Sara Lee Corp. Reports Net Sales Increase In Third Quarter And First Nine Months

Sara Lee Corp. reported earnings for the third quarter and first nine months of fiscal 2012 and provided an update on the progress of the spin-off of D.E. Master Blenders 1753.

Following are highlights:

3 percent increase in adjusted net sales; 2 percent increase in reported net sales

Coffee & Tea Co: adjusted net sales up 5 percent; reported net sales up 1 percent

Meat Co: adjusted net sales up 1 percent; reported net sales up 2 percent

Adjusted and reported operating income decreased 5 percent and 66 percent

Coffee & Tea Co: adjusted operating segment income down 9 percent; reported operating segment income down 21 percent

Meat Co: adjusted operating segment income down 7 percent; reported operating segment income down 13 percent

Adjusted earnings per share (EPS) decreased two cents to $0.20; reported EPS decreased fourteen cents to $0.06

"I am pleased to announce that we are on track to spin-off the coffee and tea business by June 30. Significant progress has been made in the last quarter with the IRS private letter ruling, an F-1 prospectus filing for coffee, the successful bond redemption and tender offers and the investor day for Coffee Co. (D.E. Master Blenders 1753),” said Executive Chairman Jan Bennink in a prepared statement. "Both companies are in full preparation to become highly successful pure play companies. Sean Connolly, the new CEO for Meats, is finalizing his strategy and his new management structure, which will be presented to investors shortly. Michiel Herkemij, appointed as CEO for Master Blenders in December, has presented his strategy to investors and has added a supply chain executive and a regional head for Western Europe to his executive team. The boards for the new companies will be announced in May."

Chief Executive Officer Marcel Smits added, “I am pleased to report that Meat Co. showed continued improvement in volume trends, achieved SG&A reductions and launched new innovation in the third quarter. The coffee and tea business performed well in its main markets with underlying margin improvement, and is gearing up for significant innovation. Activity levels in both companies increased during this period as the corporate headquarters operation continued to be scaled down. In addition, both businesses worked through manufacturing inefficiencies that impacted results. Positively, after two years of steep commodity cost increases, we finally see a stabilization and, in the case of coffee, a reversal of raw material trends. For the first time in two years, both businesses recovered their commodity cost increases and will see further benefits in Q4, particularly in coffee. We are confident that we will achieve our guidance, at the low end of the range for sales and operating income, as we continue to build two stand-alone businesses.”

Overall, coffee and tea experienced strong performance in its branded business during the quarter. Excluding green coffee exports, adjusted net sales increased by 8.2 percent. Including export sales, the business grew by 4.6 percent. Going forward net sales will be reported excluding green coffee export sales.

All business sectors showed strength, with Western Europe the most robust, at 10.5 percent sales growth, rest of world at 8.4 percent and out-of-home at 2.9 percent. Shares in the key Western European countries (Netherlands, France and Spain) held steady or grew.

Mix improved to 6.5 percent, from 5.4 percent last quarter, while volume continued to be negative at -7.3  percent compared to the prior year in Q3. Volume has been affected by three factors: the elimination of private label business in France in summer 2011; the effects of the Thai flooding; and negative volume trends in several smaller countries due to aggressive pricing to protect margins. Excluding French private label and Thai volume declines, the ongoing business shows a -3.9 percent compared to the prior year in Q3. Actions are underway to rebalance volume and margins in these markets.

Operating segment income for the third quarter was below last year, adversely affected by SG&A increases due to stranded costs, costs for the stand-alone company and one-off innovation costs. Positive raw material developments are not reflected in this quarter due to the forward buying strategy of the business.

Income was impacted by a $17 million currency mark-to-market loss in this quarter. Adjusted operating margins excluding this impact are healthy at 14.7 percent, a significant increase over the comparable number last quarter of 13.6 percent. As of the spin-off, these currency mark-to-market impacts will be reported below the operating profit line to better track operating results.

MAP spend was below last year, as funds were partly reallocated to support volume actions in selected smaller markets and to foster upcoming innovations.

Innovations are starting to show the first green shoots, with the encouraging launch of the premium R&G line in the Netherlands, the upcoming re-launch of capsules and the re-launch of the Spanish tea range with new flavors and packaging in Q4.

The total Meat Co. business continues to show positive progress. For the first time in the fiscal year, pricing net of commodities was positive in both the retail and foodservice and specialty meats segments. Total volumes have begun to stabilize and were slightly down (less than 1 percent) for the quarter, showing sequential improvement from a 5.7 percent decline over the prior year in Q1 and a 3.5 percent decline over the prior year in Q2, assisted by the timing of the Easter holiday as well as higher commodity turkey sales. Bakery categories in both segments continue to perform below expectations, diluting the stronger performance of the meat categories.

Third quarter reported and adjusted net sales showed a slight increase of almost 1 percent over the prior year third quarter as positive pricing offset a weaker sales mix. Unit volumes were flat for the quarter, continuing a sequential improvement from volume declines of 7.3 percent over the prior year in Q1 and a 4.9 percent decline over the prior year in Q2. Volume declines from the transition to third party brokers have shown improvement. Adjusted and reported operating segment income declined, as a result of discounts to move aged inventory and higher MAP spend.

Jimmy Dean continues its strong performance with positive volume growth for the quarter. New innovations, including quesadillas and bowl variants, launched in Q3 and were supported by increased media and advertising spend.

The Ball Park frozen hamburger patty launch in Q3 extends the brand beyond hot dogs. Rollout of this new product will continue through Q4. Media and Advertising campaigns supporting Ball Park are also planned for Q4.

Efforts to refresh and reposition the Hillshire Farm brand continue. The Hillshire Farm sausage business showed improvement in the quarter behind new products launched earlier in the year, increased MAP spend and selected pricing actions implemented in Q2.

In the first nine months, adjusted and reported net sales were flat as pricing and sales mix virtually offset volume declines and higher slotting expenses. Adjusted operating segment income declined 3 percent and reported operating segment income declined 14 percent as lower volumes and higher commodity costs and slotting expenses were not entirely offset by lower SG&A costs and favorable pricing.

In the third quarter, adjusted and reported net sales increased by almost 3 percent and 7 percent, respectively, over the prior year’s third quarter as pricing more than offset volume declines in the segment. Adjusted and reported operating segment income declined as a result of the lower segment volumes and related manufacturing inefficiencies. Low single digit volume growth in the meat business was offset by high single-digit volume declines in bakery as that business continues to suffer from negative economic and industry trends.

In the first nine months, adjusted and reported net sales increased by approximately 3 percent and 9 percent, respectively, driven primarily by higher pricing and the impact of the Aidells acquisition. Adjusted and reported operating segment declines can be attributed to higher commodity costs and declining volumes offsetting additional higher pricing and lower SG&A costs.