Sara Lee (SLE)

Q3 2012 Earnings Call

May 03, 2012 10:00 am ET


Melissa Napier - Senior Vice President of Investor Relations

Jan Bennink - Executive Chairman and Member of Finance Committee

Mark A. Garvey - Chief Financial Officer and Executive Vice President

Marcel H. M. Smits - Chief Executive Officer

Unknown Executive -


Jason English - Goldman Sachs Group Inc., Research Division

Andrew Lazar - Barclays Capital, Research Division

Alexia Howard - Sanford C. Bernstein & Co., LLC., Research Division

Robert Dickerson - Consumer Edge Research, LLC

Eric R. Katzman - Deutsche Bank AG, Research Division

Christopher Growe - Stifel, Nicolaus & Co., Inc., Research Division

Kenneth B. Zaslow - BMO Capital Markets U.S.

Robert Moskow - Crédit Suisse AG, Research Division

Karel Zoete - Rabobank Equity Research



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Good morning, and welcome to Sara Lee's Third Quarter Earnings Conference Call for Fiscal 2012. [Operator Instructions] This call is being recorded. [Operator Instructions] I would now like to turn the call over to Melissa Napier, Senior Vice President of Investor Relations for Sara Lee Corporation. Thank you, Melissa. You may begin.

Melissa Napier

Thank you, Wendy, and good morning to everyone. I'm joined today by Jan Bennink, Marcel Smits and Mark Garvey, who will be discussing our third quarter results. Our results were released at 6:30 this morning. You can find that release along with the slides that we'll be reviewing today posted to our website. Our third quarter Form 10-Q is expected to be filed on or before May 10.

Before I will turn the call over to Jan, who will walk us through the agenda and start talking about pure-play progress, I'd like to just refer you, as usual, to the forward-looking statements that are currently displayed and remind you that during today's call, we may make forward-looking statements about future operations, and actual results may differ from those expressed or implied in these statements. All explanations of non-GAAP financial measures are included in our release as well as at the slide in the back of the deck. We'll take your questions after management's prepared remarks. To ensure adequate time is available, we request that you limit yourself to one question. Jan?

Jan Bennink

Thank you, Melissa. Good morning, ladies and gentlemen. Welcome to the Q3 earnings announcement of Sara Lee. I think this is a very special one as this is the last earnings call at Sara Lee Co. And I think as of the next time, we'll have 2 separate companies performing the call.

Before going to the presentation, let me take you through the order of the call. First of all, I'll start with the pure play progress, followed by Mark taking you to the financials, and then we take a deep dive into the 2 companies. Coffee and Tea will be taken by myself, and then Marcel will take you through the Meat. And then we go into the Q&A as Melissa just said.

Let me now take you through the progress of pure play. I mean the presentation is getting shorter and shorter as we're nearing the end. So the key milestones, what have we done in this quarter? Our IRRs Private Letter Rulings, it's done, signed, sealed delivered, very good. I mean the results were in line with expectations and somewhat above. The debt tender offers and redemption are completed, which is done in March.

The D.E Master Blenders Investor Day, happening on March 13 and 14. Also there I think that's been completed, the strategy given and the guidance given. The SEC review, we filed the F1 on the 1st of March. I can say that all the SEC reviews and the process is going completely according to our plans, and we feel very comfortable. The debt rates for the Master Blenders, also that one is going according to plan. And we'll hope to announce something in the next couple of weeks in terms of the results of the debt rates.

So what are the critical days from now until -- as I -- as you've seen in the press release, June 30, which will be the day of the spin, so that as of July 1, both of the companies will be up and running. An important thing still to be done is the announcement of the boards. That will happen in the next couple of weeks. We will announce who will be in the boards of the Sara Lee current board members, as well as we will announce some new board members who will join both of the companies.

Investor meetings are going on. The Master Blenders on the road in May and June, and MeatCo as you have hopefully gotten the invitation will have its Investor Day by June 5. And then the following road shows are happening in June.

The special dividend will occur immediately after the spinoff. And the spin there, as I said before, we are saying the end of June, but be very specific, June 30 is the day we're all aiming for, so that over the weekend, July 1, we're up and running. So that's all about the spinoff. We feel very comfortable. I think we're really making sure that things are happening the way we want them to happen. And let me then take you through the Chief -- to Mark, who will take you through the financials. Mark?

Mark A. Garvey

Thank you, Jan. Good morning to everyone on the call. I'd like to start by reviewing some key financial highlights for the quarter. Overall, results were mixed. Adjusted net sales for continuing operations grew by 3%. In the North American Meat businesses, we're seeing a stabilization of volume trends. Overall, volumes were almost flat for the quarter compared to declines in the previous 2 quarters.

In Coffee and Tea, we continue to see strong pricing and positive mix as sales of single-serve capsules do well. However, this positive trend was partially offset by lower volumes. Adjusted operating income from continuing operations decreased 5% for the quarter and was up 6% year-to-date.

A number of factors impacted our results. Volume softness in both businesses has led to some manufacturing inefficiencies, which we are working to mitigate. In addition, both businesses are managing through stranded costs and will continue to do so in fiscal '13.

Finally, we had negative commodity mark-to-market results in the quarter, which led to a variance of $18 million compared to the same quarter last year. Adjusted earnings per share for continuing operations was down $0.02 to $0.20 for the quarter. Year-to-date, earnings per share was up $0.10 to $0.65.

Looking ahead to the full year, we are beginning to see commodity costs decline in the Coffee and Tea business and stabilize in our Meat business. This should have some beneficial impact on our fourth quarter results, particularly for Coffee and Tea, and gives us confidence that we will end up within our existing guidance ranges. To be more precise, we expect adjusted earnings per share to fall in the middle of our guidance range of $0.89 to $0.95, which we provided at the beginning of this fiscal year. And as you'll see later, our earnings-per-share expectations has benefited from a favorable expectations on interest expense and tax costs for the year. Our net sales and adjusted operating income, we expect actual results to be at the low end of the current guidance ranges.

Now we would like to look at our results in some more detail. On this slide, you can see a summary of our third quarter and first 9-month performance for continuing operations. As I mentioned, adjusted net sales grew by 3% for the quarter and 4.9% year-to-date. We did see price increases exceeding commodity cost increases from both businesses in the quarter, the first quarter since the third quarter of fiscal '10, in fact, that we have had pricing ahead of commodities in all segments.

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