EAGLE, IDAHO — Lamb Weston Holdings, Inc. delivered solid results during the first quarter of fiscal 2019. Each of the company’s three business units experienced sales growth during the quarter, but management warned potato crop issues in Europe may be a headwind during the rest of the year.
Net income for the quarter ended Aug. 26 totaled $107.8 million, equal to 73c per share on the common stock, an increase compared with the same period of the previous year when Lamb Weston earned $83.4 million, equal to 56c per share.
Sales during the quarter rose 12% to $914.9 million.
“Our results also reflect the continued overall favorable operating environment in North America, including solid demand growth for frozen potato products and tight manufacturing capacity,” said Thomas P. Werner, president and chief executive officer, during a conference call with securities analysts on Oct. 2. “We anticipate that these operating conditions will remain generally favorable through fiscal 2019.”
Sales for Lamb Weston’s Global business unit, which comprises its top 100 North American-based restaurant chain customers, saw sales rise 13% to $466.8 million. The company said price/mix accounted for 8 percentage points of the gain during the quarter, reflecting the carryover impact of pricing actions taken in the prior year as well as improvement in customer and product mix. Business unit volume increased 5%, driven by the benefit of limited time product offerings and growth in sales to customers in the United States and key international markets.
The company’s Foodservice segment, which services North American food service distributors and restaurant chains outside the top 100, experienced a 7% increase in sales during the quarter to $297.8 million. Price/mix increased accounted for the entire gain. The Foodservice unit saw its volume decline, but the contraction was offset by the growth in sales of higher margin items, the company said.
Expanded distribution of Lamb Weston’s Grown in Idaho line and other branded products led to a 26% surge in sales in the company’s Retail division.
Management said it expects mid-single digit sales growth for fiscal 2019. Price/mix is expected to be higher during the first half vs. the second half of the year, reflecting a carryover impact of customer contract pricing structures that took effect beginning in the second half of fiscal 2018, according to the company.
Adding uncertainty to the company’s performance during the rest of the year is the size and quality of the European potato crop.
“…The operating environment in Europe will be more volatile through fiscal 2019 as a result of poor potato crop in the region,” Mr. Werner said. “Unlike the crop in the Columbia Basin (in North America), less than half of the European potato crop is irrigated, and therefore, it is dependent on rainfall.
“In July and August, extreme heat and drought conditions in Europe had a significantly negative impact on crop yield and quality, resulting in potato price futures more than doubling versus … earlier in the year. As a result, we expect raw prices for Lamb Weston/Meijer and for the industry to sharply increase in the second half of our fiscal 2019. This will also impact the first half of fiscal 2020 as Lamb Weston/Meijer finishes processing this year’s short crop.”
He added that the company has plans in place to stretch its U.S. production capacity to support European customers.
“We will also leverage our U.S. assets to serve other potential customers as opportunities arise in export markets, especially in Asia and the Middle East,” Mr. Werner said.
Mr. Werner added that the situation in Europe is ongoing and it will take the company 30 days to 60 days to better understand the situation.
“We have reflected our best estimate in our outlook today, and we'll update our investors in January if this thing starts to become more clear,” he said.