Bernadette Madarieta
Senior Vice President and Chief Financial Officer at Lamb Weston
Thanks, Tom, and good morning, everyone. Let me start by echoing Tom's comments thanking our employees. We appreciate your hard work and dedication. As Tom discussed, we feel good about the benefits from our pricing actions and cost savings efforts to offset much of the significant cost inflation that we've been experiencing. And I'm confident in our ability to continue to manage through this volatile business environment. Specifically, in the quarter, our sales increased 7% to $955 million.
Price/mix was up 12% as we continued to execute our previously announced product and freight pricing actions in each of our business segments to offset input, manufacturing and transportation cost inflation. Most of the increase in the quarter reflects these pricing actions, while mix was also favorable. Sales volumes declined 5% as we were unable to fully serve market demand due to logistics constraints, especially for our international shipments, as well as lower production run rates and throughput at our factories resulting from labor shortages. Increased shipments in our Foodservice segment and to our large chain restaurant customers in North America that are served by our Global segment partially offset the volume decline.
However, while volume increased in these channels, it was tempered by the Omicron variant's negative effect on restaurant traffic, on the availability of labor to keep restaurants open and on our production facilities and supply chain. Gross profit in the quarter increased $24 million. Product and freight price increases along with favorable mix more than offset the impact of higher costs on a per pound basis and lower sales volumes. We expanded gross margin by 110 basis points versus the prior year quarter and 270 basis points sequentially to more than 23%. Looking at our costs, double-digit inflation drove the increase in cost per pound for the third straight quarter and accounted essentially for all of the increase in the quarter.
There were four key areas that drove the increase in cost. First, commodities played the biggest role led by edible oils, ingredients for batter and other coatings and packaging. Labor costs also increased due to competition for factory workers. Second, transportation rates continued to climb [Phonetic] due to the persistent disruption in global logistics networks. We also continue to use an unfavorable mix of higher cost trucking versus rail to meet service obligations for certain customers. Third, we began to see higher potato costs resulting from the poor crop that was harvested last fall in our primary growing regions.
The increase in potato costs reflects the impact of purchasing potatoes in the open market at a significant premium to contracted prices. Higher transportation costs for shipping potatoes from the Midwest and Eastern North America to our plants in the Pacific Northwest, lower potato utilization rates and running production lines at lower speeds to accommodate low quality potatoes. The increase in our potato costs, decrease in potato utilization rates and how the crop is performing in storage are all in line with the expectations that we shared with you last quarter, and we believe we've secured enough potatoes to deliver our volume forecast until we begin to harvest the early potato varieties in July.
As a reminder, we will continue to realize the financial impact of this year's poor potato crop through most of the second quarter of fiscal 2023. The final key area that drove the increase in costs are operational inefficiencies, explained by labor shortages, Omicron-related absenteeism, especially in January and into early February and other industry-wide supply chain challenges. This resulted in lower production run rates and throughput in our factories, leading to fewer pounds to cover fixed overhead. As I'll discuss later, we'll continue to see the impact of these costs in the fourth quarter. The effect of lower potato utilization and production run rates in the third quarter was largely offset by a range of cost mitigation efforts, including eliminating underperforming SKUs, changes to product specifications and increased productivity savings from our Win as 1 and other cost saving initiatives. So in short, we're managing well through this highly inflationary and poor potato crop environment. We feel good about how we are controlling those things that we can control, which led to the year-over-year and sequential gross margin expansion.
Moving on from cost of sales. Our SG&A declined $9 million in the quarter, largely due to lower consulting expenses associated with improving our commercial and supply chain operations as those projects ended, lower [Phonetic] overall compensation and benefits expense, and a $2 million decline in advertising and promotion expenses. The decline in SG&A was partially offset by higher information technology infrastructure costs, including cost to design the next release of a new enterprise resource planning system. Equity method earnings in the quarter were $30 million and included a $20 million unrealized gain related to mark-to-market adjustments associated with currency and commodity hedging contracts.
The large mark-to-market gain in the quarter primarily relates to changes in the value of natural gas derivatives at Lamb-Weston/Meijer as commodity markets there have experienced significant volatility. Excluding the impact of these mark-to-market adjustments, equity earnings increased $1 million versus the prior quarter. Favorable price/mix and higher sales volumes were largely offset by input inflation and higher manufacturing and distribution costs in both Europe and the U.S.
Moving to our segments. Sales in our Global segment were up 2% in the quarter. Price/mix increased 8%, reflecting domestic and international pricing actions associated with customer contract renewals and inflation-driven price escalators. It also reflects higher prices charged for freight. Volume fell 6%. International shipments, which have historically accounted for about 40% of the segment's total volume were down nearly 20% versus the prior year quarter due to limited shipping container availability and disruptions to ocean freight networks. Sales volumes to North American large QSR and casual dining restaurant customers increased, but at a slower rate than previous quarters due to Omicron's negative impact on consumer traffic. Global's product contribution margin, which is gross profit less the advertising and promotional expenses declined 8% to $73 million. Higher manufacturing and distribution cost per pound, as well as the impact of lower sales volumes more than offset the benefit of favorable price/mix.
Moving to our Foodservice segment. Sales increased 34%, with price/mix up 22% and volume up 12%. As expected, the rate of increase in Foodservice's price/mix accelerated sequentially to 22% in the third quarter from 8% in the second quarter as the benefits of the product and freight pricing actions that we began implementing earlier this fiscal year to mitigate inflation continued to build. In addition, the increase reflects favorable product and customer mix. The ongoing recovery in demand from small and regional restaurant chains and independently owned restaurants, as well as from non-commercial customers drove a 12% increase in sales volumes. While our shipments to restaurants have essentially returned to pre-pandemic levels, our shipments to non-commercial channels have not yet fully rebounded.
As with our sales to large chain restaurants in our Global segment, the Foodservice segment's volume growth was tempered by Omicron's negative impact on restaurant traffic and labor availability in those restaurants. In addition, manufacturing labor shortages and the effect of Omicron-related absenteeism limited our ability to fully serve demand due to lower production run rates and throughput in our factories. Foodservice's product contribution margin rose 52% to $107 million, with favorable price, volume and mix more than offsetting higher manufacturing and distribution cost per pound.
In our Retail segment, sales declined 12%, with volume down 24% and price/mix up 12%. The volume decline reflected two factors. First, more than half of the decline was due to incremental losses of certain lower margin private label products. And second, despite solid category growth, branded product volumes were down as labor and supply chain disruption limited our ability to service demand. The increase in price/mix was driven by product and freight pricing actions across our portfolio to offset inflation, as well as favorable mix. Retail's product contribution margin declined 5% to $32 million. Lower sales volumes and higher manufacturing and distribution cost per pound drove the decline, which was partially offset by favorable price/mix and a $2 million decrease in A&P expenses.
Moving to our liquidity position and cash flow. We ended the quarter with nearly $430 million in cash and $1 billion of availability on our undrawn revolver. Through the first three quarters of the year, we generated about $175 million of cash from operations. That's down about $200 million versus the first three quarters of the prior year due primarily to higher working capital and lower earnings. Year-to-date, we've spent more than $225 million in capital expenditures as we continued construction of our capacity expansions in Idaho and China. We've also returned nearly $230 million of cash to our shareholders, including $103 million in dividends and $126 million in share repurchases. After repurchasing $50 million of shares in the third quarter, we have just under $300 million remaining under our buyback authorization.
Now let's turn to our updated fiscal 2022 outlook. We expect our full-year sales growth to be above our long-term target of low to mid single-digits. In the fourth quarter, we expect sales to be driven by price/mix as we continue to execute our previously announced product and transportation pricing actions to offset input and transportation cost inflation. However, we expect sales volumes will continue to be pressured as export volumes remain constrained due to limited shipping container availability, supply chain volatility and labor shortages challenge [Phonetic] run rates and throughput at our factories, and as restaurant traffic and consumer demand may slow due to inflation and the persistent effect of COVID variants in the U.S. and key international markets. In addition, please note that we'll be lapping a high volume comparison in the prior year.
With respect to earnings for the full-year, we expect our gross margin will be 19% to 20%. This update puts us at the high end of the 18% to 20% range that we provided in our previous outlook. We're comfortable to be at the higher end of that range. Because of our confidence in the pace and execution of product and freight price increases that we're currently implementing in the market, we have more clarity on the net impact in margin from this year's poor potato crop, and we're making steady progress in stabilizing our supply chain operations and driving savings behind our cost mitigation initiatives. Based on our updated full-year estimate, we expect our gross margin in the fourth quarter to be 19% to 21%.
That's down sequentially from the 23% we delivered in the third quarter and reflects in part our usual gross margin seasonality. It also includes the impact of significantly higher costs held in finished goods inventory that were produced during the third quarter. These costs were driven by incremental costs and inefficiencies associated with very high levels of Omicron-related factory worker absenteeism in January and February that resulted in broad-based production disruptions. Since we typically hold 50 to 60 days of finished goods inventory, we'll realize these costs during our fiscal fourth quarter as that inventory is sold.
The low [Phonetic] gross margins, we expect our SG&A expenses in the fourth quarter to step up to $105 million to $110 million as we continue to invest in the design and build of our new ERP system. We expect equity earnings, excluding the impact of any mark-to-market adjustments, will remain pressured due to input cost inflation and higher manufacturing costs in both Europe and the U.S. For the year, we continue to expect interest expense to be approximately $110 million, excluding the $53 million of costs associated with the senior notes that we redeemed in the second quarter, total depreciation and amortization expense of approximately $190 million, and an effective tax rate of approximately 22%. We've reduced our estimate for capital expenditures to $325 million from our previous target of $450 million to reflect the timing of expenditures related to our capacity expansion projects in Idaho and China.
So in sum, in the third quarter, we delivered solid sales growth and expanded our gross margins behind our pricing actions and our cost mitigation efforts. For the year, we're targeting the upper end of our previous gross margin range due to our confidence in our pricing execution to offset inflation, the more clarity that we now have on our potato costs and the steady progress that we're making in stabilizing labor and our supply chain.
Now here's Tom for some closing comments.
