Executive Summary / Key Takeaways

• Lamb Weston is executing a strategic turnaround focused on operational efficiency, cost reduction, and regaining market share to counter soft global restaurant traffic and increased industry capacity.
• Recent performance shows signs of sequential volume recovery (9% growth in Q3 FY2025) and profitability stabilization, despite persistent macroeconomic uncertainty and competitive pricing pressures.
• The company's restructuring plan, including facility closure and production curtailments, is on track to deliver significant cost savings ($55 million in FY2025, $85 million annualized in FY2026) and is complemented by a broader end-to-end value creation review.
• Significant capital investments in new, more efficient capacity are nearing completion, positioning Lamb Weston to leverage a modernized footprint and improve free cash flow starting in FY2026, even as environmental compliance requires substantial future spending.
• While near-term challenges persist, including the risk of continued demand softness and competitive intensity, Lamb Weston's focus on internal execution, technological advantages, and customer relationships underpins its confidence in long-term category growth and value creation.

Setting the Scene: A Global Leader Adapts to Shifting Tides

For 75 years, Lamb Weston Holdings, Inc., headquartered in Eagle, Idaho, has been a cornerstone of the global frozen potato products market. As the number one supplier in North America and a leading player internationally, the company has built its reputation on producing value-added products, primarily French fries, for a diverse customer base spanning over 100 countries, heavily weighted towards the foodservice channel, particularly Quick Service Restaurants (QSRs). Becoming publicly traded over eight years ago provided the capital necessary to fuel significant strategic growth, including major capacity expansions and the integration of its European joint venture.

However, the operating environment has shifted dramatically. Fiscal year 2024 brought a confluence of challenges: a disruptive ERP system transition in North America impacting customer fulfillment, a voluntary product withdrawal to uphold quality standards, and, most significantly, a rapid softening of global restaurant traffic that accelerated into fiscal 2025. This demand weakness, coupled with substantial capacity expansion announcements by competitors, has created a notable supply-demand imbalance across the industry, intensifying the competitive landscape. Lamb Weston's narrative today is one of strategic adaptation – leveraging its foundational strengths to navigate these near-term headwinds while positioning itself for long-term growth.

The Competitive Arena: Battling for Share in a Crowded Market

Lamb Weston operates within a dynamic competitive environment, facing off against both publicly traded players like Conagra Brands (CAG), Tyson Foods (TSN), and Kraft Heinz (KHC) (in overlapping frozen food segments) and significant privately held rivals such as McCain Foods and J.R. Simplot. While precise, directly comparable market share figures for all niche competitors are not publicly detailed, Lamb Weston holds an estimated 25-30% aggregate share in frozen potatoes, a testament to its scale and market penetration.

The current environment is marked by increased intensity. Competitors, including legacy players and newer entrants, have announced plans to add over 3.5 billion pounds of capacity between 2024 and 2027, primarily outside the U.S., potentially adding 10 billion pounds globally between 2023 and 2028 – significantly more than in the preceding five years. This influx of supply into a market facing soft demand has heightened competition for volume, leading to targeted price investments across the industry.

Compared to diversified peers like Conagra Brands and Tyson Foods, Lamb Weston maintains a more focused portfolio centered on potatoes. This focus allows for deeper expertise and efficiency within its niche, contributing to generally higher gross margins (LW TTM Gross Profit Margin: 22.61% vs. CAG 28%, TSN 7%, KHC 35% - noting KHC's different product mix). However, this specialization also exposes Lamb Weston more directly to fluctuations in potato input costs and demand specific to the potato category, unlike competitors with broader protein or packaged food portfolios. Lamb Weston strategically positions itself as a premium, value-added provider, leveraging its brand reputation and product quality to command pricing power where possible, contrasting with more cost-focused strategies employed by some rivals. The company's extensive global distribution network and strong relationships with large chain customers provide a significant competitive moat, although recent share losses, partly due to operational disruptions, highlight the need to actively defend and regain position through targeted actions.

Technological Edge and Innovation: A Foundation for Quality and Efficiency

At the heart of Lamb Weston's competitive strength lies its differentiated technology and commitment to innovation in potato processing. While specific, detailed quantitative metrics on all proprietary technologies are not publicly disclosed, the company emphasizes its advanced capabilities in areas such as freezing processes, slicing techniques, and product formulation.

These technologies translate into tangible benefits that contribute to its competitive moat:

• Operational Efficiency: Advanced processing techniques are designed to optimize yield per unit and reduce waste, contributing to lower manufacturing costs compared to less specialized or older processes used by some competitors.
• Product Quality & Performance: Technology enables superior product attributes such as consistent texture, taste retention, and potentially longer shelf life for frozen products, which are critical for foodservice customers focused on quality and minimizing waste. Innovation also extends to developing products with specific benefits, like reduced oil absorption or the ability to be held refrigerated for extended periods ("fridge-friendly fries"), expanding the addressable market.
• Innovation Pipeline: Ongoing R&D supports the development of new, value-added products and variations (e.g., battered/seasoned fries, licensed retail products, the 3-sided Frenzy Fries). These initiatives aim to meet evolving consumer preferences and help customers drive traffic through unique menu offerings. While specific target metrics for new technologies are not always public, the strategic intent is clear: enhance product differentiation, improve operational efficiency, and open new market opportunities.

For investors, this technological foundation is crucial. It supports Lamb Weston's premium positioning, underpins its ability to command pricing power (even in a competitive environment), drives manufacturing efficiency contributing to profitability, and fuels future growth by enabling market expansion and meeting diverse customer needs. It's a key element of the company's strategy to maintain relevance and profitability in a commoditized market segment.

Recent Performance: Navigating Operational Bumps and Market Softness

Fiscal year 2024 presented significant operational hurdles. The North America ERP transition in the second half led to reduced inventory visibility and impacted customer order fulfillment, contributing to estimated net sales impacts of $135 million and net income impacts of $95 million pre-tax in Q3 FY2024 alone. This disruption, coupled with a voluntary product withdrawal in Q4 FY2024 (resulting in charges of approximately $40 million in Q4 FY2024 and $39 million in Q1 FY2025 Adjusted Gross Profit), weighed heavily on results.

Q4 FY2024 performance fell short of targets, with net sales declining 5% and volume down 8%, impacted by share losses (higher than anticipated), the product withdrawal, and soft restaurant traffic. Adjusted Gross Profit declined $72 million, and the gross margin of 23% was 400 basis points below target, largely due to the withdrawal and unfavorable mix from lost share of higher-margin customers.

The challenges continued into the first half of fiscal 2025. Q1 FY2025 saw net sales decline 1% and volume down 3%, still reflecting carryover share losses, EMEA business exits, soft traffic, and the withdrawal impact. Adjusted Gross Profit declined $137 million, pressured by the withdrawal, higher depreciation from new plants, and increased manufacturing costs per pound due to input inflation and lower utilization rates. Q2 FY2025 performance was below expectations, with sales down 8% and volume down 6%, driven by declining traffic, incremental share losses (exceeding expectations due to competitive intensity), and the carryover EMEA exits. Adjusted EBITDA fell $95 million, primarily from a $135 million decline in Adjusted Gross Profit, reflecting price/mix declines, higher manufacturing costs (input inflation, lower utilization, unplanned downtime), and increased depreciation.

However, Q3 FY2025 showed signs of sequential improvement, aligning with updated expectations. Net sales increased 4% to $1,520.5 million, driven by a 9% volume increase. This volume growth was crucial, reflecting the successful replacement of volume lost during the prior year's ERP transition and recent customer contract wins, net of losses, although soft traffic still tempered the increase. Price/mix declined 5% due to planned investments to compete. Adjusted EBITDA increased 6% to $363.8 million, benefiting from higher sales volume and lower manufacturing costs per pound (lapping prior year issues), partially offset by unfavorable price/mix and higher transportation/warehousing costs. The North America segment saw sales up 4% and Adjusted EBITDA up 5%, while International sales were up 5% but Adjusted EBITDA declined 8% due to unfavorable price/mix and higher costs, despite strong volume growth. For the thirty-nine weeks ended February 23, 2025, net sales were $4,775.5 million (down 2%) and Adjusted EBITDA was $935.6 million (down 21%).

Strategic Response and Restructuring for Efficiency

In response to the persistent challenging environment, Lamb Weston has taken decisive action. The Restructuring Plan, announced in October 2024, is a key component of its strategy to drive operational and cost efficiencies and improve cash flows. This plan includes:

• The permanent closure of the Connell, Washington manufacturing facility, an older, higher-cost plant, reducing North America capacity by over 5% (nearly 300 million pounds).
• Temporary curtailment of certain production lines and schedules across the North America network to better manage utilization rates and reduce elevated finished goods inventory.
• A reduction in global headcount by approximately 4%.
• Reductions in other operating expenses and capital expenditures.

These actions are expected to generate approximately $55 million in pre-tax cost savings in fiscal 2025 ($36.7 million in SG&A, $18.3 million in Cost of Sales based on 2/3, 1/3 split) and annualized savings of about $85 million in fiscal 2026. Pre-tax charges associated with the plan are estimated at $190 million to $210 million, with $169.4 million recognized in the first thirty-nine weeks of FY2025.

Beyond the initial restructuring, Lamb Weston is undertaking a thorough end-to-end review with AlixPartners to accelerate value creation and refine its long-term strategy. This includes over 30 projects focused on areas like logistics optimization, warehouse space reduction, and broader supply chain and operating expense efficiencies. The goal is to improve fundamentals, enhance execution, and ensure the company is best positioned to navigate the current market and capitalize on future growth.

Liquidity and Capital Allocation: Investing for the Future, Returning to Shareholders

Lamb Weston maintains a solid balance sheet and ample liquidity. As of February 23, 2025, the company had $67.5 million in cash and cash equivalents and $1,052.5 million available under its revolving credit facility, totaling $1.1 billion in liquidity. Net debt stood at $4.2 billion, resulting in a leverage ratio of 3.4x on a trailing 12-month basis, within manageable levels, and the company remains in compliance with its debt covenants.

Cash flow from operations for the first thirty-nine weeks of FY2025 was $485.3 million, a slight increase year-over-year, benefiting from favorable working capital changes despite lower income. Investing activities used $559 million, primarily directed towards the ongoing capacity expansion projects in the Netherlands and Argentina. The projects in China and the U.S. were completed in FY2024, and the Netherlands expansion was completed in Q2 FY2025, with Argentina on track for mid-calendar 2025 completion.

Capital expenditures for fiscal 2025 are targeted at $750 million, a reduction from the initial plan, reflecting the deferral of the next phase of the ERP system build and other modernization projects as part of the restructuring efforts. Over 80% of this CapEx is committed to completing the major expansion projects. Looking ahead, fiscal 2026 is expected to be a positive inflection point for free cash flow, with a targeted CapEx of approximately $550 million. This includes about $400 million for base maintenance and modernization (expected to be in line with annual depreciation and amortization) and $150 million for environmental capital projects, as the company anticipates spending approximately $500 million over the next five years to comply with increasingly strict wastewater treatment regulations.

Lamb Weston remains committed to returning cash to shareholders. The share repurchase authorization was increased by $250 million to $750 million in December 2024, with $458 million remaining as of February 23, 2025. The company repurchased 2.97 million shares for $193.8 million in the first thirty-nine weeks of FY2025. The quarterly dividend was also increased by $0.01 to $0.37 per share, continuing its history of annual increases since becoming public. While the current dividend payout ratio is temporarily above the 25%-35% target range due to depressed earnings, the company intends to repurchase shares opportunistically, potentially allowing leverage to temporarily exceed 3.5x.

Outlook and Guidance: A Cautious Near-Term, Focus on Execution

Lamb Weston's outlook for the remainder of fiscal year 2025 reflects the expectation that the challenging operating environment will persist. The company reaffirmed its full-year guidance in the Q3 FY2025 call, targeting:

• Net Sales: $6.35 billion to $6.45 billion (updated from previous ranges), implying a 1% decline versus fiscal 2024 at the midpoint. This is expected to be driven by a low to mid-single-digit decline in price/mix, partially offset by a low single-digit increase in volume growth.
• Adjusted EBITDA: $1.17 billion to $1.21 billion (updated from previous estimates).
• Adjusted SG&A: $665 million to $675 million (updated from previous ranges).
• Effective Tax Rate: Approximately 28% (excluding comparability items).
• Capital Expenditures: Approximately $750 million.

Management expects sales volumes in Q4 FY2025 to be slightly higher than Q3, primarily driven by International growth. However, costs per pound are expected to increase sequentially in Q4 due to seasonal factors and higher factory burden absorption related to production curtailments, which will more than offset manufacturing efficiency improvements. The benefit from incremental volume in the International segment is expected to be largely offset by planned price investments and higher costs per pound for the full year.

For fiscal 2026, the targeted CapEx reduction to $550 million signals a shift in focus towards base maintenance, modernization, and environmental compliance rather than growth capital, aligning with expectations for lower industry capacity utilization in the medium term. This is anticipated to be a positive inflection point for free cash flow generation.

The guidance assumes that soft restaurant traffic trends will continue, particularly in the U.S. QSR segment, and that the competitive environment will remain intense, necessitating targeted price investments. While they do not anticipate a near-term improvement in the demand environment, the company is focused on internal execution, cost reduction, and leveraging its modernized asset base.

Key Risks and Challenges

Despite proactive measures, several risks could impact Lamb Weston's performance and the investment thesis:

• Persistent Demand Weakness: Continued soft global restaurant traffic, exacerbated by consumer economic uncertainty and potential trade-down in serving sizes, could further pressure volume and pricing.
• Competitive Capacity: The significant increase in announced industry capacity, particularly if it comes online as planned, could prolong the supply-demand imbalance and intensify competitive pricing pressures beyond current expectations.
• Operational Execution: Risks remain in successfully implementing the restructuring plan, achieving targeted cost savings, and improving manufacturing efficiencies, especially with temporary curtailments and new plant ramp-ups.
• Input Cost Volatility: While North America potato prices are expected to decline, other input costs (edible oils, packaging, energy) and European potato costs remain subject to volatility.
• Environmental Capital Expenditures: The substantial spending required for environmental compliance ($500 million over five years) represents a significant capital drain, although the company is exploring mitigation options.
• Litigation: Ongoing federal securities and antitrust class actions present potential financial and reputational risks.
• Shareholder Activism: While engagement is ongoing, activist pressure could lead to strategic shifts or distractions.

Conclusion

Lamb Weston is navigating a complex period marked by operational recovery from past disruptions and significant external pressures from soft demand and increased industry capacity. The company's recent performance shows early signs of volume stabilization and profitability management, driven by aggressive internal actions like the restructuring plan and a broader focus on cost discipline and operational efficiency.

The core investment thesis centers on Lamb Weston's ability to weather this challenging near-term environment by controlling internal factors – optimizing its cost structure, leveraging its modernized manufacturing footprint, and regaining market share through focused commercial efforts and technological advantages. While the competitive landscape is intensifying and demand recovery timing remains uncertain, the company's strategic adjustments, coupled with expected improvements in free cash flow generation starting in fiscal 2026 as major CapEx projects conclude, position it to benefit when the global frozen potato category inevitably returns to its historical growth trajectory. Investors should monitor the trajectory of restaurant traffic, the impact of competitive capacity additions, and the successful execution of Lamb Weston's cost reduction and volume recovery initiatives as key indicators of progress.