Lamb Weston's Q1 2026: Contradictions in Supply-Demand Imbalance, Capacity Expansion, and Pricing Strategies

The above is the analysis of the conflicting points in this earnings call

Date of Call: September 30, 2025

Financials Results

• Revenue: Q1 net sales up $5M (+$24M FX); at constant currency, down 1% YOY; volume +6%, price/mix -7%. North America: net sales -2% YOY (price/mix -7%, volume +5%). International: net sales +4% (FX +$24M); constant currency flat (volume +6%, price/mix -6%).

Guidance:

• Reaffirmed FY26 revenue (cc) $6.35B–$6.55B (-2% to +2%).
• FY26 adjusted EBITDA $1.0B–$1.2B; includes 53rd week (Q4).
• Expect YOY volume growth in both segments; International back-half volumes ~flat.
• Price/mix: mid-to-high single-digit decline in 1H (cc), moderating to low-to-mid in 2H.
• Q2 gross margin roughly flat vs Q1; low single-digit inflation from Q2.
• Tariffs now included (~$25M annualized on palm oil/ingredients).
• NA potato contract prices down mid-single digit; benefit begins late Q2; EU potato costs flat to slightly lower.
• FY26 capex ≈ $500M ($400M maintenance/modernization; $100M environmental).
• Tax rate 26%–27% (low 30s 1H; low 20s 2H).
• Cost savings on track: ~$100M FY26 run-rate; $250M by FY28; working capital +$60M FY26.

Business Commentary:

* Volume Growth and Customer Momentum: - Lamb Weston reported a 6% increase in volume, driven by customer wins and retention, particularly in North America and Asia. - The growth was supported by strategic marketing investments, innovation, and enhanced customer-centric initiatives, improving brand loyalty and market share.

• Cost Savings Initiatives:
• The company is on track to achieve at least $250 million in annual run-rate savings by fiscal year-end 2028 through its Cost Savings Program.

• Cost savings efforts are focused on operational efficiencies, process improvements, and supply chain optimizations, contributing to enhanced manufacturing performance and customer satisfaction.

• Capacity Management:

• Lamb Weston restarted a previously curtailed production line in North America to maintain strong customer fill rates due to increased demand signals.

• The decision reflects the company's proactive response to customer needs and strategic planning to manage capacity effectively amidst the dynamic industry landscape.

• Price and Mix Trends:

• Price/mix at constant currency rates declined 7%, influenced by the carryover impact of fiscal 2025 price and trade investments.
• Despite this, Lamb Weston secured approximately 75% of its global open contract volume at pricing levels in line with expectations, indicating strategic customer engagement and retention efforts.

Sentiment Analysis:

• Management said results “exceeded our expectations,” with volume +6% but price/mix -7% and net sales down 1% at constant currency. They reaffirmed FY26 guidance but highlighted competitive pressure in Europe, Q2 gross margins only flat vs Q1, and added tariffs (~$25M) to outlook. QSR traffic was flat overall, burger down, and international traffic mixed.

Q&A:

• Question from Andrew Lazar (Barclays): How does restarting a curtailed U.S. line square with industry supply-demand, and any updates on industry capacity adds/delays?
  Response: Line was restarted to meet stronger demand and maintain fill rates; industry capacity announcements have slowed, with several delayed or canceled, indicating rational capacity behavior.

• Question from Andrew Lazar (Barclays): Is the outlook for price/mix declines in 1H unchanged?
  Response: Expect mid- to high single-digit price/mix decline in 1H at constant currency, moderating to low- to mid-single-digit declines in 2H.

• Question from Thomas Palmer (JPMorgan): Clarify Q2 gross margin drivers—North America vs International?
  Response: NA should see normal seasonal patterns with some input cost inflation offset by lower potato prices; most margin pressure is in International.

• Question from Thomas Palmer (JPMorgan): What’s the tariff exposure now included in guidance?
  Response: About $25M annualized, mainly on imported palm oil and other ingredients (primarily from Indonesia/Malaysia); fully included in guidance.

• Question from Peter Galbo (BofA): Should historical gross margin seasonality return in 2H?
  Response: Yes; after Q2 roughly flat vs Q1, expect seasonal step-up in Q3 and seasonal decline in Q4.

• Question from Peter Galbo (BofA): Why add brokers given prior direct-sales advantage?
  Response: Direct sales force remains; brokers will augment coverage in underpenetrated channels, freeing direct team to focus where most effective.

• Question from Max Andrew Gumport (BNP Paribas Exane): What drove NA volume gains and will they persist?
  Response: New customer onboarding accelerated into Q1 earlier than planned, boosting volumes; timing drove the step-up and was contemplated in guidance.

• Question from Max Andrew Gumport (BNP Paribas Exane): Did better Q1 change full-year gross margin view?
  Response: No material change; Q1 was better than expected, so Q2 is now expected to be roughly flat vs Q1.

• Question from Matthew Smith (Stifel): Impact of restarting a curtailed line on costs and duration of run?
  Response: Restarting a previously maintained line has minimal startup cost; expected to keep running given demand, with potential to restart other curtailed lines as needed.

• Question from Matthew Smith (Stifel): Update on FY26 cost savings phasing and targets?
  Response: On track for ~$100M FY26 run-rate; savings came a bit faster in Q1; ~2/3 to COGS, ~1/3 to SG&A.

• Question from Scott Marks (Jefferies): What’s driving new business wins—price or other factors?
  Response: Wins stem from deeper customer-centric engagement and focus on service/quality; pricing in NA is in line with expectations, with high retention on 75% of contracts.

• Question from Scott Marks (Jefferies): What are you seeing in traffic trends?
  Response: QSR overall flat; burger down, chicken up; internationally mixed—UK down 4%, some EU markets up slightly, others down.

• Question from Jacob Henry (TD Cowen): How did contract pricing land vs expectations; any extra discounting?
  Response: NA pricing aligned with expectations; company is supporting customers; International is more competitive; retail mix shifting toward private label.

• Question from Stephen Powers (Deutsche Bank): Is the customer service scorecard fully back to target?
  Response: Improving but not universally; ongoing structural and innovation efforts aim to further raise service, quality, and consistency.

• Question from Stephen Powers (Deutsche Bank): Timeline to ramp Argentina to target utilization?
  Response: Plant is operational and qualifying products; ramp will be gradual over time, with most output destined for Brazil.

• Question from Marc Torrente (Wells Fargo): How should we think about SG&A run rate and phasing?
  Response: About one-third of FY26 savings benefit SG&A; Q1 included $7M one-time items; expect ~$10M incremental A&P/innovation spend later in FY26 and normalized stock comp.

• Question from Marc Torrente (Wells Fargo): Visibility on sustaining volume momentum after early wins?
  Response: No specifics, but restarting a curtailed line signals confidence; Q1 volume upside partly timing of planned ramps.

• Question from William Reuter (BofA): Profitability of new customer-specific products vs existing?
  Response: Not disclosed; new business is priced appropriately for acceptable returns.

• Question from William Reuter (BofA): Capex beyond FY26—how to model?
  Response: Approx. $500M in FY26 (~$400M maintenance, ~$100M environmental); plan for ~$100M environmental annually for ~5 years, with ongoing optimization efforts.