On Lamb Weston's fourth quarter and fiscal 2023 earnings call, Tom Werner, President and Chief Executive Officer, and Bernadette Madarieta, Chief Financial Officer, discussed the company's strong financial results and provided an outlook for fiscal 2024. They also noted that some of the remarks included non-GAAP financial measures and cautioned that actual results may differ due to risks and uncertainties.

Lamb Weston achieved record sales of $5.4 billion in fiscal 2023 and experienced strong profit growth. The company acquired the remaining interest in its European joint venture, a controlling interest in its Argentinian joint venture, and made progress on capital expansion projects in China, Idaho, and The Netherlands. Additionally, Lamb Weston opened an innovation center in Bergen Op Zoom, launched new products with proprietary technologies, stabilized its supply chain, and completed the design work for its new enterprise resource planning system.

In fiscal 2023, the global frozen potato category remained healthy and the fry attachment rate in the US remained well above pre-pandemic levels. However, inflation and other macro pressures have continued to temper traffic in certain restaurant channels. In the fourth quarter, total restaurant traffic grew compared to the prior year, but decelerated sequentially each month. Traffic picked up in June, but casual dining and full-service restaurants remain soft. Forecasting global demand for frozen potatoes is difficult due to the variabilities of restaurant traffic trends and continued macro pressures on the consumer, and as a result, a cautious view of demand and volume was incorporated into the fiscal 2024 financial targets.

The company expects input cost inflation to continue to have a meaningful impact on their cost structure, and they have agreed to a 20% price increase for the crop in North America and a 35-40% increase in Europe. Pricing actions will be more modest this year, but the company will continue to drive improvements in product and customer mix, revenue growth, and supply chain productivity to benefit sales growth and profitability. The early potato varieties harvested this year appear to be consistent with historical averages, and the crops in the Columbia Basin, Idaho, Alberta, and the Midwest are largely in line with historical averages.

The company is making a change to their reportable segments, splitting them into North America and International. Mike Smith, the Chief Operating Officer, will be responsible for both segments and the global supply chain. The company delivered record sales and earnings growth in the past year and remain confident about the long-term growth prospects of the category.

In the fourth quarter of fiscal 2024, Lamb Weston's sales increased to a quarterly record of $1.7 billion, largely due to the consolidation of EMEA and Argentina operations. Price/mix was up 24% as a result of pricing actions taken in fiscal 2023, but freight rates were reduced further to match the decline in transportation costs. Overall sales volumes decreased by 10% due to four factors.

In the quarter, Lamb Weston's sales were affected by their strategic decision to exit certain lower-priced and lower-margin business, softer casual dining and full-service restaurant traffic in the US, customers in international markets right-sizing inventories, and certain large retail customers temporarily lowering prices. Despite these challenges, the company's gross profit increased more than $170 million to nearly $425 million due to pricing actions, mix improvement, supply chain productivity, and the benefit of the EMEA acquisition. Gross margin increased 300 basis points to 25.1% despite higher input and manufacturing costs per pound and the impact of lower volumes.

In the quarter, the increase in cost per pound was largely driven by a 20% increase in the contracted price for potatoes, higher prices for open market potatoes, and increased costs of labor, energy, edible oils, and ingredients for batter coatings. SG&A expenses increased $65 million, driven by higher compensation and benefit expenses, an $8 million increase in advertising and promotion expenses, and higher expenses related to improving IT and ERP infrastructure. Adjusted EBITDA increased $117 million, largely due to higher sales and gross profit, and net sales excluding acquisitions grew 17%. Price/mix was up 28%, largely comparable to the increases in the previous two quarters, due to pricing actions taken in the second and third quarters.

Global's volume declined 11%, and its product contribution margin increased $145 million. Foodservice sales grew 4%, with a 13% price/mix increase, but lower volumes. Retail segment sales increased 25%, with a 35% price/mix increase due to pricing actions implemented in February. Lower volumes drove Foodservice's product contribution margin decline.

The fourth quarter saw a 10% decline in volume, largely due to challenges with private label products, but Retail's product contribution margin increased by $40 million and its margin percentage expanded 140 basis points. The company has a solid balance sheet with $305 million in cash and no borrowings, and a leverage ratio of 2.6 times. They returned $190 million of cash to shareholders in fiscal 2023, and anticipate a challenging operating environment in fiscal 2024 with inflation and other macro factors affecting their cost structure, restaurant traffic, and consumer demand.

The company is targeting sales of $6.7 to $6.9 billion for the year, with $1 billion to $1.1 billion of that coming from the EMEA transaction. Sales growth, excluding acquisitions, is expected to be driven by pricing actions and favorable customer and product mix. However, pricing actions are not expected to be as high as in fiscal 2023, and transportation rates will likely be a headwind due to lower freight costs. The company is also strategically managing product mix by exiting certain lower-priced and lower-margin business, which will likely pressure volume.

The company is taking a cautious approach to consumer demand due to conflicting data about the health of the consumer and other macroeconomic headwinds. Despite these near-term factors, the company remains confident in the health and long-term growth prospects of the Global category. For fiscal 2024, the company expects adjusted EBITDA to be between $1.45 billion and $1.525 billion, with growth of more than 20% or about $260 million. This growth will be driven by higher sales and gross profit, partially offset by higher SG&A expenses.

Bernadette has outlined the company's fiscal 2024 outlook, which includes sales of $6.7 billion to $6.9 billion, with $1 billion to $1.1 billion of that coming from the consolidation of EMEA operations. The company expects the sales growth to be driven by price/mix, with volume pressure due to strategic customer and product mix management. The company is targeting adjusted EBITDA, including unconsolidated joint ventures, of nearly $1.5 billion, an increase of 20%, driven by sales and gross profit growth. Additionally, the company has started managing their operations as two business segments, North America and International, and will provide recast financial information for the past two years.

Tom Werner remarks that in the fourth quarter of fiscal year 2023, there was softness in the Foodservice channel and some destocking in the Retail channel. Additionally, they walked away from some volume during the contract season, but restaurant traffic has picked up a little bit in early June. They are monitoring the situation closely.

Tom Werner and Bernadette Madarieta discussed new opportunities in the market, as well as the destocking that occurred in the Global segment due to more timely on-time distribution. Andrew Lazar asked about potential new accounts, to which Werner responded that it was a mixed bag. Madarieta also mentioned that restaurant trends had softened, but the demand had been aided by the French fry attachment rate. Finally, Lazar asked about the gross margin level, which was estimated to be around 25%, and whether this level would be sustainable moving forward.

Tom Palmer asked about the cadence of 2024, to which Bernadette Madarieta replied that margins and profitability usually decline in the first quarter due to seasonality. Tom then asked about Europe, to which Bernadette responded that frozen potato prices have increased, and they are addressing it with pricing.

Bernadette Madarieta reported that the gross margin for the quarter was 25.1%, a 300-basis point increase, despite absorbing the lower-margin EMEA business. This was due to inflation, reduced fixed cost coverage from extended maintenance downtime, and an inventory write-off. Peter Galbo clarified that the additional hedging loss or mark-to-market loss was not adjusted out, which would have resulted in a higher exit rate.

The speaker is confident in their ability to manage the potato crop yields, as they have done in the past. They are closely monitoring their contracted amount versus the forecast, and will make adjustments to the new crop if necessary. They are also bringing on more capacity over the next 18 months as a testament to their belief in the category going forward.

Bernadette Madarieta has stated that the company is close to being done with the process of exiting lower margin businesses, and that they will continue to assess their customer and product mix as contracts come due. Tom Werner also confirmed that all of their capital projects are on track, with the midpoint of their CapEx for this year at $850 million, with the expectation that it will decrease for the next fiscal year.

Tom Werner discussed the elevated number of strategic capital projects and said that they will give additional guidance in the coming quarters. He also noted that the company had done a good job rebasing their business and had selectively walked away from business due to capacity constraints. Rob Dickerson asked if this meant that the pricing would remain stable if industry trends did not worsen, to which Tom Werner replied that they would evaluate accounts and businesses globally going forward.

Tom Werner and Bernadette Madarieta discussed the company's plans to expand the overall profit pool and drive adjusted EBITDA going forward. They discussed how the company has worked hard over the last 15 months to reach historic margin levels and will focus on driving account volume. Adam Samuelson asked for clarification on the expected EBITDA contribution from acquisitions and inquired about the line of sight to narrowing the gap between EMEA and the legacy North America business on margins.

Tom Werner explains that the target for their business is to run the assets around 95% capacity and that they are trending towards that. Bernadette Madarieta adds that they are confident in the actions they have taken so far and will continue to deliver going forward. Matt Smith then asks a follow-up question about the parent business and capacity utilization in the industry. Tom Werner responds that they are targeting 95% capacity utilization and are trending towards that, but he is unable to comment on the industry.

Matt Smith asked Bernadette Madarieta to provide some insight into the factors impacting fiscal 2024, such as the ERP spending and amortization expense related to the EMEA. Madarieta said that SG&A is expected to increase by $200 million due to IT spending, the EMEA, headcount, and noncash amortization. She also said that the IT spending and ERP investments will cause a peak level of expense in the coming years, with noncash amortization continuing to increase as the system is amortized over five to seven years.

William Reuter from Bank of America asked Bernadette Madarieta about the French fry attachment rate and whether there had been a sequential change. Madarieta said there had not been a sequential change and that the rate remained well above pre-pandemic levels. Reuter then asked if any of the future CapEx projects could include acquisitions, to which Madarieta responded that most of the projects would be organic investments. Carla Casella from JPMorgan then asked about the draw of the revolver borrowings and the timeframe of the cost increase for potatoes, to which Madarieta responded that the draw was related to the EMEA acquisition and that the cost increase had already gone into place.

Dexter Congbalay announced that the company will be holding an Investor Day on October 11th at the New York Stock Exchange. He also mentioned that the costs associated with the crop that is currently being harvested will start to be reflected in the P&L in the second quarter, as the company carries about 45-60 days of inventory. He concluded the call by encouraging those on the call to reach out to him for any follow-up questions.

This summary was generated with AI and may contain some inaccuracies.