Good day, welcome to the Lamb Weston third quarter 2021 earnings call. Today's call is being recorded. At this time, I'd like to turn the call over to Dexter Congbalay, Vice President of Investor Relations of Lamb Weston. Please go ahead.
Good morning, and thank you for joining us for Lamb Weston's third quarter 2021 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 expected 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 SEC filings for more details on our forward-looking statements.
Some of today's 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. Tom will provide an overview of the current operating environment and our recently announced investment in China.
While Rob will provide some details on our third quarter results, as well as some shipment trends for the fourth quarter. With that, let me now turn the call over to Tom.
Thank you, Dexter. Good morning, and thank you for joining our call today. We delivered solid sales volumes in the third quarter as restaurant traffic and consumer demand improved as governments gradually eased social and on-premise dining restrictions in some markets. While still down year-over-year, the rate of volume decline improved sequentially in both the U.S. and in our key international markets from what we realized during the first half of our fiscal year.
This was largely in response to governments easing restrictions as the quarter progressed and demonstrates that consumers are ready to go out as restaurants expand dining capacity. Specifically, overall restaurant traffic in the U.S. was between 85%-90% of pre-pandemic levels. Traffic at large quick service chain restaurants continued at roughly prior year levels as they leveraged drive-through, takeout, and delivery formats. After a slow start to the quarter, traffic at full service restaurants recovered to 70%-80% of prior year levels.
Traffic began to pick up later in the quarter as some governments gradually lifted social and dining restrictions that were put in place due to the resurgence of COVID, and as the relatively mild winter weather provided more outdoor dining opportunities. While we expect this momentum will continue, we're mindful that some of this performance may be due to customers and distributors restocking inventory prior to an expected boom in restaurant traffic in coming months.
In contrast, demand at non-commercial customers, which includes lodging and hospitality, healthcare, schools and university, sports and entertainment, and workplace environments, remained around 50% of prior levels for the entire quarter. We're confident that demand from these customers will return, but realize that recovery to pre-pandemic levels may take some time as governments slowly lift restrictions for larger gatherings. In retail, demand in the quarter was strong, with weekly category volume at 115%-125% of prior year levels as consumers continued to eat more meals at home.
Outside the U.S., restaurant traffic and fry demand has been mixed. In Europe, which is served by our Lamb Weston/Meijer joint venture, fry demand in the quarter was 80%-85% of prior year levels. However, we believe that demand rate is likely to soften as governments reimpose severe social restrictions in response to the resurgence of COVID infections. Demand in most of our international markets in Asia, Oceania, and Latin America improved in the quarter. Our shipments in China were strong.
Demand in our other key markets in the aggregate remained below prior year levels, but it continued to improve sequentially versus the first half of the year, as well as in each month of the quarter. While demand in Europe remains soft, we feel good about the demand trends in the U.S. and most of our key international markets, and we expect governments will continue to gradually roll back social restrictions in the months ahead as more of their citizens get access to vaccines. This should serve to unlock pent-up consumer demand to visit restaurants and other food service outlets, and ultimately, demand for fries.
As a result, we remain optimistic that overall frozen potato demand will steadily approach pre-pandemic levels on a run rate basis by the end of calendar 2021. The progress we made on sales volume in the quarter was offset by the pandemic's continued effect on our supply chain operations. As Rob will discuss later, COVID related disruptions significantly affected our production, transportation, and warehousing networks, leading to significantly higher costs as we focused on customer service while dealing with the pandemic's impact in some of our communities and workforce.
In addition, decisions that we made in the first half of the year to defer certain capital repair and maintenance projects further reduced our flexibility to manage disruptions and drove incremental manufacturing and distribution costs. In summary, in the third quarter, we delivered solid top-line results. Operating in a pandemic environment has been and will continue to be challenged, and we expect that we'll continue to incur hard costs across our supply chain in the near term. Before I turn the call over to Rob, let me review a couple of items.
First, we'll provide our normal update for this year's potato crop when we report earnings in July and October. Second, as you may have seen a couple of weeks ago, we announced that we're building a new French fry processing facility in China. At a total investment of around $250 million, this greenfield facility will complement our plant in Shangdu and is expected to add about 250 million pounds of frozen potato product capacity. We anticipate starting up the plant sometime during the back half of calendar 2023.
We chose to build this plant in China because it's a fast-growing, 1 billion pounds+ market and a key driver to our international growth. This new plant enables us to support customers in China using in-country supply, which is something that our larger customers there increasingly want as they continue to expand. Our new facility will allow us to further diversify our manufacturing base and mitigate risks of potential trade disruptions as we look to drive international growth.
In summary, in the third quarter, we delivered solid top-line results as demand continued to gradually recover, but incremental costs related to pandemic-related disruptions pressured earnings. We expect that the increasing availability of COVID vaccines and the easing of government-imposed social restrictions will allow restaurant traffic to gradually improve as the year progresses, and we remain optimistic that overall frozen potato demand will approach pre-pandemic levels on a run rate basis by the end of calendar 2021. Let me turn the call over to Rob.
Thanks, Tom. Good morning, everyone. As Tom noted, in the third quarter, we delivered solid sales results as overall demand continued to improve, but the pandemic's disruptive impact on our manufacturing and distribution operations significantly increased our costs. Specifically in the quarter, net sales declined 4% to $896 million. Sales volume was down 6%, largely due to the pandemic's impact on fry demand, but improved through the quarter after a slow start. Importantly, that rate of volume decline improved sequentially from the 14% decline that we realized during the first half of fiscal 2021.
Most of the sequential improvement was within our global segment and largely reflects a steady recovery in shipments in our key international markets. Stronger sales of limited time offering products in the U.S. also contributed to the global segment's recovery. In addition, we saw sequential improvement in our food service segment, led by casual dining, as well as continued strength by our branded offerings in our retail segment. Price mix increased 2%. Improved price in our retail and food service segments, as well as favorable mix in retail, drove the increase.
Price was up in our global segment, although this was offset by negative mix. Gross profit declined $54 million as lower sales and higher manufacturing and distribution costs more than offset the benefit of favorable price mix and productivity savings. Let's focus on cost of goods sold. As Tom noted, the higher costs were largely a result of the pandemic's disruptive impact across our supply chain. The resurgence of COVID in many of the communities where our plants are located greatly affected our manufacturing workforce.
At times, the combination of infected and quarantined employees significantly affected our ability to staff production lines and other key roles at a number of our facilities. The consequences were, first, we lost days of production, which resulted in a number of our plants operating well below normal utilization rates and reduced our ability to cover fixed overhead costs. Recall that a year ago, we decided to continue paying employees despite production lines being down due to COVID. While we believe that was a right thing to do to support our production teams, it has had an impact on our cost structure.
Second, focusing on maintaining customer service levels required us to quickly adjust production schedules to accommodate workforce and manufacturing line availability. This drove incremental costs and inefficiencies. In many cases, we shifted production from one facility to another, even though the alternate facility may not be the most effective in terms of cost or throughput for that specific product. That negatively impacted line speeds, throughput, and raw potato recovery rates.
Third, the number of affected employees and facilities meant that we incurred even more costs related to temporary shutdown and restart of manufacturing facilities. Compounding these disruptions in the quarters were our decisions to defer certain capital repair and maintenance projects on our production lines that were originally scheduled for the first half of fiscal 2021. We planned on undertaking these capital and maintenance projects once the demand environment and our operations were more stable during the second half of the year.
While deferring these projects was prudent in light of the uncertainty surrounding COVID, executing them that same time as another COVID wave impacted our plants led to additional disruption in our manufacturing capabilities and further limited our flexibility to adjust production schedules across our network. This drove additional costs and inefficiencies on top of the staffing-related issues I described. The pandemic-induced volatility at our production facilities also had a downstream impact on our transportation and warehousing operations.
We generally prefer to rely on rail more than trucking to move product from our production facilities and warehouses to our distribution centers and customers across the country. However, late changes to production schedules required us to switch significant volume from rail to trucking, which is more flexible but also higher cost, in an effort to maintain customer service levels. In addition, we typically employ trucks using contracted carrier rates as opposed to securing spot trucking, which tends to be higher cost.
Spot trucking has also had significant rate increases over the past six months, but because of the disruption to our production schedules, and again, to prioritize customer service. We lean more on expensive spot trucking. Our transportation costs significantly increased because of an unfavorable mix of rail and trucking, as well as an unfavorable mix of contracted and spot trucking. As you would expect, our warehousing costs also increased with the additional handling required across our distribution network.
Finally, while the pandemic-related effects on our supply chain were the primary drivers of our cost increases, we also realized higher costs due to input cost inflation in the low single digits. We expect that rate will begin to tick up in the coming quarters as edible oil and transportation costs continue to increase. While our costs were higher in the quarter, we are starting to see the benefits of our supply chain team's work around a series of initiatives we call Win as One. These initiatives build upon the Lamb Weston operating culture productivity programs that we have in place.
Broadly speaking, Win as One seeks ways to reduce our variable and fixed cost, increase production throughput on existing assets, and improve working capital, especially inventories. In the couple of the plants where the team has implemented these new ways of working, asset utilization is at or above pre-pandemic utilization rates, and we're seeing the benefit in the cost structures in those facilities. As the team continues to roll out these programs to the rest of the network, and as infection and quarantine rates decline through vaccination programs we're supporting for our production employees.
We expect our cost structure and utilization rates will begin to normalize. Longer term, we expect these initiatives to enhance margins, drive cash flow, and strengthen our culture of continuous improvement. Since we only began to roll out Win as One at a couple of our plants a few months ago, we're not providing any specifics on activities or targets today. We anticipate giving investors more insight into this program as we gain more traction. Moving on from cost of sales, our SG&A increased $8 million in the quarter.
The increase was largely due to investments we're making behind the Win as One initiatives I just described. Equity method earnings were $11 million. Excluding the impact of unrealized mark-to-market adjustments and a comparability item in the prior year quarter, equity earnings declined about $11 million. Two factors drove the decline. First, fry demand in Europe fell as much of the region remained in lockdown and as colder weather affected outdoor dining. Second, our joint ventures also realized higher production costs related to COVID disrupting their manufacturing and distribution operations.
Adjusted EBITDA, including joint ventures, was $167 million, which is down $61 million. Lower income from operations drove the decline. Adjusted diluted EPS in the quarter was $0.45, which is down $0.32, mostly due to lower income from operations. EPS was also down due to higher interest expense, reflecting our higher average total debt resulting from actions we took to in late fiscal 2020 and early fiscal 2021 to enhance our liquidity position.
Moving to our segments, sales for our global segment, which generally includes sales for the top 100 North American-based QSR and full-service restaurant chains, as well as all sales outside of North America, were down 2% in the quarter. Volume was down only 2%, which is much better than the -12% we realized during the first half of fiscal 2021. Shipments to large chain restaurant customers in the U.S., of which approximately 85% are to QSRs, increased nominally versus prior year. QSRs continued to per
form well as they continued to leverage drive-through and delivery formats. As I mentioned earlier, U.S. QSRs were also aided by the return of some noteworthy limited-time product offerings. International shipments, which historically comprise about 40% of the segment's volume, were about 95% of prior year levels in the aggregate. That's up from around 75% of prior year levels that we realized during the first half of fiscal 2021. In the third quarter, shipments in China were strong versus the prior year when demand was negatively impacted by COVID.
Shipments to our other key markets strengthened as the quarter progressed and were generally stronger in developed markets than emerging ones. Price mix was flat with positive price offset by unfavorable mix. Global's product contribution margin, which is gross profit less A&P expense, declined 27% to $79 million. Higher manufacturing and distribution costs, as well as unfavorable mix, drove the decline. Sales for our food service segment, which services North American food service distributors and restaurant chains generally outside the top 100 North American restaurant customers, declined 22%.
Volume declined 24%. After a slow start, shipments to smaller chain and independent full service and Quick Service Restaurants recovered to about 90% of prior year levels for the entire quarter, as governments gradually eased social and indoor dining restrictions. We believe that some of the sales volume strengthening during the last few weeks of the quarter may reflect distributors restocking inventory in anticipation of more governments lifting social restrictions in the spring. However, it's difficult to gauge the extent of that benefit.
In contrast, shipments to non-commercial customers remained at around 50% of prior year levels, with continued strength in healthcare more than offset by weakness into other channels such as travel, hospitality, and education. Price mix increased 2% behind the carryover pricing benefit of pricing actions we took in the second half of fiscal 2020. This was partially offset by unfavorable mix versus the prior year, due to lower sales of premium products. As we've discussed in previous earnings calls, we've regained much of this business since the pandemic first struck last spring.
On a year-over-year basis, it remained a mixed headwind for the quarter. Food services product contribution margin declined 30% to $70 million. Lower sales volumes, higher manufacturing and distribution costs, and unfavorable mix drove the decline and was partially offset by favorable price. Sales for our retail segment increased 23%, with volume up 13%. Sales of our branded portfolio, which include Alexia, Grown in Idaho, and licensed restaurant trademarks, were up about 45%, continuing the strong growth trend we've seen since the start of the pandemic.
Well above category volume growth rates that have been between 15% and 25% in the quarter. The increase in our branded volume was partially offset by the loss of certain low-margin private label volume, which will continue to be a headwind on volume through the remainder of the fiscal year. Price mix increased 10%, primarily reflecting the favorable mix benefit of selling more of our higher margin branded products. Retail's product contribution margin increased 15% to $33 million.
The increase was driven by favorable mix and was partially offset by higher manufacturing and distribution costs, as well as a $1 million increase in advertising and promotional expense. Moving to our cash flow and liquidity position. We continue to be comfortable with our liquidity position and confident in our ability to continue to generate cash. At the end of the third quarter, we had nearly $715 million of cash on hand, and our revolver was undrawn. Our total debt was more than $2.7 billion, and our net debt to EBITDA ratio was about 3.5x .
In the first three quarters of fiscal 2021, we generated nearly $375 million of cash from operations, which is down about $60 million versus last year, due to lower sales and earnings. We spent $107 million in CapEx and paid $101 million in dividends. In addition, in the third quarter, we resumed our share buyback program and bought back nearly $13 million worth of stock at an average price of just over $77 per share. Turning to our current shipment trends.
Please note that instead of providing a comparison to last fiscal year's fourth quarter, we're providing comparisons to the fourth quarter of fiscal 2019. We're doing this since fourth quarter of fiscal 2020, which includes March, April, and May of 2020, includes the severe impact of government-imposed social restrictions at the beginning of the COVID pandemic. It was also the height of personal and economic uncertainty for many businesses and individuals. As such, we believe the fourth quarter of fiscal 2019 provides a more meaningful comparison for investors to understand the current condition of our business.
Broadly speaking, we're optimistic about the recent restaurant traffic and shipment trends in the industry in the U.S. and many of our key international markets other than Europe. U.S. shipments in the four weeks ending March 28th were approximately 90% of levels during a similar period for the fourth quarter of fiscal 2019. In our global segment, shipments to our large QSR and full-service chain restaurant customers in the U.S. were more than 85% of fiscal 2019 levels, and we expect that rate will largely continue for the remainder of the fourth quarter.
In our food service segment, shipments to our full-service restaurants, regional and small QSRs, and non-commercial customers in aggregate were approximately 90% of fiscal 2019 levels. We anticipate that shipments for these customers will largely continue at similar rate for the remainder of the fourth quarter. Shipments to non-commercial customers, which have historically comprised about 25% of this segment's volume, remained at around half of fiscal 2019 levels.
We expect these shipment rates will likely remain soft for the rest of the quarter and will likely take time to fully recover to pre-pandemic levels. In our retail segment, shipments were approximately 110% of fiscal 2019 levels, with strong volume growth of our branded products partially offset by a decline in shipments of private label products. We believe this rate may gradually decline during the remainder of the fourth quarter as consumers begin to shift purchases of fries to dining at restaurants as governments lift social restrictions. Outside the U.S., overall demand varies by market.
In Europe, shipments by our Lamb Weston/Meijer joint venture were about 85% of fiscal 2019 levels. Demand has softened over the past few months as governments in some of our larger markets, such as Italy and France, re-imposed stricter social restrictions to combat a resurgence in COVID infections. In addition, other than in the U.K., vaccination efforts across Europe have lagged well behind rates in the U.S. As a result, we anticipate shipments may slow during the remainder of the fourth quarter.
Shipments to our other international markets, which primarily include Asia, Oceania, and Latin America, were approximately 75% of fiscal 2019 levels in aggregate. As I discussed earlier, international shipment rates have steadily improved over the past few months, and we expect that will continue during the remainder of the fourth quarter as governments slowly ease social restrictions and as the current congestion at shipping ports begins to clear up.
For those markets that are currently already operating under more lenient social restrictions, we anticipate that current shipment rates for those countries will largely remain at current levels. In short, although Europe is challenging, we believe overall shipment and restaurant trends in the U.S. and most of our international markets will remain favorable as governments continue to roll back social restrictions and vaccine becomes more widely available.
These trends will keep us on a path of steady progress in restaurant traffic, which we believe will lead to overall frozen potato demand approaching pre-pandemic levels on a run rate basis by the end of calendar 2021. With respect to costs, in the fourth quarter, we expect to incur a similar level of incremental pandemic related manufacturing distribution costs as we did in the third quarter. We experienced significant disruption in our production facilities, transportation, and warehousing networks in January and February, and this continued into March.
We will realize some of the costs related to these disruptions in the fourth quarter as we ship finished goods inventory produced during these months. Now, here's Tom for closing comments.
Thanks, Rob. Let me just quickly sum up by saying we continue to prioritize ensuring the health and safety of our employees during these challenging times by adhering to strict COVID protocols in all of our manufacturing locations and encouraging all our workers and their families to get vaccinated as soon as possible. We're confident that the near term pandemic related pressures on our manufacturing and distribution networks are temporary and that our cost structure will normalize once we get past COVID.
In addition, we believe that the investments we're making in our supply chain will improve our cost structure over the long term. We feel good about the trends in restaurant traffic and frozen potato demand in the U.S. and most of our key international markets, and remain optimistic that overall frozen potato demand will approach pre-pandemic levels on a run rate basis by the end of calendar 2021.
Finally, as shown with our investments for a new facility in China and to expand chopped and formed capacity in Idaho, we're focusing on the right strategic and operating priorities to serve our customers and build upon the long-term health of the category in order to create value for all our stakeholders. Thank you for joining us today. Now we're ready to take your questions.
Thank you. If you would like to ask a question, you may signal by pressing star one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, star one for questions. We'll take our first question from Andrew Lazar with Barclays.
Good morning, everybody.
Morning, Andrew.
Morning, Andrew.
Hi there. I know this could be a little difficult, but I was hoping maybe you could help us maybe quantify a little bit, if you could, some of these incremental COVID costs that I know you believe are largely transitory. If demand ultimately returns on a run rate basis by the end of calendar year to pre-pandemic levels, would you expect these higher costs under that kind of a scenario to bleed into the beginning of fiscal 2022? Is that sort of an expectation we should have at this point?
Do we think that if this steady pace of improvement in restaurant traffic continues, that it's largely more of a 4Q issue? Then I've just got a follow-up.
Okay. Andrew, it's Rob. In terms of quantifying it, again, we did stop breaking that out as a specific as we viewed it as more normal. I think we started that in Q2, I believe. The way I would think about it is that you know what pricing has done. You know we've got modest input cost inflation. If you go back historically and look at margins, that would give you a sense of what margins should be in a normalized ex the COVID costs. I would argue that the bulk of any margin difference there is going to be related to the COVID cost.
I think you can back into it that way and come pretty close. In terms of bleeding into Q1, again, it's going to depend on how quickly we can get people and plants vaccinated and back to normal production and operating schedules. Again, we see demand recovering, as we've said, by the end of calendar 2021 to pre-COVID levels. As you think about that tells you the pull on the demand side ought to be there. It's back to, as long as we can get people in the plants to operate the plants, we should, over time, get costs back to where they are.
Again, that'll take some time to get people vaccinated, get them back into plants, and stabilize all of that. I anticipate that certainly into Q4, and we'll probably have some bleed over into Q1 as well.
This is just using back of the envelope math and the comments, Rob, that you gave around the first month trends of fiscal 4Q. Based on that, it would seem to suggest maybe sales down around 10% versus 4Q of 2019. That's sequentially a bit better than what we saw for the two-year trends in 1Q and 2Q, but maybe not quite as much as I would have expected given reopening and vaccine rollout and everything else. I didn't know if the math was generally right as we've got it and if I was maybe expecting the sequential improvement to be a little bit greater in 4Q than it would suggest.
Yeah. It's a great question, Andrew. I think if you look at Q4 of 2019, particularly I think in our global business, that it was a pretty strong quarter. The comp is tough in that one. The other one, as I mentioned that in our food service business, we believe there's a bit of restocking going on. We'll see how that plays out through Q4 in actuality. That's one where maybe we're taking a maybe conservative perspective on that, if that makes sense.
Yep. Great. Thanks very much.
Thanks.
We'll take our next question from Bryan Spillane with Bank of America.
Hey, good morning, everyone.
Morning, Bryan.
Just two questions from me. One maybe just related to Andrew's question about the sales trends. I think in the press release, you talked about U.S. QSRs or U.S. global running, I think, at 85% of prior year, and I think that's down, right? I think it was running at 95% when you reported the second quarter. A, is that true? B, is there something in the comps or just what's happening there that would have suggested maybe a slowdown? Or is there a slowdown suggested in that?
Yeah, I think that, again, that goes back to the comp back to 2019, if you look at the global. The comp to 2019, again, that Q4 2019 being a particularly strong quarter in the global business unit. If that gives you a better look at it.
Hey, Bryan, it's Dexter. In short, we don't see a slowdown versus if you think about it on Q3, Q4 sequential. The North American business is holding up well.
Okay. Second question, can you give us a sense of where you stand now and I don't know what the right measure is, but COVID impacting, I guess, the production, right? Whether it's absenteeism or utilization rates. It seems like it surged and maybe a little bit more than you expected at some point during the third quarter. Just trying to get a sense of current state of business. Has it improved at all? Are you still pretty much in the same level of absenteeism that you were experiencing in the third quarter?
Hey, Bryan, it's Tom. I would say it is improving. We have taken a number of actions several weeks ago to encourage our employees to get vaccinated. We are seeing improvement. The thing Rob talked about it in his prepared remarks, the thing that I made the decision that we're going to service our customers. That is causing, as we take the plants down like Rob said, we're moving things around, and it's very unnatural for us right now. This is not a systemic problem. This is a short-term issue that we'll continue to manage through.
We've got the right team focused on the course corrective actions. There is adjustments every week on production, and that's a decision. It's right for the company, it's right for to service our customers for the long term. It is improving. I think as the employees and people get vaccinated, and we're still following our protocols in the plants to keep the employees safe. We are seeing improvement, and it will gradually improve. I suspect we get the summer, and we should be in pretty good shape, close to normalized run rates.
All right. Thanks, Tom. Thanks, Rob.
You bet.
Thank you. We'll take our next question from Chris Growe with Stifel.
Hi, good morning.
Morning, Chris.
Hi. Just had a question for you, if I could ask first about the international performance and really focus more on the outlook. You'd indicated that the Europe, I guess I understand, given there's been some incremental restrictions there, but in some of those, which you call other key markets, I think about Asia and Oceania in particular, and I know Latin America would be a little weaker right now given restrictions in those markets. To run at 75% of 4Q19 levels, I was surprised at that degree of decline or lower level of shipments. I just want to understand, you mentioned China being very strong.
Are there other markets that are weighing on that, especially in that Asia region that may be resulting in this weaker performance overall?
Yeah. This is Rob. In particular, the Philippines is a little bit light, but we've also had some business shifts. We've moved some of the business that has come through our top line historically, we've moved to Lamb Weston/Meijer. Some of that's just shift within our overall platform, is part of it. The other piece that just in the near term that's playing a little bit of a role is the port issues and some of the logistics challenges you've seen more globally, where getting containers available and so on and so forth is having an impact. We think that'll clean up. That's also having an impact on those volumes.
Okay. That port issue, was that an issue in the quarter or more of an issue, say, going forward, like in Q4 and going forward?
Well, it was certainly an issue in the quarter to some degree with exports. Going forward, it's not cleaned up yet. We're in the same boat as everybody else who's exporting out of the Port of Seattle and the West Coast ports that container availability and ship reliability. We'll see a bit of what we think into this quarter as well.
Okay. There were some reports recently about potato costs being down from this current crop, and I know that can vary by region and state and whatnot. I want to get just an overall sense of that we're going to get a better update on the crop conditions going forward. Can you talk at all about what's been reported at least that potato costs could be down a little bit from this coming crop?
Yeah, Chris, this is Tom. As I always do in July and October, Chris, I'll update you on the overall crop condition, acres, yield, all those kind of things. I defer on the overall contract pricing as we aren't all the way closed yet. I understand that there's reports out there, but I will address that in July as I always do.
Okay. Thank you for that.
Yep.
Thank you. We'll take our next question from Adam Samuelson with Goldman Sachs.
Yes, thanks. Morning, everyone.
Morning, Adam.
Hi. I guess, I was hoping just on the cost issues in the quarter, and Tom, Rob, I appreciate that it was kind of a whole cascade of things that kind of snowballed on themselves. Is there any way to disaggregate and dimensionalize some of those individual pieces in terms of the incremental freight expense, kind of unplanned downtime, fixed cost under absorption? I'm just trying to make sure we're sensitive to how those really impacted the margin performance and again, where some of that might continue into at least the upcoming quarter.
We can be sensitive to layering in that impact and then taking that impact out as we get into fiscal 2022 and 2023.
I think obviously we've got the data internally, but I don't want to start down a path of disaggregating that and have an update on. I guess what I would say is that it all stems from not being able to staff and operate those lines because of COVID. It's that cascading effect. There's nothing systemic in the operating costs there that I would call out. It's really that one-time or the temporary impact of the COVID. On the transportation side, again, the shifting around from rail to truck and more spot trucking and so forth, that's temporary as well, driven off of that same issue.
I would point that there is generally transportation cost inflation going on. As we go recontract freight for the coming periods, I think we, like everybody else, are going to see freight cost increase.
Hey, Adam, it's Dexter. We have tried to step back from giving out on specific numbers. Of course, we got the data internally, but it's just one of those things that how much is really specific to COVID and things like inflation that might not be. We're just trying to be careful in terms of doing that and trying to report that out going forward, because it isn't an imprecise science at the end of the day. We gave you the three biggest drivers plus inflation on our COGS. It's tough to give you a sense of how much is specific to each individual item. Sorry about that.
Okay. All right. Maybe I'll circle back with that one. Follow-up question was really on the new China plant and just thinking about both timing and market impact. Do you think as we look at that when it comes online, is there sufficient market growth in China that wouldn't actually need to displace imports and that the market growth domestically there could absorb that while the import number stays roughly the same? Or how do you think about the knock-on effects of the China plants in terms of their import needs and how that would cascade back to the U.S.? Thanks.
Yeah, I'd admit it absolutely fits into our long-term strategic plan. China's a big market. It's a billion, 1 billion pound . It's been growing at 10%-15% annually for a number of years. We expect that growth to continue. A lot of our bigger customers are expanding their storefronts, and continue to do so. The plant's going to take about two years to come online. Adam, it gives us flexibility to shift current export production to in-country, which is another strategic reason to build that plant. We're committed to China, and we'll be committed to it long term.
It, again, adds a geographical flexibility to our overall operating network around the globe. It's two years out. These things, you got to think through what the category's going to look like in two years in some of these markets, and you got to invest in it. That's part of one of our strategic pillars, is to continue to invest in this company for the long term, and we'll continue to do that.
Okay, great. I'll pass it on. Thanks.
Thanks, Adam.
We'll take our next question from Tom Palmer with JP Morgan.
Good morning, and thanks for the questions.
Good morning.
I appreciate that it's tough to be overly precise, but I wanted to ask about your segment mix expectations. You noted that volume could be back to pre-pandemic levels by the end of the calendar year. How are you thinking about the mix between global and food service? Based on what you're seeing from customers, do you think that both segments could approach pre-pandemic volumes, or should we be thinking about a shift towards the global side?
Yeah, this is Tom. I expect, at the end of the calendar year, based on some of the data we look at, things we're projecting food service to be back to pre-pandemic levels. As we've seen markets in the U.S., not all of them open up and just lift restrictions. We've seen them approach or get pretty darn close to pre-pandemic levels. Now, we need some time to work through, overall, the consumer behavior of going back to eat at restaurants over a longer period of time.
That gives me confidence that there's some pent-up demand for the restaurants in our food service segment, and I think we'll get back to pre-pandemic levels by the end of calendar year. The mix will settle into where it was before all this happened, in terms of segment.
Okay. Thanks for that. Really helpful. I had kind of a different type of mix. You noted mix headwinds from a pricing standpoint in both global and food service during the third quarter. We're lapping some pretty big mix headwinds a year ago in the fourth quarter, and here you are a month in with improving volume trends. Should we think about mix kind of swinging to a tailwind as we think about the fourth quarter?
Yeah. Obviously, there's gonna be a significant mix change versus Q4 of last year, which everybody knows we're in the deep end of the pandemic. We expect food service trends to improve, global's pretty steady state and growing to pre-pandemic levels. Retail, if you recall last year, retail directionally was up, like, 150%. That's gonna taper off. Q3 was 105%-115%, roughly. The mix shift for us will be skewing back to, I call it, a more normalized segment mix on Q4.
Okay. Thanks, guys.
Thank you. We'll take our next question from Rob Dickerson with Jefferies.
Great. Thank you so much. Hey, Tom, just a question around capacity in the industry, and then also your decision to obviously lean into China a little bit. I guess combines all the comments you were talking about today, just kind of shifting maybe some volume into some less efficient plants. Should we take the China investment as a kind of go forward use of cash as you think about incremental capacity versus potentially looking at some of your footprint within the U.S. and maybe making some of those plants more modernized, so to speak, and more efficient?
In terms of China use of cash, we're evaluating that. The way to think about continual modernization program for five, 10 years. We're upgrading these plants with the latest technology. There's a certain amount of maintenance we do every year we're committed to for food safety and people safety, and some of the bigger equipment that's aged, we replace it. Just in terms of overall capacity in the industry, I think about the category two to three years out, and based on our projections on the category growth overall.
That's what drives a lot of our decisions in terms of investing, because we got to make a decision now for what we think is going to happen in two or two and a half years. That's the way we've always operated. I think the category will come back by the end of the calendar year on a normalized run rate basis, and I believe it's going to return to growth. The things that we're going to do in the near term is make sure we're positioned to capture our share, capture the growth, and service our customers, and continue to evaluate the footprint and the cost competitiveness of our footprint in the marketplace.
That'll drive the investment decisions going forward here in the next 12 - 15 months.
Got it. Okay. I mean, for now, obviously, it is a kind of wait and see where the growth here goes in the next 12 months. It sounds like the footprint for now is good. Right? There is not really a need to necessarily lean into the U.S. side with incremental capacity. If the industry continues to grow, that is obviously a use of cash potential going forward over the next two years, looks like.
Yeah, I'll jump in. Think about it this way. We got to think through what the next two years, two, three years of the category's going to look like. I'm not going to sit and wait and see what happens. We're going to make some decisions and potentially move some things forward to get ourselves ready for the next two, three years so we have available capacity to meet the demand and the category growth and service our customers, just like we have been in the past. We make decisions now anticipating what two and three years is going to look like.
Yeah. Fair enough. Thanks a lot. I appreciate it.
Yep.
Thank you. As a reminder, star one if you'd like to ask a question. We'll take our next question from Jenna Giannelli with Goldman Sachs.
Hi there. Thanks for taking my question. I just had a follow-up one on the China plant. Did you talk or have you talked about the cadence of the CapEx spend that you're planning there? Then just in terms of impact, potential efficiencies gained, anything that you can point to from maybe past examples where you've expanded capacity and the type of overall benefit from a margin standpoint that you saw? Thanks.
Jenna, we have not talked about the cadence of that CapEx spend there. Again, it's $250 million. It'll take us about two years to get it in. Again, you've got lead time order on equipment and progress payments against that. I think to some degree that the bulk of it's going to be a big chunk of the spend is going to be in next fiscal year, and then following into the last several months before startup there. Some of it'll be this year, but the bulk of it's going to be in next year and into the following year.
In terms of efficiencies, clearly we're going to gain technical efficiencies in areas like recovery, but there are so many variables that go into that. Clearly, labor costs are lower in China than they would be in the U.S. You get some offsets and some other things. Clearly we'll gain some efficiencies there. I will tell you that the folks who have been running our existing plant in Chengdu, and we've done some debottlenecking there to service growth there, have done a great job of managing those assets and extracting the real value out of those.
We're very confident in the team there and their ability to deliver when we give them the new asset to work with.
Okay, perfect. That's super helpful. I just have one more if I can. I know that you mentioned that you may have seen it's hard to gauge, but some pull forward of demand from your food service customers kind of in preparation for what they're expecting as more demand. From your standpoint, how are you thinking about working capital requirements as demand ramps for you? I guess mainly in kind of the food service and to a lesser extent at the global segment. That's it for me. Thank you.
I think if you think about the ramp-up in that, just look at the demand, look at our DSO on the receivable side and what it's been historically, and we'll ramp back up to those kinds of levels in our food service. That's what we anticipate is it'll just get back to kind of normal DSO levels when you get to year end, and it'll carry through the receivables number.
Thank you. We'll take our final question from Carla Casella with JP Morgan.
Hi. One follow-up on the cost question. Can you give a sense for how much of your total COGS is food-grade oil or edible-grade oil?
Dexter, I'm not sure if we've. Go ahead.
No, we haven't. Carla, let me take that. We don't give a specific on that. What we have said on COGS, just generally breaking down, normal environment, about roughly a third is raw potatoes. Roughly another, call it 20%, 25%, is going to be a combination, in no particular order here, of edible oils, packaging, and miscellaneous ingredients. The remaining, call it 40%, 45%, again, no particular order here, combination of fixed overhead, conversion costs, which is largely labor, fuel, electric power, and water, and then finally, transportation and warehousing. We don't break it down any finer than that.
Okay, great. That's helpful. Thank you.
That will conclude our question- and- answer session. At this time, I'd like to turn the call back over to Mr. Congbalay for any additional or closing remarks.
Hi, everybody. Appreciate the time today and listening to the call. Any follow-up questions or need to speak, best thing to do is pop me an email, then we can schedule a time. Have a good day, everyone. Thank you.
That will conclude today's call. We appreciate your participation.