Lamb Weston Reports Fiscal Fourth Quarter 2020 Results; Provides Update for First Quarter of Fiscal Year 2021

Fourth Quarter 2020 Highlights (includes the contribution of an additional sales week versus the prior year)

• Net sales declined 16% to $847 million
• Income from operations declined 79% to $31 million, and includes $58 million of net costs related to the COVID-19 pandemic’s impact on operations
• Net income declined $112 million to a loss of $2 million
• Adjusted EBITDA including unconsolidated joint ventures⁽¹⁾ declined 64% to $78 million, and includes
  
  $74 million of net costs related to the pandemic’s impact on operations
• Diluted EPS declined $0.76 to a loss of $0.01 from $0.75
• Adjusted Diluted EPS ⁽¹⁾ declined $0.75 to a loss of $0.01 from $0.74

Full Year 2020 Highlights (includes the contribution of a 53^rd week)

• Net sales increased 1% to $3,792 million
• Income from operations declined 17% to $557 million, and includes $58 million of net costs related to the COVID-19 pandemic’s impact on operations
• Net income attributable to Lamb Weston declined 24% to $366 million
• Adjusted EBITDA including unconsolidated joint ventures⁽¹⁾ declined 12% to $800 million, and includes
  
  $74 million of net costs related to the pandemic’s impact on operations
• Diluted EPS declined 22% to $2.49 from $3.18
• Adjusted Diluted EPS⁽¹⁾ declined 22% to $2.50 from $3.22
• Cash flows from operations declined 16% to $574 million
• Returned $144 million of cash to stockholders in the form of both dividends and share repurchases

First Quarter of Fiscal Year 2021 Business Update (for 7 weeks ending July 20)

• North America shipments at approximately 85% of prior-year level, led by demand from quick serve restaurants and retail, while full-service restaurants have improved sequentially as states ease restrictions
• Europe shipments at approximately 75% of prior-year level, and have improved sequentially as countries ease restrictions
• China shipments at approximately 85% of prior-year level, while performance in other international markets has softened due to the effect of the continued spread of COVID-19 as well as inventory destocking

EAGLE, Idaho–(BUSINESS WIRE)–Lamb Weston Holdings, Inc. (NYSE: LW) announced today its fiscal fourth quarter and full year 2020 results and provided a business update for the first quarter of fiscal 2021.

“The final months of fiscal 2020 were some of the most challenging in our Company’s history. Government efforts worldwide to slow the spread of COVID-19, including restrictions on restaurants and other foodservice operations, as well as shelter-in-place orders, abruptly reduced near-term demand for frozen potato products, which significantly impacted our sales and earnings in the fourth quarter,” said Tom Werner, President and CEO. “During this time, we have prioritized the health and safety of our Lamb Weston team, and worked closely with our customers and suppliers as they manage through this uncertain environment. In addition, we took steps to strengthen our financial liquidity, and to position our manufacturing and commercial operations for success in fiscal 2021 and beyond.”

“As states began to reopen, we saw clear evidence of frozen potato demand steadily strengthening across our restaurant and foodservice channels,” Werner continued. “In the aggregate, french fry demand from most of our quick service restaurant customers in North America and our international markets, which together comprised a majority of our sales, rebounded substantially by the end of June. Although fry demand at full-service restaurants remains well below that of a year ago, it has also gradually improved as more states ease on-premises dining restrictions. Fry demand by our “non-commercial” customers – such as hotels, schools and universities, and sporting venues – remains very soft. Retail demand continues to be a bright spot for the category and for Lamb Weston. After rising sharply in the latter half of the fourth quarter as consumers stepped-up food-at-home purchases, category growth began to normalize in some markets, but in total continues to be above historical rates.”

“This steady improvement in category growth is encouraging, but there is still a great deal of uncertainty regarding its sustainability given the pace of economic recovery, consumer behavior, and governments either postponing lifting dining restrictions or reinstating restrictions on restaurants in response to rising COVID-19 infections in many states. Accordingly, we are deferring providing a financial outlook until we gain more clarity on the demand environment going forward. Instead, we have provided some observations on what we have seen so far in our first quarter of fiscal 2021. Although we continue to face an unprecedented challenging environment in the near term, we remain confident in the long-term health and structure of the category, as well as our ability to execute on our strategies, support our customers, generate sustainable top- and bottom-line growth, and create value for our stakeholders.”

Summary of Fourth Quarter and FY 2020 Results
($ in millions, except per share)
					Year-Over-Year					Year-Over-Year
		Q4 2020			Growth Rates		FY 2020			Growth Rates
Net sales		$	846.9		(16%)		$	3,792.4		1%
Income from operations		$	30.9		(79%)		$	556.9		(17%)
Net income (loss) attributable to Lamb Weston		$	(1.6)		(101%)		$	365.9		(24%)
Adjusted EBITDA including unconsolidated joint ventures(1)		$	78.3		(64%)		$	799.8		(12%)
Diluted EPS		$	(0.01)		(101%)		$	2.49		(22%)
Adjusted Diluted EPS(1)		$	(0.01)		(101%)		$	2.50		(22%)

Q4 2020 Commentary

Net sales declined $156.5 million to $846.9 million, down 16 percent, or 22 percent excluding the benefit of the additional week of sales versus the prior year. Price/mix increased 1 percent due to improved price/mix in the Retail segment, partially offset by unfavorable mix in the Global and Foodservice segments. Volume declined 17 percent, or 23 percent excluding the benefit of the additional selling week, due to the sharp decline in demand for frozen potato products outside the home following government-imposed restrictions on restaurants and other foodservice operations to slow the spread of the COVID-19 virus, as well as customers destocking inventories as they adjusted to the abrupt change in the business environment. The decline was partially offset by increased in-home consumption of frozen potato products. In addition, the volume decline was partially offset by an approximately 1 percentage point benefit from acquisitions.

Income from operations declined $117.1 million, or 79 percent, to $30.9 million versus the year-ago period, reflecting lower sales and gross profit, partially offset by lower selling, general and administrative expense (“SG&A”). The decline includes approximately $58 million of costs, net of estimated employee retention credits provided by the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) and other labor incentives, related to the pandemic’s impact on operations, as follows:

• Approximately $25 million of factory utilization-related production costs and inefficiencies, such as labor retention costs; costs to shut down, sanitize, and restart manufacturing facilities after a production employee was infected by the virus; costs arising from modifying production schedules and reducing run-times; and costs to shift certain manufacturing lines from producing foodservice-oriented products to retail-oriented products;

• Approximately $22 million of non-utilization-related costs (including $10 million of non-cash costs), primarily consisting of expensing crop year 2019 contracts for raw potatoes that could not be used due to the pandemic’s near-term effect on demand for frozen potato products, as well as incremental warehousing, transportation and supply chain costs due to lower product throughput; and

• Approximately $11 million of incremental SG&A and other expenses, largely comprised of costs to adopt and maintain enhanced employee safety and sanitation protocols, including purchases of safety and health screening equipment, costs to retain certain sales employees, net of CARES Act retention credits and other labor incentives, and expensing certain capitalized costs for manufacturing facility expansion projects that were stopped.

Summary of COVID-19 Pandemic-Related Costs
($ in millions)
		Impact on
		Pretax Income
Utilization-related production costs		$	(25)
Non-utilization-related costs			(22)
Subtotal: Cost of sales			(47)
SG&A and other expenses			(11)
Equity method investment earnings (loss)			(16)
Total		$	(74)

Gross profit declined $139.4 million, and included approximately $47 million of pandemic-related costs described above. Lower sales and higher manufacturing costs due to unfavorable mix, inefficiencies and input cost inflation drove the remainder of the decline.

SG&A expenses declined $22.3 million, largely driven by lower incentive compensation accruals, advertising and promotional expenses, and travel and meeting expenses, as well as suspending contributions to the Company’s charitable foundation. The decline was partially offset by approximately $11 million of pandemic-related expenses described above. During the quarter, the Company incurred approximately $3 million of non-recurring expenses, excluding expenses payable to us by Lamb-Weston/Meijer under the cost sharing agreement, that primarily relates to consulting expenses associated with developing and implementing a new enterprise resource planning (“ERP”) system, and investments in our sales, marketing and operating capabilities.

Net income (loss) attributable to Lamb Weston declined $112.0 million to a loss of $1.6 million, primarily reflecting a decline in income from operations and equity method investment earnings.

Adjusted EBITDA including unconsolidated joint ventures⁽¹⁾ declined $137.1 million to $78.3 million, down 64 percent versus the prior year period, due to a decline in income from operations and equity method investment earnings. The decline includes approximately $74 million of net costs related to the pandemic’s impact, consisting of the $58 million of costs identified above and an additional $16 million of production, raw potato contract, supply chain costs and SG&A and other expenses at the Company’s unconsolidated joint ventures.

Diluted EPS decreased $0.76 to a loss of $0.01. The decrease primarily reflects a decline in income from operations and equity method investment earnings.

Adjusted Diluted EPS⁽¹⁾, which excludes items impacting comparability, decreased $0.75 to a loss of $0.01.

The Company’s effective tax rate⁽²⁾ in the fourth quarter of fiscal 2020 was 63.6 percent benefit, versus 18.9 percent expense in the prior year period, and is primarily due to lower earnings and discrete items originating during the fourth quarter of fiscal 2020. The prior year period includes a $1.4 million, or $0.01 per share, income tax benefit related to the true-up of the transition tax on previously untaxed foreign earnings under the U.S. Tax Cuts and Jobs Act (the “Tax Act”). The effective tax rate varies from the U.S. statutory tax rate of 21 percent principally due to the impact of U.S. state taxes, foreign taxes, permanent differences, and discrete items.

Q4 2020 Segment Highlights

Global
Global Segment Summary
					Year-Over-Year
			Q4 2020		Growth Rates		Price/Mix		Volume
			(dollars in millions)
Net sales		$	429.3		(18%)		(2%)		(16%)
Segment product contribution margin(3)		$	33.5		(70%)

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, decreased $97.2 million to $429.3 million, down 18 percent, or 24 percent excluding the benefit of the additional selling week, compared to the prior year period. Price/mix decreased 2 percent, largely due to unfavorable customer mix and lower sales of limited time offering products. Volume decreased 16 percent, or 22 percent excluding the benefit of the additional selling week, due to the sharp decline in demand for frozen potato products outside the home as a result of the pandemic’s impact on restaurant and other foodservice-related traffic. Acquisitions contributed approximately one-and-a-half percentage points of volume growth.

Global segment product contribution margin decreased $77.2 million to $33.5 million, down 70 percent compared to the prior year period. Pandemic-related costs accounted for approximately $29 million of the decline. Lower sales volumes and higher manufacturing costs due to unfavorable mix, inefficiencies and input cost inflation largely drove the rest of the decline.

Foodservice
Foodservice Segment Summary
					Year-Over-Year
			Q4 2020		Growth Rates		Price/Mix		Volume
			(dollars in millions)
Net sales		$	175.8		(44%)		(2%)		(42%)
Segment product contribution margin(3)		$	42.5		(61%)

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, declined $137.3 million to $175.8 million, down 44 percent, or 47 percent excluding the benefit of the additional selling week, compared to the prior year period. Price/mix decreased 2 percent due to unfavorable mix as sales of Lamb Weston branded and premium products softened. Volume decreased 42 percent, or 45 percent excluding the benefit of the additional selling week, due to the sharp decline in demand for frozen potato products outside the home as a result of the pandemic’s impact on restaurant and other foodservice-related traffic.

Foodservice segment product contribution margin decreased $65.8 million to $42.5 million, down 61 percent compared to the prior year period. Pandemic-related costs accounted for approximately $8 million of the decline. Lower sales volumes and higher manufacturing costs due to unfavorable mix and inefficiencies largely drove the rest of the decline.

Retail
Retail Segment Summary
					Year-Over-Year
			Q4 2020		Growth Rates		Price/Mix		Volume
			(dollars in millions)
Net sales		$	201.9		56%		17%		39%
Segment product contribution margin(3)		$	31.4		50%

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 $72.7 million to $201.9 million, up 56 percent, or 44 percent excluding the benefit of the additional selling week, compared to the prior year period. Volume increased 39 percent, or 27 percent excluding the benefit of the additional selling week, due to increased in-home consumption of frozen potato products following government-imposed stay-at-home orders. Demand was strong across the Company’s premium and mainstream branded offerings, as well as for its private label products. Price/mix increased 17 percent, largely driven by favorable mix from increased sales of branded products, as well as pricing actions.

Retail segment product contribution margin increased $10.4 million to $31.4 million, up 50 percent compared to the prior year period. Higher sales volumes, favorable mix and lower advertising and promotional expenses drove the increase, which was partially offset by approximately $10 million of pandemic-related costs.

Equity Method Investment Earnings

Equity method investment earnings (loss) from unconsolidated joint ventures in Europe, the U.S., and South America were a loss of $6.1 million and earnings of $15.2 million for the fourth quarter of fiscal 2020 and 2019, respectively. Equity method investment earnings also included a $2.7 million unrealized gain related to mark-to-market adjustments associated with currency and commodity hedging contracts in the current quarter and a $1.3 million loss related to these items in the prior year quarter. Excluding the mark-to-market adjustments, earnings from equity method investments declined $25.3 million compared to the prior year period. Pandemic-related production, raw potato contract, supply chain and SG&A costs accounted for approximately $16 million of the decline (including $4 million, net of labor incentives, that was utilization-related and $12 million that was non-utilization-related), with the remainder largely driven by lower sales following government-imposed restrictions on restaurant and other foodservice operations.

Fiscal Year 2020 Commentary

Net sales were $3,792.4 million, up 1 percent compared to fiscal 2019. Excluding the benefit of the 53^rd week, net sales declined 1 percent. Price/mix increased 1 percent due to pricing actions and favorable mix, largely due to pricing actions in the Company’s Foodservice and Retail segments. Volume was flat, or down 3 percent excluding the benefit of the 53^rd week, as strong growth through the first three fiscal quarters was offset by the sharp decline in demand for frozen potato products outside the home during the fiscal fourth quarter following government-imposed restrictions on restaurants and other foodservice operations, as well as customers destocking inventories as they adjusted to the abrupt change in the business environment.

Income from operations declined $111.5 million, or 17 percent, to $556.9 million from the prior year primarily due to lower gross profit, and included approximately $58 million of costs related to the pandemic’s impact on operations in the fourth quarter, as described above. Gross profit declined $108.3 million, including approximately $47 million of pandemic-related costs. The remainder of the decline was driven by higher manufacturing costs due to input cost inflation, inefficiencies, higher depreciation expense primarily associated with the Company’s new french fry production line in Hermiston, Oregon, and unfavorable mix. In addition, gross profit included a $2.5 million loss related to unrealized mark-to-market adjustments and realized settlements associated with commodity hedging contracts in the current year, compared with a $10.8 million loss related to these items in the prior year.

SG&A expense increased $3.2 million compared to the prior year. The increase in SG&A was largely driven by approximately $11 million of pandemic-related expenses described above, higher expenses related to the Company’s information technology services and infrastructure (including approximately $8 million of non-recurring expenses, excluding expenses payable to Lamb Weston by Lamb-Weston/Meijer under the cost sharing agreement, that primarily relates to consulting expenses associated with developing and implementing a new ERP system), and investments in the Company’s sales, marketing and operating capabilities. The increase was partially offset by lower incentive compensation accruals, a $9.5 million reduction in advertising and promotional expenses, lower travel and meeting expenses, and suspending contributions to the Company’s charitable foundation.

Net income attributable to Lamb Weston decreased $112.7 million, or 24 percent, to $365.9 million, primarily reflecting a decline in income from operations and equity method investment earnings due to lower demand following government-imposed restrictions on restaurants and other foodservice operations during the Company’s fourth fiscal quarter. The results also included a $2.6 million ($2.0 million after-tax) loss related to the withdrawal from a multiemployer pension plan by the Company’s joint venture, Lamb-Weston/RDO Frozen (“Lamb Weston RDO”). The decline was partially offset by an $8.6 million incremental benefit from acquiring the remaining 50.01% equity interest in the Company’s joint venture (the “BSW Acquisition”), Lamb Weston BSW, LLC (“Lamb Weston BSW”).

Adjusted EBITDA including unconsolidated joint ventures⁽¹⁾ was $799.8 million, down 12 percent versus the prior year, reflecting a decline in income from operations and equity method investment earnings, partially offset by a $10 million incremental benefit from the BSW Acquisition. The decline includes approximately $74 million of net pandemic-related costs, including $58 million of costs described above and an additional $16 million of pandemic-related costs at the Company’s unconsolidated joint ventures.

Diluted EPS decreased $0.69, or 22 percent, to $2.49, largely reflecting a decline in income from operations and equity method earnings, partially offset by an approximate $0.07 benefit related to the BSW Acquisition, and a $0.06 charge related to the BSW Acquisition in the prior year period.

Adjusted Diluted EPS⁽¹⁾, which excludes items impacting comparability, decreased $0.72, or 22 percent, to $2.50, largely reflecting a decline in income from operations and equity method investment earnings, partially offset by an approximate $0.07 benefit from the BSW Acquisition.

The Company’s effective tax rate⁽²⁾ was 23.5 percent for fiscal 2020, compared to 21.5 percent in fiscal 2019. Fiscal 2019 includes a $2.4 million decrease in income tax expense related to the true-up of the transition tax on previously untaxed foreign earnings under the Tax Act. Excluding this comparability item, the Company’s effective tax rate for fiscal 2019 was 21.9 percent. The difference between the Company’s effective tax rates in fiscal 2020 and 2019 is primarily due to permanent differences and discrete items. The effective tax rate varies from the U.S. statutory tax rate of 21 percent principally due to the impact of U.S. state taxes, foreign taxes, permanent differences, and discrete items.

Fiscal Year 2020 Segment Highlights

Global
Global Segment Summary
					Year-Over-Year
			FY 2020		Growth Rates		Price/Mix		Volume
			($ in mil.)
Net sales		$	1,973.6		1%		0%		1%
Segment product contribution margin(3)		$	374.5		(16%)

Net sales for the Global segment increased $12.1 million to $1,973.6 million, up 1 percent, or down 1 percent excluding the benefit of the 53^rd week, compared to fiscal 2019. Volume increased 1 percent, or down 1 percent excluding the benefit of the 53^rd week, driven by growth in sales to strategic customers in the U.S. and key international markets during the first three quarters of the fiscal year. Volume growth was partially offset by the sharp decline in demand for frozen potato products outside the home during the fourth quarter, primarily attributable to government-imposed restrictions on restaurants and other foodservice operations, as well as customers destocking inventories as they adjusted to the abrupt change in the business environment. Price/mix was flat as positive pricing actions were offset by unfavorable customer mix.

Global segment product contribution margin decreased $71.8 million to $374.5 million, down 16 percent compared to fiscal 2019. Pandemic-related costs accounted for approximately $29 million of the decline. Higher manufacturing costs due to unfavorable mix, inefficiencies and input cost inflation, as well as higher depreciation expense primarily associated with the addition of the new production line in Hermiston, Oregon, largely drove the rest of the decline.

Foodservice
Foodservice Segment Summary
					Year-Over-Year
			FY 2020		Growth Rates		Price/Mix		Volume
			($ in mil.)
Net sales		$	1,069.1		(8%)		2%		(10%)
Segment product contribution margin(3)		$	356.0		(12%)

Net sales for the Foodservice segment decreased $87.

Contacts

Investors:

Dexter Congbalay

224-306-1535

dexter.congbalay@lambweston.com

Media:

Shelby Stoolman

208-424-5461

shelby.stoolman@lambweston.com

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