Lamb Weston Holdings, Inc. (LW) Q1 2026 Earnings Call Transcript
Access earnings results, analyst expectations, report, slides, earnings call, and transcript.
Overview
The earnings call summary provides mixed signals. While there are positive elements such as strategic investments, cost savings, and new customer wins, there are also concerns like flat revenue guidance and inflationary pressures. The Q&A reveals uncertainties about tariff exposures and unclear management responses, which offset the positives. Without a clear market cap, the overall sentiment leans neutral, as positive elements are balanced by risks and uncertainties.
Key Financial Performance
Net Sales Flat at $5 million increase, including a $24 million favorable impact from foreign currency translation. On a constant currency basis, net sales declined 1% compared with the prior year. Reasons: Volume increased 6% due to customer wins and retention, but price/mix declined 7% due to fiscal 2025 price and trade investments and unfavorable channel product mix.
North America Net Sales Declined 2% compared with the prior year. Price/mix declined 7%, while volume increased 5%. Reasons: Supported by recent customer contract wins and growth across channels, but impacted by lower net selling prices.
International Net Sales Increased 4%, including a $24 million favorable impact from foreign currency translation. On a constant currency basis, net sales were flat. Volume grew 6%, but price/mix declined 6%. Reasons: Pricing actions in key international markets to support customers.
Adjusted Gross Profit Declined due to unfavorable price/mix, partially offset by higher sales volume, cost savings initiatives, and lapping a $39 million charge from the prior year. Reasons: Benefits from cost savings initiatives and lower manufacturing costs per pound.
Adjusted EBITDA Flat at $302 million. Reasons: Favorable impact on net sales from currency translation offset by higher local currency expenses, particularly cost of sales in global markets.
North America Adjusted EBITDA Declined 6% or $18 million to $260 million. Reasons: Price and trade investments in support of customers, partially offset by higher sales volumes, lower manufacturing costs per pound, and cost savings initiatives.
International Adjusted EBITDA Increased $6 million to $57 million. Reasons: Absence of last year's $18 million charge, lower potato prices, cost savings initiatives, and favorable foreign currency translation, offset by price investments and start-up costs in Argentina.
Free Cash Flow Strong at $273 million. Reasons: Lower inventories and benefits from cost savings initiatives.
Capital Expenditures Declined $256 million to $79 million. Reasons: Completion of production facility expansion projects.
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Operating Highlights
New Product Launches: Launching new products this fall, including Alexia garlic and parmesan crinkle cut fries, dill pickle seasoned fries, PAW Patrol waffle fries, and shaped tots. Internationally, rolling out crunchy artisanal fries.
Innovation Hubs: Established global innovation hubs in North America and the Netherlands to drive disruptive innovation.
Market Expansion: Restarting a curtailed production line in North America due to sustained volume growth. Began shipping from a new manufacturing facility in Mar del Plata, Argentina, with 80% of production destined for export, primarily to Latin America, including Brazil.
Customer Wins: Secured new business globally, expanded share in away-from-home categories like C-stores and cash and carry, and increased business with QSR customers outside the U.S.
Cost Savings Program: Tracking to achieve $250 million in annual run rate savings by fiscal year-end 2028. Cost savings initiatives are improving manufacturing cost per pound and driving operational efficiencies.
Supply Chain Improvements: Programs in manufacturing, logistics, and procurement are enhancing quality, customer satisfaction, and operational run rates.
Focus to Win Strategy: Realigned sales teams around priority markets, expanded reach with a broker model, and prioritized markets and products with sustainable competitive advantages.
Capital Efficiency: Improved working capital, reduced capital investments, and generated strong free cash flow.
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Risk or Challenges
Competitive Pressures: Increased competitive actions in certain markets, particularly in Europe and Latin America, are pressuring price/mix and could impact profitability.
Supply Chain Challenges: Start-up costs and factory burden absorption related to the new manufacturing facility in Argentina are higher than expected, which could affect margins.
Economic Uncertainties: Restaurant traffic in key markets like the U.K. has declined, and mixed traffic trends outside the U.S. could impact sales volumes.
Operational Risks: Longer-than-expected planned maintenance downtime at one plant and additional start-up expenses in Argentina could adversely affect margin performance.
Regulatory and Tariff Risks: The impact of enacted tariffs by the U.S. and other governments is now incorporated into the fiscal outlook, potentially affecting financial performance.
Strategic Execution Risks: The company is in the early stages of implementing its 'Focus to Win' strategy, and there is a risk of not achieving the planned $250 million annual run rate savings by fiscal year-end 2028.
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Guidance & Outlook
Revenue Expectations: The company expects revenue at constant currency rates in the range of $6.35 billion to $6.55 billion for fiscal 2026, which represents a 2% decline to 2% increase. This includes the contribution of a 53rd week in the fourth quarter.
Volume Growth: Year-over-year volume growth is expected in both segments, with North America showing growth in both the first and second half of the year. International segment volume is expected to be flat in the back half of the year due to competitive pressures and lapping prior year customer acquisitions.
Price/Mix: Unfavorable price/mix is anticipated at constant currency, with the impact being more pronounced in the first half of the year. This is expected to moderate in the second half, supported by new contracts signed this year.
Adjusted EBITDA: The adjusted EBITDA guidance range remains at $1 billion to $1.2 billion for fiscal 2026. This now excludes noncash share-based compensation expense.
Cost Savings Program: The company is on track to achieve at least $250 million of annual run rate savings by fiscal year-end 2028 as part of its Focus to Win strategy.
Capital Expenditures: Capital spending for fiscal 2026 is expected to be approximately $500 million, with $400 million allocated for maintenance and modernization and $100 million for environmental projects.
Potato Costs: In North America, the company expects a mid-single-digit percent decrease in contract prices for the 2025 potato crop, with benefits realized starting late in the fiscal second quarter. In Europe, potato costs are expected to be flat to slightly lower than the previous year's fixed price contracts.
Innovation and Product Launches: New innovative products are being launched this fall, including flavor-forward offerings and licensed brands. Internationally, the rollout of crunchy artisanal fries continues.
Manufacturing and Capacity: The company is restarting a curtailed line in North America in the latter part of the second quarter to support sustained volume growth. Additionally, a new manufacturing facility in Argentina has begun shipping, with 80% of production destined for export.
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Shareholder Return Plan
Cash Dividends: In the first quarter, $52 million in cash dividends were returned to shareholders.
Historical Dividends: Since the spin in 2016, over $2 billion in cash has been returned to shareholders.
Share Repurchase: $10 million of stock was repurchased in the first quarter, leaving $348 million authorized under the plan.
Historical Share Repurchase: Since the spin in 2016, share repurchases have been part of the $2 billion returned to shareholders.
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Key Q&A
Q:Why did Lamb Weston restart a previously curtailed production line in the U.S.?
A:Lamb Weston restarted the production line to keep up with demand signals, maintain customer fill rates, and address the volume and new customers they are bringing on board. The industry has been rational, with some announced capacities being delayed, postponed, or canceled.
Q:Does the low to mid-single-digit year-over-year decline in price/mix for the first fiscal half of the year still hold?
A:Yes, but foreign currency has a larger impact. On a constant currency basis, they expect a mid- to high single-digit decrease in price in the first half, moderating to low to mid-single digits in the back half of the year.
Q:What is the update on gross margin commentary for North America?
A:In North America, there is a more seasonal increase in gross margin. Input cost inflation will rise slightly in Q2, but lower potato prices will start to benefit. Most changes are related to the International segment.
Q:What is Lamb Weston’s tariff exposure?
A:Most tariff exposure relates to imports of palm oil and other ingredients, amounting to about $25 million annually. They primarily source from Indonesia and Malaysia. A vote in March could potentially remove the Indonesia tariff rate, but the full amount is included in their guidance for the year.
Q:Should historical seasonality on the gross margin line return in the second half of the year?
A:Yes, based on Q1 strength, gross margin is expected to be flat with Q2, followed by a seasonal step-up in Q3 and a seasonal decline in Q4, similar to historical patterns.
Q:Why is Lamb Weston expanding the usage of brokers in North America?
A:Lamb Weston is maintaining its direct sales force but augmenting it with brokers in underpenetrated channels. This allows the direct sales team to focus on their strengths while exploring new opportunities in areas previously overlooked.
Q:What is the contribution of customer wins and volume growth in North America?
A:Customer wins and volume growth were significant, with some customers converting earlier than expected, contributing to a larger-than-expected step-up in Q1 volume. This primarily relates to the North America segment.
Q:Why is there a flat gross margin between Q1 and Q2 despite expectations of a step-up?
A:Q1 gross margin came in better than expected, and inflation is expected to accelerate from Q1 to Q2. The overall gross margin for the year remains close to original expectations.
Q:What is the impact of restarting the curtailed line in the second quarter?
A:Restarting the line involves minimal costs and is easier than starting a new facility. The line is expected to continue running based on demand signals. Fixed cost absorption will moderate by the end of Q2.
Q:What is the phasing of cost savings in fiscal '26?
A:Cost savings are on track for the $100 million target, with about 2/3 benefiting gross profit and 1/3 benefiting SG&A. Savings were realized faster in Q1, but the overall target remains unchanged.
Q:What is driving Lamb Weston’s new customer wins?
A:New customer wins are driven by improved customer engagement, joint business planning, and a focus on service, quality, and consistency rather than just price. Retention rates are high, and new customers are providing tailwinds.
Q:What is the traffic environment for QSR in the U.S. and internationally?
A:In the U.S., QSR traffic was flat, with burger QSR traffic down and chicken QSR traffic up. Internationally, QSR traffic was mixed, with declines in the U.K. and Italy but increases in France, Germany, and Spain.
Q:What are the details on pricing of contracts signed this quarter?
A:In North America, pricing was in line with expectations, with a focus on service and quality rather than just price. Internationally, competitive dynamics and raw pricing influenced contracts.
Q:What is the status of the new facility in Argentina?
A:The facility is operational and ramping up, with much of its capacity intended for export to Brazil. It will take time to reach target utilization levels.
Q:What is the underlying run rate of SG&A going forward?
A:SG&A will benefit from cost savings, but incremental costs include normalized stock compensation and $10 million in strategic investments planned for the latter half of the fiscal year.
Q:What is the visibility on sustaining volume momentum despite muted industry traffic?
A:Volume momentum is supported by restarting curtailed lines and earlier-than-expected customer conversions. Future customer wins are not disclosed, but demand signals are positive.
Q:Are new customer-specific products less profitable than existing ones?
A:Profitability specifics for new customers are not disclosed, but pricing aligns with the company’s P&L expectations.
Q:What is the expected CapEx over the next few years?
A:CapEx is expected to remain around $500 million annually, with $400 million for maintenance and $100 million for environmental expenditures over the next five years.
Q:Review of Unclear Management Responses
A:Management avoided providing specific details on the profitability of new customer-specific products and the exact timeline for the new Argentina facility to reach target utilization levels. Additionally, they did not disclose future customer wins or detailed scorecard metrics for customer service improvements.
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Earnings Word Cloud
The most frequently occurring keywords in this quarter's earning call
America Brazil
America line
Americas segment
Asia
Europe crop
Focus Win
Hancock Vice
Latin America
North Americas
Restaurant traffic
Win plan
absorption start
benefit cost
category
charge product
condition
contract reminder
contribution
cost saving
currency rate
currency translation
customer momentum
facility Argentina
home
liquidity cash
manufacturing facility
menu
mix currency
outperformance
product withdrawal
production facility
progress cost
rate sale
response volume
sale currency
saving track
support
trade investment
translation currency
volume North
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The earnings call summary provides mixed signals. While there are positive elements such as strategic investments, cost savings, and new customer wins, there are also concerns like flat revenue guidance and inflationary pressures. The Q&A reveals uncertainties about tariff exposures and unclear management responses, which offset the positives. Without a clear market cap, the overall sentiment leans neutral, as positive elements are balanced by risks and uncertainties.
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