Q4 2020 Lamb Weston Holdings Inc Earnings Call
Thanks, Dan I forget.
Welcome to de Lamb Weston fourth quarter in fiscal year 2020 earnings call.
Conference is being recorded.
The conference over to Mr. Dexter Congbalay.
<unk> Investor Relations definitely question. Please go ahead Sir.
Good morning, Thank you for <unk> Watson's fourth quarter.
[laughter] My screen, just one black box.
Fourth quarter fiscal 2020 earnings call. This morning.
Oh, we issued our earnings press release, which is available on our website <unk> dot com.
Please note that during my remarks will 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 S. C suite filings for more details on our forward looking statements.
Somewhat today's remarks include non-GAAP financial measures.
These non-GAAP financial measures should not be considered replacement for it should be ever got together with our GAAP results you can find the GAAP to non-GAAP reconciliations earnings release.
With me today at time, Warner <unk>, President and Chief Executive Officer, and Roberts, our Chief Financial Officer.
Tom will provide an overview of the near term demand environment.
That's why it's our efforts to manage through the carpet Nike pent up the 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 fiscal 21.
With that let me now I'll turn the call over to Tom.
Hi, good exar, good morning, everyone and thanks for joining our call today.
Before getting into our performance in the quarter I want to thank the entire Lamb Weston team for their commitment to support our communities our customers and our consumers don't during these trying times well keeping themselves in their colleagues say.
We should be proud of doing airport to help people around the world. It's their commitment and spirit of team worked it makes me so honored to be part of this great Company now, let me turn to the performance.
One Alonso physical 2020, where some of the most challenging had lamb westons history.
After starting to realize the impact of government efforts to control the spread its grow the virus in China on our local operations in February we saw more severe effect on our overall business beginning in late March as governments in the U.S. in Europe took actions to try to slow spread to the virus.
He government restrictions on restaurants in other food service businesses abruptly and significantly reduced restaurant traffic and the demand for fries.
In addition to the initial drop in demand was so Steven quick the customers needed to just inventory levels, which further reduced our shipments as a result, our sales and earnings fell in the fourth quarter.
Starting in May you as demand for fries began to recover and that improvement has continued through mid July.
The recovery has been lit led by quick service restaurants as consumers levers dryser options by the end of June QSR traffic rebounded significantly.
Expected full service restaurants were affected much more severely than QSR ours, they adapted by increasing carry out and delivery options and starting in late may consumer traffic began to increase as certain state governments gradually east restrictions to allow for more on premise Bonnie.
However, while steadily improving our shipments to this channel currently remain well below prior year levels.
Right demanded by our non commercial customers such as hotel 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 a pandemic ends and consumer confidence improves.
In contrast, consumer 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.
Bright demand in Europe, which served through our Lamb Weston Meyer joint venture has also improved since the end of May.
Although a high proportion of ourselves Arda QSR as most of the consumption is dying in or take away since drive through options are much more limited.
These QSR 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 free gold with levels.
Right demand in our other key international markets has been mixed Chinese recovery has been solid was our weekly shipments in July approaching three gold levels.
Demand in Asia outside of China has been very but consumption overall has held up better than in the U.S. in Europe.
Consumption in Latin America, including Mexico held up relatively well in the fourth quarter that began to soften at the end of May.
We've been encouraged by the breadth and the pace of recovery and 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 sustainability.
For example, recent actions by California, Texas or impose restrictions on restaurants, and foodservice outlets as well as New York City. His decision to postpone lifting restrictions for on premise dining illustrate how volatile and fragile the U.S. recovery in demand can be.
Because of this uncertainty, we're not providing a financial outlook for fiscal 2021, instead, Rob will detail later or providing trends in our shipments that we have observed so far during our fiscal first quarter.
Managing through this crisis isn't a difficult and I'm proud of how we're executing on a range of priorities and actions to navigate the business or the current environment and position us for success as demand continues to recover.
First or prioritizing the health and safety of our Lamb Weston team and have adopted enhance employee safety at sanitation protocols at each of our manufacturing commercial and support locations. Nonetheless, we've had a number of production employees contract the virus, which is required us to temporarily shut down manufacturing lines to be Sam.
Ties.
Fortunately the possibility of temporarily shutting down the line to remains a risk until the viruses 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 as it will continue to be our number one priority.
Second we're working to remain a trusted value business partner for our customers as they manage their supply chains and commercial operations.
For example over a larger chain restaurant customers, we've helped them manage inventory levels and the time of heightened volatility. We've also begun to help customers identify the best fries for delivery and carry out 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 Salesforce has been a real asset and allowing us to stay close with customers to identify the appropriate products for simplified menus.
Creatively broaden their fry offerings and react quickly the customer needs in this volatile market.
Third we're adapting our manufacturing operations to meet the new demand environment.
All necessary, our actions and the resulting disruption that 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 key factor employees on payroll.
Since the demand environment remains fluid and we'll continue to evaluate further actions to line or manufacturing operations as appropriate.
However, meeting customer demand was a workforce that's being affected by the virus creates a difficult scheduling exercise for our manufacturing team, which will continue to make capacity in cost management challenging.
Finally, we significantly enhanced our limited liquidity position by securing additional debt financing and stake 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 repaid the borrowings under our credit facility in July.
In summary, we believe that by executing on these priorities and actions were positioned to navigate through an uncertain environment physical 2021 inch emerge as a stronger company wants where on the other side its virus.
Before handing off the Colorado, 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 Grolier areas and in your 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.
Sure.
With respect or a customer contract negotiations, we're encouraged by how the discussions have been progressing and have already finalize a handful of the global and regional restaurant chain customer contracts.
For those remaining contracts will remain discipline. It 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 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 pandemics 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.
Well 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 weaker 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 foodservice outlets fell sharply in the last two months of the quarter following government imposed restrictions on restaurants, and other foodservice operations and stay at home orders.
Related to the pandemic.
The volume decline also reflects inventory de stocking 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 mirror consumer demand trends by channel, but we're still down versus the prior year.
Specifically, our weekly shipments to large chain restaurants in the U.S.
We're about 50% of pre co vid levels from late March through early April.
Then improve to around 85% by the end of May as consumers took advantage of QSR drive-thrus.
Our weekly shipments to full service restaurants, and noncommercial outlet such as hotels schools and universities sporting event is and workplace cafeterias.
Bottomed at about 20% of pre cobot levels in mid April then improve 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 replaying 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 on our global and food service segments.
For the year sales were up 1%, including the benefit of the 50 Threerd week, excluding that benefit sales were down 1%.
Gross profit in the quarter declined $139 million.
This included about $47 million of cost related to the Pandemics 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.
Oh, the 47 million about 25 million reflects utilization related cost 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, there five there, including modifying production schedules and reducing runtimes, thereby sub optimizing utilization at each facility.
Second costs net of any government credits to retain factory laborer, including paying them full weekly wages, although hours work may have been well below that.
Third cost to shutdown sanitize and restart manufacturing facilities. After a factory employer tested positive for the virus.
And finally incremental costs to produce retail products on food service oriented production lines.
We 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 cost, which largely included nearly $14 million, which 10 million in the quarter was noncash determinate certain raw potato purchase obligations related to the 2019.
Right.
Nearly 6 million of incremental warehousing transportation supply chain costs.
About $3 million of other costs.
We expect over half of these non utilization related costs will be nonrecurrent.
While these pandemic related costs had a pronounced impact on our results for the quarter. The remaining 92 million dollar 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.
Were partially offset the decline in gross profit by a 22 million dollar reduction SGN a expense.
It was largely driven by lower incentive compensation accrued 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 this ace, yes, DNA reductions.
Were $11 million of expenses related to the pandemic, which largely included expenses to it stopped and maintain enhanced employee safety and sanitation protocols.
Expenses net of government credits to retain certain direct sales employees in our foodservice segment, so that where it is better positioned to drive growth as demand improves.
And expensing more than $3 million of capitalized costs associated with manufacturing expansion manufacturing expansion projects.
That were shelf for the time being.
We expect to incur some of the pandemic related SGN, 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.
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 Pandemics effect on European Fried demand was similar to what we saw for full service restaurants in the U.S.
With Lamb Weston Meyer shipped 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 50 million 58 million in our base business and 16 million at our unconsolidated joint ventures.
Susan.
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 sent down from 74 cents last year.
For the year adjusted diluted EPS was $2.50 down 22%.
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 mix 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 de stocking 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 co bit monthly run rate and recovered to about 80% in may.
Monthly shipments to other markets in Asia, Australia in Mexico, where 70% to 80% are pretty good levels through late April but began to soften by the end of the quarter in certain markets due to inventory de stocking.
Locals product contribution margin, which is gross profit less and p. expense declined $77 million to 34 million.
Pandemic related costs accounted for 29 million of the declined with the remainder primarily driven by lower sales and higher manufacturing costs.
Sales for our foodservice segment, which services North American foodservice distributors and chain restaurants outside the top 100, North American restaurants 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've taken last fall.
Volume declined 42%, reflecting the severe impact of the shutdown had on full service restaurants, and non commercial outlets, including customers and stocking 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 services product contribution margin declined $66 million to 43 million with pandemic related cost 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 main stream bent 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.
Retails product contribution margin increased $10 million to 31 million.
This was driven by higher sales volumes favorable mix and lower A.M.P. expense and it was partially offset by $10 million a 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 dollar term loan.
And completing a 500 million dollar note offering.
At the end of the quarter, our net debt was less than two $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 than in July we fully repaid the $495 million that we've 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 and 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 one 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 Friday demand in North America, and our key international markets.
The business environment remains volatile, especially in the U.S. were increases in coated 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 fried 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.
Approximately 85% of prior year levels.
In our global segment weekly shipments to our large chain restaurant customers, which are predominantly QSR ours have recovered to 85% to 90% of prior year levels. During the most recent weeks of the quarter.
In our foodservice segment.
Which is largely full service restaurants, and other non commercial 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 back branded products.
Weekly shipments to retail customers in the most recent weeks have been 5% to 10% more than prior year levels as food at home purchases began to normalize threeq over at rates or growth has been led by our branded products.
In Europe shipments today by our Lamb Weston Meyer joint venture are around 75% of prior year levels.
Early in the quarter weekly shipments were trending at more than 65% and hit recovered to around 80% in the most recent weeks as more countries east restrictions and consumers gain confidence about dining in restaurants.
In China, which is included in our global segments 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 our global segment has softened since the end of the fourth quarter.
In Japan customers have been de stocking inventories due to postponement of the Olympics.
In sum the amount and pace of recovery in fried demand has been better than what we had anticipated when the prices first arose.
QSR is 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 as product programs progress largely in line with our expectations.
While other international markets are a bit softer.
Our to be clear, we believe that this improvement remains fragile as Covance cases continue to rise in the U.S. and in Latin America.
We're 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 a 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 pandemics impact on our operations.
For example, these include expenses to adopt and maintain enhance employee safety and sanitation protocols throughout the company.
Cost to modify production schedules and reducing runtimes nearby sub optimizing plant and labor utilization.
Cost to shutdown 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, but we've executed well and took the necessary actions to maintain through a potentially volatile period going forward.
Now here's talk for some closing comments.
Thanks, Rob let me just quickly some 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 in the actions we've taken to have is well positioned for physical 2021 and beyond.
The recovery in demand. These past few months has been encouraging with solid improvements in most of our channels, especially at QSR. So while we expect there'll be some bumps on the road to recovery will continue to overcome them as the year progresses. Our long term view remains the same and remain confident in our strategies, our ability to generate top and bottom.
The 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, ladies and gentlemen, if he'd like to ask a question at this time, please seeking by pressing star one on your telephone keypad. If you are using a speaker phone. Please make sure. Your mute function is turned off to layer signal to reach our equipment again that is star one to take to signal for a question.
Your first question from Andrews, our with Barclays. Please go ahead. Your line is open.
Good morning, everybody.
Good morning, everyone here.
Hi, there.
And that.
Some of your or at least early discussions around customer contract negotiations and such where we're encouraging I know in the last call you talked about.
You know approaching some of these 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 somebody is not not RFP that business and go through this process.
I'm trying to avoid some of that I know, there's always you somewhat more limited obviously and how specific you can get around some of it but I was hopeful you can run a little bit more color on what you know what you've seen from Matt that you approach what you're seeing that that's been encouraging in other words is your sense that.
There you wouldn't expect a lot of business shifting let's say between various competitors is that kind of the outcome and.
And you can a little bit around you know what does it what does it take and to sort of make that happen right with respect to or what's the give it back sort of band in order to to make that happen. If that's okay.
Yeah Andrew of.
You know I.
Yeah, I'm not going again in a lot of specifics, but I will tell you.
[music].
It's it's been early encouraging we've had some early discussions and we closed some.
Negotiations early in the process.
And you know, it's it's a partnership and that's what it's all about with our customers, especially some of the big customers.
You know, it's a it's a challenging environment everybody recognizes that and one of the most important thing is a shirt supply. We certainly have our challenges in the network that Robin I discussed on our prepared remarks in terms of.
You know manufacturing.
Disruptions, but you know the plan was to get ahead of us talk to some of our customers with some of these big contracts coming up for negotiations and you know there's some given tags, but I will tell you. How we ended up some of the negotiations.
Feel good about where we ended up and I'm not going again specifics I don't talk about customers.
But you know it's.
You know more to come on that down the road and yet we have several more contract negotiations coming up but you know I feel really good where we ended up with the wasn't Weve got completed to this point.
I guess you know.
Obviously demand and trying to forecast demand certainly the Q1 and that's the hardest to one without question, but if I can.
All right maybe some of that the comments you give me the is it fair to say maybe that your anticipation at least around the contract negotiation piece of all there.
As one where maybe there's a little bit more visibility to anybody to had a couple of months ago.
Piece that maybe we will be I don't know for lack of better word maybe more manageable in the context of all the things that it's really all about demand and how quickly that coming back and you know pricing is not necessarily the.
You know the piece that sort of derail the recovery if you will.
Yeah I think.
Andrew its a.
Yeah, the key to the whole environment, we're operating in as demand forecasting and.
Well what is manageable today is different tomorrow is different yesterday.
But.
Well, we do have a lands of future demand based on orders in the system now its narrowed down a lot from what it used to be just because of the uncertainty and channels.
You know so it's.
Again, it's it's ensuring as best we can with.
Disruptions were having in our manufacturing plants, making sure we've got.
Take care of the key customers certainly, we're having some challenges with the plant shutdown, but the demand signal.
You know we look at a lot of Dan just like every other company and the demand signals a key that's going to drive you know the near term going forward certainly when we have some of these contracts data behind us a that's helpful, but thats not necessarily an indicator on the demand forecast.
Because.
The historical demand that we would have with these big customers has completely changed so work hand to mouth right now on what their what they're saying and their store in store traffic.
As you can imagine with the things that are going on in the environment in the U.S. specifically of.
You know some of our bigger markets that are have more spikes in cases and more restrictions.
You know the signals.
Mixed so but the encouraging thing to all this is over the past six eight weeks it Rob alluded to the things we look at its hanging in there pretty well across all of our channels.
But you know the whole key to this end demand signal and.
We look at a lot of different data.
We certainly have a lands on what our forward orders look like.
But but the outlook period is a lot shorter than what it used to be but we're monitoring it closely.
Thanks very much.
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Thank you we'll next go to Adam Samuelson with Goldman Sachs. Please go ahead.
Yes, thanks, good morning, everyone.
Good morning, and.
No I guess, maybe taking continuing on that discussion in 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 does have done it wasn't in the May corridor.
And your quarter than big commentary alluded to and I'm just trying to.
Really thinking about those incremental and kind of production costs that you laid out in the press release.
And so how much of that was more one time, how much of that.
It is more recurring as long as you've got this.
Kind of do they told me the issue play.
Maybe.
How how do you how would you frame how to think about the decremental gross margins <unk>. Your volumes are certainly slowed down year on year just over the next three at 12 months.
Sure Adam this is Rob.
As I walk through those you know a broken 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 at 22 14 of that.
Was related to the 20 or is the 2019 crop write off and so you know there may be some tweaking and true up here and in Q1 as we finalize those those discussions with growers.
But but.
Not likely that that's going to recur in our minds transportation and warehousing inefficiencies.
You know.
May have some recurrence of some of that but but but hopefully we would you know that steps we've taken to improve.
And the additional volume pushing through that we're getting a should help that as well and as you go to the utilization costs and really that's the tough it's the one it's really tough to forecast because that's largely driven by [noise].
You know really jerked around production schedules. So think about it is as we've got to production schedule in a plan to go run.
Couple of people show up after a long weekend with Cove, Ed and we don't have enough people and we don't have the assurance to continue to run that that line and keep people safe and healthy and so we then take step to shut that down I have no idea have forecast that and so that's one that that.
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 hips and at some shutdowns and restarts and standardization sanity standardizations. It aligns. So that's the way I think about and I know, it's not not perfect.
The information, but I think that's what that's that's a reality what we're dealing with here.
No. That's that's very helpful color and then maybe just I know Lotto a lot of uncertainty is disappointing as well, but mean, yes, gionee expectations for 21, or how you bound those just given the realities with business environment that up.
Yeah in terms of SGN, a or you know we have continued to squeeze hard on the asked you in a recognized some of that is an automatic governor is as we saw the fourth quarters incentive comp adjusted down and then.
Nobody is traveling so it's easy to control to any right now.
But you know right now what we've done is we've got a hiring freeze a in place on arrest DNA ex critical replacement kind roles.
You know we're not.
Spending a lot in terms of.
Some of the more forward looking developmental spend.
We have suspended.
To further work on released two of our.
The ERP system, we are finishing up or at least one because we're just you know just about done with that.
And thought it made sense to finish set up so again, we're taking the steps and you saw that in Q4. So we'll continue to main a really maintain a really tight fist on SJ costs. As we go forward until we can see thing starts to stabilize where we think that continuing to some of those forward looking investments.
Like the relates to the R to P and so forth makes sense.
Okay, I really appreciate that color 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 something.
Great. Thank you.
So yeah, well just kind of an overarching question.
The current situation than traditional.
So you go back to March.
To fly by late right you had they put in the orders for the gross for the 2020 are they.
Sounds like you know dollar you, but probably larger players in the industry kind of pulled back temporarily on capacity like you sort of some line shifts that will require complete service to retail et cetera, well like where are you sit now you know are looking for this year versus where you bought a couple months ago, that's not a whole.
Typically in terms of 2019 inventory rolling off 2020.
Crop yields you mentioned currently.
Demand, obviously still question Mark what Kinda overall, you know do you feel like.
All things considered.
You know well actually not about spot you know, we think that maybe hopefully you know the worst behind us.
And what we saw Q4, hopefully right what would be the worst.
I always will kind of work their way back because demand has a crater Harvey seems okay on track lower supply orders I'm actually came in.
Decently and.
Basically our forecasting.
My actually prove out the deals that we would actually be a pretty good spot once you get to be out to be less the hopes. It just got an overarching comments on kind of stay in the industry, where you think your position.
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'm sorry.
Phil really comfortable power set up for this fiscal year now.
No demand is going to be the wildcard the demand signal and I'm really encouraged by what's been happening last six eight weeks.
You know I think I think a lot of the things that we navigated through.
In April when all this head.
I would you at the same thing again, and so all navigate through the balance of this year was the new crop and nextshares crop and the demand signal.
I feel good about how the company's position, we certainly have our challenges that the team and a land Watson employees were working through in our operations.
10, you to enhance safety protocols for our employees.
You know, we got we have the entire organization focused on business recovery plans and cost savings and so.
You know you step back.
And I feel the company's focused.
Or are they have bumps in the ROE. There's no question about it but the thing the big things that we decision in the last 90 days.
I'm confident that it's the path forward and now we just got to operating this business over the next 12 months, it's got to be bumpy will make adjustments as we need to.
But we got everybody focused so I feel good about where the company sits right now.
Okay great.
What I'm hearing it doesn't sound like you know there was nothing really to prepared remarks that persists. It doesn't sound like you know a very dire enough. Because this is such that you have the plan would be for you got some form of restructuring our overhead reduction right sounds like you want to hold the line so to speak so when demand recovery.
You are in Oh for a better comparative spot.
Absolutely I never said, that's right where we're at.
Okay Super Thank you.
Thank you. Our next question will come from Tom Palmer with JP Morgan. Please go ahead.
Hi, Good morning, I wanted to add on the utilization.
Side, I think I've seen a couple announcement about facilities are workers can follow that at some facilities. So just was wondering.
One how much capacity have you taken offline over the past couple of them on and then from utilization rate standpoint, a wait what do you think you're running today.
You know the we made a decision about 30 ish days ago too.
For a shutdown two of our factories.
Just based on.
Manufacturing efficiencies and.
Well when those factories back or in the process open those factories back up and part of the reason for that as you know or what we've been talking about on this call is the.
The shut downs that we've experienced have been a little bit more pronounced than we anticipated.
Actually after.
After.
The first party generally had a lot more palm and on our plants. So it's been more disruptive at the time, we made the rights isn't too.
You know temporarily shut down a couple of factories that we set to open a backup and you know, it's it's a need to the business as recoveries are improving.
And or you know.
Work and production schedules and things are.
A little bit more disruptions and we thought so.
That was an assistant we made we reversed and decision so right path going forward and you know, it's just going to help us navigator the demand improvement.
As a things recover.
Oh. Thanks for that also wanted to follow up on not out of guidance question. In addition to ask DNA in the past you've given some expectation for items like cost inflation Putbacks and then you get more specifically within SGN 80, ERP spend so.
I appreciate you're not giving both financial guidance, but wondered if you might give updates on maybe those line items.
Sure. This is Rob and in terms of the Capex.
I think I've mentioned that that for the year 2021, our our expectation on Capex right now is about $140 million.
We've said in the past it if it's really somewhere in the neighborhood of 100 ton of 20 125 million for maintenance level Capex.
So we want to continue to maintain a facilities, we had a couple of projects underway.
What we want to finish off including the RP and so we'll finish that offset that brings us for the 140 expectation for the year again, it's things open up later in the year you know assuming that that we continue to trend positively in terms of covance and so forth in demand that may change, but at this point were settled on.
The 140 in terms of SGN a costs again as I spoke to that we'll continue to.
To maintain a pretty tight handle on SGN a.
You know we have the released one that will.
So life.
Here in in the first to September.
And so we're currently incurring some training cost related to that but that's the only.
The element of SGN, a that I would say would be any anything that's outside the norm and that's going to be you know in the in the.
Sub $10 million I mean, it's not it's not a huge amount of money.
And the Grand scheme of of the year.
Other than that again, we'll keep asking in a pretty tight or for the you are less than until we see a any any any light on horizon.
And then just on the cost inflation fees.
I'm, sorry, yeah cost inflation continue to see broadly speaking kind of that low single digit kind of cost inflation.
Across a across the system that Oh, you know that we've seen in the in the past year. So don't don't expect anything dramatically different there.
Thank you.
Thank you we'll next go to Chris Growe with Stifel. Please go ahead.
Hi, good morning.
I want to Chris Good morning, just kind of a couple of questions for you. The first one just be in relation to your crop contracts being down 20, 25% for the coming crop does that reflect your view of demand and it really is still dislocations can change. We go through the years a lot of volatility right now or is it would be idea to contract for loss and just be able to.
One you are open market, but if I could ask related to that are the levers in place you'd have to acquire more potatoes with demand improves that they're going to be there. But are you have an ability to go out and get those at a reasonable price or if your case or as inflation in the spot market.
Yeah, Chris the [noise].
No point in time is our plan all along was to reset or contracting crop volume with the intent as a things become more clear that.
We have the ability to go procure opened potatoes, and that's the plan and we're executing that plan I feel confident about.
We're positioned from a crop in and our ability to procure potatoes, with our growers that we partner with for a long time. So no concern at all on that front and you know us as a the year plays out Chris.
You know, we get six eight months down the road and we started 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 level so to speak.
Excuse me so I feel good about our position you know we made a point in time decision you know there's a lot a lot as a in the industry, there's a lot of different.
Decisions made but generally the industry was carried in the same spots I feel good about where we're at there's a potatoes available.
Okay. Thank you then I had a second question free which was is it possible you could tell us your capacity level as you exited the quarter I'm. Just I'm wondering also have you what you see what's obvious I heard your answer before you closed a couple of facilities, you're now reopening knows how to need have you reduced your workforce have you close any other facilities and then.
Again kind of where you exited the quarter. If you if you can speak to that.
Well, 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 it's in the stage of start.
We have all our employees are especially in the factories still on payroll.
We absolutely have to run all our factories and its base out of a need.
You know this Russians, we're having with the goal, but it hasn't sanitization and and and the every positive is different so are we follow the protocols.
That we need to follow some factories that have a positive we showed a line down some of them. We have some planned out for a day. Some you know we've had instances where we set a factory down for a couple of weeks and.
No. So the team is doing a terrific job navigating through all that Chris the I'm not going even speak to utilization levels, because it's so variable right now across the network.
That it's it's.
Until until this thing stabilizes.
You know, what's going to be really difficult to talk about utilization levels.
In 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 my question I got a couple of quick ones for you and really I.
Again, we're focused on 20 to 23 more so than than 2021.
So maybe the first one icon.
You know if you think about industry capacity in coal you know I know the community ball focused a lot on <unk>. The debate over the last couple of years. If you were kind of think about.
What that could potentially look like in 20 to 23.
Again, we're talking about North American capacity.
Is it your sense that it would sort of not change or is there a potential that need.
Other factories are facility by getting weeded out in the disruption.
You know so great question, Brian I think.
You know as I think about the industry. It kind of gets back to you know demand and it.
No I believe it's going to.
Get back recover it's just a matter when obviously.
And I think like any industry.
And it you know everybody is going to reflect on current footprint.
And it.
I think through strategy on what the footprint should look like.
In the next three to five years, what matters 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 we've taking a very close look at efficiencies and cost a manufacturer and a lot of things. So I think all the whole industry is going to do that around the globe.
And you know I don't I expect that that there could be some footprint changes.
You know, there's as demand recovers to levels.
On a couple of years that we've experienced you know there's going to continually be a 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.
Buying you know I anticipate that may accelerate brides to your point.
Alright. Thanks, Thanks for that Didnt second question, you talked a little bit about you've talked on the call today about the band recovery I do I get normalizing mobility in consumer behavior right all around pandemic, but.
We think about with that right and especially you know we moved in if there's going to be less.
[noise] money put in consumers pockets.
Yes, we're in a recession I can you remind the first one that was like an or wait no nine in more specifically how aggressive the need to eat it was in terms of [noise].
If you're going after.
And.
Do you anticipate that that could be a sort of a factor to get not too much in the current round of contracts, but if we're looking out into 22 or 23.
Anything that you're seeing that would make you think that you know it you could could become more competitive in that.
Got it.
Yeah, I think I think you know anodyne the the behavior from the consumer.
We really didn't feel it as a company looking back at the the history, because there's a lot of trade down.
The QSR space and the Internet and at that time, it's in the international market was growing exponentially faster than the overall, north American and European market.
So our volumes as a company wasn't.
Hung in there and actually grew through that period time, you know the.
You know the next two three years, Brian is Uh huh.
You know, it's really hard to predict but I think there'll be some of that behavior and you know time will tell how it all plays out.
Hey, Thanks, and then get just the last one for me.
Hey, given all of the uncertainty that there is around demand at this point and your.
Are you talking to customers are contracting with customers hasn't changed at all either the duration of the contract like you know what it really difficult to do a two year deal or two and a half your deal right now just because there's so much and certainly.
And or is there anything different.
Ended the month of the contracts with the contract goes one way if demand is accurate but.
Thing you know what or different if demand is why just trying to understand that if there's anything different in the contracts and the way you're kind of thinking about structuring of now just given how unusual this environment. This thanks.
Yeah, Brian there hasn't really been any material changes and the contract negotiations that we've had at this point.
Good day.
Thanks Brent.
Thank you we'll next go to Carla Casella with JP Morgan. Please go ahead.
Hi, I'm two questions one R&D costs incurred this quarter for Kobe that the unusual costs related to the non utilization. How does is actually linger into the next quarter or get exactly when they get until the next growing season.
Hi, Good day.
Yeah. Karl this is Rob in terms of those costs again, I think that that is you look through those I've broken down into the 25 related to utilization.
And the 22 that was not related to utilization of that have that a 22 again, a big chunk of that was related to raw write off related to 2019 crop and settling those contracts and so I would would not expect anything material out of that or to recur extend others.
There may be some minor true ups here that we cleaned up in the in Q1, but it's going to be B b much smaller than what we saw previously and then I said there were some capital write offs, we had in in the quarter that don't anticipate goes all will recur.
And then transportation warehousing said that that expect those to improve.
Versus what we saw in Q4 may still have some but they'll they'll be they'll be better on the utilization costs, the 25 million or utilization costs as Tom and I have talked through that kitchen really tough to predict and add the forecast what's going to happen because those are largely driven by couple of things one what's happening with advanced signal and.
To what's happening in terms of a employee health as a show up for work, we can keep from safe and at work and and keep them healthy at work, but outside of work as a circulate and community. They may get sick and so we may have unexpected shutdowns plants and so that's what's driving that too.
25 million as that utilization that 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 one where there's a risk I think.
Okay and on the care side, you did you break out how much what the carrier we think there and does any of that linger into one fewer it's not all but so far.
Fourth quarter.
Yeah in Q4, and and I don't know that I spoke to it but its disclose either in the release or the K I think about $9 million of cares Act a relief is what we received in the quarter.
And then there there is some carry over into Q1, we'll see with new legislation that that's been kicked around what what what that has in store and and see how we can quantify that going forward.
Okay, and then just one lastly can you remind us how much of your business is.
And that schools universities hotels, and maybe where it was 19, that's the way that could be in 20.
Yeah, we are.
21.
Sure, we don't breakout that level of detail of the bulk of that business is reported through our foodservice business, but life or our foodservice segment, but by far the bulk of that foodservice segment is.
The restaurants up and down the street, but we've never broken out the specifics on the hotels, but again as as I mentioned my prepared remarks that that that you know our demand on that as the same of as as you'd expect and what you're saying in that segment in the economy generally.
Okay, great. Thank you.
Thank you.
Thank you and ladies and gentlemen, this will conclude or time for questions and answers on the call today and I turn the conference back over to Mr. Dexter Congbalay for any additional for closing remarks.
Thanks, everyone for joining us for our Q4 call if you'd like to separate time to have a discussion. Please email me at that we can scheduled time either today over next couple of days. Thank you very much.
Thank you again that does conclude today's call. We do you think you for your participation you may now disconnect.
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