Good day, and welcome to the Lamb Weston Fourth Quarter and Fiscal Year 2025 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Debbie Hancock, Vice President of Investor Relations. Please go ahead.

Good morning, and thank you for joining us for Lamb Weston's Fourth Quarter and Full Year Fiscal 2025 Earnings Call. I'm Debbie Hancock, Lamb Weston'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 be making forward-looking statements about the company's expected performance that are based on our current expectations. 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 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. Good morning, and thank you for joining us today. I first want to thank our Lamb Weston team around the globe for their hard work and strong execution. Fiscal 2025 was a year of substantial change for Lamb Weston. In addition to me becoming CEO, we recently added significant new and relevant experience to the Board with six new members, including a new Chairman, Bradley Alford, as well as Lawrence Kurzius; Paul Maass; Timothy McLevish; Ruth Kimmelshue and Scott Ostfeld. Management and the new Board have a high sense of urgency and are aligned on capitalizing on the many opportunities we collectively see to drive results in our business. Today's results evidence the momentum we continue to build with customers and the visibility we have in our business as we work to rebuild credibility with investors. We are focused on controlling what we can control and are taking advantage of opportunities to drive results and improve execution through a cost savings program we announced today, along with our customer-centric Focus to Win strategy for long-term success. Successful execution of these plans will help drive improved performance, including free cash flow and long-term returns. To drive further alignment along with sales and adjusted EBITDA, free cash flow and returns on capital have been added to our compensation plans for fiscal 2026. This alignment continues at the Board level, which for 2026, the Board has unanimously elected to receive their compensation in equity in the company. We believe these cumulative actions are readying the organization to further support customers and accelerate our performance when demand returns to growth. Turning to business results. Lamb Weston ended the year with momentum and customer wins and retention, delivering results ahead of our updated expectations for fiscal 2025. The team is executing at…

Thank you, Mike, and good morning, everyone. I want to start by thanking our teams for their hard work in fiscal '25 as we navigated a challenging year. Halfway through the year, we made important changes to adapt to the evolving environment and put our business on a path back to growth. Our fourth quarter results reflect the progress we made throughout the year to address the dynamic and changing environment. We delivered volume growth in the fourth quarter and for the full year, disciplined cost management and a focus on cash flow with significant working capital improvements and lower capital expenditures. Let's begin with our fourth quarter results on Slide 17. Net sales increased 4% compared with the prior year. Volume increased 8%, primarily driven by contract wins across each of our channels and geographic regions and lapping an approximate $22 million negative impact in the prior period from a previously announced voluntary products withdrawal. These gains were partially offset by soft global restaurant traffic trends, which were down low single digits in our largest markets of the U.S. and U.K. Despite lower traffic trends, there are some positive trends in the consumption data. In the U.S., French fries attachment rates continue to remain approximately 2 points higher than pre-pandemic levels. The French fry category grew 1% in the quarter and QSR fry serving sizes also increased 1%. Price/mix declined 4% in the quarter compared to the prior year reflecting efforts to support customers on price and trade in an increasingly competitive environment in both our North America and International segments. Looking at our segments. North America net sales declined 1% compared with the prior year, primarily due to lower net selling prices. Price mix in our North America segment declined 5% due to pricing actions to support our…

Thank you, Bernadette . I'm confident in the direction we are taking in Lamb Weston, and we are making important and significant changes to our business to compete more effectively in today's marketplace. We have organizational alignment to capitalize on the tremendous opportunities in front of us. We will drive performance by focusing on the controllables, but we do so knowing it will provide an even bigger opportunity for us and our customers when restaurant traffic returns to growth, and we will be ready. With that, we're happy to take your questions.

[Operator Instructions] We will go first to Peter Galbo with Bank of America.

Mike and Bernadette, thanks for the questions. Mike, maybe I wanted to start on the EBITDA margin target for the year, I think, is around 17% at the midpoint, and that would kind of be, I think, the lowest, it's been since the company was spun public on a stand-alone basis. So maybe you can just kind of help us understand if you think this is a floor in terms of a margin percentage, and I know you guys probably care about dollars more than percentages, but what the push and pull factors might be over the next couple of years that could push that number either higher or lower from that new kind of 17 base?

Yes, Peter, I appreciate the question. As I think about it, obviously, we're going to be below that normalized range here in fiscal '26. I think despite the fact that our key customers are experiencing headwinds, we're supporting them with price and trade in what's really a competitive environment. We've talked about that in the past. We're also investing in markets and channels that are strategic and where we believe we have the right to win for the long term, and those are going to be longer-term opportunities that we believe will deliver whole EBITDA dollars as you talked about. But I'll tell you, when I think about our category compared to some of the other categories in CPG, where the challenges might be a little bit more structural in nature, we operate in a really attractive category, and you've heard me talk about how it's one of the most ordered items across all generations, French fries. It's one of the most profitable items on restaurant menus and the attachment rate remains high. And so we believe we're going to continue to invest in the business for the long term. And we're also making significant changes around our cost structure, and we've done a lot of work, as we talked about in our prepared remarks over the last several months. And it's shown us where we have some opportunities. And so we're addressing those and with the announced $250 million cost savings program over the next few years. And so I'll tell you, listen, we believe our strategy has us on a path to return to those margin levels, but we'll provide more details once we're further along with our Focus to Win strategy.

Great. That's helpful. And maybe just as a follow-up to both of you, there was a lot of discussion around the improvement in working capital, both in the prepared remarks and in the press release this morning. I guess just, Mike, there's a lot of ways to get there in terms of the working capital improvement, and it looks to be on the inventory side. But maybe just a little bit more detail on what specifically you're planning to do around inventory levels, what that might look like in the supply chain as we contemplate to go forward.

Yes. No, great question around working capital. When you think about our Focus to Win strategy, a big part of it is value creation, and that's across the entire P&L. When I look at the progress we made really in Q4, we improved our inventories and a lot of that had to do with the stronger volumes that we saw coming through the P&L. Keep in mind, for this coming fiscal year and the crop season, we've reduced our acres. And we have higher inventories, and so we're making sure that we work through those inventories in the right ways. I talked a little bit about improving our capabilities as an organization. And one of those capabilities that we are investing behind for the future is around planning and integrated planning from the ag side all the way through to finished goods, and so we're really confident in our ability to improve our working capital over the next couple of years.

We'll go next to Scott Marks with Jefferies.

First one, I wanted to ask about international capacity. You made some comments, I believe that there has been some announced capacity internationally, but that you don't necessarily expect those to get off the ground. So just wondering, one, if I have that correct. And then two, maybe what gives you confidence that some of those projects won't be moving forward?

Yes, I appreciate the question, Scott. I'm not going to speculate on what the capacity will or won't happen, what will or won't be announced. But we do believe that the industry has been pretty rational in the past as it relates to capacity. And through our competitive intelligence, we believe that there's roughly 1 billion to 1.5 billion pounds has been canceled or delayed. I'll also tell you the pace of new announcements has also slowed. And so when we think about our business, we're really taking the steps to control what we can control and ensure that our production lines up with our demand. And the great thing about the position that we're in as we see restaurant traffic return and as our customers start to grow, we're well positioned with available capacity to take advantage of those improved demand signals.

Appreciate the answer. And then secondly, I just wanted to ask about kind of the CapEx guide for the year and maybe go forward, how we should be thinking about it. I think in the presentation, you mentioned that about 3% of sales should be kind of a maintenance CapEx number. And obviously, the guide you gave came in a little bit below what folks were looking for. So just wondering if you can kind of share some thoughts around that and kind of puts and takes and how we should think about that going forward?

You bet. So first, we are reducing the capital intensity as we shift away from our growth investments to modernization and maintenance, as you mentioned. Generally, we would expect about 3% of sales for base capital and 2% for modernization. And then as I mentioned, there's about $100 million we have now that's related to wastewater treatment. So all in, we expect that this $500 million CapEx plan is really something that is going to support Lamb Weston continuing to maintain its assets and the capabilities that we need to drive our strategy forward.

[Operator Instructions] We will move next to Alexia Howard at Bernstein.

So two quick things from me. First of all, can you talk about what went better than expected this quarter and whether any of those trends could persist into fiscal '26.

Yes. The one that comes to mind, Alexia, for Q4 is how we're engaging with our customers. You've heard me talk a lot about the importance of driving customer centricity through our organization, and that starts at the top. And I've been personally out meeting with several of our top customers and talking about where we have opportunities to improve and where we can help support them in their growth into the future, and so we're continuing to do that. The other area, obviously, that we've talked about here is around our Focus to Win strategy and the cost savings program. And obviously, we've been doing a lot of analysis over the last several months, but we've already started to focus in some of those areas to start implementing some of the opportunities that we see, specifically around better execution on the business as well as focusing on our innovation moving forward.

Yes. And Alexia, the only other thing I'd mention is just the really strong volume growth across all of our channels and all of our regions. I think as we mentioned, North America volume was up 4% and International volume up 16%. And as Mike mentioned, that's a big reason we were able to also drive down our inventories at the end of the year.

Very helpful. Can I follow up with a question about the Burger channel. I think you said on a 2-year stack, the traffic in there is still down, I believe, high single digits you mentioned. How much exposure do you have to that channel in North America? Because I'm trying to figure out if there's a risk if GLP-1 weight loss drugs really step up next year with the pill version coming out, could that have a material impact? Or are there ways that you can insulate yourself from that kind of outcome next year?

Yes. Good question. Alexia, when you look at QSR servings or fry servings, 85% or over 80% of fry servings come from the QSR space. Specific to GLP-1s, we don't see a material impact on our business right now. When you look at the retail frozen potato category data, it seems to be in a good spot. Also, when I look at fry menu importance, it remains above pre-pandemic levels. So when consumers are going to restaurants, they're ordering fries at a higher level than they were prior to the pandemic. We continue to engage in industry studies, and we're evaluating the consumer just like all the other companies out there on what the impact of GLP-1s might have. And we have our innovation team aligned to make sure that we adjust and change with any sort of consumer preferences that may come our way.

We'll move next to Steve Powers with Deutsche Bank.

Mike, I think as part of your outlook, you mentioned that it assumes continued positive customer momentum that you've built in the back half of '25. I just wanted a little bit more clarity there. Is that just the carryover of recent business wins? Or are you assuming a degree of incremental wins that may not have yet been finalized. Just trying to understand exactly what that commentary means.

Yes. It's both, Steve. I mean we've had a lot of strong volume, as Bernadette mentioned, in Q4. But the teams are also out there pounding the pavements and talking to our customers and making sure that they understand that Lamb Weston is here to support them for growth. Last call, we talked about a new large QSR chain that's switching to a frozen fry and that transition continues to move forward, and we're continuing to pick up new opportunities as our teams out there engaging with customers in a more profound way.

Okay. Great. And then if I could, the outlook, as you mentioned a couple of times, it doesn't include the impact of any additional tariffs or retaliatory countermeasures, which I think I understand, I guess around that, is there a way maybe to offer a little bit of commentary just around how you're assessing the risks and opportunities associated with potential changes in the current status quo, and what work you're doing just to position yourself against different scenarios that may develop as recent -- as quickly as the next few weeks. So just how you're thinking about that?

Yes. No, I appreciate the question. As you know, just from a business perspective, we're a global business, and so we're supplying most of our customers locally or regionally. As it relates to our cost structure, our biggest area where we will be impacted by tariffs is oil and some of our ingredients. We continue to look at opportunities for us to look at different blends and other things to mitigate exposure. But in total, if the August 1 tariff do come to fruition, the exposure to our financial results and our outlook is about $25 million.

We'll go next to Marc Torrente with Wells Fargo Securities.

First, just on your outlook for sales, expected flattish overall price/mix is expected to be down, implying volumes could be flat to up even. How much of that is driven by the 53rd week falling in Q4? And then with your carryover customer wins and your level of visibility into the year, any more color on expected sales cadence through the year?

Yes. No, thank you for the question. As we look at the first half and the back half of the year, our sales are going to be much more pressured in the first half of the year, primarily due to the carryover pricing from fiscal '25. From a volume perspective, we've got the carryover volume momentum that was included in there. But most of the volume impact is going to be in the 53rd week in the back half of the year that's where you're going to see some of the increase in volume. And to a lesser extent, you will see impact of pricing in the back half of the year with the fiscal '26 pricing actions that relate to the fall contract renewals.

Okay. I appreciate that. And then bridging out the EBITDA a little more. The decrease seems primarily due to lower gross profit pre-cost savings. Could you help with quantifying some of those larger buckets between pricing investment, inflation, fixed cost absorption? Any other color on front half versus back half phasing on those costs? And when could those costs start to stabilize versus being a headwind.

Yes. So the way to look at this year from a margin perspective is we're going to see more of a sequential increase from first to second quarter and then to third quarter. Last year, if you recall, there was a large increase in margins in the third quarter, and that was because we had a lot of raw inventories that we continue to process. This year, we will get back to the more seasonal trend where we will begin harvesting out of field, and we'll see the impact of some of the lower pricing of potatoes as well as the cost benefit of harvesting out of field beginning in the second quarter. So really, the lowest margin impact from an adjusted gross profit perspective will be in the first quarter and then sequentially increasing and then the typical seasonal decline that we see in the fourth quarter. Does that help explain a little bit about how we're expecting the year to play out? Anything else I can cover?

No, that's helpful. Appreciate it.

Great. You bet.

We'll go next to Robert Moskow with TD Cowen.

I appreciate the commentary about what's happening in terms of your -- how you interpret global capacity increases. I was wondering if you could be a little more specific about what's happening in North America. Are there projects going on by your competitors that are still ramping in North America? And if so, I know it's too early to kind of fast forward a year from now, but I think we're all wondering, at what point does your pricing structure kind of stabilize? And I think that what's happening from competitors probably has a lot to do with it. So more specifically, when you said that 1 billion to 1.5 billion pounds of projects have been delayed, was any of that in North America as well?

Yes. To answer the last part of your question, Rob, that 1 billion to 1.5 billion, none of that was in North America. Keep in mind, there are some projects that are still being finalized. Those were -- decisions on those projects were made a couple of years or so ago, so they're just in the final stages. But majority of the new capacity that has been announced and coming online is overseas and international markets. A large portion of that is in Europe as well as some of the other developing markets that we talked about. I think the important thing to note is that not all capacity is created equal. And so as I talked about in the prepared remarks, it depends on the quality of raw. It depends on the capabilities in those facilities on the types of opportunities that these manufacturers can go after. And so again, like I said, the pace of new announcements has definitely slowed over the last quarter.

Yes. And the only other thing I'd add to that is that our strategy, as Mike talked about it today, really is positioning us to gain share and lean into those premium segments of the market. And to Mike's point, not all capacity is created equal. So you'll see a lot from us in that respect as it relates to carrying out our strategy as we move forward.

We will go next to Carla Casella with JPMorgan.

Just wanted to ask you, your leverage target, is it still about 3.5x to 4x range. And do you see taking leverage up to that level? Or is that more just the level in case you see the right opportunity in terms of M&A?

Carla, thanks for the question. Yes, we do continue to target a ratio of about 3.5x, and we'll reduce debt as warranted to make sure we maintain this level.

Carla, I was just going to say the other thing for us is we also are open and then we'll entertain M&A or other joint venture partnerships in the future.

Okay. That's great. I mean just on that -- I was just going to follow-up actually on that note. Are there -- what are you seeing in terms of opportunities? I know you had been looking to more international M&A and buying in some of the regions. Is there any more opportunity for those kind of easier businesses you already know type M&A or anything more off the board you would look at?

No. We're continuing to focus on the potato industry, and we'll continue to look at M&A globally as long as it's in the right markets with the right capabilities that support our Focus to Win strategy. And so we'll continue to keep our options open. And like we said in the past, we'll look at M&A. We'll look at joint venture partnerships and other ways to grow our business around the globe.

We'll go next to Max Gumport with BNP Paribas.

First, with regards to your strategic framework in determining the geographies that you want to focus on, could you give a bit more color on what your plan might be for geographies, where you don't believe if you have a competitive advantage or you don't see strong growth potential? And specifically, how would you view Europe with regard to setting into this framework?

Yes, I appreciate the question. I'm not going to give details around those geographies right now. Obviously, we've done a lot of work over the last several months. And for competitive reasons, I'm not going to share the details of what those might look like. But I know that as we get into those plans a little bit further on, we'll update the investment community on those decisions as they move forward.

Okay. And then the decision to remove noncash stock-based compensation as an expense with regard to your adjusted metrics, I mean it seems to me a bit like a step backwards as an accounting practice. So I was hoping to get a sense for the motivation. I mean, I would view that as a real expense if it's the cost of retaining employees, and I think given you're going into a year when incentive comp is normalizing, and the Board is going to be receiving their typical cash retainer and shares or restricted stock. The timing feels a bit odd to me. So can you talk more about the justification for this decision?

Yes, I'll speak to that. So our annual incentive plan, which is normalizing and the $40 million incremental costs that I referred to, that's a cash award that certainly will be included in our EBITDA metrics. As we take a look at EBITDA, some of the noncash items that are affected with volatility in terms of whether or not performance is achieved or not. Those are items that are driving volatility and change that really aren't something that we want to manage the business towards. And so we took this opportunity now to add that back. Very common in industry where we've seen this added back, and we took that opportunity to do it as that is an item that we as a management team as we evaluate this business do generally add back.

That will conclude our Q&A session. We will now turn the conference back to Debbie Hancock for any additional or closing remarks.

Thank you, Jess, and thank you, everyone, for joining us today. The replay of the call will be available on our website later this afternoon. Thank you.

Thank you. Ladies and gentlemen, that does conclude today's call. We thank you for your participation. You may disconnect at this time.