Sara Lee Reports Strong Fiscal 2010 Results

Operating income was up significantly for the year, driven by improved operating segment income across all five continuing business segments.

Aug 13 2010 --- Sara Lee Corp. reported strong results for fiscal 2010. Operating income was up significantly for the year, driven by improved operating segment income across all five continuing business segments. In particular, the North American Retail and International Beverage segments showed impressive results, while the North American Foodservice segment increased operating segment income in a challenging environment. The discontinued International Household and Body Care businesses also reported strong fiscal 2010 results. Diluted earnings per share increased significantly in fiscal 2010, both on a reported and an adjusted basis. Net sales and unit volumes decreased in fiscal 2010, due to price competition and heavy promotional activity in various categories, as well as the impact of planned exits from low margin business. Cash from operations increased in fiscal 2010 driven by strong operating results and disciplined working capital management. Fiscal 2010 was a 53-week year, with the 53rd week falling in the fourth quarter. To facilitate meaningful year-over- year comparisons, the “adjusted” results presented in this release exclude the impact of the 53rd week.

“Sara Lee concluded a very strong year, highlighted by robust earnings per share growth, an increase in cash flow and higher adjusted operating segment income in most of our ongoing business segments,” said Sara Lee Corp. interim chief executive officer Marcel H. M. Smits.

“In fact, fiscal 2010 results compare favorably to the guidance we provided on May 6, 2010. Cash from operations came in at the top end of the guidance range, despite a $200 million voluntary cash contribution to the company’s pension plans in the fourth quarter, which was not included in the guidance. In addition, despite currency headwinds in the fourth quarter, adjusted EPS for fiscal 2010, which excludes $0.03 per share for the 53rd week, came in at $1.08 per share, compared to our guidance of $1.06 to $1.10 per share, which included the impact of the 53rd week,” Smits said.

“As we look forward to fiscal 2011, we are confident that we will show further base business improvement and we will appropriately deploy the remaining proceeds from the Household and Body Care divestiture,” Smits concluded.

North American Retail
The North American Retail segment had a great fiscal 2010, building on the past two years of strong business improvements. Operating segment income was up significantly and operating margin rose from 9.2% to 12.3% in fiscal 2010. The segment also increased its share position in ten of its twelve core categories during the year. The retail business is also well on its way with the planned exit from the commodity meats business. In the fourth quarter of fiscal 2010, the North American Retail segment invested heavily behind its core retail brands, Hillshire Farm, Jimmy Dean and Ball Park, the launch of new products and other consumer-centric marketing programs to help set the stage for another year of growth in fiscal 2011.

North American Fresh Bakery
The North American Fresh Bakery segment had a challenging fiscal 2010 as price competition in the category intensified. In response to the competitive environment, the segment adjusted its pricing during the course of the year and saw its branded unit volumes starting to recover in the second half of fiscal 2010. Overall profitability of the segment, however, was flat in fiscal 2010. In the fourth quarter of fiscal 2010, operating segment income was $8 million, compared to $23 million in the year-ago quarter, a decrease primarily due to a $16 million charge for a partial withdrawal liability relating to a multi-employer pension plan, higher MAP spending behind the Sara Lee brand, lower prices and lower unit volumes. These factors were partially offset by lower commodity costs, the additional 53rd week and a decrease in operating costs driven by Project Accelerate initiatives and other continuous improvement savings.

North American Foodservice
The North American Foodservice segment produced a second consecutive year of increased adjusted operating segment income. Favorable commodity costs, Project Accelerate and continuous improvement savings and sales mix improvements led to this achievement in a very challenging foodservice environment. The foodservice segment reported operating segment income of $16 million in the fourth quarter compared to $34 million in the year-ago period, a decrease primarily due to lower unit volumes, rising commodity costs, increased MAP spending and significant items related to business exits. These impacts were partially offset by improved sales mix, higher prices, the 53rd week and savings from Project Accelerate and continuous improvement initiatives.
While foodservice industry trends are expected to remain challenging for the foreseeable future, the business segment expects to have another year of bottom-line improvement in fiscal 2011 behind new business with key customers and further improvements in its cost structure. As communicated in the third quarter earnings release, the segment lost two accounts in fiscal 2010. The first was a high volume, but low sales and low margin bakery contract, which will impact unit volumes in the first half of fiscal 2011. The second was a low volume, but high margin liquid coffee concentrate contract, which will impact the segment’s year-over-year comparisons for most of fiscal 2011.

International Beverage
The International Beverage segment reported strong bottom-line results for fiscal 2010, primarily driven by Project Accelerate savings, lower commodity costs, higher unit volumes and the 53rd week. The segment also benefited from a $30 million favorable foreign exchange variance in fiscal 2010, largely from mark-to-market currency impacts related to the purchase of raw materials. In the fourth quarter, however, adjusted operating segment income decreased due to significantly higher MAP spending. The marketing investment supported several new coffee innovations, most notably the successful launch of L’OR Espresso capsules in France in the fourth quarter. Incremental MAP spending was also put behind the Senseo and Douwe Egberts brands in key European markets and behind the Pickwick tea brand in the Netherlands.
Reported operating segment income was $124 million, up 10.5% from $112 million in the fourth quarter of fiscal 2009, driven by the 53rd week and lower year-over-year charges for Project Accelerate.
The International Beverage segment will continue to invest high levels of MAP spending behind its brands and new products in fiscal 2011. The increased marketing support, combined with unfavorable foreign currency exchange rates and the impact of stranded overhead costs that were previously shared with discontinued operations, will mute operating segment income growth in fiscal 2011. As a result, the segment’s bottom-line is expected to be flat to slightly down in fiscal 2011, while the top-line is expected to grow.

International Bakery
The International Bakery segment continued to face macro-economic and competitive headwinds in its core Spanish market in fiscal 2010, but the French refrigerated dough business and the Australian frozen bakery business did well during the year. In Spain, while unit volumes were still under pressure from private label competition, the business worked diligently on improving its business model through cost reductions, restructurings and right-sizing of the manufacturing footprint. During fiscal 2010, Sara Lee sold several bakeries to a third-party manufacturer, which helped improve the segment’s plant utilization rates and reduce its cost per unit. All these actions have helped mitigate the impact of lower unit volumes on the segment’s profitability. The segment reported an operating segment loss of $18 million in the fourth quarter, primarily due to $21 million in Project Accelerate charges.
At the start of fiscal 2011, as a result of the improved business model in its Spanish bakery business, the segment has a much better foundation to grow upon. The segment also expects to benefit from the continued strong performance of its European refrigerated dough and Australian frozen bakery businesses and anticipates to deliver bottom-line improvement in fiscal 2011.