Q3 2020 Earnings Call
Excuse me, ladies and gentlemen, thank you for your patience and holding the conference will begin in a few moments again. Thank you for your patience and holding the conference will begin in a few moments.
[music].
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 Congbalay VP Investor Relations of Lamb Weston. Please go ahead.
Good morning, Thank you for joining us for Lamb Westons third quarter 2020 earnings call. This morning, we issued our earnings press release, which is available on our website Lamb Weston Dot com.
Please note that during our remarks, we'll make some forward looking statements about the company watch. 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 under risk factors contained in our filings with the FCC 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 or replacement for that should be read together with our GAAP results you can find the GAAP to non-GAAP reconciliations in our earnings release.
With me today, our Tom Werner, our President and Chief Executive Officer, and Roberts, our Chief Financial Officer.
Tom will provide an overview of our priorities for managing three totaled 19 endemic crisis as well 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 a considerable uncertainly uncertainty as it relates to the scope and speed of the Kobin pandemic any impact on the global economy, our industry and each of our lives.
Well do our best to answer your questions relating to consumer demand in our response to the crisis, but please recognize that much it's still unknown.
As a consequence of this uncertainty we have withdrawn or financial outlook. Despite only two months remaining in or physical fourth quarter. At this time, it's extremely difficult to reasonably forecast customer and consumer demand in North America Anarchy International markets.
In a few minutes, Rob will provide details on our performance for the third quarter. The let me start by sharing with you our priorities as it relates to our Lamb Weston team, our operations and our customers.
First I want to thank the entire Lamb Weston team I'm proud of how we're managing through this adversity, including all the efforts to protect and support our employees families neighbors and local communities.
Media are meeting our obligation to continue to dry food to help people all over the globe.
Working with our customers and continuing to support our business.
Railing together to care for one other it's that spirit of team work as well as our service oriented culture that serves as a cornerstone for making Lamb Weston so great.
It is paramount to ensure that health safety and emotional well being over Lamb Weston team.
People must feel safe and comfortable where they work.
Since the potential severity of this outbreak became apparent my management team and I have led to cross functional task force to ensure that we make decisions using the most up today information from the CDC and other authorities were leveraging our experience in China, where except for a government mandated 10 day extension of the.
Chinese new year, we operated through the worst of the outbreak.
We've taken steps to enhance sanitation protocols and our production facilities and offices.
Promotes social distancing by having employees worked 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 to feed people across the country and around the world.
And we take this responsibility seriously.
We're confident in our ability to continue to safely produce fries, another frozen potato products.
As you can imagine the demand situation remains fluid. So there will undoubtedly be in 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 Wolf take further actions to align our manufacturing operations, including temporarily reducing production.
Third we in our joint venture partners are committed to remaining a trusted the value business partner for our customers as they all managed through supply chain and inventory concerns.
Several large QSR chain customers have already indicated to us and fries our priority item.
We enter customers will not likely be able to forecast consumer demand trends given the breadth of the pandemic and the pace under which it continues to unfold.
However, while good data on the Pandemics effect on restaurant traffic consumer buying patterns and French fries demand is limited.
We can provide some insight into what we've seen so far in some of our markets in Asia the U.S. in Europe.
In China after the government play severe social and movement restrictions that significantly reduce restaurant traffic French fries demand declined about 50% for about a month.
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 the virus.
We are adopting lessons learned from them to our operations around the world.
In other key markets in Asia, such as Japan, South Korea, Taiwan in Singapore, we've seen only a modest impact on French fries 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 fried demand.
In the U.S., 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 service restaurants, the remaining 15% is purchased at retail.
Our sales breakdown as 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, Mexico.
Our foodservice segment, which is about 30% of sales.
Primarily cells your range of foodservice operations.
We estimate that close to 80% of the segment sales are full service restaurants in outlets such as workplace cafeterias hotels hospitals and schools with more than 20% to smaller QSR ours.
Our retail segment historically accounts for about 13% of our sales.
Of the Fries purchase had a QSR normally about two thirds of in purchase via drive through carry out or delivery with remain third consumed on premises.
Prior to the adoption more severe social and movement restrictions, we saw little change in orders and shipments to QSR as increases in dry through traffic as well as 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 experienced 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 is expected to be down much more sharply than the QSR.
While many of these operators are taking steps to boost takeout and delivery sales. We expect this won't 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 fights has significantly increased as food at home consumption rises with you the option social distancing policies and families docking their freezers.
We've taken steps to boost production of our retail products in order to meet the increased demand.
So the bottom line is that in the U.S.U.S. ours that have established drive-thru takeout and delivery capabilities or 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 mills prepared at home and pantry loading.
In Europe, which has served or Lamb Weston Meyer joint venture, although a high proportion of ourselves already QSR ours Fry purchasing patterns are much different than in the U.S.
Most of the consumption is dying in or take away. The a 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 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 Lamb Weston Myers results.
Before turning the call overdrive, restock, better financial liquidity and capital allocation.
We are strong balance sheet and have sufficient liquidity to whether this crisis, even if it resulted in a prolonged downturn in demand.
Last week in an abundance of caution we fully drew down or existing 500 million dollar revolver in order to provide additional financial flexibility in light of the market uncertainty.
As you know me seen a couple of weeks ago, we declared a regular quarterly dividend.
However, we temporarily suspended or modest share repurchase program.
Finally, we will take the necessary actions cemented our managed our cost structure working capital and capital expenditures. This means deferring capital when possible, including postponing all non critical projects.
Let me close by saying that these are extraordinary times.
Nothing about confronting this pandemic will be easy.
But lamb Weston is well positioned in terms of our business mix operating flexibility cost structure and liquidity position to weather the storm.
Our entire team is committed to stepping up and doing our part to keep feeding people support our communities and be a valued stable business partner for our customers.
We're taking the necessary actions in our operations to navigate through this crisis by working in close partnership with customers and suppliers across the globe.
Now, let me turn the call over to Rob.
Thanks, Tom and good morning, everyone.
As you've seen in our earnings release, our reported performance in third quarter was mixed.
However, it's important to note that through February which was before the impact of the pandemic raced across the globe. We were on track to deliver the financial targets that we outlined on January 30 2020.
We provided a more detailed description of our third quarter results in our earnings release and in the 10-Q, which will file later today here some brief highlights.
Net sales increased 1% due to a 1% increase in price mix.
Volume was flat as growth in foodservice segment was partially offset by a decline in our global segments reported volume.
While volume growth of non customized for limited time offering products in our global segment was strong.
Was more.
More than offset by timing of sales of customized and higher margin limited time offering products as well as the initial affects a pandemic on restaurant traffic in China.
In addition acquisitions contributed more than one point of volume growth.
But this was largely offset by a one point declined due to fewer shipping days in the quarter related to timing of the Thanksgiving holiday.
Gross profit declined $23 million or 8%, primarily due to input and fixed cost inflation.
Edible oils drove most of the input cost inflation, while higher insurance rates and medical expenses drove most of the increase in fixed cost.
In addition.
Unrealized gains on commodity hedging contracts was a 4 million dollar headwind largely as a result of a $4 million gain that we realized in the prior year quarter.
Yes, DNA expense increased about $8 million and included 2 million of nonrecurring consulting expenses associated with developing and implementing our new enterprise resource planning system.
Through the first nine months, we realized about 6 million in one time ERP related cost and expect to spend around 10 million for the year.
Regarding our ERP project, we're slowing it down a bit to manage both cost and risks in light of the challenging operating environment as hand.
Equity method earnings excluding comparability items declined about $2 million.
This was due to a negative 6 million dollar change in unrealized mark to market adjustments.
Excluding these adjustments equity earnings increased about four and a half million.
Adjusted EBITDA, including joint ventures declined $26 million or 10% to 228 million.
Lower sales and gross profit in our base business, which again largely reflected the timing of sales in our global segment and cost inflation as well as higher S. DNA drove the decline.
Adjusted diluted EPS declined 18 cents or 19% to 77 cents due largely to lower sales and operating profits as low as well as lower equity method earnings.
Moving to our segments, our foodservice and retail businesses reported inline with our expectations and you can find a detailed in our earnings release and 10-Q.
But let me touch quickly on our global segment, given the headline performance this quarter.
Loews reported sales were down 2%, including a 1% decline in both volume and price mix.
Volume was down primarily because we lapped a very strong growth of customized and limited time product offering products.
The prior year quarter.
This created about a seven percentage point volume headwinds.
The Corona virus related impact on restaurant traffic in China accounted for an additional two points of the volume drop.
While the timing of Thanksgiving was another one point.
These declines were nearly offset by a six point increase in shipments of non limited time offering products as well as a two point benefit from acquisitions.
So after taking into account the timing of sales the pandemics impact on restaurant traffic that benefit from acquisitions Globals volume in the third quarter was largely inline with the growth that we delivered in the first half of the year.
Levels price mix declined 1% as pricing actions were more than offset by unfavorable mix.
This was due to lower amount of customized and limited time offering products sold versus a strong sales of these kinds of products in the prior year quarter.
As well as higher proportion of sales to international customers.
Globals product contribution margin, which is gross profit less advertising promotional expense decreased $20 million or 15%.
The factors driving the decline in segment's profitability, primarily lower volume and higher manufacturing costs are consistent with what drove our total company gross profit.
Moving to our cash flow liquidity position and balance sheet.
We generated about $435 million cash from operations year to date.
That's down about 2% versus last year due to increased working capital requirements to support our growth.
We've also invested more than $150 million and capital expenditures Nike related projects here to date.
For fiscal 2020, we've reduced our capex target by $100 million to 200 million as we seek nurse near term opportunities to preserve liquidity.
Through the first nine months, we bought back about $23 million of stock and paid 88 million in dividends to our shareholders.
As Tom mentioned, we believe we have sufficient liquidity to whether the current operating environment, even if there's a prolonged decline in demand.
This includes having more than $500 million of cash on hand, after drawing down our revolver last week.
We have a strong balance sheet with about $2.2 billion total debt at the end of the quarter.
Our maturity profile is also attractive we haven't approximately $280 million balance on a term loan facility that matures in November of Twentytwenty one.
And at approximately $290 million balance on another facility that matures in June 2024.
The mandatory annual amortization on these two loans is about 30 million combined.
In addition, we have to 833 million dollar high yield notes that mature in 2024 and 2026, respectively.
We're also in good shape risk with respect to our financial covenants.
Our first covenant is to maintain debt to EBITDA, including joint ventures leverage ratio of less than 4.5 times.
At the end of the third quarter, we were at 2.4 times.
Our second covenant.
And EBITDA, including joint ventures to interest expense ratio of at least 2.75 times at the end of the quarter, we were at nearly nine times.
Now here's Tom for some closing comments.
Thanks, Rob.
We are difficult times for all of US and we don't know how long these times last but we faced challenges before and we will always come out stronger on the other side.
I hope we were able to provide you with some insight on our priorities and our ability to manage through this crisis. We don't have all the answers, but I'm confident that our entire team will focus on doing our part to keep feeding people around the world.
We are closely working with our customers and our suppliers as we continue to navigate through this environment and because of that Lamb Weston will continue to be a strong and valued business partner.
Thank you for joining us today now we're ready to take your questions.
Thank you if he would like to ask a question. Please signal by pressing star one on your telephone keypad.
Yeah, using a speakerphone. Please make sure your mute function, it's turned off to allow your signal to reach our equipment again press star one to ask a question.
Pause for just a moment to allow everyone and opportunity to signal for questions.
Well take our first question from Andrew Lazaro with Barclays.
Good morning, everyone hope everyone is staying healthy on your end.
Good morning, Andrew.
Hi, there.
You know Lamb Westons, obviously come through 'em by all measures are pretty fantastic you know a couple of years I'm certainly from from an industry supply demand perspective, almost you topic and in certain ways and I realize there's really not any precedent for this and much it's still very fluid, but just if you think about this generally and thinking forward.
You know with industry capacity, having come online this year.
And obviously that wasn't proved and not really being issue given how strong demand was but with now maybe that you know weakening of demand for some some period of time I guess, how would you at this stage see current events you know sort of impacting this what's been this really fantastic sort of supply demand balance maybe closer in and then you know over.
Over a longer term period of time.
Yeah, Andrew it's all about the demand curve right now and obviously you know it's a fluid situation as I indicated in my remarks, and you know the most important thing is too you know that our customers are talking about is assured supply.
And that's what we're focused on the situation is fluid.
You know how the demand curve continues and where it flattens out.
You know it's difficult to forecast right now so it's the most important thing is you know what I alluded to in my remarks is.
You know continue make food products and feed people and you know the indication.
That I talked that all talk about is.
The fact that I do know is what we're seeing in China. So.
You know we had a downturn, we got through the worse or the.
The crisis over there at least as we know today production went down 50%. It's it's running about 70% demand. So as I think about the market is all about us your supply.
Even more people safe producing food safely all those things and you know it's gonna take time to see how old is all plays out.
Understood. Thank you for that and then just a quick follow up you know you've got some very large scale because cities and the manufacturing side and.
Are there.
Certain actions that you can take kind of in the in the near term when when demand flows and sort of it the volume leverage becomes the fixed cost absorption becomes less you know less significant are there things that you can change and a sort of the fixed cost base or really near term should we expect the like the decremental margin.
Just given the lack of that kinda volume leverage you used to.
I have like an outsized impact on profitability trying to get a sense for that or if it all possible. Thanks. So much yeah, you know Andrew <unk> as you can imagine we're looking at a lot of different scenarios in the production plan based on how things are changing.
Every week. So you know I will assure you that as we think through.
You know Sloan production down were taken all the actions necessary.
You know to take cost out, where we can and but at the same time you know we've got to support our employees that are coming to facilities every single day, but you know certainly.
Everything is in play and we're reacting in real time I am Super proud.
Of our supply chain team and and what they've done and how they reacted to this and you know we've made a lot of we've taken steps to ensure that not only are we providing our customers with products.
But we're keeping our employees as safe as possible in this environment.
So thanks, very much window stay well everybody.
Thanks.
Well take our next question from Bryan Spillane with Bank of America.
Hey, good morning, everyone.
Good morning running Brian.
So I've a couple of questions. The first one maybe a follow up the Andrew.
We've fielded a few times in recent weeks <unk> really simple question.
If you needed to turn to playing off is there anything that would stop you from being able to do that Bob I think there's a perception that your plants are kinda like glass for this is that just have to be continuously run so just want to make sure.
That's the right perception or you know if you needed to shut down or set or a planned as it is it that complicated the do it.
Yeah. This is Rob the if you think about is food processing facilities and.
We very regularly take the lines down for normal sanitation, just as part of producing food and so you know every couple of weeks, we take aligned down we'll take it will take each of our lines down just to make sure that we're continuing to keep keep the the lines foods.
And so as you think about this across the globe you know, we've got 20, some odd French fries manufacturing plants and so those are each individual units in within those units there are lines and those lines go down regularly and so.
In contrast to that perception that it's like a glass for us it's continuous yes or continuous when they're operating but we regularly take them down. So that's just part of our process.
Alright, Thanks, and then the second related to the change in capital spending guidance for this year, how far can you stretch that I guess I'm trying to just get a sense or if you're deferring something today.
Are there some capex needs that are required on whether its maintenance capex or whatever it would be that you can only the first six months or a year or just.
How much flexibility I guess you have on capital spending over let's say 12 months or 18 months.
Yeah. This is Rob again, the on Capex, our base level of capital kind of keep the wheels on capital of is around 125 million here.
For the Lamb Weston consolidated business. So we think we can operate at that level for some period of time.
You know and and maintain the productivity of the plants now that doesn't include anything that's going to enhance productivity or or or a improve our cost structure necessarily that's just maintaining so but that's our that's our base level of capital.
Okay, and then last one for me just you know there's a lot we spent a lot of focus around.
Are you are you know sort of relationships in negotiations with your customers and you know, though is that a lot of focus on pricing, but I guess.
Given this current situation and how fluid or are uncertain demand will be.
How much flexibility can you provide for your customers in terms of being able to offer them ranges and outcomes on volume.
And is that maybe more valuable discussions you're having with customers today than just purely price.
Well it did you know Bryce Tom it's all about demand right now and understanding.
You know what the demand curve is and it's about ensuring that our customers.
We're meeting those needs. So it's that's the focus right now versus <unk>.
You know the.
The pricing discussion. So you know its insured supply and you know that's what we're that's what everybody's focused on right now.
Alright, thank very much.
Well take our next question from Chris Growe stifle.
Hi, Good morning, Thank you Chris.
I Hope you guys are well I think that's first of all on on the supply chain and I'm a bit to Brian's question, but.
Temporarily reducing production I understand in this environment because someone understand what you've framed that for what you expect to do in the coming quarter or so or couple of quarters. The and then I'm curious also how you accommodate and then put that spoiled. So is it you have to produce these products and put it in freezers is that an incremental costs for you or.
How does how do you comedy that in this environment.
Yeah, Chris and this is Rob the.
Right. We have we have the raw the raw overtime will spoil we can stretch it out some.
Can stretch it out forever and and so you know you.
You. So we have the ability to manage that to some degree to meet demand to try and optimize that that cost versus a degradation of the raw.
Get past September.
And it's really tough for us to run raw from the prior year, but we can stretch it out a bit and so that's exactly the math it that we're doing to try and optimize that given what we're seeing in demand.
Okay.
Then just one other question, which is either we knew this quarter had a tough comp for LTL shows and customized products.
I guess I'm trying to understand does that become an ongoing concern say Q4, where I would not have expected that based on the comps, but is that something your customers or do we said are they foregoing those opportunities and therefore, you have more of a risk in future quarters around this mix factor from Lpos and customized products.
Let me let me start there there are two components to that one is LTL shows, which there's always some level of volatility depending on on what customers want to promote and how to promote it.
The other is these customized products and so for a number of our large chain customers in particular, which report in the global business unit.
There are very customized products for those customers and the way and we started reporting under the new revenue recognition standard in in first quarter 2019.
And under that standard.
We recognize the revenue for those customized products when we manufacture it and have a purchase order in hand from those customers as opposed to traditionally the way I learned at 30 years ago of when the product chips and title changes and so.
There are some volatility in when we receive purchase orders on those things and so we have some large customers and if we don't have timely receipt of purchase order, we don't recognize that revenue and so that's what happened between global if you look at Q2 Q3.
Q2 wasn't really is good in underlying shipments.
As as what it reflected and eras reported in Q3 wasn't as bad in underlying shipments and so I think so I want to take that revenue recognition piece out of that.
In terms of L. T O is interestingly.
Some of our customers in China are really looking at LTL goes and trying to determine when's the right time to launch those to get customer traffic back and so.
Think about LT owes isn't customer traffic incentive and that's how they use it and so that's what we're gearing up for now so I don't think Theres anything that would say that customers are aren't going to use LTL isn't a future. In fact, I think if anything I think I can only going to be used as we indicated in China.
To leverage people back into the into the stores.
Yeah, Chris This is Tom I think that's right, what Rob said in China, but the other thing as I stated in my prepared remarks, right now and the environment in the near term you know some of our customers are talking about menu simplification. So you know the near term.
From its it's about making sure fries or on the menu their base Fry item.
You know in some of the promotional items are going to be pushed out for awhile.
Okay that was there was very good color. Thank you for that.
Well take our next question, Adam Samuelson with Goldman Sachs.
Yes. Thank you good morning, everyone.
Got it.
I guess first Tom was hoping is maybe taking all of it on the U.S. trends in the framework you gave on China and the experience you've had there over the last couple of months. It's very helpful. And appreciate that this is very dynamic in seeming to changing day by day, but any you guys have any visibility.
In terms of regional trends in the U.S.
For some of the states in jurisdictions, where somebody shelter in place.
Sure.
As a other jurisdictions, where they're not in place or only recently put in place and do you do you see some of the U.S. markets following that pattern and any quantification that's it.
Yeah, Adam as you can you can appreciate this is a very fluid situation it I'm not going to get into specific regional.
Areas of our country, what I will tell you is.
You know we've got to a team this analyzing daily.
Order patterns.
You know across the regions I can't get into specifics because its you know it's it there's a lot of it'd be speculative going forward because it does change, but we're monitoring it certainly as more restrictions on.
You know this the social distancing are more pronounced yeah, that's going to impact you know demand and.
No so.
What I will say is we're watching it closely and we're monitoring it every day, we're watching our order patterns and this is a fluid situation and you can understand that.
I'm not going to put it put out any kind of hey, here's this number that number it is regions because it changes every single day right now, but we got a team all over it and we're reacting to.
Reacting to what we're seeing every day in and that's yeah. That's what we're doing them as is.
Is this going forward.
Okay, that's very helpful.
The second question for me is in is on Europe, and the joint venture and.
It's probably maybe more rob's any framing.
Were especially your customers while the QSR customers are just completely shot and they don't have that drive through his demands.
Well it.
Framing is the balance sheet liquidity position of the joint venture.
Tools available to manage that in thinking about.
Obviously, you're coming into the joint venture and.
And any cash needs at that business might have if the demand declines are more severe.
Yeah.
In terms of of liquidity and balance sheet position of the joint venture.
The joint venture is in good shape in terms of both its balance sheet covenant compliance and in terms of liquidity they have.
Their own standalone revolving credit.
Line access and and and the sensitivities we've run there similar to what we've run here even in a prolonged downturn in demand.
That that they appear to have sufficient liquidity to to weather the storm here.
Okay and that color and it's very helpful. I'll pass it on thanks.
Well take our next question from Tom Palmer with JP Morgan.
Good morning, and thank you for the question.
Just wanted to pass on the Cogs basket get an idea of fixed versus variable cost.
In terms of next fall as we look on a near term time horizon and then maybe.
You could help with what portion of those fixed costs, maybe you could.
But over a several week or so period if needed.
Sure Tom This is Rob.
In terms of fixed variable, we've we've talked about before that about 70% of our manufacturing costs are variable costs.
On a cogs basis, 30% fixed so that includes depreciation you run the math there.
You know the components that are that are included in fixed.
Repairs and maintenance sits in fixed.
As a big component of that fixed costs, and and as well as labor and then warehousing, but the thoroughly on on maintenance if you've got a line down you're encouraging the folks to not go in with big maintenance crew and do a lot of work and so those are the kinds of things that you actually.
We have had a.
Pretty good control over.
Makes sense.
Okay, Thanks for that detail.
And then also wanted to clarify some of the mix factors in the global segment I think you detailed the sales shortfall, mainly came from international especially China.
But then you also called out negative mix from international markets is a margin headwind, which would seem to suggest they grew as a percentage of segment sales. So maybe just because reconcile that in the U.S. volumes also data in this segment or is that more going to be in the fourth quarter that you see you as volumes data. Thanks.
Yeah, I think that if you look at again that reported top line that revenue recognition issue that I talked about is a is a significant piece of that and then gives you look at at actual shipments.
The international markets tend to have a lower margin on average than that our U.S. markets just simply as a result of market structure, and then additional freight cost and so forth.
[laughter] [laughter].
So just to clarify U.S. volumes were up during the third quarter.
We we don't split it out that way publicly.
But I will tell you that the revenue recognition issue was largely a U.S. issue.
Okay. Thank you.
Well take our next question from Rob Dickerson with Jefferies.
Great. Thank you so much.
So look we obviously right now you're you're watching.
Demand very closely as you say right, but just given.
Frankly, a bit news to land.
And Western company and tell the harvest works and demand contracts would have you. So I I'm just curious like you know as you would seems like normally you set those contracts now right with the farmers you know to figure out to the then which are based upon that potential go forward demand later for the harvest.
This year in the fall, which are really help you know supply demand in calendar 21, which seems kind of a possibility of work at this point.
How do you work through that now you know with the farmers given just the fluidity.
Situation.
Yeah, you know if you're basically still have to contract with the farmers to secure supply come October November.
Yeah, Rob I'm I'm not going to comment on that because we're right in the middle of of negotiating.
Contract price at this point and and other needs. So I'm you know going to do not comment on that and you can respect that till we get through you know the process.
Okay, Yeah, no completely make sense parties for asking I mean.
I would say, though it seems like.
Like there obviously are you happy to have some type of internal gas kind of some gas to just kind of work help you work through whatever the those negotiations are I mean, that's kind of where we are is that right.
That's fair.
Okay cool.
I get it sorry, or that's a suit that circumstance I didn't I guess I'm, just very simplistically when when do we normally yeah.
I've kind of a read and early read.
On the health of the harvest that would come in this year. That's I think that's around May is that is that right may June.
No we usually have a good good idea and what we do and will continue to do it is well have an early read in July and will provide full color.
Tom on how we're seeing the the crop in October.
Okay. Okay Fair and then just lastly, Ah yes, just in terms of you know overall labor situation I mean, obviously at the fabric companies, probably the same thing but for now at least you feel.
Comfortable with your supply chain right ability of of workers to get through the plants.
So it's more about demand forecasting.
Variable moving forward relative to.
Anything on the on the labor side, that's it. Thank you so much.
Yeah, Rob it's all about demand forecasting we've got you know obviously our protocols in place.
In terms of reacting to the co bid situation in our plants and you know, we're taking necessary actions to adjust our production scheduling as I mentioned earlier and we'll give you continue to do that and you know I'm committed to continue to support our employee.
Yes.
As they come in the plants everyday and produce food to feed people in the U.S. and around the globe. So you know it's a fluid situation.
You know its emotional the most important thing is to do everything we can.
For the health and wellbeing of our employees and that's the focus.
Sounds great really thank you so much.
Well take our next question from Carla Casella with JP Morgan.
Hi, I'm I'm wondering is still on the food service retail in the production side.
How many care plan things getting better service in retail and how easy is if it's a decline from one.
Production to the other.
I'm not going to give me a spin we don't break out specifics on which plant produces what [noise].
You know there there.
What we've done is we've been able to convert some of our quote food service.
Lines to retail to meet that demand, where we can not all lines are created equal.
You know so it's it's a matter of.
You know how these lines are configured and but I will tell you what we've done everywhere possible is to shift that production from foodservice retail and ensure that you know as we looked at it look at the demand curve across.
Our product line, we're adjusting where we can and you know the teams under the supply chain team has done a terrific job converting at light speed to adapt to the environment. There were operating in and you know so what I will tell you know I'm not going to tell you specifics.
But we're doing everything we can to convert lines, where we can.
Okay, great. Thank you.
Yeah.
Well take our last question from Rebecca she met with Morningstar.
Yeah. Good morning, Thank you for that.
So.
HM.
I get a renewed for exactly what is happening in China.
But I know there have been some reports.
You know.
That that new cases as opposed to 19 by our spiking up again, if people are getting back to work and back out in the general population are you HM.
And your demand data indicate that that is happening.
<unk>.
Tom.
You know.
I know the news that's coming out.
Is mixed that's what I know.
Factually, what I know in our business and in China is what I stated earlier.
Well this happen in January February you know the last two three weeks our business fell off about 50% team worked through it they did a terrific job the China team continuing to operate provide food for people.
And now we're seeing in you know traffic patterns or business about 70% of normalized levels and you know with the recent news that you alluded to its new news to all of US. So you know I can't speculate on what our visit.
This is going to do.
But as I said earlier this is a this we're managing this every day. So we're looking at the data.
It's very fluid we haven't you know we haven't seen any indications are based on you know what you alluded to the new news the new cases.
And you know so it's it's really a day to day thing that we're going to continue to monitor but right. Now you know we haven't seen any change.
Based on the last 24 hours and you know so that's.
But again, we're watching this every single day based on what we know.
Yeah, Okay, great. Thank you and then my my next question as a follow up to the previous question.
Several HM.
I've been reporting Oh, you know surges in demand in the last few weeks out you know 70, 80%.
You know and specifically in some frozen food categories, where you reside and yeah. I was just wondering if you talk about kind of consider some production over time the recap panic.
He is it likely that you have I know I guess my capacity coming that type of demand.
Yeah.
You know what what.
I will say is well you know what we've done is shift as many lines as we can to retail based on.
The demand changes were experiencing.
So.
No. We are doing everything we can to me to demand and I'm not going to give you a percentage of what we're seeing their retail business, but obviously it's up.
And we'll do all all weekend to help support.
The retail demand that we're seeing and we have we have changed some of our production lines, where we can again.
To support the retail demand surge.
Okay, great. Thank you sorry.
<unk>.
That concludes today's question and answer session. Mr. Kornblut at this time I will turn the conference back team for any additional or closing remarks.
Thanks, everybody for for joining the call I'd be happy to range for a follow Paulson conversations it'd be was just email me and we could sort of a time a other than that hope they put it stay safe and again, thanks for joining the call.
This concludes today's call. Thank you for your participation you may now disconnect.
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