Adjusted net sales1 up 1.8% in the quarter, driven by top-line improvement in the two growth businesses- North American Retail and International Beverage; reported net sales essentially flat
Diluted EPS as reported of $1.37 compared to $0.53 in year-ago period
Adjusted EPS from continuing operations of $0.24 in second quarter vs. $0.27 in year-ago period
Reaffirming guidance for adjusted EPS from continuing operations of $0.85 – $0.89 per share
DOWNERS GROVE, Ill. (Feb. 8, 2011) – Sara Lee Corp. (NYSE: SLE) today reported a 1.8% increase in second quarter fiscal 2011 adjusted net sales from continuing operations, driven by gains in the company’s two strategic
growth businesses, North American Retail and International Beverage. On a reported basis net sales were essentially flat (-0.4%), due to the impact of a weaker euro. The company reported lower operating income and
diluted earnings per share from continuing operations for the second quarter of fiscal 2011, primarily due to higher commodity costs net of pricing. Second quarter results compare to a very strong year-ago period, when decreasing
commodity costs provided a benefit to the company. Sara Lee’s North American Fresh Bakery segment is now reported as a discontinued operation, following the agreement to sell the business to Grupo Bimbo.
On January 28, 2011, Sara Lee announced that its board of directors agreed in principle to divide the company into two separate, publicly-traded companies. The separation is expected to be completed in early calendar year 2012.
The North American Retail and North American Foodservice businesses (excluding the North American beverage business) are planned to be spun off, tax-free, into a new public company that will assume the “Sara Lee” name.
The yet to be named other company will consist of Sara Lee’s current International Beverage and Bakery businesses, as well as the North American beverage business. Each company will have leading consumer brands and compelling growth prospects.
“We are excited to move forward with the implementation of our strategic initiative to create two pure-play companies. We are confident that this plan offers the best opportunity to deliver long-term value to our
shareholders,” said Sara Lee Corp. chief executive officer Marcel Smits.
“At $0.24, our second quarter adjusted EPS from continuing operations showed good improvement from the $0.14 earned in the first quarter. As we focus on driving operational improvement in our two growth businesses,
we are well positioned to finish the year with a strong second half. The North American Retail segment will benefit from first half pricing actions and MAP investments. In the International Beverage business, we continue
to push through pricing to offset commodity increases and we expect further benefits from successful innovation.
We are confident in our ability to drive top-line and bottom-line growth for the fiscal year,” Smits concluded.
Second Quarter Review
Net Sales
Reported net sales from continuing operations for the second quarter of fiscal 2011 were $2.3 billion, down 0.4% versus the year-ago period, as a favorable shift in sales mix and higher prices were offset by lower unit volumes
and unfavorable foreign currency exchange rates. The company’s adjusted net sales rose 1.8% in the quarter, as growth in International Beverage and North American Retail more than offset expected declines in North American Foodservice and International Bakery. In the first half, reported net sales from continuing operations were $4.4 billion, up 0.1% versus the year ago period. Adjusted net sales grew 2.4% in the first half.
¹ The term “adjusted net sales” and other “adjusted” financial measures are explained and reconciled to each item’s most
comparable U.S. generally accepted accounting principles measure at the end of this release.
Operating Income
The first half of fiscal 2011 compares to a very strong year-ago period. In the prior year, favorable commodity costs and pricing contributed to a strong first quarter and even stronger second quarter. This year, in contrast,
operating segment income will be more heavily weighted toward the second half of the year. The second quarter of fiscal 2011 delivered $294 million of adjusted operating segment income versus $195 million in the first quarter.
Reported operating income from continuing operations for the second quarter of fiscal 2011 was $206 million, compared to $269 million in the year-ago period, a decrease of $63 million, or 23%. The decline was primarily
driven by higher commodity costs net of pricing (-$54 million), as well as volume declines net of mix improvements, higher MAP spending, unfavorable exchange rates and the impact of commodity mark-tomarket, partially offset by savings from corporate and continuous improvement net of inflation. Adjusted
operating income from continuing operations was $249 million, compared to $296 million in the second quarter of fiscal 2010, a decrease of $47 million, or 16%.
Reported operating income from continuing operations for the first half of fiscal 2011 was $376 million, compared to $581 million in the year-ago period, a decrease of $205 million, or 35%. The decline was primarily the result of no longer receiving contingent sale proceeds from the sale of its tobacco business ($133 million in the year-ago period), as well as higher commodity costs net of pricing (-$96 million), increased investment in MAP and unfavorable exchange rates, partially offset by savings from corporate and continuous improvement net of inflation, a commodity mark-to-market benefit and mix improvement net of volume declines. Adjusted operating income from continuing operations was $428 million, compared to $483 million
in the first half of fiscal 2010, a decrease of $55 million, or 11%.
Diluted Earnings Per Share Reported and adjusted EPS can be summarized as follows:
Second Quarter First Half
2011 2010 2011 2010
Diluted EPS as reported $1.37 $0.53 $1.65 $0.94
Less:
Gain on sale of discontinued operations 0.84 - 0.97 -
Tax benefit – discontinued operations 0.35 - 0.35 -
Other significant items (0.13) 0.15 (0.18) 0.17
Contingent sale proceeds - 0.02 - 0.17
Adjusted EPS* $0.31 $0.36 $0.51 $0.60
Of which:
Adjusted EPS from continuing operations 0.24 0.27 0.37 0.43
Adjusted EPS from discontinued operations 0.07 0.09 0.14 0.17
* Amounts are rounded and may not add to the total.
Sara Lee reported a gain on the sale of Household & Body Care discontinued operations of $0.84 in the second quarter and $0.97 in the first half. As a result of entering into an agreement to sell the North American Fresh
Bakery operations, Sara Lee is required to record a deferred tax asset and related tax benefit associated with the excess tax over book basis. This tax benefit is $0.35 in the second quarter. Upon the close of the sale of the
North American Fresh Bakery business, this benefit will reverse. For more detail on the impact of significant items on diluted EPS, see pages 16-19.
Cash from Operations
Net cash from operating activities was $233 million for the first half of fiscal 2011, compared to $472 million in the prior-year period. The $239 million decline is mainly due to a $112 million increase in inventory balances
primarily due to higher commodity input costs, a $55 million decline in adjusted operating income from continuing operations and a $29 million decline in operating cash flow from discontinued operations.
Financial and Business Highlights
MAP spending increased 2% in the second quarter of fiscal 2011. In the first half MAP increased 10%, driven by greater investment behind the core growth brands, Jimmy Dean and Hillshire Farm, in North American Retail and the launch of innovative new products, such as L’Or EspressO, in International Beverage.
In the second quarter, commodity costs (excluding commodity mark-to-market) increased by approximately $127 million, partially offset by approximately $73 million in higher prices, resulting in a net unfavorable commodity cost impact of approximately $54 million. In the first half of fiscal 2011, commodity costs increased by approximately $219 million, partially offset by approximately $123 million in price increases, resulting in a net unfavorable commodity cost impact of $96 million. Included in the above commodity cost increases were currency mark-to-market losses, related to the purchase of commodities in the International Beverage segment, of $2 million in the quarter and $33 million year-to-date.
Net interest expense was $21 million in the quarter, compared to $29 million in the year-ago period. In the second quarter the company incurred $25 million of debt extinguishment costs related to the early redemption of debt. This is the final extinguishment charge bringing the full year total to $55 million. The lower interest rate on the new bonds will reduce annual interest expense by approximately $20 million.
General corporate expenses declined $18 million to $45 million in the second quarter compared to $63 million in the year-ago period, due to a reduction in information technology costs and lower employee benefit costs.
Mark-to-market adjustments from unrealized commodity derivatives amounted to a loss of $2 million in the quarter compared to a gain of $2 million in the second quarter last year.
The effective tax rate for continuing operations in the second quarter, on an as reported basis, was 32.7%, compared to (24.4)% in the year-ago quarter. Sara Lee expects the tax rate for continuing operations, excluding significant items, to be between 34% and 35% for fiscal 2011. For further detail on the tax rate, see pages 18 and 19 of this release.
Project Accelerate is a company-wide cost savings and productivity initiative focused on outsourcing actions, supply chain efficiencies and organizational simplification. The company has revised Project Accelerate benefits and costs to exclude the North American Fresh Bakery business. Ongoing cumulative benefits realized from the beginning of fiscal 2009 to date are $194 million, of which approximately $50 million are incremental in the first half of fiscal 2011. At the end of fiscal 2011, Sara Lee expects cumulative ongoing benefits of $220 to $240 million. By the end of fiscal 2012, the company expects annualized benefits in continuing operations of $300 to $350 million. The company expects Project Accelerate costs in fiscal 2011 to be approximately $30 to $40 million and minimal charges in fiscal 2012. In total, project charges will amount to approximately $280 million from 2009 to 2012.
The company’s global body care and European detergents businesses were sold in December 2010. The company received cash proceeds of $1.6 billion and recognized an after-tax gain of $539 million on the dispositions in the quarter.
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