Lamb Weston Holdings’ quarterly sales for the 13-week period ending February 27, 2022 increased by $59.2 million to $955 million – up 7% compared to Q3 2021 receipts. Income from operations rose 33% to $134 million and net income climbed 61% to $107 million.
Tom Werner, president and chief executive officer of the Eagle, Idaho-headquartered international manufacturer and marketer of value-added frozen potato, appetizer and vegetable products, reported that the company has continued to make financial and operating progress during challenging times through strong execution of pricing actions to manage significant input, manufacturing and supply chain cost inflation.
Lamb Weston increased shipments to restaurant and foodservice channels in North America during the third quarter, although growth was tempered by softer restaurant traffic as a result of the effects of the highly contagious Omicron variant of coronavirus and an inability to fully serve customer demand due to widespread industry supply chain constraints, including labor and commodities shortages, that resulted in lower production run-rates and throughput in factories.
“Our pricing actions, along with manufacturing productivity and cost mitigation efforts, drove sequential and year-over-year improvement in our gross margin despite the Omicron variant affecting demand across our restaurant and foodservice channels, and disrupting production and disruption of operations more than anticipated. In addition, constraints in global logistics networks continued to significantly limit our international sales volumes,” stated Werner.
He added: “We are managing through this challenging macro environment well and remain on track to deliver our financial targets for fiscal 2022. The increase in our potato costs resulting from the exceptionally poor crop harvested in fall 2021 in the Pacific Northwest is in line with expectations, and enough raw potatoes have been secured to meet our near-term production forecast. We plan to continue to execute on our pricing, productivity and cost management actions to mitigate the effect of inflation, and drive run-rate and throughput improvements in our factories. Our capacity expansions in Idaho and China are on schedule, and we remain confident that continuing to invest in our business and executing on our strategies will have us well positioned to support the needs of customers and drive long-term growth.”
Price/mix increased 12 percent during the third quarter, versus the same period in 2021. The advance primarily reflected the benefit of pricing actions across each of the company’s business segments to offset input, manufacturing, and transportation cost inflation. Volume declined five percent, reflecting lower export volume and lower shipments to retail channels.
Income from operations increased $33.2 million to $133.8 million, up 33 percent versus the prior year quarter, reflecting higher gross profit and lower selling, general and administrative expenses. Gross profit increased $24.3 million, as the benefits from higher price/mix 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 from key inputs, particularly raw materials such as edible oils, ingredients such as grains and starches used in product coatings, and raw potatoes, as well as higher transportation, packaging, and labor costs.
The rise in per pound costs was partially offset by supply chain productivity savings. The increase in gross profit also included a $1.7 million increase in unrealized mark-to-market adjustments associated with commodity hedging contracts, which includes a $3.6 million gain in the current quarter, compared with a $1.9 million gain related to these items in the prior year quarter.
Global Segment Highlights
During a recent earnings call with financial analysts, Werner noted that while order from customers in Asia and Oceana have been stable, demand has not been met due to limited availability of containers needed to export french fries and other frozen potato products. While it is expected that overall business in these regions will return to pre-pandemic levels, widespread Covid-related government restrictions in key markets such as China may lead to volatility in the near term.
Net sales for the Global segment, which is generally composed 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 receipts, increased $9.4 million to $487.9 million. That was up 2 percent versus the prior year’s third quarter, with price/mix up 8 percent and volume down 6 percent. The benefit of domestic and international product and freight pricing actions to offset inflation, as well as favorable mix, drove the increase in price/mix.
Global segment product contribution margin declined $6.3 million to $73.0 million, down 8 percent versus the prior year quarter. Higher manufacturing and distribution costs per pound as well as lower sales volumes more than offset the benefit of favorable price/mix.
“Demand in Europe, which is served by our Lamb Weston/Meijer joint venture, has also been fairly stable – although it was temporarily affected by the spread of Omicron during the quarter,” remarked Werner. “As in the US, we expect demand in Europe may be volatile in the upcoming months as cost inflation and coronavirus variants impact restaurant traffic. “So, while we expect that demand in the near term will be choppy, we remain confident in the long term resiliency and growth prospects of the category in the US and our key international markets.”
Commenting on the devastating war in Ukraine, Werner stated: “Our hearts go out to all the people affected by Russia’s invasion. Our exposure to Russia is indirect as it runs through our 50% ownership at Lamb Weston/Meijer. Last month, the Russia joint venture began winding down production of Lamb Weston branded products and cost construction of its previously announced capacity expansion.”
Already on March 10, Netherlands-headquartered Lamb Weston/Meijer issued the following statement:
“We condemn the brutal aggression and violence in Ukraine and will not stand by. Last week, we already halted the export of our products to and from Russia and stopped the construction of and investments in new production lines in the country. We are now evaluating further next steps regarding our operating business in Russia, which exclusively sources from and supplies to the local market.
“Our number one priority is our people and we want and need to handle our response carefully, thus considering the personal situation of our colleagues and their families in Russia, as well as those of our farmers and other local suppliers.”
Foodservice Results
Net sales realized in the Foodservice segment, which includes North American distributors and restaurant chains generally outside the top 100 North America-based restaurant chain customers, increased by $75 million to $294.5 million – up 34 percent versus Q3 in 2021, with price/mix up 22 percent and volume up 12 percent. The benefits of product and freight pricing actions taken earlier in the year to offset inflation, as well as favorable mix, drove the increase in price/mix. The ongoing recovery in demand at full-service restaurants and in non-commercial channels (such as lodging and hospitality, healthcare, schools and universities, sports and entertainment, and workplace environments) drove the increase in sales volumes.
While shipments to restaurants have essentially returned to pre-pandemic levels, demand in non-commercial channels remain below pre-pandemic levels. The segment’s overall volume growth was tempered by softer restaurant and non-commercial traffic as a result of the effects of the Omicron variant, as well as an inability to fully serve customer demand due to widespread industry supply chain constraints, including labor shortages, that resulted in lower production run-rates and throughput in the factories.
The Foodservice segment’s product contribution margin increased $36.5 million to $106.7 million, up 52 percent compared to the prior year quarter. Favorable price, volume and mix drove the increase, and were partially offset by higher manufacturing and distribution costs per pound.
Retail Segment Highlights
Net revenues generated in the Retail segment, which includes sales of branded and private label products to grocery, mass merchant and club store customers in North America, declined $18.9 million to $143.6 million, down 12 percent versus the prior year quarter, with volume falling 24 percent and price/mix up 12 percent.
Lower shipments of private label products, resulting from incremental losses of certain low-margin business, as well as lower shipments of branded products, drove the sales volume slippage. The decline in branded product shipments reflected an inability to fully serve customer demand due to lower production run-rates and throughput in the factories. Product and freight pricing actions across the branded and private label portfolios to offset inflation, as well as improved mix, drove the increase in price/mix.
The Retail segment product contribution margin declined $1.5 million to $31.6 million, down 5 percent versus the prior year quarter. Lower sales volumes and higher manufacturing and distribution costs per pound drove the decline, partially offset by favorable price/mix and a $1.6 million decrease in A&P expenses.
Fiscal 2022 Outlook
Looking ahead, Lamb Weston believes that fiscal 2022 net sales growth will be above its long-term target of low-to-mid single digits. Higher raw potato costs on a per pound basis are anticipated due to the impact of extreme summer heat that negatively affected the yield and quality of potato crops in the Pacific Northwest. Taking this and other factors into account, the company expects its full year fiscal 2022 gross margin to be 19 percent to 20 percent. This compares with a previous expectation of 18 percent to 20 percent.
