Sara Lee: reports strong fiscal 2010 results

Downers Grove / IL. (slc) Sara Lee Corporation 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. 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 interim chief executive officer Marcel H. M. Smits.

«In fact, fiscal 2010 results compare favourably to the guidance we provided on May 06, 2010. Cash from operations came in at the top end of the guidance range, despite a 200 million USD 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 USD per share for the 53rd week, came in at 1,08 USD per share, compared to our guidance of 1,06 to 1,10 USD per share, which included the impact of the 53rd week», Smits said.

«As intended, we made a significant investment behind marketing in the fourth quarter. During the year, we made meaningful progress in divesting our International Household and Body Care business, took receipt of a portion of the divestiture proceeds and executed a 500 million USD accelerated share repurchase program, while also committing to maintain and gradually increase our healthy dividend. 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.

Financial Review

Net Sales and Unit Volumes: Net sales for fiscal 2010 were 10,8 billion USD, down 0,8 percent versus fiscal 2009 as the positive impact of an additional 53rd week, favourable foreign currency exchange rates and positive sales mix, were more than offset by lower unit volumes, lower prices and the impact of divestitures. The company´s adjusted net sales decreased 2,8 percent for the year. Total Sara Lee unit volumes decreased 3,7 percent in fiscal 2010; however, excluding the impact of the 53rd week and planned exits from commodity and kosher meats in the North American Retail segment, total Sara Lee unit volumes were down 1,5 percent in fiscal 2010. In the fourth quarter of fiscal 2010, net sales were 2,8 billion USD, up 4,2 percent, as the impact of the 53rd week and favourable sales mix more than offset lower unit volumes, lower prices and unfavourable foreign currency exchange rates. Adjusted net sales were down 2,8 percent in the fourth quarter.

Operating Income: Sara Lee reported operating income of 918 million USD in fiscal 2010, up 88,6 percent compared to 487 million USD in fiscal 2009. Adjusted operating income was 932 million USD for the year, up 157 million USD year-over-year, or 20,2 percent. The improvement in adjusted operating income included a 142 million USD increase in total adjusted operating segment income for the five continuing business segments, while general corporate expenses, excluding significant items, decreased by 14 million USD. In the fourth quarter of fiscal 2010, operating income was 79 million USD, compared to a loss of twelve million USD in the year-ago period. Adjusted operating income was 136 million USD, compared to 245 million USD in the fourth quarter of fiscal 2009, a decrease of 109 million USD, or 44,3 percent, primarily due to an approximately 50 million USD increase in media advertising and promotion (MAP) spending behind key brands and innovative new products in the quarter, 32 million USD of unfavourable mark-to-market variances on commodity derivatives, as well as lower unit volumes and lower prices, partially offset by an improved sales mix.

Operating income from discontinued operations was 251 million USD in fiscal 2010, up ten million USD, or 3,4 percent, helped by a 33 million USD benefit due to the cessation of depreciation and amortization in compliance with accounting rules. Adjusted operating income from discontinued operations was 333 million USD in fiscal 2010, up 72 million USD, or 26,3 percent. At the net income level, discontinued operations reported a net loss of 199 million USD in fiscal 2010, due to 453 million USD in income tax expense, of which 428 million USD was related to the deemed repatriation of overseas earnings, attributable to the existing overseas cash and book value of the International Household and Body Care businesses. In the fourth quarter of fiscal 2010, operating income from discontinued operations was 44 million USD, down 36 million USD, or 46,3 percent. Adjusted operating income in the fourth quarter was 94 million USD, up 13 million USD, or 12,7 percent.

Cash from Operations: Net cash from operating activities was 952 million USD in fiscal 2010, compared to 900 million USD in the prior year. The increase was primarily driven by higher operating income and better working capital management, which was partially offset by higher year-over-year cash restructuring payments, cash taxes and cash contributions to the pension plans. Cash contributions to the pension plans were 332 million USD in fiscal 2010, compared to 306 million USD in fiscal 2009. Included in the amount for fiscal 2010 was a 200 million USD voluntary cash contribution to the pension plans in the fourth quarter, which was previously planned for fiscal 2011.

Business Performance Review

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 percent to 12,3 percent 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. MAP spending increased 21 million USD or 67 percent in the fourth quarter, while the segment also increased other consumer spending in the period. Meaningful growth investments were made in the new Kansas City sliced meat plant that will become operational in calendar year 2011 and in the implementation of IT tools from SAP and Oracle that will deliver future benefits in cost efficiency, promotion effectiveness, logistics, planning and manufacturing costs.

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 eight million USD, compared to 23 million USD in the year-ago quarter, a decrease primarily due to a 16 million USD 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. Adjusted operating segment income decreased by twelve million USD, or 39,4 percent, to 17 million USD in the fourth quarter, partially driven by accounting adjustments related to employee benefits and third party bread distributors.

Net sales increased 4,8 percent to 587 million USD in the fourth quarter of fiscal 2010, primarily due to the impact of the 53rd week and favourable sales mix into branded business, which were partially offset by lower unit volumes and lower prices. Adjusted net sales decreased 4,5 percent to 535 million USD in the fourth quarter. Unit volumes, excluding the 53rd week, decreased 3,1 percent, as slightly higher unit volumes for branded breads were more than offset by volume weakness in private label bakery products as a result of intense price competition in the category. Branded volumes rose following price recalibration earlier in the year, and were helped by new products such as Sara Lee Soft + Smooth Plus breads.

Although input costs, most notably wheat, are rapidly increasing, the segment is confident that it can successfully manage through this in fiscal 2011, through a combination of commodity hedging and strategic pricing. Assuming a moderately improving competitive environment, the North American Fresh Bakery segment is expected to return to its trajectory of gradually increasing profitability in fiscal 2011. However, the segment anticipates operating income to be down in the first quarter, as price levels are meaningfully lower than in the early part of fiscal 2010 and the segment is investing in both its branded and private label business to strengthen its market position. To offset these factors, cost reduction efforts have been intensified to adjust the business to the new price levels.

North American Foodservice: The North American Foodservice segment produced a second consecutive year of increased adjusted operating segment income. Favourable 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 USD in the fourth quarter compared to 34 million USD 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. Adjusted operating segment income decreased by twelve million USD, or 33,5 percent, to 23 million USD in the fourth quarter.

Net sales increased 1,4 percent to 460 million USD in the fourth quarter, primarily driven by the impact of the 53rd week, favorable sales mix and higher prices, which were partially offset by significantly lower unit volumes, while adjusted net sales decreased 5,9 percent. The loss of two contracts earlier in the fiscal year, as well as the planned exit of low-margin meats business and demand weakness in the foodservice market, resulted in 19,6 percent lower unit volumes in the quarter.

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 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 USD in the fourth quarter, primarily due to 21 million USD in Project Accelerate charges. This compares to a loss of 201 million USD in the year-ago period, due to a 207 million USD impairment charge. Adjusted operating segment income was eleven million USD, compared to 14 million USD in the prior-year quarter, or down 23,5 percent, largely due to reduced prices and lower unit volumes, partially offset by lower commodity costs and Project Accelerate and continuous improvement savings.

Net sales decreased 2,4 percent to 184 million USD in the fourth quarter, due to lower prices, unfavorable foreign currency exchange rates, lower unit volumes and unfavorable sales mix, which were partially offset by the 53rd week. Adjusted net sales decreased 5,2 percent. Unit volumes, excluding the 53rd week, declined 2,0 percent as successful new product launches, such as new Sara Lee pies and cakes in Australia, various new refrigerated dough products across Europe and the continued success of Bimbo Tender Crust bread in Spain, could not fully offset volume weakness in cakes and toasted breads in Spain.

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.

Info: Sara Lee Reports Strong Fiscal 2010 Results – Investing for Growth (complete press release on saralee.com, PDF, 21 pages, 276 KB).