Bernadette Madarieta
Senior Vice President and Chief Financial Officer at Lamb Weston
Thanks, Tom, and good morning, everyone. As Tom said, we're pleased with our financial performance and operating momentum through the first half of the year, which has provided us with a strong foundation to raise our annual sales and earnings targets. Let me review our second quarter results before discussing our updated outlook.
Sales in the second quarter grew 27% to nearly $1.28 billion. That's a record for us. A 30% increase in price mix drove our sales growth as we continued to benefit from product and great pricing actions across each of our business segments. The increase reflects the carryover impact of product pricing actions that we initiated in fiscal 2022 as well as pricing actions that we began implementing during this fiscal year. The increase also reflects benefits from efforts to improve our portfolio mix.
Sales volumes declined 3% as we continued to experience the supply-chain constraints and related shortfalls in order fulfillment that Tom described. This primarily affected volumes and service levels in our Foodservice and Retail segments. To a lesser extent, volumes in the quarter were also impacted by softer casual dining and full-service restaurant traffic as well as the timing of replacing losses of some low-margin business in our Foodservice and Retail segments.
Gross profit in the quarter increased $176 million to $382 million, as a result of our sales growth and strong gross margin performance. Our margin expanded 950 basis points versus the prior year quarter and about 550 basis points sequentially to nearly 30%. Broadly speaking, pricing actions in each of our business segments, efforts to improve customer and product mix, and value created from our productivity programs have caught up to the cumulative effect of input and transportation cost inflation over the past couple of years.
Input cost inflation, however, continues to be challenging. Once again, it was the primary driver of a double-digit increase in our manufacturing and distribution cost per pound in the quarter, largely due to higher prices for edible oils, ingredients for batter coatings, labor and transportation. Potato costs were also up as a consequence of the historically poor crop that was harvested last fall. While this is the last quarter that we will realize the financial impact from the 2021 crop, we expect our potato costs to continue to increase in the second half of this year as a result of higher contract prices and the need for significant open market purchases due to poor yields from the 2022 crop.
We also continue to incur higher costs and operational inefficiencies associated with shortages of key ingredients and spare parts, onboarding newly hired production team members and other industry-wide supply chain challenges. While the impacts from these constraints have been slowly easing, we expect they will continue to be a headwind through the remainder of the year.
Moving on from cost of sales. Our SG&A, excluding items impacting comparability, increased $45 million to $136 million, largely due to higher compensation and benefit expenses due to improved operating performance and higher expenses relating to improving our IT infrastructure, including designing and building a new ERP system. Equity method earnings from our unconsolidated joint ventures increased $16 million, excluding items impacting comparability and mark-to-market adjustments associated with currency and commodity hedging contracts. Higher pricing, especially in Europe, drove the increase. Demand continued to hold up relatively well despite the impact of significant consumer inflation and volatile energy costs. This sets Lamb Weston/Meijer up to deliver solid results in the second half of the year.
Moving to our segments. Sales in our Global segment were up 34% in the quarter behind a 31% increase in price/mix. As Tom noted earlier, most of the increase was driven by price escalators and updated pricing structures. With the increase in price mix, Global's product contribution margin more than doubled to $171 million in the quarter. In addition, Global's product contribution margin percentage approached pre-pandemic levels, which is a key milestone for our overall performance. While we were always confident that we would restore Global's margins, we knew it would take longer than in other segments due to the structure and terms of the channels' customer contracts.
Sales in our Foodservice segment grew 14%, driven by a 25% increase in price mix as we continue to realize the carryover benefit of pricing actions that we announced throughout fiscal 2022 as well as actions taken earlier this year to counter inflation. Sales volumes decreased 11%, primarily reflecting production constraints and to a lesser extent, softer traffic in casual dining and full-service restaurants. In addition, because of these production constraints, we've had to make some tough choices on customer service, which has resulted in the loss of some lower-margin business. Foodservice's product contribution margin increased 25% as the benefits from pricing actions more than offset higher manufacturing and distribution cost per pound and the impact of lower volumes.
Sales in our Retail segment increased 34%, behind a 43% increase in price mix, reflecting pricing actions across our branded and private label portfolios. Volume fell 9%, largely as a result of production constraints. It also reflects the incremental losses of certain lower margin private label products. Through a combination of the team's strong execution of pricing and mix management, Retail's product contribution margin more than tripled to $66 million. Its production contribution margin percentage is now in line with our away-from-home channels.
Moving to our liquidity position and cash flow. Our balance sheet remains solid with strong liquidity and a low leverage ratio. We ended the quarter with about $420 million of cash and $1 billion undrawn revolver. Our net debt was about $2.3 billion, resulting in a 2.4 times leverage ratio. That's down from 3.1 times at the end of fiscal 2022, reflecting our earnings recovery.
In the first half of the year, we generated about $290 million of cash from operations or about $80 million more than the first half of last year, largely due to the higher earnings. Capital expenditures were about $270 million, which is up about $120 million from the first half of last year. This increase is largely related to construction costs as we continue to expand processing capacity in Idaho, China and Argentina.
As a reminder, our annual maintenance capital expenditures have typically been about $120 million to $130 million as we generally target about 3% to 4% of sales. In the first half of the year, we returned nearly $100 million of cash to shareholders, including more than $70 million in dividends and $28 million in share repurchases.
As you may have seen a few weeks ago, our Board of Directors approved a 14% increase in our quarterly dividend, reflecting the successful execution of our strategy to drive strong financial results and cash flow and our confidence in our ability to deliver sustainable, profitable growth over the long term.
So now let's turn to the updated fiscal 2023 outlook. Please note that our updated targets do not reflect the financial consolidation of Lamb Weston/Meijer as that transaction has not yet closed. We believe the transaction will be completed during our fiscal fourth quarter. So for the year, we've increased our sales target to $4.8 billion to $4.9 billion, which implies a growth rate of 17% to 19.5%. That's up from our previous target of $4.7 billion to $4.8 billion.
We expect that higher price mix will be the primary driver of sales growth in the second half of the year. Forecasting volumes in the second half remains difficult as we anticipate shipments will continue to be affected by supply chain constraints through fiscal 2023 and because of volatility surrounding a potential slowdown in restaurant traffic and demand as consumers face inflation and a weaker macroeconomic environment.
For earnings, we're targeting adjusted net income of $540 million to $580 million. That's up from our previous target of $360 million to $410 million. Adjusted diluted earnings per share of $3.75 to $4, up from our previous target of $2.45 to $2.85. And finally, adjusted EBITDA, including unconsolidated joint ventures of $1.05 billion to $1.1 billion, up from our previous estimate of $840 million to $910 million. We continue to expect the increase in our earnings will be driven primarily by sales growth and gross margin expansion.
We're targeting gross margins during the second half of the year to be between 27% and 28%, which is in line with the more than 27% that we delivered in the first half and up from the 23% that we posted during the back half of fiscal 2022. We expect the seasonal, sequential quarterly cadence for gross margins will be less pronounced than in previous years. Specifically, we do not foresee much of the typical seasonal step-up in gross margin from Q2 to Q3 or much of the typical step down from Q3 to Q4 for a few reasons.
First, beginning in the third quarter, we expect our raw potato costs to increase to reflect the approximately 20% increase in the contracted price of the recently harvested potato crop. In addition, we expect higher potato costs as a result of significant high-cost open market purchases. Second, we expect continued significant inflation for other key inputs during the second half of the year, especially for edible oils and ingredients for batter coatings.
Third, we expect a more muted step-up in global pricing from Q2 to Q3 due to the acceleration of pricing actions for contracts up for renewal in the coming years. And finally, we expect the year-over-year price increases in our Foodservice and Retail segments will decelerate as we begin to lap actions taken in fiscal 2022.
With respect to SG&A, we expect expenses, excluding items impacting comparability of $525 million to $550 million. That's up from our previous target, largely due to higher compensation and benefit expenses, including increased incentive compensation expense due to improved operating performance as well as expenses for outside services, including support of our IT and ERP upgrades. Our estimates of other financial targets, including interest expense, capital expenditures, depreciation and amortization expenses and our effective tax rate are unchanged.
And with that, let me now turn it back over to Tom for some closing comments.
