EAGLE, Idaho--(BUSINESS WIRE)--Lamb Weston Holdings, Inc. (NYSE: LW) announced today its fiscal fourth quarter and full year 2022 results and provided its outlook for fiscal 2023.
“We finished the year on a strong note, including a record high sales quarter fueled by double-digit growth in each of our core segments. Our fiscal 2022 performance is a testament to the strength and dedication of the entire Lamb Weston team,” said Tom Werner, President and CEO. “Benefits from our pricing actions, productivity, simplification, and cost mitigation efforts continued to build through the year as we managed increases in input and transportation costs, constraints in global logistics networks, and the impact of a historically poor potato crop. Our sales volumes throughout the year also held up well despite volatile consumer demand and supply chain disruptions.”
“We enter this new fiscal year with strong underlying fundamentals and business momentum, and believe our financial targets of strong sales growth and continued improvement in profitability in fiscal 2023 are prudent in light of the current challenging operating and inflationary environment. Specifically, our targets include gross margins approaching normalized levels during the second half of fiscal 2023 behind higher pricing in each of our core segments, an average potato crop, a broad easing of cost and logistics pressures across our supply chain, and continued productivity and cost mitigation efforts.”
“We continue to be encouraged by the resiliency of U.S. restaurant traffic and french fry demand as consumers adjust to sharp inflation headwinds. We remain confident in the health and long-term growth prospects for the global frozen potato category, and we are committed to executing our strategies, investing in our people and operations, and supporting our customers in order to drive sustainable, profitable growth and create value for our shareholders over the long term.”
Summary of Fourth Quarter and FY 2022 Results
($ in millions, except per share)
Adjusted EBITDA including unconsolidated joint ventures(1)
Net sales increased $145.6 million to $1,153.1 million, up 14 percent versus the prior year quarter. Price/mix increased 15 percent, primarily reflecting the benefit of pricing actions across each of the Company’s core business segments to offset input, manufacturing, and transportation cost inflation. Volume declined 1 percent, primarily reflecting lower export volume due to limited shipping container availability and disruptions to ocean freight networks. Total volume in North America increased behind shipments to large chain restaurant customers. This growth more than offset lower shipments to foodservice and retail channels in North America stemming from an inability to fully serve customer demand due to widespread industry supply chain constraints, including labor and commodities shortages, that resulted in lower production run-rates and throughput in the Company’s production facilities.
Income from operations increased $37.1 million to $136.0 million, up 38 percent versus the prior year quarter, reflecting higher gross profit, partially offset by higher selling, general and administrative expenses (“SG&A”). Gross profit increased $56.2 million, as the benefits from higher price/mix more than offset the impact of higher manufacturing and distribution costs on a per pound basis, as well as lower sales volumes. The higher costs per pound primarily reflected double-digit cost inflation from key inputs, including: edible oils, ingredients such as grains and starches used in product coatings, packaging, labor costs, and higher transportation costs. The increase in costs per pound also reflected higher costs and inefficiencies associated with the impact of extreme summer heat that negatively affected the yield and quality of potato crops in the Pacific Northwest in fall 2021, the effects of labor and commodities shortages on production run-rates, and production downtimes associated with scheduled maintenance and capital improvements. The increase in per pound costs was partially offset by supply chain productivity savings. The increase in gross profit also included a $7.9 million decrease in unrealized mark-to-market adjustments associated with commodity hedging contracts, which includes a $0.1 million gain in the current quarter, compared with a $8.0 million gain related to these items in the prior year quarter.
SG&A increased $19.1 million compared to the prior year quarter, primarily due to higher incentive compensation expense and a $3.5 million contribution to the Lamb Weston charitable foundation. The increase in SG&A was partially offset by lower consulting expenses associated with improving the Company’s commercial and supply chain operations, and a $2.4 million decrease in advertising and promotion expenses (“A&P”).
Net income was $32.0 million, down $33.5 million versus the prior year quarter, and Diluted EPS was $0.22, down $0.22 versus the prior year quarter. The decreases were driven by a $62.7 million non-cash impairment charge (before and after-tax, or $0.43 per share) to write-off the Company’s portion of Lamb-Weston/Meijer v.o.f’s (“LWM”) net investment in Russia resulting from LWM’s announced intent to withdraw from its joint venture in response to the war in Ukraine. These charges were partially offset by higher income from operations and lower interest expense.
Adjusted Net Income(1) was $94.7 million, up $29.2 million versus the prior year quarter, and Adjusted Diluted EPS(1) was $0.65, up $0.21 versus the prior year quarter. Adjusted EBITDA including unconsolidated joint ventures(1) increased $35.5 million to $201.8 million, up 21 percent versus the prior year quarter. These increases were driven by higher income from operations.
The Company’s effective tax rate(2) in the fourth fiscal quarter was 41.2 percent, versus 17.9 percent in the prior year quarter. The Company’s effective tax rate varies from the U.S. statutory tax rate of 21 percent principally due to the impact of U.S. state taxes, foreign taxes, permanent differences, and discrete items, and was elevated relative to the Company’s historical rate primarily due to the Russia impairment charge treated as a non-deductible permanent difference. Excluding the Russia impairment charge, the Company’s effective tax rate was 19.1 percent.
Net sales for the Global segment, which is generally comprised of the top 100 North American-based quick-service (“QSR”) and full-service restaurant chain customers as well as all of the Company’s international sales, increased $48.8 million to $558.4 million, up 10 percent versus the prior year quarter, with price/mix up 10 percent and volume flat. The benefit of domestic and international product and freight pricing actions to offset inflation, as well as favorable mix, drove the increase in price/mix. A solid increase in sales volumes to North American large QSR and casual dining restaurant chain customers was offset by lower export shipments due to limited shipping container availability and disruptions to ocean freight networks.
Global segment product contribution margin declined $0.7 million to $55.7 million, down 1 percent versus the prior year quarter. Higher manufacturing and distribution costs per pound more than offset the benefit of favorable price/mix.
Net sales for the Foodservice segment, which services North American foodservice distributors and restaurant chains generally outside the top 100 North American based restaurant chain customers, increased $68.4 million to $388.4 million, up 21 percent versus the prior year quarter, with price/mix up 24 percent and volume down 3 percent. The benefits of product and freight pricing actions taken earlier in the year to offset inflation drove the increase in price/mix. Overall demand in the segment’s restaurant and non-commercial channels (such as lodging and hospitality, healthcare, schools and universities, sports and entertainment, and workplace environments) remained solid in the quarter despite the effect of high inflation on consumers. However, shipments declined due to an inability to fully serve customer demand due to widespread industry supply chain constraints, including labor shortages, as well as downtimes for scheduled maintenance and capital improvements that resulted in lower production run-rates and throughput in the Company’s production facilities.
Foodservice segment product contribution margin increased $45.5 million to $141.8 million, up 47 percent compared to the prior year quarter. Favorable price drove the increase, and was partially offset by higher manufacturing and distribution costs per pound.
Net sales for the Retail segment, which includes sales of branded and private label products to grocery, mass merchant, and club customers in North America, increased $29.6 million to $175.9 million, up 20 percent versus the prior year quarter, with price/mix up 22 percent and volume down 2 percent. Product and freight pricing actions across the branded and private label portfolios to offset inflation, as well as improved mix, drove the increase in price/mix. Lower shipments of private label products, resulting from incremental losses of certain low-margin business, drove the sales volume decline. The volume decline was partially offset by an increase in shipments of branded products, although growth was tempered by an inability to fully serve customer demand due to lower production run-rates and throughput in the Company’s production facilities.
Retail segment product contribution margin increased $20.4 million to $41.6 million, up 96 percent versus the prior year quarter. Favorable price/mix and a $3.1 million decrease in A&P expenses drove the increase, partially offset by lower sales volumes and higher manufacturing and distribution costs per pound.
Equity Method Investment Earnings (Loss)
Equity method investment earnings (loss) from unconsolidated joint ventures in Europe, the U.S., and South America were a loss of $56.7 million and earnings of $9.6 million for fourth quarter fiscal 2022 and 2021, respectively. Equity method investment earnings (loss) in the fourth quarter of fiscal 2022 included a $62.7 million non-cash impairment charge to write-off the Company’s portion of LWM’s net investment in Russia. Equity method investment earnings also included a $1.0 million unrealized loss related to mark-to-market adjustments associated with currency and commodity hedging contracts in the current quarter, compared to a $4.5 million unrealized gain related to these items in the prior year quarter.
Excluding the charge to write-off the Company’s portion of LWM’s net investment in Russia and the mark-to-market adjustments, earnings from equity method investments increased $1.9 million compared to the prior year quarter, reflecting the benefit of favorable price/mix and higher sales volumes, largely offset by input cost inflation and higher manufacturing and distribution costs in both Europe and the U.S.
Net sales increased $428.0 million to $4,098.9 million, up 12 percent versus fiscal 2021. Price/mix increased 9 percent, primarily reflecting the benefit of pricing actions across each of the Company’s business segments to offset input, manufacturing, and transportation cost inflation, as well as favorable mix. Volume increased 3 percent, reflecting higher shipments to restaurant and foodservice channels in North America, partially offset by lower exports due to limited shipping container availability and disruptions to ocean freight networks, as well as lower shipments to retail channels. The Company’s volume growth was tempered by an inability to fully serve customer demand due to widespread industry supply chain constraints, including labor and commodities shortages, that resulted in lower production run-rates and throughput in the Company’s production facilities.
Income from operations declined $30.4 million to $444.4 million, down 6 percent from the prior year, reflecting higher SG&A. Gross profit was flat, as the benefits from higher price/mix and volume were offset by the impact of higher manufacturing and distribution costs on a per pound basis. The higher costs per pound primarily reflected double-digit cost inflation from key inputs and higher transportation costs. The increase in costs per pound also reflected higher raw potato costs due to the impact of extreme summer heat that negatively affected the yield and quality of potato crops in the Pacific Northwest in fall 2021, the effects of labor and commodities shortages on production run-rates, as well as lower raw potato utilization rates. The increase in per pound costs was partially offset by securing changes to product specifications, portfolio simplification, and driving supply chain savings behind our Win as 1 productivity program. Gross profit also included a $28.9 million decrease in unrealized mark-to-market adjustments associated with commodity hedging contracts, which included a $9.5 million loss in the current year, compared with a $19.4 million gain related to these items in the prior year.
SG&A increased $30.4 million compared to the prior year, primarily due to higher compensation and benefits expense; higher travel, employee relations and in-person meeting expenses; higher information technology infrastructure costs, including expenses related to the planning and design of the Company’s new enterprise resource planning system; and a $3.5 million contribution to the Lamb Weston charitable foundation. The increase in SG&A was partially offset by lower consulting expenses associated with improving the Company’s commercial and supply chain operations.
Net income was $200.9 million, down $116.9 million versus the prior year, and Diluted EPS was $1.38, down $0.78 versus the prior year. The decreases were driven by a $62.7 million non-cash impairment charge (before and after-tax, or $0.43 per share) to write-off the Company’s portion of LWM’s net investment in Russia, and a loss of $53.3 million ($40.5 million after-tax or $0.27 per share) associated with the extinguishment of debt (see Liquidity and Cash Flow below).
Adjusted Net Income(1) was $304.1 million, down $13.7 million versus the prior year, and Adjusted Diluted EPS(1) was $2.08, down $0.08 versus the prior year, reflecting lower income from operations, partially offset by lower interest expense. Adjusted EBITDA including unconsolidated joint ventures(1) declined $22.7 million to $725.7 million, down 3 percent versus the prior year, primarily due to lower income from operations.
The Company’s effective tax rate(2) was 26.3 percent for fiscal 2022, compared to 22.2 percent in fiscal 2021. The Company’s effective tax rate varies from the U.S. statutory tax rate of 21 percent principally due to the impact of U.S. state taxes, foreign taxes, permanent differences, and discrete items, and was elevated in fiscal 2022 relative to the Company’s historical rate primarily due to the Russia impairment charge treated as a non-deductible permanent difference. Excluding the Russia impairment charge, the Company’s effective tax rate for fiscal 2022 was 21.4 percent.
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