Bernadette Madarieta
Chief Financial Officer at Lamb Weston
Thanks, Tom, and good morning, everyone.
As Tom noted, our financial results were generally in line with our expectations. Specifically, while sales declined 1% compared with the year-ago quarter, the decline was less than the high-single-digits we expected due to better-than-projected volume and price/mix. Compared with the first quarter a year ago, volume declined 3%, and largely reflected the carryover effects of customer share losses in North America, the exit of certain lower-priced and lower-margin business in Europe last year, and soft restaurant traffic trends in the U.S.
To a lesser extent, the previously announced voluntary product withdrawal that began affecting our sales in fourth quarter of fiscal 2024 also contributed to the first quarter decline. Volume growth in our key international markets partially offset the overall decline. Price/mix increased 2% compared with the prior year due to the benefit of inflation-driven pricing actions in Europe, as well as the carryover benefit of pricing actions we took last year in North America. Unfavorable channel and product mix, as well as targeted investments in price and trade, tempered the increase in price/mix.
Moving on from sales, our adjusted gross profit declined $137 million to $353 million, due primarily to three factors. First, about $39 million of the decline was due to the voluntary product withdrawal. It was higher than the $20 million to $30 million range that we anticipated in the quarter, primarily due to higher-than-expected costs to dispose the product. Second, more than $15 million of the adjusted gross profit decline was due to higher depreciation expense that's largely related to our capacity expansions in China and Idaho that were completed last fiscal year. The rest of the decline was primarily driven by higher manufacturing costs per pound, which reflects input cost inflation, as well as inefficiencies associated with lower factory utilization rates. To a lesser extent, lower sales volumes and higher warehousing costs also contributed to the decline. Together, these factors more than offset the net benefit from pricing actions.
Our gross margin in the quarter was nearly 21.5%, which was about 100 to 150 basis points below our target of 22% to 23%. Of the shortfalls, nearly 100 basis points was related to the greater-than-expected impact of the voluntary product withdrawal. The remainder largely reflected higher-than-expected manufacturing costs per pound.
Adjusted SG&A increased $6 million to $149 million due to an incremental $6 million of non-cash amortization related to our new ERP system that went live in the third quarter of fiscal 2024. Aggressive actions to reduce spending offset inflation and investments in our information technology infrastructure. All of this led to adjusted EBITDA of $290 million. While that's better than what we guided, it was down about $123 million versus the prior year quarter, largely due to higher manufacturing costs per pound and the impact of the voluntary product withdrawal, which more than offsets the net benefit from pricing actions.
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 3% versus the prior year quarter. Volume declined 4% and was largely driven by the carryover impact of smaller and regional customer share losses in food-away-from-home channels, as well as declining restaurant traffic in the U.S.
The volume decline was partially offset by growth in retail channels. Price/mix increased 1%, reflecting the carryover benefit of inflation-driven pricing actions for contracts with large and regional chain restaurant customers taken in fiscal 2024, which was partially offset by unfavorable channel and product mix and, to a lesser extent, targeted investments in price.
North America's segment adjusted EBITDA declined $103 million to $276 million and included an approximately $21 million charge related to the voluntary product withdrawal. The remaining decline largely reflects the combination of higher manufacturing costs per pound, unfavorable mix, and investments in price and trade, which combined more than offsets the carryover benefit of prior year pricing actions.
Sales in our International segment, which includes sales to customers in all channels outside of North America, increased 4% versus the prior year quarter. Price/mix increased 5%, largely reflecting pricing actions announced this year to counter input cost inflation. Volume declined 1% due to our strategic decision to exit certain lower-priced and lower-margin business in EMEA in early fiscal 2024 and, to a lesser extent, the voluntary product withdrawal.
These business exits in EMEA will continue to be a headwind during the second quarter of fiscal 2025. Growth in key international markets outside of EMEA tempers the overall volume decline. International segment adjusted EBITDA declined $39 million to $51 million. About $18 million, or about half of that decline, related to the voluntary product withdrawal. The remainder was largely driven by higher manufacturing costs per pound, which was partially offset by the benefit of inflation-driven pricing actions.
Moving to our liquidity position and cash flow. We continue to maintain a solid balance sheet with ample liquidity. We ended the first quarter with about $120 million of cash and $1 billion available under our global revolving credit facility. Our net debt was about $3.9 billion, which puts our leverage ratio at three times.
Last week, we increased our available liquidity, $275 million, by entering into a new $500 million term loan. We used the proceeds from the loan to pay off an existing $225 million term loan and $275 million of borrowings under our global revolving credit facility. As a result, it had no impact on our total debt, increased our available liquidity, and our leverage ratio was not affected.
In the first quarter, we generated $330 million of cash from operations, which, despite a decline in earnings, is about the same amount we generated last year due to favorable changes in working capital. We expect further working capital improvements during the balance of the year as we execute our restructuring plan.
Net capital expenditures were about $335 million as we finalized spending for our Idaho capacity expansion and continued construction of our expansion projects in the Netherlands and Argentina. We expect our capital spending in the first quarter will be our highest quarter for the year as it accounted for almost half of our updated annual capital spending target.
During the quarter, we returned more than $133 million of cash to shareholders, including $52 million in dividends. We spent $82 million to repurchase more than 1.4 million shares at an average price of just over $58 per share.
Before discussing our outlook, let me first provide additional details on the restructuring plan we announced yesterday. As Tom noted, these were hard but necessary decisions to adjust to the current business trends. These actions will help us manage asset utilization rates, leverage our more efficient lower-cost production assets, and reduce costs and expenses.
The actions include a 4% reduction in our global headcount and the elimination of certain unfilled job positions. We do not take this lightly, and we've carefully considered the impact on our Lamb Weston family. We currently estimate that these actions will generate total savings of approximately $55 million in fiscal 2025, with about one-third benefiting cost of sales and two-thirds benefiting SG&A expenses. We've incorporated these savings in our updated fiscal 2025 outlook. We expect further benefits in fiscal 2026, with estimated annualized savings of about $85 million.
We expect to record a $200 million to $250 million pre-tax charge associated with the restructuring, most of which we expect to record in the second quarter. About 20% of the charge is non-cash and primarily reflects the accelerated depreciation of assets at our Connell facility. The remaining 80% are cash charges comprised of costs of contracted raw potatoes that will not be used due to the production line curtailment, the teardown and other cleanup costs associated with permanently closing the Connell production facility, severance and other employee-related costs associated with the reduction in our workforce, and other miscellaneous restructuring costs.
Additionally, we've scrutinized every project and every dollar of capital. As a result, we now expect capital expenditures in fiscal 2025 of approximately $750 million, which is down $100 million from our plan entering the year. A significant portion of the reduction reflects deferring the build and implementation of the next phase of our ERP system, which, once built, will be deployed first in our manufacturing plants in North America.
The remaining decline is largely due to deferring or canceling modernization projects due to the current operating environment. While the next phase of the ERP build and implementation has been deferred, we are committed to the benefits that an integrated system will deliver, but are prioritizing the investments needed to complete our strategic projects in the Netherlands and Argentina.
As it relates to next year's capital expenditures, we're currently targeting a notable decrease in spend, as we expect our strategic capacity expansion projects will be completed by the end of this fiscal year. In fiscal 2026, we expect expenditures for base capital and modernization efforts will be in line with our annual depreciation and amortization expense.
In addition, we expect to spend approximately $150 million for environmental capital projects at our manufacturing facilities. Our manufacturing processes involve water intake and waste handling and disposal activities, which are subject to a variety of environmental laws and regulations, along with the requirements of permits issued by governmental authorities. To comply with these regulations, we expect the laws in the states in which we operate will require us to spend approximately $500 million over the next five years.
The estimate to comply may vary based on changes in regulations and other factors. We're evaluating options to lessen these expenditures, including the potential for government incentives. And lastly, fiscal 2026 capital expenditures may include costs to restart the next phase of our ERP build. Consistent with past practice, we'll provide a specific capital spending target for next year when we provide our fiscal 2026 outlook in late July.
Now turning to our updated fiscal 2025 outlook. We're continuing to target a net sales range of $6.6 billion to $6.8 billion on a constant currency basis, or growth of 2% to 5%, with volume driving our sales growth. For earnings, we expect to deliver at the low-end of our target adjusted EBITDA range of $1.38 billion to $1.48 billion. We're targeting the low-end of the range due to higher manufacturing costs per pound, which relates to fixed cost deleveraging related to the temporarily curtailed lines in our plants, as well as less favorable customer and product mix. These factors will put additional pressure on our gross margins. We'll look to offset much of this pressure with the estimated $55 million of manufacturing, supply chain, and SG&A savings that we expect to generate from our restructuring plan, as well as efforts to aggressively manage costs across the business.
Other updates to our financial targets include reducing our adjusted SG&A target to between $680 million and $690 million from our previous range of $740 million to $750 million. Increasing our interest expense estimate by $5 million to approximately $185 million to account for higher average debt balances during the year, and increasing our estimated full year effective tax rate to approximately 25% from approximately 24% to reflect a higher proportion of income from our International segment, as well as other discrete items.
In addition, since we're targeting the lower-end of our adjusted EBITDA range, and since we've updated our estimates for interest expense and our effective tax rate, we reduced our adjusted diluted earnings per share target range to $4.15 to $4.35. So in summary, we're responding to the current challenging environment by adjusting our spending to protect profitability and ensure positive free cash flow while continuing to invest in and execute our strategy.
Let me now turn it over to Tom for some closing comments.
