the permanent capacity curtailment at Connell, that is a benefit. The temporarily curtailed lines throughout our footprint, we have the same fixed costs that are being allocated over fewer pounds, if you will. And so that's where the deleveraging is occurring. We are in the process of also managing down our inventories.
We have a very high inventory level. And so we take in the combination running less so that we can get our inventories into a better place as we end this fiscal year.
Tom Palmer, Analyst, Citi: Okay. Thank you. I guess I just struggle with why this wasn't factored in a quarter ago if the volume outlook is so little changed, but we can
Adam Samuelson, Analyst, Goldman Sachs: talk about it later. Thank you.
Conference Operator: We'll take our next question from Robert Moskow with T. B. Cowen.
Dexter Congolay, Investor Relations, Lamb Weston0: Thanks for the question. Two things. Is it fair to say that pricing goes negative for the rest of the year in North America? Because I think you still have to give incentives to food service customers to get them to come back after the ERP disruption. So can you give us an update on how that's going?
Have you started that yet or is there a lot more acceleration to do and a follow-up after?
Tom Warner, President and Chief Executive Officer, Lamb Weston: Yes. So our current pricing environment again is in line with what we anticipated for this year. And for the kind of how we're working the foodservice channel, so to speak, it's as we do every year, it's on account by account basis. So we're managing it with great detail in terms of customer interaction. The larger contracted pricing discussions like I said are largely behind us.
So as we move forward, it's really going to be on an account by account basis in the market and in the foodservice channel and the teams managing it. We have a high level visibility to some of the actions we're taking, but it's going to continue to play out over the coming months quarters.
Bernadette Madrieta, Chief Financial Officer, Lamb Weston: Yes. And if I could just add, Tom, I just want to emphasize that the overall pricing environment is competitive, but it's been disciplined. And as Tom said, our pricing, investment for the year continues to be on track. You will see greater pricing investment though during the balance of the year relative to the Q1. And so we will see some negative price mix.
Dexter Congolay, Investor Relations, Lamb Weston0: Okay. So it's going to step up.
Dexter Congolay, Investor Relations, Lamb Weston: As we expected.
Bernadette Madrieta, Chief Financial Officer, Lamb Weston: Yes, as we expected though. Absolutely.
Dexter Congolay, Investor Relations, Lamb Weston0: That's fine. And my follow-up is, I know you don't like these hypotheticals, but like a year from now, let's say demand is unchanged or just not getting any worse and you've made all these capacity reductions and they're still in place. Is that sufficient to get the industry supply demand back in balance? Is that alone enough? And then where do you think utilization would be in that scenario compared to where it is now?
Tom Warner, President and Chief Executive Officer, Lamb Weston: Yes. So I'm not going to get into hypotheticals, but I'll go back to some of the comments I made earlier, Robert, is the industry in total, we're all feeling the same thing. And so we made our decisions based on what's best for the company in terms of how we're taking actions. And I think it remains to be seen overall what the industry will do. But again, there's capacity announcements that may be paused.
But it's again, it's we're just we're in a trend time watch in terms of restaurant traffic. And as we move through the next several quarters, we'll be and we are closely monitoring restaurant traffic. That's going to determine not only for Lamb Weston, but for the industry, but potentially additional actions that we got to take in terms of getting this thing balanced out in supply demand.
Dexter Congolay, Investor Relations, Lamb Weston0: Okay. All right. Well, thank you.
Tom Palmer, Analyst, Citi: Yes.
Conference Operator: We'll take our next question from Rob Dickerson with Jefferies.
Dexter Congolay, Investor Relations, Lamb Weston1: Great. Thanks so much. So I guess just kind of first question is just on some of the share loss, right, clearly coming out of the BRP (TSX:DOO) (NASDAQ:DOOO) disruption in Q3. It seems like maybe you got a little bit better in Q4, maybe got a little bit better in Q1, but at the same time, it sounds like a fair amount of the volume pressure in North America, at least, in Q1 was still from the share loss. And then secondly, as we think through kind of the rest of the year, especially the back half as you lap that, there is kind of this implied nice lift, right, that should come as you get that share back.
So I'm just curious if you can provide like any color as to maybe how the share regain progression might be coming?
Adam Samuelson, Analyst, Goldman Sachs: Yes.
Bernadette Madrieta, Chief Financial Officer, Lamb Weston: So,
Tom Warner, President and Chief Executive Officer, Lamb Weston: probably we are seeing business wins and we will start seeing that in Q3, Q4 of this fiscal year. And so those are known things. The thing that kind of clouds it up is the base business with restaurant traffic being challenged, volumes are down on some of our key accounts across the board. So while we're confident in the back half in terms of the business we're bringing in, we're closely monitoring what's happening with our base accounts. And so we're in the market, we're winning customers back, but it's going to be a little murky based on what's going on with restaurant traffic right now in the back half of the year.
Dexter Congolay, Investor Relations, Lamb Weston1: Yes. Okay. Okay. Fair enough. And then just another kind of quick simple one for me is just the plant closure, I'm not sure if you can quantify maybe just kind of as a percent of your total global North America capacity, kind of what that estimate is?
That's it. Thanks.
Bernadette Madrieta, Chief Financial Officer, Lamb Weston: Yes. That's about 5% of our capacity. In North America, £300,000,000
Dexter Congolay, Investor Relations, Lamb Weston1: Super, perfect. Thank you so much.
Conference Operator: We'll take our next question from Mark Torrente with Wells Fargo (NYSE:WFC) Securities.
Adam Samuelson, Analyst, Goldman Sachs: Hey, good morning. Thank you for the questions. Just building on the last one on the Conoco facility, any context around relative manufacturing costs versus other newer facilities? And I appreciate you sizing the capacity there. And then also any other color on sizing and timeline
Peter Galbo, Analyst, Bank of America: for the plant curtailments?
Tom Warner, President and Chief Executive Officer, Lamb Weston: Yes. So just in terms of the Connell decision, it's a difficult decision. And it's impactful to that community, people, all those things. And we didn't take any of that lightly. But the decision parameters are we look at our footprint, look at production capabilities, cost to produce, we go through the litany of things you go through when you make these decisions and potential future capital expenditures required in the facilities we have right now currently.
And then you just go through the decision metrics and that was what drove specifically the decision to close Connell. And it's again, it's difficult, it's hard, you're impacting a lot of things. But the long term footprint of the company, it was the right decision to do.
Adam Samuelson, Analyst, Goldman Sachs: Okay. Thank you. And then you also called out some strong volume trends internationally outside of Europe. Maybe some additional color there, key regions and how much is new international production enabling this?
Bernadette Madrieta, Chief Financial Officer, Lamb Weston: Yes. No, as it relates to our international business, we are seeing some good wins, particularly in the Asia Pacific region. That's where we're seeing a large pickup there also in Latin America, which is positive in light of our upcoming plant that will be coming online in the spring of next year. So that's driving a lot of it. As Tom was alluding to, customer wins, a lot of our customer wins have been in the international segment and we're going to see much of that begin to hit in Q3.
Adam Samuelson, Analyst, Goldman Sachs: Great. Thank you.
Bernadette Madrieta, Chief Financial Officer, Lamb Weston: You bet.
Conference Operator: We'll take our next question from Matt Smith with Stifel.
Adam Samuelson, Analyst, Goldman Sachs: Hi, good morning. I wanted to come back to the discussion around pricing and what you're seeing in the business. It sounds like the amount so far the investment in pricing has been relatively in line with your expectations. But in part of the explanation for taking EBITDA to the low end, you referenced higher price investments and or higher investments in price and trade than originally anticipated. So can you help me balance those two dynamics against each other?
Are you seeing perhaps a bit more price investment in the foodservice business and that's still to come and that's the difference?
Bernadette Madrieta, Chief Financial Officer, Lamb Weston: Yes. Matt, as it relates to our pricing investments, it's fair to say that our pricing is coming in line with what we expected for the year. Most of it's on a cost basis as it was relating to our gross profit. In Q1, you did see pricing was up, I think positive 2%. But much of that investment, as I think Tom may have alluded to, is going to be heading beginning in
Adam Samuelson, Analyst, Goldman Sachs: Q2. Thank you for that. I'll leave it there.
Bernadette Madrieta, Chief Financial Officer, Lamb Weston: Thank you.
Conference Operator: We'll take our next question from Carla Casella with JPMorgan.
Carla Casella, Analyst, JPMorgan: Hi. I'm wondering on the $200,000,000 to $250,000,000 of charges, can you bucket that a little bit in terms of the different items that you talked about? And then also is the 20% non cash, is that mostly the potato inventory write down or is another piece of it that's non cash versus cash?
Bernadette Madrieta, Chief Financial Officer, Lamb Weston: Yes. So the 20% that's non cash, that's mainly going to be related to the accelerated depreciation on the Connell facility as it related to the balance of the value that we had placed there. The remainder is largely going to be attributable to cash expenditures related to contracted potatoes that we will be paying for, but will not need, related to the curtailments in Connell and then the other production curtailments. That's about 60% of the cash cost.
Carla Casella, Analyst, JPMorgan: Okay, great. And then given the lower volumes this year and that potato contracts that you won't that you're paying for, you haven't used, will that change any of your negotiations with your suppliers for next year or your contract pricing for next year?
Tom Warner, President and Chief Executive Officer, Lamb Weston: No. So we'll as we do every year, we'll as we go through the process, we'll provide insights at the appropriate time that we do every year, which is typically our April call of July. So we're on the front end of those negotiations, but we will not expect any changes in terms of how we go through the process at all based on this. It may change our needs, but that's about it.
Carla Casella, Analyst, JPMorgan: Okay. But I guess my thought is if the volumes are lower, would you see material step up in the pricing? Are you getting a lot of volume base to discounts that you may lose?
Tom Warner, President and Chief Executive Officer, Lamb Weston: No, I'm not going to comment on that. We typically we're right in the middle of those negotiations. So I'm not going to comment and talk about the specifics of how all that works.
Carla Casella, Analyst, JPMorgan: Okay. And then just one question on leverage target, any change to your current leverage target?
Bernadette Madrieta, Chief Financial Officer, Lamb Weston: No changes.
Carla Casella, Analyst, JPMorgan: So that's at 3.5 times?
Bernadette Madrieta, Chief Financial Officer, Lamb Weston: That's correct. And I think as I shared, we're at 3 times right now, comfortable with that as it provides optionality.
Carla Casella, Analyst, JPMorgan: Okay. That's great. Thank you so much.
Bernadette Madrieta, Chief Financial Officer, Lamb Weston: Thank you.
Conference Operator: That will conclude our question and answer session. At this time, I'd like to turn the call back over to Mr. Kong Boy for any additional or closing remarks.
Dexter Congolay, Investor Relations, Lamb Weston: Thanks for joining the call today. As usual, if you want to set up a follow-up call, please e mail me. We can set up a time. Other than that, again, thanks for joining the call and have a good day.
Conference Operator: That will conclude today's call. We appreciate your participation.
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