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Operator: Good day, and welcome to the Lamb Weston Second Quarter Fiscal Year 2025 Earnings Call. Today’s call is being recorded. At this time, I’d like to turn the call over to Dexter Congbalay. Please go ahead.

Dexter Congbalay: Good morning, and thank you for joining us for Lamb Weston’s second quarter 2025 earnings call. Earlier today, we issued our earnings press release and posted slides that we will use for today’s call. You can find both on our website at lambweston.com. Please note that during our remarks, we’ll make some forward-looking statements about the company’s expected performance that are based on how we see things today. 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, but 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. With me today are Tom Werner, our President and Chief Executive Officer; and Bernadette Madarieta, our Chief Financial Officer. With that, let me now turn the call over to Tom.

Tom Werner: Thank you, Dexter. Good morning and thank you for joining our call today. Let me start with the leadership change we announced earlier today. As you’ve likely seen, I will be stepping down as CEO and Mike Smith, our current COO, will become Lamb Weston’s next President and CEO beginning January 3rd, 2025. The Board and I believe now is the right time to transition to allow a new leader to guide Lamb Weston into its next chapter of growth and I could not be more thrilled to hand over the reins to Mike. His appointment represents the culmination of a thoughtful year’s long succession planning process by the Board and we are confident he is the right leader to guide Lamb Weston forward. Over the course of his 17-year career at Lamb Weston, Mike has developed a deep understanding of all critical aspects of our business and operational opportunities, and driven growth across multiple areas of the company.

I’ve had the pleasure of working closely with Mike and have witnessed firsthand his value-based leadership style and steadfast focus on people as well as his thorough understanding of the business. I’m confident that with Mike at the helm, Lamb Weston will drive profit and deliver value for our shareholders. Now turning to our results. Our second quarter performance was below our expectations and not what we aim to achieve at Lamb Weston. Slide 4 provides a snapshot of the key themes that we’ll be discussing with you today. We expect the challenging operating environment will persist in the near term, as weak restaurant traffic trends and additional capacity expansions announced by our competitors since our Investor Day last year add to the current imbalance in global industry supply and demand, especially outside North America.

In this new reality, we’re evaluating opportunities beyond our initial restructuring plan to adjust our operations, including reducing manufacturing and supply chain costs and operating expenses. In addition, we’re evaluating opportunities to drive the top-line by improving sales execution, while also expanding our total addressable market by leveraging proprietary technologies to serve non-traditional fry customers. As we discussed on our last quarter’s earnings call, we expect to significantly reduce our capital spending next year, as we shift away from growth capital to focus on base, modernization and environmental capital. We expect these steps to increase our free cash flow, which would provide more flexibility to step-up capital returns to our shareholders.

We’ll address each of these points during this call. Let me now turn it over to Bernadette to discuss details on our second quarter results.

Bernadette Madarieta: Thanks, Tom, and good morning, everyone. Starting on Slide 5. You can see that net sales declined 8% compared with the year ago quarter. Volume declined 6%, primarily driven by declining restaurant traffic in the U.S. and many of our key international markets, customer share losses net of gains and the carryover impact of our decisions last year to exit certain lower price and lower margin business in EMEA to strategically manage customer and product mix. While the effects of these three factors were largely in line with our expectations, the declines in sales and volume were more than what we anticipated for the quarter, as we experienced incremental customer share losses in both business segments, due to an increasingly competitive environment.

Price-mix declined 2%, as compared to the prior year quarter, which was just below our target for the period. Our pricing actions in North America were in line with our expectations. However, pricing in our international markets was more competitive. Channel and product mix was also in line with our expectations, but unfavorable versus the prior-year quarter, reflecting customer share losses exceeding customer gains. For our North America segment specifically, sales declined 8% versus the prior year quarter. Volume declined 5% and included the carryover impact of smaller and regional customer share losses in food away from home channels in the prior year and share losses in certain chain restaurant accounts. The majority of the decline, however, was due to the drop-in restaurant traffic in the U.S. According to restaurant industry data providers, U.S. restaurant traffic in the second quarter declined about 2%, versus the prior year, although trends improved modestly versus our fiscal first quarter as QSR did continue to step-up promotional activity.

Traffic at QSR chain specializing in Hamburgers in the second quarter declined about 1.5% versus the year ago period. We continue to be encouraged by the improving trend in traffic and the steady fry attachment rate. But as a reminder, many of these promotional meal deals have consumers trading down from a medium serving size to a small French fry serving size. As a result, while we benefit from improving traffic trends, the effect of the trade-down in serving sizes, acts as a partial and with some customers a significant headwind to our volumes. Price mix in North America declined 3%, reflecting the planned investments that we made to retain and attract volume as well as unfavorable channel and product mix. For our International segment, sales declined 6% versus the prior year quarter.

Volume declined 6% driven by several factors. First, restaurant traffic declined or softened sequentially in many of our key international markets. While restaurant traffic in the UK, our largest market in Europe, was flat, traffic declined in Germany, France and Spain. In Japan, QSR traffic grew versus the prior year, but decelerated versus our fiscal first quarter. Traffic growth in China remained soft. Second, we experienced incremental customer share losses resulting from a more intense competitive environment, most notably in the Middle East and certain markets in Asia Pacific. And third, we continue to realize the carryover effect of exiting certain lower-priced and lower-margin business in EMEA. This was the last quarter that this will serve as a headwind.

Price mix was flat versus the prior year quarter, as incremental pricing actions to compete in key international markets offset the benefit of inflation-driven pricing actions in EMEA. Moving on from sales. On Slide 6, you can see that adjusted EBITDA fell $95 million versus the prior year quarter to $282 million. The decrease is largely attributable to a $135 million decline in adjusted gross profit. That was due primarily to four factors. First, price mix declined due to the planned pricing actions to retain customers and attract incremental volume. Second, higher manufacturing cost per pound, which reflects input cost inflation and inefficiencies associated with lower production and lower factory and potato utilization rates. Third, we incurred incremental production costs related to unplanned facility downtime and additional start-up costs associated with our new capacity expansion.

And finally, while not impacting EBITDA, we incurred $16 million of higher depreciation expense that’s largely related to our capacity expansions in China and Idaho, that were completed last fiscal year. Adjusted SG&A declined $12 million to $165 million. We reduced adjusted SG&A despite an incremental $7 million of non-cash amortization related to our new ERP system that went live in the third quarter of fiscal 2024. Continued execution of our expense reduction initiatives including those associated with our restructuring plan drove most of the improvement with the remainder largely due to lower performance-based compensation and benefit accruals. For North America specifically, adjusted EBITDA declined $55 million to $267 million, driven by a combination of unfavorable price mix, lower sales volumes, higher manufacturing cost per pound and incremental production costs.

For our International segment, adjusted EBITDA declined $53 million to $47 million. Higher manufacturing cost per pound and incremental production costs drove the decline and the increasingly competitive environment in each region affected our ability to use price to fully offset inflation. Moving to our liquidity position and cash flow on Slide 7. We ended the second quarter with about $80 million of cash and $1.2 billion available under our revolving credit facility. Our net debt was $4 billion, which puts our leverage ratio at 3.4 times on a trailing 12-month basis. In the first half of the year, we generated nearly $430 million of cash from operations, which is down about $25 million versus the prior year due to lower earnings, which were partially offset by favorable changes in working capital.

Capital expenditures for the first half of the year net of proceeds from blue chip swap transactions in Argentina were $486 million, as we completed our expansion in the Netherlands during the second quarter and continued construction of our Argentina facility. We expect our capital spending during the second half of the year to significantly decline, as we continue to target total annual capital expenditures of $750 million in fiscal 2025. During the quarter, we returned about $52 million to shareholders in the form of cash dividends. We did not repurchase any shares under our share repurchase authorization during the second quarter. I’ll now turn it back over to Tom, who will cover the next few slides. Tom?

Tom Werner: Thanks, Bernadette. At our Investor Day more than a year ago, we provided our view of the global frozen potato industry, including our estimates of future additions as well as demand growth. Much has changed since then, so we wanted to provide you with our updated view. As shown on Slide 8, prior to COVID, frozen potato demand in the U.S. and our key international markets was growing above historical rates resulting in Lamb Weston and the industry at large operating above full capacity. While COVID affected demand for a relatively short period, we saw evidence of frozen potato demand quickly rebounding to pre-COVID levels and historical growth rates. As a result, we strategically plan to expand capacity, so we would be well-positioned to serve our customers and capture our share of growing global demand.

So, starting in early 2021 and knowing that it typically takes two to three years to plan, construct and qualify new facility, we were one of the first processors to announce major capacity expansions and modernization of our existing production lines. This included projects in China, Idaho, the Netherlands and Argentina. By the time of our Investor Day in October 2023, as you can see on the chart, some competitors had also announced capacity expansion projects. Since then, legacy competitors as well as some relatively new market entrants have announced plans to construct more than 3.5 billion pounds of additional capacity between 2024 and 2027. This primarily includes expansions in Europe, China and Brazil, but also in relatively new frozen potato processing regions such as India and the Middle East.

While competitors’ expansion announcements are always expected, we did not foresee the timing and aggregate scale of these additional expansions. As you can see on Slide 9, including these additional announcements, we expect the industry in total may add up to 8.6 billion pounds of incremental production capacity over the next four calendar years. Given the near-term operating environment, we don’t know whether all capacity expansions that have been announced will move forward and be operational by the end of calendar 2028. That said, if all these announced capacity additions are completed and on time and if there are no further capacity reductions other than our strategic closure of Canal Washington facility, we estimate total industry capacity may be more than 44 billion pounds by the end of 2028.

That’s an additional 10 billion pounds of capacity being added between 2023 and 2028 which is 4 billion pounds more than what was added in the previous five years. This has implications for industry capacity utilization. In 2024, we estimate capacity utilization is around 90%, which itself is down from the high 90s during the past couple of years due to the slowdown in global demand and the addition of nearly 3 billion pounds of incremental supply by Lamb Weston and our peers. Over the next few years, we expect capacity utilization maybe in the mid to high 80s. Accordingly and again assuming all the announced expansion projects are completed or not significantly delayed, we expect the operating environment will remain challenged through the medium-term, even if demand returns to historical rates, as incremental capacity expansions add to the current imbalance in global industry supply and demand especially outside North America.

As you see on Slide 10, we have again been an early mover to implement actions to combat the challenging environment. Nearly three months ago, we announced a restructuring plan to address the imbalance and improve our cost structure. This included reducing headcount, permanently closing a processing facility and temporarily curtailing production lines and schedules. We remain on track to deliver on the $55 million of cost savings associated with this plan in fiscal 2025 and annualized cost savings of $85 million in fiscal 2026. In addition, as I noted earlier, we’re continuing to evaluate and execute opportunities to adjust our supply chain operations and support functions to effectively manage through this challenging environment, protect our profitability and improve free cash flow.

We brought on a new Chief Supply Chain Officer about four months ago and we’re encouraged to see the opportunity she and the team identified to reduce our manufacturing and supply chain costs. In the back half of the year, we’ll have more to say about these initiatives to improve performance and profitability. Let me now turn over the call to Bernadette to discuss our updated outlook.

Bernadette Madarieta: Thanks, Tom. While we anticipated a challenging environment for the balance of fiscal 2025, during our last earnings call, our performance so far has fallen short of expectations. As a result, we’re reducing our financial targets for the year to reflect our performance in the second quarter as well as the increasingly competitive environment that Tom just described. As you can see on Slide 11, we’re reducing our net sales target range to $6.35 billion to $6.45 billion from our previous range of $6.6 billion to $6.8 billion. Using the midpoint of the new sales range implies a sales decline of 1% versus fiscal 2024. We’re also reducing our adjusted EBITDA target range to $1.17 billion to $1.21 billion from our previous estimate of around $1.38 billion.

Let me walk you through the key changes. On Slide 12, you can see that, about one-fourth of the reduction in our annual sales target reflects the shortfall versus expectations during the second quarter. The remainder reflects a combination of factors that affect the second half of the year. In North America, we expect incremental sales volume pressure due to the impact of unexpected loss of a chain restaurant customer, partially offset by the benefit of some new customer wins and a greater-than-forecasted impact from the downsizing and serving size related to promotional meals at key customers. Our forecast for price mix in North America is down modestly from our previous estimate, due to less favorable mix than we previously anticipated. Our forecast specifically for price is essentially unchanged, as the pricing environment while competitive remains largely in line with our initial expectations.

In our International segment, we expect volume to be below our previous forecast, primarily reflecting incremental customer share losses, resulting from a more intense competitive environment as well as softer restaurant traffic in key international markets. In addition, we expect incremental pricing pressure in each of our regions, but for different reasons. In Asia Pacific and Latin America, we’re experiencing an increasingly competitive environment, as demand growth slows and as additional supply from Europe and newer entrants in India, China and the Middle East gain share. In EMEA, we’re moderating some of the inflation-driven pricing actions that we implemented earlier this year to counter the initial surge in the market price of potatoes.

In short, we expect the 1% decline in total Lamb Weston net sales versus the prior year will be driven by a low to mid-single-digits decline in price mix, partially offset by a low single-digits increase in volume growth. With respect to adjusted EBITDA on Slide 13, you can see that nearly one-third of the $190 million reduction in adjusted EBITDA target reflects the shortfall in our performance in the second quarter versus expectations. Most of the remaining reduction in our EBITDA forecast is due to the impact of a more competitive environment in our key international markets, which is affecting volume and our ability to pass along input cost inflation. It’s also due to the reductions in volume and less favorable mix in North America, that I described earlier.

In addition, relative to our previous forecast, we expect to incur increased manufacturing costs due to inefficiencies from lower asset and potato utilization. With respect to SG&A, we’re maintaining our current range of $680 million to $690 million but will likely be towards the top end of the range. As you can see on Slide 14, based on our updated annual financial forecast, for the second half of the year, we expect to deliver sales of $3.1 billion to $3.2 billion implying growth of 1% to 4% as compared with the prior year period. We expect higher volume in both international and North America will drive overall sales growth. We forecast that our International segment will contribute the majority of the overall volume increase, primarily reflecting the benefit of incremental volume from recent chain customer contract wins across each of our geographic regions, net of recent share losses, lapping the impact of canceled shipments associated with last year’s ERP transition, as well as the impact of the voluntary product withdrawal that affected our results in the fourth quarter of fiscal 2024.

We expect North America volume growth to also reflect the benefit of lapping canceled shipments associated with last year’s ERP transition, continued progress in regaining share of regional and small customers lost in the prior year and incremental volume from recent chain customer contract wins net of share losses. We expect overall price mix will be down in the second half of the year. In North America, we’re forecasting price mix will decline as pricing actions more than offset benefits of improved product and channel mix. As I previously noted, our price investments are consistent with our prior expectations. In international, we’re forecasting overall price mix will also decline due to pricing actions in response to competitive dynamics in key international markets.

Moving to earnings. In the second half, we expect to deliver $600 million to $640 million of adjusted EBITDA, which is in line with what we delivered in the prior period. Overall, we expect the benefit from incremental volume growth in both international and North America will drive EBITDA growth, but will be largely offset by planned investments in price in North America, incremental price actions in key international markets and the impact of input cost inflation and increased manufacturing costs due to inefficiencies from lower asset and potato utilization, which we are actively working to address. Now turning to our thoughts on capital expenditures on Slide 15. As I previously noted, we’re continuing to target total capital expenditures of approximately $750 million for fiscal 2025.

We spent about $485 million during the first half of the year, as we completed our expansion in the Netherlands and continued construction of our Argentina facility. Spending in the second half of the year will focus on maintenance, modernization and the continued construction of our Argentina facility, which is on track to be completed in mid-calendar 2025. For 2026, we’re continuing to target total capital expenditures of approximately $550 million. We expect about $400 million will be for base maintenance capital and modernization efforts, which is in line with our annual depreciation and amortization expense. The other $150 million will be for environmental capital projects that largely focus on wastewater treatment at our manufacturing facilities.

As we highlighted last quarter, we expect to spend about $500 million in total over the next five years to comply with increasingly strict government regulations and permit limitations. For at least a few years beyond 2026, given our expectations for lower industry capacity utilization, we do not expect to direct any significant investments to growth capital. We’ll focus our spending on base and modernization capital, which together is generally up to 5% of sales, plus an additional $75 million or so each year for environmental projects. As a result, fiscal 2026 should be a positive inflection point for our free cash flow. Note that, the annual amounts that I just described, exclude any capital we expect to deploy when we restart the next phase of our ERP implementation.

Turning to our thoughts on capital return to shareholders on Slide 16. Today, we announced a $250 million increase to our share repurchase authorization. With this increase, we have approximately $560 million remaining under our authorization. As has been our practice, we’ll continue to use a disciplined approach to repurchasing shares, but the increased authorization combined with the increase in expected free cash flows, provides us with the flexibility to opportunistically buy back shares under the program. With respect to dividends, we declared a $0.01 increase in our quarterly dividend to $0.37 per share. This is consistent with our history of increasing our dividend each year since becoming a public company more than eight years ago. Our target dividend payout ratio remains 25% to 35% of earnings per share.

While we’re above that range today, that’s a result of temporarily depressed earnings. Let me now turn the call back over to Tom for some closing comments.

Tom Werner: Thanks, Bernadette. Let me just summarize today by saying, we expect the operating environment in the near-term will remain challenging as additional capacity expansions are announced during a period of ongoing pressure on demand. We are proactively adapting to this dynamic environment by strategically adjusting our footprint, reducing capital expenditures, managing our cost structure and improving cash flow. At the same time, we remain committed to returning capital to our shareholders through opportunistic share repurchases and steady increases in our dividend, while continuing to maintain and modernize our production assets. Overall, we remain well-positioned with the unique strength and scale that Lamb Weston System provides to navigate a tough industry-wide operating environment.

We’re taking actions to adapt our operations to weather these transitory challenges and make lasting improvements to our operations, and we’ll continue to leverage our solid fundamentals and balance sheet to continue to deliver value to our shareholders. Before taking questions, I just want to end with saying again that, serving as Lamb Weston’s President and CEO has been a privilege and an honor, and I’m proud of what the entire Lamb Weston team has accomplished during these last eight years. With Mike and his leadership team at the helm, Lamb Weston’s future is in great hands. Thank you for joining us this morning. Now let me turn it back over to Dexter.

Dexter Congbalay: Thanks, Tom. Before opening up the call for questions, I just want to note that Mike and Bernadette will be on the road with investors in January. We’ll provide details for those meetings shortly after the start of the New Year. With that, we’re now ready to take your questions.

Operator: Thank you. [Operator Instructions]. We’ll go first to Andrew Lazar with Barclays.

Andrew Lazar: Great. Thanks very much. Tom, I guess, even assuming 3% annual demand growth over time, and obviously that’s a lot more than what we currently see, as you talked about capacity utilization by 2028 would only get back to around 90% and that’s certainly below where it’s been historically in more the mid to high 90s. I guess in light of this, what do you now view as Lamb Weston’s sort of structural or normalized EBITDA margin? And is it lower or maybe appropriately how much lower is it than what you might have previously thought? And then I’ve got a follow-up.

Tom Werner: Yes. Andrew, I think based on our reguide here today and going forward, assuming all that capacity comes online and there’s no other industry adjustments to the footprint, we believe, the go forwards in the range of on an EBITDA basis 19% to 20%.

Bernadette Madarieta: Yes. And then Andrew we’ll just expand margins by pricing to offset inflation over the longer-term. But as Tom said, in the short-term, medium-term environment, we’re expecting 19% to 20% EBITDA margins.

Andrew Lazar: Thanks for that. And then, Tom, in light of the industry dynamic and some of the incremental capacity and such, why do you think other players have not yet made sort of similar decisions to curtail production or perhaps close or shutter older, less efficient facilities given all the new capacity that’s coming on stream as you have? Because again, typically it’s been an industry that’s been rational and that obviously seems to be sort of breaking down now quite materially. Thank you.

Tom Werner: Yes. Andrew, I think what as Lamb Weston, we’re managing our business based on the environment that we’re operating in. And I’m certain that the rest of the industry is evaluating the dynamics right now and it remains to be seen. But I would anticipate there may be some actions from our competitors, but it remains to be seen, based on the environment.

Bernadette Madarieta: Yes. Andrew over the long term, we expect it’s going to be a generally balanced based on the confidence and continued category growth, positive French fry attachment rate. This is just a short-term to medium-term that we’re going to have to work through this and we’ll continue to evaluate any additional opportunities to reduce costs and make sure, we profitably manage the business, as we move forward in this difficult environment.

Tom Werner: Thank you.

Operator: Thank you. We’ll take our next question from Peter Galbo with Bank of America.

Peter Galbo: Good morning. Thank you for the question. Tom, I actually wanted to spend some time on the International business because I think there’s a lot of moving parts there that maybe are not fully appreciated. So maybe we can start with Europe. I mean, I think, you’ve called out some incremental pressure. It seems like you’re expecting more. I’m not sure how much of that is tied to the fact that, you were expecting maybe a tighter potato crop this year that ended up coming in better and so competitors feel the ability to kind of price discount a bit more. So maybe if you can start with that on Europe. And then, as it relates to Asia, calling out the incremental pressure and I think the share pressure that you’re seeing now, just how you think about that with already existing in light of the capacity that’s coming.

So why would it not necessarily get worse, in some of those markets as the slide kind of outlines, there’s quite a bit of capacity that’s expected to come online. So, I know there’s a lot there, but maybe if you could address again Europe and then the Asia markets kind of separately would be helpful.

Tom Werner: Yes. So, Europe initially the crop was projected to be below average. It recovered through the growing season. So, you had some initial high cost open potatoes, the industry procured and then the crop came down. With that and the competitiveness of that market, it’s been difficult to get inflation pass through in terms of to the customer. And so, that’s really driving the pressure on the European market. And the other part of your question in terms of Asia, I would say that one of the — and we’re getting some traction. But as you recall, when we had our ERP challenges, we protected a lot of the North America customers and we had some impact on our international, specifically in Asia customers. And so, there’s — while the team is doing a great job winning back some of that business, it’s just a little bit more competitive than we anticipated and we’ll be going forward.

Bernadette Madarieta: Yes. And Tom, the only thing I’d add to that in the Asia market with the increased capacity that’s come online there, it becomes more of an export market than it ever has been. And so, we’ll continue to look for that as opportunities to move sales profitably as well.

Peter Galbo: Okay. Thanks for that. And then, I guess just on the back of Andrew’s question around EBITDA margins, if I can take it up to the gross margin level. There has been obviously quite a bit of deleverage as a result of I think idling the capacity. Bernadette, I think you called out some other factors that hopefully we can go through. But I guess the question is, look, if the deleverage, is it more than you expected, or are there just other manufacturing elements that have come in that again this gross margin now we run out at a significantly lower level? Thanks very much.

Tom Werner: Yes. I think the initial — we’ve had some production manufacturing challenges early this fiscal year in terms of efficiencies and plants running throughput and hitting production schedules. And so, that’s been really disappointing. We got a new Chief Supply Chain Officer, who’s focused on that going forward and have a number of different things identified and we are seeing improvements. But as we continue to focus on production improvements, it’s going to take some time to get us back to normal operating efficiency levels.

Bernadette Madarieta: Yes. And then, just a reminder as it relates to the back half margins, seasonally, we’ll always see gross margins in the third quarter be a little bit higher than in the fourth quarter. Not only will it be affected by seasonality, but we’ll have the absence of some of those things that affected us in the first half of the year related to the product withdrawal and some of the inventory write-offs that we had previously talked about.

Operator: Thank you. We’ll take our next question from Tom Palmer with Citi.

Tom Palmer : Good morning. Thanks for the question. I just wanted to clarify on the customer losses that were not expected. To what extent was pricing the determinant of these losses? I know there was mention of in Asia some ERP challenges. So, I’m just trying to understand like if customer service was part of the consideration here with some of the lack of wins that were expected?

Bernadette Madarieta: Yes. As it relates to customer losses, every year we go into the negotiation and it’s a very competitive environment. And so, some of that’s going to be related to price, but there wasn’t necessarily any ERP or other industry service factors at all. We continue to service our customers, but it’s a competitive environment and more competitive than we originally thought it was going to be, as we entered into the second quarter.

Tom Palmer : Okay. Understood. Thank you. I did see the expanded buyback program. Just how aggressive, I guess, are you willing to be as you watch the shares maybe a bit lower today?

Bernadette Madarieta: Yes. So, as we move forward and I mentioned the back half of the year, we’re going to have more free cash flow because most of our capital investments were made in the first half of the year. As we have more free cash flow, we’re going to opportunistically be in the market and buy back shares, and we’re excited to have the increased authorization that we announced today as well, the additional $250 million as we move forward. So, we’ll leave it at that. But again, we’ll have that additional free cash flow as we focus more on maintenance and base capital and modernization efforts moving forward.

Operator: Thank you. We’ll take our next question from Ken Goldman with JPMorgan.

Ken Goldman: The activist reiterated its opinion this morning that, in addition to management changes, Lamb requires significant board change or should be sold just to quote them. I know you don’t know every Board member’s intention, but Tom, you’re on the Board, you may have some insight here. Just curious, is it your belief at this time that, there will be meaningful Board changes, that the Board is open to Lamb being sold? And if you can’t comment, do you at least know if the company plans on issuing a formal response to the activist’s letter?

Tom Werner: Ken, we’re here today to talk about earnings, our outlook, what’s going on in the business and more importantly, the transition about Mike running the company going forward. So, I’ll leave it at that, but, that’s what we’re here to talk about today.

Ken Goldman: Okay. Following up, how do you see in terms of guidance? I know there’s a lot of moving pieces in the back half, certainly some easier comparisons. Just as we think about underlying volume trends, excluding changes to customers, the lap, are you expecting any kind of improvement sequentially in consumer demand for your products? Again, just on a like-for-like basis, if that’s even possible to kind of parse out.

Bernadette Madarieta: Yes. We are expecting incremental volume from customer wins that, I think even previously we’ve been talking started seeing the benefit of those in the third quarter. P7 to date, we are seeing the impact of that. So, a lot of positive momentum there, particularly in the international segment.

Operator: We’ll go next to Robert Moskow with TD Cowen.

Robert Moskow: Hi, thanks. Similar to Ken’s question, are there any assumptions in your back half about regaining customers that you lost from the ERP disruption? Do you have to get new business wins in the back half from — starting from today in order to achieve those numbers?

Bernadette Madarieta: The numbers that we’ve included in the back half of the year include all of our line of sight-to-customer wins that we have in place. So, no, there isn’t a large amount in there that is unknown business wins.

Robert Moskow: Okay. And a quick follow-up. You lost another chain customer in North America. Is there any concerns about reputation risk from the missteps in calendar 2024? What are your customers saying about their willingness to trust Lamb Weston as a supplier?

Tom Werner: Yes. In terms of really across the board from a customer standpoint, certainly we’ve had to address and repair some of those relationships. But by and large, I think we’re through most of, some of the challenging discussions we’ve had and it takes time, but I feel great about where we are with our large customers. And even some of the foodservice channel business, it’s taken us more time than what we had previously anticipated to regain some of those accounts that were impacted by some of the challenges we had a year ago.

Operator: We’ll take our next question from Rob Dickerson with Jefferies.

Rob Dickerson: Great. Thanks so much. Tom, maybe just kind of a basic question for you on the accrual capacity you’d now see coming online over the next three, four years. What do you think drove those players to decide to have that all that capacity there just given the operating backdrop globally, number one? And then number two, we’ve always forever kind of spoken about, fairly defragmented market, obviously, in the United States with the kind of opportunity to defragment globally. But now kind of what we’re hearing as well, that fragmentation ex-U.S. actually is causing some of this issue because you have some of these smaller players that are leading in and deciding, let’s all add this new capacity, because maybe we can get some of the margin too, we can get some of that profit too.

It just seems clearly like, this is the first time this much has been added outside of the U.S. and it doesn’t sound like we’re talking about kind of the core three other players that we normally discuss when we talk Lamb in the U.S. Thanks.

Tom Werner: Yes, Rob. So, when you step back and you go look at between 2017 and 2022 there was about 3 billion pounds that were added in the industry and all that capacity got utilized based on the demand growth. And as I said in my remarks, two, three years ago as we saw demand recovering at historical rates, we made the strategic decision to expand our footprint. And so, subsequent to that, obviously there’s been some additional capacity expansions in Europe, India and China as well as North America that I think the industry was seeing the same category growth rates. The environment we’re dealing with today is, we’re seeing restaurant slowdown in a lot of markets. And so, I think the industry has seen the same thing in terms of category growth and it slowed down.

And so, we view this as a transitory situation. And I think, as I said earlier, some of the capacity announcements we’ll see, if they actually come to fruition based on the environment or they’re delayed. So, I think it’s a combination of the industry kind of viewing the categories the same and the categories change and that’s been the big driver.

Rob Dickerson: Okay. Fair enough. And then Bernadette, it could be a little nitpicky here. But there is a one side, when you kind of map out that CapEx and we talk about the CapEx kind of starting to come off, at least the gross CapEx in fiscal ’26. And I think the total number still for CapEx is $550 million, which is similar to what you’ve spoken to in this past. But there is that little circle, right, that says 6% to 8%, which I’m assuming as I look at the chart, 6% to 8% of sales implied. Now clearly, you’ve guided to ’25, right? We know what CapEx is. We can kind of reverse engineer to get to what then you think your implied sales would be in ’26 to get to 6% to 8%. And it does — I don’t know, it seems a little high, let’s say, on the sales side. So is that like — just to clarify, like you’re very comfortable with the $550 million if it winds up being at 6% to 8% of sales.

Bernadette Madarieta: Absolutely. I’m very comfortable with $550 billion.

Rob Dickerson: Okay, great. All right, I’ll pass it on. Thanks a lot.

Operator: We’ll go next to Alexia Howard with Bernstein.

Alexia Howard: Good morning, everyone.

Tom Werner: Good morning.

Alexia Howard: Can I turn to the demand side of the equation? We’ve talked a lot about capacity and competitors this morning. What is your research telling you about the reasons for the weak consumer demand? And I imagine the reasons might be quite different between U.S. and Europe. And specifically, are you seeing any impact at the moment about on the uptake of GLP-1 weight loss drugs, particularly here in the U.S.? I’m just wondering how that informs your expectations about an improvement in demand going forward? And then I have a follow-up. Thank you.

Bernadette Madarieta: Sure. As it relates to U.S. demand, most of the decline in demand versus the prior year relates to there being the fifth consecutive quarter, where consumers have continued to face inflation and we’ve seen declines in restaurant traffic. So that’s the primary reason that we’re seeing that. As it affects our business, there’s more value promotion meals. And when those value promotion meals drive the increased traffic, we see consumers trading down and there’s been a bigger impact on that and we’ve adjusted then our forecast accordingly. If we turn to the international markets, overall the restaurant traffic trends there have slowed sequentially as well, as compared with the first quarter, as they’re continuing to adjust to menu price inflation as well.

We have not though seen a large impact from GLP-1 based on everything that we’ve seen to date. We’ll continue to monitor it. But from a demand perspective, we’re not expecting anything significant in the long term.

Tom Werner: Hi, Alexia, just one thing to also to state here. The fry attachment rates have been consistent and steady. So, it’s when people are going to restaurants are buying fries at the same time like they usually did, they might be now buying a smaller fry. But at least they’re still buying the fries when they go to the restaurants at the same rate.

Alexia Howard: Great. Thank you for that. And then as a follow-up, you mentioned in your opening remarks, new TAM opportunities with non-traditional customers. Can I ask about how large those markets are and exactly what they are that you’re going after?

Tom Werner: Yes. Alexia, I’m not going to get into specifics in terms of volume potential and specific customer opportunities. But the way to think about it is, things that we’ve done in the past with some of our customers that traditionally didn’t offer fries and/or tater tots. That’s some of the things we’re looking at with, some potentially new customer entrants into the frozen potato category and I’ll just leave it at that.

Operator: We’ll go next to Steve Powers with Deutsche Bank.

Steve Powers: Great. Thanks. Good morning for me as well. I wanted to go back to capacity utilization from a slightly different perspective. When you talk about the low 90s utilization today, how does land utilization compare to that industry benchmark? I guess, what I’m trying to get at is, how much of the industry slack is in your business?

Tom Werner: Yes. The footprint adjustments we made several months ago brought us back up into the low 90% range and that’s the reason we did it. We feel comfortable about, where our utilization is today. And as I stated earlier, we’ve had some challenges across our footprint with some unplanned downtime and other maintenance issues that we’re addressing. We’re seeing more efficient utilization in the past period and it’s improving. But overall the reasons we made the changes we made was to get our utilization rate kind of in the low 90s and we’ll improve on that.

Steve Powers: Okay. Very good. I guess — and then I want to just dig back into just the business that’s been slower to win back than you had hoped. I guess to boil it down, I guess the question is really like what’s the sales pitch to those accounts? And is there really any lever you can lean on besides price to the extent that the competition is now servicing those accounts is doing a good job?

Tom Werner: No. Some of it is price, there’s no question about it. But we also, as we’re talking to those customers, it’s talking about different products, different innovation, potentially some, if they’re doing a like value-added menu offering. So, there’s some different discussions we’re having going forward. And it’s — we’re winning some of that back. It’s just taking longer than what we anticipated.

Bernadette Madarieta: Yes. We’re focused on consistency, quality, customer service. And then, if there’s anything we can bring to the table in terms of LTOs, those are the conversations that we’re having in addition to price and the competitive environment.

Steve Powers: Thank you, very much.

Operator: We’ll take our next question from Max Gumport with BNP Paribas.

Max Gumport: Hi. Thanks for the question. I wanted to turn back to the comment on the 19% to 20% EBITDA margin being an estimate for the go forward level in the current supply demand environment. So that does look to be roughly in line with how you’re guiding for the second half EBITDA margin. But you’ve also observed today that, your earnings in ’25 are temporarily depressed. Clearly, there’s price investments going on, there’s manufacturing inefficiencies, there’s other pressures that could abate. And then, you’ll also be getting benefits from all the cost-cutting initiatives that you’re just starting to get after. So, I’m trying to get more clarity on what you see, as your normalized adjusted EBITDA margin and why it would not be higher than the 19% to 20% that you’re expecting for the second half of this fiscal year? Thanks very much.

Bernadette Madarieta: Yes. Thanks for the question. In the short to medium-term, we expect the pressures to continue. Certainly, we are doing everything we can from a cost view to make sure that we can continue to increase the profitability and we’ll continue to do that over time. But right now, in the short to medium-term with the pressures that we’ve been seeing, we’re going to go ahead and guide at the 19%, 20% range for EBITDA margins and we’ll come back, as we’re able to show more in terms of what those improvements and other things look to be. As again, our new Chief Supply Chain Officer has been here four months, but we’ve got a lot of positive things we’re seeing just this period. But want to wait until we’ve got a more robust plan to come back with on that.

Operator: We’ll go next to Matt Smith with Stifel.

Matt Smith: Hi. Good morning. Tom, you talked about initiatives to improve the impact of a lower utilization for manufacturing. Can you just provide a little more color about how you address that both in the near-term and over time? And along with that, you temporarily suspended production on some lines. Has the impact of that suspension, has that been in line with your expectations, or has it contributed to more of some of the production inefficiencies we’ve seen?

Tom Werner: No. It’s been largely in line with our expectations. The production challenges we’ve had were unplanned and the run rates for a number of different reasons weren’t up to where we normally expect them to be. And again, I’ll reiterate, they’ve improved and they’re improving. And we’ve had some start-up issues with the Kruiningen plant and a little bit American Falls that we didn’t anticipate, but those are improving. We got the teams working on them. We expect that to continue to improve and get to normalized levels here in the near-term.

Matt Smith: Thank you, Tom. And one clarification, you mentioned your utilization rate or land utilization rate improving from here. Is that a reflection of the improving traffic trends? And I’ll leave it there and pass it on. Thank you.

Tom Werner: No, it’s more a reflection of how we’re processing the potatoes in the plant and the utilization rate and just being more efficient with how we’re running the lines and assuming that, we’ve got a lot of the issues here in the last three, four months addressed going forward. We’re expecting to be running more normalized here for the back half of the year.

Operator: We’ll go next to Marc Torrente with Wells Fargo Securities.

Marc Torrente: Hi, good morning and thank you for taking my questions. Just a little more on the utilization, just asking different way. So, you believe you’re currently in line with industry rates in the low 90s and most of the forward incremental capacity you laid out through 2018 is from competitors. So, would you expect to be ahead of industry capacity utilization over the medium-term?

Tom Werner: No, I think we’re generally in line. I know there’s some competitors that, from what we understand are running higher. But I think overall, we’re at kind of industry standard right now.

Marc Torrente: Okay. And then finished goods inventory elevated coming out of Q1, inventory seemed higher in Q2. Any color on how much progress you had working through that during the quarter? Where are you currently versus normalized levels? And when would you expect production at Lamb Weston Pivot?

Bernadette Madarieta: Yes. As it relates to second and third quarters, our raw material inventory and our finished goods inventory are usually at their peak, because we’ve just harvested potatoes in September October. So, you usually see that peak and then we’ll continue to work those inventories down, as we move forward throughout the balance of the year.

Marc Torrente: Okay. Thanks.

Operator: We’ll take our next question from Carla Casella with JPMorgan.

Carla Casella: Hi. Just wanted a question on leverage. I know your CapEx is coming down next year, but looking at the balance of CapEx coming down, increased buybacks, increased dividend, just have you changed your leverage target view there or have you had conversations with the agencies?

Bernadette Madarieta: Yes. No change to our leverage target. We continue to target the 3.5 times leverage ratio.

Carla Casella: Okay. Great. Thanks.

Bernadette Madarieta: Thank you.

Operator: Thank you. With no additional questions in queue, I’d like to turn the call back over to Mr. Congbalay for any additional or closing remarks.

Dexter Congbalay: Thanks everyone for joining the call today. If you have any follow-up questions, please e-mail me and we could schedule a time to do so. Again, thank you and have a happy holiday everyone.

Operator: Thank you. That will conclude today’s call. We appreciate your participation.