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Investing.com -- S&P Global Ratings has revised its outlook for U.S.-based Lamb Weston Holdings Inc (NYSE:LW). to negative from stable, citing a challenging operating environment and competitive pressures. The ratings agency affirmed the company’s ’BB+’ issuer credit rating and its ’BB+’ issue-level rating on the company’s senior unsecured notes. The outlook revision reflects expectations that Lamb’s operating performance and credit metrics will continue to be pressured by intensifying competition, declining capacity utilization, and potential trade policy risks.
Lamb Weston’s competitive position has been affected by softened restaurant traffic and increased announced industry-wide capacity additions. The company’s profits have weakened, resulting in S&P Global Ratings-adjusted leverage of 3.8x for the twelve months ended Feb. 28, 2025, above the 3.5x downgrade trigger. However, S&P expects a modest rebound for EBITDA in fiscal 2026 with leverage trending to the low 3x area, due to the company’s cost savings programs.
Since the company’s 2023 investor day, competitors have announced more than 3.5 billion pounds of additional capacity, primarily in Europe, China, and Brazil. The company expects the industry could add up to 8.6 billion pounds by 2028, bringing total industry capacity in excess of 44 billion pounds. This has resulted in more intense pricing pressure in international markets compared to North America.
Industry capacity utilization has declined from high-90% levels in 2022-2023 to approximately 90% in 2024, with Lamb’s management projecting further potential deterioration to mid-to-high 80% range in coming years. This capacity build-out, coupled with subdued restaurant traffic and consumer trade-down pressures, is driving heightened competitive intensity across global markets for frozen french fries, particularly in international regions.
Lamb’s revenue is expected to decline about 1% in fiscal 2025 to $6.4 billion. The company’s restructuring and cost savings program have resulted in both gross and S&P Global Ratings-adjusted EBITDA margin compression, leading to an expected negative 18.5% contraction in EBITDA dollars for fiscal 2025.
S&P expects the roll-off of restructuring costs and full realization of $85 million annualized cost savings to lead to a rebound in EBITDA margins. However, top-line pressure is expected to continue. Lamb recently hired Alix Partners to assist in evaluating near-and long-term value creation and incremental cost savings opportunities. S&P expects S&P Global Ratings-adjusted EBITDA to improve in 2026 with margin upside back to 20.0%, due to the realization of the savings and the rolling off of more than $200 million in restructuring costs incurred in fiscal 2025, leading to a decline in leverage to 3.3x in fiscal 2026.
Lamb Weston may face material downside risk due to emerging U.S. tariff policies that could exacerbate an already challenging global frozen potato industry landscape. Lamb disclosed that its manufacturing operations export is in the mid-to-high-teens as a percent of total volume and net sales, making this revenue stream vulnerable to retaliatory tariffs that could significantly impair volumes and pricing power.
Lamb’s financial policy is characterized by a growing dividend payout and share repurchases offsetting dilution. However, the company’s discretionary cash flow (DCF) turned negative during fiscal 2025. S&P anticipates a rebound in the company’s free operating cash flow (FOCF) generation to more than $300 million in fiscal 2026, driven by lower capital spending.
The ratings could be lowered if the company does not improve EBITDA in-line with S&P’s forecast or if the company’s leverage remains above 3.5x. This could occur if profit deterioration continues, potentially due to its inability to realize planned cost savings, impaired global trade, input cost inflation, or structural industry supply-demand imbalance that increases competitive intensity and weakens the company’s pricing power. The ratings could also be lowered if the company transacts larger-than-expected debt-funded share repurchases or acquisitions.
The outlook on Lamb could be revised to stable if the company improves EBITDA and reduces and sustains leverage to the low 3x area or below, successfully executes on its current restructuring program and improves its overall cost position, and can navigate difficult industry conditions with stable pricing and maintaining market share.
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