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Lamb Weston (LW) Benefits From Capacity Expansion, Pricing

Lamb Weston Holdings, Inc. LW has been benefiting from its capacity-expansion endeavors. To this end, the company recently unveiled expansion plans for its french fry processing capacity in Argentina with the construction of a new manufacturing unit in Mar del Plata, Buenos Aires. Apart from this, Lamb Weston has been gaining from its robust price/mix and recovery in the Foodservice channel.

Let’s delve deeper.

Factors Backing Lamb Weston

Lamb Weston’s efforts to boost offerings and expand capacity enable it to effectively meet rising demand for snacks and fries. In July 2021, the company announced the expansion plan of a french fry processing capacity at its existing American Falls, ID facility, with an envisioned capacity to manufacture more than 350 million pounds of frozen french fries and other potato products annually. In March 2021, the company unveiled plans to build a new french fry processing facility in Ulanqab, Inner Mongolia, China.

Apart from the abovementioned capacity-expansion endeavors, the company (in July 2022) bought an additional 40% stake in Lamb Weston Alimentos Modernos S.A. ("LWAMSA") — which is its joint venture in Argentina. It had completed the acquisition of joint venture interests in Lamb Weston BSW sometime around mid-fiscal 2019. The company acquired Australia-based companies, Ready Meals and Marvel Packers in 2019 and 2018, respectively.

Lamb Weston has been benefiting from a recovery in the Foodservice business. In the fourth quarter of fiscal 2022, Foodservice sales soared 21% to $388.4 million. Volumes increased as demand for full-service restaurants and non-commercial channels like lodging and hospitality, healthcare, schools and universities, sports and entertainment and workplace environments remained strong.

However, this was countered by reduced shipments due to supply-chain headwinds, including labor restrictions. That said, the price/mix jumped 24% and gained from product and freight pricing actions to counter inflation.

Lamb Weston’s top line has also been benefiting from the robust price/mix, as witnessed during the fourth quarter of fiscal 2022. The price/mix increased 15% in the quarter. The price/mix increased 10% in the Global segment, 24% in the Foodservice segment and 22% in the Retail segment. Net sales growth in fiscal 2023 is likely to be backed by pricing actions to counter significant input and transportation cost inflation and improve volume and mix.

Cost Inflation a Challenge Overall

Lamb Weston’s gross profit in the last reported quarter was impacted by escalating manufacturing and distribution costs on a per-pound basis along with reduced sales volumes. Increased costs per pound reflected double-digit cost inflation from key inputs, mainly including raw materials like edible oils and ingredients, as well as escalated transportation, packaging and labor costs.

Higher per-pound costs were also a result of labor and commodity shortages affecting production run rates. Inflation is likely to remain a major threat to the company’s costs and demand for fries, per the fourth-quarter earnings call.

Other Players Grappling With Inflation

Many consumer staple companies are bearing the brunt of cost inflation. For instance, Church & Dwight CHD has been battling major cost hurdles.

CHD expects to witness additional cost inflation of $135 million in 2022, $50 million higher than its earlier expectations. Church & Dwight stated that incremental inflation is mainly associated with raw and packaging materials as well as the pass-through of similar costs from third-party manufacturers.

Conagra Brands CAG has been encountering higher cost of goods sold for a while now. On its last earnings call, management at CAG stated that the macroeconomic landscape remains volatile and it expects the cost of goods sold inflation to linger in fiscal 2023.

Moreover, gross inflation (input cost inflation before hedging and other sourcing gains) is anticipated in the low-teens range in fiscal 2023. Conagra Brands intends to raise its SG&A investment to facilitate infrastructure and continued automation and support talent.

Flowers Foods FLO is battling major hurdles due to cost inflation and supply-chain bottlenecks. In the second quarter of fiscal 2022, FLO’s materials, supplies, labor and other production costs (excluding depreciation and amortization) escalated by 240 basis points (bps) to 51.9%. This resulted from increased ingredient and packaging expenses, which led the gross margin to contract 240 bps to 48.1%.

Flowers Foods expects inflation to reach its peak in the third quarter.

Coming back to Lamb Weston, the frozen potato products company is likely to keep its growth story going on the back of the abovementioned upsides.

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