Tom Werner, Lamb Weston: The Potato Crop is in Great Shape Worldwide

During the most recent Q1 2024 Earnings Call by Insider Monkey Transcripts, Tom Werner, President/CEO, of Lamb Weston Holdings Inc., said the company’s worldwide potato crops are in ‘great shape’.

“[…] I think, the crops -- and we will have a -- as we do every January on our earnings call, kind of a debrief on how we are feeling about the overall crop and storage, crop is in great shape worldwide. So, I don't expect any impacts in any region in terms of challenges with the crop at this point,” Werner replied to one of the participating journalists.

In the same respect, he added that the company’s employees are harvesting and processing the potato crops in its growing regions in both North America and Europe and the Lamb Weston decision makers believe the crops in the Columbia Basin, Idaho, Alberta, and the Midwest are in line with pre-pandemic historical averages.

“In Europe, we believe that the crop will also be in line with historical averages as a result of improved growing conditions. We will provide our final assessment of the crop, including how it performs out of stores when we report our second quarter results in early January. So in summary, we delivered solid results in the first quarter and continue to have good operating momentum. The overall category remains healthy with demand and supply largely balanced. And finally, at this time we believe the potato crops in our growing regions in North America or Europe will be in line with pre-pandemic averages,” Werner declared.

‘The Global Frozen Potato Category Continues to be Solid’

Lamb Weston’s President and CEO added that the global frozen potato category continues to be solid with overall demand and supply balanced.

“Fry attachment rates, which is the rate at which consumers order fries when visiting a restaurant or other food service outlets across our key markets have remained largely steady and above pre-pandemic levels. Restaurant traffic in our key markets was generally solid,” he explained.

For the US overall restaurant traffic, it was flat versus the prior year quarter as QSR traffic growth offset further traffic declines in full-service restaurant channels.

“We believe that this is the cumulative effect of inflation and other macro pressures on the consumer over the past few years favoring QSR traffic and tampering with full-service and casual dining traffic. While overall traffic growth did slow sequentially from about 1% in our fiscal fourth quarter as quick-service restaurant traffic growth cooled much of that weakness was in June and we are encouraged that both QSR and full-service restaurant traffic trends improved as the quarter progressed,” Tom Werner mentioned.

For Europe, Werner explained that the restaurant traffic grew in many of the company’s key markets. In the UK, traffic was up mid-single-digits with growth in both QSR and full-service restaurants.

According to his presented data, growth was also solid in France, Germany, Italy, and Spain. In Asia, China's restaurant traffic growth was very strong, but at depressed levels as the country rebounded from the severe COVID-related restrictions. Traffic in Japan was solid in both QSR and full-service restaurants.

“We suspect that restaurant traffic trends will be volatile in the near term as high interest rates, high inflation, and uncertainty continue to affect consumers. That said, frozen potato demand has proven resilient during the most challenging economic times and we continue to be confident in the long-term growth prospects of the global category. Now concerning cost, we continue to expect input cost inflation in the mid-to-high single-digits, largely driven by higher contract prices for potatoes, including a 20% increase in North America and a 35% to 40% increase in Europe,” he concluded.

Sales Increased up to 48%

During the same conference call, Bernadette Madarieta, the company’s CFO, mentioned that compared with the prior year, sales increased USD540m or 48% to about USD1.7bn. About USD375m or 70% of the increase was attributable to the incremental sales from acquisitions with most coming from the company’s EMEA business.

“We lapped our Argentina acquisition this quarter, but we'll continue to receive the incremental benefit from the consolidation of the EMEA operations in the second and third quarters. As a reminder, since we began to consolidate EMEA's sales beginning in the fourth quarter of fiscal 2023, those results are included in last year's sales baseline. Excluding the incremental sales from our acquisitions net sales grew 15%; price-mix was up 23% as we benefited from the pricing actions taken in fiscal 2023 in both our North America and International segments to counter input and manufacturing cost inflation. Mix was also favorable, as we continue to strategically manage our product and customer portfolio,” she added.

Input costs continued to increase mid-to-high single-digits on a per-pound basis, Madarieta explained. The increases were largely driven by a 20% increase in the contracted price for potatoes in North America.

“Higher prices for open market potatoes due to poor yields from the 2022 crop and continued increases in the cost of labor, energy, and ingredients for batter coatings. The increase was partially offset by supply chain productivity savings, lower costs for edible oils, and lower freight costs. Selling, General and Administrative Expenses (SG&A), excluding comparability items, increased USD45m to USD160 million. More than half of the increase was from incremental SG&A with the consolidation of EMEA,” Bernadette Madarieta also said.

Last, but not least, she explained that higher sales and gross profit in the base business drove most of the growth with the remainder attributable to incremental earnings from consolidating EMEA.

“We are executing our strategies to deliver strong top and bottom-line growth by improving our customer and product portfolio mix and offsetting input cost inflation through pricing actions, and driving productivity savings across our supply chain. Volume elasticities in response to inflation-based pricing actions have been generally low, and we expect volume trends to improve as the year progresses. While we remain cautious about the effect of inflation on the consumer, we feel good about the start of the year and the health of the category, which gives us the confidence to raise our full-year sales and earnings targets. And with that, let me now turn it back over to Tom for some closing comments,” she summed up.