LAMB WESTON HOLDINGS, INC. The following discussion and analysis of our financial condition and results of
operations, which we refer to as "MD&A," should be read in conjunction with our
condensed consolidated financial statements and related notes included in
"Financial Statements and Supplementary Data" of this Quarterly Report on Form
10-Q (this "Form 10-Q") and the Company's Annual Report on Form 10-K for the
fiscal year ended
Forward-Looking Statements
This report, including the MD&A, contains forward-looking statements within the
meaning of the federal securities laws. Words such as "will," "continue," "may,"
"expect," 'plan," "anticipate," "believe," "estimate," "support," "impact,"
"improve," "enhance," 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 our plans,
execution, liquidity, dividends, share repurchases, capital expenditures,
operational costs, ERP implementation and business outlook and prospects, as
well as the impact of the COVID-19 pandemic on the industry and consumer demand.
These forward-looking statements are based on management's current expectations
and are subject to uncertainties and changes in circumstances. Readers of this
report should understand that these statements are not guarantees of performance
or results. Many factors could affect our actual financial results and cause
them to vary materially from the expectations contained in the forward-looking
statements, including those set forth in this report. These risks and
uncertainties include, among other things: impacts on our business due to health
pandemics or other contagious outbreaks, such as the current COVID-19 pandemic,
including impacts on demand for our products, increased costs, disruption of
supply or other constraints in the availability of key commodities and other
necessary services; our ability to successfully execute our long-term value
creation strategies; our ability to execute on large capital projects, including
construction of new production lines; the competitive environment and related
conditions in the markets in which we and our joint ventures operate; political
and economic conditions of the countries in which we and our joint ventures
conduct business and other factors related to our international operations;
disruption of our access to export mechanisms; risks associated with possible
acquisitions, including our ability to complete acquisitions or integrate
acquired businesses; our debt levels; the availability and prices of raw
materials; changes in our relationships with our growers or significant
customers; the success of our joint ventures; actions of governments and
regulatory factors affecting our businesses or joint ventures; the ultimate
outcome of litigation or any product recalls; levels of pension, labor and
people-related expenses; our ability to pay regular quarterly cash dividends and
the amounts and timing of any future dividends; and other risks described in our
reports filed from time to time with the
Overview
This MD&A is provided as a supplement to the consolidated financial statements
and related condensed notes included elsewhere herein to help provide an
understanding of our financial condition, changes in financial condition and
results of our operations. Our MD&A is based on financial data derived from the
financial statements prepared in accordance with
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Executive Summary
? Net sales declined 12% to
? Income from operations declined 28% to
? Net income declined 31% to
? Diluted earnings per share declined 31% to
? EBITDA including unconsolidated joint ventures declined 18% to
Compared with the second quarter of fiscal 2020, price/mix increased, largely
due to higher prices in our Foodservice and Retail segments and improved mix in
our Retail segment. Our sales volume declined as demand for frozen potato
products outside the home declined after government-imposed social restrictions
to slow the spread of COVID-19 reduced restaurant traffic and included
restrictions for on-premise dining. In addition, the onset of colder weather
during the quarter tempered demand by limiting outdoor dining traffic across
many
We expect that we will continue to incur additional costs as a result of the pandemic's impact on our manufacturing, supply chain, commercial and functional support operations ("COVID-related costs") at least through the remainder of fiscal 2021. These costs may include, but are not limited to, costs to shut down, sanitize, and restart production facilities after a production employee has been infected by the virus; production inefficiencies and labor retention costs arising from modifying production schedules, reducing run-times, and lower overall factory utilization; costs to adopt and maintain enhanced employee safety and sanitation protocols, such as purchasing personal protection and health screening equipment and services; costs related to processing raw potatoes out of storage longer than prior years; and incremental warehousing and transportation costs.
We also expect that the pandemic will continue to have an impact on the
In the
largely stabilized at approximately 90% of pre-pandemic levels. Traffic at
large, quick service chain restaurants ("QSRs") were essentially at prior-year
levels by continuing to leverage drive-thru and delivery formats. Traffic at
full-service restaurants weakened from 70% to 80% of prior-year levels during
most of the first two months of the quarter to 60% to 70% of prior-year levels
during the latter weeks of the quarter, related to governments reimposing
social and on-premise dining restrictions, as well as reduced outdoor dining
? due to the onset of colder weather across many markets. Demand by our
non-commercial customers (i.e., lodging and hospitality, healthcare, schools
and universities, sports and entertainment, and workplace environments)
remained approximately 50% below prior-year levels. In contrast, demand for
retail frozen potato products remained strong along with overall food-at-home
consumption with the adoption of government-imposed social restrictions. We
continue to expect traffic and demand at full-service restaurants and
non-commercial operations to be more vulnerable than at QSRs, especially as
governments continue to impose social restrictions, and as options for outdoor
dining become more limited during colder weather months in our third quarter.
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In
frozen potato products approached prior-year levels during the first half of
the quarter, but softened to 75% to 85% of prior-year levels during much of the
second half of the quarter, related to governments reimposing social and
? on-premise dining restrictions, as well as reduced outdoor dining due to the
onset of colder weather across many markets. Since most consumption in
is dine-in or carry-out as QSR drive-thru options are more limited, we
anticipate that demand will continue to be tempered as governments continue to
impose social restrictions, and as options for outdoor dining become more
limited during colder weather months in our third quarter.
Demand improvement in our other key international markets was mixed. In
? and
In our other key markets, which are primarily in
improved sequentially, but remained well below prior-year levels.
While the near-term impact of the pandemic on demand and sales volume is likely
to be material, we believe we have sufficient liquidity to manage through the
uncertainty. In the first half of fiscal 2021, we generated
As discussed above, the government-imposed severe social and business restrictions, including closing or partially closing restaurants and other foodservice operations, have led to a decrease in consumer and customer demand for our products. In response, we have taken actions, and will continue to evaluate various options, to lower our cost structure and maximize the efficiency of our manufacturing and commercial operations, including temporarily closing facilities and/or modifying production schedules to rebalance utilization rates across our manufacturing network. During these uncertain times, our top priorities are to ensure the health and welfare of our employees, maintain product safety, and continue to support our customers as they manage their supply chains and inventories.
We believe that the possibility of wide availability of government-approved COVID-19 vaccines by mid-calendar 2021 may allow governments to gradually ease broad social restrictions in their respective jurisdictions, which would likely have a favorable impact on restaurant traffic. In the coming months, we anticipate facing challenging and volatile operating conditions until the virus is broadly contained, and that demand may soften, especially at full-service restaurants, as governments continue to impose broad social restrictions and as colder weather limits outdoor dining. However, we believe that global restaurant traffic will improve through calendar year 2021, which will lead to overall frozen potato demand approaching pre-pandemic levels, on a run-rate basis, by the end of the calendar year.
Operating Results
We have four reportable segments: Global, Foodservice, Retail, and Other. We report product contribution margin by segment. Product contribution margin is the primary measure reported to our chief operating decision maker for purposes of allocating resources to our segments and assessing their performance. Product contribution margin represents net sales less cost of sales and advertising and promotion expenses. Product contribution margin includes advertising and promotion expenses because the amounts are directly associated with segment performance; it excludes general corporate expenses and interest expense because management believes these amounts are not directly associated with segment performance. For additional information on our reportable segments and product contribution margin, see Note 13, Segments, of the Condensed Notes to Consolidated Financial Statements in "Part I, Item 1. Financial Statements" of this report.
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Thirteen Weeks Ended
Thirteen Weeks Ended
November 29, November 24, %
2020 2019 Inc/(Dec)
Segment sales
Global $ 475.9 $ 539.6 (12%)
Foodservice 241.1 304.9 (21%)
Retail 140.7 132.1 7%
Other 38.4 42.6 (10%)
$ 896.1 $ 1,019.2 (12%)
Segment product contribution margin
Global $ 92.7 $ 128.9 (28%)
Foodservice 87.7 111.3 (21%)
Retail 30.1 28.5 6%
Other 10.5 10.4 1%
221.0 279.1 (21%)
Advertising and promotion expenses 2.5 6.0 (58%)
Gross profit $ 223.5 $ 285.1 (22%)
Net Sales
Compared to the prior-year quarter,
Global segment net sales declined
Foodservice segment net sales declined
Retail segment net sales increased
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margin private label business, as well as the benefit of additional shipping
days related to the timing of the
Net sales in our Other segment declined
Product Contribution Margin
Global segment product contribution margin declined
Foodservice segment product contribution margin declined
Retail segment product contribution margin increased
Other segment product contribution margin increased
Selling, General and Administrative Expenses
Compared with the prior-year period, selling, general and administrative
expenses declined
Interest Expense, Net
Compared with the prior-year quarter, interest expense, net in the second
quarter of fiscal 2021 increased
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Income Tax Expense
Income tax expense for the second quarter of fiscal 2021 and 2020 was
Equity Method Investment Earnings
We conduct business through unconsolidated joint ventures in
Twenty-Six Weeks Ended
Twenty-Six Weeks Ended
November 29, November 24, %
2020 2019 Inc/(Dec)
Segment sales
Global $ 923.4 $ 1,057.2 (13%)
Foodservice 477.8 610.3 (22%)
Retail 294.6 261.4 13%
Other 71.8 79.3 (9%)
$ 1,767.6 $ 2,008.2 (12%)
Segment product contribution margin
Global $ 170.5 $ 231.6 (26%)
Foodservice 173.5 213.8 (19%)
Retail 65.9 57.4 15%
Other 23.7 20.1 18%
433.6 522.9 (17%)
Advertising and promotion expenses 3.7 10.8 (66%)
Gross profit $ 437.3 $ 533.7 (18%)
Net Sales
Compared with the prior-year period,
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Global segment net sales declined
Foodservice segment net sales declined
Retail segment net sales increased
Net sales in our Other segment declined
Product Contribution Margin
Compared with the prior-year period,
Global segment product contribution margin declined
Foodservice segment product contribution margin declined
Retail segment product contribution margin increased
Other segment product contribution margin increased
Selling, General and Administrative Expenses
Compared with the prior-year period, selling, general and administrative
expenses declined
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a
Interest Expense, Net
Compared with the prior-year period, interest expense, net increased
Income Tax Expense
Income tax expense for the first half of fiscal 2021 and 2020 was
Equity Method Investment Earnings
We conduct business through unconsolidated joint ventures in
Liquidity and Capital Resources
Sources and Uses of Cash
The current COVID-19 pandemic has disrupted our business and operating results.
As a result of the uncertainties caused by the pandemic, we have taken, and are
continuing to take, actions to enhance liquidity. We limited discretionary
expenses across the Company and implemented a hiring and salary freeze for our
We believe our cash on hand, cash flows from operations and our current credit facilities will be sufficient to satisfy our future working capital requirements, interest payments, capital expenditures, dividends on our common stock, and other financing requirements for the foreseeable future. While we expect increased availability of COVID-19 vaccines to enable a gradual return of consumer french fry demand as our fiscal year progresses, we continue to evaluate and take action, as necessary, to preserve adequate liquidity and ensure that our business can continue to operate during these uncertain times. If we are unable to generate sufficient cash flows from operations, or are otherwise unable to comply with the terms of our credit facilities, we may be required to seek additional financing alternatives, which may require waivers under our credit agreements governing our senior secured debt and indentures governing our senior notes, in order to generate additional cash. There can be no assurance that we would be able to obtain additional financing or any such
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waivers on terms acceptable to us or at all. For additional information on our debt, see Note 9, Debt and Financing Obligations, of the Condensed Notes to Consolidated Financial Statements in "Part I, Item 1. Financial Statements" of this report and Note 9, Debt and Financing Obligations, of the Notes to Consolidated Financial Statements in "Part II, Item 8. Financial Statements and Supplementary Data" of the Form 10-K.
Cash Flows
Below is a summary table of our cash flows, followed by a discussion of the sources and uses of cash through operating, investing, and financing activities (dollars in millions):
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