Good day and welcome to the Lamb Weston First Quarter 2021 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 and thank you for joining us for Lamb Weston’s first quarter 2021 earnings call. This morning, we issued our earnings press release which is available on our website lambweston.com. Please note that during our remarks, we’ll make some forward-looking statements about the company’s expected performance.

These statements are based on how we see things today. Actual results may differ materially due to risks and uncertainties. Please refer to the cautionary statements and risk factors contained in our SEC filings for more details on our forward-looking statements. Some of today's remarks include non-GAAP financial measures.

These non-GAAP financial measures should not be considered a replacement for and should be read together with our GAAP results. You can find the GAAP to non-GAAP reconciliations in our earnings release. With me today are Tom Werner, our President and Chief Executive Officer; and Rob McNutt our Chief Financial Officer.

Tom will provide an overview of the current operating environment as well as other business updates. Rob will then provide some details on our first quarter results as well as some trends that we are seeing so far in the second quarter. 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. I hope that you and your families continue to be well. Let me just start of by saying and I feel good about our performance in the quarter and how we are executing as a company.

This is a testament to the Lamb Weston team and I want to thank them for their commitment to each other and our company as well as our continued service to our customers, suppliers and communities. As we navigate this challenging environment, our first priority remains ensuring the health and safety of our employees.

Since the onset of the pandemic, we have instituted more rigorous operating protocols across the company, especially for our production and frontline teams that work to keep feeding the world -- while keeping our manufacturing facilities and product safe. In some cases, this has created additional burdens for our team members and their families.

And I want to thank them for their commitment and understanding. I continue to be inspired by the spirit of teamwork that our employees show every day, and that makes me proud to be a part of this great company. In addition to the hard work by our team, our improved financial performance versus our fourth quarter of 2020 reflects two broad factors.

First, the operating environment has steadily recovered over the past few months with restaurant traffic and fry demand improving in North America and most of our key markets.

Second, we have gotten better in managing through the disruption that the pandemic has created in our manufacturing operations, as well as controlling costs across the business. With respect to the operating environment, we are optimistic about the sequential improvement, breadth and pace of recovery in restaurant traffic and fry demand.

However, we also remain cautious about the uncertainty of the recovery stability, with COVID continuing to be a challenge in the U.S. and some key international markets. In the U.S. overall restaurant traffic and fry demand steadily improved early in the quarter then largely stabilized at levels that were below what we saw just before the pandemic.

Traffic at large quick service chain restaurants approached prior year levels, especially during the latter half of the quarter, by leveraging drive-through, takeout and delivery formats.

Full service restaurant traffic also improved as the quarter progressed, then stabilized at about 75% to 80% of prior year levels as governments relaxed restriction for on-premise dining, and restaurants lean more on carryout delivery, and outdoor dining to generate sales.

Traffic and demand at non-commercial customers which includes lodging and hospitality, healthcare, schools and universities, sports and entertainment and workplace environments remain at less than 50% of prior year levels for the entire quarter although it did improve modestly as the quarter progressed.

In retail demand growth in the quarter was strong. After peaking in more than 50% weekly category volume growth in April and May, weekly volume growth steadily moderated to between 15% and 20% growth by August as restrictions on restaurants eased.

In Europe, which is served by our Lamb Weston/Meijer joint venture, Fry demand approached prior year levels by the end of the quarter. Although it's important to know that demand at this time last year was somewhat soft for us due to a poor potato crop. Demand improvement in our other key and all international markets was mixed.

In China and Australia, demand steadily improved and approached prior levels by the end of the quarter. In our other key markets in Asia and Latin America, the improvement in demand was uneven as governments employed different approaches to contain the spread of the virus. In short, demand steadily improved in the U.S.

and across most of our international markets as summer progressed, then stabilized below pre pandemic levels. Along with that steady recovery in demand, our team's leveraged lessons learned when COVID first hit and have adapted our operations to better manage through the current environment.

As I noted earlier, since the onset of the pandemic, we've stepped up our employee safety and sanitation protocols at each of our manufacturing, commercial and support locations, which has resulted in earlier detection of COVID among our workforce.

We've also steadily become more efficient in minimizing disruptions to our manufacturing facilities and service levels, including isolating specific areas of our facilities that would be needed to shut down sanitize and restart after members of our production team are affected by the virus, as well as increasing flexibility to adjust production schedules and runtimes across the network.

Our supply chain team has been able to significantly reduce our incremental production costs and inefficiency as compared to what we incurred in the fourth quarter of fiscal 2020.

We've also taken a range of steps to aggressively manage our selling general and administrative expenses, including shutting down all travel and large meetings and deferring other discretionary expenditures and projects.

Our project that we did not differ was implementing phase one of our new enterprise resource planning system, as we believe it will be a key enabler to driving efficiencies over the long term. We are currently evaluating options for when to begin implementing phase two.

Before handing the call off to Rob, let me update you on the potato crop and the pricing environment. With respect to the crop, on a preliminary basis we believe the crop and our growing areas in the Columbia Basin, Idaho, Alberta, and the Upper Midwest will be consistent with historical averages in the aggregate.

Our early read on the European potato crop is that it will also be consistent with historical averages and that's a welcome sign given the poor crops in recent years. As usual, we'll provide our updated view of the crops yield and quality and how we expect the crop to hold up in storage when we report our second quarter results in early January.

With respect to contract discussions and pricing, we’re largely through the negotiations for the domestic large chain restaurant contracts that are up for renewal this year. And in the aggregate, we have maintained stable pricing in the portfolio.

For those contracts yet to be finalized, we'll remain disciplined and take an approach designed to maintain and reinforce our strategic customer relationships. Outside of these large chain restaurant contracts on balance, domestic pricing continues to hold up well.

However, we have begun to see increased competitive activity in some domestic market segments, as well as more value oriented product segments in some international markets. As demand continues to strengthen, we expect pricing pressure in these segments will lessen.

In summary, we feel good about our performance in the quarter and how we're executing as a company. We're optimistic about the positive demand trends in the U.S. and in our key international markets but we remain cautious due to the continued uncertainty with the current operating environment.

We're navigating through the crisis by prioritizing the health and safety of our employees, leveraging our manufacturing footprint and operational agility to make sure we service customers and aggressively controlling costs across the entire company.

And finally, we're encouraged about the health of this year's crop, as well as the overall pricing stability across our portfolio. These are challenging times which we expect will be around for a while but we also believe that by focusing on our strategies and our commitment to our employees and servicing our customers will emerge a stronger company.

Now let me turn the call over to Rob..

Thanks, Tom. Good morning, everyone. As Tom noted, we believe that we weathered the worst of the pandemic’s effect on our operations during the fourth quarter of fiscal 2020. Demand across most restaurant sectors, has improved from the lows of Q4 providing a backdrop for us to deliver a 3% sequential sales growth in our first quarter.

The sequential increase in earnings was more dramatic.

We nearly doubled gross profit from $111 million to $214 million and increased EBITDA including joint ventures by more than two and a half times from $78 million to $202 million as we increased operating leverage and we greatly improved our ability to control costs and manage through the disruption that the pandemic has on our manufacturing network and distribution chain.

While our results remain below pre-pandemic levels, and down versus prior year, this sequential improvement in the demand environment and our financial performance is encouraging. Now turning to our year-over-year results. Net sales declined 12% versus prior year quarter to $872 million.

Sales volume was down 14% as frozen -- potato demand outside the home continued to be affected by government imposed restrictions on restaurant traffic and other food service operations.

However, after realizing some benefit from customers reloading inventories early in the first quarter, our weekly shipment trends in each of our domestic channels and most of our international markets steadily improved as a quarter progressed. I'll discuss this in more detail when reviewing our business segment performance.

Price mix increased 2% due to improvements in both the food service and retail segments. Gross Profit declined $35 million with about $16 million due to pandemic related costs on our manufacturing and supply chain operations.

That $16 million is down from $47 million of pandemic related production costs that we incurred in the fourth quarter of fiscal 2020. Of this $16 million, about $6 million were utilization related costs and inefficiencies arising from disruptions to our manufacturing network.

That compares to about $25 million of cost for utilization related costs that we incurred in the fourth quarter.

As a reminder, these costs largely relate to labor and other costs to shut down, sanitize and restart manufacturing facilities impacted by COVID, cost associated with modifying production schedules and reducing runtimes across our network to compensate for facilities impacted by COVID, and incremental costs and inefficiencies related to manufacturing retail products online is primarily designed for food service products.

The other 10 of the $16 million consists of non-utilization related costs, and included about $3 million of expense to the remaining crop, year 2019, raw potato purchase obligations, and about $7 million for enhanced employee safety, sanitation protocols, as well as for incremental warehousing transportation and supply chain costs.

As we previously discussed, we expect to incur utilization and non-utilization related costs and inefficiencies. As long as our manufacturing and supply chain operations are impacted by the pandemic.

The remaining $19 million decline in gross profit largely reflects lower sales volumes partially offset by favorable price mix, a $5 million year-over-year change in mark-to-market adjustments and cost efficiency savings. SG&A in the quarter was essentially flat.

Cost management efforts, including a $3.5 million reduction in advertising and promotional expense, offset $1 million of non-recurring expenses associated with implementing our new ERP system and $4 million of pandemic related expenses, largely related to net costs over retaining certain sales employees.

Equity method earnings were $12 million, up $1 million from last year. However, excluding the impact of unrealized mark-to-market adjustments, equity earnings declined $2 million, with half due to pandemic related costs similar to what we incurred in our base business.

While down versus last year, equity earnings increased sequentially as a result of significant decline in pandemic related costs in the first quarter, as well as steady improvements in our weekly shipments by our European joint venture. EBITDA including joint ventures was $202 million, down $31 million.

About $21 million of the decline was due to pandemic related costs I've discussed. The remainder of the EBITDA decline was driven by lower sales and gross profit. Diluted EPS in the quarter was $0.61 down $0.18 or 23% from last year. Now moving to our segments, sales for our global segment, which includes the top 100 U.S.

based QSR, and full service restaurant chains, as well as all sales outside of North America were down 14% in the quarter. Price mix declined 1% as a result of negative mix. Volumes fell 13% due to the decline in demand for fries outside of the home.

However, weekly shipments to large QSR chains, which historically comprise about one half of global segments sales improved from around 85% of prior year levels at the end of May to near prior year levels by the end of the first quarter.

Weekly shipments to large full service chains, which historically comprised about 10% of global sales improved from 45% to 50% in May, to 70% to 80% by the end of the first quarter, as governments relaxed restrictions on on-premise dining and as restaurants improved carry out and delivery capabilities.

International sales, which historically comprised about 40% of segment sales were mixed. As Tom noted, monthly shipments in China and Australia approached prior year levels by the end of the quarter as demand steadily improved. Monthly shipment trends in other markets in Asia Pacific and Latin America were uneven.

This mirrored pattern -- in demand recovery but also generally lag is the rate of customer -- the lag, the rate of customer improvement as customers and distributors in these markets continued to right size, their inventories. Global's product contribution margin which is gross profit less A&P expense declined $25 million to $78 million.

Pandemic-related costs accounted for about $9 million of the decline with the remainder, driven by lower sales. Sales for our Foodservice segment which services North American foodservice distributors and restaurant chains outside the top 100 North American restaurant customers declined 22% in the quarter.

Price/mix increased 6% behind the carryover benefit of pricing actions taken in the latter half of fiscal 2020. Mix was unfavourable for two reasons. First, independent restaurants which purchase a high amount of Lamb Weston branded products have been disproportionately impacted by the pandemic.

And second, some customers have traded down to more value oriented products in order to reduce costs. It's important to note that this impact was more pronounced in the fiscal fourth quarter. And we've steadily regained much of this business as restaurant traffic improved in recent months.

Volume declined 28%, reflecting the continued impact that government imposed restrictions have had on consumer traffic.

Our weekly shipments to full service in small and regional quick service restaurants, which together have historically compromised three quarters of the segments sales improved to 80% to 85% of prior year sales by the end of the first quarter.

Our weekly shipments to non-commercial outlets, which have historically compromised the other 25% of the segment sales modestly improved as a quarter progressed, but were soft at about 50% of prior year levels. Food Services product contribution margin declined $17 million to $86 million.

With pandemic related costs accounting for $4 million of the decline. The remainder was primary driven by lower sales offset by favorable price mix. Sales in our retail segment increased 19% in the quarter, volume increased 11%.

Although this masks the performance of our branded portfolio, which historically is compromised about 40% of the segments volume. Our brands are winning volume growth of our Grown in Idaho, Alexia and licensed brand products was up together more than 30% in the quarter.

That's well above weekly category volume growth rates, which ranged between range between 15% and 25%. However, retail segments volume growth was partially offset by decline in private label shipments, which reflects the loss of certain low margin private label business that largely began during the third quarter of fiscal 2020.

Price mix increased 8% reflecting that favorable mix of more branded products. Retail product contribution margin increased $7 million to $36 million and was driven by higher sales volumes, favorable mix and lower A&P expense. This increase was partially offset by $3 million of pandemic related costs. Moving to our cash flow and liquidity position.

In the first quarter, we generated more than $250 million of cash from operations. That's up $12 million versus last year. Our top priorities in deploying cash continue to be investing to grow the business and returning cash to shareholders. In the quarter, we spent $33 million in CapEx, including for our new ERP system.

Given the outlook for the business, cash flow and improved liquidity position, we're increasing our capital expenditures target for the year to $180 million from $140 million as we invest in productivity and optimization projects, as well as some targeted growth capacity.

With respect to capital returns, we declared our regular quarterly dividend two weeks ago. Since the pandemic began, we've taken steps to enhance our liquidity and further and strengthen our financial position by entering into a new $325 million term loan and completing a $500 million note offering.

In September, we amended our credit agreement to put in place a new three year $750 million revolver to replace the $500 million facility that was set to expire in November of 2021. The new revolver remains undrawn and fully available.

In conjunction with the revolver, with more than $1 billion of cash on hand, we chose to prepay the approximately $270 million outstanding balance on the term loan that was due in November 2021.

All-in the financing actions we've taken since the pandemic began, have increased our liquidity by nearly $1 billion, lowered our weighted average interest rate and stretched our debt amortization, while only increasing our expected annual after tax interest payments by about $11 million.

So along with our current, so along with our ability to continue to generate cash, we feel good about our current liquidity position. Now turning to some demand trends that we're seeing in the second quarter.

As Tom mentioned, in the aggregate the demand environment and our weekly shipments have largely stabilized during the latter half of the first quarter and into the first four weeks of September. Specifically, in the U.S. shipments to date in the second quarter are approximately 90% the prior year levels.

In our global segment, weekly shipments to our large QSR and full service chain restaurant customers in the U.S. are trending at around 95% of prior year levels.

While QSR are light are likely to be largely unaffected, we anticipate that shipments to full service restaurants could take a step back as outdoor dining options become more limited with the onset of colder weather.

In our food service segment, weekly shipments to our full service restaurants regional and small QSRs and non-commercial customers in aggregate are trending at approximately 80% of prior year levels. Shipments to full service restaurants and small and regional QSRs had been trending above that rate, but could soften due to colder weather.

Shipments to non-commercial customers have been trending well below that rate, and are likely to remain so until the spread of COVID is broadly contained. In our retail segment, weekly shipments are trending even with prior year levels, with strong volume growth of our branded products offset by a decline in shipments of private label products.

In Europe, weekly shipments to date in the second quarter by our European joint venture are approaching prior year levels, although consumer demand at this time last year was somewhat soft due to high prices and quality concerns as a result of the poor crop. As in the U.S.

we believe that shipments to full service restaurants in Europe may also begin to soften as cold weather reduces outdoor dining options. Shipment trends in our other international markets are mixed. In China and Australia, shipments are approaching prior year levels.

In other markets in Asia Pacific and Latin America, demand has improved since the end of the first quarter although our shipments continue to generally lag demand improvements as customers and distributors continue to right size their inventories. As a reminder, all of our international sales are included as part of our global segments results.

In short, overall demand across our markets is largely consistent with what we observed during the latter half of the first quarter. Although we remain cautious about the effect of the onset of colder weather on outdoor dining, as well as the continuing spread of the virus in the U.S. and its resurgence in some key international markets.

In addition, when estimating sales for the quarter recall that our second quarter results last year benefited from strong sales customized products, including limited time offerings, as well as from additional shipping days related to the timing of the Thanksgiving holiday.

With respect to costs, as we've previously discussed, we plan to process potatoes from the 2019 crop through early September, which is a couple of months longer than usual. We stretched out the old crop in order to manage inventories in light of the pandemics impact on fry demand.

Processing older crop results in higher cost as a result of higher raw potato storage fees and lower recovery rates, since we typically carry upwards of 60 days of finished goods inventory will realize the impact of these higher costs in our second quarter income statement as we sell that inventory over the coming months.

Now, here's Tom for some closing comments..

Thanks, Rob. Let me just quickly sum up by saying it was a solid quarter in the context of the current operating environment. And I'm proud of how our manufacturing, commercial and support teams that continue to focus on the right strategic and operating priorities to serve our customers.

We're optimistic about a steady improvement in restaurant traffic and fry demand in most of our markets as well as our ability to control costs and manage through the pandemics impact on our operations. However, we do expect some choppiness and demand as the world continues to manage through the crisis.

We remain confident that Lamb Weston is well positioned to emerge as a strong company once we get to the other side of the pandemic, and create value for our stakeholders over the long term. Thank you for joining us today. And we're now ready to take your questions..

[Operator Instructions] And we'll take our first question from Chris Growe with Stifel..

Hi, good morning..

Good morning, Chris..

Hi, thank you for the time. I just had a -- just to start off, I had a question for you on the gross margin. Obviously, there's a marked improvement sequentially. You talked about the leverage, you talked about you had lower COVID costs as an example.

One other element of this that we've seen is stronger price and mix and stronger than expected, especially that in the food service division. I just want to get a sense of its sound like mix was positive. You have some pricing coming through as well.

I guess I'm trying to think about the first quarter versus the fourth quarter and how important that component was to the gross margin performance, or was it more the leverage than that price mix improvement?.

Yes, this is Tom. The important thing comparing to Q4, it's really about the volume returning. And because Q4, we just fell off a cliff in food service. And as you guys know, that's one of our stronger margin segments.

So, it's a -- it's a combination of pricing flow through and really the restaurants re-openings and volume starting to recover in Q1 that really drove the sequential improvement..

And in relation to that the from the pricing, you had the pricing in the fourth quarter just with mass by mix, is that the way to say in that food service division?.

Well, yes absolutely. And it's, we had significantly lower volume in Q4. So it was a major component of it. And as you, as you look at, we talked about Q1, it's really volume and price flown through and volume returning as I said..

Yes, in food service, Chris, that it's not a -- that that price increase comes through over time. I mean, it's not, it's not one customer. They're all different contracts. So they roll at a different time. So some of that has, a little bit more impact in Q1 than we saw in Q4..

Okay. I just one more follow on to that, and I'll let it go. But my question on the gross margin would be as I think about, normally, from Q1 to Q2 you have a nice sequential improvement in gross margin.

It sounds like that you have some residual cost coming through from utilizing [row] [ph] crop as an example and utilizing as an inventory, you have a tough comp as well.

Do we think about the gross margin? Is it just contingent on volume? Or is there [enough on] [ph] the cost side there that we should think about the gross margin maybe been a little softer in Q2, versus Q1, even though sequentially that normally is better?.

I think you're spot on Chris. That one, we've got some cost carryover that we don't normally have in Q2. Q2 normally we're selling crop that was processed directly out of field, so no storage cost to it. And they're fresh potatoes, so they process better. So that's going to have some impact on our Q2 margin.

And in addition, as I mentioned, I think in my comments that that recall the Q2 last year, we had strong performance in LTOs and other specialty products like that, that help on the pricing side..

Okay, thank you for the time. Thank you..

Thank you..

We'll take our next question from Andrew Lazar with Barclays..

Morning, everybody..

Morning, Andrew..

Hi. First thing, I think Tom you mentioned, it sounds like there's some maybe increased competitive pressure in some segments of the U.S. maybe outside of some of the large chains, and some of the more value oriented I think international segments you may have said.

I was hoping you could just maybe go into that a little bit more and give us a sense of sort of what's happening there and is it -- is it through sort of contracts or not necessarily contract pricing just kind of more like spot pricing types of competitive dynamics? I'm trying to get a better handle on that..

Yes, Andrew, it's predominantly spot pricing in certain regions in the -- in North America, and it's, it's a little, I'd characterize it this way. It's a bit more pronounced than normal. And like I said, everything overall from a pricing standpoint, is pretty stable. It's nothing that we haven't seen before. So we're watching it carefully.

But obviously, with capacity available, we just need to manage through it and we will. The international side of it, the way to think about it, the pricing pressure is on the lower not the lower line flow type items. That's that we characterize as non-value added. So we play in that a little bit and a lot of these markets.

But our most of our focus is on the value added, like Crisscut curly fry type items in the international markets, but it is getting competitive on the lower value than on value added side..

Got it. And then you talked about sort of sequential demand trends and traffic trends, certainly improving pretty dramatically over the course of the quarter, of course from the from the lows, if you will in the in the fourth quarter.

But that, maybe last couple weeks it seems to have kind of like stabilized or plateaued a little bit at some of the levels that Rob went through. Trying to get a sense of what you think is, is driving that sort of moderating pace, right of sequential improvements in sort of restaurant traffic or away from home eating.

Because obviously, we haven't necessarily come into like super cold weather and things it's your point of kind of moderated or the pace right of sequential improvement is moderated a bit. So trying to get a sense of what you're seeing out there and what you think is driving that. Thank you..

Now, some of the some of the Q1- think about it this way, Andrew. In Q1, as we reopened up, a lot of our customers started rebuilding stocking inventory, because they dramatically decreased their orders. And you know, starting in March, April, May. So there was a restock happening kind of mid-May through June, and everybody trying to get caught up.

And so I think, as I think about where we're at today, in terms of demand, it's been pretty stable at the levels that we talked to in the script.

And the thing -- we got our eye on is as, as the weather changes, and you have flare ups and COVID hotspots, we certainly have data where we look at the markets that are potentially put more restrictions on, we're watching those ordering patterns very closely. So, those are a couple things that we continue to remain cautious about.

We just got to work through it. And it'll actualize itself over the next 90 days, but we're watching it carefully..

Got it. Thanks very much..

We'll take our next question from Bryan Spillane with Bank of America.

Hey, thank you. And good morning, everyone. So a couple questions first, on the -- on margins, and it gets us we're thinking about cost going forward understanding that some of the COVID costs, probably stay in the base for a while.

Can you just give us a sense for how much expenses maybe you're deferring into the out year? So just how much cost avoidance is happening this year and that we might have to think about adding back into the out years? And then also just this, we're talking about cost, if you can comment at all on just what you're seeing in terms of freight costs.

And if, if that's something we should be thinking about?.

Yes, thanks, Bryan. In terms of deferring cost, I mean, that those inefficiency costs and the COVID costs and so on and so forth. Those are flowing straight through the inventory.

Now, if you're asking about are we deferring any maintenance costs or things like that, that might bite us in future years, none of that; we continue to maintain our facilities as we normally do, and so nothing there. So really nothing that I would say gets deferred into out years.

Now we did mention last, last call that we had deferred some expansion capital that we were looking at, but again, that's we'll reassess that as market recovers. In terms of freight costs, I've heard others have had challenged with some near term freight.

We tend to contract a lot of our trucking, as opposed to play a lot in the spot market, where we'd had some freight volatility, maybe more in Q4 is in early in Q1 was as we were trying to catch up those inventories and hot shooting some things our rail, truck freight, had some negative impact to it, but that we've pretty well stabilized.

And again, so because we contract the trucking, largely, we're not as exposed as maybe some others that you may have heard..

Okay, and then and then just tying back to Andrew’s question around pricing, and just the competitive dynamics in the market.

Can you give a sense now of kind of where capacity utilization rates are or just how much slack there is in the system in North America? And again, I think we spoke about this last quarter, it seems like there were some plant older plants maybe that had been taken out of commission.

And so it's a little bit difficult I think, from the seats, we're sitting in really to get an understanding of just where, where the industry sits right now, in terms of utilization rates, any color you can help us with that would be would be, would be helpful?.

Yes, Bryan, I -- I'm not going to get into a specific number on utilization rate, because it's, really a moving target right now. And, we if you think about playing less than obviously, our utilization rates below, were reading [ph] historically operated.

But on top of that, we as we have shutdowns and start-ups over the past, since the pandemic started, it really muddies the waters on what your overall capacity is. Now, we know the absolute number historically. But it's about running production as much as you can, in light of the disruptions we're experiencing, and they've gotten a lot better.

And we're getting, like I noted in my remarks, we're a lot better at adjusting and moving production around when we have a disruption to service our customers, which also there's a cost element to that. So, I think, I think as this becomes more stabilized. Bryan we’ll have a better understanding of the overall capacity utilization across the industry.

And the competitive set is experiencing some of the same things that we are. So it's a bit of a moving target right now..

All right, yes. I appreciate that. Thank you..

Thanks, Bryan..

We'll take our next question from Tom Palmer with JPMorgan..

Good morning, and thanks for the question. I wanted to ask on the retail shipment side, I was a bit surprised the quarter to date figure was only flat given how robust your branded takeaway is. I appreciate branded much stronger than private label.

But do you think that the quarter-to-date shipment for [indiscernible] is an accurate reflection of overall takeaway trends for you at retail, or are shipments may be lagging that that takeaway a bit?.

Yes, I think that that again, as I said in prepared remarks that on our branded business, we continue to perform very well. And private label, we've, seeded some of that, that volume that started really in Q3 of last year. And so I think that our branded performance, I think is continues to be very strong.

But that private label offsets our offsets as our overall sales out of the retail I think that that accurately reflects it. Now, category trends out of the retail stores. I mean, you get the Nielsen data as we do. And so you, you see those are continued to be pretty strong overall. But for us, it's that it's that mixed trade..

Okay, thanks. And you mentioned the tough comp for LTOs next quarter. We see QSR volumes, at least beginning to trend more favorably.

Are you seeing those customers returning back towards or starting to plan limited time offers and to you know, to what extent might those start to flow through in the next quarter or two?.

Yes, Tom. I won't get into specifics on customers and LTOs. What I will say is, there's renewed interest across many of our customers. But those, obviously take some time to get through the innovation and then get it on menu. So more to come on that. But also say is, there's some renewed interest in it..

All right, thank you..

We'll take our next question from Rob Dickerson with Jefferies..

Great, thank you so much. So just, in terms of the crop this year, it sounds like, what you were saying in the prepared remarks is basically the crop maybe in your sourcing areas, it sounds, about average this year, which is good.

But given, the reduction in number of potatoes that went into the ground this year for this year's crop, and kind of where we are, in terms of the harvest time.

And again, do you kind of currently find the demand supply equation fairly healthy at this point when you look at the overall broader crop? And then secondly, could others be maybe somewhat disadvantaged, given their, re-emergence of demand, but maybe some varied regional supply sourcing? Thanks..

Yes. Rob, I think overall, how I'll characterize it is right now, based on our overall demand forecasts were balanced from around like, the industry is kind of in the same spot. So as we do every year, as the our forecasts change, we quickly align that with our raw needs.

And our Ag team does a great job canvassing our growing areas, and ensure that we're covered to serve as our customers. So I think everything's pretty balanced right now..

Okay, great. And then also, we've heard recently, no large part of yours since we started construction in one of their plants, right. They were constructing it, they start construction, probably hit the back building.

I know, Bob, this is only willing to say so much, but I just, you know, curious, you know, if you'd be willing to comment on just maybe, like infact a symbol of confidence on the overall industry, like structural basis of the industry, as we think about, even going into calendar 21 because a lot of questions to be asked around utilization now.

But, if you’re thinking 12 to 18 months in a large competitors back at a plant, you know, it seemed to me that the industry is saying, yes, we're trying to get through this, but we also have to be prepared for when demand comes back because the industry overall isn't structurally impaired at this point. Thanks..

Tom Werner:.

chapter:.

Okay, great. Thank you. I'll pass it on..

We’ll take our next question from Adam Samuelson with Goldman Sachs.

Yes, thanks. Good morning, everyone..

Good morning, Adam..

Yes, thanks good morning everyone..

Maybe, hey, maybe kind of keying off of Rob's question just on the raw supply. I believe the contract rate is up in the Pacific Northwest. This year it was up about 3%.

And I'm just trying to make sure when you say pricing stable in terms of your contract negotiations with your customers, is that pricing stable a net number? Or is that a gross number? And so we got to think about flat top line price and there's a there should be a kind of low-to-mid single digit inflation on the on the potato cost side?.

Yes, Adam, in terms of the pricing negotiations with customers. I think what we were speaking to is that generally the pricing negotiations were consistent with expectations. And so I think there was some concern that some had expressed on our last call that there might be some pricing pressure and we just hadn't seen that.

Now recognize that in our global business unit, those big chain customers, we tend, on average to have about a third of those contracts come up every year. And those contracts structures are different. Some have cost pass through elements, some have just cost inflation elements and so forth.

And so that, that it's fairly variable in terms of how those contracts work. But I think overall, I think the read is that, that pricing in our marketplace for sales, continues to be in good shape stable from our expectations. On the raw side, the crops in good shape and we've got what we need to serve as our customers for this year..

Okay, that's helpful. And then the follow up just thinking about the SG&A line and any way to help frame, how what that can look like this year. I know, you're probably taking a very tight lid on all the discretionary spending, and some things like team here fairly easy to control in the current environment.

But what that could look like and [indiscernible] is any update on the ERP project in terms of timing and completion?.

Yes, Adam it’s Tom. In terms of SG&A, we've -- early on, like we mentioned put a lid on stopped all non-discretionary spending and projects, and travel those kind of things, and we'll continue to do that. As sort of terms of levels of SG&A I think we target around 8%, 9% of sales.

And, the -- with that said, as, as things continue to improve there's, some things we may choose to invest in within SG&A. But we'll manage that tightly like we have, and the team's done a good job putting the lid on cost of non-discretionary. In terms of ERP….

I’ll take that Tom. In terms of the ERP, we have implemented released one of that ERP, which covered our financial reporting, covered our maintenance in the plants and covered our indirect procure to pay cycle. And that was that’s been implemented and is now operating and standard ERP exercise not perfect, but not horrible.

It's all it's, it's fine and operating well, the team has done a great job with it. In terms of release two, that impacts more customer facing and inventory elements and in given the current environment. We're really stepped back from that.

One, to let the key people in the business run the business in this challenging time, and two, just managing through the risk. So we're going through the assessment now to determine what the timing is to do that, but we haven't relaunched it at this point..

Okay, that color is very helpful. Thanks so much..

We'll take our next question from Bryan Hunt with Wells Fargo Securities..

Thanks for your time this morning. My question has to do with your potato supply. You know, you had said coming into the year your contracting is down 20% to 25%. And you made some earlier comments your balance from our raw perspective relative to your forecast.

How much latitude do you have to catch up with demand with spot potatoes, if you were to see demand come in stronger than your forecast..

We have like we do every time this year, we have a pretty good idea of working with our growers, strategic growers of potential open potatoes available, and we make decisions. We made decisions this year already to make sure that we have raw valuable based on the changing forecasts.

And we'll continue to make those decisions throughout the course of the next 60, 90 and 120 days as things change. So there is some flexibility in the system and the whole industry does kind of the same playbook.

So, like I said, we feel we've made some decisions to do some things to keep it balanced right now based on our latest thinking on how the demand is going to play out for the balance of the year. And we'll continue to evaluate it and we have a great ad team that has a very good understanding of what's available in the market.

So I have no concern that we'll be if things improve dramatically. We have a plan in place to make sure we stay balanced..

Great. My next question is, you touched on LTOs potential, and the margin opportunity that you've seen historically in LTOs.

In your discussions with in contracting for the upcoming year, with your QSR customers, what, what is their mind set around LTOs? Is there potential for more of them? Or less of them year-over-year? You know, like can you just touch on the potential quantity of LTOs on a year-over-year basis?.

Yes, I think the way to think about it is, there was a period, where a lot of customers of all different sizes, were focused on many simplification, based on, the environment that unfolded in the last six months, and I think, now that now that there's a return of demand, the mindset was, some of our customers is a clarification.

So that's, that's leading towards renewed discussions on LTO activity, and what that could look like for some of our customers. And every customer is different. So some are more aggressive on menu items than others and the, thing to remember is, once those discussions starts, it does take some time to get them in the marketplace and on menu..

And then my last question is, and you touched on this briefly. When you look at capital allocation, you talk about growth, returning cash to shareholders.

Given the lower capacity utilization in the industry, we could see there might be from the outside looking in opportunities to maybe make some capacity acquisitions that more favorable multiples, and you have in the not too distant past.

Can you touch on maybe what the M&A pipeline looks like today versus a year ago? And do you feel more confident and putting money to work on acquisitions versus returning it to shareholders? That's it for me. Thank you, Tom and Rob..

Yes so consistent to what I've talked about in the past. One of our strategic pillars is invest for growth, an important part of that is M&A. And we continue to canvass the industry. Even in the last six months, we're staying as in touch with opportunities as possible and it's a, it's an environment that may lead to some opportunistic M&A.

And the great news is, Rob and his team have done a good job getting our, getting the revolver done in this environment, and building some additional debt. So we got cash on the balance sheet, got a lot of firepower, and if the opportunity presents itself, ready to play.

So, we continue to do everything we can to move some forward and we're ready to go..

Thanks for your comments..

We'll take our next question from Carla Casella with JPMorgan..

Hi, this is Sarah [ph] Clark on so Carla Casella. On your COVID related costs thanks for breaking that out in more detail.

What percent of those do you expect to recur each quarter going forward throughout this year?.

Yeah, that this is Rob. It -- that's so hard to determine, because what you're what you're trying to forecast there is how many infections you're going to have, where they're going to come on, what line and so how you shut that down. So I think that's a challenge to forecast.

So the best that we can do is disclose what has happened and disclose enough of the detail and then, I'll let you do your own forecast on COVID in these in these spots..

Got it. Thank you, and then how are you evaluating your shelf space at retailers? Do you feel like you have the right skews at retail and then how are you looking at this in the food service space as well.

Yes, I think from a retail standpoint, we feel good about our shelf space and facing. As Rob mentioned, the branded offerings on shelf are doing pretty well. And, we were continuing evaluating shelf set. So we feel good about all that. In terms of the food service, I'm not quite following your question..

I'm just, that's fine. The [indiscernible] view is fine. And then last question, in terms of margin differential by product.

Have you ever broken out the difference between branded and private label margins?.

No, we don't..

Okay, thank you..

Thank you..

That concludes today's question and answer session, Mr. Congbalay at this time I'll turn the conference back to you for any additional remarks..

Thanks everyone for joining the call this morning. If you would like to set up a follow up call please email me and we can get something set up either today over the next couple of days. Again, thanks for joining and disconnect the call. Thanks..

This concludes today's call. Thank you for your participation. You may now disconnect..