Sara Lee Corp. Reports Weak Second Quarter Net Sales

The International beverage segment continues to push through pricing actions in the face of record increases in green coffee costs. Value-added innovation, such as L'Or EspressO, Douwe Egberts Aromettes and Marcilla Cápsulas Gran Aroma, has helped the segment maintain or grow share in most major markets. In particular, growth in France, Spain, and Brazil demonstrates the success of focused investments behind premium
innovation in these countries. L'Or EspressO has sold in excess of 115 million pods since its launch in France in April 2010 and sales are now expanding to other countries (launched in the Netherlands in December). On Nov. 30, 2010, Sara Lee finalized the acquisition of Damasco, a coffee company in Brazil, which contributed $3 million to net sales in the quarter.

The international beverage segment increased net sales 2 percent in the second quarter to $899 million, while adjusted net sales grew 7 percent. Reported operating segment income declined 36 percent to $109 million and adjusted operating segment income declined 11 percent to $142 million. Unit volumes were down 2 percent and sales mix was up 3 percent, as high single-digit growth in single-serve, tea and instants, was offset by low single-digit declines in multiserve and coffee concentrates. In addition, adjusted sales growth was driven by pricing actions implemented to offset increases in green coffee costs. The decline in adjusted operating segment income is mostly attributed to significant commodity cost increases which have outpaced pricing actions.

For the second half of the fiscal year, the business expects to see further improvement in volume and sales mix and anticipates strong top-line growth, driven by the continued roll-out and geographic expansion of successful innovations launched in recent quarters. While the business will continue to increase prices, it does not expect to completely offset increases in commodity costs and adjusted operating segment income is expected to be down in fiscal 2011 as a result of higher commodity costs net of pricing, approximately $10 million of stranded overhead related to the Household & Body Care divestiture and a $30 million unrealized mark-to-market currency gain in fiscal 2010.

Results for the international bakery segment came in below expectations. Earlier restructuring actions continue to benefit the Spanish bakery business but performance is still impacted by difficult macro-economic and competitive conditions in Spain. The Spanish business is reducing costs, narrowing price gaps to private label and launching innovative new products. Meanwhile, the French refrigerated dough business continues to perform well, reporting volume and sales growth versus last year.

The segment reported a net sales decline of 12 percent to $185 million and an adjusted net sales decline of 7 percent.

Reported operating segment income was $5 million versus a loss of $1 million in the prior year period, while adjusted operating segment income declined to $5 million from $11 million in the prior year. The declines in net sales and operating segment income were mostly attributed to lower unit volumes, a net reduction in prices and an unfavorable shift in sales mix.

The segment expects strong performance from its refrigerated dough business in the second half of the year and expects adjusted operating segment income to be roughly flat in fiscal 2011, due to the continued challenges in the Spanish fresh bakery market.

The company reported $852 million in net sales from discontinued operations in the second quarter. Operating income from discontinued operations was $26 million in the second quarter. Adjusted operating income from discontinued operations was $67 million in the quarter.

The North American Fresh Bakery operations reported a net sales decline of 2 percent, on a reported and adjusted basis, to $487 million in the second quarter. Operating segment income was $2 million compared to $19 million in the comparable quarter. Adjusted operating segment income was $8 million versus $19 million in the prior year, despite an $11 million benefit from halting depreciation in fiscal 2011 following the reclassification of the segment to discontinued operations. The decline in operating segment income was driven by flat volumes and lower pricing. Prices increased versus the first quarter but still remain below prior-year levels. Input costs continue to rise in the category and the company is preparing further price increases in the back half of the year to offset additional cost increases.