Lamb Weston expects further price pressure

Lamb Weston published its quarterly figures for Q2 on December 19th. These show higher net sales, due to a higher volume of potato products sold, but lower prices. Looking at constant currency the net sales are about flat, due to the lower product prices. The management anticipates that further price drops are needed to shift their fries, which is not what shareholders were hoping to hear.The headline figures are all looking normal. The net result of $62.1 million for the second financial quarter is altogether different compared to a loss of $36.1 million during the second quarter last year. Revenue went up 1.1% to $1.62 billion, which was slightly higher than analysts had previous anticipated.Favourable currencyThe volume was 8% higher during the quarter, but thanks to an 8% decline in prices the net results were about flat. This volume growth was mainly realised in North America and Asia. The first saw an 8% growth in volume, due to recent customer wins, and international volume growth was 4%. A favourable foreign currency impact, compared to the dollar, is helping the Idaho-based processor to sell more potato products. In Asia 7% more product volume was sold, but at constant currency there was an 8% decline.Lamb Weston is expecting net sales of $6.55 billion, compared to $6.35 billion before. The adjusted EBITDA is expected to increase from $1 to $1.20 billion. CEO Mike Smith said the company is on track to achieve the $100 million cost saving program for the current fiscal year. Rising costsThe company is expecting that further price decreases will take place in order to keep volumes steady. This is exactly what shareholders found worrying, as margins cannot be expanded in the current market. Meanwhile, all costs are moving the other way. Labour, energy, transport and tariffs are pushing up prices for Lamb Westons fries. The management touched on the subject of possible palm oil tariffs, which could also increase fry prices. Europe is currently the most volatile market, putting pressure on the total Lamb Weston performance. Even with the North American plants, consumption and export being favourable there is – according to management – still a good chance that Europe will drag down financial figures for the company. Lamb Weston notices both lower exports from Europe and a smaller internal demand from restaurants.Share prices fallDespite initial sound financial figures, investors were not happy with what they heard. Share prices dropped nearly 26% to just under $44 per share, from almost $60. This is the lowest point since May 2017, in the first year that the company went to the NYSE.