Sara Lee Reports Strong Sales Growth in Second Quarter of FY08
DOWNERS GROVE, Ill.-- (BUSINESS WIRE) -- Sara Lee Corporation (NYSE:SLE) today announced that net sales for the second quarter of fiscal 2008, ending Dec. 29, 2007, were $3.5 billion, an increase of 9.7% compared to $3.2 billion in the prior year period. Net sales grew in all six business segments, with particularly strong growth in international beverage (+21.7%), international bakery (+17.6%), household and body care (+14.3%) and North American retail bakery (+9.2%). The corporation’s adjusted net sales1 – which exclude the impact of foreign currency exchange rates and acquisitions/divestitures – increased 4.2% in the second quarter of fiscal 2008, also with growth across all six business segments, most notably in North American retail bakery (+9.2%), international beverage (+7.7%) and international bakery (+4.3%). For the first six months of fiscal 2008, Sara Lee reported net sales of $6.6 billion, up 9.0% over the comparable period last year, while adjusted net sales rose 4.3%.
1 The terms “adjusted net sales,” “adjusted operating income” and “adjusted operating segment income” are reconciled to each item’s most comparable U.S. generally accepted accounting principles measure on the tables titled "Non-GAAP Adjusted Operating Income by Industry Segment" and "Operating Results by Business Segment," with an explanation of the terms in the "Explanation of Non-GAAP Financial Measures" section of this release.
“During the second quarter, we benefited from our ongoing investment in the company as sales growth continued across all business segments and we gained share for many of our largest brands,” said Brenda C. Barnes, chairman and chief executive officer of Sara Lee Corporation. “Our strategic approach to pricing, combined with the impact of procurement and continuous improvement savings, helped offset significantly increased input costs. In addition, the higher advertising and promotion spending that supported more than 40 new products launched this quarter helped us strengthen our position as a marketplace leader.”
Sara Lee reported operating income of $233 million for the second quarter of fiscal 2008, compared to an operating loss of $2 million in the second quarter of fiscal 2007. Adjusted operating income – which excludes the impact of significant items, foreign currency exchange rates and acquisitions/divestitures – was $254 million in the second quarter of fiscal 2008, compared to $255 million in the prior year’s period. For the first six months of fiscal 2008, operating income was $527 million, compared to $252 million in the first six months of fiscal 2007. Adjusted operating income declined 0.7% in the first six months of fiscal 2008, from $443 million to $440 million.
Diluted EPS as reported were $.25 per share in the second quarter of fiscal 2008 versus a loss of $.08 per share for the year-ago period. Diluted EPS were impacted by various significant items, as shown in the table below, that on a year-over-year basis increased diluted EPS as reported by $.32 per share. The remaining increase in diluted EPS of $.01 per share was primarily the result of favorable foreign currency exchange rates. In the first six months of fiscal 2008, diluted EPS as reported were $.53, compared to $.36 for the first half of fiscal 2007.
Impact of Significant Items on Diluted Earnings per Share
Second Quarter Six MonthsSignificant items related to continuing operations before income taxes(i)
(.02 ) (.25 ) (.04 ) (.28 )Significant items related to continuing operations(i)
.03 (.29 ) .03 (.11 )Total impact of significant items(i)
$ .03 $ (.29 ) $ .03 $ (.09 )(i)Amounts are rounded and may not add to the total
Other Financial Highlights
- Net cash from operating activities was approximately $205 million in the first six months of fiscal 2008, compared to $38 million in the first six months of fiscal 2007, the latter included $88 million of cash generated by discontinued operations. The year-over-year increase was primarily driven by a reduction in cash paid for taxes, pension plans, transformation activities and interest.
- Media advertising and promotion (MAP) spending for continuing operations increased 14.0% in the second quarter of fiscal 2008, driven by significantly higher MAP spending in North American retail meats, international beverage and household and body care. For the first six months of fiscal 2008, MAP spending increased 17.1%, most notably behind marketing campaigns for Ball Park, Hillshire Farm, Ambi Pur and Sanex.
- Net interest expense was $29 million for the second quarter of fiscal 2008, an increase of $1 million compared to the year-ago period, primarily resulting from lower interest income. Net interest expense was $58 million in the first six months of fiscal 2008, compared to $77 million in the prior year’s period.
- General corporate expenses were $61 million in the second quarter of fiscal 2008 compared to $93 million in the year-ago period, primarily due to lower transformation and employee benefit costs. In the first six months of fiscal 2008 corporate expenses were $128 million, compared to $177 million in the comparable period last year.
- The company repurchased 12 million shares of its common stock in the second quarter of fiscal 2008 at an average price of $16.04 per share, for a total cost of $194 million. At the end of the second quarter, approximately 31 million shares remained authorized by the board of directors for repurchase.
- The effective tax rate for continuing operations for the second quarter was 10.9%, compared to a negative 88.6% in the prior year’s period. For additional information on the tax rate, please see please see the table "Summary of Income Tax Amounts for the Quarters and Six Months Ending December 29, 2007 and December 30, 2006."
Business Performance Review
North American Retail Meats
- Net sales increased 0.9% to $695 million in the second quarter of fiscal 2008, as a 4.4% increase in retail meat sales was partially offset by a 40.9% decline in commodity meat sales to non-retail customers; adjusted net sales also increased 0.9%.
- Net sales for the first six months of fiscal 2008 increased 2.1% to $1.3 billion; adjusted net sales also increased 2.0%.
- Operating segment income was $50 million in the second quarter, compared to a loss of $6 million in the year-ago period. The increase was primarily due to an asset impairment charge for the closure of a facility in the second quarter of last year and improved results in Mexico in this year’s second quarter, that were partially offset by higher MAP spending. Higher prices partially offset commodity cost increases, while procurement and other continuous improvement savings offset inflation in labor and benefit costs. Adjusted operating segment income increased 9.0% to $50 million from $47 million in the prior year’s period.
- Operating segment income for the first six months was $78 million, compared to $21 million last year. Adjusted operating segment income was $79 million, compared to $95 million in the first six months of fiscal 2007.
Unit volumes, excluding acquisitions, increased 2.0% in the second quarter, consisting of a decline of 0.8% for retail meats (including the reduction of commodity meat products sold at retail due to the closure of our hog slaughter facility last year) and significantly higher unit volumes for non-retail commodity meats (see footnote on "Net Sales Bridge" table). During the second quarter, each of the major retail meats brands, Jimmy Dean, Hillshire Farm, Ball Park and Sara Lee, increased or maintained market share according to IRI share data (12 weeks ending December 16, 2007). For the first six months unit volumes increased 2.5%.
North American Retail Bakery (including Senseo coffee)
- Net sales increased 9.2% to $547 million in the second quarter of fiscal 2008, primarily driven by higher selling prices to offset increases in input costs and unit volume growth; adjusted net sales also increased 9.2%.
- Net sales for the first six months increased 6.6% to $1.1 billion; adjusted net sales also rose 6.6%.
- Operating segment income was $7 million in the second quarter, compared to $3 million in the year-ago period. The improvement was driven by lower transformation-related expenses and a reduction in MAP spending. Higher prices and savings from procurement and other continuous improvement initiatives were offset by increases in the cost of commodities and SG&A. Adjusted operating segment income was $7 million, compared to $8 million in the prior year.
- Operating segment income for the first six months was $15 million, compared to $8 million in the first six months of the prior year. Adjusted operating segment income was $16 million, compared to $18 million in the first six months of fiscal 2007.
Excluding acquisitions, unit volumes increased 2.8% in the second quarter, driven by growth in the branded fresh and frozen bakery businesses and Senseo single-serve coffee. During the second quarter, the Sara Lee brand maintained its position as the No. 1 fresh bakery brand in America with a 7.8% share, and the bakery business increased or maintained market share in five of its seven bakery categories, according to IRI share data (12 weeks ending December 16, 2007). Unit volumes were flat for the first six months.
Foodservice
- Net sales increased 1.7% to $625 million in the second quarter of fiscal 2008, driven by higher prices and a favorable sales mix; adjusted net sales increased 1.6%.
- Net sales for the first six months decreased 0.4% to $1.1 billion; adjusted net sales declined 0.6%.
- Operating segment income decreased 5.2% to $56 million in the second quarter, as higher prices and savings from procurement and other continuous improvement initiatives were more than offset by increases in commodities, inflation and other input costs. Adjusted operating segment income declined 8.0% to $56 million.
- Operating segment income for the first six months decreased 1.8% to $77 million, while adjusted operating segment income declined 9.0%.
Unit volumes, excluding acquisitions, decreased 3.1% in the second quarter and 5.7% for the first six months, as double-digit growth in Douwe Egberts One-Touch liquid coffee concentrates was more than offset by the planned exit of certain low-margin meats and sauces and dressing products, and lower unit volumes in traditional roast and ground coffee.
International Beverage
- Net sales increased 21.7% to $821 million in the second quarter of fiscal 2008, primarily driven by favorable foreign currency exchange rates, a positive sales mix and price increases taken to cover higher commodity costs; adjusted net sales rose 7.7%.
- Net sales for the first six months increased 23.4% to $1.5 billion; while adjusted net sales rose 10.9%.
- Operating segment income was $125 million, compared to an operating segment loss of $10 million in the second quarter of fiscal 2007, an increase that was primarily due to the impairment and transformation charges taken in last year’s second quarter, favorable foreign currency exchange rates and higher prices. These factors were partially offset by higher SG&A costs, resulting in part from planned business growth and an increase in MAP spending. Adjusted operating segment income decreased 1.6% to $129 million.
- Operating segment income for the first six months increased to $246 million from $82 million, while adjusted operating segment income rose 9.3% to $253 million.
Unit volumes, excluding acquisitions, decreased 2.5% in the second quarter. Volume increases for Senseo single-serve coffee, Cafitesse liquid coffee concentrates in foodservice, instant coffees and hot tea were more than offset by lower volumes in multi-serve roast and ground coffee, most notably in Brazil. Despite the planned lower unit volumes, the Brazilian coffee business increased sales and margins by improving its pricing and sales mix. Unit volumes for instant coffees experienced double-digit growth, driven by strong volumes in Thailand, the United Kingdom and Russia, the latter resulting from the launch of Moccona Premium Selection instant coffee at the end of the first quarter. Unit volumes were up 0.9% in the first six months.
International Bakery
- Net sales increased 17.6% to $234 million in the second quarter of fiscal 2008, primarily due to favorable foreign currency exchange rates, price increases to cover higher input costs and higher unit volumes; adjusted net sales rose 4.3%.
- Net sales for the first six months increased 13.9% to $455 million; while adjusted net sales increased 3.0%.
- Operating segment income was $9 million in the second quarter, compared to $4 million in the year-ago period with the increase primarily due to favorable foreign currency exchange rates, procurement and other continuous improvement savings, lower transformation costs and higher prices to cover increasing commodity costs. Adjusted operating segment income was $14 million, compared to $15 million in the year-ago period.
- Operating segment income for the first six months was $22 million, compared to $18 million for the year-ago period. Adjusted operating segment income for the first six months of $30 million was unchanged compared to the prior year’s period.
Unit volumes, excluding acquisitions, increased 1.6% in the second quarter, driven by growth in the Spanish fresh bakery business and the European refrigerated dough business, which was partially offset by a unit volume decline in the Australian bakery business, the latter primarily due to lower private label ice cream volume. Consumers in Spain voted Bimbo Tender Crust bread “Product of the Year 2007,” a highly regarded award in the consumer goods category. Unit volumes increased 1.7% in the first six months.
Household and Body Care
- Net sales increased 14.3% to $582 million in the second quarter of fiscal 2008, primarily behind favorable foreign currency exchange rates, higher unit volumes and a positive sales mix; adjusted net sales rose 3.4%.
- Net sales for the first six months increased 13.2% to $1.1 billion, while adjusted net sales rose 3.5%.
- Operating segment income increased 13.6% to $64 million in the second quarter, primarily driven by favorable foreign currency exchange rates, higher unit volumes, continuous improvement savings and a favorable sales mix. These factors were partially offset by higher MAP spending, as well as an increase in other SG&A costs due to an $8 million reserve established for pending legal matters. Adjusted operating segment income decreased 12.1% in the second quarter.
- Operating segment income for the first six months decreased 10.2% to $121 million, while adjusted operating segment income decreased 15.7% in the first half.
Unit volumes, excluding acquisitions, increased 4.5% in the second quarter, primarily driven by strong unit volumes in air care and body care. Air care volumes grew on strength in aerosols, particularly for Ambi Pur Puresse, while body care unit volume grew as a result of strong volumes across this core category, most notably for Sanex, Radox and Duschdas shower gels and Sanex and Monsavon deodorants. The Monsavon Douceur Naturelle deodorant range was recognized with the “Product of the Year 2007” award in France. Ambi Pur 3volution air freshener won the “Product of Year 2007” award in Spain, while Ambi Pur Puresse took home the “Product of the Year 2007” award in Italy. Unit volumes rose 6.6% in the first six months.
Guidance
Sara Lee currently expects full-year fiscal 2008 diluted EPS from continuing operations to be in the range of $1.03 to $1.09 per share, which includes $.18 per share of contingent proceeds received in the first quarter of fiscal 2008 from the sale of its tobacco business in fiscal 1999. Actual results may differ from this guidance due to future significant events that may occur, the nature, timing and financial impact of which are not yet known.
Fiscal 2008
Guidance
Fiscal 2007Actual
Change vs.Last Year
Change vs.Prior Guidance
Diluted EPS from cont.
ops. as reported
$1.03 - $1.09/
share
+$.46 - $.52/
share
$(.31)/share(1)
+$.34/share
+$.03—
$.82 - $.88/
share
+$.10 - $.16/
share
—
+3.7 pts. - +4.1 pts.
(0.2) pts.+3.2 pts.
(0.1) pts.—
—
+0.5 pts. - +0.9 pts.
(0.1) pts.—
—
1 Excludes a tax benefit of $.21 per share reported in the first quarter of fiscal 2007.
2 Represents Sara Lee’s results from and forecasts relating to continuing operations, excluding an $.18 per share tobacco gain in the first quarter of fiscal 2008, as identified in the table above. Management believes that presenting core Sara Lee EPS enables investors to better understand base business earnings. Fiscal 2007 core Sara Lee EPS of $.72 per share included a one-time tax benefit of $.21 per share that was reported in significant items in the first quarter of fiscal 2007.
3 Impact of adjustments to operating income used to compute adjusted operating margin. The dollar amounts are $42 million for the significant items, net in the first six months of fiscal 2008 and $418 million for the significant items, net in fiscal 2007; $130 million for the contingent tobacco sale proceeds in fiscal 2008 and $120 million for the contingent tobacco sale proceeds in fiscal 2007.
Form 10-Q
In alignment with today’s reporting of Sara Lee’s earnings, the company also filed a Form 10-Q for the second quarter of fiscal 2008 with the Securities and Exchange Commission this morning.
Webcast
Sara Lee Corporation’s review of second quarter results for fiscal 2008 will be broadcast live via the Internet today at 9 a.m. CST. The live webcast can be accessed at www.saralee.com and is anticipated to conclude by 10 a.m. CST. For people who are unable to listen to the webcast live, the earnings review will be available two hours following the completion of the webcast in the Investors Relations section of the Sara Lee corporate Web site until Wednesday, Aug. 6, 2008.
Forward-Looking Statements
This news release contains forward-looking statements regarding Sara Lee’s business prospects, costs and operating results, including statements contained under the heading “Guidance.” In addition, from time to time, in oral statements and written reports, the corporation discusses its expectations regarding the corporation’s future performance by making forward-looking statements preceded by terms such as “expects,” “likely” or “believes.” These forward-looking statements are based on currently available competitive, financial and economic data and management’s views and assumptions regarding future events. Such forward-looking statements are inherently uncertain, and investors must recognize that actual results may differ from those expressed or implied in the forward-looking statements. Consequently, the corporation wishes to caution readers not to place undue reliance on any forward-looking statements. Among the factors that could cause Sara Lee’s actual results to differ from such forward-looking statements are factors relating to:
- Sara Lee’s relationship with its customers, such as (i) a significant change in Sara Lee’s business with any of its major customers, such as Wal-Mart, its largest customer, including changes in the level of inventory these customers maintain; and (ii) credit and other business risks associated with customers operating in a highly competitive retail environment;
- The consumer marketplace, such as (iii) significant competition, including advertising, promotional and price competition, and changes in consumer demand for Sara Lee’s products; (iv) fluctuations in the availability and cost of raw materials, Sara Lee’s ability to increase product prices in response and the impact on Sara Lee’s profitability; (v) the impact of various food safety issues on sales and profitability of Sara Lee products; (vi) inherent risks in the marketplace associated with new product introductions, including uncertainties about trade and consumer acceptance; and (vii) changes in regulations that impose additional requirements on Sara Lee, such as recent requirements regarding the labeling of trans fat content;
- Sara Lee’s international operations, such as (viii) impacts on reported earnings from fluctuations in foreign currency exchange rates, particularly the European euro, given Sara Lee’s significant concentration of business in Western Europe; (ix) Sara Lee’s generation of a high percentage of its revenues from businesses outside the U.S. and costs to remit these foreign earnings into the U.S. to fund Sara Lee’s domestic operations; and (x) Sara Lee’s ability to continue to source production and conduct manufacturing and selling operations in various countries due to changing business conditions, political environments, import quotas and the financial condition of suppliers;
- Previous business decisions, such as (xi) Sara Lee’s ability to generate margin improvement through continuous improvement initiatives and transitioning the entire organization to a common information technology system and the risk that the transition to a common information technology system will be disruptive to the business; (xii) Sara Lee’s ability to achieve planned cash flows from capital expenditures and acquisitions, particularly its worldwide bakery business, and the impact of changing interest rates and the cost of capital on the discounted value of those planned cash flows, which could impact future impairment analyses; (xiii) credit ratings issued by the three major credit rating agencies and the impact these ratings have on Sara Lee’s cost to borrow funds and access to capital/debt markets; (xiv) the settlement of a number of ongoing reviews of Sara Lee’s income tax filing positions in various jurisdictions and inherent uncertainties related to the interpretation of tax regulations in the jurisdictions in which Sara Lee transacts business; (xv) changes in the expense for multi-employer pension plans that Sara Lee participates in; and (xvi) the continued legality of tobacco products in the Netherlands, Germany and Belgium.
In addition, the corporation’s results may also be affected by general factors, such as economic conditions, political developments, interest and inflation rates, accounting standards, taxes and laws and regulations in markets where the corporation competes. We have provided additional information in our Form 10-K for fiscal 2007, which readers are encouraged to review, concerning factors that could cause actual results to differ materially from those in the forward-looking statements. Sara Lee undertakes no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.
About Sara Lee Corporation
Each and every day, Sara Lee (NYSE:SLE) delights millions of consumers and customers around the world. The company has one of the world’s best-loved and leading portfolios with its innovative and trusted food, beverage, household and body care brands, including Ambi Pur, Ball Park, Douwe Egberts, Hillshire Farm, Jimmy Dean, Kiwi, Sanex, Sara Lee and Senseo. Collectively, these brands generate more than $12 billion in annual net sales covering approximately 200 countries. The Sara Lee community consists of 52,000 employees worldwide. Please visit www.saralee.com for the latest news and in-depth information about Sara Lee and its brands.
Condensed Consolidated Balance Sheets at
December 29, 2007 and June 30, 2007
For the Quarter and Six Months Ended
December 29, 2007 and December 30, 2006
December 30,
Net income from discontinued operations, net of tax expense of nil, nil, nil and $30
- - - 62(Loss) gain on sale of discontinued operations, net of tax expense of nil, nil, nil and $2
- (5 ) - 11Adjustments to reconcile net income to net cash used in operating activities:
Changes in current assets and liabilities, net of businesses acquired and sold
(393 ) (582 )Changes in current assets and liabilities, net of businesses acquired and sold
$ (393 ) $ (582 )
For the Quarter and Six Months Ended
December 29, 2007 and December 30, 2006
Adjusted operating income(a)
$ 254 $ 255 (0.2 ) %-
(32 ) NMAdjusted operating income(a)
$ 440 $ 443 (0.7 ) %(a) Adjusted operating income is a non-GAAP measure that excludes the impact of significant items and contingent sale proceeds. See "Explanation of Non-GAAP Financial Measures" for a detailed explanation of this and other non-GAAP measures used in this release.
Operating Results by Business Segment(a)
Net sales
$ 695 $ 688 $ 7 0.9 % $ 1,345 $ 1,318 $ 27 2.1 %Adjusted net sales(a)
$ 695 $ 688 $ 7 0.9 % $ 1,345 $ 1,318 $ 27 2.0 %Operating segment income
$ 50 $ (6 ) $ 56 NM $ 78 $ 21 $ 57 NMAdjusted operating segment income(a)
$ 50 $ 47 $ 3 9.0 % $ 79 $ 95 $ (16 ) (16.2 )%Adjusted operating margin %(a)
7.3 % 6.7 % 0.6 % 5.9 % 7.2 % (1.3 )%Net sales
$ 547 $ 500 $ 47 9.2 % $ 1,065 $ 998 $ 67 6.6 %Adjusted net sales(a)
$ 547 $ 500 $ 47 9.2 % $ 1,065 $ 998 $ 67 6.6 %Operating segment income (loss)
$ 7 $ 3 $ 4 NM $ 15 $ 8 $ 7 93.2 %Adjusted operating segment income(a)
$ 7 $ 8 $ (1 ) (7.4 )% $ 16 $ 18 $ (2 ) (10.6 )%Adjusted operating margin %(a)
1.3 % 1.6 % (0.3 )% 1.5 % 1.8 % (0.3 )%Net sales
$ 625 $ 614 $ 11 1.7 % $ 1,147 $ 1,152 $ (5 ) (0.4 )%Adjusted net sales(a)
$ 625 $ 616 $ 9 1.6 % $ 1,147 $ 1,154 $ (7 ) (0.6 )%Operating segment income
$ 56 $ 59 $ (3 ) (5.2 )% $ 77 $ 78 $ (1 ) (1.8 )%Adjusted operating segment income(a)
$ 56 $ 60 $ (4 ) (8.0 )% $ 77 $ 84 $ (7 ) (9.0 )%Adjusted operating margin %(a)
8.9 % 9.8 % (0.9 )% 6.7 % 7.3 % (0.6 )%(a) Adjusted net sales, adjusted operating segment income and adjusted operating margin % are non-GAAP measures.
See "Explanation of Non-GAAP Financial Measures" for a detailed explanation of these and other non-GAAP measures used in this release.
Operating Results by Business Segment(a)
Net sales
$ 821 $ 675 $ 146 21.7 % $ 1,527 $ 1,238 $ 289 23.4 %Adjusted net sales(a)
$ 821 $ 763 $ 58 7.7 % $ 1,527 $ 1,377 $ 150 10.9 %Operating segment income
$ 125 $ (10 ) $ 135 NM $ 246 $ 82 $ 164 NMAdjusted operating segment income(a)
$ 129 $ 131 $ (2 ) (1.6 )% $ 253 $ 231 $ 22 9.3 %Adjusted operating margin %(a)
15.7 % 17.2 % (1.5 )% 16.5 % 16.8 % (0.3 )%Net sales
$ 234 $ 199 $ 35 17.6 % $ 455 $ 399 $ 56 13.9 %Adjusted net sales(a)
$ 234 $ 224 $ 10 4.3 % $ 455 $ 441 $ 14 3.0 %Operating segment income
$ 9 $ 4 $ 5 NM $ 22 $ 18 $ 4 23.8 %Adjusted operating segment income(a)
$ 14 $ 15 $ (1 ) (2.8 )% $ 30 $ 30 $ - 0.2 %Adjusted operating margin %(a)
6.0 % 6.4 % (0.4 )% 6.7 % 6.9 % (0.2 )%Net sales
$ 582 $ 509 $ 73 14.3 % $ 1,103 $ 974 $ 129 13.2 %Adjusted net sales(a)
$ 582 $ 562 $ 20 3.4 % $ 1,101 $ 1,063 $ 38 3.5 %Operating segment income
$ 64 $ 56 $ 8 13.6 % $ 121 $ 134 $ (13 ) (10.2 )%Adjusted operating segment income(a)
$ 67 $ 76 $ (9 ) (12.1 )% $ 125 $ 149 $ (24 ) (15.7 )%Adjusted operating margin %(a)
11.5 % 13.5 % (2.0 )% 11.4 % 14.0 % (2.6 )%(a) Adjusted net sales, adjusted operating segment income and adjusted operating margin % are non-GAAP measures.
See "Explanation of Non-GAAP Financial Measures" for a detailed explanation of these and other non-GAAP measures used in this release.
Operating Results by Business Segment(a)
Net sales
$ 3,491 $ 3,182 $ 309 9.7 % $ 6,622 $ 6,073 $ 549 9.0 %Adjusted net sales(a)
$ 3,491 $ 3,350 $ 141 4.2 % $ 6,620 $ 6,345 $ 275 4.3 %Operating income
$ 233 $ (2 ) $ 235 NM $ 527 $ 252 $ 275 NMOperating margin %
6.7 % (0.1 )% 6.8 % 8.0 % 4.2 % 3.8 %Adjusted operating income(a)
$ 254 $ 255 $ (1 ) (0.2 )% $ 440 $ 443 $ (3 ) (0.7 )%Adjusted operating margin %(a)
7.3 % 7.6 % (0.3 )% 6.6 % 7.0 % (0.4 )%(a) Adjusted net sales, adjusted operating income and adjusted operating margin % are non-GAAP measures.
See "Explanation of Non-GAAP Financial Measures" for a detailed explanation of these and other non-GAAP measures used in this release.
The following table illustrates the components of the change in net sales versus the prior year for each of the six reported business segments.
Second Quarter Fiscal 2008
Adjusted(b)
Net Sales
Total Net Sales
North American Retail Meats(a)
2.0% -1.1% 0.9% 0.0% 0.0% 0.9%First Six Months Fiscal 2008
Adjusted(b)
Net Sales
Total Net Sales
North American Retail Meats(a)
2.5% -0.5% 2.0% 0.0% 0.1% 2.1%(a)The unit volume change in the North American retail meats business segment includes unit volume for both the retail meats business and the non-retail commodity meats business.
Unit volumes in retail meats for the second quarter decreased 0.8% due to a 1.5% decrease in the U.S., partially offset by a 2.5% increase in Mexico. Unit volumes for retail meats for the first six months decreased 0.5% due to a 0.2% decline in the U.S. and a 1.7% decline in Mexico.
Unit volumes for non-retail commodity meats increased 20.3% in the second quarter and 22.7% in the first six months. In fiscal 2007, the corporation completed the shutdown of a single domestic pork slaughtering and meat production facility, but did not exit certain whole hog purchase contracts at this facility. Previously, portions of these hogs had been used in the corporation’s production process and the remainder sold. Currently, the whole hogs are being sold to another slaughter operator, resulting in the increase in non-retail commodity meats unit volumes. The shutdown of this plant also resulted in less production and sales of commodity meat by-products at this plant, which had higher dollar sales per pound than hog sales, resulting in a decline in total non-retail commodity meat sales.
(b)Adjusted net sales is a non-GAAP measure that excludes the impact of foreign currency exchange rates and acquisitions/divestitures. See "Explanation of Non-GAAP Financial Measures" for a detailed explanation of this and other non-GAAP measures in this release.
Second Quarter Fiscal 2008 - The corporation recognized a tax expense on continuing operations of $22 million on pretax income of $204 million, or an effective rate of 10.9%. The tax rate in the quarter was impacted by a $37 million tax benefit related to the reversal of valuation allowances on the German net deferred tax assets. The corporation determined that a valuation allowance is no longer necessary due to recent and projected profitability of the German operations.
Six Months Ended Fiscal 2008 - The tax expense and related effective tax rate on continuing operations, for the first six months of fiscal 2008, was determined by applying a 29.3% estimated annual tax rate to pretax earnings and then recognizing the impact of the reversal of $37 million of valuation allowances on the German net deferred tax assets; and tax benefits of $13 million related to tax rate and tax law changes and the finalization of tax audits and reviews. The resulting effective tax rate for the six month period was 18.6%. The estimated annual effective tax rate related to ordinary income for fiscal 2008 includes an annual charge of $108 million to repatriate a portion of fiscal 2008 foreign earnings. This estimated charge increases the estimated annual effective tax rate by approximately 11%.
Second Quarter Fiscal 2007 - The corporation recognized a tax expense from continuing operations of $27 million despite recognizing a pretax loss of $30 million. The tax expense was primarily attributable to the recognition of a $27 million valuation allowance on the Brazil net deferred tax assets and the impact of recognizing a $92 million non-deductible goodwill impairment charge in the second quarter of fiscal year 2007.
Six Months Ended 2007 - The estimated annual effective tax rate related to ordinary income for the first six months of fiscal 2007 was 61.4%. This tax rate assumed the recognition of a $194 million cost to repatriate substantially all foreign earnings to the U.S. and 43% of the annual effective rate related to this annual cost. The tax expense and related effective tax rate on continuing operations, for the first six months of fiscal 2007, was determined by applying the 61.4% annual rate to pretax earnings, which includes a $92 million non-deductible impairment charge, and then recognizing the impact of the following unusual and infrequently occurring items:
-The corporation sold the shares of a subsidiary which resulted in a $158 million tax benefit that was recognized in the first quarter of fiscal 2007.
-After considering the lower future profit expectations of a Brazilian coffee operation, the corporation concluded that it was necessary to recognize a $27 million valuation allowance on the Brazil net deferred tax assets.
Explanation of Non-GAAP Financial Measures
Management measures and reports Sara Lee’s financial results in accordance with U.S. generally accepted accounting principles (“GAAP”). In this news release, Sara Lee highlights certain items that have significantly impacted the corporation’s results and uses certain non-GAAP financial measures to help investors understand the financial impact that these significant items have had on the corporation’s financial results. These significant items and non-GAAP financial measures are described below.
“Significant items” are income or charges that management believes have had or are likely to have a significant impact on the earnings of the applicable business segment or on the total corporation for the period in which the item is recognized and that affect the comparability of underlying results from period to period. Significant items include the impact of businesses acquired or disposed of after the start of the fiscal period presented, the impact of changes in foreign currency exchange rates, charges for exit activities, transformation costs, impairment charges, accelerated depreciation, income recognized from change in vacation policy and the receipt of contingent tobacco sale proceeds. Management highlights these significant items to provide investors with greater transparency into the underlying sales or profit trends of Sara Lee or the applicable business segment and also to provide more meaningful comparability between Sara Lee’s financial results from period to period. Additionally, Sara Lee believes that investors desire to understand the impact of these factors to better project and assess the longer term trends and future financial performance of the corporation.
In this news release, management presents adjusted net sales, adjusted operating segment income, adjusted operating income, adjusted operating margin and, in the Guidance section, core Sara Lee EPS, which are non-GAAP financial measures that exclude the impact of the significant items from net sales, operating income, operating segment income, operating margin or diluted EPS computed in accordance with GAAP. Management believes that these non-GAAP financial measures reflect an additional way of viewing aspects of Sara Lee’s business that, when viewed together with Sara Lee’s financial results computed in accordance with GAAP, provide a more complete understanding of factors and trends affecting Sara Lee’s historical financial performance and projected future operating results, greater transparency of underlying profit trends and greater comparability of results across periods. These non-GAAP financial measures are not intended to be a substitute for the comparable GAAP measures and should be read only in conjunction with our consolidated financial statements prepared in accordance with GAAP. Investors frequently have requested information from management regarding significant items, and management believes that investors use these non-GAAP measures to assess Sara Lee’s historical financial performance and to project future financial results for the corporation. Management also uses these non-GAAP financial measures, in conjunction with the GAAP financial measures, to understand, manage and evaluate our businesses, in planning for and forecasting financial results for future periods, and as one factor in determining incentive compensation. Many of the significant items excluded in the calculation of adjusted net sales, adjusted operating segment income, adjusted operating income and core Sara Lee EPS will recur in future periods; however, the amount and frequency of each significant item varies from period to period. As a result, management believes these non-GAAP financial measures give investors a more complete understanding of Sara Lee’s underlying sales and profit trends. The following is a summary of the non-GAAP financial measures presented in this news release.
“Adjusted net sales” is a non-GAAP financial measure that excludes from net sales the impact of businesses acquired or disposed after the start of the fiscal period presented and excludes the impact of changes in foreign currency exchange rates.
“Adjusted operating income” is a non-GAAP financial measure that excludes from operating income the impact of significant items such as charges for exit activities, the results of businesses acquired or disposed after the start of the fiscal period presented, transformation costs, impairment charges, accelerated depreciation, change in vacation policy, changes in foreign currency exchange rates, unusual tax benefits (charges) recognized in the fiscal period presented and the receipt of contingent tobacco sale proceeds.
“Adjusted operating segment income” is a non-GAAP financial measure that excludes from the operating segment income of a specified business segment the impact of significant items such as charges for exit activities, the results of businesses acquired or disposed after the start of the fiscal period presented, transformation costs, impairment charges, accelerated depreciation, changes in foreign currency exchange rates and change in vacation policy.
“Adjusted operating margin” is a non-GAAP financial measure that equals adjusted operating income divided by adjusted net sales of the corporation (in the case of computing adjusted operating margin for Sara Lee) or adjusted net sales for a business segment divided by adjusted operating segment income for that business segment (in the case of computing adjusted operating margin for a specific business segment).
Sara Lee Corporation
Media: Jon Harris, +1.630.598.8661
Analysts: Aaron Hoffman, +1.630.598.8739
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