Lamb Weston Holdings, Inc. : Reports Fiscal Second Quarter 2018 Results and Updates Full Year Outlook

Lamb Weston Holdings, Inc. (NYSE: LW) announced today its second quarter 2018 results and updated its outlook for fiscal 2018.

“Our second quarter and first half results were solid,” said Tom Werner, President and CEO. “Our commercial teams have worked through customer contract negotiations, and now that those discussions are largely behind us, we’re focused on our ongoing commitment to deliver industry-leading service, drive innovation and service limited time offerings with our customers. Our supply chain teams continued to focus on managing cost and capacity utilization, as well as successfully starting-up our new 300 million pound french fry production line in Richland, Washington. In addition, with this year’s potato crop fully harvested, we consider it to be consistent overall with historical averages, and that storability will also likely be consistent with planned expectations. With our solid first half performance and some key milestones now behind us, we have better clarity on how we see the rest of the year unfolding, and have raised our annual outlook for sales growth and EBITDA accordingly.”

“We expect growth in demand to continue not just through fiscal 2018, but also for the foreseeable future,” Werner continued. “To support this growth, we recently announced an additional 300 million pound french fry production line expansion in Hermiston, Oregon, to be operational in the fourth quarter of fiscal 2019. This new capacity will support our customers’ growth in North America as well as Asia, where demand growth has been, and is projected to remain, strong. In addition to funding this $250 million investment, we expect to generate sufficient earnings and cash flow to support the recent increase in our dividend, as well as provide flexibility to take advantage of future potential growth opportunities. By continuing to take a balanced, returns-driven approach when deploying capital, we remain confident in our ability to support our customers and create value for our shareholders over the long term.”

Q2 2018 Commentary

Net sales were $824.6 million, up 4 percent versus the year-ago period. Price/mix increased 5 percent due to pricing actions and favorable product and customer mix. Volume declined 1 percent, as compared to a 4 percent increase in the prior year quarter.

Income from operations rose 11 percent to $139.8 million from the prior year period, and included $4.0 million of costs related to the spinoff from Conagra Brands, Inc. (formerly ConAgra Foods, Inc., “Conagra”). A portion of the increase reflects the impact of $9.0 million of expenses incurred in the prior year period related to the spinoff from Conagra. Excluding these comparability items, income from operations grew $9.3 million, driven by favorable price/mix, partially offset by commodity, manufacturing, transportation and warehousing cost inflation, higher depreciation expense and approximately $3 million of costs related to the start-up of the Company’s new french fry production line in Richland, Washington.

Adjusted EBITDA including unconsolidated joint ventures⁽¹⁾ was $188.9 million, up 12 percent versus the prior year quarter, reflecting growth in income from operations and equity method investment earnings.

Diluted EPS declined to $0.52 from $0.59 in the prior year period, while Adjusted Diluted EPS⁽¹⁾ declined to $0.54 from $0.63 in the prior year period. The declines were primarily driven by higher interest costs related to debt incurred in connection with the spinoff and higher tax expense, partially offset by growth in income from operations and equity method investment earnings.

The effective tax rate⁽²⁾ was 33 percent in the second quarter of fiscal 2018, versus 27 percent in the prior year period. The lower rate in the second quarter of fiscal 2017 is primarily attributable to an increase in costs related to the spinoff from Conagra determined to be deductible, as well as a discrete benefit from fiscal 2016 foreign taxes.

Q2 2018 Segment Highlights

Global

Net sales for the Global segment, which is comprised of the top 100 North American based restaurant chain customers as well as the Company’s international business, increased 1 percent to $416.9 million. Price/mix increased 3 percent, largely reflecting price increases and improvement in customer and product mix. Volume declined 2 percent, as compared to a 5 percent increase in the prior year quarter. The decline in volume is attributable to the elimination of less-profitable volume in North America and internationally as well as lower shipments to certain export markets. This was partially offset by increased shipments to strategic customers in the U.S.

Global Segment Product Contribution Margin⁽¹⁾ declined 4 percent to $88.2 million, with favorable price/mix offsetting commodity, manufacturing, transportation and warehousing cost inflation. Higher depreciation expense as well as start-up costs associated with the new Richland production line drove the earnings decline.

Foodservice

Net sales for the Foodservice segment, which services North American foodservice distributors and restaurant chains outside the top 100 North American based restaurant chain customers, increased 9 percent to $272.8 million. Price/mix increased 8 percent, reflecting the carryover effect of pricing actions taken in fiscal year 2017, pricing actions implemented in the current year, and improvement in customer and product mix. Volume increased 1 percent, as compared to a 5 percent increase in the prior year quarter, as a result of broad-based growth across the segment’s customer base.

Foodservice Segment Product Contribution Margin⁽¹⁾ increased 15 percent to $92.2 million, driven by favorable price/mix, partially offset by commodity, manufacturing, transportation and warehousing cost inflation, as well as higher depreciation expense and start-up costs associated with the new Richland production line.

Retail

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 6 percent to $102.0 million. Price/mix increased 4 percent, due to higher prices across the branded and private label portfolio, as well as improved mix, partially offset by higher trade spending in support of Grown in Idaho branded products. Volume increased 2 percent, primarily driven by distribution gains of Grown in Idaho as well as growth of Alexia and other branded products.

Retail Segment Product Contribution Margin⁽¹⁾ declined 7 percent to $19.4 million, mainly due to higher trade spending as well as commodity, manufacturing, transportation and warehousing cost inflation. Advertising and promotional spending also increased to support broader distribution of Grown in Idaho.

Equity Method Investment Earnings

Equity method investment earnings from unconsolidated joint ventures in the U.S. and Europe were $12.1 million and $6.2 million for the second quarter of fiscal 2018 and 2017, respectively. These amounts included a $2.7 million unrealized loss related to mark-to-market adjustments associated with currency hedging contracts in the current quarter and a $0.7 million gain in the prior year quarter. Excluding these adjustments, earnings from equity method investments increased $9.3 million, largely due to favorable price/mix in the U.S. and Europe, as well as the benefit of lower raw potato costs in Europe.

Outlook

The Company provides earnings guidance on a non-GAAP basis and does not reconcile guidance to GAAP as the Company cannot predict certain elements that are included in reported GAAP results, including costs related to the spinoff from Conagra and other items impacting comparability.

The Company updated its outlook for fiscal year 2018 as follows:

As summarized in the table above, the Company expects:

• Net sales to grow mid-single digits, with price/mix and volume growth improving in the second half of fiscal 2018 as new pricing structures for an increasing number of customer contracts become effective and as the Company’s new production capacity in Richland, Washington becomes available. The Company’s previous estimate was for net sales to grow low-to-mid single digits.
• Adjusted EBITDA including unconsolidated joint ventures⁽¹⁾ to be in the range of $780 million to $790 million, including higher selling, general and administrative expenses as a percentage of sales for fiscal 2018 due to the full-year impact of incremental costs associated with being a stand-alone public company, as well as higher advertising and promotional expense in support of the introduction of the Company’s Grown in Idaho product line in retail. Using the mid-point of the range, this represents an increase of approximately 13% percent versus a fiscal 2017 pro forma Adjusted EBITDA including unconsolidated joint ventures⁽¹⁾ of $692 million. The Company’s previous estimate was for Adjusted EBITDA including unconsolidated joint ventures⁽¹⁾ to be in the range of $740 million to $760 million.
• Total interest expense for fiscal 2018 to continue to be in the range of $105 million to $110 million, which is an increase of approximately $45 million to $50 million from fiscal 2017 due to the full-year impact of the Company’s capital structure after the spinoff from Conagra.
• Cash used for capital expenditures to be approximately $250 million for fiscal 2018, an increase of $25 million versus the previous estimate of $225 million. This increase primarily relates to costs associated with the initial phase of construction of a new production line at our Hermiston, Oregon facility.

The Company is continuing to evaluate the effect on its effective tax rate⁽²⁾ of the tax reform legislation (the “Act”) that was signed into law on December 22, 2017. The Act lowers the U.S. corporate tax rate from 35 percent to 21 percent, and sets forth other provisions that may affect the Company’s effective tax rate for fiscal 2018. As a result, the Act will result in a blended effective tax rate for the Company for fiscal 2018 that is lower than the Company’s original estimated range of 33 to 34 percent.

End Notes

Webcast and Conference Call Information

Lamb Weston will host a conference call to review its second quarter 2018 results at 10:00 a.m. ET today. A listen-only webcast and accompanying presentation slides will be provided at www.lambweston.com.

About Lamb Weston

Lamb Weston, along with its joint venture partners, is a leading supplier of frozen potato, sweet potato, appetizer and vegetable products to restaurants and retailers around the world. For more than 60 years, Lamb Weston has led the industry in innovation, introducing inventive products that simplify back-of-house management for our customers and make things more delicious for their customers. From the fields where Lamb Weston potatoes are grown to proactive customer partnerships, Lamb Weston always strives for more and never settles. Because, when we look at a potato, we see possibilities. Learn more about us at lambweston.com.

Forward-Looking Statements

This press release contains forward-looking statements within the meaning of the federal securities laws. Words such as “continue,” “focus,” “deliver,” “expect,” “drive,” “create,” “support,” “grow,” “remain,” “project,” “believe,” and variations of such words and similar expressions are intended to identify forward-looking statements. Examples of forward-looking statements include, but are not limited to, statements regarding the Company’s plans, execution, capital investments, dividends, taxes, and business outlook and prospects. These forward-looking statements are based on management’s current expectations and are subject to uncertainty and changes in circumstances. Readers of this press release should understand that these statements are not guarantees of performance or results. Many factors could affect the Company’s actual financial results and cause them to vary materially from the expectations contained in the forward-looking statements, including those set forth in this press release. These risks and uncertainties include, among other things: the Company’s ability to successfully execute its long-term value creation strategies; the competitive environment and related conditions in the markets in which it operates; political and economic conditions of the countries in which it conducts business and other factors related to its international operations; disruption of its access to export mechanisms; its ability to complete proposed acquisitions or integrate acquired businesses or execute on large capital projects; its future debt levels; the availability and prices of raw materials; changes in its relationships with its growers or significant customers; the success of its joint ventures; actions of governments and regulatory factors affecting its businesses or joint ventures; the ultimate outcome of litigation or any product recalls; levels of pension, labor and people-related expenses; its ability to pay regular quarterly cash dividends and the amounts and timing of any future dividends; and other risks described in the Company’s reports filed from time to time with the Securities and Exchange Commission. The Company cautions readers not to place undue reliance on any forward-looking statements included in this press release, which speak only as of the date of this press release. The Company undertakes no responsibility for updating these statements, except as required by law.

Non-GAAP Financial Measures

To supplement the financial information included in this press release, the Company has presented Adjusted Income from Operations, Adjusted EBITDA including unconsolidated joint ventures, pro forma Adjusted EBITDA including unconsolidated joint ventures, Adjusted Diluted EPS, pro forma Adjusted Diluted EPS and Segment Product Contribution Margin, each of which is considered a non-GAAP financial measure. The non-GAAP financial measures provided should be viewed in addition to, and not as an alternative for, financial measures prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") that are presented in this press release. The non-GAAP financial measures presented may differ from similarly titled non-GAAP financial measures presented by other companies, and other companies may not define these non-GAAP financial measures the same way. These measures are not substitutes for their comparable GAAP financial measures, such as net income, diluted earnings per share, or other measures prescribed by GAAP, and there are limitations to using non-GAAP financial measures.

Management uses these non-GAAP financial measures to assist in comparing the Company's performance on a consistent basis for purposes of business decision making by removing the impact of certain items that management believes do not directly reflect the Company's underlying operations. Management believes that presenting these non-GAAP financial measures provide investors with useful information because they (i) provide meaningful supplemental information regarding financial performance by excluding certain items, (ii) permit investors to view performance using the same tools that management uses to budget, make operating and strategic decisions, and evaluate historical performance, and (iii) otherwise provide supplemental information that may be useful to investors in evaluating the Company's results. The Company believes that the presentation of these non-GAAP financial measures, when considered together with the corresponding GAAP financial measures and the reconciliations to those measures, provides investors with additional understanding of the factors and trends affecting the Company's business than could be obtained absent these disclosures.

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