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Text: These statements are based on how we see things today.
Actual results may differ materially due to risks and uncertainties.
Some of today's remarks include non-GAAP financial measures.
These non-GAAP financial measures should be -- should not be considered a replacement for and should be read together with our GAAP results.
Tom will provide an overview of the current operating environment, while Rob will provide some details on our second quarter results as well as some shipment trends for the third quarter.
We delivered solid financial results in the second quarter as our entire Lamb Weston team continues to execute well through this challenging environment.
That's only possible because of their ongoing commitment to serving our customers, suppliers and communities.
Our second quarter results also reflect operating conditions that were generally similar to what we experienced in the first quarter.
Overall restaurant traffic in the US was resilient by holding steady at around 90% of pre-pandemic levels for much of the quarter.
However, traffic and frozen potato demand rates continued to vary widely by channel.
Traffic at large chain restaurants were essentially at prior year levels as quick service restaurants continued to leverage drive-through, takeout and delivery formats.
Traffic at full service restaurants was 70% to 80% of the prior year levels for much of the quarter.
However, traffic began to soften in November as governments reimposed social and on-premise dining restrictions in an effort to contain the resurgence of COVID and as the onset of colder weather tempered outdoor dining opportunities across many markets.
Traffic and demand at non-commercial customers, which includes lodging, hospitality, healthcare, schools and universities, sports and entertainment, and workplace environment was fairly steady at around 50% of prior year levels for the entire quarter.
In retail, consumer demand continued to be strong with weekly category volume growth between 15% and 20% versus the prior year.
Outside the US, restaurant traffic in fry demand were uneven across markets and varied within the quarter.
In Europe, which is served by our Lamb Weston Meijer joint venture, fry demand during much of the quarter was similar to last year, but softened the 75% to 85% of prior year levels during the latter part of the quarter as governments reimposed social restriction and as the weather turn colder.
As you may recall, unlike in the US, QSRs in Europe generally have only limited drive-through capabilities.
Demand in our other key international markets was mixed.
In China and Australia, demand was near prior year levels.
In our other key markets in Asia and Latin America, overall demand improved sequentially from our first quarter, but remained well below prior year levels.
Going forward, we expect many of the softer traffic and demand trends that we began to see in November to carryover into our fiscal third quarter.
The sharp resurgence in COVID in the US and Europe has led government to imposed even more rigid social restrictions, In addition, we expect outdoor restaurant dining traffic in our largest markets to fall further as we enter the coldest months of the year in the northern hemisphere.
Not surprisingly, we expect traffic at full service restaurants will continue to be disproportionately affected.
Major QSR chains in the US should be able to continue to hold up well due to their ability to serve customers via drive-through and delivery.
Retail should also benefit as consumers eat more meals at home.
And as Rob will discuss later, while still early, our shipments to those channels in December support that view.
So on one the hand in the near term, we anticipate facing even more challenging and volatile operating conditions than what we experienced in the first half of our fiscal year.
On the other hand, we believe this COVID induced shock to demand is temporary.
We're confident in the strength of the frozen potato category and do not see any structural impediments to recovery in demand and growth over the long term.
As COVID vaccines become more widely available in the coming months and as the virus is more broadly contained, we expect governments will gradually less social restrictions.
This should lead to steady growth in restaurant traffic as the year progresses.
We believe this growth will lead to overall frozen potato demand approaching pre-pandemic levels on a run rate basis by the end of calendar 2021.
In the meantime, we're confident in our business fundamentals, the pricing capacity utilization and potato supply and our ability to manage through the pandemics impacts on our manufacturing operations.
Our recently announced increase in our quarterly dividend in the planned resumption of our share repurchase program reinforce our conviction in the strength of our business and the category, as well as our commitment to support customers and create value for our stakeholders.
In summary, we delivered solid Q2 results and are executing well in a challenging environment.
We expect frozen potato demand has softened in the near term due to reduced traffic, following government reimposed, social restrictions as well as the onset of colder weather, and we're optimistic that the increasing availability of COVID vaccines will enable restaurant traffic to gradually improve as the year progresses and that demand will approach pre-pandemic levels by the end of calendar 2021.
As Tom noted, we delivered solid financial results in the second quarter, as our teams continued to manage through an ever changing demand environment as well as COVID-related disruptions to our manufacturing and distribution networks.
For the quarter, net sales declined 12% to $896 million.
Sales volume was down 14% largely due to fry demand at restaurants and foodservice being negatively impacted following government imposed restrictions to contain the spread of COVID, as well as colder weather beginning to limit outdoor dining across many of our markets.
Overall, as Tom described earlier, restaurant traffic and our sales volumes in the US stabilized at approximately 90% of pre-pandemic levels, although performance varied widely by sales channel.
International sales were mixed but improved sequentially versus our first quarter.
Price mix increased 2% driven by improved price in our Foodservice and Retail segments as well as favorable mix in retail.
Gross profit declined $62 million as lower sales and higher manufacturing costs more than offset the benefit of favorable price mix and productivity savings.
As we discussed in our previous earnings call, we expect that our manufacturing cost to increase in the quarter.
This was partly due to processing potatoes from the 2019 crop through early September, which is a couple of months longer than usual.
We did this in order to manage finished goods inventories in light of the pandemics impact on fry demand.
Processing older crop results in increased cost due to significant -- due to higher raw material storage fees and lower recovery rates.
Since we typically carry upwards of 60 days of finished goods inventory, we realize the impact of these costs in our second quarter income statement as we sold that inventory.
We also realized higher manufacturing costs due to input cost inflation, primarily related to edible oils, raw potatoes and other raw ingredients.
Overall, our input cost inflation was in the low-single digits.
Finally, we continue to realize incremental costs and inefficiencies resulting from the pandemic's disruptive effect on our manufacturing and supply chain operations.
As a reminder, these costs largely relate to labor and other cost to shutdown, sanitize and restart manufacturing facilities impacted by COVID.
Cost associated with modifying production schedules reducing run-times and manufacturing retail products on lines primarily designed for foodservice products and cost per enhancing employee safety and sanitation protocols, as well as for incremental warehousing, transportation and supply chain costs.
Specifically in the quarter, we had notable disruptions in our facilities in Idaho, as well as lesser ones in some other facilities.
We expect to continue to incur COVID-related costs through at least the remainder of fiscal 2021.
As a result, we consider these costs and disruptions as part of our ongoing operations and are no longer disclosing these costs separately.
SG&A declined by nearly $8 million in the quarter, largely due to lower incentive compensation expense accruals and a $3.5 million reduction in advertising and promotional expense.
The decline was partially offset by investments to improve our operations and IT infrastructure, which included about $5 million of non-recurring consulting and training expenses associated with implementing Phase 1 of our new ERP system.
Equity method earnings were $19 million, which is up $4 million versus last year.
Excluding the impact of unrealized mark-to-market adjustments equity earnings increased about $2 million due to better performance by our European joint venture.
However, like in the US, our shipments softened during the latter part of the quarter reflecting the effect on restaurant traffic of governments reimposing, social restrictions, as well as colder weather on outdoor dining.
EBITDA, including joint ventures was $213 million which is down $48 million.
The decline was driven by lower income from operations and it was partially offset by higher equity method earnings.
Diluted earnings per share in the quarter was $0.66, down $0.29 largely due to lower income from operations.
EPS was also down due to higher interest expense reflecting our higher average total debt and the write-off of some debt issuance costs as we paid off the term loan, a year early.
The decline was partially offset by higher equity earnings.
Moving to our segments.
Sales for our Global segment, which generally includes sales for the top 100 North American based QSR and full service restaurant chains, as well as all sales outside of North America were down 12% in the quarter.
Volume was down 11% due to softer demand for fries outside the home, especially in our international markets.
Shipments to large chain restaurant customers in the US of which approximately 85% are to QSRs approach prior year levels as QSRs leveraged drive-through and delivery formats.
However, some of that strength also reflected pulling forward sales of customized and limited time offering products from the third quarter.
International sales, which historically comprised about 40% of segment sales, we're at about 80% of prior year levels in the aggregate, but vary by market.
Shipments in China and Australia approached prior year levels.
Our shipments to other parts of Asia and Latin America, improved sequentially as customers and distributors in many of these markets were able to right-size inventories, however, they remained well below prior year levels.
Price mix declined 1% as a result of negative mix.
Price alone was flat.
Global's product contribution margin, which is gross profit less A&P expense declined 28% to $93 million.
Lower sales volume, higher manufacturing costs, and unfavorable mix drove the decline.
Sales for our Foodservice segment, which services North American foodservice distributors and restaurant chains generally outside the top 100 North American restaurant customers, declined 21% in the quarter.
Segments to smaller chain and independent full service and quick service restaurants tracked around 70% to 80% of prior year levels through much of October, but slowed to 60% to 70% in November, following government's reimposing, social restrictions and as colder weather tempered restaurant traffic in some of our markets.
Shipments to non-commercial customers improved modestly since summer but remain at around 50% of prior year levels, with strength in healthcare more than offset by continued weakness in the other channels.
Price mix increased 4% behind the carryover benefit of pricing actions taken in the latter half of fiscal 2020.
Mix continued to be unfavorable with some hard hit independent restaurants looking to reduce costs by purchasing more value-added products rather than the premium Lamb Weston branded ones.
While we've regained much of this business since the pandemic first struck last spring on a year-over-year basis, it remains a mix headwind.
Foodservices product contribution margin declined 21% to $88 million.
Lower sales volumes, higher manufacturing costs and unfavorable mix drove the decline and was partially offset by favorable price.
Sales for our Retail segment increased 7% in the quarter.
Price mix increased 7%, primarily reflecting favorable mix benefit of selling more of our higher margin branded portfolio of Alexia, Grown in Idaho and licensed restaurant trademarks.
Sales of our branded products were up about 30% which is well above category growth rates, which ranged between 15% and 20%.
The increase in our branded volume was offset by the loss of certain low margin, private label volume that began late in the second quarter of fiscal 2020, as well as an additional amount that began a couple of months ago.
As a result, we expect private label losses to continue to be a headwind.
Retail's product contribution margin increased 6% to $30 million.
The increase was driven by favorable mix and lower A&P expense and was partially offset by higher manufacturing costs.
Moving to our cash flow and liquidity position.
We are comfortable with our liquidity positioned and confident in our ability to continue to generate cash.
In the first half, we generated nearly $320 million of cash from operations, which is down about $25 million versus last year, due to lower sales and earnings.
We spent $54 million in capex, including expenditures for our new ERP system.
We paid $67 million in dividends and a few weeks ago, announced a 2% increase in our quarterly dividend.
In addition, we plan to resume our share repurchase program this quarter.
As you may recall, we temporarily suspended our buyback program in late fiscal 2020 in order to help preserve our liquidity during the early days of the pandemic.
As we discussed in our previous earnings call, in September, we amended our credit agreement to put in place a new three-year $750 million revolver.
At the same time, using a portion of the more than $1 billion of cash on hand, we prepaid the approximately $270 million outstanding balance on the term loan that was due in November of 2021.
At the end of the second quarter, we had more than $760 million of cash on hand and our new revolver was undrawn.
Our total debt was $2.75 billion and our net debt to EBITDA ratio was 3.1 times.
Now turning to our shipments so far in the third quarter.
Broadly speaking, in the US, demand at QSRs and at retail are holding up well, while traffic at full service restaurants continues to soften.
Specifically, US shipments in the four weeks ending December 27, were approximately 85% of prior year levels.
In our Global segments, shipments to our large QSR and full-service chain customers in the US, were more than 95% of prior year levels.
We expect that rate will largely continue for the remainder of the third quarter.
In our Foodservice segment, shipments to our full service restaurants regional and small QSRs and non-commercial customers in aggregate were 60% to 65% of prior year levels.
That is largely in line with what we realized during the latter part of the second quarter.
We anticipate that shipments to full-service restaurants and small and regional QSRs will continue to soften as social restrictions broaden and as winter weather takes a bigger bite out of outdoor dining.
Shipments to non-commercial customers, which have historically comprised about 25% of the segment's volume were roughly half of prior year levels and will likely remain soft for the remainder of the quarter.
In our Retail segments, shipments were above prior year levels with strong volume of our branded products, partially offset by a decline in shipments of private label products.
We believe that this rate will largely continue for the remainder of the quarter.
Outside the US, overall demand has slowed, but it's varied by market.
In Europe, shipments by our Lamb Weston Meijer joint venture were approximately 85% of prior year levels, continuing the softer demand that we realized during the latter part of the second quarter.
We believe that shipments will continue to soften due to severe social restrictions and colder weather.
Shipments to our other international markets, which primarily include Asia, Oceana, Latin America were mixed.
In aggregate, international shipments so far in the quarter have been softer than what we realized during the latter half of the second quarter.
As a reminder, all of our international sales are included as part of our Global results.
In short, other than at US QSRs, which can leverage drive-through access, global demand for fries at restaurants and foodservice will be soft in the third quarter, following government's reimposing restrictions to combat the resurgence of COVID, as well as colder weather in our Northern Hemisphere markets limits outdoor dining opportunities.
With respect to contract pricing, after completing discussions for contracts that were up for renewal, we expect pricing across our domestic large chain restaurant portfolio in aggregate to be flat versus prior year.
Outside of these large chain restaurant contracts, on balance, domestic pricing is holding up well.
However, we continue to see increased competitive activity in more value-added oriented products in some international markets and to a lesser extent in some value tiered domestic market segments.
With respect to costs, the potato crop in our growing regions in the Columbia Basin, Idaho, Alberta, and the upper Midwest is consistent with historical averages in aggregate.
We don't see any notable impact on cost outside of inflation.
Crop in our growing areas in Europe is also broadly consistent with historical averages, which should help ease cost pressures there versus last year.
However, we do expect to continue to incur additional cost as a result of COVID's disruptive impact on our manufacturing and supply chain operations and we expect that we'll continue to do so until the virus is broadly contained.
Now here's Tom for some closing comments.
Let me just quickly sum up by saying while the near-term environment will be volatile.
We believe that the restaurant traffic will gradually recover to pre-pandemic levels by the end of calendar 2021.
We'll continue to focus on the right strategic and operating priorities to serve our customers and build upon the long-term health of the category in order to create value for our stakeholders.

user
q2 earnings per share $0.66.
q2 sales $896 million versus refinitiv ibes estimate of $876.8 million.
qtrly volume declined 14 percent.
north america and europe shipments will remain soft during remainder of quarter.
expect demand will remain soft in the coming months, especially at full-service restaurants.
lamb weston - believe restaurant traffic may approach pre-pandemic levels later this calendar year if vaccines and other measures are successful.
plan to resume share repurchase program in january 2021.
announced a 2% increase in quarterly dividend.

assistant