Sara Lee Corp. reported earnings for the second quarter and first half of fiscal 2012 and updated the progress of the spin-off of the company’s international coffee and tea business. Net sales increased 6 percent.
“We continue to see solid progress in our businesses as we head into the second half of our fiscal year,” said Executive Chairman Jan Bennink in a prepared statement. “We remain on track to complete the spin-off during the fourth quarter of the fiscal year. We have closed all announced business divestitures and have supplemented our core businesses with acquisitions that will strengthen our long-term growth profile. Each business now has the CEO and CFO in place and they are assessing further changes to strengthen the organization. Finally, as we announced last week, we now have full control over the Senseo trademark and look forward to a continued partnership with Philips to leverage Senseo’s strong brand equity into new products and geographic market expansion.”
Chief Executive Officer Marcel Smits added, “The meat business showed a marked improvement in volume and mix trends in the quarter in response to course corrections. We made brisk improvement on the meat categories in the retail and foodservice businesses, while the bakery categories lagged. Coffee and tea continued its upward trend and, importantly, operations in the key Western European countries continue to perform well. We are confident that we now have the market fundamentals in line to deliver on our guidance for the full year.”
In the second quarter, coffee and tea continued its strong performance. Adjusted net sales grew 12 percent, driven by pricing and strong mix. This positive performance was partially offset by volume declines which can be attributed largely to the complete shutdown of the Thai business during massive flooding and the deliberate withdrawal from private label business in France. Adjusted operating margin increased for the second consecutive quarter, to 14.6 percent, despite a 20 percent increase in MAP spending. Pricing has now fully covered raw material increases for the first time since the beginning of the spike in raw material prices.
The meats business showed encouraging progress in the second quarter as selective pricing actions were effective in reversing volume loss trends in key categories. After a volume decline of 5.7 percent in the first quarter, the second quarter showed a decline of 3.5 percent, with trends improving as the quarter progressed. Volume and share improvement in the company’s core meat categories was diluted by weak performance in bakery categories. A portion of the volume decline can be attributed to short-term disruption related to the transition of accounts to a third party broker. The long-term benefit of this strategic move is expected to greatly outweigh the near-term volume impact. Mix declined 0.4 percent in the first quarter but increased 1.0 percent in the second quarter.
In the second quarter, adjusted and reported net sales were flat versus the prior year period, as volume declines of 4.9 percent were offset by a positive mix effect of 1.5 percent as well as pricing.
The North American retail segment implemented selective strategic pricing actions in the second quarter in order to address competitive price gaps in certain categories. As a result, the company saw volume and share trends improve in core categories. The overall result was a quarter-over-quarter volume/mix improvement of 390 basis points (from -7.3 percent in the first quarter to -3.4 percent in the second quarter). Adjusted operating segment income increased 5 percent as a result of lower SG&A, operations productivity and lower MAP spend. Commodity price increases were not fully recovered in the quarter.
Market share trends showed meaningful improvements in each of the segment’s core categories. The best performance in the quarter came from the Jimmy Dean business which continues to deliver positive trends on volume, revenue and operating profit, driven by innovation. Meanwhile, extensive resources are being put behind plans to improve the innovation and positioning of the Hillshire Farm brand. The bakery business underperformed during the holiday season in a very competitive market, impacting quarterly results and diluting the impact of positive trends in meat.
In the first six months, adjusted and reported net sales declined 1 percent to $1,425 million. Pricing and sales mix virtually offset volume declines, the exit of the final hog resale contract and slotting fees on new items. Adjusted operating segment income declined 1 percent as the impact of volume declines more than offset lower SG&A and operations productivity.