Senior Vice President and Chief Financial Officer at Lamb Weston
Thanks, Tom, and good morning, everyone.
As Tom discussed, we're pleased with our progress in the quarter. We generated strong sales as solid demand across our restaurants and foodservice channels in North America drove volume growth and we implemented pricing actions. We believe our pricing and cost mitigation actions have us positioned to navigate through this difficult operating environment and to support sustainable profitable growth over the long term.
Specifically in the quarter, sales increased 12% to a little over $1 billion. This is only the fourth time in Lamb Weston's history that we topped $1 billion of sales in a quarter. Sales volumes were up 6%. Volume growth was driven by our Foodservice segment, which reflects the continued year-over-year recovery in on-premise dining and by strong shipments to our large chain restaurant customers in North America that is served by our Global segment.
Sales volumes of branded products in our Retail segment were also up in the quarter, but the segment's overall volume declined due primarily to lower shipments of private label products. While our overall volume growth in the quarter was strong, it was tempered by industry-wide upstream and downstream supply chain constraints, including delays in the availability of spare parts, edible oils and other key materials to our factories, as well as labor shortages, which impacted production run rates and throughput at our processing plant.
In our Global segment, volume growth was also tempered by the limited availability of shipping containers and disruptions at ports and in ocean freight networks. We expect these production and logistic challenges, as well as the near-term impact of COVID variants to limit our volume growth through at least the end of fiscal 2022.
Price mix was up 6%, as we realized benefits from our previously announced pricing actions in each of our core segments. As a reminder, we began implementing product pricing actions in the first quarter as a primary lever to offset inflationary cost pressures. And it generally takes a couple of quarters before these actions are fully realized in the marketplace.
We've also taken actions to more frequently change the freight rates that we charge to customers, so they better reflect market rates. Historically, we only adjusted these rates once or twice a year. Most of the increase in price mix in the quarter reflects the product and freight pricing actions, with favorable mix providing only a modest benefit.
Gross profit in the quarter declined $18 million, as the benefit of increased sales was more than offset by higher manufacturing and transportation costs on a per pound basis. Double-digit inflation for commodities and transportation costs accounted for almost 90% of the increase in cost per pound. Of the two, commodities played a bigger role and were again led by edible oils, including canola oil, which nearly doubled versus the prior year quarter.
Ingredients such as wheat and starches used to make batter and other coatings and containerboard and plastic film for packaging. Freight costs rose, especially for ocean freight and trucking as global logistics networks continued to struggle. Our costs also increased due to an unfavorable mix of higher cost trucking versus rail in order to meet service obligations for certain customers.
As Tom mentioned, we also incurred higher cost per pound versus the prior year due to incremental costs and inefficiencies driven by lower production run rates and throughput at our factories, which resulted in fewer pounds to cover fixed overhead. Lost production days and unplanned downtimes were primarily due to labor shortages across our manufacturing network, including COVID-related absenteeism.
While the cost drivers in the first two quarters of the year have been largely consistent, in the second quarter, we began to realize the initial benefits of the pricing and cost mitigation actions that we discussed during our last earnings call. As a result of these efforts, gross margin increased sequentially versus the first quarter by 500 basis points to more than 20%. While pricing actions provided the larger lift to the sequential improvement to gross margins, our production run rates and throughput improved sequentially, primarily due to our efforts to stabilize factory labor. While still lower than average, labor retention rates improved modestly versus the first quarter and the number of new applicants has been steady. With more stability, we, in turn, drove more factory throughput.
Finally, our actions to optimize our portfolio are also providing benefit. We've eliminated underperforming SKUs to simplify our portfolio and increase throughput in our factories. We've also successfully partnered with our large customers to secure changes to product specifications, to mitigate a portion of the operating impact of the poor quality of this year's potato crop.
In short, while our run rates and cost structure are not yet where we want them to be, we look forward to building on the notable sequential progress that we made in the quarter and believe that we positioned ourselves to manage through this challenging near-term increased cost and poor potato crop environment.
Moving on from cost of sales. Our SG&A increased $7 million in the quarter, largely due to a couple of factors. First, it reflects higher labor and benefit costs and higher sales commissions associated with increased sales volumes. Second, it includes a $2.5 million increase in advertising and promotional expenses as we stepped up support for our retail products. While these expenses are up compared with the prior year, they are still below pre-pandemic levels.
The increase in SG&A was partially offset by a reduction in consulting expenses associated with improving our commercial and supply chain operations as those consulting projects ended, as well as fewer expenses in the current quarter related to the design of a new enterprise resource planning system. We had approximately $2 million of ERP-related expenses in the quarter, which consisted primarily of consulting expenses. That's down from about $5 million of similar type expenses in the prior year quarter. We are resuming our efforts in the second half of fiscal 2022 to design the next phase of our new ERP system.
Diluted earnings per share in the quarter was $0.22, down $0.44. About $0.28 of the decline was related to costs associated with the redemption and write-off of previously unamortized debt issuance costs related to the senior notes that were originally issued in connection with our spin-off from ConAgra in November 2016. We identified these costs as items impacting comparability in our non-GAAP results. Excluding the impact of these items, adjusted diluted EPS was $0.50, which is down $0.16 due to lower income from operations and equity method earnings.
Moving to our segments. Sales for our Global segment were up 9% in the quarter. Price mix was up 5%, reflecting a balance of higher prices charged for freight, pricing actions associated with customer contract renewals and inflation driven price escalators. Volume was up 4%. Higher shipments to large chain restaurant customers in North America drove the volume increase, while logistics constraints tempered our international shipments.
Overall, the Global segment's total shipments continued to trend above pre-pandemic levels. Global's product contribution margin, which is gross profit less A&P expenses, declined 13% to $81 million. Higher manufacturing and distribution cost per pound more than offset the benefit of favorable price mix and higher sales volumes.
Moving to our Foodservice segment. Sales increased 30%, with volume up 22% and price/mix up 8%. The ongoing recovery in demand from small and regional restaurant chains and independently owned restaurants, as well as from non-commercial customers drove the increase in sales volumes. The initial benefits of product and freight pricing actions that we began implementing earlier this fiscal year, as well as favorable mix drove the increase in price/mix. Foodservice's product contribution margin rose 19% to $104 million as favorable price/mix and higher sales volumes more than offset higher manufacturing and distribution cost per pound.
Moving to our Retail segment. Sales increased 1%. Price/mix increased 5%, reflecting the initial benefits of pricing actions in our branded portfolio, higher prices charged for freight and improved mix. Sales volume declined 4%, as an increase in branded product volume was more than offset by lower shipments of private label products resulting from incremental losses of certain low-margin business.
Retail shipments in the quarter were also tempered by the industry-wide supply chain constraints and production disruptions that I discussed earlier. Retail's product contribution margin declined 29% to $21 million. Higher manufacturing and distribution cost per pound, a $2 million increase in A&P expenses and lower sales volumes drove the decline.
Moving to our liquidity position and cash flow. Our liquidity position remains strong. We ended the first half of fiscal 2022 with almost $625 million of cash and $1 billion of availability on our undrawn revolver. In the first half, we generated more than $205 million of cash from operations. That's down about $110 million versus the first half of the prior year, due primarily to lower earnings.
During the first half of the year, we spent nearly $150 million in capital expenditures, as we continued construction of our chopped and formed expansion in American Falls, Idaho, and our new processing lines in American Falls in China. We continue to put significant effort into managing certain material equipment and labor availability issues to keep our capital projects on track.
In the first half of the year, we returned $145 million to shareholders, including nearly $70 million in dividends and $76 million of share repurchases. This includes $50 million of share repurchases in the second quarter alone. Last month, we announced a 4% increase in our quarterly dividend rate, which equates to approximately $144 million annually, and a $250 million increase to our current share repurchase plan, reflecting our confidence in the long-term potential of our business. As a result, we have about $344 million authorized for share repurchases under the updated plan.
As I referenced earlier, during the quarter, we redeemed and issued nearly $1.7 billion of senior notes. In doing so, our average debt maturity increased from four years to more than seven years, and we reduced our annual interest expense by approximately $8.5 million. We remain committed to our capital allocation priorities. First, to reinvest in our business both organically and with M&A, and then to return free cash flow to shareholders through a combination of dividends and share repurchases over time.
Now turning to our updated outlook. We continue to expect our full-year sales growth in fiscal 2022 to be above our long-term target of low to mid-single digits. In the third quarter, we anticipate price/mix will be up sequentially versus the 6% increase that we delivered in the second quarter as the benefit of previously announced product pricing actions in each of our core segments continues to build.
We expect volume growth in the third quarter will decelerate sequentially versus the 6% we delivered in second quarter. As a result of the near-term impact of COVID variants on restaurant traffic and demand, the macro industry supply chain constraints and labor challenges that will continue to affect production run rates and throughput in our factories and global logistics disruptions and container shortages that effect both domestic and export shipments. We expect further deceleration in the fourth quarter as we begin to lap some of the higher volume comparison from the prior year.
With respect to earnings, we continue to expect net income and adjusted EBITDA, including joint ventures, will be pressured to fiscal 2022, reflecting significantly higher potato costs in the second half of the year resulting from the poor crop, double-digit inflation for key production inputs and freight and higher SG&A expenses. For the full year, we expect our gross margin will be 600 basis points to 700 basis points below our pre-pandemic margin rate of 25% to 26%, implying a target range of 18% to 20%. That's a change from the 17% to 21% range that we provided in our previous outlook.
We narrowed the range for a number of reasons. First, we're confident about the pace and execution of the product and freight price increases that we are implementing in the market. Second, we expect to build upon the incremental progress that we made in the second quarter to stabilize our supply chain operations and drive savings behind our cost mitigation initiatives. However, we expect that the improvement in our run rate, throughput and costs will continue to be gradual, reflecting the broader macro challenges facing the labor market that will likely persist through fiscal 2022.
And third, we have greater clarity on the net cost impact from this year's exceptionally poor potato crop. As a reminder, we'll begin to realize the full financial impact of this year's poor potato crop in the third quarter and will continue to realize its effect through most of the second quarter of fiscal 2023. Below gross margin, we expect our SG&A expenses to step up to $100 million to $110 million in the third and fourth quarters as we begin design the second phase of our new ERP project.
Equity earnings will likely remain pressured due to input cost inflation and higher manufacturing costs, both in Europe and U.S. We expect our interest expense to be approximately $110 million, excluding the $53 million of costs associated with the redemption of the senior notes in the second quarter. We previously estimated interest expense to be approximately $115 million. Our estimates for total depreciation and amortization expense of approximately $190 million, an effective tax rate of approximately 22%, and capital expenditures of approximately $450 million remains unchanged.
So in sum, we're seeing the benefit of our pricing actions, which drove the sequential improvement in our top line and gross margin in the quarter. Along with our pricing actions, we're on track with our other cost mitigation initiatives, positioning us to manage through the impact of the very poor crop.
And finally, for fiscal 2022, we continue to expect net sales growth will be above our long-term target of low to mid-single digits. And we have enough clarity in our sales and cost outlook to narrow our previous target gross margin rate.
Now here's Tom for some closing comments.