Lamb Weston Holdings, Inc. (LW) Earnings Call Transcript

Great. Good morning. Thank you for joining us today. I'm Peter Galbo, I run the U.S. Consumer Staples team here at BofA across food -- packaged food, beverages and household and personal care. We're really excited to be joined today by Jim Gray, the new-ish [indiscernible] CFO for Lamb Weston; as well as Debbie Hancock from Investor Relations. Thanks guys for joining. We've got about 50 minutes to go through a list of questions. We've got a number of folks on the webcast, a number of folks live on the Zoom. If you would like to ask a question on the Zoom, if you want to use the raise hand function, at any point, I'm happy to call on you. If you'd rather I ask a question on your behalf, feel free to hit me on Bloomberg, or [indiscernible] on my team, who's also here on Bloomberg and we'll be happy to ask on your behalf.

But with that, we'll get started. And Jim, I guess, just to kick off, reported 4Q earnings and issued fiscal '27 guidance just a few weeks ago. Maybe before we get into the broader discussion, just any pressing questions or clarifications that you've all had in conversations with investors coming out of the quarter that we should touch on first here?

Well, first of all, Peter, thanks for having us. I think maybe coming out of the Q4 year-end, it was important to understand how maybe solid the performance in North America was and then also really update everyone on how the challenge is with the Middle East and like just changes in cost of oil and shipment disruption was impacting our EMEA business as part of international. Maybe just for modeling purposes, the only thing I would probably say is just remind everybody that fiscal '26 was 53 weeks. And so then we're trying to be pretty diligent in giving you estimates of what '26 would look like if it was restated on a 52-week basis. And then our guidance is from there, right? And people come to know me at Lamb Weston, I tend to like kind of growth rates and/or margin expansion type of guidance because I think it's more indicative of the underlying drivers of the business. And so our guidance was really shape on 52-week '26 as a base.

Great. Okay. Cool. I guess, thinking about the leadership changes at Lamb Weston, there's a new slate of folks heading the company. Obviously, yourself, Mike kind of being the constant, but then also the [ addition of an Lamb ], just what kind of excites you about the opportunity to come over from Ingredion? As you kind of go into the hood, what are some of the biggest opportunities you've seen thus far?

Yes. I mean, I think initially, just outside in, you're attracted to the business because of just the tremendous margin structure that exists across the entire food supply chain, what the consumer enjoys in terms of a french fry product versus what a foodservice operator, a restaurant earns in terms of margin, the simplicity of the product in terms of making it in the back room of the kitchen. And then honestly, the arbitrage that the french fry processors make and then also the farmers, right? It's not -- it's a relatively rewarding crop to grow. So that is initially how to look at that and say, well, that's pretty exciting. What's really kind of more here that I've learned as I've been here for the first 4 months on, so just really enduring customer relationships and Lamb really has demonstrated a lot of global leadership with some of the biggest and most challenging customers and shown time and time again, an ability to succeed both in delivering quality, just consistency of service, delivering innovation, and we'll talk a little bit more about those. I think the second piece is just a really resilient supply chain and really pretty strong manufacturing cost position, especially in North America, really have come to believe that given setup in terms of the Columbia Basin in Idaho where the potatoes grow the concentration of our manufacturing assets and the way that they've matured over time through really focused CapEx investment to get the utilization right and then the ability to distribute frozen product throughout North America. Those 3 things come together, and they really, really do lend themselves to a strong cost position. And then maybe the piece that's also interesting is that I think there's some real breathing space around growth, whether it's innovation and existing customers. Mike Smith has talked a lot about, like there's a whole bunch of restaurants that actually don't have fryers and don't have refrigeration. And yes, there's like some really interesting things that we can do in innovation when we think about like air fryer penetration in households. And so how can we think about the product. Obviously, deliver food safe with some kind of kill step in there, but the breathing space around growth is pretty cool, whether that's -- and I'm talking North America, but also, obviously, internationally, and we're in the midst of that, too. So those have been kind of the 3 maybe more kind of positive surprises that after kind of getting your feet wet a little bit that have come to known about Lamb.

And maybe, Jim, just to expand on that, like on the challenges side, has there been anything that's kind of caught you, "Hey, we have to do more work here, or I need more time as I, again, kind of dig in and see potentially opportunity"?

Well, I mean, I think the challenge is that some of the folks on the call know in that there's constant between you have a product that Mother Nature gives you every year and you're going to have variability in that. And so how can you reduce that variability? How can you mitigate some of that volatility to really get towards more of a consistent profit stream that you -- all of the people attending here in love and want to come and predict? But I think that takes real agility. It takes some buildings and competencies across the management team and how we do stuff and how we look at the business. And so that's always going to be ongoing, whether you're in any type of food product that whether it's dairy, ag, animal protein, et cetera. I think the other piece here that then is maybe -- I think it was kind of a perceived challenge. I think it comes away as a negative sometimes, and it's way overblown, but it's like we're constantly looking at SAP and our different systems and making sure that we're getting the most out of our applications. And like how are we using AI within those systems in order to just see our market space better, make the more informed decisions and reduce costs as we go forward. And I think Lamb has a better toolkit than they're giving credit for. So -- but we got to continue to work there.

Okay. Great. I think the word of the day, back on earnings, I don't have the exact count, but I was told that Mike used the word "inflection point" -- or the word "inflection point", probably 7 times or 8 times in his script. So we've gotten a lot of questions on that. And I guess just what are the 2 or 3 continental metrics you'd point people to is the clearest evidence that the inflection is real and durable as you kind of enter '27 rather than just kind of a favorable easy comparison type year?

Yes. Well, having, I think, time to reflect on that and really, let's sort of put ourselves in what has been the situation with a lot of food companies, you come out of COVID, you had this amazing consumer demand bounced back, '21, '22, supply chains tightened up in a lot of places. There was a lot of demand, and it wasn't just in the United States, it was really globally, right, and really taxed. And so honestly, I think one of the ways that companies that supply products had to rationalize was like through price. And so you did see a lot of price increasing '23, '24. And I think that we've come back off of that. I think the grocery basket got expensive for consumers. That's often a reference point. The cost of dining out really jumped up. You had both labor costs as well as food costs. You've had some really tough pressure on animal protein, and it's cost in the center of the plate. And so that obviously -- I think that softens demand. And so in a soft-demand environment in '25 and part of '26, you've seen this whole, like, people wrestle with price. I point to that and look at our fiscal '26, and we now break out on our top line price mix, we had almost $400 million of price mix pressure. And if you actually look at North America's EBITDA, it was -- I mean, it was solid. I mean, in so to be able to endure that type of price change, be able to get and continue to win some volume with customers but also manage your costs such that your margins are still healthy, that's probably one of the most challenging conditions that a food company can face. And I would say, Lamb endured that quite well. And so yes, I think there's actually support when Mike says, "Hey, there's an inflection point." As we go forward, we still have some cost input inflation, and maybe there's some room in a pricing environment as we go forward. I'm not saying that's guaranteed, but it's not as tough as it was in, say, '24 when Walmart is throwing out mandates for everybody. I think that there may be -- it's a really great starting point to be in. So -- and then on top of that now, yes, we've got some international, EMEA specific, issues, but I think they're -- I'm hoping they're temporal, and we can work through them, and we'll just be more kind of accountable and transparent in terms of what the impact has been. But it shouldn't persist in terms of where we're at with Iran and the U.S. and Israel.

Great. Okay. Thanks for that. Before we get into some of the nitty-gritty I think on the margin, Jim, maybe we can step back and talk a little bit more about capacity, first in North America and then internationally. It seems like the capacity utilization story in North America has really improved dramatically, call it, from the lows of calendar '24 of the fall/winter. Just kind of remind us where we stand today from a capacity utilization standpoint in North America. And just also what's changed from a competitive dynamic. You've had some other industry participants that have pushed out capacity, maybe mothball some capacity, but just kind of where you see the health of capacity, not only for land within, but kind of for the industry in North America.

Yes. I think, maybe just to start on the industry comment, right, what would be is that whenever you're going to see the cost of the input is either flat or slightly down and some of the pricing in, so the foodservice industries kind of reflect that. You're going to stimulate demand. I still believe there's some elasticity here, because of the margin that restaurant operators earn, right? So like why wouldn't you be thinking about like, "Well, maybe I'll have an in and out offer on a french fry. Maybe I can actually -- that's a way to generate some excitement with my consumer, and I'm going to make some great margin on it. And I like the pricing of the product coming in." And so I'm not -- I reflect a little bit like maybe some of that's the demand sensitivity that exists, at least for our category. Utilization right now for us, we're in that kind of very high 80s, low 90s. We did close a facility, Connell, and we've balanced our demand and our utilization there. So I think that's -- we still have some room to go and would like to be able to kind of absorb a bit more demand, but that's a pretty healthy plus for us to be. And then on industry, I think the question that everybody had out there was looking at like a number of different expansions or new capacity come in. And I don't know if necessarily the return is there on new capital. And really, what's happened is, I think post 2025 impact on immigration and maybe the infrastructure demand in construction for data centers, the cost in building new is really inflated. And I've seen that maybe just in the last 2 years. I mean, I'm a stickler over my capital investment budget, and we really, really do pretty aggressive bids. But either in my prior experience as here, I'm still seeing capital infrastructure projects, particularly in the U.S., have gone up quite a bit in cost. And so that may always give pause to a CFO when they're looking at what's the ROI, what's my payback, how quickly. So you need to have some better industry economics to afford the cash flow generation to get to the return on that investment.

Okay. Okay. And maybe same question kind of goes for international, right, which has been a bit more challenged. You had the [ Conagra ] facility come online in the Netherlands, you had another facility whose name I am not even going to begin to try and pronounce.

The [ Broekhuizenvorst ]. We will just abbreviate it for you.

[ Broekhuizenvorst ] is a much easier pronunciation. So maybe you can talk a little bit about the European dynamic from a capacity standpoint. And then obviously, Asia, that's probably been the sticking point for a lot of folks, particularly in China and India, some of I think the local players have ramped capacity. So if you can touch on kind of those International is a big geographic segment, but just kind of the different moving parts within it.

Yes, yes. I think maybe, so for folks who know and maybe some [indiscernible], so a lot of the capacity for frozen french fries that was built in Europe. The U.K. has its own -- kind of its own market, but Europe out of the Netherlands, Germany and then some of the other growing regions have a handful of players and a lot of capacity. And typically, that potato crop has been attractive to the farmer to grow, and that capacity has served maybe, I don't know, 70%. 70% of that capacity was going to Europe type of demand. And so then Europe is traditionally exporting, and exporting and whether it was into the Middle East or Southeast Asia, potentially into South America, sometimes into the U.S. And then what we've -- the kind of tectonic shift as we've seen more potatoes growing in northern parts of China as well as some northern parts of India, Nepal, that area. And we've seen now frozen fry capacity come online some from European players, some from us, and then also in some independents. And therefore, then the production and the shipping has gone not just China for China, which is still a very healthy, robust market for french fries, at least but also maybe China for rest of Asia or Northern Asia, Southeast Asia, India, for Southeast Asia, India, for the Middle East, et cetera. And so where does that rebalance? So some of that rebalancing is going to happen, I think, in Europe. I can't necessarily speak for competitors. What we've done is we've elected to close one of our plants, [ Broekhuizenvorst ]. And by doing so, I think, there are 2 keys for us. One is, could we move our entire book of customer business and service it with our 3 other facilities, and do that successfully. And then can we then have the fixed costs avoided when we move into those facilities? And so that's underway. Pretty confident that, that move is going to work. And so then that allows us to just kind of rightsize our cost structure in our fixed cost capacity with the type of demand that we're seeing that we used to service or still service within Europe as well as what we export from Europe into other parts of the world. And so that's -- I mean, that's our game plan. And again, I think what we're sort of seeing is a bit of a -- maybe like a pause just like looking at demand, and say, "Is the demand there?" I would say the demand in China from multinationals is still pretty strong. That's still clearly that type of franchise, a type of McDonald's franchise and Yum, the world really works, as you have at urbanization continuing within China. And it works as a theme. It works in some other countries as well. And so what we find is that how we would like to compete in those parts of the world is really through innovation. That's where I think it's value add for our customers, it's value creating for us, and so that tends to be a good synergy.

Great. Well, any plus pronunciation, Jim, on [ Broekhuizenvorst ] because, again, I would have definitely put on that. So thank you. Jim, a question that came in maybe on the back of that, and what you mentioned about where kind of the shifts happen. We all know like french fries are, at the end of the day, a global market. And so I think there's a bit of question, just the increase, I think, international competition, particularly in Asia, that historically has been a pretty big export destination for a lot of actually the North American capacity, right? If I think about Lamb's export business out of the Pacific Northwest, going into Japan, going into Korea. And so I think there's a bit of a question of does local competition there from China, from India, back up capacity back into the U.S.? And then do we get into a mismatch again on capacity here because you've effectively repatriated a lot of the capacity. So maybe you can just touch on what's the compound effect of what it could mean for North America exports?

Yes. I mean, the premise of the question is that it's kind of a global market for french fries. Maybe just to add a couple of nuances to that. So one, not all potatoes are created equal. So there are certain species that grow in the Columbia River Basin in Idaho, where you get more of a white flesh potato, that when fried, has a lighter golden color to it. That is a spec that some multinational customers really demand versus more of a yellow flesh potato, which grows in primarily in Europe. And then there's kind of a frozen supply chain which, at the end of the day, can get quite expensive and onerous to move products all over the world. So I don't -- I wouldn't say that like you would have a -- what I'm not seeing is like you can have a manufacturing footprint in the Pacific Northwest, and let's say we're going to call that a global production source. We're going to be economically limited by having to ship a frozen product, when you got to handle it in the container, you got to put it on a ship, you got to unload it, you got to put it on a truck and a warehouse, and eventually get it to a foodservice operator in Japan. So if you're coming out of Northern China, you got to do the same thing, right? So just kind of when we do the math on that, I think -- I still think the landed cost is what we really look at, and say, "Yes, I think there are some places where you can have landed costs," and quality combined coming still out of North America and be pretty effective in Northern Asia, Eastern Asia. And maybe if you think like just going down through Central America and parts of South America. If you're coming out of Europe, you're going to hit maybe the eastern part of the United States, you hit South America, and you can hit kind of North Africa and part of the Middle East, right? And if you're coming out of India, you clearly get the Middle East and Southeast Asia, China, really China for Southeast Asia, China for Northern Asia. I think, is roughly how I would think the truly competitive markets, not country by country. We call them clusters, but those are some of our kind of clusters, high level, very high level clusters that we look at. And we've gone down deeper within some of those clusters, too. I don't know if I answered the question, but at least I'm trying to frame it.

No, you did. No, I mean, gosh, if I think about 4 years ago, we were worried about the influx of European imports into the East Coast of the U.S., and there was a whole debate around yellow flesh potato and white flesh potatoes. So I remember being down own that path and my potato knowledge with [indiscernible] at the time. But no, it's helpful. No. I think, Jim, what might be helpful now would be kind of to switch to some of the moving pieces on the model for '27. And I think that conversation probably starts and ends with price. Q4, I think, was your sixth consecutive quarter of volume growth, still had, and you alluded to this earlier, some negative price mix headwinds at least in the quarter. I think you've implied for fiscal '27 that we kind of continue to have maybe some headwinds at least through the first half. But can you just give us an update on where pricing actions stand today, what we might expect kind of over the cadence of the year and how we should all think about that flowing through, probably more for North America, but maybe at a total enterprise level?

Yes. And maybe I'll just keep it to the kind of 2 main answers, right, for North America. So 1 is to the extent that we have channels, and we are winning some more volume in one channel versus another, that's going to impact what we report on our top line is price mix, right? And we always try and give you at least a little bit of detail and say, "Oh, that was due to mix or channel mix." But if we're going to add customers in multinational chains, because they're a larger customer, they actually have a lower cost to serve, that price point is going to be lower than necessarily if you're going out to individual foodservice operators and you're doing that through distributors, with the field sales team, I'm going to have a slightly higher cost there than even if I'm going into retail packaging, where I'm adding a package, a smaller package, for the consumer to take home, put in their fridge and then use in their oven. And so just as we grow in multinational chain a little bit more so, because we've added some accounts, and we've expanded the industry, we expanded the market, that's going to have an impact on price mix, right? But necessarily like still from a gross margin basis, gross profit dollar basis, that's actually growing gross profit dollars, which is, I think, where we should be focused, right? The second piece, though, is your question is, "Okay, well, now, Jim, what about price per pound or price per unit? Or what are the actual price pressures?" And we had 2 things, I think, happening in North America. One, we had a pretty healthy potato crop. And so contracting on prices was down a little bit. But everything else has had some inflation since the end of February. So edible oil, freight costs, some of our packaging costs are up. And so we're taking more of an approach where like, "Wow, these are -- this is real input cost inflation." Our competitors are seeing this and our customers who are also seeing it as well. And so it provides a better basis for a conversation with customer procurement teams that says like, "Well, you're facing this cost pressure. So am I. Have to cover it." And it sort of sets, I think, a stronger base for price increases as we go forward. And so we'll see what sticks as we go forward, but we're generally leaning into that.

And remind us, Jim, just from a disclosure standpoint, you all had talked about a price increase, I believe that went back in the spring.

Yes, March.

In the mom-and-pop channel, right, the foodservice channel, that's kind of what's the only thing that's been announced at least at this point.

Yes. And so -- and that was -- so you announced it. And there's -- by the way, there's always a little bit of a time lag in our business, right? Because you got to announce it and let people working through their systems in terms of when they actually see the gross list price on the foodservice distributor, menu changes, so to speak. And so that was fully effective end of May, June is when we're starting to see that impact. But right now, because of the continuing hostilities and kind of the volatility and the uncertainty around oil and how oil then works into things like polypropylene indices and soy oil futures, which do have a little bit of an impact on our business, either in terms of how we hedge or actually how we buy inputs. So that's -- those are real costs put an inflation on that. We anticipated some of that in our outlook. As we talked about in Q1, and I think we indicated a bit more in the first half of our fiscal '27, "Bryan, you have to be agile in the business." And so we're thinking about, well, what pricing would be needed now as we think about whether or not these input cost inflation is going to endure and then getting that effective for the back half of this fiscal year.

And Jim, just remind us for fiscal '27, potatoes, roughly 1/3 of your cost, down low single digit. The rest of the bucket is up quite a bit. And so I think you would netted us to around 3% inflation kind of in the cost basket for the year?

Yes. Yes.

Okay. Great.