Frozen potato products specialist Lamb Weston has reported a 12% net sales increase of $110.5 million to $1,006.6 million during the second quarter that ended on November 28, 2021. It was attributed to the ongoing recovery in demand in restaurant and other foodservice channels in North America, as well as higher prices.
Earnings, adjusted to extinguish debt, amounted to 50 cents per share, which exceeded Wall Street expectations. The average estimate of four analysts surveyed by Zacks Investment Research was for an earnings performance of 33 cents per share.
“We are pleased with our financial and operating progress in the quarter as we continue to navigate through a difficult and volatile macro environment defined by cost inflation, supply chain disruptions and production challenges due primarily to a tight labor market,” said Tom Werner, president and chief executive officer of the Eagle, Idaho, USA-headquartered multinational company. “The implementation of pricing actions, along with the other strategic actions we’ve taken to offset cost pressures and improve throughput in our factories, led to sequential gross margin gains in the quarter.”
He continued: “Looking ahead, we are on track to deliver our financial targets for the year. We expect our pricing actions, productivity improvements in our factories, and product optimization efforts to mitigate the effect of the ongoing macro-operational challenges and higher potato costs resulting from an exceptionally poor harvest in the US Pacific Northwest. We remain confident in the strong long-term outlook for the global frozen potato category, and believe that executing on our strategies and ongoing investments in our business will keep us on a path to deliver sustainable, profitable growth and create value for our stakeholders.”
Income from operations declined $25.2 million to $114.4 million, down 18 percent versus the prior year quarter, reflecting lower gross profit and higher selling, general and administrative expenses (“SG&A”). Gross profit declined $18.0 million, as the benefits from increased sales volumes and higher price/mix were more than offset by higher manufacturing and distribution costs on a per-pound basis. The higher costs per pound predominantly reflected double-digit cost inflation from key inputs, particularly edible oils; ingredients, such as grains and starches used in product coatings; transportation; and packaging.
The increase in costs per pound also reflected the effect of labor shortages on production run rates, as well as lower raw potato utilization rates. The increase in per pound costs was partially offset by supply chain productivity savings. The decline in gross profit also included a $6.1 million decrease in unrealized mark-to-market adjustments associated with commodity hedging contracts, which includes a $1.0 million loss in the current quarter, compared with a $5.1 million gain related to these items in the prior year quarter.
Net income was $32.5 million, down $64.4 million versus the prior year quarter, and Diluted EPS was $0.22, down $0.44 versus the prior year quarter. The declines were driven by a loss of $53.3 million ($40.5 million, or $0.28 per share, after-tax) associated with the extinguishment of debt, as well as lower income from operations and equity method investment earnings.
Segment Highlights
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, rose $40.8 million to $516.7 million, up 9 percent versus the prior year quarter, with price/mix up 5 percent and volume up 4 percent. The increase in price/mix largely reflected the benefit of pricing actions, including higher prices charged for freight. Strong growth in shipments to restaurant chain customers in the United States drove the increase in sales volumes. While demand in most of the company’s key international markets was solid, export sales volumes declined as a result of limited shipping container availability and disruptions to ocean freight networks.
Global segment product contribution margin declined $11.8 million to $80.9 million, down 13 percent versus the prior year quarter. Higher manufacturing and distribution costs per pound more than offset the benefit of favorable price/mix and higher sales volumes.
Foodservice Summary
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 $72.8 million to $313.9 million, up 30 percent versus the prior year quarter, with volume up 22 percent and price/mix up 8 percent. Strong demand at small and regional chain restaurants, as well as independently-owned restaurants, drove the increase in sales volumes. 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 below pre-pandemic levels. The segment’s overall volume growth was tempered by the inability to serve full 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 increase in price/mix largely reflected the initial benefits of pricing actions taken earlier in the year, higher prices charged for freight, and favorable mix.
Foodservice segment product contribution margin increased $16.7 million to $104.4 million, up 19 percent compared to the prior year quarter. Favorable price/mix and higher sales volumes drove the increase, and were partially offset by higher manufacturing and distribution costs per pound.
Retail Summary
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 $1.9 million to $142.6 million, up 1 percent versus the prior year quarter, with price/mix up 5 percent and volume down 4 percent. The increase in price/mix was largely driven by favorable price in our branded portfolio, including higher prices charged for freight, and improved mix. The sales volume decline largely reflects lower shipments of private label products resulting from incremental losses of certain low-margin business, partially offset by an increase in branded product sales volumes. Product shipments were tempered by the inability to serve full customer demand due to lower production run-rates and throughput in the factories.
Retail segment product contribution margin declined $8.7 million to $21.4 million, down 29 percent versus the prior year quarter. Higher manufacturing and distribution costs per pound, a $1.9 million increase in A&P expenses, and lower sales volumes drove the decline.
About Lamb Weston
While frozen potato products account for the most of its business, Lamb Weston also produces and markets frozen appetizers and vegetables to restaurants and retail stores around the world. The company hold equity interests in three potato processing joint ventures, including 50% of Lamb Weston/Meijer in the Netherlands, Lamb Weston/RDO Frozen, and Lamb Weston Alimentos Modernos SA.
