Lamb Weston Reports Fiscal First Quarter 2024 Results; Raises Fiscal Year 2024 Outlook

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

Tom Werner, President and CEO:
 

"We delivered solid sales and earnings growth in the quarter, driven by the carryover benefit of pricing actions initiated last year as well as improved customer and product mix.Organic sales volumes were in line with expectations, and shipment trends improved as the quarter progressed"

"We raised our earnings target for the year to reflect our performance in the quarter, as well as the current solid demand and pricing environment. "We continue to expect the potato crop in our growing regions in North America will be in line with historical averages, and we believe the overall crop in Europe has improved compared to earlier predictions as a result of better growing conditions."

"The integration of our EMEA operations and our capacity expansions also remain on track, including the start-up of our facility in China this month. With these investments, along with our strategic efforts to improve the capabilities and flexibility of our global production network and operations, we believe that we are well-positioned to continue to serve our customers and drive sustainable, profitable growth over the long term."

 
Q1 2024 Commentary

The net sales increased by USD 539.7 million to a total of USD 1,665.3 million, representing a 48 percent increase compared to the prior year quarter. This increase includes USD 374.9 million in incremental sales resulting from the consolidation of the financial results of (1) Lamb-Weston/Meijer v.o.f. (“LW EMEA”) in Europe, following the completion of the Company’s acquisition in February 2023 of the remaining interest in LW EMEA (the “LW EMEA Acquisition”), and (2) Lamb Weston Alimentos Modernos S.A. (“LWAMSA”) in Argentina, following the Company’s acquisition in July 2022 of an additional 40 percent interest in LWAMSA (the “LWAMSA Acquisition” and, together with the LW EMEA Acquisition, the “Acquisitions”).

Net sales, excluding the incremental sales attributable to the Acquisitions, grew 15 percent versus the prior year quarter. Price/mix increased 23 percent, reflecting the benefit of pricing actions across both of the Company’s business segments to counter input and manufacturing cost inflation, the timing of trade spending in North America, and favorable mix, partially offset by lower customer transportation charges.

Volume declined 8 percent, primarily reflecting the Company’s decisions to exit certain lower-priced and lower-margin business as it continues to strategically manage customer and product mix.

To a lesser extent, inventory destocking by certain customers in international markets and in select U.S. retail channels also pressured volumes. Volume elasticities in response to inflation-based pricing actions across the Company’s portfolio have generally been low.

Gross profit increased USD 226.2 million versus the prior year quarter to USD 499.5 million and included USD 22.5 million of costs (USD 16.7 million after-tax, or USD 0.11 per share) associated with the sale of inventory stepped-up to fair value in the LW EMEA Acquisition, and a USD 31.7 million (USD 23.8 million after-tax, or USD 0.16 per share) unrealized gain related to mark-to-market adjustments associated with commodity hedging contracts.

The prior year quarter included a USD 4.0 million (USD 3.0 million after-tax, or USD 0.02 per share) unrealized loss related to mark-to-market adjustments associated with commodity hedging contracts. The Company has identified LW EMEA integration and acquisition-related items as items impacting comparability.

Excluding unrealized mark-to-market gains and losses related to commodity derivatives and items impacting comparability, gross profit increased USD 213.0 million, driven primarily by: benefits from pricing actions, which more than offset the impact of higher costs on a per pound basis and lower sales volumes; the timing of trade spending in North America; and incremental earnings attributable to the consolidation of the financial results of LW EMEA.

The higher costs per pound reflected mid-to-high-single-digit cost inflation for key inputs, including: raw potatoes, labor, ingredients such as grains and starches used in product coatings, and energy. The increase in per pound costs was partially offset by lower costs for edible oils and transportation.

Selling, general and administrative expenses ("SG&A") increased USD 59.9 million versus the prior year quarter to USD 176.2 million, and included USD 4.0 million of LW EMEA integration and acquisition-related expenses (USD 3.0 million after-tax, or USD 0.02 per share), USD 4.4 million (USD 3.3 million after-tax, or USD 0.02 per share) of unrealized losses related to mark-to-market adjustments associated with currency hedging contracts, and USD 7.4 million (USD 5.5 million after-tax, or USD 0.04 per share) of foreign currency exchange losses. The prior year quarter included USD 1.0 million (USD 0.7 million after-tax, with no per share impact) of foreign currency exchange losses.

Excluding these items, SG&A increased USD 45.1 million to USD 160.4 million, primarily due to incremental expenses attributable to the consolidation of the financial results of LW EMEA and higher expenses related to improving the Company’s information systems and enterprise resource planning ("ERP") infrastructure.

Income from operations increased USD 166.3 million to USD 323.3 million, up 106 percent versus the prior year quarter. Adjusted Income from Operations(1), which excludes foreign currency exchange and unrealized mark-to-market derivative gains and losses and items impacting comparability, increased USD 167.9 million to USD 329.9 million, up 104 percent versus the prior year quarter. These increases were driven by higher sales and gross profit, partially offset by higher SG&A.

Net income amounted to USD 234.8 million, which is an increase of USD 2.9 million compared to the prior year quarter. Diluted EPS was USD 1.60, remaining the same as the prior year quarter.

Net income in the current quarter included a total net loss of USD 4.7 million (USD 6.6 million before tax, or USD 0.03 per share) from foreign currency exchange and unrealized mark-to-market derivative gains and losses, along with items impacting comparability.

In contrast, net income in the prior year quarter included a total net benefit of USD 118.6 million (USD 154.6 million before tax, or USD 0.82 per share).

This benefit encompassed USD 104.2 million (USD 140.5 million before tax, or USD 0.72 per share) in unrealized mark-to-market adjustments associated with commodity and currency hedging contracts (primarily at LW EMEA), USD 0.7 million (USD 1.0 million before tax) in foreign currency exchange losses, and a USD 15.1 million gain (before and after-tax, or USD 0.10 per share) recognized in connection with the LWAMSA Acquisition, which related to the remeasuring of the Company’s previously held 50 percent ownership interest to fair value.

Adjusted Net Income(1) reached USD 239.5 million, marking an increase of USD 126.2 million compared to the prior year quarter. Similarly, Adjusted Diluted EPS(1) was USD 1.63, which is up by USD 0.85 versus the prior year quarter.

Adjusted EBITDA(1) increased by USD 178.2 million, reaching USD 412.8 million, representing a 76 percent increase compared to the prior year quarter. These increases were primarily driven by higher income from operations, including the benefit of incremental earnings from LW EMEA.

The Company's effective tax rate(2) in the first quarter was 22.9 percent, whereas it was 24.1 percent in the prior year quarter.

Excluding foreign currency exchange and unrealized mark-to-market derivative gains and losses and items impacting comparability in the first quarter of fiscal 2024 and 2023, the Company's effective tax rate was 23.1 percent in the current quarter and 25.0 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.

Q1 2024 Segment Highlights

Effective May 29, 2023, in connection with the Company’s Acquisitions and to align with its expanded global footprint, management, including the Company’s chief executive officer, who is its chief operating decision maker, began managing the Company’s operations as two business segments based on management’s change to the way it monitors performance, aligns strategies, and allocates resources.

This resulted in a change from four reportable segments to two (North America and International), effective the beginning of fiscal 2024.

Beginning with this first quarter of fiscal 2024, all summary financial information is presented under the new reportable segments and corresponding prior period amounts have been reclassified to conform with current period classification.

North America Summary
 Net sales for the North America segment, which includes all sales to customers in the U.S., Canada and Mexico, increased USD 179.8 million to USD 1,135.4 million, up 19 percent versus the prior year quarter.

Price/mix increased 24 percent, reflecting the carryover benefit of pricing actions taken in fiscal 2023 to counter inflationary pressures, the timing of trade spending, and favorable mix, partially offset by lower customer transportation charges.

Volume declined 5 percent, primarily reflecting the Company’s decisions to exit certain lower-priced and lower-margin business. To a lesser extent, lower shipments in response to inventory destocking by certain customers also pressured volumes.

North America Segment Adjusted EBITDA increased USD 147.6 million to USD 379.4 million. The carryover benefit of pricing actions, the timing of trade spending, and favorable mix drove the increases, which were partially offset by higher costs per pound and the impact of lower volumes.

International Summary

Net sales for the International segment, which includes all sales to customers outside of North America, increased USD 359.9 million to USD 529.9 million, with the current year including USD 374.9 million of incremental sales attributable to the consolidation of the financial results of LW EMEA and LWAMSA. International net sales, excluding the incremental sales attributable to the Acquisitions, declined 9 percent.

Price/mix increased 18 percent, driven by the carryover benefit of pricing actions taken in fiscal 2023 to counter inflationary pressures, as well as favorable mix, partially offset by lower customer transportation charges. Volume, excluding the benefit from acquisitions, declined 27 percent, primarily reflecting the Company’s decisions to exit certain lower-priced and lower-margin business. To a lesser extent, lower shipments in response to inventory destocking by certain customers in several markets in the Asia-Pacific region also pressured volume.

International Segment Adjusted EBITDA increased USD 56.5 million to USD 89.6 million, up 171 percent and excluded a net loss from comparability items of USD 22.5 million. Incremental earnings from the consolidation of the financial results of LW EMEA and favorable price/mix drove the increases, which were partially offset by higher costs per pound and the impact of lower volumes.
 Equity Method Investment Earnings

Equity method investment earnings from unconsolidated joint ventures were USD 12.1 million and USD 174.6 million for the first 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, while results in the prior year quarter also included earnings associated with the Company’s 50 percent interests in LW EMEA and LWAMSA.

The results in the prior year quarter include a USD 144.5 million unrealized gain related to mark-to-market adjustments associated with currency and commodity hedging contracts (USD 107.2 million after-tax, or USD 0.74 per share), and a USD 15.1 million gain (before and after-tax, or USD 0.10 per share) recognized in connection with the LWAMSA Acquisition, which related to remeasuring the Company’s previously held 50 percent ownership interest to fair value.

Excluding these items, equity method investment earnings declined USD 2.9 million compared to the prior year quarter, largely due to LW EMEA earnings being included in the prior year quarter.

Liquidity and Cash Flows

As of August 27, 2023, the Company had USD 163.3 million of cash and cash equivalents, with no borrowings outstanding under its USD 1.0 billionU.S. revolving credit facility.

Net cash provided by operating activities was USD 334.6 million, up USD 142.5 million versus the prior year quarter, primarily due to higher earnings, offset partially by unfavorable changes in working capital. Capital expenditures were USD 304.7 million, up USD 183.5 million versus the prior year quarter, primarily reflecting increased investments to support capacity expansion projects and to upgrade the Company’s information systems and ERP infrastructure.

Capital Returned to Shareholders

In the first quarter of fiscal 2024, the Company returned USD 40.8 million to shareholders through cash dividends and USD 100.0 million through share repurchases, with an aggregate of 992,365 shares repurchased at an average price per share of USD 100.77. The Company has approximately USD 124 million remaining under its existing share repurchase program.

Fiscal 2024 Outlook

The Company raised its financial targets for fiscal 2024, which include:
 

• Net sales of USD 6.8 billion to USD 7.0 billion, including USD 1.1 billion to USD 1.2 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 is continuing to target net sales, excluding incremental sales attributable to the LW EMEA Acquisition, to grow 6.5 percent to 8.5 percent, and to be largely driven by pricing actions.
  
  Sales volumes are expected to be primarily pressured by the Company’s decisions to strategically manage customer and product mix by exiting certain lower-priced and lower-margin business. In addition, the Company believes softening restaurant traffic trends in the U.S. and other key markets due to macroeconomic headwinds may also pressure volumes.
  
  The Company previously expected to deliver net sales of USD 6.7 billion to USD 6.9 billion, including USD 1.0 billion to USD 1.1 billion of incremental sales attributable to the consolidation of the financial results of LW EMEA.


• Net income of USD 800 million to USD 870 million and Diluted EPS of USD 5.47 to USD 5.92, including a net loss from foreign currency exchange and unrealized mark-to-market derivative gains and losses and items impacting comparability of USD 6.6 million (USD 4.7 million after-tax, or USD 0.03 per share) during the first quarter of fiscal 2024.
  
  The Company previously expected to deliver net income of USD 725 million to USD 790 million and Diluted EPS of USD 4.95 to USD 5.40. Excluding foreign currency exchange and unrealized mark-to-market derivative gains and losses and items impacting comparability, Adjusted Net Income(1) of USD 805 million to USD 875 million, Adjusted Diluted EPS(1) of USD 5.50 to USD 5.95, and Adjusted EBITDA(1) of USD 1,540 million to USD 1,620 million (+26% compared to fiscal 2023 using the mid-point).
  
  The Company expects higher sales and gross profit will largely drive anticipated earnings growth in fiscal 2024. The Company continues to expect gross profit growth will be partially offset by higher SG&A of USD 765 million to USD 775 million, largely reflecting: incremental expense attributable to the consolidation of the financial results of LW EMEA; increased investments to upgrade the Company’s information systems and ERP infrastructure; non-cash amortization of intangible assets associated with the LW EMEA Acquisition; and higher compensation and benefits expense due to increased employee headcount. The Company previously expected Adjusted EBITDA(1) of USD 1,450 million to USD 1,525 million.

The Company also updated its target of interest expense, net to approximately USD 155 million, down from the Company’s previous estimate of approximately USD 165 million.

The Company continues to target:
 

• Depreciation and amortization expense of approximately USD 325 million;
• Cash used for capital expenditures of USD 800 million to USD 900 million as the Company continues construction of previously-announced capacity expansion efforts in China, Idaho, the Netherlands and Argentina, as well as capital investments to upgrade its information systems and ERP infrastructure; and
• An effective tax rate(2) (full year) of 23 percent to 24 percent.

End Notes

(1) Adjusted Income from Operations, 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.

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