Bernadette Madarieta
Chief Financial Officer at Lamb Weston
Thanks Tom, and good morning, everyone. As Tom noted, we're not happy with the magnitude of the impact of the ERP transition on our customers, our business and our P&L. However, I do want to take a moment and say how proud I am of our Lamb Weston team members, who did work tirelessly to remedy the issues we experienced and bring our customer order fulfillment rates back to pre-transition levels within the quarter. I also want to thank our sales team members who stayed close to our customers to limit the impact as much as possible on their businesses.
Let's review our third quarter results. Sales increased $205 million, or 16%, to $1.46 billion. The entire increase was driven by $357 million of incremental sales from the acquisition of the EMEA business. This is the last quarter that we'll receive the incremental benefit from the EMEA consolidation since we began to consolidate EMEA sales beginning in the fourth quarter of fiscal 2023. If we exclude the incremental sales from the EMEA acquisition, net sales declined $152 million, or 12%. We estimate that the majority of the decline, or approximately $135 million, was due to unfilled orders attributable to the ERP transition.
Price mix was up 4% as we continued to benefit from the inflation-driven pricing actions taken in fiscal 2023 and pricing actions taken this year in both our North America and International segments. However, unfavorable mix related to the type of orders we were able to fill during the ERP transition, partially offset the benefit of the pricing actions. In addition, lower freight charges to customers were nearly a 5-point headwind, which was driven by lower volumes shipped and the pass-through of lower freight rates when shipping products to customers.
Total sales volumes declined 16%, with about 8 points of the decline associated with unfilled customer orders due to the ERP system transition. The other 8 points of the decline was primarily driven by two factors. First, more than half reflected softer-than-expected restaurant traffic trends in North America and key international markets. As Tom mentioned, we believe the traffic trends remain challenging as consumers continue to adapt to higher menu prices. In addition, unusually poor weather in January negatively affected traffic in the U.S.
Second, the remainder of the volume decline reflected the carryover impact of exiting lower margin business during the second half of fiscal 2023. This is the last quarter in which we will see any meaningful headwind from the four notable contracts that we exited last year to strategically manage customer and product mix.
Moving on from sales, adjusted gross profit increased $24 million to $427 million, which was driven by the benefit of inflation-driven pricing actions and incremental earnings from the consolidation of the EMEA business. The increase was partially offset by mid-single digit input cost inflation on a per pound basis, and a $20 million charge for the write-off of excess raw potatoes as we considered the softer restaurant traffic trends in North America, as well as the higher-than-expected impact on volume from the ERP transition.
In addition, we estimate that the ERP transition negatively impacted adjusted gross profit by approximately $88 million. We estimate that approximately $55 million was due to lower volumes and negative mix and that the remaining $33 million was due to about $26 million from reduced fixed cost coverage and inefficiencies arising from planned downtime for the ERP transition in our factories, as well as additional freight charges as we sought to reduce the impact of shipment delays on our customers and about 7 million for penalties associated with delayed shipments or the inability to fill customer orders.
Adjusted SG&A increased $30 million to $164 million, primarily due to incremental SG&A with the consolidation of EMEA, as well as higher expenses associated with the ERP system transition, including non-cash amortization. The increase includes approximately $7 million of incremental costs to support the system post go live, including efforts to restore customer order fulfillment rates to pre-transition levels. A reduction in compensation and benefit accruals tempered the increase in SG&A. All of this led to adjusted EBITDA of $344 million, which is down 2% versus the prior year.
Lower income in the Lamb Weston base business, which includes an estimated $95 million impact from the ERP transition and a $25 million write-off of excess potatoes, more than offset incremental earnings from consolidating the EMEA business and the benefit of inflation-driven pricing actions. So, on an underlying basis, excluding these items, adjusted EBITDA would have been around $465 million, while sales excluding acquisitions and the impact of the ERP transition, would have been down 1% to 2%.
Moving to our segments. Sales in our North America segment, which includes sales to customers in all channels in the U.S., Canada and Mexico, declined $123 million, or 12% in the quarter. We estimate that essentially all of that decline was due to unfilled orders and unfavorable mix attributable to the ERP transition. Price mix was up 5%, driven by the carryover benefit of pricing actions that took effect in fiscal 2023 across each of our primary sales channels, as well as some pricing actions taken this year. Mix was unfavorable as higher margin, lower volume customers, which typically have more complex mix product orders, were harder to fill until the inventory visibility issues related to the ERP transition were resolved.
In addition, lower freight charges to customers partially offset the increase in price mix by more than 4 percentage points. Volume declined 17% with more than half of the decline reflecting unfilled customer orders resulting from the ERP transition. The remainder of the decline primarily reflects soft restaurant traffic and retail trends, as well as the carryover impact of exiting lower margin business during the second half of fiscal 2023. North America's segment adjusted EBITDA declined 14% to $286 million. The decline was largely driven by an estimated $83 million impact from the ERP transition and a $23 million charge for the write-off of excess potatoes, of which about $5 million of the excess potato write-off was incurred at our North American joint venture. The impact of lower volumes and higher cost per pound also contributed to the decline. These factors more than offset the benefit of inflation-driven pricing actions.
Sales in our International segment, which includes sales to customers in all channels outside of North America, grew nearly $330 million, of which $357 million were incremental sales from the EMEA acquisition. Excluding the EMEA acquisition, net sales declined $29 million, or 16%. We estimate approximately $12 million of that decline relates to unfilled orders attributable to the ERP transition. Price mix was up 1%, driven primarily by the carryover benefit of pricing actions taken last year as well as pricing actions taken this year. Lower freight charges to customers partially offset the increase in price mix by about 5 percentage points.
Sales volume declined 17%, with more than half of the decline reflecting the carryover impact of exiting lower margin business during the second half of fiscal 2023. The remainder of the volume decline reflects unfilled customer orders served by North American exports as a result of the ERP transition. International segment's adjusted EBITDA increased 88% to $102 million. Incremental earnings from the consolidation of EMEA's financial results drove the increase. Excluding the EMEA acquisition, higher cost per pound, an estimated $5 million impact from the ERP transition, lower volumes and a $2 million allocated charge for the write-off of excess raw potatoes more than offset favorable price mix.
Let's move to our liquidity position and cash flow. Our balance sheet remains strong. We ended the quarter with a net debt leverage ratio of 2.6 times adjusted EBITDA, up from 2.4 times at the end of the fiscal second quarter. Our net debt increased about $270 million to $3.8 billion as we drew on our revolver to largely finance increased working capital needs during the ERP system transition, as well as increased capital expenditures. We continue to have ample liquidity, including more than $900 million available under our revolving credit facilities.
In the first nine months of the year, we generated more than $480 million of cash from operations, up about $145 million versus the prior-year period, primarily due to higher earnings. We spent nearly $830 million in capital expenditures, which is up about $330 million from the prior-year period. The increase primarily reflects construction and equipment costs for our new China factory that started up in November, as well as costs related to our capacity expansion projects in Idaho, Netherlands and Argentina. And finally, we've returned more than $270 million of cash to our shareholders, comprised of $122 million in dividends and $150 million in share repurchases.
Turning to our updated fiscal 2024 outlook. We updated our full-year sales and earnings targets to reflect the impact of the ERP system transition as well as near-term demand trends. Specifically, we reduced our annual net sales target to $6.54 billion to $6.6 billion from our previous target range of $6.8 billion to $7 billion. The updated range includes $1.1 billion of incremental sales attributable to the EMEA acquisition during the first three quarters of the year. Our updated sales target implies sales of $1.69 billion to $1.75 billion in our fiscal fourth quarter, which is flat to up 3% compared with the same period a year ago.
We expect price mix will drive our sales growth in the fourth quarter, reflecting the continued carryover benefit of inflation-driven pricing actions taken in fiscal 2023 and actions we've taken in fiscal 2024. We expect lower freight charges to customers will continue to partially offset the increase in price mix.
As Tom noted, we expect volumes in the fourth quarter will decline mid-single digits, which is down from our previous target of positive volume growth. The primary reasons for the change include our expectation that soft restaurant traffic trends in North America will continue longer than we initially anticipated and that restaurant traffic trends in several of our key international markets have also softened more than expected. We point to softer restaurant traffic trends as the driver, affecting our volume performance since our fry attachment rates in North America and our key international markets have generally been stable and that our customer order fulfillment rates that were affected as part of the ERP transition in North America are back to pre-transition levels. In addition, we expect volume in the fourth quarter may be impacted by some customers in North America that were affected by the ERP transition seeking supply and at least temporarily, from alternative sources.
For earnings, we reduced our adjusted EBITDA range to $1.48 billion to $1.51 billion from a previous range of $1.54 billion to $1.62 billion, that's down about $85 million using the midpoints of the two ranges. The decrease largely reflects an estimated $95 million impact from the ERP transition, a $25 million charge for the write-off of excess raw potatoes and the impact of softer restaurant traffic trends in North America and our key international markets. We partially offset the decrease by absorbing some of the financial impact of the ERP transition, as well as reducing compensation and benefit accruals.
Our updated target implies adjusted EBITDA of $350 million to $375 million in the fourth quarter, an increase of 9% versus the prior year quarter using the midpoint of the range. We expect higher sales and adjusted gross profit to drive the growth, partially offset by adjusted SG&A of $190 million to $195 million. With respect to adjusted diluted earnings per share, we lowered our full-year target to $5.50 to $5.65. We're also updating a couple of other financial targets.
We expect capital expenditures of $950 million, which is the upper end of our previous range of $900 million to $950 million. We also expect our annual effective tax rate to be around 23%, which is at the low end of our targeted range of 23% to 24%. Our targets for depreciation and amortization expense of $300 million and interest expense of $140 million are unchanged.
Let me now turn it back over to Tom for some closing comments.
