FrozenFoodsBiz BUZZ

Lamb Weston Prepared Financially to Weather Global Coronavirus Storm

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By John Saulnier, FrozenFoodsBiz Editorial Director

It was an earnings call like none other, as President & CEO Tom Werner announced that business uncertainties unleashed by the Covid-19 pandemic has forced Lamb Weston to withdraw its financial outlook for the remainder of the fiscal year. He assured analysts, however, that the Eagle, Idaho-headquartered frozen potato products specialist “is well positioned in terms of business mix, operating flexibility cost structure and liquidity position to weather the storm.”

The storm spawned by the phantom novel coronavirus that originated in Wuhan, China late last year has by now been attributed to over 82,000 deaths and more than 1,431,000 million confirmed cases of infection globally, while wreaking unprecedented economic havoc and social disruption. Much of the world is now in lockdown or under some manner of mandated immobility as billions of people self-isolate, shelter in place and quarantine themselves in hope of blunting the spread of beastly bug.

“During these uncertain times, our top priorities are to ensure the health and welfare of our employees, maintain product safety, and continue to support our customers as they work to manage their supply chains and inventories. While the near-term impact of the Covid-19 pandemic on consumer demand and sales volume is likely to be material, we believe we have sufficient liquidity to manage through the uncertainty, and we remain confident in the long-term outlook for our customers and the continued growth of the global category,” said Werner.

Key statistics in the company’s fiscal third quarter 2020 results posted on April 1 include a 1% sales increase of $10.5 million to $937 million, and a 16% decline in operations income to $163 million. Net income fell 21% to $111 million, while adjusted earnings per share declined 19% to $0.77. Gross profit fell by $23 million, or 8%, primarily due to input and fixed cost inflation.

At the close of New York Stock Exchange trading on the day of the earnings call, Lamb Weston (LW) shares were quoted at $51, down by $6.10 or 10.68% from the day before. The price slipped further on April 2, closing at $49.88., but by April 7 had rebounded to $55.10

“Our results were mixed,” said Werner. “We drove solid growth in our foodservice and retail segments, but our global segment’s sales declined due to the timing of sales of customized products and higher-margin limited time offering products, as well as the initial effects of the Covid-19 pandemic on restaurant traffic in China. In addition, all our segments had fewer shipping days related to the timing of the Thanksgiving holiday. We also realized the impact of higher than expected input and fixed cost inflation, which pressured earnings.”

While the operating environment in most of Lamb Weston’s markets outside of China during Q3 was favorable, estimates on the sweeping impact of novel coronavirus on the global economy are unclear. What is clear is that a recession, if not worse, is inevitable.

President & CEO Tom Werner

“At this time, despite only two months remaining in our fiscal fourth quarter, we are unable to reasonably forecast frozen potato product demand because of the pandemic’s unpredictable near-term effect on restaurant traffic in North America and our key international markets,” stated Werner.

Noting that the current demand situation is fluid, the chief executive added: “There will undoubtedly be an effect on our operations and supply chain. We’re watching consumer and customer demand and have begun to adapt our production schedules to react accordingly. As appropriate, we’ll take further actions to align our manufacturing operations – including temporarily reducing production.”

China Sales Rebounding After Deep Dive

Lessons learned from the company’s recent experience in China – where demand for french fries plummeted by 50% for a month or so during the height of the coronavirus emergency there during January and February, but has now crawled back to levels approximating 70% of normal, pre-outbreak volume – are being adopted by Lamb Weston team members around the world.

“Our China team continued to operate, providing food for people,” said Werner. “They worked through it and did a terrific job.”

The chief executive officer covered a lot of territory during the hour-long earnings call. Here are some of the key points:

  • In other markets in Asia including Japan, South Korea, Taiwan and Singapore, there has been only a modest reduction in french fry demand.
  • In the United States, it’s still too early to determine how the impact on demand will play out. Normally, about 65% of all french fry volume is moved through quick service restaurants, while 20% is ordered at full service restaurants. The remaining 15% is purchased at supermarkets and other retail stores.
  • The sales breakdown is broadly consistent with the global segment split, which accounts for about 52% of total sales. Lamb Weston primarily serves large QSR chain customers in the United States and internationally. Major markets outside of the US are largely in Asia, Australia, Mexico and Europe. Foodservice accounts for about 30% of the business, of which 80% of the segment’s sales is generated at full service restaurants and outlets such as workplace cafeterias, hotels, hospitals and schools. Smaller QSRs represent about 20% of purchases.
  • The retail segment historically accounts for about 13% of Lamb Weston’s sales.

  • Typically about two-thirds of the fries sold at quick service restaurants are picked up by customers at drive-through windows or ordered as carry-out for off-premise consumption, with the remaining one-third is consumed in dining rooms. Prior to government and health department-ordered implementation of more strict social and movement restrictions, Lamb Weston saw little change in orders and shipments to QSRs, as increases in drive-through traffic as well as stepped up delivery orders cushioned much of the decline in on-premise dining.
  • However, with the adoption of more severe dining room consumption restrictions coupled with work-at-home and self-isolation developments across more states, orders are beginning to slow. If the China experience provides an appropriate guide, then it can be expected that QSR volumes will eventually begin to recover at a fast rate, with the recovery of full-service restaurants lagging until after strict restrictions are relaxed.
  • Takeaway order traffic at full service restaurants in the United States is expected to be down much more sharply than in the QSRs, even while many of these operators are taking steps to boost takeout and delivery sales. This will likely make up only a fraction of lost business. So sales to these types of foodservice customers are more at risk.

In contrast, retail demand for frozen fries has significantly increased as food consumed at home rises with the adoption of social distancing policies and consumers stock their freezers. Lamb Weston has taken steps to boost production of retail products in order to meet the increased demand.

  • The bottom line in the United States is that QSRs that have established drive-through takeout and delivery capabilities are in a much better position in the current environment than are full service restaurants and other outlets that largely cater to dine-in traffic.
  • Not surprisingly, some customers are discussing the need for menu simplification. So near-term, it’s about making sure fries are on the menu. Some of the promotional items will be sidelined or pushed out for a while.
  • In Europe, which is served through the Netherlands-headquartered Lamb Weston/Meijer joint venture, most of the consumption is dine-in or takeaway via walk-in traffic, since drive through options are much more limited. The impact of the virus on demand so far has been most pronounced in Italy, following the adoption of severe social movement restrictions as Covid-19.

Other European nations have since adopted similar restrictions. So a decline in demand is expected to accelerate in those countries as well, which will further negatively impact Lamb Weston/Meijer’s results.

Solid Foundation at Home and Abroad

Also taking part in the earnings call was Chief Financial Officer Rob McNutt, who assured analysts that the company has sufficient liquidity to weather the current operating environment – even if there should be a prolonged decline in demand for french fries and other frozen potato products supplied by Lamb Weston.

Chief Financial Officer Rob McNutt

“This includes having more than $500 million of cash on hand after drawing down our revolver last week,” he said. “We have a strong balance sheet with about $2.2 billion of total debt at the end of the quarter. Our maturity profile is also attractive. We have an approximately $280 million balance on a term loan facility that matures in November of 2021, and have an approximately $290 million balance on another facility that matures in June 2024. The mandatory annual amortization on these two loans is about $30 million combined. In addition, we have two $833 million high yield notes that mature in 2024 and 2026, respectively.”

When asked about the capability of the Lamb Weston/Meijer joint venture in Europe [which operates six production plants in the Netherlands, United Kingdom and Austria and has its own joint venture factory in Russia] to cope with demand declines and potential cash needs should the Covid-19 crisis impact the market for an extended period of time, McNutt was unequivocally optimistic.

“The joint venture is in good shape in terms of both its balance sheet covenant compliance and in terms of liquidity,” he stated. “They have their own standalone revolving credit line access. Even in a prolonged downturn in demand, they appear to have sufficient liquidity to weather the storm here.”

Lamb Weston/Meijer’s Corporate Center in Breda, the Netherlands.