Lamb Weston Reports Fiscal Third Quarter 2023 Results; Updates Fiscal Year 2023 Outlook
Potato Processor Lamb Weston F2023 Q3 Results: Sales up 31 percent YOY, volume flat
Lamb Weston Holdings, Inc. (NYSE: LW) recently announced its fiscal third quarter 2023 results and updated its fiscal 2023 outlook.
Tom Werner, President and CEO:
Net sales increased USD 298.6 million to USD 1,253.6 million, up 31 percent versus the prior year quarter. Price/mix increased 31 percent, reflecting the benefit of pricing actions across each of the Company’s core business segments to counter input and manufacturing cost inflation.
Overall volume was flat as solid growth in shipments to large chain restaurant and retail channel customers in North America offset the impact of exiting certain lower-priced and lower-margin business as the Company continues to strategically manage customer and product mix due to capacity constraints.
To a lesser extent, softer traffic at casual dining and full-service restaurants in North America also affected volume.
Income from operations increased USD 132.5 million to USD 266.3 million, up 99 percent versus the prior year quarter.
Adjusted Income from Operations(1), which excludes items impacting comparability, increased USD 128.2 million to USD 262.0 million, up 96 percent versus the prior year quarter. The increases were driven by higher sales and gross profit, partially offset by higher selling, general and administrative expenses ("SG&A"). Gross profit increased USD 176.8 million versus the prior year quarter to USD 397.8 million, as the benefits from pricing actions more than offset the impact of higher manufacturing costs on a per pound basis.
The higher costs per pound primarily reflected double-digit cost inflation for key inputs, including: raw potatoes, edible oils, ingredients such as grains and starches used in product coatings, labor, and energy.
In addition, the increase in gross profit included an USD 8.7 million decrease in unrealized mark-to-market adjustments associated with commodity hedging contracts, reflecting a USD 5.1 million loss in the current quarter, compared with a USD 3.6 million gain related to these items in the prior year quarter.
SG&A increased USD 44.3 million versus the prior year quarter to USD 131.5 million, and included a net USD 4.3 million gain (USD 2.8 million after-tax, or USD 0.02 per share) related to actions taken to mitigate the effect of changes in currency rates on the fiscal fourth quarter purchase of the remaining equity interest in Lamb-Weston/Meijer v.o.f. ("LW EMEA"), net of other acquisition-related costs.
Excluding items impacting comparability, SG&A increased USD 48.6 million to USD 135.8 million, primarily due to higher compensation and benefits expense, and to a lesser extent, higher expenses related to improving the Company’s information systems and enterprise resource planning ("ERP") infrastructure, as well as a USD 5.5 million increase in advertising and promotion expenses.
Net income was USD 175.1 million, up USD 68.5 million versus the prior year quarter, and Diluted EPS was USD 1.21, up USD 0.48 versus the prior year quarter. The increases were driven by higher income from operations, which included a net USD 4.3 million gain (USD 2.8 million after-tax, or USD 0.02 per share) for acquisition-related items.
The increase in net income and Diluted EPS was partially offset by lower equity method investment earnings, which included a USD 47.3 million unrealized loss (USD 35.1 million after-tax, or USD 0.24 per share) related to mark-to-market adjustments associated with natural gas and electricity hedging contracts at LW EMEA, and a USD 19.3 million unrealized gain (USD 14.3 million after-tax, or USD 0.10 per share) in the prior year quarter.
The Company has identified the mark-to-market adjustments related to natural gas and electricity derivatives in the current and prior year quarters, and the LW EMEA acquisition-related items discussed above, as items impacting comparability.
Adjusted Net Income(1) was USD 207.4 million, up USD 115.1 million versus the prior year quarter, and Adjusted Diluted EPS(1) was USD 1.43, up USD 0.80 versus the prior year quarter. Adjusted EBITDA including unconsolidated joint ventures(1) increased USD 145.2 million to USD 345.5 million, up 72 percent compared to the prior year quarter. These increases were driven by higher income from operations.
The Company’s effective tax rate(2) in the third fiscal quarter was 19.4 percent, versus 22.6 percent in the prior year quarter. Excluding items impacting comparability, the Company’s effective tax rate was 20.3 percent for the fiscal third quarter, and 22.0 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.
Q3 2023 Segment Highlights
Global Segment Summary
The benefit of domestic and international pricing actions to counter inflationary pressures drove a 33 percent increase in price/mix. Volume was flat as solid growth from key customers in North America offset the impact of exiting certain lower-priced and lower-margin business in international and domestic markets.
Global segment product contribution margin increased USD 94.5 million to USD 167.5 million, up 129 percent versus the prior year quarter. Pricing actions drove the increase, which was partially offset by higher manufacturing costs per pound.
Foodservice Segment Summary
The carryover benefits of pricing actions taken in the prior year, as well as actions taken in fiscal 2023, to counter inflationary pressures drove the increase in price/mix. Incremental losses of certain lower-priced and lower-margin business and, to a lesser extent, a slowdown in casual dining and other full-service restaurant traffic, drove the volume decline.
Foodservice segment product contribution margin increased USD 36.2 million to USD 142.9 million, up 34 percent compared to the prior year quarter. Pricing actions drove the increase, which was partially offset by higher manufacturing costs per pound and the impact of lower volume.
Retail Segment Summary
The carryover benefits of pricing actions taken in the prior year, as well as actions taken in fiscal 2023, across the branded and private label portfolios to counter inflationary pressures drove a 44 percent increase in price/mix. Volume rose 6 percent, driven by strong growth in branded products as customer service rates improved, as well as modest growth in private label products.
Retail segment product contribution margin increased USD 51.0 million to USD 82.6 million, up 161 percent versus the prior year quarter. Pricing actions drove the increase, which was partially offset by higher manufacturing costs per pound.
Equity Method Investment Earnings (Loss)
Equity method investment earnings (loss) from unconsolidated joint ventures in Europe and the U.S. was a loss of USD 23.3 million and earnings of USD 29.7 million for the third quarter of fiscal 2023 and 2022, respectively.
Equity method investment earnings (loss) in the quarter include a USD 45.6 million unrealized loss related to mark-to-market adjustments associated with currency and commodity hedging contracts, of which USD 47.3 million (USD 35.1 million after-tax, or USD 0.24 per share) related to losses in natural gas and electricity derivatives as commodity markets in Europe continued to experience significant volatility.
Equity method investment earnings in the prior year quarter included a USD 19.6 million unrealized gain related to mark-to-market adjustments associated with currency and commodity hedging contracts, of which USD 19.3 million (USD 14.3 million after-tax, or USD 0.10 per share) related to gains in natural gas and electricity derivatives.
Excluding the items impacting comparability noted above (mark-to-market adjustments related to natural gas and electricity derivatives) and the other mark-to-market adjustments, earnings from equity method investments increased USD 12.2 million compared to the prior year quarter, reflecting favorable price/mix, partially offset by higher manufacturing costs, in both Europe and the U.S.
Liquidity and Cash Flows
At the end of the fiscal third quarter, the Company had USD 675.0 million of cash and cash equivalents and no borrowings outstanding under its USD 1.0 billion revolving credit facility.
Through the first three quarters of fiscal 2023, net cash provided by operating activities was USD 335.1 million, up USD 161.1 million versus the prior year period due to higher earnings, partially offset by increased working capital uses.
Capital expenditures were USD 497.0 million, up USD 270.0 million versus the prior year period, primarily reflecting increased investments to support capacity expansion projects and to upgrade the Company’s information systems and ERP infrastructure.
In its fiscal fourth quarter on February 28, 2023, the Company acquired the remaining equity interest in LW EMEA for €531.6 million (USD 564.0 million) in cash, subject to certain post-closing adjustments pursuant to the purchase agreement, and 1,952,421 shares of the Company’s common stock.
The Company funded the cash portion of this acquisition with the proceeds from a USD 450.0 million term loan and USD 114.0 million of cash on hand. With the completion of the transaction, the Company owns 100 percent of the equity interest in LW EMEA.
Accordingly, the Company will begin to consolidate LW EMEA’s financial results in its consolidated financial statements in its fiscal fourth quarter, and include LW EMEA’s results in the Company’s Global segment.
Capital Returned to Shareholders
In the fiscal third quarter, the Company returned USD 35.2 million to shareholders through cash dividends and USD 12.2 million through share repurchases, with 124,691 shares repurchased at an average price per share of USD 97.92.
Through the first three quarters of fiscal 2023, the Company paid USD 105.8 million in cash dividends and repurchased USD 40.6 million of its common stock, with 529,167 shares repurchased at an average price per share of USD 76.66. The Company has approximately USD 228 million authorized for share repurchases under its existing program.
Fiscal 2023 Outlook
The Company is updating its financial targets for fiscal 2023 as follows, which now include the consolidation of LW EMEA:
(1)Adjusted Income from Operations, Adjusted Net Income, Adjusted Diluted EPS, and Adjusted EBITDA including unconsolidated joint ventures 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.
(3) For more information about product contribution margin, please see “Non-GAAP Financial Measures” and the table titled “Segment Information” included in this press release.
Tom Werner, President and CEO:
"We delivered another quarter of strong operating results and have raised our fiscal 2023 financial targets accordingly."
"Our performance was broad-based, with strong sales and earnings growth across each of our core business segments that were in line with or exceeded our projections for the quarter. We expect this momentum will continue through this fiscal year and provide a solid foundation for fiscal 2024."
"However, we continue to believe that the near-term macroenvironment in North America and Europe will remain volatile as we face higher costs for raw potatoes and other key inputs, and as consumer demand and restaurant traffic continue to be affected by inflationary pressures Longer term."
"We believe we are well-positioned to drive sustainable, profitable growth, and to better serve customers around the world as we leverage the commercial and operational benefits of our recently-acquired European operations, as well as our capacity expansion investments in the U.S., China, Argentina, and the Netherlands."
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Q3 2023 CommentarySummary of Third Quarter FY 2023 Results
Net sales increased USD 298.6 million to USD 1,253.6 million, up 31 percent versus the prior year quarter. Price/mix increased 31 percent, reflecting the benefit of pricing actions across each of the Company’s core business segments to counter input and manufacturing cost inflation.
Overall volume was flat as solid growth in shipments to large chain restaurant and retail channel customers in North America offset the impact of exiting certain lower-priced and lower-margin business as the Company continues to strategically manage customer and product mix due to capacity constraints.
To a lesser extent, softer traffic at casual dining and full-service restaurants in North America also affected volume.
Income from operations increased USD 132.5 million to USD 266.3 million, up 99 percent versus the prior year quarter.
Adjusted Income from Operations(1), which excludes items impacting comparability, increased USD 128.2 million to USD 262.0 million, up 96 percent versus the prior year quarter. The increases were driven by higher sales and gross profit, partially offset by higher selling, general and administrative expenses ("SG&A"). Gross profit increased USD 176.8 million versus the prior year quarter to USD 397.8 million, as the benefits from pricing actions more than offset the impact of higher manufacturing costs on a per pound basis.
The higher costs per pound primarily reflected double-digit cost inflation for key inputs, including: raw potatoes, edible oils, ingredients such as grains and starches used in product coatings, labor, and energy.
In addition, the increase in gross profit included an USD 8.7 million decrease in unrealized mark-to-market adjustments associated with commodity hedging contracts, reflecting a USD 5.1 million loss in the current quarter, compared with a USD 3.6 million gain related to these items in the prior year quarter.
SG&A increased USD 44.3 million versus the prior year quarter to USD 131.5 million, and included a net USD 4.3 million gain (USD 2.8 million after-tax, or USD 0.02 per share) related to actions taken to mitigate the effect of changes in currency rates on the fiscal fourth quarter purchase of the remaining equity interest in Lamb-Weston/Meijer v.o.f. ("LW EMEA"), net of other acquisition-related costs.
Excluding items impacting comparability, SG&A increased USD 48.6 million to USD 135.8 million, primarily due to higher compensation and benefits expense, and to a lesser extent, higher expenses related to improving the Company’s information systems and enterprise resource planning ("ERP") infrastructure, as well as a USD 5.5 million increase in advertising and promotion expenses.
Net income was USD 175.1 million, up USD 68.5 million versus the prior year quarter, and Diluted EPS was USD 1.21, up USD 0.48 versus the prior year quarter. The increases were driven by higher income from operations, which included a net USD 4.3 million gain (USD 2.8 million after-tax, or USD 0.02 per share) for acquisition-related items.
The increase in net income and Diluted EPS was partially offset by lower equity method investment earnings, which included a USD 47.3 million unrealized loss (USD 35.1 million after-tax, or USD 0.24 per share) related to mark-to-market adjustments associated with natural gas and electricity hedging contracts at LW EMEA, and a USD 19.3 million unrealized gain (USD 14.3 million after-tax, or USD 0.10 per share) in the prior year quarter.
The Company has identified the mark-to-market adjustments related to natural gas and electricity derivatives in the current and prior year quarters, and the LW EMEA acquisition-related items discussed above, as items impacting comparability.
Adjusted Net Income(1) was USD 207.4 million, up USD 115.1 million versus the prior year quarter, and Adjusted Diluted EPS(1) was USD 1.43, up USD 0.80 versus the prior year quarter. Adjusted EBITDA including unconsolidated joint ventures(1) increased USD 145.2 million to USD 345.5 million, up 72 percent compared to the prior year quarter. These increases were driven by higher income from operations.
The Company’s effective tax rate(2) in the third fiscal quarter was 19.4 percent, versus 22.6 percent in the prior year quarter. Excluding items impacting comparability, the Company’s effective tax rate was 20.3 percent for the fiscal third quarter, and 22.0 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.
Q3 2023 Segment Highlights
Global Segment Summary
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Net sales for the Global segment, which is generally comprised of the top 100 North American-based quick-service and full-service restaurant chain customers, as well as all of the Company’s international sales, increased USD 160.6 million to USD 648.5 million, up 33 percent versus the prior year quarter.Global Segment Summary
The benefit of domestic and international pricing actions to counter inflationary pressures drove a 33 percent increase in price/mix. Volume was flat as solid growth from key customers in North America offset the impact of exiting certain lower-priced and lower-margin business in international and domestic markets.
Global segment product contribution margin increased USD 94.5 million to USD 167.5 million, up 129 percent versus the prior year quarter. Pricing actions drove the increase, which was partially offset by higher manufacturing costs per pound.
Foodservice Segment Summary
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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 USD 65.5 million to USD 360.0 million, up 22 percent versus the prior year quarter, with price/mix up 25 percent and volume down 3 percent.Foodservice Segment Summary
The carryover benefits of pricing actions taken in the prior year, as well as actions taken in fiscal 2023, to counter inflationary pressures drove the increase in price/mix. Incremental losses of certain lower-priced and lower-margin business and, to a lesser extent, a slowdown in casual dining and other full-service restaurant traffic, drove the volume decline.
Foodservice segment product contribution margin increased USD 36.2 million to USD 142.9 million, up 34 percent compared to the prior year quarter. Pricing actions drove the increase, which was partially offset by higher manufacturing costs per pound and the impact of lower volume.
Retail Segment Summary
(Click to enlarge)
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 USD 72.4 million to USD 216.0 million, up 50 percent versus the prior year quarter.Retail Segment Summary
The carryover benefits of pricing actions taken in the prior year, as well as actions taken in fiscal 2023, across the branded and private label portfolios to counter inflationary pressures drove a 44 percent increase in price/mix. Volume rose 6 percent, driven by strong growth in branded products as customer service rates improved, as well as modest growth in private label products.
Retail segment product contribution margin increased USD 51.0 million to USD 82.6 million, up 161 percent versus the prior year quarter. Pricing actions drove the increase, which was partially offset by higher manufacturing costs per pound.
Equity Method Investment Earnings (Loss)
Equity method investment earnings (loss) from unconsolidated joint ventures in Europe and the U.S. was a loss of USD 23.3 million and earnings of USD 29.7 million for the third quarter of fiscal 2023 and 2022, respectively.
Equity method investment earnings (loss) in the quarter include a USD 45.6 million unrealized loss related to mark-to-market adjustments associated with currency and commodity hedging contracts, of which USD 47.3 million (USD 35.1 million after-tax, or USD 0.24 per share) related to losses in natural gas and electricity derivatives as commodity markets in Europe continued to experience significant volatility.
Equity method investment earnings in the prior year quarter included a USD 19.6 million unrealized gain related to mark-to-market adjustments associated with currency and commodity hedging contracts, of which USD 19.3 million (USD 14.3 million after-tax, or USD 0.10 per share) related to gains in natural gas and electricity derivatives.
Excluding the items impacting comparability noted above (mark-to-market adjustments related to natural gas and electricity derivatives) and the other mark-to-market adjustments, earnings from equity method investments increased USD 12.2 million compared to the prior year quarter, reflecting favorable price/mix, partially offset by higher manufacturing costs, in both Europe and the U.S.
Liquidity and Cash Flows
At the end of the fiscal third quarter, the Company had USD 675.0 million of cash and cash equivalents and no borrowings outstanding under its USD 1.0 billion revolving credit facility.
Through the first three quarters of fiscal 2023, net cash provided by operating activities was USD 335.1 million, up USD 161.1 million versus the prior year period due to higher earnings, partially offset by increased working capital uses.
Capital expenditures were USD 497.0 million, up USD 270.0 million versus the prior year period, primarily reflecting increased investments to support capacity expansion projects and to upgrade the Company’s information systems and ERP infrastructure.
In its fiscal fourth quarter on February 28, 2023, the Company acquired the remaining equity interest in LW EMEA for €531.6 million (USD 564.0 million) in cash, subject to certain post-closing adjustments pursuant to the purchase agreement, and 1,952,421 shares of the Company’s common stock.
The Company funded the cash portion of this acquisition with the proceeds from a USD 450.0 million term loan and USD 114.0 million of cash on hand. With the completion of the transaction, the Company owns 100 percent of the equity interest in LW EMEA.
Accordingly, the Company will begin to consolidate LW EMEA’s financial results in its consolidated financial statements in its fiscal fourth quarter, and include LW EMEA’s results in the Company’s Global segment.
Capital Returned to Shareholders
In the fiscal third quarter, the Company returned USD 35.2 million to shareholders through cash dividends and USD 12.2 million through share repurchases, with 124,691 shares repurchased at an average price per share of USD 97.92.
Through the first three quarters of fiscal 2023, the Company paid USD 105.8 million in cash dividends and repurchased USD 40.6 million of its common stock, with 529,167 shares repurchased at an average price per share of USD 76.66. The Company has approximately USD 228 million authorized for share repurchases under its existing program.
Fiscal 2023 Outlook
The Company is updating its financial targets for fiscal 2023 as follows, which now include the consolidation of LW EMEA:
- Net sales of USD 5.25 billion to USD 5.35 billion, including USD 300 million to USD 325 million of sales attributable to the consolidation of LW EMEA’s results in the fiscal fourth quarter. The Company previously expected to deliver net sales of USD 4.8 billion to USD 4.9 billion, which did not include the expected contribution from LW EMEA.
- Net income of USD 639 million to USD 664 million and Diluted EPS of USD 4.42 to USD 4.57, including a net benefit from items impacting comparability of USD 8.1 million (USD 9.0 million after-tax, or USD 0.07 per share) during the first three quarters of fiscal 2023.
The Company previously expected to deliver net income of USD 580 million to USD 620 million and Diluted EPS range of USD 4.03 to USD 4.28, including a net benefit from items impacting comparability of USD 51.1 million (approximately USD 41.3 million after-tax, or USD 0.28 per share) recorded during the first half of fiscal 2023. - Excluding items impacting comparability, Adjusted Net Income(1) of USD 630 million to USD 655 million, Adjusted Diluted EPS(1) of USD 4.35 to USD 4.50, and Adjusted EBITDA including unconsolidated joint ventures(1) of USD 1,180 million to USD 1,210 million. The Company estimates the consolidation of LW EMEA will contribute an incremental USD 10 million to USD 15 million of Adjusted EBITDA including unconsolidated joint ventures(1).
The Company previously expected to deliver Adjusted Net Income(1) of USD 540 million to USD 580 million, Adjusted Diluted EPS(1) range of USD 3.75 to USD 4.00, and Adjusted EBITDA including unconsolidated joint ventures(1) range of USD 1,050 million to USD 1,100 million. - Gross margins including the consolidation of LW EMEA of 27 percent to 27.5 percent. Excluding the consolidation of LW EMEA, the Company raised its gross margin estimate to 28 percent to 28.5 percent, which is above the Company’s previous target of 27 percent to 28 percent.
- SG&A, excluding items impacting comparability, of USD 550 million to USD 570 million, up from the Company’s previous estimate of USD 525 million to USD 550 million, largely reflecting the consolidation of LW EMEA.
(1)Adjusted Income from Operations, Adjusted Net Income, Adjusted Diluted EPS, and Adjusted EBITDA including unconsolidated joint ventures 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.
(3) For more information about product contribution margin, please see “Non-GAAP Financial Measures” and the table titled “Segment Information” included in this press release.
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