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Lamb Weston Holdings Inc (LW) Q1 2025 Earnings Call Transcript Highlights: Navigate…

  • Revenue: Sales fell 1% compared to the previous year, exceeding the expected high single-digit decline.

  • Volume: Down 3% year-over-year due to loss of customer share and weak restaurant visit trends.

  • Price mix: Increased by 2% due to inflation-related pricing measures in Europe and North America.

  • Adjusted gross profit: Decrease of $137 million to $353 million.

  • Gross margin: Nearly 21.5%, about 100-150 basis points below the 22-23% target.

  • Adjusted EBITDA: $290 million, down $123 million year-on-year.

  • North America segment sales: Down 3% year over year.

  • International segment sales: Up 4% year over year.

  • Cash and liquidity: The quarter ended with $120 million in cash and $1 billion under the global revolving credit facility.

  • Net debt: About $3.9 billion, with a leverage ratio of three times.

  • Cash from operations: Generated $330 million, similar to last year.

  • Capital expenditure: Approximately $335 million in the first quarter.

  • Shareholder returns: Returned over $133 million, including $52 million in dividends and $82 million in share repurchases.

  • Savings through restructuring plan: Annual savings of $55 million are expected to be generated in fiscal year 2025 and $85 million in fiscal year 2026.

  • Outlook for the 2025 financial year: The target is net sales of $6.6 billion to $6.8 billion and adjusted EBITDA at the low end of $1.38 billion to $1.48 billion.

  • Adjusted diluted EPS target: Reduced to $4.15 to $4.35.

Release date: October 2, 2024

For the complete transcript of the conference call, please see the full conference call minutes.

Positive points

  • Lamb Weston Holdings Inc (NYSE:LW) delivered first-quarter financial results that were broadly in line with expectations, with sales above target due to better-than-expected volume and pricing mix.

  • The company managed to regain customer share and win new business, particularly in key international markets.

  • Lamb Weston Holdings Inc (NYSE:LW) announced a restructuring plan to improve operating efficiency that is expected to result in significant cost savings.

  • North America's potato crop is expected to be slightly above average, which could benefit the company in the coming quarters.

  • The company has a strong balance sheet with ample liquidity and ended the first quarter with approximately $120 million in cash and $1 billion under its global revolving credit facility.

Negative points

  • Lamb Weston Holdings Inc (NYSE:LW) faces challenges with higher-than-expected manufacturing costs partially offsetting better sales and SG&A performance.

  • Global restaurant traffic, particularly in the U.S., remains a challenge with overall traffic down 2% year-over-year.

  • The company is grappling with the impact of a voluntary product withdrawal that resulted in a decline in adjusted gross profit.

  • Lamb Weston Holdings Inc (NYSE:LW) announced the permanent closure of its Connell Washington plant, reducing overall capacity in North America by more than 5%.

  • The Company expects to incur a pre-tax charge of $200 million to $250 million related to its restructuring plan, which will impact its financial results.

Q&A highlights

Q: Can you explain why prices in North America were better than expected and whether trade investments were cheaper than expected? A: The pricing environment was in line with expectations, with better mix and carryovers from last year contributing to results. The contract season ended as expected and stabilized the environment for the future. (Thomas Werner, CEO)

Q: Are other North American players considering similar capacity reduction measures, and how might this impact the imbalance between supply and demand? A: We have made difficult decisions based on the current operating environment, as restaurant traffic is expected to continue to be difficult. We are focused on managing Lamb Weston and while other companies may be looking at expanding capacity, this remains to be seen. (Thomas Werner, CEO)

Q: Can you provide more details on the $500 million in environmental improvements and possible mitigation strategies? A: The $500 million will primarily go toward wastewater investments needed to maintain current capacity levels. The timeline varies by regulation and we are exploring government incentives to reduce spending. (Bernadette Madarieta, CFO)

Q: How does the temporary delay in ERP implementation affect medium-term financial goals? A: The delay came at the right time, allowing us to focus on stabilizing the business. Although this will postpone ERP benefits, we do not expect any major impact on future guidance and will resume work upon completion of the major enhancements. (Bernadette Madarieta, CFO)

Q: How will the restructuring measures affect gross margins and profit distribution during the year? A: Higher manufacturing costs are due to the reduction in fixed costs for unused lines and a less favorable channel mix. We aim to offset costs through savings of $55 million and expect margin improvement as volume returns. (Bernadette Madarieta, CFO)

For the complete transcript of the conference call, please see the full conference call minutes.

This article first appeared on GuruFocus.

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