Sara Lee Corp. Reports First Quarter Earnings Gain

Nov. 21, 2011
Sara Lee Corp. reported earnings for the first quarter and updated the progress of the spin-off of the company’s international coffee and tea business.

Sara Lee Corp. reported earnings for the first quarter and updated the progress of the spin-off of the company’s international coffee and tea business.

Adjusted net sales increased 6 percent and adjusted operating income increased 4 percent. Net sales increased 13 percent while reported operating income declined 29 percent.

Meat adjusted net sales declined 0.6 percent and adjusted operating segment income declined 4 percent.

Meat net sales increased 2 percent and reported operating segment income declined 17 percent.

Coffee and tea adjusted net sales increased 14 percent and adjusted operating segment income increased 20 percent.

Coffee and tea net sales and operating segment income increased 27 percent and 26 percent, respectively.

Adjusted earnings per share (EPS) increased $0.06 to $0.18; reported EPS decreased $0.15 to $(0.06)

“We are moving forward aggressively, preparing our meat and coffee and tea businesses for strong futures as independent pure-play companies,” said Sara Lee Executive Chairman Jan Bennink in a prepared statement. “Within the past month we have closed the sale of North American refrigerated dough to Ralcorp and announced the sales of Spanish bakery to Grupo Bimbo and the majority of the North American foodservice beverage operations to J.M. Smucker. We have also gained DOJ approval on the North American Fresh Bakery sale to Grupo Bimbo. These actions demonstrate our progress toward the creation of two focused entities that are poised for long-term growth. Meanwhile, we are increasing our investment in the future, with strong support behind core brands and new product development. The solid performance of our base business and our exciting pipeline of innovation give me great confidence that both companies are positioned for successful futures.”

Chief Executive Officer Marcel Smits added, “We’re pleased with the solid top and bottom line performances of our businesses while facing the challenge of managing volume and margins in an environment of commodity inflation and weak macroeconomic conditions. The coffee and tea business showed strong progress, with double-digit top and bottom line growth and margin expansion despite a healthy increase in marketing

investment. In North America, we’ve invested heavily behind new product launches, implemented organizational changes and achieved further cost reductions. For Sara Lee as a whole, we are on track to achieve our goal of $180 to $200 million in cost savings. All of these initiatives taken together give us confidence for the remainder of the year and allow us to maintain our EPS guidance despite a currency headwind and the exclusion of our N.A. Foodservice Beverage business from continuing operations.”

The retail segment reported a 2 percent decline in adjusted and reported net sales to $684 million, as the positive effect of higher prices was more than offset by volume declines. In the prior year, the first quarter showed strong volume growth partially driven by heavy promotional expenditure. During the first quarter of this year, the company launched several new products under the Hillshire Farm brand, including Grilled Essentials,

Gourmet Creations and Deli Carvers. These innovations resulted in start-up and marketing expenses in the first quarter of this year, but will have a positive impact on performance from the second quarter through the remainder of the year.

Adjusted operating segment income declined 9 percent to $56 million as volume declines and higher marketing investment offset SG&A savings and efficiencies from the implementation of SAP across all meat plants. MAP spending was 13 percent higher behind the launch of new products and support of the core brands. Pricing actions

along with cost savings more than offset continued increases in commodity costs. Reported operating segment income declined $18 million.

Looking forward, the segment will increasingly benefit from a number of factors, including the positive impact of innovation and selective pricing actions to improve volume softness. Meanwhile, the lapping of price increases and the increasing benefits of cost initiatives taken in recent quarters will contribute to the bottom line.

The newly-named North American Foodservice & Specialty Meats segment is comprised of the North American foodservice meats and bakery businesses (the beverage business is now reported as a discontinued operation) and the company’s specialty meats business, currently consisting of Aidells and Gallo. The results for Aidells and Gallo previously had been included in North American Retail.

The North American Foodservice & Specialty Meats segment reported another quarter of solid top-line growth.

Adjusted net sales increased 2 percent to $280 million, driven largely by pricing actions taken across the portfolio, while volumes increased 2 percent, including the contribution from the Aidells acquisition. Excluding Aidells, volumes declined 2 percent versus a strong prior year quarter driven by soft restaurant traffic and declines in foodservice bakery. Reported net sales grew by 12 percent, largely driven by strong performance from Aidells, which outperformed expectations with double-digit volume and sales growth.

Adjusted operating segment income increased 7 percent to $27 million driven by manufacturing and SG&A savings.

The adjusted operating margin expanded 40 basis points over the prior year to 9.6 percent. Reported operating segment income grew 16 percent while the reported operating margin also increased 40 basis points to 8.9 percent. The coffee and tea segment made a broad-based rebound versus the fourth quarter of fiscal 2011, evidencing a strong start to the year. Adjusted net sales increased 14 percent, to $906 million versus the prior year, supported by an increase in MAP spending of 32 percent. The increase in adjusted net sales was driven by pricing and mix growth of 14 percent and 4 percent, respectively. The company’s strategic choice to phase out private label production in France contributed to a volume decline of 3 percent.

The success of the L’OR EspressO capsules, continued good performance of Senseo in Spain and France, and the termination of private label production in France each contributed to positive mix growth. Price increases were enacted in multiple markets to offset commodity price increases in fiscal 2011. Barring any unforeseen spikes in green coffee prices from current levels, price increases and cost savings are expected to offset higher commodity prices from the second quarter of fiscal 2012 onwards. Reported net sales increased 27 percent to $922 million.

Although the Western Europe businesses continue to operate in a challenging environment, these operations showed a marked improvement compared to the fourth quarter of fiscal 2011. Spain, the Netherlands and Denmark improved volume trends compared to the preceding quarter. In the Netherlands, the company increased its value share in each of the last 4 months. L’OR EspressO continues to perform well in France, the Netherlands, Belgium and most notably in Spain where it commands 10.6 percent value share of the total retail coffee market only 20 weeks post-launch.

Businesses in the rest of the world delivered strong volume and sales performance, led by Brazil, Australia and Poland. Australia continued to gain market share in the retail instant coffee market, aided by increased MAP spending and the introduction of Moccona Café Classics Frappé, a unique offer in the cold instant coffee mix segment.

Despite the increase in MAP spend to $41 million, adjusted operating segment income increased 19 percent to $121 million. The adjusted operating margin of 13.3% was supported by positive mix and pricing to offset peak levels of green coffee commodity costs experienced during the quarter. Reported operating segment income increased 26 percent to $114 million and the reported operating margin was 12.3 percent.


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