Solid Q1 for Lamb Weston; Potato Crop Concern in Europe

Lamb Weston Holdings has reported that sales were up 12% to $914.9 million during the first quarter of fiscal 2019 in comparison with the like period the year before. Income from operations rose 11% to $153 million, while adjusted EBITDA advanced 11% to $213 million.

As this story was being filed at 1:30 PM on October 2, the company’s stock price was up +8.68% to $71.57 over the previous day’s closing quote. That’s $1.62 shy of the 52-week high value of $73.19.

“We’re pleased with our solid results in the first quarter, with each of our core business segments driving sales growth and expanding product contribution margins,” said Tom Werner, president and chief executive officer of the Eagle, Idaho, USA-headquartered company.

lw Euro factoryHe continued: “For the remainder of fiscal 2019, we continue to anticipate the operating environment in North America will remain generally favorable, with solid demand for frozen potato products and tight manufacturing capacity. However, we expect that our European joint venture, Lamb Weston/Meijer (LW/M), will face challenges arising from a poor potato crop. Although it’s too early to determine the full impact of these challenges, we believe that pricing and cost reduction actions, along with opportunities in our North American and export businesses, enable us to remain on track to deliver on our fiscal 2019 targets.”

Drought and higher than normal summer temperatures impacting the potato growing sector were strongly felt in the major production areas of Europe – from the United Kingdom, France, Belgium and the Netherlands to Germany and Poland. LW/M sources raw material from most of these countries to process at its plants in the Netherlands, England and Austria. It also operates a joint venture french fry factory in Russia with the Belaya Dacha Group.

Excluding $2.2 million of pre-tax costs related to Lamb Weston’s separation from Conagra Brands (formerly ConAgra Foods) on November 9, 2016, income from operations grew $12.8 million, or 9%, driven by higher sales and gross profit. Gross profit increased $34.3 million due to favorable price/mix, volume growth, and supply chain efficiency savings.

This increase was partially offset by transportation, warehousing, input and manufacturing cost inflation, and higher depreciation expense primarily associated with the company’s french fry production line in Richland, Washington, which started running in the second quarter of fiscal 2018. In addition, gross profit included a $5.6 million loss related to unrealized mark-to-market adjustments and realized settlements associated with commodity hedging contracts in the current quarter, compared with a $3.2 million gain in the prior year period.

LW product brandThe rise in gross profit was partially offset by a $21.5 million increase in selling, general and administrative expenses, excluding comparability items. The increase includes approximately $7 million of unfavorable foreign exchange, a $5 million rise in incentive compensation expense, primarily reflecting an increase in stock price and absolute shares outstanding, and a $3 million lift in advertising and promotional support. Higher expenses related to information technology services and infrastructure, as well as investments in sales, marketing and operating capabilities, largely drove the remainder of the increase.

Global Segment Highlights

Net sales for the Global segment, which is comprised of the top 100 North America-based restaurant chain customers as well as the company’s international business, increased to $466.8 million, up 13% compared to the prior year period. Price/mix rose 8%, reflecting the carryover impact of pricing actions taken in the prior year as well as improvement in customer and product mix. Volume increased 5%, driven by the benefit of limited time product offerings and growth in sales to strategic customers in the United States and key international markets.

Global segment product contribution margin increased to $94.5 million, up 27% compared to the prior year period. Favorable price/mix and volume growth drove the increase, which was partially offset by transportation, warehousing, input and manufacturing cost inflation, as well as higher depreciation expense primarily associated with the Richland production line.

Foodservice Figures

Net sales for the Foodservice segment, which includes North American foodservice distributors and restaurant chains outside the top 100 North restaurant chain customers, increased to $297.8 million, up 7% compared to the prior year period. Price/mix advanced 7%, reflecting carryover impact of pricing actions taken in the prior year as well as improvement in customer and product mix. Volume declined nominally as growth in sales of higher-margin Lamb Weston-branded and operator-labeled products largely offset the loss of some lower-margin, distributor label product volumes.

Foodservice segment product contribution margin increased to $102 million, up 12% compared to the prior year period, driven by favorable price/mix, partially offset by transportation, warehousing, input and manufacturing cost inflation, as well as higher depreciation expense primarily associated with the Richland production line.

Retail Results

Net sales for the Retail segment, which includes sales of branded and private label products to grocery, mass merchant and club customers in North America, rose to $116.2 million, up 26% compared to the prior year period. Price/mix increased 13%, due to higher prices across the private label and branded portfolios, as well as improved mix. Volume advanced 13%, primarily driven by distribution gains of “Grown in Idaho” and other branded products.

Retail segment product contribution margin increased to $22.7 million, up 38% compared to the prior year period, due to higher price/mix, volume and lower trade expense. The increase was partially offset by higher advertising and promotional support, as well as transportation, warehousing, input and manufacturing cost inflation.

Outlook

Looking ahead to the next three quarters of fiscal 2019, the company forecasts the following:

  • Net sales should grow by mid-single digits, with price/mix higher in the first half of fiscal 2019 versus the second half of the year, reflecting the carryover impact of customer contract pricing structures that took effect beginning in the second half of fiscal 2018.
  • Adjusted EBITDA including unconsolidated joint ventures in the range of $860 million to $870 million. It is expected that the rate of gross profit dollar growth to be at least in line with net sales growth.
  • Total interest expense to be approximately $110 million.
  • An effective tax rate of approximately 24%.
  • Cash used for capital expenditures of approximately $360 million, excluding acquisitions, of which approximately $200 million is related to completing the construction of a 300 million pound french fry production line in Hermiston, Oregon, which is expected to be operational in May 2019.
  • Total depreciation and amortization expense of approximately $150 million.