Lamb Weston President and CEO Tom Werner expects input cost inflation, especially for edible oils, packaging and transportation, to be a significant headwind for the frozen potato products company during fiscal 2022.
“Our goal is to offset inflation using a combination of levers including pricing. To that end, we just began implementing broad base price increases in our foodservice and retail segments, and don’t expect to see the most of their benefit until our fiscal third quarter,” he told financial analysts during an earnings call on July 27 as the Eagle, Idaho, USA-headquartered company posted Q4 and full year results.
“Fiscal 2021 was the most challenging operating environment in our history, but we believe the worst of the Covid-19 pandemic’s effect on our business is behind us,” said Werner. “We’re encouraged by the pace of recovery in US restaurant traffic, especially at full-service restaurants, and continue to expect that overall french fry demand will return to pre-pandemic levels around the end of calendar 2021. We also anticipate that demand in Europe and in our key export markets will steadily improve as vaccines become more widely available and vaccination rates increase in those markets.”
Net sales during the fourth quarter rose 19% to $1,008 million, while income from operations advanced a whopping 220% to $99 million. Net income in Q4 increased to $66 million from a loss of $2 million.
For the full year, net sales fell 3% to $3,671 million, while income from operations declined 15% to $475 million. Net income dropped 13% to $318 million, and diluted earnings per share declined 13% to $2.16.
“While french fry demand trends have become more predictable compared to a year ago, the lingering effects of the pandemic and the sharp recovery of the broader economy in the US has disrupted supply chain operations across all industries, including ours,” said Werner. “While we expect these disruptions to be transitory, we believe these challenges, along with notable input and transportation cost inflation and the impact of a tighter labor market, will continue to pressure our earnings in the near term. However, we expect these pressures will ease as we anticipate gradual improvements in our supply chain operations as global economic conditions continue to stabilize, and as we look to pass through rising costs.”
Q4 2021 Segment Highlights
Net sales for the Global segment, which is generally comprised of the top 100 North America-based quick service (QSR) and full-service restaurant chain customers as well as all of the company’s international sales, increased $80.3 million to $509.6 million – up 19 percent versus the prior year quarter, with volume up 16 percent and price/mix up 3 percent.
Net sales and volume increased 28 percent and 24 percent, respectively, excluding the benefit of the additional selling week in the prior year quarter. The recovery in demand, especially at QSRs and other large chain restaurant customers in the United States, largely drove the increase in sales volume. Shipments to customers in the company’s key international markets also improved in the aggregate, although varied by country. Overall sales volume growth also reflected a comparison to reduced shipments in the prior year quarter as customers destocked inventories. The increase in price/mix reflected both favorable price and mix.
Global segment product contribution margin increased $22.9 million to $56.4 million, up 68 percent versus the prior year quarter. Higher sales volume, favorable price/mix and lower manufacturing and distribution costs per pound drove the increase.
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 $144.2 million to $320.0 million, up 82 percent versus the prior year period, with volume up 64 percent and price/mix up 18 percent. Net sales and volume increased 94 percent and 74 percent, respectively, excluding the benefit of the additional selling week in the prior year quarter.
The recovery in demand at small and regional chain restaurants, as well as independently-owned restaurants, especially at full-service establishments, drove the increase in sales volume. Shipments to non-commercial customers, such as lodging and hospitality, healthcare, schools and universities, sports and entertainment, and workplace environments, also increased versus the prior year quarter, but remained well below pre-pandemic levels.
Overall sales volume growth also reflected a comparison to reduced shipments in the prior year quarter as customers significantly destocked inventories. In the current quarter, shipment and order trends in each of the segment’s primary sales channels improved as the quarter progressed as governments eased social restrictions, and as consumers enjoyed the onset of warmer weather. The increase in price/mix largely reflected the benefit of favorable mix from higher sales of Lamb Weston branded and premium products, which had softened in the prior year quarter.
Foodservice segment product contribution margin increased $53.8 million to $96.3 million, up 127 percent compared to the prior year quarter. Higher sales volume, favorable price/mix and lower manufacturing and distribution costs per pound drove the increase.
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, declined $55.6 million to $146.3 million, down 28 percent versus the prior year period, with volume down 30 percent and price/mix up 2 percent. Net sales and volume declined 22 percent and 24 percent, respectively, excluding the benefit of the additional selling week in the prior year quarter.
The sales volume decline reflects a comparison to the prior year quarter that included a surge in demand for in-home consumption of frozen potato products following government-imposed social restrictions, as well as lower shipments of private label products resulting from incremental losses of certain low-margin business. However, total shipments in the current quarter remained near pre-pandemic levels, driven by continued strong demand for the company’s premium and mainstream branded offerings, partially offset by lower private label sales. The increase in price/mix was largely driven by favorable mix from higher sales of branded products.
Retail segment product contribution margin declined $10.2 million to $21.2 million, down 32 percent versus the prior year quarter. Lower sales volumes and a $3.1 million increase in A&P expenses to support new product launches, drove the decline, partially offset by favorable price/mix.
Elaborating on the quarterly and yearly results during the earnings call, Werner remarked:
“For our larger customers in our global and foodservice segments, we work through production and distribution challenges to maintain customer service levels and support them as they manage through near term volatility in demand and inventories. We also partnered with several large chain QSR to broaden their menus with new products and limited time offerings and to position them for a more aggressive set of offerings in a post-pandemic environment.
“In our foodservice segment, despite lower volumes in the near term, we maintain our direct sales force that services independent restaurants. We believed it was important to continue to invest in the sales capabilities to provide these customers with uninterrupted support as they adapted to capacity restrictions in new operating models. That investment is now paying off as sales of Lamb Weston branded products have rebounded.”
He continued: “In retail, the surge in food at home consumption during the pandemic provides a strong tailwind to our branded portfolio…Our branded portfolio market share in aggregate has nearly doubled in the past five years. And we’ve significantly closed the gap with a leading branded competitor, including what we produce for private label retail customers. We are now the clear leader in the category.
“In our supply chain, we’re making some significant investments to support long-term growth and profitability. First, we began construction of a new chopped and form line in our facility in American Falls, Idaho that will be available in spring 2022. Second, we announced major capacity expansion projects in China and the US. We expect both lines to be operational in the next couple of years, which will have us well positioned to support market growth. In addition, through our joint venture in Europe, Lamb-Weston/Meijer, we announced a capacity expansion project in Russia – and just this morning (July 27) a £400 million expansion in the Netherlands. These two expansions will be focused on supporting continued growth in their respective primary markets.”