Lamb Weston Holdings, Inc. — Form 10-Q Summary
Reporting period: Second quarter of fiscal 2023, the 13 weeks ended November 27, 2022; year-to-date figures cover 26 weeks. Comparisons are with the corresponding periods ended November 28, 2021, except balance-sheet comparisons, which are to May 29, 2022. Amounts are in U.S. dollars.
Business context and reporting period
Lamb Weston produces and markets value-added frozen potato products, principally french fries, and reports four segments: Global, Foodservice, Retail, and Other. Its products reach customers in more than 100 countries. The company acquired an additional 40% of its Argentina joint venture, LWAMSA, in July 2022, raising ownership to 90% and beginning consolidation; the acquired operation was not material to consolidated sales or operating income.
Key financial results
| Metric | Q2 FY2023 | Q2 FY2022 | First half FY2023 | First half FY2022 |
|---|---|---|---|---|
| Net sales | $1,276.5m | $1,006.6m | $2,402.1m | $1,990.8m |
| Gross profit | $381.6m | $205.5m | $654.9m | $356.8m |
| Income from operations | $271.8m | $114.4m | $428.8m | $174.6m |
| Net income | $103.1m | $32.5m | $335.0m | $62.3m |
| Diluted EPS | $0.71 | $0.22 | $2.32 | $0.42 |
- Q2 sales increased 27%: price/mix rose 30%, while volume declined 3%. First-half sales increased 21%, with price/mix up 26% and volume down 5%.
- Q2 gross margin was approximately 29.9%, versus 20.4% a year earlier; operating margin was approximately 21.3%, versus 11.4%. Pricing more than offset higher per-pound manufacturing and distribution costs and lower volume.
- Q2 product contribution margin, a non-GAAP measure, increased 87% to $375.0m. Adjusted income from operations was $245.3m, adjusted net income was $185.4m, adjusted diluted EPS was $1.28, and adjusted EBITDA including unconsolidated joint ventures was $334.6m. These adjusted figures exclude items affecting comparability and should not be treated as GAAP results.
- Q2 GAAP earnings included a $107.3m equity-method investment loss, principally reflecting a $136.8m unrealized loss on European natural gas and electricity derivatives, amid significant market volatility. A $26.5m net gain from currency-risk mitigation and other costs related to the pending LWM acquisition was included in SG&A.
- For the first half, operating cash flow was $288.0m, compared with $207.5m. Investing cash flow was negative $311.0m, including $232.9m of property and equipment additions; financing cash flow was negative $96.6m. Cash declined $105.6m to $419.4m.
- At November 27, 2022, total debt and financing obligations were $2,764.5m before debt issuance costs, including $588m of variable-rate debt. Cash was $419.4m; revolving-credit availability was $994.6m, with no revolving borrowings outstanding. The company reported compliance with its debt covenants.
- Inventories increased to $822.1m from $574.4m at fiscal year-end, contributing to working-capital cash use. The company declared a $0.28-per-share dividend payable in March 2023.
Material changes versus the prior comparable period
- Revenue and operating profit grew sharply as broad pricing actions countered input, manufacturing, and transportation inflation. Segment sales rose 34% in Global and Retail, 14% in Foodservice, and 3% in Other during Q2.
- Volume softness was concentrated in Foodservice and Retail, where supply disruptions constrained production and customer fulfillment; Foodservice volume also reflected lost low-margin business and softer casual/full-service restaurant trends.
- Higher reported Q2 net income also reflects unusually adverse and favorable comparison items. The prior-year quarter included a $53.3m loss on extinguishment of debt; the current quarter included the large European energy-derivative loss and the LWM-related net gain.
- First-half investing outflows increased with capacity and technology projects. The company also spent $42.3m to acquire the additional LWAMSA interest.
Guidance, commentary, risks, and unusual items
- For the second half of fiscal 2023, management expected price/mix to be the primary driver of sales growth and gross margins to remain broadly consistent with first-half levels. It expected supply constraints, labor onboarding, product mix, and volatile demand to continue affecting production and customer fulfillment.
- Management cited inflation, higher raw potato contract rates, and below-average Pacific Northwest crop yields following late-season heat as cost pressures. It expected LWM earnings could improve with continued pricing actions. Fiscal 2023 capital expenditures were estimated at $475m–$525m, excluding acquisitions.
- In October 2022, Lamb Weston agreed to acquire the remaining 50% of European joint venture LWM for €525m in cash and €175m in Lamb Weston shares. Closing was expected in Q4 fiscal 2023, subject to regulatory approvals; the company expected to use new borrowings and cash on hand for the cash consideration.
- The company announced an approximately $240m Argentina facility investment, expected to add more than 200m pounds of annual capacity, with completion planned in fiscal 2025.
- Risks highlighted include commodity and energy prices, labor and supply-chain constraints, inflation and recession-related demand changes, foreign-exchange and interest-rate exposure, geopolitical disruption including the war in Ukraine, and execution, approval, funding, and integration risks related to the LWM acquisition. A 10% adverse currency move was estimated to produce a $41.8m loss on foreign-currency monetary assets and liabilities; a one-percentage-point rise in variable borrowing rates was estimated to increase annual interest expense by $6.0m.
- The filing reported no material changes to previously disclosed risk factors or legal contingencies. Management stated disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether production throughput and customer fulfillment recover, and whether volume and demand trends match management’s expectations.
- Whether pricing continues to offset inflation, including raw potato, labor, energy, and distribution costs, and how crop yields affect margins.
- Progress, regulatory approval, timing, financing, and final share/cash consideration for the LWM acquisition; assess related foreign-exchange exposure.
- The scale and timing of capital spending, including the stated fiscal 2023 range and the Argentina expansion, alongside elevated inventory and working-capital needs.
- How European energy-derivative mark-to-market changes affect reported equity-method earnings; distinguish these volatile GAAP items from management’s non-GAAP adjusted measures.