Lamb Weston's Q2 2026 Earnings Call: Contradictions in Capacity Restart, Price Mix Dynamics, and International Gross Margins Signal Supply-Demand Tensions

Date of Call: None provided

Financials Results

• Gross Margin: 20.4% (first half reference); adjusted gross margin in the second half expected to be flat to down versus the first half's 20.4%

Guidance:

• Reaffirming fiscal 2026 outlook (includes a 53rd week in Q4).
• Expect continued volume growth and strong sales momentum; on track to high end of sales guidance range.
• North America: second-half volumes expected to grow at or above first-half rates; price/mix headwind to moderate.
• International: second-half volumes expected to be flat year-over-year; continued price/mix and ramp-up costs pressure margins.
• Adjusted EBITDA guidance range $1.0B–$1.2B; expect to finish near the midpoint.
• Full-year tax rate 28%–29%; second-half rates in low 20s.

Business Commentary:

* Volume Growth and Market Share: - Lamb Weston reported an 8% increase in volume for Q2 and 7% for the first half of the year. - This growth was driven by customer wins, share gains, and strong retention, particularly in North America and Asia, despite soft restaurant traffic trends.

• Cost Management and Savings:
• The company is on track to achieve their cost savings targets for the year, with benefits from initiatives like rebalancing supply and demand, and improved operational efficiencies.

• A key driver is the optimization of the global supply chain, leading to better run rates and reduced costs per pound.

• International Market Dynamics:

• International volume grew by 7%, but adjusted EBITDA in the International segment declined by $21 million.

• Challenges were attributed to pricing pressures due to supporting customers and higher international manufacturing costs, particularly in Latin America and Europe.

• North America Segment Performance:

• North America adjusted EBITDA increased by 7%, supported by higher sales volumes and lower manufacturing costs.
• This improvement was partially offset by price and trade actions to support customers, but the overall segment remains solid and profitable.

Sentiment Analysis:

Overall Tone: Neutral

• Management emphasized progress on their Focus to Win plan, volume growth (volume +8% Q2) and cost-savings, but flagged international pricing/mix headwinds, ramp costs in Argentina and underutilization in Europe; they reaffirmed FY26 EBITDA guidance range of $1.0B–$1.2B and expect to finish near the midpoint.

Q&A:

• Question from Thomas Palmer (JPMorgan): Are you planning more substantial actions in Europe (beyond reduced shifts) to rebalance supply/demand, and should we expect a seasonal uptick in North America in 3Q?
  Response: They are rebalancing supply — curtailing one European line while restarting previously curtailed North American lines to meet demand; NA seasonal uptick will be tempered by mix shifts toward chains/private label that pressure gross margins.

• Question from Peter Galbo (Bank of America): Update on Asia/export markets competitiveness and does the 'flat to down' second-half gross margin comment apply to Q3 as well?
  Response: Asia/China remain volume drivers but added local capacity is pressuring exports from Europe; second-half margin commentary covers both quarters — Q3 seasonal margin improvement will be moderated and Q4 steps down versus Q3.

• Question from Matthew Smith (Stifel): Are this year's contract pricings landing as expected and is North America price/mix still a low-single-digit headwind or worsened by mix?
  Response: Price/mix drag is expected to moderate in H2 versus H1, but mix (growth in chain business and shift to private label) has amplified the headwind and will persist through the balance of the year.

• Question from Robert Moskow (TD Cowen): Why reopen more NA capacity now, any profitability drag, and is the decision permanent?
  Response: Utilization had reached low-90s; reopening NA lines improves run rates, OEE and absorption with no expected cost drag, producing a net positive factory-burden effect in NA; lines are expected to remain open for the foreseeable future.

• Question from Alexia Howard (Bernstein): How are you improving execution via discipline, accountability and metrics?
  Response: They implemented Focus to Win scorecards and KPIs, added accountability across supply chain, engaged AlixPartners for scorecarding, and are investing in demand/supply planning to improve predictability and execution.

• Question from Max Andrew Gumport (BNP): What scenarios could push you to the lower half of adjusted EBITDA guidance and why not raise the low end?
  Response: Primary downside risks are international price/mix pressure, Argentina ramp/start-up costs and European underutilization; given those dynamics management is prudent and expects to finish nearer the midpoint rather than raise the low end.

• Question from Scott Marks (Jefferies): Are current trade-support levels adequate or is incremental support needed, and what happened to previously paused international capacity projects?
  Response: About 90% of large chain contracts are settled and management feels current customer support/pricing is appropriate; some capacity was added in developing markets but new project announcements have slowed and they expect industry rationalization over time.

• Question from Marc Torrente (Wells Fargo Securities): How much of back-half volume visibility is driven by the 53rd week versus underlying momentum and any near-term traffic trends?
  Response: H2 volume outlook is consistent with H1 momentum aside from the 53rd week; North America growth is driven by chain momentum while international is expected flat; November traffic matched prior commentary (still soft).

• Question from Carla Casella (JPMorgan): Where does overall industry frozen capacity stand and does it vary by region?
  Response: Capacity varies regionally — added capacity in some developing markets is pressuring European exports given low raw costs, but the pace of new capacity announcements has slowed and management expects gradual rationalization.

• Question from William Reuter (Bank of America): Are you accepting lower pricing/penalties to regain share and can high fill rates enable stronger pricing later; also how does leverage inform buybacks?
  Response: Management says pricing has been competitive (not punitive), North America execution is driving share gains and sustained fill rates; capital-allocation priorities remain investing in the business with opportunistic repurchases while maintaining balance-sheet discipline.

Contradiction Point 1

Capacity Restart and Supply-Demand Balance

It involves the decision to restart a production line and its impact on the company's supply-demand balance strategy, which is crucial for operational efficiency and cost management.

Is a temporary production reduction in Europe anticipated, similar to the U.S. plant closures and curtailed lines last year? - Thomas Palmer (JPMorgan)

20251219-2026 Q2: We have restarted some of those previously curtailed lines in North America driven by strong volume. We have also communicated a curtailment of one line in our European market to balance supply and demand globally. - Mike Smith(CEO)

How does the U.S. production line restart address current industry supply-demand imbalances, and have there been additional capacity delays or cancellations since last quarter? - Andrew Lazar (Barclays Bank PLC)

2026Q1: The line was restarted due to demand signals and customer fill rate requirements. The industry has been rational, and some announced capacity may have been delayed or canceled, which suggests capacity may be adjusted based on market conditions. - Mike Smith(CEO)

Contradiction Point 2

Price Mix Dynamics in North America

It concerns the trends and expectations in pricing and product mix in the North American market, which directly impacts revenue and profitability.

Given the moderating price/mix impact in North America, is this year's pricing aligned with last year's performance? - Matthew Smith (Stifel)

20251219-2026 Q2: We expect price/mix to be down more in the first half than the second. - Bernadette Madarieta(CFO)

Is the expected price/mix decline for Q2 still in the low to mid-single digits? - Andrew Lazar (Barclays Bank PLC)

2026Q1: The decline is expected to be low to mid-single digits for fiscal Q2, with improvement expected in the second half of the year. - Bernadette Madarieta(CFO)

Contradiction Point 3

International Gross Margin Trends

It involves the expected trends in gross margins for the international segment, which is important for assessing regional financial performance and profitability.

Does the flat or down guidance for second-half gross margin apply to both quarters? - Peter Galbo (Bank of America)

20251219-2026 Q2: The decline in International gross margin is due to start-up costs and longer-than-expected maintenance issues. - Bernadette Madarieta(CFO)

Can you clarify the gross margin commentary and any seasonal increases in North America? - Thomas Palmer (JPMorgan Chase & Co)

2026Q1: We expect International gross margin to improve in the second half, assuming no further significant operational disruptions. - Bernadette Madarieta(CFO)

Contradiction Point 4

North American Capacity and Production Dichotomy

It reflects differing statements about the status and strategic decisions surrounding capacity and production in North America, which could impact operational efficiency and financial performance.

Did you mention a temporary production reduction in Europe as part of rebalancing supply and demand, and how does this compare to U.S. production adjustments last year? - Thomas Palmer (JPMorgan)

20251219-2026 Q2: We have restarted some of those previously curtailed lines in North America driven by strong volume. - Mike Smith(CEO)

Can you clarify North American capacity and pricing stability? - Robert Moskow (TD Cowen)

2025Q2: Most new capacity is overseas. The 1 billion to 1.5 billion pounds of delayed capacity is primarily outside North America. - Michael Jared Smith(CEO)

Contradiction Point 5

International Price/Mix Trends

It reflects differing views on the price/mix trends in international markets, which have significant implications for the company's global revenue and profitability.

Can you update us on Asia's export markets and whether competition has intensified since our last discussion? - Peter Galbo (Bank of America)

20251219-2026 Q2: The strength we are seeing in Asia is in markets like China and APAC. In Europe, a strong crop has led to lower raw costs, but depressed traffic in those markets is challenging prices. - Mike Smith(CEO)

Is there stabilization in international price/mix? - Marc Torrente (Wells Fargo Securities)

2025Q3: Price pressure is anticipated due to soft demand and macroeconomic factors. Additional processing capacity globally has been announced, but some may be delayed. - Mike Smith(CEO)