Amid a recent flurry of M&A activity in the global food industry, US-based frozen potato supplier Lamb Weston is also ready to join the line-up as it seeks to tap into rising global demand for French fries.
On an earnings call with investors yesterday (4 January) following a “solid” set of second-quarter results, president and chief executive Tom Werner said “investing for growth” remained one of his three strategic priorities as the world’s second-biggest French fry maker seeks battles with Canada-based McCain Foods.
Lamb Weston, which also produces appetisers and vegetables destined for retailers and foodservice outlets both domestically and internationally, reported a 4% increase in second-quarter sales on 4 January, bringing total revenue for the six months ended 26 November to US$1.64bn. Adjusted EBITDA for the half climbed 12% to $380m.
In a sign of optimism over the fiscal 2018 outlook, the owner of the Alexia and Grown in Idaho brands, raised its sales growth forecast to the mid- to single-digits range from low-to-mid digits. The company now sees adjusted EBITDA coming in at $780-790m compared to $740-760m previously.
For the fiscal 2017 year ended 28 May, the Idaho-based company booked sales of $3.17bn, up 6% from the previous 12 months, and EBITDA of $707m.
To cater to the increase in global appetite for frozen potato products, Lamb Weston, which was spun off from ConAgra Foods in 2016 and is listed on the New York Stock Exchange, has so far predominately focused on booting production at its North American plants to address capacity restraints.
The company invested in a new French fry facility in Richland, Washington, where production is already underway and is expected to be fully on stream by the end of this fiscal year. It is also investing $250m at its existing site in Hermiston, Oregon, to add an extra 300m pounds of French fry capacity by the end of the fiscal 2019 year.
And in April last year, it bought the potato division of Dutch firm Oerlemons Foods via its European joint venture Lamb-Weston/Meijer. That acquisition brought the number of production sites in the Netherlands to four, adding to one in the UK and another in Austria.
Werner said Lamb Weston would “complement these investments by seeking acquisitions in regions where we may have an ability to accelerate our growth”.
To address the global demand for frozen potato products, Werner said: “We believe that there are a number of opportunities to generate solid returns by investing strategically through both capacity expansion and acquisitions. After funding higher-return investments to support growth, we’ll look to other opportunities to deploy cash. These would generally be bolt-on transactions, which we can readily afford within our capital structure and will be in potato-related categories.”
Robert McNutt, Lamb Weston’s chief financial officer, further explained the prospect for potential acquisitions when questioned by Goldman Sachs analyst Adam Samuelson, who said there were more such murmurings on this conference call than on other recent ones.
“But the point is, when we have those opportunities, we are going to get involved in M&A,” McNutt responded. “It’s part of our strategic pillar, and we are going to have our ear to the ground within the category, and if we have an opportunity, we are going to execute against that.”
As part of Lamb Weston’s ambitions to become the number one in French fries, CEO Werner said his two other strategic priorities to complement the investment arena are centred on “accelerating category and customer growth, and differentiating our global supply chain to drive growth”.
To that end, he added the company plans to expand its product range and penetrate “non-traditional frozen potato product outlets such as convenience stores and coffee houses”.
And in the same context, he said his growth strategy will also continue to focus on “fast-growing markets like China and south-east Asia”.
Commenting on the company’s retail business, which supplies branded and private-label products to grocers and wholesalers, Werner said: “We’ll look to expand distribution and gain share by continuing to leverage our three-tier strategy, offering premium Alexia branded products, mainstream products through Grown in Idaho, and licensed brands and private-label products.”
However, while Lamb Weston put in a “solid” second-quarter performance, volumes declined 1%, in contrast to a 4% increase a year earlier, which both the chief executive and CFO said was the result of an exit from certain “lower-margin” businesses.
While neither quantified or specified what those business areas were, McNutt said “constrained capacity led us to balance incremental business opportunities with maintaining high levels of service by exiting some lower-margin business”.
He added: “Clearly, our new Richland line will mitigate this issue considerably.”
Werner said Lamb Weston will continue to target a “leverage” range of 3.5 to four times adjusted EBITDA, and in the near term expects to be at or below the low-end of that range, which will provide flexibility to pursue acquisitions.