Lamb Weston Reports Fiscal Fourth Quarter and Full Year 2023 Results; Provides Fiscal Year 2024 Outlook
Some of Lamb Weston's potato products
Lamb Weston Holdings, Inc. (NYSE: LW) announced its fiscal fourth quarter and full year 2023 results and provided its outlook for fiscal 2024.
Tom Werner, President and CEO:
Net sales increased USD 541.8 million to USD 1,694.9 million, up 47 percent versus the prior year quarter, with the current year including USD 380.9 million of incremental sales attributable to the consolidation of the financial results of (1) Lamb-Weston/Meijer v.o.f. ("LW EMEA"), the Company’s former joint venture in Europe, following the completion of the Company’s acquisition in February 2023 of the remaining interest in LW EMEA (the "LW EMEA Acquisition"), and (2) Lamb Weston Alimentos Modernos S.A. ("LWAMSA"), the Company’s joint venture in Argentina, following the Company’s acquisition in July 2022 of an additional 40 percent interest in LWAMSA (together with the LW EMEA Acquisition, the "Acquisitions").
Net sales, excluding the incremental sales attributable to the Acquisitions, grew 14 percent versus the prior year quarter. Price/mix increased 24 percent, reflecting the benefit of pricing actions across each of the Company’s core business segments to counter input and manufacturing cost inflation, as well as favorable mix.
Volume declined 10 percent, reflecting the impacts of the Company’s efforts to exit certain lower-priced and lower-margin business as it continues to strategically manage customer and product mix, softening demand due to a slowdown in casual and full-service restaurant traffic, and inventory destocking by certain customers in international markets as well as in select U.S. retail channels.
Income from operations increased USD 51.0 million to USD 187.0 million, up 38 percent versus the prior year quarter. Adjusted Income from Operations(1), which excludes items impacting comparability, increased USD 105.7 million to USD 241.7 million, up 78 percent versus the prior year quarter. The increases were driven by higher sales and gross profit, partially offset by higher selling, general and administrative expenses (“SG&A”).
Gross profit increased USD 125.2 million versus the prior year quarter to USD 379.4 million, and included USD 27.0 million of costs (USD 20.0 million after-tax, or USD 0.14 per share) associated with the sale of inventory stepped-up in the LW EMEA Acquisition, and an USD 18.7 million (USD 13.9 million after-tax, or USD 0.09 per share) unrealized loss related to mark-to-market adjustments associated with natural gas and electricity hedging contracts at LW EMEA as commodity markets in Europe continued to experience significant volatility.
The Company has identified LW EMEA Acquisition-related items and mark-to-market adjustments related to natural gas and electricity derivatives in the current and prior year quarters as items impacting comparability.
Excluding these items, gross profit increased USD 170.9 million, driven primarily by incremental earnings attributable to the consolidation of the financial results of LW EMEA and benefits from pricing actions, which more than offset the impact of higher costs on a per pound basis and lower sales volumes.
The higher costs per pound reflected high-single-digit cost inflation for key inputs, including: raw potatoes, labor, energy, edible oils, and ingredients such as grains and starches used in product coatings.
The increase in per pound costs was also driven by lower throughput at the Company’s production facilities due to increased scheduled maintenance downtimes, as well as increased write-downs of inventories. The increase in per pound costs was partially offset by lower transportation costs.
The increase in gross profit was partially offset by a USD 31.6 million change in unrealized mark-to-market adjustments associated with commodity hedging contracts, reflecting a USD 31.5 million loss in the current quarter, compared with a USD 0.1 million gain related to these items in the prior year quarter.
SG&A increased USD 74.2 million versus the prior year quarter to USD 192.4 million, and included USD 9.0 million of LW EMEA Acquisition-related expenses (USD 9.8 million after-tax, or USD 0.07 per share), net of a foreign currency gain from actions taken to mitigate the effect of changes in currency rates on the purchase price.
Excluding this net expense, SG&A increased USD 65.2 million to USD 183.4 million, primarily due to incremental expenses attributable to the consolidation of the financial results of LW EMEA, higher compensation and benefits expense, an USD 8.0 million increase in advertising and promotion ("A&P") expenses, and higher expenses related to improving the Company’s information systems and enterprise resource planning ("ERP") infrastructure.
Net income was USD 498.8 million, up USD 466.8 million versus the prior year quarter, and Diluted EPS was USD 3.40, up USD 3.18 versus the prior year quarter. Net income in the current quarter included a total net benefit of USD 320.7 million (USD 356.0 million before tax), or USD 2.18 per share, of items impacting comparability, including: a non-cash net benefit of USD 334.6 million (USD 374.7 million before tax, or USD 2.27 per share) related to the LW EMEA Acquisition; and a USD 13.9 million (USD 18.7 million before tax, or USD 0.09 per share), unrealized loss related to mark-to-market adjustments associated with natural gas and electricity hedging contracts at LW EMEA.
Net income in the prior year quarter included a total net loss of USD 61.8 million (USD 61.5 million before tax), or USD 0.42 per share, including: a USD 62.7 million (USD 62.7 million before tax), or USD 0.43 per share, non-cash impairment charge to write-off the Company’s portion of LW EMEA’s net investment in its former joint venture in Russia; and a USD 0.9 million (USD 1.2 million before tax), or USD 0.01 per share, gain related to mark-to-market adjustments associated with natural gas and electricity hedging contracts at LW EMEA.
Adjusted Net Income(1) was USD 178.1 million, up USD 84.3 million versus the prior year quarter, and Adjusted Diluted EPS(1) was USD 1.22, up USD 0.58 versus the prior year quarter. Adjusted EBITDA including unconsolidated joint ventures(1) increased USD 117.5 million to USD 318.1 million, up 59 percent compared to the prior year quarter. Higher income from operations drove the increases.
The Company’s effective tax rate(2) in the fourth fiscal quarter was 12.6 percent, versus 41.2 percent in the prior year quarter.
Excluding USD 35.3 million and USD 0.3 million of net tax expense from items impacting comparability in the fiscal fourth quarter of 2023 and 2022, respectively, the Company’s effective tax rate was 17.1 percent in the current quarter, and 19.1 percent in the prior year quarter.
The Company’s 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 and currency, permanent differences, and discrete items.
Q4 2023 Segment Highlights
Global Summary
Global net sales, excluding the incremental sales attributable to the Acquisitions, grew 17 percent versus the prior year quarter. The benefit of domestic and international pricing actions to counter multi-year inflationary pressures as well as favorable mix drove a 28 percent increase in price/mix.
Volume declined 11 percent, largely reflecting the Company’s efforts to exit certain lower-priced and lower-margin business in international and domestic markets, as well as lower shipments in response to inventory destocking early in the quarter by certain customers in international markets to align with pre-Covid inventory stock levels.
Global product contribution margin increased USD 117.6 million to USD 173.3 million, and included USD 27.0 million of costs (USD 20.0 million after-tax, or USD 0.14 per share) associated with the sale of inventory stepped-up in the LW EMEA Acquisition.
Excluding items impacting comparability, product contribution margin increased USD 144.6 million to USD 200.3 million, up 260 percent versus the prior year quarter.
Pricing actions, incremental earnings from the consolidation of the financial results of LW EMEA, and favorable mix largely drove the increase, which was partially offset by higher costs per pound and the impact of lower volumes.
Foodservice Summary
Pricing actions taken in fiscal 2023 to counter inflationary pressures drove the increase in price/mix. The effect of a slowdown in restaurant traffic, especially at casual dining and other full-service establishments, along with the impact of exiting certain lower-priced and lower-margin business, drove the volume decline. Improved service levels partially offset the rate of decline.
Foodservice product contribution margin decreased USD 2.7 million to USD 139.1 million, down 2 percent compared to the prior year quarter. Higher costs per pound and the impact of lower volumes more than offset the benefit of pricing actions.
Pricing actions taken in fiscal 2023 across the branded and private label portfolios to counter inflationary pressures drove a 35 percent increase in price/mix. Volume fell 10 percent, reflecting certain customers in select retail channels temporarily lowering prices to reduce private label inventories, as well as acceptable volume elasticity in response to the Company’s previous pricing actions.
Retail product contribution margin increased USD 41.5 million to USD 83.1 million, up 100 percent versus the prior year quarter. Pricing actions drove the increase, which was partially offset by higher costs per pound, the impact of lower volumes, and higher A&P expenses.
Equity Method Investment Earnings (Loss)
Equity method investment earnings from unconsolidated joint ventures in Europe and the U.S. were earnings of USD 416.6 million and a loss of USD 56.7 million for the fourth quarter of fiscal 2023 and 2022, respectively.
The results in the current quarter include a USD 410.7 million (USD 364.4 million after-tax, or USD 2.48 per share) non-cash gain related to remeasuring the Company’s initial 50 percent ownership interest in LW EMEA to fair value.
The results in the prior year quarter include a USD 62.7 million (before and after-tax, or USD 0.43 per share) non-cash impairment charge to write-off the Company’s portion of LW EMEA’s net investment in its former joint venture in Russia, and a USD 1.2 million (USD 0.9 million after-tax, or USD 0.01 per share) unrealized gain in the prior year quarter related to mark-to-market adjustments associated with natural gas and electricity derivatives at LW EMEA.
Excluding these items, equity method investments increased USD 1.1 million compared to the prior year quarter, reflecting favorable price/mix, partially offset by higher costs per pound, in both Europe and the U.S.
Fiscal Year 2023 Commentary
Net sales increased USD 1,251.7 million to USD 5,350.6 million, up 31 percent versus fiscal 2022, with the current year including USD 421.0 million of incremental sales attributable to the consolidation of the financial results of LW EMEA and LWAMSA beginning in the fourth and first quarters of fiscal 2023, respectively. Net sales, excluding the incremental sales attributable to the Acquisitions, grew 20 percent versus the prior year.
Price/mix increased 26 percent, reflecting the benefit of pricing actions across each of the Company’s core business segments to counter input and manufacturing cost inflation.
Volume decreased 6 percent, largely reflecting the Company’s efforts to exit certain lower-priced and lower-margin business as it continued to strategically manage customer and product mix, as well as softer demand due to a slowdown in casual and full-service restaurant traffic.
To a lesser extent, in late fiscal 2023, inventory destocking by certain customers in international markets as well as in select U.S. retail channels contributed to the volume decline.
Income from operations increased USD 437.7 million to USD 882.1 million, up 98 percent from the prior year. Adjusted Income from Operations(1) increased USD 461.6 million to USD 906.0 million, up 104 percent from the prior year. Higher sales and gross profit drove the increases, which were partially offset by higher SG&A.
Gross profit increased USD 600.1 million versus fiscal 2022 to USD 1,432.1 million, and included the combined USD 45.7 million (USD 33.9 million after-tax, or USD 0.23 per share) of costs impacting comparability in the fiscal fourth quarter described above.
Excluding items impacting comparability, gross profit increased USD 645.8 million, driven primarily by the benefits from pricing actions more than offsetting the impacts of higher costs on a per pound basis and lower volumes. Incremental earnings from the consolidation of the financial results of LW EMEA beginning in the fiscal fourth quarter also contributed to the increase.
The higher costs per pound primarily reflected double-digit cost inflation for key inputs, including: raw potatoes, edible oils, ingredients such as grains and starches used in product coatings, labor, and energy.
The increase in gross profit was partially offset by a USD 29.0 million change in unrealized mark-to-market adjustments associated with commodity hedging contracts, reflecting a USD 38.5 million loss in the current year, compared with a USD 9.5 million loss related to these items in the prior year.
SG&A increased USD 162.4 million versus fiscal 2022, and included a net USD 21.8 million gain (USD 12.2 million after-tax, or USD 0.08 per share) related to actions taken to mitigate the effect of changes in currency rates on the purchase price of LW EMEA, net of other acquisition-related costs.
Excluding this net gain, SG&A increased USD 184.2 million to USD 571.8 million, primarily due to higher compensation and benefits expense, incremental expenses attributable to the consolidation of the financial results of LW EMEA in the fiscal fourth quarter, higher expenses related to improving the Company’s information systems and ERP infrastructure, and a USD 15.5 million increase in A&P expenses.
Net income was USD 1,008.9 million, up USD 808.0 million versus the prior year, and Diluted EPS was USD 6.95, up USD 5.57 versus the prior year.
Net income in fiscal 2023 included a total net benefit of USD 329.8 million (USD 364.1 million before tax), or USD 2.27 per share, of items impacting comparability, including: a USD 356.6 million (USD 405.5 million before tax), or USD 2.46 per share, non-cash net gain related to the LW EMEA Acquisition and a USD 15.1 million (before and after-tax), or USD 0.10 per share, non-cash gain related to the Company’s acquisition of LWAMSA, with these gains partially offset by a USD 41.9 million (USD 56.5 million before tax), or USD 0.29 per share, unrealized loss related to mark-to-market adjustments associated with natural gas and electricity hedging contracts at LW EMEA.
Net income in fiscal 2022 was partially offset by a total net loss of USD 79.7 million (USD 84.3 million before tax), or USD 0.54 per share, of items impacting comparability, including: a USD 62.7 million (before and after-tax), or USD 0.43 per share, non-cash impairment charge to write-off the Company’s portion of LW EMEA’s net investment in its former joint venture in Russia; a USD 40.5 million (USD 53.3 million before tax), or USD 0.27 per share, loss associated with the extinguishment of debt; and a USD 23.5 million (USD 31.7 million before tax), or USD 0.16 per share, unrealized gain related to mark-to-market adjustments associated with natural gas and electricity hedging contracts at LW EMEA.
Adjusted Net Income(1) was USD 679.1 million, up USD 398.5 million versus the prior year, and Adjusted Diluted EPS(1) was USD 4.68, up USD 2.76 versus the prior year. Adjusted EBITDA including unconsolidated joint ventures(1) increased USD 532.0 million to USD 1,226.0 million, up 77 percent compared to the prior year. Higher income from operations drove the increases.
The Company’s effective tax rate(2) for fiscal 2023 was 18.2 percent, versus 26.3 percent in fiscal 2022. Excluding USD 34.3 million of net tax expense and a USD 4.6 million benefit from items impacting comparability in fiscal 2023 and 2022, respectively, the Company’s effective tax rate was 21.8 percent for fiscal 2023, and 21.4 percent in fiscal 2022. The Company’s 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 and currency, permanent differences, and discrete items.
Fiscal Year 2023 Segment Highlights
Global Summary
The benefit of domestic and international pricing actions to counter multi-year inflationary pressures, as well as favorable mix, drove a 27 percent increase in price/mix. Volume declined 5 percent, largely reflecting the Company’s efforts to exit certain lower-priced and lower-margin business in international and domestic markets, and to a lesser extent, lower shipments in response to inventory destocking by certain customers in international markets late in fiscal 2023.
Global product contribution margin increased USD 343.3 million to USD 595.5 million, up 136 percent compared to the prior year, and included USD 27.0 million (USD 20.0 million after-tax, or USD 0.14 per share) of costs associated with the sale of inventory stepped-up in the LW EMEA Acquisition.
Excluding this item, product contribution margin increased USD 370.3 million to USD 622.5 million, up 147 percent versus the prior year. Pricing actions, incremental earnings from the consolidation of the financial results of LW EMEA, and favorable mix drove the increase, which was partially offset by higher costs per pound.
Foodservice Summary
Foodservice product contribution margin increased USD 101.7 million to USD 551.0 million, up 23 percent compared to the prior year. Pricing actions drove the increase, which was partially offset by higher costs per pound and the impact of lower volumes.
Volume fell 4 percent, largely driven by the impact of exiting certain low-margin, private label business, and to a lesser extent, the impact of certain customers in select retail channels taking actions to reduce private label inventories in late fiscal 2023. Retail product contribution margin increased USD 170.7 million to USD 280.1 million, up 156 percent compared to the prior year. Pricing actions drove the increase, which was partially offset by higher costs per pound.
Equity Method Investment Earnings (Loss)
Equity method investment earnings (loss) from unconsolidated joint ventures in Europe and the U.S. were earnings of USD 460.6 million and a loss of USD 10.7 million for fiscal 2023 and 2022, respectively. The fiscal 2023 results include non-cash gains on the acquisitions of interests in the Company’s LW EMEA and LWAMSA joint ventures of USD 425.8 million (USD 379.5 million after-tax or USD 2.62 per share), as well as a USD 31.1 million unrealized loss related to mark-to-market adjustments associated with currency and commodity hedging contracts at LW EMEA, of which USD 37.8 million (USD 28.0 million after-tax, or USD 0.19 per share) related to losses in natural gas and electricity derivatives.
Equity method investment gains in the prior year included a USD 26.5 million unrealized gain related to mark-to-market adjustments associated with currency and commodity hedging contracts, of which USD 31.7 million (USD 23.5 million after-tax, or USD 0.16 per share) related to gains in natural gas and electricity derivatives.
Equity method investment earnings in fiscal 2022 also included a USD 62.7 million (before and after-tax, or USD 0.43 per share) non-cash impairment charge to write-off the Company’s portion of LW EMEA’s net investment in its former joint venture in Russia.
Excluding these items (non-cash acquisition gains and impairment charge, and mark-to-market adjustments related to natural gas and electricity derivatives), and the other mark-to-market adjustments, earnings from equity method investments increased USD 52.3 million compared to the prior year, reflecting the benefit of pricing actions, partially offset by higher manufacturing costs, in both Europe and the U.S.
Liquidity and Cash Flows
At the end of fiscal 2023, the Company had USD 304.8 million of cash and cash equivalents, with no borrowings outstanding under its USD 1.0 billionU.S. revolving credit facility. Net cash provided by operating activities for fiscal 2023 was USD 761.7 million, up USD 343.1 million versus the prior year due to higher earnings and cash provided by working capital.
Capital expenditures during fiscal 2023 were USD 736.0 million, up USD 429.6 million versus the prior year, primarily reflecting increased investments to support capacity expansion projects and to upgrade the Company’s information systems and ERP infrastructure.
Capital Returned to Shareholders
During fiscal 2023, the Company returned USD 146.1 million to shareholders through cash dividends and USD 45.0 million through share repurchases, with an aggregate of 569,698 shares repurchased at an average price per share of USD 78.99.
Fiscal 2024 Outlook
Fiscal 2024 Segment Realignment
Effective May 29, 2023, in connection with the Company’s recent acquisitions and to align with its expanded global footprint, management, including the Company’s chief executive officer, who is its chief operating decision maker, began managing the Company’s operations as two business segments based on management’s change to the way it monitors performance, aligns strategies, and allocates resources.
This resulted in a change from four reportable segments to two (North America and International), effective the beginning of fiscal 2024. All summary financial information on a prospective basis will be presented under the new reportable segments beginning with the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ending August 27, 2023.
End Notes
(1) Adjusted Income from Operations, Adjusted Net Income, Adjusted Diluted EPS, and Adjusted EBITDA including unconsolidated joint ventures are non-GAAP financial measures. Please see the discussion of non-GAAP financial measures, including a discussion of guidance provided on a non-GAAP basis, and the associated reconciliations at the end of this press release for more information.
(2) The effective tax rate is calculated as the ratio of income tax expense to pre-tax income, inclusive of equity method investment earnings.
(3) For more information about product contribution margin, please see “Non-GAAP Financial Measures” and the table titled “Segment Information” included in this press release.
Tom Werner, President and CEO:
"We finished the year with another solid quarter of top and bottom-line growth and drove record sales and earnings for fiscal 2023 through a combination of improved pricing in each of our core segments and supply chain productivity savings, all while we continued to operate in a highly difficult cost environment."
"In addition, the integration of our recently-acquired European operations is well underway, and we look forward to leveraging our unified, global commercial team and production network to better serve customers and capitalize on strategic opportunities across our key markets."
"We begin fiscal 2024 with good business momentum and believe our annual financial targets are prudent when accounting for the ongoing inflationary environment, including higher raw potato costs in each of our growing areas, and softening casual and full-service restaurant traffic in the near term as our customers and consumers continue to face challenging macro headwinds."
"For fiscal 2024, in addition to the incremental sales from the recently-acquired European operations, we expect to deliver solid sales growth, largely driven by pricing actions and favorable mix, and earnings growth that reflects expected improvements in performance in both our legacy Lamb Weston and European operations."
"Despite continuing inflationary and macro headwinds, global frozen potato demand has proven resilient, and we remain confident in the health and long-term growth prospects for the category. We are committed to investing in our people, global production capacity, and operations, and believe that we will continue to be well-positioned to support our customers, drive sustainable, profitable growth, and create value for our stakeholders."
(Click to enlarge)
Summary of Fourth Quarter and FY 2023 Results
Net sales increased USD 541.8 million to USD 1,694.9 million, up 47 percent versus the prior year quarter, with the current year including USD 380.9 million of incremental sales attributable to the consolidation of the financial results of (1) Lamb-Weston/Meijer v.o.f. ("LW EMEA"), the Company’s former joint venture in Europe, following the completion of the Company’s acquisition in February 2023 of the remaining interest in LW EMEA (the "LW EMEA Acquisition"), and (2) Lamb Weston Alimentos Modernos S.A. ("LWAMSA"), the Company’s joint venture in Argentina, following the Company’s acquisition in July 2022 of an additional 40 percent interest in LWAMSA (together with the LW EMEA Acquisition, the "Acquisitions").
Net sales, excluding the incremental sales attributable to the Acquisitions, grew 14 percent versus the prior year quarter. Price/mix increased 24 percent, reflecting the benefit of pricing actions across each of the Company’s core business segments to counter input and manufacturing cost inflation, as well as favorable mix.
Volume declined 10 percent, reflecting the impacts of the Company’s efforts to exit certain lower-priced and lower-margin business as it continues to strategically manage customer and product mix, softening demand due to a slowdown in casual and full-service restaurant traffic, and inventory destocking by certain customers in international markets as well as in select U.S. retail channels.
Income from operations increased USD 51.0 million to USD 187.0 million, up 38 percent versus the prior year quarter. Adjusted Income from Operations(1), which excludes items impacting comparability, increased USD 105.7 million to USD 241.7 million, up 78 percent versus the prior year quarter. The increases were driven by higher sales and gross profit, partially offset by higher selling, general and administrative expenses (“SG&A”).
Gross profit increased USD 125.2 million versus the prior year quarter to USD 379.4 million, and included USD 27.0 million of costs (USD 20.0 million after-tax, or USD 0.14 per share) associated with the sale of inventory stepped-up in the LW EMEA Acquisition, and an USD 18.7 million (USD 13.9 million after-tax, or USD 0.09 per share) unrealized loss related to mark-to-market adjustments associated with natural gas and electricity hedging contracts at LW EMEA as commodity markets in Europe continued to experience significant volatility.
The Company has identified LW EMEA Acquisition-related items and mark-to-market adjustments related to natural gas and electricity derivatives in the current and prior year quarters as items impacting comparability.
Excluding these items, gross profit increased USD 170.9 million, driven primarily by incremental earnings attributable to the consolidation of the financial results of LW EMEA and benefits from pricing actions, which more than offset the impact of higher costs on a per pound basis and lower sales volumes.
The higher costs per pound reflected high-single-digit cost inflation for key inputs, including: raw potatoes, labor, energy, edible oils, and ingredients such as grains and starches used in product coatings.
The increase in per pound costs was also driven by lower throughput at the Company’s production facilities due to increased scheduled maintenance downtimes, as well as increased write-downs of inventories. The increase in per pound costs was partially offset by lower transportation costs.
The increase in gross profit was partially offset by a USD 31.6 million change in unrealized mark-to-market adjustments associated with commodity hedging contracts, reflecting a USD 31.5 million loss in the current quarter, compared with a USD 0.1 million gain related to these items in the prior year quarter.
SG&A increased USD 74.2 million versus the prior year quarter to USD 192.4 million, and included USD 9.0 million of LW EMEA Acquisition-related expenses (USD 9.8 million after-tax, or USD 0.07 per share), net of a foreign currency gain from actions taken to mitigate the effect of changes in currency rates on the purchase price.
Excluding this net expense, SG&A increased USD 65.2 million to USD 183.4 million, primarily due to incremental expenses attributable to the consolidation of the financial results of LW EMEA, higher compensation and benefits expense, an USD 8.0 million increase in advertising and promotion ("A&P") expenses, and higher expenses related to improving the Company’s information systems and enterprise resource planning ("ERP") infrastructure.
Net income was USD 498.8 million, up USD 466.8 million versus the prior year quarter, and Diluted EPS was USD 3.40, up USD 3.18 versus the prior year quarter. Net income in the current quarter included a total net benefit of USD 320.7 million (USD 356.0 million before tax), or USD 2.18 per share, of items impacting comparability, including: a non-cash net benefit of USD 334.6 million (USD 374.7 million before tax, or USD 2.27 per share) related to the LW EMEA Acquisition; and a USD 13.9 million (USD 18.7 million before tax, or USD 0.09 per share), unrealized loss related to mark-to-market adjustments associated with natural gas and electricity hedging contracts at LW EMEA.
Net income in the prior year quarter included a total net loss of USD 61.8 million (USD 61.5 million before tax), or USD 0.42 per share, including: a USD 62.7 million (USD 62.7 million before tax), or USD 0.43 per share, non-cash impairment charge to write-off the Company’s portion of LW EMEA’s net investment in its former joint venture in Russia; and a USD 0.9 million (USD 1.2 million before tax), or USD 0.01 per share, gain related to mark-to-market adjustments associated with natural gas and electricity hedging contracts at LW EMEA.
Adjusted Net Income(1) was USD 178.1 million, up USD 84.3 million versus the prior year quarter, and Adjusted Diluted EPS(1) was USD 1.22, up USD 0.58 versus the prior year quarter. Adjusted EBITDA including unconsolidated joint ventures(1) increased USD 117.5 million to USD 318.1 million, up 59 percent compared to the prior year quarter. Higher income from operations drove the increases.
The Company’s effective tax rate(2) in the fourth fiscal quarter was 12.6 percent, versus 41.2 percent in the prior year quarter.
Excluding USD 35.3 million and USD 0.3 million of net tax expense from items impacting comparability in the fiscal fourth quarter of 2023 and 2022, respectively, the Company’s effective tax rate was 17.1 percent in the current quarter, and 19.1 percent in the prior year quarter.
The Company’s 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 and currency, permanent differences, and discrete items.
Q4 2023 Segment Highlights
Global Summary
(Click to enlarge)
Net sales for Global, which is generally comprised of the top 100 North American-based quick-service and full-service restaurant chain customers, as well as all the Company’s international sales, increased USD 475.0 million to USD 1,033.4 million, up 85 percent versus the prior year quarter, with the current year including USD 380.9 million of incremental sales attributable to the consolidation of the financial results of LW EMEA and LWAMSA.
Global Summary
Global net sales, excluding the incremental sales attributable to the Acquisitions, grew 17 percent versus the prior year quarter. The benefit of domestic and international pricing actions to counter multi-year inflationary pressures as well as favorable mix drove a 28 percent increase in price/mix.
Volume declined 11 percent, largely reflecting the Company’s efforts to exit certain lower-priced and lower-margin business in international and domestic markets, as well as lower shipments in response to inventory destocking early in the quarter by certain customers in international markets to align with pre-Covid inventory stock levels.
Global product contribution margin increased USD 117.6 million to USD 173.3 million, and included USD 27.0 million of costs (USD 20.0 million after-tax, or USD 0.14 per share) associated with the sale of inventory stepped-up in the LW EMEA Acquisition.
Excluding items impacting comparability, product contribution margin increased USD 144.6 million to USD 200.3 million, up 260 percent versus the prior year quarter.
Pricing actions, incremental earnings from the consolidation of the financial results of LW EMEA, and favorable mix largely drove the increase, which was partially offset by higher costs per pound and the impact of lower volumes.
Foodservice Summary
(Click to enlarge)
Net sales for Foodservice, which services North American foodservice distributors and restaurant chains generally outside the top 100 North American based restaurant chain customers, increased USD 16.5 million to USD 404.9 million, up 4 percent versus the prior year quarter, with price/mix up 13 percent and volume down 9 percent.
Foodservice Summary
Pricing actions taken in fiscal 2023 to counter inflationary pressures drove the increase in price/mix. The effect of a slowdown in restaurant traffic, especially at casual dining and other full-service establishments, along with the impact of exiting certain lower-priced and lower-margin business, drove the volume decline. Improved service levels partially offset the rate of decline.
Foodservice product contribution margin decreased USD 2.7 million to USD 139.1 million, down 2 percent compared to the prior year quarter. Higher costs per pound and the impact of lower volumes more than offset the benefit of pricing actions.
(Click to enlarge)
Net sales for Retail, which includes sales of branded and private label products to grocery, mass merchant, and club customers in North America, increased USD 44.7 million to USD 220.6 million, up 25 percent versus the prior year quarter.
Retail Summary
Pricing actions taken in fiscal 2023 across the branded and private label portfolios to counter inflationary pressures drove a 35 percent increase in price/mix. Volume fell 10 percent, reflecting certain customers in select retail channels temporarily lowering prices to reduce private label inventories, as well as acceptable volume elasticity in response to the Company’s previous pricing actions.
Retail product contribution margin increased USD 41.5 million to USD 83.1 million, up 100 percent versus the prior year quarter. Pricing actions drove the increase, which was partially offset by higher costs per pound, the impact of lower volumes, and higher A&P expenses.
Equity Method Investment Earnings (Loss)
Equity method investment earnings from unconsolidated joint ventures in Europe and the U.S. were earnings of USD 416.6 million and a loss of USD 56.7 million for the fourth quarter of fiscal 2023 and 2022, respectively.
The results in the current quarter include a USD 410.7 million (USD 364.4 million after-tax, or USD 2.48 per share) non-cash gain related to remeasuring the Company’s initial 50 percent ownership interest in LW EMEA to fair value.
The results in the prior year quarter include a USD 62.7 million (before and after-tax, or USD 0.43 per share) non-cash impairment charge to write-off the Company’s portion of LW EMEA’s net investment in its former joint venture in Russia, and a USD 1.2 million (USD 0.9 million after-tax, or USD 0.01 per share) unrealized gain in the prior year quarter related to mark-to-market adjustments associated with natural gas and electricity derivatives at LW EMEA.
Excluding these items, equity method investments increased USD 1.1 million compared to the prior year quarter, reflecting favorable price/mix, partially offset by higher costs per pound, in both Europe and the U.S.
Fiscal Year 2023 Commentary
Net sales increased USD 1,251.7 million to USD 5,350.6 million, up 31 percent versus fiscal 2022, with the current year including USD 421.0 million of incremental sales attributable to the consolidation of the financial results of LW EMEA and LWAMSA beginning in the fourth and first quarters of fiscal 2023, respectively. Net sales, excluding the incremental sales attributable to the Acquisitions, grew 20 percent versus the prior year.
Price/mix increased 26 percent, reflecting the benefit of pricing actions across each of the Company’s core business segments to counter input and manufacturing cost inflation.
Volume decreased 6 percent, largely reflecting the Company’s efforts to exit certain lower-priced and lower-margin business as it continued to strategically manage customer and product mix, as well as softer demand due to a slowdown in casual and full-service restaurant traffic.
To a lesser extent, in late fiscal 2023, inventory destocking by certain customers in international markets as well as in select U.S. retail channels contributed to the volume decline.
Income from operations increased USD 437.7 million to USD 882.1 million, up 98 percent from the prior year. Adjusted Income from Operations(1) increased USD 461.6 million to USD 906.0 million, up 104 percent from the prior year. Higher sales and gross profit drove the increases, which were partially offset by higher SG&A.
Gross profit increased USD 600.1 million versus fiscal 2022 to USD 1,432.1 million, and included the combined USD 45.7 million (USD 33.9 million after-tax, or USD 0.23 per share) of costs impacting comparability in the fiscal fourth quarter described above.
Excluding items impacting comparability, gross profit increased USD 645.8 million, driven primarily by the benefits from pricing actions more than offsetting the impacts of higher costs on a per pound basis and lower volumes. Incremental earnings from the consolidation of the financial results of LW EMEA beginning in the fiscal fourth quarter also contributed to the increase.
The higher costs per pound primarily reflected double-digit cost inflation for key inputs, including: raw potatoes, edible oils, ingredients such as grains and starches used in product coatings, labor, and energy.
The increase in gross profit was partially offset by a USD 29.0 million change in unrealized mark-to-market adjustments associated with commodity hedging contracts, reflecting a USD 38.5 million loss in the current year, compared with a USD 9.5 million loss related to these items in the prior year.
SG&A increased USD 162.4 million versus fiscal 2022, and included a net USD 21.8 million gain (USD 12.2 million after-tax, or USD 0.08 per share) related to actions taken to mitigate the effect of changes in currency rates on the purchase price of LW EMEA, net of other acquisition-related costs.
Excluding this net gain, SG&A increased USD 184.2 million to USD 571.8 million, primarily due to higher compensation and benefits expense, incremental expenses attributable to the consolidation of the financial results of LW EMEA in the fiscal fourth quarter, higher expenses related to improving the Company’s information systems and ERP infrastructure, and a USD 15.5 million increase in A&P expenses.
Net income was USD 1,008.9 million, up USD 808.0 million versus the prior year, and Diluted EPS was USD 6.95, up USD 5.57 versus the prior year.
Net income in fiscal 2023 included a total net benefit of USD 329.8 million (USD 364.1 million before tax), or USD 2.27 per share, of items impacting comparability, including: a USD 356.6 million (USD 405.5 million before tax), or USD 2.46 per share, non-cash net gain related to the LW EMEA Acquisition and a USD 15.1 million (before and after-tax), or USD 0.10 per share, non-cash gain related to the Company’s acquisition of LWAMSA, with these gains partially offset by a USD 41.9 million (USD 56.5 million before tax), or USD 0.29 per share, unrealized loss related to mark-to-market adjustments associated with natural gas and electricity hedging contracts at LW EMEA.
Net income in fiscal 2022 was partially offset by a total net loss of USD 79.7 million (USD 84.3 million before tax), or USD 0.54 per share, of items impacting comparability, including: a USD 62.7 million (before and after-tax), or USD 0.43 per share, non-cash impairment charge to write-off the Company’s portion of LW EMEA’s net investment in its former joint venture in Russia; a USD 40.5 million (USD 53.3 million before tax), or USD 0.27 per share, loss associated with the extinguishment of debt; and a USD 23.5 million (USD 31.7 million before tax), or USD 0.16 per share, unrealized gain related to mark-to-market adjustments associated with natural gas and electricity hedging contracts at LW EMEA.
Adjusted Net Income(1) was USD 679.1 million, up USD 398.5 million versus the prior year, and Adjusted Diluted EPS(1) was USD 4.68, up USD 2.76 versus the prior year. Adjusted EBITDA including unconsolidated joint ventures(1) increased USD 532.0 million to USD 1,226.0 million, up 77 percent compared to the prior year. Higher income from operations drove the increases.
The Company’s effective tax rate(2) for fiscal 2023 was 18.2 percent, versus 26.3 percent in fiscal 2022. Excluding USD 34.3 million of net tax expense and a USD 4.6 million benefit from items impacting comparability in fiscal 2023 and 2022, respectively, the Company’s effective tax rate was 21.8 percent for fiscal 2023, and 21.4 percent in fiscal 2022. The Company’s 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 and currency, permanent differences, and discrete items.
Fiscal Year 2023 Segment Highlights
Global Summary
(Click to enlarge)
Net sales for Global increased USD 870.2 million to USD 2,934.4 million, up 42 percent compared to the prior year, with the current year including USD 421.0 million of incremental sales attributable to the consolidation of the financial results of LW EMEA and LWAMSA. Net sales, excluding the incremental sales attributable to the Acquisitions, grew 22 percent versus the prior year.
Global Summary
The benefit of domestic and international pricing actions to counter multi-year inflationary pressures, as well as favorable mix, drove a 27 percent increase in price/mix. Volume declined 5 percent, largely reflecting the Company’s efforts to exit certain lower-priced and lower-margin business in international and domestic markets, and to a lesser extent, lower shipments in response to inventory destocking by certain customers in international markets late in fiscal 2023.
Global product contribution margin increased USD 343.3 million to USD 595.5 million, up 136 percent compared to the prior year, and included USD 27.0 million (USD 20.0 million after-tax, or USD 0.14 per share) of costs associated with the sale of inventory stepped-up in the LW EMEA Acquisition.
Excluding this item, product contribution margin increased USD 370.3 million to USD 622.5 million, up 147 percent versus the prior year. Pricing actions, incremental earnings from the consolidation of the financial results of LW EMEA, and favorable mix drove the increase, which was partially offset by higher costs per pound.
Foodservice Summary
(Click to enlarge)
Net sales for Foodservice increased USD 170.9 million to USD 1,489.1 million, up 13 percent compared to the prior year, with price/mix up 22 percent and volume down 9 percent. The carryover benefits of pricing actions taken in the prior year, as well as actions taken in fiscal 2023, to counter inflationary pressures drove the increase in price/mix. The impact of exiting certain lower-priced and lower-margin business and a slowdown in casual dining and other full-service restaurant traffic drove the volume decline.
Food Service Summary
Foodservice product contribution margin increased USD 101.7 million to USD 551.0 million, up 23 percent compared to the prior year. Pricing actions drove the increase, which was partially offset by higher costs per pound and the impact of lower volumes.
(Click to enlarge)
Net sales for Retail increased USD 203.1 million to USD 797.7 million, up 34 percent compared to the prior year. The carryover benefits of pricing actions taken in the prior year, as well as actions taken in fiscal 2023, across the branded and private label portfolios to counter inflationary pressures drove a 38 percent increase in price/mix.
Retail Summary
Volume fell 4 percent, largely driven by the impact of exiting certain low-margin, private label business, and to a lesser extent, the impact of certain customers in select retail channels taking actions to reduce private label inventories in late fiscal 2023. Retail product contribution margin increased USD 170.7 million to USD 280.1 million, up 156 percent compared to the prior year. Pricing actions drove the increase, which was partially offset by higher costs per pound.
Equity Method Investment Earnings (Loss)
Equity method investment earnings (loss) from unconsolidated joint ventures in Europe and the U.S. were earnings of USD 460.6 million and a loss of USD 10.7 million for fiscal 2023 and 2022, respectively. The fiscal 2023 results include non-cash gains on the acquisitions of interests in the Company’s LW EMEA and LWAMSA joint ventures of USD 425.8 million (USD 379.5 million after-tax or USD 2.62 per share), as well as a USD 31.1 million unrealized loss related to mark-to-market adjustments associated with currency and commodity hedging contracts at LW EMEA, of which USD 37.8 million (USD 28.0 million after-tax, or USD 0.19 per share) related to losses in natural gas and electricity derivatives.
Equity method investment gains in the prior year included a USD 26.5 million unrealized gain related to mark-to-market adjustments associated with currency and commodity hedging contracts, of which USD 31.7 million (USD 23.5 million after-tax, or USD 0.16 per share) related to gains in natural gas and electricity derivatives.
Equity method investment earnings in fiscal 2022 also included a USD 62.7 million (before and after-tax, or USD 0.43 per share) non-cash impairment charge to write-off the Company’s portion of LW EMEA’s net investment in its former joint venture in Russia.
Excluding these items (non-cash acquisition gains and impairment charge, and mark-to-market adjustments related to natural gas and electricity derivatives), and the other mark-to-market adjustments, earnings from equity method investments increased USD 52.3 million compared to the prior year, reflecting the benefit of pricing actions, partially offset by higher manufacturing costs, in both Europe and the U.S.
Liquidity and Cash Flows
At the end of fiscal 2023, the Company had USD 304.8 million of cash and cash equivalents, with no borrowings outstanding under its USD 1.0 billionU.S. revolving credit facility. Net cash provided by operating activities for fiscal 2023 was USD 761.7 million, up USD 343.1 million versus the prior year due to higher earnings and cash provided by working capital.
Capital expenditures during fiscal 2023 were USD 736.0 million, up USD 429.6 million versus the prior year, primarily reflecting increased investments to support capacity expansion projects and to upgrade the Company’s information systems and ERP infrastructure.
Capital Returned to Shareholders
During fiscal 2023, the Company returned USD 146.1 million to shareholders through cash dividends and USD 45.0 million through share repurchases, with an aggregate of 569,698 shares repurchased at an average price per share of USD 78.99.
Fiscal 2024 Outlook
(Click to enlarge)
For fiscal 2024, the Company expects:
Fiscal 2024 Outlook
- Net sales of USD 6.7 billion to USD 6.9 billion, including USD 1.0 billion to USD 1.1 billion of incremental sales attributable to the consolidation of the financial results of LW EMEA during the first three quarters of the fiscal year.
The Company is targeting net sales, excluding those incremental sales attributable to the LW EMEA Acquisition, to grow 6.5 percent to 8.5 percent, and to be largely driven by pricing actions. Sales volumes are expected to be pressured by the Company’s continuing efforts to strategically manage customer and product mix by exiting certain lower-priced and lower-margin business, as well as ongoing softening restaurant traffic trends in the U.S. and other key markets due to macroeconomic headwinds. - Net income of USD 725 million to USD 790 million, Diluted EPS of USD 4.95 to USD 5.40, and Adjusted EBITDA including unconsolidated joint ventures(1) of USD 1,450 million to USD 1,525 million (+21% using the mid-point). The Company expects higher sales and gross profit will largely drive earnings growth.
The Company expects gross profit growth will be partially offset by higher SG&A, which is expected to be USD 765 million to USD 775 million, largely reflecting: incremental expense attributable to the consolidation of the financial results of LW EMEA; increased investments to upgrade the Company’s information systems and ERP infrastructure; the non-cash amortization of intangible assets associated with the LW EMEA Acquisition; and higher compensation and benefits expense due to increased headcount. - Cash used for capital expenditures of USD 800 million to USD 900 million as the Company continues construction of previously-announced capacity expansion efforts in China, Idaho, the Netherlands and Argentina, as well as capital investments to upgrade its information systems and ERP infrastructure.
Fiscal 2024 Segment Realignment
Effective May 29, 2023, in connection with the Company’s recent acquisitions and to align with its expanded global footprint, management, including the Company’s chief executive officer, who is its chief operating decision maker, began managing the Company’s operations as two business segments based on management’s change to the way it monitors performance, aligns strategies, and allocates resources.
This resulted in a change from four reportable segments to two (North America and International), effective the beginning of fiscal 2024. All summary financial information on a prospective basis will be presented under the new reportable segments beginning with the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ending August 27, 2023.
End Notes
(1) Adjusted Income from Operations, Adjusted Net Income, Adjusted Diluted EPS, and Adjusted EBITDA including unconsolidated joint ventures are non-GAAP financial measures. Please see the discussion of non-GAAP financial measures, including a discussion of guidance provided on a non-GAAP basis, and the associated reconciliations at the end of this press release for more information.
(2) The effective tax rate is calculated as the ratio of income tax expense to pre-tax income, inclusive of equity method investment earnings.
(3) For more information about product contribution margin, please see “Non-GAAP Financial Measures” and the table titled “Segment Information” included in this press release.
Source
Sponsored Content
