Lamb Weston Holdings, Inc.

Please stand by. We're about to begin. Good day, and welcome to the Lamb-Weston fourth quarter and fiscal year 2020 earnings call. Today's conference is being recorded, and at this time, I'd like to turn the conference over to Mr. Dexter Congvalet, VP, Investor Relations of Lamb-Weston. Please go ahead, sir.

Good morning, and thank you for joining us for Lamb-Weston's fourth quarter. One second. My screen just went blank, possibly. Fourth quarter in fiscal 2020 earnings call. This morning, we issued our earnings press release, which is available on our website, labweston.com. Please note that during our remarks, we'll make some forward-looking statements about the company's expected performance. These statements are based on how we see things today. Actual results may differ materially due to risks and uncertainties. Please refer to the cautionary statements and risk factors contained in our SEC filings 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 Werner, our President and Chief Executive Officer, and Rob McNutt, our Chief Financial Officer. Tom will provide an overview of the near-term demand environment, as well as our efforts to manage through the COVID-19 pandemic crisis. Rob will then provide some details on our fourth quarter results, financial liquidity, and trends we're seeing so far in the first quarter of fiscal 21. 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. Before getting into our performance in the quarter, I want to thank the entire Lamb-Wesson team for their commitment to support our communities, our customers, and our consumers during these trying times while keeping themselves and their colleagues safe. We should be proud of doing our part to help feed people around the world. It's their commitment and spirit of teamwork that makes me so honored to be part of this great company. Now let me turn to the performance. The final months of physical 2020 were some of the most challenging in Lam Weston's history. After starting to realize the impact of government efforts to control the spread of the coronavirus in China on our local operations in February, we saw a more severe effect on our overall business beginning in late March as governments in the U.S. and Europe took actions to try to slow the spread of the virus. These government restrictions on restaurants and other food service businesses abruptly and significantly reduced restaurant traffic and the demand for fries. In addition, the initial drop in demand was so steep and quick that customers needed to adjust inventory levels, which further reduced our shipments. As a result, our sales and earnings fell in the fourth quarter. Starting in May, U.S. demand for fries began to recover, and that improvement has continued through mid-July. The recovery has been led by quick-service restaurants as consumers leverage drive-through options. By the end of June, QSR traffic rebounded significantly. As expected, full-service restaurants were affected much more severely than QSRs. They adapted by increasing carry-out and delivery options, and starting in late May, consumer traffic began to increase as certain state governments gradually eased restrictions to allow for more on-premise dining. However, while steadily improving, our shipments to this channel currently remain well below prior year levels. Fry demand by our non-commercial customers such as hotels, schools, universities, and sporting venues was hit hard as traffic at these outlets suffered. Our shipments to these customers remain very soft and will likely remain so until the pandemic ends and consumer confidence improves. In contrast, consumers sharply stepped up food-at-home purchases in the fourth quarter, and retail purchases remain a bright spot for the category and for Lamb Weston. Friday Man in Europe, which is served through our Lamb Weston-Meyer joint venture, has also improved since the end of May. Although a high proportion of our sales are to QSRs, most of the consumption is dine-in or takeaway, since drive-thru options are much more limited. These QSRs act more like full-service restaurants. Like in the U.S., weekly shipments bottomed in April, and they have steadily improved since then, but currently remain well below pre-COVID levels. Fry demand in our other key international markets has been mixed. China's recovery has been solid, with our weekly shipments in July approaching pre-COVID levels. Demand in Asia and outside of China has been varied, but consumption overall has held up better than in the U.S. and Europe. Consumption in Latin America, including Mexico, held up relatively well in the fourth quarter, but began to soften at the end of May. We have been encouraged by the breadth and the pace of recovery in Friday Man. It's been faster than we anticipated when the crisis first arose. However, there's still a great deal of uncertainty regarding the recovery's sustainability. For example, recent actions by California and Texas to reimpose restrictions on restaurants and food service outlets, as well as New York City's decision to postpone lifting restrictions for on-premise dining, illustrate how volatile and fragile the U.S. recovery and demand can be. Because of this uncertainty, we are not providing a financial outlook for fiscal 2021. Instead, Rob will detail later, we're providing trends in our shipments that we have observed so far during our physical first quarter. Managing through this crisis has been difficult, and I'm proud of how we're executing on a range of priorities and actions to navigate the business in the current environment and position us for success as the band continues to recover. First, we're prioritizing the health and safety of our Lamb, Weston team, and have adopted enhanced employee safety and sanitation protocols at each of our manufacturing, commercial and support locations. Nonetheless, we've had a number of production employees contract the virus, which has required us to temporarily shut down manufacturing lines to be sanitized. Unfortunately, the possibility of temporarily shutting down lines remains a risk until the virus is under control. We're always seeking ways to improve testing processes that can help us identify affected employees before they show up for work. The safety of our employees has and will continue to be our number one priority. Second, we're working to remain a trusted and valued business partner for our customers as they manage their supply chains and commercial operations. For example, for our larger chain restaurant customers, we've helped them manage inventory levels in a time of heightened volatility. We've also begun to help customers identify the best fries for delivery and carryout, as well as develop limited time offering products that would be available as soon as this fall in the U.S. For independent operators, our direct sales force has been a real asset in allowing us to stay close with customers to identify the appropriate products for simplified menus, creatively broaden their fry offerings and react quickly to customer needs in this volatile market. Third, we're adapting our manufacturing operations to meet the new demand environment. While necessary, our actions and the resulting disruption has come at a cost during the quarter. For example, we've incurred incremental costs to redirect certain manufacturing lines to make retail products. We've also adjusted production schedules and run times in an effort to spread production across our network and keep factory employees on payroll. Since the demand environment remains fluid, we'll continue to evaluate further actions to align our manufacturing operations as appropriate. However, meeting customer demand with a workforce that's being affected by the virus creates a difficult scheduling exercise for our manufacturing team, which will continue to make capacity and cost management challenging. Finally, we've significantly enhanced our liquidity position by securing additional debt financing and taking steps to preserve cash. Based on these actions and our ability to generate cash, we feel confident enough about our liquidity that we fully repay the borrowings under our credit facility in July. In summary, we believe that by executing on these priorities and actions, we're positioned to navigate through an uncertain environment in fiscal 2021. and to emerge as a stronger company once we're on the other side of this virus. Before handing off the call to Rob, let me quickly update you on a couple of items. With respect to this year's potato crop at this point, the crops in our North America growing areas and in Europe are consistent with historical averages. As usual, we'll have more insight on the yield and quality of the crop after the harvest takes place later in the year. With respect to our customer contract negotiations, we're encouraged by how the discussions have been progressing and have already finalized a handful of the global and regional restaurant chain customer contracts. For those remaining contracts, we'll remain disciplined and take an approach designed to maintain and reinforce our strategic customer relationships. So as you can see in the near term, we're taking the necessary actions across our manufacturing, commercial, and support teams to navigate the market crisis including, most importantly, prioritizing the health, safety, and well-being of our employees and partnering with our customers and suppliers across the globe. We're facing an unprecedented, challenging, and volatile operating environment that will likely continue for the foreseeable future, but we remain confident in our strategies and the long-term health and structure of the category. Let me turn the call over to Rob.

Thanks, Tom. Good morning, everyone. As Tom noted, our fourth quarter results reflect the pandemic's effect on frozen potato demand as well as the impact on our cost structure as we manage through the crisis and position ourselves for fiscal 2021. While the quarter was highly challenging, we've seen improvements in recent months from the lows we saw in April. We believe that we're well positioned to manage through the continuing recovery. Specifically in the quarter, net sales declined 16%, including the benefit of an additional week of sales versus the prior year. Excluding that benefit, sales declined 22%. Sales volume was down 17%, or 23%, excluding the extra week, as frozen potato demand at restaurants and other food service outlets fell sharply in the last two months of the quarter, following government-imposed restrictions on restaurants and other food service operations and stay-at-home orders related to the pandemic. The volume decline also reflects inventory destocking by chain restaurant and food service customers in April through mid-May as they adjusted to the abrupt drop in near-term demand. Our weekly shipments towards the end of the quarter more closely mirrored consumer demand trends by channel. But we're still down versus a prior year. Specifically, our weekly shipments to large chain restaurants in the U.S. were about 50% of pre-COVID levels from late March through early April, then improved to around 85% by the end of May as consumers took advantage of QSR drive-thrus. Our weekly shipments to full-service restaurants and non-commercial outlets such as hotels, schools, and universities, sporting venues, and workplace cafeterias bottomed at about 20% of pre-COVID levels in mid-April, then improved to approximately 70% by the end of May as some states began to ease restrictions on restaurants and bars. In contrast, our retail segments' weekly shipments in April through mid-May Spiked up around 50% versus prior year as consumers increased food-at-home purchases in response to shelter-in-place orders. Demand remained high as we exited the quarter, with weekly shipments growth of about 30%. Price mix increased 1% for the total company, with gains in retail partially offsetting unfavorable mix in our global and food service segments. For the year, sales were up 1%, including the benefit of the 53rd week. Excluding that benefit, sales were down 1%. Gross profit in the quarter declined $139 million. This included about $47 million of costs related to the pandemic's impact on our operations. In the quarter, we elected to keep all of our plants open and continue to pay our employees. and therefore spread reduced demand across the entire system. This led to all of our plants operating at lower rates, resulting in labor, energy, and materials utilization levels that were well off of our standards. Accordingly, this had a significant impact on our margins. Of the 47 million, about 25 million reflects utilization-related costs and inefficiencies arising from disruptions to our manufacturing network. These costs and inefficiencies largely consisted of, first, spreading lower volume across our entire manufacturing network, including modifying production schedules and reducing run times, thereby sub-optimizing utilization at each facility. Second, costs, net of any government credits to retain factory labor, including paying them full weekly wages, although hours worked may have been well below that. Third, cost to shut down, sanitize, and restart manufacturing facilities after a factory employee had tested positive for the virus. And finally, incremental cost to produce retail products on food service-oriented production lines. To be clear, we expect to incur utilization-related costs and inefficiencies as long as our manufacturing operations are impacted by the pandemic, especially with respect to disruptions arising from shutting down and sanitizing facilities, including the cost of shifting production to non-affected locations. The other 22 of the $47 million consists of non-utilization-related costs, which largely included nearly $14 million, of which $10 million in the quarter was non-cash to terminate certain raw potato purchase obligations related to the 2019 crop. Nearly $6 million of incremental warehousing, transportation, and supply chain costs, and about $3 million of other costs. We expect over half of these non-utilization-related costs will be non-recurring. While these pandemic-related costs had a pronounced impact on our results for the quarter, the remaining $92 million decline in gross profit largely reflects lower sales volumes. as well as higher manufacturing costs due to unfavorable mix, other inefficiencies, and input cost inflation. We partially offset the decline in gross profit by a $22 million reduction in SG&A expense, which was largely driven by lower incentive compensation accruals and adopting a broad range of cost mitigation efforts. We also reduced advertising and promotional expense by $5 million primarily related to our retail segment and suspended contributions to our charitable foundation in order to preserve cash. Partially offsetting these SG&A reductions were $11 million of expenses related to the pandemic, which largely included expenses to adopt and maintain enhanced employee safety and sanitation protocols, expenses, net of government credits to retain certain direct sales employees in our food service segment So that we're in a better position to drive growth as demand improves. And expensing more than $3 million of capitalized costs associated with manufacturing expansion projects that were shelved for the time being. We expect to incur some of the pandemic-related SG&A expenses going forward, especially for maintaining enhanced employee safety and sanitation protocols. Equity method earnings swung to a loss of $6 million, down from a positive $15 million last year. Excluding the impact of unrealized mark-to-market adjustments, equity earnings declined $25 million, of which about $16 million reflects pandemic-related costs and expenses similar to what we incurred in our base business. The remaining $9 million of the decline was largely driven by lower sales, primarily in Europe, As Tom mentioned, the pandemic's effect on European fry demand was similar to what we saw for full-service restaurants in the U.S., with Lamb, Weston, Meyers weekly shipments bottoming in April at about 35% of prior year levels and recovering to around 60% by the end of May.

Adjusted EBITDA

including joint ventures declined $137 million to $78 million. About $74 million of the decline was due to the pandemic-related costs and expenses that I previously discussed, which included $58 million in our base business and $16 million at our unconsolidated joint ventures. Excuse me. The remainder of the EBITDA decline was driven by lower sales, higher manufacturing costs, and lower equity method earnings. For the year, adjusted EBITDA, including joint ventures, was about $800 million, down 12%. Adjusted diluted EPS in the quarter was a loss of one cent, down from 74 cents last year. For the year, adjusted diluted EPS was $2.50, Moving to our segments, sales for our global segment, which includes the top 100 U.S.-based chains, as well as all sales outside of North America, were down 18% in the quarter. Price mixed declined 2%, largely due to unfavorable customer and product mix, including the impact of lower sales of limited-time offering products. Volume fell 16%. This was due to the sharp drop-off in U.S. consumer demand and inventory destocking, with weekly shipments to large chain customers as low as 50% of prior year levels in mid-April and rebounding to about 85% by the end of May. International sales were mixed. In China, monthly shipments in March recovered to nearly 70% of pre-COVID monthly run rate and recovered to about 80% in May. Monthly shipments to other markets in Asia, Australia and Mexico were 70% to 80% of pre-COVID levels through late April, but began to soften by the end of the quarter in certain markets due to inventory destocking. Global's product contribution margin, which is gross profit, less A&P expense, declined $77 million to $34 million. Pandemic-related costs accounted for $29 million of the decline, with the remainder primarily driven by lower sales and higher manufacturing costs. Sales for our food service segment, which services North American food service distributors and chain restaurants outside the top 100 North American restaurant customers, declined 44% in the quarter. Price mix declined 2% due to unfavorable mix as sales of Lamb Weston branded and premium products softened. Price alone was positive, reflecting the pricing actions that we'd taken last fall. Volume declined 42%, reflecting the severe impact of the shutdown had on full-service restaurants and non-commercial outlets, including customers restocking inventories in April through early May. By the end of May, our weekly shipment rate had recovered to around 70% of prior year levels. Food service's product contribution margin declined $66 million to $43 million, with pandemic-related costs accounting for $8 million of the decline. The remainder was primarily driven by lower sales, unfavorable mix, and higher manufacturing costs. Sales in our retail segment increased 56% in the quarter. Volume increased 39%. As we discussed earlier, our weekly shipments have been strong since late March, led by demand for our mainstream branded products, such as Grown in Idaho, as well as for our premium Alexia branded products. Price mix increased 17%. largely driven by favorable mix and pricing actions. Retail's product contribution margin increased $10 million to $31 million. This was driven by higher sales volumes, favorable mix, and lower A&P expense, and was partially offset by $10 million of pandemic-related costs. Moving to our liquidity position and cash flow, Since the pandemic crisis began, we've taken steps to enhance our liquidity and further strengthen our financial position by drawing $495 million from our previously undrawn credit facility, entering into a new $325 million term loan, and completing a $500 million note offering. At the end of the quarter, our net debt was less than $2.2 billion. which is down nearly $140 million from the end of last year. And we had about $1.4 billion of cash and cash equivalents. As Tom mentioned, based on these actions and efforts to generate and preserve cash, we feel confident enough in our liquidity that in July we fully repaid the $495 million that we had drawn on our credit facility. With respect to cash flow, for the year, we generated about $575 million of cash from operations. That's down more than $100 million versus last year with the decline in earnings. Nonetheless, in the fourth quarter, we generated about $140 million of cash from operations. Our top priorities in deploying that cash continue to be investing to grow the business and returning cash to shareholders. For fiscal 2021, we currently expect capital expenditures of about $140 million as we conduct appropriate plant maintenance and implement Phase 1 of our new ERP system. With respect to capital returns, as you may have seen last week, we declared our regular quarterly dividend.

However, we continue to suspend our share repurchase program due to the current operating environment. Now turning to fiscal 2021.

As we've noted, we're not providing an outlook for the year because of the unpredictable effect of the pandemic on fry demand in North America and our key international markets. The business environment remains volatile, especially in the U.S., where increases in COVID cases have recently led government authorities in a number of states to reinstate restrictions on restaurant and food service outlets. We believe these actions may slow, or possibly even reverse, Some of the recovery and fry demand. Instead of providing near-term financial targets, we're providing a summary of our shipments during the first seven weeks or just more than half of our fiscal first quarter. In aggregate, the demand environment and our weekly shipments has improved since the end of May. Specifically, in the U.S., shipments to date are approximately 85% of prior year levels. In our global segment, weekly shipments to our large chain restaurant customers, which are predominantly QSRs, have recovered to 85% to 90% of prior year levels during the most recent weeks of the quarter. In our food service segment, which is largely full service restaurants and other noncommercial customers, weekly shipments during the most recent weeks have been 70% to 75% of prior year levels including solid recovery in sales of Lamb Weston branded products. Weekly shipments for retail customers in the most recent weeks have been 5% to 10% more than prior year levels as home purchases began to normalize pre-COVID rates. Our growth has been led by our branded products. In Europe, shipments to date by our Lamb Weston Meijer joint venture are around 75% of prior year levels. Early in the quarter, weekly shipments were trending at more than 65% and have recovered to around 80% in the most recent weeks as more countries ease restrictions and consumers gain confidence about dining and restaurants. In China, which is included in our global segment, shipments today are approximately 85% of prior year levels. with monthly shipments improving from about 80% in May to more than 95% in the most recent weeks. Demand in our other key international markets, which are also included in our global segment, has softened since the end of the fourth quarter. In Japan, customers have been destocking inventories due to postponement of the Olympics. In sum, the amount and pace of recovery in fry demand has been better than what we had anticipated when the crisis first arose. QSRs in the U.S. have bounced back faster than we expected, while full-service restaurants have also recovered somewhat faster due to states' easing restrictions. Demand in Europe and China has progressed largely in line with our expectations, while other international markets are a bit softer. However, to be clear, we believe that this improvement remains fragile as COVID cases continue to rise in the US and in Latin America. We are currently seeing evidence of orders slowing after some states recently placed restrictions for on-premise dining at restaurants. We expect that this high degree of uncertainty will likely continue until the pandemic has ended and consumer confidence has been restored. With respect to costs, as Tom discussed, we've taken a range of actions to reduce our cost profile, but expect to continue to incur incremental costs and expenses resulting from the pandemic's impact on our operations. For example, these include expenses to adopt and maintain enhanced employee safety and sanitation protocols throughout the company, costs to modify production schedules, and reducing runtimes, thereby sub-optimizing plant and labor utilization, cost to shut down, sanitize, and restart manufacturing facilities when necessary, and cost to produce retail products on food service-oriented production lines. So as you can see, it was a challenging quarter where we've executed well and took the necessary actions to maintain through a potentially volatile period going forward. Now here's Tom for some closing comments.

Thanks, Rob. Let me just quickly sum up by saying we are managing through this difficult and volatile environment by prioritizing the health and safety of our employees and supporting our customers as they deal with uncertainty. We believe that the tough decisions we made and the actions we've taken have us well positioned for fiscal 2021 and beyond. The recovery in demand these past few months has been encouraging, with solid improvements in most of our channels, especially at QSRs. While we expect there will be some bumps on the road to recovery, we'll continue to overcome them as the year progresses. Our long-term view remains the same, and we remain confident in our strategies, our ability to generate top and bottom line growth, and create value for all our stakeholders. Thank you for joining us today, and we're now ready to take your questions.

Thank you, and ladies and gentlemen, if you'd like to ask a question at this time, please signal by pressing star 1 on your telephone keypad. And if you are using a speaker phone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, that is star one to signal for a question. We'll take our first question from Andrew Lazar with Barclays. Please go ahead. Your line is open.

Good morning, everybody. Good morning, Andrew. Hi there. Tom, you mentioned that, you know, some of your at least early discussions around customer contract negotiations and such were encouraging. I know on the last call you talked about You know, approaching some of these key customers maybe a little bit earlier even in the process than you might have otherwise. Just to kind of get in front of it, hopefully have some of these not RFP the business and, you know, go through this process to try and avoid some of that. I know there's always, you're somewhat more limited, obviously, in how specific you can get around some of this, but I was hopeful that you could provide a little bit more color on what, you know, what you've seen from that new approach to What you're seeing that's been encouraging, in other words, is your sense that you wouldn't expect a lot of business shifting, let's say, between various competitors? Is that kind of the outcome? And to the extent you can, a little bit around, you know, what has it taken to sort of make that happen, right, with respect to or what's the give back sort of in order to make that happen if that's the case?

Yeah, Andrew, you know, I – I'm not going to get into a lot of specifics, but I will tell you it's been really encouraging. We've had some early discussions. We've closed some negotiations early in the process. It's a partnership and that's what it's all about with our customers, especially some of the big customers. It's a challenging environment. Everybody recognizes that. One of the most important things is assured supply. We certainly have our challenges in the network that Rob and I discussed on our prepared remarks in terms of manufacturing, Disruptions, but the plan was to get ahead of it, talk to some of our customers with some of these big contracts coming up for negotiations. There are some give and takes, but I will tell you how we ended up some of the negotiations. I feel good about where we ended up. I'm not going to get into specifics. I don't talk about customers, but more to come on that down the road. We've got several more contract negotiations coming up, but I feel really good where we ended up with the ones that we've got completed to this point.

Thank you. You know, obviously demand and trying to forecast demand is certainly the key one, and that's the hardest one without question. But if I can summarize maybe some of the comments you just made, is it fair to say maybe that your anticipation, at least around the contract negotiation piece of all this, is one where maybe there's a little bit more visibility than you might have had a couple months ago and a piece that maybe will be, I don't know, for lack of a better word, maybe more manageable In the context of all these things, it's really all about demand and how quickly that comes back. Pricing is not necessarily the piece that derails the recovery, if you will.

Yeah. I think, Andrew, you hit the key to the whole environment we're operating in. It's demand forecasting. What's manageable today is different tomorrow, is different yesterday. We do have a lens of future demand based on orders in the system. Now it's narrowed down a lot from what it used to be just because of the uncertainty in the channels. Again, it's ensuring as best we can with the disruptions we're having in our manufacturing plants, making sure we've got You know, taking care of the key customers, certainly we're having some challenges with the plant shutting down, but the demand signal, you know, we look at a lot of data, just like every other company, the demand signal is the key that's going to drive, you know, the near term going forward. Certainly when we have some of these contracts done and behind us, that's helpful, but that's not necessarily an indicator on the demand forecast because The historical demand that we would have with these big customers has completely changed. So we're hand-to-mouth right now on what they're seeing in their store and store traffic. As you can imagine, with the things that are going on in the environment in the U.S. specifically of some of our bigger markets that have more spikes in cases, and more restrictions, the signal's mixed. The encouraging thing to all this is over the past six, eight weeks that Rob alluded to, the things we look at, it's hanging in there pretty well across all of our channels. The whole key to this is demand signal. You know, we look at a lot of different data. We certainly have a lens on what our forward orders look like, but the outlook period is a lot shorter than what it used to be, but we're monitoring it closely.

Thanks very much.

Yep.

Thank you. We'll next go to Adam Samuelson with Goldman Sachs. Please go ahead.

Yes, thanks. Good morning, everyone.

Morning, Adam.

So I guess maybe continuing on that discussion and thinking about kind of what we can glean from the fiscal fourth quarter from kind of the margin performance and how it works out prospectively from here is the demand environment certainly is less bad than it was in the May quarter, as your quarter-to-date commentary alluded to. And I'm just trying to really think about Those incremental kind of production costs that you laid out in the press release and how much of that was more one time, how much of that is more recurring as long as you've got this kind of the COVID issue and maybe similarly, how would you frame how to think about the decremental gross margins as your volumes are certainly still down year on year just over the next three to 12 months?

Sure, Adam. This is Rob. As I walked through those, you know, I broke it into the $25 million that's utilization-related costs and then the $22 million that's not utilization-related costs. And if you look at that $22, $14 of that was related to the 2019 crop write-off. There may be some tweaking and true-up here in Q1 as we finalize those discussions with the growers, but not likely that that's going to recur in our minds. Transportation, warehousing, inefficiencies may have some recurrence of some of that, but hopefully the steps we've taken to improve and the additional volume pushing through that we're getting should help that as well. And then you go to the utilization costs and really that's the one that's really tough to forecast because that's largely driven by really jerking around production schedules. So think about it as we've got a production schedule in a plant to go run A couple people show up after a long weekend with COVID, and we don't have enough people and we don't have the assurance to continue to run that line and keep people safe and healthy. And so we then take a step to shut that down. I have no idea how to forecast that. And so that's one that, you know, you look at that $25 million, and it's hard for me to get my head around that we're not going to continue to incur some of those costs. and I'll tell you in Q1, you know, we have had some additional hits and some shutdowns and restarts and sanitizations of the lines. So, that's the way I think about it. I know it's not perfect information, but I think that's the reality of what we're dealing with here.

No, that's very helpful, Collar. And then maybe just, I know a lot of uncertainties at this point as well, but the SG&A expectations for 21 are How would you bound those, just given kind of the realities of the business environment today?

Yeah, in terms of SG&A, you know, we have continued to squeeze hard on the SG&A. Now, recognize some of that is an automatic governor, as we saw in the fourth quarter, is incentive comp adjusted down. And then, you know, nobody's traveling, so it's easy to control T&E right now. But, you know, right now what we've done is we've got a hiring freeze in place on our SG&A X critical replacement kind of roles. You know, we're not spending a lot in terms of, you know, some of the more forward-looking developmental spend. We have suspended further work on release two of our ERP system. We are finishing up release one because we're just about done with that and thought it made sense to finish that up. So, again, we're taking the steps, and you saw that in Q4, so we'll continue to maintain a really tight fist on SG&A costs as we go forward until we can see things start to stabilize where we think that continuing to Some of those forward-looking investments like the release to the ERP and so forth make sense.

Okay.

I really appreciate that call. I'll pass it on. Thank you.

Thanks. Thank you. We'll next go to Rob Dickerson with Jefferies. Please go ahead. Your line is open.

Great. Thank you. So, you know, Tom, look, just kind of an overarching question in terms of current situation and positioning. You know, obviously, you go back to March, everyone's kind of flying blindly, right? You had to put in the orders for the, you know, with the growers for the 2020 harvest. Sounds like, you know, not only you, but other larger players in the industry kind of pulled back temporarily on capacity. Like you're saying, there's some, you know, line shifts that were required from food service to retail, et cetera. But, like, where do you sit now, you know, looking forward to this year versus where you were a couple months ago kind of holistically in terms of 2019 inventory rolling off 2020 crop yields. You mentioned currently demand, obviously, is still a question mark. But kind of overall, do you feel like all things considered, we're actually not in a bad spot. We think that maybe, hopefully, the worst is behind us. and what we saw on Q4 hopefully, right, would be the worst and now we can kind of work our way back because demand has a crater, the harvest seems okay, contract lowers, you know, supply orders actually came in decently and, you know, basically our forecasting might actually prove out to be okay and we might actually be in a pretty good spot once we get to the end of the year. I mean, that's the hope. So just kind of any overarching comments on kind of state of the industry and where you think you're positioned.

Yeah, Rob, I, you know, sit here today. We made a lot of decisions the last 90 days based on a lot of unknowns. And, you know, there's where we're positioned right now as a company, I feel really comfortable how we're set up for this physical year. Now, Demand is going to be the wild card, the demand signal. I'm really encouraged by what's been happening the last six to eight weeks. I think a lot of the things that we navigated through in April when all this hit, I would do the same thing again. We'll navigate through the balance of this year with the new crop and next year's crop and the demand signal. I feel good about how the company is positioned. We certainly have our challenges that the team and the Lamb & Wesson employees are working through in our operations. We continue to enhance safety protocols for our employees. We have the entire organization focused on business recovery plans and cost savings. You know, you step back and I feel the company's focused. We're going to have bumps in the road. There's no question about it. But the big things that we decisioned in the last 90 days, 100% confident that It's the path forward. And now we've just got to operate this business over the next 12 months. It's going to be bumpy. We'll make adjustments as we need to. But we've got everybody focused, so I feel good about where the company sits right now.

Okay, great. Because, you know, what I'm hearing, it doesn't sound like, you know, there was nothing really in the preparatory marks for the press release. It doesn't sound as if, you know, you're in a dire enough position such that, Thank you. Our next question will come from Tom Palmer with JP Morgan. Please go ahead.

Good morning. Wanted to ask on the utilization rate side, I think I've seen a couple announcements about facilities or workers being furloughed at some facilities. So just was wondering, one, how much capacity have you taken offline over the past couple of months? And then from utilization rate standpoint, where do you guys think you're running today?

You know, we made a decision about 30-ish days ago to temporarily shut down two of our factories just based on manufacturing efficiencies. And we've opened those factories back or in the process of opening those factories back up. And part of the reason for that is, you know, what we've been talking about on this call is the – The shutdowns that we've experienced have been a little bit more pronounced than we anticipated, especially after the first part of June. We had a lot more positive in our plants, so it's been more disruptive. At the time, we made the right decision to temporarily shut down a couple of factories, and we've since opened them back up. It's a need to the business as recoveries are improving. and we're, you know, work and production schedules and things are a little bit more disruptive than we thought. So that was the decision we made. We've reversed the decision. It's the right path going forward and, you know, it's just going to help us navigate through the demand improvement as things recover.

Thanks for that. I also wanted to follow up on Adam's guidance question. In addition to SG&A, in the past, you've given some expectations for items like cost inflation, CapEx, and then just more specifically within SG&A, the ERP spend. So I appreciate you're not giving full financial guidance, but wondered if you might give updates on maybe those line items.

Sure. This is Rob. In terms of the CapEx, I think I mentioned that for the year 2021, our expectation on CapEx Right now it's about $140 million. We've said in the past that it's really somewhere in the neighborhood of $120 million, $125 million for maintenance level CapEx. And so we want to continue to maintain the facilities. We had a couple of projects underway that we want to finish off, including the ERP. And so we'll finish that off. So that brings us to the $140 million expectation for the year. Again, as things open up later in the year, assuming that we continue to trend positively in terms of COVID and so forth in demand, that may change. But at this point, we're settled on the 140. In terms of SG&A costs, again, as I spoke to, that we'll continue to maintain a pretty tight handle on SG&A. Again, We have the release one that will go live here in the first of September. And so we're currently incurring some training costs related to that. But that's the only element of SG&A that I would say would be anything that's outside the norm. And that's going to be, you know, in the, you know, sub $10 million. I mean, it's not a huge amount of money in the grand scheme of the year. Other than that, again, we'll keep SG&A pretty tight for the year, less than until we see any light on the horizon.

And then just on the cost inflation piece?

I'm sorry, yeah, cost inflation. Continue to see, broadly speaking, kind of that low single-digit kind of cost inflation across the system that we've seen in the past year or so. Don't expect anything dramatically different there.

Thank you.

Thank you. We'll next go to Chris Groh with Stiefel. Please go ahead.

Hi, good morning.

Good morning, Chris.

Good morning. Just had two questions for you. The first one would just be in relation to your crop contracts being down 20%, 25% for the coming crop. Does that reflect your view of demand? And I realize those expectations can change as we go through the years, a lot of volatility right now. Or is it the idea to contract for less and just be able to buy more in the open market? And if I can ask related to that, Are there levers in place you have to acquire more potatoes if demand improves? They're going to be there, but do you have an ability to go out and get those at a reasonable price in case there is inflation in that spot market?

Yeah, Chris. The point in time is our plan all along was to reset our contracting crop volume with the intent as things become more clear that We have the ability to go procure open potatoes, and that's the plan, and we're executing that plan. I feel confident about where we're positioned from a crop and our ability to procure potatoes with our growers that we've partnered with for a long time. So no concern at all on that front. And, you know, as the year plays out, Chris, You know, we get six, eight months down the road and we start talking about 2021 crop. You know, we can make some adjustments with that crop, early crop going forward if, you know, if the demand returns to normalized levels, so to speak. Excuse me. So, I feel good about how we're positioned. You know, we made a point in time decision. You know, there's a lot of, in the industry, there's a lot of different J.D. J.D. J.D. J.D. J.D. J.D. J.D. J.D. J.D. J.D. J.D. J.D.

and then again kind of where you exit the corridor if you could speak to that.

We've got all of our factories running with the exception of one of the factories that we temporarily shut down. It's in the stage of startup. We have all of our employees, especially in the factories, still on. payroll and we you know absolutely have to run all our factories and it's based out of a need of you know the disruptions we're having with the COVID hits and sanitization and and and every positive is different so um are we follow the protocols um that we need to follow some factories that have a positive we shut a line down some of them we have to shut the plant down for a day um some We've had instances where we shut a factory down for a couple of weeks. The team's doing a terrific job navigating through all that, Chris. I'm not going to even speak to utilization levels because it's so variable right now across the network that until this thing stabilizes, it's going to be really difficult to talk about utilization levels. and this environment.

Okay.

I appreciate that. Thank you.

Thank you. We'll next go to Brian Spilling with Bank of America. Please go ahead.

Hey, good morning everybody and thanks for taking the question. I got a couple of quick ones for you and really I guess more focused on 22, 23 more so than 2021. So maybe the first one, Tom, just If you think about industry capacity in total, I know the investment community, we've all focused a lot on the additions that have been made over the last couple of years, but if you were to kind of think about what that could potentially look like in 22 and 23, again, we're just talking about North American capacity, is it your sense that it would sort of not change, or is there a potential that maybe some older factories or facilities Get weeded out in this disruption.

You know, that's a great question, Brian.

I think, you know, as I think about the industry, it kind of gets back to, you know, demand. And, you know, I believe it's going to get back, recover. It's just a matter of when, obviously. And I think, like any industry, and everybody's going to reflect on current footprint and think through strategy on what the footprint should look like in the next three to five years, what modernization looks like in the next three to five years, Certainly, you know, as we're experiencing the disruptions in our manufacturing facilities, we've taken a very close look at efficiencies and cost to manufacture and a lot of things. So I think the whole industry is going to do that around the globe. And, you know, I don't I expect that there could be some footprint changes. As demand recovers to levels in a couple of years that we've experienced, there's going to continually be investment in capacity at some point down the road, and how that translates into Modernization of new plants versus taking older plants out of the system, I anticipate that may accelerate, Brian, to your point.

All right. Thanks for that. And the second question, you talked a little bit about, you talked on the call today about demand recovery is tied to, I guess, normalizing mobility and consumer behavior, right? It's all around pandemic. But As we think about recession, right, and especially, you know, as we move in, if there's going to be less stimulus money put in consumers' pockets, to the extent that we're in a recession, could you remind us first what that was like in 2008 and 2009, and more specifically, how aggressive maybe the behavior was in terms of competitors going after pieces of business, and do you anticipate that that could be a J.D.

We really didn't feel it as a company, looking back at the history, because there was a lot of trade down to the QSR space. At that time, the international market was growing exponentially faster than the overall North American and European market. Our volumes as a company hung in there and actually grew through that period of time. The The next two, three years, Brian, it's really hard to predict, but I think there'll be some of that behavior, and time will tell how it all plays out.

Okay, thanks. And then just the last one for me, Tom. Given all of the uncertainty that there is around demand at this point, as you're talking to customers, contracting with customers, Has it changed at all either the duration of the contract? Like, you know, is it really difficult to do a two-year deal or a two-and-a-half-year deal right now just because there's so much uncertainty? And or is there anything different in terms of the mechanism of the contract? So the contract goes one way if demand is X, but things, you know, are different if demand is Y. Just trying to understand if there's anything different in these contracts and the way you're kind of thinking about structuring them now just given how unusual this environment is. Thank you.

Yeah, Brian, there hasn't really been any material of changes in any of the contract negotiations that we've had at this point.

Okay, thanks. Thanks, Brent. Thank you.

We'll next go to Carla Casilla with J.P. Morgan. Please go ahead.

Hi, two questions. One on the costs that you incurred this quarter for COVID. The The unusual costs related to the non-utilization, how much of that should linger into the next quarter or is that something that lingers until the next growing season is tabulated?

Yeah, Carla, this is Rob. In terms of those costs, again, I think that as you look through those, I broke them down into the 25 related to utilization. and the 22 that was not related to utilization. Of that 22, again, a big chunk of that was related to raw write-off related to 2019 crop and settling of those contracts. And so I would not expect anything material out of that to recur or extend other than there may be some minor true-ups here that we clean up in Q1, but it's going to be much smaller than what we saw previously. And then I said there were some capital write-offs that we had in the quarter that don't anticipate those will recur. And then Transportation Warehousing said that expect those to improve versus what we saw in Q4. May still have some, but they'll be better. On the utilization costs, the $25 million in utilization costs, as Tom and I have talked through, that It's really tough to predict and to forecast what's going to happen because those are largely driven by a couple of things. One, what's happening on the demand signal, and two, what's happening in terms of employee health as they show up for work. We can keep them safe at work and keep them healthy at work, but outside of work, as they circulate in the community, They may get sick, and so we may have unexpected shutdowns of plants. And so that's what's driving that $25 million is that utilization that is tied to both of those issues. So that's the one that I would expect will have some recurrence. Hopefully, we'll get better and smarter at managing those costs. But that's the one where there's a risk, I think.

Okay. And on the care side, did you – Do you break out how much was the CARES incentive, and does any of that linger into 1Q, or is that all just so fourth quarter?

Yeah, in Q4, and I don't know that I spoke to it, but it's disclosed either in the release or the K. I think about $9 million of CARES Act relief is what we received in the quarter. And then there is some carryover into Q1. We'll see with new legislation that's being kicked around what that has in store and see how we can quantify that going forward.

Okay, and then just one last one. Can you remind us how much of your business is the schools, universities, hotels, and maybe where it was in 19 versus where you expect to be in 20?

Yeah, we don't break out. Sure. We don't break out that level of detail. The bulk of that business is reported through our food service segment, but by far the bulk of that food service segment is the restaurants up and down the street. But we've never broken out the specifics on the hotels. But again, as I mentioned in my prepared remarks, that that You know, our demand on that is the same as you'd expect and what you're seeing in that segment in the economy generally.

Okay, great. Thank you.

Thank you.

Thank you.

And ladies and gentlemen, this will conclude our time for questions and answers on the call today. I'd like to turn the conference back over to Mr. Dexter Congvalet for any additional closing remarks.

Thanks, everyone, for joining us for our Q4 call. If you'd like to set the time to have a discussion, please email me and then we can schedule time either today or for the next couple of days.

Thank you very much.

Thank you. And again, that does conclude today's call. We do thank you for your participation.

You may now disconnect.