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 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 2 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.
Tom Werner: Thanks, Bernadette. With the impact of the order fulfillment issues behind us, we remain focused on serving our customers as we close out fiscal 2024. While near-term demand trends may be soft, we remain confident in the long-term growth outlook and the health of the category. And by continuing to execute our strategies, we believe that we will remain well positioned to deliver sustainable, profitable growth and create value for our shareholders over the long term. Thank you for joining us today and now we’re ready to take your questions.
Operator: [Operator Instructions] We’ll go first to Andrew Lazar with Barclays.
Andrew Lazar: I think one of the questions I’m getting probably most this morning, frankly, separate from all things sort of ERP related, really has to do much more with your comments around slowing restaurant traffic all the time when sort of industry capacity is set to start building once again and what that could portend for pricing going forward, particularly with cost pressure not being anywhere near what it was in the last couple of years. So I guess, as a starting point, I’d really be curious to get your perspective on how you would address sort of that concern at this point.
Tom Werner: Yes Andrew, thank you for the question. Certainly, the restaurant traffic trends have been soft as we stated in our comments and everybody knows we’ve got capacity coming on in the industry. And the thing to remember is as the capacity comes on, it’s not all created equal. So the capabilities of the capacity are different. And as we have in the past, when we’ve had capacity coming online, we’re going to be very — we’re going to manage it very closely and be — and look at the opportunities we have in the different markets based on the capacity coming online as we have in the past. And so the difference is, obviously, the trends in the restaurant traffic are softer. We expect that to be a temporary outlier at this point.
Time will tell but we’ll manage the capacity coming online like we have in the past with ourselves and competitors and the category has been resilient and we remain confident and the long-term trajectory of this category which we expect to get back to 2% to 4% growth at a minimum.
Andrew Lazar: And then I know there are a number of costs, right, that Lamb Weston absorbed in fiscal ’24, that I don’t think you would expect to necessarily repeat next year. So some of the inventory write-offs, the costs associated with, obviously, this ERP disruption and such. I mean, just back of the envelope, it would seem like, again, if it weren’t for those things, maybe EBITDA would be closer to — even closer to like $1.7 billion this year as sort of a base. And I’m just trying to get a sense if we exclude those costs, would that kind of be — how we think about a baseline for EBITDA for ’24 off of which you would expect to grow EBITDA hopefully closer to your algorithm, let’s say, in fiscal ’25? Or am I missing something in that sort of math?
Bernadette Madarieta: Andrew, this is Bernadette. You’re absolutely thinking about it correctly. We did absorb those costs and I think you would add those back as you look to fiscal ’25. I think what’s going to be key is we’ll need to take a look at the restaurant traffic trends and impact on volume as we move forward and how that translates to fiscal ’25. And we’re in the process of rolling that up right now and we’ll have more information when we give our outlook in July.
Operator: We’ll go next to Peter Galbo with Bank of America.
Peter Galbo: I wanted to unpack maybe just the underlying volume comment that you made, Bernadette. So I mean at the total company level, right, if we strip out the 8 points from ERP and there’s obviously a piece that was walkaway business it seems like underlying volumes would have been down, I don’t know, 4% or 5%. And that’s kind of what you’re extrapolating into 4Q. Just want to understand if that’s kind of the logic as to how you’re applying whatever the 3Q rate was forward?
Bernadette Madarieta: Yes. So you’re exactly right. It was a 16% decline in the quarter, 8 points related to the ERP transition and then the underlying volume we had expected it to improve sequentially but that the softer traffic trends that we did see, we do expect those to remain soft in Q4 of this year and that’s what we’re updating in our outlook. That continued softness.
Peter Galbo: Okay. Got it. And I think what’s implied again in the fourth quarter guidance, again just thinking about this as it starts rolling forward into next year, is that price/mix kind of steps back up at least sequentially or the contribution rate based on kind of the updated guidance? And I wasn’t sure how much of that is just mix as you get back to fulfillment versus anything else that we might be considering.
Bernadette Madarieta: Yes, you’re going to see a couple of things. Mix will be part of it. As we said, in the third quarter, we weren’t able to fill a lot of those orders that are more higher margin, just given the more mixed loads and the order fulfillment issues we were having. So you will see that impact then into the fourth quarter. But there’s generally a sequential change between third and fourth quarter and you’ll continue to see that as you have in previous periods.
Operator: We’ll go next to Adam Samuelson with Goldman Sachs.
Adam Samuelson: So I guess, first, kind of continuing on Peter’s line of questioning. I want to think about the volume impact of customers who are seeking alternative sources of supply and where — I mean, definitionally, that’s market share. Now one could say that, that is temporary. But just get your perspective on your ability to get that volume and that share back? And on a related point, kind of we’ve talked about the headwinds from foregone volumes, from business you walked away from, kind at the time, the explanation was that you were going to be trying to backfill that with higher margin and higher mix products, does it seem like we’re getting that incremental uplift on the back end? And I’m just trying to get a update on where you are with those targeted volumes and targeted customers and categories.
Tom Werner: Yes, this is Tom. So a couple of things. We’re getting ready to go through our contracting season as we do every year at this time. We’re on the front end of it. So we have a robust plan on how we’re going to work through that. And so I’m confident the team and our direct sales force and Mike Smith and his commercial leaders are focused on that. So more to come on that but it’s going to take some time. It’s not perfectly matched as we’ve stated in the past in terms of the volume, we’ve exited versus what we’re targeting in the marketplace and we’re going to do it at the right margin levels. So that’s number one. Number two, this is a tough transition. There’s no question about it. And it materially impacted the company and we’re not happy about it.
And so we have to win back the trust of a lot of — some of our smaller customers and we’re working hard to do that with our direct sales force. But it’s going to take some time and that’s an unfortunate thing that has happened but I’m confident we have a plan. We’ve got everybody activated our direct sales force, 300 salespeople on the street but it’s going to take some time. And your question about — your point about market share is absolutely true. And so we’re going to have to work hard to get it back and we will. We have a resilient sales force but it’s going to take some time and I’m confident that the team, we got a great plan in place but it will take some time and we’re going to get there.
Adam Samuelson: Okay. That’s helpful. And then a second question I had on capital allocation and CapEx. I guess I’m just trying to get a sense for higher — at the high end of the range on capital spend this year and that’s just the timing of payments on projects. Has there been a — with a slower demand environment in the near term, is there any thoughts about timing of capital spend in ’25 and ’26 as it relate to the Netherlands and Argentina facilities and how quickly those need to be brought on or how quickly upgrading of other facilities needs to happen? And should we still be thinking about CapEx in — how should we think about CapEx in ’25 given slightly higher spend this year?
Tom Werner: Yes. So Adam, as we communicated in our Investor Day in October, we’re going to have an elevated level this year, next year. The projects that you mentioned, those are baked and we’re committed to it. And so we expect ’25 will be elevated as we stated. And as we continue to evaluate the market and what’s happening we’ll evaluate all of our capital expenditures going forward in terms of base capital levels that are needed.
Bernadette Madarieta: Yes, the guidance would be consistent with what we shared at Investor Day, 12% to 13% of sales in fiscal ’25.
Operator: We’ll go next to Tom Palmer with Citi.
Tom Palmer: I wanted to follow up, I guess, a little on Peter and Adam’s question, just on some of these customers. When might you have clarity whether these customers have kind of dropped you on a more sustained basis or whether you’re starting to kind of win them back. Is this — it’s really going to play out over 4Q and by next quarter, we’ll have real visibility over that trajectory? Or could it take even longer?
Tom Werner: No. Right now, as we sit, my belief is over the next 3 to 5 months, we’ll have some clarity on it. That’s going to be in conjunction to a lot of the contracting that we go through with the customers this cycle. So Tom, I think we’ll have good visibility by the time we get to our next call in July and we’ll get some more color on it by then.
Tom Palmer: Okay. And then just the mid-single-digit volume decline in 4Q. If we were to kind of break that down between industry and then versus Lamb Weston specific, I mean just any help here, I mean is it industry is a smaller piece to consider and the Lamb Weston piece is more meaningful?
Bernadette Madarieta: Yes. No, I would say that it’s more industry is where you’re going to be seeing that with the softer traffic trends. And then the other piece will be any hangover that we have from the ERP transition but definitely more traffic trends softening that’s impacting that.
Operator: We’ll go next to Robert Moskow with TD Cowen.
Robert Moskow: A few small ones. I don’t know, maybe you wait a few months before you tell us this. But you said you’ve contracted with growers already for potatoes. I would imagine you have a volume assumption like internally related to that in terms of demand for fiscal ’25. Is there anything or you can give us on how much volume you’re contracting with those growers? And then secondly, you say that the ERP project is a multiyear and I guess I need to know more about it. But are there any other steps along the way that you think will possibly impact your execution with customers.
Bernadette Madarieta: Thanks, Robert. First, I’ll take your last question first in terms of the ERP. The next phase of the ERP will be in North America and that will be at our plants. We will do a pilot plant first where we will test all of its capabilities before we earn the right to move to the other plants and we’ll do that in waves. So we’re right now in the middle of completing design build for the plants and then we’ll roll that out in phases but it will have much less of an impact given our deployment strategy. Whereas this one was much larger in scope. And then as it relates to the potato crop that we contracted for 2024, yes, we do use volume estimates just like we do every year. We have taken down the number of acres that we did contract this year just given the elevated level of inventories that we’re going to have at the end of this year with the excess crop.
