EAGLE, IDAHO – Lamb Weston Holdings, Inc.’s top and bottom lines headed in different directions during the first quarter of fiscal 2022. Sales rose 13% as foodservice and institutional businesses recovered around the world, but the company’s net income fell 67% for the quarter. Inflation, supply chain disruptions, labor shortages and a Pacific Northwest potato crop damaged by excessive heat this summer all combined to pressure earnings.
“Our margin improvement lags our volume recovery as a result of the timing of pricing actions to offset cost inflation as well as challenging macro factors that increase our cost and affected our production run rates and throughput,” said Thomas P. Werner, president and chief executive officer, during an Oct. 7 conference call to discuss the quarterly results. “These ongoing challenges combined with the extreme summer’s heat (to have a) negative impact on potato crops in the Pacific Northwest (and) will result in a higher cost as the year progresses. As a result, we now expect our gross profit margins will remain below pre-pandemic levels through fiscal 2022.”
Net income for the quarter ended Aug. 29 was $29.8 million, equal to 20¢ per share on the common stock, well down from the first quarter of fiscal 2021 when the company earned $89.3 million, equal to 61¢ per share.
Sales for the quarter rose to $984 million from $872 million the year prior.
Lamb Weston’s Global business unit, which is made up of the top 100 quick-service and full-service restaurant chains, had sales rise 12% to $501 million. The Foodservice business, which includes foodservice distributors and chains outside the top 100, had sales of $321 million, up 36% when compared to last year.
For the two business units combined, price/mix made up 3% of the sales growth and volume accounted for 45%.
“In the US, we continue to be encouraged by the pace of recovery in restaurant traffic and demand for fries,” Mr. Werner said. “Overall, restaurant traffic has largely stabilized at about 5% below pre-pandemic levels, led by the continued solid performance at quick-service restaurants. Traffic at full-service restaurants continued to rebound in June and July, but it did soften a bit in August as the Delta variant surged across most of the country.”
He added that “fry attachment,” which is defined as the rate at which consumers order fries when visiting restaurants, continued to support demand recovery by remaining above pre-pandemic levels.
Internationally, Mr. Werner said demand in Europe, Asia and Oceania followed a similar pattern as the United States — with steady growth that tapered with the emergence of the Delta variant. South America, especially Brazil, faced challenging conditions during the quarter.
Lamb Weston measures its supply chain costs on a per pound basis and Mr. Werner said they have increased significantly due to input and transportation cost inflation as well as labor availability and other issues that are continuing to cause production inefficiencies.
“Although we're making gradual progress to mitigate these challenges, they have slowed our efforts to stabilize our manufacturing operations during the first half of fiscal 2022,” he said. “As a result, we expect the turnaround in our supply chain will take longer than we initially anticipated.”
The extreme heat that occurred over the summer is expected to affect the potato crops in Idaho’s Columbia Basin and Alberta. The company expects both yield and quality to be below average levels.
“As we're still in the middle of the main crop harvest, the extent of the financial impact of the crop condition will be determined over the coming quarter as the harvest is completed,” Mr. Werner said. “While we expect this impact will be significant, we’re examining a variety of levers to mitigate the effect on our earnings as well as on customer service and supply.”
Levers to be pulled include optimizing Lamb Weston’s portfolio of products by eliminating underperforming stock-keeping units and partnering with customers to modify product specifications without compromising food quality.
“These modifications will help mitigate the impact of lower potato crop yields from this year’s crop as well as some of the impact of reduced potato utilization that results from poor raw potato quality,” said Bernadette M. Madarieta, chief financial officer.
Management’s outlook for the rest of fiscal 2022 is for sales growth to be above the company’s long-term target of low-to-mid single digits. Net income is expected to remain pressured for the remainder of the year as the company works through its supply chain challenges and potato crop issues.