Lamb Weston Holdings, Inc. Q1 FY2027 earnings call

• Strategic Execution: Management reports over-delivering on Q1 expectations, leading to an upward revision of full-year guidance. The 'Focus to Win' strategy is advancing, with clarity on country clusters and execution playbooks.
• North America Strength: Achieved seventh consecutive quarter of sales volume growth. Over-indexing on chicken-focused QSRs drove favorable mix. Contract renewals are ~70% complete with high retention rates.
• International Challenges & Actions: Facing headwinds in EMEA due to poor European crop yields (heat/drought) and capacity rationalization. Closed Brookheisenvorst facility to consolidate production and raise utilization to >90%. Implemented price increases in Europe to offset rising raw material costs.
• Organizational Restructuring: Completed an organizational diagnostic to simplify structure, reduce management layers, and improve agility. Consolidated China and Asia Pacific into one APAC region. Marc Schroeder will step down as President of International; search for successor underway.
• Cost & Efficiency: Implementing Zero-Based Budgeting (ZBB) to drive margin expansion and reinvest in growth. SG&A was flat to prior year excluding one-time items. Supply chain savings championships identified additional efficiencies.
• Innovation & Customer Focus: Launched new products like black pepper flavored stars in China and reduced sodium tater puffs in the US. Strengthening joint business planning and fill rates to deepen customer relationships.

North America: Net sales increased 5% year-over-year, driven by a 7% growth in sales volume. Segment-adjusted EBITDA grew 11% compared to the prior year, benefiting from cost savings initiatives, $5 million in tariff refunds, and improved joint venture earnings. The segment outperformed softer market trends, particularly benefiting from strong traffic in chicken-focused Quick Service Restaurants (QSRs). International: Net sales declined 8%, impacted by a 6% drop in sales volume and a 2% decline in price mix. Segment-adjusted EBITDA decreased to $27 million, primarily due to lower volumes in Europe and the carry-in of higher prior-year potato crop costs. While results met guidance, they remain below long-term aspirations, though EMEA saw sequential EBITDA improvement.

• Full-Year Fiscal 2027 Net Sales: Raised outlook to low single-digit growth (previously flat to 1%). Base year adjusted for 52 weeks is $6.485 billion.
• Adjusted Operating Income: Increased target range to $730 million - $810 million.
• Adjusted EPS: Raised range to $3.05 - $3.35 (previously implied around $2.90 based on FY26).
• Adjusted EBITDA: Raised range to $1.125 billion - $1.215 billion (previously $1.118 billion).
• Interest Expense: Expected range of $185 million - $190 million.
• Tax Rate: Expected range of 25% - 27%.
• Capital Expenditures: Cash used for CapEx expected at $380 million - $410 million; accrual basis investments $330 million - $350 million.
• Cash Flow from Operations: Expected $750 million - $800 million.
• Working Capital: Expect investment in working capital to remain relatively flat year-over-year despite sales growth.
• Second Quarter Outlook: Net sales expected up low single digits; Adjusted EBITDA expected up high single digits to low double digits.

• Input Cost Inflation: Persistent inflation in freight, edible oils, packaging, and ingredients. Non-potato input costs are estimated to be ~100 basis points higher than previous annual expectations.
• European Crop Conditions: Prolonged heat and dry conditions have negatively impacted yield and quality, leading to tighter supply and higher raw material costs. Potato supply is expected to be the industry limiter in Europe.
• Competitive Environment: Capacity rationalization in Europe includes competitor facility closures (e.g., Belgium) and delayed expansions (e.g., Germany), creating a complex competitive landscape.
• Execution Risk: International performance currently lags long-term aspirations; success depends on effective implementation of organizational simplification and ZBB without cutting too deep into revenue-generating activities.

Q: Peter Galbo asked about the sustainability of North America's volume growth given softening consumer traffic and competitor concerns. / A: Mike Smith attributed the strength to over-indexing on chicken-focused QSRs, which showed 4% traffic growth. He emphasized that 'Focus to Win' initiatives, including better joint business planning, consistent fill rates, and a maniacal focus on manufacturing efficiency, are driving new customer wins and stabilizing growth despite broader market softness.

Q: Tom Palmer inquired about North American pricing expectations and how the updated guidance reflects price mix improvements. / A: Mike Smith noted contract negotiations are 70% complete with good realization of inflation-driven pricing. Jim Gray added that while volume growth may moderate, price mix is becoming less of a headwind. The EBITDA growth is driven by pricing momentum and significant cost savings offsetting persistent input inflation.

Q: Max Gunport asked for updates on international strategic partnerships/divestitures and guardrails for Zero-Based Budgeting (ZBB) to prevent cutting too deep. / A: Jan Craps explained the 'Where to Play' work is done, focusing now on 'How to Win' through country clusters; specific divestiture details will be shared at the early 2027 Investor Day. Mike Smith clarified ZBB is about fostering an owner mindset and identifying where to reinvest, not just cutting costs, ensuring organic sales momentum is protected.

Q: Puran Sharma questioned European procurement strategies given tighter crop conditions and asked if international organizational simplification was primarily for cost or execution. / A: Mike Smith stated sufficient contracted potato supply exists, though open-market exposure is lower than usual. He confirmed the APAC consolidation and org simplification were primarily aimed at improving agility, speed, and execution, with cost savings being a secondary benefit rather than the primary driver.

Q: Alexia Howard asked how Lam Weston identifies 'winning' customers and if there is risk of adverse competitor reactions to their strong North America performance. / A: Mike Smith explained they use analytics to identify customers aligned with consumer trends and deepen relationships through joint planning. Regarding competition, he cited product innovation (e.g., LTOs, battered fries) and consistent quality as key differentiators that create stickiness and mitigate competitive threats.