Lamb Weston Holdings Inc. (LW, Financial), a leader in the global frozen potatoes market, posted excellent quarterly results, including a 6.8% increase in net sales. Net sales for the first six months increased 5.3%.
French fries are one of the most important items on menus in the US, and Lamb Weston Holdings is the leading producer and marketer of value-added frozen potato products worldwide. In North America and globally, the company holds 42% and 23% of the market share compared to its peers (McCain, Simplot, Cavendish, Ore Ida, and others). It has 22 factories in North America, Europe, and China. Further, one factory is under construction in Russia.
Lamb Weston’s reportable operating segments are:
- Global
- Foodservice
- Retail
- Other
Strong second-quarter results
On Jan. 10, the Eagle, Idaho-based company reported its financial results for its fiscal second-quarter 2017. The company’s net sales increased 6.81% to $790.7 million, compared to $740.3 million for the comparable prior-year period. Net sales for the Global, Foodservice and Retail segments increased 6.26% to $412.6 million, 11.28% to $250.6 million and 5.12% to $96.5 million. On the other hand, net sales of the Other segment decreased 11.43% to $31 million from $35 million in the same period last year.
Gross profit for the reported quarter increased 22.93% to $198.9 million, which was $161.8 million in the prior-year period. The gross profit margin increased 25.15% from 21.86% in the same period last year.
Lamb Weston’s operating income was $125.5 million, a 14.6% increase from $109.5 million in the same period last year. Operating income as a percentage of net sales increased 15.87% from 14.79% in the same period last year. Net income increased 18.18% to $91 million, or 59 cents per diluted share, compared to $77 million, or 50 cents per diluted share, for the comparable prior-year period. Net income as a percentage of net sales increased 11.51% from 10.4% in the prior-year period. The company’s adjusted EBITDA increased 20.43% to $160.9 million, compared to $133.6 million for the comparable prior-year period.
Lamb Weston’s cost of sales increased 2.3% to $591.8 million. On the other hand, cost of sales as a percentage of net sales decreased to 74.85% from 78.14% in the prior-year period. Selling, general and administrative expenses increased 40.4% to $73.4 million compared to $52.3 million in the same period last year. Net interest expense for the reported quarter increased 353.33% to $6.8 million compared to $1.5 million.
Lamb Weston ended the quarter with cash and cash equivalents of $69.4 million, an 90.66 % increase from $36.4 million in the year-ago quarter. Inventories and long-term debt for the reported quarter increased 23.45% to $615.9 million and 2177.25% to $2,382 million, compared to $498.9 million and $104.6 million for the comparable prior-year period.
Attributes of the quarter
Operating income increased primarily due to favorable price mix and volume as well as supply chain efficiencies. Adjusted EBITDA increased primarily due to the growth in income from operations, partially offset by lower equity method investment earnings.
First six months results overview
The following chart shows Lamb Weston’s financial results for first six months of 2016.
| Metrics | Six months ended November 2016 | Six months ended November 2015 | % change |
| Net sales | $1567 million | $1488.1 million | 5.3% |
| Gross profit | $379.5 million | $303.1 million | 25.21% |
| Operating income | $250.5 million | $194.1 million | 29.06% |
| Net income | $174.1 million | $140.5 million | 23.91% |
| Adjusted EBITDA | $321 million | $242.1 million | 32.59% |
| Cost of sales | $1187.5 million | $1185 million | 0.21% |
| Selling, general and administrative expenses | $129 million | $109 million | 18.35% |
| Net interest expense | $8.3 million | $2.8 million | 196.43% |
| Net cash provided by operating activities | $162.4 million | $172.9 million | (6.07)% |
Projections
For fiscal 2017, Lamb Weston expects its net sales to have mid-single-digit growth. The company expects adjusted EPS in the range of $2.20 to $2.28. Further, it forecasted interest expenses of approximately $60 million.
Growth
North America and Europe are the company's two largest geographic markets by volume. As a result, it is expanding its category-leading position in North America. Further, the company is optimizing its global footprint and capabilities and is cultivating new opportunities to drive growth in emerging markets.
The global demand for frozen potatoes is increasing, resulting in increased exports from 15% of North America's industry capacity to over 20% in the last seven years. Additionally, analysts project the global frozen category will reach $15 billion in sales by 2020. From 2016 to 2024, the frozen potatoes segment is expected to grow at a compound annual growth rate of 4.9%.
Management
On Nov. 17, 2016, the company appointed Robert McNutt as senior vice president and chief financial officer. McNutt’s experience will help Lamb Weston expand in the future.
Conclusion
Overall, Lamb Weston is a rock-solid company with 60 years of continuous expansion, deep knowledge of its industry, remarkable white space opportunities, a strong balance sheet and an experienced management team.
From 2014 to 2016, Lamb Weston’s revenue and adjusted EBITDA grew at a CAGR of 3.1% and 8.7%. Further, from 2003 to 2016, net sales increased at a CAGR of more than 6.3%. With its recent quarterly report, the company is headed toward a bright future and is set to deliver greater shareholder returns.
Disclosure: I do not hold any position in the company.
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