EAGLE, IDAHO — With operations in China and throughout Asia, Lamb Weston Holdings, Inc. is relying on its experience in those markets to discern how the spread of the coronavirus (COVID-19) into Europe and North America may affect demand for its potato-based products. The company is evaluating customer and consumer demand in each market and adapting production accordingly.
“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,” said Thomas P. Werner, president and chief executive officer, during an April 1 earnings call with analysts to discuss third-quarter results. “As restrictions have relaxed, we've seen volume climb back to about 70% of pre-crisis demand today.
“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. In the US, it's still too early to determine how the impact on demand will play out.”
Approximately 65% of all french fries are purchased at quick-service restaurants (QSR), with another 20% purchased at full-serve restaurants, according to the company. The remaining 15% is purchased at retail.
“Our sales breakdown is broadly consistent with that split,” Mr. Werner said. “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 US 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.”
Retail demand for frozen fries, on the other hand, has increased significantly.
“We've taken steps to boost production of our retail products in order to meet the increased demand,” Mr. Werner said. “So, the bottom line is that, in the US, QSRs that have established drive-thru, 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.”
Lamb Weston’s third-quarter results for the period ended Feb. 23 were impacted by the spread of COVID-19 around the world. Quarterly net income fell to $111 million, equal to 76¢ per share on the common stock, when compared to the same period of the previous year when the company earned $141 million, or 96¢.
Sales rose to $937 million from $927 million the year prior.
“Our reported performance in (the) third quarter was mixed,” said Robert M. McNutt, chief financial officer. “However, it's important to note that through February, which was before the impact of the pandemic across the globe, we were on track to deliver the financial targets that we outlined on Jan. 3, 2020.”
Sales for the company’s Global business unit, which includes its top 100 North American-based restaurant chain customers and international business, fell 2% to $487 million. Volume fell 1%, primarily due to higher sales of customized products and higher-margin limited-time offering products in the prior-year period, as well as the initial effects of the COVID-19 pandemic on restaurant traffic in China.
Lamb Weston’s Foodservice segment, which supplies North American foodservice distributors and restaurant chains outside the top 100 North American chains, increased 7% to $283 million. Volume increased 3%, led by growth in distributor private label and Lamb Weston branded products.
Retail segment sales rose 2% to $132 million during the quarter. Volume was flat as higher sales of Grown in Idaho and other branded products were offset by lower sales of private label products, according to the company.
Despite having only two months left in its fiscal fourth quarter, the company withdrew its financial guidance.
“At this time, it's extremely difficult to reasonably forecast customer and consumer demand in North America in our key international markets,” Mr. Werner said