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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 not be considered a replacement for and should be read together with our GAAP results.
Tom will provide some comments on our performance as well as a brief overview of the current operating environment.
Bernadette will then provide details on our first quarter results and fiscal 2022 outlook.
We're pleased with our strong sales growth in the quarter, which reflects the on growing broad recovery in demand across our out of home sales channels as well as continued improvement in our key international markets.
However, 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.
These ongoing challenges combined with the extreme summer's heat negative, negative impact on potato crops in the Pacific Northwest will result in higher costs as the year progresses.
As a result, we now expect our gross profit margins will remain below pre-pandemic levels through fiscal 2022.
We believe many of these costs and supply chain challenges are transitory and we're taking aggressive actions to mitigate their effects on our operations and financial performance.
We're confident that our actions along with our investments to improve productivity and operations over the long-term will get us back on track to deliver higher margins and sustainable growth.
Before Bernadette gets into some of the specifics of our first quarter results and outlook, let's briefly review the current operating environment starting with demand.
In the U.S., we continue to be encouraged by the pace of recovery in restaurant traffic and demand for fries.
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.
Demand improved at non-commercial Foodservice outlets especially in the education market, which help to offset the near-term slowdown in full service restaurants.
The fry attachment rate in the U.S. which is a rate at which consumers order fries when visiting a restaurant or other Foodservice outlets also continued to help support the recovery in demand by remaining above pre-pandemic levels.
Demand in U.S. retail channels also remained solid with overall category volumes in the quarter still up 15% to 20% from pre-pandemic levels.
Outside the U.S., overall fry demand continued to improve in the quarter, although the rate of improvement varied widely among our key international markets.
Demand in Europe, which is served by our Lamb-Weston/Meijer joint venture gradually recovered as vaccination rates climbed.
Demand in Asia and Oceania was solid but also softened in August due to the spread of the Delta variant and South America remain challenged especially in Brazil.
So overall, we're happy with the recovery in global demand and believe it provides a solid foundation for continued volume growth in fiscal 2022.
With respect to the pricing environment, I'm pleased with the progress of our recently implemented pricing actions demanded sharp input costs inflation.
In our Foodservice and Retail segments as well as in some of our international business, we'll begin to realize some of the pricing benefits in the second quarter and more fully in the third quarter.
In our Global segment, the contract renewables for large chain restaurant customers have largely progressed as we expected and we'll generally begin to see the impact of any pricing actions associated with these contracts in our third quarter.
In addition, we'll continue to benefit from price escalators for most of the global contracts that are not up for renewal this year.
These price adjustments reset based on the underlying timing of the contract renewals were largely during our physical third quarter.
Overall, we expect our price increases across our business segments will in aggregate mitigate much of the cost inflation.
However depending on the pace and scope of inflation and the increase of potato cost resulting from this year's poor crop we may take further price action as the year progresses.
In contrast to demand and pricing, the manufacturing and distribution environment continues to be difficult.
Our supply chain costs on a per pound basis have increased significantly due to input and transportation cost inflation as well as labor availability and other macro supply chain disruptions that are continuing to cause production inefficiencies across our global manufacturing network.
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 physical 2022.
As a result, we expect the turnaround in our supply chain will take longer than we initially anticipated.
Now turning to the crop, the early read on this year's crop in the Columbia base in Idaho and Alberta indicates that it will be well below average levels and both yield and quality due to the extreme heat over the summer.
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.
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.
As usual we'll provide a more complete assessment of the crop and its impact on earnings when we release our second quarter results in early January.
So in summary, I feel good about the overall pace of recovery in French Fry demand especially in the U.S. and believe it provides a solid foundation for future growth.
I also feel good about the current pricing environment and how we're executing pricing actions in the marketplace.
We do expect higher potato costs input and transportation inflation, labor challenges and other industrywide operational headwinds to continue for the remainder of this fiscal year.
While we're taking specific actions to mitigate these challenges they will keep our gross margins below pre-pandemic levels through fiscal 2022.
And finally, I'm confident that we're taking the right steps to get our company back on track to delivering more normalized profit margins.
As many of you know, this is my first earnings call as CFO of Lamb Weston.
I've now been in the role for about nine weeks.
For those on the line that I haven't met, it's a pleasure to meet you over the phone.
I'm looking forward to meeting many of you in person over the coming months as we get back into the cadence of in-person investor meetings and industry events.
As Tom discussed, we feel good about the health of the category and our top line performance in the first quarter and expect our gross margins going forward will improve as we benefit from our recent pricing actions, as well as from other actions that we're taking to mitigate some of the macro challenges affecting our supply chain.
Specifically in the quarter, sales increased 13% to $984 million, with volume up 11% and price mix up 2%.
As expected, volume was the primary driver of sales growth reflecting the ongoing recovery in fry demand outside the home in the U.S. and in some of our key international markets, as well as a comparison to relatively soft shipments in the prior-year quarter.
Lower retail segment sales volume partially offset this growth, largely as a result of incremental losses of low-margin private label business.
Overall, our sales volume in the first quarter was about 95% of what it was during the first quarter of fiscal 2020 before the pandemic impacted demand.
Moving to pricing; pricing actions and favorable mix drove an increase in price mix in each of our core business segments.
As I'll discuss in more detail later, our pricing actions include the benefit of higher prices charged to customers for product delivery in an effort to pass through rising freight costs.
The offset to this is higher transportation costs in cost of goods sold.
Gross profit in the quarter declined $63 million, as the benefit of higher sales was more than offset by higher manufacturing and transportation costs on a per pound basis.
The decline in gross profit also includes the $6 million decrease in unrealized mark-to-market adjustments, which includes a $1 million gain in the current quarter compared with a $7 million gain in the prior year quarter.
The increase in cost per pound, primarily related to three factors.
First, we incurred double-digit cost inflation for key commodity inputs, most notably edible oils which has more than doubled versus the prior year quarter.
Other inputs that saw significant inflation include ingredients such as wheat and starches used to make batter and other coatings and containerboard and plastic film for packaging.
Higher labor costs were also a factor as we incurred more expense from increased unplanned overtime.
Second, our transportation costs increased due to rising freight rates as global logistics networks continue to struggle.
Our costs also rose due to an unfavorable mix of higher costs trucking versus rail as we took extraordinary steps to deliver product to our customers.
Together, inflation for commodity inputs and transportation accounted for approximately three quarters of the increase in our cost per pound.
The third factor driving the increase in cost per pound was lower production run rates and throughput at our plants from lost production days and unplanned downtime.
This resulted in incremental costs and inefficiencies.
Some of this is attributable to ongoing upstream supply chain disruptions including the timely delivery of key inputs and other vendor supplied materials and services.
However, most of the impact on run rates was attributable to volatile labor availability and shortages across our manufacturing network.
So what do we do to mitigate these higher costs and stabilize our supply chain?
First, price; we are executing our recently announced price increases across each of our business segments and implementation of these pricing actions are on track.
Our price-cost relationship will progressively improve as our pass-through pricing catches up with deflationary cost increases.
We'll begin to see some benefit from these actions in the second quarter and it will continue to build through the year.
If needed, we will implement additional rounds of price increases to mitigate the impact of further cost inflation.
We've also increased the freight rates that we charge customers to recover the cost of product delivery.
And we are adjusting them more frequently to better reflect changes to the market rates.
These adjustments have also lagged the cost increases.
While we saw some benefit in the first quarter, we expect to see more of a benefit beginning in the second quarter.
In addition, we're significantly restricting the use of higher costs spot rate trucking.
Second, we're optimizing our portfolio.
We're eliminating underperforming skews to drive savings through simplification in terms of procurement, production, inventory management, and distribution.
We're also partnering with our customers to modify product specifications without comprising food, safety and 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.
Third, we're increasing productivity savings with our Win As One program.
While realized savings to-date have been small given that the initiative is still fairly new we began to execute specific cost reduction programs around procurement, commodity utilization, manufacturing waste, inventory management and logistics as well as programs to improve demand planning and throughput.
We expect savings from these and other productivity programs will steadily build as our supply chain stabilizes.
And finally, we're managing labor availability and volatility.
This includes changing how we schedule our labor crews, which provides our employees more control and predictability over their personal schedules and reduces unplanned overtime.
We're also reviewing compensation levels to make sure we remain an Employer of Choice in each of our local communities.
This is in addition to the other recruiting tools and incentives such as signing and retention bonuses.
Moving on from cost of sales; our SG&A increased $13 million in the quarter.
This increase was largely driven by three factors.
First, it reflects the investments we're making behind information technology, commercial and supply chain productivity initiatives that should improve our operations over the long term.
About $4 million this quarter represents non-recurring ERP related expenses.
Second, it reflects higher compensation and benefits expense.
And third, it includes an additional $3 million of advertising and promotional support behind the launch of new branded items in our retail segment.
This increase compares to a low base in the prior year when we significantly reduced A&P activities at the onset of the pandemic.
Diluted earnings per share in the first quarter was $0.20, down from $0.61 in the prior year, while adjusted EBITDA including joint ventures was $123 million, down from $202 million.
Moving to our segments, sales for our Global segment were up 12% in the quarter with volume up 10% and price mix up 2%.
Overall, the segments' total shipments are trending above pre-pandemic levels due to strength in our North American chain restaurant business especially at QSRs.
Our international shipments in the quarter also approached pre-pandemic levels, despite congestion at West Coast ports and the worldwide shipping container shortage continuing to disrupt our exports as well as softening demand in Asia due to the spread of the Delta variant.
The 2% increase in price mix reflected the benefit of higher prices charged for freight, inflation driven price escalators and favorable customer mix.
Global's product contribution margin, which is gross profit less advertising and promotional expenses declined 45% to $43 million.
Input and transportation cost inflation as well as higher manufacturing costs per pound more than offset the benefit of higher sales volume and favorable price mix.
Moving to our Foodservice segment, sales increased 36% with volume up 35% and price mix up 1%.
The strong increase in sales volumes largely reflected the year-over-year recovery in shipments to small and regional restaurant chains and independently owned restaurants.
Volume growth in August was also tempered by the inability to service full customer demand due to lower production run rates and throughput at our plants largely due to labor availability.
Our shipments to non-commercial customers improved through the quarter as the education, lodging and entertainment channels continued to strengthen.
Overall non-commercial shipments were up sequentially to 75% to 80% to pre-pandemic levels from about 65% during the fourth quarter of fiscal 2021.
The increase in price mix largely reflected pricing actions including the benefit of higher prices charged for freight.
Foodservices product contribution margin rose 12% to $96 million.
Higher sales volumes and favorable price mix more than offset input and transportation cost inflation as well as higher manufacturing costs per pound.
Moving to our Retail segments; sales declined 14% with volume down 15% and price mix up 1%.
The sales volume decline largely reflects lower shipments of private label products, resulting from incremental losses of certain low margin business.
Sales of branded products were down slightly from a strong prior-year quarter that benefited from very high in-home consumption demand due to the pandemic, but remained well above pre-pandemic levels.
The increase in price mix was largely driven by favorable price including higher prices charged for freight.
Retails product contribution margin declined 59% to $15 million.
Input and transportation cost inflation, higher manufacturing cost per pound, lower sales volumes and a $2 million increase in A&P expenses to support the launch of new products drove the decline.
Let's move to our cash flow and liquidity position.
In the first quarter, we generated more than $160 million of cash from operations.
That's down about $90 million versus the prior year quarter due primarily to lower earnings.
We spent nearly $80 million in capital expenditures and paid $34 million in dividends.
We also bought back nearly $26 million worth of stock or about double what we have typically repurchased in prior quarters.
During the quarter, we amended our revolver to increase its capacity from $750 million to $1 billion and extended its maturity date to August 2026.
At the end of the first quarter, our revolver was undrawn and we had nearly $790 million of cash on hand.
Our total debt was about $2.75 billion and our net-debt-to-EBITDA including joint ventures ratio was 2.7 times.
Now, let's turn to our updated outlook.
We continue to expect our sales growth in fiscal 2022 to be above our long-term target of low to mid-single digits.
In the second quarter, we continued to anticipate sales growth will be largely driven by higher volume as we lap a comparison to relatively fast shipments during the second quarter of fiscal 2021 due to the pandemic.
We expect price mix will be up sequentially versus the 2% that we delivered in Q1 as the execution of pricing actions in all of our segments remain on track.
For the second half of the year, we continued to expect our sales growth will reflect more of a balance of higher volume and improved price mix as we begin to lap some of the softer volume comparisons from the prior year and as the benefit from our earlier pricing actions continue to build.
Our volume growth, however, may be tempered by global logistics disruptions and container shortages that affects both domestic and export shipments.
It may also be tempered by lower factory production due to macro industry and labor challenges, as well as a poor quality crop.
With respect to earnings, we expect net income and adjusted EBITDA including joint ventures will continue to be pressured through fiscal 2022.
That's a change from our previous expectation of earnings gradually approaching pre-pandemic levels in the second half of the year.
Driving most of this change is our expectation of significantly higher potato costs, resulting from poor yield and quality of the crops in our growing regions.
We previously assumed the potato crop that approached historical averages.
Outside of raw potatoes, we expect double-digit inflation for key production inputs, such as edible oils, transportation and packaging to continue through fiscal 2022.
We had previously assumed these costs would begin to gradually ease during the second half of the year.
We also expect the macro challenges that have slowed the turnaround in our supply chain to continue through fiscal 2022.
That said we expect the labor and transportation actions that I described earlier along with our Win As One productivity initiative will help us continue to gradually stabilize operations, improve production run rates and throughput and manage costs as the year progresses.
For the full year, we expect our gross margin may be at least 5 points to 8 points below our normalized annual margin rate of 25% to 26%.
While we recognize this is a wide range, it reflects the volatility and high degree of uncertainty regarding the cost pressures that I've discussed.
Consistent with prior years, we'll have a better understanding of the crop's financial impact in the next couple of months and we will provide an update when we release our second quarter results in early January.
Below gross margin we expect our quarterly SG&A expense will be in the high 90s as we continue our investments to improve our operations over the long-term.
While equity earnings will likely remain pressured due to input cost inflation and higher manufacturing costs both in Europe and the U.S. We've also updated a couple of our other targets for the year.
First, we've reduced our capital expenditure estimate to $450 million from our previous estimate of $650 million to $700 million.
This significant reduction is due to the timing of spend behind our large capital projects and effectively shift the spend into early 2023 -- fiscal 2023.
Despite the shift in expenditures, our expansion projects in Idaho and China remain on track to open in the spring and fall of 2023 respectively.
And second, we're reducing our estimated full year effective tax rate to approximately 22%, down from our previous estimate of between 23% and 24%.
Our estimates for total interest expense of around $115 million and total depreciation and amortization expense of approximately $190 million remain unchanged.
So in summary, the strong recovery in demand helped fuel our top line growth in the first quarter, but higher manufacturing and distribution costs led to lower earnings.
For fiscal 2022, we expect net sales growth will be above our long-term target of low to mid-single digit, but that our earnings will continue to be pressured for the remainder of the year due to higher potato costs from a poor crop and persistent inflationary and macro challenges.
Nonetheless, we expect to begin to see earnings improve in the second quarter behind our pricing actions and the steps we're taking to improve our cost.
Now, here's Tom for some closing comments.
Let me just sum it up.
We feel good about the near-term recovery in demand in the U.S. and our key international markets, as well as the long-term health and growth of the category.
We're taking the necessary steps with respect to pricing and continuing to focus on stabilizing our supply chain to mitigate near-term operational headwinds and improve profitability.
We're on track with our recently announced capacity investments to support our customer and category growth, as well as our long-term strategic and financial objectives.

user
q1 earnings per share $0.20.
q1 sales $984 million versus refinitiv ibes estimate of $1 billion.
sees fy 2022 net sales growth above long-term target range of low-single digits.
lamb weston holdings - sees net income and adjusted ebitda including joint ventures to be pressured through fiscal 2022.

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