Lamb Weston Holdings, Inc.

Good day and welcome to the Lamb Weston Third Quarter 2020 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Dexter Congolet, VP Investor Relations of Lamb Weston. Please go ahead.

Good morning and thank you for joining us for Lamb Weston's Third Quarter 2020 Earnings Call. This morning, we issued our earnings press release, which is available on our website, lambweston.com. due to risks and uncertainties. Please refer to the cautionary statements and risk factors contained on our pilings with the SEC for more details on our forward-looking statements. Some of today's remarks include non-GAAP financial measures. These non-GAAP financial measures should not be considered a replacement for and should be read together with our GAAP results. You can find the GAAP to non-GAAP reconciliations in our earnings release. With me today are Tom Warner, our President and Chief Executive Officer, and Rob McDonough, our Chief Financial Officer. Tom will provide an overview of our priorities for managing through the COVID-19 pandemic crisis, as well as some thoughts on the near-term demand environment. Rob will then provide some details on our third quarter results, financial liquidity and capital structure. With that, let me now turn the call over to Tom.

Thank you, Dexter. Good morning, everyone, and thank you for joining our call today. We're clearly in a time of considerable uncertainty as it relates to the scope and speed of the COVID pandemic and the impact on the global economy, our industry, and each of our lives. We'll do our best to answer your questions relating to consumer demand and our response to the crisis, but please recognize that much is still unknown. As a consequence of this uncertainty, we've withdrawn our financial outlook despite only two months remaining in our physical fourth quarter. Thank you for joining us today. Thank you for joining us today. Thank you for joining us. We operated through the worst of the outbreak. We've taken steps to enhance sanitation protocols in our production facilities and offices, promote social distancing by having employees work at home when possible, and canceling almost all travel. Second, as a leader in our category, and as I mentioned earlier, we have the obligation to continue to make food and do our part We're confident in our ability to continue to safely produce fries and other frozen potato products. As you can imagine, the demand situation remains fluid, so there will undoubtedly be an effect on our operations and supply chain. We're watching consumer and customer demand and have begun to adapt our production schedules to react accordingly. As appropriate, we'll take further actions to align our manufacturing operations, including temporarily reducing production. Third, we and our joint venture partners are committed to remaining a trusted and valued business partner for our customers as they all manage through supply chain and inventory concerns. Several large QSR chain customers have already indicated to us that fries are a priority item. We and our customers will not like Thank you for joining us. As restrictions have relaxed, we've seen volume climb back to about 70% of pre-crisis demand today. Our team there has responded well and continues to manage through the impact of the virus. We're adopting lessons learned from them to our operations around the world. In other key markets in Asia, such as Japan, South Korea, Taiwan, and Singapore, we've seen only a modest impact on French fry demand. While our sales in these markets mirror these trends, we're continuing to closely monitor the situation for additional evidence of consumer reaction and fry demand. In the US, it's still too early to determine how the impact on demand will play out. Normally, about 65% of all fries are purchased at a quick-serve restaurant, with another 20% purchased at a full-serve restaurant. The remaining 15% is purchased at retail. Our sales breakdown is broadly consistent with that split. Our global segment, which accounts for about 52% of our total sales, primarily serves large QSR chain customers in the U.S. and internationally, largely including Asia, Australia, and Mexico. Our food service segment, which is about 30% of sales, primarily sells to a range of food service operations. We estimate that close to 80% A retail segment historically accounts for about 13% of our sales. Of the price purchased at a QSR, normally about two-thirds have been purchased via drive-thru, carry-out, or delivery, with the remaining third consumed on-premises. Prior to the adoption of more severe social and movement restrictions, we saw little change in orders and shipments to QSR Higher delivery orders cushion much of the decline in on-premise dining. However, with the adoption of more severe restrictions across more states, we're seeing orders beginning to slow. If the China experience provides an appropriate guide, then we would expect QSR volumes to begin to recover at a faster rate than for full-service restaurants after the more severe restrictions are relaxed. Traffic at full-service restaurants and operations in the U.S. is expected to be down much more sharply than at QSRs. While many of these operators are taking steps to boost takeout and delivery sales, we expect this will make up only a fraction of lost business, so our sales to these types of customers are more at risk. In contrast, retail demand for frozen fries has significantly increased as food-at-home consumption rises, with the adoption of social distancing The bottom line is that in the U.S., QSRs that have established drive-through, take-out, and delivery capabilities are in a much better position in the current environment than full-service restaurants and other outlets that largely cater to dine-in traffic. Retail will likely benefit in the near term with more meals prepared at home and pantry loading. In Europe, which has served through our Lamb-Weston-Meyer joint venture, although a high proportion of our The importance of the consumption is dine-in or takeaway via walk-in traffic since drive-through options are much more limited. The impact of the virus on demand so far has been most pronounced in Italy after it adopted severe social and movement restrictions. Other European nations have since adopted similar restrictions, so we expect the decline in demand to accelerate in those countries as well, which will further negatively impact Lem, Weston, Myers' results.