Good day and welcome to the Lamb Weston Fourth Quarter and Fiscal Year 2020 Earnings Call. Today's conference is being recorded. And at this time I'd like to turn the conference over to Mr. Dexter Congbalay, VP Investor Relations of Lamb Weston. Please go ahead sir.

Good morning and thank you for joining us for Lamb Weston's Fourth Quarter and Fiscal 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 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 SEC filings for more details on our forward-looking statements. Some of today's remarks include non-GAAP financial measures. These non-GAAP financial measures should not be considered a replacement for and should be read together with our GAAP results. You can find the GAAP to non-GAAP reconciliations in our earnings release. With me today are; Tom Werner, our President and Chief Executive Officer; and Rob McNutt our Chief Financial Officer. Tom will provide an overview of the near-term demand environment as well as our efforts to manage through the COVID-19 pandemic crisis. Rob will then provide some details on our fourth quarter results, financial liquidity and trends we're seeing so far in the first quarter of fiscal '21. With that let me now turn the call over to Tom.

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

Thanks Tom. Good morning, everyone. As Tom noted, our fourth quarter results reflect the pandemic's effect on frozen potato demand, as well as the impact on our cost structure as we manage through the crisis and position ourselves for fiscal 2021. While the quarter was highly challenging, we've seen improvements in recent months from the lows we saw in April. We believe that we're well-positioned to manage through the continuing recovery. Specifically, in the quarter net sales declined 16% including the benefit of an additional week of sales versus the prior year. Excluding that benefit sales declined 22%. Sales volume was down 17% or 23% excluding the extra week as frozen potato demand at restaurants and other 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 destocking by chain restaurant and foodservice customers in April through mid-May as they adjusted to the abrupt drop in near-term demand. Our weekly shipments towards the end of the quarter more closely mirrored consumer demand trends by channel, but we're still down versus the prior year. Specifically, our weekly shipments to large chain restaurants in the U.S. were about 50% of pre-COVID levels from late March through early April then improved to around 85% by the end of May as consumers took advantage of QSR drive-throughs. Our weekly shipments to full-service restaurants and non-commercial outlets such as hotels, schools and universities, sporting venues and workplace cafeterias bottomed at about 20% of pre-COVID levels in mid-April then improved to approximately 70% by the end of May as some states began to ease restrictions on restaurants and bars. In contrast, our retail segment's weekly shipments in April through mid-May spiked up around 50% versus prior year as consumers increased food-at-home purchases in response to shelter-in-place orders. Demand remained high as we exited the quarter with weekly shipments growth of about 30%. Price/mix increased 1% for the total company with gains in retail, partially offsetting unfavorable mix in our global and foodservice segments. For the year, sales were up 1% including the benefit of the 53rd week. Excluding that benefit, sales were down 1%. Gross profit in the quarter declined $139 million. This included about $47 million of cost related to the pandemic's impact on our operations. In the quarter, we elected to keep all of our plants open and continue to pay our employees, and therefore, spread reduced demand across the entire system. This led to all of our plants operating at lower rates resulting in labor, energy and materials utilization levels that were well off of our standards. Accordingly, this had a significant impact on our margins. Of the $47 million, about $25 million reflects utilization related costs and inefficiencies arising from disruptions to our manufacturing network. These costs and inefficiencies largely consisted of; first, spreading lower volume across our entire manufacturing network including modifying production schedules and reducing run times, thereby, sub-optimizing utilization at each facility; second, costs net of any government credits to retain factory labor, including paying them full weekly wages, although hours worked may have been well below that; third, cost to shutdown, sanitize and restart manufacturing facilities after a factory employee had tested positive for the virus; and finally, incremental cost to produce retail products on foodservice oriented production lines. To be clear, we expect to incur utilization related costs and inefficiencies as long as our manufacturing operations are impacted by the pandemic, especially with respect to disruptions arising from shutting down and sanitizing facilities including the cost of shifting production to non-affected locations. The other $22 million of the $47 million consists of non-utilization-related costs, which largely included nearly $14 million of which $10 million in the quarter was non-cash to terminate certain raw potato purchase obligations related to the 2019 crop, nearly $6 million of incremental warehousing transportation and supply chain costs and about $3 million of other costs. We expect over half of these non-utilization-related costs will be non-recurring. While these pandemic-related costs had a pronounced impact on our results for the quarter, the remaining $92 million decline in gross profit largely reflects lower sales volumes as well as higher manufacturing costs due to unfavorable mix, other inefficiencies and input cost inflation. We partially offset the decline in gross profit by a $22 million reduction in SG&A expense, which was largely driven by lower incentive compensation accruals and adopting a broad range of cost mitigation efforts. We also reduced advertising and promotional expense by $5 million, primarily related to our retail segment and suspended contributions to our charitable foundation in order to preserve cash. Partially offsetting these SG&A reductions were $11 million of expenses related to the pandemic, which largely included expenses to adopt and maintain enhanced employee safety and sanitation protocols; expenses net of government credits to retain certain direct sales employees in our foodservice segment so that we're in a better position to drive growth as demand improves; and expensing more than $3 million of capitalized costs associated with manufacturing expansion projects that were shelved for the time being. We expect to incur some of the pandemic-related SG&A expenses going forward, especially for maintaining enhanced employee safety and sanitation protocols. Equity method earnings swung to a loss of $6 million down from a positive $15 million last year. Excluding the impact of unrealized mark-to-market adjustments, equity earnings declined $25 million of which about $16 million reflects pandemic-related costs and expenses similar to what we incurred in our base business. The remaining $9 million of the decline was largely driven by lower sales primarily in Europe. As Tom mentioned, the pandemic's effect on European fry demand was similar to what we saw for full-service restaurants in the U.S. with Lamb Weston/Meijer sticking to the weekly shipments bottoming in April at about 35% of prior year levels and recovering to around 60% by the end of May. Adjusted EBITDA including joint ventures declined $137 million to $78 million, about $74 million of the decline was due to the pandemic-related costs and expenses that I previously discussed, which included $58 million in our base business and $16 million at our unconsolidated joint ventures. 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 $0.01 down from $0.74 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 destocking with weekly shipments to large chain customers as low as 50% of prior year levels in mid-April and rebounding to about 85% by the end of May. International sales were mixed. In China, monthly shipments in March recovered to nearly 70% of pre-COVID monthly run rate and recovered to about 80% in May. Monthly shipments to other markets in Asia, Australia, and Mexico were 70% to 80% of pre-COVID levels through late April but began to soften by the end of the quarter in certain markets due to inventory destocking. Global's product contribution margin which is gross profit less A&P expense declined $77 million to $34 million. Pandemic-related costs accounted for $29 million of the decline with the remainder, primarily driven by lower sales and higher manufacturing costs. Sales for our Foodservice segment which services North American foodservice distributors and chain restaurants outside the top 100 North American restaurant customers declined 44% in the quarter. Price/mix declined 2% due to unfavorable mix as sales of Lamb Weston branded and premium products softened. Price alone was positive reflecting the pricing actions that we'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 destocking inventories in April through early May. By the end of May, our weekly shipment rate had recovered to around 70% of prior year levels. Foodservice's product contribution margin declined $66 million to $43 million with pandemic-related costs accounting for $8 million of the decline. The remainder was primarily driven by lower sales, unfavorable mix, and higher manufacturing costs. Sales in our Retail segment increased 56% in the quarter. Volume increased 39%. As we discussed earlier, our weekly shipments have been strong since late March led by demand for our mainstream branded products such as Grown In Idaho as well as for our premium Alexia branded products. Price/mix increased 17% largely driven by favorable mix and pricing actions. Retail's product contribution margin increased $10 million to $31 million. This was driven by higher sales volumes, favorable mix, and lower A&P expense and was partially offset by $10 million of pandemic-related costs. Moving to our liquidity position and cash flow. Since the pandemic crisis began we've taken steps to enhance our liquidity and further strengthen our financial position by drawing $495 million from our previously undrawn credit facility, entering into a new $325 million term loan, and completing a $500 million note offering. At the end of the quarter, our net debt was less than $2.2 billion, which is down nearly $140 million from the end of last year and we had about $1.4 billion of cash and cash equivalents. As Tom mentioned, based on these actions and efforts to generate and preserve cash, we feel confident enough in our liquidity that in July, we fully repaid the $495 million that we'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 in deploying that cash continue to be investing to grow the business and returning cash to shareholders. For fiscal 2021, we currently expect capital expenditures of about $140 million as we conduct appropriate plant maintenance and implement phase 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 fry demand in North America and our key international markets. The business environment remains volatile, especially in the U.S. where increases in COVID cases have recently led government authorities in a number of states to reinstate restrictions on restaurant and foodservice outlets. We believe these actions may slow or possibly even reverse, some of the recovery in fry demand. Instead of providing near-term financial targets, we're providing a summary of our shipments during the first seven weeks or just more than half of our fiscal first quarter. In aggregate, the demand environment and our weekly shipments has improved since the end of May. Specifically, in the U.S., shipments to-date is approximately 85% of prior year levels. In our Global segment, weekly shipments to our large chain restaurant customers, which are predominantly QSRs have recovered to 85% to 90% of prior year levels, during the most recent weeks of the quarter. In our 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 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 begin to normalize to pre-COVID rates. Our growth has been led by our branded products. In Europe, shipments to-date by our Lamb Weston/Meijer joint venture are around, 75% of prior year levels. Early in the quarter, weekly shipments were trending at more than 65% and have recovered to around 80% in the most recent weeks as more countries ease restrictions and consumers gain confidence about dining in restaurants. In China, which is included in our Global segment, shipments to-date are approximately 85% of prior year levels, with monthly shipments improving from about 80% in May to more than 95% in the most recent weeks. Demand in our other key international markets which are also included in our Global segment, has softened since the end of the fourth quarter. In Japan, customers have been destocking inventories due to postponement of the Olympics. In sum, the amount and pace of recovery in fry demand has been better than what we had anticipated, when the crisis first arose. QSRs in the U.S. have bounced back faster than we expected, while full-service restaurants have also recovered somewhat faster due to states easing restrictions. Demand in Europe and China has progressed largely in line with our expectations, while other international markets are a bit softer. However, to be clear, we believe that this improvement remains fragile, as COVID cases continue to rise in the U.S. and in Latin America. We are currently seeing evidence of orders slowing after some states recently placed restrictions on on-premise dining at restaurants. We expect that this high degree of uncertainty will likely continue until the pandemic has ended and consumer confidence has been restored. With respect to costs, as Tom discussed, we've taken a range of actions to reduce our cost profile. We'd expect to continue to incur incremental costs and expenses resulting from the pandemic's impact on our operations. For example, these include expenses to adopt and maintain enhanced employee safety and sanitation protocols throughout the company, costs to modify production schedules and reducing run times thereby sub-optimizing plant and labor utilization, costs to shut down, sanitize and restart manufacturing facilities when necessary, and costs to produce retail products on foodservice-oriented production lines. So as you can see, it was a challenging quarter, where we've executed well and took the necessary actions to maintain through a potentially volatile period going forward. Now, here's Tom for some closing comments.

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

Thank you. We'll take our first question from Andrew Lazar with Barclays. Please go ahead. Your line is open.

Good morning, everybody.

Good morning, Andrew.

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

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

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

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

Thanks very much.

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

Hi, guys. Thanks. Good morning, everyone.

Good morning, Adam.

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

Sure Adam. This is Rob. I divided the costs into $25 million related to utilization and $22 million that isn’t. Out of the $22 million, $14 million was linked to the crop write-off from 2019. We might adjust some of this in Q1 as we finalize discussions with the growers, but it’s unlikely to recur. There may be some transportation and warehousing inefficiencies that could happen again, but the steps we've taken to improve and the extra volume we’re seeing should help. Regarding the utilization costs, those are challenging to predict because they depend on fluctuating production schedules. For instance, if our production line is set, and a couple of workers call in sick after a long weekend due to COVID, we might have to halt operations to keep everyone safe. I can't accurately forecast those situations. Looking at the $25 million in utilization costs, it's tough for me to believe we won’t encounter some of those expenses again. In Q1, we experienced additional challenges with shutdowns, restarts, and line sanitizations. That's how I view the situation. I recognize it's not perfect information, but it reflects our current reality.

No, that's very helpful color. And then maybe just, I know a lot of uncertainties at this point as well but any SG&A expectations for 2021, or how would you bound those just given kind of the reality of the business environment today?

Yes. We have been actively managing our SG&A expenses. It's important to note that some of this is driven by external factors, as we experienced in the fourth quarter when incentive compensation decreased and travel expenses dropped significantly. Currently, we have implemented a hiring freeze on our SG&A team, except for essential replacements. We're also limiting spending on future development initiatives and have paused further work on the second release of our ERP system. We are wrapping up the first release, as it's nearly complete, and we believe it's wise to finish that project. We are committed to closely monitoring and controlling SG&A costs moving forward, until we see signs of stabilization in the business environment, at which point we may consider resuming some forward-looking investments, such as the second release of the ERP system.

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

Thank you, Tom. I have a broad question regarding the current situation and positioning. Looking back to March, it felt like we were all navigating without clear visibility. You had to place orders with growers for the 2020 harvest, and it seems that both you and other major players in the industry temporarily reduced capacity, as you mentioned, due to some shifts from foodservice to retail. Now, as we look ahead at this year compared to a couple of months ago, considering the rolling off of 2019 inventory and the 2020 crop yields, demand remains uncertain. Overall, do you believe we’re not in a bad position? Perhaps the worst is behind us, and what we experienced in Q4 could be seen as the low point. We can potentially recover since demand has been established, the harvest looks decent, contract levels are lower, and supply orders have come in reasonably well. Our forecasts might end up being accurate, leading to a favorable situation by the end of the year. That's the hope. Could you share any overarching insights on the state of the industry and your outlook on your positioning?

Yes Rob, I am here today to discuss the decisions we've made over the past 90 days amidst many uncertainties. I feel very comfortable with our current position as a company for this fiscal year. Demand will be the unpredictable factor, but I am encouraged by the progress we've seen in the last six to eight weeks. Reflecting on the challenges we faced in April, I would make the same choices again. We will continue to navigate the remainder of this year with both this year's and next year's crops in mind, along with demand signals. I believe the company is well positioned despite the challenges our team and Lamb Weston employees are managing in operations. We are enhancing safety protocols for our employees, and the entire organization is focused on business recovery plans and cost savings. Overall, I am confident that the decisions we've made in the last 90 days are the right path forward. We know there will be challenges ahead over the next 12 months, and we'll make necessary adjustments, but everyone is focused, and I feel positive about the company's current situation.

It seems that there was nothing significant mentioned in the prepared remarks or the press release. It doesn't appear that your situation is dire enough to warrant any restructuring or overhead cuts. It seems you aim to maintain stability so that when demand increases, you'll be in a stronger competitive position.

Absolutely, 100%. That's right where we're at.

Thank you. Our next question will come from Tom Palmer with JPMorgan. Please go ahead.

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

We made a decision about 30 days ago to temporarily shut down two of our factories due to manufacturing efficiencies. We are in the process of reopening those factories. The reason for this is that the shutdowns we experienced have been more significant than we expected, particularly after early June when we saw improved performance in our plants. This situation has been more disruptive than anticipated. At the time, it was the right choice to shut down those factories, but now, as recovery is improving, reopening them is necessary for the business. We are adjusting our production schedules, which have proven to be more complex than we thought. Reversing this decision is the right path forward and will help us manage the improvement in demand as we recover.

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

Sure, this is Rob. For 2021, we currently expect our capital expenditures to be around $140 million. Previously, we indicated that maintenance-level capital expenditures would be in the range of $120 million to $125 million. Our goal is to maintain our facilities, and we have a few ongoing projects, including the ERP, that we aim to complete. Thus, our expectation stands at $140 million for the year. However, as situations improve later in the year, particularly concerning COVID and demand, this could change. For SG&A costs, we plan to keep a close watch on expenses. We'll be launching Release one at the beginning of September, which will incur some training costs, but that's the only significant SG&A cost outside of the usual, staying under $10 million. Overall, we will keep SG&A expenditures tight this year unless we see some positive developments.

And then just on the cost inflation piece?

I'm sorry, yes, cost inflation continue to see, broadly speaking kind of that low single-digit kind of cost inflation across the system that we've seen in the past year. So 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.

Good morning, Chris.

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

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

Okay. Thank you. And then I had a second question for you 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 – you see – obviously, I heard your answer before you closed a couple of facilities. You're now reopening those for out of need. Have you reduced your workforce? Have you closed any other facilities? And then again kind of where you exit the quarter if you can speak to that?

No we've got all of our factories running with the exception of one of the factories that we temporarily shut down, it's in the stage of start-up. We have all of our employees, especially in the factories still on payroll. And we absolutely have to run all our factories and it's based out of a need of the disruptions we're having with the COVID hits and sanitization. And every positive is different so – or we follow the protocols that we need to follow some factories that have a positive which had a line down. Some of them we have to shut the plant down for a day some – we've had instances where we shut a factory down for a couple of weeks. And so the team is doing a terrific job navigating through all that Chris. The – I'm not going to even speak to utilization levels because it's so variable right now across the network that it's – until this thing stabilizes, it's going to be really difficult to talk about utilization levels in this environment.

Okay. We'll next go to Bryan Spillane with Bank of America. Please go ahead.

Hey, good morning, everybody and thanks for taking the questions. I got a couple of quick ones for you. And really I guess more focused on 2022, 2023 more so than 2021. So maybe the first one Tom, just if you think about industry capacity in total, I know the investment community we've all focused a lot on the additions that have been made over the last couple of years. But if you were to kind of think about what that could potentially look like in 2022 and 2023, again just talking about North American capacity, is it your sense that it would sort of not change, or is there a potential that maybe some older factories or facilities get weeded out in this disruption?

That's a great question, Bryan. When I consider the industry, it really comes down to demand. I believe it will recover; it's just a matter of timing. Like any industry, everyone will reassess their current operations and develop strategies for what their footprint should resemble in the next three to five years, including what modernization will entail. Given the disruptions we're experiencing in our manufacturing facilities, we've closely examined efficiencies and manufacturing costs, among other factors. I expect the entire industry to approach this similarly worldwide. There may be changes to the footprint. As demand recovers to the levels we've seen in a couple of years, there will inevitably be continued investment in capacity at some point in the future. How this impacts the modernization of new plants versus the removal of older ones could accelerate, as you mentioned, Bryan.

Thank you for that. For my second question, you mentioned that the recovery in demand is linked to the normalization of mobility and consumer behavior related to the pandemic. Considering the possibility of a recession, especially with reduced stimulus funds for consumers, could you remind us of the market conditions during the recession in 2008 and 2009? Specifically, how aggressive were competitors in pursuing business opportunities at that time? Also, do you foresee that being a factor again, not necessarily in the current contracts but looking ahead to 2022 or 2023? Is there anything you're observing that might indicate a more competitive environment?

In 2008 and 2009, we didn't experience significant changes in consumer behavior as a company, mainly because many consumers shifted to quick service restaurants during that time. Furthermore, the international market was expanding much more rapidly than the North American and European markets. As a result, our company maintained and even increased its volumes during that period. It's challenging to predict the next couple of years, but I believe we may see some similar behavioral shifts. Only time will reveal how things will unfold.

Okay. Thanks. For my last question, Tom, with the current uncertainty around demand, have you noticed any changes in the length of contracts when you're discussing terms with customers? Is it challenging to negotiate two-year or 2.5-year deals right now due to this uncertainty? Additionally, are there any changes in how the contracts are structured? For example, do the terms shift depending on whether demand is high or low? I'm trying to understand if you're approaching contract structuring differently in this unusual environment. Thanks.

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

Okay. Thanks.

Thanks, Bryan.

Thank you. We'll next go to Carla Casella with JPMorgan. Please go ahead.

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

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

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

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

Okay. And then, just one last one. Can you remind us how much of your business is the schools, universities, hotels and maybe where it was in 2019 versus where you expect to be in 2020?

We don’t provide that level of detail. Most of that business is included in our foodservice reporting, particularly through our Foodservice segment. The majority of this segment consists of local restaurants, but we haven't detailed the specifics related to hotels. However, as I noted in my prepared remarks, the demand in that area is consistent with expectations and aligns with trends in that segment and the overall economy.

Okay, great. Thank you.

Thank you.

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

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

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