Release Date: April 04, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Sales increased $205 million or 16% to $1.46 billion, driven by incremental sales from the acquisition of the EMEA business.
- Price/mix was up 4% due to inflation-driven pricing actions taken in fiscal 2023 and fiscal 2024 in both North America and international segments.
- Adjusted gross profit increased $24 million to $427 million, driven by pricing actions and incremental earnings from the EMEA business.
- Cash from operations generated more than $480 million in the first 9 months, up about $145 million versus the prior year period.
- Lamb Weston has returned more than $270 million of cash to shareholders, comprised of $122 million in dividends and $150 million in share repurchases.
Negative Points
- ERP transition reduced net sales by about $135 million and volume growth by approximately 8 percentage points in the third quarter.
- Adjusted EBITDA was negatively impacted by approximately $95 million due to the ERP transition.
- Significant challenges with inventory visibility at distribution centers led to shipment delays, canceled orders, and ultimately, lower-than-expected volumes.
- Restaurant traffic trends in the U.S. have been generally flat to slightly down during the past 6 to 9 months, impacting sales and volume performance.
- Global restaurant traffic has slowed, and Lamb Weston anticipates volume will decline mid-single digits in the fourth quarter.
Q & A Highlights
Q: What are the main challenges Lamb Weston Holdings Inc faced this quarter?
A: (Thomas P. Werner - President, CEO & Director) The main challenges were related to the transition from a legacy enterprise resource planning system to SAP, which affected various areas including customer orders, inventory management, and shipments. This led to shipment delays, canceled orders, and ultimately, lower-than-expected volumes and margins.
Q: How did the ERP transition impact Lamb Weston's financials?
A: (Bernadette M. Madarieta - CFO) The ERP transition reduced net sales by about $135 million and volume growth by approximately 8 percentage points in the third quarter. Adjusted EBITDA was negatively impacted by approximately $95 million, with more than half due to lower sales and unfulfilled customer orders and the remainder due to incremental costs related to the transition.
Q: What is the current demand environment for Lamb Weston's products?
A: (Thomas P. Werner - President, CEO & Director) Global French fry demand remains resilient but is currently at or below the historical annual growth rate of 2% to 4%. Restaurant traffic trends in the U.S. have been flat to slightly down, and QSR traffic was flat in the third quarter. Traffic at full-service restaurants has declined, and outside the U.S., restaurant traffic growth has slowed sequentially from the fiscal second quarter.
Q: What is Lamb Weston's updated outlook for the remainder of fiscal 2024?
A: (Bernadette M. Madarieta - CFO) The company reduced its annual net sales target to $6.54 billion to $6.6 billion, with an adjusted EBITDA range of $1.48 billion to $1.51 billion. They expect volumes in the fourth quarter to decline mid-single digits, reflecting soft restaurant traffic trends and the impact of the ERP transition.
Q: How is Lamb Weston addressing the challenges with the ERP transition?
A: (Thomas P. Werner - President, CEO & Director) The company has contained the effect of the inventory visibility issues to the fiscal third quarter and restored customer order fulfillment rates to pre-transition levels. They are actively engaging customers to earn their trust and business back.
Q: What are the expectations for the upcoming potato crop?
A: (Thomas P. Werner - President, CEO & Director) In North America, Lamb Weston has agreed to a 3% decline in aggregate contract prices for the 2024 potato crop and has secured the targeted number of acres to be planted. Planting is on schedule, and they expect potato costs in North America to decline somewhat during the second half of fiscal 2025, assuming an average crop.
Q: How is the ERP transition expected to proceed?
A: (Bernadette M. Madarieta - CFO) The next phase of the ERP will be in North America at the plants, with a pilot plant first to test capabilities before moving to other plants in waves. This phase is expected to have much less of an impact than the initial transition.
Q: How is Lamb Weston's capital allocation strategy affected by the current challenges?
A: (Thomas P. Werner - President, CEO & Director) The company remains committed to its dividend and will evaluate share buybacks based on the company's performance and market conditions. They are also committed to their capital expenditure projects, which are expected to be elevated this year and next.
Q: What is the company's approach to M&A given the current challenges?
A: (Thomas P. Werner - President, CEO & Director) Lamb Weston continues to evaluate international acquisition opportunities and will pursue them if they align with the company's long-term strategy, despite the current challenges.
Q: How is Lamb Weston planning to backfill the contracts it exited in '23?
A: (Thomas P. Werner - President, CEO & Director) The company is currently in the process of contracting with customers for FY '25 and has a plan to target specific opportunities and rebuild relationships with customers affected by the ERP transition.
