Ladies and gentlemen, you're currently on hold for today's Lamb Weston Third Quarter Earnings Conference Call. We're currently admitting additional participants and plan to be underway shortly. We appreciate your patience. Please remain on the line. Good day, and welcome to the Lamb Weston Third Quarter Earnings Conference Call.
Today's conference is being recorded. At this time, I'd like to turn the conference over to Dexter Congolay, Vice President, Investor Relations of Lamb Weston. Please go ahead, sir.
Good morning, and thank you for joining us for Lamb Weston's Q3 2018 earnings call. This morning, we issued our earnings press release, which is available on our website, lambweston.com. Please note that during our remarks, we'll make some forward looking statements about the company's performance. These statements are based on how we see things today. Actual results may differ materially due to risks and uncertainties.
Please refer to the cautionary statements and risk factors contained in our filings with the SEC for more details on our forward looking statements. In addition, some of today's prepared remarks include non GAAP financial measures. These non GAAP financial measures should not be considered a replacement for and should be read together with our GAAP results. You can find the GAAP to non GAAP reconciliations in our earnings release. With me today are Tom Werner, our President and Chief Executive Officer and Rob McNutt, our Chief Financial Officer.
During this call, Tom will provide an overview of our performance as well as some highlights and key operational updates. Rob will then provide details on our Q3 results, our debt and cash flow and our updated fiscal 2018 outlook. Tom will wrap up with some closing remarks before opening up the call for questions. With that, let me now turn the call over to Tom.
Thank you, Dexter. Good morning, everyone, and thank you for joining us today. Our strong quarter of sales, earnings and cash flow growth reflects the benefits of our capital expansion investments, our laser focus on delivering industry leading customer service and new product innovation in the market, and our commitment to operational excellence. Sales grew 12%, driven by good balance of higher price mix and volume growth. Adjusted EBITDA, including unconsolidated joint ventures, increased 25% to about $240,000,000 And through the 1st 9 months of the year, we generated about $310,000,000 of cash flow from operations, up about $55,000,000 versus the prior year period.
Because of this strong performance, we are raising our outlook for fiscal 2018. We now expect our sales growth rate to be at the upper end of our targeted mid single digit range and adjusted EBITDA, including unconsolidated joint ventures to be $805,000,000 to $810,000,000 Rob will provide more details on our updated outlook later on the call. Our results this quarter reflect how well our commercial and supply chain teams continue to execute on our strategic and financial objectives. But before I run through some of the highlights and key operational updates, I want to take a moment and thank all the Lamb Weston team members for the completion of our post spin transition services with our former parent. There was a tremendous amount of heavy lifting all across our company to complete the transition on time.
And we did it seamlessly while continuing to drive our business results. I cannot emphasize enough how proud I am of the team. Now moving to our key highlights for the quarter. First, our new £300,000,000 French fry line in Richland, Washington is up and running, providing us with much needed additional flexibility across our manufacturing network to support customer growth, innovation and service levels. Having the new line start up and run at plan levels was key to driving our strong volume growth in the quarter.
I want to thank the team that brought this project to realization on time, on budget and with remarkable safety performance. 2nd, we've broken ground for our £300,000,000 French fry line in Hermiston, Oregon. Favorable weather conditions have allowed us to accelerate the construction, and we've increased CapEx spending in the near term to reflect that. We continue to expect the new line to be operational towards the end of our Q4 of fiscal 2019. And finally, our new £180,000,000 facility in Russia became operational this quarter.
The team there is in the process of securing customer qualification of the line, and we'll begin ramping up production to support increasing demand in that market. As you may recall, our interest in this plant is through our Lamb Weston Meyer joint venture in Europe, which is a minority owner of this facility. In addition to progress on the capacity front, we've also finalized price agreements in each growing region for the 2018 potato crop. Just like we do every year, our next step in the annual process is to enter into contracts with individual growers, and we expect to complete this process relatively soon. For competitive reasons, we don't provide many details regarding contracted potato prices and acreage requirements.
Our approach to contracting raw potato supply has been and will continue to be to work with growers so that they make a fair return over and above their costs. We want to ensure that they can reinvest in their businesses and we look at these partnerships over the long term horizon. Like many other agricultural sectors, input costs, whether it's for seed, fertilizer, labor or capital have been rising. So it's fair to assume that raw potato prices would increase as well. As a result, we expect our weighted average contracted per pound raw potato price to increase in the low to mid single digit range.
However, it's really important to remember that contracted prices are only one element of understanding our total potato costs, Potato yield, quality and how they hold up in storage are all keys to determining how the potatoes perform in our production facilities and our actual costs. Much of that is not known until our fiscal Q2. We will provide a view on total manufacturing costs when we provide our fiscal 2019 outlook in late July, with appropriate updates as the year progresses. Switching to our top line performance, limited time offers or LTOs, innovation and retail sales execution helped to accelerate growth, drive category news and share gains in the quarter. Opportunities to supply customers with limited time offers are a core part of our long term growth story.
And in the Q3, there were meaningful contributors. Most of this was centered in our Global segment. A few LTOs accounted for about half of that segment's volume growth. Going forward, our new fry capacity gives us more flexibility to partner with customers to develop additional innovative limited time offerings and help them drive traffic and sales growth. On the innovation front, we recently announced an exciting new platform called Crispy on Delivery.
It's a comprehensive solution that enables fries to stay hot and crispy for the fast growing home delivery channel. It's a new coated fry that stays crispy for up to 30 minutes when put in a unique proprietary packaging system that allows moisture to escape while keeping the fries warm. This fry and packaging combination is the first of its kind in the market. It is a promising solution to help customers expand delivery of fries, which are typically the highest margin food product on their menus, while meeting a clear consumer opportunity. While we are on the front end of showing this product solution to our customers, and while it's still early, I am very excited about the possibilities surrounding this offering, and we are looking forward to partnering with our customers.
In our retail segment, Grown in Idaho branded products continued to gain distribution, with shipments beginning late in the quarter to a few large new customers. This should provide a tailwind for growing in Idaho in the Q4 and as we exit the year. Over the next few months, we'll step up marketing investments to support this growth and that of our other brands. Our retail strategy is clearly working. Together, Roan in Idaho, Alexia branded, licensed branded and private label products have captured nearly 5 points of market share over the past year.
And before turning the call over to Rob, I'm pleased to announce that Mike Smith will lead our Foodservice and Retail Business Units. Mike has been with Lamb Weston for more than 10 years, most recently partnering with me in leading the development of our overall business strategy and the redesign of our innovation process. Mike is an excellent example of the depth of talent in our organization and a great fit for this role. He'll take over a foodservice team that has driven strong sales and earnings growth over the past few years and a retail team that has continued to expand distribution of our branded portfolio. Mike will be taking over from Rod Hebenstall, who is leaving the company to become a CEO of a publicly traded food company outside the potato category.
I'd like to thank Rod for his leadership and contribution to Lamb Weston, and I wish Rod and his family well as they embark on this new adventure. So as our strong Q3 year to date results show, our commercial and supply chain teams are executing well and the operating environment continues to be favorable. As a result, we've raised our annual outlook for sales growth and adjusted EBITDA. We continue to believe that we are well positioned to create shareholder value over the long term by focusing on our strategic and operational objectives. Let me turn the call over to Rob to provide the details on our Q3 results and our updated outlook for the year.
Thanks, Tom. Good morning, everyone. As Tom mentioned, we're pleased with our performance in the quarter. We executed well across the organization and delivered strong top and bottom line growth and generated strong cash flow. Specifically, as compared to Q3 of 2017, sales grew 12% to $863,000,000 Price mix increased 7%, up from the 4% that we delivered in the first half.
This was primarily due to implementation of new pricing structures associated with recently renewed contracts in our Global segment and to a lesser degree in our Retail segment. In addition, in foodservice, we continue to benefit from pricing and mix improvement actions taken in fiscal 2017, as well as actions taken in the first half of fiscal twenty eighteen. Volume increased 5%, led by growth in our Global and Retail segments. Gross profit increased $37,000,000 or up 18% versus prior year. Higher price mix and volume growth drove the increase more than offsetting the impacts of higher transportation and warehousing cost, input cost inflation and higher depreciation expense primarily associated with our new production line in Richland.
Our gross margin percentage expanded 130 basis points to more than 28%. SG and A expense, excluding items impacting comparability, increased $16,000,000 to 73,000,000 dollars Three factors primarily drove the increase. 1st, incremental labor benefits and infrastructure costs related to operating as a standalone public company. 2nd, higher incentive compensation costs based on our year to date operating performance, including the true up for the higher incentive accrual rate for the first half of the year And third, increased investments in advertising and promotional support in our retail segment as we continue to expand distribution of Grown in Idaho branded products. As a result, adjusted income from operations in the quarter was up $21,000,000 or 14 percent to 171,000,000 dollars Equity method investment earnings from our unconsolidated joint ventures, which include Lamb Weston Meyer in Europe and Lamb Weston RDO in Minnesota were $26,000,000 up from about $13,000,000 last year.
These amounts included an unrealized gain of $2,500,000 in the current quarter related to mark to market adjustments associated with commodity and foreign currency hedging contracts. This compares to a $1,400,000 loss in the prior year quarter. In addition, equity earnings include a $4,000,000 gain on sale related to divestiture of a non core business in Europe, as well as a $2,000,000 currency translation benefit. Excluding these items, equity earnings increased a bit under $4,000,000 Lower potato costs in Europe as well as volume growth by both joint ventures primarily drove that increase. So putting it all together, adjusted EBITDA, including unconsolidated joint ventures, increased about $47,000,000 or 25 percent to $238,000,000 Higher earnings in our base business drove about 2 thirds of the increase.
Let me take a couple of minutes to talk about the impact of tax reform enacted in December 2017. Compared with Q3 of fiscal 2017, tax reform decreased income tax expense and increased net income approximately $47,000,000 or $0.31 per diluted share. The increase is made up of 2 items. First, we recorded a provisional $24,000,000 net one time discrete benefit. About $39,000,000 relates to the benefit for remeasurement of our net U.
S. Deferred tax liabilities using the new statutory tax rate, partially offset by a $15,000,000 transition tax on our previously untaxed foreign earnings. The cash impact of this transition tax will take place over the next 8 years, but the expense was recognized in Q3. We've excluded this $24,000,000 net benefit from adjusted earnings as a comparability item. 2nd, accounting rules require that we record the effect of changes in rates resulting from newly enacted tax laws in the period, the change is effective.
Accordingly, we recorded a $23,000,000 or $0.15 per diluted share benefit from the lower U. S. Corporate tax rate in the 3rd quarter. Because our fiscal year is not a calendar year, a blended rate applies for fiscal 2018, resulting in a federal tax rate of approximately 29% for fiscal year 2018 and a 21% federal rate for fiscal years thereafter. About $14,000,000 or $0.09 per share of the rate benefit is related to earnings reported in the first half of our fiscal year with about $9,000,000 or $0.06 related to fiscal 2018 Q3 earnings.
As a result, our overall effective tax rate in the 3rd quarter excluding comparability items for tax reform was about 19%. For both the Q4 and full year fiscal 2018, we expect to have a blended overall effective tax rate excluding comparability items for tax reform of about 28%. Regarding earnings per share, adjusted diluted EPS was up $0.32 to $0.91 Operating gains and higher equity method investment earnings drove just over half of the increase, while about 0 point dollars of the increase was due to applying the lower tax rate as a result of recently enacted tax reform. Now let's review the results for each of our business segments. Sales for our global segment, which includes the top 100 U.
S.-based chains, as well as all other sales outside of North America, were up 15% in the quarter. Price mix rose 9% as we implemented new pricing structures associated with recently renewed contracts and continued to improve customer and product mix. We expect these new pricing structures will continue to deliver solid price mix growth in the Q4. Volume grew 6%. As Tom mentioned, about half of this increase was driven by limited time product offerings.
The other half of the increase was primarily driven by sales of base products to strategic customers in the U. S. We expect Global's volume growth to be solid for the remainder of the year as we continue to benefit from the sales of limited time product offerings and growth with our strategic customers. Nonetheless, it's important to note that we'll be lapping a more difficult prior year comparison with Global's volume up 4% in the Q4 of 2017. Global's product contribution margin, which is gross profit less advertising and promotional expense, increased $22,000,000 or about 23% in the quarter.
The increase was driven by favorable price mix and volume. This was partially offset by higher input costs, manufacturing, transportation and warehouse cost inflation and higher depreciation expense associated with the new Richland line. In the Q3, Global's product Global's margin percentage expanded by about 180 basis points. Year to date, it's up about 20 basis points. Sales for our Foodservice segment, which services North American Foodservice distributors and restaurant chains outside the top 100 North American restaurant customers increased 5% in the quarter.
Price mix increased 5% as compared to a 10% increase in the prior year period. The increase this quarter reflected pricing actions and continued improvement in customer and product mix. Volume grew nominally behind increased shipments of higher margin Lamb Weston branded and operator labeled products. However, this was mostly offset by the loss of some lower margin distributor label volume as we continue to be price disciplined when competing for these types of contracts. While we're confident about the long term volume trends for our Foodservice segment, we're being cautious about growth in the near term.
That's because the loss of some distributor labor volume will likely continue to be a headwind through the first half of fiscal 2019. And although demand by regional QSRs continues to be solid, we're beginning to see evidence of traffic slowing somewhat at independent restaurants. Nonetheless, we believe these factors are temporary. We expect industry capacity to remain tight, allowing for a generally attractive pricing environment, including for distributor label volume. In addition, the U.
S. Economy remains strong, which should eventually lead to upward wage pressure and increased disposable income and higher food spending away from home. We're confident that we'll be able to continue to drive earnings growth in the 3rd quarter. Food Services product contribution margin increased 7% as favorable price mix more than offset higher input costs and the Richland depreciation. Product contribution margin percentage expanded by 80 basis points.
In our retail segment, sales grew 31%. Volume was very strong, up 22%. This was primarily driven by distribution gains of Grown in Idaho and other branded products, as well as the timing of shipments of some private label products from the Q2 into 3rd. We don't expect to repeat this level of retail volume growth in the 4th quarter as we're unlikely to see similar timing impact of private label shipments. In addition, we'll be facing a more difficult year over year comparison.
Recall that volume growth was 1% in Q3 2017, but was plus 7% in Q4. Nonetheless, we do expect solid growth of grown in Idaho to continue in the 4th quarter as we've only recently gained distribution in a few large new customers. We also expect solid volume growth for our other branded products. Retail sales growth was also driven by a 9% increase in price mix. This was a result of higher prices across our branded and private label portfolio as well as improved mix.
Increased trade spending in support of expanding distribution grown in Idaho partially offset this increase. Retail's product contribution margin increased 32% as higher volume and price mix more than offset cost inflation, as well as stepped up advertising and promotional investments behind Grown in Idaho. Product contribution margin percentage expanded by 20 basis points. Switching to our balance sheet and cash flow. Our total debt at the end of the quarter was about $2,400,000,000 down about $65,000,000 from the end of second quarter.
Most of that decrease is a reduction in the balance of our revolving credit line, which we use primarily to finance working capital. As you may recall, our revolver balance tends to be highest in the second quarter and early into the third quarter. That's when we build raw potato and finished goods inventories during the fall harvest and when we pay many of our growers. Our net debt to adjusted EBITDA ratio was 3.4 times, slightly below our target of 3.5 to 4. We're comfortable being below our target range for a period of time as it provides additional balance sheet flexibility.
With respect to cash flow, we generated $310,000,000 in cash from operations in the 1st 9 months of the year, up $55,000,000 versus the prior year period. A portion of this increase relates to lower cash taxes as a result of tax reform. Capital expenditures for the 1st 9 months are just over $200,000,000 which is about the same versus prior year period. Let me now turn to our updated fiscal 2018 outlook. As Tom mentioned, we've raised our outlook based on our solid year to date performance.
For sales, we're targeting a growth rate at the upper end of the mid single digit range we previously provided. On a year to date basis, our sales are up about 7%, driven by solid price mix and volume growth. Sales growth in the 4th quarter will likely be driven largely by price mix, with many of the factors driving the increase in the 3rd quarter also benefiting growth in the 4th quarter. However, volume growth in the 4th quarter we have flexibility to take additional production lines down for scheduled we have flexibility to take additional production lines down for scheduled maintenance without sacrificing customer service levels. 2nd, foodservice and retail volumes faced some headwinds that I described earlier.
And 3rd, we'll be lapping a more difficult comparison versus the prior year. For adjusted EBITDA, including joint ventures, we've increased our target to be in the range of $805,000,000 to $810,000,000 up from our previous target of $780,000,000 to 790,000,000 dollars The midpoint of this higher range is approximately a 17% increase versus a pro form a 2017 amount of $692,000,000 With respect to supply chain costs, on a per pound basis, we continue to expect our overall cost of potatoes to be in line with our previous guidance. Non potato costs will increase at a lowtomidsingledigitrate on a full year basis. In the Q4, we continue to expect non potato cost to increase at mid single digit rate, largely driven by transportation, warehousing and commodity inflation. Our annual SG and A costs will be a bit higher than we expected a few months ago.
This is largely due to higher incentive compensation costs as a result of our strong operating performance as well as higher advertising and promotional investments behind Groningen Idaho as we continue to build distribution scale. In addition, with interest rates increasing, we expect total interest expense of about $110,000,000 which is on the high end of our previous target range of $105,000,000 to 110,000,000 With respect to taxes, as I mentioned earlier, we anticipate a full year overall effective tax rate, excluding comparability items related to tax reform and spin off costs, of approximately 28%. While we're still evaluating the longer term impact of the new tax law, we continue to estimate that our long term effective tax rate, including foreign and state taxes, will be in the mid-20s. And finally, we raised our capital expenditure target for the year to $270,000,000 to 2 $80,000,000 up from $250,000,000 This increase reflects accelerated spending on our new production line at our Hermiston, Oregon facility. We continue to expect the total cost of the new line to be about $250,000,000 with about $50,000,000 spent in fiscal 2018 and remain on target to start the lineup towards the end of our Q4 of fiscal 2019.
Let me now turn the call back over to Tom for closing comments. Thanks, Rob. We're pleased with our Q3 financial results, our progress against operational goals and our ability to once again raise our sales and EBITDA targets for the year. We built good momentum behind strong execution and targeted investments in capacity and capabilities. As a result, we remain well positioned to serve and grow with our customers, generate solid returns and create value for all our stakeholders over the long term.
I want to thank you for your interest in Lamb Weston, and we're now happy to take your questions.
Yes, sir. Thank you. We first go to Andrew Lazar with Barclays.
Good morning, everybody. Thanks for the question.
Good morning, Andrew.
Just two items if I could. I guess the first one is, over the past few years, Lamb Weston certainly come in well ahead of its long term EBITDA growth algorithm, as you mentioned in your prepared remarks and a combination of pricing and the global demand environment. I guess as we think forward a bit, are there any items that you would call out even broadly that could dampen this sort of momentum? And I guess what I'm getting at is what could be the unlock, I guess, in allowing Lam to sort of update the EBITDA growth sort of algorithm given that you fairly recently updated the long term top line algorithm a bit? And then I've got a follow-up.
Sure. Andrew, it's Tom. I as I think forward, the just to level set everybody, we've had several years of no inflation. And the capacity demand supply demand situation in the industry certainly has allowed us some great tailwinds. But going forward, we're going to have some inflation that we haven't experienced in several years that we're going to have to manage through.
We have a great team who will manage through that. But the last several years, we've been over the center line of our long term outlook. And to expect that to continue, it's going to be hard pressed. So we've got some things coming at us. The next year.
The team is working on it and we'll give guidance in Q4 late July on that front.
Okay. Thanks for that. And then you mentioned that you lost some distributor label volume in the food spur space, which I know is lower margin to begin with. But I'm just curious, where does that volume go, just given how tight the capacity situation is in the industry? I didn't I guess I thought that there just weren't that many options for folks to sort of leave various suppliers and go elsewhere.
Well, think of it this way, Andrew, as we continue to work on our overall portfolio and we're evaluating our customer mix and our SKUs in terms of overall margin profile, we're making choices and we've been making choices for the last 12 to 18 months in terms of volume that we just want to walk away from to pursue other opportunities in the marketplace. It's really some of the street business, the independents that as we clean up our SKU portfolio, we're making choices to walk away from that low margin business and point that capacity elsewhere. So that's the big component of what's going on in the foodservice segment right now.
Got it. Okay. Thanks very much.
Next question comes from Adam Samuelson with Goldman Sachs.
Yes, thanks. Good morning, everyone. Good morning, Adam. I guess first question, Just on some of the revenue trends in the quarter, some of the qualitative comments that you gave in the prepared remarks. I think you alluded to a bit of a slowdown in some of the more independent foodservice business.
If you could just expand on that a little bit. I know there's been some weather issues in the Northeast this winter that might have impacted the comps, but wondering if you could give any additional color there. And then I have a follow-up.
Yes. There has been some weather impact, but we have seen in the foodservice channel, the independents, they are slowing down and the benefit of that is or the other side of that coin is, in our QSR Global Business Unit, we're seeing a lot of good traction with our customers' mix and how we're aligned with those customers. So it's a put and take, but right now overall we are seeing a little slowdown in the foodservice segment.
Okay. That's helpful. And then I guess second question from me is related to like on the cost trends. And I know you talked about an expectation for cost to tick higher to stay more elevated on the potato side moving forward. But in the quarter itself on the global side, looked like unit cost did tick up pretty meaningfully.
Was there a mix impact there that the processing costs were higher? Just wondering any more color on cost trends between potato and non potato, kind of what has changed relative to where you were 3, 6 months ago, it would be helpful.
Yes, Adam, this is Rob. In terms of cost, a couple of elements driving the increase there. As we've talked about, we're seeing inflation in transportation and warehousing. And I think others have seen, we've been talking about that the last several quarters. But it does seem to be accelerating a bit.
The other side is we are seeing some other input cost inflation and then recognize and part of this is mix related. The depreciation of that new line in Richland is a little bit heavier weighted into that global business. So you see a little bit more of that there.
Okay. But just to be clear on
the cost side relative to where you would have been in January on earnings, it's the non potato inflation, it's same, worse, just how does that track versus the expectation?
It's really where we expected it to be. Transportation warehousing is the only thing that really is a little bit faster. But again, for us, that's not as big a deal as it might be for others.
Okay, great. That's all very helpful. I'll pass it on. Thanks.
Next question comes from Akshay Jagdale with Jefferies.
Good morning and congratulations on an outstanding quarter.
Thanks, Josh.
Yes. So I wanted to Tom, I wanted to ask you a little bit about Global. Just this is the Q1 post the contracting, right? And I mean to say the results were exceptional would be an understatement there, especially on price mix. So my question really is, this you did this contracting several months ago.
And since then, I would argue that demand has strengthened, right, especially in the U. S. With the LTO with one of your large customers going as well as it is. So can you just put into perspective where you see sort of capacity utilization rates over the next 12 months and maybe the next 24 months? I mean, just it looks like not much is going to change from an industry perspective on utilization rates because even though some incremental capacity is coming online from you guys, it seems like demand is more than making up for it.
So that's my first question. Just to get some color commentary from you guys on your expectations for utilization rates over the next 12 months 24 months.
Akshay, a perspective I'll give you is, you step back and the industry's been running at high capacity utilization for the past several years. Based on how we are forecasting demand, as I stated in my Q2 call, between 1.5% 2.5%, we expect that to continue. And if you think about what's happening in the market right now, what I just said previously, in the QSR space, it's performing really well. So you're seeing that reflected in the global business unit. And also we have some limited time offerings in Q3 that really accelerated that growth.
So you put all those things together, we made the announcement on Hermiston, our competitive set, they're going to add some capacity over the next 12 to 18 months. But we expect, like I said in Q2, we're going to run our assets to low end 95%, and we've got flexibility to support our customer needs going forward. Plus, we've got to have the additional flexibility capacity, as Rob noted on his comments, to make sure that we're maintaining our assets. And we're committed to doing that, But we expect the utilization rates to remain fairly consistent to where they have in the past based on the capacity coming on.
And just to clarify, so when you say over the next 12 months to 24 months, right, next couple of years, you expect them to remain where they have been over the last couple of years, right? I mean, because the historical rates for the industry, as you have alluded to, are like 95%, but we've been operating over 100%. And your price mix tells us that even that might be a bit conservative. So over the next couple of years, is there any reason to believe that utilization rates aren't going to remain pretty tight for the industry?
Yes, actually, this is Rob. A couple of things, recognize there's been some capacities come on in Europe. And so as that comes on, that can become competitive in some of those export markets. And so that allows us to be able to maintain growth and service levels domestically. And as Tom spoke to and recall prior to the Richland 5 startup, we said we were operating at very high level of capacity.
And so we were limited in our in the ability to help customers with LTOs. And so now that we've got Richland 5 running and then looking forward to the new Hermiston line coming on, we'll be able to maintain 1, maintain the operating assets at the right level from a maintenance perspective, but also really support our customers with those limited time offerings, which tend to be pretty good business for them to drive traffic and therefore us. So we anticipate things are going to continue to be relatively tight, but we'll manage through that with the balance of export and domestic demand servicing those limited time offerings. And so that's a calculus that the teams go through on an ongoing basis to get the best margins we can out of the capacity we've got. But we do anticipate overall industry capacity will continue to be relatively tight over the next 12 months to 24 months.
Got it. And just one on the LTOs and more in general about your innovation pipeline. What you mentioned about the fries for the 2 Go segment was it seems pretty exciting too. But how do you manage how are you managing sort of this LTO demand, right, or just your innovation pipeline? Because now you have some flex capacity, so you can actually go out and sell some of this stuff.
But given the inherent sort of inherent nature of these products to be on and off menus, I imagine it's harder to manage. So can you give us some sense of how we should be thinking about that as a contributor to your top line going forward? Because I mean, you're having tremendous success right now with one of your customers. And I'm assuming we can't expect that to continue for every product you launch, right? So can you just give us a high level perspective on contribution from
customers and we in terms of our customer relationships and working with them as they plan their outlook and their monthly calendar and their menu, we're close to it. So these things, the LTOs, they're variable obviously, but we have a point of view on when those are going to hit. And we're working with our customers and we have a very rigorous system whereas we have insights or have an outlook on what they're thinking in terms of menu and doing different products or trying different some different products that we have on their menu to do LTOs. We're putting all that in our schedule and our outlook and our thinking. But that said, sometimes it just takes some time to get these on the menu, but we have a good outlook based on our system how we work with our customers on when these LTOs are going to hit.
Thanks a lot.
Next question comes from Matthew Granger with Morgan Stanley.
Hi, good morning. Thanks for the question. Thanks. Rob, I guess first question on the freight side. Obviously, you've given us updated sense of your inflation outlook for the full year.
And so I think we have a sense of where you stand there. But just from a more qualitative standpoint, just hoping you could elaborate a little bit on your supply chain, how you've adapted to the increase in freight costs and anything about the structure of your supply chain, maybe it's the concentration or your use of rail, something that would just to help us better understand how you're differentiated from everyone else who's feeling this pressure?
Yes. If you think about our business, retail tends to be priced on a delivered basis, and that's a smaller portion of our business maybe than some others might be, not necessarily in the private and the food category in general. And then the food service and the global business, those we tend to be contracted where we can more easily share the freight increases with our customer base. Also recognize that because the predominant of our productions in Pacific Northwest, we do have forward distribution in the Midwest and in the East, and a lot of that is done by rail. And so we'll ship a lot of that by rail into forward distribution, and then it tends to be a lot of customer pickup in that short haul forward.
And so that customer pickup, the customer then obviously is dealing with the freight issues. Our teams constantly are looking at rail versus truck rates to optimize that. And so that's just an ongoing part of the model. But again, we don't tend to be necessarily as tied to truck maybe as some others. Then how we balance the freight cost between ourselves and our customers maybe a little different weighting than some others in the food business.
Okay, that's helpful. Thanks. And I guess one other follow-up just on Akshay's line of questioning in the LTOs. Tom, I think you spoke to the volatility or the unpredictability in the LTOs and that clearly seems to have been maybe one of the factors along with your own optionality in terms of driving positive mix during the quarter. But is there I guess, if we're thinking about the forward price mix outlook and the strength that you exhibited during the quarter here, I know my question is getting a little long winded here, but I know you see avenues for positive mix going forward.
In the short term, was there anything inflated about the mix favorability in Q3 that we should expect to see moderate more significantly over the next 3 to 6 months, so just shorter term timeframe?
Yes, I think as we kind of commented on earlier, we certainly from a volume perspective, our grown in Idaho, but you look at our retail segment growing in Idaho and our private label accelerated this quarter. We've got some new customers with Corona in Idaho, big customers. So that's certainly probably not probably, it's over indexed on where that's going to grow going forward. And I would say, our global business unit in particular, as we stated, the LTO that's going on right now was drove a considerable amount of growth. And that's again, that's not going to continue going forward.
But underneath that in the global business unit, if you look at our customers in that segment, again, the QSR traffic, the customers in that space continue to grow and I feel confident that that will continue in the near term.
Okay. And is it just one follow-up. Is it fair to assume that LTOs are almost always going to be higher margin than normal course business, even more premium styles?
Yes, Matthew, I'm not going to get into specifics in terms of financial, what happens financially with LTOs. So I'll just leave it at that.
Okay. Thanks, Tom. Appreciate it.
Next question comes from Bryan Spillane with Bank of America.
Hey, good morning everyone.
Good morning, Bryan.
Just one question. And I guess it's kind of tied back to, I think, maybe what Akshay was asking about utilization rates. But just now that you've got the incremental capacity up and running, as we're kind of thinking just out over the next four quarters, how much of that volume is at a net basis is available to actually grow volumes year over year? Or how much of that should we think is being sort of netted out as you were kind of running above 100% capacity utilization and maybe you're going to slow down a little bit production in some of the existing facilities do the regular maintenance, that type of thing. So I guess what I'm really trying to drive at is, as we're thinking about over the next 4 quarters, is it more of a price mix skew driving revenues versus volume?
And then really just how much actual volume growth is available to you just given your capacity situation?
Well, a couple of things, Brian. Certainly, we've got to catch up on a few maintenance things coming up. And we the additional capacity with Richland gives us flexibility to continue to service our customers at the volume levels that we expect. We are going to continue to run our assets within the 95% to 100% range. And the critical thing to remember as we talked about earlier is the category over the last several years and I've stated it before continues to grow at a pretty good rate between 1.5% to 2.5%.
And our view is that's going to continue, and which is why we brought the Hermiston line forward. So we have to do some things to manage our assets, but we have we see opportunities in the marketplace in the category that will continue to run our assets at current levels. And the additional capacity gives us flexibility to flex with our customers as they're we've talked about LTLs a lot on the call today, but as they're thinking about new things to drive traffic. So I don't anticipate us doing anything different than what we've been doing from a capacity utilization standpoint. And I think the industry in general will continue to run at tight levels.
And can you remind us, Richland adds 6 percent to North American volume, just the amount of capacity that it enables you to incremental volume it allows you to generate?
It's about £300,000,000 off of a initial base of £5,500,000,000. Yes.
Okay.
All
right. Thank you.
Thank you.
Next question comes from Andrew Carter with Stifel.
Thanks. Good morning, guys. I just have one here for you. You said that really the only impediment to revisiting kind of your long term EBITDA growth is kind of starting to see some more input cost inflation. You've seen 5% or so on non potato here in the Q4 and some on the potato.
Just wanted to talk kind of circle back to kind of degree of pricing power you have to offset this both in terms of the contracts you had in place that you set up last summer, the number of contracts that are coming due this summer and then some of your smaller customers where you have the ability to take some pricing?
Andrew, there's a lot of variables in our contracting. So within each segment, you have contracts that you have pass through mechanisms, some are fixed price. In our foodservice segment, we have list pricing that we can go into the market. So there's a lot of variables in our retail segment. You have contracted prices that are fixed, some have very pass through mechanism.
So it's really a mixed bag. What I will tell you is in July, when we wrap up our year and give our full year guidance, we'll have a clear view of the inflation impact next year and how that adds up in terms of long term outlook. And we'll also, as we do every year at this time, as we're going through contracting and thinking about our pricing architecture for the coming year, we'll have that point of view for you then as well.
Thanks guys. Congrats on the quarter.
Thanks. Thanks, Ed.
Next question comes from Adam Misrahi with Berenberg Capital Markets.
Hi, guys. One question for me. The international export business seems to be called out less and less in your results as we go through this year. Can you talk about how that part of your business is performing relative to your expectations at the start of the year? And why international seemingly playing less of a role in overall volume growth versus this time 12 to 18 months ago?
Thank you.
Yes, Adam, it's Dexter. One of the things we called out actually last quarter was we tailed back on some of our international business from a mix perspective. Some of that was lower margin. We were able to redeploy some of that volume that we were exporting before back into North America, which obviously carries a little bit higher margin that way. So, growth in international, this quarter actually we were slightly down as a result of walk away from some of those contracts.
And one of the other things that's in terms of China in particular, we're continuing to scale up production in China itself. So that means that we're exporting a little bit less until we get that plant fully ramped
up. Great. Very helpful. Thank you.
Our last question comes from Michael Gallo with CL King.
Hi, good morning and again congratulations on the strong results.
Thanks, Mike. Good morning.
Yes, my question is just a bigger picture question. Obviously, in a little bit of a non traditional customer your product. Obviously, they had enormously successful launch. I was wondering if you start to see signs that that's driving some other perhaps nontraditional large QSR players to start thinking about whether some of your products would be opportunities for their menu? Thanks.
Michael, I'll come at it from this standpoint. There is opportunity. This is my belief in the nontraditional customers. What's going on in the market and the success that we're having right now is a testament to that. We've got some things we're working on in our innovation pipeline that obviously I can't share for competitive reasons, But that's an area that I think is huge opportunity.
It's a long runway to get some of those non traditional customers to entertain potato offerings, fry or non fry. But that's an area that's top of mind for me and my team. And we're focused on it. We've got some work going around it. But again, that's a long runway.
But the great news is, we've got resources against it. And when we can crack that code and get in one of those non traditional fry channels, it could pay off really big. So we're working on it. We've got some great ideas. And hopefully sooner than later we'll crack the code.
Thanks very much. And then just a follow-up, just on the retail business for the Q4, I know you have a few moving pieces there between the distribution gains and then also you had the significant private label business you had in Q3. I guess to start to dimensionalize, obviously, it's not going to be 30% kind of growth that you saw in Q3. But should we expect that to be kind of midway between what you saw kind of Q2 and Q3? Or I guess trying to dimensionalize the different pieces?
Thanks.
Yes, this is Robin. And again, recognize the relative comp Q4 last year was stronger. But as I mentioned, we've got a couple of new customers for
the grown in
Idaho that start shipping in Q4. And so we'll see the impact of that. But also recognize, as I mentioned in my prepared remarks that we had some shift in timing between Q2 and Q3, which was meaningful enough to call out. So I think you're going to end up somewhere in between there, as you mentioned. So I think that's a fair way to think about it, but it recognizes a wide range, right?
Thanks very much.
Thanks, Mike.
That does conclude our question and answer session for today. I'll turn the conference back over to management for closing remarks.
Hi, it's Dexter. If anybody has some follow-up questions, please probably best to e mail me and then we can set up some time to speak.
Other than that, have a good day. Thank you.
You. Ladies and gentlemen, that does conclude today's conference. We thank you for your participation and you may now disconnect.