Forward-Looking Statements
This report, including Management's Discussion and Analysis of Financial
Condition and Results of Operations, which we refer to as "MD&A," contains
forward-looking statements within the meaning of the federal securities laws.
Words such as "will," "continue," "may," "expect," "anticipate," "should,"
"believe," "estimate," "grow," "drive," "invest," "support," "improve,"
"increase," "outlook," 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 our plans,
capital investments, dividends, share repurchases, business outlook and
prospects, and remediation of the material weakness in internal control. These
forward-looking statements are based on management's current expectations and
are subject to uncertainties and changes in circumstances. Readers of this
report should understand that these statements are not guarantees of performance
or results. Many factors could affect our actual financial results and cause
them to vary materially from the expectations contained in the forward-looking
statements, including those set forth in this report. These risks and
uncertainties include, among other things: our ability to successfully execute
our long-term value creation strategies; our ability to execute on large capital
projects, including construction of new production lines; the competitive
environment and related conditions in the markets in which we and our joint
ventures operate; political and economic conditions of the countries in which we
and our joint ventures conduct business and other factors related to our
international operations; disruption of our access to export mechanisms; risks
associated with possible acquisitions, including our ability to complete
acquisitions or integrate acquired businesses; our debt levels; the availability
and prices of raw materials; changes in our relationships with our growers or
significant customers; the success of our joint ventures; actions of governments
and regulatory factors affecting our businesses or joint ventures; the ultimate
outcome of litigation or any product recalls; levels of pension, labor and
people-related expenses; our ability to pay regular quarterly cash dividends and
the amounts and timing of any future dividends; our ability to remediate the
material weakness in internal control; and other risks described in our reports
filed from time to time with the U.S. Securities and Exchange Commission
("SEC"). We caution readers not to place undue reliance on any forward-looking
statements included in this report, which speak only as of the date of this
report. We undertake no responsibility for updating these statements, except as
required by law.
This Item 2 is intended to supplement, and should be read in conjunction with,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included in our Annual Report on Form 10-K for the fiscal year ended
May 26, 2019 (the "Form 10-K"), which we filed with the SEC on July 25, 2019.
Overview
Lamb Weston Holdings, Inc. ("we," "us," "our," "the Company," or "Lamb Weston"),
along with our joint ventures, is a leading global producer, distributor, and
marketer of value-added frozen potato products. We are the number one supplier
of value-added frozen potato products in North America. We, along with our joint
ventures, are also a leading supplier of value-added frozen potato products
internationally, with a strong and growing presence in high-growth emerging
markets. We, along with our joint ventures, offer a broad product portfolio to a
diverse channel and customer base in over 100 countries. French fries represent
the majority of our value-added frozen potato product portfolio.
Management's discussion and analysis of our results of operations and financial
condition is provided as a supplement to the consolidated financial statements
and related condensed notes included elsewhere herein to help provide an
understanding of our financial condition, changes in financial condition and
results of our operations. Our MD&A is based on financial data derived from the
financial statements prepared in accordance with United States ("U.S.")
generally accepted accounting principles ("GAAP") and certain other financial
data (EBITDA, EBITDA including unconsolidated joint ventures and Adjusted
Diluted EPS) that is prepared using non-GAAP measures. Refer to "Reconciliations
of Non-GAAP Financial Measures to Reported Amounts" below for the definitions of
EBITDA, EBITDA including unconsolidated joint ventures and Adjusted Diluted EPS,
and a reconciliation of these non-GAAP financial measures to net income or
diluted earnings per share.
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Executive Summary
Lamb Weston delivered strong sales, volume, and earnings growth results in the
second quarter of fiscal 2020. Compared with the second quarter of fiscal 2019:
? Net sales increased 12% to $1,019.2 million
? Income from operations increased 11% to $193.5 million
? Net income attributable to Lamb Weston increased 18% to $140.4 million
? Diluted earnings per share increased 28% to $0.95, while Adjusted Diluted EPS
increased 19% to $0.95
? EBITDA including unconsolidated joint ventures increased 17%, to $260.9 million
In addition, in the first half of fiscal 2020, our net cash provided by
operating activities increased 9% to $345.3 million. We returned $71.9 million
of cash to shareholders through dividends and share repurchases, and we recently
announced a 15% increase in the quarterly dividend to $0.23 per share.
These results were driven by solid operating execution by our commercial
organizations coupled with strategic actions we have taken over the last few
years to invest in our business to capitalize on the continued demand growth for
frozen potato products around the world. We continue to execute on that strategy
by investing cash back into the business to improve manufacturing operations and
systems, support customer growth, and increase our presence in key markets such
as Australia and South America. In the first half of fiscal 2020, we acquired a
frozen potato processor in Australia and a 50% ownership interest in Lamb Weston
Alimentos Modernos S.A., a joint venture with Sociedad Commercial del Plata in
Argentina, which together added approximately 200 million pounds of production
capacity to our manufacturing network.
Comparing performance with the second quarter of fiscal 2019, volume and
price/mix increased in each of our core business segments. Our volume growth was
primarily driven by growth in our Global and Foodservice segments, and includes
benefits from acquisitions and additional shipping days in the quarter related
to the timing of the Thanksgiving holiday. Volume growth, favorable price/mix,
lower transportation costs, and commodity mark-to-market gains more than offset
input cost inflation; factory inefficiencies; and higher depreciation expense
primarily associated with our new french fry production line in Hermiston,
Oregon, which started operating towards the end of the fourth quarter of fiscal
2019. Earnings growth also benefited from acquiring the remaining 50.01% equity
interest in our joint venture, Lamb Weston BSW, LLC (the "BSW Acquisition"), and
higher equity method investment earnings.
In fiscal 2020, we expect the overall operating environment will be generally
favorable with continued solid demand growth globally. New industry capacity in
North America and Europe may ease near-term capacity constraints and should
allow processors to operate their production facilities at more normalized
levels. However, while we expect to have adequate raw potatoes to support our
business in fiscal 2020, overall raw potato supply in North America and Europe
is tight due to relatively poor weather conditions late in the growing season
and during the crop harvest, which may temper the supply of frozen potato
products until a new potato crop is harvested beginning in the summer of 2020.
We expect the rate of inflation for many of our commodity and manufacturing
costs will be similar to the first half of fiscal 2020. We also expect higher
selling, general and administrative costs as a result of investments in our
enterprise resource planning infrastructure, as well as for continued
improvements in our information systems, sales, marketing, innovation,
operations, and other functional capabilities, designed to drive operating
efficiencies and support future growth.
Operating Results
We have four reportable segments: Global, Foodservice, Retail, and Other. We
report product contribution margin by segment. Product contribution margin is
the primary measure reported to our chief operating decision maker for purposes
of allocating resources to our segments and assessing their performance. Product
contribution margin represents net sales less cost of sales and advertising and
promotion expenses. Product contribution margin includes advertising and
promotion expenses because the amounts are directly associated with segment
performance; it excludes general corporate expenses and interest expense because
management believes these amounts are not directly associated with segment
performance. For additional information on our reportable segments and product
contribution margin, see Note 15,
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Segments, of the Condensed Notes to Consolidated Financial Statements in "Part
I, Item 1. Financial Statements" of this report.
Thirteen Weeks Ended November 24, 2019 compared to Thirteen Weeks Ended November
25, 2018 (dollars in millions)
Net Sales and Product Contribution Margin
Thirteen Weeks Ended
November 24, November 25, %
2019 2018 Inc/(Dec)
Segment sales
Global $ 539.6 $ 470.0 15%
Foodservice 304.9 279.7 9%
Retail 132.1 123.9 7%
Other 42.6 37.8 13%
$ 1,019.2 $ 911.4 12%
Segment product contribution margin
Global $ 128.9 $ 112.4 15%
Foodservice 111.3 97.4 14%
Retail 28.5 25.9 10%
Other 10.4 7.2 44%
279.1 242.9 15%
Advertising and promotion expenses 6.0 6.1 (2%)
Gross profit $ 285.1 $ 249.0 14%
Net Sales
Lamb Weston's net sales for the second quarter of fiscal 2020 were $1,019.2
million, an increase of $107.8 million, or 12%, compared to the second quarter
of fiscal 2019. Volume increased 10%, primarily driven by growth in our Global
and Foodservice segments, and includes an approximate 1.5 percentage point
benefit from acquisitions, as well as an approximate 1 percentage point benefit
from additional shipping days related to the timing of the Thanksgiving holiday.
Price/mix increased 2% due to pricing actions and favorable mix.
Global segment net sales increased $69.6 million, or 15%, to $539.6 million,
compared with $470 million in the second quarter of fiscal 2019. Volume
increased 14%, driven by solid growth in sales, including the benefit of limited
time product offerings, to strategic customers in the U.S. and key international
markets, an approximate 3 percentage point benefit from acquisitions, and an
approximate 1 percentage point benefit from additional shipping days related to
the timing of the Thanksgiving holiday. Price/mix increased 1%, largely
reflecting pricing adjustments associated with multi-year contracts.
Foodservice segment net sales increased $25.2 million, or 9%, to $304.9 million,
compared with $279.7 million in the second quarter of fiscal 2019. Volume
increased 5 percent, led by growth in distributor private label and Lamb Weston
branded products. Approximately half of the volume increase reflected the
benefit of additional shipping days related to the timing of the Thanksgiving
holiday. Price/mix increased 4 percent, primarily reflecting pricing actions
initiated during the quarter and improved mix.
Retail segment net sales increased $8.2 million, or 7%, to $132.1 million,
compared with $123.9 million in the second quarter of fiscal 2019. Volume
increased 4 percent, driven by increased sales of Grown in Idaho and other
branded products as well as private label products. Approximately 2 percentage
points of the volume increase reflected the benefit of additional shipping days
related to the timing of the Thanksgiving holiday. Price/mix increased 3
percent, driven by favorable mix and pricing actions.
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Net sales in our Other segment increased $4.8 million, or 13%, to $42.6 million,
compared with $37.8 million in the second quarter of fiscal 2019, largely due to
increased volumes in our vegetable business, partially offset by lower
price/mix.
Product Contribution Margin
Lamb Weston's product contribution margin for the second quarter of fiscal 2020
was $279.1 million, an increase of $36.2 million, or 15%, compared to the second
quarter of fiscal 2019.
Global segment product contribution margin increased $16.5 million, or 15%, to
$128.9 million in the second quarter of fiscal 2020, driven by volume growth and
favorable price/mix. Global segment cost of sales was $409.5 million, up 15%
compared to the second quarter of fiscal 2019, reflecting higher sales volumes;
input cost inflation; higher manufacturing costs due to factory inefficiencies,
which were primarily driven by higher maintenance and related costs; and higher
depreciation expense primarily associated with the new Hermiston production
line. The increase in cost of sales was partially offset by lower transportation
costs.
Foodservice segment product contribution margin increased $13.9 million, or 14%,
to $111.3 million in the second quarter of fiscal 2020, driven by favorable
price/mix and volume growth. Cost of sales was $192.2 million, up 6% compared to
the second quarter of fiscal 2019, due to higher sales volumes; input cost
inflation; higher manufacturing costs due to factory inefficiencies; and higher
depreciation expense primarily associated with the new Hermiston production
line. The increase in cost of sales was partially offset by lower transportation
costs. Advertising and promotion spending decreased $0.5 million in the second
quarter of fiscal 2020 as compared to the second quarter of fiscal 2019.
Retail segment product contribution margin increased $2.6 million, or 10%, to
$28.5 million, largely due to favorable price/mix and volume growth. Cost of
sales was $100.4 million, up 6% compared to the second quarter of fiscal 2019,
primarily due to higher sales volumes; input cost inflation; higher
manufacturing costs due to factory inefficiencies; and higher depreciation
expense primarily associated with the new Hermiston production line. The
increase in cost of sales was partially offset by lower transportation costs.
Advertising and promotion spending increased $0.4 million to $3.3 million in the
second quarter of fiscal 2020 as compared to the second quarter of fiscal 2019,
reflecting the timing of marketing investments in support of Grown in Idaho,
Alexia and other branded products.
Other segment product contribution margin was $10.4 million, an increase of $3.2
million as compared with $7.2 million of income in the second quarter of fiscal
2019. These amounts include a $4.2 million gain related to unrealized
mark-to-market adjustments and realized settlements associated with commodity
hedging contracts in the second quarter of fiscal 2020, and a $0.4 million gain
related to the contracts in the prior year period. Excluding these adjustments,
Other segment product contribution margin declined $0.6 million, largely due to
lower price/mix in our vegetable business.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $16.6 million, or 22%, to
$91.6 million in the second quarter of fiscal 2020 compared with the same period
in 2019. The increase was largely driven by an approximate $6 million increase
in incentive compensation expense accruals primarily based on our operating
performance, as well as investments in our sales, marketing, operating and
systems capabilities, which included more than $2 million of expense associated
with designing and implementing a new enterprise resource planning system. These
increases were partially offset by an approximate $2 million reduction in
foreign exchange losses. The prior year period also included an approximate $4
million insurance settlement benefit.
Interest Expense, Net
Interest expense, net was $25.4 million for the second quarter of fiscal 2020, a
decrease of $0.8 million compared with the same period in fiscal 2019. The
decrease in "Interest expense, net" was the result of lower average total debt
versus the prior year and lower interest rates, including anticipated patronage
dividends, on the term loan facility we refinanced during the first quarter of
fiscal 2020. For more information on this refinance see "Liquidity and Capital
Resources" in this MD&A.
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Income Tax Expense
Income tax expense for the second quarter of fiscal 2020 and 2019 was $42.7
million and $34.0 million, respectively. The effective income tax rate
(calculated as the ratio of income tax expense to pre-tax income, inclusive of
equity method investment earnings) was approximately 23.3% and 21.5% for the
second quarter of fiscal 2020 and 2019, respectively, in our Consolidated
Statements of Earnings. The effective tax rate varies from the U.S. statutory
tax rate of 21% principally due to the impact of U.S. state taxes, foreign
taxes, permanent differences, and discrete items.
Equity Method Investment Earnings
We conduct business through unconsolidated joint ventures in Europe, the U.S.,
and South America and include our share of the earnings based on our economic
ownership interest in them. Our share of earnings from our equity method
investments was $15.0 million and $10.2 million for the second quarter of fiscal
2020 and 2019, respectively. These amounts included a $2.7 million unrealized
loss related to mark-to-market adjustments associated with currency and
commodity hedging contracts in the second quarter of fiscal 2020, and a $1.1
million unrealized loss related to the contracts in the second quarter of fiscal
2019. Excluding these adjustments, earnings from equity method investments
increased $6.4 million, largely reflecting lower raw potato prices in Europe.
Twenty-Six Weeks Ended November 24, 2019 compared to Twenty-Six Weeks Ended
November 25, 2018 (dollars in millions)
Net Sales and Product Contribution Margin
Twenty-Six Weeks Ended
November 24, November 25, %
2019 2018 Inc/(Dec)
Segment sales
Global $ 1,057.2 $ 936.8 13%
Foodservice 610.3 577.5 6%
Retail 261.4 240.1 9%
Other 79.3 71.9 10%
$ 2,008.2 $ 1,826.3 10%
Segment product contribution margin
Global $ 231.6 $ 206.9 12%
Foodservice 213.8 199.4 7%
Retail 57.4 48.6 18%
Other 20.1 12.2 65%
522.9 467.1 12%
Advertising and promotion expenses 10.8 12.5 (14%)
Gross profit $ 533.7 $ 479.6 11%
Net Sales
Lamb Weston's net sales for the first half of fiscal 2020 were $2,008.2 million,
an increase of $181.9 million, or 10%, compared to the first half of fiscal
2019. Volume increased 8%, primarily driven by growth in our Global segment, and
includes an approximate one-and-a-half percentage point benefit from
acquisitions. Price/mix increased 2% due to pricing actions and favorable mix.
Global segment net sales increased $120.4 million, or 13%, to $1,057.2 million,
compared with $936.8 million in the first half of fiscal 2019. Volume increased
12%, driven by solid growth in sales, including the benefit of limited time
product offerings, to strategic customers in the U.S. and key international
markets, an approximate two-and-a-half
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percentage point benefit from acquisitions. Price/mix increased 1%, largely
reflecting pricing adjustments associated with multi-year contracts.
Foodservice segment net sales increased $32.8 million, or 6%, to $610.3 million,
compared with $577.5 million in the first half of fiscal 2019. Volume increased
3 percent, led by growth in distributor private label and Lamb Weston branded
products. Price/mix increased 3 percent, primarily reflecting improved mix and
pricing actions initiated in the fall of 2018 and fall of 2019.
Retail segment net sales increased $21.3 million, or 9%, to $261.4 million,
compared with $240.1 million in the first half of fiscal 2019. Volume increased
6 percent, driven by increased sales of private label products as well as Grown
in Idaho and other branded products. Price/mix increased 3 percent, driven by
favorable mix and pricing actions.
Net sales in our Other segment increased $7.4 million, or 10%, to $79.3 million,
compared with $71.9 million in the first half of fiscal 2019, largely due to
increased volumes in our vegetable business, partially offset by lower
price/mix.
Product Contribution Margin
Lamb Weston's product contribution margin for the first half of fiscal 2020 was
$522.9 million, an increase of $55.8 million, or 12%, compared to the first half
of fiscal 2019.
Global segment product contribution margin increased $24.7 million, or 12%, to
$231.6 million in the first half of fiscal 2020, driven by volume growth and
favorable price/mix. Global segment cost of sales was $823.2 million, up 13%
compared to the first half of fiscal 2019, due to higher sales volumes; input
cost inflation; higher manufacturing costs due to factory inefficiencies, which
were primarily driven by higher maintenance and related costs; and higher
depreciation expense primarily associated with the new Hermiston production
line. The increase in cost of sales was partially offset by lower transportation
costs.
Foodservice segment product contribution margin increased $14.4 million, or 7%,
to $213.8 million in the first half of fiscal 2020, driven by favorable
price/mix and volume growth. Cost of sales was $393.4 million, up 5% compared to
the first half of fiscal 2019, due to higher sales volumes; input cost
inflation; higher manufacturing costs due to factory inefficiencies; and higher
depreciation expense primarily associated with the new Hermiston production
line. The increase in cost of sales was partially offset by lower transportation
costs.
Retail segment product contribution margin increased $8.8 million, or 18%, to
$57.4 million, largely due to higher price/mix, volume growth and lower
advertising and promotional expenses. Cost of sales was $198.8 million, up 8%
compared to the first half of fiscal 2019, primarily due to higher sales
volumes; input cost inflation; higher manufacturing costs due to factory
inefficiencies; and higher depreciation expense primarily associated with the
new Hermiston production line. The increase in cost of sales was partially
offset by lower transportation costs. Advertising and promotion spending
declined $1.7 million to $5.2 million in the first half of fiscal 2020 as
compared to the first half of fiscal 2019, reflecting the timing of marketing
investments in support of Grown in Idaho, Alexia and other branded products.
Other segment product contribution margin was $20.1 million, an increase of $7.9
million as compared with $12.2 million of income in the first half of fiscal
2019. These amounts include a $7.3 million gain related to unrealized
mark-to-market adjustments and realized settlements associated with commodity
hedging contracts in the first half of fiscal 2020, and a $4.0 million loss
related to the contracts in the prior year period. Excluding these adjustments,
Other segment product contribution margin declined $3.4 million, largely due to
lower price/mix in our vegetable business.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $17.2 million, or 11%, to
$170.2 million in the first half of fiscal 2020 compared with the same period in
2019. The increase was largely driven by a $7 million increase in incentive
compensation expense accruals primarily based on our operating performance, as
well as investments in our sales, marketing, operating and systems capabilities,
including approximately $4 million of expense associated with designing
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and implementing a new enterprise resource planning system. These increases were
partially offset by an approximate $6 million reduction in foreign exchange
losses and a $1.7 million decline in advertising and promotional expenses. The
prior year period also included an approximate $4 million insurance settlement
benefit.
Interest Expense, Net
Interest expense, net was $53.6 million for the first half of fiscal 2020, an
increase of $0.6 million compared with the same period in fiscal 2019. The
increase in "Interest expense, net" was the result of the write-off of $1.7
million of debt issuance costs in connection with the refinance of our term loan
facility, partially offset by lower average total debt versus the prior year and
lower interest rates, including anticipated patronage dividends, on the term
loan facility we refinanced during the first quarter of fiscal 2020. For more
information on this refinance see "Liquidity and Capital Resources" in this
MD&A.
Income Tax Expense
Income tax expense for the first half of fiscal 2020 and 2019 was $79.4 million
and $68.3 million, respectively. The effective income tax rate (calculated as
the ratio of income tax expense to pre-tax income, inclusive of equity method
investment earnings) was approximately 23.7% and 22.5% for the first half of
fiscal 2020 and 2019, respectively, in our Consolidated Statements of Earnings.
The effective tax rate varies from the U.S. statutory tax rate of 21%
principally due to the impact of U.S. state taxes, foreign taxes, permanent
differences, and discrete items.
Equity Method Investment Earnings
We conduct business through unconsolidated joint ventures in Europe, the U.S.,
and South America and include our share of the earnings based on our economic
ownership interest in them. Our share of earnings from our equity method
investments was $25.6 million and $30.1 million for the first half of fiscal
2020 and 2019, respectively. These amounts included a $1.6 million unrealized
loss related to mark-to-market adjustments associated with currency and
commodity hedging contracts in the first half of fiscal 2020, and a $0.4 million
unrealized loss related to the contracts in the first half of fiscal 2019.
Excluding these adjustments, earnings from equity method investments decreased
$3.3 million, largely reflecting higher raw potato prices and manufacturing
costs associated with last year's poor crop in Europe, partially offset by
favorable price/mix and volume growth.
Liquidity and Capital Resources
Sources and Uses of Cash
Our primary sources of liquidity are net cash provided by operating activities
and borrowings under our revolving credit facility. At November 24, 2019, we had
$23.8 million of cash and cash equivalents and $496.6 million of available
borrowing capacity on our revolving credit facility. Currently, our primary uses
of cash are for operations, capital expenditures, dividends on our common stock,
acquisitions, debt service, and stock repurchases. We believe that net cash
generated from operating activities, cash on hand, available borrowings under
our revolving credit facility, and available capital through access to capital
markets will be adequate to meet our liquidity and capital requirements,
including dividends declared, for at least the next twelve months.
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