Lamb Weston Holdings, Inc. Q3 FY2020 Earnings Call

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

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

Thank you, Dexter. Good morning, everyone. And thank you for joining our call today. We're clearly in a time of considerable uncertainty as it relates to the scope and speed of the COVID pandemic and the impact on the global economy, our industry, and each of our lives. We'll do our best to answer your questions relating to consumer demand and our response to the crisis, but please recognize that much is still unknown. As a consequence of this uncertainty, we've withdrawn our financial outlook, despite only two months remaining in our fiscal fourth quarter. At this time, it's extremely difficult to reasonably forecast customer and consumer demand in North America and our key international markets. In a few minutes, Rob will provide details on our performance for the third quarter. But let me start by sharing with you our priorities as it relates to our Lamb Weston team, our operations, and our customers. First, I want to thank the entire Lamb Weston team. I'm proud of how we're managing through this adversity, including all the efforts to protect and support our employees, families, neighbors, and local communities by meeting our obligation to continue to provide food to help feed people all over the globe, working with our customers, and continuing to support our business by rallying together to care for one another. It's that spirit of teamwork, as well as our service-oriented culture, that serves as a cornerstone for making Lamb Weston so great. It's paramount to ensure the health, safety, and emotional well-being of our Lamb Weston team. People must feel safe and comfortable where they work. Since the potential severity of this outbreak became apparent, my management team and I have led a cross-functional task force to ensure that we make decisions using the most up-to-date information from the CDC and other authorities. We're leveraging our experience in China where, except for a government-mandated 10-day extension of the Chinese New Year, we operated through the worst of the outbreak. We've taken steps to enhance sanitation protocols in our production facilities and offices, promote social distancing by having employees work at home when possible, and canceling almost all travel. Second, as a leader in our category, and as I mentioned earlier, we have the obligation to continue to make food and do our part to feed people across the country and around the world. And we take this responsibility seriously. We're confident in our ability to continue to safely produce fries and other frozen potato products. As you can imagine, the demand situation remains fluid, so there will undoubtedly be an effect on our operations and supply chain. We're watching consumer and customer demand and have begun to adapt our production schedules to react accordingly. As appropriate, we'll take further actions to align our manufacturing operations, including temporarily reducing production. Third, we and our joint venture partners are committed to remaining a trusted value business partner for our customers as they all manage through supply chain and inventory concerns. Several large QSR chain customers have already indicated to us that fries are a priority item. We and our customers will not likely be able to forecast consumer demand trends given the breadth of the pandemic and the pace under which it continues to unfold. However, while good data on the pandemic effect on restaurant traffic, consumer buying patterns, and French fry demand is limited, we can provide some insight into what we've seen so far in some of our markets in Asia, the U.S., and Europe. In China, after the government placed severe social and movement restrictions that significantly reduced restaurant traffic, French fries demand declined about 50% for about a month. As restrictions have relaxed, we've seen volume climb back to about 70% of pre-crisis demand today. Our team there has responded well and continues to manage through the impact of the virus. We're adopting lessons learned from them to our operations around the world. In other key markets in Asia such as Japan, South Korea, Taiwan, and Singapore, we've seen only a modest impact on French fry demand. While our sales in these markets mirror these trends, we're continuing to closely monitor the situation for additional evidence of consumer reaction and fry demand. In the U.S., it's still too early to determine how the impact on demand will play out. Normally, about 65% of all fries are purchased at a quick serve restaurant, with another 20% purchased at a full-service restaurant. The remaining 15% is purchased at retail. Our sales breakdown is broadly consistent with that split of our global segment, which accounts for about 52% of our total sales, primarily serving large QSR chain customers in the U.S. and internationally, largely including Asia, Australia, and Mexico. Our food service segment, which is about 30% of the sales, primarily sells to a range of food service operations. We estimate that close to 80% of the segment sales are to full-service restaurant and outlets such as workplace cafeterias, hotels, hospitals, and schools, with more than 20% to smaller QSRs. Our retail segment historically accounts for about 13% of our sales. Of the fries purchased at a QSR, normally about two-thirds have been purchased via drive-through carry-out or delivery, with the remaining third consumed on-premises. Prior to the adoption of more severe social and movement restrictions, we saw little change in orders and shipments to QSRs as increases in drive-through traffic, as well as higher delivery orders cushioned much of the decline in on-premise dining. However, with the adoption of more severe restrictions across more states, we're seeing orders beginning to slow. If the China experience provides an appropriate guide, then we would expect QSR volumes to begin to recover at a faster rate than for full-service restaurants after the more severe restrictions are relaxed. Traffic at full-service restaurants and operations in the U.S. is expected to be down much more sharply than the QSRs. While many of these operators are taking steps to boost takeout and delivery sales, we expect this will make up only a fraction of lost business. So our sales to these types of customers are more at risk. In contrast, retail demand for frozen fries has significantly increased as food-at-home consumption rises with the adoption of social distancing policies and families stocking their freezers. We've taken steps to boost production of our retail products in order to meet the increased demand. So the bottom line is that in the U.S., QSRs that have established drive-through, takeout, and delivery capabilities are in a much better position in the current environment than full-service restaurants and other outlets that largely cater to dine-in traffic. Retail will likely benefit in the near term with more meals prepared at home and pantry loading. In Europe, which is served through our Lamb Weston Meijer joint venture, although a high proportion of our sales are to QSRs, fry purchasing patterns are much different than in the U.S. Most of the consumption is dine-in or takeaway via walk-in traffic, since drive-through options are much more limited. The impact of the virus on demand so far has been most pronounced in Italy after it adopted severe social movement restrictions. Other European nations have since adopted similar restrictions. So we expect the decline in demand to accelerate in those countries as well, which will further negatively impact Lamb Weston Meijer's results. Before turning the call over to Rob, I will just talk about our financial liquidity and capital allocation. We have a strong balance sheet and have sufficient liquidity to weather this crisis even if it results in a prolonged downturn in demand. Last week, in an abundance of caution, we fully drew down our existing $500 million revolver in order to provide additional financial flexibility in light of the market uncertainty. As you have seen a couple of weeks ago, we declared our regular quarterly dividend. However, we temporarily suspended our modest share repurchase program. Finally, we'll take the necessary actions to manage our cost structure, working capital, and capital expenditures. This means deferring capital when possible, including postponing all non-critical projects. Let me close by saying that these are extraordinary times; nothing about confronting this pandemic will be easy. But Lamb Weston is well positioned in terms of our business mix, operating flexibility, cost structure, and liquidity position to weather the storm. Our entire team is committed to stepping up and doing our part to keep feeding people, support our communities, and be a valued stable business partner for our customers. We're taking the necessary actions in our operations to navigate through this crisis by working in close partnership with customers and suppliers across the globe. Now, let me turn the call over to Rob.

Thanks, Tom. Good morning, everyone. As you've seen in our earnings release, our reported performance in the third quarter was mixed. However, it's important to note that through February, which was before the pandemic raced across the globe, we were on track to deliver the financial targets that we outlined on January 3, 2020. We provided a more detailed description of our third quarter results in our earnings release and in the 10-Q, which we will file later today. Here are some brief highlights. Net sales increased 1% due to a 1% increase in price mix; volume was flat as growth in the food service segment was partially offset by a decline in our global segment's reported volume. While volume growth of non-customized or limited-time offering products in our global segment was strong, it was more than offset by the timing of sales of customized and higher-margin limited-time offering products, as well as the initial effects of the pandemic on restaurant traffic in China. In addition, acquisitions contributed more than one point of volume growth, but this was largely offset by a one-point decline due to fewer shipping days in the quarter related to the timing of the Thanksgiving holiday. Gross profit declined $23 million or 8%, primarily due to input and fixed cost inflation. Edible oils drove most of the input cost inflation, while higher insurance rates and medical expenses drove most of the increase in fixed costs. In addition, unrealized gains on commodity hedging contracts was a $4 million headwind, largely as a result of a $4 million gain that we realized in the prior year quarter. SG&A expense increased about $8 million and included $2 million of non-recurring consulting expenses associated with developing and implementing our new enterprise resource planning system. Through the first nine months, we realized about $6 million in one-time ERP related costs and expect to spend around $10 million for the year. Regarding our ERP project, we're slowing it down a bit to manage both costs and risks in light of the challenging operating environment at hand. Equity method earnings excluding comparability items declined about $2 million, but this was due to a negative $6 million change in unrealized mark-to-market adjustments. Excluding these adjustments, equity earnings increased about $4.5 million. Adjusted EBITDA, including joint ventures, declined $26 million, or 10%, to $228 million; lower sales and gross profit in our base business, which again largely reflected the timing of sales in our global segment and cost inflation, as well as higher SG&A, drove the decline. Adjusted diluted EPS declined to $0.18 or 19% to $0.77, due largely to lower sales and operating profits as well as lower equity method earnings. Moving to our segments, our food service and retail businesses reported in line with our expectations, and you can find the details in our earnings release and 10-Q. But let me touch quickly on our global segment given the headline performance this quarter. Global reported sales were down 2%, including a 1% decline in both volume and price mix. Volume was down primarily because we lapped a very strong growth of customized and limited-time product offering products in the prior year quarter. This created about a 7 percentage point volume headwind. The Coronavirus related impact on restaurant traffic in China accounted for an additional 2 points of the volume drop. The timing of Thanksgiving was another 1 point. These declines were nearly offset by a 6 point increase in shipments of non-limited time offering products, as well as a 2 point benefit from acquisitions. So after taking into account the timing of sales, the pandemic's impact on restaurant traffic benefit from acquisitions, global's volume in the third quarter was largely in line with the growth that we delivered in the first half of the year. Global's price mix declined 1% as pricing actions were more than offset by unfavorable mix. This was due to a lower amount of customized and limited-time offering products sold versus strong sales of these kinds of products in the prior year quarter, as well as a higher proportion of sales to international customers. Global's product contribution margin, which is gross profit less advertising promotional expense, decreased $20 million or 15%. The factors driving the decline in segments profitability, primarily lower volume and higher manufacturing costs, are consistent with what drove our total company's gross profit. Moving to our cash flow liquidity position and balance sheet, we generated about $435 million of cash from operations year-to-date. That's down about 2% versus last year due to increased working capital requirements to support our growth. We've also invested more than $150 million in capital expenditures and IT related projects year-to-date. For fiscal 2020, we've reduced our CapEx target by $100 million to $200 million as we seek near-term opportunities to preserve liquidity. Through the first nine months, we bought back about $23 million of stock and paid $88 million in dividends to our shareholders. As Tom mentioned, we believe we have sufficient liquidity to weather the current operating environment even if there's a prolonged decline in demand. This includes having more than $500 million of cash on hand after drawing down our revolver last week. We have a strong balance sheet with about $2.2 billion of total debt at the end of the quarter. Our maturity profile is also attractive. We have an approximately $280 million balance on a term loan facility that matures in November of 2021 and an approximately $290 million balance on another facility that matures in June 2024. The mandatory annual amortization on these two loans is about $30 million combined. In addition, we have two $833 million high yield notes that mature in 2024 and 2026, respectively. We're also in good shape with respect to our financial covenants. Our first covenant is to maintain a debt to EBITDA, including joint ventures, leverage ratio of less than 4.5x. At the end of the third quarter, we were at 2.4x. Our second covenant is an EBITDA, including joint ventures, to interest expense ratio of at least 2.75x. At the end of the quarter, we were at nearly 9x. Now, here's Tom for some closing comments.

Thank you, Rob. These are difficult times for all of us. And we don't know how long these times will last. But we've faced challenges before and we will always come out stronger on the other side. I hope we were able to provide you with some insight on our priorities and our ability to manage through this crisis. We don't have all the answers, but I'm confident that our entire team will focus on doing our part to keep feeding people around the world. We're closely working with our customers and our suppliers as we continue to navigate through this environment. And because of that, Lamb Weston will continue to be a strong and valid business partner. Thank you for joining us today. Now we're ready to take your questions.

Thank you. We'll take our first question from Andrew Lazar with Barclays.

Good morning, everyone. Hope everyone is staying healthy on your end.

Good morning, Andrew.

Hi there. For Tom, Lamb Weston has performed exceptionally over the past couple of years from an industry supply and demand perspective, almost ideal in some aspects. I understand there is no real precedent for this and the situation remains quite fluid, but as you reflect on this and look ahead, with industry capacity coming online this year, which turned out not to be a problem due to robust demand, and now possibly facing a period of weaker demand, how do you view the current events impacting what has been a strong supply and demand balance, both in the near term and over the long term?

Yes, Andrew, the focus right now is on the demand curve, which is currently very dynamic. The key point our customers are emphasizing is the need for assured supply, and that is where our efforts are directed. The situation is uncertain, making it challenging to accurately predict how the demand curve will evolve and where it may stabilize. The crucial takeaway from my comments is our commitment to producing food products and feeding people. Regarding China, we experienced a downturn, and while we believe we've navigated through the most difficult phase, production there has decreased by 50%, although demand is currently at about 70%. Thus, my perspective on the market centers on assured supply, ensuring the safety of our people, and producing food safely. It will take time to understand how everything unfolds.

Understood. Thank you for that. I have a quick follow-up. Given that you have large-scale manufacturing facilities, are there actions you can take in the near term when demand slows and volume leverage diminishes? Can you make adjustments to the fixed cost base, or should we anticipate a negative impact on margins due to the reduced volume leverage affecting profitability? I'm trying to get a better understanding of this if possible. Thank you.

Yes, Andrew, as you can imagine, we're looking at a lot of different scenarios in the production plan based on how things are changing every week. So, I will assure you that as we think through slowing production down, we're taking all the actions necessary to take cost out where we can and but at the same time, we've got to support our employees that are coming to facilities every single day. But certainly everything is in play and we're reacting in real-time. I am super proud of our supply chain team and what they've done and how they've reacted to this. And, we've taken a lot of steps to ensure that not only are we providing our customers with products, but we're keeping our employees as safe as possible in this environment.

Thanks very much and stay well, everybody.

Thanks.

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

Hey, good morning, everyone.

Good morning, Bryan.

So a couple of questions. The first one, maybe a follow up to Andrew and this is one that we've fielded a few times in recent weeks. So it's really a simple question, if you needed to turn a plant off, is there anything that would stop you from being able to do that? I think there's a perception that your plants are kind of like glass furnaces that just have to be continuously run. So just want to make sure that's the right perception or if you needed to shut down or shutter a plant, is that complicated to do it?

Yes. This is Rob. If you think about it, it is food processing facilities. And we very regularly take the lines down for normal sanitation just as part of producing food. And so, every couple of weeks, we take a line down. We'll take each of our lines down just to make sure that we're continuing to keep the lines food safe. And so, as you think about this across the globe we've got 20 some odd French fry manufacturing plants. And so those are each individual units and within those units, there are lines and those lines go down regularly. And so in contrast to that perception that it's like a glass furnace that's continuous, yes, they're continuous when they're operating, but we regularly take them down, so that's just part of our process.

Thank you. My second question is about the change in capital spending guidance for this year. How far can you extend that? I'm trying to understand if you're postponing something now, are there certain capital expenditure needs that are essential, whether for maintenance or other reasons, that can only be deferred for six months or a year? How much flexibility do you have on capital spending over the next 12 to 18 months?

Yes. This is Rob again. On CapEx, our base level of capital to keep the wheels on is around $125 million a year for the Lamb Weston consolidated business. So, we think we can operate at that level for some period of time and maintain the productivity of the plants. Now, that doesn't include anything that's going to enhance productivity or improve our cost structure necessarily; that's just maintaining. So, but that's our base level of capital.

Okay. And then last one for me. There has been a lot of focus on your relationships and negotiations with your customers, particularly regarding pricing. Given the current situation and the uncertainty of demand, how much flexibility can you offer your customers in terms of providing them with different volume outcomes? Is this flexibility more valuable in your discussions with customers today than just focusing on price?

Well, Bryan, it's Tom. It's all about demand right now and understanding what the demand curve is and ensuring that we are meeting our customers' needs. So that's the focus right now rather than the pricing discussion. It's assured supply, and that's what everyone is concentrating on at the moment.

All right. Thanks very much.

We'll take our next question from Chris Growe with Stifel.

Hi, good morning. Thank you.

Good morning, Chris.

I hope you guys are well. I want to ask first of all on the supply chain and a bit to Bryan's question, but temporarily reducing production, I understand in this environment. I guess, I want to understand if you frame that for what you expect to do in the coming quarter or so or a couple of quarters? And then I'm curious also how you accommodate an input that spoils. So is it you have to produce these products and put it in freezers? Is that an incremental cost for you or how do you accommodate that in this environment?

Yes, Chris, this is Rob. You're correct. We do have the raw materials, but they will spoil over time. We can extend their usability somewhat, but not indefinitely. We have the capacity to manage this to some extent in order to meet demand and optimize costs in relation to the deterioration of the raw materials. After September, it becomes quite challenging for us to use raw materials from the previous year. However, we can extend their usability a bit, which is the calculation we're working on to optimize based on current demand.

Okay. And then just one other question, which is we knew this quarter had a tough comp for LTOs and customized products. I guess, I'm trying to understand, does that become an ongoing concern, say, Q4, where I would not have expected that based on the comps, but is that something your customers are doing there, are they foregoing those opportunities, and therefore you have more of a risk in future quarters around this mix factor from LTOs and customizable products?

Let me start by saying there are two components to that. One is limited time offers, which always experience some level of volatility based on what customers choose to promote and how they promote it. The other component is the customized products. For several of our large chain customers, particularly those reporting in the Global Business Unit, there are highly customized products tailored for them. We began reporting under the new revenue recognition standard in the first quarter of 2019. Under this standard, we recognize revenue for these customized products when we manufacture them and have a purchase order from the customer, rather than at the time of shipment and title change, which is how I learned it three decades ago. This leads to some volatility in the timing of our purchase orders for these products. If we don't receive a purchase order on time from our large customers, we can't recognize that revenue. This is what happened when comparing global results from Q2 to Q3. Q2 didn’t perform as strongly in underlying shipments as it indicated, and conversely, Q3 was not as weak in underlying shipments as reported. Therefore, I want to emphasize the revenue recognition aspect here. Regarding limited time offers, interestingly, some of our customers in China are carefully evaluating when to launch these offers to drive customer traffic. They view limited time offers as a way to attract customers, and that’s what we are preparing for now. I believe customers are likely to continue using limited time offers, particularly in China, to encourage more people to return to their stores.

Yes, Chris, this is Tom. I think that's right what Rob said in China, but the other thing, as I stated in my prepared remarks, right now in the environment in the near term, some of our customers are talking about menu simplification. So, the near-term, it's about making sure fries are on the menu, their base fry item, and some of the promotional items, we're going to be pushed out for a while.

Okay. That was very good color. Thank you for that.

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

Yes, thank you. Good morning, everyone.

Good morning, Adam.

I was hoping you could share some insights on U.S. trends and the framework you provided regarding China, as your recent experiences there have been very informative. I understand that the situation is quite dynamic and changes frequently. Do you have any visibility into regional trends in the U.S., particularly in states and jurisdictions with short-term restrictions compared to those that do not have them or have implemented them only recently? Are you observing similar patterns in your U.S. markets, and can you provide any quantification of those trends?

Yes, Adam, as you can appreciate, this is a very fluid situation and I'm not going to get into specific regional areas of our country. What I will tell you is, we've got a team that's analyzing daily order patterns across the regions. I can't get into specifics because a lot of it would be speculative going forward because it does change, but we're monitoring it certainly as more restrictions on social distancing are more pronounced, that's going to impact demand. So what I will say is, we're watching it closely and we're monitoring it every day. We're watching our order patterns and this is a fluid situation, and you can understand that. I'm not going to put out any kind of, hey, here's this number, that number in any of these regions because it changes every single day right now, but we've got a team all over it and we're reacting to what we're seeing every day, and that's what we're doing to manage this business going forward.

That's very helpful. My second question is about Europe and the joint venture, which may be more relevant for Rob. Can you provide some insight into where your customers stand, particularly since the QSR customers are completely shut down and lack demand outlets like drive-thrus? Additionally, could you outline the liquidity position of the joint venture and the tools available to manage it? I'm also curious about your commitment to the joint venture and any potential cash needs that may arise if demand declines significantly.

Yes. In terms of liquidity and balance sheet position of the joint venture, the joint venture is in good shape in terms of both its balance sheet covenant compliance and in terms of liquidity. They have their own standalone revolving credit line access and the sensitivities we've run there similar to what we've run here even in a prolonged downturn in demand that they appear to have sufficient liquidity to weather the storm here.

Okay. That color is very helpful. I'll pass it on. Thanks.

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

Good morning, and thank you for the question.

Good morning, Tom.

First, just wanted to ask on the COGS basket, get an idea of fixed versus variable costs in terms of mix, both as we look on a near-term time horizon, and then maybe if you could help with what portion of those fixed costs maybe you could spot over a several weeks or so period if needed?

Sure, Tom, this is Rob. We've previously mentioned that approximately 70% of our manufacturing costs are variable on a COGS basis, while 30% are fixed. This includes depreciation, and if you do the calculations, you'll see that fixed costs include significant components like repairs and maintenance, labor, and warehousing. It's important to note that if there’s a line down, we encourage our teams to limit large maintenance crews and extensive work. These aspects are actually well within our control, which is beneficial.

Okay. Thanks for that detail. And then also wanted to clarify some of the mix factors in the Global segment. I think you detailed the sales shortfall mainly came from international, especially, China, but then you also called out negative mix from international markets as a margin headwind, which would seem to suggest they grew as a percentage of segment sales. So maybe just reconcile that, and, I mean, were U.S. volumes also down in this segment or is that more going to be in the fourth quarter that you see U.S. volumes dip? Thanks.

Yes, I think that if you look at again that reported top-line, that revenue recognition issue that I talked about is a significant piece of that. And then if you look at actual shipments, the international markets tend to have a lower margin on average than our U.S. markets just simply as a result of market structure and then additional freight cost and so forth.

So just to clarify, U.S. volumes were up during the third quarter?

We don't split it out that way publicly, but I will tell you that the revenue recognition issue was largely a U.S. issue.

Okay. Thank you.

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

Thank you very much. I understand that you are closely monitoring demand right now. I am relatively new to Lamb Weston and how the harvest process works, along with demand contracts. I am curious about how you normally establish contracts with farmers to align with potential future demand for the upcoming fall harvest. This would assist in balancing supply and demand for 2021, which seems challenging to predict at this moment. How do you manage the relationship with farmers under these fluid circumstances to ensure you have secured the supply needed for October and November?

Yes, Rob. I'm not going to comment on that because we're right in the middle of negotiating contract prices at this point and other needs, so I'm going to not comment on that and you can respect that till we get through the process.

Okay. Yes, no, completely makes sense. Apologies for asking. I mean, I would say though it seems like there obviously are you have to have some type of internal guess, kind of some guess to just kind of help you work through whatever those negotiations are, I mean, that's kind of where we are. Is that right?

That's fair.

Okay, cool. I get it. Sorry, you're in that circumstance. And then I guess, just very simplistically when do we normally get kind of a read, an early read on the health of the harvest that would come in this year and that's, I think that's around May. Is that right, May, June?

No, we usually have a good idea, and what we do and we'll continue to do it is, we'll have an early read in July and we'll provide full color on how we're seeing the crop in October.

Okay, okay, fair. And then just lastly, just in terms of overall labor situation, I mean, obviously, I think every company is probably dealing with the same thing. But for now at least you feel comfortable with your supply chain, right, ability of workers to get to the plants. So it's more of a demand forecasting variable moving forward relative to anything on the labor side and that's it? Thank you so much.

Yes, Rob, it's all about demand forecasting. We've got obviously our protocols in place in terms of reacting to the COVID situation in our plants. And we're taking necessary actions to adjust our production scheduling as I mentioned earlier and we'll continue to do that. And I'm committed to continue to support our employees as they come in the plants every day and produce food to feed people in the U.S. and around the globe. So, it's a fluid situation. It's emotional. The most important thing is to do everything we can for the health and well-being of our employees and that's the focus.

Sounds great. Really, thank you so much.

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

Hi. I'm just wondering, so on the Foodservice and Retail on the production side, how many of your plants are doing both Foodservice and Retail and how easy is it to switch lines from one line of production to the other?

I'm not able to provide specifics on which plant produces what. However, we have managed to convert some of our Foodservice lines to Retail to meet that demand when possible, though not all lines are equally adaptable. It depends on how these lines are configured. I can assure you that we have shifted production from Foodservice to Retail wherever we can, and we are responding to the demand curve across our product line by making adjustments. The supply chain team has done an excellent job of quickly adapting to the changing environment. While I can't give you specific details, I want to emphasize that we are doing everything possible to convert lines where feasible.

Okay, great. Thank you.

We'll take our last question from Rebecca Scheuneman with Morningstar.

Yes, good morning. Thank you for the question.

Good morning.

Good morning.

So it can be difficult to get a read for exactly what is happening in China, but there have been some reports that new cases of the COVID-19 virus are spiking up again as people are getting back to work and back out in the general population. Are you seeing anything in your demand data to indicate that, that is happening?

This is Tom. I understand that the news is mixed. What I know about our business and the situation in China is what I've mentioned earlier. During the events of January and February, our business declined by about 50% over the last two to three weeks. The team responded effectively, doing an excellent job. The China team kept operations running and continued to provide food to people. Currently, we are observing traffic patterns returning to about 70% of normal levels. As for the recent updates you referred to, this is new information for all of us. I can't predict how our business will respond, but as mentioned before, we are managing this situation on a daily basis. We are analyzing the data, which is quite dynamic. So far, we haven't noticed any changes related to the new information or cases. It's really a day-to-day process that we will keep monitoring, but at this point, we haven't observed any significant changes in the last 24 hours. Therefore, we are paying close attention to this situation based on what we know.

Yes, okay, great. Thank you. And then my next question is a follow-up to the previous question. Several packaged food companies have been reporting surges in demand in the last few weeks of 70% to 80% and specifically in some frozen food categories where you reside. And I was just wondering if you talked about trying to ship some production over to the Retail product. Is it likely that you have enough additional capacity to meet that type of demand in Retail?

What I will say is, what we've done is shift as many lines as we can to Retail based on the demand changes we're experiencing. So, we are doing everything we can to meet the demand, and I'm not going to give you a percentage of what we're seeing in our Retail business, but obviously it's up. And we'll do all we can to help support the Retail demand that we're seeing, and we have changed some of our production lines, where we can again to support the Retail demand surge.

Okay, great. Thank you so much.

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

Thanks, everybody, for joining the call. I'd be happy to arrange for follow-up calls and conversations. If you would just email me, and we can set up a time. Other than that, hope everybody stays safe. And again thanks for joining the call.

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