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Sara Lee Reports Third Quarter Earnings

All business sectors showed strength, with Western Europe the most robust, at 10.5% sales growth, Rest of World at 8.4% and Out-of-Home at 2.9%. Shares in the key Western European countries (Netherlands, France and Spain) held steady or grew.

Mix improved to +6.5%, from +5.4% last quarter, while volume continued to be negative at -7.3% 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% 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%, a significant increase over the comparable number last quarter of 13.6%. 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.

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