Lamb Weston Holdings, Inc. — Form 10-Q Summary
Business context and period: Lamb Weston produces, distributes, and markets value-added frozen potato products. This unaudited report covers the 13 weeks ended August 28, 2022, the first quarter of fiscal 2023, compared with the 13 weeks ended August 29, 2021.
Key financial results
| Metric | Q1 FY2023 | Prior-year quarter | Change |
|---|---|---|---|
| Net sales | $1,125.6 million | $984.2 million | Up 14% |
| Gross profit | $273.3 million | $151.3 million | Up 81% |
| Income from operations | $157.0 million | $60.2 million | Up 161% |
| Net income | $231.9 million | $29.8 million | Up 678% |
| Diluted EPS | $1.60 | $0.20 | Up 700% |
| Adjusted net income (non-GAAP) | $108.2 million | $26.1 million | Up 315% |
| Adjusted diluted EPS (non-GAAP) | $0.75 | $0.18 | Up 317% |
| Adjusted EBITDA including unconsolidated joint ventures (non-GAAP) | $227.8 million | $118.4 million | Up 92% |
Gross margin was approximately 24.3%, compared with 15.4% a year earlier. Price/mix rose 19%, more than offsetting a 5% sales-volume decline. Management attributed margin improvement to pricing and productivity, which outweighed inflation and lower volume. Higher costs included edible oils, ingredients, labor, transport, and potato-crop impacts.
Operating cash flow was $192.1 million, versus $161.8 million. Investing activities used $166.9 million, including $101.2 million of property and equipment additions, a $42.3 million Argentina joint-venture interest purchase, and $20.0 million for technology infrastructure. Financing activities used $63.5 million. Cash declined $39.7 million to $485.3 million.
At August 28, 2022, debt and financing obligations totaled $2,764.6 million before debt issuance costs and current/noncurrent classification. Cash was $485.3 million; the undrawn revolving facility had $994.6 million available, net of letters of credit. The company reported covenant compliance and said it expected liquidity to cover its needs for at least 12 months.
Material changes and unusual items
- Sales growth reflected 19% higher price/mix, while volume fell 5%. Softer U.S. casual-dining and full-service restaurant demand, customer shipment timing, and constrained production limited volume.
- Reported net income included $161.4 million of pretax comparability items: a $146.3 million unrealized gain at European joint venture LWM from natural-gas and electricity derivatives, and a $15.1 million gain from remeasuring the previously held stake in Argentina joint venture LWAMSA. Together these increased after-tax income by $123.7 million, or $0.85 per share. Adjusted results exclude these items.
- In July, Lamb Weston increased its LWAMSA ownership from 50% to 90% and began consolidating it. The acquired operation’s sales, operating income, and assets were not material to consolidated totals.
- Quarter-end cash was lower than at fiscal year-end, while inventories rose to $635.5 million from $574.4 million, largely reflecting higher-cost finished goods and inflation.
Outlook, commentary, and risks
Management expects price/mix to remain higher year over year in the rest of fiscal 2023, largely from carryover pricing actions. It expects demand and volume to remain volatile, with supply-chain, production-capacity, labor, commodity, and logistics constraints affecting shipments. International demand recovery is expected to be mixed.
Management expects gross margins to be pressured in the first half of fiscal 2023 by inflation, elevated raw-potato costs related to the prior year’s Pacific Northwest heat impacts, and operational constraints. It expects margins to approach normalized annual levels in the second half, subject to pricing execution and crop outcomes. European joint venture LWM may be affected by a below-average potato crop and energy-related production disruptions.
Fiscal 2023 capital expenditures, excluding acquisitions, are expected to be approximately $475 million to $525 million. The company announced an approximately $240 million Argentina capacity expansion expected to produce more than 200 million pounds annually, with construction completion expected in fiscal 2025. Other stated risks include commodity and energy prices, labor availability, currency and interest-rate movements, the war in Ukraine, international operations, customer and grower relationships, project execution, and litigation. Management said pending legal matters were not expected to have a material adverse effect. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- How much of future earnings and cash generation depends on pricing keeping pace with inflation and on recovery from production and supply-chain constraints.
- The magnitude and volatility of LWM’s derivative-related gains or losses, and the underlying economics of its energy hedges.
- Whether crop yields, potato quality, and European energy availability align with management’s margin expectations.
- Execution, spending, and expected returns for the $475–$525 million fiscal 2023 capital program and announced Argentina expansion.
- Debt-service capacity and liquidity as capital spending, dividends, and share repurchases continue; the quarter included $35.3 million of dividends and $28.4 million of repurchases.