Lamb Weston Reports Fiscal Third Quarter 2024 Results; Updates Fiscal Year 2024 Outlook

Lamb Weston Holdings, Inc. (NYSE: LW) announced its results for the third quarter of fiscal 2024 and updated its full year earnings targets for fiscal 2024.

Tom Werner, President and CEO of Lamb Weston Holdings, Inc.:
 

"The transition to a new enterprise resource planning (ERP) system in North America negatively impacted our financial results in the quarter by more than we expected. The ERP transition temporarily reduced the visibility of finished goods inventories located at distribution centers, which affected our ability to fill customer orders."

"In turn, this pressured sales volume and margin performance. While we are disappointed with the magnitude of the ERP transition’s effect on the quarter, after implementing systems adjustments and modifying processes, we believe the impact is behind us as our order fulfillment rates have normalized."

"As a result of the ERP transition’s impact and soft near-term restaurant traffic trends, we have reduced our annual sales and earnings guidance for the year. We remain confident in the underlying performance of the business, the health of the global frozen potato category and our ability to deliver sustainable, profitable growth over the long term."

Q3 2024 Commentary

ERP Transition

At the beginning of the fiscal third quarter, the Company transitioned certain central systems and functions, including order to cash, produce to deliver, source to pay, and inventory management, among others in North America to a new ERP system. After the transition, the Company experienced reduced visibility into finished goods inventories at its distribution centers, resulting in a higher-than-expected effect on customer order fulfilment rates.

The transition had a greater impact on shipments of higher-margin mixed-product loads than shipments of single-product orders, resulting in unfavorable mix. The Company partnered closely with its customers to minimize the impact and estimates the lower order fulfilment rates reduced sales volume growth by approximately 8 percentage points and net sales by approximately USD 135 million during the fiscal third quarter, with USD 123 million and USD 12 million in the Company’s North America and International segments, respectively.

In total, the Company estimates the ERP transition negatively impacted fiscal third quarter net income by approximately USD 72 million, and Adjusted EBITDA(2) by approximately USD 95 million. With respect to the impact on Adjusted EBITDA(2), the Company estimates that approximately USD 55 million related to lower order fulfillment rates, and approximately USD 40 million related to incremental costs and expenses, of which:

• Approximately USD 7 million was recorded as a reduction in gross sales, and included accrued fees and charges for delayed or unfilled customer orders;
• Approximately USD 26 million was recorded in cost of sales, and included reduced fixed cost coverage and inefficiencies resulting from planned downtime at the Company's processing facilities, as well as additional freight charges; and
• Approximately USD 7 million was recorded in selling, general and administrative expenses, and largely included consulting expenses to restore order fulfillment rates.

Of the approximately USD 95 million negative impact on Adjusted EBITDA(2), the Company estimates that approximately USD 83 million impacted the North America segment, approximately USD 5 million impacted the International segment, and approximately USD 7 million impacted unallocated corporate costs. 

The Company believes the impact of the order fulfillment issues were contained to the fiscal third quarter as customer order fulfillment rates have been restored to pre-transition levels.

Q3 Results of Operations

Net sales increased USD 204.7 million to USD 1,458.3 million, up 16 percent versus the prior year quarter, with the current year quarter including USD 356.7 million of incremental sales attributable to the consolidation of the financial results of Lamb-Weston/Meijer v.o.f., the Company’s former joint venture in Europe (“LW EMEA”), following the completion of the Company’s acquisition in February 2023 of the remaining interest in LW EMEA (the “LW EMEA Acquisition”).

Net sales, excluding the incremental sales attributable to the LW EMEA Acquisition, were down USD 152.0 million, or 12 percent versus the prior year quarter, with approximately USD 135 million of the decline attributable to the ERP transition. Volume declined 16 percent, with approximately 8 percentage points of the decline related to unfilled customer orders resulting from the Company's transition to a new ERP system in North America.

The other half of the volume decline largely reflects soft restaurant traffic trends in North America and other key international markets, as well as the carryover effect of the Company's decision to exit certain lower-priced and lower-margin business in the prior year to strategically manage customer and product mix.

Price/mix increased 4 percent, reflecting the benefit of inflation-driven pricing actions across both business segments, partially offset by lower customer transportation charges that were driven by lower volume and the pass-through of lower freight rates.

Gross profit increased USD 5.9 million versus the prior year quarter to USD 403.7 million, and included a USD 23.3 million (USD 17.3 million after-tax, or USD 0.12 per share) unrealized loss related to mark-to-market adjustments associated with commodity hedging contracts. The prior year quarter included a USD 5.1 million (USD 3.8 million after-tax, or USD 0.03 per share impact) unrealized loss related to mark-to-market adjustments associated with commodity hedging contracts. 

Adjusted Gross Profit(2) increased USD 24.1 million versus the prior year quarter to USD 427.0 million, driven by incremental earnings from the consolidation of the financial results of LW EMEA, and benefits from inflation-driven pricing actions.

Gross profit and Adjusted Gross Profit(2) in the current quarter included an estimated USD 33 million of incremental pre-tax costs associated with the ERP transition, as well as a USD 20.5 million pre-tax charge(1) for the write-off of excess raw potatoes, largely reflecting a reduction to the Company’s sales volume estimate resulting from soft restaurant traffic trends in North America and other key international markets, as well as from a higher-than-expected impact on customer order fulfillment rates related to the ERP transition. 

The increase in Adjusted Gross Profit(2) was also partially offset by higher costs per pound, which largely reflected mid-single-digit cost inflation, in aggregate, for key inputs, including: raw potatoes, labor, energy, and ingredients such as grains and starches used in product coatings. The increase in per pound costs was partially offset by lower transportation rates and lower cost of edible oils.

Selling, general and administrative expenses (“SG&A”) increased USD 48.3 million versus the prior year quarter to USD 179.8 million, and included: USD 2.4 million (USD 1.8 million after-tax, or USD 0.01 per share) of LW EMEA integration and acquisition-related expenses; USD 4.0 million (USD 3.0 million after-tax, or USD 0.02 per share) of unrealized loss related to mark-to-market adjustments associated with currency hedging contracts; and USD 9.0 million (USD 6.8 million after-tax, or USD 0.04 per share) of foreign currency exchange losses. The prior year quarter included USD 4.3 million (USD 2.8 million after-tax, or USD 0.02 per share) of LW EMEA integration and acquisition-related net gains and USD 1.8 million (USD 1.4 million after-tax, or USD 0.01 per share) of foreign currency exchange losses. 

Adjusted SG&A(2) increased USD 30.4 million to USD 164.4 million, primarily due to incremental expenses attributable to the consolidation of the financial results of LW EMEA, and higher expenses associated with information technology investments, including the transition to a new ERP system and related non-cash amortization costs. The increase in Adjusted SG&A(2) was partially offset by a reduction in compensation and benefits accruals. 

Income from operations declined USD 42.4 million to USD 223.9 million, down 16 percent versus the prior year quarter. Adjusted Income from Operations(2) declined USD 6.3 million from the prior year quarter to USD 262.6 million. The increase was driven by higher sales and Adjusted Gross Profit(2), which were largely offset by higher Adjusted SG&A(2).

Net income was USD 146.1 million, down USD 29.0 million versus the prior year quarter, and Diluted EPS was USD 1.01, down 17 percent from the prior year quarter. Net income in the current quarter included a total net loss of USD 28.9 million (USD 38.7 million before tax, or USD 0.19 per share) for foreign currency exchange and unrealized mark-to-market derivative gains and losses, and items impacting comparability.

Net income in the prior year quarter included a total net loss of USD 37.3 million (USD 49.7 million before tax, or USD 0.26 per share), including USD 38.7 million (USD 52.2 million before tax, or USD 0.27 per share) in unrealized mark-to-market adjustments associated with commodity and currency hedging contracts (primarily at LW EMEA), foreign currency exchange losses, and items impacting comparability. 

Adjusted Net Income(2) was USD 175.0 million, down USD 37.4 million versus the prior year quarter, and Adjusted Diluted EPS(2) was USD 1.20, down 18 percent from the prior year quarter. The declines in Adjusted Net Income(2) and Adjusted Diluted EPS(2) largely reflect lower Adjusted Income from Operations(2) due to the factors described above, as well as higher interest expense. 

Adjusted EBITDA(2) declined USD 8.6 million from the prior year quarter to USD 343.6 million, as an approximately USD 95 million negative impact from the ERP transition, higher cost per pound, a USD 25.0 million pre-tax charge(1) for the write-off of excess raw potatoes (of which USD 4.5 million(1) was recorded in Equity Method Investment Earnings), and lower volumes largely offset incremental earnings from the consolidation of the financial results of LW EMEA and the benefit of inflation-driven pricing actions.

The Company’s effective tax rate(3) in the third quarter was 22.8 percent, versus 19.4 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 and currency, permanent differences, and discrete items. 

Q3 2024 Segment Highlights
 

Net sales for the North America segment, which includes all sales to customers in the U.S., Canada and Mexico, declined USD 123.3 million to USD 947.5 million, down 12 percent versus the prior year quarter, with essentially all of the decline attributable to the ERP transition.

Volume declined 17 percent, with more than one-half of the decline reflecting unfilled customer orders resulting from the ERP transition. The remainder of the volume decline largely reflects soft restaurant traffic and retail trends in North America, as well as the carryover impact of the Company’s decisions to exit certain lower-priced and lower-margin business in the prior fiscal year. 

Price/mix increased 5 percent, reflecting the carryover benefit of inflation-driven pricing actions taken in fiscal 2023, as well as pricing actions for contracts with large and regional chain restaurant customers in fiscal 2024. The increase in price/mix was partially offset by lower customer transportation charges and unfavorable mix associated with the transition to a new ERP system. 

North America Segment Adjusted EBITDA declined USD 47.1 million to USD 285.9 million. An approximately USD 83 million negative impact of the ERP transition, higher costs per pound, a USD 22.7 million charge(1) for the write-off of excess raw potatoes, and lower volumes drove the decline, which was partially offset by the benefit of inflation-driven pricing actions. 
 

Net sales for the International segment, which includes all sales to customers outside of North America, increased USD 328.0 million to USD 510.8 million, with the current quarter including USD 356.7 million of incremental sales attributable to the consolidation of the financial results of LW EMEA. 

International net sales, excluding the incremental sales attributable to the LW EMEA Acquisition, declined USD 28.7 million, or 16 percent compared to the prior year quarter, with approximately USD 12 million of the decline attributable to the ERP transition. Volume, excluding the benefit from the LW EMEA Acquisition, declined 17 percent. 

More than half of the volume decline reflects the Company’s decisions to exit certain lower-priced and lower-margin business in the prior fiscal year, with the remainder primarily reflecting unfilled customer orders served by exports from North America as a result of the transition to a new ERP system. Price/mix increased 1 percent as the carryover benefit of inflation-driven pricing actions taken in fiscal 2023 was mostly offset by lower customer transportation charges. 

International Segment Adjusted EBITDA increased USD 47.6 million to USD 101.7 million. Incremental earnings from the consolidation of the financial results of LW EMEA drove the increase. Excluding the benefit from the LW EMEA Acquisition, the impact of higher costs per pound, an estimated USD 5 million negative impact from the ERP transition, lower volumes, and a USD 2.3 million allocated charge(1) for the write-off of excess raw potatoes, more than offset favorable price/mix.

Equity Method Investment Earnings (Loss)

Equity method investment earnings (loss) from unconsolidated joint ventures were earnings of USD 1.0 million and a loss of USD 23.3 million for the third quarter of fiscal 2024 and 2023, respectively. The results in the current quarter include earnings associated with the Company’s 50 percent interest in Lamb Weston/RDO Frozen, an unconsolidated joint venture in Minnesota (“Lamb Weston RDO”), while results in the prior year quarter also included earnings associated with the Company’s then 50 percent interest in LW EMEA.

The results in the prior year quarter include a USD 47.1 million (USD 34.9 million after-tax, or USD 0.24 per share) unrealized loss related to mark-to-market adjustments associated with currency and commodity hedging contracts at LW EMEA. 

Adjusted Equity Method Investment Earnings(2) declined USD 22.8 million compared to the prior year quarter, largely due to LW EMEA earnings being reflected as equity method investment earnings in the prior year quarter. The results in the current quarter also include a USD 4.5 million charge(1) for the write-off of excess raw potatoes at Lamb Weston RDO.

Liquidity and Cash Flows

As of February 25, 2024, the Company had USD 62.3 million of cash and cash equivalents, with USD 908.8 million of available liquidity under committed revolving credit facilities in the U.S. and Europe. 

Net cash provided by operating activities for the first three quarters of fiscal 2024 was USD 481.5 million, up USD 146.4 million versus the prior year period, primarily due to higher earnings. Capital expenditures during the first three quarters of fiscal 2024 were USD 828.3 million, up USD 331.3 million versus the prior year period, primarily reflecting increased investments to support capacity expansion projects and to upgrade the Company’s ERP and information systems infrastructure.

Capital Returned to Shareholders In the third quarter of fiscal 2024, the Company returned USD 40.4 million to shareholders through cash dividends. There were no repurchases of common stock under the Company's share repurchase program during the quarter.

In the first three quarters of fiscal 2024, the Company paid USD 122.0 million in cash dividends and repurchased USD 150.0 million of its common stock, with an aggregate of 1,564,351 shares repurchased at an average price per share of USD 95.89. The Company has USD 450.0 million of remaining unused capacity under its existing share repurchase program. 

Fiscal 2024 Outlook

The Company updated its financial targets for fiscal 2024, as follows:
 

• The Company updated its annual net sales target range to USD 6.54 billion to USD 6.60 billion, which includes USD 1.1 billion of incremental sales attributable to the consolidation of the financial results of LW EMEA during the first three quarters of the fiscal year.
  
  The Company reduced its annual net sales target from its previous range of USD 6.8 billion to USD 7.0 billion to reflect the higher-than-expected impact on customer order fulfillment rates from the transition to a new ERP system during the Company’s fiscal third quarter, as well as soft near-term restaurant traffic and retail trends in North America and other key international markets. The Company is targeting net sales of USD 1.69 billion to USD 1.75 billion in the Company’s fiscal fourth quarter, with growth versus the prior year quarter driven by higher price/mix.
• The Company updated its target ranges for net income to USD 770 million to USD 790 million and Diluted EPS of USD 5.30 to USD 5.45, including a net loss from foreign currency exchange and unrealized mark-to-market derivative gains and losses and items impacting comparability of USD 40.8 million (USD 30.4 million after-tax, or USD 0.20 per share) during the first three quarters of fiscal 2024. The Company previously targeted a net income range of USD 830 million to USD 900 million and a Diluted EPS range of USD 5.70 to USD 6.15.
• The Company updated its target range for Adjusted EBITDA(2) to USD 1,480 million to USD 1,510 million, which includes a USD 95.9 million pre-tax charge(1) for the write-off of excess raw potatoes, as well as incremental costs associated with the higher-than-expected impact of the transition to a new ERP system during the fiscal third quarter.
  
  The Company previously targeted an Adjusted EBITDA(2) range of USD 1,540 million to USD 1,620 million. The Company is targeting Adjusted EBITDA(2) of USD 350 million to USD 375 million in the Company’s fiscal fourth quarter, and expects higher net sales and Adjusted Gross Profit(2) to drive earnings growth, partially offset by Adjusted SG&A(2) of USD 190 million to USD 195 million.
• The Company updated its target ranges for Adjusted Net Income(2) to USD 800 million to USD 820 million and Adjusted Diluted EPS(2) to USD 5.50 to USD 5.65 from its previous target ranges of USD 830 million to USD 900 million and USD 5.70 to USD 6.15 per share, respectively.

The Company updated other financial targets, as follows:

 

• Cash used for capital expenditures of USD 950 million, which is the upper end of its previous estimated range of USD 900 million to USD 950 million; and
• An effective tax rate(3) (full year) at the lower end of its targeted range of 23 percent to 24 percent.

The Company maintained its targets for depreciation and amortization expense of approximately USD 300 million and interest expense of approximately USD 140 million.

End Notes

(1) Both GAAP and Non-GAAP results for the thirteen weeks ended February 25, 2024 include a USD 25.0 million charge (USD 19.0 million after-tax, or USD 0.13 per share) related to a write-off of excess raw potatoes. This includes a USD 20.5 million charge (USD 15.6 million after-tax, or USD 0.11 per share) in cost of sales, and a USD 4.5 million charge (USD 3.4 million after-tax, or USD 0.02 per share) recorded in equity method investment earnings (losses). 

The total charge to the reporting segments was as follows: USD 22.7 million to the North America segment and USD 2.3 million to the International segment. Non-GAAP results for the thirty-nine weeks ended February 25, 2024 include a USD 95.9 million charge (USD 72.9 million after-tax, or USD 0.50 per share) related to a write-off of excess raw potatoes. 

This includes a USD 85.1 million charge (USD 64.7 million after-tax, or USD 0.44 per share) in cost of sales, and a USD 10.8 million charge (USD 8.2 million after-tax, or USD 0.06 per share) recorded in equity method investment earnings (losses). The total charge to the reporting segments was as follows: USD 86.0 million to the North America segment and USD 9.9 million to the International segment. 

(2)Adjusted Gross Profit, Adjusted SG&A, Adjusted Income from Operations, Adjusted Equity Method Investment Earnings, Adjusted Net Income, Adjusted Diluted EPS, and Adjusted EBITDA, are non-GAAP financial measures.

Please see the discussion of non-GAAP financial measures, including a discussion of guidance provided on a non-GAAP basis, and the associated reconciliations at the end of this press release for more information. 

(3)The effective tax rate is calculated as the ratio of income tax expense to pre-tax income, inclusive of equity method investment earnings.