April 1, 2020

Lamb Weston sales ‘uneven’ during third quarter, partly due to COVID-19 in Asia

Lamb Weston Holdings (NYSE: LW) has announced its fiscal third quarter 2020 results.

Lamb Weston President & CEO Tom Werner

“Our results in the third quarter were mixed,” said Tom Werner, president and CEO. “We drove solid growth in our foodservice and retail segments, but our global segment’s sales declined due to the timing of sales of customized products and higher-margin limited time offering products, as well as the initial effects of the COVID-19 pandemic on restaurant traffic in China. In addition, all our segments had fewer shipping days related to the timing of the Thanksgiving holiday. We also realized the impact of higher-than-expected input and fixed cost inflation, which pressured earnings.”

“While the operating environment in most of our markets during the fiscal third quarter was favorable, estimates on the COVID-19 pandemic’s effect on the global economy are uncertain,” Werner continued. “At this time, despite only two months remaining in our fiscal fourth quarter, we are unable to reasonably forecast frozen potato product demand because of the pandemic’s unpredictable near-term effect on restaurant traffic in North America and our key international markets. As a result, we’re withdrawing our financial outlook for the remainder of our fiscal year.”

“During these uncertain times, our top priorities are to ensure the health and welfare of our employees, maintain product safety, and continue to support our customers as they work to manage their supply chains and inventories. While the near-term impact of the COVID-19 pandemic on consumer demand and sales volume is likely to be material, we believe we have sufficient liquidity to manage through the uncertainty, and we remain confident in the long-term outlook for our customers and the continued growth of the global category.”

Summary of Third Quarter FY 2020 Results

($ in millions, except per share)

Year-Over-Year

Year-Over-Year

Q3 2020

Growth Rates

YTD 2020

Growth Rates

Net sales

$

937.3

1%

$

2,945.5

7%

Income from operations

$

162.5

(-16%)

$

526.0

1%

Net income attributable to Lamb Weston

$

111.4

(-21%)

$

367.5

0%

Adjusted EBITDA including unconsolidated joint ventures(1)

$

227.7

(-10%)

$

721.5

5%

Diluted EPS

$

0.76

(-20%)

$

2.50

3%

Adjusted Diluted EPS(1)

$

0.77

(-19%)

$

2.51

1%

Q3 2020 Commentary

Net sales increased $10.5 million to $937.3 million, up 1% versus the year-ago period. Price/mix increased 1% due to pricing actions, partially offset by unfavorable mix. Volume was flat as growth in the Foodservice segment was partially offset by a decline in the Global segment’s volume, primarily due to timing of sales of customized products (products manufactured to a customer’s unique specifications) and higher-margin limited time offering products, as well as the initial effects of the COVID-19 pandemic on restaurant traffic in China. In addition, acquisitions contributed more than 1 percentage point of the volume increase, which was largely offset by an approximate 1 percentage point decline from the effect of fewer shipping days, compared with the prior year period, related to the timing of the Thanksgiving holiday.

Income from operations declined $31.3 million, or 16%, to $162.5 million versus the year-ago period, reflecting lower gross profit and higher selling, general and administrative expense (“SG&A”). Gross profit declined $23.0 million. Higher manufacturing costs due to input and fixed cost inflation drove most of the decline. An additional $4.3 million of the decline reflects the change in unrealized mark-to-market adjustments and realized settlements associated with commodity hedging contracts, which includes a $0.3 million loss in the current quarter, compared with a $4.0 million gain related to these items in the prior year quarter.

The remainder of the gross profit decline was driven by higher transportation costs; unfavorable customer mix; costs resulting from COVID-19-related production interruptions in China; and higher depreciation expense primarily associated with the company’s french fry production line in Hermiston, Oregon, which started operating towards the end of the fourth quarter of fiscal 2019.

SG&A increased $8.3 million, largely driven by investments in the Company’s sales, operating and systems capabilities, including approximately $2 million of non-recurring expenses, primarily consulting expenses, associated with developing and implementing a new enterprise resource planning (“ERP”) system. The increase also reflects an approximate $3 million impact of unfavorable foreign exchange, which was partially offset by a $2.3 million decline in advertising and promotional expenses.

Net income attributable to Lamb Weston decreased $30.0 million, or 21%, to $111.4 million, primarily reflecting a decline in income from operations, lower equity method earnings, which included a $2.6 million ($2.0 million after-tax) loss related to the withdrawal from a multiemployer pension plan by the company’s joint venture, Lamb-Weston/RDO Frozen (“Lamb Weston RDO”), and a higher effective tax rate.

Adjusted EBITDA including unconsolidated joint ventures(1) decreased $25.5 million to $227.7 million, down 10% versus the prior year period, due to a decline in income from operations.

Diluted EPS decreased $0.19, or 20%, to $0.76. The decrease largely reflects a decline in income from operations, lower equity method investment earnings, and a higher effective tax rate.

Adjusted Diluted EPS(1), which excludes the loss related to the withdrawal from a multiemployer pension plan by Lamb Weston RDO, decreased $0.18, or 19%, to $0.77.

The Company’s effective tax rate(2) in the third quarter of fiscal 2020 was 24.3%, versus 21.9% in the prior year period. The effective tax rate varies from the U.S. statutory tax rate of 21% principally due to the impact of U.S. state taxes, foreign taxes, permanent differences, and discrete items.

Cash flow

Through the third quarter of fiscal 2020, net cash from operating activities declined $8.7 million to $435.7 million, primarily due to increased working capital requirements. Capital expenditures, including information technology expenditures, were $152.0 million in the first three quarters of fiscal 2020, down $95.3 million versus the prior year period due to investments for the construction of a production line in Hermiston, which was completed in the fourth quarter of fiscal 2019. At February 23, 2020, the Company had no borrowings on its revolving credit facility. During the latter part of March 2020, the Company borrowed $495 million on its revolving credit facility to increase its cash position as a precautionary measure in order to preserve financial flexibility considering the uncertainty in the global markets resulting from the COVID-19 pandemic.

Capital returned to shareholders

In the first three quarters of fiscal 2020, the Company returned a total of $110.6 million to shareholders, including $87.7 million in cash dividends and $22.9 million through share repurchases. The average price per share repurchased was $79.56. The Company has approximately $195.3 million remaining under its current $250 million share repurchase authorization. Given the uncertainty of the COVID-19 pandemic’s impact, the Company has temporarily suspended share repurchases to provide additional liquidity until there is more clarity about the future operating environment.