Lamb Weston Reports Fiscal First Quarter 2023 Results; Reaffirms Fiscal Year 2023 Outlook

EAGLE, Idaho--(BUSINESS WIRE)--Oct 5, 2022--

Lamb Weston Holdings, Inc. (NYSE: LW) announced today its fiscal first quarter 2023 results and reaffirmed its fiscal 2023 outlook.

“We drove strong sales, earnings growth, and gross margin expansion in the quarter by executing pricing actions across each of our business segments and generating manufacturing cost-savings to counter inflation,” said Tom Werner, President and CEO. “While volume declined as a result of softer restaurant traffic trends and supply chain constraints impacting production run-rates in our plants, we continued to make progress in improving customer service levels.”

Q1 2023 Commentary

Net sales increased $141.4 million to $1,125.6 million, up 14 percent versus the prior year quarter. Price/mix increased 19 percent, reflecting the benefit of pricing actions across each of the Company’s core business segments to offset input, manufacturing, and transportation cost inflation. Volume declined 5 percent, primarily reflecting softer casual dining and full-service restaurant traffic in the U.S. as well as the timing of shipments to large chain restaurant customers. Shipments into foodservice and retail channels in the U.S. continued to be affected by an inability to fully serve customer demand due to widespread industry supply chain constraints, including labor and commodities shortages, that impacted production run-rates and throughput in the Company’s production facilities.

Income from operations increased $96.8 million to $157.0 million, up 161 percent versus the prior year quarter, reflecting higher gross profit, partially offset by higher selling, general and administrative expenses (“SG&A”). Gross profit increased $122.0 million, as the benefits from higher price/mix and productivity initiatives more than offset the impact of higher manufacturing and distribution costs on a per pound basis, as well as lower sales volumes. The higher costs per pound primarily reflected double-digit cost inflation for key inputs, including: edible oils, ingredients such as grains and starches used in product coatings, labor costs, and transportation costs. The increase in costs per pound also reflected higher costs associated with the impact of extreme summer heat that negatively affected the yield and quality of potato crops in the Pacific Northwest in fall of 2021, as well as the effects of labor and commodities shortages on production run-rates. The increase in gross profit also included a $2.8 million increase in unrealized mark-to-market adjustments associated with commodity hedging contracts, which includes a $4.0 million loss in the current quarter, compared with a $6.8 million loss related to these items in the prior year quarter.

SG&A increased $25.2 million compared to the prior year quarter, primarily due to higher compensation and benefits expense, and higher expenses related to improving the Company’s information and technology services infrastructure.

Net income was $231.9 million, up $202.1 million versus the prior year quarter, and Diluted EPS was $1.60, up $1.40 versus the prior year quarter. The increases were driven by a $141.3 million increase ($104.9 million after-tax, or $0.73 per share) in unrealized mark-to-market adjustments associated with natural gas and electricity hedging contracts in the Company’s joint venture in Europe, higher income from operations, and a $15.1 million gain (before and after-tax, or $0.10 per share) recognized in connection with the Company’s acquisition in July 2022 of an additional 40 percent interest in Lamb Weston Alimentos Modernos S.A. (“LWAMSA”), its joint venture in Argentina. The gain related to the remeasuring of the Company’s previously held 50 percent ownership interest to fair value. The Company has identified the mark-to-market adjustments related to natural gas and electricity derivatives in the current and prior year quarters, as well as the LWAMSA gain in the current quarter as items impacting comparability.

Adjusted Net Income (1) was $108.2 million, up $82.1 million versus the prior year quarter, and Adjusted Diluted EPS (1) was $0.75, up $0.57 versus the prior year quarter. Adjusted EBITDA including unconsolidated joint ventures (1) increased $109.4 million to $227.8 million, up 92 percent versus the prior year quarter. These increases were driven primarily by higher income from operations.

The Company’s effective tax rate (2) in the first fiscal quarter was 24.1 percent, versus 22.6 percent in the prior year quarter. The Company’s effective tax rate varies from the U.S. statutory tax rate of 21 percent principally due to the impact of U.S. state taxes, foreign taxes, permanent differences, and discrete items. Excluding items impacting comparability, the Company’s effective tax rate was 25.0 percent.

Q1 2023 Segment Highlights

Global

Net sales for the Global segment, which is generally comprised of the top 100 North American-based quick-service (“QSR”) and full-service restaurant chain customers as well as all of the Company’s international sales, increased $58.5 million to $559.7 million compared to the prior year quarter. The benefit of domestic and international product and freight pricing actions to offset inflation, as well as favorable mix, drove a 14 percent increase in price/mix. The timing of shipments to large QSR chain customers in the U.S., including the effect of lapping a notable limited time product offering in the prior year quarter, largely drove the 2 percent decline in volume. Export shipments declined modestly primarily due to production volumes being diverted to higher-margin sales channels in the U.S.

Global segment product contribution margin increased $41.1 million to $83.7 million, up 96 percent versus the prior year quarter. Favorable price/mix, primarily reflecting the benefit of pricing actions, drove the increase, more than offsetting higher manufacturing and distribution costs per pound.

Foodservice

Net sales for the Foodservice segment, which services North American foodservice distributors and restaurant chains generally outside the top 100 North American based restaurant chain customers, increased $44.9 million to $366.3 million, up 14 percent versus the prior year quarter, with price/mix up 26 percent and volume down 12 percent. The carryover benefits of product and freight pricing actions taken in the prior year as well as early in fiscal 2023 to offset inflation drove the increase in price/mix. Demand in the segment’s restaurant and non-commercial channels (such as lodging and hospitality, healthcare, schools and universities, sports and entertainment, and workplace environments) softened along with restaurant traffic as inflation pressured consumer discretionary spending. The slowdown in restaurant traffic and consumer demand was more pronounced in casual dining and other full-service restaurants than in QSRs. Shipments were also affected by an inability to fully serve customer demand due to widespread industry supply chain constraints, including labor and commodities shortages that impacted production run-rates and throughput in the Company’s production facilities, as well as incremental losses of certain low-margin non-commercial business.

Foodservice segment product contribution margin increased $41.8 million to $138.2 million, up 43 percent compared to the prior year quarter. Favorable price drove the increase, and was partially offset by higher manufacturing and distribution costs per pound, and the impact of lower sales volumes.

Retail

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, increased $37.1 million to $169.6 million, up 28 percent versus the prior year quarter, with price/mix up 32 percent and volume down 4 percent. The carryover benefits of pricing actions across the branded and private label portfolios taken in the prior year as well as earlier in fiscal 2023 to counter inflation drove the increase in price/mix. Lower shipments of private label products, resulting from incremental losses of certain low-margin business, drove the sales volume decline. Shipments of branded products increased, although growth was tempered by an inability to fully serve customer demand due to constrained production run-rates and throughput in the Company’s production facilities.

Retail segment product contribution margin increased $33.9 million to $48.7 million, up 229 percent versus the prior year quarter. The benefits of pricing actions and favorable mix drove the increase, partially offset by higher manufacturing and distribution costs per pound.

Equity Method Investment Earnings

Equity method investment earnings from unconsolidated joint ventures in Europe, the U.S., and South America were $174.6 million and $6.2 million for first quarter of fiscal 2023 and 2022, respectively. Equity method investment earnings in the quarter include a $144.6 million unrealized gain related to mark-to-market adjustments associated with currency and commodity hedging contracts, of which $146.3 million ($108.6 million after-tax, or $0.75 per share) related to changes in natural gas and electricity derivatives as commodity markets in Europe have experienced significant volatility. Equity method investment earnings in the prior year quarter include a $4.3 million unrealized gain for mark-to-market adjustments, of which $5.0 million related to changes in natural gas and electricity derivatives. Equity method investment earnings also include a $15.1 million gain (before and after-tax, or $0.10 per share) recognized in connection with the Company’s acquisition of an additional 40 percent interest in LWAMSA. The gain related to remeasuring the Company’s previously held 50 percent ownership interest to fair value.

Excluding the items impacting comparability noted above and the other mark-to-market adjustments, earnings from equity method investments increased $13.0 million compared to the prior year quarter, reflecting favorable price/mix, partially offset by higher manufacturing and distribution costs in both Europe and the U.S.

Liquidity and Cash Flows

Net cash provided by operating activities was $192.1 million, up $30.3 million versus the prior year quarter, primarily due to higher earnings. Capital expenditures, including information technology expenditures, were $121.2 million, up $42.3 million versus the prior year quarter, primarily reflecting increased investments to support capacity expansion projects.

In July 2022, the Company paid $42.3 million to increase its ownership in LWAMSA. The Company’s total ownership in the joint venture is now 90 percent. The Company began consolidating LWAMSA’s results in its consolidated financial statements following the acquisition.

Capital Returned to Shareholders

In the first quarter, the Company returned a total of $63.7 million to shareholders, including $35.3 million in cash dividends and $28.4 million through share repurchases. The Company repurchased 404,476 shares during the first quarter of fiscal 2023 at an average price per share of $70.11. The Company has approximately $241 million remaining under its existing share repurchase program.

Fiscal 2023 Outlook

The Company is reaffirming its financial targets for fiscal 2023, which include:

• Net sales of $4.7 billion to $4.8 billion, with growth versus the prior year primarily driven by the benefit of pricing actions to offset significant input and transportation cost inflation, as well as favorable mix.

• Including items impacting comparability of $161.4 million (approximately $123.7 million after-tax, or $0.85 per share), net income of $485 million to $535 million and Diluted EPS of $3.30 to $3.70.

• Excluding items impacting comparability, Adjusted Net Income (1) of $360 million to $410 million, Adjusted Diluted EPS (1) of $2.45 to $2.85, and Adjusted EBITDA including unconsolidated joint ventures (1) of $840 million to $910 million, with growth versus the prior year driven by higher sales and gross margin expansion. The Company continues to expect SG&A of $475 million to $500 million, reflecting increased higher compensation and benefits costs, increased investments to upgrade its information systems and enterprise resource planning (“ERP”) infrastructure, and higher advertising and promotion expenses.

• During the first half of fiscal 2023, the Company continues to expect its gross margins will be pressured as compared to normalized seasonal rates as it continues to manage through significant inflation for key production inputs, transportation and packaging, as well as higher raw potato costs on a per pound basis due to the impact of extreme summer heat that negatively affected the yield and quality of potato crops in the Pacific Northwest in fall 2021. The Company continues to expect its gross margins will also be pressured by ongoing industrywide operational challenges, including labor and commodities shortages, resulting from volatility in the broader supply chain.

• During the second half of fiscal 2023, the Company continues to expect gross margins will improve and approach a normalized annual rate of 25 percent to 26 percent. The anticipated improvement is predicated on a U.S. potato crop harvested in fall 2022 that is in line with historical averages, particularly in its primary growing regions in the Columbia Basin and Idaho; the continued successful implementation of the Company’s pricing actions to offset input and transportation costs inflation; and a broad easing of labor and logistics pressures that have been constraining the Company’s production and shipments.

In addition, the Company is reaffirming other financial targets, including:

• Interest expense, net of approximately $115 million;

• Depreciation and amortization expense of approximately $210 million;

• Cash used for capital expenditures of $475 million to $525 million; and an

• Effective tax rate (2) (full year) of approximately 24 percent.

End Notes

Webcast and Conference Call Information

Lamb Weston will host a conference call to review its first quarter fiscal 2023 results at 10:00 a.m. ET today, October 5, 2022. Participants in the U.S. and Canada may access the conference call by dialing 888-204-4368 and participants outside the U.S. and Canada should dial +1-323-994-2093. The confirmation code is 2956808. The conference call also may be accessed live on the internet. Participants can register for the event at:

https://globalmeet.webcasts.com/starthere.jsp?ei=1569368&tp_key=f44251d5a7.

A rebroadcast of the conference call will be available beginning on Friday, October 7, 2022 after 2:00 p.m. ET at https://investors.lambweston.com/events-and-presentations.

About Lamb Weston

Lamb Weston, along with its joint ventures, is a leading supplier of frozen potato, sweet potato, appetizer and vegetable products to restaurants and retailers around the world. For more than 70 years, Lamb Weston has led the industry in innovation, introducing inventive products that simplify back-of-house management for its customers and make things more delicious for their customers. From the fields where Lamb Weston potatoes are grown to proactive customer partnerships, Lamb Weston always strives for more and never settles. Because, when we look at a potato, we see possibilities. Learn more about us at lambweston.com.

Forward-Looking Statements

This press release contains forward-looking statements within the meaning of the federal securities laws. Words such as “manage,” “expect,” “improve,” “will,” “continue,” “deliver,” “expand,” “support,” “outlook,” and variations of such words and similar expressions are intended to identify forward-looking statements. Examples of forward-looking statements include, but are not limited to, statements regarding the Company’s plans, execution, capital expenditures and investments, operational costs, pricing actions, gross margins, productivity, potato crop, and business and financial outlook and prospects, as well as supply chain constraints, inflation, the Company’s industry, and the global economy. These forward-looking statements are based on management’s current expectations and are subject to uncertainties and changes in circumstances. Readers of this press release should understand that these statements are not guarantees of performance or results. Many factors could affect the Company’s actual financial results and cause them to vary materially from the expectations contained in the forward-looking statements, including those set forth in this press release. These risks and uncertainties include, among other things: the availability and prices of raw materials; labor shortages and other operational challenges; disruptions in the global economy caused by the war in Ukraine and the possible related heightening of the Company’s other known risks; impacts on the Company’s business due to health pandemics or other contagious outbreaks, such as the COVID-19 pandemic, including impacts on demand for its products, increased costs, disruption of supply, other constraints in the availability of key commodities and other necessary services or restrictions imposed by public health authorities or governments; levels of pension, labor and people-related expenses; the Company’s ability to successfully execute its long-term value creation strategies; the Company’s ability to execute on large capital projects, including construction of new production lines or facilities; the competitive environment and related conditions in the markets in which the Company and its joint ventures operate; political and economic conditions of the countries in which the Company and its joint ventures conduct business and other factors related to its international operations; disruption of the Company’s access to export mechanisms; risks associated with possible acquisitions, including the Company’s ability to complete acquisitions or integrate acquired businesses; its debt levels; changes in the Company’s relationships with its growers or significant customers; the success of the Company’s joint ventures; actions of governments and regulatory factors affecting the Company’s businesses or joint ventures; the ultimate outcome of litigation or any product recalls; the Company’s ability to pay regular quarterly cash dividends and the amounts and timing of any future dividends; and other risks described in the Company’s reports filed from time to time with the Securities and Exchange Commission. The Company cautions readers not to place undue reliance on any forward-looking statements included in this press release, which speak only as of the date of this press release. The Company undertakes no responsibility for updating these statements, except as required by law.

Non-GAAP Financial Measures

To supplement the financial information included in this press release, the Company has presented product contribution margin on a consolidated basis, Adjusted EBITDA, Adjusted EBITDA including unconsolidated joint ventures, Adjusted Net Income, Adjusted Diluted EPS, and adjusted income tax expense and equity method investment earnings, each of which is considered a non-GAAP financial measure. The non-GAAP financial measures provided should be viewed in addition to, and not as an alternative for, financial measures prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") that are presented in this press release. These measures are not substitutes for their comparable GAAP financial measures, such as gross profit, net income, diluted earnings per share, or other measures prescribed by GAAP, and there are limitations to using non-GAAP financial measures. The non-GAAP financial measures presented may differ from similarly titled non-GAAP financial measures presented by other companies, and other companies may not define these non-GAAP financial measures the same way.

Management uses these non-GAAP financial measures to assist in comparing the Company's performance on a consistent basis for purposes of business decision making. Management believes that presenting these non-GAAP financial measures provides investors with useful information because they (i) provide meaningful supplemental information regarding financial performance by excluding certain items affecting comparability between periods, (ii) permit investors to view performance using the same tools that management uses to budget, make operating and strategic decisions, and evaluate historical performance, and (iii) otherwise provide supplemental information that may be useful to investors in evaluating the Company's results. The Company believes that the presentation of these non-GAAP financial measures, when considered together with the corresponding GAAP financial measures and the reconciliations to those measures, provides investors with additional understanding of the factors and trends affecting the Company's business than could be obtained absent these disclosures.

The Company has also provided earnings guidance on a non-GAAP basis. The Company cannot predict certain elements that are included in reported GAAP results, including items such as strategic developments, acquisition and integration costs, impact of commodity derivatives, and other items impacting comparability. This list is not inclusive of all potential items, and the Company will update as necessary as these items are evaluated on an ongoing basis, can be highly variable and could be significant to its GAAP measures. As such, prospective quantification of these items is not feasible and a full reconciliation of non-GAAP Adjusted Net Income, Adjusted EBITDA including unconsolidated joint ventures and Adjusted Diluted EPS to GAAP net income or diluted earnings per share has not been provided.

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CONTACT: Investors:

Dexter Congbalay

224-306-1535

dexter.congbalay@lambweston.com

Media:

Shelby Stoolman

208-424-5461

shelby.stoolman@lambweston.com/

KEYWORD: IDAHO UNITED STATES NORTH AMERICA

INDUSTRY KEYWORD: RESTAURANT/BAR FOOD/BEVERAGE AGRICULTURE NATURAL RESOURCES RETAIL

SOURCE: Lamb Weston Holdings, Inc.

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