Lamb Weston Holdings, Inc. LW continued with its splendid performance in second-quarter fiscal 2019, wherein both the top and the bottom lines grew year over year and surpassed the Zacks Consensus Estimate. Moreover, management pulled up its sales and adjusted EBITDA guidance for the fiscal. These factors clearly instilled positive sentiments in investors as shares of the company gained 3.6% during the trading session on Jan 4.
Following its spin-off from Conagra Brands CAG in November 2016, the company has been delivering positive earnings and sales surprise. This splendid surprise history has helped this Zacks Rank #2 (Buy) company gain close to 31% in a year, against the industry’s decline of 19%.
Q2 in Detail
Quarterly adjusted earnings of 80 cents crushed the Zacks Consensus Estimate of 70 cents and surged 48.1% year over year. This includes a benefit of about 10 cents from lower tax rate, stemming from the recent tax reforms. Also, bottom-line growth was backed by higher operating income. Notably, effective tax rate was 21.5% this quarter, down from 33.3% in the year-ago quarter.
Lamb Weston Holdings Inc. Price, Consensus and EPS Surprise
Lamb Weston Holdings Inc. Price, Consensus and EPS Surprise | Lamb Weston Holdings Inc. Quote
Net sales advanced 11% to $911.4 million, which also surpassed the consensus mark of $895 million. The top line was fueled by improved price/mix, owing to solid pricing strategies and better mix. Moreover, volumes grew 5%, courtesy of strength noted across the Global and Retail segments.
Gross profit increased 19.6% to $249 million, as improved price mix, greater volumes and supply-chain efficiency savings compensated for increased transportation and warehousing expenses, and input and production cost inflation.
SG&A expenses increased 9.6% to $75 million on account of higher escalated IT and infrastructure related costs, and greater sales and marketing investments. Moreover, adverse currency movements were a hurdle.
Adjusted EBITDA (including unconsolidated JVs) jumped 18% to $222.8 million, driven by higher operating income.
Segment Analysis
Sales at the Global segment jumped 13% to $470 million, thanks to better price/mix and higher volumes. Volumes increased due to strong sales to strategic consumers in the United States and core international regions, and gains from limited time product offerings (or LTOs). Product contribution margin at the segment increased 28% to $112.4 million.
Foodservice sales jumped 3% to $279.7 million on the back of improved price/mix, which, in turn, was driven by continued impacts of strategic pricing actions undertaken last year along with better mix. However, volumes dipped 2%. Product contribution margin jumped 6% to $97.4 million.
At the Retail segment, sales soared 21% to $123.9 million. Volumes at the segment surged, owing to solid distribution gains of Grown in Idaho, among other branded products. Further, price/mix improved, courtesy of increased prices across private label and branded portfolios, and better mix. Product contribution margin was up 34% at $25.9 million.
Other Financial Details
The company ended the quarter with cash and cash equivalents of $121.6 million, long-term debt (excluding current portion) of $2,321.8 million and total shareholders’ deficit of $167.1 million.
The company generated $316.8 million as net cash from operating activities during the first half.
Lamb Weston also recently bought an Australian potato processor, while it also acquired partner’s interest in BSW joint venture. Additionally, Lamb Weston announced a 5% hike in quarterly dividend in December 2018, when it also adopted a share buyback plan of $250 million.
During the quarter, adjusted equity method investment earnings from unconsolidated joint ventures in the United States and Europe fell $3.9 million, owing to higher pricing in Europe. This, in turn, was a result of poor crop, which was somewhat compensated by better price/mix and improved volumes in both the United States and Europe.
Guidance
Management is pleased with its quarterly results. Further, the company expects the operating environment to remain favorable in North America in the remainder of fiscal 2019. However, the company expects to battle higher cost inflation, greater investments related to operating, sales and product innovation capacities, and hurdles related to poor potato crop in Europe. Nevertheless, the company raised its outlook, given a robust first-half show and operating momentum.
In fiscal 2019, management now expects net sales to increase mid-to-high-single digits compared with the previous view of mid-single-digit increase. The company expects sales growth to come on the back of strong price/mix in the first half.
Adjusted EBITDA (including unconsolidated joint ventures) is expected to range between $870 million and $880 million compared with the previous estimate of $860-$870 million. While gross margin is expected to at least be in line with net sales, SG&A expenses are anticipated to rise. SG&A expenses are likely to increase due to planned investments undertaken to support upgrade of information systems and enterprise resource planning infrastructure. Also, the company plans to invest more toward enhancing innovations, sales, marketing and other functional capabilities to augment operating efficiencies and fuel growth.
Interest costs are projected to be roughly $110 million, while adjusted effective tax rate is likely to be nearly 23%. Further, the company plans to use cash of $360 million for capital expenditures. Also, management anticipates equity method investment earnings to fall year over year on account of considerably greater raw potato prices in Europe.
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