Lamb Weston Holdings, Inc. Reports Fiscal Third Quarter 2018 Results and Updates Full Year Outlook

Third Quarter 2018 Highlights

• Net sales increased 12% to $863 million
• Income from operations increased 17% to $169 million; Adjusted Income from Operations⁽¹⁾ increased 14% to $171 million
• Adjusted EBITDA including unconsolidated joint ventures⁽¹⁾ increased 25% to $238 million
• Diluted EPS increased to $1.06 from $0.57 in third quarter 2017; $0.31 of the increase related to U.S. tax reform, including a $0.16 benefit from discrete items and a $0.15 benefit from a lower tax rate
• Adjusted Diluted EPS⁽¹⁾ increased to $0.91 from $0.59 in third quarter 2017, and includes a $0.15 benefit from a lower tax rate as a result of U.S. tax reform

Updated FY 2018 Outlook

• Net sales expected to increase at upper end of mid-single digits range, up from a previous estimate of mid-single digits
• Adjusted EBITDA including unconsolidated joint ventures⁽¹⁾ expected to be $805 million-$810 million, up from a previous estimate of $780 million-$790 million

EAGLE, Idaho--(BUSINESS WIRE)-- Lamb Weston Holdings, Inc. (NYSE: LW) announced today its third quarter 2018 results and updated its outlook for fiscal 2018.

“Our strong top- and bottom-line performance in the third quarter reflects the benefits of our capital expansion investments, our focus on delivering industry-leading customer service and our commitment to operational excellence,” said Tom Werner, President and CEO. “Across each of our core businesses, we grew volume and improved price/mix to drive profit growth and expand margins. Our new production line in Richland, Washington is up and running, providing us with greater flexibility across our manufacturing network to support further growth, innovation and limited time offerings for our customers, as well as allowing us to better manage costs, capacity utilization and service levels. In Europe, our joint venture delivered another solid quarter by growing volume and reducing costs. As a result of our strong year-to-date performance and continued expectation of a favorable operating environment, we’ve raised our annual outlook for sales growth and Adjusted EBITDA.”

Q3 2018 Commentary

Net sales were $863.4 million, up 12 percent versus the year-ago period. Price/mix increased 7 percent due to pricing actions and favorable product and customer mix. Volume increased 5 percent, with growth in each operating segment.

Income from operations rose 17 percent to $169.2 million from the prior year period, and included $1.7 million of costs related to the spinoff from Conagra Brands, Inc. (formerly ConAgra Foods, Inc., “Conagra”), compared with $5.1 million of expenses incurred in the prior year period related to the spinoff from Conagra.

Excluding these comparability items, income from operations grew $20.6 million, or 14 percent, driven by higher gross profit. Gross profit increased $36.9 million, due to favorable price/mix and volume, partially offset by packaging, commodity, manufacturing, transportation and warehousing cost inflation, and higher depreciation expense primarily associated with the Company’s new french fry production line in Richland, Washington. The rise in gross profit was partially offset by a $16.3 million increase in selling, general and administrative expenses, excluding comparability items. The higher SG&A was largely a result of incremental labor and benefits and infrastructure costs associated with being a stand-alone company, higher incentive compensation expense accruals based on operating performance and increased investments in advertising and promotional support.

Adjusted EBITDA including unconsolidated joint ventures⁽¹⁾ was $237.6 million, up 25 percent versus the prior year quarter, reflecting growth in income from operations and equity method investment earnings.

Diluted EPS increased $0.49 to $1.06 from $0.57 in the prior year period. Approximately $0.31 of the increase relates to the Tax Cuts and Jobs Act (the “Tax Act”) enacted in December 2017, and included a $0.16 benefit from discrete items and a $0.15 benefit related to adopting a lower tax rate. The remaining increase was driven by growth in income from operations and equity method investment earnings.

Adjusted Diluted EPS⁽¹⁾ increased $0.32 to $0.91 from $0.59 in the prior year period, and includes a $0.15 benefit related to adopting a lower tax rate as a result of the Tax Act. The remaining increase was driven by growth in income from operations and equity method investment earnings.

The effective tax rate⁽²⁾ was 4.5 percent in the third quarter of fiscal 2018, versus 33.4 percent in the prior year period. Compared with the third quarter of fiscal 2017, the Tax Act⁽³⁾ decreased income tax expense by approximately $47 million. This decrease includes a provisional $24.0 million net discrete benefit, comprised of a $38.7 million non-cash benefit from the re-measurement of the Company’s net U.S. deferred tax liabilities using the new U.S. statutory tax rate, partially offset by a $14.7 million transition tax on the Company’s previously untaxed foreign earnings, which is payable over eight years. In addition, the third quarter decrease in tax expense also includes an approximate $23 million tax benefit related to the lower U.S. corporate tax rate, which included approximately $14 million benefit related to earnings reported in the first half of fiscal 2018 and $9 million related to fiscal third quarter earnings. In the third quarter of fiscal 2018, the Company’s effective tax rate, excluding $24.0 million of comparability items arising from the Tax Act, was 18.9%. The Company will continue to refine these amounts within the measurement period allowed by Staff Accounting Bulletin (“SAB”) No. 118, which will not exceed one year from the enactment date of the Tax Act.

Q3 2018 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 15 percent to $448.7 million. Price/mix increased 9 percent, reflecting price increases as well as improvement in customer and product mix. Volume increased 6 percent, driven by the benefit of significant limited time product offerings and solid growth in sales to strategic customers in the U.S.

Global segment product contribution margin⁽¹⁾ increased 23 percent to $114.8 million, driven by favorable price/mix and volume growth. The increase was partially offset by packaging, commodity, manufacturing, transportation and warehousing cost inflation, as well as higher depreciation expense associated with the new Richland production line.

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 5 percent to $253.5 million. Price/mix increased 5 percent, as compared to a 10 percent increase in the prior year quarter, reflecting pricing actions taken in the current year, the carryover effect of pricing actions taken in fiscal year 2017, and improvement in customer and product mix. Volume increased nominally as growth of higher-margin Lamb Weston-branded and operator-labeled products offset the loss of some lower-margin, distributor-label product volumes.

Foodservice segment product contribution margin⁽¹⁾ increased 7 percent to $90.0 million, driven by favorable price/mix, partially offset by packaging, commodity, manufacturing, transportation and warehousing cost inflation, as well as higher depreciation expense associated with the new Richland production line.

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 31 percent to $130.2 million. Volume increased 22 percent, primarily driven by distribution gains of Grown in Idaho and other branded products, as well as the timing of shipments of private label products. Price/mix increased 9 percent, due to higher prices across the private label and branded portfolios, as well as improved mix, partially offset by higher trade investments to support expanded distribution of Grown in Idaho branded products.

Retail segment product contribution margin⁽¹⁾ increased 32 percent to $30.5 million, mainly due to higher volume and price/mix. The increase was partially offset by packaging, manufacturing, transportation and warehousing cost inflation, as well as higher trade investments and advertising and promotional support behind Grown in Idahobranded products.

Equity Method Investment Earnings

Equity method investment earnings from unconsolidated joint ventures in the U.S. and Europe were $26.4 million and $12.7 million for the third quarter of fiscal 2018 and 2017, respectively. These amounts included a $2.5 million unrealized gain related to mark-to-market adjustments associated with currency and commodity hedging contracts in the current quarter and a $1.4 million loss in the prior year quarter. Excluding these adjustments, earnings from equity method investments increased $9.8 million, driven by solid operating results in Europe and the U.S., including lower raw potato and production costs in Europe, volume growth, an approximate $4 million gain related to a divestiture of a non-core business, and a $2.0 million foreign currency translation benefit.

Outlook

The Company provides earnings guidance on a non-GAAP basis and does not reconcile guidance to GAAP as the Company cannot predict certain elements that are included in reported GAAP results, including costs related to tax reform, the spinoff from Conagra, and other items impacting comparability.

The Company updated its outlook for fiscal year 2018 as follows:

As summarized in the table above, the Company expects:

• Net sales to grow at the upper end of the mid-single digit range, driven by solid price/mix and volume growth. The Company’s previous estimate was for net sales to grow mid-single digits.
• Adjusted EBITDA including unconsolidated joint ventures⁽¹⁾ to be in the range of $805 million to $810 million, including higher selling, general and administrative expenses as a percentage of sales for fiscal 2018 due to the full-year impact of incremental labor and benefits and infrastructure costs associated with being a stand-alone public company, higher incentive compensation expense accruals as a result of the Company’s operating performance, and higher advertising and promotional expense in support of the introduction of the Company’s Grown in Idaho product line in retail. Using the mid-point of the range, this represents an increase of approximately 17% percent versus a fiscal 2017 pro forma Adjusted EBITDA including unconsolidated joint ventures⁽¹⁾ of $692 million. The Company’s previous estimate was for Adjusted EBITDA including unconsolidated joint ventures⁽¹⁾ to be in the range of $780 million to $790 million.

In addition, the Company expects:

• Total interest expense for fiscal 2018 to be approximately $110 million, which is an increase of approximately $50 million from fiscal 2017 due to the full-year impact of the Company’s capital structure after the spinoff from Conagra. The Company’s previous estimate was for total interest expense to be in the range of $105 million to $110 million.
• A blended estimated effective tax rate⁽²⁾ excluding comparability items of approximately 28 percent, which reflects the effect of a lower U.S. corporate tax rate as a result of the Tax Act. The Company’s previous estimate was for an effective tax rate of 33 to 34 percent.
• Cash used for capital expenditures to be between $270 million and $280 million for fiscal 2018, up from the Company’s previous estimate of $250 million. The increase of between $20 million and $30 million reflects the acceleration of spending for the initial phase of construction of a new 300 million pound french fry production line at the Company’s Hermiston, Oregon facility that will support customers’ growth in North America as well as Asia. The Company continues to expect this $250 million production line to be completed during the fourth quarter of fiscal 2019.

End Notes

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Webcast and Conference Call Information

Lamb Weston will host a conference call to review its third quarter 2018 results at 10:00 a.m. ET today. Investors and analysts may access the call toll-free by dialing (800) 239-9838, and using the event confirmation code of 8591354. 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 our 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 “continue,” “focus,” “deliver,” “expect,” “drive,” “support,” “grow,” “will,” “manage,” “expand,” 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, taxes, and business outlook and prospects. These forward-looking statements are based on management’s current expectations and are subject to uncertainty 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; the competitive environment and related conditions in the markets in which it operates; political and economic conditions of the countries in which it conducts business and other factors related to its international operations; disruption of its access to export mechanisms; its ability to complete proposed acquisitions or integrate acquired businesses or execute on large capital projects; 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; the impact of the Tax Act, including the effect on net deferred tax liabilities and the discrete transition tax on unremitted foreign earnings; 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, pro forma Adjusted EBITDA including unconsolidated joint ventures, 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 provide 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.

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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.

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Lamb Weston Holdings, Inc.
Investors:
Dexter Congbalay, 224-306-1535
[email protected]
or
Media:
Shelby Stoolman, 208-424-5461
[email protected]

Source: Lamb Weston Holdings, Inc.