Lamb Weston Holdings, Inc. — Form 10-Q Summary
Reporting period: Third quarter of fiscal 2021, the 13 weeks ended February 28, 2021, and year to date, the 39 weeks ended that date. Comparisons are with the periods ended February 23, 2020. Amounts are in U.S. dollars; financial statement figures are in millions unless noted.
Business context and results
Lamb Weston produces and markets value-added frozen potato products through Global, Foodservice, Retail, and Other segments. COVID-19 restrictions continued to weigh on restaurant and other food-away-from-home demand; retail demand remained strong. Management said restaurant and foodservice shipment trends improved sequentially, but remained below pre-pandemic levels.
| Metric | Q3 FY2021 | Q3 FY2020 | 39 weeks FY2021 | 39 weeks FY2020 |
|---|---|---|---|---|
| Net sales | $895.8 | $937.3 | $2,663.4 | $2,945.5 |
| Gross profit | $196.7 | $250.4 | $634.0 | $784.1 |
| Income from operations | $100.6 | $162.5 | $375.9 | $526.0 |
| Net income | $66.1 | $111.4 | $252.3 | $367.5 |
| Diluted EPS | $0.45 | $0.76 | $1.72 | $2.50 |
| Adjusted EBITDA including unconsolidated joint ventures (non-GAAP) | $167.1 | $227.7 | $582.1 | $721.5 |
Q3 sales fell 4%: volume declined 6%, partly offset by 2% higher price/mix. Gross margin was approximately 22.0%, versus 26.7% a year earlier; operating margin was approximately 11.2%, versus 17.3%. Year-to-date sales fell 10%, with volume down 12% and price/mix up 2%; gross margin was approximately 23.8%, versus 26.6%.
Segment and operating changes
- Q3 Foodservice sales declined 22% to $219.5 million, with volume down 24%; segment contribution margin fell 30% to $70.2 million.
- Global sales declined 2% to $478.5 million; contribution margin fell 27% to $79.3 million.
- Retail sales rose 23% to $162.5 million, reflecting 13% volume growth and 10% higher price/mix; contribution margin rose 15% to $33.1 million. Branded sales gains more than offset weaker private-label volume.
- Q3 gross profit declined 21%. Management attributed the decline to lower sales and pandemic-related production, transportation and warehousing disruption, delayed maintenance and capital work, and input-cost inflation. A $7.5 million year-over-year improvement in commodity-hedge mark-to-market adjustments partly offset the decline.
- Q3 SG&A rose 9% to $96.1 million, including long-term manufacturing, supply-chain and IT investments and approximately $1 million of non-recurring ERP consulting costs. Year-to-date SG&A was unchanged at $258.1 million and included approximately $7 million of non-recurring ERP-related costs.
- Q3 equity-method earnings increased to $11.1 million from $9.8 million, but excluding hedge mark-to-market and a prior-year pension item, management said earnings declined $10.8 million, principally from weaker European demand and higher pandemic-related costs.
Cash flow, debt and liquidity
For the first 39 weeks, operating cash flow was $374.8 million, down from $435.7 million. Investing activities used $106.2 million, versus $289.8 million in the prior-year period, which included a $116.7 million acquisition. Financing activities used $919.9 million, primarily for repayment of short-term borrowings and debt, dividends, and share repurchases. Cash declined $649.7 million from fiscal year-end to $714.3 million.
At February 28, 2021, debt and financing obligations totaled $2,767.9 million before debt issuance costs; there were no short-term borrowings and $32.0 million of current long-term debt and financing obligations. The company had no revolver borrowings and $744.6 million of availability under its $750 million revolving facility, net of letters of credit. It repaid a $271.9 million term loan due in November 2021 using cash on hand. The company reported compliance with its debt covenants. Management stated that cash, operating cash flow and available facilities should cover foreseeable requirements, while noting that additional financing or covenant waivers might be needed if cash generation or covenant compliance deteriorates.
Outlook, risks and notable items
- Management expected restaurant traffic to improve through calendar 2021 and frozen potato demand to approach pre-pandemic levels on a run-rate basis by year-end; these expectations were subject to uncertainty and were not presented as formal earnings guidance.
- Management expected continued pandemic-related costs and demand uncertainty until COVID-19 was broadly contained. It cited ongoing risks to demand, production efficiency, labor, supply chains, commodities, transportation, and warehousing.
- Fiscal 2021 capital investment, including IT, was expected to be approximately $160 million. A new China processing facility was announced, with expected investment of approximately $250 million and completion in the first half of fiscal 2024.
- The company resumed share repurchases in January 2021 after suspending them at the onset of the pandemic. It repurchased 164,678 shares for $12.7 million during the first 39 weeks; $182.6 million remained authorized. Year-to-date dividends paid were $100.9 million; a quarterly dividend of $0.235 per share was declared for payment in June 2021.
- Commodity-hedge gains and foreign currency translation affected reported results. The company also disclosed higher interest expense, including a $1.0 million write-off of debt issuance costs related to the term-loan repayment. Management said pending or threatened legal matters were not expected to have a material adverse effect. No material changes to stated risk factors were reported.
Investor verification priorities
- Track restaurant traffic, foodservice shipments and recovery against pre-pandemic levels, alongside continuing pandemic-related operating costs.
- Assess whether cash flow and liquidity remain adequate after debt service, dividends, planned capital spending and the China facility investment.
- Review covenant headroom, debt maturities and variable-rate exposure; a 1% rate increase was estimated to raise annual interest expense by approximately $6.0 million before tax.
- Separate underlying operating performance from commodity-hedge adjustments, equity-method results and non-GAAP measures.
- Monitor execution and costs of ERP and other supply-chain investments, and the returns and funding implications of resumed repurchases and planned expansion.