Lamb Weston Holdings, Inc. 2027 Q1 Earnings Call

Please go ahead. Good morning, and thank you for joining us for Lamb Weston's first quarter fiscal 2027 earnings call.

I'm Debbie Hancock, Lamb Weston's Vice President of Investor Relations. Earlier today, we issued our press release that we will use for our discussion today. You can find the release on our website, lambweston.com. Slides will be shared during our webcast, and we will also be posted on the website after the call. 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 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 Jan Craps, Executive Chair, Mike Smith, President and CEO, and Jim Gray, Chief Financial Officer. Each will provide prepared remarks and then will be available to take your questions. I will now turn the call over to Jan.

Thanks, Debbie, and good morning, everyone. I hope you're doing well. I'm encouraged to see the organization embracing the changes that we have been driving to make the company more performance-driven, focused on value creation, and deliberate on resources and capital allocation. I'm happy to see our efforts reflected in our strong first quarter results, where we over-delivered our Q1 expectations and built solid momentum for the remainder of the year. I'm also pleased that we are today able to raise the full-year forecast on net sales, adjusted EPS, and adjusted EBITDA, as our strategy continues to take hold, customers are recognizing us for the value we deliver, and our execution continues to solidify. During our full-year results call, I shared my key priorities to drive value creation for Lamb Weston. Let me provide you a quick update from my perspective.

Regarding people, we have changed half of the executive leadership team, building the expertise and capabilities needed to drive our strategic priorities. We implemented target setting and compensation changes that drive individual and regional accountability. We just announced an organization redesign that drives significant improvements in speed of decision-making, simplicity, and accountability while delivering efficiencies that will improve our EBITDA margin and offer an opportunity to shift resources from back office staff to frontline growth opportunities. Regarding strategy, we have advanced into the how to win stage after completing the where to play work. Each country cluster owner will have a clear mission and clarity how they contribute to Lamb Weston's growth algorithm. We have identified opportunities for best practice sharing through Lamb Weston's execution playbooks for elevated innovation impact and for stronger joint business planning through new capabilities.

Our work on where to play may lead to partnership and divestiture opportunities. It has already catalyzed capacity rationalization for us, which is also something we continue to see across the industry, with capacity being shuttered and projects being canceled or postponed. Regarding resources, we have now started implementing ZBB as a new muscle and routine for the company, already realizing real savings in the first phase. Payment terms have seen improvements, and the supply chain has organized its first savings championship, where over 70 team members from across all regions and supply chain functions came together to benchmark and stretch beyond the planned cost savings initiatives. We have also identified opportunities to further deploy AI to enhance our operating performance. We are delivering on the promise of significant operational and cultural changes at Lamb Weston.

At the board level, we also lead by example and reduced the boards to 11 members from 13. There is a lot more to come, though, and we will continue to update on the progress on these and other initiatives. We see real sizable opportunities to create more value for Lamb Weston, our growers, our team members, our partners, and our shareholders. We also see greater value in the company than what we believe is reflected in the current stock price. We are executing against our key initiatives with a great sense of urgency and confidence that a performance and ownership culture we are building will enable us to further differentiate Lamb Weston. Now let me hand it over to Mike to discuss the progress the team has realized in Q1.

Over to you, Mike. Thank you, Jan, and good morning, everyone.

The Lamb Weston team delivered a solid start to fiscal 2027 with net sales, adjusted EPS, and adjusted EBITDA results above our guidance. As a result, we are increasing our full-year fiscal 2027 outlook. Underlying these results are several favorable trends. We grew volume for the seventh consecutive quarter in North America and are exceeding end market growth. This in part reflects the fact that we over-indexed to chicken-focused QSRs. Price mix improved as we lap targeted investments and customers recognize the value we bring. Supply-demand is harmonizing as industry capacity continues to rationalize and capacity expansion projects are increasingly delayed or shuttered, and Europe experiences a tighter crop environment. The team continues to raise the bar, strengthening our customer relationships, addressing challenges with urgency and agility in a dynamic market, and relentlessly focusing on delivering improved financial performance.

North America had a good quarter. Sales volume, net sales, gross margin, and segment adjusted EBITDA dollars all improved year-over-year and were ahead of expectations. International segment performance met our expectations but is below our long-term aspirations. Segment adjusted EBITDA increased sequentially versus fourth quarter. We continue to control what is within our control and take action to better position our business for long-term success. Our cost savings program remains robust and on track. These aggressive programs have permanently lowered our cost of operating while building new capabilities and a culture focused on costs and process improvement. We are successfully executing our Focus to Win strategy, demonstrating positive results and positioning us for improved performance long term. Our North America business started the year with good momentum with existing customers and fueled by new wins.

Over the past year, we have added several growing customers, expanded business with existing customers, and we have built a strong mix of sales across QSR restaurant channels. Our focus on strengthening customer partnerships and driving performance through value-added innovation is our foundation for growth. We have completed about 70% of our contracts in for renewal this year with a high retention rate and pricing that reflects the current inflationary environment. We anticipate completing most of the outstanding discussions over the next two quarters. Overall, segment price mix improved and was down 1.7% in the first quarter. This was a 70 basis point improvement from the fourth quarter decline of 2.4%. Price mix reflects equal parts price and mix, including the impact of carryforward targeted pricing we implemented in fiscal 2026, as well as ongoing mix shifts with growth in multinational chains and private label offerings.

This was partially offset by recent inflation-justified pricing actions we have taken. As our most strategic and important market, we are encouraged by the solid momentum and execution of our North America business. Shifting to international segment. As I mentioned earlier, our results for the quarter were in line with our guide, but they do not yet meet our expectations for long-term performance. As we have worked through the carry-in of prior year's potato costs, we expect segment adjusted EBITDA margin to improve from first quarter levels. In EMEA, we are managing market challenges by acting on what is under our control. We are balancing our network utilization as demonstrated by stopping production at our Broekhuizenvorst facility, and we have successfully transitioned our customers' fulfillment to other Lamb Weston locations, enabling further cost optimization.

We are well positioned to raise Lamb Weston capacity utilization in the region to more than 90%. As reported in the media, the market has seen announcements from other manufacturers regarding capacity closures or delays in future capacity expansion. This includes one announcing a closure of a Belgium facility and delays in new capacity additions from others, including media reports of a cancellation of a previously announced large new facility in Germany. Furthermore, in contrast to last year's robust crop yields, this year's European crop has been negatively impacted in both quality and yield due to extensive heat and dry conditions. Non-contracted spot prices for open market potatoes are up and we anticipate tighter supply. Potatoes will be the limiter in the industry this year, and we expect not all open industry capacity will be used.