The paragraph is part of the Lamb Weston Second Quarter Fiscal Year 2025 Earnings Call. Dexter Congbalay introduces the call, mentioning that they have issued an earnings press release and slides available on their website. The call includes forward-looking statements, and they caution that actual results may differ due to risks. Tom Werner, the CEO, announces a leadership change, stating that he will step down and Mike Smith, the current COO, will take over as President and CEO on January 3rd, 2025. The transition aims to guide Lamb Weston into its next phase of growth.

The paragraph discusses the appointment of Mike as a leader at Lamb Weston, highlighting his 17-year career with the company and his understanding of its operations. Despite recent below-expectation performance, the company is navigating a challenging operating environment with weak restaurant traffic and increased competition. Lamb Weston plans to adapt its operations by cutting costs, improving sales execution, and expanding its market. The company also intends to reduce capital spending next year, prioritizing modernization and environmental investments over growth capital.

The company experienced an 8% decline in net sales compared to the previous year, with a 6% drop in volume, largely due to decreasing restaurant traffic in the U.S. and key international markets, customer share losses, and strategic exits from certain low-margin businesses in EMEA. These declines exceeded expectations amid rising competition. Although pricing actions in North America met expectations, international pricing was more competitive. Sales specifically in North America fell 8%, driven by decreased restaurant traffic and prior share losses in certain accounts.

Restaurant traffic in the second quarter declined by about 2% compared to the previous year, but showed modest improvement from the first quarter due to increased promotions by QSRs, particularly those specializing in hamburgers, which saw a 1.5% drop in traffic. Despite improved traffic and a steady fry attachment rate, smaller serving sizes due to promotional meal deals impacted volumes. In North America, a 3% decline in price mix resulted from strategies to retain and attract volume and an unfavorable mix. International sales fell 6%, driven by declining traffic in key markets, such as Germany, France, and Spain, and competitive pressures in the Middle East and Asia Pacific. Japan saw growth deceleration, while China remained weak. Additionally, exiting low-margin EMEA businesses continued to impact volumes, although its effect is ending. Incremental pricing in international markets balanced the benefits of inflation-driven pricing in EMEA, resulting in flat price mix.

The paragraph discusses a $95 million decrease in adjusted EBITDA to $282 million compared to the previous year's quarter due to a $135 million decline in adjusted gross profit. This decline was mainly caused by a reduced price mix, higher manufacturing costs per pound, unplanned downtime and start-up costs, and increased depreciation expenses linked to capacity expansions in China and Idaho. Adjusted SG&A expenses fell by $12 million to $165 million, attributed to expense reduction initiatives, despite increased amortization from a new ERP system. In North America, adjusted EBITDA dropped by $55 million to $267 million due to unfavorable factors like price mix and higher costs. The International segment saw a $53 million decline in adjusted EBITDA to $47 million, driven by higher costs and competitive pressures. Slide 7 focuses on liquidity and cash flow.

The company ended the second quarter with $80 million in cash and $1.2 billion available from a revolving credit facility, resulting in a net debt of $4 billion and a leverage ratio of 3.4 times. Cash from operations for the first half of the year was nearly $430 million, down by $25 million from the previous year due to lower earnings offset by favorable changes in working capital. Capital expenditures totaled $486 million, mainly for projects in the Netherlands and Argentina, but are expected to decrease in the second half, with a goal of $750 million for fiscal 2025. The company returned $52 million to shareholders through dividends but did not buy back any shares. Tom Werner discussed updates on the global frozen potato industry, noting that after a brief COVID-related decline, demand quickly returned to pre-pandemic levels and historical growth rates.

The paragraph details a strategic plan to expand production capacity in response to growing global demand, with initial announcements made in early 2021. This included projects in several countries. By October 2023, other processors had also announced expansions, leading to a potential addition of 8.6 billion pounds of capacity over the next four years, mainly in Europe, China, Brazil, India, and the Middle East. Despite uncertainties about the completion of all announced expansions, if realized, total industry capacity could exceed 44 billion pounds by 2028, marking a significant increase compared to the previous five-year period.

The paragraph discusses the implications of industry capacity utilization, which is expected to decrease to the mid to high 80s in the coming years due to a slowdown in global demand and increased supply. This creates a challenging operating environment despite potential demand recovery. To address the imbalance, the company has implemented a restructuring plan that includes headcount reduction, closing a processing facility, and temporary production cuts, aiming for significant cost savings by fiscal 2025 and 2026. A new Chief Supply Chain Officer has been hired to identify further cost reduction opportunities. More details on performance and profitability improvement initiatives will be shared later.

The company is lowering its financial targets for fiscal 2025 due to underperformance in the second quarter and an increasingly competitive environment. The new net sales target range is $6.35 billion to $6.45 billion, indicating a 1% sales decline compared to fiscal 2024. Adjusted EBITDA is also being reduced from around $1.38 billion to $1.17 billion to $1.21 billion. Factors contributing to the sales target reduction include a loss of a chain restaurant customer in North America, partly offset by new customer acquisitions and changes in promotional meals. Price mix forecasts in North America have decreased slightly, while the international segment expects lower volumes due to increased competition and softer restaurant traffic.

The paragraph discusses Lamb Weston's expectations of financial performance, highlighting anticipated challenges in their markets. In Asia Pacific and Latin America, increased competition and slowing demand are pressuring prices, while in EMEA, inflation-driven pricing adjustments are being moderated. The company predicts a 1% decline in net sales due to a decrease in price mix, partly offset by a slight increase in volume. Adjusted EBITDA is expected to be $190 million lower, primarily due to underperformance in the second quarter and competitive pressures affecting volume and pricing. Manufacturing inefficiencies and a less favorable mix in North America contribute to increased costs. Despite these challenges, Lamb Weston forecasts sales growth of 1% to 4% in the second half of the year, driven by higher volumes in both international and North American markets._EXPECT_TAGS:finance

The paragraph discusses the company's forecasts for volume and earnings growth. The International segment is expected to drive the majority of overall volume increases, benefiting from new customer contracts and overcoming previous setbacks like ERP transition issues and product withdrawals. North American growth will also benefit from overcoming past challenges and new contracts. However, overall price mix is expected to decline in both regions due to pricing actions and competitive pressures. Despite anticipated volume growth, adjusted EBITDA is predicted to be similar to the previous period, as benefits will be offset by strategic price investments, increased costs, and manufacturing inefficiencies. The paragraph concludes with a reference to a discussion on capital expenditures.

The company plans to allocate approximately $750 million for capital expenditures in fiscal 2025, with $485 million already spent in the first half on projects in the Netherlands and Argentina. The second half will focus on maintenance and construction in Argentina, which is slated for mid-2025 completion. For 2026, they are targeting $550 million in expenditures, with $400 million for maintenance and modernization and $150 million for environmental projects, mainly wastewater treatment. Over the next five years, a total of $500 million is expected to be spent on regulatory compliance. Beyond 2026, investment will concentrate on maintenance and modernization, along with $75 million annually for environmental efforts, anticipating a positive free cash flow inflection point in 2026. Additionally, the company announced a $250 million increase in its share repurchase program, leaving $560 million available for buybacks. The figures exclude future spending on ERP implementation.

The company plans to maintain its disciplined approach to share repurchases, benefiting from an increased authorization and anticipated higher free cash flows, allowing for opportunistic buybacks. They've announced a $0.01 increase in their quarterly dividend to $0.37 per share, consistent with their annual dividend growth since going public. Although their current dividend payout ratio exceeds the target due to temporarily reduced earnings, they aim to adapt to challenging market conditions through strategic adjustments, cost management, and cash flow improvement. Despite near-term challenges, they are committed to returning capital to shareholders and enhancing their operations, leveraging the company's strengths to navigate the difficult industry environment and deliver shareholder value.

The paragraph discusses a conference call where Tom Werner expresses gratitude for his time as Lamb Weston's President and CEO, assuring that the company is in good hands with Mike and his leadership team. Dexter Congbalay mentions upcoming investor meetings in January. During the Q&A, Andrew Lazar from Barclays inquires about Lamb Weston's future capacity utilization and EBITDA margins, highlighting a concern that future utilization might not reach historical levels. Tom Werner and Bernadette Madarieta respond, noting that despite market conditions, they expect EBITDA margins to be around 19% to 20% in the near to medium term, with plans to use pricing strategies to counter inflation.

The paragraph features a discussion during a conference call where Andrew questions Tom Werner, of Lamb Weston, about why other industry players haven't reduced production or closed less efficient facilities given the new capacity in the market. Tom explains that Lamb Weston manages its business based on current industry dynamics and anticipates potential actions from competitors. Bernadette Madarieta comments that the company expects a balanced long-term outlook due to positive category growth, implying that current challenges are temporary. The discussion then transitions to Peter Galbo of Bank of America asking about pressure in the International business, particularly in Europe, which may be linked to a better-than-expected potato crop, allowing competitors to reduce prices.

The paragraph discusses the challenges and dynamics in the European and Asian markets. In Europe, despite an initial below-average potato crop projection that improved over time, high costs and competitive pressures have prevented passing inflation onto customers, impacting the market. In Asia, following ERP-related disruptions, efforts are being made to regain business, but it's more competitive than expected. Bernadette Madarieta mentions that with increasing capacity, Asia becomes more of an export market, presenting opportunities for profitable sales. Peter Galbo shifts the focus to questions about gross margins.

The paragraph discusses challenges a company is facing with production efficiency and gross margins. Tom Werner mentions that they have experienced manufacturing inefficiencies and production issues this fiscal year, which have impacted their operating efficiency. A new Chief Supply Chain Officer has been appointed to address these issues, and improvements are being observed. Bernadette Madarieta highlights that while third-quarter gross margins are typically higher than the fourth due to seasonality, the company also faced challenges like product withdrawals and inventory write-offs earlier in the year. The operator then introduces a question from Tom Palmer, who inquires about unexpected customer losses and whether pricing or customer service issues, particularly in Asia, contributed to these losses.

The paragraph discusses customer losses in a competitive environment, with some losses related to pricing but not due to ERP or service factors. Tom Palmer acknowledges understanding of the situation and Bernadette Madarieta explains the company's strategy to use free cash flow for share buybacks, especially since most capital investments were made earlier in the year. An additional $250 million buyback authorization is announced. Ken Goldman from JPMorgan inquires about potential board changes and the possibility of the company being sold, as suggested by an activist. The response is uncertain, with no clear insight into board members' intentions or a formal company response to the activist's letter.

The paragraph is a discussion about the business outlook and challenges faced by the company, focusing on transitioning leadership, earnings guidance, and customer relationships. Tom Werner opens the discussion about leadership transition and future company plans. Ken Goldman inquires about consumer demand and volume trends. Bernadette Madarieta mentions positive momentum from new customer wins, particularly internationally. Robert Moskow asks about recovering lost customers due to ERP disruptions and inquiries about the company's reputation risk following a customer loss in North America. Madarieta confirms current projections include known customer wins, and Werner acknowledges efforts to repair and maintain customer relationships.

The paragraph discusses the challenges faced by a company in regaining some of its large customers and foodservice channel business following earlier difficulties. Rob Dickerson from Jefferies inquires about the new capacity coming online in the next few years and the reasons behind smaller global players deciding to add capacity, leading to market fragmentation outside the U.S. Tom Werner responds by noting that between 2017 and 2022, 3 billion pounds of capacity were added in the industry, which was utilized due to demand growth, and mentions a strategic decision to expand their footprint as demand recovered.

The paragraph discusses industry capacity expansions in regions like Europe, India, China, and North America in response to category growth rates, which have since slowed alongside a restaurant market downturn. This slowdown is viewed as temporary, and future capacity projects might be delayed based on current conditions. Rob Dickerson and Bernadette Madarieta discuss capital expenditure (CapEx), with Bernadette expressing confidence in the $550 million CapEx figure, expected to represent 6% to 8% of sales by fiscal '26. Rob acknowledges this clarification and passes the conversation to Alexia Howard, who intends to discuss demand aspects.

The paragraph discusses factors affecting weak consumer demand in the U.S. and Europe, noting ongoing inflation and decreased restaurant traffic as major reasons, particularly in the U.S. The impact on business includes consumers opting for more value promotion meals, leading to trading down. International markets are also experiencing slowed restaurant traffic due to menu price inflation. Although GLP-1 weight loss drugs have not shown a significant impact on demand, the situation is being monitored. Additionally, fry attachment rates remain steady, though consumers may be purchasing smaller sizes.

In the paragraph, the discussion revolves around new market opportunities with non-traditional customers in the frozen potato category. Tom Werner mentions that they are exploring opportunities with potential new customer entrants who traditionally didn’t offer fries or tater tots. He avoids giving specific details about market size or customer opportunities but hints at past collaborations with similar customers. The conversation also shifts to their current capacity utilization, which is in the low 90s percentage range following recent adjustments. Werner explains these changes were made to improve utilization and discusses ongoing efforts to address unplanned downtime and maintenance issues. Steve Powers from Deutsche Bank questions the company's approach to regaining business that has been slower to recover, seeking insight into their sales strategies for those accounts.

In the paragraph, Tom Werner and Bernadette Madarieta discuss strategies beyond pricing to regain customer accounts from competitors, such as focusing on different products, innovations, consistency, quality, and customer service. They acknowledge winning back customers is taking longer than anticipated. Bernadette emphasizes the importance of maintaining quality and exploring limited-time offers (LTOs). Max Gumport then asks about the expected 19%-20% EBITDA margin in light of temporary earnings depression and ongoing cost-cutting efforts. Bernadette responds, indicating they anticipate short- to medium-term pressures continuing, affecting the margin outlook.

The company is focusing on maintaining and potentially increasing profitability in the short to medium-term by guiding EBITDA margins in the 19-20% range, despite current pressures. Their new Chief Supply Chain Officer has shown positive developments, but a more detailed plan will be presented later. In response to lower manufacturing utilization, they have temporarily suspended production on some lines, which has met expectations. Despite unplanned production challenges and start-up issues at certain plants, improvements are being made, and they anticipate normalizing operations soon. Improvements in land utilization rates are expected due to better traffic trends.

In the paragraph, Tom Werner discusses the current efficiency in processing potatoes and anticipates normalized operations in the latter half of the year. Marc Torrente from Wells Fargo Securities inquires about the company's alignment with industry utilization rates and potential capacity expansion. Werner confirms they are generally in line with the industry but acknowledges some competitors might have higher utilization rates. Torrente also questions elevated finished goods inventory levels, and Bernadette Madarieta explains that these peaks are typical due to recent potato harvests, with inventories expected to decrease over the year. Carla Casella from JPMorgan is introduced with a question on leverage towards the end.

In the paragraph, during a call, Bernadette Madarieta confirms that despite changes in their capital expenditures (CapEx), buybacks, and dividends, there is no change to their leverage target, which remains at a 3.5 times leverage ratio. Carla Casella acknowledges this response. The operator then closes the session by inviting participants to contact Dexter Congbalay for any follow-up questions and wishes everyone a happy holiday.

This summary was generated with AI and may contain some inaccuracies.