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Lamb Weston Holdings, Inc. (LW) Navigating Challenging Headwinds, Positioning for Long-Term Growth
Published on September 24, 2024 | Ticker: LW

Business Overview

Lamb Weston Holdings, Inc. (LW) is a leading global producer, distributor, and marketer of value-added frozen potato products. The company reported annual net income of $725.5 million and annual revenue of $6,467.6 million in its latest fiscal year. Despite facing a challenging operating environment, Lamb Weston remains focused on executing its long-term strategies to drive sustainable growth and create value for shareholders.

Lamb Weston is the number one supplier of value-added frozen potato products in North America and a leading supplier internationally, with a strong and growing presence in high-growth emerging markets. The company offers a broad product portfolio to a diverse channel and customer base in over 100 countries, with French fries representing the majority of its value-added frozen potato product portfolio.

In fiscal 2024, Lamb Weston transitioned to a new reporting structure, managing its operations in two reportable segments: North America and International. The North America segment includes all sales to customers in the U.S., Canada, and Mexico, while the International segment encompasses all sales to customers outside of North America.

Financials

For the full fiscal year 2024, Lamb Weston generated annual operating cash flow of $798.2 million, while free cash flow was negative $193.6 million as the company continued to invest in capacity expansion projects. In the fourth quarter of fiscal 2024, the company reported a 5% year-over-year decline in sales to $1.61 billion, with volume down 8% and price/mix up 3%.

The decline in fourth quarter sales was driven by several factors, including higher-than-expected share losses, the company's decision to exit certain lower-priced and lower-margin business in Europe, and softer restaurant traffic trends in North America and key international markets. Adjusted gross profit declined $72 million, and adjusted EBITDA fell $50 million compared to the prior year period, as lower sales and gross profit more than offset a decline in SG&A expenses.

Segmental Performance

In the North America segment, fourth quarter sales declined 4% year-over-year to $947.5 million, with volume down 7% and price/mix up 3%. The volume decline was primarily due to share losses and softer restaurant traffic in the U.S. Adjusted EBITDA for the North America segment decreased 7% to $277 million.

The International segment reported a 7% year-over-year decline in fourth quarter sales to $510.8 million, with volume down 9% and price/mix up 2%. The volume decline was driven by strategic exits of lower-priced and lower-margin business in Europe, as well as softer restaurant traffic in key international markets. Adjusted EBITDA for the International segment fell 52% to $40 million.

Guidance and Outlook

For fiscal 2025, Lamb Weston is targeting sales of $6.6 billion to $6.8 billion, implying growth of 2% to 5%, which is expected to be driven largely by volume. However, the company anticipates volume will decline during the first half of the year due to the carryover impact of recent share losses and continued softness in restaurant traffic.

Lamb Weston expects adjusted EBITDA of $1.38 billion to $1.48 billion for fiscal 2025, with diluted earnings per share targeted at $4.35 to $4.85. The company's guidance reflects investments in price and trade support to drive volume growth and share, as well as higher costs per pound and an estimated $20 million to $30 million loss in the first quarter associated with a voluntary product withdrawal.

Liquidity

Lamb Weston ended the fourth quarter with $62.3 million in cash and cash equivalents and $908.8 million of available liquidity under committed revolving credit facilities. The company generated $798.2 million in annual operating cash flow and used $990 million in capital expenditures, primarily for strategic investments to complete facilities in China and Idaho, as well as ongoing capacity expansion projects in the Netherlands and Argentina.

During fiscal 2024, Lamb Weston returned $384 million to shareholders through dividends and share repurchases, reflecting the strength of its balance sheet and confidence in the long-term outlook for the business.

Risks and Challenges

Lamb Weston faces several risks and challenges in the current operating environment, including softening restaurant traffic trends, increased industry capacity, and the need to make targeted investments in price and trade support to drive volume growth and protect market share. The company also contends with input cost inflation, particularly in Europe, where the potato crop is expected to be below average.

Additionally, Lamb Weston's recent ERP system transition in North America resulted in temporary disruptions to customer order fulfillment, which negatively impacted sales and earnings in the third quarter of fiscal 2024. While the company has restored order fulfillment rates to pre-transition levels, the experience highlighted the importance of effective system implementation and integration.

Long-Term Growth Strategies

Despite the near-term headwinds, Lamb Weston remains focused on executing its long-term strategies to drive sustainable, profitable growth. The company continues to invest in capacity expansion and modernization projects in the U.S., the Netherlands, and Argentina, which are expected to enhance its production capabilities and support customer demand over the long term.

Lamb Weston is also working to strengthen its product portfolio by introducing innovative technologies to expand its total addressable market, while implementing pricing actions to offset input cost inflation. The company is also simplifying key processes to make it easier for customers to do business with Lamb Weston.

Conclusion

Lamb Weston is navigating a challenging operating environment, marked by softening restaurant traffic, increased industry capacity, and input cost inflation. The company is taking decisive actions to manage through these near-term headwinds, including targeted investments in price and trade support, cost reduction initiatives, and adjustments to its manufacturing footprint.

Despite the current challenges, Lamb Weston remains confident in the long-term growth outlook for the frozen potato category and its ability to create value for shareholders. The company's strategic investments in capacity expansion, product innovation, and operational improvements position it well to continue supporting its customers and capitalizing on the industry's growth opportunities over the long term.

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