Bernadette Madarieta
Senior Vice President & Chief Financial Officer at Lamb Weston
Thanks, Tom, and good morning, everyone. I want to also thank the Lamb Weston team for delivering another quarter of strong results and continuing to build good operating momentum across the company. This momentum has enabled us to raise our financial targets for the remainder of the year. I also want to add a warm welcome to the Lamb Weston EMEA team.
Let's begin with our third quarter results. Sales in the third quarter were up 31% to $1.25 billion. Price/mix was up 31% as we continue to benefit from pricing actions across each of our core business segments to counter input and manufacturing cost inflation. 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.
Our overall sales volumes were flat. While we increased shipments to our large QSR chain customers and to Retail customers in North America, which generally reflects demand and restaurant traffic trends that Tom described earlier. Our growth in volume was offset by a couple of factors. First, we continued efforts to strategically improve our product and customer mix by exiting certain lower-priced lower-margin business. Second, and to a lesser extent, softer casual dining and full-service restaurant traffic also affected volumes in the quarter, which is largely reflected in our Foodservice shipments.
It's worth noting that in the quarter, we also continued to make progress in stabilizing our supply chain with better availability of production team members and key ingredients, as well as improve production forecasting. As a result, the impact on production in the quarter was relatively modest, which helped drive improvements in our customer fill rates versus our first and second quarters. This improvement is more apparent in our Retail and Foodservice segments as we have largely maintained high fill rates in our global segment, since the start of the pandemic.
That said, we expect changes in product mix and consumer demand will continue to pressure our near-term production, and therefore shipments of high demand products, including retail fries, premium fries and batter-coated products. We expect this volume pressure and our ability to meet growing consumer demand will continue until our capacity investments in China, Idaho, Argentina and the Netherlands become available over the next couple of years.
Gross profit in the quarter increased $177 million to nearly $400 million, as a result of our sales growth and gross margins, expanding 860 basis points versus the prior year quarter to 31.7%. Our strong gross margin performance reflects the cumulative benefit of executing pricing actions in each of our business segments to counter input and manufacturing cost inflation as well as leveraging efforts to improve customer and product mix and supply chain productivity.
On the cost side in the quarter, we again realized a double-digit increase in input and manufacturing cost per pound. This was largely driven by about a 20% increase in contracted prices for potatoes in North America, significantly higher prices for open market potato purchases due to poor yields from the calendar year 2022 crop and continued increases in the cost of edible oils, ingredients for batter coatings, labor and energy.
In contrast, our transportation costs fell in the quarter, as industry rates for rail, trucking and ocean freight services continued their steady decline over the past couple of quarters. We are continuing to reduce our freight charges to customers to match the decline in costs, which will steadily reduce the tailwind from transport prices in our sales line. However, the impact on our gross profit over time will be largely neutral.
Moving on from gross profit, our SG&A, excluding items impacting comparability increased $49 million to $136 million, primarily reflecting higher compensation and benefit expenses due to improved operating performance as well as actions to maintain competitive pay levels across our organization. We also had higher expenses related to improving our IT infrastructure, including designing and building a new ERP system and a $6 million increase in advertising and promotion expenses, largely behind support of our branded products in our Retail segment.
Equity method earnings from our unconsolidated joint ventures increased $12 million, excluding items impacting comparability and mark-to-market adjustments associated with currency and commodity hedging contracts. Favorable price/mix largely reflecting pricing actions in Europe drove the increase.
Moving to our segments. Sales in our Global segment were up 33% in the quarter. Price/mix was up 33%, reflecting the revenue growth management initiatives and pricing actions to counter inflation that Tom described earlier. Global's volume was flat. Solid growth of shipments to large QSR chain customers in North America was offset by the impact of exiting certain lower-priced and lower-margin business in international and domestic markets as we actively manage our customer mix. Global's product contribution margin increased to $168 million from a relatively weak prior year quarter, which at the time reflected significant input in manufacturing cost increases and only a modest benefit from product pricing actions. Global segment's product contribution margin percentage in the quarter was 25.8% which is back to its seasonal pre-pandemic level and was also a bit better than expected as we realize more benefits from pulling forward pricing actions for some customers than we originally anticipated.
Sales in our Foodservice segment grew 22%, driven by a 25% increase in price/mix, as we continue to realize the carryover benefit of product pricing actions that we announced throughout fiscal 2022, as well as the actions taken in fiscal 2023 to counter inflation. Sales volumes were down about 3%, primarily reflecting exiting of some lower-priced, lower-margin business to manage our customer and product mix as well as softer traffic in casual dining and full-service restaurants. Foodservice's product contribution margin increased to $143 million or up 34% as the cumulative benefit from pricing actions more than offset higher manufacturing cost per pound and the impact of lower volumes.
Our Retail segment delivered another strong quarter with sales up 50%. Price/mix increased 44%, reflecting pricing actions across our branded and private label portfolios to counter inflation. This was aided in part by limited trade support, given the strong category demand and constrained supply environment. Volume in this segment was up 6% behind better customer fill rates for our branded products. Private label volume was also up as we lap the incremental losses of certain lower-priced and lower-margin products over the past couple of years. Retail's product contribution margin increased to $83 million and its margin percentage topped 38% as the cumulative benefit from pricing actions more than offset higher manufacturing costs per pound. We're very pleased with how our Retail team has strengthened our market share, profitability and portfolio mix over the past couple of years and we remain confident in our ability to remain the overall category leader.
Moving to our liquidity position and our cash flow. Our balance sheet remains solid with strong liquidity and a low leverage ratio. We ended the quarter with about $675 million of cash and a $1 billion undrawn revolver. Our cash balance was inflated as we did take on a new $450 million term-loan at the end of January to fund most of the cash consideration for the EMEA transaction, which closed a couple days into our fiscal fourth quarter.
Our net debt was more than $2.5 billion at the end of the third quarter, resulting in a 2.3 times leverage ratio on a trailing 12-month basis. After accounting for the EMEA transaction, the estimated net debt at the beginning of our fiscal fourth quarter would be about $3.3 billion, resulting in a 2.6 times leverage ratio using our updated fiscal 2023 earnings target and an annualized contribution from our EMEA operations.
Our capital allocation priorities remain the same. We continue to prioritize investing in the business to drive long-term growth, as well as delivering dividend growth for our shareholders and share repurchases to offset management dilution. In the first three quarters of the year, we generated about $335 million of cash from operations. That's about $160 million more than the first three quarters of last year. This is largely due to the higher earnings, partially offset by increased working capital.
Capital expenditures were nearly $500 million, which is up about $270 million from the first three quarters of last year. This increase is largely related to construction costs as we continue to expand processing capacity in Idaho, China and Argentina. In the first three quarters, we returned nearly $146 million of cash to shareholders, including $106 million in dividends and about $41 million in share repurchases.
Now let's turn to our 2023 outlook. Our updated targets include the financial consolidation of Lamb Weston EMEA beginning in our fiscal fourth quarter. For the year, we've increased our sales target to $5.25 billion to $5.35 billion, up from our previous target of $4.8 billion to $4.9 billion. About $300 million to $325 million of the increase reflects the consolidation of Lamb Weston EMEA. The additional $100 million to $150 million increase reflects our strong results in our fiscal third quarter and our expected continued momentum in the fourth quarter.
Excluding the contribution from EMEA, we expect our net sales growth in the fourth quarter to be driven by price/mix, as volumes will continue to be affected by certain -- exiting certain lower-priced and lower-margin volume business to strategically manage customer and product mix and the potential for a slowdown in restaurant traffic and consumer demand.
For earnings, we're targeting adjusted diluted earnings per share of $4.35 to $4.50. That's up from our previous target of $3.75 to $4. And adjusted EBITDA, including unconsolidated joint ventures of $1.18 billion to $1.21 billion up from our previous estimates of $1.05 billion to $1.1 billion. Of the $110 million to $130 million increase in our adjusted EBITDA target, we estimate that EMEA will contribute an incremental $10 million to $15 million of that amount. That implies then that EMEA's total EBITDA contribution of $20 million to $30 million in the fourth quarter, which is in line with the normalized full year pre-pandemic EBITDA of about EUR100 million. The additional $100 million to $115 million increase in our full year EBITDA target reflects our strong results in our fiscal third quarter and our expected strong sales and earnings growth in the fourth quarter.
Including the consolidation of EMEA, we're targeting a full year gross margin of 27% to 27.5%, implying a fourth quarter gross margin of 23% to 24.5%. Excluding EMEA, we've raised our full year gross margin target to 28% to 28.5%, up from our previous target of 27% to 28%. This implies the fourth quarter gross margin target, excluding EMEA of 25% to 27%. While this would be a healthy gross margin expansion versus the prior year quarter, it also implies a notable step down from our fiscal third quarter gross margin of 31.7%.
We believe this estimate is prudent, reflecting typical seasonal patterns in our cost structure, significantly higher cost, open market potatoes, continued inflation for key inputs and the impact of volume declines, as a result of inflationary pressures on consumers. With respect to SG&A, we expect expenses excluding items impacting comparability of $550 million to $570 million. That's up from our previous target of $525 million to $550 million. The increase largely reflects the consolidation of Lamb Weston EMEA.
In addition, we increased our estimate for capital expenditures to between $700 million to $725 million up from our previous estimate of $475 million to $525 million. This increase reflects accelerated spending behind capital expansion investments, as well as capital spending associated with the consolidation of EMEA. We also made adjustments to other financial targets, which you can find in our earnings release.
And with that, let me turn the call back over to Tom for some closing comments.
