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Lamb Weston Holdings, Inc. LW posted robust fourth-quarter fiscal 2021 results, as both top and bottom lines increased year over year and came ahead of the respective Zacks Consensus Estimate. Results were largely aided by demand recovery for frozen potato products, with curbs being lifted and restaurant traffic improving.
Management remains encouraged about the recovering restaurant traffic in the United States, particularly at full-service restaurants. It further expects overall U.S. demand for french fry to return to pre-pandemic levels around the end of calendar year 2021. Demand in Europe and key export markets is likely to improve with the increased availability of vaccines in the regions. That said, lingering pandemic impacts and the sudden recovery of the broader U.S. economy have hurt the overall supply chain of the industry. Supply-chain disruptions, significant input and transportation cost inflation, and a tough labor market are likely to put pressure on the company’s earnings in the near term.
Nonetheless, these pressures are likely to ease with gradual enhancements in supply-chain operations and when the company is able to combat escalated costs.
Quarter in Detail
The company’s adjusted earnings of 44 cents per share came a penny ahead of the Zacks Consensus Estimate. In the year-ago period, the company posted a loss of 1 cent per share.
Lamb Weston Holdings Inc. Price, Consensus and EPS Surprise
Lamb Weston Holdings Inc. price-consensus-eps-surprise-chart | Lamb Weston Holdings Inc. Quote
Net sales came in at $1,007.5 million, which advanced 19% year on year and beat the consensus mark of $940 million. Volumes rose 13% year over year and price/mix went up 6%. On excluding the impact of an additional week in the year-ago period, net sales and volumes jumped 28% and 21%, respectively. Sales volumes were backed by a rebound in the away-from-home frozen potato products demand, with pandemic-led curbs on restaurants and other foodservice locations being lifted. Also, results benefited from comparisons with the year-ago period’s soft shipments, as customers then largely destocked inventories due to the sudden change in the business environment. Price/mix was backed by improved price and mix in all core segments.
SG&A expenses escalated $18.9 million due to elevated incentive compensation accruals and investments to enhance the company’s manufacturing, commercial and supply-chain operations. Also, a rise in advertising and promotion expenses led to the upside. These were partly compensated by cost management initiatives. Adjusted EBITDA (including unconsolidated joint ventures) more than doubled to $166.3 million, thanks to elevated income from operations and equity method investment earnings.
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Sales in the Global segment jumped 19% to $509.6 million. Volumes rose 16% and price/mix increased 3%. On excluding the impact of an additional week in the year-ago period, net sales and volumes jumped 28% and 24%, respectively. Sales volume was mainly backed by demand recovery in the United States, particularly at QSRs and other large-chain restaurant customers. The company also witnessed improved aggregate shipments to customers in core international markets. Apart from these, overall sales volume growth was aided by comparison with the year-ago period’s low shipments as discussed above. Product contribution margin in the segment advanced 68% to $56.4 million.
Foodservice sales soared 82% to $320 million. Price/mix and volumes jumped 18% and 64%, respectively. On excluding the impact of an additional week in the year-ago period, net sales and volumes surged a respective 94% and 74%. Sales volumes were driven by a demand revival at small and regional chain restaurants, combined with independently-owned restaurants. Shipments to non-commercial customers like lodging and hospitality, schools and universities, sports and entertainment, healthcare, and workplace environments improved year over year, though it remained below pre-pandemic levels. Apart from these, overall sales volume growth was aided by comparison with the year-ago period’s low shipments as discussed above. Shipment and order trends in the quarter under review improved in all primary sales channels as the quarter progressed, thanks to coronavirus-related curbs being relaxed and the warm weather setting in. Product contribution margin more than doubled to reach $96.3 million.
In the Retail segment, sales tumbled 28% to $146.3 million. Price/mix advanced 2% but volumes plunged 30%. On excluding the impact of an additional week in the year-ago period, net sales and volumes were down 22% and 24%. Tough comparisons with the year-ago period’s demand surge due to increased at-home consumption of frozen potato products, together with reduced shipments of private-label products, affected sales volume growth. Total shipments in the quarter under review, however, remained close to pre-pandemic levels on the back of continued demand strength for the company’s premium and mainstream branded offerings. Product contribution margin slumped 32% to $21.2 million.
Other Financial Details
Lamb Weston, which shares space with General Mills GIS, ended the quarter with cash and cash equivalents of $783.5 million, long-term debt and financing obligations (excluding current portion) of $2,705.4 million and total shareholders’ equity of $480.6 million. The company generated $553.2 million as net cash from operating activities during the 52 weeks ended May 31, 2021, wherein capital expenditures (including IT expenditure) amounted to $161.3 million. In fiscal 2022, the company expects cash used for capital expenditures (excluding buyouts) to be $650- $700 million
Management paid out dividends worth $135.3 million and bought back shares worth $25.7 million in fiscal 2021, thereby returning $161 million to its shareholders. Lamb Weston has shares worth $170 million remaining under its current authorization of $250 million.
Lamb Weston’s sturdy balance sheet and capacity to generate cash keep it well placed to boost production capacity and fuel long-term growth. This includes the company’s recent investments in China and the United States. Also, the solid financial position keeps the company well placed to make prudent IT investments, including the second phase of the ERP system. Additionally, Lamb Weston has unveiled investments to expand capacity in the Netherlands and Russia, via its joint venture in Europe.
For fiscal 2022, management expects net sales growth to exceed its long-term goal of low-to-mid single digits. It expects first-half net sales growth to be backed by increased volumes, resulting from the ongoing demand recovery and comparisons with relatively lower shipments in the year-ago period. In the second half, net sales growth is likely to depict a balance of elevated volumes and better price/mix. This is because the recent pricing endeavors are likely to be fully implemented in the market and sales volumes in the higher-margin channels are likely to reach pre-pandemic levels.
Net income and adjusted EBITDA (including unconsolidated joint ventures) are likely to be under pressure in the first half of fiscal 2022. Management expects supply-chain volatility as well as considerable cost inflation of key production inputs, packaging and transportation from the year-ago period. Apart from these, management expects operating expenses to see pressure in the near term from continued investments in supply-chain, commercial and manufacturing operations. These investments are, however, likely to aid long-term growth and margin enhancement. That said, management expects earnings to slowly normalize in the second half of fiscal 2022, as it expects stabilized manufacturing and distribution and a better price/mix.
Shares of the Zacks Rank #2 (Buy) company have gained 23.4% in the past year, outpacing the industry’s growth of 14.8%.
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