LW - NYSE

Good day, and welcome to the Lamb Weston Fourth Quarter and Fiscal Year 2025 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Debbie Hancock, Vice President of Investor Relations. Please go ahead.

Good morning, and thank you for joining us for Lamb Weston's Fourth Quarter and Full Year Fiscal 2025 Earnings Call. I'm Debbie Hancock, Lamb Weston's Vice President of Investor Relations. Earlier today, we issued our press release and posted slides that we will use for our discussion today. You can find both on our website, lambweston.com. Please note that during our remarks, we will be making forward-looking statements about the company's expected performance that are based on our current expectations. Actual results may differ materially due to risks and uncertainties. Please refer to the cautionary statements and risk factors contained in our SEC filings for more details on our forward-looking statements. Some of today's remarks include non-GAAP financial measures. These non-GAAP financial measures should not be considered a replacement for and should be read together with our GAAP results. You can find the GAAP to non-GAAP reconciliations in our earnings release and the appendix to our presentation. Joining me today are Mike Smith, our President and CEO; and Bernadette Madarieta, our Chief Financial Officer. Let me now turn the call over to Mike.

Thank you, Debbie. Good morning, and thank you for joining us today. I first want to thank our Lamb Weston team around the globe for their hard work and strong execution. Fiscal 2025 was a year of substantial change for Lamb Weston. In addition to me becoming CEO, we recently added significant new and relevant experience to the Board with six new members, including a new Chairman, Bradley Alford, as well as Lawrence Kurzius; Paul Maass; Timothy McLevish; Ruth Kimmelshue and Scott Ostfeld. Management and the new Board have a high sense of urgency and are aligned on capitalizing on the many opportunities we collectively see to drive results in our business. Today's results evidence the momentum we continue to build with customers and the visibility we have in our business as we work to rebuild credibility with investors. We are focused on controlling what we can control and are taking advantage of opportunities to drive results and improve execution through a cost savings program we announced today, along with our customer-centric Focus to Win strategy for long-term success. Successful execution of these plans will help drive improved performance, including free cash flow and long-term returns. To drive further alignment along with sales and adjusted EBITDA, free cash flow and returns on capital have been added to our compensation plans for fiscal 2026. This alignment continues at the Board level, which for 2026, the Board has unanimously elected to receive their compensation in equity in the company. We believe these cumulative actions are readying the organization to further support customers and accelerate our performance when demand returns to growth. Turning to business results. Lamb Weston ended the year with momentum and customer wins and retention, delivering results ahead of our updated expectations for fiscal 2025. The team is executing at a high level and our long-standing commitment to quality, service, and innovation is driving success with customers globally. We had a strong fourth quarter that came in above our expectations. Volume was up with wins across channels and geographies and net sales grew. Price/mix declined reflecting our support of customers with price and trade as we manage the competitive environment and soft restaurant traffic. We're also seeing the benefits of our cost savings in our cost structure. Adjusted EBITDA increased in the quarter, and we made significant progress in improving working capital. For the full year, our success in the second half enabled us to end the year with volume up. As discussed on earlier calls, our full year profit was impacted by actions to support customers in a competitive environment, higher costs from production curtailments and higher inventories during the year as well as inflationary pressures. We offset some of this impact by delivering slightly above our cost savings target, with $59 million of savings for the year. Since January, when I took on the role of CEO, I've worked closely with the Board and management team to drive change with urgency and better position our business for success. Over the past several months and with the support of outside resources, we undertook an end-to-end assessment of our operations. We developed a strategic plan to drive targeted decision-making and actions and we are now executing on a plan to unlock near and long-term value. This plan, which we call Focus to Win includes zero-based budgeting, assessing our noncore assets and augmenting our commercial go-to-market. We are already making progress. You can see in our better-than-expected results announced today, but we know that the work and the real opportunities are ahead of us. We are operating in an industry with rapidly changing dynamics in a global consumer environment that remains uncertain. It requires a new approach, a Focus to Win. Global demand for French fries remain strong, but the market dynamics are evolving in important ways, growth in food delivery, expanding QSR concepts and air fryers changing how we cook at home are creating an opportunity that demands innovation and new approaches. Geographic growth is greatest in emerging markets where margin profiles are lower but also where QSR formats are expanding. And following market shortages during COVID, the long-term attractiveness of our industry has created the potential for future supply-demand imbalance, most notably outside the U.S. As previously discussed, while new capacity has been announced globally, we do not expect at all to be built. We have already begun to see industry consolidation and decisions to postpone or cancel capacity additions. We believe these postponements and cancellations could continue as the industry has been rational over time. Importantly, not all new capacity is created equal, geographic exposure, capabilities, reliability of raw material sourcing and quality to determine the markets and channels impacted by new capacity. We believe that much of the new capacity in developing markets like India and the Middle East does not have the capability to produce higher-margin premium items, which is the strategic focus for Lamb Weston. We believe the work we performed on the market confirmed our right to win in our key geographies, segments and product categories. We are operating in some of the lowest cost potato-growing regions and we are investing in capabilities aligned to growth opportunities and to our customers' needs to win and grow profitably over time. Let's talk about our Focus to Win strategy. To differentiate Lamb Weston in today's market, we are defining where to play through a strategic framework that focuses our resources and efforts on the most attractive growth opportunities across markets, channels and product segments. How we expect to win is targeted, strengthen our customer partnerships, execute with excellence and set the pace for innovation. We are creating a repeatable cycle with 4 elements that drive growth and profitability for Lamb Weston. First, we are focusing investments on priority global markets and segments. Second, we are strengthening customer partnerships. Third, we are achieving executional excellence. And finally, we are setting the pace for innovation. We'll talk more about these shortly. But at the core, we will do what our team does better than anyone else, be our customers' #1 partner, a world-class potato company and an industry-leading innovator. Our focus will be on geographies, channels and products where we can both differentiate and lead. We built our business in part by being something for everyone. But going forward, we will continue to partner with excellence in our core markets. We will invest to grow in markets, channels and product categories with more attractive profit opportunities where customers value our full product and service offerings. We will focus our resources on markets and segments where we have the greatest advantage and reevaluate noncore assets and markets. We will close the capability gaps in our organization, and we will target premium market segments where innovation is a differentiator. We must transform how we operate. It is how we will win. First, strengthen customer partnerships. Lamb Weston remains a partner of choice for our customers. Our third-party research confirms that our value, relationships and service are best-in-class. Our opportunity is to expand what we've done with our largest customers to our priority customer targets and geographies, enhancing our joint business planning activities and capabilities. Second, achieve executional excellence. To be a partner of choice for our customers and to successfully and profitably operate in an increasingly competitive market, everything we do, we must do with excellence across all functions of the company. For example, in supply chain, we are focused on operating an advantaged global footprint aligned to our growth plan with a streamlined distribution network and revamped continuous improvement team with a focus on plant productivity. This includes simplifying and standardizing operations across locations, driving OEE improvement via our Lamb Weston manufacturing operating culture and embedding a zero loss mindset in raw potato and materials usage. Finally, to differentiate in a competitive marketplace with changing customer preferences, we must continue Lamb Weston's long track record of being an innovation leader. Our innovation efforts have delivered incremental improvements that directly enhance the customer and consumer experience. Looking ahead, we're expanding our ambition to include breakthrough innovations such as Lamb Weston Fast Fries that allow operators in nontraditional fry channels to provide customers with fast and crispy fry offerings. These customers unlock new sources of value in channels that don't traditionally serve fries. This next chapter broadens our innovation efforts beyond product level and into areas such as process technology. Finally, we have created global innovation hubs to orchestrate disruptive innovation platforms. We believe this will create a global network of insights and innovation specialists centered on two innovation hubs, North America and International. In concert with these plans and as part of our Focus to Win strategy, today, we announced cost savings that are designed to better align our organization with the environment, improve efficiency and focus on our biggest opportunities. We have identified at least $250 million of annualized run rate savings that we expect to achieve by the end of fiscal 2028 that Bernadette will talk about more in a moment. We believe these actions will lower our cost base and help ensure we remain competitive while reallocating resources on a more targeted basis to invest for growth. As I've discussed, customer and consumer preferences for our products remain high, though execution in this period of macro uncertainty will be paramount to the future success of the company. We must control what we can control to continue delivering best-in-class returns on our business. This includes streamlining our organization, implementing zero-based budgeting and strategically investing to improve productivity and strengthen our manufacturing network. But we also should not lose sight of the bigger picture, which is that Lamb Weston will be poised to deliver for our customers with an improved cost structure and operations. When our customers see increased demand in their business, we don't know exactly when that will be, but when it does happen, we have confidence that it will, and we will be well positioned to win when it does. I'll now turn it over to Bernadette to review the fourth quarter and fiscal year performance and walk through our outlook.

Thank you, Mike, and good morning, everyone. I want to start by thanking our teams for their hard work in fiscal '25 as we navigated a challenging year. Halfway through the year, we made important changes to adapt to the evolving environment and put our business on a path back to growth. Our fourth quarter results reflect the progress we made throughout the year to address the dynamic and changing environment. We delivered volume growth in the fourth quarter and for the full year, disciplined cost management and a focus on cash flow with significant working capital improvements and lower capital expenditures. Let's begin with our fourth quarter results on Slide 17. Net sales increased 4% compared with the prior year. Volume increased 8%, primarily driven by contract wins across each of our channels and geographic regions and lapping an approximate $22 million negative impact in the prior period from a previously announced voluntary products withdrawal. These gains were partially offset by soft global restaurant traffic trends, which were down low single digits in our largest markets of the U.S. and U.K. Despite lower traffic trends, there are some positive trends in the consumption data. In the U.S., French fries attachment rates continue to remain approximately 2 points higher than pre-pandemic levels. The French fry category grew 1% in the quarter and QSR fry serving sizes also increased 1%. Price/mix declined 4% in the quarter compared to the prior year reflecting efforts to support customers on price and trade in an increasingly competitive environment in both our North America and International segments. Looking at our segments. North America net sales declined 1% compared with the prior year, primarily due to lower net selling prices. Price mix in our North America segment declined 5% due to pricing actions to support our customers, which was only partially offset by favorable channel and product mix. The favorable mix was attributable to growth in higher margin regional small and retail customers. Volume increased 4%, primarily related to regional small and retail customer wins. These volume gains were partially offset by soft restaurant traffic. In the U.S., QSR traffic improved from February's level, but compared with the prior year was down 1% in the quarter and the fiscal year. Traffic at QSR chain specializing in hamburgers was down 2% in the quarter and 3% for the year. It's important to note that this is on top of declines in the prior year. Restaurant traffic on a 2-year stack is down mid-single digits with QSR hamburger focused restaurants, down high single digits over the 2-year period. For our International segment, sales grew 15% versus the prior-year quarter with little impact from foreign exchange. Despite restaurant traffic being down 3% in the U.K., our largest international market and relatively flat in key international markets. The International segment volume increased 16% driven primarily by recent customer contract wins and to a lesser extent, lapping the voluntary product withdrawal in the prior year. Price/mix declined 1%, reflecting pricing actions to support customers in key international markets in response to the continued competitive environment. Moving on from sales. As expected, adjusted gross profit declined compared with the prior-year quarter, due primarily to first pricing actions to support our customers. Second, deliberate choices we made to temporarily curtail some production, resulting in approximately $19 million of higher factory burden absorption. Specifically, fixed costs assigned to our curtailed lines are being temporarily absorbed by lower production levels, which leads to increased cost per pound. Third, low single-digit input cost inflation, including the benefit of lower raw potato prices. And finally, while not impacting EBITDA, higher depreciation expense from our recent capacity expansions. These actions were partially offset by increased sales volume and lapping the impact of the voluntary product withdrawal in the prior year. Adjusted SG&A declined $16 million on lower advertising and promotional spend lapping of higher ERP transition expenses in the prior year as well as the benefit of our cost-saving initiatives. All of this led to adjusted EBITDA of $285 million which is essentially flat or up $2 million versus the prior year. Lower adjusted SG&A offset lower adjusted gross profit and equity method earnings after adjustments for depreciation and amortization. Turning to segment EBITDA performance on Slide 19. Adjusted EBITDA in our North America segment declined 7% or $19 million versus the prior year quarter to $258 million, primarily related to pricing actions to support our customers and $17 million of incremental fixed factory burden absorption. This was only partially offset by lapping a $19 million charge for the voluntary product withdrawal in the prior year and lower SG&A expenses. For our International segment, adjusted EBITDA increased $22 million to $63 million. Higher net sales, lower manufacturing cost per pound, including lapping a $21 million charge related to the voluntary product withdrawal in the prior year and lower SG&A offset the impact of a 1% decrease in price mix. Moving to our liquidity position and cash flows on Slide 20. We ended the year with approximately $1.24 billion of liquidity, comprised of approximately $1.17 billion available under our revolving credit facility and $71 million of cash and cash equivalents. Our net debt was $4.1 billion, and our adjusted EBITDA to net debt leverage ratio was 3.3x on a trailing 12-month basis. In fiscal '25, we generated $868 million of cash from operations. This is up $70 million versus the prior year due primarily to $349 million of favorable changes in working capital, which was primarily attributable to lower inventories, which reduced 8 days and a favorable change in accrued liabilities. We expect to continue to drive inventory improvements as part of our Focus to Win plan. This plan includes approximately $60 million of cash flow from inventory improvement in fiscal '26 and '27 or $120 million in total by the end of fiscal '27. Turning to Slide 21. Capital expenditures for fiscal 2025, net of proceeds from blue chip swap transactions in Argentina were $651 million, down $323 million with our expansion projects nearing completion. We ended the year below our initial $750 million target due to continued capital discipline, cost savings initiatives and the timing of projects and cash outlays. For fiscal '26, our capital spending is expected to be approximately $500 million with approximately $400 million in maintenance and modernization and $100 million for environmental projects, which are mostly for wastewater treatment. On Slide 22, you can see that we remain committed to returning cash to shareholders. For the year, we returned $489 million. In the fourth quarter, we repurchased $100 million of shares and $282 million in the year, leaving us with $358 million available under the plan. We also returned $207 million in cash dividends during the year. We plan to continue to follow a disciplined capital allocation approach, anchored around investment in the business, its capabilities and areas we are working to competitively differentiate Lamb Weston to execute our business strategy while maintaining a strong balance sheet and opportunistically returning capital to shareholders. Let's turn to our outlook. Starting with the potato crop on Slide 23. We started harvesting and processing the early potato varieties in North America, and initial indications are that this portion of the new crop is slightly above historical averages. At this time, the potato crops in the Columbia Basin, Idaho, Alberta and the Midwest, that will be harvested in the fall appear to be largely within historical ranges as growing conditions in these regions have been favorable. As a reminder, in North America, we've agreed to a mid-single-digit decrease in the aggregate and contract prices for the 2025 potato crop. Because we ended the year with lower inventories, we expect that we will begin realizing the benefits of lower-cost potatoes harvested out of field in the second quarter of fiscal '26. This is earlier than last year and in line with historical seasonal timing. In Europe, favorable dry and warm growing conditions in the industry's main growing regions of the Netherlands, Belgium, Northern France and Germany are expected to result in an average crop. We currently expect our potato costs in Europe to be flat to slightly lower than the previous year's fixed price contracts. We will provide more details on the crops in both North America and Europe when we report our second quarter results. Turning to Slide 24 and our fiscal 2026 outlook. The outlook includes the contribution of a 53rd week with the additional week falling in the fourth quarter. In fiscal '26, we expect our category to continue to be in high demand with customers and consumers prioritizing French fries as a menu and an at-home item. However, our guidance assumes continued pressure on consumers from macroeconomic and geopolitical factors. Our outlook assumes no improvement in global restaurant traffic from fiscal '25 levels, but it does plan for customer momentum that began in the second half of fiscal '25 to continue. It also does not include additional impacts of evolving trade policy, including changes in tariffs and retaliatory countermeasures. With this as a backdrop, we expect revenue for fiscal '26 in the range of $6.35 billion to $6.55 billion, which is a 2% decline to 2% growth on a constant currency basis. The carryover pricing actions we made in fiscal '25 to support our customers will have a negative impact on net sales in the first half of the year. Based on the timing of contract renewals, most of the fiscal '26 pricing actions will impact the second half of the year, and they are expected to have a lesser impact than those made in fiscal '25. In total, we expect sales to be stronger in the second half of the fiscal year, which will benefit from the additional week. Turning to our adjusted EBITDA outlook on Slide 25. Beginning in fiscal '26, we are implementing changes in our reporting of adjusted SG&A and adjusted EBITDA to fully exclude noncash share-based compensation expense. In fiscal '25, stock-based compensation expense was $40 million. After this call, we will publish a schedule recasting prior periods to reflect this new methodology on our investor website. With this change, we expect adjusted EBITDA for fiscal 2026 of $1 billion to $1.2 billion. We expect adjusted gross profit to be down negatively impacted by the carryover pricing and further efforts to support customers with price and trade in fiscal '26. Low single-digit inflation, including the benefit of lower raw potato costs, and higher fixed factory burden and start-up costs in our International segment, primarily related to our new plant in Argentina, which is expected to begin producing sellable product in August. Before the benefits of our cost savings program, we expect adjusted SG&A will increase compared with the prior year due to an incremental $40 million headwind related to normalizing incentive compensation expenses after a couple of years of lower-than-planned incentive achievement and approximately $10 million of incremental investments, including, for example, innovation and advertising and promotion expenses to support our long-term strategic plan. Our adjusted gross margin and SG&A will benefit from the cost savings program that we announced today. We expect to deliver approximately $200 million of the full savings target by the end of fiscal '27 with about half on a run rate basis fiscal '26. In fiscal '26, we expect approximately 2/3 of the $100 million of savings to be realized in the second half of the year. About 2/3 will benefit adjusted gross profit and 1/3 will benefit adjusted SG&A this year. Over the program's life, however, we anticipate approximately 75% of the benefit in gross profit and 25% in SG&A. To deliver the savings, we expect to recognize approximately $70 million to $100 million of cash pretax charges, most of which are expected to be paid in fiscal '26. Keep in mind that these savings are on top of the remaining approximately $25 million of incremental benefits that we expect to deliver under the restructuring plan we announced in fiscal '25. And finally, adjusted EBITDA will benefit from the contribution of an additional week of sales and earnings. We are targeting a full year effective tax rate of approximately 26% for fiscal '26, excluding the impact of comparability items. This tax rate is forecast to be in the high 20s in the first half of the year and low 20s in the second half of the year, reflecting the expected timing of discrete items most notably in the fourth quarter, we do not expect the recently enacted U.S. federal tax legislation to have a material impact on our fiscal '26 tax rate. In summary, Lamb Weston is operating from a strong financial foundation, and we believe the steps we announced today will enable us to improve our competitiveness and financial position through cost savings, establishing clear strategic priorities and working capital improvements. We believe these expected savings, together with lower levels of capital expenditures and working capital improvements, will help drive improved profitability and cash flow over the long term. I'll now turn the call back over to Mike.

Thank you, Bernadette . I'm confident in the direction we are taking in Lamb Weston, and we are making important and significant changes to our business to compete more effectively in today's marketplace. We have organizational alignment to capitalize on the tremendous opportunities in front of us. We will drive performance by focusing on the controllables, but we do so knowing it will provide an even bigger opportunity for us and our customers when restaurant traffic returns to growth, and we will be ready. With that, we're happy to take your questions.

[Operator Instructions] We will go first to Peter Galbo with Bank of America.

Mike and Bernadette, thanks for the questions. Mike, maybe I wanted to start on the EBITDA margin target for the year, I think, is around 17% at the midpoint, and that would kind of be, I think, the lowest, it's been since the company was spun public on a stand-alone basis. So maybe you can just kind of help us understand if you think this is a floor in terms of a margin percentage, and I know you guys probably care about dollars more than percentages, but what the push and pull factors might be over the next couple of years that could push that number either higher or lower from that new kind of 17 base?

Yes, Peter, I appreciate the question. As I think about it, obviously, we're going to be below that normalized range here in fiscal '26. I think despite the fact that our key customers are experiencing headwinds, we're supporting them with price and trade in what's really a competitive environment. We've talked about that in the past. We're also investing in markets and channels that are strategic and where we believe we have the right to win for the long term, and those are going to be longer-term opportunities that we believe will deliver whole EBITDA dollars as you talked about. But I'll tell you, when I think about our category compared to some of the other categories in CPG, where the challenges might be a little bit more structural in nature, we operate in a really attractive category, and you've heard me talk about how it's one of the most ordered items across all generations, French fries. It's one of the most profitable items on restaurant menus and the attachment rate remains high. And so we believe we're going to continue to invest in the business for the long term. And we're also making significant changes around our cost structure, and we've done a lot of work, as we talked about in our prepared remarks over the last several months. And it's shown us where we have some opportunities. And so we're addressing those and with the announced $250 million cost savings program over the next few years. And so I'll tell you, listen, we believe our strategy has us on a path to return to those margin levels, but we'll provide more details once we're further along with our Focus to Win strategy.

Great. That's helpful. And maybe just as a follow-up to both of you, there was a lot of discussion around the improvement in working capital, both in the prepared remarks and in the press release this morning. I guess just, Mike, there's a lot of ways to get there in terms of the working capital improvement, and it looks to be on the inventory side. But maybe just a little bit more detail on what specifically you're planning to do around inventory levels, what that might look like in the supply chain as we contemplate to go forward.

Yes. No, great question around working capital. When you think about our Focus to Win strategy, a big part of it is value creation, and that's across the entire P&L. When I look at the progress we made really in Q4, we improved our inventories and a lot of that had to do with the stronger volumes that we saw coming through the P&L. Keep in mind, for this coming fiscal year and the crop season, we've reduced our acres. And we have higher inventories, and so we're making sure that we work through those inventories in the right ways. I talked a little bit about improving our capabilities as an organization. And one of those capabilities that we are investing behind for the future is around planning and integrated planning from the ag side all the way through to finished goods, and so we're really confident in our ability to improve our working capital over the next couple of years.

We'll go next to Scott Marks with Jefferies.

First one, I wanted to ask about international capacity. You made some comments, I believe that there has been some announced capacity internationally, but that you don't necessarily expect those to get off the ground. So just wondering, one, if I have that correct. And then two, maybe what gives you confidence that some of those projects won't be moving forward?

Yes, I appreciate the question, Scott. I'm not going to speculate on what the capacity will or won't happen, what will or won't be announced. But we do believe that the industry has been pretty rational in the past as it relates to capacity. And through our competitive intelligence, we believe that there's roughly 1 billion to 1.5 billion pounds has been canceled or delayed. I'll also tell you the pace of new announcements has also slowed. And so when we think about our business, we're really taking the steps to control what we can control and ensure that our production lines up with our demand. And the great thing about the position that we're in as we see restaurant traffic return and as our customers start to grow, we're well positioned with available capacity to take advantage of those improved demand signals.

Appreciate the answer. And then secondly, I just wanted to ask about kind of the CapEx guide for the year and maybe go forward, how we should be thinking about it. I think in the presentation, you mentioned that about 3% of sales should be kind of a maintenance CapEx number. And obviously, the guide you gave came in a little bit below what folks were looking for. So just wondering if you can kind of share some thoughts around that and kind of puts and takes and how we should think about that going forward?

You bet. So first, we are reducing the capital intensity as we shift away from our growth investments to modernization and maintenance, as you mentioned. Generally, we would expect about 3% of sales for base capital and 2% for modernization. And then as I mentioned, there's about $100 million we have now that's related to wastewater treatment. So all in, we expect that this $500 million CapEx plan is really something that is going to support Lamb Weston continuing to maintain its assets and the capabilities that we need to drive our strategy forward.

[Operator Instructions] We will move next to Alexia Howard at Bernstein.

So two quick things from me. First of all, can you talk about what went better than expected this quarter and whether any of those trends could persist into fiscal '26.

Yes. The one that comes to mind, Alexia, for Q4 is how we're engaging with our customers. You've heard me talk a lot about the importance of driving customer centricity through our organization, and that starts at the top. And I've been personally out meeting with several of our top customers and talking about where we have opportunities to improve and where we can help support them in their growth into the future, and so we're continuing to do that. The other area, obviously, that we've talked about here is around our Focus to Win strategy and the cost savings program. And obviously, we've been doing a lot of analysis over the last several months, but we've already started to focus in some of those areas to start implementing some of the opportunities that we see, specifically around better execution on the business as well as focusing on our innovation moving forward.

Yes. And Alexia, the only other thing I'd mention is just the really strong volume growth across all of our channels and all of our regions. I think as we mentioned, North America volume was up 4% and International volume up 16%. And as Mike mentioned, that's a big reason we were able to also drive down our inventories at the end of the year.

Very helpful. Can I follow up with a question about the Burger channel. I think you said on a 2-year stack, the traffic in there is still down, I believe, high single digits you mentioned. How much exposure do you have to that channel in North America? Because I'm trying to figure out if there's a risk if GLP-1 weight loss drugs really step up next year with the pill version coming out, could that have a material impact? Or are there ways that you can insulate yourself from that kind of outcome next year?

Yes. Good question. Alexia, when you look at QSR servings or fry servings, 85% or over 80% of fry servings come from the QSR space. Specific to GLP-1s, we don't see a material impact on our business right now. When you look at the retail frozen potato category data, it seems to be in a good spot. Also, when I look at fry menu importance, it remains above pre-pandemic levels. So when consumers are going to restaurants, they're ordering fries at a higher level than they were prior to the pandemic. We continue to engage in industry studies, and we're evaluating the consumer just like all the other companies out there on what the impact of GLP-1s might have. And we have our innovation team aligned to make sure that we adjust and change with any sort of consumer preferences that may come our way.

We'll move next to Steve Powers with Deutsche Bank.

Mike, I think as part of your outlook, you mentioned that it assumes continued positive customer momentum that you've built in the back half of '25. I just wanted a little bit more clarity there. Is that just the carryover of recent business wins? Or are you assuming a degree of incremental wins that may not have yet been finalized. Just trying to understand exactly what that commentary means.

Yes. It's both, Steve. I mean we've had a lot of strong volume, as Bernadette mentioned, in Q4. But the teams are also out there pounding the pavements and talking to our customers and making sure that they understand that Lamb Weston is here to support them for growth. Last call, we talked about a new large QSR chain that's switching to a frozen fry and that transition continues to move forward, and we're continuing to pick up new opportunities as our teams out there engaging with customers in a more profound way.

Okay. Great. And then if I could, the outlook, as you mentioned a couple of times, it doesn't include the impact of any additional tariffs or retaliatory countermeasures, which I think I understand, I guess around that, is there a way maybe to offer a little bit of commentary just around how you're assessing the risks and opportunities associated with potential changes in the current status quo, and what work you're doing just to position yourself against different scenarios that may develop as recent -- as quickly as the next few weeks. So just how you're thinking about that?

Yes. No, I appreciate the question. As you know, just from a business perspective, we're a global business, and so we're supplying most of our customers locally or regionally. As it relates to our cost structure, our biggest area where we will be impacted by tariffs is oil and some of our ingredients. We continue to look at opportunities for us to look at different blends and other things to mitigate exposure. But in total, if the August 1 tariff do come to fruition, the exposure to our financial results and our outlook is about $25 million.

We'll go next to Marc Torrente with Wells Fargo Securities.

First, just on your outlook for sales, expected flattish overall price/mix is expected to be down, implying volumes could be flat to up even. How much of that is driven by the 53rd week falling in Q4? And then with your carryover customer wins and your level of visibility into the year, any more color on expected sales cadence through the year?

Yes. No, thank you for the question. As we look at the first half and the back half of the year, our sales are going to be much more pressured in the first half of the year, primarily due to the carryover pricing from fiscal '25. From a volume perspective, we've got the carryover volume momentum that was included in there. But most of the volume impact is going to be in the 53rd week in the back half of the year that's where you're going to see some of the increase in volume. And to a lesser extent, you will see impact of pricing in the back half of the year with the fiscal '26 pricing actions that relate to the fall contract renewals.

Okay. I appreciate that. And then bridging out the EBITDA a little more. The decrease seems primarily due to lower gross profit pre-cost savings. Could you help with quantifying some of those larger buckets between pricing investment, inflation, fixed cost absorption? Any other color on front half versus back half phasing on those costs? And when could those costs start to stabilize versus being a headwind.

Yes. So the way to look at this year from a margin perspective is we're going to see more of a sequential increase from first to second quarter and then to third quarter. Last year, if you recall, there was a large increase in margins in the third quarter, and that was because we had a lot of raw inventories that we continue to process. This year, we will get back to the more seasonal trend where we will begin harvesting out of field, and we'll see the impact of some of the lower pricing of potatoes as well as the cost benefit of harvesting out of field beginning in the second quarter. So really, the lowest margin impact from an adjusted gross profit perspective will be in the first quarter and then sequentially increasing and then the typical seasonal decline that we see in the fourth quarter. Does that help explain a little bit about how we're expecting the year to play out? Anything else I can cover?

No, that's helpful. Appreciate it.

Great. You bet.

We'll go next to Robert Moskow with TD Cowen.

I appreciate the commentary about what's happening in terms of your -- how you interpret global capacity increases. I was wondering if you could be a little more specific about what's happening in North America. Are there projects going on by your competitors that are still ramping in North America? And if so, I know it's too early to kind of fast forward a year from now, but I think we're all wondering, at what point does your pricing structure kind of stabilize? And I think that what's happening from competitors probably has a lot to do with it. So more specifically, when you said that 1 billion to 1.5 billion pounds of projects have been delayed, was any of that in North America as well?

Yes. To answer the last part of your question, Rob, that 1 billion to 1.5 billion, none of that was in North America. Keep in mind, there are some projects that are still being finalized. Those were -- decisions on those projects were made a couple of years or so ago, so they're just in the final stages. But majority of the new capacity that has been announced and coming online is overseas and international markets. A large portion of that is in Europe as well as some of the other developing markets that we talked about. I think the important thing to note is that not all capacity is created equal. And so as I talked about in the prepared remarks, it depends on the quality of raw. It depends on the capabilities in those facilities on the types of opportunities that these manufacturers can go after. And so again, like I said, the pace of new announcements has definitely slowed over the last quarter.

Yes. And the only other thing I'd add to that is that our strategy, as Mike talked about it today, really is positioning us to gain share and lean into those premium segments of the market. And to Mike's point, not all capacity is created equal. So you'll see a lot from us in that respect as it relates to carrying out our strategy as we move forward.

We will go next to Carla Casella with JPMorgan.

Just wanted to ask you, your leverage target, is it still about 3.5x to 4x range. And do you see taking leverage up to that level? Or is that more just the level in case you see the right opportunity in terms of M&A?

Carla, thanks for the question. Yes, we do continue to target a ratio of about 3.5x, and we'll reduce debt as warranted to make sure we maintain this level.

Carla, I was just going to say the other thing for us is we also are open and then we'll entertain M&A or other joint venture partnerships in the future.

Okay. That's great. I mean just on that -- I was just going to follow-up actually on that note. Are there -- what are you seeing in terms of opportunities? I know you had been looking to more international M&A and buying in some of the regions. Is there any more opportunity for those kind of easier businesses you already know type M&A or anything more off the board you would look at?

No. We're continuing to focus on the potato industry, and we'll continue to look at M&A globally as long as it's in the right markets with the right capabilities that support our Focus to Win strategy. And so we'll continue to keep our options open. And like we said in the past, we'll look at M&A. We'll look at joint venture partnerships and other ways to grow our business around the globe.

We'll go next to Max Gumport with BNP Paribas.

First, with regards to your strategic framework in determining the geographies that you want to focus on, could you give a bit more color on what your plan might be for geographies, where you don't believe if you have a competitive advantage or you don't see strong growth potential? And specifically, how would you view Europe with regard to setting into this framework?

Yes, I appreciate the question. I'm not going to give details around those geographies right now. Obviously, we've done a lot of work over the last several months. And for competitive reasons, I'm not going to share the details of what those might look like. But I know that as we get into those plans a little bit further on, we'll update the investment community on those decisions as they move forward.

Okay. And then the decision to remove noncash stock-based compensation as an expense with regard to your adjusted metrics, I mean it seems to me a bit like a step backwards as an accounting practice. So I was hoping to get a sense for the motivation. I mean, I would view that as a real expense if it's the cost of retaining employees, and I think given you're going into a year when incentive comp is normalizing, and the Board is going to be receiving their typical cash retainer and shares or restricted stock. The timing feels a bit odd to me. So can you talk more about the justification for this decision?

Yes, I'll speak to that. So our annual incentive plan, which is normalizing and the $40 million incremental costs that I referred to, that's a cash award that certainly will be included in our EBITDA metrics. As we take a look at EBITDA, some of the noncash items that are affected with volatility in terms of whether or not performance is achieved or not. Those are items that are driving volatility and change that really aren't something that we want to manage the business towards. And so we took this opportunity now to add that back. Very common in industry where we've seen this added back, and we took that opportunity to do it as that is an item that we as a management team as we evaluate this business do generally add back.

That will conclude our Q&A session. We will now turn the conference back to Debbie Hancock for any additional or closing remarks.

Thank you, Jess, and thank you, everyone, for joining us today. The replay of the call will be available on our website later this afternoon. Thank you.