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Item 2. Management’s Discussion and Analysis

2021-01-07 compared with 2020-10-07 · 175 added, 115 removed, 123 unchanged (70% of the section changed)

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations, which we refer to as “MD&A,” should be read in conjunction with our condensed consolidated financial statements and related notes included in "Financial Statements and Supplementary Data"

of this Quarterly Report on Form 10-Q (this "Form 10-Q") and the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 2020 (the “Form 10-K”), which we filed with the U.S.

Securities and Exchange Commission (“SEC”) on July 28, 2020.

Forward-Looking Statements

This report, including Management's Discussion and Analysis of Financial Condition and Results of Operations, which we refer to as “MD&A,” contains forward-looking statements within the meaning of the federal securities laws.

Words such as “will,” “continue,” “may,” “expect,” “anticipate,” “believe,” “estimate,” “support,” “impact,” “remain,” “outlook,” and variations of such words and similar expressions are intended to identify forward-looking statements.

This report, including the MD&A, contains forward-looking statements within the meaning of the federal securities laws.

Words such as “will,” “continue,” “may,” “expect,” ‘plan,” “anticipate,” “believe,” “estimate,” “support,” “impact,” “improve,” “enhance,” and variations of such words and similar expressions are intended to identify forward-looking statements.

Examples of forward-looking statements include, but are not limited to, statements regarding our plans, execution, liquidity, dividends, share repurchases, capital expenditures, operational costs, ERP implementation and business outlook and prospects, as well as the impact of the COVID-19 pandemic on the industry and consumer demand.

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We undertake no responsibility for updating these statements, except as required by law.

This Item 2 is intended to supplement, and should be read in conjunction with, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the fiscal year ended May 31, 2020 (the “Form 10-K”), which we filed with the SEC on July 28, 2020.

Lamb Weston Holdings, Inc.

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French fries represent the majority of our value-added frozen potato product portfolio.

Management’s discussion and analysis of our results of operations and financial condition is provided as a supplement to the consolidated financial statements and related condensed notes included elsewhere herein to help provide an understanding of our financial condition, changes in financial condition and results of our operations.

This MD&A is provided as a supplement to the consolidated financial statements and related condensed notes included elsewhere herein to help provide an understanding of our financial condition, changes in financial condition and results of our operations.

Our MD&A is based on financial data derived from the financial statements prepared in accordance with United States (“U.S.”) generally accepted accounting principles (“GAAP”) and certain other financial data (EBITDA and EBITDA including unconsolidated joint ventures) that is prepared using non-GAAP measures.

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Executive Summary

On March 11, 2020 (during the fourth quarter of fiscal 2020), the World Health Organization declared that the spread of COVID-19 qualified as a global pandemic.

Throughout this pandemic, our primary focus and attention has remained directed towards the health and well-being of our employees, and we have taken numerous steps to keep our employees safe, including implementing enhanced sanitation protocols and preventative screenings at all our manufacturing facilities, providing masks and requiring social distancing for employees across all our facilities, providing benefits that help support our employees and their families, and implementing remote work arrangements for functional support areas to comply with shelter-in-place orders and federal and local government recommendations.

If an employee at one of our manufacturing facilities tests positive for COVID-19, we have developed plans to temporarily close the area where the employee works in order to sanitize and disinfect the facility before allowing employees to return to the facility and restart operations.

Lamb Weston’s financial performance in the first quarter of fiscal 2021 reflects the effect on frozen potato demand and restaurant traffic following the significant government-imposed social and economic restrictions to control the spread of COVID-19.

While demand trends have improved in each of our U.S.

sales channels since the end of fiscal 2020, demand for our products remain below pre-pandemic levels.

As a result, our sales and earnings in the fiscal first quarter declined as compared to the first quarter of fiscal 2020.

Lamb Weston’s financial performance in the second quarter of fiscal 2021 reflects the COVID-19 pandemic’s negative impact on frozen potato demand in our food-away-from-home sales channels.

While demand trends have improved in both our food-away-from-home and food-at-home sales channels since the end of fiscal 2020, it remains below pre-pandemic levels.

As a result, our sales and earnings in the fiscal second quarter declined as compared to the second quarter of fiscal 2020.

Specifically:

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● EBITDA including unconsolidated joint ventures declined 18% to $213.2 million

● Income from operations and EBITDA including unconsolidated joint ventures included approximately $20 million and $21 million of net costs, respectively, related to the pandemic’s impact on our operations, as described below

In the first quarter of fiscal 2021, our net cash provided by operating activities was $250.6 million, up 5% as compared to the first quarter of fiscal 2020.

We also paid $33.6 million of cash dividends to shareholders.

As compared to the first quarter of fiscal 2020, price/mix increased, largely due to higher prices and improved mix in our Foodservice and Retail segments, while our volume declined as demand for frozen potato products outside the home fell following government-imposed restrictions on restaurants and other foodservice operations to slow the spread of COVID-19.

Income from operations declined due to lower sales as well as approximately $20 million of costs, net of employee retention credits provided by the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) and other labor incentives, related to the pandemic’s impact on operations, which included:

● Approximately $6 million of factory utilization-related production costs and inefficiencies, such as labor retention costs;

costs to shut down, sanitize, and restart manufacturing facilities after a production employee was infected by the virus;

costs arising from modifying production schedules and reducing run-times;

and additional costs and inefficiencies related to manufacturing retail products on lines primarily designed for foodservice products;

● Approximately $10 million of non-utilization-related costs, of which approximately $3 million relates to expensing the remaining crop year 2019 contracts for raw potatoes that could not be used due to the pandemic’s near-term effect on demand, and approximately $7 million of expense for enhanced employee safety and sanitation protocols as well as incremental warehousing, transportation and other supply chain costs;

● Approximately $4 million of selling, general and administrative expenses (“SG&A”), largely comprised of costs to retain certain sales employees, net of CARES Act retention credits and other labor incentives.

The amount of COVID-19 related costs sequentially decreased from fourth quarter of fiscal 2020, however, we expect that we will continue to incur some of these costs until the pandemic no longer has an impact on our manufacturing, supply chain, commercial and functional support operations.

We expect that we will continue to realize the impact of the pandemic on the U.S.

and global economies, global consumer demand for frozen potato products, and on our business and financial results for the remainder of fiscal 2021.

Compared with the second quarter of fiscal 2020, price/mix increased, largely due to higher prices in our Foodservice and Retail segments and improved mix in our Retail segment.

Our sales volume declined as demand for frozen potato products outside the home declined after government-imposed social restrictions to slow the spread of COVID-19 reduced restaurant traffic and included restrictions for on-premise dining.

In addition, the onset of colder weather during the quarter tempered demand by limiting outdoor dining traffic across many U.S.

Income from operations declined due to lower sales and higher production costs, which were largely due to incremental costs resulting from the pandemic’s effect on our manufacturing and supply chain operations, costs related to processing raw potatoes out of storage longer than in prior years, and input cost inflation.

The earnings decline was partially offset by lower selling, general and administrative costs (“SG&A”).

We expect that we will continue to incur additional costs as a result of the pandemic’s impact on our manufacturing, supply chain, commercial and functional support operations (“COVID-related costs”) at least through the remainder of fiscal 2021.

These costs may include, but are not limited to, costs to shut down, sanitize, and restart production facilities after a production employee has been infected by the virus;

production inefficiencies and labor retention costs arising from modifying production schedules, reducing run-times, and lower overall factory utilization;

costs to adopt and maintain enhanced employee safety and sanitation protocols, such as purchasing personal protection and health screening equipment and services;

costs related to processing raw potatoes out of storage longer than prior years;

and incremental warehousing and transportation costs.

We also expect that the pandemic will continue to have an impact on the U.S.

and global economies, global consumer demand for frozen potato products, and on our business and financial results for at least the remainder of fiscal 2021.

While the impact is uncertain, we continue to closely monitor the global french fry industry, including consumer reaction and demand.

During the first quarter, we observed the following:

● In the U.S., overall restaurant traffic and demand for frozen potato products steadily improved early in the quarter, then largely stabilized at below pre-pandemic levels during the latter half of our first quarter.

Traffic at large, quick service chain restaurants (“QSRs”) approached prior-year levels by leveraging drive-thru and delivery formats.

Full-service restaurant traffic recovered to 70% to 80% of prior-year levels by the end of the quarter, aided by the relaxing of government-imposed restrictions for on-premise dining, as well as increased carry-out and delivery.

Demand by our non-commercial customers (i.e., lodging and hospitality, healthcare, schools and universities, sports and entertainment, and workplace environments) was significantly below prior-year levels.

We continue to expect traffic and demand at full-service restaurants and non-commercial operations to be more vulnerable than at QSRs, especially as options for outdoor dining become more limited with the onset of colder weather beginning in our second quarter.

In contrast, demand for retail frozen potato products significantly increased along with overall food-at-home consumption with the adoption of social distancing policies and government-imposed shelter-in-place restrictions.

Retail demand growth peaked early in the quarter, and steadily moderated as the quarter progressed.

● In Europe, which is served by our Lamb-Weston/Meijer joint venture, demand for frozen potato products steadily approached prior-year levels by the end of the quarter, although demand at this time last year was tempered due to a poor potato crop.

Since most consumption in Europe is dine-in or carry-out as QSR drive-thru options are more limited, we anticipate that demand may be tempered as options for outdoor dining decline with the onset of colder weather beginning in our second quarter.

During the second quarter, we observed the following:

● In the U.S., overall restaurant traffic and demand for frozen potato products largely stabilized at approximately 90% of pre-pandemic levels.

Traffic at large, quick service chain restaurants (“QSRs”) were essentially at prior-year levels by continuing to leverage drive-thru and delivery formats.

Traffic at full-service restaurants weakened from 70% to 80% of prior-year levels during most of the first two months of the quarter to 60% to 70% of prior-year levels during the latter weeks of the quarter, related to governments reimposing social and on-premise dining restrictions, as well as reduced outdoor dining due to the onset of colder weather across many markets.

Demand by our non-commercial customers (i.e., lodging and hospitality, healthcare, schools and universities, sports and entertainment, and workplace environments) remained approximately 50% below prior-year levels.

In contrast, demand for retail frozen potato products remained strong along with overall food-at-home consumption with the adoption of government-imposed social restrictions.

We continue to expect traffic and demand at full-service restaurants and non-commercial operations to be more vulnerable than at QSRs, especially as governments continue to impose social restrictions, and as options for outdoor dining become more limited during colder weather months in our third quarter.

● In Europe, which is served by our Lamb-Weston/Meijer joint venture, demand for frozen potato products approached prior-year levels during the first half of the quarter, but softened to 75% to 85% of prior-year levels during much of the second half of the quarter, related to governments reimposing social and on-premise dining restrictions, as well as reduced outdoor dining due to the onset of colder weather across many markets.

Since most consumption in Europe is dine-in or carry-out as QSR drive-thru options are more limited, we anticipate that demand will continue to be tempered as governments continue to impose social restrictions, and as options for outdoor dining become more limited during colder weather months in our third quarter.

● Demand improvement in our other key international markets was mixed.

In China and Australia, demand for frozen potato products steadily improved and was approaching prior-year levels by the end of the quarter.

In our other key markets, which are primarily in Asia and Latin America, the improvement in restaurant traffic and demand for frozen potato products has been uneven as governments employ differing approaches to contain the spread of COVID-19.

In response to the decline in consumer and customer demand related to the pandemic, we have taken actions, and will continue to evaluate various options, to lower our cost structure and maximize the efficiency of our manufacturing and commercial operations, including temporarily closing facilities and/or modifying production schedules to rebalance utilization rates across our manufacturing network.

As discussed above, the government-imposed severe social and business restrictions, including closing or partially closing restaurants and other foodservice operations, have decreased the demand for our products.

The outlook for the spread and eventual containment of COVID-19 remains unpredictable, as does its potential impact on the global economy, restaurant traffic, customer and consumer demand, our supply chain, and availability of key commodities and other necessary services.

During these uncertain times, our top priorities are to ensure the health and welfare of our employees, maintain product safety, and continue to support our customers as they work to manage their supply chains and inventories.

While the near-term impact of the pandemic on consumer demand and sales volume is likely to be material, we believe we have sufficient liquidity to manage through the uncertainty.

See “Liquidity and Capital Resources” in this MD&A for more information.

In China and Australia, demand for frozen potatoes stabilized at near prior-year levels.

In our other key markets, which are primarily in Asia and Latin America, demand improved sequentially, but remained well below prior-year levels.

While the near-term impact of the pandemic on demand and sales volume is likely to be material, we believe we have sufficient liquidity to manage through the uncertainty.

In the first half of fiscal 2021, we generated $318.8 million of cash from operations, down 8% as compared to the first half of fiscal 2020, and we paid $67.2 million of cash dividends to shareholders.

In December 2020, we announced a two-cent annual increase to our quarterly dividend.

In addition, we plan to resume our share repurchase program, which we suspended at the onset of the COVID-19 pandemic to preserve liquidity.

The timing and amount of share repurchases will be subject to our evaluation of market conditions, applicable legal requirements, and other factors.

In response, we have taken actions, and will continue to evaluate various options, to lower our cost structure and maximize the efficiency of our manufacturing and commercial operations, including temporarily closing facilities and/or modifying production schedules to rebalance utilization rates across our manufacturing network.

During these uncertain times, our top priorities are to ensure the health and welfare of our employees, maintain product safety, and continue to support our customers as they manage their supply chains and inventories.

We believe 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.

In the coming months, we anticipate facing challenging and volatile operating conditions until the virus is broadly contained, and that demand may soften, especially at full-service restaurants, as governments continue to impose broad social restrictions and as colder weather limits outdoor dining.

However, we believe that global restaurant traffic will improve through calendar year 2021, which will lead to overall frozen potato demand approaching pre-pandemic levels, on a run-rate basis, by the end of the calendar year.

Operating Results

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We report product contribution margin by segment.

Product contribution margin is the primary measure reported to our chief operating decision maker for

purposes of allocating resources to our segments and assessing their performance.

Product contribution margin is the primary measure reported to our chief operating decision maker for purposes of allocating resources to our segments and assessing their performance.

Product contribution margin represents net sales less cost of sales and advertising and promotion expenses.

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Financial Statements” of this report.

Thirteen Weeks Ended August 30, 2020 compared to Thirteen Weeks Ended August 25, 2019 (dollars in millions)

Thirteen Weeks Ended November 29, 2020 compared to Thirteen Weeks Ended November 24, 2019 (dollars in millions)

Net Sales and Product Contribution Margin

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Advertising and promotion expenses

Lamb Weston’s net sales for the first quarter of fiscal 2021 were $871.5 million, a decline of $117.5 million, or 12%, compared to the first quarter of fiscal 2020.

Price/mix increased 2% due to improved price/mix in the Foodservice and Retail segments.

The decline was partially offset by increased sales of frozen potato products for in-home consumption.

Global segment net sales decreased $70.1 million, or 14%, to $447.5 million, compared with $517.6 million in the first quarter of fiscal 2020.

Price/mix decreased 1% as a result of negative mix.

Compared to the prior-year quarter, Lamb Weston’s net sales for the second quarter of fiscal 2021 declined $123.1 million, or 12%, to $896.1 million.

Volume declined 14%, predominantly due to the decline in demand for frozen potato products outside the home following government-imposed restrictions on restaurants and other foodservice operations to slow the spread of COVID-19, as well as the effect of colder weather, which limited outdoor dining traffic across many U.S.

In addition, the volume decline reflected the benefit of additional shipping days related to the timing of the Thanksgiving holiday in the prior year quarter.

Price/mix increased 2%, largely due to higher prices in our Foodservice and Retail segments and improved mix in our Retail segment.

Global segment net sales declined $63.7 million, or 12%, to $475.9 million.

Volume declined 11%, primarily due to the decline in demand for frozen potato products outside the home as a result of the pandemic’s negative impact on restaurant and other foodservice-related traffic in the U.S.

and in most of our key international markets.

Foodservice segment net sales declined $68.7 million, or 22%, to $236.7 million, compared with $305.4 million in the first quarter of fiscal 2020.

The volume decline also reflected the benefit of additional shipping days related to the timing of the Thanksgiving holiday in the prior year quarter.

Price/mix declined 1% as a result of negative mix.

Foodservice segment net sales declined $63.8 million, or 21%, to $241.1 million.

Volume declined 25% due to the decline in demand for frozen potato products outside the home as a result of the pandemic’s negative impact on restaurant and non-commercial customers, such as lodging and hospitality, healthcare, schools and universities, sports and entertainment, and workplace environments, as well as the benefit of additional shipping days related to the timing of the Thanksgiving holiday in the prior year quarter.

Volume trends weakened during the latter weeks of the quarter, reflecting the effect on restaurant traffic, especially at full-service restaurants, of government-imposed social restrictions and colder weather on outdoor dining.

Price/mix increased 4%, reflecting the carryover benefit of pricing actions implemented during fiscal 2020, partially offset by unfavorable mix as sales of Lamb Weston branded and premium products softened.

Retail segment net sales increased $8.6 million, or 7%, to $140.7 million.

Price/mix increased 7%, largely driven by favorable mix from increased sales of branded products.

Volume increased nominally as strong growth in shipments of premium and mainstream branded offerings, which have historically comprised approximately 40% of the segment’s shipments, were offset by a decline in shipments of private label products, which reflects incremental losses of certain low-

margin private label business, as well as the benefit of additional shipping days related to the timing of the Thanksgiving holiday in the prior year quarter.

Net sales in our Other segment declined $4.2 million, or 10%, to $38.4 million, compared with $42.6 million in the second quarter of fiscal 2020, as lower volumes in our vegetable business more than offset favorable price/mix.

Product Contribution Margin

Lamb Weston’s product contribution margin declined $58.1 million, or 21%, to $221.0 million in the second quarter of fiscal 2021.

The decline was driven by lower sales due to the pandemic, as well as higher manufacturing costs, which were largely due to COVID-related costs (as described above), and input cost inflation.

Global segment product contribution margin declined $36.2 million, or 28%, to $92.7 million in the second quarter of fiscal 2021.

Lower sales volumes, higher manufacturing costs and unfavorable mix drove the decline.

Global segment cost of sales was $382.4 million, down 7% compared to the second quarter of fiscal 2020, primarily due to lower sales volumes, partially offset by the higher manufacturing costs described above.

Foodservice segment product contribution margin declined $23.6 million, or 21%, to $87.7 million in the second quarter of fiscal 2021.

Lower sales volumes, higher manufacturing costs, and unfavorable mix drove the decline, partially offset by favorable price.

Cost of sales was $152.5 million, down 21% compared to the second quarter of fiscal 2020, due to lower sales volumes, partially offset by the higher manufacturing costs described above.

Retail segment product contribution margin increased $1.6 million, or 6%, to $30.1 million in the second quarter of fiscal 2021.

Favorable mix and $2.4 million of lower advertising and promotional expenses drove the increase.

Cost of sales was $109.8 million, up 9% compared to the second quarter of fiscal 2020, primarily due to higher sales volume and the higher manufacturing costs described above.

Other segment product contribution margin increased $0.1 million, or 1%, to $10.5 million in the second quarter of fiscal 2021.

These amounts include a $4.3 million gain related to unrealized mark-to-market adjustments and realized settlements associated with commodity hedging contracts in the second quarter of fiscal 2021, and a $4.2 million gain related to the contracts in the prior year period.

Excluding these adjustments, Other segment product contribution margin was flat, as the impact of lower sales volumes in our vegetable business was offset by the benefit of favorable price/mix.

Selling, General and Administrative Expenses

Compared with the prior-year period, selling, general and administrative expenses declined $7.7 million, or 8%, to $83.9 million, largely due to lower incentive compensation expense accruals and a $3.5 million decline in advertising and promotional expenses.

The decline in SG&A was partially offset by investments to improve our operations and information technology infrastructure, which included approximately $5 million of non-recurring expenses (primarily consulting and employee training expenses) associated with implementing the first phase of a new enterprise resource planning (“ERP”) system.

Interest Expense, Net

Compared with the prior-year quarter, interest expense, net in the second quarter of fiscal 2021 increased $4.6 million to $30.0 million.

The increase reflected higher average total debt versus the prior year resulting from our actions to enhance our liquidity position, as well as the write-off of $1.0 million of debt issuance costs related to paying off a term loan facility that was due in November 2021.

For more information see “Liquidity and Capital Resources” in this MD&A.

Income Tax Expense

Income tax expense for the second quarter of fiscal 2021 and 2020 was $31.9 million and $42.7 million, respectively.

The effective income tax rate (calculated as the ratio of income tax expense to pre-tax income, inclusive of equity method investment earnings) was 24.8% and 23.3% for the second quarter of fiscal 2021 and 2020, respectively, in our Consolidated Statements of Earnings.

The effective tax rate varies from the U.S.

statutory tax rate of 21% principally due to the impact of U.S.

state taxes, foreign taxes, permanent differences, and discrete items.

Equity Method Investment Earnings

We conduct business through unconsolidated joint ventures in Europe, the U.S., and South America and include our share of the earnings based on our economic ownership interest in them.

Our share of earnings from our equity method investments was $19.2 million and $15.0 million for the second quarter of fiscal 2021 and 2020, respectively.

Equity method investment earnings included a $0.1 million unrealized loss related to mark-to-market adjustments associated with currency and commodity hedging contracts in the second quarter of fiscal 2021, compared to a $2.7 million unrealized loss related to the contracts in the second quarter of fiscal 2020.

Excluding the mark-to-market adjustments, earnings from equity method investments increased $1.6 million compared to the prior year period, largely due to improved performance in Europe, although demand in Europe softened during the latter half of the quarter, reflecting the negative impact on restaurant traffic at full-service restaurants related to governments reimposing social and on-premise dining restrictions, as well as reduced outdoor dining due to the onset of colder weather across many markets.

Twenty-Six Weeks Ended November 29, 2020 compared to Twenty-Six Weeks Ended November 24, 2019 (dollars in millions)

Net Sales and Product Contribution Margin

Twenty-Six Weeks Ended

Segment sales

Segment product contribution margin

Advertising and promotion expenses

Compared with the prior-year period, Lamb Weston’s net sales for the first half of fiscal 2021 declined $240.6 million, or 12%, to $1,767.6 million.

Volume declined 14%, reflecting the decline in demand for frozen potato products outside the home following government-imposed restrictions on restaurants and other foodservice operations to slow the spread of COVID-19, as well as the effect of colder weather, which limited outdoor dining traffic across many U.S.

markets during the latter months of the first half of fiscal 2021.

The decline was partially offset by increased sales volume in our Retail segment.

Price/mix increased 2% due to improved price/mix in the Foodservice and Retail segments.

Global segment net sales declined $133.8 million, or 13%, to $923.4 million.

Volume declined 12%, primarily due to the decline in demand for frozen potato products outside the home as a result of the pandemic’s negative impact on restaurant and other foodservice-related traffic in the U.S.

and in most of our key international markets.

Price/mix declined 1% as a result of negative mix.

Foodservice segment net sales declined $132.5 million, or 22%, to $477.8 million.

Volume decreased 27% due to the decline in demand for frozen potato products outside the home as a result of the pandemic’s negative impact on restaurant and non-commercial customers, such as lodging and hospitality, schools and universities, sports and entertainment, and workplace environments.

Retail segment net sales increased $24.6 million, or 19%, to $153.9 million, compared with $129.3 million in the first quarter of fiscal 2020.

Volume increased 11% due to increased sales of frozen potato products for in-home consumption following government-imposed stay-at-home orders.

Shipments of our premium and mainstream branded

offerings, which have historically comprised approximately 40% of the segment’s shipments, were strong, but were partially offset by a decline in private label product shipments, reflecting the loss of certain low-margin private label business beginning in the second quarter of fiscal 2020.

Volume trends weakened during the latter weeks of the quarter, reflecting the negative impact on restaurant traffic, especially at full-service restaurants, related to government-imposed social restrictions and reduced outdoor dining due to the onset of colder weather.

Price/mix increased 5%, reflecting the carryover benefit of pricing actions implemented during fiscal 2020, partially offset by unfavorable mix as sales of Lamb Weston branded and premium products softened.

Retail segment net sales increased $33.2 million, or 13%, to $294.6 million.

Price/mix increased 7%, largely driven by favorable mix from increased sales of branded products.

Net sales in our Other segment declined $3.3 million, or 9%, to $33.4 million, compared with $36.7 million in the first quarter of fiscal 2020, largely due to lower volumes in our vegetable business.

Volume increased 6% due to increased sales of frozen potato products for in-home consumption following government-imposed social restrictions.

Sales volumes of premium and mainstream branded offerings more than offset the decline in sales volumes of private label products, which reflects incremental losses of certain low-margin private label business.

Net sales in our Other segment declined $7.5 million, or 9%, to $71.8 million, compared with $79.3 million in the first half of fiscal 2020, largely due to lower volumes in our vegetable business, partially offset by favorable price/mix.

Product Contribution Margin

Lamb Weston’s product contribution margin for the first quarter of fiscal 2021 was $212.6 million, a decline of $31.2 million, or 13%, compared to the first quarter of fiscal 2020.

The decline primarily related to lower sales due to the pandemic and approximately $16 million of pandemic-related costs, net of CARES Act retention credits and other labor incentives, resulting from lower factory utilization and production inefficiencies, manufacturing and operational disruptions directly attributable to the pandemic, and other supply chain costs discussed above.

Global segment product contribution margin declined $24.9 million, or 24%, to $77.8 million in the first quarter of fiscal 2021.

Pandemic-related costs accounted for approximately $9 million of the decline, with the remainder driven by lower sales.

Global segment cost of sales was $369.3 million, down 11% compared to the first quarter of fiscal 2020, primarily due to lower sales, partially offset by the pandemic costs cited above.

Advertising and promotion expense was lower in the first quarter of fiscal 2021, as compared to prior year period.

Foodservice segment product contribution margin declined $16.7 million, or 16%, to $85.8 million in the first quarter of fiscal 2021.

Pandemic-related costs accounted for approximately $4 million of the decline, with the remainder driven by lower sales volume, partially offset by favorable price/mix.

Cost of sales was $150.3 million, down 25% compared to the first quarter of fiscal 2020, due to lower sales volumes.

Advertising and promotion expense was lower in the first quarter of fiscal 2021, as compared with the prior year period.

Retail segment product contribution margin increased $6.9 million, or 24%, to $35.8 million.

Higher sales volumes, favorable mix and a $1.9 million decline in advertising and promotional expenses drove the increase, which was partially offset by approximately $3 million of pandemic-related costs.

Cost of sales was $118.1 million, up 20% compared to the first quarter of fiscal 2020, primarily due to higher sales volume.

Other segment product contribution margin was $13.2 million, an increase of $3.5 million as compared with $9.7 million in the first quarter of fiscal 2020.

These amounts include a $7.7 million gain related to unrealized mark-to-market adjustments and realized settlements associated with commodity hedging contracts in the first quarter of fiscal 2021, and a $3.1 million gain related to the contracts in the prior year period.

Compared with the prior-year period, Lamb Weston’s product contribution margin for the first half of fiscal 2021 declined $89.3 million, or 17%, to $433.6 million.

The decline was driven by lower sales due to the pandemic, as well as higher manufacturing costs, which were largely due to COVID-related costs, and input cost inflation.

Global segment product contribution margin declined $61.1 million, or 26%, to $170.5 million in the first half of fiscal 2021.

Lower sales volumes, higher manufacturing costs and unfavorable mix drove the decline.

Global segment cost of sales was $751.8 million, down 9% compared to the first half of fiscal 2020, primarily due to lower sales, partially offset by the higher manufacturing costs described above.

Foodservice segment product contribution margin declined $40.3 million, or 19%, to $173.5 million in the first half of fiscal 2021.

Lower sales volumes, higher manufacturing costs, and unfavorable mix drove the decline, partially offset by favorable price.

Cost of sales was $302.9 million, down 23% compared to the first half of fiscal 2020, due to lower sales volumes, partially offset by the higher manufacturing costs described above.

Retail segment product contribution margin increased $8.5 million, or 15%, to $65.9 million in the first half of fiscal 2021.

Higher sales volumes, favorable mix and a $4.3 million decline in advertising and promotional expenses drove the increase, which was partially offset by higher manufacturing costs.

Cost of sales was $227.8 million, up 15% compared to the first half of fiscal 2020, primarily due to higher sales volume and the higher manufacturing costs described above.

Other segment product contribution margin increased $3.6 million to $23.7 million, as compared with $20.1 million in the first half of fiscal 2020.

These amounts include a $12.1 million gain related to unrealized mark-to-market adjustments and realized settlements associated with commodity hedging contracts in the first half of fiscal 2021, and a $7.3 million gain related to the contracts in the first half of fiscal 2020.

Excluding these adjustments, Other segment product contribution margin declined $1.2 million, largely due to higher costs in our vegetable business.

Selling, General and Administrative Expenses

Selling, general and administrative expenses declined $0.5 million, or less than 1%, to $78.1 million in the first quarter of fiscal 2021 compared with the same period in 2020, as cost management efforts and a $3.7 million decline in advertising and promotional expenses offset approximately $4 million of pandemic-related expenses described above, as well as approximately $1 million of non-recurring expenses (primarily consulting expenses) associated with developing and implementing a new enterprise resource planning (“ERP”) system.

Compared with the prior-year period, selling, general and administrative expenses declined $8.2 million, or 5%, to $162.0 million.

The decline was largely driven by lower incentive compensation expense, cost management efforts, and

a $7.1 million decline in advertising and promotional expenses, which more than offset investments to improve our operations and information technology infrastructure, which included approximately $6 million of non-recurring expenses (primarily consulting and employee training expenses) associated with implementing the first phase of a new ERP system.

Interest Expense, Net

Interest expense, net was $30.3 million for the first quarter of fiscal 2021, an increase of $2.1 million compared with the same period in fiscal 2020.

The increase in “Interest expense, net” was the result of higher average total debt versus the prior year.

For more information on this refinance see “Liquidity and Capital Resources” in this MD&A.

Compared with the prior-year period, interest expense, net increased $6.7 million to $60.3 million.

For more information see “Liquidity and Capital Resources” in this MD&A.

Income Tax Expense

Income tax expense for the first quarter of fiscal 2021 and 2020 was $28.0 million and $36.7 million, respectively.

The effective income tax rate (calculated as the ratio of income tax expense to pre-tax income, inclusive of equity method investment earnings) was 23.9% and 24.1% for the first quarter of fiscal 2021 and 2020, respectively, in our Consolidated Statements of Earnings.

Income tax expense for the first half of fiscal 2021 and 2020 was $59.9 million and $79.4 million, respectively.

The effective income tax rate (calculated as the ratio of income tax expense to pre-tax income, inclusive of equity method investment earnings) was 24.3% and 23.7% for the first half of fiscal 2021 and 2020, respectively, in our Consolidated Statements of Earnings.

The effective tax rate varies from the U.S.

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We conduct business through unconsolidated joint ventures in Europe, the U.S., and South America and include our share of the earnings based on our economic ownership interest in them.

Our share of earnings from our equity method investments was $11.9 million and $10.6 million for the first quarter of fiscal 2021 and 2020, respectively.

Equity method investment earnings included a $4.7 million unrealized gain related to mark-to-market adjustments associated with currency and commodity hedging contracts in the first quarter of fiscal 2021, compared to a $1.1 million unrealized gain related to the contracts in the first quarter of fiscal 2020.

Excluding the mark-to-market adjustments, earnings from equity method investments declined $2.3 million compared to the prior year period.

Pandemic-related manufacturing costs and SG&A expenses accounted for approximately $1 million of the decline, with the remainder largely driven by lower sales following government-imposed restrictions on restaurant and other foodservice operations.

Our share of earnings from our equity method investments was $31.1 million and $25.6 million for the first half of fiscal 2021 and 2020, respectively.

Equity method investment earnings included a $4.6 million unrealized gain related to mark-to-market adjustments associated with currency and commodity hedging contracts in the first half of fiscal 2021, compared to a $1.6 million unrealized loss related to the contracts in the first half of fiscal 2020.

Excluding the mark-to-market adjustments, earnings from equity method investments declined $0.7 million compared to the prior year period, largely reflecting the impact of lower sales following government-imposed restrictions on restaurant and other foodservice operations as well as COVID-related costs in Europe.

Liquidity and Capital Resources

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As a result of the uncertainties caused by the pandemic, we have taken, and are continuing to take, actions to enhance liquidity.

We limited discretionary expenses across the Company;

implemented a hiring and salary freeze for our U.S.

We limited discretionary expenses across the Company and implemented a hiring and salary freeze for our U.S.

salaried positions.

suspended future share repurchases, and received benefits under the CARES Act and other labor incentives.

In addition, in September 2020, we amended our credit agreement to increase available borrowings under our revolving credit facility from $500.0 million to $750.0 million and extended the maturity date to September 2023.

In September 2020, we amended our credit agreement to increase available borrowings under our revolving credit facility from $500.0 million to $750.0 million and extended the maturity date to September 2023.

In connection with the amendment, we used cash on hand to repay the $271.9 million term loan facility due in November 2021.

Considering the current environment, with a significant number of employees working remotely, we have also deferred the second phase of our new ERP system implementation.

As a result of our actions, our cash and cash equivalents balance was $1,032.5 million and approximately $800 million at August 30, 2020 and at the end of our fiscal month ended September 27, 2020, respectively.

As a result of our actions, our cash and cash equivalents balance was $763.9 million at November 29, 2020.

We believe our cash on hand, cash flows from operations and our current credit facilities will be sufficient to satisfy our future working capital requirements, interest payments, capital expenditures, dividends on our common stock, and other financing requirements for the foreseeable future.

We continue to evaluate and take action, as necessary, to preserve adequate liquidity and ensure that our business can continue to operate during these uncertain times.

While we expect increased availability of COVID-19 vaccines to enable a gradual return of consumer french fry demand as our fiscal year progresses, we continue to evaluate and take action, as necessary, to preserve adequate liquidity and ensure that our business can continue to operate during these uncertain times.

If we are unable to generate sufficient cash flows from operations, or are otherwise unable to comply with the terms of our credit facilities, we may be required to seek additional financing alternatives, which may require waivers under our credit agreements governing our senior secured debt and indentures governing our senior notes, in order to generate additional cash.

There can be no assurance that we would be able to obtain additional financing or any such waivers on terms acceptable to us or at all.

There can be no assurance that we would be able to obtain additional financing or any such

waivers on terms acceptable to us or at all.

For additional information on our debt, see Note 9, Debt and Financing Obligations, of the Condensed Notes to Consolidated Financial Statements in “Part I, Item 1.

Financial Statements” of this report.

Below is a summary table of our cash flows, followed by a discussion of the sources and uses of cash through operating, investing, and financing activities:

Thirteen Weeks Ended

Financial Statements” of this report and Note 9, Debt and Financing Obligations, of the Notes to Consolidated Financial Statements in "Part II, Item 8.

Financial Statements and Supplementary Data"

of the Form 10-K.

Below is a summary table of our cash flows, followed by a discussion of the sources and uses of cash through operating, investing, and financing activities (dollars in millions):

Twenty-Six Weeks Ended

Net cash flows provided by (used for):

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Operating Activities

In the first quarter of fiscal 2021, cash provided by operating activities increased $12.1 million to $250.6 million, compared with $238.5 million in the same period a year ago.

The increase related to $48.9 million of cash provided by favorable changes in working capital, partially offset by a $36.8 million decrease in income from operations, adjusted for non-cash income and expenses.

Favorable changes in working capital primarily related to lower sales and therefore, lower receivables in first quarter 2021, compared with the same period in fiscal 2020, and the timing of the collection of accounts receivable.

A lower incentive compensation payout in fiscal 2020, relative to fiscal 2019, also contributed to the favorable changes in working capital.

These increases in working capital were partially offset by a larger finished goods inventory build in first quarter of fiscal 2021, compared with fiscal 2020, due to the abnormally low finished goods inventories at the end of fiscal 2020, as we balanced production with declining demand resulting from the impact of the COVID-19 pandemic.

Lower earnings from operations in first quarter of fiscal 2021 related to government-imposed restrictions on restaurants and other foodservice operations to slow the spread of COVID-19 and approximately $21 million of pandemic-related costs, net of CARES Act retention credits and other labor incentives.

In the first half of fiscal 2021, cash provided by operating activities decreased $26.5 million to $318.8 million, compared with $345.3 million in the same period a year ago.

The decrease related to an $85.2 million decrease in income from operations, adjusted for non-cash income and expenses, partially offset by $58.7 million of cash provided by favorable changes in working capital.

Lower income from operations in the first half of fiscal 2021 related to government-imposed restrictions on restaurants and other foodservice operations to slow the spread of COVID-19.

See “Operating Results” in this MD&A for more information.

Favorable changes in working capital primarily related to lower sales and therefore, lower receivables in the first half of fiscal 2021, compared with the same period in fiscal 2020, and the timing of the collection of accounts receivable.

Also contributing to favorable working capital changes was an increase in income taxes and accounts payable, due to timing.

This favorability was partially offset by a decrease in rebate accruals due primarily to lower sales in fiscal 2021, relative to fiscal 2020 and a larger finished goods inventory build in the first half of fiscal 2021, compared with fiscal 2020, due to the abnormally low finished goods inventories at the end of fiscal 2020, as we balanced production with declining demand resulting from the impact of the COVID-19 pandemic, and decreases in other accrued liabilities.

Investing Activities

Investing activities used $33.1 million of cash in the first quarter of fiscal 2021, compared with $176.7 million in the same period in the prior year.

The decrease related to our efforts to preserve liquidity and defer strategic capital expenditures.

We increased our estimate of fiscal 2021 capital expenditures from $140 million to $180 million, reflecting investments in productivity, optimization and growth capacity projects.

Investing activities used $53.3 million of cash in the first half of fiscal 2021, compared with $240.2 million in the same period in the prior year.

Excluding the $116.7 million of cash used for the acquisition of a frozen potato processor in Australia in the prior year, cash used for investing activities decreased $70.2 million, compared with the first half of fiscal 2020.

The decrease related to our efforts to preserve liquidity during the COVID-19 pandemic.

Cash used for capital investing activities in fiscal 2021, including information technology expenditures, is expected to be $180 million, reflecting investments in productivity, optimization and growth capacity projects.

These expenditures could increase or decrease as a result of a number of factors, including our financial results, future economic conditions, including the impact of COVID-19, and our regulatory compliance requirements.

Financing Activities

During the first quarter of fiscal 2021, cash used for financing activities increased $495.3 million to $550.2 million, compared with $54.9 million during the same period a year ago.

During the first quarter of fiscal 2021, financing activities primarily related to the repayment of $498.1 million of short-term borrowings, the payment of $33.6 million in cash dividends to common stockholders, and $9.2 million of debt and financing obligations repayments.

Financing activities also included $9.6 million for the repurchase of 151,151 shares for restricted stock tax withholdings.

Given the uncertainty of the COVID-19 pandemic, we have temporarily suspended share repurchases in the near-term to provide us with additional liquidity.

In addition, we used cash on hand to repay the $271.9 million term loan facility due in November 2021.

As of our fiscal month ended September 27, 2020, no borrowings were outstanding under the amended revolving credit facility.

During the first quarter of fiscal 2020, financing activities primarily related to $309.0 million of debt and financing obligation repayments, $299.3 million of net proceeds from the issuance of debt related to our refinancing $300.0 million of the $599.1 million term loan facility outstanding at May 26, 2019, the payment of $29.2 million in cash dividends to common stockholders, $8.3 million of short-term borrowing repayments and a $3.5 million increase in cash used to repurchase 111,721 shares of our common stock, including tax withholdings in connection with vesting of restricted stock.

For more information about our debt, interest rates, maturity dates, and covenants, see Note 9, Debt and Financing Obligations of the Notes to Consolidated Financial Statements in “Part II, Item 8.

During the first half of fiscal 2021, cash used for financing activities increased $773.6 million to $867.2 million, compared with $93.6 million during the same period a year ago.

During the first half of fiscal 2021, financing activities primarily related to the repayment of $498.8 million of short-term borrowings, $289.6 million of debt and financing obligations repayments, which includes the repayment of the $271.9 million term loan facility due in November 2021, the payment of $67.2 million in cash dividends to common stockholders, and $2.8 million of debt issuance costs primarily related to amending our credit agreement in September 2020 to increase available borrowings under our revolving credit facility from $500.0 million to $750.0 million and extending the maturity to September 2023.

Financing activities also included $9.8 million for the repurchase of 156,506 shares from employees to cover income and payroll taxes on equity awards that vested during the period.

In December 2020, we announced a two-cent annual increase to our quarterly dividend.

In addition, we plan to resume our share repurchase program, which we suspended at the onset of the COVID-19 pandemic to preserve liquidity.

These actions reflect our belief in the long-term strength of our business.

During the first half of fiscal 2020, financing activities primarily related to $318.1 million of debt and financing obligation repayments, $299.3 million of net proceeds from the issuance of debt related to refinancing $300.0 million of the $599.1 million term loan facility outstanding at May 26, 2019, the payment of $58.5 million in cash dividends to common stockholders, $1.4 million of short-term borrowings and $17.8 million in cash used to repurchase 185,200 shares of our common stock, including tax withholdings in connection with vesting of restricted stock.

For more information about our debt, interest rates, maturity dates, and covenants, see Note 9, Debt and Financing Obligations, of the Condensed Notes to Consolidated Financial Statements in “Part I, Item 1.

Financial Statements” of this report and Note 9, Debt and Financing Obligations of the Notes to Consolidated Financial Statements in “Part II, Item 8.

Financial Statements and Supplementary Data” of the Form 10-K.

At August 30, 2020, we were in compliance with the financial covenant ratios and other covenants contained in our credit agreements.

At November 29, 2020, we were in compliance with the financial covenant ratios and other covenants contained in our credit agreements.

Obligations and Commitments

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Reconciliations of Non-GAAP Financial Measures to Reported Amounts

To supplement the financial information included in this report, we have presented EBITDA and EBITDA including unconsolidated joint ventures, each of which is considered a non-GAAP financial measure.

To supplement the financial information included in this report, we have presented EBITDA and EBITDA including unconsolidated joint ventures, each of which is a non-GAAP financial measure.

Lamb Weston’s management uses EBITDA and EBITDA including unconsolidated joint ventures to evaluate the Company’s performance.

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These measures are not a substitute for their comparable GAAP financial measures, such as net income, and there are limitations to using non-GAAP financial measures.

The following table reconciles net income to EBITDA and EBITDA including unconsolidated joint ventures.

The following table reconciles net income to EBITDA and EBITDA including unconsolidated joint ventures (dollars in millions):

Thirteen Weeks Ended

Twenty-Six Weeks Ended

Equity method investment earnings

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included in the Form 10-K.

There were no material changes to these critical accounting estimates during the first quarter of fiscal 2021.

There were no material changes to these critical accounting estimates during the first half of fiscal 2021.

New and Recently Adopted Accounting Pronouncements

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis