Bernadette Madarieta
Chief Financial Officer at Lamb Weston
Thanks, Tom, and good morning, everyone. As Tom noted, our sales and earnings performance fell well short of our targets. Our team members are focused on getting our operations and financial results back on track in fiscal 2025. Before I provide our outlook for the upcoming year, let's begin by reviewing our fourth quarter results. Sales declined $83 million or 5% to more than $1.61 billion. Volume declined 8% and price/mix increased 3%. As it relates to volume, nearly five percentage points of the decline reflects the impact of share losses, as well as our decision to exit certain lower-priced and lower-margin business in EMEA earlier in the year. The decline is a couple of points more than what we originally anticipated and was driven in part by higher-than-estimated share losses.
With respect to the ERP transition, the issues we experienced that affected our third quarter order fill rates were temporary and contained in that quarter. We have healthy warehouse inventory levels and flows throughout the system. The remaining three points of the 8-point volume decline reflected about one point loss related to the unexpected voluntary product withdrawal that Tom referenced, and about two points related to soft restaurant traffic trends in North America and many of our key international markets, which was a bit more than we had expected. Price/mix increased 3%, reflecting the carryover benefit of inflation-driven pricing actions taken in late fiscal 2023 as well as pricing actions taken in fiscal 2024 across both of our business segments. The increase in price/mix, however, was a few points below our expectations. This was largely due to unfavorable mix versus our forecast as customer demand for value-based products increased as well as targeted investments in price in North America.
Moving on from sales, our adjusted gross profit declined $72 million to $363 million. About $40 million of that decline was due to the voluntary product withdrawal. The remaining $32 million was primarily driven by lower volume and an $8 million increase in depreciation expense associated with our capacity expansions in China and Idaho. The carryover benefit of our pricing actions largely offset higher manufacturing costs, which was primarily driven by mid-single-digit input cost inflation. Our gross margin in the quarter was about 23%, which was about 400 basis points below our target of 27%. Of the shortfall, about 250 basis points was related to the voluntary product withdrawal. The remaining roughly 150 basis points largely reflected the unfavorable mix impact from greater-than-expected share losses of higher-priced, higher-margin customers as well as the investments in price that we made in our North America segment.
Adjusted SG&A declined $6 million to $172 million, reflecting lower performance-based compensation expense, which more than offset higher expenses associated with information technology investments, higher advertising and promotion investments to support the launch of retail products in EMEA, and $6 million of incremental noncash amortization related to our new ERP system. Our SG&A in the quarter was about $20 million below the midpoint of our fourth quarter target of approximately $193 million, largely due to lower performance-based compensation expense and other cost savings efforts. All of this led to adjusted EBITDA of $283 million, which is down $50 million versus the prior year as lower sales and gross profit more than offset the decline in SG&A. That's about $80 million below the midpoint of our fourth quarter EBITDA target of approximately $363 million. About half of that shortfall is due to the voluntary product withdrawal late in the quarter.
The other half is due largely to targeted investments in price and trade support in our North America segment, unfavorable mix, and lower-than-expected volume, partially offset by favorable SG&A compared with our forecast. Moving to our segments. Compared with the year ago period, sales in our North America segment, which includes sales to customers in all channels in the U.S., Canada, and Mexico, declined $47 million or 4% in the quarter. Volume declined 7% with about five points related to share losses and about 2% related to soft restaurant traffic in the U.S. Price/mix increased 3%, driven by the carryover benefit of inflation-driven pricing actions taken in late 2023, as well as pricing actions for contracts with large and regional chain restaurant customers taken in fiscal 2024.
Unfavorable mix due to share losses of higher-margin customers as well as targeted investments in price tempered the increase in price/mix. The North America segment's adjusted EBITDA declined $21 million or 7% to $277 million primarily due to an approximately $19 million charge related to the voluntary product withdrawal. The remainder largely reflects a combination of lower sales volumes, unfavorable mix, and higher cost per pound, more than offsetting the benefit of prior pricing actions. Sales in our International segment, which includes sales to customers in all channels outside of North America, declined $36 million or 7%. Volume declined 9% with nearly five percentage points from share losses, which are due in part to decisions to exit certain lower-priced and lower-margin business in EMEA earlier in the year. We expect these strategic exits will continue to be a headwind through the first half of fiscal 2025.
More than two points of the volume decline in the quarter reflects the voluntary product withdrawal, while the remaining roughly two points reflected soft restaurant traffic trends in key international markets. Price/mix increased 2%, driven primarily by inflation-driven pricing actions taken in fiscal 2023 as well as the carryover benefit of pricing actions taken earlier in fiscal 2024. Our International segment's adjusted EBITDA declined $43 million or 52% to $40 million. About $21 million of that decline related to the voluntary product withdrawal. The remainder of that decline was driven by lower sales volume, higher cost per pound, and higher advertising and promotional investments to support the launch of retail products in EMEA and was partially offset by the benefit of prior pricing actions.
Moving to our liquidity position and cash flow. Our balance sheet remains strong. We ended the quarter with net debt leverage ratio of 2.7 times adjusted EBITDA, and our net debt declined nearly $40 million as compared to the end of our fiscal third quarter to about $3.75 billion. We continue to have ample liquidity, including nearly $1.2 billion available for a new global revolving credit facility. For the year, we generated about $800 million of cash from operations, which is up about $37 million versus the prior year. As we discussed before, driving long-term growth requires making the right, strategic, and forward-looking investments.
The resilience of our business and our overall financial strength put us in the ideal position to modernize our assets as well as to invest in critical areas that support customer needs and unlock efficiencies for our people and our business. This allowed us to spend about $990 million in capital expenditures this year or about $255 million more than the prior year, largely reflecting strategic investments, to complete facilities in China and American Falls, Idaho. Our ongoing capacity expansion projects in the Netherlands and Argentina, and our new ERP system. Finally, consistent with our capital allocation priorities, we returned $384 million of cash to our shareholders through dividends and share repurchases during the year. This includes $210 million in share repurchases, including $60 million in the fourth quarter and $174 million in dividends. This reflects the strength of our balance sheet and our confidence in our business.
Now turning to our fiscal 2025 outlook. As Tom discussed, we expect that the operating environment this year will be challenging, and that consumers will continue to be more intentional with the dollars they spend in a pressured economic landscape. We expect that soft restaurant traffic and fry demand may result in higher-than-normal available industry capacity for selected product types and channels in fiscal 2025, and that we will make some targeted investments in price and trade to support volume growth and share. In addition, we're aggressively evaluating opportunities and implementing actions to drive supply chain productivity, balanced production based on lower shipments, and reduced operating expenses.
Specifically for the year, we're targeting sales of $6.6 billion to $6.8 billion on a constant currency basis. This implies growth of 2% to 5%, which we expect will be driven largely by volume. However, we anticipate that volume will decline during the first half of the year, primarily due to two factors: first, we'll continue to experience the impact of recent share losses; and second, despite efforts by quick service and casual dining chains to improve traffic through increased promotional activity, we expect that restaurant traffic will remain soft for at least the first half of the year as the consumer continues to adjust to the cumulative impact of years of menu price inflation as well as other economic headwinds.
During the second half of the year, we expect our volume to increase as we lap the prior year impacts of the ERP transition and voluntary product withdrawal, increasingly benefit from recent customer contract wins in the U.S. and key international markets, and recapture some of the market share we lost in fiscal 2024. In fiscal 2025, we don't expect a meaningful contribution to come from price/mix in the aggregate. In North America, we're targeting price/mix to decline. We expect to drive improvements in mix as the year progresses as we recapture lost share in higher-priced, higher-margin channels. However, due to the soft demand environment, we believe the mix benefits will be more than offset by targeted investments in price and trade support to drive volume growth and share growth across the sales channels.
In international, when possible under the terms of the customer contracts, we'll look to drive pricing actions to offset input cost inflation, which we anticipate will be largely driven by a below-average crop in Europe. In addition, we'll begin to gradually leverage our revenue growth management tools to manage our price architectures and improve mix. However, we anticipate that the increase in price/mix may be tempered by targeted investments in price and trade support in certain markets and channels to protect market share and win new business.
For earnings, we expect adjusted EBITDA of $1.38 billion to $1.48 billion. For diluted earnings per share, we're targeting $4.35 to $4.85. This includes an adjusted SG&A target of $740 million to $750 million, which is up $70 million versus the prior year, reflecting returning performance-based compensation expense back to targeted levels, an incremental $24 million of noncash amortization related to our new ERP system, and an incremental $10 million of advertising and promotional investments largely to support our retail brands in both North America and EMEA.
Excluding these three items, our adjusted SG&A expenses are down due to aggressive cost management. As I previously discussed, we're continuing to evaluate and implement additional cost savings actions. We're targeting total depreciation and amortization expense of $375 million, which is an increase of $75 million. About $50 million of the increase is included in cost of sales and largely associated with the depreciation of the capacity expansions in China, Idaho, and the Netherlands. The remainder of the increase primarily reflects the incremental amortization of our ERP system, which is recorded in SG&A. For interest expense, we're forecasting about $180 million. That's an increase of about $45 million, reflecting higher average debt levels and lower capitalized interest. We're forecasting a full year effective tax rate of approximately 24%, which is similar to last year's rate.
Finally, we're targeting cash use for capital expenditures of approximately $850 million as we continue the construction of our previously announced capacity expansion efforts in the Netherlands and Argentina. We currently expect the expansion in the Netherlands to be completed by the end of calendar 2024, while Argentina is targeted to be operational in mid-calendar 2025. In addition, as Tom mentioned, we're looking at rephasing future capital investments to modernize production capabilities to better match the demand environment. That said, more than 80% of this year's forecasted capital expenditures are committed. Since we anticipate our two large capacity expansions will be completed by the end of fiscal 2025, we expect a notable decrease in capital expenditures in fiscal 2026.
Because of the rapid change in the operating environment our fiscal 2025 growth rates are below our normalized fiscal 2024 baseline. As it relates to sales, our fiscal 2025 outlook implies a normalized growth rate of 0% to 3% after adjusting for the estimated impact of the ERP transition in fiscal 2024. That growth rate is at the low end of our long-term growth algorithm of low to mid-single digits. Our adjusted EBITDA target for fiscal 2025 is about $160 million, below our normalized fiscal 2024 baseline of about $1.6 billion. Broadly speaking, that decline reflects targeted investments in price and trade support to retain or win new customers, challenges in certain markets and channels to implement sufficient pricing to offset input cost inflation, an estimated carryover impact of unfavorable mix from lost share of higher-priced, higher-margin customers in North America, and an additional estimated $20 million to $30 million loss in the first quarter of fiscal 2025 associated with the voluntary product withdrawal.
Before I turn the call back over to Tom, I want to provide some thoughts on the first quarter. While we don't typically provide quarterly guidance, given our recent results, the expected headwinds and the changes in the operating environment, we're providing more detail on our expectations for the quarter. Specifically in the first quarter, we're targeting sales to be down mid- to high single digits, with volume down mid-single digits due to the carryover impact of share losses, soft restaurant traffic, and the voluntary product withdrawal. We believe that the impact of share losses and soft traffic will be the greatest in the first quarter and gradually ease as the year progresses. We expect price/mix may be down low to mid-single digits as the carryover benefit of pricing actions taken in fiscal 2024 are more than offset by the impact of unfavorable mix and targeted investments in price and trade support in North America.
For earnings, we expect our EBITDA margin to be the lowest of the year due to our typical seasonality and the $20 million to $30 million loss estimated to be associated with the voluntary product withdrawal that I mentioned earlier. We do not expect additional losses related to the product withdrawal beyond the first quarter. We also expect our first quarter margin will be pressured by higher cost per pound, unfavorable mix, and investments in price and trade support.
Let me now turn it back over to Tom for some closing comments.
