Lamb Weston (NYSE: LW) reported Q3 EPS of $0.45, $0.06 worse than the analyst estimate of $0.51. Revenue for the quarter came in at $896 million versus the consensus estimate of $816.45 million.

“We delivered solid sales volumes during the quarter as consumers and full-service restaurant traffic responded favorably to the gradual easing of broad social restrictions as the quarter progressed, as well as to the benefit of relatively mild winter weather for much of the period,” said Tom Werner, President and CEO. “However, COVID-19 continued to significantly disrupt our manufacturing and distribution operations across our entire supply chain network, which resulted in higher costs.”

“In the coming months, we believe the gradual improvement in frozen potato demand will continue to the extent governments further lift social restrictions, and as warmer weather provides more outside dining opportunities. The ongoing disruptive effects of COVID-19 on our supply chain will continue to pressure near-term costs, but should also lessen after vaccines become more widely available for our manufacturing teams and our supply chain partners. In addition, we remain optimistic that overall demand in the U.S. will steadily return to pre-pandemic levels around the end of calendar 2021, and that global category growth will resume at historical rates soon thereafter. Our recently-announced investments to construct a new manufacturing facility in China, as well as the expansion of our chopped and formed product capacity in the U.S., underscore our confidence in the long-term health of the global category, as well as our strategy to support the growth of our customers as they continue to expand across our key markets.”

GUIDANCE:

Fourth Quarter Fiscal 2021 Business Update

Set forth below is additional detail on the Company’s shipments for the first four weeks of the fourth quarter fiscal 2021 through March 28, 2021. Because of the severe government-imposed social and business restrictions to slow the spread of COVID-19 and the resulting negative impact on frozen potato shipments during the fourth quarter fiscal 2020, the Company believes a comparison to shipments during the fourth quarter fiscal 2019 provides a more meaningful comparison for readers to understand the current condition of the Company’s business.

United States: Shipments were approximately 90 percent of fourth quarter fiscal 2019 levels.

• Shipments to large chain restaurant customers, which are composed of QSR and large full-service chain restaurants, were more than 85 percent of fourth quarter fiscal 2019 levels. The Company, which records shipments to these customers in its Global segment, anticipates this rate will largely continue for the remainder of its fiscal 2021 fourth quarter.
• Shipments to customers served by the Company’s Foodservice segment, which includes products ultimately sold to full-service chain and independent restaurants, regional and small QSRs, and non-commercial customers (e.g., lodging and hospitality, healthcare, schools and universities, sports and entertainment, and workplace environments) were approximately 90 percent of fourth quarter fiscal 2019 levels. The Company believes that its March 2021 shipments include the benefit of customers restocking depleted inventories. As a result, the Company anticipates this rate will largely continue for the remainder of its fiscal 2021 fourth quarter. The Company also expects shipments to non-commercial customers, which have historically comprised approximately 25 percent of the segment, will remain soft for the remainder of its fiscal 2021 fourth quarter.
• Shipments to customers served by the Company’s Retail segment were approximately 110 percent of fourth quarter fiscal 2019 levels, driven by strength in the Company’s premium and mainstream branded offerings, partially offset by a decline of private label product shipments, which reflects incremental losses of certain low-margin private label business. The Company believes this rate may gradually decline during the remainder of its fiscal 2021 fourth quarter as the Company expects consumers to increase purchases away from home.

International:

• Europe: Shipments by the Company’s joint venture, Lamb-Weston/Meijer, were approximately 85 percent of fourth quarter fiscal 2019 levels. The Company anticipates that this rate may soften during the remainder of its fiscal 2021 fourth quarter as governments across parts of Europe have reimposed stricter social restrictions to curb another resurgence of COVID-19.
• Other Key Markets: Shipments to the Company’s key international markets, which are primarily in Asia, Oceania and Latin America, were approximately 75 percent of fourth quarter fiscal 2019 levels, in aggregate. The Company anticipates that shipment rates will gradually improve during the remainder of its fiscal 2021 fourth quarter as governments slowly ease social restrictions, where applicable. For markets that are currently operating under more lenient government-imposed social restrictions, the Company anticipates that shipment rates will largely continue for the remainder of its fiscal 2021 fourth quarter. Excluding shipments associated with the Company’s unconsolidated joint venture in Argentina, the Company records shipments to these markets in its Global segment.

The Company believes that the possibility of wide availability of government-approved COVID-19 vaccines by mid-calendar 2021 may allow governments to gradually ease broad social restrictions in their respective jurisdictions, which would likely have a favorable impact on restaurant traffic. While the Company expects to continue to face challenging and volatile operating conditions until the virus is broadly contained, it continues to believe that global restaurant traffic will improve through calendar year 2021. Improvements in global restaurant traffic would, in turn, lead to overall frozen potato demand approaching pre-pandemic levels, on a run-rate basis, by the end of the calendar year.

The Company will continue to prioritize the health and welfare of its employees, maintain product safety, and support its customers as they manage their supply chains and inventories. The Company has taken actions, and will continue to evaluate various options, to lower its cost structure and maximize efficiencies in its manufacturing and commercial operations, including modifying production schedules to rebalance utilization rates across its manufacturing network.

The Company expects that it will continue to incur significant costs as a result of the pandemic’s ongoing impact on its manufacturing, distribution, commercial and functional operations until the COVID-19 virus is broadly contained. These costs may include, but are not limited to: production inefficiencies and labor retention costs arising from modifying production schedules, reducing run-times, and lower overall factory utilization; costs to shut down, sanitize, and restart production facilities after production is impacted by the virus; costs to adopt and maintain enhanced employee safety and sanitation protocols, such as purchasing personal protection and health screening equipment and services; and incremental transportation and warehousing costs.

For all of fiscal 2021, the Company is:

• Reducing its estimate for interest expense, net, to approximately $120 million from its previous estimate of approximately $125 million,
• Reducing its estimate for depreciation and amortization to approximately $185 million from its previous estimate of approximately $190 million, and
• Reducing its estimate for cash used for capital expenditures, excluding acquisitions, to approximately $160 million from its previous estimate of approximately $180 million.

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