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Lamb Weston Holdings, Inc. (NYSE:LW)
Q3 2020 Earnings Call
Apr 1, 2020, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

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.

Dexter Congbalay -- Lamb Weston Holdings, Inc.

Good morning and thanks 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 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.

Tom Werner -- President and Chief Executive Officer

Thank you, Dexter. Good morning, everyone, and thank you for joining our call today. We are 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 As a consequence of this uncertainty, we've withdrawn our financial outlook, despite only two months remaining in our fiscal fourth quarter.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, 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. We're 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 and valued 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's 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 US and Europe.

In China, after the government placed severe social and movement restrictions that significantly reduced restaurant traffic, french fry 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 US, 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 serve restaurant. The remaining 15% is purchased at retail. Our sales breakdown is broadly consistent with that split.

Our Global segment, which accounts for about 52% of our total sales, primarily serves large QSR chain customers in the US and internationally, largely including Asia, Australia and Mexico. Our Foodservice segment, which is about 30% of sales, primarily sells your range of foodservice operations. We estimate that close to 80% of the segment sales are the full service restaurants 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 purchase 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 US is expected to be down much more sharply than the QSRs. While many of these operators are taking steps to boost take-out 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 family 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 US, QSRs that have established drive-through, take-out 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 US. Most of the consumption is dine-in or take-away 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'll just [Phonetic] 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 may have seen a couple of weeks ago, we declared our regular quarterly dividend. However, we've temporarily suspended our modest share repurchase program.

Finally, we will 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 this 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.

Robert McNutt -- Senior Vice President and Chief Financial Officer

Thanks Tom, and good morning, everyone. As you've seen in our earnings release, our reported performance in third quarter was mixed. However, it's important to note that through February, which was before the impact of the pandemic raised across the globe, we were on track to deliver the financial targets that we outlined on January 3, 2020. We've provided a more detailed description of our third quarter results in our earnings release and in the 10-Q, which we'll 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 Foodservice 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 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 1 point of volume growth, but this was largely offset by a 1 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 cost. 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 cost 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 $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 Foodservice 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's 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, while 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 and the 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 lower amount of customized and limited time offering products sold versus the strong sales of these kinds of products in the prior-year quarter, as well as 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 the segment's, 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 is 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 debt to EBITDA, including joint ventures, leverage ratio of less than 4.5 times. At the end of the third quarter, we were at 2.4 times. Our second covenant is an EBITDA, including joint ventures, to interest expense ratio of at least 2.75 times. At the end of the quarter, we were at nearly 9 times.

Now, here's Tom for some closing comments.

Tom Werner -- President and Chief Executive Officer

Thanks 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 valued business partner.

Thank you for joining us today. Now, we're ready to take your questions.

Questions and Answers:

Operator

[Operator Instructions] We'll take our first question from Andrew Lazar with Barclays.

Andrew Lazar -- Barclays -- Analyst

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

Tom Werner -- President and Chief Executive Officer

Good morning, Andrew.

Andrew Lazar -- Barclays -- Analyst

Hi there. So Tom, Lamb Weston has obviously come through, by all measures, a pretty fantastic couple of years. Certainly, from an industry supply demand perspective, almost utopic in certain ways, and I realize there's really not any precedent for this and much is still very fluid. But just as you think about this generally and thinking forward, with industry capacity having come online this year, and obviously that wasn't proved to not really be an issue given how strong demand was, but with now maybe a weakening of demand for some period of time, I guess, how would you at this stage see current events sort of impacting this -- what's been this really fantastic sort of supply demand balance maybe closer in and then over a longer-term period of time?

Tom Werner -- President and Chief Executive Officer

Yeah, Andrew, it's all about the demand curve right now, and obviously it's a fluid situation, as I indicated in my remarks. And the most important thing is to -- that our customers are talking about is assured supply, and that's what we're focused on. The situation is fluid. How the demand curve continues and where it flattens out, it's difficult to forecast right now. So it's -- the most important thing is -- what I alluded to my remarks is, continue to make food products and feed people. And the indication that I talked -- that I'll talk about is, the fact that I do know is what we're seeing in China. So we had a downturn. We got through the worst of the crisis over there. At least as we know it today, production went down 50%. It's running about 70% demand. So, as I think about the market, it's all about assured supply, keeping our people safe, producing food safely, all those things. And it's going to take time to see how this all plays out.

Andrew Lazar -- Barclays -- Analyst

Understood. Thank you for that. And then, just a quick follow-up. You've got some very large scaled facilities on the manufacturing side. And are there certain actions that you can take kind of in the near term when demand slows and sort of the volume leverage becomes -- the fixed cost absorption becomes less significant? Are there things that you can change in sort of the fixed cost base? Or really near term, should we expect like the detrimental margin, just given the lack of the kind of volume leverage you used to, to have like an outsized impact on profitability? Trying to get a sense for that, if at all possible. Thanks so much.

Tom Werner -- President and Chief Executive Officer

Yeah, 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 have reacted to this. And we made a lot of -- 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.

Andrew Lazar -- Barclays -- Analyst

Thanks very much, and stay well, everybody.

Tom Werner -- President and Chief Executive Officer

Thanks Andrew.

Operator

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

Bryan Spillane -- Bank of America Merrill Lynch -- Analyst

Hey, good morning, everyone.

Tom Werner -- President and Chief Executive Officer

Good morning, Bryan.

Robert McNutt -- Senior Vice President and Chief Financial Officer

Good morning, Bryan.

Bryan Spillane -- Bank of America Merrill Lynch -- Analyst

So I have 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 a really 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 if that's the right perception. Or if you needed to shut down or shutter a plant, is it that complicated to do it?

Robert McNutt -- Senior Vice President and Chief Financial Officer

Yeah. This is Rob. If you think about -- 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.

Bryan Spillane -- Bank of America Merrill Lynch -- Analyst

All right, thanks. And then the second, related to the change in capital spending guidance for this year, how far can you stretch that? I guess, I'm trying to just get a sense for, if you're deferring something today, are there some capex needs that are required, whether it's maintenance capex or whatever it would be, that you can only defer six months or a year? Just how much flexibility, I guess, you have on capital spending over, let's say, 12 months or 18 months?

Robert McNutt -- Senior Vice President and Chief Financial Officer

Yeah. This is Rob again. On capex, our base level of capital -- kind of keep-the-wheels-on capital 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.

Bryan Spillane -- Bank of America Merrill Lynch -- Analyst

Okay. And then, last one for me. Just there's always been a lot of focus around your sort of relationships and negotiations with your customers, and there's always been a lot of focus on pricing. But, I guess, given this current situation and how fluid or uncertain demand will be, how much flexibility can you provide for your customers in terms of being able to offer them ranges and outcomes on volume? And is that maybe more valuable in discussions you're having with customers today than just purely price?

Tom Werner -- President and Chief Executive Officer

Well, Bryan, it's Tom. It's all about demand right now and understanding what the demand curve is, and it's about ensuring that our customers -- we're meeting those needs. So it's -- that's the focus right now versus the pricing discussion. So it's assured supply, and that's what we're -- that's what everybody is focused on right now.

Bryan Spillane -- Bank of America Merrill Lynch -- Analyst

All right. Thanks very much.

Operator

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

Chris Growe -- Stifel -- Analyst

Hi, good morning. Thank you.

Tom Werner -- President and Chief Executive Officer

Good morning, Chris.

Chris Growe -- Stifel -- Analyst

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 what -- how [Phonetic] 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?

Robert McNutt -- Senior Vice President and Chief Financial Officer

Yeah, Chris, this is Rob. You're right, we have the raw. The raw over time will spoil. We can stretch it out some, can't stretch it out forever. And so, you -- so, we have the ability to manage that to some degree to meet demand, to try and optimize that cost versus the degradation of the raw. Get past September, and it's really tough for us to run raw from the prior year. But we can stretch it out a bit, and so that's exactly the math that we're doing to try and optimize that, given what we're seeing in demand.

Chris Growe -- Stifel -- Analyst

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 comp? But is that something your customers are doing today? Are they forgoing those opportunities and therefore you have more of a risk in future quarters around this mix factor from LTOs and customizable products?

Robert McNutt -- Senior Vice President and Chief Financial Officer

Let me start. There are two components to that. One is LTOs, which there's always some level of volatility, depending on what customers want to promote and how to promote it. The other is these customized products. And so, for a number of our large chain customers in particular, which report in the Global business unit, there are very customized products for those customers. And the way -- and we started reporting under the new revenue recognition standard in first quarter of 2019, and under that standard, we recognize the revenue for those customized products when we manufacture it and have a purchase order in hand from those customers, as opposed to traditionally, the way I learned it 30 years ago, when the product ships and title changes. And so, there's some volatility in when we receive purchase orders on those things. And so, we have some large customers, and if we don't have timely receipt of purchase order, we don't recognize that revenue. And so, that's what happened between Global, if you look at Q2 to Q3. Q2 wasn't really as good in underlying shipments as what it reflected or was reported in Q3 wasn't as bad in underlying shipments. And so, I think -- so I want to take that revenue recognition piece out of that.

In terms of LTOs, interestingly, some of our customers in China are really looking at LTOs and trying to determine when is the right time to launch those to get customer traffic back. And so, think about LTOs as a customer traffic incentive, and that's how they use it. And so, that's what we're gearing up for now. So I don't think there's anything that would say that customers are or aren't going to use LTOs in the future. In fact, I think if anything, I think, they're going to be used, as we indicated in China, to leverage people back into the end of the stores.

Tom Werner -- President and Chief Executive Officer

Yeah, 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 in the near term, it's about making sure fries on the menu, their base fry item, and some of the promotional items are going to be pushed out for a while.

Chris Growe -- Stifel -- Analyst

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

Operator

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

Adam Samuelson -- Goldman Sachs -- Analyst

Yes, thank you. Good morning, everyone.

Tom Palmer -- J.P. Morgan -- Analyst

Good morning, Adam.

Adam Samuelson -- Goldman Sachs -- Analyst

I guess first, Tom, I was hoping just maybe dig in a little bit on the US trends. And the framework that you gave on China and the experience that you've had there over the last couple of months is very helpful, and appreciate that this is very dynamic and seemingly changing day by day. But any -- do you guys have any visibility in terms of regional trends in the US for some of the states and jurisdictions where some of these some of these shelter [Technical Issues] versus other jurisdictions where they're not in place or only recently put in place? And kind of do you see some of the US markets following that pattern and any quantification of that if you could?

Tom Werner -- President and Chief Executive Officer

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 it's -- a lot of it'd be speculative going forward because it does change, but we're monitoring it. Certainly, as more restrictions on the social distancing are more pronounced, that's going to impact demand. And 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 it 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.

Adam Samuelson -- Goldman Sachs -- Analyst

Okay, that's very helpful. And then, the second question for me is on Europe and the joint venture, and it's probably maybe Rob's [Phonetic]. Any framing of where, especially your customers -- lot of the QSR customers are just completely shut and they don't have that drive-through as a demand outlet [Phonetic]. Just framing of the balance sheet liquidity position of the joint venture or tools available to manage that and just thinking about obviously your commitment to the joint venture and any cash needs that that business might have if the demand declines are more severe?

Robert McNutt -- Senior Vice President and Chief Financial Officer

Yeah. In terms of liquidity and balance sheet position with 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 stand-alone 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 take -- weather the storm here.

Adam Samuelson -- Goldman Sachs -- Analyst

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

Operator

We'll take our next question from Tom Palmer with J.P. Morgan.

Tom Palmer -- J.P. Morgan -- Analyst

Good morning, and thank you for the question. First, Tom, I 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 spread [Phonetic] over a several-week or so period if needed.

Robert McNutt -- Senior Vice President and Chief Financial Officer

Sure, Tom, this is Rob. In terms of fixed/variable, we've talked about before that about 70% of our manufacturing costs are variable costs on a COGS basis; 30% fixed. So that includes depreciation, and you run the math there. The components that are included in fixed, repairs and maintenance sits in fixed, is a big component of that fixed cost, and as well as labor and then warehousing. But the -- clearly on maintenance, if you've got a line down, you're encouraging the folks to not go in with big maintenance crew and do a lot of work. And so, those are the kinds of things that you actually have pretty good control over that makes sense.

Tom Palmer -- J.P. Morgan -- Analyst

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 is a margin headwind, which would seem to suggest they grew as a percentage of segment sales. So maybe just reconcile that. And were US volumes also down in this segment? Or is that more going to be in the fourth quarter that you see US volumes dip? Thanks.

Robert McNutt -- Senior Vice President and Chief Financial Officer

Yeah, 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 US markets, just simply as a result of market structure and then additional freight costs and so forth.

Tom Palmer -- J.P. Morgan -- Analyst

So just to clarify, US volumes were up during the third quarter?

Robert McNutt -- Senior Vice President and Chief Financial Officer

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

Tom Palmer -- J.P. Morgan -- Analyst

Okay, thank you.

Operator

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

Rob Dickerson -- Jefferies -- Analyst

Great. Thank you so much. So look, obviously right now, you're watching demand very closely as you say, which is the given. Frankly, I'm a bit new to Lamb Weston company and how the harvest works and demand contracts, what have you. So I'm just curious like, as you -- it seems like normally you set those contracts now, right, with the farmers to figure out and then -- which are based upon that potential go-forward demand later for the harvest this year in the fall, which would really help supply demand in calendar '21, which seems kind of impossible [Phonetic] to forecast at this point. How do you work through that now with the farmers, given just the fluidity of the situation, if you basically still have to contract with the farmers to secure supply come October, November?

Tom Werner -- President and Chief Executive Officer

Yeah, Rob, I'm not going to comment on that because we're right in the middle of negotiating contract price 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.

Rob Dickerson -- Jefferies -- Analyst

Okay. Yeah, completely makes sense. Apologies for asking. I would say that it seems like there obviously are -- you have to have some type of internal guess, kind of some guess to just kind of work -- to help you work through whatever those negotiations are. I mean that's kind of where we are. Is that right?

Tom Werner -- President and Chief Executive Officer

That's fair.

Rob Dickerson -- Jefferies -- Analyst

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? That's -- I think that's around May. Is that right, May, June?

Tom Werner -- President and Chief Executive Officer

No, we usually have a good idea in 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.

Rob Dickerson -- Jefferies -- Analyst

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

Tom Werner -- President and Chief Executive Officer

Yeah, 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 into the plants every day and produce food to feed people in the US 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.

Rob Dickerson -- Jefferies -- Analyst

Sounds great, really. Thank you so much.

Operator

We'll take our next question from Carla Casella with J.P. Morgan.

Carla Casella -- J.P. Morgan -- Analyst

Hi. I'm just wondering, so on the Foodservice, Retail and 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?

Tom Werner -- President and Chief Executive Officer

I'm not going to give you a -- we don't break out specifics on which plant produces what. There are -- what we've done is, we've been able to convert some of our "Foodservice" lines to Retail to meet that demand where we can. Not all lines are created equal. So it's a matter of how these lines are configured and -- but I will tell you what we've done everywhere possible is to shift that production from Foodservice to Retail and ensure that as we look at the demand curve across our product line, we're adjusting where we can, and the team has done -- the supply chain team has done a terrific job converting at light speed to adapt to the environment that we're operating in. And so, what I will tell you, -- I'm not going to tell you specifics, but we're doing everything we can to convert lines where we can.

Carla Casella -- J.P. Morgan -- Analyst

Okay, great. Thank you.

Operator

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

Rebecca Scheuneman -- Morningstar -- Analyst

Yeah, good morning. Thank you for the question. So it can be difficult to get a read for exactly what is happening in China, but there have been some reports of -- that the 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?

Tom Werner -- President and Chief Executive Officer

This is Tom. I know that the news that's coming out is mixed. That's what I know. Actually, what I know in our business in China is what I stated earlier. When all this happened in January, February, the last two, three weeks, our business fell off about 50%. Team worked through it. They did a terrific job. The China team continuing to operate, provide food for people. And now we're seeing traffic patterns -- our business is about 70% of normalized levels. And with the recent news that you alluded to, it's new news to all of us. So I can't speculate on what our business is going to do. But as I said earlier, this is a -- we're managing this every day. So we're looking at the data. It's very fluid. We haven't seen any indications based on what you alluded to, the new news, the new cases. And so, it's really a day to day thing that we're going to continue to monitor. But right now, we haven't seen any change based on the last 24 hours. And so, that's -- but again, we're watching this every single day based on what we know.

Rebecca Scheuneman -- Morningstar -- Analyst

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?

Tom Werner -- President and Chief Executive Officer

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.

Rebecca Scheuneman -- Morningstar -- Analyst

Okay, great. Thank you so much.

Operator

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.

Dexter Congbalay -- Lamb Weston Holdings, Inc.

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 the time. Other than that, hope everybody stay safe. And again, thanks for joining the call.

Operator

[Operator Closing Remarks]

Duration: 51 minutes

Call participants:

Dexter Congbalay -- Lamb Weston Holdings, Inc.

Tom Werner -- President and Chief Executive Officer

Robert McNutt -- Senior Vice President and Chief Financial Officer

Andrew Lazar -- Barclays -- Analyst

Bryan Spillane -- Bank of America Merrill Lynch -- Analyst

Chris Growe -- Stifel -- Analyst

Adam Samuelson -- Goldman Sachs -- Analyst

Tom Palmer -- J.P. Morgan -- Analyst

Rob Dickerson -- Jefferies -- Analyst

Carla Casella -- J.P. Morgan -- Analyst

Rebecca Scheuneman -- Morningstar -- Analyst

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