Lamb Weston Withdraws Financial Outlook for 2020
Lamb Weston Holdings, Inc. just announced its fiscal third quarter 2020 results. In the company statement, President and CEO Tom Werner had this to say: “Our results in the third quarter were mixed. We drove solid growth in our Foodservice and Retail segments, but our Global segment’s sales declined due to the timing of sales of customized products and higher-margin limited time offering products, as well as the initial effects of the COVID-19 pandemic on restaurant traffic in China. In addition, all our segments had fewer shipping days related to the timing of the Thanksgiving holiday. We also realized the impact of higher-than-expected input and fixed cost inflation, which pressured earnings.”
He continued to say that while the operating environment in most of their markets during the fiscal third quarter was favorable, estimates on the COVID-19 pandemic’s effect on the global economy remain uncertain. “At this time, despite only two months remaining in our fiscal fourth quarter, we are unable to reasonably forecast frozen potato product demand because of the pandemic’s unpredictable near-term effect on restaurant traffic in North America and our key international markets. As a result, we’re withdrawing our financial outlook for the remainder of our fiscal year.”
Werner pointed out that during these uncertain times, their top priorities are to ensure the health and welfare of the employees, maintain product safety, and continue to support their customers as they work to manage supply chains and inventories. While the near-term impact of the COVID-19 pandemic on consumer demand and sales volume is likely to be material, Werner said he believes the company has sufficient liquidity to manage through the uncertainty, and he remains confident in the long-term outlook for their customers and the continued growth of the global category.
Figures
Net sales increased USD10.5m to USD937.3m, up 1% versus the year-ago period. Price/mix increased 1% due to pricing actions, partially offset by unfavorable mix. Volume was flat as growth in the Foodservice segment was partially offset by a decline in the Global segment’s volume, primarily due to timing of sales of customized products (products manufactured to a customer’s unique specifications) and higher-margin limited time offering products, as well as the initial effects of the COVID-19 pandemic on restaurant traffic in China. In addition, acquisitions contributed more than 1% of the volume increase, which was largely offset by an approximate 1% decline from the effect of fewer shipping days, compared with the prior year period, related to the timing of the Thanksgiving holiday.
Income from operations declined USD31.3m, or 16%, to USD162.5m versus the year-ago period, reflecting lower gross profit and higher selling, general and administrative expense (“SG&A”). Gross profit declined USD23.0m. Higher manufacturing costs due to input and fixed cost inflation drove most of the decline. An additional USD4.3m of the decline reflects the change in unrealized mark-to-market adjustments and realized settlements associated with commodity hedging contracts, which includes a USD0.3m loss in the current quarter, compared with a USD4.0m gain related to these items in the prior year quarter. The remainder of the gross profit decline was driven by higher transportation costs; unfavorable customer mix; costs resulting from COVID-19-related production interruptions in China; and higher depreciation expense primarily associated with the company’s French fry production line in Hermiston, Oregon, which started operating towards the end of the fourth quarter of fiscal 2019.
SG&A increased USD8.3m, largely driven by investments in the company’s sales, operating and systems capabilities, including approximately USD2m of non-recurring expenses, primarily consulting expenses, associated with developing and implementing a new enterprise resource planning (“ERP”) system. The increase also reflects an approximate USD3m impact of unfavorable foreign exchange, which was partially offset by a USD2.3m decline in advertising and promotional expenses.
Net income attributable to Lamb Weston decreased USD30.0m, or 21%, to USD111.4m, primarily reflecting a decline in income from operations, lower equity method earnings, which included a USD2.6m (USD2.0m after-tax) loss related to the withdrawal from a multiemployer pension plan by the company’s joint venture, Lamb-Weston/RDO Frozen, and a higher effective tax rate.
Outlook
The company has withdrawn its financial outlook for fiscal year 2020 for net sales growth including unconsolidated joint ventures. At this time, the company does not believe it can reasonably forecast frozen potato product demand in the near term due to the unpredictable effect of the COVID-19 pandemic on the global economy, and more specifically, on restaurant traffic in North America and key international markets, including markets served by the company’s joint ventures.
