Foodservice slow down, ERP disruptions negatively impact Lamb Weston

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EAGLE, IDAHO – Softer-than-expected foodservice traffic in North America and key international markets combined with the rocky rollout of a new enterprise resource planning (ERP) software negatively impacted potato processor Lamb Weston Holdings, Inc. during the third quarter of fiscal 2024.

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“Overall, global french fry demand remains resilient, but we believe it’s currently at or below the historical annual growth rate of about 2% to 4%,” said Tom Werner, president and chief executive officer, during an April 4 conference call with securities analysts. “According to restaurant industry data providers, restaurant traffic trends in the US have been generally flat to slightly down during the past six to nine months as consumers continue to adjust to the cumulative effect of inflation on menus.”

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Quick-service restaurant traffic was flat during the third quarter after growing modestly during the first half of fiscal 2024, according to Lamb Weston Holdings. Traffic at full-service restaurants has declined each quarter during the fiscal year.

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Mr. Werner added that outside of the United States, restaurant traffic has continued to increase when compared to the previous year, but growth has slowed sequentially from the company’s fiscal second quarter.

“Similar to the US, we believe traffic in these markets is also affected by consumers adjusting to the cumulative effect of inflation as well as other macro headwinds,” he said.

Adding to the pressure on the company was the rollout of the ERP software that did not go as planned. As a result, disruptions were experienced in receiving and processing, customer orders, trade pricing and promotion management, managing inventories and warehousing, scheduling and transportation and shipments, invoicing customers and treasury and cash management, according to the company.

“We experienced significant challenges with inventory visibility at distribution centers, which led to shipment delays, canceled orders and ultimately, lower-than-expected volumes in the quarter,” Werner said. “In particular, we had more difficulty filling shipments of mixed product loads, which are generally higher margin than shipments of single product loads. This pressured margins in the quarter.”

The company estimated the disruptions reduced net sales by about $135 million and volume growth by approximately 8% during the quarter.

“We also estimate that adjusted EBITDA was negatively impacted by approximately $95 million, with more than half of that due to lower sales and unfulfilled customer orders and the remainder due to incremental costs and expenses directly related to the transition,” Werner said.

For the quarter ended Feb. 25, Lamb Weston’s net income fell 17% to $146 million, equal to $1.01 per share on the common stock, down from $175 million, or $1.22 per share, during the same period of the previous year.

Quarterly sales rose 16% to $1.46 billion from $1.25 billion the year before.

Bernadette M. Madarieta, chief financial officer, said the sales increase was driven entirely by the consolidation of the company’s business in the EMEA region.

“If we exclude the incremental sales from the EMEA acquisition, net sales declined $152 million, or 12%,” she said. “Price/mix was up 4% as we continued to benefit from the inflation-driven pricing actions taken in fiscal 2023 and pricing actions taken this year in both our North America and international segments.

“However, unfavorable mix related to the type of orders we were able to fill during the ERP transition partially offset the benefit of the pricing actions. In addition, lower freight charges to customers were nearly a 5-point headwind, which was driven by lower volume shipped and the pass-through of lower freight rates when shipping products to customers.”

The company updated its fiscal 2024 outlook by reducing its net sales target to a range of $6.54 billion to $6.6 billion from the previous range of $6.8 billion to $7 billion.

“Our updated sales target implies sales of $1.69 billion to $1.75 billion in our fiscal fourth quarter, which is flat to up 3% compared with the same period a year ago,” Madarieta said. “We expect volumes in the fourth quarter will decline mid-single digits, which is down from our previous target of positive volume growth.

“The primary reasons for the change include our expectation that soft restaurant traffic trends in North America will continue longer than we initially anticipated. And that restaurant traffic trends in several of our key international markets have also softened more than expected.” 

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