Lamb Weston Holdings, Inc. (NYSE: LW) Q3 2021 earnings call dated Apr. 07, 2021
Corporate Participants:
Dexter P. Congbalay — Vice President of Investor Relations
Tom Werner — President and Chief Executive Officer
Robert McNutt — Senior Vice President and Chief Financial Officer
Analysts:
Andrew Lazar — Barclays — Analyst
Bryan Spillane — Bank of America Merrill Lynch — Analyst
Christopher Growe — Stifel Nicolaus — Analyst
Adam Samuelson — Goldman Sachs — Analyst
Thomas Palmer — J.P. Morgan — Analyst
Robert Dickerson — Jefferies — Analyst
Jenna Giannelli — Goldman Sachs — Analyst
Carla Casella — JPMorgan Securities LLC — Analyst
Presentation:
Operator
Good day, and welcome to the Lamb Weston Third Quarter 2021 Earnings Call. [Operator Instructions] At this time, I’d like to turn the call over to Dexter Congbalay, VP, Investor Relations of Lamb Weston. Please go ahead.
Dexter P. Congbalay — Vice President of Investor Relations
Good morning and thank you for joining us for Lamb Weston’s Third Quarter 2021 Earnings Call. This morning, we issued our earnings press release, which is available on our website, lambweston.com.
Please note that during our remarks, we’ll make some forward-looking statements about the company’s expected performance. These statements are based on how we see things today. Actual results may differ materially due to risks and uncertainties. Please refer to the cautionary statements and risk factors contained in our SEC filings for more details on our forward-looking statements.
Some of today’s remarks include non-GAAP financial measures. These non-GAAP financial measures should not be considered a replacement for and should be read together with our GAAP results. You can find the GAAP to non-GAAP reconciliations in our earnings release.
With me today are Tom Werner, our President and Chief Executive Officer; and Rob McNutt, our Chief Financial Officer. Tom will provide an overview of the current operating environment and our recently-announced investment in China, while Rob will provide some details on our third quarter results as well as some shipment trends for the fourth quarter.
With that, let me now turn the call over to Tom.
Tom Werner — President and Chief Executive Officer
Thank you, Dexter. Good morning and thank you for joining our call today. We delivered solid sales volumes in the third quarter as restaurant traffic and consumer demand improved as governments gradually ease social and on-premise dining restrictions in some markets. While still down year-over-year, the rate of volume decline improved sequentially in both the US and in our key international markets from what we realized during the first half of our fiscal year. Again, this was largely in response to governments easing restrictions as the quarter progressed and demonstrates that consumers are ready to go out as restaurants expand dining capacity.
Specifically, overall restaurant traffic in the US was between 85% and 90% of pre-pandemic levels. Traffic at large quick service chain restaurants continued at roughly prior-year levels as they leveraged drive-thru, takeout and delivery formats. After a slow start to the quarter, traffic at full service restaurants recovered to 70% to 80% of prior-year levels. Traffic began to pick up later in the quarter as some governments gradually lifted social and dining restrictions that were put in place, due to the resurgence of COVID and as a relatively mild winter weather provided more outdoor dining opportunities. While we expect this momentum will continue, we’re mindful that some of this performance may be due to customers and distributors restocking inventories prior to an expected boom in restaurant traffic in coming months.
In contrast, demand in non-commercial customers, which includes lodging and hospitality, healthcare, schools and university, sports and entertainment, and workplace environments, remain around 50% of prior-year levels for the entire quarter. We’re confident that demand from these customers will return, but realize the recovery to pre-pandemic levels may take some time as governments slowly lift restrictions for larger gatherings.
In retail, demand in the quarter was strong with weekly category volume at 115% to 125% of prior-year levels as consumers continued to eat more meals at home. Outside the US, restaurant traffic and fry demand has been mixed. In Europe, which is served by our Lamb-Weston/Meijer joint venture, fry demand in the quarter was 80% to 85% of prior-year levels. However, we believe that demand rate is likely to soften as governments reimposed severe social restrictions in response to the resurgence of COVID infections.
Demand in most of our international markets in Asia, Oceania and Latin America improved in the quarter. Our shipments in China were strong. Demand in our other key markets in the aggregate remain below prior-year levels, but continue to improve sequentially versus the first half of the year as well as in each month of the quarter. So while demand in Europe remained soft, we feel good about the demand trends in the US and most of our key international markets. And we expect governments will continue to gradually roll back social restrictions in the months ahead as more of their citizens get access to vaccines. This should serve to unlock pent-up consumer demand to visit restaurants and other food service outlets and ultimately, demand for fries. As a result, we remain optimistic the overall frozen potato demand will steadily approach pre-pandemic levels on a run rate basis by the end of calendar 2021.
The progress we made on sales volume in the quarter was offset by the pandemic’s continued effect on our supply chain operations. As Rob will discuss later, COVID-related disruption significantly affected our production, transportation, and warehousing networks leading to significantly higher costs as we focused on customer service, while dealing with the pandemic’s impact in some of our communities and workforce. In addition, decisions that we made in the first half of the year to defer certain capital, repair and maintenance projects further reduced our flexibility to manage disruptions and drove incremental manufacturing and distribution costs.
So in summary, in the third quarter, we delivered solid top line results. Operating in a pandemic environment has been and will continue to be challenged, and we expect it will continue to incur our higher costs across our supply chain in the near term.
Before I turn the call over to Rob, let me review a couple of items. First, we will provide our normal update for this year’s potato crop when we report earnings in July and October. Second, as you may have seen a couple of weeks ago, we announced that we’re building a new French fry processing facility in China at a total investment of around $250 million. This greenfield facility will complement our planned Shangdu and is expected to add about 250 million pounds of frozen potato product capacity. We anticipate starting up the plant sometime during the back half of calendar 2023. We chose to build this plant in China because it’s a fast-growing 1 billion pound plus market and a key driver to our international growth. This new plant enables us to support customers in China using in-country supply, which is something that our larger customers there increasingly want as they continue to expand. In addition, our new facility will allow us to further diversify our manufacturing base and mitigate risks or potential trade disruptions as we look to drive international growth.
So in summary, in the third quarter, we delivered solid top line results as demand continued to gradually recover, but incremental costs related to pandemic-related disruptions pressured earnings. We expect that the increasing availability of COVID vaccines and the easing of government-imposed social restrictions will allow restaurant traffic to gradually improve as the year progresses. And we remain optimistic that overall frozen potato demand will approach pre-pandemic levels on a run rate basis by the end of calendar 2021.
Now, let me turn the call over to Rob.
Robert McNutt — Senior Vice President and Chief Financial Officer
Thanks, Tom. Good morning, everyone. As Tom noted, in the third quarter, we delivered solid sales results as overall demand continued to improve, but the pandemic’s disruptive impact on our manufacturing and distribution operations significantly increased our costs. Specifically in the quarter, net sales declined 4% to $896 million. Sales volume was down 6%, largely due to the pandemic’s impact on fry demand, but improved through the quarter after a slow start. Importantly, that rate of volume decline improved sequentially from the 14% decline that we realized during the first half of fiscal 2021. Most of the sequential improvement was within our Global segment and largely reflects a steady recovery in shipments in our key international markets. Stronger sales of limited-time offering products in the US also contributed to the Global segment’s recovery. In addition, we saw a sequential improvement in our Foodservice segment led by casual dining, as well as continued strength by our branded offerings in our Retail segment.
Price/mix increased 2%. Improved price in our Retail and Foodservice segments as well as favorable mix in Retail drove the increase. Price was up in our Global segment, although this was offset by negative mix. Gross profit declined $54 million as lower sales and higher manufacturing and distribution costs more than offset the benefit of favorable price/mix and productivity savings.
Let’s focus on cost of goods sold. As Tom noted, the higher costs were largely a result of the pandemic’s disruptive impact across our supply chain. The resurgence of COVID in many of the communities where our plants are located greatly affected our manufacturing workforce. At times, the combination of infected and quarantined employees significantly affected our ability to staff production lines and other key roles at a number of our facilities. The consequences were: First, we lost days of production, which resulted in a number of our plants operating well below normal utilization rates and reduced our ability to cover fixed overhead costs. In addition, recall that a year ago, we decided to continue paying employees despite production lines being down due to COVID. While we believe that was a right thing to do to support our production teams, it has had an impact on our cost structure. Second, focusing on maintaining customer service levels required us to quickly adjust production schedules to accommodate workforce and manufacturing line availability. This drove incremental costs and inefficiencies. In many cases, we shifted production from one facility to another even though the alternate facility may not be the most effective in terms of cost or throughput for that specific product. That negatively impacted line speeds, throughput, and raw potato recovery rates. And third, the number of effective employees and facilities meant that we incurred even more costs related to temporary shutdown and restart of manufacturing facilities.
Compounding these disruptions in the quarters were our decisions to defer certain capital, repair and maintenance projects on our production lines that were originally scheduled for the first half of fiscal 2021. We planned on undertaking these capital and maintenance projects once the demand environment and our operations were more stable during the second half of the year. While deferring these projects was prudent in light of the uncertainty surrounding COVID, executing them at the same time as another COVID wave impacted our plants led to additional disruption in our manufacturing capabilities and further limited our flexibility to adjust production schedules across our network. This drove additional costs and inefficiencies on top of the staffing-related issues I described.
The pandemic-induced volatility in our production facilities also had a downstream impact on our transportation and warehousing operations. We generally prefer to rely on rail more than trucking to move product from our production facilities and warehouses to our distribution centers and customers across the country. However, late changes to production schedules required us to switch significant volume from rail to trucking, which is more flexible, but also higher cost in an effort to maintain customer service levels.
In addition, we typically employed trucks using contracted carrier rates as opposed to securing spot trucking, which tends to be higher cost. Spot trucking has also had significant rate increases over the past six months, but because of the disruption to our production schedules and again to prioritize customer service, we leaned more on expensive spot trucking. So our transportation costs significantly increased because of an unfavorable mix of rail and trucking, as well as an unfavorable mix of contracted and spot trucking. As you would expect, our warehousing costs also increased with the additional handling required across our distribution network.
Finally, while the pandemic-related effects on our supply chain were the primary drivers of our cost increases, we also realized higher cost due to input cost inflation in the low-single-digits. We expect that rate will begin to tick up in the coming quarters as edible oil and transportation costs continue to increase.
While our costs were higher in the quarter, we are starting to see the benefits of our supply chain team’s work around a series of initiatives we call Win As One [Phonetic]. These initiatives build upon the Lamb Weston operating culture productivity programs that we have in place. Broadly speaking, Win As One seeks ways to reduce our variable and fixed cost, increased production throughput on existing assets and improved working capital, especially inventories. In the couple of the plants where the team has implemented these new ways of working, asset utilization is at or above pre-pandemic utilization rates, and we’re seeing the benefit in the cost structures in those facilities.
As the team continues to roll out these programs to the rest of the network and as infection and quarantine rates decline through vaccination programs we’re supporting for our production employees, we expect our cost structure and utilization rates will begin to normalize. Longer term, we expect these initiatives to enhance margins, drive cash flow and strengthen our culture of continuous improvement. Since we only began to roll out Win As One at a couple of our plants few months ago, we’re not providing any specifics on activities or targets today. We anticipate giving investors more insight into this program as we gain more traction.
Moving to the segments — moving on from cost of sales, excuse me, our SG&A increased $8 million in the quarter. The increase was largely due to investments we’re making behind the Win As One initiatives I just described. Equity method earnings were $11 million. Excluding the impact of unrealized mark-to-market adjustments and a comparability item in the prior-year quarter, equity earnings declined about $11 million. Two factors drove the decline. First, fry demand in Europe fell as much of the region remained in lockdown and as colder weather affected outdoor dining. Second, our joint ventures also realized higher production costs related to COVID disrupting their manufacturing and distribution operations.
Adjusted EBITDA, including joint ventures, was $167 million, which is down $61 million. Lower income from operations drove the decline. Adjusted diluted EPS in the quarter was $0.45, which is down $0.32, mostly due to lower income from operations. EPS was also down due to higher interest expense reflecting our higher average total debt resulting from actions we took to — in late fiscal 2020 and early fiscal 2021 to enhance our liquidity position.
Now, moving to our segments. Sales for our Global segment, which generally includes sales for the top 100 North American based QSR and full service restaurant chains, as well as all sales outside of North America, were down 2% in the quarter. Volume was down only 2%, which is much better than the minus 12% we realized during the first half of fiscal 2021.
Shipments to large chain restaurant customers in the US, of which approximately 85% are to QSRs, increased nominally versus prior year. QSRs continue to perform well as they continue to leverage drive-thru and delivery formats. As I mentioned earlier, US QSRs were also aided by the return of some noteworthy limited-time product offerings.
International shipments, which historically comprise about 40% of the segment’s volume, were about 95% of prior-year levels in the aggregate. That’s up from around 75% of prior-year levels that we realized during the first half of fiscal 2021. In the third quarter, shipments in China were strong versus the prior year when demand was negatively impacted by COVID. Shipments to our other key markets strengthened as the quarter progressed and were generally stronger in developed markets than emerging ones.
Price/mix was flat with positive price offset by unfavorable mix. Global’s product contribution margin, which is gross profit less A&P expense, declined 27% to $79 million. Higher manufacturing and distribution costs as well as unfavorable mix drove the decline.
Sales for our Foodservice segment, which services North American foodservice distributors and restaurant chains generally outside the top 100 North American restaurant customers, declined 22%. Volume declined 24%. After a slow start, shipments to smaller chain and independent full service and quick service restaurants recovered to about 90% of prior-year levels for the entire quarter as governments gradually ease social and indoor dining restrictions.
We believe that some of the sales volumes strengthening during the last few weeks of the quarter may reflect distributors’ restocking inventory in anticipation of more governments lifting social restrictions in the spring. However, it’s difficult to gauge the extent of that benefit. In contrast, shipments to non-commercial customers remained at around 50% of prior-year levels, with continued strength in healthcare more than offset by weakness in other channels such as travel, hospitality, and education.
Price/mix increased 2% behind the carryover pricing benefit of pricing actions we took in the second half of fiscal 2020. This was partially offset by unfavorable mix versus the prior year due to lower sales of premium products. As we’ve discussed in previous earnings calls, we’ve regained much of this business since pandemic first struck last spring, but on a year-over-year basis, it remained a mix headwind for the quarter.
Foodservice’s product contribution margin declined 30% to $70 million. Lower sales volumes, higher manufacturing and distribution costs, and unfavorable mix drove the decline and was partially offset by favorable price.
Sales for our Retail segment increased 23%, with volume up 13%. Sales of our branded portfolio, which include Alexia, Grown in Idaho and licensed restaurant trademarks, were up about 45%, continuing the strong growth trend we’ve seen since the start of the pandemic and well above category volume growth rates that have been between 15% and 25% in the quarter. The increase in our branded volume was partially offset by the loss of certain low-margin private label volume, which will continue to be a headwind on volume through the remainder of the fiscal year. Price/mix increased 10%, primarily reflecting the favorable mix benefit of selling more of our higher-margin branded products.
Retail’s product contribution margin increased 15% to $33 million. The increase was driven by favorable mix and was partially offset by higher manufacturing and distribution costs, as well as $1 million increase in advertising and promotional expense.
Moving to our cash flow and liquidity position. We continue to be comfortable with our liquidity position and confident in our ability to continue to generate cash. At the end of the third quarter, we had nearly $715 million of cash on hand and our revolver was undrawn. Our total debt was more than $2.7 billion and our net debt-to-EBITDA ratio was about 3.5 times.
In the first three quarters of fiscal 2021, we generated nearly $375 million of cash from operations, which is down about $60 million versus last year due to lower sales and earnings. We spent $107 million in capex and paid $101 million in dividends. In addition, in the third quarter, we resumed our share buyback program and bought back nearly $13 million worth of stock at an average price of just over $77.00 per share.
Now, turning to our current shipment trends. Please note that instead of providing a comparison to last fiscal year’s fourth quarter, we’re providing comparisons to the fourth quarter of fiscal 2019. We’re doing this since fourth quarter of fiscal 2020, which includes March, April and May of 2020, includes the severe impact of government-imposed social restrictions at the beginning of the COVID pandemic. It was also the height of personal and economic uncertainty for many businesses and individuals. As such, we believe the fourth quarter of fiscal 2019 provides a more meaningful comparison for investors to understand the current condition of our business.
Broadly speaking, we’re optimistic about the recent restaurant traffic and shipment trends in the US and many of our key international markets other than Europe. US shipments in the four weeks ending March 28 were approximately 90% of levels during a similar period for the fourth quarter of fiscal 2019.
In our Global segment, shipments to our large QSR and full service chain restaurant customers in the US were more than 85% of fiscal 2019 levels, and we expect that rate will largely continue for the remainder of the fourth quarter. In our Foodservice segment, shipments to our full service restaurants, regional and small QSRs, and non-commercial customers in aggregate were approximately 90% of fiscal 2019 levels. We anticipate that shipments for these customers will largely continue at similar rate for the remainder of the fourth quarter.
Shipments to non-commercial customers, which have historically comprised about 25% of the segment’s volume, remained at around half of fiscal 2019 levels. We expect these shipment rates will likely remain soft for the rest of the quarter and will likely take time to fully recover from pre — to pre-pandemic levels.
In our Retail segment, shipments were approximately 110% of fiscal 2019 levels, with strong volume growth of our branded products partially offset by a decline in shipments of private label products. We believe this rate may gradually decline during the remainder of the fourth quarter, as consumers begin to shift purchases of fries to dining at restaurants as governments lift social restrictions.
Outside the US, overall demand varies by market. In Europe, shipments by our Lamb-Weston/Meijer joint venture were about 85% of fiscal 2019 levels. Demand has softened over the past few months as governments in some of our larger markets such as Italy and France reimposed stricter social restrictions to combat a resurgence in COVID infections. In addition, other than in the UK, vaccination efforts across Europe have lagged well behind rates in the US. As a result, we anticipate shipments may slow during the remainder of the fourth quarter.
Shipments to our other international markets, which primarily include Asia, Oceania and Latin America, were approximately 75% of fiscal 2019 levels in aggregate. As I discussed earlier, international shipment rates have steadily improved over the past few months, and we expect that will continue during the remainder of the fourth quarter as governments slowly ease social restrictions and as the current congestion at shipping ports begins to clear up. For those markets that are currently already operating under more lenient social restrictions, we anticipate that current shipment rates for those countries will largely remain at current levels. In short, although Europe is challenging, we believe overall shipment and restaurant trends in the US and most of our international markets will remain favorable as governments continue to roll back social restrictions and vaccine becomes more widely available. These trends will keep us on a path of steady progress in restaurant traffic, which we believe will lead to overall frozen potato demand approaching pre-pandemic levels on a run rate basis by the end of calendar 2021.
With respect to costs, in the fourth quarter, we expect to incur a similar level of incremental pandemic-related manufacturing and distribution costs as we did in the third quarter. We experienced significant disruption in our production facilities, transportation, and warehousing networks in January and February, and this continued into March. We will realize some of the costs related to these disruptions in the fourth quarter as we ship finished goods’ inventory produced during these months.
Now, here’s Tom for closing comments.
Tom Werner — President and Chief Executive Officer
Thanks, Rob. Let me just quickly sum up by saying, we continue to prioritize ensuring the health and safety of our employees during these challenging times by adhering to strict COVID protocols in all of our manufacturing locations and encouraging all our workers and their families to get vaccinated as soon as possible.
We’re confident that the near-term pandemic-related pressures on our manufacturing and distribution networks are temporary and that our cost structure will normalize once we get past COVID. In addition, we believe that the investments we’re making in our supply chain will improve our cost structure over the long term. We feel good about the trends in restaurant traffic and frozen potato demand in the US and most of our key international markets and remain optimistic that overall frozen potato demand will approach pre-pandemic levels on a run rate basis by the end of calendar 2021.
And finally, as shown with our investments for a new facility in China and to expand chopped and formed capacity in Idaho, we’re focusing on the right strategic and operating priorities to serve our customers and build upon the long-term health of the category in order to create value for all our stakeholders.
Thank you for joining us today. Now, we’re ready to take your questions.
Questions and Answers:
Operator
Thank you. [Operator Instructions] We’ll take our first question from Andrew Lazar with Barclays.
Andrew Lazar — Barclays — Analyst
Good morning, everybody.
Tom Werner — President and Chief Executive Officer
Good morning, Andrew.
Robert McNutt — Senior Vice President and Chief Financial Officer
Good morning, Andrew.
Andrew Lazar — Barclays — Analyst
I know this could be a little difficult, but I was hoping maybe you could help us maybe quantify a little bit if you could some of these incremental COVID costs that I know you believe are largely transitory. And if demand ultimately returns on a run rate basis by the end of calendar year to pre-pandemic levels, I guess, would you expect these higher costs under that kind of a scenario to bleed into the beginning of fiscal ’22? Is that sort of an expectation we should have at this point, or do we think that if this steady pace of improvement in restaurant traffic continues, then it’s largely more of a 4Q issue? And then, I just got a follow-up.
Robert McNutt — Senior Vice President and Chief Financial Officer
Okay. Andrew, it’s Rob. In terms of quantifying it, again, we did stop breaking that out as a specific as we viewed it as more normal. I think we started that in Q2 I believe. But the way I would think about it is that you know what pricing has done, you know we’ve got modest input cost inflation. And so, if you go back historically and look at margins, that would give you a sense of what margin should be in a normalized — ex the COVID costs. And I would argue that the bulk of any margin difference there is going to be related to the COVID costs. And so, I think you can back into it that way and come pretty close.
In terms of bleeding into Q1, again, it’s going to depend on how quickly we can get people and plants vaccinated and back to normal production and operating schedules. Again, we see demand recovering, as we’ve said, by the end of calendar 2021 to pre-COVID levels. And so, as you think about that, that tells you the operating — the pull on the demand side ought to be there. And so it’s back to — as long as we can get people in the plants to operate the plants, we should over time get costs back to where they are. But again, that will take some time to get people vaccinated, get them back into plants and stabilize all of that. So I anticipate that certainly into Q4, and we’ll probably have some bleed over into Q1 as well.
Andrew Lazar — Barclays — Analyst
And then, this is just using back-of-the-envelope math and the comments Rob that you gave around, sort of, the first month trends of fiscal 4Q. Based on that, it would seem to suggest maybe sales down around 10% versus 4Q of 2019. And that’s sequentially a bit better than what we saw for the two-year trends in 1Q and 2Q, but maybe not quite as much as I would have expected given reopening and vaccine rollout and everything else. And so, I didn’t know if the math was generally right as we’ve got it in and if I was maybe expecting the sequential improvement to be a little bit greater in 4Q than it would suggest?
Robert McNutt — Senior Vice President and Chief Financial Officer
Yeah. It’s a great question, Andrew. And I think if you look at Q4 of ’19, particularly I think on our global business that we — it was a pretty strong quarter. So the comp is tough in that one. The other one — and as I mentioned that in our Foodservice business, we believe there is a bit of restocking going on. We’ll see how that plays out through Q4 in actuality, but that’s one where maybe we’re taking maybe conservative perspective on that. Does that makes sense?
Andrew Lazar — Barclays — Analyst
Yeah. Great. Thanks very much.
Robert McNutt — Senior Vice President and Chief Financial Officer
Thanks.
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.
Bryan Spillane — Bank of America Merrill Lynch — Analyst
So just two questions for me. One maybe just related to Andrew’s question about the sales trends. I think in the press release, you talked about US QSRs for US Global running, I think, at 85% of prior year. And I think that’s down, right? I think it was running at 95% when you reported the second quarter. So A) is that true and B) just is there something in the comps or just what’s happening there that would have suggested maybe a slowdown or is there a slowdown suggesting that?
Robert McNutt — Senior Vice President and Chief Financial Officer
Yeah. I think that again that goes back to the comp back to ’19 if you look at the Global. And so, the comp to ’19 — again that Q4 ’19 being a particularly strong quarter in the Global business unit, if that — if you go [Speech Overlap].
Bryan Spillane — Bank of America Merrill Lynch — Analyst
Okay. So…
Dexter P. Congbalay — Vice President of Investor Relations
Hey, Bryan. It’s Dexter. In short, we don’t see a slowdown versus if you think about it on Q3, Q4 sequential. I mean, the US — North American business is holding up well.
Bryan Spillane — Bank of America Merrill Lynch — Analyst
Okay. And then second question, just can you give us a sense of where you stand now and — I know what the right measure is, but COVID impacting, I guess, the production rate, whether it’s absenteeism or utilization rates, or it seems like it surged maybe a little bit more than you expected at some point during the third quarter? So just trying to get a sense of like current status of business has it improved at all, or are you still pretty much at the same level of absenteeism that you were experiencing in the third quarter?
Tom Werner — President and Chief Executive Officer
Hey, Bryan. This is Tom. I would say, it is improving. We have taken a number of actions several weeks ago to encourage our employees to get vaccinated, but we are seeing improvement. And the thing — Rob talked about in his prepared remarks, the thing — that I made the decision that we’re going to service our customers, so that is causing — as we take the plants down, like Rob said, we’re moving things around and it’s very unnatural for us right now. This is not a systemic problem. This is a short-term issue that we will continue to manage through, but we’ve got the right team focused on the course corrective actions. And — but there is adjustments every week on production and that’s a decision. It’s right for the company. It’s right for the service our customers for the long term, but it is improving. And I think, as the employees and people get vaccinated, and we’re still following our protocols in the plants to keep the employees safe, but we are seeing an improvement and it will gradually improve. And I suspect we get to summer, and we should be in pretty good shape close to normalized run rates.
Bryan Spillane — Bank of America Merrill Lynch — Analyst
All right. Thanks, Tom. Thanks, Rob.
Tom Werner — President and Chief Executive Officer
You bet.
Operator
Thank you. We’ll take our next question from Chris Growe with Stifel.
Christopher Growe — Stifel Nicolaus — Analyst
Hi. Good morning.
Tom Werner — President and Chief Executive Officer
Good morning, Chris.
Christopher Growe — Stifel Nicolaus — Analyst
Hi. Just had a question for you if I could ask first about the international performance and really focus more on the outlook. You had indicated that — the Europe, I guess I understand given there has been some incremental restrictions there, but in some of those what you call other key markets when I think about Asia and Oceania in particular, and I know Latin America will be a little weaker right now given restrictions in those markets, but to run at 75% of 4Q ’19 levels, I was surprised to that degree of decline or lower level of shipments. I just want to understand kind of how — you mentioned China being very strong. Are there other markets that are weighing on that, especially in that Asia region that may be resulting in this weaker performance overall?
Robert McNutt — Senior Vice President and Chief Financial Officer
Yeah. This is Rob. In particular, the Philippines is a little bit light, but we’ve also had some business shifts. We’ve moved some of the business that has come through our top line. Historically, we moved to Lamb Weston/Meijer. And so, some of that is just shift within our overall platform, is part of it. But the other piece that just in the near term that’s playing a little bit of a role is the port issues and some of the logistics challenges you’ve seen more globally, where getting containers available and so on and so forth is having an impact. We think that will clean up, but that’s also having an impact on those volumes.
Christopher Growe — Stifel Nicolaus — Analyst
Okay. That port issue was that an issue in the quarter or more of an issue say going forward like in Q4 and going forward?
Robert McNutt — Senior Vice President and Chief Financial Officer
Well, it’s certainly an issue in the quarter to some degree with exports, but going forward, it’s not cleaned up yet. And we’re in the same boat as everybody else who is exporting out of the Port of Seattle and the West Coast ports that container availability and ship reliability. So we’ll see a bit of what we think into this quarter as well.
Christopher Growe — Stifel Nicolaus — Analyst
Okay. And there were some reports recently about potato costs being down from this current crop. And I know that can vary by region and state and whatnot. I just want — I want to get just an overall sense and we’re going to get a better update on the crop conditions going forward, but can you talk at all about what’s been reported at least that potato costs could be down a little bit from this coming crop?
Tom Werner — President and Chief Executive Officer
Yeah. Chris, this is Tom. As I always do in July and October, Chris, I’ll update you on the overall crop condition, acres, yield, all those kinds of things. And I differ on the overall contract pricing as we aren’t all the way closed yet. I understand that there is reports out there, but I will address that in July as I always do.
Christopher Growe — Stifel Nicolaus — Analyst
Okay. Thank you for that.
Tom Werner — President and Chief Executive Officer
Yeah.
Operator
Thank you. We’ll take our next question from Adam Samuelson with Goldman Sachs.
Adam Samuelson — Goldman Sachs — Analyst
Hi. Yes. Thanks. Good morning, everyone.
Tom Werner — President and Chief Executive Officer
Good morning, Adam.
Adam Samuelson — Goldman Sachs — Analyst
Hi. So I guess, I was hoping — on the cost issues in the quarter and Tom, Rob, I appreciate that it was kind of a whole cascade of things that kind of snowballed on themselves, but is there any way to disaggregate some of — and dimensionalize some of those individual pieces in terms of the incremental freight expense, kind of unplanned downtime, fixed cost under-absorption? I’m just trying to make sure we’re sensitive to kind of how those really impacted the margin performance and again, where some of that might continue into the upcoming quarter, we can be sensitive to layering in that impact and then, taking that impact out as we get into fiscal ’22 and ’23.
Tom Werner — President and Chief Executive Officer
Yeah. I think it’s tough to — I mean, obviously, we’ve got the data internally, but I don’t want to start down a path of disaggregating that and have an update on. But I guess what I would say is that it all stems from not being able to staff and operate those lines because of COVID. And so, it’s that cascading effect. And so there is nothing systemic in the operating costs there that I would call out. It’s really that one-time or the temporary impact of the COVID.
On the transportation side, again, the shifting around from rail to truck and March [Phonetic] spot trucking and so forth, that’s temporary as well, driven off of that same issue. But I would point that there is generally transportation cost inflation going on. And so as we go recontract freight for the coming periods, I think we like everybody else are going to see freight cost increase.
Dexter P. Congbalay — Vice President of Investor Relations
Hey, Adam. It’s Dexter. We have tried to step back on giving out on specific numbers. Of course, we’ve got the data internally. But it’s just one of those things that how much is really specific to call it COVID and that things like inflation that might not be. So we’re just trying to be careful in terms of doing that and trying to report that kind of going forward because it is an imprecise science at the end of the day. But we gave you the three biggest drivers plus inflation on our COGS. So it’s tough to give you a sense of how much is specific to each individual item. So sorry about.
Adam Samuelson — Goldman Sachs — Analyst
Okay. All right. Maybe, I’ll circle back with that one. A follow-up question was really on the new China plant and just thinking about both timing and market impact. And is that — do you think as we look at that when it comes online, is that — is the market — is there a sufficient market growth in China that would then actually need to displace imports and that the market growth domestically there could absorb that while the import number stays roughly the same, or how do you think about the knock-on effects of the China plant in terms of their import needs and how that would cascade back to the US? Thanks.
Tom Werner — President and Chief Executive Officer
Yeah. It absolutely fits into our long-term strategic plan. China is a big market. It’s a 1 billion — 1.1 billion pound. It’s been growing at 10% to 15% annually for a number of years. We expect that growth to continue. A lot of our bigger customers are expanding their storefronts and continue to do so. And so, the plant is going to take about two years to come online. And Adam, it gives us flexibility to shift current export production to in-country, which is another strategic reason to build that plant. And we’re committed to China, and we will be committed to it long term, but it again adds a geographical flexibility to our overall operating network around the globe, but it’s two years out. So these things you got to think through what the category is going to look like in two years in some of these markets and you got to invest in it. And that’s part of — one of our strategic pillars is to continue to invest in this company for the long term. And we’ll continue to do that.
Adam Samuelson — Goldman Sachs — Analyst
Okay. Great. I’ll pass it on. Thanks.
Tom Werner — President and Chief Executive Officer
Thanks, Adam.
Operator
We’ll take our next question from Tom Palmer with J.P. Morgan.
Thomas Palmer — J.P. Morgan — Analyst
Good morning, and thanks for the questions.
Tom Werner — President and Chief Executive Officer
Good morning.
Robert McNutt — Senior Vice President and Chief Financial Officer
Good morning.
Thomas Palmer — J.P. Morgan — Analyst
I appreciate that it’s tough to be overly precise, but I wanted to ask about your segment mix expectations. You noted that volume could be back to pre-pandemic levels by the end of the calendar year. How are you thinking about the mix between Global and Foodservice? Based on what you’re seeing from customers, do you think that both segments could approach pre-pandemic volumes or should we be thinking about a shift towards the Global side?
Tom Werner — President and Chief Executive Officer
Yes. This is Tom. I expect at the end of the calendar year based on some of the data we look at, things we’re projecting, Foodservice to be back to pre-pandemic levels. And as we’ve seen markets in the US, not all of them open up and just lift restrictions, we’ve seen them approach or get pretty darn close to pre-pandemic levels. Now, we need some time to work through overall the consumer behavior of going back to eat at restaurants over a longer period of time. But that gives me confidence that there is some pent-up demand for the restaurants in our Foodservice segment and I think we’ll get back to pre-pandemic levels by the end of calendar year. And the mix will settle into where it was before all this happened in terms of segment.
Thomas Palmer — J.P. Morgan — Analyst
Okay. Thanks for that. Really helpful. And then, I had kind of a different type of mix. So you noted mix headwinds from a pricing standpoint in both Global and Foodservice during the third quarter. We’re lapping some pretty big mix headwinds a year ago in the fourth quarter and here you are a month in with improving volume trends. Should we think about mix kind of swinging to a tailwind as we think about the fourth quarter?
Tom Werner — President and Chief Executive Officer
Yeah. Obviously, there’s going to be a significant mix change versus Q4 of last year, which everybody knows we’re in the deep end of the pandemic. So the Foodservice — we expect Foodservice trends to improve. Global is pretty steady state and growing to pre-pandemic levels. And Retail — if you recall, last year, Retail directionally was up like a 150%, that’s going to taper off. Q3 was 105% to 115% roughly. So the mix shift for us will be skewing back to, I call it, a more normalized segment mix in Q4.
Thomas Palmer — J.P. Morgan — Analyst
Okay. Thanks, guys.
Operator
Thank you. We’ll take our next question from Rob Dickerson with Jefferies.
Robert Dickerson — Jefferies — Analyst
Great. Thank you so much. Tom, just a question around capacity in the industry and then, also your decision to obviously lean into China a little bit. And I guess combined all the comments you’re talking about today, just kind of shifting maybe some — volume into some less efficient plants. Should we take the China investment kind of as a kind of go-forward use of cash as you think about incremental capacity versus potentially looking at some of your footprint within the US and maybe making some of those plants more modernized so to speak and more efficient?
Tom Werner — President and Chief Executive Officer
In terms of China use of cash, that’s — we are evaluating that. And the way to think about our North American footprint as we have — we’ve had a continual modernization program for five, 10 years. So we’re upgrading these plants with the latest technology. There is a certain amount of maintenance we do every year we are committed to for food safety and people safety and some of the bigger equipment that’s aged, we replace it. And just in terms of overall capacity in the industry, I think about the category two to three years out. And based on our projections on the category growth overall, that’s what drives a lot of our decisions in terms of investing because we got to make a decision now for what we think is going to happen in two and 2.5 years, and that’s the way we’ve always operated.
And I think, the category will come back by the end of the calendar year on a normalized run rate basis, and I believe it’s going to return to growth. And the things that we’re going to do in the near term is make sure we’re positioned to capture our share and capture the growth and service our customers and continue to evaluate the footprint and the cost competitiveness of our footprint in the marketplace. And that will drive the investment decisions going forward here in the next 12 to 15 months.
Robert Dickerson — Jefferies — Analyst
Got it. Okay. So I mean for now, obviously, you could say, kind of wait and see where the growth goes over the next 12 months, and it sounds like the footprint for now is good, right? There is not really a need to necessarily lean into the US side with incremental capacity, but if the industry continues to grow, that’s obviously a use of cash potential going forward over the next two years, let’s say?
Tom Werner — President and Chief Executive Officer
Yeah. I’ll jump in. Think about it this way, we got to think through the next two years — two, three years what the category is going to look like. I’m not going to sit and wait and see what happens. So we’re going to make some decisions and potentially move some things forward to get ourselves ready for the next two, three years, so we have available capacity to meet the demand and the category growth and service our customers. Just like we have been in the past, we make decisions now anticipating what two and three years are going to look like.
Robert Dickerson — Jefferies — Analyst
Yeah. Fair enough. Thanks a lot. I appreciate it.
Tom Werner — President and Chief Executive Officer
Yeah.
Operator
Thank you. [Operator Instructions] We’ll take our next question from Jenna Giannelli with Goldman Sachs.
Jenna Giannelli — Goldman Sachs — Analyst
Hi there. Thanks for taking my question. I just had a follow-up on the China plant. Did you talk or have you talked about the cadence of the capex spend that you’re planning there? And then, just in terms of impact, potential efficiencies gain, anything that you can point to from maybe past examples where you’ve expanded capacity and the type of overall benefit from a margin standpoint that you saw? Thanks.
Robert McNutt — Senior Vice President and Chief Financial Officer
Yeah, Jenna. We have not talked about the cadence of that capex spend there. Again, it’s $250 million. It will take us about two years to get it in. And again, you’ve got a lead-time order on equipment and progress payments against that. And so, I think to some degree that it’s going to be — the bulk of it is going to be — a big chunk of the spend is going to be in next fiscal year and then following into the last several months before startup there. So some of it will be this year, but the bulk of it is going to be in next year and into the following year.
In terms of efficiencies, clearly, we’re going to gain technical efficiencies in areas like recovery, but there are so many variables that go into that. Clearly, labor costs are lower in China than they would be in the US, but you get some offsets and some other things. But clearly, we’ll gain some efficiencies there. I will tell you that the folks who have been running our existing plant in Shangdu and we’ve done some debottlenecking there to service growth there, have done a great job of managing those assets and extracting the real value out of those. So we’re very confident in the team there and their ability to deliver when we give them the new asset to work with.
Jenna Giannelli — Goldman Sachs — Analyst
Okay. Perfect. That’s super helpful. And I just have one more if I can. I know that you mentioned that you may have seen it’s hard to gauge, but some pull-forward of demand from your food service customers kind of in preparation for what they are expecting as more demand. So from your standpoint, how are you thinking about working capital requirements as demand ramps for you and I guess, mainly in the Foodservice and to a lesser extent, in the Global segment? And that’s it for me. Thank you.
Robert McNutt — Senior Vice President and Chief Financial Officer
Yeah. I think, if you think about the ramp-up in that, just look at the demand, look at our DSO on the receivable side and what it’s been historically, and we will ramp back up to those kinds of levels in our Foodservice. So that’s what we anticipate, that it will just get back to kind of normal DSO levels when you get to year-end and it will carry through the receivables number.
Operator
Thank you. We’ll take our final question from Carla Casella with JPMorgan.
Carla Casella — JPMorgan Securities LLC — Analyst
Hi. One follow-up on the cost question. Have you — can you give us a sense for how much of your total COGS is feed grade oil or edible grade oil?
Robert McNutt — Senior Vice President and Chief Financial Officer
Dexter, I’m not sure if we have this — go ahead.
Dexter P. Congbalay — Vice President of Investor Relations
No, we haven’t. Carla, let me take that. We don’t give a specific on that. What we have said on COGS just generally breaking down normal environment, about roughly a third is raw potatoes. Roughly another, call it, 20% and 25% is going to be a combination and no particular order here of edible oils, packaging and miscellaneous ingredients. And the remaining, call it, 40%, 45%, again, no particular order here, combination of fixed overhead, conversion costs, which is largely labor, fuel, electric power and water, and then, finally transportation and warehousing. We don’t break it down any finer than that.
Carla Casella — JPMorgan Securities LLC — Analyst
Okay. Great. That’s helpful. Thank you.
Operator
That will conclude our question-and-answer session. At this time, I’d like to turn the call back over to Mr. Congbalay for any additional or closing remarks.
Dexter P. Congbalay — Vice President of Investor Relations
Hi, everybody. Appreciate the time today and listening to the call. Any follow-up questions or need to speak, best thing is just to pop an email me and then we can schedule time. Have a good day, everyone. Thank you.
Operator
[Operator Closing Remarks]