Lamb Weston’s European Capacity Actions and Margin Outlook Don’t Match in 2026 Earnings Call

Date of Call: Apr 1, 2026

Financials Results

• Revenue: $6.45B-$6.55B (full-year guidance range, Q3 revenue not explicitly stated)
• Gross Margin: 20.9% in Q3; adjusted gross margin expected to decline 250-300 bps in Q4

Guidance:

• Net sales expected in range of $6.45B-$6.55B, including ~1.8% FX benefit.
• Adjusted EBITDA expected in range of $1.08B-$1.14B, including impact from Middle East conflict.
• North America: high single-digit volume growth in second half (Q4 includes extra week).
• International: full-year volume growth expected but declines anticipated in second half; Q4 constant currency price mix unfavorable, expected to moderate slightly.
• Q4 adjusted gross margin expected down 250-300 bps from 20.9%.
• Full-year tax rate ~28%, depreciation/amortization ~$395M.

Business Commentary:

North America Performance:

• Lamb Weston's North America segment reported 12% volume growth and 5% net sales growth in Q3.
• This performance was driven by customer wins, share gains, and strong retention, despite soft restaurant traffic and consumer sentiment.

International Challenges and Actions:

• The international segment experienced a 9% decline in net sales on a constant currency basis, with a 2% decrease in volume.
• Challenges were due to a surplus in the European potato market, local sourcing in developing regions, and lower restaurant traffic. The company responded by closing a plant in Argentina and curtailing production in the Netherlands.

Cost Savings and Strategic Investments:

• Lamb Weston achieved its goal of $100 million in cost savings in fiscal 2026 ahead of schedule, contributing to improved customer partnerships and operational efficiencies.
• The savings were reinvested to support customers, enhancing product quality and innovation, which strengthened customer retention and acquisition.

Pricing and Market Dynamics:

• North America's price mix declined 7%, influenced by price and trade support for customers and a shift towards value-oriented channels.
• Despite this, the company managed to grow volumes, supported by an additional week of sales in Q4 and strategic pricing decisions.

Outlook and Strategy Adjustments:

• The company raised its fiscal 2026 net sales guidance, expecting growth in the range of $6.45 billion to $6.55 billion.
• Adjustments were made to account for dynamic market conditions, including potential impacts from the Middle East conflict and evolving capacity strategies.

Sentiment Analysis:

Overall Tone: Neutral

• Management highlights 'solid performance' and 'strong customer partnerships' in North America with volume growth. Internationally, acknowledges 'challenged' markets and takes cost actions, but notes 'progress' on strategy. Outlook is cautiously optimistic: 'We are making clear progress' on Focus to Win, though environment remains 'dynamic' and 'evolving quickly'.

Q&A:

• Question from Tom Palmer (JPMorgan): On utilization rates and actions to reach targeted 90%+ range.
  Response: North America is in low 90s%; restarted curtailed lines for flexibility. Internationally, actions like curtailing lines and closing Argentina plant are taken; evaluation based on supply/demand.

• Question from Tom Palmer (JPMorgan): On European pricing environment and potential margin recovery.
  Response: Decline due to capacity imbalance, soft demand, and cheap potatoes; contracting less acres this year, expecting industry-wide reduction.

• Question from Peter Galbo (Bank of America): On North America price mix outlook into fiscal 2027.
  Response: Expect continued price mix pressure into fiscal 2027, moderating with benefits from recent actions; will provide guidance in Q4.

• Question from Peter Galbo (Bank of America): On reduced CapEx guidance and structural expenditures.
  Response: Decline due to no longer needing greenfield expansions; disciplined spending on environmental projects continues as planned.

• Question from Matthew Smith (Stifel): On North America volume trajectory and selectivity.
  Response: Focus on customer partnerships drives volume; as utilization normalizes, can be more thoughtful about business selection.

• Question from Matthew Smith (Stifel): On potato write-offs and inventory for 2027.
  Response: No additional raw potato write-offs anticipated; Q3 write-off reflected current demand view.

• Question from Robert Moskow (TD Cowen): On North America competitor supply chain footprint and capacity.
  Response: Can't comment on competitors; Lamb Weston is winning business with strong utilization and moderating price mix.

• Question from Alexia Howard (Bernstein): On avoiding European potato write-offs via demand planning.
  Response: Adjusted procurement processes in Europe for better flexibility and demand prediction, as seen in North America.

• Question from Alexia Howard (Bernstein): On North America price mix outlook for fiscal 2027.
  Response: Too early to specify; new business with chains/retail created mix headwind but adds industry strength.

• Question from Scott Marks (Jefferies): On North America curtailed lines and available capacity.
  Response: Most curtailed lines in North America have been restarted, providing flexibility and selectivity.

• Question from Scott Marks (Jefferies): On international competitor capacity and behavior.
  Response: No direct comments; pace of competitor capacity announcements has slowed, some short-term curtailments in Europe.

• Question from Marc Torrente (Wells Fargo Securities): On incremental cost savings and future targets.
  Response: Savings on track, mostly from supply chain; cultural shift ongoing, further plans to be shared later.

• Question from Marc Torrente (Wells Fargo Securities): On portfolio management and strategic approach.
  Response: Prioritizing markets/channels per Focus to Win; new Executive Chair assessing international businesses for adjustments.

• Question from Carla Casella (JPMorgan): On Middle East conflict costs and disruptions.
  Response: Impact depends on conflict length/severity; risks include lower volumes, inventory impacts, and commodity volatility; hedging and commercial agreements help manage.

Contradiction Point 1

European Capacity Actions

Contradiction on the nature and scale of capacity adjustments in Europe.

Tom Palmer (JPMorgan) - Tom Palmer (JPMorgan)

2026Q3: The European potato market is reset due to a surplus... The company is contracting for less acreage this year, expecting the industry to follow... - Mike Smith(CEO)

What are the current US utilization rates, will recent international plant actions push them above 90%, and how might the 15% expected European potato price decline impact industry buying patterns and potential margin recovery next year? - Thomas Palmer (JPMorgan)

20251219-2026 Q2: Confirmed that a single line in Europe is being curtained to balance global supply and demand... - Mike Smith(CEO)

Contradiction Point 2

North America Utilization & Capacity Management

Contradiction on the strategic intent and management of North American capacity.

Matthew Smith (Stifel) - Matthew Smith (Stifel)

2026Q3: The focus remains on winning customer partnerships... Higher utilization allows the company to be more thoughtful and selective about future business wins." and "Most curtailed lines in North America have been restarted, providing flexibility but also enabling thoughtful future volume decisions. - Mike Smith(CEO)

With strong volume growth and utilization back in the low 90s, will you become more selective about volume growth to improve leverage and are there expected incremental potato write-offs in Q4? - Robert Moskow (TD Cowen)

20251219-2026 Q2: Utilization rates in North America reached very high levels (low 90s), necessitating the restart of additional lines to maintain customer fill rates. These lines are intended to remain open for the foreseeable future as North America shows solid volume momentum and predictability. - Mike Smith(CEO) and Bernadette Madarieta(CFO)

Contradiction Point 3

Gross Margin Outlook

Contradiction on the expected trajectory for gross margins in the back half of the fiscal year.

Peter Galbo (Bank of America) - Peter Galbo (Bank of America)

2026Q3: Some price mix pressure is expected to continue into fiscal 2027, moderating from current levels. - Mike Smith(CEO) and Bernadette Madarieta(CFO)

What is the outlook for North America price mix in the back half of fiscal 2027 considering chain mix and deflationary potato costs, and what drove the $100M reduction in full-year CapEx guidance? - Peter Galbo (Bank of America)

20251219-2026 Q2: The flat to down gross margin outlook is specifically for the second half of the fiscal year, driven by mix shifts, pricing headwinds, and ramp-up costs in Argentina. It moderates the typical Q3 seasonal improvement. - Bernadette Madarieta(CFO)

Contradiction Point 4

Competitor Capacity Expansion Outlook

Contradiction on whether competitor greenfield expansions are still active and ramping.

Robert Moskow (TD Cowen) - Robert Moskow (TD Cowen)

2026Q3: The company's competitors have facilities that are up and running. The focus is on Lamb Weston's own performance... The competitive landscape is dynamic, but the company is confident in its position. - Mike Smith(CEO)

How are North American competitors' supply chain footprints and greenfield expansions progressing? - Andrew Lazar (Barclays Bank PLC)

2026Q1: Industry capacity announcements have slowed, and some previously announced capacity is believed to be delayed, postponed, or canceled. No new capacity announcements have been made since the July earnings report. - Mike Smith(CEO)

Contradiction Point 5

European Market Fundamentals and Potato Procurement Strategy

Contradiction on the European potato market's state and the company's procurement and capacity plans.

Tom Palmer (JPMorgan) - Tom Palmer (JPMorgan)

2026Q3: The European potato market is reset due to a surplus, slower demand, and new local capacity. The company is contracting for less acreage this year, expecting the industry to follow... - Mike Smith(CEO)

What are the current US utilization rates and potential impact of recent international plant actions on reaching 90%+ utilization, and how might the 15% expected European potato price decline affect industry buying patterns and potential margin recovery next year? - Jacob Henry (TD Cowen)

2026Q1: In North America, pricing has been in line with expectations... Internationally, more competitive dynamics are present, influenced by new capacity... - Mike Smith(CEO) & Bernadette Madarieta(CFO)