Lamb Weston Reports Fiscal Second Quarter 2019 Results and Updates Full Year Outlook

Lamb Weston Reports Fiscal Second Quarter 2019 Results and Updates Full Year Outlook

Second Quarter 2019 Highlights

• Net sales increased 11% to $911 million
• Income from operations increased 24% to $174 million; Adjusted Income from Operations⁽¹⁾ increased 21% to $174 million
• Adjusted EBITDA including unconsolidated joint ventures⁽¹⁾ increased 18% to $223 million
• Diluted EPS increased to $0.74 from $0.52, and includes a $0.10 benefit from a lower tax rate as a result of U.S. tax reform, partially offset by a $0.06 decrease related to the acquisition of the remaining interest in the Lamb Weston BSW joint venture
• Adjusted Diluted EPS⁽¹⁾ increased to $0.80 from $0.54; and includes a $0.10 benefit from a lower tax rate as a result of U.S. tax reform

Updated FY 2019 Outlook

• Net sales expected to increase mid-to-high single digits, up from a previous estimate of mid-single digits
• Adjusted EBITDA including unconsolidated joint ventures⁽¹⁾ expected to be $870 million-$880 million, up from a previous estimate of $860 million-$870 million

Capital Deployment Highlights

• Purchased partner’s interest in BSW joint venture
• Acquired Australian potato processor
• Increased quarterly dividend by 5%
• Adopted $250 million share repurchase program

Lamb Weston Holdings, Inc. (NYSE: LW) announced today its fiscal second quarter 2019 results and updated its full year outlook.

“We delivered another quarter of strong sales, earnings and cash flow growth,” said Tom Werner, President and CEO. “We’re executing well across the organization and continue to expect the operating environment in North America to remain generally favorable for the remainder of fiscal 2019. As we’ve previously indicated, while we anticipate delivering solid sales and earnings results in the second half of fiscal 2019, our performance will moderate as we begin to lap strong prior year results, face increased cost inflation, ramp up investments in operating, sales and product innovation capabilities, and tackle the challenges arising from a historically poor potato crop in Europe. Despite these headwinds, due to our strong first half performance and operating momentum, we have raised our annual outlook for sales growth and EBITDA.”

“In addition, we’ve recently taken actions that we believe demonstrate our balanced, returns-driven approach when deploying capital,” Werner continued. “First, we completed the purchase of our partner’s interest in our Lamb Weston BSW joint venture in December. Second, consistent with our strategy to differentiate our global supply chain to drive growth, we acquired a frozen potato processor in Australia, which will provide us with additional capacity to serve our customers. Third, we increased our quarterly dividend by approximately 5 percent, enabling us to maintain a dividend payout range of 25 to 35 percent of Adjusted Diluted EPS. And finally, we adopted a $250 million share repurchase program designed to buy back stock on an opportunistic basis. We believe these actions, along with our performance, show our commitment to executing on our strategies to support customers, drive growth and create value for our shareholders over the long term.”

Q2 2019 Commentary

Net sales were $911.4 million, up 11 percent versus the year-ago period. Price/mix increased 6 percent due to pricing actions and favorable mix. Volume increased 5 percent, driven by growth in the Company’s Global and Retail segments.

Income from operations rose 24 percent to $174.0 million from the prior year period, which included $4.0 million of pre-tax costs in the prior year period related to the Company’s separation from Conagra Brands, Inc. (formerly ConAgra Foods, Inc., “Conagra”) on November 9, 2016.

Excluding this comparability item, income from operations grew $30.2 million, or 21 percent, driven by higher sales and gross profit. Gross profit increased $40.8 million due to favorable price/mix, volume growth and supply chain efficiency savings. This increase was partially offset by transportation, warehousing, input and manufacturing cost inflation. In addition, gross profit included a $1.7 million loss related to unrealized mark-to-market adjustments and realized settlements associated with commodity hedging contracts in the current quarter, compared with a $0.6 million loss related to these items in the prior year period.

The rise in gross profit was partially offset by a $10.6 million increase in selling, general and administrative expenses (“SG&A”), excluding comparability items. The increase was largely driven by higher expenses related to information technology services and infrastructure, as well as investments in the Company’s sales, marketing and operating capabilities. The increase in SG&A also includes approximately $2 million of unfavorable foreign exchange, which was more than offset by an approximately $4 million benefit from an insurance settlement.

Adjusted EBITDA including unconsolidated joint ventures⁽¹⁾ was $222.8 million, up 18 percent versus the prior year period, primarily due to growth in income from operations.

Diluted EPS increased $0.22, or 42 percent, to $0.74, which included a $0.10 benefit related to a lower U.S. corporate tax rate as a result of the U.S. Tax Cuts and Jobs Act (the “Tax Act ”) enacted in December 2017, partially offset by a $0.06 decrease related to the acquisition of the remaining interest of the Company’s Lamb Weston BSW, LLC (“Lamb Weston BSW”) joint venture. The remaining increase in diluted EPS reflects growth in income from operations.

Adjusted Diluted EPS⁽¹⁾ increased $0.26, or 48 percent, to $0.80, which included a $0.10 benefit related to a lower U.S. corporate tax rate as a result of the Tax Act. The remaining increase in Adjusted Diluted EPS reflects growth in income from operations.

The Company’s effective tax rate⁽²⁾ in the second quarter of fiscal 2019 was 21.5 percent. The lower rate in the second quarter of fiscal 2019 versus 33.3 percent in the prior year period is primarily attributable to the effects of the Tax Act, as well as the benefit of foreign-related discrete items.

Q2 2019 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 to $470.0 million, up 13 percent compared to the prior year period. Price/mix increased 7 percent, reflecting the carryover impact of pricing actions taken in the prior year as well as improved mix. Volume increased 6 percent, driven by growth in sales to strategic customers in the U.S. and key international markets, as well as the benefit of limited time product offerings.

Global segment product contribution margin⁽¹⁾ increased to $112.4 million, up 28 percent compared to the prior year period. Favorable price/mix, volume growth and supply chain efficiency savings drove the increase, which was partially offset by transportation, warehousing, input and manufacturing cost inflation.

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 to $279.7 million, up 3 percent compared to the prior year period. Price/mix increased 5 percent, reflecting the carryover impact of pricing actions taken in the prior year as well as improved mix. Volume declined 2 percent largely due to the loss of some lower-margin volume, partially offset by growth of sales of higher-margin products.

Foodservice segment product contribution margin⁽¹⁾ increased to $97.4 million, up 6 percent compared to the prior year period, driven by favorable price, improved mix and supply chain efficiency savings, partially offset by transportation, warehousing, input and manufacturing cost inflation.

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 to $123.9 million, up 21 percent compared to the prior year period. Volume increased 16 percent, primarily driven by distribution gains of Grown in Idaho and other branded products, as well as private label products. Price/mix increased 5 percent, due to higher prices across the branded and private label portfolios, as well as improved mix.

Retail segment product contribution margin⁽¹⁾ increased to $25.9 million, up 34 percent compared to the prior year period, due to higher price/mix, volume growth and supply chain efficiency savings. The increase was partially offset by transportation, warehousing, input and manufacturing cost inflation.

Equity Method Investment Earnings

Equity method investment earnings from unconsolidated joint ventures in the U.S. and Europe were $10.2 million and $12.1 million for the second quarter of fiscal 2019 and 2018, respectively. These amounts included a $1.1 million unrealized loss related to mark-to-market adjustments associated with currency and commodity hedging contracts in the current quarter and a $3.1 million loss related to these items in the prior year quarter. Excluding these adjustments, earnings from equity method investments declined $3.9 million compared to the prior year period, largely reflecting higher raw potato prices associated with a poor crop in Europe, partially offset by higher price/mix and volume growth in both Europe and the U.S.

Outlook

The Company updated its outlook for fiscal year 2019 as follows:

As summarized in the table above, the Company expects:

• Net sales to grow mid-to-high single digits, with price/mix higher in the first half of fiscal 2019 versus the second half of the fiscal year, reflecting the carryover impact of customer contract pricing structures that took effect beginning in the second half of fiscal 2018. The Company’s previous estimate was for net sales to grow mid-single digits.
• Adjusted EBITDA including unconsolidated joint ventures⁽¹⁾ in the range of $870 million to $880 million, an increase from the Company’s previous estimate of $860 million to $870 million. For fiscal 2019, the Company expects:
  • The rate of gross profit dollar growth to be at least in line with net sales growth.
  • To incur significantly higher SG&A as it invests to upgrade its information systems and enterprise resource planning infrastructure, as well as sales, marketing, innovation, operations and other functional capabilities, designed to drive operating efficiencies and support future growth.
  • Equity method investment earnings to decline versus the prior year, reflecting the effect of significantly higher raw potato prices in Europe.
  • The range also includes the impact of the Company exercising its contractual right to purchase the remaining 50.01% equity interest in its joint venture, Lamb Weston BSW, that it did not own. While the transaction closed in December 2018, the Company ceased recording a noncontrolling interest in the Lamb Weston BSW joint venture on its Consolidated Statement of Earnings as of November 2, 2018, the date on which the Company entered into a definitive agreement to purchase the interest.

In addition, the Company expects:

• Total interest expense to be approximately $110 million.
• An effective tax rate⁽²⁾ of approximately 23 percent, down from the Company’s previous estimate of approximately 24 percent.
• Cash used for capital expenditures of approximately $360 million.
• Total depreciation and amortization expense of approximately $150 million.

End Notes

Webcast and Conference Call Information

Lamb Weston will host a conference call to review its second quarter 2019 results at 10:00 a.m. ET today. Investors and analysts may access the call toll-free by dialing (888) 394-8218, and using the event confirmation code of 8861817. A listen-only webcast 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 its 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 “execute,” “deliver,” “continue,” “expect,” “drive,” “support,” “grow,” “will,” “face,” “anticipate,” “provide,” “mitigate,” “create,” 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, and business outlook and prospects. These forward-looking statements are based on management’s current expectations and are subject to uncertainties 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; its ability to execute on large capital projects, including construction of new production lines; the competitive environment and related conditions in the markets in which it and its joint ventures operate; political and economic conditions of the countries in which it and its joint ventures conduct business and other factors related to its international operations; disruption of its access to export mechanisms; risks associated with possible acquisitions, including its ability to complete acquisitions or integrate acquired businesses; its 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, Adjusted Net Income Available to Lamb Weston Common Stockholders, 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, cash flow from operations, 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 provides 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.

The Company also provides earnings guidance on a non-GAAP basis. The Company cannot predict certain elements that are included in reported GAAP results, including items such as strategic developments, acquisition and integration costs, and other items impacting comparability. This list is not inclusive of all potential items, and the Company will update as necessary as these items are evaluated on an ongoing basis, can be highly variable and could be significant to its GAAP measures. As such, prospective quantification of these items is not feasible and a full reconciliation of non-GAAP Adjusted EBITDA including unconsolidated joint ventures to GAAP net income has not been provided.

Lamb Weston Holdings, Inc.
Reconciliation of Non-GAAP Financial Measures
(unaudited, dollars in millions)

To supplement the financial information included in this press release, the Company has presented Adjusted EBITDA including unconsolidated joint ventures, which is considered a non-GAAP financial measure. The following table reconciles net income attributable to Lamb Weston to Adjusted EBITDA including unconsolidated joint ventures.

For more information, please contact:
Investors:
Dexter Congbalay
224-306-1535
dexter.congbalay@lambweston.com

Media:
Shelby Stoolman
208-424-5461
shelby.stoolman@lambweston.com

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