Lamb Weston CEO Tom Werner on April 4 reported the Eagle, Idaho, USA-headquartered frozen potato product company’s transition to a new enterprise resource planning (ERP) system in North America negatively impacted financial results in the third quarter more than expected.
Although sales rose 16% year-over-year, net income declined by approximately $72 million. Earnings before interest, taxes, depreciation and amortization, fell compared to a year ago, with adjusted EBITDA at approximately $95 million.
The ERP transition temporarily reduced the visibility of finished goods inventories located at distribution centers, which affected our ability to fill customer orders,” said Werner. “In turn, this pressured sales volume and margin performance. While we are disappointed with the magnitude of the 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.”
Looking ahead, Lamb Weston has lowered its guidance as a result of the ERP transition’s impact and soft near-term restaurant traffic trends. The company guided for FY24 revenue of $6.54 billion to $6.60 billion vs. $6.88 billion consensus and EPS of $5.50 to $5.65 vs. $6.03 consensus.
Q3 Operations Reults
Net sales increased $204.7 million to $1,458.3 million, up 16 percent versus the prior year quarter in Q3, with the current year quarter including $356.7 million of incremental sales attributable to the consolidation of the financial results of Lamb-Weston/Meijer, the company’s former joint venture in Europe (LW EMEA), following the completion of the acquisition in February 2023 of the remaining interest in LW EMEA.
Net sales, excluding the incremental sales attributable to the acquisition, were down $152.0 million, or 12 percent versus the prior year quarter, with approximately $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 transition to a new ERP system.
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 $5.9 million versus the prior year quarter to $403.7 million, and included a $23.3 million ($17.3 million after-tax, or $0.12 per share) unrealized loss related to mark-to-market adjustments associated with commodity hedging contracts. The prior year quarter included a $5.1 million ($3.8 million after-tax, or $0.03 per share impact) unrealized loss related to mark-to-market adjustments associated with commodity hedging contracts.
Adjusted Gross Profit increased $24.1 million versus the prior year quarter to $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 in the current quarter included an estimated $33 million of incremental pre-tax costs associated with the ERP transition, as well as a $20.5 million pre-tax charge 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 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.
