EAGLE, IDAHO – Lamb Weston Holdings Inc. is navigating a myriad of difficult market conditions in an effective manner. In addition to COVID-19 and logistics issues, the company must manage the effects of a poor potato crop in the Pacific Northwest that has forced it to source its main ingredient from other parts of the country, leading to even higher costs of production.
Bernadette M. Madarieta, chief financial officer, outlined the challenges facing the company during an April 7 conference call to discuss third-quarter results.
“There were four key areas that drove the increase in cost,” she said. “First, commodities played the biggest role, led by edible oils, ingredients for batter and other coatings and packaging. Labor costs also increased due to competition for factory workers. Second, transportation rates continue to climb due to the persistent disruption in Global Logistics Networks. We also continue to use an unfavorable mix of higher cost trucking versus rail to meet service obligations for certain customers.
“Third, we began to see higher potato costs resulting from the poor crop that was harvested last fall in our primary growing regions. The increase in potato costs reflects the impact of purchasing potatoes in the open market at a significant premium to contracted prices. Higher transportation costs for shipping potatoes from the Midwest and Eastern North America to our plants in the Pacific Northwest, lower potato utilization rates and running production lines at lower speeds to accommodate low-quality potatoes.”
Finally, she said operational inefficiencies due to labor shortages brought on by the omicron surge in December and January resulted in lower run rates, which in turn affected the company’s performance.
Despite the challenges, Lamb Weston performed well during the third quarter ended Feb. 27. Net income rose to $107 million, equal to 73¢ per share on the common stock, from $66 million, equal to 45¢ per share, the year before.
Quarterly sales rose to $955 million from $896 million in fiscal 2021.
“We benefited from our previously announced pricing actions to mitigate the significant cost inflation across our supply chain,” said Thomas P. Werner, president and chief executive officer. “We’ve also been driving improvements in our manufacturing operations as we focus on what’s in our control.”
Such improvements have included product specification changes to adapt to the poor potato crop, portfolio optimization and an emphasis on attracting and retaining employees.
Mr. Werner added that last week Lamb Weston informed foodservice and retail customers of another round of pricing that will take effect over the next six months.
The bulk of Lamb Weston’s business is in foodservice and Mr. Werner said he believes near-term demand will be “choppy” due to rising prices and COVID-19.
“In the US, overall fry demand, restaurant traffic in our third quarter remained solid,” he said. “Although it weakened temporarily as the omicron variant spread quickly. Omicron's impact peaked in January and affected consumer traffic at both quick-service and full-service restaurants. In addition, some restaurants closed temporarily or reduced operating hours due to staff shortages, which further impacted demand. Restaurant traffic, however, has rebounded to pre-micron levels.
“The fry attachment rate in the US, which is the rate at which consumers order fries when visiting a restaurant or other foodservice outlets, has been fairly consistent since the beginning of the pandemic and remains above pre-pandemic levels. Going forward, we expect restaurant traffic and consumer demand for fries in the US to remain strong. Although it may be more volatile in the near term as consumers face significant cost inflation.”
For fiscal 2022 Lamb Weston is guiding that sales growth will be above its long-term target of low- to mid-single digits. But fourth-quarter sales volumes are expected to be tempered by production and logistics disruptions, inflation and the impact of COVID variants on restaurant traffic.
“Like others, we’re managing through freight challenges, including both cost increases and shipping delays,” Mr. Werner said. “The freight challenges are impacting our top line as it limits our ability to service full demand. This is caused by a lack of containers for international and domestic shipments and truck driver shortages.“This, combined with higher fuel cost, has also increased our cost to deliver products. We’re continuing to navigate through these and other operating challenges and remain on track to deliver our financial commitments for the year.”