Lamb Weston Holdings Inc

Previous wording

The following discussion and analysis of our financial condition and results of operations, which we refer to as “MD&A,” should be read in conjunction with our condensed consolidated financial statements and related notes included in "Financial Information" of this Quarterly Report on Form 10-Q (this “Form 10-Q”) and in “Financial Statements and Supplementary Data” of the Company's Annual Report on Form 10-K for the fiscal year ended May 28, 2023 (the “Form 10-K”), which we filed with the United States (“U.S.”) Securities and Exchange Commission (“SEC”) on July 25, 2023.

Current wording

The following discussion and analysis of our financial condition and results of operations, which we refer to as “MD&A,” should be read in conjunction with our condensed consolidated financial statements and related notes included in "Financial Information" of this Quarterly Report on Form 10-Q (this “Form 10-Q”) and in “Financial Statements and Supplementary Data” of the Company's Annual Report on Form 10-K for the fiscal year ended May 28, 2023 (the “Form 10-K”), which we filed with the United States (“U.S.”) Securities and Exchange Commission (the “SEC”) on July 25, 2023.

Previous wording

This report, including the MD&A, contains forward-looking statements within the meaning of the federal securities laws. Words such as “will,” “continue,” “may,” “expect,” “would,” “believe,” “deliver,” “manage,” “anticipate,” “drive,” “leverage,” “benefit,” “increase,” “outlook,” and variations of such words and similar expressions are intended to identify forward-looking statements. Examples of forward-looking statements include, but are not limited to, statements regarding our business and financial outlook and prospects, our plans, execution, capital expenditures and investments, pricing actions, cash flows, liquidity, dividends, enterprise resource planning (“ERP”) system implementation, integration of our former European joint venture, Lamb-Weston/Meijer v.o.f. (“LW EMEA”), and inflation, conditions in our industry, and the global economy. These forward-looking statements are based on management’s current expectations and are subject to uncertainties and changes in circumstances. Readers of this report should understand that these statements are not guarantees of performance or results. Many factors could affect these forward-looking statements and our actual financial results and cause them to vary materially from the expectations contained in the forward-looking statements, including those set forth in this report. These risks and uncertainties include, among other things: the availability and prices of raw materials and other commodities; labor shortages and other operational challenges; an uncertain general economic environment, including inflationary pressures and recessionary concerns, any of which could adversely impact our business, financial condition or results of operations, including the demand and prices for our products; risks associated with integrating acquired businesses, including LW EMEA; levels of labor and people-related expenses; our ability to successfully execute our long-term value creation strategies; our ability to execute on large capital projects, including construction of new production lines or facilities; difficulties, disruptions or delays in implementing new technology, including our new ERP system; the competitive environment and related conditions in the markets in which we operate; political and economic conditions of the countries in which we conduct business and other factors related to our international operations; disruptions in the global economy caused by conflicts such as the war in Ukraine and conflicts in the Middle East and the possible related heightening of our other known risks; impacts on our business due to health pandemics or other contagious outbreaks, such as the COVID-19 pandemic, including impacts on demand for our products, increased costs, disruption of supply, other constraints in the availability of key commodities and other necessary services or restrictions imposed by public health authorities or governments; disruption of our access to export mechanisms; risks associated with ot…

Excerpt shortened here; the source contains the full paragraph.

Current wording

This report, including the MD&A, contains forward-looking statements within the meaning of the federal securities laws. Words such as “will,” “continue,” “may,” “expect,” “would,” “believe,” “deliver,” “manage,” “anticipate,” “drive,” “leverage,” “benefit,” “increase,” “outlook,” and variations of such words and similar expressions are intended to identify forward-looking statements. Examples of forward-looking statements include, but are not limited to, statements regarding our business and financial outlook and prospects, our plans, execution, capital expenditures and investments, pricing actions, cash flows, liquidity, dividends, enterprise resource planning (“ERP”) system implementation, integration of our former European joint venture, Lamb-Weston/Meijer v.o.f. (“LW EMEA”), and inflation, conditions in our industry, and the global economy. These forward-looking statements are based on management’s current expectations and are subject to uncertainties and changes in circumstances. Readers of this report should understand that these statements are not guarantees of performance or results. Many factors could affect these forward-looking statements and our actual financial results and cause them to vary materially from the expectations contained in the forward-looking statements, including those set forth in this report. These risks and uncertainties include, among other things: the availability and prices of raw materials and other commodities; labor shortages and other operational challenges; an uncertain general economic environment, including inflationary pressures and recessionary concerns, any of which could adversely impact our business, financial condition or results of operations, including the demand and prices for our products; difficulties, disruptions or delays in implementing new technology, including our new ERP system; risks associated with integrating acquired businesses, including LW EMEA; levels of labor and people-related expenses; our ability to successfully execute our long-term value creation strategies; our ability to execute on large capital projects, including construction of new production lines or facilities; the competitive environment and related conditions in the markets in which we operate; political and economic conditions of the countries in which we conduct business and other factors related to our international operations; disruptions in the global economy caused by conflicts such as the war in Ukraine and conflicts in the Middle East and the possible related heightening of our other known risks; impacts on our business due to health pandemics or other contagious outbreaks, such as the COVID-19 pandemic, including impacts on demand for our products, increased costs, disruption of supply, other constraints in the availability of key commodities and other necessary services or restrictions imposed by public health authorities or governments; disruption of our access to export mechanisms; risks associated with ot…

Excerpt shortened here; the source contains the full paragraph.

Previous wording

This MD&A is provided as a supplement to the consolidated financial statements and related condensed notes included elsewhere herein to help provide an understanding of our financial condition, changes in financial condition and results of our operations. Our MD&A is based on financial data derived from the financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). We have also presented Adjusted EBITDA, which is considered a non-GAAP financial measure, to supplement the financial information included in this report. Refer to “Non-GAAP Financial Measures” below for the definition of Adjusted EBITDA, and a reconciliation of this non-GAAP financial measure to its most directly comparable GAAP financial measure, net income. For more information, refer to the “Results of Operations” and “Non-GAAP Financial Measures” sections below.

Current wording

This MD&A is provided as a supplement to the consolidated financial statements and related condensed notes included elsewhere herein to help provide an understanding of our financial condition, changes in financial condition and results of our operations. Our MD&A is based on financial data derived from the financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). We have also presented Adjusted EBITDA, Adjusted Gross Profit, Adjusted Selling, General and Administrative (“SG&A”) expenses, and Adjusted Equity Method Investment Earnings, each of which is considered a non-GAAP financial measure, to supplement the financial information included in this report. Refer to “Non-GAAP Financial Measures” below for the definitions of Adjusted EBITDA, Adjusted Gross Profit, Adjusted SG&A, and Adjusted Equity Method Investment Earnings, and a reconciliation of these non-GAAP financial measures to their most directly comparable GAAP financial measures, net income, gross profit, SG&A, or equity method investment earnings, as applicable. For more information, refer to the “Results of Operations” and “Non-GAAP Financial Measures” sections below.

Previous wording

In November 2023, our greenfield french fry processing facility in Ulanqab, Inner Mongolia, China became operational as scheduled. Our capacity expansion and modernization efforts in Idaho, Argentina, and the Netherlands remain on track. In addition, at the beginning of our third quarter of fiscal 2024, we began transitioning certain central systems and functions in North America to a new ERP system, as part of our multi-year effort to upgrade our information systems and ERP infrastructure across the company.

Current wording

Our third quarter results include a higher-than-expected impact from the transition to a new ERP system in North America. As previously disclosed, at the beginning of our third quarter of fiscal 2024, we began transitioning certain central systems and functions in North America to a new ERP system, as part of our multi-year effort to upgrade our information systems and ERP infrastructure across the company. The transition resulted in a temporary reduction in visibility into our finished goods inventories at distribution centers, which affected our ability to fulfill customer orders. As a result, our sales volume performance declined in the quarter and margins were pressured more than we initially anticipated, as more fully described below in “Results of Operations.” By the end of the quarter, we restored the visibility into our finished goods inventories and customer order fulfillment rates to pre-transition levels.

Previous wording

In the first half of fiscal 2024, we generated net cash from operating activities of $455.2 million, up $167.2 million compared to the first half of fiscal 2023, primarily due to higher earnings. We ended the second quarter with $78.3 million of cash and cash equivalents and $175.0 million of borrowings outstanding under our $1.0 billion U.S. revolving credit facility. In addition, we returned an aggregate of $90.8 million to our common stockholders during the quarter, including $50.0 million of share repurchases and $40.8 million in cash dividends. In October 2023, we increased our share repurchase authorization to $500.0 million, and in December 2023, we increased our quarterly cash dividend to common stockholders by 29% to $0.36 per share.

Current wording

In the first three quarters of fiscal 2024, we generated net cash from operating activities of $481.5 million, up $146.4 million compared to the first three quarters of fiscal 2023, primarily due to higher earnings. We returned an aggregate of $272.0 million to our common stockholders in the form of cash dividends and share repurchases. We ended the third quarter with $62.3 million of cash and cash equivalents and $908.8 million of available liquidity under committed revolving credit facilities in the U.S. and Europe.

Previous wording

In fiscal 2024, we expect to deliver net sales and earnings growth, and to benefit from incremental sales and earnings during the first three quarters of the fiscal year, as compared to the first three quarters of fiscal 2023, from the consolidation of the financial results of LW EMEA. In addition to the incremental sales related to the consolidation of LW EMEA, we expect pricing actions to drive net sales growth for fiscal 2024, as we expect sales volumes will continue to be pressured by our decisions to strategically manage our customer and product mix by exiting certain lower-priced and lower-margin business. We also anticipate that demand for our products in the near term may be tempered by softer restaurant traffic trends, as compared to the prior year period, in North America and other key markets as our customers and consumers generally both respond to challenging macroeconomic environments.

Current wording

For the remainder of fiscal 2024, we expect to deliver net sales growth that is driven by the carryover benefit of pricing actions taken in fiscal 2023, as well as pricing actions in select sales channels taken in fiscal 2024. We expect volume growth will be pressured, with performance mixed by geography and sales channel. We continue to anticipate that demand for our products in the near term may be tempered by soft restaurant traffic trends, as compared to the prior year period, in North America and other key international markets as our customers and consumers generally respond to the cumulative effect of inflation for food consumed away from home. We do not expect the ERP system transition to have a material impact on our financial performance for the remainder of fiscal 2024 as customer order fulfillment rates have been restored to pre-transition levels.

Previous wording

We expect earnings growth for fiscal 2024 to be largely driven by sales and gross profit growth, and that the rate of input cost inflation, driven largely by higher potato costs, will, in aggregate, moderate as compared to fiscal 2023 inflation rates. We anticipate that the increase in gross profit will be partially offset by the $64.6 million pre-tax charge incurred in the second quarter of fiscal 2024 to write-off excess raw potatoes, and by higher SG&A, reflecting: incremental expense attributable to the consolidation of the financial results of LW EMEA; increased investments to upgrade our information systems and ERP infrastructure; non-cash amortization of intangible assets associated with the LW EMEA Acquisition; and higher compensation and benefits expenses due to increased employee headcount.

Current wording

We expect net income and Adjusted EBITDA growth for the remainder of fiscal 2024, as compared to the prior year period, to be largely driven by sales and Adjusted Gross Profit growth, and that the rate of input cost inflation, driven largely by higher potato costs, will, in aggregate, moderate as compared to fiscal 2023 inflation rates. We anticipate that the increase in Adjusted Gross Profit during this period will be partially offset by higher SG&A, reflecting: increased information technology investments, including expenses associated with the transition to the new ERP system and related amortization, and higher compensation and benefits expenses due to increased employee headcount.

Previous wording

We continue to believe in the long-term growth outlook for the frozen potato category and that Lamb Weston is well-positioned to drive sustainable, profitable growth, and to better serve customers around the world as we seek to leverage the commercial and operational benefits from the LW EMEA Acquisition, as well as the benefits we expect from our previously announced capacity expansion investments in China, the U.S., Argentina, and the Netherlands.

Current wording

We continue to believe in the long-term growth outlook for the frozen potato category and that Lamb Weston is well-positioned to drive sustainable, profitable growth, and to better serve customers around the world as we seek to leverage the commercial and operational benefits from the LW EMEA Acquisition, as well as the benefits we expect from our previously announced capacity expansion investments in the U.S., the Netherlands, and Argentina.

Previous wording

Effective May 29, 2023, to align with our expanded global footprint following the completion of the LW EMEA Acquisition, management, including our chief executive officer (who is our chief operating decision maker), began managing operations in two business segments based on management’s change to the way it monitors performance, aligns strategies, and allocates resources. As a result of this change, we now have two operating segments, each of which is a reportable segment: North America and International. We report net sales and Adjusted EBITDA by segment and on a consolidated basis, which are the primary measures reported to our chief operating decision maker for purposes of allocating resources to our segments and assessing their performance. Adjusted EBITDA is a non-GAAP financial measure. For additional information on our reportable segments, Segment Adjusted EBITDA, and Adjusted EBITDA, see Note 12, Segments, of the Condensed Notes to Consolidated Financial Statements in “Part I, Item 1. Financial Statements” of this report and “Non-GAAP Financial Measures” below. Prior period segment data has been retrospectively adjusted to conform with current period classification.

Current wording

Effective May 29, 2023, to align with our expanded global footprint following the completion of the LW EMEA Acquisition, management, including our chief executive officer (who is our chief operating decision maker), began managing operations in two business segments based on management’s change to the way it monitors performance, aligns strategies, and allocates resources. As a result of this change, we now have two operating segments, each of which is a reportable segment: North America and International. We report net sales and Adjusted EBITDA by segment (Segment Adjusted EBITDA) and on a consolidated basis (Adjusted EBITDA), which are the primary measures reported to our chief operating decision maker for purposes of allocating resources to our segments and assessing their performance. Adjusted EBITDA is a non-GAAP financial measure. For additional information on our reportable segments, Segment Adjusted EBITDA, and Adjusted EBITDA, see Note 12, Segments, of the Condensed Notes to Consolidated Financial Statements in “Part I, Item 1. Financial Statements” of this report and “Non-GAAP Financial Measures” below. Prior period segment data has been retrospectively adjusted to conform with current period classification.

Previous wording

Compared to the prior year quarter, net sales for the second quarter of fiscal 2024 increased $455.6 million, or 36%, to $1,732.1 million, and included $375.8 million of incremental sales attributable to the consolidation of the financial results of LW EMEA following the completion of the LW EMEA Acquisition in February 2023.

Current wording

Compared to the prior year quarter, net sales for the third quarter of fiscal 2024 increased $204.7 million, or 16%, to $1,458.3 million, and included $356.7 million of incremental sales attributable to the consolidation of the financial results of LW EMEA following the completion of the LW EMEA Acquisition in February 2023.

Previous wording

Net sales, excluding the incremental sales attributable to the LW EMEA Acquisition, grew 6% versus the prior year quarter. Price/mix increased 12%, reflecting the benefit of inflation-driven pricing actions across each of our business segments, and favorable mix, partially offset by lower customer transportation charges. Volume declined 6%, primarily reflecting the carryover effect of our decisions to exit certain lower-priced and lower-margin business in the prior year to strategically manage customer and product mix. Volume elasticities in response to inflation-based pricing actions across our portfolio continued to remain low.

Current wording

Net sales, excluding the incremental sales attributable to the LW EMEA Acquisition, were down $152.0 million, or 12% versus the prior year quarter, with approximately $135 million of the decline attributable to the ERP transition. Volume declined 16%, with approximately 8 percentage points of the decline reflecting unfilled customer orders resulting from the ERP transition. The other half of the volume decline largely reflects soft restaurant traffic trends in North America and other key international markets, as well as the carryover effect of our decisions to exit certain lower-priced and lower-margin business in the prior year to strategically manage customer and product mix. Price/mix increased 4%, reflecting the benefit of inflation-driven pricing actions across both of our business segments, partially offset by lower customer transportation charges.

Previous wording

International segment net sales, which includes all sales to customers outside of North America, increased $351.0 million, or 164%, to $565.0 million, and included $375.8 million of incremental sales attributable to the consolidation of the financial results of LW EMEA. International segment net sales, excluding the incremental sales attributable to the LW EMEA Acquisition, declined 12% compared to the prior year quarter. Price/mix increased 10%, driven by the carryover benefit of inflation-driven pricing actions taken in fiscal 2023, as well as favorable mix, partially offset by lower customer transportation charges. Volume, excluding the benefit from the LW EMEA acquisition, declined 22%, primarily reflecting our decisions to exit certain lower-priced and lower-margin business as well as lapping a strong prior year comparison.

Current wording

International segment net sales, which includes all sales to customers outside of North America, increased $328.0 million, or 179%, to $510.8 million, and included $356.7 million of incremental sales attributable to the consolidation of the financial results of LW EMEA. International segment net sales, excluding the incremental sales attributable to the LW EMEA Acquisition, declined $28.7 million, or 16% compared to the prior year quarter, with approximately $12 million of the decline attributable to the ERP transition. Volume, excluding the benefit from the LW EMEA Acquisition, declined 17%. More than half of the volume decline reflects our decisions to exit certain lower-priced and lower-margin business in the prior fiscal year, with the remainder primarily reflecting unfilled customer orders served by exports from North America as a result of the ERP transition. Price/mix increased 1% as the carryover benefit of inflation-driving pricing actions taken in fiscal 2023 was mostly offset by lower customer transportation charges.

Previous wording

Gross profit increased $94.0 million, or 25%, to $475.6 million, and included $1.8 million ($1.3 million after-tax, or $0.01 per share) of benefits associated with the sale of inventory stepped-up to fair value in the LW EMEA Acquisition, and a $4.6 million ($3.5 million after-tax, or $0.02 per share) unrealized loss related to mark-to-market adjustments associated with commodity hedging contracts. The prior year quarter included a $0.4 million ($0.3 million after-tax, with no per share impact) unrealized gain related to mark-to-market adjustments associated with commodity hedging contracts.

Current wording

Gross profit increased $5.9 million, or 1%, to $403.7 million, for the third quarter of fiscal 2024, and included a $23.3 million ($17.3 million after-tax, or $0.12 per share) unrealized loss related to mark-to-market adjustments associated with commodity hedging contracts. The prior year quarter included a $5.1 million ($3.8 million after-tax, with $0.03 per share impact) unrealized loss related to mark-to-market adjustments associated with commodity hedging contracts.

Previous wording

The increase in gross profit was also partially offset by higher costs per pound, which largely reflected mid-single-digit cost inflation, in the aggregate, for key inputs, including: raw potatoes, ingredients such as grains and starches used in product coatings, and labor. The increase in per pound costs was partially offset by supply chain productivity savings as well as lower costs for edible oils.

Current wording

The increase in Adjusted Gross Profit was also partially offset by higher costs per pound, which largely reflected mid-single-digit cost inflation, in the aggregate, for key inputs, including: raw potatoes, labor, energy, and ingredients such as grains and starches used in product coatings. The increase in per pound costs was partially offset by lower transportation rates and lower cost of edible oils.

Previous wording

SG&A increased $60.2 million to $170.0 million in the second quarter of fiscal 2024, and included: $4.8 million ($3.6 million after-tax, or $0.02 per share) of LW EMEA integration and acquisition-related expenses; $3.0 million ($2.2 million after-tax, or $0.01 per share) of unrealized gains related to mark-to-market adjustments associated with currency hedging contracts; and $9.2 million ($6.9 million after-tax, or $0.05 per share) of foreign currency exchange gains. The prior year quarter included $26.5 million ($19.2 million after-tax, or $0.13 per share) of LW EMEA integration and acquisition-related net gains and $1.4 million ($1.0 million after-tax, or $0.01 per share) of foreign currency exchange losses.

Current wording

SG&A increased $48.3 million to $179.8 million in the third quarter of fiscal 2024, and included: $2.4 million ($1.8 million after-tax, or $0.01 per share) of LW EMEA integration and acquisition-related expenses; $4.0 million ($3.0 million after-tax, or $0.02 per share) of unrealized loss related to mark-to-market adjustments associated with currency hedging contracts; and $9.0 million ($6.8 million after-tax, or $0.04 per share) of foreign currency exchange loss. The prior year quarter included $4.3 million ($2.8 million after-tax, or $0.02 per share) of LW EMEA integration and acquisition-related net gains and $1.8 million ($1.4 million after-tax, or $0.01 per share) of foreign currency exchange losses.

Previous wording

International Segment Adjusted EBITDA increased $40.0 million to $100.2 million, and excluded a net benefit from comparability items of $1.8 million ($1.3 million after-tax, or $0.01 per share) associated with the sale of inventory stepped-up to fair value in the LW EMEA Acquisition. Incremental earnings from the consolidation of the financial results of LW EMEA drove the increase. Excluding the benefit from the LW EMEA Acquisition, higher costs per pound, including a $7.6 million allocated charge for the write-off of excess raw potatoes, and the impact of lower volumes, more than offset favorable price/mix.

Current wording

International Segment Adjusted EBITDA increased $47.6 million to $101.7 million. Incremental earnings from the consolidation of the financial results of LW EMEA drove the increase. Excluding the benefit from the LW EMEA Acquisition, higher costs per pound, an estimated $5 million negative impact from the ERP transition, lower volumes, and a $2.3 million allocated charge for the write-off of excess raw potatoes, more than offset favorable price/mix.

Previous wording

Compared with the prior year quarter, interest expense, net increased $4.5 million to $29.1 million, reflecting the impact of higher total debt outstanding and higher interest rates on our floating rate debt, partially offset by higher capitalized interest related to our manufacturing expansion projects and interest income.

Current wording

Compared with the prior year quarter, interest expense, net increased $9.9 million to $35.7 million, reflecting the impact of higher total debt outstanding and higher interest rates on our floating rate debt, partially offset by higher capitalized interest related to our manufacturing expansion projects, net of interest income.

Previous wording

Income tax expense for the second quarter of fiscal 2024 and 2023 was $66.2 million and $36.8 million, respectively. The effective income tax rate (calculated as the ratio of income tax expense to pre-tax income, inclusive of equity method investment earnings) was 23.5% and 26.3% for the second quarter of fiscal 2024 and 2023, respectively. The effective tax rate varies from the U.S. statutory tax rate of 21%, principally due to the impact of U.S. state taxes, foreign taxes and currency, permanent differences, and discrete items.

Current wording

Income tax expense for the third quarter of fiscal 2024 and 2023 was $43.1 million and $42.1 million, respectively. The effective income tax rate (calculated as the ratio of income tax expense to pre-tax income, inclusive of equity method investment earnings) was 22.8% and 19.4% for the third quarter of fiscal 2024 and 2023, respectively. The effective tax rate varies from the U.S. statutory tax rate of 21%, principally due to the impact of U.S. state taxes, foreign taxes and currency, permanent differences, and discrete items.

Previous wording

Equity method investment earnings (loss) from unconsolidated joint ventures were earnings of $4.7 million and a loss of $107.3 million for the second quarter of fiscal 2024 and 2023, respectively. The results in the current quarter include earnings associated with our 50% interest in Lamb Weston/RDO Frozen, an unconsolidated potato processing joint venture in Minnesota (“Lamb Weston RDO”), while results in the prior year quarter also included earnings associated with our previously held 50% interest in LW EMEA that were classified as equity method investment earnings (losses) prior to the completion of the LW EMEA Acquisition. The results in the prior year quarter include a $130.1 million ($96.5 million after-tax, or $0.67 per share) unrealized loss related to mark-to-market adjustments associated with currency and commodity hedging contracts in LW EMEA.

Current wording

Equity method investment earnings (loss) from unconsolidated joint ventures were earnings of $1.0 million and a loss of $23.3 million for the third quarter of fiscal 2024 and 2023, respectively. The results in the current quarter include earnings associated with our 50% interest in Lamb Weston/RDO Frozen, an unconsolidated potato processing joint venture in Minnesota (“Lamb Weston RDO”), while results in the prior year quarter also included earnings associated with our previously held 50% interest in LW EMEA that were classified as equity method investment earnings (losses) prior to the completion of the LW EMEA Acquisition. The results in the prior year quarter include a $47.1 million ($34.9 million after-tax, or $0.24 per share) unrealized loss related to mark-to-market adjustments associated with currency and commodity hedging contracts in LW EMEA.

Previous wording

Excluding these items, equity method investment earnings declined $18.1 million compared to the prior year quarter, largely due to our share of LW EMEA earnings being included in the prior year quarter. The results in the second quarter also include a $6.3 million pre-tax charge for the write-off of excess raw potatoes at Lamb Weston RDO.

Current wording

Adjusted Equity Method Investment Earnings declined $22.8 million compared to the prior year quarter, largely due to our share of LW EMEA earnings being included in the prior year quarter. The results in the third quarter also include lower sales from unfilled customer orders related to the transition to a new ERP system and a $4.5 million pre-tax charge for the write-off of excess raw potatoes at Lamb Weston RDO.

Previous wording

Twenty-Six Weeks Ended November 26, 2023 compared to Twenty-Six Weeks Ended November 27, 2022

Current wording

Thirty-Nine Weeks Ended February 25, 2024 compared to Thirty-Nine Weeks Ended February 26, 2023

Previous wording

Compared to the first half of fiscal 2023, net sales increased $995.3 million, or 41%, to $3,397.4 million, and included $750.7 million of incremental sales attributable to the consolidation of the financial results of (1) LW EMEA, following the completion of the LW EMEA Acquisition in February 2023, and (2) Lamb Weston Alimentos Modernos S.A., our joint venture in Argentina (“LWAMSA”), following our acquisition in July 2022 of an additional 40% equity interest in LWAMSA (the “LWAMSA Acquisition” and, together with the LW EMEA Acquisition, the “Acquisitions”).

Current wording

Compared to the first three quarters of fiscal 2023, net sales increased $1,200.0 million, or 33%, to $4,855.7 million, and included $1,107.4 million of incremental sales attributable to the consolidation of the financial results of (1) LW EMEA, following the completion of the LW EMEA Acquisition in February 2023, and (2) Lamb Weston Alimentos Modernos S.A., our joint venture in Argentina (“LWAMSA”), following our acquisition in July 2022 of an additional 40% equity interest in LWAMSA (the “LWAMSA Acquisition” and, together with the LW EMEA Acquisition, the “Acquisitions”).

Previous wording

Net sales, excluding the incremental sales attributable to the Acquisitions, grew 10%. Price/mix increased 17%, reflecting the benefit of inflation-driven pricing actions across each of our business segments, lower trade spending in North America, and favorable mix, partially offset by lower customer transportation charges. Volume declined 7%, primarily reflecting the carryover effect of our decisions to exit certain lower-priced and lower-margin business in the prior year as we continue to strategically manage customer and product mix. To a lesser extent, inventory destocking by certain customers in international markets and in select U.S. retail channels also pressured volumes. Volume elasticities in response to inflation-based pricing actions across our portfolio continued to remain low.

Current wording

Net sales, excluding the incremental sales attributable to the Acquisitions, grew $92.6 million, or 3% compared to the first three quarters of fiscal 2023, with growth tempered by approximately $135 million due to the ERP transition during our fiscal third quarter. Price/mix increased 15%, reflecting the benefit of inflation-driven pricing actions across both of our business segments, partially offset by lower customer transportation charges. Volume declined 12%, with more than half of the decline reflecting the carryover effect of our decisions to exit certain lower-priced and lower-margin business in the prior year to strategically manage customer and product mix. Nearly one quarter of the volume decline reflects unfilled customer orders resulting from the transition to a new ERP system. The remainder of the volume decline was largely due to soft demand trends in North America and other key international markets, inventory destocking by certain customers in international markets and in select U.S. retail channels during the first half of fiscal 2024, and volume elasticity in response to inflation-based pricing actions.

Previous wording

North America segment net sales, which includes all sales to customers in the U.S., Canada, and Mexico, increased $284.4 million, or 14%, to $2,302.5 million. Price/mix increased 18%, reflecting the carryover benefit of inflation-driven pricing actions taken in fiscal 2023, lower trade spending, and favorable mix, partially offset by lower customer transportation charges. Volume declined 4%, primarily reflecting the carryover effect of our decisions to exit certain lower-priced and lower-margin business in the prior year. To a lesser extent, lower shipments in response to inventory destocking by certain customers in select U.S. retail channels also pressured volumes.

Current wording

North America segment net sales, which includes all sales to customers in the U.S., Canada, and Mexico, increased $161.1 million, or 5%, to $3,250.0 million, with growth tempered by approximately $123 million due to the ERP transition during our fiscal third quarter. Price/mix increased 13%, reflecting the carryover benefit of inflation-driven pricing actions taken in fiscal 2023, as well as pricing actions for contracts with large and regional chain restaurant customers in fiscal 2024, partially offset by lower customer transportation charges. Volume declined 8%, with approximately two-thirds of the volume decline reflecting the carryover effect of our decisions to exit certain lower-priced and lower-margin business in the prior year. The remaining approximately one-third of the volume decline reflects unfilled customer orders resulting from the ERP transition. To a lesser extent, soft restaurant traffic and retail trends, as well as lower shipments in response to inventory destocking by certain customers in select U.S. retail channels, also pressured volumes.

Previous wording

International segment net sales, which includes all sales to customers outside of North America, increased $710.9 million, or 185%, to $1,094.9 million, and included $750.7 million of incremental sales attributable to the Acquisitions. International segment net sales, excluding the incremental sales attributable to the Acquisitions, declined 11% compared to the prior year period. Price/mix increased 14%, driven by the carryover benefit of inflation-driven pricing actions taken in fiscal 2023, as well as favorable mix, partially offset by lower customer transportation charges. Volume declined 25%, primarily reflecting the carryover effect of our decisions to exit certain lower-priced and lower-margin business in the prior year. To a lesser extent, lower shipments in response to inventory destocking by certain customers in several markets in the Asia-Pacific region also pressured volume.

Current wording

International segment net sales, which includes all sales to customers outside of North America, increased $1,038.9 million, or 183%, to $1,605.7 million, and included $1,107.4 million of incremental sales attributable to the Acquisitions. International segment net sales, excluding the incremental sales attributable to the Acquisitions, declined $68.5 million, or 12% compared to the prior year period, with approximately $12 million of the decline attributable to the ERP transition during our fiscal third quarter. Volume declined 22%, primarily reflecting the carryover effect of our decisions to exit certain lower-priced and lower-margin business in the prior year. To a lesser extent, soft restaurant traffic trends in key international markets, as well as lower shipments in response to inventory destocking by certain customers in several markets in the Asia-Pacific region, also pressured volume. Less than 10% of the volume decline reflects unfilled customer orders resulting from the ERP transition. Price/mix increased 10%, driven by the carryover benefit of inflation-driven pricing actions taken in fiscal 2023, partially offset by lower customer transportation charges.

Previous wording

Gross profit increased $320.2 million, or 49%, to $975.1 million, and included $20.7 million of costs ($15.4 million after-tax, or $0.11 per share) associated with the sale of inventory stepped-up to fair value in the LW EMEA Acquisition, and a $27.1 million ($20.2 million after-tax, or $0.14 per share) unrealized gain related to mark-to-market adjustments associated with commodity hedging contracts. The prior year period included a $3.6 million ($2.7 million after-tax, or $0.02 per share) unrealized loss related to mark-to-market adjustments associated with commodity hedging contracts.

Current wording

Compared to the first three quarters of 2023, gross profit increased $326.1 million, or 31%, to $1,378.8 million, and included $20.7 million of costs ($15.4 million after-tax, or $0.11 per share) associated with the sale of inventory stepped-up to fair value in the LW EMEA Acquisition, and a $3.8 million ($2.9 million after-tax, or $0.02 per share) unrealized gain related to mark-to-market adjustments associated with commodity hedging contracts. The prior year period included a $8.7 million ($6.5 million after-tax, or $0.04 per share) unrealized loss related to mark-to-market adjustments associated with commodity hedging contracts.

Previous wording

Excluding unrealized mark-to-market commodity gains and losses and items impacting comparability, gross profit increased $97.2 million, driven primarily by benefits from pricing actions and incremental earnings attributable to the consolidation of the financial results of LW EMEA. Gross profit also included a $64.6 million pre-tax charge for the write-off of excess raw potatoes, largely reflecting a reduction to our initial sales estimate that was developed in January 2023 for the following year, as well as a solid potato crop in our growing regions in North America.

Current wording

Adjusted Gross Profit increased $334.3 million versus the prior year quarter to $1,395.7 million, driven primarily by incremental earnings attributable to the consolidation of the financial results of LW EMEA, and benefits from inflation-driven pricing actions. Gross profit and Adjusted Gross Profit included a total of $85.1 million of pre-tax charges for the write-off of excess raw potatoes, largely reflecting a reduction in our initial sales estimate that was developed in January 2023 for the following year, as well as a higher-than-expected impact on customer shipments associated with the transition to a new ERP system. In addition, gross profit and Adjusted Gross Profit included an estimated $33 million of incremental costs associated with the ERP transition during our fiscal third quarter.

Previous wording

The increase in gross profit was also partially offset by higher costs per pound, which largely reflected mid-to-high single-digit cost inflation, in the aggregate, for key inputs, including: raw potatoes, ingredients such as grains and starches used in product coatings, and labor. The increase in per pound costs was partially offset by supply chain productivity savings as well as lower costs for edible oils.

Current wording

The increase in Adjusted Gross Profit was also partially offset by higher costs per pound, which largely reflected mid-to-high single-digit cost inflation, in the aggregate, for key inputs, including: raw potatoes, ingredients such as grains and starches used in product coatings, labor, and energy. The increase in per pound costs was partially offset by lower transportation rates, lower cost of edible oils, and supply chain productivity savings.

Previous wording

SG&A increased $120.1 million to $346.2 million in the first half of fiscal 2024, and included: $8.8 million of LW EMEA integration and acquisition-related expenses ($6.6 million after-tax, or $0.04 per share); $1.4 million ($1.0 million after-tax, or $0.01 per share) of unrealized losses related to mark-to-market adjustments associated with currency hedging contracts; and $1.8 million ($1.4 million after-tax, or $0.01 per share) of foreign currency exchange gains. The prior year period included: $26.5 million ($19.2 million after-tax, or $0.13 per share) of LW EMEA integration and acquisition-related net gains; and $2.4 million ($1.8 million after-tax, or $0.01 per share) of foreign currency exchange losses.

Current wording

Compared to the first three quarters of 2023, SG&A increased $168.4 million to $526.0 million and included: $11.2 million of LW EMEA integration and acquisition-related expenses ($8.4 million after-tax, or $0.05 per share); $5.4 million ($4.0 million after-tax, or $0.03 per share) of unrealized losses related to mark-to-market adjustments associated with currency hedging contracts; and $7.3 million ($5.5 million after-tax, or $0.03 per share) of foreign currency exchange losses. The prior year period included: $30.8 million ($22.0 million after-tax, or $0.15 per share) of LW EMEA integration and acquisition-related net gains; and $4.2 million ($3.2 million after-tax, or $0.02 per share) of foreign currency exchange losses.

Previous wording

Excluding these items, SG&A increased $42.5 million to $177.4 million, primarily due to incremental expenses attributable to the consolidation of the financial results of LW EMEA; higher expenses related to improving our information systems and ERP infrastructure; and higher compensation and benefits expenses.

Current wording

Adjusted SG&A increased $117.9 million to $502.1 million, primarily due to incremental expenses attributable to the consolidation of the financial results of LW EMEA, and to a lesser extent, higher expenses associated with information technology investments, which included the transition to a new ERP system and related non-cash amortization costs. The increase was partially offset by a reduction in compensation and benefits accruals.

Previous wording

International Segment Adjusted EBITDA increased $96.5 million to $189.8 million, and excluded $20.7 million ($15.4 million after-tax, or $0.11 per share) of costs associated with the sale of inventory stepped-up to fair value in the LW EMEA Acquisition. Incremental earnings from the consolidation of the financial results of LW EMEA drove the increase. Excluding the benefit from the LW EMEA Acquisition, higher costs per pound, including a $7.6 million allocated charge for the write-off of excess raw potatoes, and the impact of lower volumes, more than offset favorable price/mix.

Current wording

International Segment Adjusted EBITDA increased $144.1 million to $291.5 million, and excluded $20.7 million ($15.4 million after-tax, or $0.11 per share) of costs associated with the sale of inventory stepped-up to fair value in the LW EMEA Acquisition. Incremental earnings from the consolidation of the financial results of LW EMEA drove the increase. Excluding the benefit from the LW EMEA Acquisition, International Segment Adjusted EBITDA declined as higher costs per pound, a $9.9 million allocated charge for the write-off of excess raw potatoes, an approximately $5 million impact from the ERP transition, and the impact of lower volumes, more than offset favorable price/mix.

Previous wording

Compared with the first half of fiscal 2024, interest expense, net increased $9.2 million to $59.8 million, reflecting the impact of higher total debt outstanding and higher interest rates on our floating rate debt, partially offset by higher capitalized interest related to our manufacturing expansion projects and interest income.

Current wording

Compared with the first three quarters of fiscal 2023, interest expense, net increased $19.1 million to $95.5 million, reflecting the impact of higher total debt outstanding and higher interest rates on our floating rate debt, partially offset by higher capitalized interest related to our manufacturing expansion projects, net of interest income.

Previous wording

Income tax expense for the first half of fiscal 2024 and 2023 was $136.1 million and $110.5 million, respectively. The effective income tax rate (calculated as the ratio of income tax expense to pre-tax income, inclusive of equity method investment earnings) was 23.2% and 24.8% for the first half of fiscal 2024 and 2023, respectively. The effective tax rate varies from the U.S. statutory tax rate of 21%, principally due to the impact of U.S. state taxes, foreign taxes and currency, permanent differences, and discrete items.

Current wording

Income tax expense for the first three quarters of fiscal 2024 and 2023 was $179.3 million and $152.6 million, respectively. The effective income tax rate (calculated as the ratio of income tax expense to pre-tax income, inclusive of equity method investment earnings) was 23.1% and 23.0% for the first three quarters of fiscal 2024 and 2023, respectively. The effective tax rate varies from the U.S. statutory tax rate of 21%, principally due to the impact of U.S. state taxes, foreign taxes and currency, permanent differences, and discrete items.

Previous wording

Equity method investment earnings from unconsolidated joint ventures were earnings of $16.8 million and $67.3 million for the first half of fiscal 2024 and 2023, respectively. The results in the current year period include earnings associated with our 50% interest in Lamb Weston RDO, while results in the prior year also included earnings associated with our previously held 50% interest in LW EMEA. The results in the prior year include a $14.4 million unrealized gain ($10.7 million after-tax, or $0.07 per share) related to mark-to-market adjustments associated with currency and commodity hedging contracts and a $15.1 million gain (before and after-tax, or $0.10 per share) recognized in connection with the LWAMSA Acquisition, which related to remeasuring our previously held 50% ownership interest to fair value.

Current wording

Equity method investment earnings from unconsolidated joint ventures were earnings of $17.8 million and $44.0 million for the first three quarters of fiscal 2024 and 2023, respectively. The results in the current year period include earnings associated with our 50% interest in Lamb Weston RDO, while results in the prior year also included earnings associated with our previously held 50% interest in LW EMEA. The results in the prior year include a $32.7 million unrealized loss ($24.3 million after-tax, or $0.16 per share) related to mark-to-market adjustments associated with currency and commodity hedging contracts and a $15.1 million gain (before and after-tax, or $0.10 per share) recognized in connection with the LWAMSA Acquisition, which related to remeasuring our previously held 50% ownership interest to fair value.

Previous wording

Excluding these items, equity method investment earnings declined $21.0 million compared to the prior year period, largely due to our share of LW EMEA earnings being included in the prior year. The results in the current period also include a $6.3 million pre-tax charge for the write-off of excess raw potatoes at Lamb Weston RDO.

Current wording

Adjusted Equity Method Investment Earnings declined $43.8 million compared to the prior year period, largely due to our share of LW EMEA earnings being included in the prior year. The results in the current period also include a $10.8 million pre-tax charge for the write-off of excess raw potatoes at Lamb Weston RDO.

Previous wording

As of November 26, 2023, we had $78.3 million of cash and cash equivalents, with $175.0 million in borrowings outstanding under our $1.0 billion U.S. revolving credit facility. We believe we have sufficient liquidity to meet our business requirements for at least the next 12 months. Cash generated by operations, supplemented by our cash and cash equivalents and availability under our credit facilities, are our primary sources of liquidity for funding our business requirements. Our funding requirements include capital expenditures for announced manufacturing expansions in Idaho, the Netherlands, and Argentina, as well as capital investments to upgrade information systems and ERP infrastructure, working capital requirements, and shareholder returns, including cash dividends and repurchases under our share repurchase program.

Current wording

As of February 25, 2024, we had $62.3 million of cash and cash equivalents, with $908.8 million of available liquidity under our committed revolving credit facilities in the U.S. and Europe. We believe we have sufficient liquidity to meet our business requirements for at least the next 12 months. Cash generated by operations, supplemented by our cash and cash equivalents and availability under our credit facilities, are our primary sources of liquidity for funding our business requirements. Our funding requirements include capital expenditures for announced manufacturing expansions in Idaho, the Netherlands, and Argentina, as well as capital investments to upgrade information systems and ERP infrastructure, working capital requirements, and shareholder returns, including cash dividends and repurchases under our share repurchase program.

Previous wording

In the first half of fiscal 2024, cash provided by operating activities increased $167.2 million to $455.2 million, compared with $288.0 million in the same period of fiscal 2023. The increase related to a $255.6 million increase in income from operations, adjusted for non-cash income and expenses, partially offset by $88.4 million of cash used for unfavorable changes in working capital, primarily related to construction-related purchases included in accounts payable and changes in compensation and benefit accruals. See “Results of Operations” in this MD&A for more information related to the increase in income from operations.

Current wording

In the first three quarters of fiscal 2024, cash provided by operating activities increased $146.4 million to $481.5 million, compared with $335.1 million in the same period of fiscal 2023. The increase related to a $265.6 million increase in income from operations, adjusted for non-cash income and expenses, partially offset by $119.2 million of cash used for unfavorable changes in working capital, primarily related to changes in compensation and benefit accruals and the timing of accounts payable. See “Results of Operations” in this MD&A for more information related to the increase in income from operations.

Previous wording

Investing activities used $570.8 million of cash in the first half of fiscal 2024, compared with $311.0 million in the same period in the prior year. The increase primarily relates to our investments to expand our french fry and chopped and formed capacity and other facility modernization efforts in American Falls, Idaho; the construction of a greenfield french fry processing facility in Ulanqab, Inner Mongolia, China, which became operational in November 2023; and the construction of french fry processing facilities in Mar-del-Plata, Argentina and Kruiningen, the Netherlands. We also used $58.9 million to upgrade our information systems and ERP infrastructure. We expect to use approximately $900 million to $950 million in fiscal 2024 as we continue construction of our capacity expansion efforts in Idaho, the Netherlands, and Argentina, as well as capital investments to upgrade our information systems and ERP infrastructure.

Current wording

Investing activities used $824.8 million of cash in the first three quarters of fiscal 2024, compared with $535.7 million in the same period in the prior year. The increase primarily relates to our investments to expand our french fry and chopped and formed capacity and other facility modernization efforts in American Falls, Idaho; the construction of a greenfield french fry processing facility in Ulanqab, Inner Mongolia, China, which became operational in November 2023; and the construction of french fry processing facilities in Mar del Plata, Argentina and Kruiningen, the Netherlands. We expect to use approximately $950 million in fiscal 2024 as we continue construction of our capacity expansion efforts in Idaho, the Netherlands, and Argentina, as well as capital investments to upgrade our information systems and ERP infrastructure.

Previous wording

During the first half of fiscal 2024, we used $164.3 million of cash to repurchase 1,564,351 shares of our common stock at an average price of $95.89 per share, and we withheld 134,340 shares from employees to cover income and payroll taxes on equity awards that vested during the period. In addition, we paid $81.6 million in cash dividends to common stockholders and $27.7 million of debt and financing obligations. These financing uses were offset by $162.1 million of borrowings during the period primarily under our U.S. revolving credit facility.

Current wording

During the first three quarters of fiscal 2024, proceeds from short-term borrowings and debt issuances were $429.2 million, of which $379.1 million were short-term. The increase in short-term borrowings related to continued investments to expand french fry capacity and unfavorable third quarter cash receipts for products shipped due to lower customer order fulfillment rates (reduced product shipments) as we transitioned to our new ERP system. We used $165.1 million of cash to repurchase 1,564,351 shares of our common stock at an average price of $95.89 per share, and we withheld 144,260 shares from employees to cover income and payroll taxes on equity awards that vested during the period. In addition, we paid $122.0 million in cash dividends to common stockholders and $42.0 million of debt and financing obligations.

Previous wording

In the first half of fiscal 2023, cash used forfinancing activities primarily related to $23.3 million of additional borrowings under our RMB-denominated loan facility, offset by $16.7 million of debt and financing obligation repayments, and the payment of $70.6 million of cash dividends to our common stockholders. In addition, we used $34.9 million of cash to repurchase 404,476 shares of our common stock at an average price of $70.11 per share, and we withheld 82,042 shares from employees to cover income and payroll taxes on equity awards that vested during the period.

Current wording

In the first three quartersof fiscal 2023, cash used forfinancing activities primarily related to issuing a new term loan facility for net proceeds of $450.0 million and borrowing $59.1 million and $1.7 million under our RMB-denominated loan facility and other credit facilities, respectively, offset by $24.6 million of debt and financing obligation repayments, and the payment of $105.8 million of cash dividends to our common stockholders. In addition, we used $47.2 million of cash to repurchase 529,167 shares of our common stock at an average price of $76.66 per share, and we withheld 83,973 shares from employees to cover income and payroll taxes on equity awards that vested during the period.