Lamb Weston Holdings, Inc. — Form 10-Q
Reporting period: First quarter of fiscal 2024, the 13 weeks ended August 27, 2023; compared with the 13 weeks ended August 28, 2022. Amounts are in U.S. dollars. Lamb Weston produces and sells value-added frozen potato products. Following the acquisition of the remaining interest in its European joint venture, the company reports North America and International segments.
Key financial results
| Metric | Q1 FY2024 | Q1 FY2023 |
|---|---|---|
| Net sales | $1,665.3 million | $1,125.6 million |
| Gross profit / gross margin | $499.5 million / 30.0% | $273.3 million / 24.3% |
| Income from operations / operating margin | $323.3 million / 19.4% | $157.0 million / 13.9% |
| Net income | $234.8 million | $231.9 million |
| Diluted EPS | $1.60 | $1.60 |
| Adjusted EBITDA (non-GAAP) | $412.8 million | $234.6 million |
| Operating cash flow | $334.6 million | $192.1 million |
| Capital expenditures | $267.3 million | $101.2 million |
At August 27, 2023, cash was $163.3 million. Total debt and financing obligations were $3,469.3 million before debt discounts and current/noncurrent presentation; the company had no U.S. revolving-credit borrowings and reported $994.6 million of availability, net of letters of credit. Current assets were $1,846.3 million and current liabilities were $1,285.4 million. Management said liquidity was sufficient for at least the next 12 months.
Material changes and drivers
- Sales rose 48%, including $374.9 million of incremental sales from consolidating LW EMEA and LWAMSA. Excluding acquisition-related sales, sales grew 15%; price/mix increased 23% while volume declined 8%.
- North America sales increased 19%; International sales increased 212%, but International sales excluding acquisition contributions declined 9%. Volume declines largely reflected the company’s exit from selected lower-priced, lower-margin business, with some customer inventory destocking also contributing.
- Gross profit benefited from pricing, trade-spending timing, favorable mix, and LW EMEA consolidation. These benefits more than offset higher per-pound costs and lower volumes. Key input costs, including potatoes, labor, ingredients, and energy, experienced mid-to-high-single-digit inflation.
- Net income was nearly flat despite higher operating income: equity-method investment earnings fell to $12.1 million from $174.6 million. The prior-year figure included a $144.5 million unrealized joint-venture derivative gain and a $15.1 million acquisition-related gain.
- Operating cash flow increased by $142.5 million year over year. Investing outflows rose with expansion and systems spending; financing outflows included $100.0 million of share repurchases and $40.8 million of dividends.
Outlook, risks, and notable items
- Management expects fiscal 2024 net sales and earnings growth, with acquisition-related sales and earnings benefits during the first three quarters versus the prior year. Sales growth is expected to be driven largely by pricing and consolidation of LW EMEA; strategic mix exits are expected to pressure volumes.
- Management expects input-cost inflation, driven largely by higher potato costs, to moderate in aggregate versus fiscal 2023. Higher SG&A is expected from LW EMEA consolidation, ERP and information-system investment, intangible amortization, and increased headcount costs.
- Fiscal 2024 capital spending is expected to be approximately $800 million to $900 million, including capacity expansions in China, Idaho, the Netherlands, and Argentina, and information-system and ERP upgrades.
- Risks identified include commodity and labor costs, softer restaurant traffic and macroeconomic conditions, acquisition integration, execution of large capital projects, foreign exchange and interest-rate exposure, debt levels, customer and grower relationships, and international operating conditions. A hypothetical 1% increase in variable interest rates would raise annual interest expense by approximately $13.1 million before tax.
- Q1 results included a $22.5 million inventory fair-value step-up charge related to the LW EMEA acquisition, a $31.7 million unrealized commodity-derivative gain, $4.0 million of integration/acquisition-related expenses, and currency-hedging and foreign-exchange losses. Adjusted EBITDA is a non-GAAP measure; reported net income and EPS provide the GAAP comparison.
- The company reported compliance with credit-agreement covenants and no material changes to previously disclosed legal proceedings or risk factors. LW EMEA, representing 22% of quarterly sales and 30% of total assets at quarter-end, was excluded from the company’s internal-control assessment while integration proceeds.
Investor verification points
- Assess how much reported growth and segment performance depend on acquired businesses versus pricing, and whether volume declines persist.
- Track potato and other input costs, price/mix, trade spending, restaurant traffic, and customer inventory behavior against management’s outlook.
- Monitor execution, timing, and returns on the $800–$900 million fiscal 2024 capital-spending plan and ERP investments.
- Review cash generation, share repurchases, dividends, debt maturities, variable-rate exposure, and remaining repurchase authorization of $123.9 million.
- Evaluate acquisition integration and control remediation for LW EMEA, alongside the effects of derivative and foreign-exchange movements on reported results.